<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1996
REGISTRATION STATEMENT NO. 333-03770
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ECLIPSE SURGICAL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 3845 77-0223740
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification
Number)
</TABLE>
1049 KIEL COURT
SUNNYVALE, CALIFORNIA 94089
(408) 747-0120
(Address, including zip code and telephone number, including
area code, of Registrant's principal executive offices)
--------------------------
DOUGLAS MURPHY-CHUTORIAN, M.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ECLIPSE SURGICAL TECHNOLOGIES, INC.
1049 KIEL COURT
SUNNYVALE, CALIFORNIA 94089
(408) 747-0120
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
JEFFREY D. SAPER, Esq. RODRIGO A. GUERRA JR., Esq.
HOWARD S. ZEPRUN, Esq. SKADDEN, ARPS, SLATE, MEAGHER & FLOM
JENNIFER L. TSAY, Esq. Four Embarcadero Center
WILSON SONSINI GOODRICH & ROSATI San Francisco, California 94111
Professional Corporation (415) 984-6400
650 Page Mill Road
Palo Alto, California 94304
(415) 493-9300
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CROSS-REFERENCE SHEET
SHOWING LOCATION IN THE PROSPECTUS OF INFORMATION REQUIRED BY
ITEMS IN PART I OF FORM S-1
<TABLE>
<CAPTION>
FORM S-1 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors; The Company
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside and Inside Front Cover Pages; Underwriting
9. Description of Securities to be Registered........... Outside Front Cover Page; Prospectus Summary;
Capitalization; Description of Capital Stock; Shares
Eligible for Future Sale
10. Interest of Named Experts and Counsel................ Legal Matters
11. Information with Respect to the Registrant........... Outside Front and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; Use of Proceeds;
Dividend Policy; Capitalization; Dilution; Selected
Financial Data; Management's Discussion and Analysis
of Financial Condition and Results of Operations;
Business; Management; Certain Transactions;
Principal Shareholders; Description of Capital
Stock; Shares Eligible for Future Sale; Legal
Matters; Experts; Additional Information; Financial
Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 21, 1996
4,000,000 SHARES
[LOGO]
ECLIPSE SURGICAL TECHNOLOGIES, INC.
COMMON STOCK
----------------
All of the shares of Common Stock offered hereby are being sold by Eclipse
Surgical Tech-
nologies, Inc. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price per share of Common Stock will be between $13.00 and $15.00. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. Application has been made for listing of the
Common Stock on The Nasdaq Stock Market's National Market under the symbol ESTI.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGE
6.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share...................... $ $ $
Total.......................... $ $ $
Total Assuming Full Exercise of
Over-Allotment Option (3)...... $ $ $
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $1,100,000, which are payable by the
Company.
(3) Assuming exercise in full of the 30-day option granted by the Company to the
Underwriters to purchase up to 600,000 additional shares, on the same terms,
solely to cover over-allotments. See "Underwriting."
-------------------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made in New York City on or about ,
1996.
-------------------
PAINEWEBBER INCORPORATED
DEUTSCHE MORGAN GRENFELL
JEFFERIES & COMPANY, INC.
------------
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
THE COMPANY MUST OBTAIN PRE-MARKET APPROVAL FROM THE U.S. FOOD AND DRUG
ADMINISTRATION BEFORE THE COMPANY WILL BE ABLE TO OFFER ITS PRODUCTS FOR TMR ON
A COMMERCIAL BASIS IN THE U.S. THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL
OBTAIN SUCH APPROVAL OR WHEN SUCH APPROVAL MAY BE OBTAINED. SEE "RISK FACTORS --
NO ASSURANCE OF FDA OR OTHER REQUIRED GOVERNMENTAL APPROVALS."
<TABLE>
<C> <S>
TMR is an
investigational surgical
procedure performed on
the beating heart of
patients with
debilitating angina in
order to improve the
blood supply to the
myocardium, or heart
[PHOTOGRAPH OF OPERATING ROOM SCENE] muscle.
</TABLE>
<TABLE>
<S> <C>
[Map of U.S. with TMR sites labelled]
Eclipse TMR lasers are installed in major hospital
centers in the U.S. The Company believes it is the market
leader in installation of TMR surgical lasers in the U.S.
</TABLE>
The Company intends to furnish to its shareholders annual reports containing
audited financial statements, quarterly reports containing unaudited financial
statements and such other periodic reports as the Company may determine to be
appropriate or as may be required by law.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-------------------
This Prospectus contains certain trademarks of the Company.
2
<PAGE>
PROSPECTUS SUMMARY
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS DISCUSSED IN THIS PROSPECTUS,
INCLUDING THOSE SET FORTH IN "RISK FACTORS." PROSPECTIVE INVESTORS SHOULD
CONSIDER CAREFULLY THE FACTORS DISCUSSED IN "RISK FACTORS." THE FOLLOWING
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL SHARE AND PER
SHARE DATA AND INFORMATION IN THIS PROSPECTUS RELATING TO THE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING (I) GIVE EFFECT TO A THREE-FOR-ONE SPLIT OF THE
COMMON STOCK TO BE EFFECTED PRIOR TO THE CLOSING OF THE OFFERING, (II) GIVE
EFFECT TO AMENDMENTS TO THE COMPANY'S STOCK OPTION PLAN AND DIRECTOR STOCK
OPTION PLAN AND ADOPTION OF AN EMPLOYEE STOCK PURCHASE PLAN PRIOR TO THE CLOSING
OF THE OFFERING, AND (III) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION TO PURCHASE UP TO 600,000 ADDITIONAL SHARES OF COMMON
STOCK.
THE COMPANY
Eclipse Surgical Technologies, Inc. (the "Company") designs, develops,
manufactures and distributes laser-based surgical products and disposable
fiber-optic accessories for the treatment of advanced cardiovascular disease
through transmyocardial revascularization ("TMR"). TMR is a surgical procedure
performed on the beating heart in which a laser device is used to create
pathways through the myocardium, or heart muscle, directly into the heart
chamber. The pathways are intended to enable improved blood supply to the
myocardium from the heart chamber. TMR potentially offers end-stage cardiac
patients a means to alleviate their symptoms of angina, or chest pain, and
improve their quality of life. The Company currently offers its Eclipse TMR 2000
laser system for sale in limited numbers for investigational use only, pursuant
to an Investigational Device Exemption ("IDE") granted by the U.S. Food and Drug
Administration ("FDA") in September 1995. From that time through April 30, 1996,
the Company has installed its TMR laser systems in 20 hospitals in the U.S. and
two hospitals in Europe. The Company believes it is the market leader in
installations of TMR surgical lasers in the U.S.
According to the American Heart Association (the "AHA"), cardiovascular
disease is the leading cause of death and disability in the U.S. Coronary artery
disease, the principal form of cardiovascular disease, is characterized by a
progressive narrowing of the coronary arteries, which supply oxygenated blood to
the heart, potentially resulting in angina and damage to the heart. Typically,
the condition worsens over time and often leads to heart attack or death. More
than six million Americans experience anginal symptoms, and approximately
500,000 deaths in the U.S. annually are attributable to coronary artery disease.
The primary therapeutic options for treatment of coronary artery disease are
drug therapy, percutaneous transluminal coronary angioplasty ("PTCA" or "balloon
angioplasty") including techniques which augment or replace PTCA such as stent
placement and atherectomy, and coronary artery bypass graft surgery ("CABG" or
"open heart bypass surgery"). The total number of such cardiovascular related
surgical procedures performed in the U.S. each year is estimated at 885,000,
consisting of approximately 485,000 open heart bypass surgeries and 400,000 PTCA
procedures. When these primary therapeutic options are exhausted, the patient is
left with no viable surgical alternative other than, in limited cases, heart
transplantation. Without a viable surgical alternative, the patient is generally
managed with drug therapy, but often with significant lifestyle limitations. TMR
offers potential relief to this large class of patients with severe
cardiovascular disease.
The Company's initial clinical study, which commenced in November 1995, is
designed to assess the safety and effectiveness of the Company's TMR procedure
as compared with drug therapy in patients with severe angina. Phase I of this
clinical study was completed in January 1996, and Phase II, the final phase of
the clinical trial, commenced in March 1996. In the second quarter of 1996, the
Company intends to undertake Phase I of a second FDA approved TMR study designed
to assess the safety and effectiveness of TMR used in conjunction with CABG as
compared with CABG alone. Through these and other trials, the Company is seeking
to expand the indications for TMR.
3
<PAGE>
The Company's objective is to become the leading supplier in the TMR market
by developing multiple surgical platforms and providing a comprehensive suite of
high quality TMR products. The Company believes that its compact, flexible
fiber-optic based system will enable it to offer effective solutions across the
three principal surgical approaches potentially available for TMR, open chest
surgery, minimally invasive surgery and percutaneous surgery. The Company is
also developing a broad range of disposable fiber-optic based surgical tools
designed to operate with the Company's laser base unit and intended to provide
physicians with a broad range of options for their individual tactile
preferences and solutions for the different geometry of each patient's heart
cavity. The Company holds five U.S. patents and related foreign patents relating
to surgical treatment with lasers and fiber-optic handpieces, and has applied
for or is in the process of applying for additional patents relating to its
laser technology, TMR applications and fiber-optic handpieces. While the
Company's existing patents are not being utilized with the Company's current TMR
protocol, the Company believes such patents may be applicable to minimally
invasive and percutaneous approaches.
The Company must obtain pre-market approval ("PMA") from the FDA before the
Company will be able to offer its products for TMR on a commercial basis in the
U.S. There can be no assurance that the Company will obtain such approval, or
when such approval may be obtained.
The Company is a California corporation formed in 1989. The Company's
principal executive offices are located at 1049 Kiel Court, Sunnyvale,
California 94089 and its telephone number at that location is (408) 747-0120.
RISK FACTORS
The securities offered hereby involve a high degree of risk. The Company's
success will depend upon successful completion of clinical trials, which are
currently at an early stage; the receipt of FDA and other governmental
approvals, which may take considerable time, and may not be granted at all;
acceptance of TMR, which is a new surgical procedure, among the medical
community; the ability to protect the Company's intellectual property rights;
the risk of claims of infringement of third party intellectual property rights;
the ability of the Company to manage change and growth in its business,
particularly in light of the Company's limited history of TMR operations and
history of operating losses; the ability of the Company to succeed in light of
significant competition; and other risks. See "Risk Factors."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company......... 4,000,000 shares (1)
Common Stock Outstanding after the 15,682,396 shares (2)
Offering....................................
Use of Proceeds............................. For research and development including
clinical trials; expansion of sales and
marketing resources; capital expenditures,
including expansion of manufacturing
facilities; repayment of outstanding
indebtedness and overdue obligations; and
general corporate purposes including working
capital. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol...... ESTI
</TABLE>
- ------------------------------
(1) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to 600,000 additional shares of Common Stock.
(2) Excludes as of May 15, 1996 (i) 2,662,526 shares of Common Stock issuable
upon exercise of outstanding options under the Company's Stock Option Plan,
and 1,332,230 additional shares reserved for future issuance under such
plan, (ii) 33,000 shares of Common Stock issuable upon exercise of
outstanding options under the Company's Director Stock Option Plan and
167,000 additional shares reserved for future issuance under such plan,
(iii) 250,000 shares of Common Stock reserved for future issuance under the
Company's Employee Stock Purchase Plan and (iv) 1,171,638 shares of Common
Stock issuable upon exercise of outstanding warrants. See "Management --
Stock Option Plan," "-- Director Stock Option Plan," "-- Employee Stock
Purchase Plan" and "Description of Capital Stock -- Warrants."
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................................... $ 3,289 $ 2,645 $ 2,105 $ 2,020 $ 2,707 $ 528 $ 1,752
Cost of revenues.................................. 1,389 1,108 1,013 1,173 1,642 382 502
--------- --------- --------- --------- --------- ----------- -----------
Gross profit.................................. 1,900 1,537 1,092 847 1,065 146 1,250
--------- --------- --------- --------- --------- ----------- -----------
Operating Expenses:
Research and development........................ 813 920 906 971 1,010 195 517
Sales and marketing............................. 333 620 794 392 879 191 396
General and administrative...................... 367 546 325 1,031 681 199 211
--------- --------- --------- --------- --------- ----------- -----------
Total operating expenses.......................... 1,513 2,086 2,025 2,394 2,570 585 1,124
--------- --------- --------- --------- --------- ----------- -----------
Operating income (loss)....................... 387 (549) (933) (1,547) (1,505) (439) 126
Interest and other income (expense), net.......... (23) (19) (3) (435) (921) (221) (50)
Provision for income taxes........................ 35 -- -- -- -- -- --
--------- --------- --------- --------- --------- ----------- -----------
Net income (loss)............................. $ 329 $ (568) $ (936) $ (1,982) $ (2,426) $ (660) $ 76
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Net income (loss) per share................... $ 0.03 $ (0.05) $ (0.08) $ (0.16) $ (0.19) $ (0.05) $ 0.01
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Shares used in per share calculation.......... 10,491 10,537 11,676 12,526 12,765 12,765 14,863
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Supplemental net income (loss)(3)............. -- -- -- -- $ (2,298) -- $ 108
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Supplemental net income (loss) per share(3)... -- -- -- -- $ (0.18) -- $ 0.01
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Shares used in supplemental per share
calculation(3)............................... -- -- -- -- 12,902 -- 15,005
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................... $ 1,277 $ 50,298
Working capital......................................................................... 468 51,568
Total assets............................................................................ 4,679 53,580
Long-term obligations, less current portion(2).......................................... 23 23
Accumulated deficit..................................................................... (5,939) (5,939)
Total shareholders' equity.............................................................. 720 51,700
</TABLE>
- ------------------------------
(1) As adjusted to give effect to the application of the estimated net proceeds
of the Offering, based on an assumed initial public offering price of $14.00
per share. See "Use of Proceeds."
(2) Does not include $1,691 of current portion of long-term obligations which
will be paid in full out of the proceeds of the Offering. See "Use of
Proceeds."
(3) Supplemental net income, supplemental net income per share and shares used
in supplemental per share calculation for 1995 and the three months ended
March 31, 1996 were calculated assuming that the indebtedness to be repaid
with the net proceeds of the Offering had been repaid at the beginning of
each such period using the assumed proceeds from the sale of the minimum
number of shares required to retire such indebtedness, at an assumed
offering price of $14.00 per share. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED BY SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS DISCUSSED IN THIS PROSPECTUS, INCLUDING THE RISK FACTORS SET FORTH
BELOW. PROSPECTIVE PURCHASERS OF THE COMMON STOCK SHOULD CONSIDER CAREFULLY THE
RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS
PROSPECTUS, PRIOR TO INVESTING IN THE COMMON STOCK OFFERED HEREBY.
EARLY STAGE OF CLINICAL TRIALS
The Company must obtain pre-market approval ("PMA") from the U.S. Food and
Drug Administration (the "FDA") before the Company will be able to offer its
products for transmyocardial revascularization ("TMR") on a commercial basis in
the U.S. A necessary prerequisite for submitting a PMA application is completion
of clinical testing to demonstrate the safety and effectiveness of the Company's
TMR products.
The Company is currently at an early stage of clinical testing. The Company
has completed Phase I of its initial clinical study and has only recently
commenced Phase II, the final phase of such study. Phase II will involve a
minimum of 126 patient trials, of which ten trials were performed from
commencement of the trials on March 18, 1996 through March 31, 1996. The study,
including 12-month patient follow-up reviews, is currently expected to be
completed by the latter half of 1997. However, completion of the clinical
studies on a timely basis will depend on the Company's ability to establish TMR
sites and enroll participating patients. In addition, the clinical studies will
require substantial financial and management resources. There can be no
assurance that the Company will have the resources necessary to complete such
clinical studies. Furthermore, there can be no assurance that the Company's
clinical studies will be completed within the currently anticipated time frame
or otherwise in a timely manner, nor that such clinical studies will demonstrate
the safety and effectiveness of the Company's TMR products to the extent
necessary to obtain FDA and other regulatory approvals and establish a
commercial market for the Company's products. Moreover, results of the initial
clinical testing are not necessarily predictive of results to be achieved in
later clinical studies, if undertaken, or commercially, if a PMA is obtained.
Failure to complete the Company's clinical studies in a timely manner or to
demonstrate the safety and effectiveness of the Company's TMR products could
delay or prevent regulatory approval and would materially and adversely affect
the Company's business, financial condition and results of operations. See "--
No Assurance of FDA Approval or Other Required Governmental Approvals" and
"Business -- Government Regulation."
NO ASSURANCE OF FDA OR OTHER REQUIRED GOVERNMENTAL APPROVALS
The Company's products are regulated in the U.S. as medical devices by the
FDA under the federal Food, Drug and Cosmetic Act ("FDC Act") and, as such,
require FDA approval of a PMA application prior to commercial sale in the U.S.
The FDA approves PMA applications for specific indications only and FDA policy
prohibits commercial marketing of devices for indications that have not been
approved by the FDA. The process of obtaining required regulatory approvals from
the FDA and other regulatory authorities is lengthy, expensive and inherently
uncertain, generally takes several years or longer to complete, if approval is
obtained at all, and requires the submission of extensive clinical data and
supporting information to the FDA. There can be no assurance that FDA approval
of products developed by the Company will be obtained on a timely basis, if at
all. Furthermore, there can be no assurance that FDA approval will be obtained
for any or all indications sought by the Company. Failure to obtain FDA approval
on a timely basis or for the indications sought by the Company would materially
and adversely affect the Company's business, financial condition and results of
operations.
Sales of medical devices outside of the U.S. are subject to foreign
regulatory requirements that vary widely by country. In addition, the FDA must
approve the export of devices that require a PMA but are not yet approved
domestically. The time required to obtain approval for sale in foreign countries
may be longer or shorter than that required for FDA approval, and the
requirements may differ. Although the Company is seeking regulatory approval to
begin marketing of its products outside the U.S., there can be no assurance that
such approval will be received on a timely basis, if at all.
6
<PAGE>
Foreign and domestic regulatory approvals, if granted, may include
significant limitations on the indicated uses for which the product may be
marketed. In addition, to obtain such approvals, medical device manufacturers
must comply with numerous other requirements of the FDA and certain foreign
regulatory authorities. For example, the Company will be required to obtain the
European Conforming Mark (the "CE Mark") by June 1998 for its products in order
to continue to sell its products after such date in European Union countries.
Product approvals can be withdrawn for failure to comply with regulatory
standards or because of unforeseen problems following initial marketing. The
Company will also be required to follow applicable Good Manufacturing Practices
("GMP") regulations of the FDA, which include testing, control and documentation
requirements, as well as similar requirements in other countries, including
International Standards Organization ("ISO") 9000 standards. Failure to meet
these requirements would preclude the Company from marketing its products on a
commercial basis, and therefore would materially and adversely affect the
Company's business, financial condition and results of operations. See "Business
- -- Government Regulation."
RISKS ASSOCIATED WITH NEW SURGICAL PROCEDURE; NO ASSURANCE OF MARKET ACCEPTANCE
The Company's ability to successfully commercialize its TMR products will
depend upon its ability to achieve acceptance of its TMR systems and procedures
among cardiologists, cardiac surgeons and other members of the medical
community. The Company believes that it will not achieve such acceptance until
such time, if any, as the Company's TMR products can be demonstrated to be safe,
efficacious and cost-effective. Even if the clinical safety and effectiveness of
the Company's TMR products is established, cardiologists, cardiac surgeons and
other members of the medical community may elect not to recommend TMR for any
number of other reasons. Broad use of the Company's TMR products will require
training of numerous physicians, and the time required to complete such training
could adversely affect market acceptance. Moreover, even if TMR becomes
generally accepted by the medical community, physicians trained in competitive
TMR products may elect not to consider the Company's products, or may elect
instead to recommend a competitor's products. Failure of the Company's products
to achieve significant market acceptance would materially and adversely affect
the Company's business, financial condition and results of operations. See
"Business -- Regulatory Status" and " -- Competition."
DEPENDENCE ON SINGLE PRODUCT LINE
The Company has elected to focus its resources on the continued development
and refinement of its TMR products. If the Company is unable to obtain requisite
regulatory approvals or to achieve commercial acceptance of its TMR products,
the Company's business, financial condition and results of operations will be
materially and adversely affected and could result in cessation of the Company's
current business.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF
FUTURE LITIGATION
The Company's success will depend, in part, on its ability to obtain patent
protection for its products, preserve its trade secrets, and operate without
infringing the proprietary rights of others. The Company's policy is to seek to
protect its proprietary position by, among other methods, filing U.S. and
foreign patent applications related to its technology, inventions and
improvements that are important to the development of its business. The Company
holds five U.S. patents and related foreign patents relating to surgical
treatment with lasers and fiber-optic handpieces, and has applied for or is in
the process of applying for additional patents relating to its laser technology,
TMR applications and fiber-optic handpieces. There can be no assurance that any
of the Company's patents or patent applications will not be challenged,
invalidated or circumvented in the future or that the rights granted thereunder
will provide a competitive advantage. The Company intends to vigorously protect
and defend its intellectual property. It is uncertain whether patent protection
will continue to be available for surgical methods in the future. Costly and
time-consuming litigation brought by the Company may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company, or to determine the enforceability, scope and validity of the
proprietary rights of others.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute confidentiality and assignment of inventions agreements in connection
7
<PAGE>
with their employment, consulting or advisory relationships with the Company.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for any breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
have been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. In this regard, competitors of
the Company have been issued a number of patents related to TMR. In September
1995, the Company received from a competitor a notice of potential infringement
of the competitor's patent regarding a method for TMR utilizing synchronization
of laser pulses to the beating of the heart. In January 1996, the Company
received from a second competitor a notice of potential infringement of the
competitor's patent regarding a method to perform TMR using fiber optics. The
Company has concluded in each case, following discussion with its patent
counsel, that it does not utilize the process and/or apparatus which is the
subject of the patent at issue, and has responded to the respective competitor
to such effect. The Company has received no further correspondence on either
matter. There can be no assurance, however, that further claims or proceedings
will not be initiated by either competitor, or that claims by other parties will
not arise in the future. Any such claims in the future, with or without merit,
could be time-consuming and expensive to respond to and could divert the
attention of the Company's technical and management personnel. The Company may
be involved in litigation to defend against claims of infringement by the
Company, to enforce patents issued to the Company, or to protect trade secrets
of the Company. If any relevant claims of third party patents are upheld as
valid and enforceable in any litigation or administrative proceeding, the
Company could be prevented from practicing the subject matter claimed in such
patents, or would be required to obtain licenses from the patent owners of each
such patent or to redesign its products or processes to avoid infringement.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Accordingly, there can be no assurance that current
and potential competitors and other third parties have not filed or in the
future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the U.S. or internationally. In the event the Company were to
require licenses to patents issued to third parties, there can be no assurance
that such licenses would be available or, if available, would be available on
terms acceptable to the Company, or that the Company would be successful in any
attempt to redesign its products or processes to avoid infringement.
Accordingly, an adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would materially and adversely
affect the Company's business, financial condition and results of operations.
See "Business -- Intellectual Property Matters" and "-- Competition."
EXPECTATION OF INTENSE MARKET COMPETITION
The Company expects that the market for TMR, which is currently in the early
stages of development, will be intensely competitive. Competitors are likely to
include two laser competitors, PLC Systems, Inc. ("PLC") and CardioGenesis
Corporation ("CardioGenesis"), both of which are currently selling TMR products
for investigational use in the United States and abroad. PLC has already
received the CE Mark which allows the sales of its products commercially in all
European Union countries. Other competitors may include additional companies
that elect to enter the market, including large companies in the laser and
cardiac surgery markets. Many of these companies have significantly greater
financial, development, marketing and other resources than the Company. In the
event a competitor is able to obtain a PMA for its products prior to the
Company, the Company's ability to compete successfully could be materially and
adversely affected.
8
<PAGE>
TMR also competes with other methods for the treatment of cardiovascular
disease, including drug therapy, PTCA and CABG. Although the Company is seeking
to demonstrate the safety and effectiveness of the Company's TMR procedures in
patients for whom other cardiovascular treatments are not likely to provide
relief, and in the future intends to pursue the safety and effectiveness of TMR
when used in conjunction with other treatments, there can be no assurance that
the Company's TMR products will be accepted in these markets. There can be no
assurance that physicians will use the Company's TMR
procedures to replace or supplement established treatments, or that the
Company's TMR procedures will be competitive with current or future
technologies. Such competition could materially and adversely affect the
Company's business, financial condition and results of operations.
Any product developed by the Company that gains regulatory approval will
face competition for market acceptance and market share. An important factor in
such competition may be the timing of market introduction of competitive
products. Accordingly, the relative pace at which the Company is able to develop
products, complete clinical testing and regulatory approval processes, gain
third party reimbursement acceptance and supply commercial quantities of the
product to the market are expected to be important competitive factors. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors. Failure to do so would materially and
adversely affect the Company's business, financial condition and results of
operations. See "Business -- Competition."
LIMITED HISTORY OF TMR OPERATIONS; HISTORY OF OPERATING LOSSES
Although the Company commenced operations in June 1989, the Company's
operations to date have consisted primarily of the manufacture and sale of
non-TMR related laser products and accessories. The Company commenced its
operations and clinical studies with respect to TMR products in September 1995,
and accordingly has limited experience to date with the TMR market and TMR
products.
From inception to December 31, 1995, the Company incurred cumulative net
losses of approximately $5.9 million. As of March 31, 1996, the Company had
overdue obligations and indebtedness of approximately $375,000 and $1.3 million,
respectively, which are expected to be paid out of the proceeds of the Offering.
The Company's revenues and operating income will continue to be constrained
until such time, if ever, as FDA and other regulatory approval is obtained for
the Company's TMR products, and for an indefinite period of time after any such
approval is obtained. Furthermore, the Company expects its expenses in all
categories to increase as its clinical trial and other business activities
expand. Hence, there can be no assurance that the Company will achieve or
sustain profitability in the future. Failure to achieve significant commercial
revenues or profitability would materially and adversely affect the Company's
business, financial condition and results of operations. See "Use of Proceeds."
POTENTIAL DIFFICULTIES IN MANAGING BUSINESS UNDERGOING RAPID CHANGE
The Company's future success will depend to a significant extent on the
ability of its current and future management personnel to operate effectively,
both independently and as a group. In this regard, a number of members of the
Company's senior management team have only recently joined the Company.
Moreover, certain members of such management team have limited or no experience
as a senior executive of a public corporation. There can be no assurance that
the management team will operate together effectively. To compete successfully
against current and future competitors, complete clinical trials in progress,
prepare additional products for clinical trials and develop future products, the
Company believes that it must continue to expand its operations, particularly in
the areas of research and development, sales and marketing, training, and
manufacturing. If the Company were to experience significant growth in the
future, such growth would likely result in new and increased responsibilities
for management personnel and place significant strain upon the Company's
management, operating and financial systems and resources. To accommodate such
growth and compete effectively, the Company must continue to implement and
improve information systems, procedures and controls, and to expand, train,
motivate and manage its work force. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate
9
<PAGE>
to support the Company's future operations. Any failure to implement and improve
the Company's operational, financial and management systems or to expand, train,
motivate or manage employees could materially and adversely affect the Company's
business, financial condition and results of operations. See "-- Dependence on
Key Personnel," "Business -- Employees" and "Management -- Directors and
Executive Officers."
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
Results of operations are expected to fluctuate significantly from quarter
to quarter depending upon numerous factors, including the timing and results of
clinical trials; delays associated with the FDA and other regulatory approval
processes; health care reform and reimbursement policies; demand for the
Company's products; changes in pricing policies by the Company or its
competitors; the number, timing and significance of product enhancements and new
product announcements by the Company and its competitors; the ability of the
Company to develop, introduce and market new and enhanced versions of the
Company's products on a timely basis; customer order deferrals in anticipation
of new or enhanced products offered by the Company or its competitors; product
quality problems; personnel changes; changes in Company strategy; and the level
of international sales. Quarter to quarter operating results could also be
affected by the timing of the receipt of individual customer orders, order
fulfillment and revenue recognition with respect to small numbers of individual
laser base units, since each unit carries a high price per unit. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business -- Regulatory Status," "-- Sales and Marketing," "--
Manufacturing and Quality Assurance" and "-- Government Regulation."
RISKS OF TECHNOLOGICAL CHANGE
Significant resources are continually being expended to develop new and
improved treatment methodologies for coronary artery disease. Accordingly, the
market acceptance and commercial success of the Company's TMR products and
procedures will depend not only on the safety and effectiveness of the Company's
TMR products and procedures but also the relative safety and effectiveness of
alternative treatment measures, which alternatives could potentially include new
treatments or improvements or adjuncts to existing treatments. Accordingly, the
improvement of existing alternative treatment measures or emergence of new
alternative treatments would materially and adversely affect the Company's
business, financial condition and results of operations.
UNCERTAINTY REGARDING THIRD PARTY REIMBURSEMENT
The Company expects that its ability to successfully commercialize its
products will depend significantly on the availability of reimbursement for
surgical procedures using the Company's products from third party payors such as
governmental programs, private insurance and private health plans. Reimbursement
is a significant factor considered by hospitals in determining whether to
acquire new equipment. Notwithstanding FDA approval, if granted, third party
payors may deny reimbursement if the payor determines that a therapeutic medical
device is unnecessary, inappropriate, not cost-effective or experimental or is
used for a non-approved indication.
The Health Care Financing Administration ("HCFA") has recently issued a
policy indicating that Medicare coverage will not be precluded for
investigational procedures furnished in accordance with FDA-approved protocols
governing clinical trials. TMR procedures performed using the Company's
products, in the limited trials to date, have received Medicare reimbursement.
There can be no assurance, however, that HCFA will continue to provide
reimbursement for TMR, or will continue to provide such reimbursement at levels
adequate to permit hospitals to perform the Company's TMR procedures.
There can be no assurance as to whether third party payors will cover TMR or
as to the levels of reimbursement. There also can be no assurance that levels of
reimbursement, if any, will not be decreased in the future, or that future
legislation, regulation, or reimbursement policies of third party payors will
not otherwise adversely affect the demand for the Company's products or its
ability to sell its products on a profitable basis. Fundamental reforms in the
healthcare industry in the U.S. and Europe that could affect the availability of
third party reimbursement continue to be proposed, and the Company cannot
predict the timing or effect of any such proposal. If third party payor coverage
or reimbursement is unavailable or inadequate, the Company's business, financial
condition and results of operations could be materially and adversely affected.
See "Business -- Third Party Reimbursement."
10
<PAGE>
LIMITED SALES, MARKETING AND DISTRIBUTION SYSTEMS
The Company has made limited sales of its TMR products to date, for
investigational use only. Accordingly, the Company has maintained a limited
sales and marketing organization in the U.S. and abroad. The Company plans to
market its TMR products, if approved, through a direct sales force in the U.S.
and through a relationship with a major cardiovascular surgical products company
or companies for international sales. Establishment of a sales force capable of
effectively commercializing the Company's TMR products will require substantial
efforts and require significant management and financial resources. There can be
no assurance that the Company will be able to establish such a sales capability
on a timely basis, if at all. Moreover, there can be no assurance that the
Company's international distributor or distributors will devote sufficient
resources to development of the markets for the Company's products or will be
successful in such commercialization efforts. See "Business -- Sales and
Marketing."
RISK OF PRODUCT LIABILITY
The Company faces an inherent and significant business risk of exposure to
product liability claims in the event that the use of its products results in
personal injury or death, and there can be no assurance that material product
liability claims will not be assessed against the Company in the future. The
Company maintains insurance against product liability claims in the amount of $1
million per occurrence and $1 million in the aggregate, and expects to seek to
increase such coverage if and when a PMA is obtained. However, there can be no
assurance that such coverage will continue to be available in the amount desired
or on terms acceptable to the Company, or that such coverage will be adequate
for liabilities actually incurred. Also, in the event that any of the Company's
products prove to be defective, the Company may be required to recall or
redesign such products. Any uninsured or underinsured claim brought against the
Company or any claim or product recall that results in significant cost to or
adverse publicity against the Company could materially and adversely affect the
Company's business, financial condition and results of operations. See "Business
- -- Product Liability and Insurance."
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON KEY SUPPLIERS
The Company's success will depend in part on its ability to manufacture its
products in a timely, cost-effective manner and in compliance with GMP, ISO 9000
and other regulatory requirements. The manufacture of the Company's products is
a labor-intensive, complex operation involving a number of separate processes
and components. The Company's manufacturing activities to date have consisted
primarily of manufacturing limited quantities of systems for use in clinical
trials. The Company does not have experience in manufacturing its products in
the commercial quantities that might be required if the Company receives
regulatory approval for its TMR products. Furthermore, as a condition to receipt
of PMA approval, the Company's facilities, procedures and practices will be
subject to pre-approval and ongoing GMP inspections by FDA.
Manufacturers often encounter difficulties in scaling up manufacturing of
new products, including problems involving product yields, quality control and
assurance, component and service availability, adequacy of control policies and
procedures, lack of qualified personnel, compliance with FDA regulations, and
the need for further FDA approval of new manufacturing processes and facilities.
There can be no assurance that manufacturing yields, costs or quality will not
be adversely affected as the Company seeks to increase production, and any such
adverse effect could materially and adversely affect the Company's business,
financial condition and results of operations.
The Company currently purchases certain laser and fiber-optic components
from single sources. Although the Company has identified alternative vendors,
the qualification of additional or replacement vendors for certain components or
services is a lengthy process. There can be no assurance that materials obtained
from outside suppliers will continue to be available in adequate quantities or
at the times required by the Company or that the Company will be able to locate
alternative suppliers on a timely basis. Any significant supply interruption
would have a material adverse effect on the Company's ability to manufacture its
products and, therefore, would materially and adversely affect the Company's
business, financial condition and results of operations. The Company expects to
manufacture its products based on forecasted product orders, and intends to
purchase subassemblies and components prior to receipt of purchase orders from
customers. Lead times for materials and components ordered by the Company vary
significantly, and
11
<PAGE>
depend on factors such as the business practices of the specific supplier,
contract terms and general demand for a component at a given time. As a result,
there is a risk of excess or inadequate inventory if orders do not match
forecasts. See "Business -- Manufacturing and Quality Assurance."
DEPENDENCE ON KEY PERSONNEL
The Company's future business and operating results depend in significant
part upon the continued contributions of its key technical and senior management
personnel, including Douglas Murphy-
Chutorian, M.D., the Company's Chief Executive Officer. The Company maintains
key person life insurance policies on Dr. Murphy-Chutorian in the amount of $2
million. The Company's future business and operating results also depend in
significant part upon its ability to attract and retain qualified additional
management, manufacturing, technical, marketing and sales and support personnel
for its operations. Competition for such personnel is intense, and there can be
no assurance that the Company will be successful in attracting or retaining such
personnel. The loss of any key employee, the failure of any key employee to
perform in his or her current position, or the Company's inability to attract
and retain skilled employees, as needed, could materially and adversely affect
the Company's business, financial condition and results of operations. See
"Management -- Directors and Executive Officers."
NO PRIOR TRADING MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after the Offering. The initial public offering price
will be determined through negotiations among the Company and the
representatives of the Underwriters based on several factors and may not be
indicative of the market price of the Common Stock after the Offering. The
market price of the Common Stock is likely to be highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, announcements of technological innovations, new
products or new contracts by the Company or its competitors, developments with
respect to patents or proprietary rights, conditions and trends in the medical
device and other technology industries, healthcare reform measures, adoption of
new accounting standards affecting the medical device industry, changes in
financial estimates by securities analysts, general market conditions and other
factors. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the common stocks of early stage companies. These broad market
fluctuations may materially and adversely affect the market price of the Common
Stock. In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. Such litigation, if brought against the
Company, could result in substantial costs and a diversion of management's
attention and resources. See "Underwriting."
CONCENTRATION OF SHARE OWNERSHIP
Upon completion of the Offering, the present directors and executive
officers of the Company and their affiliates will beneficially own approximately
33.1% of the outstanding Common Stock. As a result, these shareholders will be
able to exercise significant influence over matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may have the effect of
delaying or preventing a change in control of the Company. See "Principal
Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public market
following the Offering could adversely affect the market price for the Common
Stock. The number of shares of Common Stock available for sale in the public
market is limited by restrictions under the Securities Act of 1933, as amended
(the "Securities Act"), and by lock-up agreements under which the holders of
such shares have agreed not to sell or otherwise dispose of any of their shares
for a period of 180 days after the date of this Prospectus without the prior
written consent of PaineWebber Incorporated. However, PaineWebber Incorporated
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. As a result of these
restrictions, based on shares outstanding as of May 15, 1996, on the date of
this Prospectus, a total of 269,544 shares other than the 4,000,000 shares
offered hereby will be eligible for sale; an additional 116,667 shares will be
eligible for sale 90 days after the date of this Prospectus pursuant to Rule
144; an additional 9,629,937 shares will be eligible for sale 180 days after the
date of this Prospectus
12
<PAGE>
under Rule 144, upon expiration of the lock-up agreements. In addition, the
Company intends to register on the effective date of the Offering a total of
4,444,756 shares of Common Stock subject to outstanding options or reserved for
issuance under the Company's Stock Option Plan, Director Stock Option Plan and
Employee Stock Purchase Plan. Further, upon expiration of the lock-up agreements
referred to above, holders of approximately 10,231,953 shares of Common Stock
will be entitled to certain registration rights, including 201,249 shares which
have the right to demand registration. Such demands may be made as early as 180
days following the Offering. If such holders, by exercising their registration
rights, cause a large number of shares to be registered and sold in the public
market, such sales could materially and adversely affect the market price for
the Common Stock. See "Description of Capital Stock -- Registration Rights" and
"Shares Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price for the Common Stock is expected to be
substantially higher than the net tangible book value per share of Common Stock.
Accordingly, investors purchasing shares of Common Stock in the Offering will
incur immediate and substantial dilution of $10.70 per share assuming an initial
public offering price of $14.00 per share. To the extent outstanding options to
purchase the Common Stock are exercised, there will be further dilution. See
"Dilution" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
DISCRETION OF MANAGEMENT IN USE OF PROCEEDS
The net proceeds of the Offering are estimated to be approximately $51
million, assuming an initial public offering price of $14.00 per share and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company. While the Company anticipates that it will utilize
approximately $15 million of the net proceeds for research and development,
approximately $15 million for expansion of sales and marketing resources,
approximately $3 million for capital expenditures, including expansion of
manufacturing facilities, and approximately $2 million for repayment of
outstanding indebtedness, and that the balance of the proceeds, approximately
$14 million, will be used for general corporate purposes including working
capital, management of the Company will have complete discretion of the
application of the proceeds. There can be no assurance that business
developments and opportunities will not require the Company to utilize the
proceeds in a manner different than presently anticipated, or that the Board of
Directors and management will not determine for other reasons to utilize the
proceeds in a different manner.
POTENTIAL NEED FOR ADDITIONAL CAPITAL
Although the Company anticipates that the net proceeds of the Offering,
together with sales of products for investigational use, will be sufficient to
meet the Company's capital requirements through at least calendar year 1997,
there can be no assurance that the Company will not require additional sources
of cash at an earlier date. This will depend upon the progress of expansion of
the Company's clinical trials and any need for additional trials or other
testing of the Company's products, and the timing of required expenditures. If
the Company is required to obtain additional financing in the future, there can
be no assurance that capital will be available on terms acceptable to the
Company, if at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby are estimated to be $51 million, assuming an initial public
offering price of $14.00 per share and after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company.
The Company anticipates that approximately $15 million of the net proceeds
will be utilized for research and development, including funding of clinical
trials in support of regulatory and reimbursement approvals; approximately $15
million will be used for expansion of sales and marketing resources;
approximately $3 million will be used for capital expenditures, including
expansion of manufacturing facilities; and approximately $2 million will be used
for repayment of outstanding indebtedness in the aggregate principal amount of
approximately $1.7 million (including debt in the aggregate principal amount of
$50,000 held by one director of the Company) plus accrued interest thereon in
the aggregate amount of $276,000 at March 31, 1996. The remainder of the
proceeds, estimated at approximately $14 million, will be used for other general
corporate purposes including working capital. Of the indebtedness to be repaid,
$1 million bears interest at the rate of 6% per annum and matures on December
31, 1996, $375,000 bears interest at the rate of 10% per annum and is currently
due, and the remainder bears interest at the rate of 10% per annum and matures
on December 31, 1996. Proceeds not immediately used will be held as cash and
will be invested in short-term marketable securities. Management of the Company
will have complete discretion in the application of the proceeds of the
Offering. See "Risk Factors -- Discretion of Management in Use of Proceeds."
The foregoing represents estimates only, and the actual amounts expended by
the Company for these purposes and the timing of such expenditures will depend
on numerous factors, including the status of the Company's development efforts,
actions relating to regulatory matters, including the extent to which the
Company may be required to extend or expand its clinical trials, the extent to
which the Company's products gain market acceptance, and competitive factors.
DIVIDEND POLICY
The Company has never paid a cash dividend on its capital stock and does not
anticipate paying any cash dividends on the Common Stock in the foreseeable
future, as it intends to retain its earnings, if any, to generate increased
growth and for general corporate purposes.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 and as adjusted to give effect to the sale of the shares of Common
Stock offered hereby and the application of the estimated net proceeds therefrom
as described in "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
AS
ACTUAL ADJUSTED(1)
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Current portion of long-term debt......................................................... $ 1,691 $ 8
--------- -----------
--------- -----------
Long-term debt less current portion....................................................... $ 23 $ 23
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized,
no shares issued and outstanding....................................................... -- --
Common Stock, no par value; 50,000,000 shares authorized;
11,682,396 shares issued and outstanding (actual);
15,682,396 shares issued and outstanding (as adjusted) (2)............................. 6,659 57,639
Accumulated deficit..................................................................... (5,939) (5,939)
--------- -----------
Total shareholders' equity............................................................. 720 51,700
--------- -----------
Total capitalization................................................................... $ 743 $ 51,723
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) As adjusted to give effect to the estimated net proceeds of the Offering,
based on an assumed initial public offering price of $14.00 per share. See
"Use of Proceeds."
(2) Excludes as of March 31, 1996 (i) 2,633,751 shares of Common Stock issuable
upon exercise of outstanding options under the Company's Stock Option Plan,
and 1,361,005 additional shares reserved for future issuance under such
plan, (ii) 18,000 shares of Common Stock issuable upon exercise of
outstanding options under the Company's Director Stock Option Plan and
182,000 additional shares reserved for future issuance under such plan,
(iii) 250,000 shares of Common Stock reserved for future issuance under the
Company's Employee Stock Purchase Plan and (iv) 1,171,638 shares of Common
Stock issuable upon exercise of outstanding warrants. See "Management --
Stock Option Plan," "-- Director Stock Option Plan," "-- Employee Stock
Purchase Plan" and "Description of Capital Stock -- Warrants."
15
<PAGE>
DILUTION
The net tangible book value of the Company at March 31, 1996 was
approximately $720,000 or $0.06 per share of Common Stock. "Net tangible book
value" per share is equal to the Company's total tangible assets less its total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale of 4,000,000 shares of Common Stock offered hereby and
the application of the estimated net proceeds therefrom as described in "Use of
Proceeds," the pro forma net tangible book value of the Company at March 31,
1996 would have been approximately $51,700,000 or $3.30 per share. This
represents an immediate increase in net tangible book value of $3.24 per share
to existing shareholders and an immediate dilution in net tangible book value of
$10.70 per share to purchasers of Common Stock in the Offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share (1).......................... $ 14.00
Net tangible book value per share prior to the Offering............ $ 0.06
Increase per share attributable to sales of shares in the
Offering.......................................................... 3.24
---------
Pro forma net tangible book value per share after the Offering....... 3.30
---------
Dilution in net tangible book value per share to purchasers in the
Offering............................................................ $ 10.70
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
shareholders and by the purchasers of shares in the Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............................ 11,682,396 74.5% $ 6,659,000 10.6% $ 0.57
New investors.................................... 4,000,000 25.5 56,000,000 89.4 14.00
------------ ----- ------------- -----
Total.......................................... 15,682,396 100.0% $ 62,659,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- ------------------------
(1) Before deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The foregoing tables do not give effect to the exercise of any options or
warrants subsequent to March 31, 1996. As of May 15, 1996 (i) 2,662,526 shares
of Common Stock were issuable upon exercise of outstanding options under the
Company's Stock Option Plan, and 1,332,230 additional shares were reserved for
future issuance under such plan, (ii) 33,000 shares of Common Stock were
issuable upon exercise of outstanding options under the Company's Director Stock
Option Plan and 167,000 additional shares were reserved for future issuance
under such plan, (iii) 250,000 shares of Common Stock were reserved for future
issuance under the Company's Employee Stock Purchase Plan and (iv) 1,171,638
shares of Common Stock were issuable upon exercise of outstanding warrants. See
"Management -- Stock Option Plan," "-- Director Stock Option Plan," "-- Employee
Stock Purchase Plan" and "Description of Capital Stock -- Warrants."
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1994 and 1995 and
for the years ended December 31, 1993, 1994 and 1995 are derived from the
Company's audited financial statements included elsewhere in this Prospectus.
The selected financial data as of December 31, 1991, 1992 and 1993 and for the
years ended December 31, 1991 and 1992 are derived from audited financial
statements of the Company not included in this Prospectus. The selected
financial data as of March 31, 1996 and for the three months ended March 31,
1995 and 1996 are derived from the Company's unaudited financial statements
included elsewhere in this Prospectus. In the opinion of management, such
unaudited financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. The results of operations for the three months
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the full year. The following data should be read in conjunction
with the financial statements of the Company, including the notes thereto. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Financial Statements."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net revenues......................... $ 3,289 $ 2,645 $ 2,105 $ 2,020 $ 2,707 $ 528 $ 1,752
Cost of revenues..................... 1,389 1,108 1,013 1,173 1,642 382 502
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................... 1,900 1,537 1,092 847 1,065 146 1,250
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development........... 813 920 906 971 1,010 195 517
Sales and marketing................ 333 620 794 392 879 191 396
General and administrative......... 367 546 325 1,031 681 199 211
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses............. 1,513 2,086 2,025 2,394 2,570 585 1,124
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss).......... 387 (549) (933) (1,547) (1,505) (439) 126
Interest and other income (expense),
net................................. (23) (19) (3) (435) (921) (221) (50)
Provision for income taxes........... 35 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................ $ 329 $ (568) $ (936) $ (1,982) $ (2,426) $ (660) $ 76
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share...... $ 0.03 $ (0.05) $ (0.08) $ (0.16) $ (0.19) $ (0.05) $ 0.01
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in per share
calculations.................... 10,491 10,537 11,676 12,526 12,765 12,765 14,863
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Supplemental net income (loss)
(1)............................. -- -- -- -- $ (2,298) -- $ 108
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Supplemental net income (loss)
per share (1)................... -- -- -- -- $ (0.18) -- $ 0.01
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in supplemental per
share calculation (1)........... -- -- -- -- 12,902 -- 15,005
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 302 $ 103 $ 131 $ 132 $ 123 $ 1,277
Working capital (deficit)............................ 102 (67) 834 657 (1,549) 468
Total assets......................................... 916 1,115 1,953 2,922 2,459 4,679
Long-term obligations less current
portion............................................. 66 34 -- 1,009 -- 23
Accumulated deficit.................................. (104) (672) (1,607) (3,589) (6,015) (5,939)
Total shareholders' equity (deficit)................. 174 71 1,011 (139) (1,429) 720
</TABLE>
- ------------------------
(1) Supplemental net income, supplemental net income per share and shares used
in supplemental per share calculation for 1995 and the three months ended
March 31, 1996 were calculated assuming that the indebtedness to be repaid
with the net proceeds of the Offering had been repaid at the beginning of
each such period using the assumed proceeds from the sale of the minimum
number of shares required to retire such indebtedness, at an assumed
offering price of $14.00 per share. See "Use of Proceeds."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS DISCUSSED IN THIS PROSPECTUS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS."
OVERVIEW
The Company was founded in 1989 as an outgrowth of certain research and
development efforts initially undertaken by the Company's founders in the early
1980s related to the use of laser technology to treat cardiovascular disease.
From 1989 through September 1995, the Company engaged in research, development
and sale of surgical laser products principally for procedures such as
atherectomy and arthroscopy. In 1993, the Company created and spun off to its
shareholders a balloon angioplasty company, Atlantis Catheter Company, Inc. In
1995, the Company determined that there is a significant opportunity in the TMR
market, and that the Company is well-positioned to enter this market because of
the Company's expertise with laser-based surgical techniques and the treatment
of cardiovascular disease. Accordingly, in late 1995, the Company changed its
strategic direction and began to apply its laser expertise toward the nascent
TMR market.
Since late 1995, the Company has been engaged in restructuring its
operations and expanding its management team in order to focus on the
development and commercialization of its TMR products. In September 1995, the
Company received an IDE allowing it to begin selling its TMR products for
investigational use only, and commenced clinical trials in the United States and
Europe in November 1995. In 1995 and the first quarter of 1996, the Company
installed a total of six and twelve TMR systems in hospitals, respectively.
To date, the Company has focused almost exclusively on research and
development activities relating to surgical laser products, substantially
contributing to annual operating losses since inception. At March 31, 1996, the
Company had an accumulated deficit of $5.9 million. Research and development
efforts have been funded primarily through private placements of equity in the
aggregate amount of $6.6 million since inception and periodic borrowings from
shareholders. The Company expects to continue to incur operating losses related
to research and development activities, including clinical studies, the
expansion of sales and marketing resources and the continued development of
corporate infrastructure. The timing and amounts of the Company's expenditures
will depend upon a number of factors, including the progress of the Company's
clinical trials, the status and timing of regulatory approval, the timing of
market acceptance, if any, of the Company's products, and the efforts required
to develop the Company's sales and marketing organization.
RESULTS OF OPERATIONS
REVENUES
Revenues increased from $2.1 million in 1993 and $2.0 million in 1994 to
$2.7 million in 1995, and were $1.8 million in the first quarter of 1996 as
compared to $528,000 in the first quarter of 1995 and $1.0 million in the fourth
quarter of 1995. The increases in 1995 as compared to 1994 and in the first
quarter of 1996 as compared to the first and fourth quarters of 1995 were
primarily due to commencement of sales of the Company's TMR products at the end
of 1995. These increases also resulted in an increase in accounts receivable to
$1.4 million at March 31, 1996 from $532,000 at December 31, 1995. Sales were
relatively flat from 1993 to 1994 as increased revenues from one of the
Company's early product lines offset reduced sales of laser systems for another
early product line. Since 1995, the Company has focused on the TMR market. Sales
of non-TMR related surgical products were 100% of revenues in 1993 and 1994, 68%
of revenues in 1995, and 10% of revenues in the first three months of 1996.
Future revenues could be affected by the timing and manner of sale of a
limited number of units of TMR laser systems. In order to assist hospitals in
making the substantial investment in the Company's laser system, which carries a
list price of $295,000, the Company intends either to sell the system to the
hospital outright or to place the system with the hospital for a placement fee
(currently $25,000) plus an additional
18
<PAGE>
fee for each procedure performed. In light of the relatively high list price of
the Company's laser base units, the timing of individual orders and shipments,
as well as the manner of sale, could significantly impact quarter to quarter
results.
GROSS PROFIT
Gross profit decreased from $1.1 million in 1993 to $847,000 in 1994, and
increased to $1.1 million in 1995 and $597,000 in the fourth quarter of 1995. In
the first quarter of 1996, gross profit increased to $1.3 million from $146,000
in the first quarter of 1995. Gross margin decreased from 52% in 1993 to 42% in
1994 and 39% in 1995, and increased to 71% in the first quarter of 1996 as
compared to 28% in the first quarter of 1995 and 58% in the fourth quarter of
1995. The increase in gross profit from 1994 to 1995 reflected commencement of
sales of TMR products in late 1995, offset in large part by the Company's
decision in 1995 to deemphasize sales of other, non-TMR related surgical
products. The declines in gross margin from 1993 to 1994 and from 1994 to 1995
were each attributable to changes in sales mix in favor of certain of the
Company's non-TMR surgical products which generated lower margins than other
such non-TMR surgical products, as well as underutilization of manufacturing
capacity as a result of sales mix changes. The increases in gross profit and
gross margin in the first quarter of 1996 over the prior year, including the
fourth quarter of 1995, reflected the increased emphasis on sales of higher
margin TMR systems.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased modestly from $906,000 in 1993
to $971,000 in 1994 and $1.0 million in 1995, and were $517,000 in the first
quarter of 1996 as compared to $195,000 in the first quarter of 1995 and
$438,000 in the fourth quarter of 1995. The increase in these expenses in the
first quarter of 1996 reflected a higher level of research and development
expenses relating to TMR, including commencement of clinical trials. The
relative flatness in such expenses from 1994 to 1995 reflected an increase in
the level of such expenses in the latter portion of 1995 as the Company
increased its focus on TMR, offset by reduced expenditures with respect to
non-TMR surgical products. Research and development expenditures were relatively
flat from 1993 to 1994 as a result of the relatively flat revenues year to year.
The Company believes that continued investment in the development of new and
improved products and procedures and continued investment in the Company's
clinical trials is critical to its future success. Accordingly, the Company
believes that research and development expenses will continue to increase in
future periods.
SALES AND MARKETING
Sales and marketing expenses decreased from $794,000 in 1993 to $392,00 in
1994, and increased to $879,000 in 1995. Such expenses increased to $396,000 in
the first quarter of 1996 from $191,000 in the first quarter of 1995 and
$328,000 in the fourth quarter of 1995. The increase in the first quarter of
1996 reflected the Company's application of additional resources to the TMR
market. The increase from 1994 to 1995 reflected expansion of the Company's
sales and marketing staff and increased travel and trade show expenses, as well
as expenses associated with the commencement of clinical trials for the
Company's TMR products in late 1995 and associated recruitment of participating
physicians and hospitals. The decrease from 1993 to 1994 was largely
attributable to reduced sales and marketing activity and reduced sales
commissions as the Company switched its emphasis from distributor sales to
direct sales. The Company expects that sales and marketing expenses will
continue to increase significantly as the Company continues to focus resources
on the development of its TMR products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $325,000 in 1993 to $1.0
million in 1994, and decreased to $681,000 in 1995. Such expenses increased from
$199,000 in the first quarter of 1995 and $135,000 in the fourth quarter of 1995
to $211,000 in the first quarter of 1996. The increase in the first quarter of
1996 as compared to the first quarter of 1995 and the fourth quarter of 1995
reflected increased headcount. The lower general and administrative expenses in
the fourth quarter of 1995 as compared to the first quarter of the year was due
primarily to a write off of expenses in the first quarter related to an
unsuccessful financing, while the higher expenses in 1994 as compared to 1993
and 1995 principally reflected professional fees incurred in connection with
certain financing-related initiatives which were terminated during 1994. The
Company anticipates that general and administrative expenses may increase
substantially
19
<PAGE>
in absolute terms, although such expenses may vary as a percentage of revenues,
reflecting the commitment of resources to expand the Company's systems and
infrastructure as well as compliance and other costs associated with operating
as a publicly traded corporation.
INTEREST EXPENSE, NET
Interest expense, net of interest income, increased from $3,000 in 1993 to
$435,000 in 1994 and $921,000 in 1995, and was $50,000 in the first quarter of
1996 compared to $221,000 in the first quarter of 1995. These increases
reflected higher levels of indebtedness and, in 1994 and 1995 (including the
first quarter of 1995), amortization of a discount on notes payable and a higher
level of indebtedness of the Company. A portion of this indebtedness was reduced
in late 1995 in connection with a private offering of equity securities by the
Company. The Company expects to repay the balance of this outstanding
indebtedness with the proceeds of the Offering. See "Use of Proceeds."
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has satisfied its capital requirements
primarily through private sales of its equity securities and, to a lesser
extent, loans from shareholders. In addition, the Company's operations have been
funded in part through sales of the Company's products prior to its focus on the
TMR market. The Company used $1.1 million and $621,000 for operating activities
in 1995 and the three months ended March 31, 1996, respectively. At March 31,
1996, the Company had an accumulated deficit of $5.9 million. The net proceeds
from equity sold through March 31, 1996 was $6.7 million, and at that date the
Company had outstanding an aggregate of $1.7 million in indebtedness to
shareholders of which $1 million bears interest at 6% per annum and the
remainder bears interest at 10% per annum.
The Company had aggregate cash balances of $1.3 million at March 31, 1996.
After giving effect to the estimated net proceeds of the Offering of $51 million
at an assumed public offering price of $14.00 per share, and the use of
approximately $2 million of such proceeds to repay existing indebtedness, the
Company's adjusted cash balances at such date would be $50 million. See "Use of
Proceeds."
The Company anticipates that the net proceeds of the Offering, together with
sales of products for investigational use, will be sufficient to meet the
Company's capital requirements through at least calendar year 1997. The Company
anticipates that, through the end of 1997, approximately $10-15 million of the
proceeds of the Offering will be used for research and development, including
funding of clinical trials; approximately $10-15 million will be used for
expansion of sales and marketing resources; approximately $3 million will be
used for capital expenditures, including expansion of manufacturing facilities;
and approximately $2 million will be used for repayment of debt as referenced
above. The balance of the proceeds will be used for other general corporate
purposes including working capital. There can be no assurance, however, that the
Company will not require additional sources of cash at an earlier date in the
future, depending upon the progress of expansion of the Company's clinical
trials, any need for additional clinical trials or other testing of the
Company's products, and the timing of other required expenditures as indicated
above. If the Company is required to obtain additional financing in the future,
there can be no assurance that capital will be available on terms acceptable to
the Company, if at all.
20
<PAGE>
BUSINESS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING STATEMENTS AS A RESULT
OF CERTAIN FACTORS DISCUSSED IN THIS PROSPECTUS, INCLUDING THOSE SET FORTH UNDER
"RISK FACTORS."
The Company designs, develops, manufactures and distributes laser-based
surgical products and disposable fiber-optic accessories for the treatment of
advanced cardiovascular disease through transmyocardial revascularization
("TMR"). TMR is a surgical procedure performed on the beating heart in which a
laser device is used to create pathways through the myocardium directly into the
heart chamber. The pathways are intended to enable improved blood supply to the
myocardium from the heart chamber. TMR potentially offers end-stage cardiac
patients who are not candidates for percutaneous transluminal coronary
angioplasty ("PTCA" or "balloon angioplasty") or coronary artery bypass graft
surgery ("CABG" or "open heart bypass surgery") a means to alleviate their
anginal symptoms and improve their quality of life. The Company currently offers
its Eclipse TMR 2000 laser system for sale in limited numbers for
investigational use only pursuant to an Investigational Device Exemption (an
"IDE") from the U.S. Food and Drug Administration (the "FDA"). From September
1995 through April 30, 1996, the Company had installed its TMR laser systems in
20 hospitals in the U.S. and two hospitals in Europe. The Company believes it is
the market leader in installations of TMR surgical lasers in the U.S.
BACKGROUND
Cardiovascular disease is the leading cause of death and disability in the
U.S., according to the American Heart Association (the "AHA"). Coronary artery
disease is the principal form of cardiovascular disease and is characterized by
a progressive narrowing of the coronary arteries, which supply blood to the
heart. This narrowing process is usually due to atherosclerosis, the buildup of
fatty deposits, or plaque, on the inner lining of the arteries. Coronary artery
disease reduces the available supply of oxygenated blood to the heart muscle,
potentially resulting in severe chest pain known as angina and damage to the
heart. Typically, the condition worsens over time and often leads to heart
attack or death.
Based on standards promulgated by the Canadian Heart Association, angina is
typically classified into four classes, ranging from Class I, in which anginal
pain results only from strenuous exertion, to the most severe class, Class IV,
in which the patient is unable to conduct any physical activity without angina
and angina may be present even at rest. The AHA estimates that more than six
million Americans experience anginal symptoms.
The primary therapeutic options for treatment of coronary artery disease are
drug therapy, PTCA (including techniques which augment or replace PTCA such as
stent placement and atherectomy), and CABG. The objective of each of these
approaches is to increase blood flow through the coronary arteries to the heart.
The AHA estimates that the total number of cardiovascular related surgical
procedures performed in the U.S. each year is approximately 885,000, including
approximately 485,000 open heart bypass surgeries and approximately 400,000 PTCA
procedures. According to the American Hospital Association, approximately 1,100
hospitals in the U.S. perform cardiovascular related surgical procedures.
Drug therapy may be effective for mild cases of coronary artery disease and
angina either through medical effects on the arteries that improve blood flow
without reducing the plaque or by decreasing the rate of formation of additional
plaque (E.G., by reducing blood levels of cholesterol). Because of the
progressive nature of the disease, however, many patients with angina ultimately
undergo either PTCA or open heart bypass surgery.
PTCA is a less-invasive alternative to CABG introduced in the early 1980s in
which a balloon-tipped catheter is inserted into an artery, typically near the
groin, and guided to the areas of blockage in the coronary arteries. The balloon
is then inflated and deflated at each blockage site, thereby rupturing the
blockage and stretching the vessel. Although the procedure is usually successful
in widening the blocked channel, the artery often renarrows within six months of
the procedure, a process called "restenosis," often necessitating a repeat
procedure. A variety of techniques for use in conjunction with PTCA have been
developed in an attempt to reduce the frequency of restenosis, including stent
placement and atherectomy. Stents are small metal frames
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<PAGE>
delivered to the area of blockage using a balloon catheter and deployed or
expanded within the coronary artery. The stent is a permanent implant intended
to keep the channel open. Atherectomy is a means of using mechanical, laser or
other techniques at the tip of a catheter to cut or grind away plaque.
CABG is an open chest procedure developed in the 1960s in which conduit
vessels are taken from elsewhere in the body and grafted to the blocked coronary
arteries so that blood can bypass the blockage. CABG typically requires use of a
heart-lung bypass machine to render the heart inactive (to allow the surgeon to
operate on a still, relatively bloodless heart) and involves prolonged
hospitalization and patient recovery periods. Accordingly, it is generally
reserved for patients with severe cases of coronary artery disease or those who
have previously failed to receive adequate relief of their symptoms from PTCA or
related techniques. Unfortunately, most bypass grafts fail within one to fifteen
years following the procedure. Repeating the surgery ("re-do bypass surgery") is
possible, but is made more difficult because of scar tissue and adhesions that
typically form as a result of the first operation. The American Heart Journal
estimates that 12% of the total CABG procedures in the U.S. are re-do bypass
surgeries. Moreover, for many patients CABG is inadvisable for various reasons,
such as the severity of the patient's overall condition, the extent of coronary
artery disease or the small size of the blocked arteries.
When these treatment options are exhausted, the patient is left with no
viable surgical alternative other than, in limited cases, heart transplantation.
Without a viable surgical alternative, the patient is generally managed with
drug therapy, often with significant lifestyle limitations. TMR, currently under
clinical investigation by the Company and certain other companies, offers
potential relief to a large class of patients with severe cardiovascular
disease.
THE TMR PROCEDURE
TMR, or transmyocardial revascularization, is a surgical procedure performed
on the beating heart, in which a laser device is used to create pathways through
the myocardium directly into the heart chamber. The pathways are intended to
enable improved perfusion, or supply, of blood to the myocardium from the heart
chamber. Current clinical trials are intended to demonstrate improved perfusion
as evidenced by reduced angina in the patient. TMR potentially can be performed
using any of several different surgical approaches, including open chest
surgery, minimally invasive surgery through small openings in the chest or
percutaneous surgery involving the use of a laser-tipped catheter threaded
through a peripheral artery. TMR potentially offers end-stage cardiac patients
who are not candidates for PTCA or CABG a means to alleviate their symptoms and
improve their quality of life. TMR may also be effective when used in
conjunction with (as opposed to following) other procedures such as PTCA and
CABG. The Company has received IDEs to conduct two clinical studies of TMR using
an open chest approach but has not yet sought IDEs to conduct clinical studies
using either a minimally invasive approach or a percutaneous approach.
The physiologic principles underlying TMR as a potential treatment for
cardiovascular disease were first identified in the 1930s. It was observed then
that although the human myocardium depends on external coronary arteries for its
blood supply, it displays elements of certain direct blood pathways found in
reptilian hearts. In reptiles, blood is supplied directly to the myocardium
through these pathways from the chambers of the heart. These observations led to
a belief that impaired vascularization in the human myocardium could be treated
by creating direct pathways through the myocardium into the heart chamber.
Successes in other treatment techniques such as PTCA and CABG, however, as well
as limitations in the technologies available to perform TMR, limited the focus
on TMR until recently. Following numerous advancements in the use of laser
technology in medical applications, human trials of laser-based TMR commenced in
the 1980s. TMR is now being offered as an investigational procedure as part of
clinical studies to determine the procedure's safety and effectiveness.
BUSINESS STRATEGY
The Company's objective is to become the leading supplier in the TMR market.
The Company's strategies to achieve this goal are as follows:
DEMONSTRATE CLINICAL UTILITY OF TMR. The Company is seeking to demonstrate
the clinical safety and effectiveness of TMR and achieve FDA approval of the
Company's products through clinical trials. The
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<PAGE>
Company's initial clinical trial commenced in November 1995 and is designed to
assess the safety and effectiveness of the Company's TMR procedure as compared
with drug therapy. Depending upon the success of this initial trial, the Company
intends to submit a PMA application as early as the latter part of 1997.
DEVELOP COMPREHENSIVE PRODUCT LINES FOR TMR. The Company is seeking to
develop multiple surgical platforms and provide a comprehensive suite of high
quality products for TMR. The Company believes that its compact, flexible,
fiber-optic based system will enable it to offer effective TMR solutions across
the three principal TMR surgical approaches potentially available for TMR, open
chest surgery, minimally invasive surgery and percutaneous surgery. The Company
is also developing a broad range of disposable fiber-optic based surgical tools
designed to operate with the Company's laser base unit and intended to provide
physicians with a broad range of options for their individual tactile
preferences and solutions for the different geometry of each patient's heart
cavity.
LEVERAGE PROPRIETARY TECHNOLOGY. The Company believes that its significant
expertise in laser systems for cardiovascular disease and the proprietary
technologies it has developed are important factors in its efforts to
demonstrate the safety and effectiveness of its TMR procedures. The Company is
seeking to leverage this expertise in developing TMR systems designed for
minimally invasive and percutaneous TMR surgical procedures, in addition to the
open chest TMR procedure currently being investigated in the Company's clinical
trials. The Company is also seeking to develop additional proprietary
technologies for TMR and related procedures. The Company holds five U.S. and
related foreign patents relating to surgical treatment with lasers and
fiber-optic handpieces, and has several patent applications pending relating to
various aspects of TMR. See "Intellectual Property Matters."
EXPAND MARKET FOR THE COMPANY'S PRODUCTS. The Company is seeking to expand
market awareness of the Company's products among opinion leaders in the
cardiovascular field, subject to appropriate regulatory guidelines. In
connection with the current clinical trials, the Company has focused its initial
efforts on the 200 hospitals in the U.S. that perform the greatest number of
CABG procedures. The Company also intends to develop foreign markets for its
products through international distribution relationships. In addition, the
Company has assembled a board of scientific advisors consisting of a number of
influential cardiac surgeons and cardiologists. The Company has also developed a
comprehensive training program to assist physicians in acquiring the expertise
necessary to utilize the Company's TMR products and procedures.
EXPAND INDICATIONS FOR TMR. The Company is seeking to expand the approved
indications for TMR through additional clinical studies. For example, the
Company has obtained FDA approval to undertake Phase I of a second TMR study
intended to assess the safety and effectiveness of the Company's TMR procedures
used in conjunction with CABG as compared with CABG used alone.
RISK FACTORS
The Company's success will depend upon successful completion of clinical
trials, which are at an early stage; the receipt of FDA and other governmental
approvals, which may take considerable time, and may not be granted at all;
acceptance of TMR, which is a new surgical procedure, among the medical
community; the ability to protect the Company's intellectual property rights;
the risks of claims of infringement of third party intellectual property rights;
the ability of the Company to manage change and growth in its business,
particularly in light of the Company's limited history of TMR operations and
history of operating losses; the ability of the Company to succeed in light of
significant competition; and other risks. See "Risk Factors."
PRODUCTS AND TECHNOLOGY
ECLIPSE TMR 2000 SYSTEM
The Eclipse TMR 2000 system consists of the Eclipse TMR 2000 laser base unit
and a line of fiber-optic, laser based surgical tools. Each surgical tool
utilizes optical fiber to deliver laser energy from the source laser base unit
to the distal tip of the surgical handpiece. The compact base unit occupies a
small amount of operating room floor space, operates on a standard 208 or
220-volt power supply, features a self-contained cooling system which eliminates
the need for electrical or plumbing modifications to the hospital operating room
or catheterization laboratory where it is typically used on patients, and is
light enough to move within
23
<PAGE>
the operating room or among operating rooms in order to use operating room space
efficiently. Moreover, the flexible, lightweight and slender optical fiber used
to deliver the laser energy to the patient enables ready access to the patient
and to various sites within the open chest.
The Eclipse TMR 2000 system and related surgical procedures are designed to
be used without the requirement of the external systems utilized with certain
competitive TMR systems. For example, the Eclipse TMR 2000 does not require
electrocardiogram synchronization, which monitors the electrical output of the
heart and times the use of the laser to minimize electrical disruption of the
heart, or transesophageal echocardiography, which tests each application of the
laser to the myocardium during the TMR procedure to determine if the pathway has
penetrated through the myocardium into the heart chamber. These additional
systems often require the presence of an additional physician. The Company's
products are also designed to minimize bleeding in the external layer of the
myocardium.
ECLIPSE HOLMIUM LASER. The Eclipse TMR 2000 laser base unit generates laser
light of a 2-micron wavelength by photoelectric excitation of a solid state
holmium crystal. The holmium laser, because it uses a solid state crystal as its
source, is compact, reliable and requires low maintenance. The Company has been
using holmium lasers since the Company's inception.
DISPOSABLE SURGICAL TOOLS. The Company offers to physicians a broad range
of surgical tool options for their individual tactile preferences and solutions
for the different geometry of each patient's heart cavity. These products are
designed to give the surgeon control of the procedure, access to difficult to
reach areas of the heart and clear visualization of the surgical field. Each
such tool is designed for disposal after use in a single surgical procedure. The
products include the following devices:
CRYSTALPOINT. The CrystalPoint fiber-optic handpiece system utilizes a
single, one millimeter diameter optical fiber to deliver the energy from the
Eclipse TMR 2000 laser base unit to the targeted surgical sites within the
body. The single strand design provides maximum tactile feedback to the
surgeon, as he or she monitors the penetration of the laser into the
myocardium. The fiber-optic design provides flexibility and maneuverability
for the surgeon, particularly as compared to the articulated mechanical arms
required in connection with CO(2) laser-based devices.
CRYSTALFLEX AND J-GRIP. The CrystalFlex handpiece system is comprised
of multiple, fine fiber-optic strands in a one millimeter diameter bundle.
The CrystalFlex fiber delivers the same amount of laser energy as the
CrystalPoint, but the fiber bundle makes the CrystalFlex more flexible than
the CrystalPoint with its single solid core. The CrystalFlex is used in
conjunction with the J-Grip handpiece to provide access to hard to reach
sites within the heart cavity. The J-Grip handpiece, which is made of
malleable stainless steel alloy, has a curved end which can be repeatedly
adjusted while in use to reach different areas.
The CrystalPoint and CrystalFlex fiber-optic handpieces each have an easy to
install connector which screws into the laser base unit, and each device is
pre-calibrated in the factory so it requires no special preparation. Some
surgeons elect to use more than one product for a single patient such as
combining the CrystalFlex and J-Grip for hard to reach sites and the
CrystalPoint for easier to access areas.
REGULATORY STATUS
The Company is currently involved in the second and final phase of a
clinical study designed to assess the safety and effectiveness of TMR performed
in an open chest procedure for the treatment of patients with Class IV angina as
compared with drug therapy. The Company originally received FDA clearance to
commence this clinical study in September 1995, and undertook Phase I of the
study shortly thereafter in November 1995. Phase I was intended to provide
indications of safety prior to undertaking expanded clinical trials, and was
completed in January 1996. In February 1996, the FDA reviewed the Phase I
results and authorized commencement of Phase II.
Phase II of the study will involve a minimum of 126 patient trials, which
are currently expected to be completed by the latter half of 1996, depending on
the rate at which the Company is able to establish
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<PAGE>
additional TMR sites and enroll patients in the study. Phase II commenced March
18, 1996 and through March 31, 1996 a total of 10 trials had been performed. In
addition, the Company intends to perform patient follow-up reviews for up to
twelve months prior to submission of a PMA application.
In February 1996, the Company obtained FDA clearance to undertake Phase I of
another clinical study of TMR intended to assess the safety and effectiveness of
TMR used in conjunction with CABG as compared with CABG alone. The Company
intends to begin these trials in the second quarter of 1996.
There can be no assurance that the results of the Company's studies will be
sufficient to obtain the PMA required to commercialize its TMR products.
Additionally, there can be no assurance that the Company will not be required to
conduct additional trials which may result in substantial costs and delays. See
"-- Government Regulation."
SALES AND MARKETING
The Company is currently restricted to selling its TMR products for
investigational use only. To the extent permitted under FDA rules, the Company
is seeking to promote market awareness of the Company's products among opinion
leaders in the cardiovascular field and to recruit physicians and hospitals to
participate in the Company's clinical trials. Although approximately 1,100 U.S.
hospitals perform CABG procedures, the Company has focused its initial
recruitment efforts, in connection with the current clinical trials, on the 200
hospitals in the U.S. that perform the greatest number of CABG procedures. To
address this market area the Company maintains a domestic direct sales force
consisting of five regional sales managers and utilizes a regional distributor
of cardiovascular surgical products to manage sales in the sixth designated U.S.
sales region. In the event the Company receives a PMA for the Company's TMR
products, the Company intends to expand its direct sales and support personnel.
The Company currently offers a laser base unit, at a current end user list
price of $295,000 per unit, and disposable surgical tools (at least one of which
must be used with each TMR procedure) at an end user unit price of $1,895. In
order to assist hospitals in making the substantial investment in the Company's
laser system, the Company intends either to sell the system to the hospital
outright or to place the system with the hospital, for a placement fee
(currently $25,000) plus an additional fee for each procedure performed.
The Company intends to broaden its line of disposable products as part of
its strategy to develop multiple platforms for TMR. In addition to the open
chest TMR procedure currently under investigation, the Company intends to
develop TMR systems designed for minimally invasive TMR surgical procedures and
percutaneous TMR procedures, each of which are made possible by the use of the
Company's flexible, lightweight and slender fiber-optic based surgical tools.
Open chest TMR procedures and minimally invasive TMR surgical procedures would
typically be performed by cardiac surgeons. In contrast, the Company believes
that percutaneous TMR could be a viable procedure for interventional
cardiologists for use in conjunction with other percutaneous procedures such as
PTCA.
In Europe, the Company has sold a TMR system to Sorin Biomedical Inc.
("Sorin"), a leading supplier of cardiovascular surgery products and a
subsidiary of Fiat S.p.A., for use by Sorin in conducting clinical trials in
Europe. The Company is currently in discussions with Sorin and other firms to
establish distribution relationships (subject to appropriate regulatory
approvals). There can be no assurance that any such agreement will be
consummated.
From September 1995 through April 30, 1996, the Company installed systems in
20 hospitals in the U.S. and two hospitals in Europe. The Company believes it
has the largest number of installations of surgical lasers for TMR in the U.S.
The Company has developed, in conjunction with one of the major hospitals
using the Company's TMR products, a training program to assist physicians in
acquiring the expertise necessary to utilize the Company's TMR products and
procedures. This program includes a comprehensive two-day course including
observation of live TMR procedures, didactic training and hands-on performance
of TMR in vivo.
The Company exhibits its products at major cardiovascular meetings and
recruits new investigators to buy the Company's products for investigational use
in their hospitals. Investigators of the Company's
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products have made presentations at meetings around the world, describing their
results. Articles will be submitted to peer-reviewed publications and industry
journals to present the results of the ongoing clinical trials. The Company is
also developing a comprehensive patient recruitment program for use by hospitals
and physicians conducting the Company's investigational trials to promote
awareness of TMR and to educate prospective clinical trial patients regarding
TMR.
SCIENTIFIC ADVISORY BOARD
The Company has recently formed a Scientific Advisory Board to meet with the
Company on an individual and group basis and to discuss the Company's TMR
products and procedures, relevant developments in cardiology and the treatment
of heart disease, and strategic directions. In addition, the Company has worked
with the medical staffs of several major universities in developing the
protocols for the Company's TMR procedures and in clinical data monitoring and
statistical analysis.
The Scientific Advisory Board consists of a number of prominent members of
the medical and scientific communities, including the following persons:
<TABLE>
<CAPTION>
NAME OCCUPATION/TITLE
- --------------------------------- --------------------------------------------------------------------
<S> <C>
Eric Powers, M.D. Professor of Medicine and Director
Cardiac Cath Laboratory
University of Virginia
Norman Shumway, M.D. Professor Emeritus
Cardiothoracic Surgery
Stanford University Medical Center
Vaughn Starnes, M.D. Professor of Surgery and Chief
Cardiothoracic Surgery
University of Southern California School of Medicine
Eric Topol, M.D. Chairman
Department of Cardiology
Cleveland Clinic Foundation
</TABLE>
In addition, the Company meets several times each year, during professional
conferences and exhibitions, with the group of physicians who serve as
investigators in connection with the Company's clinical trials, in order to
discuss clinical procedures and results.
RESEARCH AND DEVELOPMENT
The Company's ongoing research and product development efforts are focused
on the development of new and enhanced lasers, fiber-optic handpieces and TMR
applications. The Company intends to continue to acquire and adapt for medical
use the most promising new laser technologies and products. In addition, the
Company continues to develop new laser handpieces in order to enhance the
utility and quality of the Company's line of disposable surgical tools and to
expand the indications for use and variety of procedures that can be performed
with the Company's surgical tools. Specifically, the Company is seeking to
achieve continual improvements in its TMR procedure, including greater surgical
access and visualization of the surgical field; greater precision in the
placement of pathways; reduced epicardial bleeding and bruising of heart muscle;
greater margins of safety with respect to underlying heart structures; and
reduced likelihood of induction of arrhythmia.
In furtherance of the Company's strategy to develop the three principal
surgical platforms for performance of TMR, current research efforts include
enhancements to open chest surgical TMR as well as complementary techniques for
minimally invasive surgical TMR and percutaneous TMR. In all these cases, the
Company anticipates new disposable products will be required to satisfy market
requirements. Minimally invasive surgical TMR and percutaneous TMR will each
require FDA approval to commence clinical trials. See "-- Government
Regulation."
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<PAGE>
The Company's research and development spending, including expenditures
related to clinical trials, was $906,000, $971,000 and $1 million, respectively,
in 1993, 1994 and 1995, and was $517,000 in the first quarter of 1996. The
Company expects that research and development expenses will increase
substantially in connection with the Company's clinical trials and ongoing
development efforts.
All medical products of the types produced by the Company require a PMA
prior to commercial marketing in the U.S. There can be no assurance that the
Company will obtain a PMA from the FDA for the Company's TMR products.
The Company has also done research and received FDA clearances for laser
surgery products other than its TMR systems. The Company is not actively
distributing such products at this time.
MANUFACTURING AND QUALITY ASSURANCE
The Company manufactures and assembles its products from purchased
components and subassemblies, primarily at the Company's facility in Sunnyvale,
California.
Each laser is mobile and shock resistant, complies with Underwriters
Laboratory ("UL") standards and is equipped with safety interlocks and user
friendly controls and meters. Company production personnel assemble and test
each laser system in a process designed to test the integrity of the laser
system and to provide for accurate calibration of system components. Upon
completion of these tests, the laser is packaged for shipment. Company personnel
uncrate and install the laser at the hospital, and verify that the system meets
acceptance criteria, including all laser power output specifications.
Laser handpieces are fabricated from tubing, connectors and optical fibers,
each of which is purchased from outside vendors. The individual optical fibers
are cut to the appropriate length, bundled and placed in the extruded tubing and
metal connectors, and the tip of the device is molded and polished. Prior to
packaging, each handpiece is tested on a laser system to verify acceptable power
output.
The Company's assembly and manufacturing activities to date have consisted
primarily of producing limited quantities of its laser units and fiber-optic
accessories for sale to clinical investigators. The Company's future
profitability will depend, in part, on its ability to achieve manufacturing
efficiencies as production volumes increase.
The core components of the Company's laser units and fiber-optic handpieces
are generally acquired from multiple sources. The Company currently purchases
certain laser and fiber-optic components and subassemblies from single sources.
Although the Company has identified alternative vendors, the qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption would have a material
adverse effect on the Company's ability to manufacture its products and,
therefore, would materially and adversely affect the Company's business,
financial condition and results of operations. The Company intends to continue
to qualify multiple sources for components that are presently single sourced and
also to build an inventory of these items for use in the event of supply
interruptions.
The Company is committed to continuous quality improvement in its
manufacturing and assembly operations. Each subassembly and product is
thoroughly tested at multiple stages of production to ensure proper operation
and compliance with applicable regulatory standards. Manufacturing quality is
documented and monitored continually, and the Company is currently seeking to
obtain ISO 9000 certification of the quality of its manufacturing processes.
The Company is required to register as a manufacturer of medical devices
with the FDA and state agencies such as the California Department of Health
Services. As a condition to receipt of a PMA, the Company's facilities,
procedures and practices will be subject to pre-approval GMP inspections and
thereafter to ongoing, periodic inspections by the FDA and such other regulatory
agencies.
The Company is also subject to certain Federal, state and local regulations
regarding environmental protection and hazardous substance controls, among
others. Although the Company believes it currently complies in all material
respects with such regulations, failure to comply could subject the Company to
fines or other enforcement actions.
27
<PAGE>
The Company provides to its customers in the U.S. and to its foreign
distributors a free one-year parts and service warranty for each laser unit. The
Company offers extended warranty coverage for one-year periods to customers in
the U.S. The Company also performs service on a fee basis on laser units that
are no longer covered by warranty. Annual service contracts are generally priced
at 10% of the purchase price of the laser unit. Handpieces are sold without
warranty.
COMPETITION
The Company expects that the market for TMR, which is currently in the early
stages of development, will be intensely competitive. Competitors include PLC
Systems, Inc. ("PLC") and CardioGenesis Corporation ("CardioGenesis"), both of
which are currently selling TMR products for investigational use in the U.S. and
abroad. Other competitors may also enter the market, including large companies
in the laser and cardiac surgery markets. Many of these companies have or may
have significantly greater financial, development, marketing and other resources
than the Company.
PLC is a publicly traded corporation which uses a CO(2) laser and an
articulated mechanical arm in its TMR products. PLC obtained an IDE to undertake
clinical trials in January 1990. PLC has conducted extensive trials but has not
yet received a PMA. PLC has received the CE Mark which allows sales of its
products commercially in all European Union countries. PLC has been issued
patents for its apparatus and methods for TMR.
CardioGenesis is a privately held company which uses a holmium laser and
fiber optics in its TMR products. CardioGenesis has been issued patents for its
methods of TMR, is actively promoting its products in Europe, and has obtained
an IDE to begin clinical trials in the U.S.
The Company believes that the factors which will be critical to market
success include the timing of receipt of requisite regulatory approvals,
effectiveness and ease of use of the TMR products and procedures on both a stand
alone basis and in conjunction with other procedures such as CABG and PTCA,
breadth of product line, system reliability, brand name recognition and
effectiveness of distribution channels and cost of capital equipment and
disposable devices.
TMR also competes with other methods for the treatment of cardiovascular
disease, including drug therapy, PTCA and CABG. Although the Company is seeking
to demonstrate the safety and effectiveness of the Company's TMR procedures in
patients for whom other cardiovascular treatments are not likely to provide
relief, and in the future intends to pursue the safety and effectiveness of TMR
when used in conjunction with other treatments, there can be no assurance that
the Company's TMR products will be accepted. Moreover, technological advances in
other therapies for cardiovascular disease such as pharmaceuticals or future
innovations in cardiac surgery techniques could make such other therapies more
effective or lower in cost than the Company's TMR procedure and could render the
Company's technology obsolete. There can be no assurance that physicians will
use the Company's TMR procedure to replace or supplement established treatments,
or that the Company's TMR procedure will be competitive with current or future
technologies. Such competition could materially and adversely affect the
Company's business, financial condition and results of operations.
Any product developed by the Company that gains regulatory approval will
face competition for market acceptance and market share. An important factor in
such competition may be the timing of market introduction of competitive
products. Accordingly, the relative pace at which the Company can develop
products, complete clinical testing and regulatory approval processes, gain
reimbursement acceptance and supply commercial quantities of the product to the
market are expected to be important competitive factors. In the event a
competitor is able to obtain a PMA for its products prior to the Company, the
Company's ability to compete successfully could be materially and adversely
affected. There can be no assurance that the Company will be able to compete
successfully against current and future competitors. Failure to do so would
materially and adversely affect the Company's business, financial condition and
results of operations.
GOVERNMENT REGULATION
Laser-based surgical products and disposable fiber-optic accessories for the
treatment of advanced cardiovascular disease through TMR are considered medical
devices, and as such are subject to regulation in
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<PAGE>
the U.S. by the FDA. The Company has FDA clearance for the sale of the Eclipse
laser system for thoracic surgery. However, the Company has voluntarily
submitted the device to the more rigorous PMA process with the objective of
gaining approval for more specific labeling for the treatment of advanced
cardiovascular disease.
To obtain a PMA for a medical device, the Company must file a PMA
application that includes clinical data and the results of pre-clinical and
other testing sufficient to show that there is a reasonable assurance of safety
and effectiveness of the product for its intended use. To begin a clinical
study, an IDE must be obtained and the study must be conducted in accordance
with FDA regulations. An IDE application must contain preclinical test data
demonstrating the safety of the product for human investigational use,
information on manufacturing processes and procedures, and proposed clinical
protocols. If the IDE application is cleared by the FDA, human clinical trials
may begin. The results obtained from these trials, if satisfactory, are
accumulated and submitted to the FDA in support of a PMA application. Premarket
approval from the FDA is required before commercial distribution of devices
similar to those under development by the Company is permitted in the U.S. In
addition to the results of clinical trials, the PMA application must include
other information relevant to the safety and effectiveness of the device, a
description of the facilities and controls used in the manufacturing of the
device, and proposed labeling. By law, the FDA has 180 days to review a PMA
application. While the FDA has responded to PMA applications within the allotted
time frame, reviews more often occur over a significantly longer period and may
include requests for extensive additional trials. There can be no assurance that
the Company will not be required to conduct additional trials which may result
in substantial costs and delays, nor can there be any assurance that a PMA will
be obtained in a timely manner, if at all. In addition, changes in existing
regulations or adoptions of new regulations or policies could prevent or delay
regulatory approval of the Company's products. Furthermore, even if a PMA is
granted, subsequent modifications of the approved device for the manufacturing
process may require a supplemental PMA or the submission of a new PMA which
could require substantial additional clinicial efficacy data and FDA review.
After the FDA accepts a PMA application for filing, and after FDA review of the
application, a public meeting is frequently held before an FDA advisory panel in
which the PMA is reviewed and discussed. The panel then issues a favorable or
unfavorable recommendation to the FDA or recommends approval with conditions.
Although the FDA is not bound by the panel's recommendations, it tends to give
such recommendations significant weight.
Products manufactured or distributed by the Company pursuant to a PMA will
be subject to pervasive and continuing regulation by the FDA, including, among
other things, postmarket surveillance and adverse event reporting requirements.
Failure to comply with applicable regulatory requirements can result in, among
other things, warning letters, fines, suspensions or delays of approvals,
seizures or recalls of products, operating restrictions or criminal
prosecutions. The FDC Act also requires the Company to manufacture its products
in registered establishments and in accordance with GMP regulations and to list
its devices with the FDA. Furthermore, as a condition to receipt of a PMA, the
Company's facilities, procedures and practices will be subject to additional
pre-approval GMP inspections and thereafter to ongoing, periodic GMP inspections
by the FDA. These GMP regulations impose certain procedural and documentation
requirements upon the Company with respect to manufacturing and quality
assurance activities. The FDA has proposed amendments to the GMP regulations
that will likely increase the cost of compliance with GMP requirements. Labeling
and promotional activities are subject to scrutiny by the FDA. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses. Changes in existing regulatory requirements or adoption of new
requirements could materially and adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will not be required to incur significant costs to comply with laws
and regulations in the future or that laws and regulations will not materially
and adversely affect the Company's business, financial condition and result of
operations.
29
<PAGE>
The Company is also regulated by the FDA under the Radiation Control for
Health and Safety Act, which requires laser products to comply with performance
standards, including design and operation requirements, and manufacturers to
certify in product labeling and in reports to the FDA that their products comply
with all such standards. The law also requires laser manufacturers to file new
product and annual reports, maintain manufacturing, testing and sales records,
and report product defects. Various warning labels must be affixed and certain
protective devices installed, depending on the class of the product. In
addition, the Company is subject to California regulations governing the
manufacture of medical devices, including an annual licensing requirement. The
Company's facilities are subject to ongoing, period inspections by the FDA and
California regulatory authorities.
Sales, manufacture and further development of the Company's TMR system also
may be subject to additional federal regulations pertaining to export controls
and environmental and worker protection, as well as to state and local health,
safety and other regulations that by locality, which may require obtaining
additional permits. The impact of such regulations cannot be predicted.
Sales of medical devices outside of the U.S. are subject to foreign
regulatory requirements that vary widely by country. The time required to obtain
approval for sale in foreign countries may be longer or shorter than that
required for FDA approval, and the requirements may differ. In addition, there
may be foreign regulatory barriers other than pre-market approval, and the FDA
must approve the export of devices that require PMA but are not yet approved
domestically. Such FDA approval for certain devices can require documentation of
approval of importation by the foreign country and a finding by the FDA that
exportation of the device is not contrary to public health and safety. To
continue to market in Europe, the Company must obtain the certifications
necessary to enable the Company to affix to its products the CE Mark by June
1998. The CE Mark is an international symbol of adherence to quality assurance
standards and compliance with applicable European medical device directives. In
order to obtain a CE Mark, the Company must be in compliance with appropriate
ISO 9000 standards and obtain certification of its quality assurance systems by
a recognized European Union notified body. The CE Mark will generally allow the
Company to market the products throughout Europe. However, certain individual
countries within Europe require further approval by their national regulatory
agencies. Failure to receive the right to affix the CE Mark or other requisite
approvals will prohibit the Company from selling its TMR products in member
countries of the European Union or elsewhere, and there can be no assurance that
the Company will be successful in meeting the European certification
requirements.
INTELLECTUAL PROPERTY MATTERS
The Company's success will depend, in part, on its ability to obtain patent
protection for its products, preserve its trade secrets, and operate without
infringing the proprietary rights of others. The Company's policy is to seek to
protect its proprietary position by, among other methods, filing U.S. and
foreign patent applications related to its technology, inventions and
improvements that are important to the development of its business. The Company
holds five U.S. patents and related foreign patents relating to surgical
treatment with lasers and fiber-optic handpieces, and has applied for or is in
the process of applying for additional patents relating to its laser technology,
TMR applications and fiber-optic handpieces. While the Company's existing
patents are not being utilized with the Company's current TMR protocol, the
Company believes such patents may be applicable to minimally invasive and
percutaneous approaches. There can be no assurance that any of the Company's
patents or patent applications will not be challenged, invalidated or
circumvented in the future or that the rights granted thereunder will provide a
competitive advantage. The Company intends to vigorously protect and defend its
intellectual property. It is uncertain whether patent protection will continue
to be available for surgical methods in the future. Costly and time-consuming
litigation brought by the Company may be necessary to enforce patents issued to
the Company, to protect trade secrets or know-how owned by the Company, or to
determine the enforceability, scope and validity of the proprietary rights of
others.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute confidentiality and assignment of inventions agreements in connection
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<PAGE>
with their employment, consulting, or advisory relationships with the Company.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for any breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
have been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. In this regard, competitors of
the Company have been issued a number of patents related to TMR. In September
1995 the Company received from a competitor a notice of potential infringement
of the competitor's patent regarding a method for TMR utilizing synchronization
of laser pulses to the beating of the heart. In January 1996, the Company
received from a second competitor a notice of potential infringement of the
competitor's patent regarding a method to perform TMR using fiber optics. The
Company has concluded in each case, following discussion with its patent
counsel, that it does not utilize the process and/or apparatus which is the
subject of the patent at issue, and has responded to the respective competitor
to such effect. The Company has received no further correspondence on either
matter. There can be no assurance, however, that further claims or proceedings
will not be initiated by either competitor, or that claims by other parties will
not arise in the future. Any such claims in the future, with or without merit,
could be time-consuming and expensive to respond to and could divert the
attention of the Company's technical and management personnel. The Company may
be involved in litigation to defend against claims of infringement by the
Company, to enforce patents issued to the Company, or to protect trade secrets
of the Company. If any relevant claims of third party patents are upheld as
valid and enforceable in any litigation or administrative proceeding, the
Company could be prevented from practicing the subject matter claimed in such
patents, or would be required to obtain licenses from the patent owners of each
such patent or to redesign its products or processes to avoid infringement.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Accordingly, there can be no assurance that current
and potential competitors and other third parties have not filed or in the
future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or internationally. In the event the
Company were to require licenses to patents issued to third parties, there can
be no assurance that such licenses would be available or, if available, would be
available on terms acceptable to the Company, or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would materially
and adversely affect the Company's business, financial condition and results of
operations.
Unrelated to the products used in its TMR procedure, the Company has
received notices from three holders of patents requesting that the Company
become a licensee. Although the Company believes that either these patents are
subject to challenge as being invalid or are not infringed by the Company's
products, there can be no assurance that the Company would prevail in any such
action. In one case, the Company has taken a non-exclusive license to a patent
involving arthroscopy use. In a second case, the Company buys components only
from licensees of the patent holder, which the Company believes obviates the
need for a separate license. In addition, the Company has received notice of
interference of one of its patents involving products that the Company is not
actively pursuing. The Company has received a non-exclusive license to the
technology. Should the Company determine that it is necessary for it to obtain a
license to any patents or intellectual property, there can be no assurance that
any such license would be available on acceptable terms or at all, or that the
Company would be able to develop or otherwise obtain alternative technology.
Failure of
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<PAGE>
the Company to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would materially and adversely
affect the Company's business, financial condition and results of operations.
THIRD PARTY REIMBURSEMENT
The Company expects that sales volumes and prices of the Company's products
will depend significantly on the availability of reimbursement for surgical
procedures using the Company's products from third party payors such as
governmental programs, private insurance and private health plans. Reimbursement
is a significant factor considered by hospitals in determining whether to
acquire new equipment. Reimbursement rates from third party payors vary
depending on the third party payor, the procedure performed and other factors.
Moreover, third party payors, including government programs, private insurance
and private health plans, have in recent years been instituting increasing cost
containment measures designed to limit payments made to healthcare providers by,
among other measures, reducing reimbursement rates, limiting services covered,
negotiating prospective or discounted contract pricing and carefully reviewing
and increasingly challenging the prices charged for medical products and
services.
Medicare reimburses hospitals on a prospectively determined fixed amount for
the costs associated with an in-patient hospitalization based on the patient's
discharge diagnosis, and reimburses physicians on a prospectively determined
fixed amount based on the procedure performed, regardless of the actual costs
incurred by the hospital or physician in furnishing the care and unrelated to
the specific devices used in that procedure. Medicare and other third party
payors are increasingly scrutinizing whether to cover new products and the level
of reimbursement for covered products. In addition, Medicare traditionally has
considered items or services involving devices that have not been approved or
cleared for marketing by the FDA to be precluded from Medicare coverage. Under a
new Health Care Financing Administration ("HCFA") policy effective November 1,
1995, Medicare coverage will not be precluded for items and related services
involving devices that have been classified by the FDA as
"non-experimental/investigational" ("Category B") devices and that are furnished
in accordance with FDA-approved protocols governing clinical trials. Even with
items or services involving Category B devices, however, Medicare coverage may
be denied if other coverage requirements are not met, for example if the
treatment is not medically needed for the specific patient. In November 1995,
the Company received Category B designation from the HCFA. There can be no
assurance, however, that this coverage will continue or that Medicare will
reimburse adequately the costs of the Company's TMR procedures when and if a PMA
is granted.
The Company believes that reimbursement for the Company's TMR procedures to
date has been sought primarily through Medicare. Accordingly, the Company has
limited experience to date with the acceptability of its TMR procedures for
reimbursement by private insurance and private health plans. There can be no
assurance that private insurance and private health plans will approve
reimbursement for TMR.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. The Company may need to seek international reimbursement
approvals, and there can be no assurance that any such approvals will be
obtained in a timely manner, if at all. Failure to receive foreign reimbursement
approvals could have an adverse effect on market acceptance of the Company's
products in the foreign markets in which such approvals are sought.
The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets. The Company believes that the escalating cost of medical
products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products offered by the Company. There
can be no assurance that third party reimbursement and coverage will be
available or adequate in U.S. or foreign markets, that current levels of
reimbursement will not be decreased in the future, or that future legislation,
regulation, or reimbursement policies of third party payors will not otherwise
adversely affect the demand for the Company's products or its ability to sell
its products on
32
<PAGE>
a profitable basis. Fundamental reforms in the healthcare industry in the U.S.
and Europe that could affect the availability of third party reimbursement
continue to be proposed, and the Company cannot predict the timing or effect of
any such proposal. If third party payor coverage or reimbursement is unavailable
or inadequate, the Company's business, financial condition and results of
operations could be materially and adversely affected.
PRODUCT LIABILITY AND INSURANCE
The Company maintains insurance against product liability claims in the
amount of $1 million per occurrence and $1 million in the aggregate, and expects
to seek to increase such coverage if and when a PMA is obtained. However, there
can be no assurance that such coverage will continue to be available in the
amount desired or on terms acceptable to the Company, or that such coverage will
be adequate for liabilities actually incurred. Any uninsured or underinsured
claim brought against the Company, or any claim or product recall that results
in significant cost to or adverse publicity against the Company, could
materially and adversely affect the Company's business, financial condition and
results of operations.
LITIGATION
The Company is not a party to any pending legal proceeding that, if
determined adversely to the Company, the Company believes would have a material
adverse effect on the Company. See "Business -- Intellectual Property Matters."
EMPLOYEES
As of March 31, 1996 the Company had 28 employees, including 7 in research
and development, 9 in manufacturing, 9 in sales and marketing and 5 in
administration. All employees have entered into confidentiality agreements with
the Company but the Company does not otherwise have employment agreements with
any of its employees. None of the Company's employees is covered by a collective
bargaining agreement and the Company has experienced no work stoppages to date.
FACILITIES
The Company leases an approximately 17,700 square foot building in
Sunnyvale, California. The facility contains a Class 10,000 clean room for laser
handpiece and catheter fabrication. The facility is leased through March 1998,
but the lease may be terminated earlier by the Company upon 135 days' prior
written notice and payment of a penalty of $6,000, or extended for two
additional one-year periods. The Company's former affiliate, Atlantis Catheter
Company, Inc., currently subleases approximately 850 square feet of the premises
for which it reimburses the Company for a pro-rata share of the rent. This
sublease can be terminated upon 60 days' notice by either party. The Company
believes that this facility is adequate to meet its foreseeable requirements
through at least 1996. There can be no assurance that additional facilities will
be available to the Company if and when needed thereafter.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Douglas Murphy-Chutorian, M.D.(1) 41 Chairman of the Board and Chief Executive Officer
Richard L. Mueller Jr. 40 President, Chief Operating Officer and Director
Barbara A. Dreblow 39 Chief Financial Officer
Janet Kaiser Castaneda 53 Vice President, Legal
Linda J. Fenney, M.D. 45 Vice President, Medical Affairs
Stuart D. Harman 43 Vice President, Product Development
Margaret S. Yarak 43 Vice President, Marketing
Robert L. Mortensen(1)(2) 62 Director
Iain M. Watson(1)(2) 40 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
All directors hold office until the next annual meeting of shareholders or
until their successors have been elected and qualified. Officers serve at the
discretion of the Board and are appointed annually. There are no family
relationships between the directors or officers of the Company.
DOUGLAS MURPHY-CHUTORIAN, M.D. has been Chairman of the Board and Chief
Executive Officer of the Company since June 1989. Dr. Murphy-Chutorian was also
Chairman of the Board of Atlantis Catheter Company, Inc. ("Atlantis") from
November 1993 to March 1996 when Atlantis was acquired by Biocompatibles
International plc. Dr. Murphy-Chutorian is an interventional cardiologist and
served as a Clinical Assistant Professor in the Department of Cardiology and
Cardiovascular Medicine at Albert Einstein College of Medicine (Montefiore
Division) and Stanford University Medical Center from 1986 through July 1990. He
is currently a member of the voluntary clinical staff of Stanford University
Medical Center and of Montefiore Medical Center. Dr. Murphy-Chutorian received
his M.D. degree from the College of Physicians and Surgeons, Columbia
University, completed his residency at New York University/Bellevue Hospital and
completed his cardiology training at Stanford University Medical Center.
RICHARD L. MUELLER, JR. has been President and Chief Operating Officer of
the Company since December 1995. From May 1994 until December 1995, Mr. Mueller
was Vice President of Research and Development at Heartport, Inc., a
minimally-invasive cardiac surgery company. From November 1990 until May 1994,
Mr. Mueller was Director of Research and Development at Origin Medsystems, Inc.,
an endosurgical device manufacturer. From March 1987 until November 1990, Mr.
Mueller was Director of New Product Development at Devices for Vascular
Intervention, Inc., a coronary atherectomy manufacturer. Mr. Mueller holds a
B.S.E.E. degree from Northwestern Polytechnic University and a B.S. degree in
business management from Westminster College.
BARBARA A. DREBLOW has been Chief Financial Officer of the Company since
November 1994. From November 1992 until November 1994, Ms. Dreblow was Corporate
Controller and Director of Finance for First Pacific Networks, Inc., a
telecommunications equipment manufacturer. From November 1989 to November 1992,
Ms. Dreblow was a manager with Coopers & Lybrand, L.L.P., a public accounting
firm. Ms. Dreblow is a certified public accountant.
JANET KAISER CASTANEDA has been Vice President, Legal of the Company since
March 1996. From July 1988 until March 1996, Ms. Castaneda was an attorney at
the Law Offices of James E. Eakin, an intellectual
34
<PAGE>
property firm in Belmont, California. Ms. Castaneda holds a B.S. degree in
Medical Technology from Michigan State University, a J.D. degree from University
of Puget Sound and is a Registered Patent Attorney.
LINDA J. FENNEY, M.D. has been Vice President, Medical Affairs of the
Company since February 1996. From November 1994 to December 1995, Dr. Fenney was
Director of Safety and Surveillance for Roche Corporation. From September 1993
to November 1994, Dr. Fenney was Director of Labeling and Post Marketed Safety
for Syntex Pharmaceutical Co. and from 1989 to 1993 she was Associate Medical
Director, Cardiovascular Therapy at the Institute of Clinical Medicine at Syntex
Pharmaceutical Co. From 1989 to 1995, Dr. Fenney was a member of the voluntary
clinical faculty in Cardiology at Stanford University Medical Center. Dr. Fenney
received her medical degree from London University and completed residency
training in England and at Stanford University Medical Center.
STUART D. HARMAN has been Vice President, Product Development of the Company
since January 1996. From April 1994 until December 1995, Mr. Harman was Director
of the Surgical Products Division of the Company. From September 1991 until
March 1994, Mr. Harman was Marketing Manager for Sunrise Technologies, Inc., a
medical laser manufacturer. From 1980 until August 1991, Mr. Harman held various
engineering and marketing management positions at Heraeus LaserSonics, Inc., a
medical laser manufacturer.
MARGARET S. YARAK has been Vice President, Marketing of the Company since
December 1995. From April 1992 to December 1995, Ms. Yarak was a marketing and
public relations consultant to several medical device and pharmaceutical
companies. From 1989 to 1992, Ms. Yarak was Vice President, Corporate
Development of SysteMed, Inc., a pharmacy benefits management firm. From 1984 to
1989 she held a variety of marketing positions at McGaw, Inc., an intravenous
products and medical device company. Ms. Yarak received a Masters degree in
Education from Tufts University.
ROBERT L. MORTENSEN has been a director of the Company since April 1992.
Since 1984, Mr. Mortensen has been either President or Chairman of the Board and
a director of Lightwave Electronics Corporation, a solid-state laser company
that he founded. He holds an MBA from Harvard University.
IAIN M. WATSON has been a director of the Company since April 1992. Since
September 1993, Mr. Watson has been President of HAL Investments, Inc., an
investment company. From 1980 to September 1993, Mr. Watson held various
positions with the Boston Consulting Group, a management consulting firm. Mr.
Watson holds an MBA from Harvard University.
BOARD COMMITTEES
The Board of Directors formed a Compensation Committee and an Audit
Committee in 1994. Prior to such date, there were no committees of the Board of
Directors. The Compensation Committee makes recommendations to the Board
concerning salaries and incentive compensation for the Company's officers and
employees and administers the Company's Stock Option Plan and Employee Stock
Purchase Plan. The Audit Committee reviews the results and scope of the audit
and other services provided by the Company's independent auditors including
review and analysis of the Company's systems and the adequacy of controls.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Dr.
Murphy-Chutorian, Mr. Mortensen and Mr. Watson. No member of the Compensation
Committee or executive officer of the Company has a relationship that
constitutes an interlocking relationship with executive officers or directors of
another entity.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Amended and Restated Articles of Incorporation eliminate to
the fullest extent permissible under California law the liability of its
directors to the Company for monetary damages. Such limitation of liability does
not affect the availability of equitable remedies such as injunctive relief or
rescission. In addition, the Company's Amended and Restated Bylaws provide that
the Company must indemnify its officers, directors, employees and other agents,
to the fullest extent permitted by California
35
<PAGE>
law. The Company has entered into indemnification agreements with each officer,
director and employee of the Company to such effect. At present, there is no
pending litigation or proceeding involving any director, officer, employee or
agent of the Company where indemnification will be required or permitted.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"), may be permitted to officers, directors
or persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and Exchange
Commission (the "Commission") such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. The Company will
seek to obtain officers' and directors' insurance in the near future. The
Company will bear the expenses of such policy.
DIRECTOR COMPENSATION
Directors who are not compensated as employees or consultants to the Company
receive a retainer of $10,000 per year for serving on the Board of Directors,
plus fees of $1,500 per board meeting and $1,500 per committee meeting, provided
such committee meeting does not occur on the same day as a board meeting.
The Company also has a Director Stock Option Plan for non-employee
directors. Directors Iain Watson and Robert Mortensen were each granted an
option to purchase an aggregate of 9,000 shares of Common Stock pursuant to such
Plan in fiscal 1995. See "Management -- Director Stock Option Plan."
EXECUTIVE COMPENSATION
The following table sets forth all compensation received for services
rendered to the Company and the Company's subsidiaries in all capacities during
fiscal 1995 by (i) the Company's Chief Executive Officer and (ii) the Company's
two other executive officers whose total compensation exceeded $100,000 during
fiscal 1995 (together, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
AWARDS
ANNUAL -------------
COMPENSATION SECURITIES
------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY OPTIONS/SARS COMPENSATION(1)
- ----------------------------------------------------------------- --------- ------------- ------------- -------------------
<S> <C> <C> <C> <C>
Douglas Murphy-Chutorian, M.D. .................................. 1995 $ 207,130 -- $ 320
Chairman of the Board and Chief Executive Officer
Barbara A. Dreblow .............................................. 1995 100,000 -- 66
Chief Financial Officer
Stuart D. Harman ................................................ 1995 100,666 106,029 112
Vice President, Product Development
</TABLE>
- ------------------------
(1) Payment of life insurance premiums.
36
<PAGE>
The following table sets forth certain information concerning grants of
stock options to each of the Named Executive Officers during the fiscal year
ended December 31, 1995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS(1) VALUE AT ASSUMED
------------------------------------------------------------ ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% 10%
- -------------------------------- ------------- ----------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Douglas Murphy-Chutorian,
M.D. .......................... -- -- -- -- -- --
Barbara A. Dreblow.............. -- -- -- -- -- --
Stuart D. Harman................ 106,029 8.10% $ 1.67 12/31/05 $ 8,836 $ 17,672
</TABLE>
- ------------------------
(1) Each of these options was granted pursuant to the Stock Option Plan. These
options were granted at an exercise price equal to the fair market value of
the Company's Common Stock as determined by the Board of Directors of the
Company on the date of grant and, as long as the optionee maintains
continuous employment with the Company, vest over a three year period at the
rate of one-third of the shares on the first anniversary of the date of
grant and 1/36th of the grant per month thereafter. The options granted were
Incentive Stock Options. No options were granted for a term longer than ten
years. No SARs were granted.
(2) In accordance with the rules of the Securities and Exchange Commission,
shown are the hypothetical gains or "option spreads" that would exist for
the respective options. These gains are based on assumed rates of annual
compounded stock price appreciation of 5% and 10% from the date the option
was granted over the full option term. The 5% and 10% assumed rates of
appreciation are mandated by the rules of the Commission and do not
represent the Company's estimate or projection of future increases in the
price of its Common Stock.
The following table sets forth certain information as of December 31, 1995
concerning exercisable and unexercisable stock options held by each of the Named
Executive Officers. None of the Named Executive Officers exercised any options
during fiscal year 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
FISCAL YEAR END AT FISCAL YEAR END(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Douglas Murphy-Chutorian, M.D. ........................... -- -- -- --
Barbara A. Dreblow........................................ 54,168 95,832 $ 12,639 $ 22,361
Stuart D. Harman.......................................... 8,151 111,849 1,902 1,358
</TABLE>
- ------------------------
(1) The value for an "in the money" option represents the difference between the
exercise price of such option and the fair market value of the Company's
Common Stock at December 31, 1995 as determined by the Company's Board of
Directors, multiplied by the total number of shares subject to the option.
STOCK OPTION PLAN
The Company's Stock Option Plan (the "Stock Plan") provides for the granting
to employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and for
the granting to employees and consultants of nonstatutory stock options and
stock purchase rights ("SPRs"). The amended and restated Stock Plan was approved
by the Board of Directors and by the shareholders in April 1996. Unless
terminated sooner, the Stock Plan will
37
<PAGE>
terminate automatically March 31, 2006. The Board has the authority to amend,
suspend or terminate the Stock Plan, provided that no such action may affect any
share of Common Stock previously issued and sold or any option previously
granted under the Stock Plan.
Four million shares of Common Stock have been reserved for issuance pursuant
to the Stock Plan. As of the date of this Prospectus, options to purchase an
additional 2,662,526 shares of Common Stock were outstanding under the Stock
Plan at a weighted average exercise price of $1.81 per share, and an additional
1,332,230 shares of Common Stock remained available for future grant.
The Stock Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee is required to be constituted to
comply with Section 16(b) of the Exchange Act and applicable laws. The Committee
has the power to determine the terms and conditions of the options or SPRs
granted, including the exercise price, the number of shares subject to each
option or SPR and the exercisability thereof, and the form of consideration
payable upon exercise. Options and SPRs granted under the Stock Plan are not
generally transferable by the optionee other than by will or laws of descent,
and each option and SPR is exercisable during the lifetime of the optionee only
by such optionee. Options granted under the Stock Plan to date typically vest
over three years and have a ten-year term. Options granted under the Stock Plan
must be exercised within three months of the end of optionee's status as an
employee or consultant of the Company, or within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's ten year term. In the case of SPRs, unless the
Committee determines otherwise, the Restricted Stock Purchase Agreement
evidencing the sale of the shares to purchaser shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Committee. The exercise price of all incentive stock options granted under the
Stock Plan must be at least equal to the fair market value of the Common Stock
on the date of grant. The exercise price of nonstatutory stock options and SPRs
granted under the Plan is determined by the Committee. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of the Company's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market value
on the grant date and the term of such incentive stock option must not exceed
five years. The term of all other options granted under the Stock Plan may not
exceed ten years.
The Stock Plan provides that in the event of a merger of the Company with or
into another corporation or a sale of substantially all of the Company's assets
or SPR, each option and SPR shall be assumed or an equivalent option substituted
by the successor corporation. If the outstanding options and SPRs are not
assumed or substituted as described in the preceding sentence, the option or the
SPR will terminate unless the Administrator shall provide for the accelerated
vesting of options outstanding at such time. If the Administrator makes an
option or SPR exercisable in full in the event of a merger or sale of assets,
the Administrator shall notify the optionee that the option or SPR shall be
fully exercisable for a period of fifteen (15) days from the date of such
notice, and the option or SPR will terminate upon the expiration of such period.
Richard L. Mueller Jr., Chief Operating Officer and a director of the
Company, was granted an option to purchase an aggregate of 750,000 shares of
Common Stock of the Company in December 1995 at an exercise price of $1.67 per
share. Linda J. Fenney, Vice President, Medical Affairs of the Company, was
granted an option to purchase an aggregate of 64,500 shares of Common Stock of
the Company in December 1995 at an exercise price of $1.67 per share. Margaret
S. Yarak, Vice President, Marketing of the Company, was granted an option to
purchase an aggregate of 75,000 shares of Common Stock of the Company in
December 1995 at an exercise price of $1.67 per share. None of such officers was
a Named Executive Officer for 1995.
38
<PAGE>
DIRECTOR STOCK OPTION PLAN
Non-employee directors are entitled to participate in the Director Stock
Option Plan (the "Director Plan"). The amended and restated Director Plan was
adopted by the Board of Directors and the shareholders in April 1996. The
Director Plan has a term of ten years and will terminate March 31, 2006, unless
terminated sooner by the Board. A total of 200,000 shares of Common Stock have
been reserved for issuance under the Director Plan. As of the date of this
prospectus, options to purchase 18,000 shares of Common Stock were outstanding
at a price of $1.67 per share, and options to purchase 182,000 shares of Common
Stock remained available for future grant under the Director Plan (without
giving effect to an additional 7,500 shares to be automatically granted to each
of the Company's two outside directors upon reelection to the Board at the
Company's Annual Meeting of Shareholders to be held April 24, 1996).
The Director Plan provides for the automatic grant of 22,500 shares of
Common Stock to each non-employee director first elected or appointed to the
Board after June 1, 1996 on the date on which such person first becomes a
non-employee director (the "First Option"). Subsequently, each non-employee
director shall automatically be granted an option to purchase 7,500 shares (a
"Subsequent Option") each year on the date of such non-employee director's
annual reelection to the Board, if on such date he or she shall have served on
the Board for at least six months. Each First Option and each Subsequent Option
shall have a term of 10 years. The First Option shall vest as to 1/3rd of the
shares subject to the First Option per year following the date of grant. Each
Subsequent Option shall vest in full one year following the date of grant. The
exercise prices of the First Option and each Subsequent Option shall be 100% of
the fair market value per share of the Common Stock, generally determined with
reference to the closing price of the Common Stock as reported on the Nasdaq
National Market, on the date of grant.
In the event of a merger of the Company or the sale of substantially all of
the assets of the Company, each option may be assumed or an equivalent option
substituted by the successor corporation. If an option is assumed or substituted
for, it shall continue to vest as provided in the Director Plan. If the
successor does not agree to assume or substitute the option, each option shall
also become fully vested and exercisable for a period of thirty days from the
date the Board notifies the optionee of the option's full exercisability, after
which period the option shall terminate. Options granted under the Director Plan
must be exercised within sixty days of the end of the optionee's tenure as a
director of the Company, but in no event later than the expiration of the
option's ten year term. In the case of death or disability of the non-employee
director terminating the non-employee director's status as a director or such
death or disability occurring sixty days after termination of director status,
the optionee will have twelve months from such date to exercise his or her
option, but in no event may the option be exercised after the expiration of the
option's ten year term. No option granted under the Director Plan is
transferable by the optionee other than by will or the laws of descent and
distribution, and each option is exercisable, during the lifetime of the
optionee, only by such optionee.
The administration and other terms of the Director Plan have been structured
so that options granted to the non-employee directors who administer the
Company's stock plans shall qualify as transactions exempt from Section 16(b) of
the Exchange Act pursuant to Rule 16b-3 promulgated thereunder.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors and shareholders in April 1996. A total of 250,000
shares of Common Stock has been reserved for issuance under the Purchase Plan.
The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, has two six-month offering periods each year beginning on
the first trading day on or after May 16 and November 16, respectively, except
for the first such offering period which commences on the first trading day on
or after the date the Securities and Exchange Commission declares the Company's
registration statement on Form S-1 effective and will end on the last trading
day on or before November 15, 1996. The Purchase Plan is administered by the
Board of Directors or by a committee appointed by the Board. The Purchase Plan
will be administered so as to comply with any applicable requirements of Rule
16b-3 of the Exchange Act. Employees are eligible to participate if they are
customarily employed by the Company or any participating subsidiary for at least
20 hours per week and more than five months in any
39
<PAGE>
calendar year. The Purchase Plan permits eligible employees to purchase Common
Stock through payroll deductions of up to 15% of an employee's compensation
except that in the first offering period payroll deductions of up to 20% are
allowed (including commissions, overtime and other bonuses and incentive
compensation), up to a maximum of $21,250 for all offering periods ending within
the same calendar year. The price of stock purchased under the Purchase Plan
will be 85% of the lower of the fair market value of the Common Stock at the
beginning or at the end of each offering period. Employees may end their
participation in the offering at any time during an offering period, and they
will be paid their payroll deductions to date. Participation ends automatically
on termination of employment with the Company.
Rights granted under the Purchase Plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the Purchase Plan. The Purchase Plan provides that, in the event
of a merger of the Company with or into another corporation or a sale of
substantially all of the Company's assets, the Board of Directors will shorten
the offering period (so that employees' rights to purchase stock under the Plan
are exercised prior to the merger or sale of assets). The Purchase Plan will
terminate in April 2006. The Board of Directors has the authority to amend or
terminate the Purchase Plan, except that no such action may adversely affect any
outstanding rights to purchase stock under the Purchase Plan.
40
<PAGE>
CERTAIN TRANSACTIONS
Between January 1994 and July 1994, the Company raised capital through the
issuance of promissory notes in which purchasers of each $50,000 unit were
issued (i) a nonrecourse promissory note in the principal amount of $50,000,
bearing interest at an annual rate of 10%, with principal and interest payable
on the earlier of consummation of the Offering or November 12, 1995 (a
"Nonrecourse Note"); (ii) 33,333 shares of Common Stock; and (iii) a warrant to
purchase up to 33,333 shares of Common Stock at a purchase price of $1.67 per
share. Upon the maturity of the Nonrecourse Notes, each holder thereof was
offered by the Company a further warrant to purchase up to 1,764 shares of
Common Stock at a purchase price of $4.17 per share in exchange for agreeing to
delay redemption of their Nonrecourse Note until December 31, 1996. Iain M.
Watson, a director of the Company, purchased a $50,000 unit in the financing
described above, and was issued a warrant to purchase up to 1,764 shares of
Common Stock at a purchase price of $4.17 per share in exchange for agreeing to
delay redemption of his Nonrecourse Note until December 31, 1996. In addition,
during 1995, the Company borrowed a total of $100,000 from Mr. Watson pursuant
to two notes payable with Mr. Watson bearing interest at 10% per annum. These
notes were repaid in full during 1995.
41
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information before and immediately
after the Offering regarding beneficial ownership of Common Stock of the Company
by (i) each person who is known by the Company to be the beneficial owner of
more than five percent of the outstanding shares of Common Stock; (ii) each
director and each Named Executive Officer; and (iii) all directors and executive
officers as a group, based on shares outstanding as of March 31, 1996.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING OFFERING(1)
----------------------- -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT PERCENT
- ------------------------------------------------------------------------- ---------- ----------- -------------------
<S> <C> <C> <C>
Douglas Murphy-Chutorian, M.D.(2)........................................ 5,063,427 43.3% 32.3%
c/o Eclipse Surgical Technologies, Inc.
1049 Kiel Court
Sunnyvale, CA 94089
Tawfeek Shaheen(3)....................................................... 1,090,689 9.2% 6.9%
Box 316
Sonoma, CA 95476
Iain M. Watson(4)........................................................ 218,298 1.9% 1.4%
Barbara A. Dreblow(5).................................................... 83,334 * *
Robert L. Mortensen(6)................................................... 61,029 * *
Stuart D. Harman(7)...................................................... 10,866 * *
Richard L. Mueller Jr.................................................... -- -- --
All directors and executive officers as a group (8 persons)(8)........... 5,448,954 45.6% 34.2%
</TABLE>
- ------------------------
(1) Assumes no exercise of the Underwriter's over-allotment option.
(2) Includes an aggregate of 3,719,454 shares of Common Stock held by Leslie
Murphy-Chutorian, the wife of Dr. Murphy-Chutorian, and by Mrs.
Murphy-Chutorian as custodian for their minor children.
(3) Includes warrants to purchase an aggregate of 126,294 shares of Common Stock
exercisable within 60 days of the date hereof.
(4) Includes options and warrants to purchase an aggregate of 96,126 shares of
Common Stock exercisable within 60 days of the date hereof.
(5) Consists of options to purchase an aggregate of 83,334 shares of Common
Stock exercisable within 60 days of the date hereof.
(6) Consists of options to purchase an aggregate of 61,029 shares of Common
Stock exercisable within 60 days of the date hereof.
(7) Consists of options to purchase an aggregate of 10,866 shares of Common
Stock exercisable within 60 days of the date hereof.
(8) Includes options and warrants to purchase an aggregate of 263,355 shares of
Common Stock exercisable within 60 days of the date hereof. See notes 3, 4,
5, 6 and 7 above.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, no par value, and 5,000,000 shares of Preferred Stock, no par
value. As of March 31, 1996, there were 11,682,396 shares of Common Stock
outstanding, a total of 201 shareholders of record and no shares of Preferred
Stock outstanding. The following descriptions of the Company's securities are
qualified in their entirety by reference to the Company's Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws, and the warrant
agreements described below.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of the shareholders. Upon giving the legally
required notice, shareholders may cumulate their votes in the election of
directors. Subject to preferences that may be applicable to any then-outstanding
shares of Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution, or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and any liquidation preference of any then-outstanding Preferred
Stock. Holders of Common Stock have no right to convert their Common Stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of the Offering
will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without the requirement of further
shareholder approval, to designate one or more series of Preferred Stock and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, conversion rights, voting rights, preemptive rights, terms of
redemption, liquidation preferences and sinking fund terms. The Board of
Directors similarly has the authority to fix the number of shares of each such
series (up to an aggregate for all series of Preferred Stock of 5,000,000
shares); to increase or decrease such number of shares (but not below the number
of shares of any such series then outstanding) and to issue up to 5,000,000
shares.
The issuance of Preferred Stock could adversely affect the voting power of
holders of Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation and could have the effect of
delaying, deferring, or preventing a change in control of the Company.
WARRANTS
As of March 31, 1996, there were warrants outstanding to purchase 1,171,638
shares of Common Stock at exercise prices ranging from $1.67 to $4.17 per share
and expiration dates through 1999. All warrants contain provisions for the
adjustment of the exercise price upon the occurrence of certain events including
stock dividends, stock splits, reorganizations, reclassifications and mergers
and termination upon certain public offerings, mergers or sales of Company
assets. The foregoing warrants were issued in reliance on exemptions from the
registration requirements of the Securities Act. Shares issuable upon exercise
of the warrants will be "restricted" securities for purposes of the Securities
Act.
REGISTRATION RIGHTS
Under the terms of certain registration rights agreements, among the Company
and certain holders of its securities (the "Rights Agreements"), following the
closing of the Offering, the holders of approximately 10,231,953 shares of
Common Stock (the "Registrable Securities"), will be entitled to certain rights
with respect to the registration of such shares under the Securities Act. Under
the Rights Agreements, if the Company proposes to register any of its securities
under the Securities Act, either for its own account or the account of other
shareholders, the holders of Registrable Securities are entitled to notice of
such registration and are entitled to include their Registrable Securities
therein, subject to, among other conditions, the Company's right to limit the
number of such shares included in any such registration based upon the advice
43
<PAGE>
of the underwriters. Further, holders of Registrable Securities may require the
Company to register all or a portion of their Registrable Securities at any time
after 180 days following the effective date of the Registration Statement of
which this Prospectus forms a part, subject to certain conditions and
limitations.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston.
LISTING
The Company has applied to list its Common Stock on the Nasdaq National
Market under the trading symbol ESTI. The Company has not applied to list its
Common Stock on any other exchange or quotation system.
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offering, the Company will have 15,682,396
shares of Common Stock outstanding, based on shares outstanding as of May 15,
1996, of which the 4,000,000 shares offered hereby will be freely tradeable
without restriction or further registration under the Securities Act. The
remaining 11,682,396 shares of Common Stock to be outstanding after the Offering
are deemed to be "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act, because such shares were issued and sold
by the Company in transactions not involving a public offering and in the future
may only be sold pursuant to a registration statement under the Securities Act,
in compliance with the provisions of Rule 144 or pursuant to another exemption
under the Securities Act. Sales of a substantial number of shares of Common
Stock in the public market following the Offering could adversely affect the
market price for the Common Stock. The number of shares of Common Stock
available for sale in the public market is limited by restrictions under the
Securities Act, and by lock-up agreements under which the holders of such shares
have agreed not to sell or otherwise dispose of any of their shares for a period
of 180 days after the date of this Prospectus without the prior written consent
of PaineWebber Incorporated. However, PaineWebber Incorporated may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. As a result of these restrictions,
based on shares outstanding as of May 15, 1996, on the date of this Prospectus,
a total of 269,544 shares other than the 4,000,000 shares offered hereby will be
eligible for sale; an additional 116,667 shares will be eligible for sale 90
days after the date of this Prospectus pursuant to Rule 144; an additional
9,629,937 shares will be eligible for sale 180 days after the date of this
Prospectus under Rule 144. In addition, the Company intends to register on the
effective date of the Offering a total of 4,444,756 shares of Common Stock
subject to outstanding options or reserved for issuance under the Company's
Stock Option Plan, Director Stock Option Plan and Employee Stock Purchase Plan.
Further, upon expiration of the lock-up agreements referred to above, holders of
approximately 10,231,953 shares of Common Stock will be entitled to certain
registration rights, including 201,249 shares which have the right to demand
registration. Such demands may be made as early as 180 days following the
Offering. If such holders, by exercising their registration rights, cause a
large number of shares to be registered and sold in the public market, such
sales could have a material adverse effect on the market price for the Common
Stock. See "Description of Capital Stock -- Registration Rights" and "Shares
Eligible for Future Sale."
The Company's officers and directors and certain other shareholders have
agreed not to sell or otherwise dispose of their shares of Common Stock (an
aggregate of 11,296,185 shares plus 3,867,164 shares issuable upon the exercise
of outstanding warrants or options) for a period of at least 180 days from the
date of this Prospectus, without the prior written consent of PaineWebber
Incorporated.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), who has beneficially owned restricted shares of
Common Stock for at least two years from the later of the date such securities
were acquired from the Company or (if applicable) the date they were acquired
from an affiliate, is entitled to sell, within any three-month period, a number
of shares that does not exceed the greater of (i) 1% of the total number of
outstanding shares of Common Stock or, (ii) the average weekly trading volume in
the Common Stock on the Nasdaq National Market during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied.
In addition, affiliates of the Company must comply with the restrictions and
requirements of Rule 144, other than the two-year holding period requirement, in
order to sell shares of Common Stock that are not restricted securities. Under
Rule 144(k), if a period of at least three years has elapsed between the later
of the date restricted securities were acquired from the Company and the date
they were acquired from an affiliate of the Company, a person who is not an
affiliate at the time of sale and has not been an affiliate at any time during
the 90 days prior to the sale could be entitled to sell the shares without
compliance with the foregoing requirements under Rule 144.
Prior to the Offering there has been no market for the shares of Common
Stock and no prediction can be made as to the effect, if any, that market sales
of shares of Common Stock or the availability of such securities for sale will
have on the market price prevailing from time to time. Nevertheless, the
possibility that substantial amounts of shares of Common Stock may be sold in
the public market may adversely affect prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities.
45
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom PaineWebber
Incorporated, Deutsche Morgan Grenfell/C. J. Lawrence Inc. and Jefferies &
Company, Inc. are acting as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement among the Company and the Underwriters (the "Underwriting Agreement"),
to purchase from the Company, and the Company has agreed to sell to the
Underwriters, the number of shares of Common Stock set forth opposite the name
of such Underwriter below at the price set forth on the cover page of this
Prospectus under "Proceeds to Company":
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
PaineWebber Incorporated...................................................................
Deutsche Morgan Grenfell/C. J. Lawrence Inc................................................
Jefferies & Company, Inc...................................................................
----------
Total.................................................................................... 4,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the shares of Common Stock listed above are subject to certain
conditions. The Underwriting Agreement also provides that the Underwriters are
committed to purchase, and the Company is obligated to sell, all of the shares
offered hereby if any of the shares being sold pursuant to the Underwriting
Agreement are purchased (without consideration of any shares that may be
purchased through the exercise of the Underwriters' over-allotment option).
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public initially at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession to other
dealers not in excess of $
per share. After the initial public offering of the Common Stock, the public
offering price, the concessions to selected dealers and the reallowance to other
dealers may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 600,000
additional shares of Common Stock at the initial public offering price set forth
on the cover page of this Prospectus, less underwriting discounts and
commissions. The Underwriters may exercise such option only to cover
over-allotments, if any, incurred in the sales of shares of Common Stock. To the
extent the Underwriters exercise such option, each of the Underwriters will
become obligated, subject to certain conditions, to purchase such percentage of
such additional shares of Common Stock as is approximately equal to the
percentage of shares of Common Stock that it is obligated to purchase as shown
in the table set forth above.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The Representatives have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
The Company and each of its executive officers and directors, and certain of
its existing shareholders, have agreed not to offer, sell, contract to sell, or
grant any option to purchase or otherwise dispose of, directly or indirectly,
any shares of capital stock of the Company or any securities convertible into or
exercisable or exchangeable for any capital stock of the Company owned by any of
them prior to the expiration of 180 days from the date of this Prospectus,
except (i) for the shares of Common Stock offered
46
<PAGE>
hereby, (ii) with the prior written consent of PaineWebber Incorporated and
(iii) in the case of the Company, for the issuance of shares of Common Stock
upon the exercise of options, or the grant of options to purchase shares of
Common Stock or restricted stock awards under the Company's Stock Option Plan,
Director Option Plan or Employee Stock Purchase Plan.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price was determined pursuant to
negotiations between the Company and the Representatives. Among the factors
considered in determining the initial public offering price, in addition to
prevailing market conditions, were certain financial information of the Company,
the history of, and the prospects for, the Company and the industry in which it
competes, an assessment of the Company's management, its past and present
operations, the prospects for, and timing of, future revenues of the Company,
the present state of the Company's development, and the above factors in
relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. The initial public offering price
set forth on the cover page of this Prospectus should not, however, be
considered an indication of the actual value of the Common Stock. Such price is
subject to change as a result of market conditions and other factors. There can
be no assurance that an active trading market will develop for the Common Stock
or that the Common Stock will trade in the public market subsequent to the
Offering at or above the initial public offering price.
LEGAL MATTERS
Certain legal matters with respect to the securities which are being offered
hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, of Palo Alto, California and for the Underwriters by
Skadden, Arps, Slate, Meagher & Flom, San Francisco, California. Owen,
Wickersham & Erickson has acted as special counsel to the Company in connection
with matters related to the Company's patents. Roger Erickson, of counsel to
such firm, is the owner of 17,463 shares of Common Stock.
EXPERTS
The financial statements of the Company as of December 31, 1995 and for each
of the three years in the period ended December 31, 1995, included elsewhere in
this Prospectus and the Registration Statement, have been so included in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in accounting and auditing. The
discussion of certain intellectual property matters in the sections entitled
"Risk Factors -- Uncertainty Regarding Patents and Protection of Proprietary
Technology; Risks of Future Litigation" and "Business -- Intellectual Property
Matters" have been so included in reliance on the advice of Owen, Wickersham &
Erickson, given on the authority of such firm as experts in intellectual
property matters.
ADDITIONAL INFORMATION
The Company is not currently subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), but will
become subject to the requirements of the Exchange Act as of the effective date
of the Registration Statement of which this Prospectus forms a part. In
accordance with the Exchange Act, the Company will file reports, proxy
statements, quarterly reports and other information with the Commission. Such
reports, proxy statements, quarterly reports and other information can be
inspected and copied at the public reference facilities of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; at its New York Regional Office, 7
World Trade Center, New York, New York 10048; and at its Chicago Regional
Office, 500 West Madison Street, Chicago, Illinois 60661 and copies of such
material can be obtained from the Commission's Public Reference Section at
prescribed rates.
47
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Financial Statements:
Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (UNAUDITED)........................... F-3
Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and the three months ended
March 31, 1995 and 1996 (UNAUDITED)..................................................................... F-4
Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1993, 1994 and 1995 and the
three months ended March 31, 1995 and 1996 (UNAUDITED).................................................. F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the three months ended
March 31, 1995 and 1996 (UNAUDITED)..................................................................... F-6
Notes to Financial Statements............................................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Eclipse Surgical Technologies, Inc.:
We have audited the accompanying balance sheets of Eclipse Surgical
Technologies, Inc. as of December 31, 1994 and 1995, and the related statements
of operations, shareholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Eclipse Surgical
Technologies, Inc. as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
March 29, 1996
F-2
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 132 $ 123 $ 1,277
Accounts receivable, net of allowance for doubtful accounts of $60 and $29 at
December 31, 1994 and 1995, respectively, and $63 at March 31, 1996......... 381 532 1,440
Inventories.................................................................. 1,833 1,670 1,612
Other current assets......................................................... 363 14 75
--------- --------- -----------
Total current assets....................................................... 2,709 2,339 4,404
Property and equipment, net.................................................... 108 98 135
Other assets................................................................... 105 22 140
--------- --------- -----------
Total assets............................................................... $ 2,922 $ 2,459 $ 4,679
--------- --------- -----------
--------- --------- -----------
LIABILITIES
Current liabilities:
Accounts payable............................................................. $ 951 $ 1,217 $ 1,233
Accrued liabilities.......................................................... 551 547 686
Customer deposits............................................................ 224 270 326
Short-term borrowings........................................................ -- 45 --
Current portion of long-term debt............................................ 326 1,809 1,691
--------- --------- -----------
Total current liabilities.................................................. 2,052 3,888 3,936
Long-term debt, less current portion........................................... 1,009 -- 23
--------- --------- -----------
Total liabilities.......................................................... 3,061 3,888 3,959
--------- --------- -----------
Commitments and contingencies (Note 9).
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, no par value:
Authorized: 5,000 shares;
Issued and outstanding: none
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 10,469 shares at December 31, 1994, 11,210 shares at
December 31, 1995 and 11,682 shares at March 31, 1996....................... 3,450 4,690 6,659
Notes receivable for sale of common stock...................................... -- (104) --
Accumulated deficit............................................................ (3,589) (6,015) (5,939)
--------- --------- -----------
Total shareholders' equity (deficit)....................................... (139) (1,429) 720
--------- --------- -----------
Total liabilities and shareholders' equity (deficit)....................... $ 2,922 $ 2,459 $ 4,679
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................................... $ 2,105 $ 2,020 $ 2,707 $ 528 $ 1,752
Cost of revenues........................................... 1,013 1,173 1,642 382 502
--------- --------- --------- --------- ---------
Gross profit............................................. 1,092 847 1,065 146 1,250
--------- --------- --------- --------- ---------
Operating expenses:
Research and development................................. 906 971 1,010 195 517
Sales and marketing...................................... 794 392 879 191 396
General and administrative............................... 325 1,031 681 199 211
--------- --------- --------- --------- ---------
Total operating expenses............................... 2,025 2,394 2,570 585 1,124
--------- --------- --------- --------- ---------
Operating income (loss).............................. (933) (1,547) (1,505) (439) 126
Interest expense........................................... (15) (447) (923) (223) (50)
Interest income............................................ 12 12 2 2 --
--------- --------- --------- --------- ---------
Net income (loss).................................... $ (936) $ (1,982) $ (2,426) $ (660) $ 76
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share................................ $ (0.08) $ (0.16) $ (0.19) $ (0.05) $ 0.01
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in per share calculation....................... 11,676 12,526 12,765 12,765 14,863
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE
-------------------- FOR COMMON ACCUMULATED
SHARES AMOUNT STOCK DEFICIT TOTAL
--------- --------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1993.............................. 8,549 $ 743 $ (671) $ 72
Issuance of common stock for cash less issuance costs
of $124............................................. 1,337 1,869 -- 1,869
Issuance of warrants................................. -- 6 -- 6
Issuance of common stock for cash upon exercise of
options............................................. 3 -- -- --
Net loss............................................. -- -- (936) (936)
--------- --------- ------------- ------------ ---------
Balances, December 31, 1993............................ 9,889 2,618 (1,607) 1,011
Issuance of common stock............................. 580 822 -- 822
Issuance of warrants................................. -- 10 -- 10
Net loss............................................. -- -- (1,982) (1,982)
--------- --------- ------------- ------------ ---------
Balances, December 31, 1994............................ 10,469 3,450 (3,589) (139)
Issuance of common stock............................. 741 1,235 $ (104) -- 1,131
Issuance of warrants................................. -- 5 -- 5
Net loss............................................. -- -- (2,426) (2,426)
--------- --------- ------------- ------------ ---------
Balances, December 31, 1995............................ 11,210 4,690 (104) (6,015) (1,429)
Issuance of common stock............................. 472 1,967 -- 1,967
Payment on notes receivable.......................... 104 104
Issuance of warrants................................. -- 2 -- 2
Net income........................................... -- -- 76 76
--------- --------- ------------- ------------ ---------
Balances, March 31, 1996 (unaudited)................... 11,682 $ 6,659 $ -- $ (5,939) $ 720
--------- --------- ------------- ------------ ---------
--------- --------- ------------- ------------ ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ (936) $ (1,982) $ (2,426) $ (660) $ 76
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization.............................. 57 11 72 13 29
Amortization of discount and financing costs............... -- 338 607 166 --
Provision for doubtful accounts............................ 9 55 40 (18) 34
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable............... (29) (247) (191) 78 (942)
(Increase) decrease in inventories....................... (741) (486) 163 (79) 58
(Increase) decrease in other assets...................... 9 (202) 349 211 (76)
Increase (decrease) in accounts payable.................. (1) 418 266 181 16
Increase (decrease) in accrued liabilities............... 28 144 (4) (29) 128
Increase (decrease) in customer deposits................. -- 224 46 (100) 56
--------- --------- --------- --------- ---------
Net cash used in operating activities.................. (1,604) (1,727) (1,078) (237) (621)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of property and equipment........................ (64) (16) (62) (7) (35)
Issuance of note receivable.................................. (50) -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing activities.................. (114) (16) (62) (7) (35)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Payments on capital lease obligations........................ (10) (2) -- -- --
Payments on short-term borrowings............................ (119) -- (782) -- (34)
Net proceeds from issuance of common stock and warrants...... 1,875 22 1,136 -- 1,969
Proceeds from short-term borrowings.......................... -- -- 827 154 --
Payments on long-term debt................................... -- -- (50) -- (125)
Proceeds from issuance of long term debt..................... -- 1,724 -- 50 --
--------- --------- --------- --------- ---------
Net cash provided by financing activities.............. 1,746 1,744 1,131 204 1,810
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... 28 1 (9) (40) 1,154
Cash and cash equivalents at beginning of period............... 103 131 132 132 123
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period..................... $ 131 $ 132 $ 123 $ 92 $ 1,277
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental schedule of cash flow information:
Interest paid................................................ $ 15 $ 9 $ 71 $ 3 $ 35
Taxes paid................................................... $ 3 $ 1 $ 1 $ -- $ 1
Supplemental schedule of noncash financing activities:
Issuance of common stock in connection with notes payable.... $ -- $ 811 $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Issuance of common stock and warrants in exchange for note
receivable.................................................. $ -- $ -- $ 104 $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Acquisition of equipment under capital lease................. $ -- $ -- $ -- $ -- $ 30
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. NATURE OF OPERATIONS:
Eclipse Surgical Technologies, Inc. (the Company) was founded in 1989 to
develop, manufacture and market surgical lasers and accessories for the
treatment of disease. Currently, the Company's emphasis is on development and
manufacture of products used for transmyocardial revascularization (TMR), a
cardiovascular procedure.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
All highly liquid instruments purchased with an original maturity of three
months or less are considered cash equivalents.
INVENTORIES:
Inventories are stated at the lower of cost (principally standard cost,
which approximates actual cost on a first-in, first-out basis) or market value.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities and customer deposits approximate fair value due to their short
maturities. Based on borrowing rates currently available to the Company for
loans with similar terms, the carrying value of the long-term debt obligations
also approximates fair value.
CERTAIN RISKS AND CONCENTRATIONS:
The Company maintains its excess cash balance in a major U.S. bank. The
Company has not experienced any losses on its deposits of cash and cash
equivalents.
The Company sells its products primarily to hospitals and other health care
providers in North America, Europe and Asia. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. Although
the Company maintains allowances for potential credit losses that it believes to
be adequate, a payment default on a significant sale could materially and
adversely affect its operating results and financial condition.
REVENUE RECOGNITION:
The Company typically recognizes product sales upon receipt of purchase
order and subsequent shipment of product. Where purchase orders allow customers
an acceptance period, revenue is recognized upon acceptance.
RESEARCH AND DEVELOPMENT:
Research and development expenses are charged to operations as incurred.
DEPRECIATION AND AMORTIZATION:
Property and equipment are stated at cost and depreciated on a straight-line
basis over their estimated useful lives of three to five years. Assets acquired
under capital leases are amortized over the shorter of their
F-7
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
estimated useful lives or the term of the related lease (generally three to five
years). Amortization of leasehold improvements is based on the straight-line
method over the shorter of the estimated useful life or the lease term.
WARRANTIES:
The Company's laser products are generally warranted for one year. The
Company provides for estimated future costs of repair, replacement, or customer
accommodations which are reflected in the accompanying financial statements.
INCOME TAXES:
The Company accounts for income taxes using the liability method under which
deferred tax assets or liabilities are calculated at the balance sheet date
using current tax laws and rates in effect for the year in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amounts expected to be
realized.
NET INCOME (LOSS) PER SHARE:
Net income (loss) per share is computed using the weighted average number of
shares of common stock outstanding and common stock equivalent shares. Common
stock equivalent shares are included in the per share calculations where the
effect of their inclusion would be dilutive. Dilutive common stock equivalent
shares consist of stock options and warrants (using the treasury stock method in
all periods presented). Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, common and common stock equivalent shares issued by
the Company during the twelve months preceding the initial offering date, using
the treasury stock method and the assumed public offering price per share, have
been included in the calculation of net income (loss) per share for all periods
presented.
RECENT PRONOUNCEMENTS:
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS No. 123) "Accounting for Stock-Based Compensation" which
establishes a fair value based method of accounting for stock-based compensation
plans and requires additional disclosures for those companies who elect not to
adopt the new method of accounting. The Company is currently following the
requirements of APB Opinion No. 25 "Accounting for Stock Issued to Employees"
and plans to adopt SFAS No. 123 during 1996 utilizing the disclosure
alternative.
INTERIM FINANCIAL INFORMATION (UNAUDITED):
The financial statements and related notes as of March 31, 1996 and for the
three months ended March 31, 1995 and 1996 have been prepared on the same basis
as the audited financial statements and, in the opinion of management, include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial position and results of operations in
accordance with generally accepted accounting principles for the interim period.
Results for interim periods are not necessarily indicative of results to be
expected for the full fiscal year.
F-8
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
3. INVENTORIES:
Inventories consist of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................................ $ 221 $ 287 $ 156
Work in process.............................................. 330 351 362
Finished goods............................................... 1,282 1,032 1,094
--------- --------- -----------
$ 1,833 $ 1,670 $ 1,612
--------- --------- -----------
--------- --------- -----------
</TABLE>
4. OTHER CURRENT ASSETS:
Other current assets consists of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31, 1996
---------------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid expenses................................................. $ -- $ -- $ 59
Receivable from related party.................................... 252 14 16
Other............................................................ 111 -- --
--------- --------- ---
$ 363 $ 14 $ 75
--------- --------- ---
--------- --------- ---
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment........................................ $ 129 $ 142 $ 207
Manufacturing and demonstration equipment...................... 152 196 196
Leasehold improvements......................................... 23 28 28
--------- --------- -----
304 366 431
Less accumulated depreciation and amortization................. (196) (268) (296)
--------- --------- -----
$ 108 $ 98 $ 135
--------- --------- -----
--------- --------- -----
</TABLE>
Property and equipment includes equipment under capital leases as follows
(IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Cost............................................................. $ 42 $ 42 $ 72
Less accumulated amortization.................................... (42) (42) (42)
--------- --------- -----
$ -- $ -- $ 30
--------- --------- -----
--------- --------- -----
</TABLE>
F-9
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
6. ACCRUED LIABILITIES:
Accrued liabilities consists of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued commissions payable...................................... $ 47 $ 120 $ 200
Accrued warranty................................................. 30 60 65
Accrued interest................................................. 104 249 262
Other............................................................ 370 118 159
--------- --------- -----
$ 551 $ 547 $ 686
--------- --------- -----
--------- --------- -----
</TABLE>
7. SHORT-TERM BORROWINGS:
In April 1995, the Company entered into a note payable with a financing
company for $50,000, with interest at 2% per month on the average daily
outstanding balance. Principal and interest payments are due monthly commencing
in May 1995 and terminating in August 1995. In July 1995, the Company amended
the note which resulted in renewing the terms through March 28, 1996. The total
balance outstanding on December 31, 1995 is $39,375.
In March 1995, the Company entered into a factoring agreement that allows
for borrowings up to 80% of eligible accounts receivable, not to exceed
$400,000. The factoring agreement is collateralized by substantially all of the
assets of the Company. Interest at 2% per month on the average outstanding
balance is charged monthly. Payments are made against the line of credit by
applying payments from the accounts receivable that have been collateralized to
the outstanding balance. During the year ended December 31, 1995, the maximum
amount drawn against the line was $201,158. The balance outstanding as of
December 31, 1995 and March 31, 1996 was $5,752 and none, respectively.
In February 1995, the Company entered into a note payable with a distributor
for $50,000 at 8% interest per annum. Principal and interest were paid in full
in December 1995.
8. LONG-TERM DEBT:
Debt consists of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable................................................ $ 1,859 $ 1,809 $ 1,684
Capital lease obligations.................................... -- -- 30
--------- --------- -----------
1,859 1,809 1,714
Less unamortized discount on notes payable................... (524) -- --
--------- --------- -----------
Total debt................................................... 1,335 1,809 1,714
Less current portion......................................... (326) (1,809) (1,691)
--------- --------- -----------
$ 1,009 $ -- $ 23
--------- --------- -----------
--------- --------- -----------
</TABLE>
The Company leases certain office equipment under a capital lease which
expires in January 2001.
F-10
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
8. LONG-TERM DEBT, CONTINUED:
During February through June 1994, the Company entered into promissory notes
for $1,008,974. The notes bear interest at 6% per annum and the maturity has
been extended through December 31, 1996. In connection with these notes, the
Company issued warrants to the debt holders to purchase an aggregate of 177,996
shares of common stock at $2.15 per share. The warrants expire in 1999.
During May through July 1994, the Company entered into promissory notes
totaling $798,738. The promissory notes comprised units, each of which includes
a $50,000 note payable bearing interest at 10% due in November 1995; 33,333
shares of common stock and 33,333 warrants at an exercise price of $1.67 per
share. In addition, a $50,000 loan entered into in January 1994, with a member
of the Company's Board of Directors, was converted into a unit with a $50,000
note payable, 33,333 shares of common stock and 33,333 warrants.
The shares and warrants issued in connection with the promissory notes were
determined to have a fair market value of $811,006, which has been charged to
discount on notes payable. The discount has been amortized as a charge to
interest expense on a straight line basis over a 17-month term. For the years
ended December 31, 1994 and 1995, the Company recorded interest expense of
$286,237 and $524,769, respectively.
Costs associated with promissory notes issued by the Company in the amount
of $135,000 were also amortized to interest expense on a straight line basis
over the 17 month term of the notes. For the years ended December 31, 1994 and
1995, $52,000 and $83,000 of these costs had been charged to interest expense,
respectively.
In March 1996, the Company issued warrants at an exercise price of $4.17 per
share to note holders who agreed to extend the term of the notes through
December 31, 1996. A total of 46,884 warrants were issued. At March 31, 1996,
$375,000 of the notes were in default as the holders did not accept these terms.
9. COMMITMENTS AND CONTINGENCIES:
The Company entered into a lease agreement for office facilities in February
1992. It was amended in November 1994 to include additional space for a total of
approximately 17,700 square feet, and to extend the lease term through March
1998. The minimum future rental payments are (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------
<S> <C>
1996.............................................................. $ 138
1997.............................................................. 154
1998.............................................................. 40
</TABLE>
Rent expense was approximately $66,000, $92,000 and $139,000 for the years
ended December 31, 1993, 1994 and 1995, respectively, and $36,000 and $35,000
for the three month periods ended March 31, 1995 and 1996, respectively.
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions at this time, management
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's financial position or results of operations.
F-11
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
10. SHAREHOLDERS' EQUITY:
COMMON STOCK:
Under certain circumstances, the Company has right of first refusal to
purchase common stock from selling shareholders.
In April 1996, the Board of Directors authorized a three-for-one stock
split. Management has retroactively applied the effect of the stock split for
all periods presented.
WARRANTS:
At December 31, 1995, warrants were outstanding to purchase a total of
1,124,754 shares of common stock at exercise prices ranging from $1.67 to $2.15.
The warrants, which were issued in connection with various debt and equity
financings, are exercisable and terminate upon the earlier of eleven months to
five years from the effective grant date, a merger or sale of all or
substantially all of the Company's assets to a noncontrolling entity, or certain
other conditions. At December 31, 1995, the Company had reserved for issuance
under these warrants 1,124,754 shares of common stock. During the years ended
December 31, 1994 and 1995 and the three month period ended March 31, 1996, no
warrants were exercised.
STOCK OPTION PLAN:
In January 1991 and as amended in October 1991 and August 1994, the Company
adopted the Dual Stock Option Plan, which includes the Employee Program under
which incentive and nonstatutory options may be granted to employees and the
Consultants Program, under which nonstatutory options may be granted to
consultants of the Company. As of March 31, 1996, the Company had reserved for
issuance under this plan a total of 3,000,000 shares of common stock. Under the
plan, options may be granted at prices not less than 85% of the fair market
value at the date of grant for nonstatutory options and not less than fair
market value for incentive options (110% of fair market value for options
granted to 10% shareholders), as determined by the Board of Directors. Under the
Dual Stock Option Plan, options generally vest over a period of three years and
expire ten years from date of grant (five years for options granted to 10%
shareholders). No shares of common stock issued under the plan are subject to
repurchase.
DIRECTOR STOCK OPTION PLAN:
In August 1994, the Company adopted the Directors Stock Option Plan which
provides for the grant of nonstatutory options to directors who are not officers
or employees of the Company. As of March 31, 1996, the Company had reserved for
issuance under this plan 450,000 shares of common stock. Under this plan,
options are granted at the trading price of the common stock at the date of
grant. Options generally vest over twelve months and expire ten years from date
of grant. No shares of common stock issued under the plan are subject to
repurchase.
F-12
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
10. SHAREHOLDERS' EQUITY, CONTINUED:
Option activity under both plans is as follows (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES -------------------------------------
AVAILABLE NUMBER OF PRICE PER
FOR GRANT SHARES SHARE TOTAL
----------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1993......................... 256 507 $0.02-$2.15 $ 349
Options granted................................ (140) 140 $1.43-$2.15 259
Options exercised.............................. -- (3) $0.02 --
Options canceled............................... 29 (29) $1.43-$2.15 (63)
----------- ----- ---------
Balance, December 31, 1993....................... 145 615 $0.02-$2.15 545
Shares reserved................................ 1,482 -- --
Options granted................................ (670) 670 $1.43 960
Options canceled............................... 49 (49) $1.43-$2.15 (71)
----------- ----- ---------
Balance, December 31, 1994....................... 1,006 1,236 $0.02-$2.15 1,434
Shares reserved................................ 1,200 -- --
Options granted................................ (1,308) 1,308 $1.67 2,180
Options canceled............................... 4 (4) $1.43-$2.15 (6)
----------- ----- ---------
Balance, December 31, 1995....................... 902 2,540 $0.02-$2.15 3,608
Options granted................................ (112) 112 $4.17 466
----------- ----- ---------
Balances, March 31, 1996 (UNAUDITED)............. 790 2,652 $0.02-$4.17 $ 4,074
----------- ----- ---------
----------- ----- ---------
</TABLE>
At December 31, 1995, options to purchase 1,241,646 shares of common stock
were exercisable.
11. INCOME TAXES:
The components of the net deferred tax asset were as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Net operating losses..................................................... $ 1,323 $ 1,639
Research and development credits......................................... 247 291
Reserves................................................................. 31 75
Accrued liabilities...................................................... 30 62
--------- ---------
Net deferred asset................................................. 1,631 2,067
Less valuation allowance................................................. (1,631) (2,067)
--------- ---------
$ -- $ --
--------- ---------
--------- ---------
</TABLE>
The Company has established a valuation allowance to the extent of its
deferred tax asset since it is not certain that a benefit can be realized in the
future due to the Company's recurring operating losses.
The change in the valuation allowance was $523,000, $828,000, and $436,000
in 1993, 1994, and 1995, respectively.
The noncurrent portion of the deferred tax assets, which totaled $1,570,000
and $1,930,000 at December 31, 1994 and 1995, respectively, are included above.
At December 31, 1995, the Company had federal and state net operating loss
carryforwards of approximately $4,300,000 and $2,700,000, respectively,
available to offset future regular and alternative minimum
F-13
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
11. INCOME TAXES, CONTINUED:
taxable income. In addition, the Company had federal and state research and
development credit carryforwards of approximately $205,000 and $86,000 available
to offset future tax liabilities. The Company's net operating loss
carryforwards, as well as credit carryforwards, expire in 2002 through 2010, if
not utilized.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company.The Company believes that the sale of common stock in
this public offering (see Note 14) will result in an ownership change which
could restrict the utilization of the carryforwards.
12. MAJOR CUSTOMERS:
In 1993 sales to one customer amounted to 11.9% of net revenues. In 1994,
there were no sales to one customer which amounted to greater than 10% of net
revenues. Sales to two customers amounted to 10% each of net revenues in 1995.
For the three months ended March 31, 1995 sales to three customers amounted to
13%, 16%, and 23% of net revenues. For the three months ended March 31, 1996,
sales to three different customers amounted to 17% of net revenues each, and
sales to one additional customer amounted to 26% of net revenues.
Export sales accounted for approximately 3.2%, 16.9% and 20% of net sales
for the years ended December 31, 1993, 1994 and 1995, respectively. For the
three months ended March 31, 1995 and 1996, export sales accounted for
approximately 41% and 8% of net sales, respectively.
13. RELATED PARTY TRANSACTIONS:
In 1993, the Company decided not to pursue an opportunity to design,
manufacture and distribute low price balloon angioplasty catheters. The Company
therefore caused the formation of Atlantis Catheter Company, Inc. (Atlantis).
The Company purchased 500,000 shares of Atlantis common stock and warrants to
purchase 4,500,000 additional shares of common stock for a total of $14,500.
These shares and warrants were distributed to the Company's shareholders as a
dividend in 1994, causing the Company's president to become the principal
beneficial shareholder of Atlantis. The president is also an outside director of
Atlantis. At December 31, 1995, 51.1% of Atlantis shares were held by the
Company's shareholders.
During 1994, the Company advanced Atlantis a total of $629,017 for
facilities and other operating expenses. The advanced funds were reimbursed
periodically by Atlantis, with a total $251,962 outstanding at December 31,
1994, and $14,000 outstanding at December 31, 1995. As of December 31, 1995, the
funds advanced by the Company to Atlantis pertain only to rent and other
facilities charges generated by the shared facilities of the two companies.
In February 1996, Atlantis was acquired by Biocompatibles International plc
(Biocompatibles), a publicly traded company, at which time Eclipse shareholders
held less than 5% of Biocompatible's outstanding common stock.
During 1995, the Company borrowed an aggregate of $100,000 from one director
pursuant to notes payable bearing interest at 10% per annum. These notes were
repaid in full during the year.
14. SUBSEQUENT EVENTS (UNAUDITED):
In April 1996, the Board of Directors approved the filing of a registration
statement by the Company with the SEC covering the proposed sale of shares of
its common stock to the public (the Offering).
In April 1996, the Board of Directors approved the following:
1. Amendments to the Company's Amended and Restated Articles of
Incorporation to increase the authorized shares of Common Stock from
45,000,000 to 50,000,000 and effect a three-for-one stock
F-14
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
14. SUBSEQUENT EVENTS (UNAUDITED):, continued:
split of the outstanding Common Stock. All common and common equivalent
shares and per share amounts in these financial statements have been
adjusted retroactively to give effect to the stock split
2. The amendment and restatement of the Company's Stock Option Plan to
increase the aggregate number of shares of Common Stock reserved for
issuance under the Plan to 4,000,000 shares (post-split) and to extend
the term of the Plan through March 2006.
3. The amendment and restatement of the Company's Director Stock Option
Plan to decrease the aggregate number of shares of Common Stock reserved
for issuance under the Plan to 200,000 shares (post-split) and to extend
the term of the Plan through March 2006.
4. The adoption of a 1996 Employee Stock Purchase Plan upon the closing of
the Company's initial public offering and the reservation of a total of
250,000 shares of the Company's Common Stock. Under the purchase plan,
employees may purchase Common Stock at the lower of 85% of the fair
market value of the Common Stock at the beginning or end of each offering
period.
F-15
<PAGE>
<TABLE>
<C> <S>
The Eclipse TMR
2000 system
generates laser
light of a
2-micron
wavelength by
photoelectric
excitation of a
solid state
holmium crystal.
The holmium laser
is compact,
reliable and has
low maintenance
[Photograph of Eclipse TMR 2000 system and nurse] requirements.
</TABLE>
<TABLE>
<S> <C>
[Photograph of slender optical fiber] [Photograph of surgical tools]
Flexible, lightweight and slender optical The Company offers a broad range of
fibers shown above are used to deliver the surgical tool options for the individual
laser energy to the patient. Eclipse TMR tactile preferences of the surgeon and
products are designed to give the surgeon solutions for the different geometry of
access to difficult to reach areas and each patient's heart cavity.
greater visualization of the surgical field.
</TABLE>
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES
IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Prospectus Summary.................................. 3
Risk Factors........................................ 6
Use of Proceeds..................................... 13
Dividend Policy..................................... 13
Capitalization...................................... 14
Dilution............................................ 15
Selected Financial Data............................. 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 17
Business............................................ 20
Management.......................................... 33
Certain Transactions................................ 40
Principal Shareholders.............................. 41
Description of Capital Stock........................ 42
Shares Eligible for Future Sale..................... 44
Underwriting........................................ 45
Legal Matters....................................... 46
Experts............................................. 46
Additional Information.............................. 46
Index to Financial Statements....................... F-1
</TABLE>
-------------------
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,000,000 SHARES
[LOGO]
ECLIPSE SURGICAL
TECHNOLOGIES, INC.
COMMON STOCK
-----------------
P R O S P E C T U S
-----------------
PAINEWEBBER INCORPORATED
DEUTSCHE MORGAN GRENFELL
JEFFERIES & COMPANY, INC.
------------
MAY , 1996
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
the Common Stock being registered hereby. All amounts are estimated except the
SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee.................................................... $ 23,794
NASD Filing Fee......................................................... 7,400
Nasdaq Listing Fee...................................................... 50,000
Directors' and Officers' Insurance...................................... 425,000
Printing and Engraving Expenses......................................... 150,000
Legal Fees and Expenses................................................. 250,000
Accounting Fees and Expenses............................................ 125,000
Blue Sky Fees and Expenses.............................................. 20,000
Transfer Agent and Registrar Fees and Expenses.......................... 7,500
Miscellaneous........................................................... 41,306
---------
Total................................................................. $1,100,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California Corporations Code authorizes a court to award,
or a corporation's Board of Directors to grant, indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act. Article IV of the Registrant's
Amended and Restated Articles of Incorporation (Exhibit 3.1) and Article V of
the Registrant's Amended and Restated Bylaws (Exhibit 3.2 hereto) provide for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by the California Corporations Code. In addition, the
Registrant has entered into Indemnification Agreements (Exhibit 10.1 hereto)
with its officers and directors. Reference is also made to Section 6 of the
Underwriting Agreement (Exhibit 1.1 hereto) which provides for the
indemnification of officers, directors and controlling persons of the Registrant
against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1993, the Registrant has issued and sold the unregistered
securities described below. Except as described below there were no underwriters
involved in the transactions, all transactions were for cash and there were no
underwriting discounts or commissions paid in connection therewith. The
Registrant relied on the exemption provided under Section 4(2) of the Securities
Act for each such issuance and, in the case of exercise of options, the
Registrant also relied on the exemption provided by Rule 701 promulgated under
the Securities Act. The purchasers of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof.
Appropriate legends were affixed to the certificates for the securities issued
in such transactions.
1. Between November 20, 1993 and March 31, 1996, the Company sold 5,244
shares of its Common Stock to 2 employees pursuant to the exercise of stock
options under its Stock Option Plan for an aggregate cash consideration of
$332.44.
2. Between January and October 1993, 166,610 shares of Common Stock were
issued to eight investors for aggregate proceeds of $316,620.
3. Between May and October 1993, the Company issued an aggregate of
1,170,003 shares of Common Stock to 29 investors for aggregate consideration of
$1,675,000. EGS Securities Corp. ("EGS") acted as the placement agent in
connection with the offering and received an underwriting commission of
$117,250, plus expense reimbursements of $6,500. An agreement between EGS and
the Company also provided for the issuance to EGS for no additional
consideration of a warrant to purchase 20% of the number of shares of
II-1
<PAGE>
Common Stock sold in the offering. EGS later agreed to reduce its entitlement to
14% of the number of shares of Common Stock sold. It transferred this right to
six affiliated individuals to whom the Company issued, for $.03 per underlying
share, warrants to purchase 163,797 shares for proceeds of $4,690. The Company
then offered the balance of the warrants intended to be issued to EGS to
shareholders participating in the offering at $.03 per share. Warrants to
purchase an additional 68,931 shares of Common Stock were issued and sold to 28
of such subscribers for proceeds of $1,974.
4. Between February and June 1994, the Company issued an aggregate of
$1,008,974 of 6% Promissory Notes to five investors and warrants to purchase an
aggregate of 177,996 shares of Common Stock to nine investors for aggregate
consideration of $10,193.
5. Between May and July 1994, the Company issued an aggregate of $848,738
of 10% Promissory Notes, 565,830 shares of Common Stock and warrants to purchase
565,830 shares of Common Stock to 27 investors. Westfield Financial Services
acted as placement agent and was paid underwriting commissions of $79,874, plus
expense reimbursements of $55,126 in connection with such offering.
6. In October 1995, the Company issued and sold an aggregate of 741,000
shares of Common Stock and warrants to purchase a further 148,200 shares of
Common Stock to 19 investors for aggregate consideration of $1,239,940.
7. In March 1996, the Company issued and sold an aggregate of 472,200
shares of Common Stock to 31 investors for $1,967,500. The Company also issued
warrants to purchase a further 46,884 shares of Common Stock for total proceeds
of $1,563 to 19 investors to defer $1,307,711 of indebtedness.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following is a list of all the exhibits, financial statements and
schedules filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ -------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement among the Underwriters and Registrant.
3.1 Certificate of Amendment and Restated Articles of Incorporation of Registrant.
3.2 Amended and Restated Bylaws of Registrant.
4.1 [not used].
4.2* Form of Warrant issued in July 1993.
4.3* Form of Warrant issued in February 1994.
4.4* Form of Warrant issued in May 1994.
4.5* Form of Warrant issued in October 1995.
4.6 Form of Warrant issued in March 1996.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
10.1* Form of Director and Officer Indemnification Agreement.
10.2* Stock Option Plan.
10.3* Director Stock Option Plan.
10.4* 1996 Employee Stock Purchase Plan.
10.5* Facilities Lease for 1049 Kiel Court, Sunnyvale, California.
11.1* Statement re: Computation of Net Income (Loss) Per Share.
23.1 Consent of Coopers & Lybrand L.L.P. (see page II-5)
23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C., counsel to Registrant (included in Exhibit 5.1).
23.3* Consent of Owen, Wickersham & Erickson, intellectual property counsel to Registrant.
24.1 Power of Attorney (see page II-4).
</TABLE>
- ------------------------
* Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts and Reserves
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained
in the form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the Closing, as specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement (No.
333-03770) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Sunnyvale, State of California, on May 20, 1996.
ECLIPSE SURGICAL TECHNOLOGIES, INC.
By: _____/s/ BARBARA A. DREBLOW_______
Barbara A. Dreblow
CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------------- ----------------
/s/ DOUGLAS MURPHY-CHUTORIAN, M.D.* Chairman and Chief Executive Officer
Douglas Murphy-Chutorian, M.D. (Principal Executive Officer) May 20, 1996
/s/ RICHARD L. MUELLER JR.* President, Chief Operating Officer and
Richard L. Mueller Jr. Director May 20, 1996
Chief Financial Officer
/s/ BARBARA A. DREBLOW (Principal Accounting and Financial May 20, 1996
Barbara A. Dreblow Officer)
/s/ ROBERT L. MORTENSEN*
Robert L. Mortensen Director May 20, 1996
/s/ IAIN M. WATSON*
Iain M. Watson Director May 20, 1996
*By /s/ BARBARA A. DREBLOW
Barbara A. Dreblow
(ATTORNEY-IN-FACT)
</TABLE>
II-4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 333-03770) to our reports dated March 29, 1996
on our audits of the financial statements and financial statement schedule of
Eclipse Surgical Technologies, Inc. as of December 31, 1994 and 1995 and for
each of the three years in the period ended December 31, 1995. We also consent
to the reference to our firm under the caption "Experts" in the Registration
Statement.
COOPERS & LYBRAND L.L.P.
San Jose, California
May 20, 1996
II-5
<PAGE>
SCHEDULE II
ECLIPSE SURGICAL TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF BALANCE AT
PERIOD ADDITIONS (1) DEDUCTIONS (2) END OF PERIOD
------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1993:
Allowance for doubtful accounts............................ $ 20 $ 9 $ 24 $ 5
Year ended December 31, 1994:
Allowance for doubtful accounts............................ $ 5 $ 55 $ -- $ 60
Year ended December 31, 1995:
Allowance for doubtful accounts............................ $ 60 $ 40 $ 71 $ 29
</TABLE>
- ------------------------
(1) Charged to costs and expenses.
(2) Accounts written off against the reserve.
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the financial statements of Eclipse
Surgical Technologies, Inc. as of December 31, 1994 and 1995, and for each of
the three years in the period ended December 31, 1995, which financial
statements are included in this Registration Statement, we have also audited the
financial statement schedule listed in Item 16b herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
May 2, 1996
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
- ----------- ------------------------------------------------------------------------------------------ -------------
<C> <S> <C>
1.1* Form of Underwriting Agreement among the Underwriters and Registrant......................
3.1 Certificate of Amendment and Restated Articles of Incorporation of Registrant.............
3.2 Amended and Restated Bylaws of Registrant.................................................
4.1 [not used]................................................................................
4.2* Form of Warrant issued in July 1993.......................................................
4.3* Form of Warrant issued in February 1994...................................................
4.4* Form of Warrant issued in May 1994........................................................
4.5* Form of Warrant issued in October 1995....................................................
4.6 Form of Warrant issued in March 1996......................................................
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, P.C..........................................
10.1* Form of Director and Officer Indemnification Agreement....................................
10.2* Stock Option Plan.........................................................................
10.3* Director Stock Option Plan................................................................
10.4* 1996 Employee Stock Purchase Plan.........................................................
10.5* Facilities Lease for 1049 Kiel Court, Sunnyvale, California...............................
11.1* Statement re: Computation of Net Income (Loss) Per Share..................................
23.1 Consent of Coopers & Lybrand L.L.P. (see page II-5).......................................
23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C., counsel to Registrant (included in
Exhibit 5.1)..............................................................................
23.3* Consent of Owen, Wickersham & Erickson, intellectual property counsel to Registrant.......
24.1 Power of Attorney (see page II-4).........................................................
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
(This Page Intentionally Left Blank)
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ECLIPSE SURGICAL TECHNOLOGIES, INC.
Richard L. Mueller, Jr. and Stephen M. Wurzburg certify that:
A. They are the President and Secretary, respectively, of Eclipse
Surgical Technologies, Inc., a California corporation (the "Corporation").
B. Section 1 of Article THIRD of the articles of incorporation of the
Corporation is amended to read as follows:
"THIRD
1. The Corporation is authorized to issue two classes of shares of
no par value capital stock, which classes shall be designated as "common
stock" and "preferred stock." The total number of shares of capital stock
which the Corporation shall have authority to issue shall be fifty-five
million (55,000,000) shares, of which fifty million (50,000,000) shares
shall be designated as common stock and five million (5,000,000) shares
shall be designated as preferred stock. Upon the filing of this
Certificate of Amendment, each outstanding share of the Corporation's
common stock shall be split up and converted into three shares of the
Corporation's common stock."
C. The foregoing amendment of articles of incorporation has been duly
approved by the Corporation's Board of Directors.
D. The foregoing amendment of articles of incorporation has been duly
approved by the required vote of shareholders in accordance with Section 902
of the Corporations Code. The total number of outstanding shares of the
Corporation is 3,894,132 shares of common stock. The number of shares voting
in favor of the amendment equaled or exceeded the vote required. The
percentage required was more than 50% of the outstanding shares of common
stock.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: April 30, 1996
<TABLE>
<S> <C>
- ------------------------------------------ ------------------------------------------
Richard L. Mueller, Jr. Stephen M. Wurzburg
President Secretary
</TABLE>
<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
ECLIPSE SURGICAL TECHNOLOGIES, INC.
Richard L. Mueller, Jr. and Stephen M. Wurzburg certify that:
1. They are the President and Secretary, respectively, of Eclipse
Surgical Technologies, Inc., a California corporation (the "Corporation").
2. The articles of incorporation of the Corporation are restated to
read as follows:
"FIRST
The name of this corporation (the "Corporation") is:
ECLIPSE SURGICAL TECHNOLOGIES, INC.
SECOND
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business, or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
THIRD
The Corporation is authorized to issue two classes of shares of no par value
capital stock, which classes shall be designated as "common stock" and
"preferred stock." The total number of shares of capital stock which the
Corporation shall have authority to issue shall be fifty-five million
(55,000,000) shares, of which fifty million (50,000,000) shares shall be
designated as common stock and five million (5,000,000) shares shall be
designated as preferred stock.
The preferred stock may be issued from time to time in one or more series.
The Board of Directors is authorized to fix the number of shares of any series
of preferred stock and to determine the designation of any such series. The
Board of Directors is further authorized to determine or alter the rights,
preferences, privileges, and restrictions granted to or imposed upon any wholly
unissued series of preferred stock and, within the limits and restrictions
stated in any resolution of the Board of Directors originally fixing the number
of shares constituting any series, to increase or decrease (but not below the
number of shares of any such series then outstanding) the number of shares of
any such series subsequent to the issuance of shares in the series. In case the
number of shares of preferred stock of any series shall be so decreased, the
shares of preferred stock constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of preferred stock of such series.
FOURTH
1. The liability of the directors of the Corporation for monetary
damages shall be eliminated to the fullest extent permissible under
California law.
2. The Corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the California Corporations code) for breach
of duty to the Corporation and its shareholders through Bylaw provisions or
through agreements with the agents, or both, in excess of the
indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject to the limits on such excess indemnification set
forth in Section 204 of the California Corporations Code."
3. The foregoing restated articles of incorporation has been duly
approved by the Corporation's Board of Directors.
2
<PAGE>
4. The foregoing is merely a restatement of articles of incorporation;
there is no amendment being made. As such, no approval is required of the
Corporation's shareholders."
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: April 30, 1996
<TABLE>
<S> <C>
- ------------------------------------------ ------------------------------------------
Richard L. Mueller, Jr. Stephen M. Wurzburg
President Secretary
</TABLE>
3
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
ECLIPSE SURGICAL TECHNOLOGIES, INC.,
A CALIFORNIA CORPORATION
<PAGE>
AMENDED AND RESTATED BYLAWS OF
ECLIPSE SURGICAL TECHNOLOGIES, INC.
TABLE OF CONTENTS
PAGE
ARTICLE I
CORPORATE OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 PRINCIPAL OFFICE . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
MEETINGS OF SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 NOTICE OF SHAREHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE . . . . . . . . . . . . 2
2.6 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.7 ADJOURNED MEETING; NOTICE. . . . . . . . . . . . . . . . . . . . . . 3
2.8 VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT. . . . . . . . . . 4
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . . . . 5
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS 5
2.12 PROXIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.13 INSPECTORS OF ELECTION . . . . . . . . . . . . . . . . . . . . . . . 6
2.14 ADVANCE NOTICE OF SHAREHOLDER NOMINEES AND SHAREHOLDER BUSINESS. . . 7
ARTICLE III
DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.1 POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.2 NUMBER OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . 8
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS . . . . . . . . . . . . . . 9
3.4 RESIGNATION AND VACANCIES. . . . . . . . . . . . . . . . . . . . . . 9
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE . . . . . . . . . . . . . .10
3.6 REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . .10
3.7 SPECIAL MEETINGS; NOTICE . . . . . . . . . . . . . . . . . . . . . .10
3.8 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
3.9 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . .11
3.10 ADJOURNMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
3.11 NOTICE OF ADJOURNMENT. . . . . . . . . . . . . . . . . . . . . . . .11
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . . . . . . .11
3.13 FEES AND COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . . . .11
3.14 APPROVAL OF LOANS TO OFFICERS. . . . . . . . . . . . . . . . . . . .12
ARTICLE IV
COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
4.1 COMMITTEES OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . .12
4.2 MEETINGS AND ACTION OF COMMITTEES. . . . . . . . . . . . . . . . . .13
ARTICLE V
OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
5.1 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
5.2 ELECTION OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . .13
5.3 SUBORDINATE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . .14
5.4 REMOVAL AND RESIGNATION OF OFFICERS. . . . . . . . . . . . . . . . .14
5.5 VACANCIES IN OFFICES . . . . . . . . . . . . . . . . . . . . . . . .14
5.6 CHAIRMAN OF THE BOARD. . . . . . . . . . . . . . . . . . . . . . . .14
5.7 CHIEF EXECUTIVE OFFICER. . . . . . . . . . . . . . . . . . . . . . .14
5.8 PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
5.9 VICE PRESIDENTS. . . . . . . . . . . . . . . . . . . . . . . . . . .15
5.10 SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
5.11 CHIEF FINANCIAL OFFICER. . . . . . . . . . . . . . . . . . . . . . .16
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,AND OTHER AGENTS. . . .16
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. . . . . . . . . . . . . .16
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
6.2 INDEMNIFICATION OF OTHERS. . . . . . . . . . . . . . . . . . . . . .16
6.3 PAYMENT OF EXPENSES IN ADVANCE . . . . . . . . . . . . . . . . . . .17
6.4 INDEMNITY NOT EXCLUSIVE. . . . . . . . . . . . . . . . . . . . . . .17
6.5 INSURANCE INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . .17
6.6 CONFLICTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
ARTICLE VII
RECORDS AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . .18
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER . . . . . . . . . . . .18
7.2 MAINTENANCE AND INSPECTION OF BYLAWS . . . . . . . . . . . . . . . .18
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. . . . . . . .19
7.4 INSPECTION BY DIRECTORS. . . . . . . . . . . . . . . . . . . . . . .19
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER. . . . . . . . . . . . . . . .19
7.6 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . .20
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . . . . .20
ARTICLE VIII
GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. . . . . . . .20
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS. . . . . . . . . . . . . .21
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED . . . . . . . . .21
8.4 CERTIFICATES FOR SHARES. . . . . . . . . . . . . . . . . . . . . . .21
8.5 LOST CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . . .22
8.6 CONSTRUCTION; DEFINITIONS. . . . . . . . . . . . . . . . . . . . . .22
ARTICLE IX
AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
9.1 AMENDMENT BY SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . .22
9.2 AMENDMENT BY DIRECTORS . . . . . . . . . . . . . . . . . . . . . . .22
-iii-
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
ECLIPSE SURGICAL TECHNOLOGIES, INC.
ARTICLE I
CORPORATE OFFICES
1.1 PRINCIPAL OFFICE
The board of directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside such state and
the corporation has one or more business offices in such state, then the board
of directors shall fix and designate a principal business office in the State of
California.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS
Meetings of shareholders shall be held at any place within or outside the
State of California designated by the board of directors. In the absence of any
such designation, shareholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of shareholders shall be held each year on a date and at
a time designated by the board of directors. At the meeting, directors shall be
elected, and any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
Special meetings of shareholders may be called for any purpose and may be
held at such time and place, within or without the State of California, as shall
be stated in a notice of meeting or in a duly executed waiver of notice thereof.
Such meetings may be called at any time by the board of directors and shall be
called by the board upon the written request of holders of shares entitled to
cast not less than ten percent (10%) of the votes at the meeting. No business
may be transacted at any special meeting otherwise than as specified in the
notice to shareholders of such meeting.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
All notices of meetings of shareholders shall be sent or otherwise given in
accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent
by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor
more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date, and hour of the meeting and (i) in the case of a
special meeting, the general nature of the business to be transacted (no
business other than that specified in the notice may be transacted) or (ii) in
the case of the annual meeting, those matters which the board of directors, at
the time of giving the notice, intends to present for action by the shareholders
(but subject to the provisions of the next paragraph of this Section 2.4 any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California (the
"Code"), (ii) an amendment of the Articles of Incorporation, pursuant to Section
902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the Code, then the notice shall also state the general nature of that
proposal.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of shareholders shall be given either (i)
personally or (ii) by first-class mail or (iii) by third-class mail but only if
the corporation has outstanding shares held of record by five hundred (500) or
more persons (determined as provided in Section 605 of the Code) on the record
date for the shareholders' meeting, or (iv) by telegraphic, facsimile
transmission or other written communication. Notices not personally delivered
shall be sent charges prepaid and shall be addressed to the shareholder at the
address of that shareholder appearing on the books of the corporation or given
by the shareholder to the corporation for the purpose of notice. If no such
address appears on the corporation's books or is given, notice shall be deemed
to have been given if sent to that shareholder by mail or telegraphic or other
written communication to the corporation's principal executive office, or if
published at least once in a newspaper of general circulation in the county
where that office is located.
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Notice shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.
If any notice addressed to a shareholder at the address of that shareholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the shareholder at that address, then
all future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available to the shareholder on written
demand of the shareholder at the principal executive office of the corporation
for a period of one (1) year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.6 QUORUM
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of shareholders. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
2.7 ADJOURNED MEETING; NOTICE
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy. In the
absence of a quorum, no other business may be transacted at that meeting except
as provided in Section 2.6 of these bylaws.
When any meeting of shareholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at the meeting at which the adjournment is taken.
However, if a new record date for the adjourned meeting is fixed or if the
adjournment is for more than forty-five (45) days from the date set for the
original meeting, then notice of the adjourned meeting shall be given. Notice
of any such adjourned meeting shall be given to each shareholder of record
entitled to vote at the adjourned meeting in accordance with the provisions of
Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation
may transact any business which might have been transacted at the original
meeting.
2.8 VOTING
The shareholders entitled to vote at any meeting of shareholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 702 through
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704 of the Code (relating to voting shares held by a fiduciary, in the name of a
corporation or in joint ownership).
The shareholders' vote may be by voice vote or by ballot; provided,
however, that any election for directors must be by ballot if demanded by any
shareholder at the meeting and before the voting has begun.
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the Articles of Incorporation, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote of the shareholders. Any shareholder entitled to vote on any matter may
vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or, except when the matter is the election of directors, may
vote them against the proposal; but, if the shareholder fails to specify the
number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
all shares which the shareholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the shares
represented and voting at a duly held meeting (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the shareholders, unless the vote of a greater number or a vote by classes is
required by the Code or by the Articles of Incorporation.
At a shareholders' meeting at which directors are to be elected, a
shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such shareholder normally
is entitled to cast) if the candidates' names have been placed in nomination
prior to commencement of the voting and the shareholder has given notice prior
to commencement of the voting of the shareholder's intention to cumulate votes.
If any shareholder has given such a notice, then every shareholder entitled to
vote may cumulate votes for candidates in nomination either (i) by giving one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that shareholder's shares are
normally entitled or (ii) by distributing the shareholder's votes on the same
principle among any or all of the candidates, as the shareholder thinks fit.
The candidates receiving the highest number of affirmative votes, up to the
number of directors to be elected, shall be elected; votes against any candidate
and votes withheld shall have no legal effect.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of shareholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though they
had been taken at a meeting duly held after regular call and notice, if a quorum
be present either in person or by proxy, and if, either before or after the
meeting, each person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of shareholders, except that if action is taken
or proposed to be taken for approval of any of those matters specified in the
second paragraph of Section 2.4 of these
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bylaws, the waiver of notice or consent or approval shall state the general
nature of the proposal. All such waivers, consents, and approvals shall be
filed with the corporate records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by the Code to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take that action at a meeting at which all
shares entitled to vote on that action were present and voted.
In the case of election of directors, such a consent shall be effective
only if signed by the holders of all outstanding shares entitled to vote for the
election of directors. However, a director may be elected at any time to fill
any vacancy on the board of directors, provided that it was not created by
removal of a director and that it has not been filled by the directors, by the
written consent of the holders of a majority of the outstanding shares entitled
to vote for the election of directors.
All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders, or a
transferee of the shares, or a personal representative of the shareholder, or
their respective proxy holders, may revoke the consent by a writing received by
the secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders has not been received, then the secretary shall give prompt notice
of the corporate action approved by the shareholders without a meeting. Such
notice shall be given to those shareholders entitled to vote who have not
consented in writing and shall be given in the manner specified in Section 2.5
of these bylaws. In the case of approval of (i) a contract or transaction in
which a director has a direct or indirect financial interest, pursuant to
Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant
to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant
to Section 1201 of the Code, and (iv) a distribution in dissolution other than
in accordance with the rights of outstanding preferred shares, pursuant to
Section 2007 of the Code, the notice shall be given at least ten (10) days
before the consummation of any action authorized by that approval.
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2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of any such meeting nor more than sixty (60) days before any such
action without a meeting, and in such event only shareholders of record on the
date so fixed are entitled to notice and to vote or to give consents, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date, except as otherwise provided in the Code.
If the board of directors does not so fix a record date:
(a) the record date for determining shareholders entitled to notice
of or to vote at a meeting of shareholders shall be at the close of business on
the business day next preceding the day on which notice is given or, if notice
is waived, at the close of business on the business day next preceding the day
on which the meeting is held; and
(b) the record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action by the board has been taken, shall
be at the close of business on the day on which the board adopts the resolution
relating to that action, or the sixtieth (60th) day before the date of such
other action, whichever is later.
The record date for any other purpose shall be as provided in Article VIII
of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation. A proxy shall be deemed signed if the shareholder's name is placed
on the proxy (whether by manual signature, typewriting, telegraphic transmission
or otherwise) by the shareholder or the shareholder's attorney-in-fact. A
validly executed proxy which does not state that it is irrevocable shall
continue in full force and effect unless (i) the person who executed the proxy
revokes it prior to the time of voting by delivering a writing to the
corporation stating that the proxy is revoked or by executing a subsequent proxy
and presenting it to the meeting or by voting in person at the meeting, or
(ii) written notice of the death or incapacity of the maker of that proxy is
received by the corporation before the vote pursuant to that proxy is counted;
provided, however, that no proxy shall be valid after the expiration of eleven
(11) months from the date of the proxy, unless otherwise provided in the proxy.
The dates contained on the forms of proxy presumptively determine the order of
execution, regardless of the postmark dates on the envelopes in which they are
mailed. The revocability of a proxy that states on its face that it is
irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of
the Code.
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2.13 INSPECTORS OF ELECTION
Before any meeting of shareholders, the board of directors may appoint an
inspector or inspectors of election to act at the meeting or its adjournment.
If no inspector of election is so appointed, then the chairman of the meeting
may, and on the request of any shareholder or a shareholder's proxy shall,
appoint an inspector or inspectors of election to act at the meeting. The
number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting pursuant to the request of one (1) or more shareholders
or proxies, then the holders of a majority of shares or their proxies present at
the meeting shall determine whether one (1) or three (3) inspectors are to be
appointed. If any person appointed as inspector fails to appear or fails or
refuses to act, then the chairman of the meeting may, and upon the request of
any shareholder or a shareholder's proxy shall, appoint a person to fill that
vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting power
of each, the number of shares represented at the meeting, the existence of a
quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
2.14 ADVANCE NOTICE OF SHAREHOLDER NOMINEES AND SHAREHOLDER
BUSINESS
To be properly brought before an annual meeting or special meeting,
nominations for the election of director or other business must be (a) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the board of directors, (b) otherwise properly brought before the
meeting by or at the direction of the board of directors, or (c) otherwise
properly brought before the meeting by a shareholder. For such nominations or
other business to be considered properly brought before the meeting by a
shareholder, such shareholder must have given timely notice and in proper form
of his intent to bring such business before such meeting. To be timely, such
shareholder's notice must be delivered or mailed to and received by the
secretary of the corporation not less than 90 days prior to the meeting;
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provided, however, that in the event that less than 100 days notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the tenth day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made. To be in
proper form, a shareholder's notice to the secretary shall set forth:
(i) the name and address of the shareholder who intends to make the
nominations or propose the business, and, as the case may be, the name and
address of the person or persons to be nominated or the nature of the
business to be proposed;
(ii) a representation that the shareholder is a holder of record of
stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice or introduce the
business specified in the notice;
(iii) if applicable, a description of all arrangements or
understandings between the shareholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder;
(iv) such other information regarding each nominee or each matter of
business to be proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to be
proposed by the board of directors; and
(v) if applicable, the consent of each nominee to serve as director
of the corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination of any
person or the proposal of any business not made in compliance with the foregoing
procedure.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the Code and any limitations in the Articles
of Incorporation and these bylaws relating to action required to be approved by
the shareholders or by the outstanding shares, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the board of directors.
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3.2 NUMBER AND QUALIFICATION OF DIRECTORS
The authorized number of directors shall be not less than four (4) nor more
than seven (7), unless and until changed by an amendment to this Section 3.2
adopted by the shareholders pursuant to Section 6.1. The number of directors
within such range shall be fixed by an amendment to this Section 3.2 adopted by
the Board of Directors; and unless and until so amended, the exact number of
directors is hereby fixed at four (4). A reduction in the authorized number of
directors shall not remove any director prior to the expiration of such
director's term of office. Directors need not be shareholders of the
corporation.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Directors shall be elected at each annual meeting of shareholders to hold
office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified.
3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the chairman
of the board, the chief executive officer, the president, the secretary or the
board of directors, unless the notice specifies a later time for that
resignation to become effective. If the resignation of a director is effective
at a future time, the board of directors may elect a successor to take office
when the resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote or
written consent of the shareholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute a majority of the required quorum), or by the unanimous written
consent of all shares entitled to vote thereon. Each director so elected shall
hold office until the next annual meeting of the shareholders and until a
successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to exist
(i) in the event of the death, resignation or removal of any director, (ii) if
the board of directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, (iii) if the authorized number of directors is increased, or (iv) if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the number of directors to be elected at that
meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election other
than to fill a vacancy created by removal, if by written
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consent, shall require the consent of the holders of a majority of the
outstanding shares entitled to vote thereon.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place within
or outside the State of California that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
California that has been designated in the notice of the meeting or, if not
stated in the notice or if there is no notice, at the principal executive office
of the corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the chief executive officer,
the president, or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
facsimile transmission or telegram, charges prepaid, addressed to each director
at that director's address as it is shown on the records of the corporation. If
the notice is mailed, it shall be deposited in the United States mail at least
four (4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone or telegram, it shall be delivered
personally or by telephone or by facsimile transmission or to the telegraph
company at least forty-eight (48) hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
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regarded as the act of the board of directors, subject to the provisions of
Section 310 of the Code (as to approval of contracts or transactions in which a
director has a direct or indirect material financial interest), Section 311 of
the Code (as to appointment of committees), Section 317(e) of the Code (as to
indemnification of directors), the Articles of Incorporation, and other
applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.10 ADJOURNMENT
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of
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directors. This Section 3.13 shall not be construed to preclude any director
from serving the corporation in any other capacity as an officer, agent,
employee or otherwise and receiving compensation for those services.
3.14 APPROVAL OF LOANS TO OFFICERS*
The corporation may, upon the approval of the board of directors
alone, make loans of money or property to, or guarantee the obligations of, any
officer of the corporation or its parent or subsidiary, whether or not a
director, or adopt an employee benefit plan or plans authorizing such loans or
guaranties provided that (i) the board of directors determines that such a loan
or guaranty or plan may reasonably be expected to benefit the corporation,
(ii) the corporation has outstanding shares held of record by 100 or more
persons (determined as provided in Section 605 of the Code) on the date of
approval by the board of directors, and (iii) the approval of the board of
directors is by a vote sufficient without counting the vote of any interested
director or directors.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have all the authority of
the board, except with respect to:
(a) the approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the
board or any committee;
(d) the amendment or repeal of these bylaws or the adoption of new
bylaws;
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* This section is effective only if it has been approved by the
shareholders in accordance with Sections 315(b) and 152 of the Code.
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(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at
a rate or in a periodic amount or within a price range determined by the board
of directors; or
(g) the appointment of any other committees of the board of directors
or the members of such committees.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a chief executive officer, a
president, a chief financial officer and a secretary. The corporation may also
have, at the discretion of the board of directors, a chairman of the board, one
or more vice presidents, one or more assistant secretaries, a treasurer, one or
more assistant treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these bylaws. Any number of
offices may be held concurrently by the same person.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment.
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5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect on the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The Chairman of the Board, if such an officer be elected, shall, if
present, preside at meetings of the Board of Directors and exercise and perform
such other powers and duties as may from time to time be assigned to such person
by the Board of Directors or as may be prescribed by these laws. The Chairman
of the Board may also serve as the Chief Executive Officer of the corporation,
if so designated by the Board, and in such event shall have the powers and
duties prescribed in Section 5.7 of these Bylaws.
5.7 CHIEF EXECUTIVE OFFICER
The Chief Executive Officer of the corporation shall, subject to the
control of the Board of Directors, have general supervision, direction and
control of the business and the officers of the corporation. He or she shall
preside at all meetings of the shareholders and, in the absence or nonexistence
of a Chairman of the Board at all meetings of the Board of Directors. He or she
shall have the general powers and duties of management usually vested in the
chief executive officer of a corporation, including general supervision,
direction and control of the business and supervision of other
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officers of the corporation, and shall have such other powers and duties as may
be prescribed by the Board of Directors or these Bylaws.
The Chief Executive Officer shall, without limitation, have the authority
to execute bonds, mortgages and other contracts requiring a seal, under the seal
of the corporation, except where required or permitted by law to be otherwise
signed and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation.
5.8 PRESIDENT
Subject to such supervisory powers as may be given by these Bylaws or the
Board of Directors to the Chairman of the Board or the Chief Executive Officer,
if there be such officers, the president shall have general supervision,
direction and control of the business and supervision of other officers of the
corporation, and shall have such other powers and duties as may be prescribed by
the Board of Directors or these Bylaws. In the event a Chief Executive Officer
shall not be appointed, the President shall have the duties of such office.
5.9 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.10 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and shareholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
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The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.11 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted by
the Code, indemnify each of its directors and officers against expenses (as
defined in Section 317(a) of the Code), judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with any proceeding (as
defined in Section 317(a) of the Code), arising by reason of the fact that such
person is or was an agent of the corporation. For purposes of this Article VI,
a "director" or "officer" of the corporation includes any person (i) who is or
was a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the Code, to indemnify each of its employees and agents (other than
directors and officers) against expenses (as defined in Section 317(a) of the
Code), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising
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by reason of the fact that such person is or was an agent of the corporation.
For purposes of this Article VI, an "employee" or "agent" of the corporation
(other than a director or officer) includes any person (i) who is or was an
employee or agent of the corporation, (ii) who is or was serving at the request
of the corporation as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, or (iii) who was an employee or agent
of a corporation which was a predecessor corporation of the corporation or of
another enterprise at the request of such predecessor corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending any civil or criminal action or proceeding
for which indemnification is required pursuant to Section 6.1 or for which
indemnification is permitted pursuant to Section 6.2 following authorization
thereof by the Board of Directors shall be paid by the corporation in advance of
the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of the indemnified party to repay such amount if it
shall ultimately be determined that the indemnified party is not entitled to be
indemnified as authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Articles of
Incorporation.
6.5 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against or incurred by such person in
such capacity or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Article VI.
6.6 CONFLICTS
No indemnification or advance shall be made under this Article VI, except
where such indemnification or advance is mandated by law or the order, judgment
or decree of any court of competent jurisdiction, in any circumstance where it
appears:
(1) That it would be inconsistent with a provision of the Articles of
Incorporation, these bylaws, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of the action asserted in
the proceeding in which the expenses were incurred or other amounts were paid,
which prohibits or otherwise limits indemnification; or
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(2) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
The corporation shall keep either at its principal executive office or at
the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the board of directors, a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.
A shareholder or shareholders of the corporation who holds at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and has
filed a Schedule 14B with the Securities and Exchange Commission relating to the
election of directors, may (i) inspect and copy the records of shareholders'
names, addresses, and shareholdings during usual business hours on five (5)
days' prior written demand on the corporation, (ii) obtain from the transfer
agent of the corporation, on written demand and on the tender of such transfer
agent's usual charges for such list, a list of the names and addresses of the
shareholders who are entitled to vote for the election of directors, and their
shareholdings, as of the most recent record date for which that list has been
compiled or as of a date specified by the shareholder after the date of demand.
Such list shall be made available to any such shareholder by the transfer agent
on or before the later of five (5) days after the demand is received or five (5)
days after the date specified in the demand as the date as of which the list is
to be compiled.
The record of shareholders shall also be open to inspection on the written
demand of any shareholder or holder of a voting trust certificate, at any time
during usual business hours, for a purpose reasonably related to the holder's
interests as a shareholder or as the holder of a voting trust certificate.
Any inspection and copying under this Section 7.1 may be made in person or
by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California the original or a copy of these bylaws as amended
to date, which bylaws shall be open to inspection by the shareholders at all
reasonable times during office hours. If the principal executive office of the
corporation is outside the State of California and the corporation has no
principal business office in such state, then the secretary shall, upon
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the written request of any shareholder, furnish to that shareholder a copy of
these bylaws as amended to date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
The accounting books and records and the minutes of proceedings of the
shareholders, of the board of directors, and of any committee or committees of
the board of directors shall be kept at such place or places as are designated
by the board of directors or, in absence of such designation, at the principal
executive office of the corporation. The minutes shall be kept in written form,
and the accounting books and records shall be kept either in written form or in
any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection
upon the written demand of any shareholder or holder of a voting trust
certificate, at any reasonable time during usual business hours, for a purpose
reasonably related to the holder's interests as a shareholder or as the holder
of a voting trust certificate. The inspection may be made in person or by an
agent or attorney and shall include the right to copy and make extracts. Such
rights of inspection shall extend to the records of each subsidiary corporation
of the corporation.
7.4 INSPECTION BY DIRECTORS
Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind as well as the physical
properties of the corporation and each of its subsidiary corporations. Such
inspection by a director may be made in person or by an agent or attorney. The
right of inspection includes the right to copy and make extracts of documents.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
The board of directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of the
fiscal year adopted by the corporation. Such report shall be sent at least
fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days)
before the annual meeting of shareholders to be held during the next fiscal year
and in the manner specified in Section 2.5 of these bylaws for giving notice to
shareholders of the corporation.
The annual report shall contain (i) a balance sheet as of the end of the
fiscal year, (ii) an income statement, (iii) a statement of changes in financial
position for the fiscal year, and (iv) any report of independent accountants or,
if there is no such report, the certificate of an authorized officer of the
corporation that the statements were prepared without audit from the books and
records of the corporation.
The foregoing requirement of an annual report shall be waived so long as
the shares of the corporation are held by fewer than one hundred (100) holders
of record.
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7.6 FINANCIAL STATEMENTS
If no annual report for the fiscal year has been sent to shareholders, then
the corporation shall, upon the written request of any shareholder made more
than one hundred twenty (120) days after the close of such fiscal year, deliver
or mail to the person making the request, within thirty (30) days thereafter, a
copy of a balance sheet as of the end of such fiscal year and an income
statement and statement of changes in financial position for such fiscal year.
If a shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and for a
balance sheet of the corporation as of the end of that period, then the chief
financial officer shall cause that statement to be prepared, if not already
prepared, and shall deliver personally or mail that statement or statements to
the person making the request within thirty (30) days after the receipt of the
request. If the corporation has not sent to the shareholders its annual report
for the last fiscal year, the statements referred to in the first paragraph of
this Section 7.6 shall likewise be delivered or mailed to the shareholder or
shareholders within thirty (30) days after the request.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or by the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the chief executive officer, the president, any
vice president, the chief financial officer, the secretary or assistant
secretary of this corporation, or any other person authorized by the board of
directors or the president or a vice president, is authorized to vote,
represent, and exercise on behalf of this corporation all rights incident to any
and all shares of any other corporation or corporations standing in the name of
this corporation. The authority herein granted may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the shareholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any
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other lawful action (other than action by shareholders by written consent
without a meeting), the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days before any such action. In that
case, only shareholders of record at the close of business on the date so fixed
are entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the Code.
If the board of directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 CERTIFICATES FOR SHARES
A certificate or certificates for shares of the corporation shall be issued
to each shareholder when any of such shares are fully paid. The board of
directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All
certificates shall be signed in the name of the corporation by the chairman of
the board or the vice chairman of the board or the president or a vice president
and by the chief financial officer or an assistant treasurer or the secretary or
an assistant secretary, certifying the number of shares and the class or series
of shares owned by the shareholder. Any or all of the signatures on the
certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate ceases to be that officer,
transfer agent or registrar before that certificate is issued, it may be issued
by the corporation with the same effect as if that person were an officer,
transfer agent or registrar at the date of issue.
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8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of these
bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
9.1 AMENDMENT BY SHAREHOLDERS
New bylaws may be adopted or these bylaws may be amended or repealed by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that if the Articles of Incorporation of
the corporation set forth the number of authorized directors of the corporation,
then the authorized number of directors may be changed only by an amendment of
the Articles of Incorporation.
9.2 AMENDMENT BY DIRECTORS
Subject to the rights of the shareholders as provided in Section 9.1 of
these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the
authorized number of directors (except to fix the authorized number of directors
pursuant to a bylaw providing for a variable number of directors), may be
adopted, amended or repealed by the board of directors.
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NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE BEEN REGISTERED UNDER THE FEDERAL SECURITIES ACT OF 1933
("ACT") OR QUALIFIED OR REGISTERED UNDER THE CALIFORNIA CORPORATE SECURITIES LAW
OF 1968 OR THE SECURITIES LAWS OF ANY OTHER STATE OR NATION ("LAWS"). THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NEITHER SAID SECURITIES NOR ANY
INTEREST THEREIN MAY BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE ACT AND QUALIFICATION OR
REGISTRATION UNDER ALL APPLICABLE LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO
THE CORPORATION THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED AS TO
SAID SALE OR OFFER.
WARRANT AGREEMENT
PREAMBLE
This Warrant Agreement (this "Agreement") is entered into by and between
Eclipse Surgical Technologies, Inc., a California corporation (the
"Corporation"), and _____________________________________________ ("Holder")
effective March 13, 1996 (the "Effective Date").
RECITAL
The Holder desires to acquire and the Corporation desires to grant to the
Holder for $0.10 per warrant a warrant to purchase __________ Corporation Common
shares with an exercise price of $12.50 per share pursuant to the terms and
conditions of this Agreement.
AGREEMENT
<PAGE>
Based upon the facts and premises contained in the above Recital and the
mutual covenants contained below the parties hereby agree as follows:
1. GRANT OF WARRANT. Subject to the terms and conditions set forth below
in this Agreement, the Corporation hereby grants to the Holder the right and
option (each such right and option referred to as a "Warrant") to purchase
__________ shares of the Corporation's Common stock (each such underlying share
referred to as a "Warrant Share").
2. PURCHASE PRICE. The purchase price of each Warrant Share (i.e., the
exercise price of each Warrant) shall be $12.50, which the Corporation's Board
of Directors has determined is currently the fair market value of such share as
of the Effective Date.
3. TERMS OF WARRANT. The Warrants shall not be exercisable after, and
shall terminate upon, the earlier of (i) June 30, 1998 or (ii) the later
occurring of (a) the merger with or into or the sale of all or substantially all
of the Corporation's assets or stock to an entity not controlling, controlled
by, or under common control with the Corporation immediately prior to such sale
or (b) fifteen days after the Corporation has given Holder notice of same. The
Warrants shall not constitute security for the repayment of any loan or other
indebtedness due from the Corporation to the Holder.
The Warrants may be exercised only as to any or all of the available
Warrant Shares; provided, however, that if the Warrants are exercised as to less
than all of the available Warrant Shares the Warrants must be exercised as to at
least 20% of the initial number of Warrant Shares (as
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adjusted pursuant to Section 5). The purchase price of the Warrant Shares as to
which the Warrants is exercised shall be paid in full at the time of exercise in
cash, by cancellation of Company indebtedness, or by cashiers or certified
check. The holder of the Warrants shall not have any of the rights of a
shareholder with respect to the Warrant Shares as to which there has been no
exercise of the Warrants.
4. TRANSFERABILITY. The Warrants shall be transferable only with the
express written consent of the Company which consent may be granted or withheld
for any reason. The Warrants may be exercised only by the Holder or by Holder's
permitted transferees. More particularly (but without limiting the generality
of the foregoing), the Warrant may not be assigned, transferred (except as
provided above), pledged or hypothecated in any way, shall not be assignable by
operation of law and shall not be subject to execution, attachment or similar
process. Any attempted assignment, transfer, pledge, hypothecation or other
disposition of the Warrant contrary to the provisions hereof, and the levy of
any execution, attachment or similar process upon the Warrant, shall be null and
void and without effect.
Upon compliance with the above provisions, the Corporation will transfer
ownership of record of the warrants to any permitted transferee upon surrender
of this Agreement properly endorsed for registration of transfer at the
Corporation's principal executive office and will execute and deliver to the
transferee a new agreement covering the so-transferred Warrants.
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Upon receipt of evidence reasonably satisfactory to the Corporation of the
loss, theft, destruction or mutilation of this Agreement and, in the case of any
such loss, theft or destruction of this Agreement upon delivery of indemnity
reasonably satisfactory to the Corporation or, in the case of any such
mutilation, upon surrender of such mutilated Agreement for cancellation at the
Corporation's principal executive office, Corporation at its expense will
execute and deliver, in lieu thereof, a new agreement covering the Warrants of
like tenor.
5. ADJUSTMENTS UPON CHANGES IN CAPITAL STRUCTURE. In the event of any
changes in the outstanding capital stock of the Corporation by reason of any
stock dividend, stock split or reverse stock split, or any reclassification,
recapitalization merger, consolidation, reorganization or liquidation which does
not terminate the Warrants pursuant to Section 3, the aggregate number of
Warrant Shares subject to the Warrants and the exercise price prior to such
event shall be appropriately adjusted in a proportional manner and the class of
shares or property subject to the Warrants shall be appropriately adjusted, as
the case may be. In the event of any merger of the Corporation or any
acquisition of 80 percent or more of its gross assets or stock, or any
reorganization or liquidation of the Corporation which does not terminate the
Warrants pursuant to Section 3, the Board of Directors shall have power at its
complete discretion to make arrangements which shall be binding upon the holders
of unexpired warrant rights for the substitution of new warrants for any
unexpired Warrants then outstanding or for the assumption of any such unexpired
Warrants by any successor to the Corporation provided that such arrangements
shall not materially diminish the rights of the Holder hereunder.
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6. METHOD OF EXERCISING WARRANT; INVESTMENT REPRESENTATION. Subject to
the terms and conditions of this Agreement, the Warrants may be exercised by
written notice to the Corporation at its main office. Such notice shall state
the election to exercise the Warrants and the number of Warrant Shares in
respect of which the Warrants are being exercised and shall be signed by the
person or persons so exercising the Warrants. Such notice shall be accompanied
by payment in cash, by cancellation of indebtedness, or by cashiers or certified
check in the amount of the full purchase price of such shares, and the
Corporation shall deliver a certificate or certificates representing such shares
as soon as practicable after the notice shall be received. The certificate or
certificates for the Warrant Shares as to which the Warrant shall have been so
exercised shall be registered in the name of the Holder (or Holder's permitted
transferees as directed by such transferees when exercising the Warrant) and
shall be delivered as provided above to or upon the written order of the person
or persons exercising the Warrants. In the event the Warrants shall be
exercised by a person other than Holder, such notice shall be accompanied by
appropriate proof of the right of such person or persons to exercise the
Warrants. All Warrant Shares that shall be purchased upon the exercise of the
Warrants as provided herein shall be fully paid and nonassessable.
The aforesaid notice shall be in form satisfactory to the Corporation in
order to establish exemptions from registration and/or qualification under any
applicable Federal and state securities laws. At a minimum it shall affirm that
the Holder is acquiring the Warrant Shares for the Holder's own account for
investment and not with a view to or for sale in connection with any
distribution thereof.
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The parties agree that any Warrant Shares issued by the Corporation upon
exercise of this Warrant, whether by the Holder or a permitted transferee, shall
be subject to the right of first refusal set forth on Exhibit A hereto and are
granted registration rights and are subject to a market stand-off pursuant to an
Amended and Restated Registration Rights Agreement dated effective March 13,
1996.
The Warrant Shares shall be subject to the following additional
restrictions and all certificates representing said shares shall bear a
conspicuous legend containing said restrictions:
THE SHARES REPRESENTED BY THE CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE FEDERAL SECURITIES ACT OF 1933 ("ACT") OR REGISTERED OR QUALIFIED UNDER
THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968 OR THE SECURITIES LAWS OF
ANY OTHER STATE OR NATION ("LAWS"). THE SHARES HAVE BEEN ACQUIRED FOR
INVESTMENT AND NEITHER SAID SHARES NOR ANY INTEREST THEREIN MAY BE SOLD OR
OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SHARES UNDER THE ACT AND QUALIFICATION OR REGISTRATION UNDER ALL
APPLICABLE LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION
THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED AS TO SAID SALE
OR OFFER. THESE SHARES ARE ALSO SUBJECT TO A RIGHT OF FIRST REFUSAL
IMPOSED BY A WARRANT AGREEMENT DATED MARCH 12, 1996, AND TO A MARKET STAND-
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<PAGE>
OFF IMPOSED BY AN AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT DATED
MARCH 12, 1996, ON FILE WITH THE SECRETARY.
In addition, the shares shall bear any legend and be subject to transfer
restrictions imposed by these and any other securities laws.
7. NOTICES OF RECORD DATE, ETC. In the event of any taking by the
Corporation of a record of the holders of Common stock for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right then, and in each such event, the Corporation shall mail
or cause to be mailed to the Holder (or any subsequent holder of this Agreement)
a notice specifying (a) the date on which any such record is to be taken and (b)
stating (i) the amount and character of such dividend, distribution or right.
Such notice shall be given at least ten (10) days prior to the record date
therein specified in order to afford Holder (or any subsequent holder of this
warrant) the opportunity to exercise the Warrant and thus participate in such
dividend or distribution or exercise such right, as the case may be. By giving
such notice, however, the Corporation is not required to affect any transaction
or amendment described in such notice even if approved. In addition, if any
notice or information is sent by the Corporation to all of the holders of Common
stock, the Corporation shall at the same time send such information or a copy of
such notice to the Holder (or any subsequent holder of this Warrant).
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<PAGE>
8. MISCELLANEOUS. Any amendment to this Warrant Agreement must be in
writing and signed by both parties hereto. This Warrant Agreement is to be
governed by California law as such law is applied to agreements between
California residents entered into and to be performed entirely in California.
It constitutes the full and complete understanding of the Corporation and Holder
and supersedes all previous agreements on the subject matter hereof. Except as
provided above, the rights of Holder may not be assigned without the prior
express written consent of the Corporation and any attempted assignment without
such consent shall be void. This Warrant Agreement shall inure to the benefit
of, and be binding upon, the successors, permitted assigns, heirs, executors,
and administrators of the parties hereto. The section headings in this Warrant
Agreement are solely for convenience and shall not be considered in its
interpretation. If any lawsuit is brought to enforce this Warrant Agreement,
such lawsuit shall be brought in Santa Clara County, California, and the
prevailing party shall be entitled to reasonable attorneys' fees. If the
application of any provision or provisions of this Warrant Agreement to any
particular facts or circumstances shall be held to be invalid or unenforceable
by any court of competent jurisdiction, then the validity and enforceability of
such provision or provisions as applied to any other particular facts or
circumstances and the validity of other provisions of this Warrant Agreement
shall not in any way be affected or impaired thereby and the provision or
provisions shall be reformed without further action of the Corporation or Holder
to and only to the extent necessary to make the same valid and enforceable when
applied to such particular facts or circumstances. Any notice required or
permitted by this Warrant Agreement shall be in writing and shall be deemed
given to the parties or any permitted assignees when delivered personally or
five days after it is deposited in the U.S. mail, postage prepaid, addressed as
indicated below or to such subsequent address of which notice is given.
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<PAGE>
9. SECURITY LAW REPRESENTATIONS. Holder represents that Holder has a net
worth in excess of one million dollars ($1,000,000), including residence taken
at its original cost or appraised value plus the cost of subsequent improvements
less any mortgages. Holder further represents that Holder is able to bear the
risk of the investment in the Warrants. Holder represents that Holder is
acquiring the Warrants and would be acquiring the Warrant Shares upon their
exercise, for Holder's own account, for investment, and not with a view to or
for sale in connection with any distribution thereof. Holder represents that
Holder has acquired all the information he deemed necessary to invest in the
Warrants by virtue of Holder asking questions and receiving answers from the
Corporation's Chairman of the Board, Douglas Murphy-Chutorian, and by conducting
any other investigations Holder deemed necessary or appropriate.
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<PAGE>
AUTHORIZED SIGNATURES
In order to bind the parties to the above Warrant Agreement, the parties or
their duly authorized representatives have signed their names below.
CORPORATION Holder
Eclipse Surgical Technologies, Inc.
By
--------------------------------- ---------------------------------------
Signature
Name
-------------------------------- ---------------------------------------
Printed Name
Title Address:
------------------------------- -------------------------------
Address:
---------------------------- -------------------------------
---------------------------- If Holder is an entity and not an
individual:
Printed Name of Entity
---------------------------------------
Printed Name of Entity
---------------------------------------
Title of Signatory at Entity
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<PAGE>
EXHIBIT A
RIGHT OF FIRST REFUSAL
1. INITIATION OF RIGHT OF FIRST REFUSAL. Until the consummation of a
firm commitment or best efforts underwritten public offering of the
Corporation's equity registered with the Securities and Exchange Commission with
gross proceeds to the Corporation of five million dollars ($5,000,000) or more,
the Holder and the Holder's heirs, executors, administrators, trustees,
Permitted Transferees (as defined below), and transferees (collectively the
"Shareholder"), shall not sell, pledge, assign, or otherwise transfer any of the
Warrant Shares to any person without first offering to the Corporation or its
designees the right and option to purchase said Warrant Shares as provided
hereinafter in this Agreement. Notwithstanding the above, the Shareholder may
sell or transfer Shareholder's Warrant Shares to the Shareholder's spouse,
parents, siblings, former spouse, or children, or to a trustee or custodian for
the benefit of himself or his spouse, parents, siblings, former spouse, or
children (the "Permitted Transferees") without first offering said Warrant
Shares to the Corporation or its designees, provided such Permitted Transferees
agree in writing to be bound by the restrictions set forth in this Agreement.
In the event of a pledge or other hypothecation of the Warrant Shares,
or the granting of an option or other right to purchase the Warrant Shares, the
Right of First Refusal shall come into existence at the time of any sale or
transfer of ownership of the Warrant Shares pursuant to foreclosure under such
pledge or hypothecation or exercise of such option or right, as the case may be,
provided, however, that the Shareholder may not pledge or hypothecate the
Warrant Shares, or
<PAGE>
grant an option or right to purchase the Warrant Shares, unless the pledge
holder or option or right holder, as the case may be, agrees in writing at the
time of the pledge or grant of the option or right to be bound by the terms of
this Agreement, and to cause any proposed assignee or transferee of such pledge
or right or option to execute and deliver to the Corporation a similar writing
prior to such assignment or transfer.
2. MECHANICS. Any Shareholder desiring to sell any or all of the Warrant
Shares during such time period shall give written notice (the "Shareholder
Notice") to the Secretary of the Corporation of the Shareholder's bona fide
intention to sell the Warrant Shares pursuant to a bona fide written offer of a
third party other than the Corporation (the "Proposed Purchaser"). The
Shareholder Notice shall include a photocopy of such written offer which shall
specify the identity of the Proposed Purchaser, the number of such Warrant
Shares proposed to be sold (hereinafter the "Offered Shares"), and the price and
payment terms of the proposed offer to buy the Offered Shares. The payment
terms of the Proposed Purchaser to the Shareholder (and of the Shareholder to
the Corporation) must be cash, cash equivalent (a certificate of deposit, shares
of stock in a publicly traded company, and the like), or a promissory note of
the Proposed Purchaser payable on date(s) specified by passage of time. The
Corporation or its designees shall have the right and option to purchase any and
all of the Offered Shares, at the price and on the payment terms specified in
the Shareholder Notice, for a period of sixty (60) days from receipt of said
notice from the Shareholder. That is, the Shareholder Notice constitutes an
irrevocable offer by the Shareholder to sell any or all of the Offered Shares to
the Corporation or its designees at the price and payment terms specified in the
Shareholder Notice for sixty days from the Corporation's receipt of the
Shareholder Notice.
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<PAGE>
The Corporation shall exercise its option by giving written notice (the
"Exercise Notice") to the Shareholder stating the number of Offered Shares for
which it is exercising its option. The Shareholder shall deliver to the
Corporation a share certificate representing those Offered Shares being
purchased by the Corporation as specified in the Exercise Notice within thirty
(30) days of the Exercise Notice against payment of the purchase price by the
Corporation for the account of Shareholder as specified in the Exercise Notice.
Any Offered Shares for which both the Corporation and its designees fail to
exercise their option as provided in this Agreement, may be sold by the
Shareholder to the Proposed Purchaser within a period of ninety (90) days
following the end of the Corporation's sixty (60) day option period specified
above, provided that (1) such sale is made at the price and on the payment terms
specified in the Shareholder Notice, (2) the Proposed Purchaser delivers a
written undertaking to the Secretary of the Corporation agreeing to be bound by
the restrictions on the Warrant Shares as set forth in this Agreement, and (3)
the Corporation receives an opinion of counsel reasonably satisfactory to it
that the sale to the Proposed Purchaser complies with applicable federal and
state corporate securities laws.
Upon receipt of a writing from Shareholder or Proposed Purchaser, as the
case may be, stating that the foregoing conditions have been satisfied and the
purchase price has been paid to the Shareholder by the Proposed Purchaser, the
Corporation shall transfer the ownership of record of the Offered Shares to the
Proposed Purchaser and reissue the share certificates as appropriate.
-3-
<PAGE>
If within this ninety (90) day period the Shareholder does not enter into
an agreement for such a sale of the Offered Shares to the Proposed Purchaser
which is consummated within thirty (30) days of the execution thereof, this
Right of First Refusal shall be revived as to the Offered Shares which
thereafter shall not be sold or transferred unless the Shareholder first offers
the Corporation the right and option to repurchase any and all of the Offered
Shares in accordance with this Agreement.
Any transfer or purported transfer of the Warrant Shares or any interest
therein shall be null and void unless the terms and conditions of this Agreement
are strictly observed and followed, or such terms and conditions are waived by
the Corporation's Board of Directors at its sole discretion.
3. NOTICES.
Any notice required or permitted by this Agreement shall be in writing
and shall be deemed given to the Shareholder or any person acquiring any of the
Warrant Shares when delivered personally or three (3) days after it is deposited
in the U.S. mail, sent registered or certified mail, return receipt requested,
postage prepaid, and addressed to the Shareholder or such acquiring person at
the address appearing on the stock or other records of the Corporation; and
shall be deemed given to the Corporation when delivered personally to its
President or a Vice President or three (3) days after it is deposited in the
mail, sent registered or certified mail, return receipt requested, postage
prepaid, and addressed to the Corporation, attention to its President, at the
Corporation's principal executive offices as indicated in the Warrant Agreement
to which this document is on exhibit. The Corporation shall initially place in
its Stock records the Holder's address as indicated in the Warrant Agreement to
which this document is on exhibit. Either party may designate another address
for
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<PAGE>
purposes of receiving notice under this Agreement by giving written notice to
the other party in accordance with this section.
-5-