<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________________ to __________________
Commission File Number: 0-21330
AVECOR CARDIOVASCULAR INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1695729
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13010 COUNTY ROAD 6, MINNEAPOLIS, MINNESOTA 55441
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(612) 559-9504
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[x] Yes [ ] No
As of August 6, 1996, there were 7,787,418 shares of the registrant's $.01
par value Common Stock outstanding.
<PAGE>
INDEX
Part I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996
(Unaudited) and December 31, 1995 3
Consolidated Statements of Operations for the three and
six month periods ended June 30, 1996 and 1995 (Unaudited) 4
Consolidated Statements of Cash Flows for the six month
periods ended June 30, 1996 and 1995 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 15
Item 2. Changes in Securities. 15
Item 3. Defaults Upon Senior Securities. 15
Item 4. Submission of Matters to a Vote of Security Holders. 15 - 16
Item 5. Other Information. 16
Item 6. Exhibits and Reports on Form 8-K. 16
SIGNATURES 17
EXHIBIT INDEX 18
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVECOR CARDIOVASCULAR INC.
CONSOLIDATED BALANCE SHEETS
------------------------
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $4,464,376 $9,178,211
Short-term investments 9,057,749 7,757,232
Accounts receivable, net 8,053,461 6,207,354
Inventories 9,449,058 5,933,487
Other current assets 1,964,995 1,067,760
----------- ------------
Total current assets 32,989,639 30,144,044
Equipment and improvements, net 3,424,755 3,065,506
Other assets 337,257 309,676
----------- ------------
Total assets $36,751,651 $33,519,226
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,959,334 $2,224,601
Accrued expenses 3,239,086 1,853,216
Accrued litigation settlement 1,100,000
----------- ------------
Total current liabilities 7,298,420 4,077,817
Deferred grant 210,904 119,848
Litigation settlement - long term 1,100,000
Contingency (note 8)
Stockholders' equity:
Serial preferred stock, par value $.01 per share;
authorized 2,000,000 shares; none issued
Common stock, par value $.01 per share;
authorized 20,000,000 shares; issued and
outstanding shares 7,782,918 and 7,663,833
shares at June 30, 1996 and
December 31, 1995, respectively 77,829 76,638
Additional paid-in capital 28,604,018 28,123,763
Accumulated earnings (deficit) (488,661) 1,175,294
Cumulative translation adjustments (50,859) (54,134)
----------- ------------
Total stockholders' equity 28,142,327 29,321,561
----------- ------------
Total liabilities and stockholders' equity $36,751,651 $33,519,226
----------- ------------
----------- ------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
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AVECOR CARDIOVASCULAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1996 1995 1996 1995
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $11,145,118 $8,090,381 $21,438,494 $15,687,216
Cost of sales 6,443,163 4,344,073 12,394,042 8,558,119
----------- ---------- ----------- -----------
Gross profit 4,701,955 3,746,308 9,044,452 7,129,097
Operating expenses:
Selling, general and
administrative 2,994,375 2,343,645 5,850,976 4,259,356
Litigation expense 3,700,000 59,614 4,204,825 79,614
Research and development 861,398 643,866 1,702,957 1,328,552
----------- ---------- ----------- -----------
Operating (loss) income (2,853,818) 699,183 (2,714,306) 1,461,575
Interest income 194,306 68,330 403,351 121,658
----------- ---------- ----------- -----------
(Loss) income before
income taxes (2,659,512) 767,513 (2,310,955) 1,583,233
Income tax (benefit) provision (783,000) 160,000 (647,000) 310,000
----------- ---------- ----------- -----------
Net (loss) income ($1,876,512) $607,513 ($1,663,955) $1,273,233
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Net (loss) income per share ($0.24) $0.09 ($0.22) $0.19
----------- ---------- ----------- -----------
Weighted average common
and common equivalent
shares outstanding 7,774,567 6,794,470 7,736,764 6,735,016
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
<PAGE>
AVECOR CARDIOVASCULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ($1,663,955) $1,273,233
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 692,200 489,287
Accretion of discount on investments (302,321) (66,866)
Changes in operating assets and liabilities:
Accounts receivable (1,845,636) (964,456)
Inventories (3,514,612) (1,442,244)
Other current assets (898,939) 94,852
Accounts payable 745,096 1,146,029
Accrued expenses 1,380,256 742,520
Accrued litigation settlement 2,200,000
------------ ------------
Net cash (used in) provided by operating activities (3,207,911) 1,272,355
------------ ------------
Cash flows from investing activities:
Purchase of equipment and improvements (1,057,487) (429,141)
Purchase of investments (7,918,608) (945,626)
Proceeds upon sale or maturity of short-term investments 6,920,412 1,000,000
Increase in other assets (32,634) (39,386)
------------ ------------
Net cash used in investing activities (2,088,317) (414,153)
------------ ------------
Cash flows from financing activities:
Net proceeds from sales of common stock 117,130 11,321,718
Net proceeds from options exercised (160,666) (342,429)
Net proceeds from warrants excercised 524,982
Grant proceeds 101,367
------------ ------------
Net cash provided by financing activities 582,813 10,979,289
------------ ------------
Effect of exchange rates on cash (420) 976
------------ ------------
Net (decrease) increase in cash and cash equivalents (4,713,835) 11,838,467
Cash and cash equivalents at beginning of period 9,178,211 2,035,281
------------ ------------
Cash and cash equivalents at end of period $4,464,376 $13,873,748
------------ ------------
------------ ------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
<PAGE>
AVECOR CARDIOVASCULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-------------------------
1. BASIS OF PRESENTATION
The consolidated financial statements included in this Form 10-Q have been
prepared by AVECOR Cardiovascular Inc. (the Company), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed, or omitted, pursuant to these rules and regulations. The year-end
balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
These consolidated financial statements should be read in conjunction with the
financial statements and related notes included in the Company's 1995 Annual
Report on Form 10-K as filed with the Securities and Exchange Commission.
The consolidated financial statements presented herein as of June 30, 1996
and for the three and six month periods ended June 30, 1996 and 1995 reflect, in
the opinion of management, all adjustments (which include only normal, recurring
adjustments) necessary for a fair presentation of financial position and the
results of operations for the periods presented. The results of operations for
any interim period are not necessarily indicative of results for the full year.
2. ORGANIZATION
The Company was incorporated on December 13, 1990. The Company designs,
develops, manufactures and markets specialty medical devices used to treat
cardiovascular disease.
The consolidated financial statements include the accounts of AVECOR
Cardiovascular Inc. and its wholly owned subsidiaries, AVECOR Cardiovascular
Ltd. and AVECOR Foreign Sales Corporation after elimination of all significant
intercompany transactions and accounts.
6
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3. INVENTORIES
Inventories consist of:
June 30, December 31,
1996 1995
---------- ------------
(Unaudited)
Raw materials $4,004,548 $2,506,496
Work-in-process 2,255,567 1,339,921
Finished goods 3,188,943 2,087,070
---------- ----------
$9,449,058 $5,933,487
---------- ----------
---------- ----------
4. INDUSTRY SEGMENT INFORMATION
The Company distributes its products through its direct sales force and
independent sales representatives. Additionally, the Company distributes its
products through domestic and foreign independent distributors who then market
the products directly to medical institutions. Sales to distributors accounting
for 10% or more of the Company's net sales for the six month periods ended June
30, 1996 and 1995 were as follows:
1996 1995
--------- ---------
(Unaudited) (Unaudited)
Distributor # 1 (1) $1,582,000
Distributor # 2 (1) $1,687,000
(1) Less than 10% of net sales
5. NET INCOME PER SHARE
Net income per common and common equivalent share has been computed by
dividing net income by the weighted average number of common and common
equivalent shares outstanding. Common equivalent shares relate to stock options
and stock warrants when their effect is not antidilutive. The difference
between primary and fully diluted earnings per share was not significant in any
period presented.
7
<PAGE>
6. STOCKHOLDERS' EQUITY
The Company's 1991 Stock Incentive Plan (Plan) provides for granting to
eligible employees and certain other individuals nonqualified and incentive
options. The Company had reserved 750,000 shares of common stock for issuance
under the Plan. In January 1996, the Company's Board of Directors authorized,
and on May 7, 1996, the Company's shareholders approved, an additional 300,000
shares of common stock to be reserved for issuance under the Plan.
On May 7, 1996, the Company's shareholders also approved the reserve of
250,000 shares of the Company's common stock for issuance pursuant to the 1995
Non-Employee Director Plan (the "1995 Director Plan") established by the Board
of Directors on August 1, 1995. Options to purchase 42,000 and 10,500 shares of
common stock were granted during 1995 and on May 7, 1996, respectively. Also on
May 7, 1996, the 52,500 granted options were approved by the Company's
shareholders.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION (SFAS 123). The Company has elected to continue following the
guidance of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, for measurement and recognition of stock-based transactions
with employees. The Company will adopt the disclosure provisions of SFAS 123 in
1996.
7. SHAREHOLDER RIGHTS PLAN
On June 26, 1996 the Company adopted a shareholder rights plan, pursuant to
which the Company declared a dividend distribution of one Preferred Share
Purchase Right on each share of the Company's Common Stock outstanding on August
2, 1996. Each Right will entitle the holder to buy one-thousandth of a share of
the Company's Series A Junior Preferred Stock, or a combination of securities
and assets of equivalent value, at an exercise price of $80.00, subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement dated June 26, 1996 between the Company and Norwest Bank Minnesota,
N.A., as Rights Agent.
8. CONTINGENCY
On July 17, 1996, the Company reached an agreement with COBE Laboratories
Inc. (COBE) to settle COBE's patent suit against the Company. The settlement
was entered into as an expeditious and cost effective means of ending the
protracted litigation and without admission of liability or infringement by
either party.
The terms of the settlement with COBE provide for the Company to make net
payments totalling $2,200,000, of which a net $1,100,000 was paid in August
1996, for settlement of the suit as well as certain license rights. The net
settlement costs of $2,200,000 were recognized as a charge to operations, in
addition to the associated legal costs, in the period ended June 30, 1996. The
remaining amount is payable on or about August 6, 1997, subject to COBE's active
enforcement of its claimed patent rights with respect to other manufacturers.
See Part II, Item 1, "Legal Proceedings".
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the results of operations and financial
condition for the three and six month periods ended June 30, 1996 compared with
the three and six month periods ended June 30, 1995 and should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto.
OVERVIEW
The Company was incorporated on December 13, 1990. In June 1991, the
Company acquired the business and assets and assumed certain liabilities of the
surgical division of SCIMED Life Systems, Inc. (the "Predecessor Business"). On
December 1, 1992, the Company exchanged 160,000 shares of its Common Stock for
all of the outstanding shares of AVECOR Cardiovascular Ltd. (formerly Cardio Med
Ltd.) pursuant to which AVECOR Cardiovascular Ltd. became a wholly owned
subsidiary of the Company. AVECOR Cardiovascular Ltd. had formerly been a
distributor for the Company in the United Kingdom. In October 1995, the Company
opened a sales office in France which is organized as a subsidiary of AVECOR
Cardiovascular Ltd.
The assets acquired by the Company from the Predecessor Business included
the Company's line of solid silicone membrane oxygenators. In October 1991, the
Company introduced its MYOtherm cardioplegia delivery system. The Company began
marketing its Signature custom tubing packs in July 1993 upon the receipt of
marketing clearance from the U.S. Food and Drug Administration (the "FDA").
Also in July 1993, the Company began international marketing of the Affinity
oxygenator. In November 1993, the Company received marketing clearance from the
FDA to begin U.S. marketing of the Affinity oxygenator, and the Company released
the device to the U.S. market in February 1994. In July 1994, the Company
received marketing clearance from the FDA to market its Affinity blood
reservoirs. In October 1995, the Company received marketing clearance from the
FDA to market its Affinity arterial filter.
RESULTS OF OPERATIONS
NET SALES
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1995
Net sales increased 38% to $11,145,000 for the three months ended June 30,
1996 from $8,090,000 for the three months ended June 30, 1995. This increase
was principally the result of a higher volume of product shipments of the
Company's Affinity product line and Signature custom tubing packs.
Sales from the Affinity product line and Signature custom tubing packs
accounted for approximately 65% and 33% of the overall increase in net sales,
respectively. The Company began U.S. marketing of the Affinity oxygenator in
late February 1994 and the Affinity blood
9
<PAGE>
reservoirs in July 1994. U.S. marketing of Signature custom tubing packs began
in July 1993. Although the Company continues to anticipate declining shipments
of its older solid silicone membrane oxygenator line, net sales of the silicone
line increased by $53,000 for the three months ended June 30, 1996 when compared
to the corresponding period in 1995.
Sales to customers located outside of the United States were approximately
39% of net sales for the three month period ended June 30, 1996 compared to 42%
of net sales for the corresponding period in 1995.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995
Net sales increased 37% to $21,438,000 for the six months ended June 30,
1996 from $15,687,000 for the six months ended June 30, 1995. This increase was
principally the result of a higher volume of product shipments of the Company's
Affinity product line and Signature custom tubing packs.
Sales from the Affinity product line and Signature custom tubing packs
accounted for approximately 64% and 32% of the overall increase in net sales,
respectively. Although the Company continues to anticipate declining shipments
of the silicone membrane oxygenator line, net sales of the silicone line
increased by $144,000 for the six months ended June 30, 1996 when compared to
the corresponding period in 1995 and by $219,000 when compared to the six months
ended December 31, 1995. The silicone membrane oxygenator line's net sales
increase for the six months ended June 30, 1996 was primarily due to a large
non-recurring shipment of approximately $290,000 occurring in January 1996.
Sales to customers located outside of the United States were approximately
39% of net sales for the six month period ended June 30, 1996 compared to 42% of
net sales for the corresponding period in 1995.
COST OF SALES / GROSS PROFIT
Cost of sales as a percentage of net sales increased to 57.8% for the three
months ended June 30, 1996 from 53.7% for the three months ended June 30, 1995.
Similarly, the cost of sales percentage increased to 57.8% for the six months
ended June 30, 1996 from 54.6% for the six months ended June 30, 1995. The cost
of sales percentages for the three and six month periods ended June 30, 1996
were unfavorably impacted by significant increases in sales of the Company's
low-margin Signature custom tubing pack line. The mix of products sold in any
period will influence the cost of sales and gross profit for the period.
Also, volume-related manufacturing efficiencies have not yet been achieved
for the Company's recently introduced Affinity arterial filter. Higher
production volumes continued to improve Affinity oxygenator product costs,
although, these improvements were offset, primarily by a decrease in Affinity
oxygenator average selling prices. Although the gross profit margin may further
benefit from manufacturing efficiencies in the future, given the uncertainty
associated with the ultimate realization of any such efficiencies and the
continuing price pressures characteristic in the Company's markets, the Company
cannot be certain if its gross profit margin will be maintained, decline or
improve.
10
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE AND LITIGATION EXPENSE
Selling, general and administrative expenses increased 28% to $2,994,000
for the three months ended June 30, 1996 from $2,344,000 for the three months
ended June 30, 1995. Selling, general and administrative expenses increased 37%
to $5,851,000 for the six months ended June 30, 1996 from $4,259,000 for the six
months ended June 30, 1995. This increase is attributed to costs associated
with the continuing development of a direct sales force in certain of the
Company's territories formerly served by distributors and independent sales
representatives, the addition of a Chief Operating Officer and the overall
increase in the Company's sales levels. In connection with the Company's
development of a direct sales force, in October 1995, the Company opened a sales
office in France from which it fields a direct sales force to serve the French
market. As a percent of sales, selling, general and administrative expenses
decreased to 26.9% for the three month period ended June 30, 1996 from 27.8% for
the three month period ended March 31, 1996. This decrease as a percent of
sales is primarily due to the increase in sales for these periods and, as a
result, the fixed portion of selling, general and administrative expenses
becoming a smaller percentage of sales.
Management anticipates that selling, general and administrative expenses
for the year ended December 31, 1996 will be higher than the year ended December
31, 1995. Selling, general and administrative expenses for 1996, while expected
to be higher than 1995, should continue to decline as a percentage of sales
dollars. These forward looking statements will be influenced by revenue
increases achieved by the Company, its ability to attract and retain qualified
sales personnel as the Company continues to develop its direct sales force, and
the timing and extent of promotional activities associated with new product
introductions, if any.
On July 17, 1996, the Company reached an agreement with COBE Laboratories
Inc. (COBE) to settle COBE's patent suit against the Company. The terms of the
settlement with COBE provide for the Company to make net payments totalling
$2,200,000, of which a net $1,100,000 was paid in August 1996. The remaining
amount is payable on or about August 6, 1997, subject to COBE's active
enforcement of its claimed patent rights with respect to other manufacturers.
The Company expensed settlement costs and professional fees, in connection with
the COBE suit, of approximately $3,700,000 and $4,205,000 for the three and six
month periods ended June 30, 1996, respectively, compared to $60,000 and $80,000
for the corresponding periods in 1995. See Consolidated Financial Statements -
Note 8 "Contingency" and Part II, Item 1, "Legal Proceedings".
RESEARCH AND DEVELOPMENT
Research and development expenses increased 34% to $861,000 and 28% to
$1,703,000 for the three and six month periods ended June 30, 1996,
respectively, from $644,000 and $1,329,000 for the three and six month periods
ended June 30, 1995, respectively. This increased research and development
spending is a result of the Company's ongoing efforts to pursue a number of
potential product opportunities. These opportunities include a new blood pump
for which the Company expects to submit a 510(k) application with the FDA in the
third quarter of 1996, although there can be no assurance that the Company will
file a 510(k) for this device, that the appropriate marketing clearance from the
FDA will be received on a timely basis, if at all, or, if received, that this
device will become commercially successful.
11
<PAGE>
The Company anticipates that research and development expenses for the
remainder of 1996 will approximate the spending level for the six months ended
June 30, 1996, as the Company moves to expand and improve its proprietary line
of disposable medical devices. This forward looking projection is dependent on
the extent and timing of new product development and the impact of the
regulatory process in obtaining marketing clearance for new products, including
the new blood pump. The need or desire to modify the Company's existing
products could also influence the level of research and development expenses.
There can be no assurance, however, that the Company's research and development
efforts will result in any commercially successful products.
INTEREST INCOME
Interest income increased to $194,000 for the three months ended June 30,
1996 from $68,000 for the three months ended June 30, 1995. Similarly, interest
income increased to $403,000 for the six months ended June 30, 1996 from
$122,000 for the six months ended June 30, 1995. Interest income during the
periods ended June 30, 1996 was earned primarily from the investment of the net
proceeds from the Company's June 1995 stock offering. At June 30, 1996, the
majority of these proceeds were invested with one investment portfolio manager
who invested in U.S. government securities, agency paper, money markets,
commercial paper and corporate obligations.
INCOME TAX PROVISION
For the three and six month periods ended June 30, 1996, a tax benefit of
$783,000 and $647,000 was recorded, respectively, compared to a tax provision of
$160,000 and $310,000 for the three and six month periods ended June 30, 1995,
respectively. The tax benefit recorded corresponds to the pretax losses
incurred for those periods. These losses are primarily due to the litigation
expense incurred during the three and six month periods ended June 30, 1996 in
connection with the Cobe lawsuit.
NET INCOME (LOSS)
Net loss was $1,877,000 or $.24 per share and $1,664,000 or $.22 per
share for the three and six month periods ended June 30, 1996, respectively,
compared to net income of $608,000 or $.09 per share and $1,273,000 or $.19 per
share for the three and six month periods ended June 30, 1995, respectively.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures totaled $1,057,000 for the six months ended June 30,
1996, compared to $429,000 for the six months ended June 30, 1995. These
expenditures were primarily related to the addition of equipment, molds and
tooling necessary to further the production of the Affinity oxygenator, related
blood reservoirs and arterial filter. Additionally, in 1996, preliminary
capital spending began for the equipment, molds and tooling for the production
of a new blood pump. These capital expenditures also include approximately
$100,000 of preliminary spending for a new facility. The Company's capital
expenditures for 1996 are expected to be approximately $1,500,000, not including
any capital expenditures which may be required in connection with new
facilities, as discussed below. The actual amount of this forward looking
projection of capital expenditures will depend on the progress of the Company's
product development efforts and the timing of the receipt of FDA marketing
clearance for any future products, including the new blood pump.
Leases for the Company's U.S. manufacturing, research and development and
administrative facilities expire on December 31, 1996. The Company is currently
negotiating a contract for the construction of a different facility into which
all operations will be consolidated. It is the Company's intent to purchase
this facility. The estimated cost of this facility is $8,500,000. The Company
believes it can obtain long-term financing for this entire amount, however, the
Company has not yet determined to what extent it will utilize this financing or
its own cash for this project. The Company may also need to provide up to
$3,000,000 in interim construction financing. These expenditures are expected
to be primarily incurred during the fourth quarter of 1996 with ultimate
financing completed in the first quarter of 1997. These forward looking
statements relating to the amount of capital expenditures and ultimate cash
usage for the new facility is dependent on the final construction
specifications, the nature of the underlying construction contract, timing of
construction and the financing terms the Company is able to negotiate for the
new facility. The Company anticipates that facilities costs will be
significantly higher in 1997 than 1996, but the extent of the Company's
investment or impact on future cost of operations will not be determinable until
construction and financing arrangements are finalized.
For the six months ended June 30, 1996, the Company used $3,208,000 in
operating activities compared to $1,272,000 of net cash generated from operating
activities for the same period in 1995. The net change of approximately
$4,480,000 is primarily the result of reduced net income, including
approximately $2,000,000 in legal expenses, and increasing levels of accounts
receivable and inventory resulting from increasing revenues. The Company
believes that its existing cash and investments as well as anticipated cash
generated from operations will be sufficient to satisfy the Company's cash
requirements for the foreseeable future.
In March 1996, net proceeds of approximately $525,000 were generated from
an exercise of the Company's stock warrants. At June 30, 1996, the majority of
these proceeds, along with the net proceeds from the Company's offering of
common stock in June 1995, remained in cash and cash equivalents and short-term
and long-term investments and will be used for general corporate purposes,
including research and development, working capital and possible acquisitions.
13
<PAGE>
As discussed above under "Results of Operations - Selling, General and
Administrative and Litigation Expense", on July 17, 1996, the Company reached an
agreement with COBE to settle COBE's patent suit against the Company. The terms
of the settlement provide for the Company to make net payments totalling
$2,200,000, of which a net $1,100,000 was paid in August 1996. The remaining
amount is payable on or about August 6, 1997, subject to COBE's active
enforcement of its claimed patent rights with respect to other manufacturers.
See Consolidated Financial Statements - Note 8 "Contingency" and Part II, and
Item 1, "Legal Proceedings".
FOREIGN CURRENCY TRANSACTIONS
Transactions by the Company's international subsidiaries are negotiated,
invoiced and paid in various foreign currencies, primarily pounds sterling, and
U.S. dollars. Accordingly, the Company is currently subject to risks associated
with fluctuations in exchange rates between the various currencies.
Substantially all of the Company's other international transactions are
denominated in U.S. dollars. Fluctuations in currency exchange rates in other
countries may therefore reduce the demand for the Company's products by
increasing the price of the Company's products in the currency of the countries
in which the products are sold.
NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION (SFAS 123). The Company has elected to continue following the
guidance of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, for measurement and recognition of stock-based transactions
with employees. The Company will adopt the disclosure provisions of SFAS 123 in
1996.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On July 17, 1996, the Company reached an agreement with COBE
Laboratories Inc. (COBE) to settle COBE's patent suit against the
Company. The settlement was entered into as an expeditious and cost
effective means of ending the protracted litigation and without
admission of liability or infringement by either party.
The terms of the settlement include certain cross-licensing
arrangements between COBE and the Company, pursuant to which COBE has
granted the Company a paid-up license under COBE patents for the
manufacture and sale of current and future Company products. In turn,
the Company has granted COBE a license under Company patents for the
manufacture and sale of current COBE products and improvements
thereto, although the scope of the license granted specifically
excludes the right to manufacture products having certain design
characteristics that the Company believes to be significant and which
are currently utilized in the Company's Affinity oxygenator.
The settlement agreement with COBE provides for the Company to make
net payments totalling $2,200,000, of which a net $1,100,000 was paid
in August 1996. The remaining amount is payable on or about August 6,
1997, subject to COBE's active enforcement of its claimed patent
rights with respect to other manufacturers.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Shareholders of AVECOR Cardiovascular Inc.,
held May 7, 1996, the shareholders voted as follows on each matter
considered at the meeting:
15
<PAGE>
1. The election of the following Directors:
Affirmative Votes Withhold Authority
----------------- -------------------
Anthony Badolato 7,130,573 17,058
Ann H. Lamont 7,130,586 17,045
David W. Stassen 7,129,386 18,245
Edward E. Strickland 7,126,840 20,791
Glenn D. Taylor 7,128,031 19,600
Gordon Wright 7,128,531 19,100
2. Proposal to adopt the Company's 1995 Non-Employee Director Option Plan:
Affirmative Votes Withhold Authority Abstaining
----------------- ------------------ ----------
6,657,971 327,760 24,695
The number of broker non-votes was 137,205.
3. Proposal to amend the Company's 1991 Stock Incentive Plan to increase the
number of shares of the Company's Common Stock, $.01 par value, reserved
for issuance by 300,000 shares, from 750,000 shares to 1,050,000 shares:
Affirmative Votes Withhold Authority Abstaining
----------------- ------------------ ----------
6,775,509 213,476 21,441
The number of broker non-votes was 137,205.
4. Proposal to ratify the selection of Coopers & Lybrand L.L.P. as
independent auditors of the Company for the fiscal year ending December 31,
1996:
Affirmative Votes Withhold Authority Abstaining
----------------- ------------------ ----------
7,123,902 13,697 10,032
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
The exhibits to this Quarterly Report on Form 10-Q are
listed in the Exhibit Index beginning on page 18 of this
Report.
(b) Reports on Form 8-K:
None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVECOR CARDIOVASCULAR INC.
August 12, 1996 By /s/ Anthony Badolato
------------------------- -----------------------------------
Date Anthony Badolato
Chief Executive Officer
August 12, 1996 By /s/ Gregory J. Melsen
------------------------- -----------------------------------
Date Gregory J. Melsen
Vice President-Finance, Treasurer and Chief
Financial Officer
(Principal Financial and Accounting Officer)
17
<PAGE>
AVECOR CARDIOVASCULAR INC.
EXHIBIT INDEX TO QUARTERLY REPORT
ON FORM 10-Q
For the Quarter Ended June 30, 1996
Item No. Description Method of Filing
- -------- ----------- ----------------
3.1 Second Restated Articles of Incorporation
of the Company, as amended July 3, 1996 Filed herewith electronically
4.1 Certificate of Designation, Preferences and
Rights of the Company's Series A Junior
Preferred Stock Included in Exhibit 3.1
4.2 Rights Agreement dated June 26, 1996
between the Company and Norwest Bank
Minnesota, N.A., which includes the form
of Rights Certificate as Exhibit B Incorporated by reference to
Exhibit 4.1 to the Company's
Current Report on Form 8-K
dated June 26, 1996 (File No.
0-21330)
10.1 Settlement Agreement between Cobe
Laboratories Inc. and the Company
dated June 30, 1996 Filed herewith electronically
10.2 Cobe Patent License To Avecor between
Cobe Laboratories Inc. and the Company
dated June 30, 1996 Filed herewith electronically
10.3 Avecor Patent License To Cobe between
Cobe Laboratories Inc. and the Company
dated June 30, 1996 Filed herewith electronically
11.1 Statement regarding computation of
earnings per share Filed herewith electronically
27.1 Financial Data Schedule Filed herewith electronically
18
<PAGE>
State of Minnesota
Office of the Secretary of State
AMENDMENT OF ARTICLES OF INCORPORATION
READ INSTRUCTIONS AT BOTTOM OF PAGE BEFORE COMPLETING THIS FORM
CORPORATE NAME: AVECOR Cardiovascular Inc.
This amendment is effective on the day it is filed with the Secretary of State,
unless you indicate another date, no later than 30 days after filing with the
Secretary of State, in this space:
The following amendments of articles or modifications to the statutory
requirements regulating the above corporation were adopted: (Insert full text
of newly amended or modified article(s), indicating which article(s) is(are)
being amended or added. If the full text of the amendment will not fit in the
space provided, please do not use this form. Instead, retype the amendment on a
separate sheet or sheets using this format.)
ARTICLE________ The Restated Articles of Incorporation of AVECOR
Cardiovascular Inc. have been restated as follows:
See Attached.
This amendment has been approved pursuant to chapter 302A, Minnesota Statutes.
I certify that I am authorized to execute this amendment and I further certify
that I understand that by signing this amendment, I am subject to the penalties
of perjury as set forth in section 609.48 as if I had signed this amendment
under oath.
/s/ Anthony Badolato
----------------------------------
(Signature of Authorized Person)
- --------------------------------------------------------------------------------
INSTRUCTIONS: FOR USE BY THE SECRETARY OF STATE
1. Type or print with dark black ink.
2. Filing fee: $35.00
3. Make check payable to Secretary of State.
4. Mail or bring completed forms to:
Secretary of State
Business Services Division
180 State Office Building
Saint Paul, MN 55155
(612) 296-2803
<PAGE>
SECOND RESTATED
ARTICLES OF INCORPORATION
OF
AVECOR CARDIOVASCULAR INC.
ARTICLE I.
The name of the corporation is AVECOR Cardiovascular Inc. (the "Corporation").
ARTICLE II.
The registered office of the Corporation in Minnesota is 13010 County Road 6,
Plymouth, Minnesota 55441.
ARTICLE III.
The Corporation shall be authorized to issue two classes of shares of capital
stock to be designated, respectively, "preferred stock" and "common stock." The
total number of shares of capital stock which the Corporation shall be
authorized to issue is twenty-two million (22,000,000), of which two million
(2,000,000) shall be shares of preferred stock of the par value of one cent
($0.01) per share and twenty million (20,000,000) shall be shares of common
stock of the par value of one cent ($0.01) per share. Shares of preferred stock
of the Corporation may be issued from time to time in one or more series, each
of which series shall have such distinctive designation or title and such number
of shares as shall be fixed by the Board of Directors prior to the issuance of
any shares thereof. Each such series of preferred stock shall have such voting
powers, full or limited, or no voting powers, and such preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof, as shall be stated and expressed in the
resolution or resolutions providing for the issue of such series of preferred
stock as may be adopted from time to time by the Board of Directors prior to the
issuance of any shares thereof pursuant to the authority hereby expressly vested
in it. The Board of Directors is further authorized to increase or decrease
(but not below the number of shares then outstanding) the number of shares of
any series of preferred stock subsequent to the issuance of shares of that
series. Except as provided in the resolution or resolutions of the Board of
Directors creating any series of preferred stock, and except as provided in
Article X hereof, the shares of common stock shall have the exclusive right to
vote for the election and removal of directors and for all other purposes. Each
holder of common stock shall be entitled to one vote for each share held.
<PAGE>
ARTICLE IV.
The Corporation shall have perpetual duration.
ARTICLE V.
(A) The Board of Directors may from time to time, by vote of a majority of
its members present at a duly held meeting, adopt, amend or repeal all or any of
the Bylaws of the Corporation as permitted by Chapter 302A of the Minnesota
Statutes, as amended, subject to the power of the shareholders to adopt, amend
or repeal such Bylaws.
(B) The Board of Directors is authorized to accept and reject
subscriptions for and to dispose of shares of authorized stock of the
Corporation, including the granting of stock options, warrants and other rights
to purchase stock, without action by the shareholders and upon such terms and
conditions as may be deemed advisable by the Board of Directors in the exercise
of its discretion, except as otherwise limited by Chapter 302A of the Minnesota
Statutes, as amended.
(C) The Board of Directors is authorized to issue, sell or otherwise
dispose of bonds, debentures, certificates of indebtedness and other securities,
including those convertible into stock, without action by the shareholders and
for such consideration and upon such terms and conditions as may be deemed
advisable by the Board of Directors in the exercise of its discretion, except as
otherwise limited by Chapter 302A of the Minnesota Statutes, as amended.
ARTICLE VI.
A director of the Corporation shall not be personally liable to the Corporation
or its shareholders for monetary damages for breach of fiduciary duty as a
director, except to the extent provided by applicable law (i) for any breach of
the director's duty of loyalty to the Corporation or its shareholders, (ii) for
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) under Sections 302A.559 or 80A.23 of the
Minnesota Statutes, as amended, (iv) for any transaction from which the Director
derived an improper personal benefit, or (v) for any act or omission occurring
prior to the date that this Article becomes effective. No amendment to or
repeal of this Article shall apply to or have any effect on the liability or
alleged liability of any director of the Corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
<PAGE>
ARTICLE VII.
Any action required or permitted to be taken at a meeting of the Board may be
taken by written consent signed by all the directors; provided that, if the
action is one which does not require shareholder approval, such action may be
taken by written consent signed by the number of directors that would be
required to take the same action at a meeting at which all directors were
present.
ARTICLE VIII.
The shareholders of the Corporation have no right to cumulate their votes in the
election of directors.
ARTICLE IX.
The shareholders of the Corporation have no preemptive rights in any future
issuance of stock by the Corporation.
ARTICLE X.
Until the earlier of: (a) December 10, 1993, or (b) the date that St. Paul Fire
and Marine Insurance Company ("St. Paul") no longer holds at least sixty
thousand (60,000) shares of Common Stock of the Corporation (appropriately
adjusted to reflect stock splits, stock dividends, reorganizations,
consolidations and similar changes hereafter effected), St. Paul shall be
entitled to elect one director of the Corporation and to exercise any right of
removal or replacement of such director.
Until the earlier of: (a) December 10, 1993, or (b) the date that Oak
Investment Partners IV A Limited Partnership, and Oak IV Affiliates Fund A
Limited Partnership (collectively, "Oak Investment") no longer hold an aggregate
of forty thousand (40,000) shares of Common Stock (appropriately adjusted to
reflect stock splits, stock dividends, reorganizations, consolidations and
similar changes hereafter effected), Oak Investment shall be entitled to elect
one director of the Corporation and to exercise any right of removal or
replacement of such director.
So long as either of St. Paul or Oak Investment is entitled to elect a director
as set forth above, the Board of Directors of tAugust 9, 1996he Corporation
shall consist of not more than six members and the holders of the Common Stock
(other than St. Paul and Oak Investment), exclusively and voting as a single
class, shall be entitled, by a vote of a majority of the outstanding shares of
Common Stock held by such holders, to elect four directors of the Corporation
and to exercise any right of removal or replacement of such directors.
<PAGE>
No delay or failure by the holders of Common Stock to elect members of the Board
of Directors whom such holders are entitled to elect shall invalidate the
election of the remaining members of the Board of Directors as set forth above.
STATE OF MINNESOTA
DEPARTMENT OF STATE
FILED
APR. 2 1992
/s/ Joan Anderson Growe
Secretary of State
<PAGE>
State of Minnesota
Office of the Secretary of State
AMENDMENT OF ARTICLES OF INCORPORATION
READ INSTRUCTIONS AT BOTTOM OF PAGE BEFORE COMPLETING THIS FORM
CORPORATE NAME: AVECOR Cardiovascular Inc.
This amendment is effective on the day it is filed with the Secretary of State,
unless you indicate another date, no later than 30 days after filing with the
Secretary of State, in this space:
The following amendments of articles or modifications to the statutory
requirements regulating the above corporation were adopted: (Insert full text
of newly amended or modified article(s), indicating which article(s) is(are)
being amended or added. If the full text of the amendment will not fit in the
space provided, please do not use this form. Instead, retype the amendment on a
separate sheet or sheets using this format.)
ARTICLE X, third paragraph
RESOLVED, That the third paragraph of Article X of the Company's
Second Restated Articles of Incorporation be amended in its
entirety as follows:
So long as either of St. Paul or Oak Investment is
entitled to elect a director as set forth above, the
Board of Directors of the Corporation shall consist of
not more than seven members and the holders of Common
Stock (other than St. Paul and Oak Investment),
exclusively and voting as a single class, shall be
entitled, by a vote of a majority of the outstanding
shares of Common Stock held by such holders, to elect
five directors of the Company and to exercise any right
of removal or replacement of such directors.
This amendment has been approved pursuant to chapter 302A, Minnesota Statutes.
I certify that I am authorized to execute this amendment and I further certify
that I understand that by signing this amendment, I am subject to the penalties
of perjury as set forth in section 609.48 as if I had signed this amendment
under oath.
/s/ Richard G. Lareau
----------------------------------
(Signature of Authorized Person)
- --------------------------------------------------------------------------------
INSTRUCTIONS: FOR USE BY THE SECRETARY OF STATE
1. Type or print with dark black ink. STAMP OF SECRETARY
2. Filing fee: $35.00
3. Make check payable to Secretary of State. STATE OF MINNESOTA
4. Mail or bring completed forms to: DEPARTMENT OF STATE
FILED
Secretary of State AUG 6, 1993
Business Services Division
180 State Office Building /s/ Joan Anderson Growe
Saint Paul, MN 55155 SECRETARY OF STATE
(612) 296-2803
<PAGE>
FORM
of
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
of
SERIES A JUNIOR PREFERRED STOCK
of
AVECOR CARDIOVASCULAR INC.
Pursuant to Section 302A.401 of the
Minnesota Business Corporations Act
of the State of Minnesota
----------------------
We, Anthony Badolato, Chief Executive Officer, and Gregory J. Melsen,
Chief Financial Officer and Treasurer, of AVECOR Cardiovascular Inc., a
corporation organized and existing under the Business Corporations Act of the
State of Minnesota (the "Corporation"), in accordance with the provisions
thereof, DO HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors by the
Articles of Incorporation of the Corporation, the said Board of Directors on
June 26, 1996, adopted the following resolution creating a series of two
hundred thousand (200,000) shares of Preferred Stock designated as Series A
Junior Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its
Articles of Incorporation, a series of Preferred Stock of the Corporation be
and it hereby is created, and that the designation and amount thereof and the
voting powers, preferences and relative, participation, optional and other
special rights of the shares of such series, and the qualifications,
limitation or restrictions thereof are as follows:
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as Series A Junior Preferred Stock, par value $.01 per share (the
"Series A Junior Preferred Shares"), and the number of shares constituting
such series shall be two hundred thousand (200,000).
Section 2. DIVIDENDS AND DISTRIBUTIONS.
(a) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to
Series A Junior Preferred Shares with respect to dividends, the holders
of Series A Junior Preferred Shares shall be entitled to receive, when,
as and if declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in cash on the
first day of January, March, July and October in each year (each such
date being referred to herein as a "Quarterly Dividend Payment Date,"
commencing on the
<PAGE>
first Quarterly Dividend Payment Date after the first issuance of a
share or fraction of a Series A Junior Preferred Share, in an amount per
share (rounded to the nearest cent) equal to (subject to the provision
for adjustment hereinafter set forth), 1,000 times the aggregate per
share amount of all cash dividends, and 1,000 times the aggregate per
share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or
a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock, par value
$.01 per share, of the Corporation (the "Common Stock") since the
immediately preceding Quarterly Dividend Payment Date, or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a Series A Junior Preferred Share. In the
event the Corporation shall at any time after June 26, 1996 (the "Rights
Declaration Date") (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of
shares, then in each such case the amount to which holders of Series A
Junior Preferred Shares were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the
Series A Junior Preferred Shares as provided in paragraph (a) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(c) Dividends shall begin to accrue and be cumulative on outstanding
Series A Junior Preferred Shares from the Quarterly Dividend Payment Date
next preceding the date of issue of such Series A Junior Preferred Shares,
unless the date of issue of such shares is prior to the record date for the
first Quarterly Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or unless the
date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of Series A Junior Preferred
Shares entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall begin
to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on the
Series A Junior Preferred Shares in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the
time outstanding. The Board of Directors may fix a record date for the
determination of holders of Series A Junior Preferred Shares entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be no more than 30 days prior to the date fixed for the payment
thereof.
Section 3. VOTING RIGHTS. In addition to any other voting rights
required by law, the holders of Series A Junior Preferred Shares shall have
the following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth, each
Series A Junior Preferred Share shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding shares of Common Stock, or
(iii) combine the outstanding shares of Common Stock into a smaller number of
shares, then in each such case the number of votes per share to which holders
of Series A Junior Preferred Shares were entitled immediately
2
<PAGE>
prior to such event shall be adjusted by multiplying such number by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately
prior to such event.
(b) If, on the date used to determine stockholders of record for any
meeting of stockholders for the election of directors, a default in dividends
on the Series A Junior Preferred Shares shall exist, the number of directors
constituting the Board of Directors of the Corporation shall be increased by
two, and the holders of the Series A Junior Preferred Shares shall have the
right at such meeting, voting together as a single class, to elect two
directors of the Corporation to fill such newly created directorships. Each
director elected by the holders of Series A Junior Preferred Shares (herein
called a "Series A Preferred Director") shall continue to serve as such
director for the full term for which he shall have been elected,
notwithstanding that prior to the end of such term a default in dividends
shall cease to exist. Any Series A Preferred Director may be removed by, and
shall not be removed except by, the vote of the holders of record of the
outstanding Series A Junior Preferred Shares, voting together as a single
class, at a meeting of the stockholders, or of the holders of Series A Junior
Preferred Shares called for such purpose. Thereafter, so long as a default
in dividends on the Series A Preferred Shares shall exist (i) any vacancy in
the office of a Series A Preferred Director may be filled (except as provided
in the following clause (ii)) by an instrument in writing signed by the
remaining Series A Preferred Director and filed with the Corporation and (ii)
in the case of the removal of any Series A Preferred Director, the vacancy
may be filled by the vote of the holders of the outstanding Series A Junior
Preferred Shares, voting together as a class, at the same meeting at which
such removal shall be voted. Each director appointed as aforesaid by the
remaining Series A Preferred Director shall be deemed, for all purposes
hereof, to be a Series A Preferred Director. Whenever the term of office of
the Series A Preferred Directors shall end and no default in dividends on the
Series A Junior Preferred Shares shall exist, the number of directors
constituting the Board of Directors of the Corporation shall be reduced by
two. For the purposes of this Section 3(b), a "default in dividends" on the
Series A Junior Preferred Shares shall be deemed to have occurred whenever
there shall be an arrearage in the payment of any dividends to which the
holders of the Series A Junior Preferred Shares are entitled to receive,
whether or not any such dividends have been declared by the Board of
Directors, for six consecutive quarters, and, having so occurred, such
default shall be deemed to exist thereafter until, but only until, all
accrued dividends on all shares of Series A Junior Preferred Shares then
outstanding shall have been paid through the last Quarterly Dividend Payment
Date.
At any time when such right to elect directors separately as a
class shall have so vested, the Corporation may, and upon the written request
of the holders of record of not less than 20% of the then outstanding total
number of the Series A Junior Preferred Shares shall, call a special meeting
of holders of such Series A Junior Preferred Shares for the election of
directors. In the case of such a written request, such special meeting shall
be held within 90 days after the delivery of such request, and, in either
case, at the place and upon the notice provided by law and in the Bylaws of
the Corporation; provided that the Corporation shall not be required to call
such a special meeting if such request is received less than 120 days before
the date fixed for the next ensuing annual or special meeting of stockholders
of the Corporation. After the number of directors of the Corporation shall
have been increased by two as hereinabove provided, the number as so
increased may thereafter be further increased or decreased in such manner as
may be permitted by the Articles of Incorporation or By-laws, provided that
no such action shall impair the
3
<PAGE>
right of the holders of Series A Junior Preferred Shares to elect and to
be represented by two directors as herein provided.
(c) Except as otherwise provided herein, in the Articles of
Incorporation of the Corporation or by law, the holders of Series A Junior
Preferred Shares and the holders of Common Stock (and the holders of shares
of any other series or class entitled to vote thereon) shall vote together as
one class on all matters submitted to a vote of stockholders of the
Corporation.
Section 4. CERTAIN RESTRICTIONS.
(a) Whenever any dividends or other distributions payable on the Series
A Junior Preferred shares as provided in Section 2 are in arrears, thereafter
and until all accrued and unpaid dividends and distributions, whether or not
declared, on Series A Junior Preferred Shares outstanding shall have been
paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any share
ranking junior (either as to dividends or upon liquidation, dissolution
or winding up) to the Series A Junior Preferred Shares;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A Junior
Preferred Shares, except dividends paid ratably on the Series A Junior
Preferred Shares and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Preferred Shares, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such parity stock in
exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding up)
to the Series A Junior Preferred Shares; or
(iv) purchase or otherwise acquire for consideration any Series A
Junior Preferred Shares, except in accordance with a purchase offer made
in writing or by publication (as determined by the Board of Directors)
to all holders of such shares upon such terms as the Board of Directors,
after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (a) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner.
4
<PAGE>
Section 5. REACQUIRED SHARES. Any Series A Junior Preferred
Shares purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become
authorized but unissued Preferred Stock and may be reissued as part of a
new series of Preferred Stock to be created by resolution or resolutions
of the Board of Directors.
Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. In the event
of any voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, the holders of Series A Junior Preferred Shares
shall be entitled to receive the greater of (a) $1,000.00 per share,
plus accrued dividends to the date of distribution, whether or not
earned or declared, or (b) an amount per share, subject to the provision
for adjustment hereinafter set forth, equal to 1,000 times the aggregate
amount to be distributed per share to holders of Common Stock. In the
event the Corporation shall at any time after the Rights Declaration
Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding shares of Common Stock, or
(iii) combine the outstanding shares of Common Stock into a smaller
number of shares, then in each such case the amount to which holders of
Series A Junior Preferred Shares were entitled immediately prior to such
event pursuant to clause (b) of the preceding sentence shall be adjusted
by multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation
shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for or
changed into other stock or securities, cash and/or any other property,
then in any such case the Series A Junior Preferred Shares shall at the
same time be similarly exchanged or changed in an amount per share
(subject to the provision for adjustment hereinafter set forth) equal to
1,000 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for
which each share of Common Stock is changed or exchanged. In the event
the Corporation shall at any time after the Rights Declaration Date (i)
declare any dividend on Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding shares of Common Stock, or (iii) combine
the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the amount set forth in the preceding sentence
with respect to the exchange or change of Series A Junior Preferred
Shares shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number
of shares of Common Stock that were outstanding immediately prior to
such event.
Section 8. NO REDEMPTION. The Series A Junior Preferred Shares
shall not be redeemable.
Section 9. RANKING. The Series A Junior Preferred Stock shall
rank junior to all other series of the Corporation's Preferred Stock as
to the payment of dividends and the distribution of assets, unless the
terms of any such series shall provide otherwise.
Section 10. FRACTIONAL SHARES. Series A Junior Preferred Shares
may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting
rights, receive dividends, participate in distributions and to have the
benefit of all other rights of holders of Series A Junior Preferred
Shares.
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Section 11. AMENDMENT. The Articles of Incorporation of the
Corporation shall not be further amended in any manner which would
materially alter or change the powers, preferences or special rights of
the Series A Junior Preferred Shares so as to affect them adversely
without the affirmative vote of the holders of a majority or more of the
outstanding Series A Junior Preferred Shares, voting separately as a
class.
IN WITNESS WHEREOF, the undersigned have executed and subscribed
this Certificate and do affirm the foregoing as true under penalties of
perjury this 26th day of June, 1996.
/s/ Anthony Badolato
-----------------------------------------
Anthony Badolato
Chief Executive Officer
ATTEST:
/s/ Gregory J. Melsen
- -----------------------------------------
Gregory J. Melsen
Chief Financial Officer
and Treasurer
STATE OF MINNESOTA
DEPARTMENT OF STATE
FILED
JUL 03 1996
/s/ Joan Anderson Growe
Secretary of State
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SETTLEMENT AGREEMENT
This Settlement Agreement, entered into and effective as of June 30, 1996
(the "Effective Date") is between Cobe Laboratories, Inc. ("Cobe") and Avecor
Cardiovascular, Inc. ("Avecor").
WHEREAS, Cobe and Avecor are parties to the lawsuit in the United States
District Court for the District of Colorado, captioned COBE LABORATORIES, INC.
V. AVECOR CARDIOVASCULAR, INC., Case No. 95-WY-2284-CB (the "Lawsuit"); and
WHEREAS, Cobe and Avecor entered into the Binding Term Sheet having an
effective date of June 30, 1996, which provides that Cobe and Avecor shall each
grant a license to the other (the "Licenses") and shall enter into a settlement
agreement, said Licenses and settlement agreement to be in accord with the
Binding Term Sheet.
NOW, THEREFORE, in consideration of the settlement, including without
limitation the releases, dismissal of the lawsuit and payments, and the
Licenses, the receipt and adequacy of which are hereby acknowledged by both
parties, Cobe and Avecor agree as follows:
1. ENFORCEMENT OF COBE PATENTS.
(a) For the five year period beginning on August 6, 1996, Cobe may
actively prosecute patent enforcement litigation under one or more of Cobe
Patents (at least under the '490 patent) against a Significant Manufacturer
having at least a two and one-half percent (2 1/2%) share of sales in the
United States of integrated microporous membrane oxygenators with hard shell
venous reservoirs disposed above the membrane. Cobe shall be deemed to be
actively prosecuting enforcement if no more than 180 days lapses between
settlement (or license) or final adjudication of one case with one Significant
Manufacturer and the settlement (or license), or filing and service of a
complaint in a subsequent case with another Significant Manufacturer. For the
purpose of satisfying enforcement under this paragraph 1(a), such settlement
(or license) shall require reasonable consideration. Notwithstanding anything
to the contrary, if a complaint is not filed and served during the first 12
months following August 6, 1996, Cobe shall be deemed to have satisfied the
foregoing requirements only if Cobe has settled (or licensed) by August 6, 1997
with at least two un-Affiliated Significant Manufacturers with reasonable
consideration from each.
<PAGE>
(b) Cobe may, as an alternative to actively prosecuting enforcement under
paragraph 1(a), bring under license of the '490 Patent at least 50% of the
sales in the United States with respect to the calendar year preceeding each
anniversary date of August 6 of integrated microporous membrane oxygenators
with hard shell venous reservoirs disposed above the membrane by all
manufacturers other than Cobe. Such license, for the purpose of the payments
under paragraph 2, shall require reasonable consideration for the license.
(c) The parties shall meet in June of 1997 through 2001 and cooperate to
determine by August 6 of each such year whether Cobe has actively prosecuted
such enforcement as provided in paragraph 1(a) or brought the specified level
of sales under license pursuant to paragraph 1(b) for the prior calendar year.
If the parties fail to agree by August 6 of any such year, and at the request
of either party, the determination shall be made by arbitration in accordance
with the provisions of paragraph 7. The arbitrator may use a market consultant
to assist in making the determination. Market share information furnished by
either party shall be held in confidence and may be used only for the purposes
of making any determination required by this paragraph.
(d) Nothing herein shall be deemed to constitute Avecor's inducement to
Cobe to commence any lawsuits, to take any position with respect to such
lawsuits or bring any manufacturer under license. All decisions concerning
whether or not to commence litigation, the claims to be asserted, and the
existence of sufficient legal and factual justification for such claims, or
licensing shall rest solely with Cobe.
2. PAYMENTS.
(a) As also set forth in the Licenses, in consideration of the
settlement, including without limitation the releases, dismissal of the lawsuit
and the Licenses, and of Cobe's active prosecution of enforcement or licensing
as set forth in paragraph 1, the parties shall make the following payments:
(i) within five (5) days of August 6, 1996, Avecor shall pay Cobe $1.4M and
Cobe shall pay Avecor $0.3M; and (ii) provided that Cobe has satisfied the
conditions of paragraph 1(a) or 1(b) as of August 6, 1997, Avecor shall pay
Cobe $1.1M within five days after that date.
(b) As also set forth in the Licenses, the value of the Cobe License
shall be deemed to abate if neither of the conditions described in paragraphs
1(a) and 1(b) are met as of August 6 of any year (unless the '490 Patent has
expired, other than by voluntary abandonment, lapsing or disclaimer) (the
"Abatement Event"). If the Abatement Event occurs as of August 6, 1997,
Avecor shall not be obligated
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<PAGE>
to make the August 6, 1997, payment, as explained above. If the Abatement
Event occurs as of August 6, 1998, Cobe shall promptly refund $880,000 of
such payment; and thereafter, $660,000 if the Abatement Event occurs as of
August 6, 1999, $440,000 as of August 6, 2000, and $220,000 as of August 6,
2001. If any payment is withheld or required to be refunded because of an
Abatement Event, Cobe shall have no further obligations under this paragraph
2(b).
3. STAY; VACATION OF TRIAL DATES AND DISMISSAL OF LAWSUIT. On July 18,
1996, the parties, by their counsel, filed with the Court in the Lawsuit a
joint motion for a stay pending execution of this Settlement Agreement and the
Licenses, and for the vacation of the trial date presently set in this case and
the vacation of such other dates as may have been fixed by the Court for
proceedings in connection with the Lawsuit. Promptly after the execution of
this Settlement Agreement and the Licenses, the parties shall also execute and
file with the Court a stipulation providing for the dismissal with prejudice of
the Lawsuit. Each party shall bear its own attorneys' fees and costs arising
out of the Lawsuit. Costs, if any, for filings in the Lawsuit pursuant to this
Settlement Agreement shall be borne equally by the parties.
4. RELEASE AND COVENANT NOT TO SUE.
(a) NO ADMISSION OF LIABILITY. This Settlement Agreement and the
Licenses shall not be construed as an admission of liability by either party
with respect to the other party's patents or otherwise and is being entered
into by the parties for the purposes of obviating the need for costly and
lengthy litigation or other dispute resolution proceedings.
(b) COBE RELEASE OF CLAIMS. Cobe, on behalf of itself and its
Affiliates, including but not limited to Gambro AB and the Affiliates of Gambro
AB, does hereby release and fully discharge Avecor, its shareholders,
directors, officers, Affiliates, sublicensees under the Licenses, employees,
agents, advisors, customers, distributors and representatives (collectively,
the "Avecor Releasees"), from and against any and all actions, causes of
action, suits, damages (including attorneys' fees), judgments, claims,
counterclaims or crossclaims whatsoever, known or unknown, in law or in equity,
which Cobe and/or its Affiliates and/or its sublicensees under the Licenses,
now have or may have or claimed to have or later claim to have against the
Avecor Releasees, or any of them, individually, jointly, or severally, which:
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<PAGE>
(i) are claims under Title 35 U.S.C. (Patents), SectionSection 100-
399, arising from or relating to the past or future manufacture, use or sale of
any and all oxygenator products of the type manufactured and sold by Avecor on
or before the date hereof; or
(ii) were asserted in the Lawsuit; or
(iii) as to all claims other than patent infringement claims,
could have been brought in the Lawsuit.
Cobe represents and warrants that it is duly authorized to enter into this
Release of Claims on behalf of itself and its Affiliates, and Gambro AB and its
Affiliates.
(c) AVECOR RELEASE OF CLAIMS. Avecor, on behalf of itself and its
Affiliates, does hereby release and fully discharge Cobe, its shareholders,
directors, officers, Affiliates, sublicensees under the Licenses, employees,
agents, advisors, customers, distributors and representatives (collectively,
the "Cobe Releasees"), from and against any and all actions, causes of action,
suits, damages (including attorneys' fees), judgments, claims, counterclaims
and crossclaims whatsoever, known or unknown, in law or in equity, which Avecor
and/or its Affiliates and/or its sublicensees under the Licenses, now have or
may have or claimed to have or later claim to have against the Cobe Releasees,
or any of them, individually, jointly, or severally, which:
(i) are claims under Title 35 U.S.C. (Patents), SectionSection 100-
399, arising from or relating to the past or future manufacture, use or sale of
any and all oxygenator products of the type manufactured and sold by Cobe or
Cobe Cardiovascular, Inc. on or before the date hereof; or
(ii) were asserted in the Lawsuit; or
(iii) as to all claims other than patent infringement claims,
could have been asserted in the Lawsuit.
Avecor represents and warrants that it is duly authorized to enter into
this Release of Claims on behalf of itself and its Affiliates.
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<PAGE>
(d) Avecor, on behalf of itself and its Affiliates covenants and agrees
not to sue Cobe, its shareholders, directors, officers, Affiliates,
sublicensees under the Licenses, employees, agents, advisors, purchasers,
customers, distributors and/or representatives for any matter, thing, claim, or
cause of action which is the subject of the Avecor Release of Claims set forth
above. Cobe, on behalf of itself and its Affiliates, including Gambro AB and
its Affiliates, covenants and agrees not to sue Avecor, its shareholders,
directors, officers, sublicensees under the Licenses, employees, agents,
advisors, purchasers, customers, distributors and/or representatives for any
matter, thing, claims, or cause of action which is the subject of the Cobe
Release of Claims set forth above. Both Avecor and Cobe represent to each
other that they are duly authorized to enter into this covenant not to sue on
behalf of their respective Affiliates including, as to Cobe, Gambro AB and its
Affiliates.
5. CONFIDENTIALITY. Within 15 days following the execution of the
Settlement Agreement and the Licenses, (i) the parties shall comply with
paragraph 22 of the Stipulated Protective Order Regarding Confidential
Information ("Protective Order") and shall certify their compliance with their
obligations pursuant to that paragraph, and (ii) each party shall return to the
other all copies of documents produced to it by the other party in the Lawsuit
(provided, that each party may retain any printed and publicly distributed
publications and patent documents), and all copies of transcripts, audiotapes
and videotapes of depositions taken by the party in the Lawsuit which are in
the possession or control of the party, its attorneys, witnesses or agents.
Pursuant to paragraph 20 of the Protective Order, the parties, and other
persons bound thereto shall continue to be obligated not to disclose Restricted
Information except as permitted by the Protective Order. Nothing herein shall
be construed to limit the right of any attorneys to practice law and to
represent other clients with respect to any matter related to blood oxygenator
devices and related products, and/or the Cobe or Avecor Patents.
6. ARBITRATION. Any dispute between the parties with respect to this
Settlement Agreement or arising out of this Settlement Agreement and the
Licenses shall be resolved by binding arbitration. All arbitrations shall be
held in Chicago, Illinois and conducted in accordance with the American
Arbitration Association Commercial Arbitration Rules in effect as of August 6,
1996. The decisions of the arbitrator shall be final and unappealable by the
parties, and may be entered in and enforced by any court of competent
jurisdiction. The parties further agree that the arbitration shall be
conducted by a single arbitrator who shall be independent of both parties and
shall be a lawyer at least 50% of whose practice is in the field of patent
litigation and licensing. Arbitration pursuant to this Settlement Agreement or
the Licenses shall be completed and a decision rendered
5
<PAGE>
within 90 days of the appointment of the arbitrator in accordance with
arbitration rules in effect.
7. AFFILIATES. For the purposes of this agreement, "Affiliate" shall
mean any partnership, person, corporation or other limited liability company
which, directly or indirectly, owns, is owned by, or is under common ownership
with, Avecor, Cobe or Gambro AB, where "owns" and "ownership" mean owning at
least fifty-one percent (51%) of the equity having the power to vote on or
direct the affairs thereof.
8. BREACH OF CONTRACT.
(a) The licenses granted in the Licenses shall be irrevocable. In the
event of a breach of this Settlement Agreement or any of the Licenses, the
remedy available to the other party shall be strict performance and/or monetary
damages as set forth in any of the foregoing paragraphs or as is available
under contract law (other than revocation of the Licenses). The Licenses shall
remain in full force and effect notwithstanding any breach or any award of
monetary damages.
(b) In the event of a breach of this Settlement Agreement, the
nonbreaching party shall provide written notice to the breaching party,
whereupon the breaching party shall have 60 days to cure the breach. In the
event the breach is not cured within 60 days, the nonbreaching party may
initiate arbitration under paragraph 6 of this Settlement Agreement any time
within 90 days of the expiration of said 60 day period.
9. GENERAL PROVISIONS.
(a) RELATIONSHIP OF PARTIES. Nothing contained in this Settlement
Agreement shall be construed to constitute any party as the partner, employee,
representative, or agent of, or joint venturer with, the other party, nor shall
any party have any authority to bind the other in any respect, it being
intended that the relationship between parties hereunder is that of independent
contractors with each party being responsible only for its own actions.
(b) AMENDMENTS AND WAIVER. No amendment, waiver or consent with respect
to any provision of this Settlement Agreement shall in any event be effective,
unless the same shall be in writing and signed by the parties hereto, and then
such amendment, waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
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<PAGE>
(c) NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be delivered by registered or certified
mail, postage prepaid and receipt requested, or by facsimile, to the following
addresses or to such other addresses as a party may notify the other in
writing:
(i) If to Cobe: Cobe Laboratories, Inc.
14401 West 65th Way
Arvada, Colorado 80004
Attention: Managing Patent Counsel
Telephone: (303) 467-6351
Facsimile: (303) 467-6688
(ii) If to Avecor: Avecor Cardiovascular, Inc.
13010 County RD 6
Plymouth MN 55441
Attention: CEO
Telephone: (612) 551-2869
Facsimile: (612) 559-5809
Any notice hereunder shall be effective upon receipt.
(e) COUNTERPARTS AND FACSIMILE SIGNATURE. This Settlement Agreement may
be executed simultaneously in two (2) or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument. Facsimile signatures hereto shall be deemed to have the same
force and effect as manual signatures.
(f) ENTIRE TRANSACTION. This Agreement contains the entire understanding
among the parties with respect to the transactions contemplated hereby and
supersedes all other agreements, (except as to the Licenses executed
concurrently herewith), understandings and undertakings, whether written or
oral, among the parties on the subject matter hereof.
(g) APPLICABLE LAW. This Settlement Agreement shall be governed by and
construed in accordance with the internal substantive laws of the State of
Colorado, excluding the United Nations Convention on Contracts for the
International Sale of Goods.
(h) OTHER RULES OF CONSTRUCTION. Words in the singular include the
plural and in the plural include the singular. The section and other headings
contained in this Settlement Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this agreement.
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<PAGE>
(i) PARTIAL INVALIDITY. In the event that any provision of this
Settlement Agreement shall be held invalid or unenforceable by any court of
competent jurisdiction, such holding shall not invalidate or render
unenforceable any other provision hereof or of the Licenses.
IN WITNESS HEREOF, each of the parties has caused this Settlement
Agreement to be executed on its behalf by a duly authorized officer all as of
the date first written above.
Cobe Laboratories, Inc. Avecor Cardiovascular, Inc.
/s/ Bruce R. Winsor /s/ Anthony Badolato
- ---------------------------- ----------------------------
By: Bruce R. Winsor By: Anthony Badolato
Title: Assistant Secretary Title: Chief Executive Officer
8
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COBE PATENT LICENSE TO AVECOR
This License, entered into and effective as of June 30, 1996 (the
"Effective Date") is between Cobe Laboratories, Inc. ("Cobe") and Avecor
Cardiovascular, Inc. ("Avecor").
WHEREAS, Cobe and Avecor are parties to the lawsuit in the United States
District Court for the District of Colorado, captioned COBE LABORATORIES, INC.
V. AVECOR CARDIOVASCULAR, INC., Case No. 95-WY-2284-CB; and
WHEREAS, Cobe and Avecor entered into the Binding Term Sheet having an
effective date of June 30, 1996, which provides that Cobe and Avecor shall each
grant a license to the other and shall enter into a settlement agreement
("Settlement Agreement"), said licenses and Settlement Agreement to be in
accord with the Binding Term Sheet.
NOW, THEREFORE, in consideration of the settlement, including without
limitation the releases, dismissal of the lawsuit and payments, as set forth in
the Settlement Agreement, the receipt and adequacy of which are hereby
acknowledged by both parties, Cobe and Avecor agree as follows:
Article I: LICENSE.
1.1 LICENSE. Subject to timely payment of amounts due to it pursuant to
paragraph 2 of this License, Cobe hereby grants to Avecor a worldwide, non-
exclusive, irrevocable license under Cobe Patents to make, have made, use and
sell Avecor Products. Cobe Patents shall mean U.S. Patents 4,469,659 for
SAMPLING DEVICE FOR BLOOD OXYGENATOR, 4,818,490 (the '490 Patent) for INTEGRAL
BLOOD OXYGENATOR and 4,451,562 for BLOOD OXYGENATOR, including any divisions,
continuations, continuations-in-part, reissues, reexaminations or extensions
thereof or any foreign patents or applications corresponding to any of the
foregoing. Avecor Products shall mean (i) the products currently sold by
Avecor or Avecor Cardiovascular, Ltd. as of the Effective Date of this License
and (ii) any products developed by or on behalf of Avecor and sold during the
Term of the Cobe Patents. Term of the Cobe Patents shall mean the term
continuing until each claim of the Cobe Patents has expired, been disclaimed or
declared invalid by a final judgment of a court or administrative agency of
competent jurisdiction from which no appeal can be or has been taken. For the
purposes of this License, "Affiliate" shall mean any partnership, person,
corporation or other limited liability company which, directly or indirectly,
owns, is owned by, or is under common ownership with, Avecor, Cobe or Gambro
AB, where "owns" and "ownership" mean owning at least fifty-
<PAGE>
one percent (51%) of the equity having the power to vote on or direct the
affairs thereof.
1.2 SUBLICENSE. Cobe hereby grants the right to Avecor to grant
sublicenses, express or implied, (i) to Avecor distributors or Avecor's
Affiliates' distributors to sell Avecor Products, (ii) to end use customers of
Avecor and of permitted sublicensees to use Avecor Products and (iii) to its
Affiliates (but only for a term ending if the sublicensee ceases to be an
Affiliate of Avecor) to make, have made, use and sell Avecor Products.
1.3 EXCLUSION OF KNOW-HOW. Cobe shall have no obligation to transfer to
Avecor any Cobe know-how or technology and grants no license or other rights to
Avecor in such know-how or technology.
1.4 ASSIGNMENT OF LICENSE. Any person or entity acquiring substantially
all of the assets related to the oxygenator business of Avecor and its
Affiliates, whether by purchase of stock or assets, by merger or other business
combination, or any other means, may succeed to ownership of this License and
all of Avecor's rights hereunder, by assignment or operation of law or
otherwise. In the event of any such acquisition, Avecor Products for the
purposes of this License shall mean (i) Avecor Products as defined prior to the
acquisition, (ii) products which Avecor has under development and which have
been embodied in a prototype with laboratory test data generated at least six
months prior to the date upon which the acquisition is consummated and (iii)
improvements to the oxygenator (whether integrated with a reservoir or stand
alone) now referred to as the Affinity and any future improvements or additions
to the Affinity line of oxygenators, provided that such improvements or
additions use a substantially similar direction of flow of blood through the
bundle as does the Affinity, as manufactured on the Effective Date of this
License. The acquiring party may elect at any time after such acquisition,
during the term of this License, to expand the scope of this License from Cobe
to include any additional products not already licensed, subject to payment of
reasonable compensation to Cobe for the additional scope of license. If the
parties cannot agree on such reasonable compensation, the amount of such
reasonable compensation shall be determined by arbitration under paragraph 8.8
of this License.
1.5 MAINTENANCE OF COBE PATENTS. Cobe shall have no obligation to
maintain or preserve Cobe Patents, and may determine in its sole discretion
whether to abandon or otherwise weaken or encumber Cobe Patents, but subject to
the effects of Article III of this License.
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ARTICLE II: PAYMENTS.
2.1 AMOUNT. In consideration of the settlement, including without
limitation the releases, dismissal of the lawsuit and this License and of
Cobe's active prosecution of enforcement or licensing as set forth in Article
III, Avecor shall make the following payments: (i) within five (5) days of
August 6, 1996, Avecor shall pay Cobe $1.4M; and (ii) provided that Cobe has
satisfied the conditions of paragraph 3.1 or 3.2 as of August 6, 1997, Avecor
shall pay Cobe $1.1M within five days after that date.
2.2 ABATEMENT. The value of the Cobe License shall be deemed to abate if
neither of the conditions described in paragraphs 3.1 and 3.2 are met as of
August 6 of any year (unless the '490 Patent has expired, other than by
voluntary abandonment, lapsing or disclaimer) (the "Abatement Event"). If the
Abatement Event occurs as of August 6, 1997, Avecor shall not be obligated to
make the August 6, 1997, payment, as explained above. If the Abatement Event
occurs as of August 6, 1998, Cobe shall promptly refund $880,000 of such
payment; and thereafter, $660,000 if the Abatement Event occurs as of August 6,
1999, $440,000 as of August 6, 2000, and $220,000 as of August 6, 2001. If any
payment is withheld or required to be refunded because of an Abatement Event,
Cobe shall have no further obligations under this paragraph 2.2.
ARTICLE III: ENFORCEMENT.
3.1 ENFORCEMENT. For the five year period beginning on August 6, 1996,
Cobe may actively prosecute patent enforcement litigation under one or more of
Cobe Patents (at least under the '490 patent) against a Significant
Manufacturer having at least a two and one-half percent (2 1/2%) share of sales
in the United States of integrated microporous membrane oxygenators with hard
shell venous reservoirs disposed above the membrane. Cobe shall be deemed to
be actively prosecuting enforcement if no more than 180 days lapses between
settlement (or license) or final adjudication of one case with one Significant
Manufacturer and the settlement (or license), or filing and service of a
complaint in a subsequent case with another Significant Manufacturer. For the
purpose of satisfying enforcement under this paragraph 3.1, such settlement (or
license) shall require reasonable consideration. Notwithstanding anything to
the contrary, if a complaint is not filed and served during the first 12 months
following August 6, 1996, Cobe shall be deemed to have satisfied the foregoing
requirements only if Cobe has settled (or licensed) by August 6, 1997 with at
least two non-Affiliated Significant Manufacturers with reasonable
consideration from each.
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3.2 LICENSING. Cobe may, as an alternative to actively prosecuting
enforcement under paragraph 1(a), bring under license of the '490 Patent at
least 50% of the sales in the United States with respect to the calendar year
preceding each anniversary date of August 6 of integrated microporous membrane
oxygenators with hard shell venous reservoirs disposed above the membrane by
all manufacturers other than Cobe. Such license, for the purpose of the
payments under paragraph 2.1, shall require reasonable consideration for the
license.
3.3 RESOLUTION OF DISPUTES. The parties shall meet in June of 1997
through 2001 and cooperate to determine by August 6 of each such year whether
Cobe has actively prosecuted such enforcement as provided in paragraph 3.1 or
brought the specified level of sales under license pursuant to paragraph 3.2
for the prior calendar year. If the parties fail to agree by August 6 of any
such year, and at the request of either party, the determination shall be made
by arbitration in accordance with the provisions of paragraph 8.8. The
arbitrator may use a market consultant to assist in making the determination.
Market share information furnished by either party shall be held in confidence
and may be used only for the purposes of making any determination required by
this paragraph.
3.4 NO INDUCEMENT. Nothing herein shall be deemed to constitute Avecor's
inducement to Cobe to commence any lawsuits, to take any position with respect
to such lawsuits or bring any manufacturer under license. All decisions
concerning whether or not to commence litigation, the claims to be asserted,
and the existence of sufficient legal and factual justification for such
claims, or licensing shall rest solely with Cobe. The sole right to institute
suit for infringement and to recover resulting damages under Cobe Patents shall
rest with Cobe.
ARTICLE IV: CONFIDENTIALITY.
4.1 CONFIDENTIALITY. Avecor and Cobe shall be under a duty of
confidentiality as set forth in paragraph 5 of the Settlement Agreement.
ARTICLE V: WARRANTIES AND INDEMNIFICATION.
5.1 WARRANTY EXCEPTIONS. COBE MAKES NO REPRESENTATIONS OR WARRANTIES,
EXPRESS OR IMPLIED AS TO AVECOR PRODUCTS OR THE COBE PATENTS; OR THE
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR THE DESIGN OF ANY AVECOR
PRODUCTS OR THAT THE SAME ARE FREE OF INFRINGING THE RIGHTS OF ANY THIRD
PARTIES. COBE SHALL NOT BE LIABLE FOR ANY CONSEQUENTIAL OR INDIRECT DAMAGES
SUFFERED
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HEREUNDER BY AVECOR, ITS AFFILIATES SUBLICENSEES, DISTRIBUTORS OF AVECOR OR
SUBLICENSEES OR ANY CUSTOMERS PERMITTED HEREUNDER OR ANY OTHERS RESULTING
FROM THE USE OF OR RELATING TO AVECOR PRODUCTS OR THE COBE PATENTS.
5.2 INDEMNIFICATION. Avecor hereby indemnifies, shall defend against and
hold Cobe harmless from any and all claims, loss, liability, damage or expense
(including without limitation reasonable fees and expenses of counsel) in
connection with investigating or defending any actions or threatened actions
arising out of or related to any manufacture, use or sale by Avecor, its
Affiliates, sublicensees, distributors of Avecor or sublicensees, or any
customers of Avecor Products including without limitation: (i) any warranties
given by Avecor, its Affiliates or distributors or deemed or held by law to
have been given by Avecor, its Affiliates or distributors; (ii) any claim of
infringement of third party patents or other proprietary rights in connection
with the use or sale of Avecor Products and (iii) any claim for negligence,
defective design, product liability or similar claims relating to Avecor
Products.
ARTICLE VI: MARKETING.
6.1 MARKETING EFFORT. Avecor and its Affiliates may determine whether
and the manner and extent to which they shall sell Avecor Products or create,
promote or maintain a market for sales of such products.
6.2 USE OF COBE NAME. Avecor shall not use the name of Cobe in
connection with any advertising, promotional or sales literature without the
prior written consent of Cobe. Cobe shall not unduly restrict or prevent
Avecor's use of the name whenever or wherever required by Federal, State or
local law or regulation, either domestically or internationally.
6.3 PATENT MARKING. Avecor shall have no obligation to mark Avecor
Products with Cobe patent numbers or otherwise with respect to Cobe Patents.
ARTICLE VII: TERM AND BREACH OF LICENSE.
7.1 TERM. The Term of this License shall be for the Term of the Cobe
Patents.
7.2 BREACH OF LICENSE. The license and sublicense granted in paragraph
1.1 and 1.2 shall be irrevocable. In the event of a breach of this License,
the remedy available to the other party shall be strict performance and/or
monetary damages and/or whatever is available under contract law but not
inconsistent with
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the irrevocable grant of the license and sublicense. The license and
sublicense shall remain in full force and effect notwithstanding any breach
or any award of monetary damages or other remedy. In the event of a breach,
the nonbreaching party shall provide written notice to the breaching party,
whereupon the breaching party shall have 60 days to cure the breach. In the
event the breach is not cured within 60 days, the nonbreaching party may
initiate arbitration under this License at any time within 90 days of the
expiration of said 60 day period.
ARTICLE VIII: GENERAL PROVISIONS.
8.1 RELATIONSHIP OF PARTIES. Nothing contained in this License shall be
construed to constitute any party as the partner, employee, representative, or
agent of, or joint venturer with, the other party, nor shall any party have any
authority to bind the other in any respect, it being intended that the
relationship between parties hereunder is that of independent contractors with
each party being responsible only for its own actions.
8.2 FORCE MAJEURE. Force Majeure shall mean any event or condition, not
existing as of the date of signature of this License, not reasonably
foreseeable as of such a date and not reasonably within the control of either
party, which prevents in whole or in material part the performance by one of
the parties of its obligations hereunder or which renders the performance of
such obligations so difficult or costly as to make such performance
commercially unreasonable. Without limiting the foregoing, the following shall
constitute events or conditions of Force Majeure: acts of state or prolonged
shortage of energy supplies, epidemics, fire, flood, hurricane, typhoon,
earthquake, lightning and explosion.
8.3 AMENDMENTS AND WAIVER. No amendment, waiver or consent with respect
to any provision of this License shall in any event be effective, unless the
same shall be in writing and signed by the parties hereto, and then such
amendment, waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
8.4 NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be delivered by registered or certified
mail, postage prepaid and receipt requested, or by facsimile.
6
<PAGE>
(a) If to Cobe: Cobe Laboratories, Inc.
14401 West 65th Way
Arvada, Colorado 80004
Attention: Managing Patent Counsel
Telephone: (303) 467-6351
Facsimile: (303) 467-6688
(b) If to Avecor: Avecor Cardiovascular, Inc.
13010 County RD 6
Plymouth MN 55441
Attention: CEO
Telephone: (612) 551-2869
Facsimile: (612) 559-5809
Any notice hereunder shall be effective upon receipt.
8.5 COUNTERPARTS AND FACSIMILE SIGNATURE. This License may be executed
simultaneously in two (2) or more counterparts, each of which shall be deemed
an original, but all of which together shall constitute one and the same
instrument. Facsimile signatures hereto shall be deemed to have the same force
and effect as manual signatures.
8.6 ENTIRE TRANSACTION. This License contains the entire understanding
among the parties with respect to the transactions contemplated hereby and
supersedes all other agreements, (except as to the Settlement Agreement and the
Avecor Patent License To Cobe executed concurrently herewith), understandings
and undertakings, whether written or oral, among the parties on the subject
matter hereof.
8.7 APPLICABLE LAW. This License shall be governed by and construed in
accordance with the internal substantive laws of the State of Colorado,
excluding the United Nations Convention on Contracts for the International Sale
of Goods.
8.8 ARBITRATION. Any dispute, claim or controversy arising out of or
relating to this License, except for any claim of indemnification hereunder,
shall be finally settled by binding arbitration. All arbitrations shall be
held in Chicago, Illinois and conducted in accordance with the American
Arbitration Association Commercial Arbitration Rules in effect as of August 6,
1996. The decisions of the arbitrator shall be final and unappealable by the
parties, and may be entered in and enforced by any court of competent
jurisdiction. The parties further agree that the arbitration shall be
conducted by a single arbitrator who shall be independent of both parties and
shall be a lawyer at least 50% of whose practice is in the field of
7
<PAGE>
patent litigation and licensing. Arbitration pursuant to this License shall
be completed and a decision rendered within 90 days of the appointment of the
arbitrator in accordance with arbitration rules in effect.
8.9 OTHER RULES OF CONSTRUCTION. Words in the singular include the
plural and in the plural include the singular. The section and other headings
contained in this License are for reference purposes only and shall not affect
in any way the meaning or interpretation of this License.
8.10 PARTIAL INVALIDITY. In the event that any provision of this License
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provision
hereof or of the Settlement Agreement or the other license.
IN WITNESS HEREOF, each of the parties has caused this License to be
executed on its behalf by a duly authorized officer all as of the date first
written above.
Cobe Laboratories, Inc. Avecor Cardiovascular, Inc.
/s/ Bruce R. Winsor /s/ Anthony Badolato
- ---------------------------- ----------------------------
By: Bruce R. Winsor By: Anthony Badolato
Title: Assistant Secretary Title: Chief Executive Officer
8
<PAGE>
AVECOR PATENT LICENSE TO COBE
This License, entered into and effective as of June 30, 1996 (the
"Effective Date") is between Cobe Laboratories, Inc. ("Cobe") and Avecor
Cardiovascular, Inc. ("Avecor").
WHEREAS, Cobe and Avecor are parties to the lawsuit in the United States
District Court for the District of Colorado, captioned COBE LABORATORIES, INC.
V. AVECOR CARDIOVASCULAR, INC., Case No. 95-WY-2284-CB; and
WHEREAS, Cobe and Avecor entered into the Binding Term Sheet having an
effective date of June 30, 1996, which provides that Cobe and Avecor shall each
grant a license to the other and shall enter into a settlement agreement
("Settlement Agreement"), said licenses and Settlement Agreement to be in
accord with the Binding Term Sheet.
NOW, THEREFORE, in consideration of the settlement, including without
limitation the releases, dismissal of the lawsuit and payments, as set forth in
the Settlement Agreement, the receipt and adequacy of which are hereby
acknowledged by both parties, Cobe and Avecor agree as follows:
Article I: LICENSE.
1.1 LICENSE. Subject to timely payment of amounts due to it pursuant
to paragraph 2 of this License, Avecor hereby grants to Cobe a worldwide,
non-exclusive, irrevocable license under Avecor Patents to make, have made,
use and sell Restricted Cobe Products. Avecor Patents shall mean U.S.
Patents 5,376,334 for MASS TRANSFER DEVICE HAVING A HOLLOW FIBER BUNDLE,
5,462,619 for MASS TRANSFER DEVICE HAVING A HOLLOW FIBER BUNDLE and 5,346,621
for HOLLOW FIBER BLOOD OXYGENATOR, including any divisions, continuations,
continuations-in-part, reissues, reexaminations or extensions thereof or any
foreign patents or applications corresponding to any of the foregoing.
Restricted Cobe Products shall mean the oxygenator (whether integrated with a
reservoir or stand alone) now referred to as the Optima and any future
improvements or additions to the Optima line of oxygenators, provided that
such improvements or additions use a substantially similar direction of flow
of blood through the bundle as does the Optima, as manufactured on the
Effective Date of this License. Restricted Cobe Products specifically
excludes oxygenators (whether integrated with a reservoir or stand alone)
using a radial outward flow of blood as illustrated by but not limited to
Avecor's Affinity oxygenator. Term of the Avecor Patents shall mean the term
continuing until each claim of the Avecor Patents has expired, been
disclaimed, or
<PAGE>
declared invalid by a final judgment of a court or administrative agency of
competent jurisdiction from which no appeal can be or has been taken. For
the purposes of this License, "Affiliate" shall mean any partnership, person,
corporation or other limited liability company which, directly or indirectly,
owns, is owned by, or is under common ownership with, Avecor, Cobe or Gambro
AB, where "owns" and "ownership" mean owning at least fifty-one percent (51%)
of the equity having the power to vote on or direct the affairs thereof.
1.2 SUBLICENSE. Avecor hereby grants the right to Cobe to grant
sublicenses, express or implied, (i) to Cobe and Gambro AB distributors or
Cobe's or Gambro AB's Affiliates' distributors to sell Restricted Cobe
Products, (ii) to end use customers of Cobe and of permitted sublicensees to
use Restricted Cobe Products and (iii) to its Affiliates (but only for a term
ending if the sublicensee ceases to be an Affiliate of Cobe) to make, have
made, use and sell Restricted Cobe Products.
1.3 EXCLUSION OF KNOW-HOW. Avecor shall have no obligation to transfer
to Cobe any Avecor know-how or technology and grants no license or other rights
to Cobe in such know-how or technology.
1.4 ASSIGNMENT OF LICENSE. Any person or entity acquiring substantially
all of the assets related to the oxygenator business of Cobe and its
Affiliates, whether by purchase of stock or assets, by merger or other business
combination, or any other means, may succeed to ownership of this License by
assignment or operation of law or otherwise.
1.5 MAINTENANCE AND LITIGATION. Avecor shall have no obligation to
maintain or preserve Avecor Patents, and may determine in its sole discretion
whether to abandon or otherwise weaken or encumber Avecor Patents. The sole
right to institute suit for infringement and to recover resulting damages under
Avecor Patents shall rest with Avecor.
ARTICLE II: PAYMENTS.
2.1 AMOUNT. In consideration of the settlement, including without
limitation the releasees, dismissal of the lawsuit and this License, Cobe shall
pay Avecor $300,000 within five (5) days of August 6, 1996.
ARTICLE III: CONFIDENTIALITY.
3.1 CONFIDENTIALITY. Avecor and Cobe shall be under a duty of
confidentiality as set forth in paragraph 5 of the Settlement Agreement.
2
<PAGE>
ARTICLE IV: WARRANTIES AND INDEMNIFICATION.
4.1 WARRANTY EXCEPTIONS. AVECOR MAKES NO REPRESENTATIONS OR WARRANTIES,
EXPRESS OR IMPLIED AS TO RESTRICTED COBE PRODUCTS OR THE AVECOR PATENTS; OR THE
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR THE DESIGN OF ANY
RESTRICTED COBE PRODUCTS OR THAT THE SAME ARE FREE OF INFRINGING THE RIGHTS OF
ANY THIRD PARTIES. AVECOR SHALL NOT BE LIABLE FOR ANY CONSEQUENTIAL OR
INDIRECT DAMAGES SUFFERED HEREUNDER BY COBE, ITS AFFILIATES, SUBLICENSEES,
DISTRIBUTORS OF COBE OR SUBLICENSEES OR ANY CUSTOMERS PERMITTED HEREUNDER OR
ANY OTHERS RESULTING FROM THE USE OF OR RELATING TO RESTRICTED COBE PRODUCTS OR
THE AVECOR PATENTS.
4.2 INDEMNIFICATION. Cobe hereby indemnifies, shall defend against and
hold Avecor and its Affiliates harmless from any and all claims, loss,
liability, damage or expense (including without limitation reasonable fees and
expenses of counsel) in connection with investigating or defending any actions
or threatened actions arising out of or related to any manufacture, use or sale
by Cobe, its Affiliates, sublicensees, distributors of Cobe or sublicensees, or
any customers of Restricted Cobe Products including without limitation: (i)
any warranties given by Cobe, its Affiliates or distributors or deemed or held
by law to have been given by Cobe, its Affiliates or distributors; (ii) any
claim of infringement of third party patents or other proprietary rights in
connection with the use or sale of Restricted Cobe Products and (iii) any claim
for negligence, defective design, product liability or similar claims relating
to Restricted Cobe Products.
ARTICLE V: MARKETING.
5.1 MARKETING EFFORT. Cobe and its Affiliates may determine whether and
the manner and extent to which they shall sell Restricted Cobe Products or
create, promote or maintain a market for sales of such products.
5.2 USE OF AVECOR NAME. Cobe shall not use the name of Avecor in
connection with any advertising, promotional or sales literature without the
prior written consent of Avecor. Avecor shall not unduly restrict or prevent
Cobe's use of the name whenever or wherever required by Federal, State or local
law or regulation, either domestically or internationally.
3
<PAGE>
5.3 PATENT MARKING. Cobe shall have no obligation to mark Restricted
Cobe Products with Avecor patent numbers or otherwise with respect to Avecor
Patents.
ARTICLE VI: TERM AND BREACH OF LICENSE.
6.1 TERM. The Term of this License shall be for the Term of the Avecor
Patents.
6.2 BREACH OF LICENSE. The license and sublicense granted in paragraph
1.1 and 1.2 shall be irrevocable. In the event of a breach of this License,
the remedy available to the other party shall be strict performance and/or
monetary damages and/or whatever is available under contract law but not
inconsistent with the irrevocable grant of the license and sublicense. The
license and sublicense shall remain in full force and effect notwithstanding
any breach or any award of monetary damages or other remedy. In the event of a
breach, the nonbreaching party shall provide written notice to the breaching
party, whereupon the breaching party shall have 60 days to cure the breach. In
the event the breach is not cured within 60 days, the nonbreaching party may
initiate arbitration under this License at any time within 90 days of the
expiration of said 60 day period.
ARTICLE VII: GENERAL PROVISIONS.
7.1 RELATIONSHIP OF PARTIES. Nothing contained in this License shall be
construed to constitute any party as the partner, employee, representative, or
agent of, or joint venturer with, the other party, nor shall any party have any
authority to bind the other in any respect, it being intended that the
relationship between parties hereunder is that of independent contractors with
each party being responsible only for its own actions.
7.2 FORCE MAJEURE. Force Majeure shall mean any event or condition, not
existing as of the date of signature of this License, not reasonably
foreseeable as of such a date and not reasonably within the control of either
party, which prevents in whole or in material part the performance by one of
the parties of its obligations hereunder or which renders the performance of
such obligations so difficult or costly as to make such performance
commercially unreasonable. Without limiting the foregoing, the following shall
constitute events or conditions of Force Majeure: acts of state or prolonged
shortage of energy supplies, epidemics, fire, flood, hurricane, typhoon,
earthquake, lightning and explosion.
4
<PAGE>
7.3 AMENDMENTS AND WAIVER. No amendment, waiver or consent with respect
to any provision of this License shall in any event be effective, unless the
same shall be in writing and signed by the parties hereto, and then such
amendment, waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
7.4 NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be delivered by registered or certified
mail, postage prepaid and receipt requested, or by facsimile, to the following
addresses or to such other address as a party may notify the other in writing:
(a) If to Cobe: Cobe Laboratories, Inc.
14401 West 65th Way
Arvada, Colorado 80004
Attention: Managing Patent Counsel
Telephone: (303) 467-6351
Facsimile: (303) 467-6688
(b) If to Avecor: Avecor Cardiovascular, Inc.
13010 County RD 6
Plymouth MN 55441
Attention: CEO
Telephone: (612) 551-2869
Facsimile: (612) 559-5809
Any notice hereunder shall be effective upon receipt.
7.5 COUNTERPARTS AND FACSIMILE SIGNATURE. This License may be executed
simultaneously in two (2) or more counterparts, each of which shall be deemed
an original, but all of which together shall constitute one and the same
instrument. Facsimile signatures hereto shall be deemed to have the same force
and effect as manual signatures.
7.6 ENTIRE TRANSACTION. This License contains the entire understanding
among the parties with respect to the transactions contemplated hereby and
supersedes all other agreements, (except as to the Settlement Agreement and the
Cobe Patent License To Avecor executed concurrently herewith), understandings
and undertakings, whether written or oral, among the parties on the subject
matter hereof.
5
<PAGE>
7.7 APPLICABLE LAW. This License shall be governed by and construed in
accordance with the internal substantive laws of the State of Colorado,
excluding the United Nations Convention on Contracts for the International Sale
of Goods.
7.8 ARBITRATION. Any dispute, claim or controversy arising out of or
relating to this License, except for any claim of indemnification hereunder,
shall be finally settled by binding arbitration. All arbitrations shall be
held in Chicago, Illinois and conducted in accordance with the American
Arbitration Association Commercial Arbitration Rules in effect as of August 6,
1996. The decisions of the arbitrator shall be final and unappealable by the
parties, and may be entered in and enforced by any court of competent
jurisdiction. The parties further agree that the arbitration shall be
conducted by a single arbitrator who shall be independent of both parties and
shall be a lawyer at least 50% of whose practice is in the field of patent
litigation and licensing. Arbitration pursuant to this License shall be
completed and a decision rendered within 90 days of the appointment of the
arbitrator in accordance with arbitration rules in effect.
7.9 OTHER RULES OF CONSTRUCTION. Words in the singular include the
plural and in the plural include the singular. The section and other headings
contained in this License are for reference purposes only and shall not affect
in any way the meaning or interpretation of this License.
7.10 PARTIAL INVALIDITY. In the event that any provision of this License
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provision
hereof or of the Settlement Agreement or the other license.
IN WITNESS HEREOF, each of the parties has caused this License to be
executed on its behalf by a duly authorized officer all as of the date first
written above.
Cobe Laboratories, Inc. Avecor Cardiovascular, Inc.
/s/ Bruce R. Winsor /s/ Anthony Badolato
- ---------------------------- ----------------------------
By: Bruce R. Winsor By: Anthony Badolato
Title: Assistant Secretary Title: Chief Executive Officer
6
<PAGE>
EXHIBIT 11.1 - Statement re Computation of Earnings Per Share
<TABLE>
<CAPTION>
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
--------- --------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
NET INCOME ($1,877) $608 ($1,664) $1,273
--------- --------- ---------- ----------
--------- --------- ---------- ----------
PER SHARE DATA:
Net income per common equivalent share,
primary ($0.24) $0.09 ($0.22) $0.19
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Net income per common equivalent share,
fully diluted ($0.24) $0.09 ($0.22) $0.19
--------- --------- ---------- ----------
--------- --------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES:
Primary:
Weighted average number of common
shares outstanding 7,775 6,493 7,737 6,457
Common equivalent shares:
Warrants 43 40
Options 258 238
--------- --------- ---------- ----------
7,775 6,794 7,737 6,735
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Fully diluted:
Weighted average number of common
shares outstanding 7,775 6,493 7,737 6,457
Common equivalent shares:
Warrants 46 46
Options 280 280
--------- --------- ---------- ----------
7,775 6,819 7,737 6,783
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,464,376
<SECURITIES> 9,057,749
<RECEIVABLES> 8,196,495
<ALLOWANCES> 143,034
<INVENTORY> 9,449,058
<CURRENT-ASSETS> 32,989,639
<PP&E> 7,219,491
<DEPRECIATION> 3,794,736
<TOTAL-ASSETS> 36,751,651
<CURRENT-LIABILITIES> 7,298,420
<BONDS> 1,310,904
77,829
0
<COMMON> 0
<OTHER-SE> 28,064,498
<TOTAL-LIABILITY-AND-EQUITY> 36,751,651
<SALES> 21,438,494
<TOTAL-REVENUES> 21,438,494
<CGS> 12,394,042
<TOTAL-COSTS> 24,152,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (403,351)
<INCOME-PRETAX> (2,310,955)
<INCOME-TAX> (647,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,663,955)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
