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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
CARDIAC PATHWAYS CORPORATION
- --------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: N/A
(2) Aggregate number of securities to which transaction applies: N/A
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid: N/A
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: N/A
(2) Form, Schedule or Registration Statement No.: N/A
(3) Filing Party: N/A
(4) Date Filed: N/A
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Cardiac Pathways Corporation Logo
CARDIAC PATHWAYS CORPORATION
995 BENECIA AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 737-0505
November 17, 2000
Dear Stockholders:
We cordially invite you to attend the Annual Meeting of Stockholders of
Cardiac Pathways Corporation that will be held on Friday, December 15, 2000 at
12:00 p.m. local time at 995 Benecia Avenue, Sunnyvale, California.
At this year's Annual Meeting you will be asked to elect directors and
approve, among other things, a new stock option plan and increases in the number
of shares to be made available under our 1998 Employee Stock Purchase Plan. You
will also be asked to approve the issuance of up to 5,882,353 shares of common
stock to certain investors in a private financing pursuant to a common stock
purchase agreement which was signed on November 7, 2000. Your vote on these
matters is important and we appreciate your continued support.
The formal notice of the Annual Meeting and the Proxy Statement have been
made a part of this invitation.
After reading the Proxy Statement, please mark, date, sign and return, at
an early date, the enclosed proxy in the enclosed prepaid envelope, in order to
ensure that your shares will be represented. Any stockholder attending the
meeting may vote in person even if he or she has returned this proxy. YOUR
SHARES CANNOT BE VOTED UNLESS YOU SIGN, DATE AND RETURN THE ENCLOSED PROXY OR
ATTEND THE ANNUAL MEETING IN PERSON.
We have also enclosed a copy of Cardiac Pathway's 2000 Annual Report to the
Stockholders.
We look forward to seeing you at the meeting.
Sincerely Yours,
Thomas M. Prescott
Chief Executive Officer
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CARDIAC PATHWAYS CORPORATION
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 15, 2000
TO OUR STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of CARDIAC
PATHWAYS CORPORATION, a Delaware corporation, will be held on December 15, 2000
at 9:00 a.m. local time, at 995 Benecia Avenue, Sunnyvale, California 94086 for
the following purposes:
1. To elect two (2) Class II directors to serve for a three (3) year term.
2. To vote on a proposal to approve a new stock plan (the "2000 Stock
Plan") with 500,000 shares of common stock available for grant
thereunder.
3. To vote on a proposal to amend Cardiac Pathways' 1998 Employee Stock
Purchase Plan to provide for a one-time increase of 50,000 shares of
common stock in the number of shares available for grant under this plan
and to change the annual automatic increase in the number of shares of
common stock available for grant thereunder from (i) the lesser of
40,000 shares, or 1.5% of Cardiac Pathways' outstanding shares, to (ii)
the lesser of 150,000, 3.0% of Cardiac Pathways' outstanding shares, or
a lesser amount determined by the Board of Directors.
4. To vote on a proposal to approve the issue and sale to an investor group
led by Van Wagoner Capital Management of up to 5,882,353 shares of
common stock, as this issuance is in excess of 20.0% of the number of
shares of Cardiac Pathways' common stock that were outstanding on June
30, 2000.
5. To ratify the appointment of Ernst & Young LLP as independent auditors
for the fiscal year ending June 30, 2001.
6. To transact such other business as may properly come before the Annual
Meeting including any motion to adjourn to a later date to permit
further solicitation of proxies if necessary, or before any adjournment
thereof.
We describe the above items in more detail in the attached Proxy Statement
accompanying this Notice. Only stockholders who owned Cardiac Pathways stock at
the close of business on October 20, 2000 may attend and vote at the meeting.
You may view a list of the stockholders entitled to vote at the meeting during
the ten days before the meeting. The Board of Directors recommends a vote "FOR"
each of the proposals.
It is very important that your shares are represented at this meeting. Even
if you plan to attend the meeting, we hope that you will promptly mark, sign,
date and return the enclosed proxy. This will not limit your right to attend or
vote at the meeting.
By order of the Board of Directors,
William N. Starling
Chairman of the Board
Sunnyvale, California
November 17, 2000
YOUR VOTE IS IMPORTANT
IN ORDER TO ENSURE THAT YOU ARE REPRESENTED AT THE MEETING, YOU ARE REQUESTED TO
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE AND RETURN IT
IN THE ENCLOSED ENVELOPE.
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FREQUENTLY ASKED QUESTIONS
WHY IS CARDIAC PATHWAY SELLING COMMON STOCK WHICH IT MUST REGISTER WITH THE SEC?
We are selling common stock in a private placement to certain investors in
order to raise funds that we need to continue to operate and grow our business
and to successfully manufacture and market our key products. A private placement
provides Cardiac Pathways with an opportunity to secure additional financing
without delay and on terms we believe reflect the progress we have made in
building our business. Further, we believe that there would be little demand in
the public market for additional shares of our common stock. We have agreed,
however, to file a registration statement to register the common stock sold in
the private placement so that these shares may be resold in the public market by
the investors. We have agreed to these registration terms in order to negotiate
a price for the common stock sold in the financing which represents only a
modest discount to the per share trading price of our common stock.
WHY DOES CARDIAC PATHWAYS NEED ADDITIONAL FUNDING?
We are in the process of transitioning from a company focused on research
and development to a company focused on manufacturing, marketing and selling our
key products. We re-launched our Chilli catheter product line and introduced the
RPM Tracking System to the market during May 2000 and have concentrated our
efforts on increasing market penetration for these products. Because,
historically, our operations have been focused on research and development and
because we have only recently begun to see significant revenue growth, our
operations have not yet generated a sufficient amount of cash flows to fund
these operations. We also need additional funds to build the infrastructure
needed to manufacture our key products in commercial volume, build our sales
force and market and sell our key products. Because our market penetration is
still in an early stage, we anticipate that we will need extensive selling
efforts before our products gain market acceptance and that there will continue
to be a period of market education before we become profitable.
WHY AM I VOTING ON THE SALE OF THE COMMON STOCK?
You are entitled to vote on the sale of the common stock because the rules
of the Nasdaq Stock Market require us to seek the consent of our stockholders
before selling securities that equal more than 20% of our outstanding common
stock. The Company is selling almost 5.9 million shares in the private placement
and this exceeds 20% of our outstanding common stock.
WHY IS CARDIAC PATHWAYS SEEKING APPROVAL OF A NEW STOCK OPTION PLAN AND AN
INCREASE TO THE NUMBER OF SHARES AVAILABLE UNDER OUR EMPLOYEE STOCK PURCHASE
PLAN?
In order to execute our business plan, we will need to attract and retain
highly skilled research, engineering, clinical and sales and marketing
personnel. In order to attract and retain such personnel, we will need to grant
them stock options to allow them to share in any stock price appreciation to
which they contribute. Our 1991 Stock Plan will expire during our 2001 fiscal
year and needs to be replaced by a new plan. This new plan will initially have
500,000 shares of common stock available for grant to our employees, consultants
and directors. Also, in July 1999, we effected a 5 for 1 reverse split of our
common stock. Because of this reverse stock split, the previous annual increase
provisions in our Employee Stock Purchase Plan were effectively reduced,
resulting in annual increases that were insufficient to ensure that a sufficient
number of shares of common stock are reserved to meet outstanding rights granted
under the Employee Stock Purchase Plan. The increases to the Employee Stock
Option Plan that we are proposing will ensure that enough common stock is
available for grant to meet our obligations to our employees under this plan.
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CARDIAC PATHWAYS CORPORATION
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PROXY STATEMENT FOR 2000
ANNUAL MEETING OF STOCKHOLDERS
------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
Our Board of Directors is soliciting proxies for the 2000 Annual Meeting of
Stockholders to be held Friday, December 15, 2000 at 12:00 p.m. local time. The
Annual Meeting will be held at our principal executive offices which are located
at 995 Benecia Avenue, Sunnyvale, California 94086. The telephone number at that
location is (408) 737-0505.
Voting materials, which include this Proxy Statement, the Proxy Card and
the 2000 Annual Report to Stockholders were first mailed on or about November
17, 2000 to all stockholders entitled to vote at the meeting.
RECORD DATE AND PRINCIPAL SHARE OWNERSHIP
Stockholders of record at the close of business on October 20, 2000 (the
"Record Date") are entitled to notice of and to vote at the meeting. Cardiac
Pathways has one series of common shares outstanding, designated common stock,
$.001 par value. At the Record Date, 3,101,866 shares of our common stock were
issued and outstanding and held of record by 148 stockholders. In addition, at
the Record Date, 27,250 shares of Series B Convertible Preferred Stock (the
"Series B Preferred") were issued and outstanding and held of record by 8
stockholders. These shares of Series B Preferred are currently convertible into
5,450,000 shares of our common stock. We have also designated 25,000 shares of
Preferred Stock as Series A Participating Preferred Stock in connection with our
Stockholder Rights Plan and no such shares were issued or outstanding as of the
Record Date.
REVOCABILITY OF PROXIES
You may revoke your proxy and change your vote at any time before the final
vote at the Annual Meeting. You may do this by signing a new Proxy Card with a
later date or by attending the meeting and voting in person. Attending the
meeting will not revoke your proxy unless you specifically request it.
VOTING
Each share of common stock outstanding on October 20, 2000 is entitled to
one vote. Holders of shares of Series B Preferred are entitled to the number of
votes per share of common stock into which their shares of Series B Preferred
are then convertible. Currently, each share of Series B Preferred is convertible
into 200 shares of common stock. If you are voting for the election of directors
(Proposal One) you may cumulate your votes and give one candidate a number of
votes equal to (i) the number of directors to be elected, multiplied by (ii) the
number of shares that you are entitled to vote. You may also distribute your
votes, on the same principle, among as many candidates as you may select,
provided that votes cannot be cast for more than two candidates. However, you
are not entitled to cumulate votes for a candidate unless the candidate's name
has been placed in nomination prior to the voting and you have given notice,
prior to the voting, of your intention to cumulate your votes. On all other
matters you shall not be entitled to cumulative votes.
SOLICITATION OF PROXIES
Cardiac Pathways will pay the cost of this solicitation. We may reimburse
brokerage firms and other persons representing beneficial owners of our stock
for their expenses in forwarding solicitation material to
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such beneficial owners. Proxies may also be solicited by certain of our
directors, officers and regular employees, without additional compensation,
personally or by telephone or telegram.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
A majority of Cardiac Pathways' voting stock outstanding on October 20,
2000 must be present in person or by proxy in order for there to be a quorum.
Without a quorum, we cannot hold the meeting or transact business. Shares voted
"FOR" or "AGAINST" a proposal count toward establishing a quorum and also count
toward the results of the voting. An abstaining vote counts toward establishing
a quorum, but its effect on the actual vote counts differs depending on the
subject of the vote. In the election of directors, an abstaining vote is not
counted and therefore has no effect on the election; however, in a vote on any
other proposal, an abstaining vote has the effect of a vote against the
proposal. A broker non-vote counts toward establishing a quorum, but is not
included in the tabulation of any voting results and therefore does not affect
the outcome of any vote. A broker non-vote occurs when a broker holding shares
for a beneficial owner does not vote on a proposal because the broker does not
have discretionary voting power for that proposal and has not received
instructions from the beneficial owner on how to vote.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
If you want to submit a proposal to Cardiac Pathways' stockholders at next
year's annual meeting and you want the Board of Directors to consider including
your proposal in Cardiac Pathways' proxy statement for that meeting, we must
receive your proposal at our principal executive offices no later than July 20,
2001. If you simply wish to have a proposal considered for submission at next
year's annual meeting, we must receive your proposal at our executive offices no
later than the close of business on the 60th day, and not earlier than the close
of business on the 90th day, prior to the date of next year's annual meeting;
provided, however, that if less than 65 days notice or prior public disclosure
of the date of the annual meeting is given or made to stockholders, notice of
the proposal to be timely must be received no later than the 7th day following
the day on which such notice of the date of the annual meeting is mailed or
public disclosure of the meeting date is given.
MARKET FOR COMMON STOCK AND DIVIDEND POLICY
The Common Stock of the Company has been traded on the Nasdaq National
Market under the symbol CPWY since the Company's initial public offering on June
12, 1996. Prior to that time there was no public market for the Company's Common
Stock. The following table sets forth for the period indicated the high and low
sale prices of the Common Stock.
HIGH LOW
---- ---
FISCAL YEAR ENDED JUNE 30, 1999
First Quarter.............................................. $51 7/8 $19 3/8
Second Quarter............................................. $30 $17 1/2
Third Quarter.............................................. $25 5/8 $4 11/16
Fourth Quarter............................................. $ 7 13/16 $ 2 1/2
FISCAL YEAR ENDED JUNE 30, 2000
First Quarter.............................................. $ 5 $ 3/4
Second Quarter............................................. $ 9 14/16 $ 2
Third Quarter.............................................. $11 1/2 $ 3
Fourth Quarter............................................. $ 5 44/64 $ 3 3/8
FISCAL YEAR ENDED JUNE 30, 2001
First Quarter.............................................. $ 5 3/8 $ 3 29/32
Second Quarter (through November 3)........................ $ 5 $ 4 1/8
As of September 22, 2000, there were approximately 148 holders of record of
the Common Stock.
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The Company has never declared or paid cash dividends on its capital common
stock. The Company currently expects to retain its future earnings for use in
the operation and expansion of its business and does not anticipate paying any
cash dividends on common stock in the foreseeable future. As documented in the
Series B Convertible Preferred Stock Purchase Agreement, when, as and if
dividends are declared by the Board of Directors of the Company, the holders of
the Company's Series B Convertible Preferred Stock are entitled to receive
cumulative dividends at a rate per share equal to 11% per annum of the initial
purchase price of shares of Series B Convertible Preferred Stock before any
dividend or other distribution will be paid or declared and set apart for
payment on any shares of common stock or other class of stock junior to the
Series B Convertible Preferred Stock. In the event that (i) the Company has not
redeemed the Series B Convertible Preferred Stock prior to May 2004 and (ii) the
holders of Series B Convertible Preferred Stock have requested such a
redemption, the cumulative dividend will increase by six percentage points each
full year after May 2004 in which a redemption does not occur. In addition, the
affirmative vote of holders of a majority of the Series B Convertible Preferred
Stock, voting as a separate class, will be required to declare or pay any
dividends on the common stock.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Cardiac Pathways' common stock as of October 20, 2000 as to (i)
each person or entity who is known by Cardiac Pathways to own beneficially more
than 5% of the outstanding shares of Common Stock Equivalents (common stock and
Series B Preferred on an as converted basis); (ii) each director of Cardiac
Pathways; (iii) Cardiac Pathways' current Chief Executive Officer and each
executive officer of Cardiac Pathways who earned more than $100,000 during the
last fiscal year; (iv) two individuals who would have been included in (iii)
above if they had still continued to serve as executive officers at the end of
Cardiac Pathways' last fiscal year; and (v) all directors and current executive
officers of the Company as a group. Except as otherwise noted, the stockholders
named in the table have sole voting and investment power with respect to all
shares of Common Stock Equivalents shown as beneficially owned by them, subject
to applicable community property laws.
COMMON STOCK
EQUIVALENTS APPROXIMATE
BENEFICIALLY PERCENTAGE
NAME AND ADDRESS OWNED OWNED(1)
---------------- ------------ -----------
State of Wisconsin Investment Board(2)...................... 1,563,000 18.3%
P.O. Box 7842
Madison, WI 53707
BA Venture Partners(3)...................................... 2,028,000 23.7
950 Tower Lane, Suite 700
Foster City, CA 94404
Entities affiliated with Morgan Stanley..................... 2,020,000 23.6
Venture Partners(4)
221 Avenue of the Americas
New York, NY 10020
Entities affiliated with Van Wagoner........................ 1,168,500 13.7
Capital Management, Inc.(5)
One Bush Street, Suite 1150
San Francisco, CA 94104
William N. Starling(6)...................................... 138,422 1.6
Thomas M. Prescott(7)....................................... 122,244 1.4
Debras Echt................................................. 0 *
Mark J. Brooks(3)........................................... 2,028,000 23.6
M. Fazle Husain(4).......................................... 2,020,000 23.5
Jon P. Hunt................................................. 0 *
Anchie Kuo, M.D.(3)......................................... 2,028,000 23.6
Richard E. Riley(8)......................................... 77,025 *
All directors and current executive officers as a group (10
persons)(9)............................................... 4,388,191 51.3
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* Less than 1%
(1) Applicable percentage ownership is based on 8,551,866 Common Equivalent
Shares outstanding as of October 20, 2000 (consisting of 3,101,866 shares of
common stock and 27,250 shares of Series B Convertible Preferred convertible
into 5,450,000 shares of common stock), together with applicable options or
warrants for such stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission, based
on factors including voting and investment power with respect to shares
subject to the applicable community property laws. Shares of common stock
subject to options or warrants currently exercisable or exercisable within
60 days after October 20, 2000 are deemed outstanding for computing the
percentage ownership of the person holding such options, but are not deemed
outstanding for computing the percentage of any other person.
(2) The State of Wisconsin Investment Board (the "SWIB") is a government agency,
which manages public pension funds and has sole dispositive and voting power
over 351,000 shares of common stock. Also
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includes 1,200,000 shares of common stock issuable upon conversion of Series
B Convertible Preferred. Also includes 12,000 shares of common stock
issuable upon the exercise of warrants to purchase 60 shares of Series B
Preferred.
(3) Security ownership for BA Venture Partners includes 2,000,000 shares of
common stock issuable upon conversion of Series B Convertible Preferred.
Also includes 28,000 shares of Common Stock issuable upon the exercise of
warrants to purchase 140 shares of Series B Preferred.
(4) Security ownership for entities affiliated with Morgan Stanley includes
2,000,000 shares of common stock issuable upon conversion of Series B
Preferred. Also includes 20,000 shares of common stock issuable upon the
exercise of warrants to purchase 100 shares of Series B Preferred.
(5) Reflects ownership as reported on Schedule 13G filed by Van Wagoner Capital
Management on February 14, 2000. Van Wagoner Capital Management, Inc. has
sole dispositive power, and Van Wagoner Funds, Inc. has sole voting power
over, 1,168,500 shares of common stock.
(6) Consists of 61,823 shares of common stock held by the Starling Family Trust,
4,433 shares of common stock held by the Starling Irrevocable Trust and
72,166 shares of common stock which may be acquired upon exercise of stock
options exercisable within 60 days after October 20, 2000. Mr. Starling has
voting and dispositive control over all of such shares.
(7) Includes 72,244 shares of common stock which may be acquired upon exercise
of stock options exercisable within 60 days after October 20, 2000 and
50,000 shares of Common Stock issuable upon conversion of Series B
Preferred.
(8) Includes 68,002 shares of common stock which may be acquired upon exercise
of stock options exercisable within 60 days after October 20, 2000.
(9) Includes 212,412 shares of common stock which may be acquired upon exercise
of stock options exercisable within 60 days after October 20, 2000. Also,
includes 50,000 shares of Common Stock issuable upon conversion of Series B
Preferred.
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PROPOSAL ONE
ELECTION OF DIRECTORS
DIRECTORS
Cardiac Pathways Board of Directors currently has five members, divided
into three classes serving staggered terms of three years. Currently, there is
one director in Class I, two directors in Class II and two directors in Class
III. The Class II directors are to be elected at the 2000 Annual Meeting. The
Class III directors and the Class I director will be elected at the Company's
2001 and 2002 Annual Meetings of Stockholders, respectively. Unless otherwise
instructed, the proxy holders will vote the proxies received by them for the two
nominees named below, all of whom are currently directors. In the event that any
nominee is unable or declines to serve as a director at the time of the meeting,
the proxies will be voted for any nominee who shall be designated by the Board
of Directors to fill the vacancy. At this time we believe that the nominees will
be able to serve as directors and will not decline to do so. In the event that
additional persons are nominated for election as directors, the proxy holders
intend to vote all proxies received by them in such a manner as will assure the
election of at least one of the nominees listed below, and, in such event, the
specific nominee to be voted for will be determined by the proxy holders.
NOMINEES FOR CLASS II DIRECTORS
Two Class II directors are to be elected at the meeting for a three-year
term. The Board of Directors has nominated MARK J. BROOKS and M. FAZLE HUSAIN
for re-election as Class II directors. Unless otherwise instructed, the persons
named in the enclosed proxy intend to vote proxies received by them for the
re-election of Messrs Brooks and Husain. We expect Mr. Brooks and Mr. Husain to
accept their nominations. However, if any of them is unable or declines to serve
as a director at the time of the meeting, proxies will be voted for a substitute
nominee or nominees designated by the present Board of Directors. Each elected
director's term of office will continue until our 2003 annual meeting or until
the director's successor has been elected and qualified.
INFORMATION CONCERNING THE NOMINEES AND INCUMBENT DIRECTORS
Below is information on the nominees for Class II directors and on the
directors whose term continues after this year's annual meeting.
NOMINEES FOR CLASS II DIRECTORS FOR A TERM EXPIRING IN 2003
NAME AGE POSITION
---- --- --------
Mark J. Brooks................... 34 Director
M. Fazle Husain.................. 36 Director
MARK J. BROOKS has served as a Director of Cardiac Pathways since July
1999. Mr. Brooks is a general partner and managing director of BA Venture
Partners, a venture capital investment firm, where he has been employed since
June 1995. From September 1993 to July 1995, Mr. Brooks was a senior associate
at Mercer Management Consulting. Prior to that time, Mr. Brooks was a loan
officer in the Media Group of Manufacturers Hanover Trust Company. Mr. Brooks is
a member of the boards of directors of ManorHouse Retirement Centers,
LivHome.com, InPatient Management Consultants, Inc., esurg.com, Sylantro
Systems, Inc. and U.S. Healthworks, Inc.
M. FAZLE HUSAIN has served as a Director of Cardiac Pathways since July
1999. Mr. Husain is a principal of Morgan Stanley Dean Witter & Co., an
investment banking firm, where he has been employed since 1991. Mr. Husain is
also a Managing Member of Morgan Stanley Venture Partners III, L.L.C., the
General Partner of Morgan Stanley Venture Partners III, L.P., Morgan Stanley
Venture Investors III, L.P. and The Morgan Stanley Venture Partners Entrepreneur
Fund, L.P. Mr. Husain was also employed at Morgan Stanley Dean Witter from 1987
until 1989. Mr. Husain focuses on investments in the life sciences and
information technology industries, including healthcare services, medical
devices and healthcare information technology.
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Mr. Husain is also a member of the boards of directors of IntegraMed America,
Inc., AllScripts, Inc., U.S. Healthworks, Inc., MedSite, Inc., NetworkOil, Inc.,
PeopleClick.com, Inc., Health Stream, Inc., Cross Country Staffing and The
Medicines Company.
CLASS III DIRECTORS
NAME AGE POSITION
---- --- --------
Thomas M. Prescott............. 45 Chief Executive Officer, President and
Director
Anchie Kuo, M.D. .............. 40 Director
THOMAS M. PRESCOTT has served as Cardiac Pathways' President and Chief
Executive Officer since May 1999 and has been a director since June 1999. Before
joining Cardiac Pathways, Mr. Prescott was Vice President and General Manager of
a respiratory business unit of Mallinckrodt, Inc., a medical device and
pharmaceutical company, from August 1996 to May 1999. Mr. Prescott served in
other senior leadership roles at Nellcor, Inc. from April 1994 until Nellcor's
acquisition by Mallinckrodt in August 1997. Prior to that time, Mr. Prescott
served in various roles at General Electric Medical Systems and Siemens. Mr.
Prescott is a member of the board of directors of Cohesion Technologies, Inc.
ANCHIE KUO, M.D. has been a director of Cardiac Pathways since July 1999.
Dr. Kuo is a managing partner of Landbridge Capital, a venture capital
investment firm. Prior to that, Dr. Kuo was a partner of BA Venture Partners,
where he was employed since 1994. Prior to joining BA Venture Partners, Dr. Kuo
was a general partner of Ventures Medical. Dr. Kuo is also a member of the
boards of directors of Immusol, Inc., The Call Doctor Company, Inc., Knowledge
Anywhere, Inc., Jintek, Inc., Cardio Now, Inc., and Rethink, Inc.
CLASS I DIRECTOR
NAME AGE POSITION
---- --- --------
William N. Starling............ 47 Director
WILLIAM N. STARLING has been a director of Cardiac Pathways since 1991 and
from January 1992 to May 1999, Mr. Starling served as the President and Chief
Executive Officer of Cardiac Pathways. Mr. Starling currently serves as managing
general partner of Synecor, LLC, , a medical technology company, and as Chief
Executive Officer and a director of IsoStent, Inc., a medical device company.
Mr. Starling is a director of RadioTherapeutics Corporation and Xoft Microtubes.
Mr. Starling also serves on the Board of Visitors at the Keenan-Flagler Business
School of the University of North Carolina at Chapel Hill.
REQUIRED VOTE
The two nominees receiving the most affirmative votes of the shares present
or represented and entitled to vote will be elected as directors. Votes withheld
from any director are counted in order to determine whether there is a quorum,
but do not count for or against the election of any director.
THE BOARD UNANIMOUSLY RECOMMENDS VOTING "FOR" EACH OF THE NOMINEES LISTED
ABOVE.
BOARD MEETINGS AND COMMITTEES
Cardiac Pathways' Board of Directors held a total of fourteen meetings
during fiscal 2000. No current or former director attended fewer than 75% of the
meetings of the Board of Directors held during fiscal 2000. The Board of
Directors has an Audit Committee, a Compensation Committee and a Special
Financing Committee. The Board of Directors has no nominating committee or any
committee performing such functions.
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The Audit Committee, which currently consists of Messrs. Husain and Brooks,
is responsible for overseeing actions taken by independent auditors and
evaluating and reviewing Cardiac Pathways' accounting policies and its system of
internal financial controls. The Audit Committee met two times during fiscal
2000.
The Compensation Committee, which currently consists of Mr. Brooks and Dr.
Kuo, is responsible for determining salaries, incentives and other forms of
compensation for directors, officers and other employees of the Company and
administering various incentive compensation and benefit plans. The Compensation
Committee met five times during fiscal 2000.
The Special Financing Committee, which currently consists of Mr. Prescott
and Mr. Starling, reviewed the terms and conditions of the proposed common stock
financing described under Proposal Four below, approved the financing as fair to
and in the best interests of the Company and the stockholders and recommended
that the full Board of Directors approve the financing and related matters. The
Special Financing Committee met three times during fiscal 2001.
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PROPOSAL TWO
APPROVAL OF THE 2000 STOCK PLAN
This proposal is to approve a new stock option plan for Cardiac Pathways.
On August 24, 2000, the Board of Directors determined that it is was in our best
interests and in the best interests of our stockholders to adopt the 2000 Stock
Plan (the "2000 Plan") (described below). At this time, the Board of Directors
adopted the Plan and reserved Common Stock for issuance thereunder, subject to
stockholder approval, in the amount of 500,000 shares. Prior to stockholder
approval of the Plan, no options will be granted pursuant to the Plan.
The new 2000 Plan is being put forward for approval by the stockholders
because Cardiac Pathways' previous employee stock option plan (the "1991 Plan")
will expire in fiscal 2001. The 2000 Plan, like the 1991 Plan, authorizes the
Board of Directors to grant incentive and non-statutory stock options to
employees, officers, consultants and directors of the Company on the terms and
subject to the conditions outlined in the description of the plan provided
below. The 2000 Plan enables the Board of Directors to create equity incentives
to help Cardiac Pathways attract, retain and motivate the best available talent
for the successful conduct of our business and the Board is recommending that
stockholders approve this plan because it will meet the purpose of enabling
Cardiac Pathways to attract and retain the necessary talent to execute on its
business objectives.
DESCRIPTION OF THE 2000 STOCK PLAN
General. The purpose of the 2000 Plan is to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to officers and other employees and consultants and to
promote the success of our business. Options granted under the Plan may be
either "incentive stock options" or nonstatutory stock options. Stock purchase
rights may also be granted under the Plan.
Administration. The Plan may generally be administered by the Board or a
Committee appointed by the Board (as applicable, the "Administrator"). The
Administrator may make any determinations deemed necessary or advisable for the
Plan.
Eligibility. Nonstatutory stock options and stock purchase rights may be
granted under the Plan to employees, directors and consultants. Incentive stock
options may be granted only to employees. The Administrator, in its discretion,
selects the employees, directors and consultants to whom options and stock
purchase rights may be granted, the time or times at which such options and
stock purchase rights shall be granted, and the exercise price and number of
shares subject to each such grant.
Limitations. Section 162(m) of the Internal Revenue Code (the "Code")
places limits on the deductibility for federal income tax purposes of
compensation paid to certain executive officers. In order to preserve our
ability to deduct the compensation income associated with options granted to
such persons, the Plan provides that no employee may be granted, in any fiscal
year, options and stock purchase rights to purchase more than 200,000 shares of
common stock. Notwithstanding this limit, however, in connection with such
individual's initial employment, he or she may be granted options and stock
purchase rights to purchase up to an additional 200,000 shares of common stock.
Terms and Conditions of Options. Each option is evidenced by a stock option
agreement between Cardiac Pathways and the optionee, and is subject to the
following terms and conditions:
(a) Exercise Price. The Administrator determines the exercise price of
options at the time the options are granted; provided, however, that the
exercise price of a stock option may not be less than 100% of the fair
market value of the common stock on the date such option is granted. The
exercise price of an incentive stock option granted to a 10% shareholder
may not be less than 110% of the fair market value on the date such option
is granted. The fair market value of the common stock is generally
determined with reference to the closing sale price for the common stock
(or the closing bid if no sales were reported) on the last market trading
day prior to the date the option is granted.
(b) Exercise of Option; Form of Consideration. The Administrator
determines when options become exercisable, and may in its discretion,
accelerate the vesting of any outstanding option. The
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means of payment for shares issued upon exercise of an option is specified
in each option agreement. The Plan permits payment to be made by cash,
check, promissory note, other shares of common stock of the Company (with
some restrictions), cashless exercises, any other form of consideration
permitted by applicable law, or any combination thereof.
(c) Term of Option. The term of an incentive stock option may be no
more than ten (10) years from the date of grant; provided, however, that in
the case of an incentive stock option granted to a 10% shareholder, the
term of the option may be no more than five (5) years from the date of
grant. No option may be exercised after the expiration of its term.
(d) Termination of Service. If an optionee's service relationship
terminates for any reason (excluding death or disability), then the
optionee generally may exercise the option within three months of such
termination to the extent that the option is vested on the date of
termination, (but in no event later than the expiration of the term of such
option as set forth in the option agreement). If an optionee's service
relationship terminates due to the optionee's disability, the optionee
generally may exercise the option, to the extent the option was vested on
the date of termination, within twelve (12) months from the date of such
termination. If an optionee's service relationship terminates due to the
optionee's death, the optionee's estate or the person who acquires the
right to exercise the option by bequest or inheritance generally may
exercise the option, to the extent the option was vested on the date of
death, within twelve (12) months from the date of such termination.
(e) Nontransferability of Options. Unless otherwise determined by the
Administrator, options granted under the Plan are not transferable other
than by will or the laws of descent and distribution, and may be exercised
during the optionee's lifetime only by the optionee.
(f) Other Provisions. The stock option agreement may contain other
terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Administrator.
Stock Purchase Rights. In the case of stock purchase rights, unless the
Administrator determines otherwise, the restricted stock purchase agreement
shall grant Cardiac Pathways a repurchase option exercisable upon the voluntary
or involuntary termination of the purchaser's employment for any reason
(including death or disability). The purchase price for shares repurchased
pursuant to the restricted stock purchase agreement shall be the original price
paid by the purchaser and may be paid by cancellation of any indebtedness owed
by us to the purchaser. The repurchase option shall lapse at a rate determined
by the Administrator.
Adjustments Upon Changes in Capitalization. In the event that our stock
changes by reason of any stock split, reverse stock split, stock dividend,
combination, reclassification or other similar change in our capital structure
effected without the receipt of consideration, appropriate adjustments shall be
made in the number and class of shares of stock subject to the Plan, the number
and class of shares of stock subject to any option or stock purchase right
outstanding under the Plan, and the exercise price of any such outstanding
option or stock purchase right.
In the event of a liquidation or dissolution, any unexercised options or
stock purchase rights will terminate. The Administrator may, in its sole
discretion, provide that each optionee shall have the right to exercise all or
any part of the option or stock purchase right, including shares as to which the
option or stock purchase right would not otherwise be exercisable.
In the event of a merger of Cardiac Pathways with or into another
corporation or the sale of all or substantially all of the assets of Cardiac
Pathways, each outstanding option and stock purchase right shall be assumed or
an equivalent option or right substituted by the successor corporation. If the
successor corporation refuses to assume the options and stock purchase rights or
to substitute substantially equivalent options or rights, the optionee shall
have the right to exercise the option or stock purchase right as to all the
optioned stock, including shares not otherwise vested or exercisable. In such
event, the Administrator shall notify the optionee that the option or stock
purchase right is fully exercisable for fifteen (15) days from the date of such
notice and that the option or stock purchase right terminates upon expiration of
such period.
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Amendment and Termination of the Plan. The Board may amend, alter, suspend
or terminate the Plan, or any part thereof, at any time and for any reason.
However, Cardiac Pathways shall obtain stockholder approval for any amendment to
the Plan to the extent necessary and desirable to comply with applicable law. No
such action by the Board or stockholders may alter or impair any option or stock
purchase right previously granted under the Plan without the written consent of
the optionee. Unless terminated earlier, the Plan shall terminate ten years from
the date the Plan was adopted by the Board.
FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. An optionee who is granted an incentive stock
option does not recognize taxable income at the time the option is granted or
upon its exercise, although the exercise is an adjustment item for alternative
minimum tax purposes and may subject the optionee to the alternative minimum
tax. Upon a disposition of the shares more than two years after grant of the
option and one year after exercise of the option, any gain or loss is treated as
long-term capital gain or loss. Net capital gains on shares held more than
twelve (12) months may be taxed at a maximum federal rate of 20%. Capital losses
are allowed in full against capital gains and up to $3,000 against other income.
If these holding periods are not satisfied, the optionee recognizes ordinary
income at the time of disposition equal to the difference between the exercise
price and the lower of (i) the fair market value of the shares at the date of
the option exercise or (ii) the sale price of the shares. Any gain or loss
recognized on such a premature disposition of the shares in excess of the amount
treated as ordinary income is treated as long-term or short-term capital gain or
loss, depending on the holding period. A different rule for measuring ordinary
income upon such a premature disposition may apply if the optionee is also an
officer, director, or 10% shareholder of the Company. Unless limited by Section
162(m) of the Code, Cardiac Pathways is entitled to a deduction in the same
amount as the ordinary income recognized by the optionee.
Nonstatutory Stock Options. An optionee does not recognize any taxable
income at the time he or she is granted a nonstatutory stock option. Upon
exercise, the optionee recognizes taxable income generally measured by the
excess of the then fair market value of the shares over the exercise price. Any
taxable income recognized in connection with an option exercise by an employee
is subject to tax withholding. Unless limited by Section 162(m) of the Code,
Cardiac Pathways is entitled to a deduction in the same amount as the ordinary
income recognized by the optionee. Upon a disposition of such shares by the
optionee, any difference between the sale price and the optionee's exercise
price, to the extent not recognized as taxable income as provided above, is
treated as long-term or short-term capital gain or loss, depending on the
holding period. Net capital gains on shares held more than twelve (12) months
may be taxed at a maximum federal rate of 20%. Capital losses are allowed in
full against capital gains and up to $3,000 against other income.
Stock Purchase Rights. Stock purchase rights will generally be taxed in the
same manner as nonstatutory stock options. However, restricted stock is subject
to a "substantial risk of forfeiture" within the meaning of Section 83 of the
Code, because Cardiac Pathways may repurchase the stock when the purchaser
ceases to provide services. As a result of this substantial risk of forfeiture,
the purchaser will not recognize ordinary income at the time of purchase.
Instead, the purchaser will recognize ordinary income on the dates when the
stock is no longer subject to a substantial risk of forfeiture (i.e., when
Cardiac Pathways' right of repurchase lapses). The purchaser's ordinary income
is measured as the difference between the purchase price and the fair market
value of the stock on the date the stock is no longer subject to right of
repurchase.
The purchaser may accelerate to the date of purchase his or her recognition
of ordinary income, if any, and begin his or her capital gains holding period by
timely filing (i.e., within thirty days of purchase), an election pursuant to
Section 83(b) of the Code. In such event, the ordinary income recognized, if
any, is measured as the difference between the purchase price and the fair
market value of the stock on the date of purchase, and the capital gain holding
period commences on such date. The ordinary income recognized by a purchaser who
is an employee will be subject to tax withholding. Different rules may apply if
the purchaser is also an officer, director, or 10% shareholder of Cardiac
Pathways.
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THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
WITH RESPECT TO THE GRANT AND EXERCISE OF OPTIONS UNDER THE PLAN. IT DOES NOT
PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF THE
EMPLOYEE'S OR CONSULTANT'S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF ANY
MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE EMPLOYEE OR CONSULTANT MAY
RESIDE.
REQUIRED VOTE
The affirmative vote of the holders of a majority of Cardiac Pathways'
voting stock present at the annual meeting in person or by proxy and entitled to
vote is required to approve the 2000 Plan.
THE BOARD UNANIMOUSLY RECOMMENDS VOTING "FOR" THE ADOPTION OF THE 2000
STOCK PLAN AND THE RESERVATION OF 500,000 SHARES FOR ISSUANCE THEREUNDER.
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PROPOSAL THREE
AMENDMENT OF 1998 EMPLOYEE STOCK PURCHASE PLAN
This proposal is to approve certain amendments to the 1998 Employee Stock
Purchase Plan. On October 18, 2000, the Board of Directors approved an amendment
to Cardiac Pathways' 1998 Employee Stock Purchase Plan ("Employee Plan") which
is subject to the approval of the stockholders at the annual meeting. Currently,
the Employee Plan provides for an annual increase of the number of shares
reserved for sale thereunder by the lesser of (A) 40,000 shares and (B) 1.5% of
Cardiac Pathways outstanding common stock. The amendment would provide for a
one-time increase of 50,000 shares to the amount of shares reserved for issuance
under the Employee Plan and would modify the annual increase provision so that
the Employee Plan would now provide for an annual increase on the first day of
each fiscal year equal to the lesser of (i) 150,000 shares, (ii) 3.0% of the
outstanding shares on such date or (iii) a lesser amount determined by the
Board.
In July 1999, the Company effected a 5 for 1 reverse split of its common
stock. Because of this reverse stock split, the previous annual increase
provisions in the Employee Plan outlined above were effectively reduced,
resulting in annual increases that were insufficient to ensure that a sufficient
number of shares of common stock were reserved to meet outstanding rights
granted the Employee Plan. The Board of Directors approved a one-time increase
in the amount of shares reserved for issuance under the Employee Plan in order
to meet the Company's current obligations under the Employee Plan for the
current fiscal year. The Board also established the revised share thresholds for
annual increases, reflected in the amendments described above, based on current
forecasts for share requirements under the Employee Plan. Because the number of
shares actually purchased under the Employee Plan will depend on a number of
factors outside the control of Cardiac Pathways and may be less than those
anticipated by these amendments, the Board has also retained the right to fix
the annual increase at a lesser number of shares than otherwise established if,
in its discretion, such increase is aggressive relative to the forecasts then
available to Cardiac Pathways. The Board's objective in adopting these
amendments to the Employee Plan is to avoid the adverse accounting consequences
that could result if the number of shares reserved under an employee stock
purchase plan prove to be insufficient at the end of an offering period to cover
the then outstanding rights under such a plan.
The essential terms of the Employee Plan are summarized as follows:
DESCRIPTION OF THE EMPLOYEE PLAN
General. The purpose of the Employee Plan is to provide employees with an
opportunity to purchase common stock through accumulated payroll deductions.
Administration. The Employee Plan may be administered by the Board of
Directors or a committee appointed by the Board of Directors. All questions of
interpretation or application of the Employee Plan are determined by the Board
of Directors or its appointed committee, and its decisions are final, conclusive
and binding upon all participants.
Eligibility. Each employee (including officers), whose customary employment
with Cardiac Pathways is at least 20 hours per week and more than five months in
any calendar year, is eligible to participate in an Offering Period (as defined
below); provided, however, that no employee shall be granted an option under the
Employee Plan (i) to the extent that, immediately after the grant, such employee
would own capital stock and/or hold outstanding options to purchase such stock
representing five percent or more of the voting power or value of the stock of
Cardiac Pathways, or (ii) to the extent that his or her rights to purchase stock
under all employee stock Employee Plans of Cardiac Pathways' accrue at a rate
which exceeds $25,000 worth of stock (determined at the fair market value of the
shares at the time such option is granted) for each calendar year. Eligible
employees become participants in the Employee Plan by filing with Cardiac
Pathways a subscription agreement authorizing payroll deductions prior to the
beginning of each Offering Period unless a later time for filing the
subscription agreement has been set by the Board.
Participation in an Offering. The Employee Plan is implemented by
consecutive overlapping offering periods lasting for 24 months (an "Offering
Period"), with a new Offering Period commencing on the first
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trading day on or after May 1 and November 1 of each year; provided, however
that the first Offering Period under the Employee Plan shall commence on
December 1, 1998 and end on October 31, 2000. Common stock may be purchased
under the Employee Plan every six months (a "Purchase Period"), unless the
participant withdraws or terminates employment earlier. To the extent the fair
market value of the common stock on any exercise date in an Offering Period is
lower than the fair market value of the common stock on the first day of the
Offering Period, then all participants in such Offering Period will be
automatically withdrawn from such Offering Period immediately after the exercise
of their options on such exercise date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof. The Board of
Directors may change the duration of the Employee Periods or the length or date
of commencement of an Offering Period. To participate in the Employee Plan, each
eligible employee must authorize payroll deductions pursuant to the Employee
Plan. Such payroll deductions may not exceed 15% of a participant's
compensation. Compensation is defined as base straight time gross earnings,
sales commissions, bonuses, incentive compensation and payments for overtime and
shift premiums. Once an employee becomes a participant in the Employee Plan, the
employee will automatically participate in each successive Offering Period until
such time as the employee withdraws from the Employee Plan or the employee's
employment with the Company terminates. At the beginning of each Offering
Period, each participant is automatically granted options to purchase shares of
common stock. The option expires at the end of the Employee Period or upon
termination of employment, whichever is earlier, but is exercised at the end of
each Employee Period to the extent of the payroll deductions accumulated during
such Employee Period. The number of shares subject to the option may not exceed
5,000 shares of the common stock in each Employee Period.
Purchase Price, Shares Purchased. Shares of common stock may be purchased
under the Purchase Plan at a price not less than 85% of the lesser of the fair
market value of the common stock on the last market trading day prior to (i) the
first day of the Offering Period or (ii) the last day of Purchase Period;
provided, however, that under certain circumstances, the Purchase Price may be
adjusted to a price not less than 85% of the lesser of the fair market value of
the common stock on (i) the date the stockholders approve an increase in shares
reserved for issuance under the Employee Plan or (ii) the last day of the
Purchase Period. The "fair market value" of the common stock on any relevant
date will be the closing price per share as reported on The Nasdaq National
Market (or the mean of the closing bid and asked prices, if no sales were
reported) as quoted on such exchange or reported in The Wall Street Journal. The
number of shares of common stock a participant purchases in each Purchase Period
is determined by dividing the total amount of payroll deductions withheld from
the participant's compensation during that Purchase Period by the Purchase
Price.
Termination of Employment. Termination of a participant's employment for
any reason, including disability or death, or the failure of the participant to
remain in the continuous scheduled employ of Cardiac Pathways for at least 20
hours per week, cancels his or her option and participation in the Employee Plan
immediately. In such event, the payroll deductions credited to the participant's
account will be returned to him or her or, in the case of death, to the person
or persons entitled thereto as provided in the Employee Plan.
Adjustment Upon Change in Capitalization. In the event that the Cardiac
Pathways' common stock is changed by reason of any stock split, reverse stock
split, stock dividend, combination, reclassification or other change in the
capital structure of Cardiac Pathways affected without the receipt of
consideration, appropriate proportional adjustments shall be made in the number
and class of shares of stock subject to the Employee Plan, the number and class
of shares of stock subject to options outstanding under the Employee Plan and
the exercise price of any such outstanding options. Any such adjustment shall be
made by the Board of Directors, whose determination shall be conclusive.
Dissolution or Liquidation. In the event of a proposed dissolution or
liquidation, the Offering Period then in progress will be shortened and a new
exercise date will be set.
Merger or Asset Sale. In the event of a merger of Cardiac Pathways with or
into another corporation or a sale of substantially all of Cardiac Pathways
assets, each outstanding option may be assumed or substituted by the successor
corporation. If the successor corporation refuses to assume or substitute the
outstanding options, the Offering Period then in progress will be shortened and
a new exercise date will be set.
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Amendment and Termination of the Plan. The Board of Directors may at any
time terminate or amend the Employee Plan. An Offering Period may be terminated
by the Board of Directors at the end of any Purchase Period if the Board
determines that termination of the Employee Plan is in the best interests of
Cardiac Pathways and its stockholders. No amendment shall be effective unless it
is approved by the holders of a majority of the votes cast at a duly held
stockholders' meeting, if such amendment would require shareholder approval in
order to comply with Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"). The Employee Plan will terminate in August 2008.
Withdrawal. Generally, a participant may withdraw from an Offering Period
at any time without affecting his or her eligibility to participate in future
Offering Periods. However, once a participant withdraws from a particular
offering, that participant may not participate again in the same offering.
Federal Tax Information for Employee Plan. The Employee Plan, and the right
of participants to make purchases thereunder, is intended to qualify under the
provisions of Sections 421 and 423 of the Code. Under these provisions, no
income will be taxable to a participant until the shares purchased under the
Employee Plan are sold or otherwise disposed of. Upon sale or other disposition
of the shares, the participant will generally be subject to tax and the amount
of the tax will depend upon the holding period. If the shares are sold or
otherwise disposed of more than two years from the first day of the Offering
Period or more than one year from the date of transfer of the stock to the
participant, then the participant will recognize ordinary income measured as the
lesser of (i) the excess of the fair market value of the shares at the time of
such sale or disposition over the Employee Price, or (ii) an amount equal to 15%
of the fair market value of the shares as of the first day of the Offering
Period. Any additional gain will be treated as long-term capital gain. If the
shares are sold or otherwise disposed of before the expiration of this holding
period, the participant will recognize ordinary income generally measured as the
excess of the fair market value of the shares on the date the shares are
purchased over the Employee Price. Any additional gain or loss on such sale or
disposition will be long-term or short-term capital gain or loss, depending on
the holding period. Cardiac Pathways is not entitled to a deduction for amounts
taxed as ordinary income or capital gain to a participant except to the extent
ordinary income is recognized by participants upon a sale or disposition of
shares prior to the expiration of the holding periods described above.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE PARTICIPANT AND CARDIAC PATHWAYS WITH RESPECT TO THE SHARES PURCHASED
UNDER THE EMPLOYEE PLAN. REFERENCE SHOULD BE MADE TO THE APPLICABLE PROVISIONS
OF THE CODE. IN ADDITION, THE SUMMARY DOES NOT DISCUSS THE TAX CONSEQUENCES OF A
PARTICIPANT'S DEATH OR THE INCOME TAX LAWS OF ANY STATE OR FOREIGN COUNTRY IN
WHICH THE PARTICIPANT MAY RESIDE.
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PARTICIPATION IN THE EMPLOYEE PLAN
Participation in the Employee Plan is voluntary and is dependent on each
eligible employee's election to participate and his or her determination as to
the level of payroll deductions. Accordingly, future purchases under the
Employee Plan are not determinable. Nonemployee directors are not eligible to
participate in the Employee Plan.
The following table sets forth certain information regarding shares
purchased during the fiscal year ended June 30, 2000 by each of the executive
officers, all current executive officers as a group, all nonemployee directors
as a group and all other employees who participated in the Employee Plan as a
group:
NUMBER OF
SHARES DOLLAR
NAME OF INDIVIDUAL OR IDENTITY OF GROUP AND POSITION PURCHASED(#) VALUE($)(1)
---------------------------------------------------- ------------ -----------
Thomas M. Prescott, President and Chief Executive Officer... -- $ --
Eldon M. Bullington, Vice President, Finance and Chief
Financial Officer......................................... -- --
Richard E. Riley, Executive Vice President, Research and
Development............................................... 784 1,464
Michael N. Forrest, Vice-President, Human Resources......... -- --
Sandra L. Miller, Vice-President, Operations................ -- --
Robert K. Weigle, Vice-President, Worldwide Sales and
Marketing................................................. -- --
All executive officers as a group (6 persons)............... 784 1,464
All nonemployee directors................................... * *
All other employees as a group.............................. 36,014 67,369
- ---------------
* Not eligible to participate in the Purchase Plan.
(1) Market value of shares on date of purchase minus the purchase price under
the Purchase Plan.
VOTE REQUIRED
The affirmative vote of the holders of a majority of Cardiac Pathways'
voting stock present at the annual meeting in person or by proxy and entitled to
vote is required to approved the proposed amendment of the Employee Plan.
THE BOARD RECOMMENDS A VOTE "FOR" THE AMENDMENT TO THE
EMPLOYEE PLAN.
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PROPOSAL FOUR
APPROVAL OF ISSUANCE OF COMMON STOCK TO CERTAIN INVESTORS
This proposal is to approve the issuance of common stock to certain
investors in Cardiac Pathways. On November 3, 2000, the Board of Directors
approved the issue and sale of up to 5,882,353 shares of the Company's common
stock to certain investors on the terms and subject to the conditions described
below at a purchase price of $4.25 per share. The amount of new shares to be
issued is in excess of 20% of the outstanding common stock of Cardiac Pathways
and, as a result, in accordance with the requirements of the Nasdaq Stock
Market, Cardiac Pathways must obtain stockholder approval for the financing.
BACKGROUND TO THE FINANCING
Cardiac Pathways was founded in 1991 and, until recently, has engaged
primarily in researching, developing, testing and obtaining regulatory
clearances for its products. We have experienced significant operating losses
since inception. As of September 30, 2000, Cardiac Pathways had an accumulated
deficit of approximately $99.2 million.
In July 1999, Cardiac Pathways, faced with the need for an infusion of
additional capital in order to avoid bankruptcy, completed a financing with a
group of investors led by BankAmerica Ventures and Morgan Stanley Dean Witter
Venture Partners which raised almost $32 million. This financing was extremely
dilutive to our then existing shareholders but enabled us to avoid bankruptcy
and gave us the capital we needed to begin transitioning the Company from one
focused on research and development around multiple technologies to a more
balanced business that is committed to the commercial success of our key
products, the Chilli Cooled Ablation Catheter and the RPM Tracking System. For
more details on the terms of the Series B Convertible Preferred Stock sold
pursuant to this financing, please see "Description of Capital Stock".
In June 2000, we realized that in order to continue to follow through on
our business plan and build the infrastructure we need to market and sell our
key products, we would need to raise additional capital in the next 8 to 12
months. We therefore began exploring the strategic alternatives available to us,
including raising additional capital through private and public equity
financings. We explored the possibility of raising needed capital through a
public offering. Unfortunately, discussions with potential investment bankers
indicated that a public offering by an early stage medical device company would
be difficult to complete given prevailing market conditions. Our management also
sought discussions with several third parties regarding a potential private
placement in order to raise the needed capital. We also explored the possibility
of selling Cardiac Pathways.
In July 2000, we engaged the services of Dain Rauscher Wessels, as
financial advisor, to assist us in analyzing the strategic alternatives
available to the Company. On July 20, 2000, Cardiac Pathways executed an
engagement letter pursuant to which Dain Rauscher Wessells was formally
retained. From July 2000 through September 2000, Dain Rauscher Wessells and our
management actively solicited third parties with respect to a possible
investment transaction with the Company and met with potential investors. The
Board of Directors also appointed a Special Financing Committee to review the
terms and conditions of any proposed financing transaction. During this time
period, our Board of Directors and the Special Financing Committee received
reports from management regarding the results of these efforts.
THE PROPOSED FINANCING
After management and our financial advisors met with several potential
investors, it became clear to us and our financial advisors that the best
possible terms for a private placement were being offered by a group of existing
shareholders of the Company led by Van Wagoner Capital Management. On November
7, 2000, we signed a definitive common stock purchase agreement with Van Wagoner
Capital Management, BA Venture Partners, Morgan Stanley Dean Witter Venture
Partners, State of Wisconsin Investment Board, Special Situations Fund and
certain other investors (including Trellis Health Ventures, Pogue Capital
Management and Thomas Fogarty) for the sale of 5,882,353 shares of common stock
at a per share price of $4.25 for aggregate net proceeds of $22.5 million. The
per share purchase price of $4.25 represents an approximate
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discount of 9.2% from the thirty-day average of our stock price for the period
ending November 6, 2000 and a discount of 0.7% from our closing stock price on
November 6, 2000. Each of the proposed investors is an existing stockholder of
the Company, with the exception of Pogue Capital Management. The Company has
also entered into a Registration Rights Agreement with the investors in the
financing which requires the Company to file within 30 days of the closing, a
registration statement registering for resale the common stock sold in the
financing. We anticipate we will file such registration statement shortly after
the 2000 Annual Meeting, provided the shareholders approve the transaction. In
the event the registration statement for the common stock is not effective
within 70 days of the closing, Cardiac Pathways will be required to issue
warrants to the investors.
In connection with considering a possible private placement, the Board
established a Special Financing Committee, composed of directors Prescott and
Starling, to review and consider the terms of any proposed investment in the
Company, to approve the terms and conditions of any proposed financing and to
provide a recommendation to the Board. On November 2, 2000, our Special
Financing Committee met with management, our financial advisors and legal
counsel to consider the terms and conditions of the proposed financing
transaction. At this time, our financial advisors reviewed standard market terms
for this kind of financing for companies similarly situated to Cardiac Pathways
and reviewed the terms and conditions of this financing with the Committee.
After considering the proposal and the factors outlined below the Committee
approved the financing and recommended to the Board of Directors that they
accept the terms of the financing. On November 3, 2000, on the recommendation of
the Special Financing Committee, the Board of Directors authorized the execution
of the stock purchase agreement, the registration rights agreement and the issue
of up to 5,882,353 shares of common stock to the investors in the financing,
subject to approval by our shareholders. If the financing does not close,
Cardiac Pathways will not have sufficient resources to continue our operations
for more than eight months in the absence of an alternative transaction. We do
not believe that any funds would be available for our stockholders in the event
Cardiac Pathways ceased operations and was liquidated.
REASONS FOR THE FINANCING
FACTORS WEIGHING IN FAVOR OF THE FINANCING
The terms of this financing, which were negotiated at arm's length with the
investors listed above, provide for a common share financing at a price which
represents only a modest discount to the current market price of our common
stock.
A common stock financing is a clean investment structure which allows us to
raise capital without forcing us to issue and sell securities with significant
preferences over our common stock. Given Cardiac Pathways' complicated capital
structure, the Board believed that a common stock financing provided the best
means to raise needed capital.
The major investors in this financing, who are all current shareholders of
Cardiac Pathways, were familiar with the Company, its business plan and its
progress to date. The Board believed that it would require a substantial
investment of time and resources on the part of management to familiarize
outside investors with Cardiac Pathways to a point where they would be willing
to agree to terms similar to those agreed to in this financing.
The Board believes in the growth potential of our key products and are
encouraged by our success to date in generating revenue and the growing market
acceptance of our products.
The requirement that the Company have a registration statement effective
with the SEC within 70 days for the common stock sold in the financing is an
acceptable condition given the fact that we were able to negotiate for a share
price which was close to the current market value of our publicly traded stock.
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The effect on Cardiac Pathways of the deteriorating financing opportunities
for development stage medical device companies. This situation, as well as
Cardiac Pathways' cash position, made it necessary for us to complete a
transaction that would provide liquidity before June 2001.
The anticipated qualification by Cardiac Pathways' auditors of the
certification of Cardiac Pathways' financial statements for the period ended
June 30, 2001 by noting "substantial doubt about its ability to continue as a
going concern," thereby decreasing Cardiac Pathways' other financing
alternatives.
The absence of any offers from any other third parties regarding a possible
acquisition of Cardiac Pathways' assets or a possible merger with Cardiac
Pathways which we believe offers our stockholders a fair return on their
investment.
The anticipated positive effects upon Cardiac Pathways' balance sheet and
results of operations from the use of the net proceeds of the financing to
expand Cardiac Pathways' ability to manufacture and market its key products and
continue to deliver on its business plans.
The Board's belief that Cardiac Pathways is well positioned to contribute
and engage in the several growing segments of the medical device industry.
FACTORS WEIGHING AGAINST THE FINANCING
The risks associated with the fact that Cardiac Pathways has to date
demonstrated only limited ability to commercialize any of its products.
The risks associated with the adoption of Cardiac Pathways products by
electrophysiologists and the availability of third party payor reimbursements
for such products.
The terms of the financing require us to sell common stock at a discount to
its current market price.
The terms of the financing require us to issue warrants to investors in the
event we fail to have the registration statement for the common stock declared
effective within 70 days of closing.
Considering all of the above factors, the Board of Directors concluded the
infusion of cash provided by the financing will give Cardiac Pathways the
resources needed to build the infrastructure needed to manufacture our key
products in commercial volume, build our sales force and market and sell our key
products, the Chilli Cooled Ablation Catheter and the RPM Tracking System. The
Board, based on all the above factors, determined that the financing was fair
and reasonable to Cardiac Pathways' and its stockholders. The board did not
assign a weight to the individual factors considered in evaluating the
financing. The board did not perform any material financial analyses. The board
also considered a liquidation sale of assets, but determined that the financing
would result in higher stockholder value. The value of Cardiac Pathways'
significant intellectual property, its success to date in generating and growing
revenue and its seasoned engineering team would not be realized in a
liquidation. The board believes that with the cash to be obtained from the
financing, Cardiac Pathways will be better positioned to continue delivering on
its business plan and to manufacture, market and sell next generation products,
thereby increasing revenues from these products.
TERMS OF THE FINANCING
OVERVIEW
THE STOCK PURCHASE AGREEMENT
The Stock Purchase Agreement provides for the issuance of up to 5,882,353
shares of common stock at a per share purchase price of $4.25. The closing of
the financing will occur within five days of receiving stockholder approval for
the issuance of the shares of the common stock. The Stock Purchase Agreement
provides that the Company cannot, within 90 days of the closing, issue and sell
additional shares of common stock at a price per share of less than $4.25
without refunding to the investors in the financing the difference between the
purchase price they paid and the price per share of common stock they would have
paid had the
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shares been sold at the effective price for these shares in the subsequent
offering. In addition to receiving stockholder approval, the closing of the
financing is also subject to other conditions including:
- The execution of the Registration Rights Agreement
- Satisfaction of the stockholder approval requirements of the Nasdaq Stock
Market in connection with the issuance of 20% or more of Cardiac
Pathways' common stock
- Receipt of approval by the holders of a majority of Cardiac Pathways'
Series B Convertible Preferred Stock
- All waiting periods, if any, under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 relating to the financing have expired or have
been terminated early
- No material adverse change in our financial condition since the date of
our Annual Report on Form 10-K for the fiscal year ended June 30, 2000.
THE REGISTRATION RIGHTS AGREEMENT
The Registration Rights Agreement provides that we will prepare and file
with the SEC, within 30 days of the closing, a registration statement on Form
S-3 for the purpose of registering under the Securities Act of 1933 (the
"Securities Act") all of the common stock sold in the financing. Cardiac
Pathways will be required to keep this registration statement effective for two
years unless (i) the investors have sold all the common stock registered
thereunder, or (ii) the investors can sell all the common stock of Cardiac
Pathways purchased by them in the financing within a three month period pursuant
to Rule 144 under the Securities Act without volume limitation. This agreement
also provides that:
- In the event we fail to file a registration statement within 30 days of
the closing, Cardiac Pathway's will issue to each investor in the
financing a warrant to purchase our common stock. The warrant will
provide that the investor will be entitled to acquire 3% of the common
stock purchased by it in the closing at an exercise price of $4.25 per
share. We will be required to issue a warrant on these same terms to the
investors for every 30 day period that passes before we file a
registration statement.
- In the event the registration statement is not declared effective by the
SEC within 70 days of the closing, Cardiac Pathway's will issue to each
investor in the financing a warrant to purchase our common stock. The
warrant will provide that the investor will be entitled to acquire 3% of
the common stock purchased by it in the closing at an exercise price of
$4.25 per share. We will required to issue a warrant on these same terms
to the investors for every 30 day period that passes before the
registration statement is declared effective.
- In the event the Company proposes to register any of its common stock
under the Securities Act after the end of the two year period during
which the registration statement described above was effective, the
Company will be required to use its reasonable efforts to include in the
registration statement those shares of common stock acquired in the
financing which the investors request the Company include.
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INTERESTS OF OUR OFFICERS, DIRECTORS AND STOCKHOLDERS IN THE FINANCING
The table below indicates the investors in the financing.
AGGREGATE
INVESTOR SHARES INVESTMENT
-------- --------- -----------
Funds affiliated with Van Wagoner Capital Management........ 3,529,412 $15,000,000
Funds affiliated with BankAmerica Ventures(1)............... 588,235 2,500,000
Funds affiliated with Morgan Stanley Dean Witter Venture
Partners(2)............................................... 588,235 2,500,000
State of Wisconsin Investment Board......................... 588,235 2,500,000
Special Situation Funds..................................... 470,588 2,000,000
Pogue Capital Management.................................... 47,059 200,000
Thomas J. Fogarty, M.D. .................................... 23,259 100,000
Trellis Health Ventures, L.P. .............................. 23,259 100,000
--------- -----------
5,858,823 $24,900,000
========= ===========
- ---------------
(1) Bank of America Ventures has nominated Mark J. Brooks and Archie Kuo, M.D.
as members of the Cardiac Pathways Board of Directors. Mr. Brooks is a
general partner and managing director of BA Venture Partners.
(2) Morgan Stanley Dean Witter Venture Partners has nominated M. Fazle Husain as
a member of the Cardiac Pathways Board of Directors. Mr. Husain is a
principal of Morgan Stanley Dean Witter & Co and a managing member and/or
general partner of various investment funds affiliated with Morgan Stanley
Dean Witter Venture Partners.
Each of the investors in the financing is a current shareholder of the
Company with the exception of Pogue Capital Management. The four largest
investors in the financing, Van Wagoner Capital Management, BA Venture Partners,
Morgan Stanley Dean Witter Venture Partners and State of Wisconsin Investment
Board, currently hold approximately 78 percent of our voting stock. In addition,
pursuant to our Certificate of Incorporation and agreements with the holders of
Series B Convertible Preferred Stock, the holders of Series B Preferred control
three of the five seats (60%) on the Board. The members of the Board of
Directors include Mark J. Brooks, Archie Y. Kuo, M.D. and M. Fazle Husain, all
nominees of the holders of Series B Preferred. Investment funds affiliated with
these three directors are participating in the financing as indicated in the
table above.
The terms of the Series B Preferred provide that the current holders of the
Series B Preferred will be entitled to adjustments to the conversion price of
these shares in the event Cardiac Pathways issues additional securities at a
price lower than the prevailing conversion price of the Series B Convertible
Preferred Stock, which is currently set at $5.00 per share of common stock. As a
result of these adjustments, the conversion ratio of the Series B Convertible
Preferred Stock will rise from its current rate of 200 shares of common stock
for each share of Series B Preferred to 218 shares of common stock for each
share of Series B Preferred.
THE 20% RULE
The Bylaws of the NASDAQ Stock Market require Cardiac Pathways to obtain
stockholder approval in connection with a transaction other than a public
offering involving the sale or issuance by Cardiac Pathways of common stock (or
securities convertible into or exercisable for common stock) equal to 20% or
more of the common stock outstanding before the issuance for less than the
greater of book value or market value of the common stock.
Before voting, each stockholder should consider the following factors with
respect to the issuance of common stock in excess of the 20% Rule. If Cardiac
Pathways fails to obtain stockholder approval, the investors will not be
required to proceed with the financing until such approval is obtained and the
closing of the financing may depress the per share price of the common stock of
Cardiac Pathways especially where the
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market price of such shares is greater than $4.25. Further, if Cardiac Pathways
fails to register the resale of the shares sold in the financing within 70 days,
we will be obligated to issue warrants which will entitle the investors to
purchase more shares of common stock at an exercise price of $4.25 which could
further depress the per share price of our common stock.
THE BOARD UNANIMOUSLY RECOMMENDS VOTING "FOR" THE APPROVAL OF THE ISSUANCE
OF THE COMMON STOCK.
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PROPOSAL FIVE
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP, independent
auditors, to audit the consolidated financial statements of the Company for the
fiscal year ending June 30, 2001. Although action by stockholders is not
required by law, the Board of Directors has determined that it is desirable to
request approval of this selection by the stockholders. Notwithstanding the
selection, the Board of Directors, in its discretion, may direct the appointment
of new independent auditors at any time during the year, if the Board of
Directors feels that such a change would be in the best interest of the Company
and its stockholders. In the event of a negative vote on ratification, the Board
of Directors will reconsider its selection.
Ernst & Young LLP has audited the Company's financial statements annually
since 1991. Representatives of Ernst & Young LLP are expected to be present at
the meeting with the opportunity to make a statement if they desire to do so and
are expected to be available to respond to appropriate questions.
THE BOARD UNANIMOUSLY RECOMMENDS VOTING "FOR" THE RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS.
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EXECUTIVE COMPENSATION AND OTHER MATTERS
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth certain information
regarding the compensation of the current Chief Executive Officer of the Company
and those executive officers of the Company who earned more than $100,000*
during the fiscal year ended June 30, 2000, for services rendered in all
capacities to the Company for the fiscal years indicated.
LONG-TERM
COMPENSATION
AWARDS
-------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
FISCAL -------------------- OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#)(1)
--------------------------- ------ --------- -------- --------------- -------------
Thomas M. Prescott.................... 2000 $233,654 $46,759 $165,021.71(2) 287,306
President, Chief Executive Officer 1999 10,817 -- -- 60,000
and Director 1998 -- -- -- --
Debra S. Echt, M.D.(3)................ 2000 247,652 -- -- 100,000
Vice President and 1999 200,011 50,000 949(4) 3,369
Chief Medical Officer 1998 212,394 -- -- 3,000
Richard E. Riley...................... 2000 210,769 25,000 -- 100,000
Executive Vice President 1999 154,865 -- -- 3,024
Research and Development 1998 150,000 -- 10,000(4) 1,000
Jon P. Hunt(5)........................ 2000 199,685 -- 60,000(4) 100,000
Vice President Sales and Marketing 1999 143,510 -- 50,483(6) 4,544
1998 39,231 -- -- 18,000
- ---------------
* Ms. Sandy L. Miller, Vice President, Operations, Mr. Eldon M. Bullington, Vice
President, Finance, and Mr. Robert K. Weigle, Vice President, Worldwide Sales
and Marketing are currently receiving an annual salary of $178,000, $180,000
and $176,000, respectively. They have not been included above as they joined
the Company after the beginning of the fiscal year ending June 30, 2000 and
therefore their respective salaries during this fiscal year did not exceed
$100,000.
(1) These shares are subject to exercise under stock options granted under the
Company's 1991 Stock Option Plan. See "-- Option Grants in Last Fiscal
Year."
(2) Consists of (i) moving and relocation expenses and temporary housing
allowance, (ii) forgiveness of a loan and related accrued interest and (iii)
payment for certain federal and state income tax obligations in connection
with (i) and (ii).
(3) Dr. Echt resigned as an officer of the Company in February 2000.
(4) Represents forgiveness of a loan and related accrued interest and payment
for certain federal and state income tax obligations in connection
therewith.
(5) Dr. Hunt resigned as an officer of the Company in June 2000.
(6) Consists of moving and relocation expenses, temporary housing allowance and
payment for certain federal and state income tax obligations in connection
therewith.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding the stock
options awarded to Cardiac Pathway's Chief Executive Officer and those executive
officers who earned more than $100,000 during the fiscal year ended June 30,
2000. All such options were awarded under the Company's 1991 Stock Plan.
INDIVIDUAL GRANTS
------------------------------------------------------------ POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------------
NAME GRANTED(#)(2) FISCAL 2000(%) SHARE($)(3)(4) DATE 5%($) 10%($)
---- ------------- -------------- -------------- ---------- ----------- -------------
Thomas M. Prescott.... 187,306 18.5% $4.50 07/29/09 $530,081 $1,343,329
100,000 4.63 06/27/10 291,178 737,903
Debra S. Echt,
M.D.(5) ............ 75,000 4.8 4.50 02/18/00 9,281 18,562
25,000 1.6 4.50 03/18/00 3,094 7,125
Richard E. Riley...... 100,000 6.4 4.50 07/29/09 283,003 717,184
Jon P. Hunt(5)........ 75,000 4.8 4.50 06/30/00 15,468 30,937
25,000 1.6 4.50 07/30/00 5,625 11,250
- ---------------
(1) Potential realizable value is based on the assumption that the Common Stock
of the Company appreciates at the annual rate shown (compounded annually)
from the date of grant until the expiration of the ten year option term.
These numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's estimate
of future price growth.
(2) Options become exercisable to 1/48 of the option shares at the end of each
month following the date of grant, with full vesting occurring on the fourth
anniversary of the date of grant, other than Mr. Prescott's grant which
becomes exercisable as to 1/4 of the shares on the first anniversary of the
date of grant and the remainder of which vest monthly as to 1/48 thereafter.
(3) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock on the date of grant.
(4) Exercise price may be paid in cash, check, promissory note, by delivery of
already-owned shares of the Company's Common Stock subject to certain
conditions, delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to deliver promptly to the Company
amount of sale or loan proceeds required to pay the exercise price, a
reduction in the amount of any Company liability to an optionee, or any
combination of the foregoing methods of payment or such other consideration
or method of payment to the extent permitted under applicable law.
(5) In connection with separation agreements entered into by Dr. Echt and Dr.
Hunt with the Company, unvested options to purchase common stock of the
Company expired as of the day they resigned from the Company. The remaining
vested shares were exercisable for up to 30 days after their resignation.
Both Dr. Echt and Dr. Hunt exercised all of the options they were entitled
to exercise prior to the expiration dates.
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AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding the exercise
of stock options by Cardiac Pathways' Chief Executive Officer and those
executive officers who earned more than $100,000 during the fiscal year ended
June 30, 2000 and the value of stock options held as of June 30, 2000 by these
executive officers.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT JUNE 30, 2000(#) AT JUNE 30, 2000($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED(#)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
Thomas M. Prescott....... -- -- 15,000 332,306 $20,112 $50,278
Debra S. Echt, M.D. ..... 25,000 $110,681 -- -- -- --
Richard E. Riley......... -- -- 43,066 77,158 35,352 22,013
Jon P. Hunt.............. 6,031 30,017 20,000 -- 7,500 --
- ---------------
(1) Fair market value of the Company's Common Stock at fiscal year-end ($4.875
based on the last reported sale price of the Company's Common Stock on June
30, 2000) minus the exercise price.
(2) Fair market value of the Company's Common Stock on the date of exercise
minus the exercise price.
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS
Ms. Miller, Messrs. Bullington, Weigle, and Riley have entered into
employment agreements with the Company pursuant to which the Company may
terminate their employment at any time with or without cause; provided, however,
that if employment is terminated with cause, the Company will pay the employee a
severance payment in an amount equal to one month of the employee's then-current
monthly base salary and if the employee's employment is terminated without
cause, the Company will pay the employee a severance payment of an amount equal
to twelve months of the employee's then-current monthly base salary. The
agreements also provide that all outstanding stock options held by the employees
become immediately exercisable in the event that the employee's employment is
terminated without cause or is constructively terminated in connection with a
merger, reorganization or sale of substantially all of the assets of the Company
in which stockholders of the Company immediately prior to the transaction
possess less than fifty percent (50%) of the voting power of the surviving
entity (or its parent) immediately after the transaction.
On May 24, 1999, the Company and Mr. Prescott entered into an employment
agreement that, among other things, provided Mr. Prescott with an annual base
salary of $265,000 and options to purchase (i) 187,306 shares of the Company's
common stock at an exercise price of $4.50 per share, and (ii) 100,000 shares of
the Company's common stock at an exercise price of $4.63 per share. One-fourth
of Mr. Prescott's options will vest on each anniversary of his employment over
the next four years. In the event Mr. Prescott is terminated without justifiable
cause during the first year of his employment, Mr. Prescott will be entitled to
acceleration of vesting as to 1/48 of such options for each full month of
employment. Mr. Prescott is also entitled to immediate vesting of 100% of his
shares if a merger or other sale of the Company results in a change in control
of its voting stock and Mr. Prescott is involuntarily terminated.
In addition to options to purchase the Company's common stock, Mr. Prescott
is entitled to the following:
- a $250,000 loan from the Company at a 7% interest rate to purchase shares
of the Company's Series B Convertible Preferred Stock (the "Series B
Preferred"). This loan is payable in 12 quarterly installments commencing
on the third anniversary of the loan;
- relocation expenses;
- a one-time bonus of $75,000 paid on June 25, 1999 (subsequently this
bonus was adjusted by mutual agreement between Mr. Prescott and the
Company to $46,759);
- severance of 12 months of his then current monthly salary in the event
Mr. Prescott is terminated without justifiable cause; and
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- a bonus of up to 25% of his then current salary upon the attainment of
goals set by the board of directors for each fiscal year during which Mr.
Prescott remains Chief Executive Officer.
Dr. Echt and Dr. Hunt entered into separation agreements with the Company,
pursuant to which Dr. Echt and Dr. Hunt resigned effective February 18, 2000 and
June 30, 2000, respectively. Pursuant to their agreements with the Company, Dr.
Echt received a lump sum severance payment equal to 5 months of her then current
monthly base salary and Dr. Hunt received a lump sum severance payment equal to
6 months of his then current monthly base salary. In addition to her lump sum
severance, Dr. Echt also received her then current monthly pay for the period
from February 18, 2000 through June 18, 2000 as if she were still employed. Dr.
Hunt also received forgiveness on the principal and interest for a $60,000 loan
made to him by the Company in addition to his lump sum severance.
DIRECTOR COMPENSATION
In fiscal 2000, nonemployee directors who were neither affiliated with nor
nominated by a stockholder that owned one percent or more of the outstanding
capital stock of Cardiac Pathways (the "Outside Directors") were entitled to
received a fee of $1,500 for attendance at each general Board of Directors
meeting, $500 if present at such meeting by telephone, a fee of $150 for
attendance at each committee meeting for services provided in that capacity and
were reimbursed for out of pocket expenses incurred in connection with their
attendance at Board of Director or committee meetings. There are currently no
Outside Directors.
Under Cardiac Pathways' 1996 Director Option Plan, Outside Directors may
receive stock option grants pursuant to an automatic nondiscretionary grant
mechanism. The exercise price of the options is set at 100% of the fair market
value of Cardiac Pathways' common stock on the grant date. The Director Option
Plan provides for an initial option grant to purchase 2,600 shares of common
stock to each new Outside Director of the Company. In addition, each Outside
Director is automatically granted an option to purchase 140 shares of common
stock at the next meeting of the Board of Directors following each Annual
Meeting of Stockholders, if on such date, such director has served on the Board
of Directors for at least the preceding six months. The terms of each of these
grants are ten years, provided that such options shall terminate three months
following the termination of the optionee as a director (or twelve months if the
termination is due to death or disability). The initial grant vests at a rate of
25% of the shares subject to such option on the first anniversary of the date of
grant and at a rate of 1/48 of such shares per month thereafter. The annual
grants vest at a rate of 1/8 of the shares subject to such option six months
after the date of grant and at a rate of 1/48 of such shares per month
thereafter.
On July 25, 2000, Dr. Kuo received an option to purchase 20,000 shares of
the Company's common stock under the Company's 1991 Stock Option Plan at an
exercise price of $4.88 per share. This one-time award of stock to Dr. Kuo was
granted to him in consideration of his ongoing and future activities related to
the Company's business operations and future strategic direction.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of directors Kuo and Brooks. Dr. Kuo
and Mr. Brooks were both nominees of the Series B Preferred stockholders. Mr.
Brooks is a general partner and managing director of BA Venture Partners, an
entity which owns 10,000 shares of the Company's Series B Preferred which is
currently convertible into 2,000,000 common shares. BA Venture Partners bought
these shares of Series B Preferred pursuant to a financing which closed in July
1999. For further discussion of this financing please see section entitled
"Certain Transactions -- Series B Financing."
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REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
During the fiscal year ended June 30, 2000 Cardiac Pathways' executive
compensation program was approved by the Board's Compensation Committee and the
Board of Directors. The following is the report of the Compensation Committee
with respect to the compensation paid to executive officers during fiscal 2000.
Actual compensation earned during the fiscal year by those executive officers
who earned more than $100,000 during fiscal 2000 is shown in the Summary
Compensation Table above.
Compensation Philosophy
Cardiac Pathways' philosophy in setting its compensation policies for
executive officers is to maximize stockholder value over time. The primary goal
of the executive compensation program is therefore to closely align the
interests of the executive officers with those of our stockholders. To achieve
this goal we attempt to (i) offer compensation opportunities that attract and
retain executives whose abilities are critical to our long-term success,
motivate individuals to perform at their highest level and reward outstanding
achievement, (ii) maintain a significant portion of the executive's total
compensation at risk, tied to achievement of financial, organizational and
management performance goals, and (iii) encourage executives to manage from the
perspective of owners with an equity stake in Cardiac Pathways.
The compensation program for the executive officers consists of the
following components: base salary and long-term stock option incentives.
Base Salary
The Compensation Committee reviewed and approved fiscal 2000 base salaries
for Thomas M. Prescott, Chief Executive Officer and President and other
executive officers at the beginning of the fiscal year. Base salaries were
established by the Compensation Committee based upon competitive compensation
data for similarly situated companies in the medical device industry, the
executive's job responsibilities, level of experience, individual performance
and contribution to the business. Executive officer salaries have been targeted
at or above the average rates paid by competitors to enable us to attract,
motivate, reward and retain highly skilled executives. In order to evaluate
Cardiac Pathways' competitive posture in the industry, the Compensation
Committee reviewed and analyzed the compensation packages, including base salary
levels, offered by other medical device companies. The competitive information
was obtained from surveys prepared by national consulting companies or industry
associations. The surveys include, but are not limited to, data from all
industries represented in Hambrecht & Quist Healthcare, Excluding Biotechnology
index. In making base salary decisions, the Compensation Committee exercised its
discretion and judgment based upon these factors. No specific formula was
applied to determine the weight of each factor.
Long-Term Stock Option Incentives
Cardiac Pathways provides its executive officers with long-term incentive
compensation through grants of stock options under the 1991 Stock Plan and, in
the future (if approved by our stockholders) under the 2000 Stock Plan. The
Compensation Committee believes that stock options provide executive officers
with the opportunity to purchase and maintain an equity interest in Cardiac
Pathways and to share in the appreciation of the value of the Company's Common
Stock. The Compensation Committee believes that stock options directly motivate
an executive to maximize long-term stockholder value. The options also utilize
vesting periods that encourage key executives to continue in the employ of
Cardiac Pathways. All options granted to executive officers in fiscal 2000 were
granted at an exercise price that was at the fair market value of our common
stock on the date of grant. The Compensation Committee considers the grant of
each option subjectively, considering factors such as the individual performance
of the executive officer and the anticipated contribution of the executive
officer to the attainment of long-term strategic performance goals. Long-term
incentives granted in prior years are also taken into consideration.
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Compensation for the President and Chief Executive Officer
On May 24, 1999, Cardiac Pathways entered an employment agreement with
Thomas M. Prescott to become President and Chief Executive Officer. All aspects
of Mr. Prescott's 2000 compensation as President and Chief Executive Officer are
governed by this employment agreement. See "Employment Agreements and
Change-in-Control Agreements."
The Compensation Committee and the Board of Directors approved Mr.
Prescott's employment agreement after a detailed review of competitive
compensation data for chief executive officers in similarly situated companies
in the medical device industry and after extensive discussion of Mr. Prescott's
qualifications. In settling on the final compensation amounts, the Compensation
Committee and the Board focused on the importance of appointing a president and
chief executive officer who could provide the leadership necessary to improve
our competitiveness and profitability.
Section 162(m)
The Board has considered the potential future effects of Section 162(m) of
the Internal Revenue Code on the compensation paid to executive officers.
Section 162(m) disallows a tax deduction for any publicly-held corporation for
individual compensation exceeding $1.0 million in any taxable year for any of
the executive officers named in the proxy statement, unless compensation is
performance-based. Cardiac Pathways has adopted a policy that, where reasonably
practicable, we will seek to qualify the variable compensation paid to its
executive officers for an exemption from the deductibility limitations of
Section 162(m). As a result, in April 1996, the stockholders approved certain
amendments to the 1991 Stock Plan intended to preserve our ability to deduct the
compensation expense relating to stock options granted under the 1991 Stock
Plan. In approving the amount and form of compensation for executive officers,
the Compensation Committee will continue to consider all elements of the cost of
providing such compensation, including the potential impact of Section 162(m).
Respectfully submitted by:
Mark J. Brooks
Anchie Kuo, M.D.
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CERTAIN TRANSACTIONS
Series B Financing
In July 1999, Cardiac Pathways' stockholders authorized and Cardiac
Pathways completed a $32 million offering of Series B Preferred at $1,000 per
share to a group of accredited investors. In connection with this Series B
Preferred financing, we raised $31.5 million, net of issuance costs. In June
2000, one of the holders of Series B Preferred converted 5,000 shares of Series
B Preferred into 1,000,000 shares of common stock. The 1,000,000 shares of
common stock were issued as unregistered common stock to an affiliate of Cardiac
Pathways subject to regulating restrictions and holding period requirements. The
remaining 27,750 shares of Series B Preferred are convertible at the option of
the holders into 5.45 million shares of common stock.
The financing was severely dilutive to Cardiac Pathways' then existing
stockholders. The following table summarizes the dilutive effect, for percentage
ownership purposes, of the financing on the stockholders based on outstanding
share information as of June 30, 2000:
SHARES PERCENTAGE
--------- ----------
Outstanding common stock as of June 30, 2000.......... 3,078,486 36.1%
New common stock issuable upon conversion of the
Series B Preferred.................................. 5,450,000 63.9
--------- -----
Total....................................... 8,528,486 100.0%
========= =====
This table does not give effect to the issuance of warrants to purchase 300
shares of Series B Preferred (convertible into 60,000 shares of common stock) in
connection with interim funding provided to the Company.
The holders of the Series B Preferred are entitled to significant rights,
preferences and privileges as a result of their investment.
The two largest holders of Series B Preferred control three of five seats
(60%) on the Board. The members of the Board include Thomas Prescott, President
and Chief Executive Officer of the Company, Mark J. Brooks, Anchie Y. Kuo, M.D.
and M. Fazle Husain, nominees of the holders of Series B Preferred and William
N. Starling, a former director, chief executive officer and president of Cardiac
Pathways. The consent of the directors nominated by the holders of Series B
Preferred will be required to increase the number of directors above the number
currently in office.
Each share of Series B Preferred is convertible into 200 shares of common
stock. The conversion ratio of the Series B Preferred is subject to adjustment
for price based antidilution.
The holders of Series B Preferred are entitled to a cumulative dividend
when, as and if declared by the Board at a rate per share equal to 11% per annum
of the initial purchase price of the Series B Preferred. The Series B Preferred
has a liquidation preference equal to the initial purchase price plus any
accrued dividends upon the occurrence of a liquidation, a merger or the sale of
all or substantially all of the Company's stock or assets. As a result of the
liquidation preference, in the event of a liquidation, merger or the sale of
substantially all of the Company's stock or assets, the holders of the Series B
Preferred will receive their original purchase price plus any accrued dividends
prior to any distribution to the holders of common stock.
The Series B Preferred is redeemable after May 31, 2004 at the request of a
majority of the holders, subject to the approval of the Company. If a redemption
request is received but not approved by the Company, the cumulative dividend
rate payable on the Series B Preferred will increase by six percentage points
for each year a redemption does not occur.
The holders of the Series B Preferred vote on all matters presented to
stockholders on an as-converted to common stock basis. In addition, the
affirmative vote of holders of a majority of the Series B Preferred, voting as a
separate class, will be required to:
1. Amend or repeal any provision, or add any provision to the
certificate of incorporation or bylaws which changes the rights of the
Series B Preferred;
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2. Increase or decrease (other than by redemption or conversion) the
total number of authorized shares of preferred stock or common stock;
3. Authorize or issue, or obligate itself to issue, any other security
convertible into or exercisable for any security having a preference over,
or being on a parity with, the Series B Preferred with respect to voting,
dividends, redemption or upon liquidation;
4. Issue any shares of common stock, other than
(a) shares of common stock issuable or issued to employees,
consultants or directors of the Company directly or pursuant to a stock
option plan or restricted stock plan approved by the board of directors,
including the representatives of the Series B Preferred;
(b) shares of common stock issuable or issued upon conversion of
the Series A Participating Preferred Stock or the Series B Preferred or
as dividends or distributions on the Series A Participating Preferred
Stock or the Series B Preferred;
(c) shares of common stock issuable or issued upon exercise of
warrants issued to banks, equipment lessors or other vendors, where such
common stock or warrants were approved by the board of directors,
including the representatives of the Series B Preferred; or
(d) shares of common stock issuable or issued as consideration for
business combinations or corporate partnering agreements approved by the
board of directors, including the representatives of the Series B
Preferred.
5. Declare or pay any dividends on its common stock or redeem,
purchase or otherwise acquire (or pay into or set aside for a sinking fund
for such purpose) any share or shares of common stock, provided, however,
that this restriction shall not apply to the repurchase of shares of common
stock from employees, officers, directors, consultants or other persons
performing services for Cardiac Pathways or any subsidiary pursuant to
agreements under which Cardiac Pathways has the option to repurchase such
shares at cost or at cost upon the occurrence of certain events, such as
the termination of employment;
6. Sell, convey or otherwise dispose of all or substantially all of
its property or business or merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary corporation) or effect
any transaction or series of related transactions in which more than fifty
percent (50%) of the voting power of this corporation is disposed of;
7. Repurchase any series of preferred stock; or
8. Increase or decrease the size of the board of directors.
The holders of the Series B Preferred have a right of first offer with
respect to future financings by Cardiac Pathways.
The holders of 45% of the then outstanding Series B Preferred will have the
right to request that Cardiac Pathways register the shares of common stock into
which the Series B Preferred are convertible after May 21, 2000. In addition, if
Cardiac Pathways otherwise registers shares of its common stock, the holders of
the Series B Preferred will be entitled to participate in the registration.
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Other Transactions with Directors, Executive Officers and Others
In May 1999, William N. Starling resigned as President and Chief Executive
Officer. Mr. Starling remained a member of the Board of Directors. Cardiac
Pathways, the holders of the Series B Preferred and Mr. Starling agreed that for
as long as Mr. Starling continues as a member of the Board, the options to
purchase common stock held by Mr. Starling will continue to vest. As of the date
he resigned as President and Chief Executive Officer, Mr. Starling held 9,458
shares subject to unvested options to purchase common stock. On January 1, 2000,
Mr. Starling entered into a consulting agreement with the Company to provide the
Company with business development and strategy consulting services on an as
directed basis. Mr. Starling was paid a total of $144,865 through the period
ending June 30, 2000, the expiration date of the agreement.
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PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative return to the stockholders of Cardiac Pathways' common stock with the
cumulative return of the Nasdaq National Market, U.S. index and of the Hambrecht
& Quist Healthcare, Excluding Biotechnology index for the period commencing June
13, 1996 (the date the Company's Common Stock commenced trading on the Nasdaq
National Market) and ending on June 30, 2000. Returns for the indices are
weighted based on market capitalization at the beginning of each fiscal year.
PERFORMANCE GRAPH
CUMULATIVE TOTAL RETURN
----------------------------------------------------------
JUNE 13, JUNE JUNE JUNE JUNE JUNE
1996 1996 1997 1998 1999 2000
-------- ------ ------ ------ ------ ------
Cardiac Pathways Corporation........ 100.00 381.58 236.84 187.50 24.68 25.66
Nasdaq Stock Market (U.S.).......... 100.00 96.77 117.69 154.95 223.12 329.60
Hambrecht & Quist Health Care --
Excluding Biotechnology........... 100.00 97.37 122.26 148.44 152.21 175.30
- ---------------
* $100 invested on 6/13/96 in stock or index -- including reinvestment of
dividends, Fiscal Year Ending June 30.
* The graph assumes that $100 was invested on June 13, 1996 in Cardiac Pathways'
common stock, in the Nasdaq National Market, U.S. Index and in the Hambrecht &
Quist Healthcare, Excluding Biotechnology index and that all dividends were
reinvested. No dividends have been declared or paid on Cardiac Pathways'
common stock. Stockholder returns over the indicated period should not be
considered indicative of future stockholder returns.
The information contained above under the captions "Report of the Board of
Directors on Executive Compensation" and "Performance Graph" shall not be deemed
to be "soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933, as amended, or Securities
Exchange Act of 1934, as amended (the "Exchange Act"), except to the extent that
the Company specifically incorporates it by reference into such filing.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Cardiac Pathways' executive
officers and directors, and persons who own more than ten percent of a
registered class of the Cardiac Pathways' equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC") and the National Association of Securities Dealers, Inc. Executive
officers, directors and greater than ten percent stockholders are required by
SEC regulation to furnish Cardiac Pathways with copies of all Section 16(a)
forms they file. Based solely on its review of the copies of such forms received
by it, or written representations from reporting persons, we believe that,
during the fiscal year ended June 30, 2000, all such forms were filed on a
timely basis.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Cardiac Pathways is authorized to issue 30,000,000 shares of common stock,
$.001 par value, and 5,000,000 shares of preferred stock, $.001 par value. Of
the preferred stock, 4,920,000 shares are undesignated, 30,000 shares are
designated series A participating preferred stock and 50,000 shares are
designated series B convertible preferred stock ("Series B Preferred").
The following summary of certain provisions of Cardiac Pathways' capital
stock describes all material provisions of, but does not purport to be complete
and is subject to, and qualified in its entirety by, the certificate of
incorporation, as amended, and the bylaws of Cardiac Pathways. The certificate
of incorporation and bylaws contain certain provisions that are intended to
enhance the likelihood of continuity and stability in the composition of the
board of directors and which may have the effect of delaying, deferring, or
preventing a future takeover or change in control of Cardiac Pathways unless
such takeover or change in control is approved by the board of directors.
COMMON STOCK
As of October 20, 2000, there were 3,101,866 shares of common stock
outstanding held of record by approximately 148 stockholders.
The issued and outstanding shares of common stock are, and the shares of
common stock issuable upon conversion of the Series B Preferred will be validly
issued, fully paid and nonassessable. Subject to the prior rights of the holders
of any preferred stock, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the board of directors may from time to time
determine. The shares of common stock are neither redeemable nor convertible and
the holders thereof have no preemptive or subscription rights to purchase any
securities of Cardiac Pathways. Upon liquidation, dissolution or winding up of
Cardiac Pathways, the holders of common stock are entitled to receive pro rata
the assets of Cardiac Pathways which are legally available for distribution,
after payment of all debts and other liabilities and subject to the prior rights
of any holders of any preferred stock then outstanding. Each outstanding share
of common stock is entitled to one vote on all matters submitted to a vote of
stockholders.
WARRANTS
As of October 20, 2000, there were outstanding warrants to purchase an
aggregate of 14,628 shares of common stock at a weighted average exercise price
of $49.94 per share. Of such warrants, the warrants to purchase 7,594 shares of
common stock expire in June 2001 and the warrants to purchase 7,034 shares of
common stock expire in July 2009. As of October 20, 2000, there were also
outstanding warrants to purchase 300 shares of series B convertible preferred
stock at an exercise price of $1,000 per share that are convertible into 60,000
shares of common stock.
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PREFERRED STOCK
The board of directors of Cardiac Pathways is authorized to issue 5,000,000
shares of undesignated preferred stock. Our board of directors has the authority
to issue the preferred stock in one or more series and to fix the price, rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
a series or the designation of such series, without any further vote or action
by Cardiac Pathways' stockholders. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of delaying, deferring or
preventing a change in control of Cardiac Pathways without further action by the
stockholders and may adversely affect the market price of the common stock, and
the voting and other rights of the holders of common stock. Effective upon the
closing of the financing, Cardiac Pathways will not be permitted to issue any
additional shares of preferred stock without the consent of two-thirds of the
holders of the Series B Preferred.
Series A Participating Preferred Stock
On April 22, 1997, pursuant to a preferred Shares Rights Agreement (the
"Rights Agreement") between Cardiac Pathways and Norwest Bank Minnesota, N.A.,
as Rights Agent (the "Rights Agent"), Cardiac Pathways' board of directors
declared a dividend of one right (a "Right") to purchase one one-thousandth of a
share of Cardiac Pathways' series A participating preferred stock (the "Series A
Preferred") for each outstanding share of common stock of Cardiac Pathways. The
dividend was paid on May 23, 1997 to stockholders of record as of the close of
business on April 30, 1997. Each Right entitles the registered holder to
purchase from Cardiac Pathways one one-thousandth of a share of Series A
Preferred at an exercise price of $125.00 (the "Purchase Price"), subject to
adjustment. The Rights Agreement will be terminated effective upon the Closing
of the financing.
Rights evidenced by common share certificates. The Rights are not be
exercisable until the Distribution Date (defined below). Certificates for the
Rights ("Rights Certificates") were not sent to stockholders and the Rights will
attach to and trade only together with the common stock. Accordingly, common
share certificates outstanding on the record date evidence the Rights related
thereto, and common share certificates issued after the record date contain a
notation incorporating the Rights Agreement by reference. Until the Distribution
Date (or earlier redemption or expiration of the Rights), the surrender or
transfer of any certificates for common stock, outstanding as of the record date
also constitute the transfer of the Rights associated with the common stock
represented by such certificate.
Distribution Date. The Rights will separate from the common stock, Rights
Certificates will be issued and the Rights will become exercisable upon the
earlier of:
- 10 days (or such later date as may be determined by a majority of the
board of directors) following a public announcement that a person or
group of affiliated or associated persons (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial ownership of 15%
or more of the outstanding common stock, or
- 10 business days (or such later date as may be determined by a majority
of the board of directors) following the commencement of, or announcement
of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a
person or group of 15% or more of the outstanding common stock.
The earlier of such dates is referred to as the "Distribution Date." The issue
and sale of the common stock in connection with the financing will not
constitute an action that would trigger a Distribution Date. In addition, the
purchasers of the common stock will not be acquiring persons with respect to the
Rights Agreement.
Issuance of rights certificates; expiration of rights. As soon as
practicable following the Distribution Date, separate Rights certificates will
be mailed to holders of record of the common stock as of the close of business
on the Distribution Date and such separate Rights certificates alone will
evidence the Rights from
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and after the Distribution Date. The Rights will expire on the earliest of (i)
April 21, 2007 (the "Final Expiration Date") or (ii) redemption or exchange of
the Rights as described below.
Initial exercise of the rights. Following the Distribution Date, and until
one of the further events described below, holders of the Rights will be
entitled to receive, upon the exercise and payment of the Purchase Price, one
one-thousandth of a share of the Series A Preferred.
Right to buy Cardiac Pathways common stock. Unless the Rights are earlier
redeemed, in the event that an Acquiring Person becomes the beneficial owner of
15% or more of Cardiac Pathways' common stock then outstanding, then proper
provision will be made so that each holder of a Right which has not theretofore
been exercised (other than Rights beneficially owned by the Acquiring Person or
any affiliate of the Acquiring Person, which will thereafter be void) will
thereafter have the right to receive, upon exercise, common stock having a value
equal to two times the Purchase Price. In the event that Cardiac Pathways does
not have sufficient common stock available for all Rights to be exercised, or
the board decides that such action is necessary and not contrary to the
interests of Rights holders, Cardiac Pathways may instead substitute cash,
assets or other securities for the common stock for which the Rights would have
been exercisable.
Right to buy acquiring company stock. Similarly, unless the Rights are
earlier redeemed, in the event that, after an Acquiring Person becomes the
beneficial owner of 15% or more of Cardiac Pathways' common stock then
outstanding, (i) Cardiac Pathways is acquired in a merger or other business
combination transaction, or (ii) 50% or more of Cardiac Pathways' consolidated
assets or earning power are sold (other than in transactions in the ordinary
course of business), proper provision must be made so that each holder of a
Right which has not theretofore been exercised (other than Rights beneficially
owned by the Acquiring Person or any affiliate of the Acquiring Person, which
will thereafter be void) will thereafter have the right to receive, upon
exercise, shares of common stock of the acquiring company having a value equal
to two times the Purchase Price.
Exchange provision. At any time after the acquisition by an Acquiring
Person of beneficial ownership of 15% or more of Cardiac Pathways' outstanding
common stock and prior to the acquisition by any person or entity of beneficial
ownership of 50% or more of Cardiac Pathways' outstanding common stock, the
board of directors of Cardiac Pathways may exchange the Rights (other than
Rights owned by the Acquiring Person), in whole or in part, at an exchange ratio
of one common Share per Right.
Redemption. At any time on or prior to the close of business on the earlier
of (i) the 10th day following the acquisition by an Acquiring Person of
beneficial ownership of 15% or more of Cardiac Pathways' common stock or such
later date as may be determined by a majority of the board of directors and
publicly announced by Cardiac Pathways, or (ii) the Final Expiration Date of the
Rights, Cardiac Pathways may redeem the Rights in whole, but not in part, at a
price of $0.01 per Right.
Adjustments to prevent dilution. The Purchase Price payable, the number of
Rights, and the number of series A preferred or common stock or other securities
or property issuable upon exercise of the Rights are subject to adjustment from
time to time in connection with the dilutive issuances by Cardiac Pathways as
set forth in the Rights Agreement. With certain exceptions, no adjustment in the
Purchase Price will be required until cumulative adjustments require an
adjustment of at least 1% in such Purchase Price.
Cash paid instead of issuing fractional shares. No fractional portion less
than integral multiples of one common Share or one one-thousandth of a share of
series A preferred will be issued upon exercise of a Right and in lieu thereof,
an adjustment in cash will be made based on the market price of the security to
be so issued on the last trading date prior to the date of exercise.
No stockholders' rights prior to exercise. Until a Right is exercised, the
holder thereof, as such, will have no rights as a stockholder of Cardiac
Pathways (other than any rights resulting from such holder's ownership of common
stock), including, without limitation, the right to vote or to receive
dividends.
Amendment of rights agreement. The provisions of the Rights Agreement may
be supplemented or amended by the board of directors in any manner prior to the
close of business on the date the Rights separate from the common stock and
become exercisable. After such date, the provisions of the Rights Agreement may
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be amended by the board in order to cure any ambiguity, defect or inconsistency,
to make changes which do not adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person), or to shorten or lengthen any
time period under the Rights Agreement; provided, however, that no amendment to
adjust the time period governing redemption shall be made at such time as the
Rights are not redeemable.
Rights and preferences of the series A preferred. Series A Preferred
purchasable upon exercise of the Rights will not be redeemable. Each share of
Series A Preferred will be entitled to an aggregate dividend of 1,000 times the
dividend declared per common Share. In the event of liquidation, the holders of
the Series A Preferred will be entitled to 1,000 times the amount paid per
common Share plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment.
Each share of series A preferred will have 1,000 votes, voting together with the
common stock. These rights are protected by customary anti-dilution provisions.
Because of the nature of the dividend, liquidation and voting rights of the
shares of Series A preferred, the value of the one one-thousandth interest in a
share of Series A preferred purchasable upon exercise of each Right should
approximate the value of one common Share.
Certain anti-takeover effects. The Rights approved by the board are
designed to protect and maximize the value of the outstanding equity interests
in Cardiac Pathways in the event of an unsolicited attempt by an acquirer to
take over Cardiac Pathways, in a manner or on terms not approved by the board of
directors. Takeover attempts frequently include coercive tactics to deprive
Cardiac Pathways' board of directors and its stockholders of any real
opportunity to determine the destiny of Cardiac Pathways. The Rights have been
declared by the board in order to deter such tactics, including a gradual
accumulation of shares in the open market of a 15% or greater position to be
followed by a merger or a partial or two-tier tender offer that does not treat
all stockholders equally. These tactics unfairly pressure stockholders, squeeze
them out of their investment without giving them any real choice and deprive
them of the full value of their shares.
The Rights are not intended to prevent a takeover of Cardiac Pathways and
will not do so. The Rights may be redeemed by Cardiac Pathways at $0.01 per
Right within ten days (or such later date as may be determined by a majority of
the Continuing directors) after the accumulation of 15% or more of Cardiac
Pathways' shares by a single acquirer or group. Accordingly, the Rights should
not interfere with any merger or business combination approved by the board of
directors.
Issuance of the Rights does not in any way weaken the financial strength of
Cardiac Pathways or interfere with its business plans. The issuance of the
Rights themselves has no dilutive effect, will not affect reported earnings per
share, should not be taxable to Cardiac Pathways or to its stockholders, and
will not change the way in which Cardiac Pathways' shares are presently traded.
Cardiac Pathways' board of directors believes that the Rights represent a sound
and reasonable means of addressing the complex issues of corporate policy
created by the current takeover environment.
However, the Rights may have the effect of rendering more difficult or
discouraging an acquisition of Cardiac Pathways deemed undesirable by the board
of directors. The Rights may cause substantial dilution to a person or group
that attempts to acquire Cardiac Pathways on terms or in a manner not approved
by Cardiac Pathways' board of directors, except pursuant to an offer conditioned
upon the negation, purchase or redemption of the Rights.
Series B Convertible Preferred Stock
As of October 20, 2000, 27,250 shares of Series B Preferred were issued and
outstanding.
The shares of Series B Preferred Stock are entitled to cumulative dividends
of 11% of the initial Series B Preferred purchase price, ($1,000), per year,
when, as and if declared by the board of directors, prior to and in preference
over any dividends paid to holders of the Series A Preferred or common stock.
After payment of the cumulative dividend to the holders of the Series B
Preferred, the holders of the Series B Preferred are entitled to participate on
an as-converted basis with the holders of the common stock in any dividends paid
on the common stock.
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The shares of Series B Preferred will have a per share right to a
distribution of $1,000 plus all accrued and unpaid dividends on such shares of
Series B Preferred prior to any distributions or payments to the holders of the
Series A Preferred or the common stock. The right to a distribution would occur
upon any liquidation, dissolution or winding up of Cardiac Pathways. A
liquidation also includes:
- the acquisition of Cardiac Pathways by another entity by means of any
transaction or series of related transaction, including, without
limitation, any reorganization, merger or consolidation, that results in
the transfer of 50% or more of the outstanding voting power of Cardiac
Pathways,
- a sale of all or substantially all of the assets of Cardiac Pathways, or
- a sale or any transaction or series of transactions that result in a sale
or transfer of 50% or more of the voting power of Cardiac Pathways.
Each shares of the Series B Preferred is convertible at the option of the
holder into 200 shares of Cardiac Pathways common stock, subject to adjustment.
After the closing of the financing, each share of Series B Preferred will be
convertible into 218 shares of common stock. All outstanding shares of Series B
Preferred are subject to conversion upon a vote of a majority of such
outstanding shares in favor of conversion. In the event that Cardiac Pathways
issues equity securities at a per share price lower price than the Conversion
Price in effect of the series B convertible preferred stock, such Conversion
Price will be adjusted.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The certificate of incorporation provides for the board to be divided into
three classes, as nearly equal in number as possible, serving staggered terms.
Approximately one-third of the board will be elected each year. The provision
for a classified board could prevent a party who acquires control of a majority
of the outstanding voting stock from obtaining control of the board until the
second annual stockholders meeting following the date the acquirer obtains the
controlling stock interest. The classified board provision could have the effect
of discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of Cardiac Pathways and could increase the
likelihood that incumbent directors will retain their positions. The certificate
of incorporation provides that directors may be removed (i) with cause by the
affirmative vote of the holders of at least a majority of the voting power of
all of the outstanding shares of voting stock or (ii) without cause by the
affirmative vote of the holders of at least 66 2/3% of the voting power of all
of the then-outstanding shares of the voting stock.
The certificate of incorporation provides that stockholder action can be
taken only at an annual or special meeting of stockholders and cannot be taken
by written consent in lieu of a meeting. The certificate of incorporation and
the bylaws provide that, except as otherwise required by law, special meetings
of the stockholders can only be called pursuant to a resolution adopted by a
majority of the board of directors, by the chief executive officer of Cardiac
Pathways, or by stockholders holding shares in the aggregate entitled to cast
not less than 10% of the votes at that meeting.
The bylaws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of Cardiac Pathways,
including proposed nominations of persons for election to the board.
stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and who
has given to Cardiac Pathways' Secretary timely written notice, in proper form,
of the stockholder's intention to bring that business before the meeting.
Although the bylaws do not give the board the power to approve or disapprove
stockholder nominations of candidates or proposals regarding other business to
be conducted at a special or annual meeting, the bylaws may have the effect of
precluding the conduct of certain business at a meeting if the proper procedures
are not followed or may discourage or defer a potential acquirer from conducting
a solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of Cardiac Pathways.
The certificate of incorporation provides that the affirmative vote of
holders of at least 66 2/3% of the total votes eligible to be cast in the
election of directors is required to amend, alter, change or repeal certain of
its
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provisions. This requirement of a super-majority vote to approve amendments to
the certificate of incorporation could enable a minority of Cardiac Pathways'
stockholders to exercise veto power over any such amendments.
REGISTRATION RIGHTS
The holders of the Series B Preferred and their permitted transferees (the
"Preferred Holders") are entitled to certain rights with respect to the
registration of such shares ("Preferred Registrable Securities") under the
Securities Act. Under the terms of an agreement between Cardiac Pathways and the
Preferred Holders, the holders of at least 45% of the Registrable Securities may
require, on two occasions after May 31, 2000, that Cardiac Pathways use its best
efforts to register the Preferred Registrable Securities for public resale. In
addition, if Cardiac Pathways proposes to register any of its securities under
the Securities Act, either for its own account or for the account of other
security holders exercising registration rights, the Preferred Holders are
entitled to notice of such registration and are entitled to include shares of
such common stock therein. The holders of Preferred Registrable Securities may
also require Cardiac Pathways to register all or a portion of their Preferred
Registrable Securities on Form S-3 under the Securities Act when use of such
form becomes available to Cardiac Pathways. All such registration rights are
subject to certain conditions and limitations, including the right of the
underwriters of an offering to limit the number of shares to be included in such
registration. If such Preferred Holders, by exercising their demand registration
rights, cause a large number of securities to be registered and sold in the
public market, such sales could have an adverse effect on the market price for
Cardiac Pathways' common stock. If Cardiac Pathways were to initiate a
registration and include shares held by such Preferred Holders pursuant to the
exercise of their piggyback registration rights, such sales may have an adverse
effect on Cardiac Pathways' ability to raise capital. In connection with the
financing, the holders of the Series B Preferred will waive certain of these
registration rights.
The holders of the common stock sold pursuant to the financing and their
permitted transferees (the "Common Holders") will be entitled to certain rights
with respect to the registration of such Shares) the "Common Registrable
Securities") under the Securities Act. Under the terms of an agreement between
Cardiac Pathways and the Common Holders, the Company is required to file a
registration statement with respect to the Common Registrable Shares within 30
days of closing the financing and is also required to use its best efforts to
have such registration statement declared effective as soon as possible
thereafter. In the event the Company fails to have the registration statement
declared effective within 70 days of the closing, or fails to file the
registration statement within 30 days of the closing, it will be required to
issue warrants to the Common Holders to acquire its common stock. Any sales by
the Common Holders may have an adverse effect on the stock price of Cardiac
Pathways.
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SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below should be read in conjunction with the
consolidated financial statements and related notes are set forth on pages F-1
through F-20.
YEAR ENDED JUNE 30,
-------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales............................ $ 6,821 $ 4,406 $ 2,420 $ 2,409 $ 1,684
Manufacturing and operating cost:
Manufacturing start-up and cost of
goods sold...................... 6,868 4,249 2,828 2,508 2,408
Research and development........... 6,947 12,115 14,353 11,756 6,819
Selling, general and
administrative.................. 10,063 6,685 4,092 3,147 1,981
-------- -------- -------- -------- -------
Total manufacturing and
operating cost........... 23,878 23,049 21,273 17,411 11,208
-------- -------- -------- -------- -------
Loss from operations................. (17,057) (18,643) (18,853) (15,002) (9,524)
Other income, net.................... 690 77 1,354 2,136 155
-------- -------- -------- -------- -------
Net loss............................. (16,367) $(18,566) $(17,499) $(12,866) $(9,369)
======== ======== ======== =======
Preferred stock dividend............. 3,300
Beneficial conversion feature related
to the issuance of the Series B
Preferred Stock.................... 960
--------
Net loss applicable to common
stockholders....................... $(20,627)
========
Net loss per share -- basic and
diluted............................ $ (10.05) $ (9.34) $ (9.07) $ (6.86)
======== ======== ======== ========
Shares used in computing net loss per
share -- basic and diluted......... 2,053 1,987 1,930 1,876
======== ======== ======== ========
JUNE 30,
--------------------------------------------------------
2000 1999 1998 1997 1996(1)
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments............ $ 12,625 $ 2,340 $ 24,517 $ 41,567 $ 52,873
Working capital (deficit)........... 12,173 (745) 22,351 39,511 52,028
Total assets........................ 21,765 8,906 30,935 46,655 57,188
Long-term liabilities, net of
current portion................... 4,900 2,974 9,248 9,077 8,877
Accumulated deficit................. (96,351) (79,983) (61,418) (43,919) (31,053)
Stockholders' equity (deficit)...... 12,597 (395) 17,485 33,992 46,051
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors that include, but are not limited to, the risks discussed in "Factors
That May Impact Future Operations" as well as those discussed in the following
"Overview" section. These forward-looking statements include the statement in
the first paragraph of "Overview" relating to the expectations of operating
losses, the statements in the second paragraph of "Overview" relating to the
range of clinical utility for the RPM Tracking System and the potential
reduction in procedure times, the statements in the fourth paragraph of
"Overview" relating to the manufacturing, marketing and distribution of the
Company's products, the statements in the last two sentences of "Cost of Goods
Sold" relating to the expectations for gross margins, the statements in the last
sentence of the first paragraph of "Impact of Adoption of New Accounting
Standards" regarding FAS 133, the statements in the last sentence of the second
paragraph of "Impact of Adoption of New Accounting Standards" regarding SAB 101,
the statements in the second paragraph of "Liquidity and Capital Resources"
regarding the Company's expected liquidity and capital needs, the statements in
the last sentence of the fourth paragraph of "Liquidity and Capital Resources"
regarding the Company's expected capital expenditures, the statements in the
section of "Factors That May Impact Future Operations" entitled "Limited
Operating History, History of Losses and Expectations of Future Losses" relating
to expectations of operating losses and the statement in the third paragraph in
the section of "Factors That May Impact Future Operations" entitled "Employees"
relating to the Company's need to expand its operations and hire new personnel.
OVERVIEW
The Company is currently shifting from a broad-based research & development
(R&D) and clinical development oriented company to one focused on expansion of
marketing, sales, distribution, customer support and manufacturing capacity. The
Company has experienced significant operating losses since inception and as of
June 30, 2000 had an accumulated deficit of approximately $96.4 million. During
the year, the Company has seen significant increases in revenues from sales of
the Chilli Cooled Ablation Catheter in the U.S. and Europe, and sales increases
of the Radii-T mapping and ablation catheter in Japan. Sales of the
Trio/Ensemble diagnostic catheters to international customers have remained
relatively constant during fiscal 2000. The Mercator diagnostic mapping baskets
and related equipment have been discontinued in order for the Company to focus
its resources on its two platforms; the Chilli Cooled Ablation Catheter and the
new RPM Tracking System. The Company expects to continue operating at a loss at
least through the end of fiscal year 2002 as it continues to expend substantial
funds to establish commercial-scale manufacturing capabilities and to expand its
sales and marketing activities.
The Company received FDA 510(k) clearance in March 2000 to begin marketing
the RPM Tracking System. This technology, developed by the Company, can be used
in many diagnostic electrophysiology procedures for real-time three dimensional
visualization of catheters utilizing ultrasound technology. The RPM Tracking
system is expected to assist physicians in precisely manipulating catheters
within the heart during procedures, offering the potential for reductions in
procedure times and improved economic benefit to the hospital and physician.
In March 2000, the Company also received FDA PMA approval for the Chilli
Cooled Ablation Catheter, incorporating the Company's Real-time Position
Management navigation technology for dynamic real-time catheter navigation and
visualization. The Chilli PMA includes approval for the new 7 French platform
with a bi-directional steering capability. New models for the Chilli with and
without the RPM navigation visualization technology were approved within the
PMA. In addition, the Company has received CE mark approval to market the RPM
Tracking System, and reference and ablation catheters incorporating RPM tracking
technology in Europe.
For the Company's products that have recently obtained FDA clearance or
approval, there can be no assurance that any such products will be successfully
commercialized or that the Company will achieve
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46
significant revenues from either domestic or international sales. Although the
FDA granted 510k clearance for the RPM Tracking System and PMA approval for the
Chilli Cooled Ablation Catheters with RPM tracking, the Company has limited
experience in manufacturing, marketing or selling these products in commercial
quantities. In order to successfully implement its business plan, the Company
must manufacture and sell the RPM and Chilli Cooled Ablation Catheters in
commercial quantities and the Company will need to expend significant capital
resources and develop manufacturing expertise to establish large-scale
manufacturing capabilities. Manufacturers often encounter difficulties in
scaling up production of new products, including problems involving production
yields, quality control and assurance, component supply shortages, shortages of
qualified personnel, compliance with FDA regulations, and the need for further
FDA approval of new manufacturing processes. The Company intends to market its
products primarily through a direct sales force in the United States and
indirect sales channels internationally. Establishing a marketing and sales
capability sufficient to support sales in commercial quantities will require
significant management and financial resources. See "-- Factors That May Impact
Future Operations."
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999
Net Sales. The Company's net sales increased 55% to $6.8 million for fiscal
2000 compared to $4.4 million for fiscal 1999. During the year, the Company has
seen significant increases in revenues from sales in the Chilli Cooled Ablation
Catheter in the United States and Europe, and sales increases from the Radii-T
mapping and ablation catheter in Japan. Sales of the Trio/Ensemble diagnostic
catheters to international customers have remained relatively constant during
fiscal 2000.
In December 1995, the Company received $3.0 million pursuant to a royalty
agreement with Arrow International Inc. ("Arrow"). This amount was recorded as
deferred royalty income and will be amortized to income for those Trio/Ensemble
catheters that Arrow manufactures and sells or, at a minimum, ratably over the
period for which the related technology patents expire. $300,000 of royalty
income related to the Arrow agreement was recognized in fiscal 2000.
Cost of Goods Sold. Cost of goods sold primarily includes raw materials
costs, catheter fabrication costs, system assembly costs and test costs. Cost of
goods sold was $6.9 million and $4.2 million for fiscal 2000 and 1999,
respectively. Cost of goods sold for fiscal 2000 included approximately $250,000
of costs associated with discontinuing the Mercator Atrial Mapping Basket
product line, approximately $450,000 of costs associated with introduction of
the RPM product line and production increases for the Chilli product line. Gross
margins were approximately break-even for fiscal 2000 and $200,000 for fiscal
1999. The Company expects that its gross margins will continue to be impacted
negatively by the cost of bringing the RPM products on line during fiscal 2001.
The Company is currently implementing manufacturing process improvements, and
these improvement, together with volume related cost improvements, are designed
to have positive effects on gross margins.
Research and Development. Research and development expenses include costs
associated with product research, clinical trials, prototype development, design
and testing, and costs associated with obtaining regulatory approvals. Research
and development expenses decreased 43% to $6.9 million for fiscal 2000 from
$12.1 million for fiscal 1999. The decrease in research and development expenses
was primarily attributable to a reduction in the number of engineering projects
underway as the Company concentrated its activities on the development,
refinement and launch of the RPM Tracking System and the new Chilli Cooled
Ablation Catheter.
Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, senior
management and administrative personnel, various legal and professional fees
including those in connection with obtaining patent protection, and costs of
trade shows. Selling, general and administrative expenses increased to $10.1
million for fiscal 2000 from $6.7 million for fiscal 1999. The increase in
selling, general and administrative expenses resulted primarily from increased
marketing and sales infrastructure supporting the North America and European
markets.
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47
Other Income (Expense), Net. Net other income was $0.7 million for fiscal
2000 compared to $0.1 million for fiscal 1999. Relative increases in net other
income during fiscal 2000 compared to the prior year was the result of increased
interest income on significantly higher cash, cash equivalent and short-term
investment balances.
Net Loss. The net loss applicable to common stockholders for fiscal 2000
was $20.6 million or $10.05 per share compared to a net loss of $18.6 million or
$9.34 for fiscal 1999.
Net Operating Loss Carryforwards. As of June 30, 2000, the Company's
reported net operating loss carryforwards were approximately $89.6 million and
$14.5 million for federal and state income tax purposes, respectively. If not
utilized, the net operating loss carryforwards will expire at various dates
beginning in the years 2001 through 2020. In addition, the net operating loss
carryforwards are subject to annual limitations as a result of the code's
ownership change provisions.
Impact of Adoption of New Accounting Standards.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted in years beginning after June 15,
2000. The Company has not in the past used, and does not anticipate in the
future using, derivative instruments, and the Company does not expect that the
adoption of FAS 133 will have a significant impact on its financial condition or
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") that must be adopted in the quarter ended June 30, 2000. SAB 101
summarizes certain areas of the Staff's views in applying generally accepted
accounting principles to revenue in financial statements. Although the Company
believes that its current revenue recognition principles comply with SAB 101,
additional guidance is expected to be issued by the SEC staff and the Company
will evaluate the affect of adopting SAB 101 at that point.
YEARS ENDED JUNE 30, 1999 AND 1998
Net Sales. The Company's net sales in fiscal 1999 resulted primarily from
limited sales of Chilli Cooled Ablation Catheters, Radii supra ventricular
tachycardia mapping and ablation catheters, Trio/Ensemble diagnostic catheters,
Mercator mapping baskets, Radio frequency Generator Systems and Arrhythmia
Mapping Systems. The Company's net sales increased to $4.4 million in fiscal
1999 compared to $2.4 million for fiscal 1998. The net increase in sales for
fiscal 1999 primarily resulted from sales of Chilli Cooled Ablation Catheters in
the U.S. market following commercial release in the third quarter of fiscal
1999. In addition, the Company had increased sales of Chilli and Radii catheters
in Europe reflecting the establishment of certain distributor arrangements in
fiscal 1999, particularly in Germany, France and Spain. The Company also
recorded higher overall sales of Radii and Trio/Ensemble catheters in Japan
during the year. In December 1995, the Company received $3.0 million pursuant to
a royalty agreement with Arrow. This amount was recorded as deferred royalty
income and will be amortized to income for those Trio/Ensemble catheters that
Arrow manufactures and sells. The royalty rate is 5% of the Trio/Ensemble
catheter's sales price. In fiscal 1999, the Company began to amortize deferred
royalty income on a straight-line basis over the estimated lives of the related
technology patents. A total of $369,138 of royalty income related to the
agreement has been recorded through June 30, 1999, of which $300,000 was
recognized in fiscal 1999.
Cost of Goods Sold. Cost of goods sold primarily includes raw materials
costs, catheter fabrication costs, and system assembly and test costs. Cost of
goods sold was $4.2 million for fiscal 1999 and resulted in a gross margin of
$157,000. For fiscal 1998, cost of goods sold was $2.8 million and resulted in a
gross margin deficit of $408,000. The increase in the gross margin for fiscal
1999 compared to fiscal 1998 was primarily due to increased sales volumes,
changes in sales mix and improved manufacturing yields. These improvements were
offset in part by increased overhead and training costs for manufacturing
personnel, higher costs associated with quality control and manufacturing
engineering activities to support higher production volumes.
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48
Research and Development. Research and development expenses include costs
associated with product research, clinical trials, prototype development, design
and testing, and costs associated with obtaining regulatory approvals. Research
and development expenses decreased to $12.1 million in fiscal 1999 compared to
$14.4 million in fiscal 1998. The decrease in research and development expenses
was primarily attributable to decreased costs related to clinical trials of the
Chilli catheter for which patient enrollment was completed in December 1997, and
decreased costs reflecting an overall smaller research and development
organization. The decreases were offset in part by increased costs associated
with consulting services, facilities and certain equipment costs during fiscal
1999 associated with various clinical programs.
Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, senior
management and administrative personnel, various legal and professional fees
including those in connection with obtaining patent protection, and costs of
trade shows. Selling, general and administrative expenses increased to $6.7
million in fiscal 1999 compared to $4.1 million in fiscal 1998. The increase was
primarily attributable to higher expenditures for sales and marketing personnel
and services to support expanding international and domestic sales, marketing
and customer service activities and increased costs associated with
demonstration units and product marketing materials.
Other Income (Expense), Net. Other income (expense), net decreased to net
other income of $77,000 in fiscal 1999 from net other income of $1.4 million in
fiscal 1998. The reduction in net other income was the result of decreased
interest income on significantly lower cash, cash equivalent and short-term
investment balances.
Net Loss. The Company's net loss increased to $18.6 million in fiscal 1999
compared to $17.5 million in fiscal 1998.
The increase in the Company's net loss primarily resulted from increased
selling, general and administrative expenses and lower interest income, which
were offset in part by increased overall sales volumes and gross margins and
decreased clinical research and product development costs.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through a
combination of private placements of equity securities yielding $33.5 million,
equipment lease financing arrangements yielding $4.0 million and a prepaid
royalty arrangement yielding $3.0 million. In addition, the Company closed its
initial public offering in June 1996 and raised net proceeds of $43.1 million.
In July 1999, the Company raised net proceeds of $31.5 million through a Series
B Convertible Preferred Stock financing. As of June 30, 2000, the Company had
$12.6 million in cash, cash equivalents and short-term investments.
The Company's liquidity and capital requirements are such that in order for
the Company to continue to manufacture, develop and market its core products,
the Company will be required to raise additional funds through public or private
financing, collaborative relationships or other arrangements prior to the end of
fiscal 2001. There can be no assurance that such additional funding will be
available on terms acceptable to the Company, if at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve additional restrictive covenants. Collaborative
arrangements with a capital raising component may require the Company to
relinquish its rights to certain of its technologies, products or marketing
territories. The failure of the Company to raise capital when needed will have a
material adverse effect on the Company's business, financial condition and
results of operations. The factors described in the next section, "Factors That
May Impact Future Operations" and elsewhere in this Report will impact the
Company's future capital requirements and the adequacy of its available funds.
Net cash used in operating activities was $14.1 million, $18.4 million and
$16.8 million in fiscal 2000, 1999 and 1998, respectively. For each of these
periods, the net cash used in operating activities resulted primarily from net
losses. Net cash used in investing activities was $8.2 million for fiscal 2000,
and net cash provided by investing activities was $16.7 million and $17.7
million in fiscal 1999 and 1998, respectively. Net cash used and provided by
investing activities resulted primarily from purchases, maturities and sales of
short-term investments, offset in part by purchases of equipment and licenses.
Net cash provided by financing
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activities was $28.4 million and $1.3 million in fiscal 2000 and fiscal 1998,
respectively, and net cash used in financing activities in fiscal 1999 was $3.2
million. The net cash provided by financing activities in fiscal 2000 resulted
primarily from the proceeds of the Series B Convertible Preferred stock
transaction, offset in part by repayment of the bridge loan.
As of the end of fiscal 2000, the Company had capital equipment of
approximately $9.6 million, less accumulated depreciation and amortization of
approximately $6.1 million, to support its product development, manufacturing
and administrative activities. The Company had financed approximately $4.0
million from capital lease obligations through fiscal 2000. The Company expects
capital expenditures to increase over the next several years as it acquires
equipment to support manufacturing and development activities.
FACTORS THAT MAY IMPACT FUTURE OPERATIONS
Limited Operating History; History of Losses and Expectation of Future Losses
The Company was founded in 1991 and to date has engaged primarily in
researching, developing, testing and obtaining regulatory clearances for its
products. The Company has experienced significant operating losses since
inception. As the end of fiscal 2000, the Company had an accumulated deficit of
$96.4 million. To date, the Company has generated only limited revenues from
sales of its products and expects its operating losses to continue through at
least the end of fiscal 2002 as it continues to expend funds to conduct its
research and development activities, establish commercial-scale manufacturing
capabilities and expand its sales and marketing activities. There can be no
assurance that any of the Company's products for diagnosis and treatment of
ventricular tachycardia and other arrhythmias, particularly the RPM Tracking
System or Chilli Cooled Ablation Catheter, will be successfully commercialized
or that the Company will achieve significant revenues from either international
or domestic sales. In addition, there can be no assurance that the Company will
achieve or sustain profitability in the future or meet the expectations of
securities industry analysts. The Company's results of operations may fluctuate
significantly from quarter to quarter or year to year and will depend on
numerous factors, including actions relating to regulatory matters, progress of
clinical trials, the extent to which the Company's products gain market
acceptance, the scale-up of manufacturing abilities and the expansion of sales
and marketing activities and competition.
No Assurance that Company's Products will Prove to be Safe and Effective
There can be no assurance that the Company's current or future products
will prove to be safe and effective in clinical trials under applicable United
States or international regulatory guidelines or that additional modifications
to the Company's products will not be necessary. Furthermore, there can be no
assurance that the Company will be successful in perfecting the design of the
RPM Tracking System. With respect to the Chilli Cooled Ablation System, because
ablation treatment of cardiac arrhythmias is relatively new, the long-term
effects of radiofrequency ablation on patients are unknown. As a result, the
long-term success of ablation therapy in treating ventricular tachycardia and
other tachyarrhythmias will not be known for several years.
No Existing Market
The Company's future success will depend upon the successful
commercialization of the Chilli Cooled Ablation Catheter and RPM Tracking
System. These products have only recently received FDA approval and clearance to
be commercialized in the United States for the treatment of certain forms of
cardiac tachyarrhythmias. The Company has to date demonstrated only limited
ability to commercialize these new products. There can be no assurance that
these products will gain any significant degree of market acceptance among
physicians, patients, and health care payors. The Company believes that
physicians' acceptance of procedures using the Company's RPM Tracking System
will be essential for market acceptance of such system. Even though the clinical
efficacy of the system has been established, electrophysiologists, cardiologists
and other physicians may elect not to recommend the use of the RPM Tracking
System for any number of reasons. There can be no assurance that this system
will be successfully commercialized for the approved product set in the United
States and Europe. There can be no assurance of the ability to obtain regulatory
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approval in certain other international markets where RPM Tracking System has
not yet received approval. The Company believes that, as with any novel medical
technology, there will be a significant learning process involved for physicians
to become proficient. Broad use of the system will require training of
electrophysiologists, and the time required to complete such training could
adversely affect market acceptance. Failure of the product to achieve
significant market acceptance would have a material adverse effect on the
Company's business, financial condition and results of operations. Even if the
RPM Tracking System achieves market acceptance, the Company will be required to
significantly ramp manufacturing operations to produce sufficient quantities of
the product to satisfy customer demand. Any failure to manufacture the RPM
Tracking System in quantities sufficient to satisfy demand will materially
adversely affect the Company's business, financial condition and results of
operations.
Marketing and Distribution
Establishing a marketing and sales capability sufficient to support planned
sales growth will require substantial efforts and significant management and
financial resources. There can be no assurance that the Company will be able to
continue to expand its marketing staff or sales force, that the establishment of
such a marketing staff or sales force will be cost-effective or that the
Company's sales and marketing efforts will be successful. There can be no
assurance that the Company will be able to maintain or enter into agreements
with existing or new distributors, or that such distributors will devote
adequate resources to selling the Company's products. Failure to establish
appropriate distribution relationships could have a material adverse effect upon
the Company's business, financial condition and results of operations.
The Company currently sells its Chilli Cooled Ablation Catheters, Radii-T
mapping and ablation catheters, Trio/Ensemble diagnostic catheters and RPM
Tracking System Products through distributors in certain international markets.
All sales of the Company's products to date have been denominated in U.S.
dollars. In addition, the Company plans to market its other products in
international markets, subject to receipt of required regulatory approvals.
Changes in overseas economic conditions, currency exchange rates, foreign tax
laws, or tariffs or other trade regulations could have a material adverse effect
on the Company's ability to market its products internationally and therefore on
its business, financial condition and results of operations.
Major Distributor; Dependence on Japan Lifeline
The Company currently relies upon international distributors of specialty
cardiovascular products to market and sell its products. A large percentage of
the Company's revenues are derived from sales to its Japanese distributor, Japan
Lifeline. Sales to Japan Lifeline accounted for 49%, 52% and 80%, of the
Company's net sales in fiscal 2000, 1999 and 1998, respectively. International
sales accounted for 67%, 78% and 87% of the Company's net sales in fiscal 2000,
1999 and 1998, respectively. In fiscal 2001, the Company anticipates that Japan
Lifeline will continue to account for a significant percentage of the Company's
net sales. The Company also relies on its European distributors for a
significant portion of its revenues. If the Company's sales to any of its
international distributors decline, the Company would experience a material
decline in revenues. Even if the Company is successful in selling its products
through new international distributors, the rate of growth of the Company's net
sales could be materially and adversely effected if its current international
distributors do not continue to sell a substantial number of the Company's
products. If the Company's sales to its current international distributors
decline, the Company cannot be certain that it will be able to attract
additional distributors that can market its products effectively or can provide
timely and cost-effective customer support and service. None of the Company's
international distributors are obligated to sell the Company's products after
its agreement with the Company has expired. Further, the Company cannot be
certain that its current international distributors will continue to represent
its products or that they will continue to devote a sufficient amount of effort
and resources to selling the Company's products.
Strategic Relationships
The Company intends to pursue strategic relationships with corporations and
research institutions with respect to the research, development, international
regulatory approval, manufacturing and marketing of
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certain of its products. There can be no assurance that the Company will be
successful in establishing or maintaining any such relationships or that any
such relationship will be successful.
Manufacturing
A number of components for the Company's products are provided by sole
source suppliers. For certain of these components, there are relatively few
alternative sources of supply, and establishing additional or replacement
vendors for such components could not be accomplished quickly. For some
components, there is currently a long lead-time between purchases and the
receipt of shipments. For those components from a single source, the vendor's
inability to supply such components in a timely manner could have a material
adverse effect on the Company's ability to manufacture the RPM Tracking System
and other diagnostic and ablation catheters and therefore on its business,
financial condition and marketing efforts.
The Company has limited experience manufacturing its products in the
volumes that will be necessary for the Company to achieve significant commercial
sales, and there can be no assurance that reliable, high volume manufacturing
capacity can be established or maintained at commercially reasonable costs. The
Company needs to expend significant capital resources and develop manufacturing
expertise to establish large scale manufacturing capabilities. Manufacturers
often encounter difficulties in scaling up production of new products, including
problems involving production yields, quality control and assurance, component
supply shortages, shortages of qualified personnel, compliance with FDA
regulations, and the need for further FDA approval of new manufacturing
processes. In addition, the Company believes that substantial cost reductions in
its manufacturing operations will be required for it to commercialize its
catheters and systems on a profitable basis. Any inability of the Company to
establish and maintain large scale manufacturing capabilities would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's manufacturing facilities are subject to periodic inspection
by regulatory authorities, and its operations must undergo QSR compliance
inspections conducted by the FDA. The Company is required to comply with QSR in
order to produce products for sale in the United States and with ISO9001/EN46001
standards in order to produce products for sale in Europe. Any failure of the
Company to comply with QSR or ISO9001/EN46001 standards may result in the
Company being required to take corrective actions, such as modification of its
policies and procedures. The Company has been granted by the State of California
the required license to manufacture medical devices. If the Company is unable to
maintain such a license, it would be unable to manufacture or ship any product,
and such inability would have a material adverse effect on the Company's
business, financial condition and results of operations.
Patents and Proprietary Rights
The Company's success will depend in part on its ability to obtain patent
and copyright protection for its products and processes, to preserve its trade
secrets and to operate without infringing or violating the proprietary rights of
third parties. The patent positions of medical device companies, including those
of the Company, are uncertain and involve complex and evolving legal and factual
questions. The coverage sought in a patent application either can be denied or
significantly reduced before or after the patent is issued. Consequently, there
can be no assurance that any patents from pending patent applications or from
any future patent application will be issued, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the Company's patents will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held by the Company. In addition, there can be no
assurance that competitors, many of which have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to make, modify, use or sell its products either in the United States or
in international markets. Litigation or regulatory proceedings, which could
result in substantial cost and uncertainty to the Company, may also be necessary
to enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. There can
be no assurance that the Company will have the financial resources to defend its
patents from infringement or claims of invalidity.
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The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the United States Patent and Trademark
Office ("USPTO") to determine the priority of inventions or an opposition to a
patent grant in a foreign jurisdiction. The defense and prosecution of
intellectual property suits, USPTO interference or opposition proceedings and
related legal and administrative proceedings are both costly and time-consuming.
Any litigation, opposition or interference proceedings will result in
substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology. Although patent and intellectual property disputes
in the medical device area have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses from others would be available to the Company on satisfactory
terms, if at all. Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is aware of certain patents owned or licensed by others and relating
to cardiac catheters and cardiac monitoring. Certain enhancements of the
Company's products are still in the design and pre-clinical testing phase.
Depending on the ultimate design specifications and results of pre-clinical
testing of these enhancements, there can be no assurance that the Company would
be able to obtain a license to such parties' patents or that a court would find
that such patents are either not infringed by the Company's enhancements or that
the Company's patents are invalid. Further, there can be no assurance that
owners or licensees of these patents will not attempt to enforce their patent
rights against the Company in a patent infringement suit or other legal
proceeding, regardless of the likely outcome of such suit or proceeding.
Competition
At present, the Company considers its primary competition to be companies
involved in current, more established therapies for the treatment of ventricular
tachycardia and atrial fibrillation, including drugs, external electrical
cardioversion and defibrillation, implantable defibrillators, ablation
accompanied by pacemaker implantation and open-heart surgery. In addition,
several competitors are also developing new approaches and new products for the
treatment and mapping of ventricular tachycardia and other arrythmias, including
ablation systems using ultrasound, microwave, laser and cryoablation
technologies and mapping systems using contact mapping, single-point spatial
mapping and non-contact, multisite electrical mapping technologies. Many of the
Company's competitors have an established presence in the field of
interventional cardiology and electrophysiology, including Boston Scientific
Corporation, C.R. Bard, Inc., Johnson and Johnson, St. Jude Medical, Medtronic,
Inc. and Endocardial Solutions, Inc. Many competitors have substantially greater
financial and other resources than the Company, including larger research and
development staffs, more experience, capabilities in conducting research and
development activities, testing products in clinical trials, obtaining
regulatory approvals and manufacturing, marketing and distributing products.
There can be no assurance that the Company will succeed in developing and
marketing technologies and products that are more clinically efficacious and
cost effective than the more established treatments or the new approaches and
products developed and marketed by its competitors. Furthermore, there can be no
assurance that the Company will succeed in developing new technologies and
products that are available prior to its competitors' products. The failure of
the Company to demonstrate the efficacy and cost effective advantages of its
products over those of its competitors or the failure to develop new
technologies and products before its competitors, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company believes that the primary competitive factors in the market for
cardiac ablation and mapping devices are safety, efficacy, ease of use and
price. In addition, the length of time required for products to be developed and
to receive regulatory and, in some cases, third party payor reimbursement
approval are
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important competitive factors. The medical device industry is characterized by
rapid and significant technological change. Accordingly, the Company's success
will depend in part on its ability to respond quickly to medical and
technological changes through the development and introduction of new products.
Product development involves a high degree of risk and there can be no assurance
that the Company's new product development efforts will result in any
commercially successful products. The Company believes it competes favorably
with respect to these factors, although there is no assurance that it will be
able to continue to do so.
Government Regulation
United States
The design, pre-clinical and clinical testing, manufacture, labeling, sale,
distribution and promotion of the Company's products are subject to regulation
by numerous governmental authorities, principally the FDA and corresponding
state and foreign regulatory agencies. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant PMA clearance or PMA approval for
devices, withdrawal of marketing authorization, a recommendation by the FDA that
the Company not be permitted to enter into government contracts and/or criminal
prosecution. The FDA also has the authority to request repair, replacement or
refund of the cost of any device manufactured or distributed by the Company.
Before a new device can be introduced into the market, a manufacturer must
generally obtain marketing clearance through a premarket notification under
Section 510(k) of the FDC Act or an approval of a PMA application under Section
515 of the FDC Act. Commercial distribution of a device for which a 510(k)
clearance is required can begin only after the FDA issues an order finding the
device to be "substantially equivalent" to a predicate device. If the Company
cannot establish that a proposed device is substantially equivalent to a legally
marketed predicate device, the Company must seek premarket approval of the
proposed device from the FDA through the submission of a PMA application.
The Company will be required to make a new 510(k) submission for any device
that is cleared through the 510(k) process if the Company modifies or enhances
the device in a manner that could significantly affect safety or effectiveness,
or if those changes constitute a major modification in the intended use of the
device. If the Company cannot establish that a proposed device is substantially
equivalent to a legally marketed predicate device, the Company must seek
premarket approval of the proposed device from the FDA through the submission of
a PMA application. There can be no assurance that the FDA will act favorably or
quickly on any of the Company's PMA applications. Significant difficulties and
costs may be encountered by the Company in its efforts to obtain FDA clearance
that could delay or preclude the Company from selling its products in the United
States. Furthermore, there can be no assurance that the FDA will not request
additional data or require that the Company conduct further clinical studies,
causing the Company to incur substantial cost and delay. In addition, there can
be no assurance that the FDA will not impose strict labeling requirements,
onerous operator training requirements or other requirements as a condition of
its PMA approval, any of which could limit the Company's ability to market its
systems. Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission ("FTC"). FDA
enforcement policy strictly prohibits the marketing of FDA cleared or approved
medical devices for unapproved uses. Further, if a company wishes to modify a
product after FDA approval of a PMA, including changes in indications or other
modifications that could affect safety or efficacy, additional clearances or
approvals will be required from the FDA. Failure to receive or delays in receipt
of FDA clearances or approvals, including the need for additional clinical
trials or data as a prerequisite to clearance or approval, or any FDA conditions
that limit the ability of the Company to market its systems, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
International
The European Union has promulgated rules which require that medical
products distributed after June 14, 1998 bear the CE mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. Quality system certification is
one of the CE
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mark requirements. The Company has received ISO9001/EN46001 certification by its
ISO Certification Registrar, one of the CE mark certification prerequisites, for
its manufacturing facility in Sunnyvale, California. Furthermore, in January
1998, the Company received the right to affix the CE mark to its Arrhythmia
Mapping System and Chilli Cooled Ablation System. In April 1998, the Company
received the right to affix the CE mark to its Radii catheters. In July 1998,
the Company received the right to affix the CE mark to its Trio/Ensemble
catheters. In April 2000, the Company received CE mark certification for the RPM
tracking system, and for its Chilli Cooled Ablation Catheters incorporating
Real-time Position Management navigation technology. While the Company intends
to satisfy the requisite policies and procedures that will permit it to receive
the CE Mark Certification for other products, there can be no assurance that the
Company will be successful in meeting the European certification requirements
and failure to receive the right to affix the CE mark will prohibit the Company
from selling these and other products in member countries of the European Union.
The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA approval, and the requirements may
differ. Export sales of medical devices that have not received FDA marketing
authorization are subject to FDA export requirements. In accordance with the FDA
Export Reform & Enforcement Act of 1996, such devices may be exported to any
country provided that the device meets a number of criteria including marketing
authorization in one of the "Tier I" countries identified in that Act. If the
device has no marketing authorization in a Tier I country, and is intended for
marketing, it may be necessary to obtain approval from the FDA to export the
device. In order to obtain export approval, the Company may be required to
provide the FDA with documentation from the medical device regulatory authority
of the country in which the study is to be conducted or the purchaser is
located, stating that the device has the approval of the country. In addition,
the FDA must find that the exportation of the device is not contrary to the
public health and safety of the country in order for the Company to obtain the
permit. The Company currently has marketing authorization in one or more Tier I
countries for all its clinically used products. The RPM Tracking System products
are currently undergoing the process and clinical trials necessary to obtain
regulatory approvals in Japan.
Third-Party Reimbursement and Uncertainty Related to Health Care Reform
In the United States, health care providers, including hospitals and
physicians, that purchase medical products for treatment of their patients,
generally rely on third party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or a part of the
costs and fees associated with the procedures performed using these products.
The Company's success will be dependent upon, among other things, the ability of
health care providers to obtain satisfactory reimbursement from third party
payors for medical procedures in which the Company's products are used. Third
party payors may deny reimbursement if they determine that a prescribed device
has not received appropriate regulatory clearances or approvals, is not used in
accordance with cost-effective treatment methods as determined by the payor, or
is experimental, unnecessary or inappropriate. Third party reimbursement is
generally provided on the basis of the procedure's DRG code as established by
the HCFA. The failure of the procedures in which the Company's products are used
or an insufficient level of reimbursements for such procedures would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, medical equipment reimbursements have been
mandated by statute to be reduced in the past, and there can be no assurance
that any such reimbursements with respect to the Company's products will be
adequate or provided at all. Failure by hospitals and other users of the
Company's products to obtain reimbursement from third party payors, or changes
in government and private third party payors' policies toward reimbursement for
procedures employing the Company's products, would have a material adverse
effect on the Company's business, financial condition and results of operations.
Moreover, the Company is unable to predict what additional legislation or
regulation, if any, relating to the health care industry or third party coverage
and reimbursement may be enacted in the future, or what effect such legislation
or regulation would have on the Company.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country by country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and
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procedures. In most markets, there are private insurance systems as well as
government managed systems. Market acceptance of the Company's products will
depend on the availability and level of reimbursement in international markets
targeted by the Company. There can be no assurance that the Company will obtain
reimbursement in any country within a particular time, for a particular amount,
or at all.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. In addition, the Company believes that treatment with the
Company's products will be more efficacious than currently available therapies.
The Company anticipates that hospital administrators and physicians would
justify the use of the Company's products by the attendant cost savings and
clinical benefits that the Company believes would be derived from the use of its
products. However, there can be no assurance that this will be the case. There
can be no assurance that reimbursement for the Company's products will be
available in the United States or in international markets under either
government or private reimbursement systems, or that physicians will support and
advocate reimbursement procedures using the Company's products.
Product Liability and Insurance
The development, manufacture and sale of medical products entail
significant risk of product liability claims and product failure claims. The
Company has only limited commercial sales to date and does not yet have, and
will not have for a number of years, sufficient clinical data to allow the
Company to measure the risk of such claims with respect to its products. The
Company faces an inherent business risk of financial exposure to product
liability claims in the event that the use of its products results in personal
injury or death. The Company also faces the possibility that defects in the
design or manufacture of the Company's products might necessitate a product
recall. There can be no assurance that the Company will not experience losses
due to product liability claims or recalls in the future. In addition, the
Company will require increased product liability coverage if any of its
potential products are successfully commercialized. Such insurance is expensive,
difficult to obtain and may not be available in the future on acceptable terms,
or at all. Any claims against the Company regardless of their merit or eventual
outcome could have a material adverse effect upon the Company's business,
financial condition and results of operations.
Employees
The Company's ability to operate successfully depends in significant part
upon the continued service of certain key scientific, technical, clinical,
regulatory and managerial personnel, and its continuing ability to attract and
retain additional highly qualified scientific, technical, regulatory and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company can retain such personnel or that it can
attract or retain other highly qualified scientific, technical, clinical,
regulatory and managerial personnel in the future, including key sales and
marketing personnel. The loss of key personnel or the inability to hire and
retain qualified personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations.
The Company's management has recently gone through a significant
restructuring. The Company's new President and Chief Executive Officer, Tom
Prescott, joined the Company in May 1999. In addition, the Company's Chief
Financial Officer, Vice President, Operations and Vice President, Sales each
joined the Company in January 2000. The Company also hired a new Vice President
of Human Resources who joined the Company in July 2000. There can be no
assurance that these newly hired officers of the Company will be able to operate
effectively with that portion of the management team that was retained.
In order to manufacture and market its products in commercial quantities,
the Company believes that it will be required to expand its operations,
particularly in the areas of manufacturing and sales and marketing and, in
connection therewith, to hire new personnel to work in these areas. There can be
no assurance that the Company's officers and its sales and marketing personnel
will be able to build a successful sales force or that they will be able to
operate effectively with the existing management team. As the Company expands
its
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56
operations in these areas, such expansion will likely result in new and
increased responsibilities for management personnel and place significant strain
upon the Company's management, operating and financial systems and resources. To
accommodate any such growth and compete effectively, the Company will be
required to implement and improve information systems, procedures, and controls,
and to expand, train, motivate and manage its work force. Any failure to
implement and improve the Company's operational, financial and management
systems or, to expand, train, motivate or manage employees as required by future
growth, if any, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Potential Volatility of Stock Price
The market price of shares of Common Stock, like that of the common stock
of many medical product and technology companies, has in the past been, and is
likely in the future to continue to be highly volatile. Factors such as
fluctuations in the Company's operating results, proportion of ownership between
common stockholders and Series B Convertible Preferred stockholders,
announcements of technological innovations or new commercial products by the
Company or competitors, government regulation, changes in the current structure
of the health care financing and payment systems, developments in or disputes
regarding patent or other proprietary rights, release of reports by securities
analysts, change in securities analysts recommendations, economic and other
external factors and general market conditions may have a significant effect on
the market price of the Common Stock. Moreover, the stock market has from time
to time experienced extreme price and volume fluctuations which have
particularly affected the market prices for medical products and high technology
companies and which have often been unrelated to the operating performance of
such companies. These broad market fluctuations, as well as general economic,
political and market conditions, may adversely affect the market price of the
Company's Common Stock. In the past, following periods of volatility in the
market price of a company's stock, securities class action litigation has
occurred against the issuing company. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, operating results and financial condition. Any adverse
determination in such litigation could also subject the Company to significant
liabilities.
> Significant Rights attaching to Series B Convertible Preferred Stock
The Company has 27,250 shares of Series B Convertible Preferred Stock
outstanding which are convertible, at the option of the holders, into 5.45
million shares of the Company's common stock. The holders of Series B
Convertible Preferred Stock are entitled to significant rights, preferences and
privileges over holders of common stock including the right to elect three of
five directors to the board of directors of the Company, to a preferential
cumulative dividend, to certain redemption rights and to a substantial
liquidation payment preference over the Company's common stock which is also
payable upon any transaction or series of transactions (including, without
limitation, any merger, reorganization or consolidation) involving a transfer of
50% or more of the outstanding voting power of the Company. The holders of
Series B Convertible Preferred Stock are also entitled to certain registration
rights and enjoy certain protective rights in that their consent is required to
effect certain corporate transactions including, but not limited to, amending
the Company's certificate of incorporation or by-laws, issuing common or
preferred stock, declaring dividends or selling all or substantially all of the
Company's stock or assets. It is likely that the preferences and rights enjoyed
by the holders of Series B Convertible Preferred Stock have a negative impact
the market price of the common stock of the Company. Also, if these holders, by
converting their Series B Convertible Preferred Stock into common stock and then
exercising their registration rights, cause a large number of securities to be
registered and sold in the public market, such sales could materially and
adversely affect the market price for the Company's common stock. In addition,
if the Company were to include in a registration statement shares held by these
holders pursuant to the exercise of their registration rights, such sales may
impede the Company's ability to raise needed capital. For a more complete
description of the rights, preferences and privileges attaching to the Series B
Convertible Preferred Stock refer to the section of "Item 5. Market for
Registrant's Common Equity and Related Stockholder Matters" entitled "Recent
Sales of Unregistered Securities".
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Significant Control by Holders of Series B Convertible Preferred Stock
The holders of Series B Convertible Preferred Stock beneficially own an
aggregate of approximately 63.9% of the outstanding voting stock of the Company
and are entitled to elect three of five directors to the Company's Board of
Directors. These stockholders, if acting together, will be able to significantly
influence all matters requiring approval of either the Board of Directors or the
stockholders of the Company, including the approval of significant corporate
transactions. This concentration of ownership may also delay, deter or prevent a
change in control and may make some transactions more difficult or impossible to
complete without the support of these stockholders.
OTHER MATTERS
We know of no other matters to be submitted at the meeting. If any other
matters properly come before the meeting, it is the intention of the persons
named in the enclosed form of Proxy to vote the shares they represent as the
Board of Directors may recommend.
THE BOARD OF DIRECTORS
Dated: November 17, 2000
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58
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of June 30, 2000 and 1999.... F-3
Consolidated Statements of Operations for the years ended
June 30, 2000, 1999 and 1998.............................. F-4
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 2000, 1999 and 1998.................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, 1999, and 1998............................. F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
59
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cardiac Pathways Corporation
We have audited the accompanying consolidated balance sheets of Cardiac
Pathways Corporation as of June 30, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 2000. Our audits also included the
financial statement schedule included on page S-1. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cardiac
Pathways Corporation at June 30, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 2000, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material aspects the information set forth
therein.
/s/ ERNST & YOUNG LLP
San Jose, California
July 28, 2000
F-2
60
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30,
----------------------------
2000 1999
------------ ------------
Current assets:
Cash and cash equivalents................................. $ 8,487,634 $ 2,339,660
Short-term investments.................................... 4,136,988
---
Accounts receivable, net of allowance for doubtful
accounts of $139,269 at June 30, 2000 and $105,000 at
June 30, 1999.......................................... 1,271,395 898,296
Inventories............................................... 2,095,178 2,228,879
Prepaid expenses.......................................... 227,070 338,479
Other current assets...................................... 222,102 76,719
------------ ------------
Total current assets.............................. 16,440,367 5,882,033
Property and equipment, net................................. 3,505,428 2,891,819
Notes receivable from related parties....................... 100,000 29,584
Intangible assets, net of accumulated amortization of
$366,666 at June 30, 2000................................. 1,633,333
Deposits and other assets................................... 86,137 102,406
------------ ------------
$ 21,765,265 $ 8,905,842
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 980,374 $ 488,128
Accrued compensation and related benefits................. 1,196,071 835,277
Accrued clinical expenses................................. 527,001 939,183
Other accrued expenses.................................... 906,682 738,831
Current obligations under capital leases.................. 257,714 325,334
Deferred income -- current portion........................ 400,000 300,000
Short-term debt obligation................................ -- 3,000,000
------------ ------------
Total current liabilities......................... 4,267,842 6,626,753
Long-term obligations under capital leases.................. 85,058 342,772
Deferred income............................................. 2,030,862 2,330,862
Accrued series B preferred dividends........................ 2,784,375 --
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized and 27,250 issued and outstanding at June
30, 2000 and none issued and outstanding at June 30,
1999; liquidation preference of $30,034,375 at June 30,
2000................................................... 27 --
Common stock, $.001 par value; 6,000,000 shares
authorized; 3,078,486 shares issued and outstanding at
June 30, 2000 and 2,007,904 at June 30, 1999........... 3,078 2,008
Additional paid-in capital................................ 109,266,557 80,152,542
Receivables from stockholders............................. (321,667) (385,000)
Accumulated deficit....................................... (96,350,867) (79,983,404)
Deferred compensation..................................... -- (180,691)
------------ ------------
Total stockholders' equity (deficit).............. 12,597,128 (394,545)
------------ ------------
$ 21,765,265 $ 8,905,842
============ ============
See Notes to Consolidated Financial Statements.
F-3
61
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net sales........................................ $ 6,820,789 $ 4,406,370 $ 2,419,816
Cost of goods sold............................... 6,868,097 4,249,308 2,827,789
------------ ------------ ------------
Gross margin (deficit)......................... (47,308) 157,062 (407,973)
Operating expenses:
Research and development....................... 6,946,822 12,115,535 14,353,393
Selling, general and administrative............ 10,063,509 6,684,669 4,091,637
------------ ------------ ------------
Total operating expenses............... 17,010,331 18,800,204 18,445,030
------------ ------------ ------------
Loss from operations............................. (17,057,639) (18,643,142) (18,853,003)
Other income (expense):
Interest income................................ 1,033,538 699,589 1,857,981
Interest expense............................... (68,488) (664,527) (578,931)
Other, net..................................... (274,873) 42,305 75,156
------------ ------------ ------------
Total other income (expense)........... 690,176 77,367 1,354,206
------------ ------------ ------------
Net loss......................................... (16,367,463) (18,565,775) (17,498,797)
Preferred stock dividend......................... 3,300,000 -- --
Beneficial conversion feature related to the
issuance of the Series B Preferred Stock....... 960,000 -- --
------------ ------------ ------------
Net loss attributable to common stockholders..... $(20,627,464) $(18,565,775) $(17,498,797)
============ ============ ============
Net loss per share -- basic and diluted.......... $ (10.05) $ (9.34) $ (9.07)
============ ============ ============
Shares used in computing net loss per common
share -- basic and diluted..................... 2,053,000 1,987,000 1,930,000
============ ============ ============
See Notes to Consolidated Financial Statements.
F-4
62
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK PREFERRED STOCK ADDITIONAL RECEIVABLES
------------------ --------------- PAID-IN FROM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT
--------- ------ ------ ------ ------------ ------------ ------------
Balance at June 30, 1997........................ 1,904,707 $1,905 -- -- $ 79,096,812 $(420,000) $(43,918,832)
Issuance of Common Stock warrants............... -- -- -- -- 60,351 -- --
Issuance of nonqualified stock option for
services...................................... -- -- -- -- 65,121 -- --
Exercise of options to purchase Common Stock.... 41,776 42 -- -- 225,502 35,000 --
Issuance of Common Stock under employee stock
purchase plan................................. 12,711 13 -- -- 343,829 -- --
Amortization of deferred compensation........... -- -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- -- (17,498,797)
--------- ------ ------ --- ------------ --------- ------------
Balance at June 30, 1998........................ 1,959,194 1,960 -- -- 79,791,615 (385,000) (61,417,629)
Issuance of Preferred Stock warrants............ -- -- -- -- 45,000 -- --
Issuance of nonqualified stock option for
services...................................... -- -- -- -- 3,811 -- --
Exercise of options to purchase Common Stock.... 32,436 32 -- -- 314,099 -- --
Issuance of Common Stock under employee stock
purchase plan................................. 16,274 16 -- -- 132,423 -- --
Deferred compensation........................... -- -- -- -- (134,406) -- --
Amortization of deferred compensation........... -- -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- -- (18,565,775)
--------- ------ ------ --- ------------ --------- ------------
Balance at June 30, 1999........................ 2,007,904 2,008 -- -- 80,152,542 (385,000) (79,983,404)
Issuance of Series B Preferred Stock, net of
issuance cost of $500,000..................... -- -- 32,250 32 32,709,968 (250,000) --
Preferred Stock Dividends....................... -- -- -- -- (4,260,000) -- --
Exercise of options to purchase Common Stock.... 33,781 33 -- -- 152,497 -- --
Issuance of Common Stock under employee stock
purchase plan................................. 36,801 37 -- -- 68,795 -- --
Write-off of receivable from Shareholder........ -- -- -- -- -- 313,333 --
Deferred compensation........................... -- -- -- -- (71,875) -- --
Amortization of deferred compensation........... -- -- -- -- -- -- --
Conversion of Preferred Series B Stock.......... 1,000,000 1,000 (5,000) (5) 514,630 -- --
Net loss........................................ -- -- -- -- -- -- (16,367,463)
--------- ------ ------ --- ------------ --------- ------------
Balance at June 30, 2000........................ 3,078,486 $3,078 27,250 $27 $109,266,557 $(321,667) $(96,350,867)
========= ====== ====== === ============ ========= ============
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY (DEFICIT)
------------ ----------------
Balance at June 30, 1997........................ $(767,676) $ 33,992,209
Issuance of Common Stock warrants............... -- 60,351
Issuance of nonqualified stock option for
services...................................... -- 65,121
Exercise of options to purchase Common Stock.... -- 260,544
Issuance of Common Stock under employee stock
purchase plan................................. -- 343,842
Amortization of deferred compensation........... 261,748 261,748
Net loss........................................ -- (17,498,797)
--------- ------------
Balance at June 30, 1998........................ (505,928) 17,485,018
Issuance of Preferred Stock warrants............ -- 45,000
Issuance of nonqualified stock option for
services...................................... -- 3,811
Exercise of options to purchase Common Stock.... -- 314,131
Issuance of Common Stock under employee stock
purchase plan................................. -- 132,439
Deferred compensation........................... 134,406 --
Amortization of deferred compensation........... 190,831 190,831
Net loss........................................ -- (18,565,775)
--------- ------------
Balance at June 30, 1999........................ (180,691) (394,545)
Issuance of Series B Preferred Stock, net of
issuance cost of $500,000..................... -- 32,460,000
Preferred Stock Dividends....................... -- (4,260,000)
Exercise of options to purchase Common Stock.... -- 152,530
Issuance of Common Stock under employee stock
purchase plan................................. -- 68,832
Write-off of receivable from Shareholder........ -- 313,333
Deferred compensation........................... 71,875 --
Amortization of deferred compensation........... 108,816 108,816
Conversion of Preferred Series B Stock.......... -- 515,625
Net loss........................................ -- (16,367,463)
--------- ------------
Balance at June 30, 2000........................ $ -- $ 12,597,128
========= ============
See Notes to Consolidated Financial Statements.
F-5
63
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(16,367,463) $(18,565,775) $(17,498,797)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,708,833 1,271,058 1,274,226
Amortization of deferred compensation..................... 108,816 190,831 261,748
(Gain) loss on disposal of property and equipment......... 44,726 -- (33,678)
Issuance of common stock warrants......................... -- -- 60,351
Issuance of preferred stock warrants...................... -- 45,000 --
Issuance of nonqualified stock options for Services....... -- 3,811 65,121
Receivable from shareholder written off................... 313,333 -- --
Changes in operating assets and liabilities:
Accounts receivable....................................... (373,099) (374,841) (354,627)
Receivable from related party............................. -- -- 1,552
Inventories............................................... 133,701 (662,213) (248,037)
Prepaid expenses.......................................... 111,409 (20,930) 94,209
Other current assets...................................... (145,383) 449,474 52,335
Accounts payable.......................................... 492,246 (591,644) 291,388
Accrued compensation and related benefits................. 360,794 233,970 138,493
Accrued clinical expenses................................. (412,182) (205,373) 448,450
Other accrued expenses.................................... 167,851 84,161 (215,572)
Deferred Income........................................... (200,000) (300,000) (19,611)
Interest payable on note.................................. -- -- (1,153,625)
------------ ------------ ------------
Net cash used in operating activities....................... (14,056,417) (18,442,471) (16,836,074)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments......................... (11,136,988) (5,612,448) (25,167,799)
Maturities of short-term investments........................ 7,000,000 22,860,948 44,394,833
Purchase of property and equipment.......................... (2,000,502) (1,202,612) (1,170,621)
Proceeds from disposal of equipment......................... -- -- 23,519
(Increase) decrease in notes receivable..................... (70,416) 230,893 59,014
Purchase of rights to certain patents....................... (2,000,000) -- --
(Increase) decrease in deposits and other assets............ 16,269 386,590 (391,713)
------------ ------------ ------------
Net cash provided by (used in) investing activities......... (8,191,637) 16,663,371 17,747,233
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations.......... (325,334) (596,687) (838,094)
Proceeds (repayment) from bridge loan financing............. (3,000,000) 3,000,000 --
Repayment of borrowings on line of credit................... -- (6,000,000) --
Repayment of note payable................................... -- -- (4,500,000)
Proceeds from borrowings on line of credit.................. -- -- 6,000,000
Proceeds from issuance of preferred stock, net of issuance
cost...................................................... 31,500,000 -- --
Proceeds from issuance of common stock...................... 221,362 446,570 569,386
Notes receivable from stockholders.......................... -- -- 35,000
------------ ------------ ------------
Net cash provided by (used in) financing activities......... 28,396,028 (3,150,117) 1,266,292
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents........ 6,147,974 (4,929,217) 2,177,451
Cash and cash equivalents at beginning of year.............. 2,339,660 7,268,877 5,091,426
------------ ------------ ------------
Cash and cash equivalents at end of year.................... $ 8,487,634 $ 2,339,660 $ 7,268,877
============ ============ ============
See Notes to Consolidated Financial Statements.
F-6
64
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Cardiac Pathways Corporation, a Delaware corporation (the "Company"),
operates in a single industry segment and designs, develops, manufactures and
markets minimally invasive systems to diagnose and treat cardiac
tachyarrhythmias.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Cardiac Pathways B.V. and Cardiac
Pathways G.m.b.H. There were no significant intercompany accounts or
transactions in fiscal 2000.
The Company has reclassified certain prior-year balances to conform with
current-year presentations.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents and short-term investments approximate fair value. The fair value of
short-term investments was based on quoted market prices.
The carrying amount for the Company's long-term and short-term debt
approximates fair value. The fair value of the Company's debt was estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
Concentrations of Credit Risk
The Company is potentially subject to concentrations of credit risk with
respect to its cash investments and trade accounts receivable. The Company
invests its excess cash in a diversified portfolio of investment grade interest
bearing instruments. The Company is exposed to credit risk in the event of
default by the financial institutions or issuers of investments only to the
extent recorded on the balance sheet. To date, the Company has not experienced
any significant losses on its investments.
The Company sells its products to distributors in Japan, Europe and to
hospitals in the United States (see Note 10). The Company does not require
collateral and maintains reserves for estimated credit losses. To date, such
losses have been within management's expectations and have not been significant.
Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
other liquid investments are classified as short-term investments. Through
fiscal 2000, management classified the Company's investment portfolio as
held-to-maturity and available-for-sale. Available-for-sale securities are
carried at fair value with unrealized gains and losses reported as a separate
component of stockholders' equity, if material. The cost of held-to-maturity
securities was adjusted for the amortization of premiums and the accretion of
discounts to maturity. Such amortization of premiums and accretion of discounts
was included in interest income. To date, the Company has not
F-7
65
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
experienced any significant unrealized gains or losses on available-for-sale
securities and, accordingly, no adjustments have been made to stockholders'
equity.
The following is a summary of held-to-maturity and available-for-sale
securities at June 30, 2000:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DESCRIPTION COST GAINS LOSSES FAIR VALUE
----------- ----------- ---------- ---------- -----------
Held-to-maturity:
U.S. government agency................... $ 1,000,000 $ -- $ -- $ 1,000,000
Other government agency.................. 1,000,000 -- (2,640) 997,360
Available-for-sale:
Auction rate preferred stock............. 2,000,000 -- -- 2,000,000
U.S. corporate obligations............... 8,119,109 -- (1,615) 8,117,494
----------- ------- ------- -----------
12,119,109 -- (4,255) 12,114,854
Amounts classified as cash equivalents..... 7,982,121 -- -- 7,982,121
----------- ------- ------- -----------
Amounts included in short-term
investments.............................. $ 4,136,988 $ $(4,255) $ 4,132,733
=========== ======= ======= ===========
All short-term investments have maturities due in one year or less, except
for $2,000,000 of available-for-sale securities (which the amortized cost equals
the estimated fair value), which has a maturity date greater than 10 years.
At June 30, 1999 the Company had $2,339,660 in cash and cash equivalents
which were held primarily in the money market account and had no short-term
investments.
There were no material realized gains or losses for the years ended June
30, 2000 and 1999. The cost of securities sold is based on the specific
identification method.
Inventory
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market and consist of the following:
JUNE 30,
------------------------
2000 1999
---------- ----------
Raw materials....................................... $1,057,454 $1,510,291
Work-in-process..................................... 204,042 174,016
Finished goods...................................... 833,682 544,572
---------- ----------
$2,095,178 $2,228,879
========== ==========
Property and Equipment
Property and equipment, including equipment under capital leases, are
carried at cost less accumulated depreciation and amortization. Property and
equipment are depreciated using the straight-line method over estimated useful
lives of three to five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful life of the asset
or the remaining term of the lease. Depreciation expense includes amortization
of capital leases and leasehold improvements.
F-8
66
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
Property and equipment consist of the following:
JUNE 30,
------------------------
2000 1999
---------- ----------
Property and equipment:
Equipment......................................... $8,319,692 $6,836,138
Leasehold improvements............................ 422,061 422,061
Equipment-in-process.............................. 903,220 622,384
---------- ----------
9,644,973 7,880,583
Less accumulated depreciation and amortization...... 6,139,545 4,988,764
---------- ----------
$3,505,428 $2,891,819
========== ==========
Intangible Asset
In July 1999, the Company entered into an agreement with a Canadian company
to obtain an exclusive worldwide license to certain patents involving the use of
ultrasound technology. The terms of the agreement included payments made by the
Company to the licensor of $1,000,000 each in August 1999 and January 2000. The
intangible asset is amortized over five years.
Revenue Recognition
Revenue from disposable products is recognized at the time of shipment.
Revenue from equipment is recognized upon shipment and the completion of certain
installation and acceptance criteria. Generally, revenue from sales to
distributors is recognized at the time of shipment.
Product Warranties
The Company warrants its equipment for a period of one year. The Company
provides for estimated warranty costs concurrent with the recognition of
revenue.
Deferred Income
Included in deferred income at June 30, 2000 and 1999, the Company had
$2,330,862 and $2,630,862 of deferred royalty income, respectively, related to
one of its diagnostic catheter systems (see Note 9). Income earned from this
royalty agreement is recorded as a component of net sales. The Company deferred
$100,000 of product revenue at June 30, 2000.
Research and Development Costs
Research and development costs, which include clinical and certain
regulatory costs, are charged to expense as incurred.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar. Monetary assets and liabilities denominated in foreign currencies are
remeasured at the fiscal year-end exchange rate. Inventory, property and other
nonmonetary assets and liabilities including related revenues, expenses, gains
and losses are remeasured using historical exchange rates during the month in
which the transactions occurred. Adjustments resulting from these remeasurements
are included in the results of operations and have been immaterial to date.
F-9
67
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
Net Loss Per Share
Basic and diluted net loss per share is computed using the weighted average
number of shares of common shares outstanding during the period. The Company has
other securities outstanding (Series B Convertible Preferred Stock Warrants, and
Stock Options -- See note 4) that could dilute basic earnings per share in the
future that were not included in the computation of diluted net loss per share
in the periods presented as their effect is antidilutive.
The following table sets forth the computation of net loss per share:
YEAR ENDED JUNE 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net loss attributable to common stockholders..... $(20,627,464) $(18,565,775) $(17,498,797)
============ ============ ============
Basic and diluted:
Weighted-average shares of common stock used in
computing basic and diluted net loss per
share....................................... 2,053,000 1,987,000 1,930,000
============ ============ ============
Basic and diluted net loss per share............. $ (10.05) $ (9.34) $ (9.07)
============ ============ ============
Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements using
the intrinsic-value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and accordingly, has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123 (FAS 123), "Accounting for Stock-Based Compensation." These provisions
require the Company to disclose pro forma net loss and net loss per share
amounts as if compensation expense related to certain stock awards were
recognized based on the fair value accounting rules under FAS 123 (see Note 4).
Recent Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted in years beginning after June 15,
2000. The Company has not in the past and does not anticipate in the future
using derivative instruments, and the Company does not expect that the adoption
of FAS 133 will have a significant impact on its financial condition or results
of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") that must be adopted in the quarter ended June 30, 2000. SAB 101
summarizes certain areas of the Staff's views in applying generally accepted
accounting principles to revenue in financial statements. Although the Company
believes that its current revenue recognition principles comply with SAB 101,
additional guidance is expected to be issued by the SEC staff and the Company
will evaluate the affect of adopting SAB 101 at that point.
2. DEBT
In May 1999, in connection with the Series B Preferred Stock Financing, the
Company obtained a convertible bridge loan of $3,000,000 from certain
participating investors. The bridge loan bore interest at the prime rate plus
2.00%. The promissory notes issued in connection with the bridge loan were
convertible into shares of Series B Convertible Preferred Stock at the same
price as the share issued in the financing. In July 1999, the bridge loan and
related accrued interest was converted into 3,052 shares of Series B Preferred
Stock concurrent with the closing of the financing (see note 4).
F-10
68
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
3. COMMITMENTS
The Company leases facilities and equipment under noncancelable lease
agreements. Future minimum lease payments were as follows:
JUNE 30, 2000
----------------------
CAPITAL OPERATING
LEASES LEASES
-------- ----------
2001................................................. $279,925 $ 774,224
2002................................................. 88,205 749,424
2003................................................. -- 747,420
2004................................................. -- 247,136
2005................................................. -- --
Thereafter........................................... -- --
-------- ----------
Total minimum lease payments............... 368,130 $2,518,204
Less amount representing interest.................... 25,358
--------
Present value of minimum lease payments.............. 342,772
Less current portion................................. 257,714
--------
Long-term portion.................................... $ 85,058
========
The Company leases its facilities under operating lease agreements that
extend through October 2003. Rent expense, net of sublease income, was
approximately, $825,649, $730,323, and $364,000 for the years ended June 30,
2000, 1999 and 1998, respectively. The Company leases certain equipment under
long-term leases, the terms of which qualify as capital leases. Capital lease
obligations are collateralized with leased equipment.
The Company's equipment acquired under capital lease arrangements and
related accumulated amortization are as follows:
JUNE 30,
------------------------
2000 1999
---------- ----------
Equipment at cost................................... $4,018,000 $4,018,000
Less accumulated amortization....................... 3,676,000 3,334,000
---------- ----------
$ 342,000 $ 684,000
========== ==========
Amortization expense of assets under capital leases is included in
depreciation expense.
At June 30, 2000, the Company had approximately $213,455 in noncancelable
commitments with suppliers to provide components in the normal course of
business.
4. STOCKHOLDERS' EQUITY
Common Stock
The Company is authorized to issue 6,000,000 shares of common stock, $.001
par value per share, of which a total of 3,078,486 and 2,007,904 shares were
outstanding at June 30, 2000 and 1999, respectively. In May 1999, the Company's
Board of Directors authorized a 1-for-5 reverse common stock split. All share
and per share amounts reflect this reverse common stock split.
F-11
69
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
Preferred Stock
In July 1999, the Company's stockholders authorized and the Company
completed a $32 million offering of Series B Convertible Preferred Stock at
$1,000 per share to a group of accredited investors. In connection with the
Series B Convertible Preferred Stock financing, the Company raised $31.5
million, net of issuance costs. The Series B Convertible Preferred Stock is
redeemable by the Company. At any time after May 31, 2004, the holders of a
majority of the then outstanding shares of Series B Convertible Preferred Stock,
voting as a single class, may request that the Company redeem the outstanding
shares of Series B Convertible Preferred Stock. The Company is not obligated to
honor a redemption request but must thereafter increase the cumulative dividend
by 6%. The Company is authorized to issue 5,000,000 shares of undesignated
preferred stock, $.001 par value per share. Preferred stock may be issued from
time to time in one or more series. The Board of Directors is authorized to
determine the rights, preferences, privileges, and restrictions granted to and
imposed upon any wholly unissued series of preferred stock and to fix the number
of shares of any series of preferred stock and the designation of any such
series without any vote or action by the Company's stockholders. At June 30,
2000, the Company had 27,250 shares of Series B Convertible Preferred Stock
outstanding, and the Company had no shares of Series B Convertible Preferred
Stock outstanding in fiscal 1999.
The June 30, 2000 balance sheet also reflects the discount or beneficial
conversion feature present in the convertible securities. The discount was being
recognized as a return to the preferred stockholders (similar to a dividend)
over the minimum period in which the preferred stockholders can realize return,
immediately for the Series B Convertible Preferred stockholders. The discount
has been accreted to additional paid in capital in the June 30, 2000 balance
sheet. Each share of Series B Convertible Preferred Stock is initially
convertible into 200 shares of the Company's Common Stock, at the option of the
holder. Each share of Series B Convertible Preferred Stock shall automatically
be converted into the Company's common stock upon the election of a majority of
the holders of the Series B Convertible Preferred Stock. Each share of Series B
Convertible Preferred Stock shall entitle the holder thereof to that number of
votes on all matters submitted to a vote of the stock holders of the Company
equal to the number of shares of common stock into which the Series B
Convertible Preferred Stock can be converted.
The Series B Convertible Preferred Stock Purchase Agreement specifies that,
when and as if dividends are declared, the holder of Series B Convertible
Preferred Stock are entitled to a cumulative dividend equal to 11% of the
purchase price paid for each share of Series B Convertible Preferred Stock, per
share, per year. If the Series B Convertible Preferred Stock is not redeemed
prior to May 31, 2004, the cumulative dividend payable shall be increased by 6
percentage points at the beginning of each year after such date. The Series B
Convertible Preferred Stock has a liquidation preference equal to the initial
purchase price plus any accrued and unpaid dividends upon the occurrence of a
liquidation, a merger or the sale of all or substantially all of the Company's
stock or assets. As a result of the liquidation preference, in the event of a
liquidation, merger or the sale of substantially all of the Company's stock or
assets, the holders of Series B Convertible Preferred Stock will receive their
original purchase price plus any accrued and unpaid dividends prior to any
distribution to the holders of common stock. After such payment any remaining
proceeds would be distributed ratably among the holders of Series B Convertible
Preferred Stock and holders of common stock. All share and per share amounts
reflect the reverse common stock split.
Because the two largest Series B Convertible Preferred Stock holders
control 3 of the 5 seats (60%) on the board of directors, the June 30, 2000
balance sheet reflects the accrual of the Series B Convertible Preferred Stock
cumulative dividends. The members of the Company's board of directors include
Mark J. Brooks, Anchie Y. Kuo, M.D., and M. Fazle Husain, nominees of the Series
B Convertible Preferred Stockholders, Thomas M. Prescott, CEO and William
Starling, a former director, chief executive officer and
F-12
70
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
president of the Company. The consent of the directors nominated by the Series B
Convertible Preferred Stock will be required to increase the number of directors
above the number currently in office.
During fiscal 2000, one of the Series B Convertible Preferred Stock holders
converted their shares of Series B Convertible Preferred Stock (5,000 shares) to
common stock (1,000,000 shares). The accrued but undeclared dividends at that
date have been accounted for as an additional contribution to equity.
Stock Warrants
The Company has issued warrants to purchase common stock in connection with
various financing and lease agreements. The fair value of warrants issued in
connection with lease transactions was expensed. The following warrants to
purchase common stock were outstanding at June 30, 2000:
PRICE PER AGGREGATE EXPIRATION
SHARES SHARE PRICE DATE
- ------ --------- ---------- ----------
7,034 $42.65 $ 300,000 July 2009
4,000 43.50 174,000 June 2001
15,394 65.63 1,010,231 June 2001
2,200 75.00 165,000 June 2001
In May 1999, the Company issued warrants to purchase 300 shares of Series B
Preferred Stock in connection with the convertible bridge loan noted above (see
note 2). The warrants are exercisable at $1,000 per share and expire in May
2004. As of June 30, 2000 none of the preferred stock warrants had been
exercised.
Stock Option Plans
In July 1991, the Board of Directors of the Company approved the Company's
1991 Stock Option Plan (the "Plan"). The Plan provides for the issuance of
incentive and nonstatutory options to employees, officers, and consultants of
the Company to acquire common stock of the Company. The Plan, as amended,
provides for the granting of options for up to 1,313,406 shares of common stock
of the Company, which includes 800,000 shares approved by the stockholders in
July 1999. The exercise price of incentive stock options granted under the Plan
may not be less than 100% (110% in the case of any options granted to a person
who owns more than 10% of the total combined voting power of all classes of
stock of the Company) of the fair market value of the common stock subject to
the option on the date of grant. Options granted under the Plan generally become
exercisable over a four-year period and generally expire ten years from the date
of grant. Expired options become available under the Plan. At June 30, 2000, a
total of 1,357,389 shares of common stock have been reserved for issuance under
the Plan (see Note 13).
In September 1996 and April 1997, the Board of Directors authorized the
exchange of certain stock option grants at the then fair market values of the
Company's common stock. These exchanges were voluntary and open to all employees
holding options subsequent to certain dates. In September 1996, options to
purchase 5,730 shares of common stock at prices ranging from $63.75 to $75.00
per share were exchanged for options to purchase a like number of shares at
$60.00 per share. Under the September 1996 exchange, all previous vesting of the
related options was forfeited. In April 1997, options to purchase 30,925 shares
of common stock at prices ranging from $42.50 to $85.00 per share were exchanged
for options to purchase a like number of shares at $33.15 per share. Vesting
terms were not modified under the April 1997 exchange, however, no vested
options related to the exchange were exercisable for a period of 180 days
following the exchange.
During the years ended June 30, 1997 and 1996, the Company recorded
deferred compensation of approximately $856,000 and $192,000, respectively,
representing the difference between the grant price and the fair value of the
Company's common stock for certain options granted during those years. The
deferred
F-13
71
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
compensation is amortized over the period for which the related stock options
become exercisable, which is generally four years. During the year ended June
30, 2000 and 1999, the company decreased unamortized deferred compensation by
approximately $72,000 and $134,000, respectively, to reflect the cancellation of
certain unvested stock options for which deferred compensation was previously
recorded. Amortization of deferred compensation was approximately $109,000,
$191,000 and $262,000 for the years ended June 30, 2000, 1999 and 1998,
respectively.
In April 1996, the Company adopted the 1996 Director Option Plan (the
"Director Plan"). The Director Plan provides for the granting of options for up
to 12,000 shares of common stock of the Company. The option grants under the
Director Plan are automatic and non-discretionary, and the exercise price of the
options is 100% of the fair market value of the common stock on the grant date.
The Director Plan provides for an initial grant of options to purchase 2,600
shares of common stock to each new non-employee director. In addition, each
non-employee director will automatically be granted an option to purchase 140
shares of common stock annually. Options granted under the Director Plan become
exercisable over a four-year period and expire ten years from the date of grant.
At June 30, 2000, a total of 12,000 shares of common stock has been reserved for
issuance under the Director Plan.
In August 1998, the Board of Directors of the Company approved the
Company's 1998 Nonstatutory Stock Option Plan (the "Supplemental Plan"). The
Supplemental Plan provides for the issuance of nonstatutory options to
non-officer employees and consultants of the Company to acquire common stock of
the Company. The Supplemental Plan, as amended, provides for the granting of
options for up to 480,000 shares of common stock of the Company, including
400,000 shares approved by the Company's Board of Directors in July 1999.
Options granted under the Supplemental Plan generally become exercisable over a
four-year period and generally expire ten years from the date of grant. Expired
options become available under the Supplemental Plan. At June 30, 2000, a total
of 476,880 shares of common stock were reserved for issuance under the
Supplemental Plan (see Note 13).
The fair value of option grants related to the above plans is estimated on
the date of grant using the Black-Scholes pricing model with the following
assumptions for the years ended June 30, 2000, 1999 and 1998:
JUNE 30,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
Risk-free interest rate......................... 6.05% 6.02% 5.75%
Expected life................................... 3.77 years 3.81 years 3.73 years
Expected volatility............................. 118% 78.8% 76.20%
Dividend yield.................................. -- -- --
F-14
72
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
The following is a summary of activity under the stock option plans:
YEAR ENDED JUNE 30,
-------------------------------------------------------------------
2000 1999 1998
--------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
STOCK OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------- --------- -------- ------- -------- ------- --------
Outstanding at July 1........ 286,667 $20.37 242,538 $27.30 205,552 $17.60
Granted.................... 1,512,706 $ 4.25 161,919 $14.01 93,337 $38.75
Exercised.................. (33,781) $ 4.52 (32,436) $ 9.68 (41,776) $ 5.40
Canceled................... (339,621) $12.19 (85,354) $32.06 (14,575) $34.65
--------- ------- -------
Outstanding at June 30....... 1,425,971 $ 5.59 286,667 $20.37 242,538 $27.30
--------- ------- -------
Exercisable at June 30....... 211,641 $11.80 113,075 $22.08 106,409 $15.65
Weighted average fair value
of options granted......... $ 3.70 $10.02 $20.10
Shares available for grant... 420,548 93,633 26,195
The following table summarizes information for outstanding and exercisable
options at June 30, 2000:
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE ------------------------------
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$ 1.15 - $ 3.53 256,634 9.31 $ 3.04 14,744 $ 1.76
$ 3.75 - $ 4.50 793,074 9.26 $ 4.28 95,472 $ 4.50
$ 4.63 - $33.13 341,077 8.98 $ 6.71 72,010 $10.55
$33.15 - $75.00 35,186 7.16 $42.90 29,415 $43.62
--------- -------
$ 1.15 - $75.00 1,425,971 9.15 $ 5.59 211,641 $11.80
========= =======
Employee Stock Purchase Plan
In April 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan"). The Purchase Plan, as amended, provides for the purchase
by employees of up to 24,600 shares of the Company's common stock. In August
1998, the Board of Directors of the Company approved the termination of the 1996
ESPP and the adoption of the Cardiac Pathways Corporation 1998 Employee Stock
Purchase Plan (the "1998 ESPP") including the initial reservation of 20,000
shares of Common Stock under the 1998 ESPP. The 1998 ESPP provides for
consecutive, overlapping 24-month offering periods. Each offering period
consists of four semi-annual purchase periods and is designed to allow eligible
employees to purchase common stock through payroll deductions at a price equal
to 85% of the lesser of the fair market value of the Company's common stock on
the first day of the applicable offering period or the last day of the
respective purchase period. The 1998 ESPP provides for an annual increase in the
number of Common Stock shares reserved equal to the lesser of 40,000 shares or
1.5% of the Company's outstanding Common Stock. The maximum number of Common
Stock shares reserved for issuance under the 1998 ESPP cannot exceed 196,000.
The adoption of the 1998 ESPP was approved by the stockholder in November 1998.
During the years ended June 30, 2000, 1999 and 1998, a total of 36,801,
16,274 and 12,711 shares were purchased, respectively, under the Employee Stock
Purchase Plans at prices ranging from $1.86 to $39.85 per share. At June 30,
2000 there were 147,300 shares reserved for future issuance under the 1998 ESPP.
F-15
73
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
The estimated fair value of purchase rights under the Company's Employee
Stock Purchase Plan is determined using the Black-Scholes pricing model with the
following assumption for the years ended June 30, 2000, 1999 and 1998:
JUNE 30,
--------------------------------
2000 1999 1998
-------- -------- --------
Risk-free interest rate........................... 5.91% 5.16% 5.54%
Expected life..................................... 6 months 6 months 6 months
Expected volatility............................... 72.62% 78.75% 76.20%
Dividend yield.................................... -- -- --
For the years ended June 30, 2000, 1999 and 1998 the weighted average fair
value of purchase rights under the plan was $1.94, $3.46 and $13.90,
respectively.
Pro Forma Compensation Expense
The Company has adopted the disclosure-only provisions of FAS 123, and
accordingly, no compensation expense has been recorded for stock awards to
employees granted at market price on the date of grant. Had compensation expense
for the Company's stock plans been determined based on the fair value
methodology, the Company's net loss and net loss per share would have been
reported as the following pro forma amounts:
YEAR ENDED JUNE 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net loss -- reported..................... $(20,627,464) $(18,565,775) $(17,498,797)
Net loss -- pro forma.................... $(22,273,698) $(19,690,069) $(19,094,636)
Net loss per share -- as reported........ $ (10.05) $ (9.34) $ (9.07)
Net loss per share -- pro forma.......... $ (10.90) $ (9.91) $ (9.89)
The above pro forma effects on the results of operations may not be
representative of the effects for future years as option grants typically vest
over several years and additional options are generally granted each year.
Stockholder Rights Plan
In April 1997, the Board of Directors approved a stockholder rights plan
and declared a dividend of one preferred share purchase right (a "Right") for
each outstanding share of common stock of the Company to holders of record as of
April 30, 1997. Each Right will entitle stockholders to purchase 1/1000 of a
share of Series A participating preferred stock of the Company (a newly
designated series of preferred stock for which each 1/1000 of a share has
economic attributes and voting rights equivalent to those of one share of the
Company's common stock) at an exercise price of $125. The Rights only become
exercisable in certain limited circumstances involving acquisitions of or tender
offers for 15% or more of the Company's capital stock by another person or group
of persons. For a limited period of time after the announcement of any such
acquisition or offer, the Rights are redeemable at a price of $.01 per Right.
After becoming exercisable, each Right entitles its holder to purchase for
$125 an amount of common stock of the Company, or in certain circumstances,
securities of the acquirer, having a then current market value equal to two
times the exercise price of the Right. The Rights expire on April 21, 2007
5. INCOME TAXES
Due to operating losses and the inability to recognize an income tax
benefit therefrom, there was no provision for income taxes for the years ended
June 30, 2000, 1999 and 1998.
F-16
74
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
Deferred income taxes reflect the net effects of tax carryforwards and
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets were as follows:
JUNE 30,
----------------------------
2000 1999
------------ ------------
Net operating loss carryforwards........................ $ 31,300,000 $ 25,800,000
Capitalized research costs.............................. 3,000,000 2,600,000
Research credit carryforwards........................... 3,000,000 3,300,000
Deferred revenue........................................ 1,000,000 1,000,000
Other................................................... 1,500,000 1,500,000
------------ ------------
Subtotal.............................................. 39,800,000 34,200,000
Valuation allowance..................................... (39,800,000) (34,200,000)
------------ ------------
Total deferred tax asset...................... $ -- $ --
============ ============
As of June 30, 2000, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $89,600,000 and
$14,500,000, respectively. The net operating loss and credit carryforwards
described above will expire at various dates beginning in the years 2001 through
2020, if not utilized. Utilization of the net operating losses and credits may
be subject to a substantial annual limitation due to the ownership change
provisions. These annual limitations may result in the expiration of net
operating losses and credits before utilization.
The increase in the valuation allowance was approximately $ 5,600,00 and
$7,600,000 for years ended June 30, 2000 and 1999, respectively.
6. RISKS DUE TO CONCENTRATIONS
Dependence on Systems
There can be no assurance that the Company's development efforts will be
successful or that the systems or any other product developed by the Company
will be safe or effective, approved by appropriate regulatory and reimbursement
authorities, capable of being manufactured in commercial quantities at
acceptable costs or successfully marketed.
Dependence on Key Suppliers
The Company purchases certain key components of its products, including a
computer workstation, a fluid pump, certain integrated circuit components, flex
circuits and biocompatible coatings from sole, single or limited source
suppliers. Any significant component supply delay or interruption could require
the Company to qualify new sources of supply, if available, and could have a
material adverse effect on the Company's ability to manufacture its products.
Dependence on Key Distributors
The Company currently relies upon international distributors of specialty
cardiovascular products to market and sell its products. A large percentage of
the Company's revenues are derived from sales of its Japanese distributor, Japan
Lifeline Company, Ltd. ("Japan Lifeline"). Sales to Japan Lifeline accounts for
49%, 52% and 80% of the Company's net sales in fiscal 2000, 1999 and 1998
respectively.
F-17
75
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
7. SUPPLEMENTAL CASH FLOW INFORMATION
2000 1999 1998
---------- -------- ----------
Capital lease obligations incurred to acquire
Equipment..................................... $ -- $226,402 $ 635,085
Cash paid for interest.......................... 68,488 613,026 1,672,205
Issuance of preferred stock for note
receivable.................................... 250,000 -- --
Conversion of preferred stock to common stock... 515,625 -- --
Beneficial conversion feature related to the
issuance of preferred stock................... 960,000 -- --
Preferred stock dividends....................... 3,300,000 -- --
8. NOTES RECEIVABLE
In March 1996, the Company entered into an employment agreement with an
officer of the Company pursuant to which it loaned $385,000 to the officer, the
proceeds of which were used to exercise a stock option granted to this officer
in January 1996. The stock exercised is pledged as collateral against the
receivable from the stockholder. In August 1998, the officer resigned from the
Company. In March 2000, a reserve against the receivable was recorded for the
amount of the difference between the $385,000 loaned and the fair value of the
pledged stock at March 31, 2000.
In May 1999, the Company entered into an employment agreement with an
officer of the Company pursuant to which the officer is entitled to a $250,000
loan from the Company at a 7% interest rate to purchase 250 shares of the
Company's Series B Convertible Preferred Stock. In March 2000, the loan was
executed for the purchase of the stock and currently reflected in the Company's
Balance Sheet.
9. RELATIONSHIP WITH ARROW INTERNATIONAL, INC.
In December 1995, the Company entered into a distribution and manufacturing
rights agreement related to certain of the Company's diagnostic catheter
products and the Company received a $3,000,000 prepaid royalty. This amount was
recorded as deferred royalty income. During the year ended June 30, 1999, the
Company began amortizing deferred royalty income on a straight-line basis over
the estimated remaining life of the related catheter patents. For the years
ended June 30, 2000, 1999, and 1998, the Company recorded royalty income of
approximately $300,000, $300,000 and $20,000, respectively.
10. INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment with principal
manufacturing and distribution operations located in the United States. The
Company also operates limited sales and distribution activities through its
European subsidiaries, Cardiac Pathways G.m.b.H. in Germany.
Net sales primarily consist of product sales to distributors located in
Japan and Europe, and direct sales to hospitals in the United States.
See Note 6 for dependence on key distributors.
F-18
76
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
All export and other foreign sales are denominated in U.S. dollars. The
following table summarizes net sales including export and other foreign sales by
geographic region:
YEAR ENDED JUNE 30,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
United States.......................... $2,543,860 $ 963,905 $ 321,491
Japan.................................. 3,343,318 2,280,433 1,924,538
Europe................................. 933,611 1,162,032 173,787
---------- ---------- ----------
$6,820,789 $4,406,370 $2,419,816
========== ========== ==========
The following table presents information about the Company's operations
located in certain geographical areas:
YEAR ENDED JUNE 30, U.S. EUROPE ELIMINATIONS CONSOLIDATED
------------------- ------------ ---------- ------------ ------------
2000
Sales to unaffiliated customers....... $ 6,820,789 $ 6,820,789
Total revenue............... $ 6,820,289 $ 6,820,789
============ ============
Operating income (loss)............... $(17,057,639) $(17,057,639)
Other income.......................... 690,176
------------
Net loss.............................. $(16,367,463)
------------
Identifiable assets................... $ 21,765,265 $ 21,765,265
============ ============
1999
Sales to unaffiliated customers....... $ 3,763,947 $ 642,423 $ 4,406,370
Transfers between geographic areas.... 270,281 -- (270,281) --
------------ ---------- --------- ------------
Total revenue............... $ 4,034,228 $ 642,423 $(270,281) $ 4,406,370
------------ ---------- --------- ------------
Operating income (loss)............... $(18,568,772) $ (53,456) (20,914) $(18,643,142)
Other income.......................... 77,367
------------
Net loss.............................. $(18,565,775)
============
Identifiable assets................... $ 7,871,898 $1,106,090 $ (72,146) $ 8,905,842
============ ========== ========= ============
1998
Sales to unaffiliated customers....... $ 2,057,193 $ 362,623 $ 2,419,816
Transfers between geographic areas.... 220,576 -- (220,576) --
------------ ---------- --------- ------------
Total revenue............... $ 2,277,769 $ 427,023 $(220,576) $ 2,419,816
============ ========== ========= ============
Operating income (loss)............... $(18,845,430) $ 18,391 $ (25,964) $(18,853,003)
Other income.......................... 1,354,206
------------
Net loss.............................. $(17,498,797)
============
Identifiable assets................... $ 30,919,990 $ 107,081 $ (92,494) $ 30,934,577
============ ========== ========= ============
11. RELATED PARTY TRANSACTIONS
The Company sold $0 during the year ended June 30, 2000 and approximately
$68,000 during the year ended June 30, 1999, of catheter products and equipment
to a hospital for which a former director of the Company is a practicing
electrophysiologist.
During the year ended June 30, 1998, the Company sold approximately $50,000
of research equipment to Conway-Stuart Medical, Inc. ("Conway-Stuart"), a
medical device company. Proceeds from the sale of
F-19
77
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
equipment were recorded to other income. There is a director of the Company who
is also a former officer who has a direct financial interest in Curon Medical,
formerly Conway-Stuart.
12. EMPLOYEE BENEFIT PLAN
The Company has an employee 401(k) salary deferral plan that allows
voluntary contributions by all full-time employees. Eligible employees may
contribute from 1% to 15% of their respective compensation, subject to statutory
limitations, and the Company may match a percentage of employee contributions at
the discretion of the Board of Directors. The Company made matching
contributions to certain eligible employees in the plan of approximately
$38,000, $53,000 and $38,000 for the years ended June 30, 2000, 1999 and 1998,
respectively.
13. CONTINGENT LIABILITIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of the matters is not expected to have a material adverse effect, if
any, on the Company's consolidated financial position or results of operations.
F-20
78
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTIONS PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ------------ ---------- ---------- ----------
Allowance for Doubtful Accounts:
June 30, 1998..................................... $ 9,500 $ 7,000 $-- $ 16,500
June 30, 1999..................................... 16,500 88,500 -- 105,000
June 30, 2000..................................... 105,000 34,269 -- 139,269
S-1
79
APPENDIX A
CARDIAC PATHWAYS CORPORATION
COMMON STOCK PURCHASE AGREEMENT
NOVEMBER 3, 2000
80
TABLE OF CONTENTS
PAGE
----
1. Definitions....................................................... A-1
2. Purchase and Sale of Stock........................................ A-1
2.1 Purchase and Sale........................................... A-1
2.2 Closing..................................................... A-1
2.3 Delivery.................................................... A-1
2.4 Subsequent Sales............................................ A-2
3. Representations and Warranties of the Company..................... A-2
3.1 Corporate Power............................................. A-2
3.2 Capitalization.............................................. A-2
3.3 Authorization............................................... A-3
3.4 Financial Statements........................................ A-3
3.5 SEC Documents............................................... A-4
3.6 No Conflict; Required Filings and Consent................... A-4
3.7 Brokers or Finders.......................................... A-5
3.8 Nasdaq National Market...................................... A-5
3.9 Absence of Litigation....................................... A-5
3.10 Common Stock to be Issued................................... A-5
3.11 Securities Law Exemption.................................... A-5
3.12 Noncontravention............................................ A-5
3.13 Key Employees............................................... A-5
3.14 Intellectual Property....................................... A-5
3.15 Title to Property and Assets................................ A-6
3.16 Compliance with Laws........................................ A-6
3.17 Related Entities............................................ A-6
3.18 Significant Customers and Suppliers......................... A-6
3.19 Foreign Corrupt Practices................................... A-7
3.20 Taxes....................................................... A-7
3.21 Environmental Matters....................................... A-7
3.22 Disclosure.................................................. A-8
3.23 No Integrated Offering...................................... A-8
4. Representations and Warranties of the Purchaser................... A-8
4.1 Authorization............................................... A-8
4.2 Purchase Entirely for Own Account........................... A-8
4.3 Investor Status; Etc. ...................................... A-8
4.4 Risk Factors................................................ A-8
4.5 Shares Not Registered....................................... A-9
4.6 No Conflict................................................. A-9
4.7 Brokers..................................................... A-9
4.8 Consents.................................................... A-9
4.9 Residency................................................... A-9
4.10 Acknowledgement Regarding Placement Agent................... A-9
4.11 Reliance on Exemptions...................................... A-9
5. Certain Covenants of the Purchasers............................... A-10
5.1 Forms 13D or 13G............................................ A-10
5.2 Reporting Obligations Pursuant to Section 16................ A-10
i
81
PAGE
----
5.3 Securities Law Transfer Restrictions........................ A-10
5.4 Legends..................................................... A-10
5.5 Standstill Provisions; Limitations on Ownership of Stock.... A-10
6. Certain Covenants of the Company.................................. A-11
6.1 Proxy Statement............................................. A-11
6.2 Stockholder Approvals; Recommendations...................... A-11
6.3 Notices of Certain Events................................... A-11
6.4 Purchase Information........................................ A-11
6.5 Restrictions on Subsequent Offerings........................ A-12
6.6 Stock Option Matters........................................ A-12
6.7 Securities Compliance....................................... A-12
6.8 No Integration.............................................. A-12
6.9 Efforts..................................................... A-12
7. Conditions Precedent to Closing................................... A-13
7.1 Conditions to the Obligation of Each Purchaser to Consummate
the Closing................................................. A-13
7.2 Conditions to the Obligation of the Company to Consummate
the Closing................................................. A-14
8. Termination; Liabilities Consequent Thereon....................... A-14
8.1 Termination................................................. A-14
8.2 Liability................................................... A-15
9. Miscellaneous Provisions.......................................... A-15
9.1 Public Statements or Releases............................... A-15
9.2 Further Assurances.......................................... A-15
9.3 Rights Cumulative........................................... A-15
9.4 Notices..................................................... A-15
9.5 Captions.................................................... A-16
9.6 Severability................................................ A-16
9.7 Governing Law; Injunctive Relief............................ A-16
9.8 Amendments.................................................. A-16
9.9 Expenses.................................................... A-17
9.10 Assignment.................................................. A-17
9.11 Survival.................................................... A-17
9.12 Entire Agreement............................................ A-17
9.13 Attorneys' Fees............................................. A-17
9.14 Exculpation Among Purchasers................................ A-17
9.15 Representation.............................................. A-17
9.16 Counterparts................................................ A-18
SCHEDULES
Schedule A -- Schedule of Purchasers
Schedule B -- Disclosure Schedule
EXHIBITS
Exhibit A -- Registration Rights Agreement
Exhibit B -- Form of Opinion
Exhibit C -- Investor Suitability Questionnaire
ii
82
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (the "Agreement") is made as of the 3rd day
of November, 2000 by and between Cardiac Pathways Corporation, a Delaware
corporation having its principal office at 995 Benecia Avenue, Sunnyvale,
California (the "Company"), and the purchasers listed on Schedule A hereto, each
of which is herein referred to as a "Purchaser" and collectively,
the"Purchasers".
WHEREAS, the parties desire that the Purchasers make an equity investment
of $25,000,000 in the Company pursuant to the terms and conditions of this
Agreement; and
WHEREAS, the shares of common stock (the "Common Stock") issued to the
Purchasers pursuant to this Agreement shall have the registration and other
rights as evidenced by the Registration Rights Agreement in substantially the
form attached hereto as Exhibit A, dated as of the date hereof, and entered into
between the Company and the Purchasers (the "Registration Rights Agreement").
NOW THEREFORE, in consideration of the mutual agreements, representations,
warranties and covenants herein contained, the parties hereto agree as follows:
1. Definitions. As used in this Agreement, the following terms shall have
the following respective meanings:
(a) "Affiliate" of a party means any corporation or other business
entity controlled by, controlling or under common control with such party
directly or indirectly through one or more intermediaries. For this purpose
"control" shall mean (i) the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of
such corporation or business entity or (ii) direct or indirect beneficial
ownership of twenty percent (20%) or more of the voting or income interest
in such corporation or other business entity.
(b) "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and all of the rules and regulations promulgated thereunder.
(c) "SEC" shall mean the Securities and Exchange Commission.
(d) "Securities Act" shall mean the Securities Act of 1933, as
amended, and all of the rules and regulations promulgated thereunder.
2. Purchase and Sale of Stock.
2.1 Purchase and Sale. The Company hereby agrees to sell to the Purchasers
or their designees, and the Purchasers or their designees hereby agree to
purchase from the Company in the amounts listed on Schedule A hereto, up to
5,882,353 shares of the Company's Common Stock (the "Shares") at the per share
purchase price (the "Per Share Purchase Price") of $4.25.
2.2 Closing. The closing of the purchase and sale of the Shares hereunder
(the "Closing") will take place, upon the satisfaction of the conditions to
closing set forth in Sections 7.1 and 7.2 hereof, at the offices of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo
Alto, California, as soon as practicable but in any event, subject to applicable
law, no later than five (5) business days after the last of the conditions set
forth in Sections 7.1 and 7.2 hereof have been satisfied. The date of the
Closing is hereinafter referred to as the "Closing Date."
2.3 Delivery. At the Closing, the Company will deliver a certificate
registered in each Purchaser's name representing the Shares to be purchased by
such Purchaser. Such delivery shall be against payment of the purchase price
therefor by each of the Purchasers to the Company in an amount equal to the
product of
A-1
83
the number of Shares to be purchased by such Purchaser and the Per Share
Purchase Price (the "Purchase Price") by wire transfer to the Company's bank
account at:
Bank Name: Citibank
Bank Address: 111 Wall Street
New York, NY 10005
Contact: David L. Hayes (415) 576-2148
ABA#: 021000089
Account Name: Morgan Stanley
Account Number: # 3889-0774
FBO CPC # 14-78247
2.4 Subsequent Sales. At any time on or before the 20th day following the
effective date of this Agreement, the Company may sell up to the balance of the
Shares not sold pursuant to this Agreement. All such sales shall be made on the
terms and conditions set forth in this Agreement. Any shares sold pursuant to
this Section 2.4 shall be deemed to be "Shares" for all purposes under this
Agreement and "Registrable Shares" for the purposes of the Registration Rights
Agreement. Any purchasers of shares sold pursuant to this Section 2.4 shall be
deemed to be "Purchasers" for all purposes under this Agreement, and shall be
deemed to be "Initial Investors" for all purposes under the Registration Rights
Agreement. Such Purchasers shall become signatories to this Agreement and the
Registration Rights Agreement.
3. Representations and Warranties of the Company. Except as set forth in
the SEC Documents (as defined in Section 3.5 below) filed prior to the date
hereto and in the Disclosure Schedule attached hereto as Schedule B (the
"Disclosure Schedule") and furnished to each Purchaser, which exceptions shall
be deemed to be representations and warranties as if made hereunder, the Company
hereby represents and warrants to the Purchaser as follows:
3.1 Corporate Power. The Company and each of its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its respective state of incorporation and is qualified to do business as a
foreign corporation in each jurisdiction except where failure to qualify would
not, individually or in the aggregate, (i) adversely affect the legality,
validity or enforceability of this Agreement or the Registration Rights
Agreement in any respect, (ii) have or result in a material adverse effect on
the results of operations, assets, prospects or financial condition of the
Company, taken as a whole or (iii) adversely impair the Company's ability to
perform fully on a timely basis its obligations under this Agreement or the
Registration Rights Agreement (any of (i), (ii) or (iii), being a "Material
Adverse Effect"). The Company and each of its subsidiaries has full corporate
power and authority to own its property and to carry on its business as
presently conducted.
3.2 Capitalization.
(a) The authorized capital stock of the Company consists of 30,000,000
shares of Common Stock, $.001 par value per share, and 5,000,000 shares of
Preferred Stock, $.001 par value per share, of which 30,000 shares have been
designated Series A Participating Preferred Stock, 50,000 shares have been
designated Series B Convertible Preferred Stock and 4,920,000 are undesignated.
As of the date hereof, (i) 3,143,264 shares of Common Stock, no shares of Series
A Participating Preferred Stock and 27,250 shares of Series B Convertible
Preferred Stock were issued and outstanding, all of which are duly authorized,
validly issued, fully paid and nonassessable; (ii) no shares were held in
treasury by the Company or by any subsidiaries of the Company; (iii) 2,000,644
shares of Common Stock were reserved for issuance under the Company's stock
plans (including: (A) 1,337,269 shares of Common Stock reserved for issuance
under the 1991 Stock Option Plan, 1,176,993 shares of which were subject to
outstanding options and 160,276 of which were reserved for future grants, (B)
12,000 shares of Common Stock were reserved for issuance under the 1996 Director
Option Plan, all of which are reserved for future grants and (C) 651,375 shares
of Common Stock were reserved for issuance under the 1998 Non-Statutory Stock
Option Plan, 399,615 of which were subject to outstanding options and 251,760
shares of which were available for future grants (collectively the Company's
"Stock Plans")); (iv) 14,628 shares of Common Stock and 300 shares of Series B
Convertible Preferred Stock were
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subject to outstanding warrants to purchase such shares; and (v) 500,000 shares
of Common Stock will be reserved for issuance under the Company's proposed 2000
Stock Option Plan to be approved by the stockholders of the Company at the
Company's annual meeting currently scheduled for December 1, 2000. All shares of
the Company's Common Stock and Preferred Stock subject to issuance as specified
above, on the terms and conditions specified in the instruments pursuant to
which they are issuable, shall be duly authorized, validly issued, fully paid
and nonassessable. Except as set forth in this Section 3.2 and in the Disclosure
Schedule, there are no existing options, warrants, calls, pre-emptive (or
similar) rights, subscriptions or other rights, agreements, arrangements or
commitments of any character obligating the Company to issue, transfer or sell,
or cause to be issued, transferred or sold, any shares of the capital stock of
the Company or other equity interests in the Company or any securities
convertible into or exchangeable for such shares of capital stock or other
equity interests, and there are no outstanding contractual obligations of the
Company to repurchase, redeem or otherwise acquire any shares of its capital
stock or other equity interests.
3.3 Authorization. The Company has full corporate power to execute,
deliver and perform this Agreement and the Registration Rights Agreement, and
each such agreement has been duly executed and delivered by the Company and is
the legal, valid and, assuming due execution by the Purchaser, binding
obligation of the Company, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency, moratorium, reorganization or similar laws
affecting creditors' rights generally, and to general equitable principles. The
execution, delivery and performance by the Company of this Agreement and the
Registration Rights Agreement have been duly authorized by all necessary
corporate action on the part of the Company and its officers, directors and
stockholders; provided, however, that the Company makes no representation or
warranty as to the enforceability of the indemnification and contribution
provisions of Section 10 of the Registration Rights Agreement to the extent that
the provisions thereof may be subject to limitations of public policy and the
effect of applicable statutes and judicial decisions. The Board of Directors of
the Company (at a meeting duly called and held) has (a) determined that the sale
of the Shares is advisable and fair and in the best interests of the Company and
its stockholders, and (b) recommended the approval and adoption by the
stockholders of this Agreement and the Registration Rights Agreement and the
approval of the sale of the Shares, and directed that this Agreement, the
Registration Rights Agreement and the sale of the Shares be submitted for
consideration by the Company's stockholders. The Board of Directors of the
Company has taken all action necessary to render inapplicable, as it relates to
Purchasers, the provisions of Section 203 of the Delaware General Corporation
Law. No other corporate action on the part of the Company is necessary to
authorize the execution, delivery and performance of this Agreement and the
Registration Rights Agreement and the consummation of the transactions
contemplated hereby and thereby (other than, in the case of this Agreement, the
approval of the sale of the Shares by (i) the holders of least a majority of the
Series B Convertible Preferred Stock of the Company and (ii) the holders of at
least a majority of the outstanding voting stock of the Company voting at a
meeting held to consider the sale of the Shares).
3.4 Financial Statements. The Company has delivered to each Purchaser its
audited Statements of Income, Stockholders' Equity and Cash Flows for the fiscal
year ended June 30, 2000, its audited Balance Sheet as of June 30, 2000, its
unaudited Statements of Income and Cash Flows for the three-month period ended
September 30, 2000 and its unaudited Balance Sheet as of September 30, 2000. All
such financial statements are hereinafter referred to collectively as the
"Financial Statements". The Financial Statements have been prepared in
accordance with the books and records of the Company and in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved, and fairly present, in all material respects, the
financial position of the Company and the results of its operations as of the
date and for the periods indicated thereon, except that the unaudited financial
statements may not be in accordance with generally accepted accounting
principles because of the absence of footnotes normally contained therein and
are subject to normal year-end audit adjustments which, individually, and in the
aggregate, will not be material. Since September 30, 2000 there has been no
material adverse change (actual or threatened) in the assets, liabilities
(contingent or other), affairs, operations, prospects or condition (financial or
other) of the Company.
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3.5 SEC Documents. The Company has filed all required reports, schedules,
forms, statements and other documents with the SEC since July 1, 1999 in a
timely manner. The Company has delivered to each Purchaser a true and complete
copy of the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 2000, and any other statement, report, registration statement (other than
registration statements on Form S-8) or definitive proxy statement filed by the
Company with the SEC during the period commencing June 30, 2000 and ending on
the date hereof. The Company will, promptly upon the filing thereof, deliver to
the Purchasers all statements, reports (including, without limitation, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K), registration statements
and definitive proxy statements filed by the Company with the SEC during the
period commencing on the date hereof and ending on the Closing Date (all such
materials required to be furnished to the Purchaser pursuant to this sentence or
pursuant to the preceding sentences of this Section 3.5 being called,
collectively, the "SEC Documents"). As of their respective filing dates, the SEC
Documents complied or will comply in all material respects with the requirements
of the Exchange Act or the Securities Act, as applicable, and the rules and
regulations promulgated thereunder, and none of the SEC Documents contained or
will contain any untrue statement of a material fact or omitted or will omit to
state a material fact required to be stated therein or necessary in order to
make the statements made therein, in light of the circumstances under which they
were made, not misleading, as of their respective filing dates, except to the
extent corrected by a subsequently filed SEC Document. The financial statements
of the Company included in the SEC Documents complied or will comply as of their
respective dates of filing with the SEC in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been or will be prepared in accordance with generally
accepted accounting principles (except, in the case of unaudited statements, as
permitted by Regulation S-X promulgated by the SEC) applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly present the financial position of the Company as of the
dates thereof and the results of its operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal year-end
audit adjustments). As of the date hereof, the Company has, on a timely basis,
made all filings required to be made by the Company with the SEC and the Company
is eligible to file a registration statement on Form S-3 with respect to
outstanding shares of its Common Stock to be offered for sale for the account of
any person other than the Company.
3.6 No Conflict; Required Filings and Consent.
(a) The execution and delivery of this Agreement and the Registration
Rights Agreement by the Company do not, and the performance of this Agreement
and the Registration Rights Agreement by the Company shall not, (i) conflict
with or violate the Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation"), the Certificates of Designation, the Company's
Bylaws, as amended (the "Bylaws") or equivalent organizational documents of the
Company or any of its subsidiaries, (ii) conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to the Company or any of its
subsidiaries or by which it or their respective properties are bound or
affected, or (iii) result in any breach of or constitute a default (or an event
that with notice or lapse of time or both would become a default) under, or
impair the Company's or any such subsidiary's rights or alter the rights or
obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the properties or assets of the
Company or any of its subsidiaries pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries or its or any of
their respective properties are bound or affected, except for any such breaches,
defaults or other occurrences that do not have or result in, individually or in
the aggregate, a Material Adverse Effect.
(b) The execution and delivery of this Agreement and the Registration
Rights Agreement by the Company do not, and the performance of this Agreement
and the Registration Rights Agreement by the Company shall not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental entity except for applicable requirements, if any, of the
Securities Act, the Exchange Act, state securities laws, the rules and
regulations of the Nasdaq National Market and the consent of a majority of the
holders of Series B Convertible Preferred Stock of the Company.
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3.7 Brokers or Finders. The Company has not incurred, and shall not incur,
directly or indirectly, any liability for any brokerage or finders' fees or
agents commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby other than with respect to arrangements with
Dain Rauscher Wessels relating to services provided in connection with the
financing of the Company consummated by this Agreement.
3.8 Nasdaq National Market. The Company's Common Stock is listed on the
Nasdaq National Market System, and there are no proceedings to revoke or suspend
such listing.
3.9 Absence of Litigation. There is no action, suit, arbitration or other
proceeding or, to the Company's knowledge, any investigation, pending or, to the
Company's knowledge, threatened in which an unfavorable outcome, ruling or
finding in any said matter, or for all matters taken as a whole, might have a
Material Adverse Effect. The foregoing includes, without limitation, any such
action, suit, proceeding or investigation that questions this Agreement or the
Registration Rights Agreement or the right of the Company to execute, deliver
and perform under same.
3.10 Common Stock to be Issued. The Shares, when issued in compliance with
the provisions of this Agreement, will be validly issued and will be fully paid
and nonassessable, and such Shares will be free of any restrictions on transfer,
liens or encumbrances and any taxes, security interests, options, warrants,
purchase rights, preemptive rights, contracts, commitments, equities, claims or
demands; provided, however, that the Shares may be subject to restrictions on
transfer under state and/or federal securities laws as set forth herein.
3.11 Securities Law Exemption. The offer, sale and issuance of the Shares
as contemplated by this Agreement are exempt from the registration requirements
of the Securities Act and applicable state securities laws, and neither the
Company nor any authorized agent acting on its behalf has taken or will take any
action hereafter that would cause the loss of such exemption.
3.12 Noncontravention. Neither the Company, nor any of its subsidiaries,
is in violation or breach of, or in default with respect to, any material
contract, agreement, instrument, lease, license, arrangement or understanding to
which it is a party, except where such violation, breach or default would not
result in, individually or in the aggregate, a Material Adverse Effect, and each
such contract, agreement, instrument, lease, license, arrangement and
understanding is in full force and effect and is the legal, valid and binding
obligation of the Company and/or its subsidiaries, enforceable against the
Company and/or its subsidiaries in accordance with its terms, except as may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or limiting creditors' rights generally or by equitable principles
relating to enforceability.
3.13 Key Employees. Since the date of the most recent SEC Document, there
has been no resignation or termination of any officer or key employee or group
of key employees in the Company. The Company is not aware that any officer or
key employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing.
3.14 Intellectual Property. The Company and each of its subsidiaries owns,
or has the contractual right to use, sell or license all intellectual property
necessary or required for the conduct of its business as presently conducted and
as proposed to be conducted, including, without limitation, all trade secrets,
processes, source code, licenses, trademarks, service marks, trade names, logos,
brands, copyrights, patents, franchises, domain names and permits (all such
intellectual property and the rights thereto are collectively referred to as the
"Company IP Rights"), except where any such failure to own or failure to have
the right to use, sell or license such Company IP Rights would not result in,
individually or in the aggregate, a Material Adverse Effect. The manufacture,
marketing, license, sale or intended use of any product currently licensed or
sold by the Company or its subsidiaries is not in breach of any material license
or agreement between the Company or any of its subsidiaries and any third party
or, to the best of the Company's knowledge, has not infringed and is not
infringing on any intellectual property right of any other party, except where
such breach or infringement will not, individually or in the aggregate, result
in a Material Adverse Effect. To the best of the Company's knowledge, there is
no claim or litigation, pending or threatened, which contests the validity,
ownership or
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right to use, sell, license or dispose of any Company IP Rights. Except as set
forth in the SEC Documents or the Disclosure Schedule, the Company owns the
Company IP Rights free and clear of all liens or other encumbrances. Neither the
Company nor any of its subsidiaries has received any communications alleging
that the Company or any of its subsidiaries has violated or, by conducting its
business presently conducted or as proposed to be conducted, violates or will
violate any intellectual property rights of any other person or entity. The
Company is not aware that any of its employees are obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency, that would interfere with their duties to the Company or any of its
subsidiaries or that would conflict with the Company's business, or the business
of any of its subsidiaries, as presently conducted or as proposed to be
conducted.
3.15 Title to Property and Assets. Neither the Company nor any of its
subsidiaries owns material real property. The Company and each of its
subsidiaries have good and defensible title to all of their material properties
and assets, free and clear of all liens, charges and encumbrances except liens
for taxes not yet due and payable and such liens or other imperfections of
title, if any, as do not materially detract from the value of or interfere with
the present use of the property affected thereby or which, individually or in
the aggregate, will not result in a Material Adverse Effect; and all leases
pursuant to which the Company or any of its subsidiaries lease from others
material amounts of real or personal property are in good standing, valid and
effective in accordance with their respective terms, and there is not, under any
of such leases, any existing material default or event of default (or any event
which with notice or lapse of time, or both, would constitute a material default
and in respect of which the Company or its subsidiary has not taken adequate
steps to prevent such default from occurring) except where the lack of such good
standing, validity and effectiveness or the existence of such default or event
of default will not result in a Material Adverse Effect. All the plants,
structures and equipment of the Company and its subsidiaries, except such as may
be under construction, are in good operating condition and repair, except where
the failure of such plants, structures and equipment to be in such good
operating condition and repair could not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect.
3.16 Compliance with Laws. The Company and each of its subsidiaries is and
has been since January 1, 1996, in compliance with all applicable laws
(including, without limitation, all Environmental Laws (as hereinafter defined)
and laws related to employee matters and employee benefit plans), rules,
regulations, orders, judgments or decrees, except where the failure to so comply
would not result in a Material Adverse Effect. To the best of the Company's
knowledge, prior to January 1, 1996, the Company and each of its subsidiaries
was in compliance with all applicable laws (including, without limitation, all
Environmental Laws and laws relating to employee matters and employee benefit
plans), rules regulations, orders, judgments or decrees, except where the
failure to so comply would not have a Material Adverse Effect. Neither the
Company nor any of its subsidiaries has received any notice or other
communication from any governmental entity or other person regarding any actual
or possible material violation of, or material failure to comply with, any law,
regulation, order, judgment or decree. "Environmental Laws" shall mean all
federal, state, local and foreign laws, ordinances, treaties, rules,
regulations, guidelines and permit conditions relating to contamination,
pollution or the environment (including ambient air, surface water, ground
water, land surface or subsurface strata) or the protection of human health and
worker safety, including, without limitation, laws and regulations relating to
Hazardous Materials Activities (as defined in Section 3.21) or emissions,
discharges, releases or threatened releases of Hazardous Materials (as defined
in section 3.21).
3.17 Related Entities. Except as set forth in the SEC Documents or the
Disclosure Schedule, the Company does not presently own or control, directly or
indirectly, any interest in any other subsidiary, corporation, association or
other business entity. The Company is not a party to any joint venture.
3.18 Significant Customers and Suppliers. No customer or supplier that was
significant to the Company or any of its subsidiaries during the period covered
by the Financial Statements or that has been significant to the Company or any
of its subsidiaries thereafter, has terminated, materially reduced or threatened
to terminate or materially reduce its purchases from or provision of products or
services to the Company or any of its subsidiaries.
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3.19 Foreign Corrupt Practices. Neither the Company nor any director,
officer, employee, agent or other person acting on behalf of the Company, nor
any subsidiary of the Company, has, in the course of that person's actions for,
or on behalf of, the Company, (a) used any corporate assets for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity, (b) made any direct or indirect unlawful payment to any
foreign or domestic governmental official or employee, (c) violated or is in
violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, or
(d) made any bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic governmental official or employee.
3.20 Taxes. The Company and each of its subsidiaries, and any
consolidated, combined, unitary or aggregate group for tax purposes of which the
Company or any of its subsidiaries is or has been a member, have timely filed
all tax returns required to be filed by them and have paid all taxes shown
thereon to be due. These returns and reports are true and complete in all
material respects. The Company and each of its subsidiaries have paid all taxes
and other assessments due. The Company and each of its subsidiaries have
provided adequate accruals in accordance with generally accepted accounting
principles in its financial statements for any taxes that have not been paid,
whether or not shown as being due on any tax returns. There is (i) no material
claim for taxes that is a lien against the property of the Company or any of its
subsidiaries or is being asserted against the Company or any of its subsidiaries
other than liens for taxes not yet due and payable, (ii) no audit of any tax
return of the Company or any of its subsidiaries being conducted by a tax
authority, (iii) no extension of the statute of limitations on the assessment of
any taxes granted by the Company or any of its subsidiaries and currently in
effect, and (iv) no agreement, contract or arrangement to which the Company or
any of its subsidiaries is a party that may result in the payment of any amount
that would not be deductible by reason of Sections 162(m), 280G or 404 of the
Code. Neither the Company nor any of its subsidiaries has ever been a member of
any combined, controlled, consolidated or affiliated group (other than the group
of which the Company is the parent) for tax purposes. Neither the Company nor
any of its subsidiaries is a party to any tax sharing or tax allocation
agreement nor does the Company or any of its subsidiaries owe any amount under
any such agreement. Neither the Company nor any of its subsidiaries has been at
any time, a "United States real property holding corporation" within the meaning
of Section 897(c)(2) of the Code.
3.21 Environmental Matters.
(a) Hazardous Materials Activities. Neither the Company nor any of its
subsidiaries has (i) transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials (as
hereinafter defined) in violation of Environmental Laws, or (ii) disposed of,
transported, sold, used, released, exposed its employees or others to or
manufactured any product containing a Hazardous Material (collectively"Hazardous
Materials Activities") in violation of any Environmental Laws in effect prior to
or as of the date hereof, which violation has not heretofore been cured or for
which there is any remaining liability. "Hazardous Materials" shall mean any
substance that has been designated by any governmental entity or by applicable
Environmental Laws to be radioactive, toxic, hazardous or otherwise a danger to
health or the environment, including, without limitation, PCBs, asbestos,
petroleum, urea formaldehyde and all substances listed as hazardous substances
pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, or defined as a hazardous waste pursuant to
the Resource Conservation and Recovery Act of 1976, as amended, and the
regulations promulgated pursuant to Environmental Laws, but excluding office and
janitorial supplies maintained in accordance with Environmental Laws.
(b) Permits. The Company and its subsidiaries hold all environmental
approvals, permits, licenses, clearances and consents (the "Environmental
Permits") necessary for the conduct of the Company's and its subsidiaries'
Hazardous Material Activities and other businesses as such activities and
businesses are currently being conducted. The Company and its subsidiaries are
and at all times have been in compliance in all material respects with the terms
of the Environmental Permits, except where noncompliance has heretofore been
cured or where there is no remaining liability.
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(c) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, claim or injunction is pending, and to
the Company's knowledge, no action, proceeding, revocation proceeding, amendment
procedure, writ, claim or injunction has been threatened by any governmental
entity against the Company or any of its subsidiaries concerning any
Environmental Permit, Hazardous Material or any Hazardous Materials Activities
of the Company or any of its subsidiaries.
3.22 Disclosure. This Agreement, the Schedules and Exhibits hereto, the
Registration Rights Agreement, and all other documents delivered to the
Purchasers in connection herewith or therewith at the Closing, do not and will
not contain any untrue statement of a material fact, or omit to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. There are no facts that will,
individually or in the aggregate, result in a Material Adverse Effect that have
not been disclosed in the SEC Documents or to the Purchasers in this Agreement
(including the Schedules and Exhibits hereto), the Registration Rights Agreement
and all other documents delivered to the Purchasers in connection herewith or
therewith at the Closing.
3.23 No Integrated Offering. Neither the Company, nor any of its
Affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales in any security or solicited any offers to
buy any security under circumstances that would require registration under the
Securities Act of the issuance of the Shares to the Purchasers. The issuance of
the Shares to the Purchasers will not be integrated with any other issuance of
the Company's securities (past, current or future) for purposes of the
Securities Act or any applicable rules of Nasdaq.
4. Representations and Warranties of the Purchaser. Each of the Purchasers,
severally and not jointly, represents and warrants to the Company as follows:
4.1 Authorization. All action on the part of the Purchaser and, if
applicable, its officers, directors and shareholders necessary for the
authorization, execution, delivery and performance of this Agreement and the
Registration Rights Agreement and the consummation of the transactions
contemplated herein and therein has been, or, prior to Closing, will be taken.
When executed and delivered, each of this Agreement and the Registration Rights
Agreement will constitute the legal, valid and binding obligation of the
Purchaser, enforceable against such Purchaser in accordance with its terms,
except as such may be limited by bankruptcy, insolvency, reorganization or other
laws affecting creditors' rights generally and by general equitable principles.
The Purchaser has all requisite corporate power to enter into each of this
Agreement and the Registration Rights Agreement and to carry out and perform its
obligations under the terms of this Agreement and the Registration Rights
Agreement.
4.2 Purchase Entirely for Own Account. The Purchaser is acquiring the
Shares being purchased by it hereunder for investment, for its own account, and
not for resale or with a view to distribution thereof in violation of the
Securities Act.
4.3 Investor Status; Etc. The Purchaser certifies and represents to the
Company that at the time the Purchaser acquires any of the Shares, such
Purchaser will be an "Accredited Investor" as defined in Rule 501 of Regulation
D promulgated under the Securities Act and was not organized for the purpose of
acquiring the Shares. The Purchaser's financial condition is such that it is
able to bear the risk of holding the Shares for an indefinite period of time and
the risk of loss of its entire investment. The Purchaser has been afforded the
opportunity to ask questions of and receive answers from the management of the
Company concerning this investment and has sufficient knowledge and experience
in investing in companies similar to the Company in terms of the Company's stage
of development so as to be able to evaluate the risks and merits of its
investment in the Company.
4.4 Risk Factors.
(a) The Purchaser acknowledges that an investment in the Company involves
known and unknown risks, uncertainties and other factors which may result in
such Purchaser's loss of its entire investment. The Company is an early stage
medical device company that develops, manufactures and markets medical devices
for the treatment of certain cardiovascular and circulatory disorders. The
Company has generated only limited revenue from sales of its products and
expects its operating losses to continue through at least the end of fiscal
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2002 as it continues to expend funds to conduct its research and development
activities, establish commercial-scale manufacturing capabilities and expand its
sales and marketing activities. There can be no assurance that the Company's
products will be accepted by the medical community for use in treatment or will
generate sufficient or sustainable revenues to enable the Company to be
profitable.
(b) The Purchaser acknowledges that such Purchaser has received a copy of
the Company's annual report for the fiscal year ended June 30, 2000 and filed on
Form 10-K and reviewed the section captioned "Factors That May Impact Future
Operation" contained therein.
4.5 Shares Not Registered. The Purchaser understands that the Shares have
not been registered under the Securities Act, by reason of their issuance by the
Company in a transaction exempt from the registration requirements of the
Securities Act, and that the Shares must continue to be held by such Purchaser
unless a subsequent disposition thereof is registered under the Securities Act
or is exempt from such registration. The Purchaser understands that the
exemptions from registration afforded by Rule 144 (the provisions of which are
known to it) promulgated under the Securities Act depend on the satisfaction of
various conditions, and that, if applicable, Rule 144 may afford the basis for
sales only in limited amounts.
4.6 No Conflict. The execution and delivery of this Agreement and the
Registration Rights Agreement by the Purchaser and the consummation of the
transactions contemplated hereby and thereby will not conflict with or result in
any violation of or default by such Purchaser (with or without notice or lapse
of time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to a loss of a material benefit under (i) any
provision of the organizational documents of such Purchaser or (ii) any material
agreement or material instrument, permit, franchise, license, judgment, order,
statute, law, ordinance, rule or regulations, applicable to such Purchaser or
its respective properties or assets.
4.7 Brokers. The Purchaser has not retained, utilized or been represented
by any broker or finder in connection with the transactions contemplated by this
Agreement.
4.8 Consents. All consents, approvals, orders and authorizations required
on the part of the Purchaser in connection with the execution, delivery or
performance of this Agreement and the consummation of the transactions
contemplated herein have been obtained and are, or will be, effective as of the
Closing Date.
4.9 Residency. The Purchaser is a resident of the jurisdiction set forth
immediately below such Purchaser's name on Schedule A hereto.
4.10 Acknowledgement Regarding Placement Agent. Purchaser acknowledges
that Dain Rauscher Wessels is acting as placement agent (the "Placement Agent")
for the Shares being offered hereby and will be compensated by the Company for
acting in such capacity. Purchaser further acknowledges that the Placement Agent
has acted solely as placement agent in connection with the offering of the
Shares by the Company, that the information and data provided to Purchaser in
connection with the transactions contemplated hereby have not been subjected to
independent verification by the Placement Agent, and that the Placement Agent
makes no representation or warranty with respect to the accuracy or completeness
of such information, data or other related disclosure material. Purchaser
further acknowledges that in making its decision to enter into this Agreement
and purchase the Shares it has relied on its own examination of the Company and
the terms of, and consequences, of holding the Shares. Purchaser further
acknowledges that the provisions of this Section 4.10 are for the benefit of,
and may be enforced by, the Placement Agent. The Company shall indemnify and
hold harmless the Purchasers from and against all fees, commissions or other
payments owing by the Company to the Placement Agent or any other person or firm
acting on behalf of the Company.
4.11 Reliance on Exemptions. The Purchaser understands that the Shares are
being offered and sold to it in reliance upon specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying upon the truth and accuracy of, and the Purchaser's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of the Purchaser set forth herein in order to determine the
availability of such exemptions and the eligibility of the Purchaser to acquire
the Shares.
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5. Certain Covenants of the Purchasers. Each Purchaser, severally and not
jointly, covenants and agrees as follows:
5.1 Forms 13D or 13G. Promptly following the Closing, the Purchaser shall,
if required, file with the SEC any reports regarding its ownership of the
Company's Common Stock as required by Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder.
5.2 Reporting Obligations Pursuant to Section 16. The Purchaser shall, if
required, agree to file with the SEC any reports required to be filed pursuant
to Section 16(a) of the Exchange Act, and the rules and regulations promulgated
thereunder, by such Purchaser, its officers, directors, employees or Affiliates
within the time such filings are required to be made and to provide the Company
with a copy of all such filings promptly thereafter.
5.3 Securities Law Transfer Restrictions. The Purchaser shall not sell,
assign, pledge, transfer or otherwise dispose or encumber any of the Shares
being purchased by it hereunder, except (i) pursuant to an effective
registration statement under the Securities Act or (ii) pursuant to an available
exemption from registration under the Securities Act and applicable state
securities laws and, if requested by the Company, upon delivery by such
Purchaser of an opinion of counsel reasonably satisfactory to the Company to the
effect that the proposed transfer is exempt from registration under the
Securities Act and applicable state securities laws. Any transfer or purported
transfer of the Shares in violation of this Section 5.3 shall be voidable by the
Company. The Company shall not register any transfer of the Shares in violation
of this Section 5.3. The Company may, and may instruct any transfer agent for
the Company, to place such stop transfer orders as may be required on the
transfer books of the Company in order to ensure compliance with the provisions
of this Section 5.3.
5.4 Legends. Each certificate representing any of the Shares shall be
endorsed with the legends set forth below, and the Purchaser covenants that,
except to the extent such restrictions are waived in writing by the Company, it
shall not transfer the shares represented by any such certificate without
complying with the restrictions on transfer described in this Agreement and the
legends endorsed on such certificate:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS
AND MAY NOT BE OFFERED, SOLD, PLEDGED OR TRANSFERRED UNLESS (I) THERE IS AN
EFFECTIVE REGISTRATION STATEMENT COVERING SUCH OFFER, SALE OR TRANSFER OR
(II) THERE IS AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE
COMPANY, THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAWS FOR SUCH OFFER, SALE
OR TRANSFER IS AVAILABLE.
5.5 Standstill Provisions; Limitations on Ownership of Stock. Without the
prior written consent of the Company's Board of Directors neither the Purchaser,
nor any Affiliate of such Purchaser, or partnership, syndicate or group of which
such Purchaser is a member, nor any entity affiliated with such Purchaser or
with which such Purchaser is acting in concert (all of which shall together be
referred to as a "Purchaser" in this Section 5.5) shall acquire (other than by
the transactions contemplated under this Agreement or the vesting or exercise of
warrants to purchase capital stock of the Company granted to the Purchaser by
the Company), directly or indirectly, beneficial ownership (as defined under
Rule 13d-3 of the Exchange Act) of any Voting Stock (as defined below) of the
Company if after such acquisition the Purchaser would beneficially own more than
thirty-five percent (35%) of the total combined voting power of the Voting Stock
then outstanding. For purposes of this Agreement, "Voting Stock" shall mean the
Common Stock and Preferred Stock of the Company, any securities convertible into
or exchangeable for the Common or Preferred Stock, any other right to acquire
Common or Preferred Stock, any other right to acquire any securities convertible
into or exchangeable for Common or Preferred Stock, and other securities issued
by the Company having the power to vote in the election of directors of the
Company.
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6. Certain Covenants of the Company.
6.1 Proxy Statement.
(a) As promptly as practicable after the execution of this Agreement, the
Company shall prepare and file with the SEC preliminary proxy materials which
shall constitute the preliminary Proxy Statement in connection with the sale of
the Shares. As promptly as practicable after comments are received from the SEC
with respect to the preliminary proxy materials, the Company shall file with the
SEC the definitive Proxy Statement, which Proxy Statement shall comply in all
material respects with the applicable requirements of the Exchange Act and
Securities Act, respectively, and the applicable rules and regulations of the
SEC thereunder.
(b) The Company shall cause the Proxy Statement to be mailed to its
stockholders and after the Proxy Statement shall have been so mailed, promptly
circulate any amended, supplemental or supplemented proxy material, if any, and,
if required in connection therewith, resolicit proxies.
(c) The Company shall use its best efforts to obtain approval for quotation
on the Nasdaq National Market (and each other national securities exchange or
automated quotation system, if any, on which shares of the Company's Common
Stock are then listed or traded), upon official notice of issuance, of the
Shares.
(d) The Company shall make all necessary filings with respect to the sale
of Shares under the Securities Act and the Exchange Act and the rules and
regulations thereunder and under applicable blue sky or similar laws and shall
use its best efforts to obtain required approvals and clearances with respect
thereto.
6.2 Stockholder Approvals; Recommendations. The Company, acting through
its Board of Directors, shall call, give notice of, convene and hold a meeting
of the holders of the Common Stock of the Company for the purpose of voting upon
the sale of the Shares (the "Stockholders' Meeting"). The Company shall ensure
that the Stockholders' Meeting is called, noticed, convened, held and conducted,
and that all proxies solicited in connection with the Stockholders' Meeting are
solicited in compliance with all applicable laws, regulations, orders, judgments
and decrees.
6.3 Notices of Certain Events. The Company hereto shall promptly notify
Purchasers of:
(a) the receipt by the Company of any notice or other communication
from any person alleging that the consent of such person is or may be
required in connection with the transactions contemplated by this
Agreement;
(b) the receipt by the Company of any notice or other communication
from any governmental entity in connection with the transactions
contemplated by this Agreement;
(c) the Company obtaining knowledge of any actions, suits, claims
investigations or proceedings commenced or threatened against, relating to
or involving or otherwise affecting the Company or the Purchasers, as the
case may be, or any of their respective subsidiaries which relate to the
consummation of the transactions contemplated by this Agreement; and
(d) the Company obtaining knowledge of the occurrence, or failure to
occur, of any event which occurrence or failure to occur will be likely to
cause (A) any representation or warranty contained in this Agreement to be
untrue or inaccurate in any material respect, or (B) any material failure
of any party to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it under this Agreement.
6.4 Purchase Information. The Company will keep the Purchasers informed of
the Company's best estimate of the earliest date on which the registration
statement by which the Company will register the Shares sold hereunder pursuant
to the terms of the Registration Rights Agreement (the "Registration
Statement"), or any post-effective amendment thereto, will become effective and
will notify each Purchaser (i) when the Registration Statement or any
post-effective amendment to such Registration Statement is filed or becomes
effective, (ii) of any request by the SEC for an amendment or any supplement to
such Registration Statement or any related prospectus, or any other information
request by any other governmental agency directly relating to the offering, and
(iii) of the issuance by the SEC of any stop order suspending the
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effectiveness of such Registration Statement or of any order preventing or
suspending the use of any related prospectus or the initiation or threat of any
proceeding for that purpose.
6.5 Restrictions on Subsequent Offerings. The Company agrees that during
the period beginning on the Closing Date and ending on and including the date
which is ninety (90) days after the Closing Date (the "Limitation Period"), the
Company will not issue and sell (i) shares of the Company's common stock at a
price per share of less than $4.25, or (ii) any options, warrants or any other
securities of the Company convertible or exchangeable into or for common stock
of the Company at a conversion or exercise price per share of less than $4.25
(such sales to be collectively referred to as a "Subsequent Dilutive Offering").
In the event the Company shall, during the Limitation Period, complete a
Subsequent Dilutive Offering, the Company shall, within ten (10) days of the
closing of the Subsequent Dilutive Offering, pay to each Purchaser an amount
equal to the number of Shares purchased by such Purchaser multiplied by the
difference between $4.25 and the effective purchase price per common share (as
of the date of sale) of the securities sold in the Subsequent Dilutive Offering;
provided, however, that Subsequent Dilutive Offerings shall be deemed to not
include any of the following: (i) securities issued in connection with a loan or
leasing arrangement with a commercial bank, equipment lessor or insurance
company, (ii) any transaction involving the Company's issuances of securities
(A) as consideration in a merger or consolidation, (B) in connection with any
strategic partnership or joint venture (the primary purpose of which is not to
raise equity capital) or (C) as consideration for the acquisition of a business,
product, license or other assets by the Company, (iii) the issuance of
securities upon exercise or conversion of the Company's options, warrants or
other convertible securities outstanding as of the date hereof and (iv) the
grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option plan, restricted stock plan or stock
purchase plan for the benefit of the Company's employees, directors or
consultants.
6.6 Stock Option Matters. The Company shall, within thirty (30) days of
the Closing Date, adopt such amendments to the Company's stock option plans,
restricted stock plans, stock purchase plans and its Bylaws to provide (i) that,
unless approved by the holders of a majority of the voting stock (voting
together as a single class), the Company shall not grant any stock options with
an exercise price of less than 100% of the fair market value of the underlying
stock on the date of grant, (ii) that these amendments may not be further
amended or repealed without the affirmative vote of the holders of a majority of
the voting stock of the Company (voting together as a single class) and (iii)
that, unless approved by the holders of a majority of the voting stock (voting
together as a single class), the Company will not amend, waive or repeal
Sections 8.8 and 8.9 of its Bylaws. The Company shall provide to each of the
Purchasers such documents or instruments used to effect the foregoing provisions
of this Section 6.6 promptly upon such amendments being brought into force.
6.7 Securities Compliance. The Company shall do all things necessary and
advisable as is necessary to enable the Purchasers to utilize Form S-3 for the
sale of their Registrable Securities as contemplated in the Registration Rights
Agreement.
6.8 No Integration. The Company will not make any offers or sales of any
security (other than the Shares) under circumstances that would cause the
offering of the Shares to be integrated with any other offering of securities by
the Company (i) for the purposes of any stockholder approval provision
applicable to the Company or its securities or (ii) for purposes of any
registration requirement under the Securities Act.
6.9 Efforts. The Company shall, and shall cause its respective
subsidiaries to, cooperate and use their best efforts to take, or cause to be
taken, all appropriate action, and to make, or cause to be made, all filings
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, their best efforts to (i) obtain, prior to the
Closing Date, all licenses, permits, consents, approvals, authorizations,
qualifications and orders of governmental authorities and parties to contracts
with the Company and its subsidiaries, (ii) defend against and respond to any
action, suit, proceeding or investigation relating to the transactions
contemplated by this Agreement and (iii) provide such assistance as is
reasonably requested by any of the Purchasers in preparing any filings and
obtaining any approvals required under the Hart-Scott-Rodino Antitrust Act of
1976 prior to the Closing Date, in each case as are necessary for consummation
of the transactions contemplated by this Agreement and to fulfill the conditions
to the sale of Shares.
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7. Conditions Precedent to Closing.
7.1 Conditions to the Obligation of Each Purchaser to Consummate the
Closing. The obligation of each Purchaser to consummate the Closing and to
purchase and pay for the Shares being purchased by it pursuant to this Agreement
is subject to the satisfaction of the following conditions precedent:
(a) Representations and Warranties. The representations and warranties
contained herein of the Company shall be true and correct on and as of the
Closing Date in all material respects with the same force and effect as
though made on and as of the Closing Date (it being understood and agreed
by each Purchaser that, in the case of any representation and warranty of
the Company contained herein which is hereinabove qualified by application
thereto of a materiality standard, such representation and warranty need be
true and correct in all respects in order to satisfy as to such
representation or warranty the condition precedent set forth in the
foregoing provisions of this Section 7.1(a)).
(b) Performance. The Company shall have performed and complied in all
material respects with all agreements, obligations and conditions contained
in this Agreement that are required to be performed by it or with which it
is required to have complied on or before the Closing Date.
(c) Rights Agreement. The Registration Rights Agreement shall have
been executed and delivered by the Company.
(d) Stockholder Approval. The Company shall have satisfied all
stockholder approval requirements of applicable law, rule or regulation,
including provisions of the Nasdaq Stock Market, or any other exchange or
market on which the Common Stock is then listed or traded, with respect to
the issuance of 20% or more of the Company's Common Stock.
(e) Series B Preferred Approval. The Company shall have received the
required approval of the holders of the outstanding Series B Convertible
Preferred Stock of the Company for the sale of the Shares.
(f) HSR Act. All waiting periods, if any, under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 relating to the transactions
contemplated hereby will have expired or terminated early.
(g) Adverse Change. Since the date of the financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 2000, no event which had, or could be reasonably expected to
have, a Material Adverse Effect, and no material adverse change in the
financial condition or prospects of the Company, shall have occurred.
(h) Absence of Litigation. No proceeding challenging this Agreement or
the transactions contemplated hereby, or seeking to prohibit, alter,
prevent or materially delay the Closing, shall have been instituted before
any court, arbitrator or governmental body, agency or official and shall be
pending.
(i) Consents. The purchase of and payment for the Shares by each
Purchaser shall not be prohibited by any law or governmental order or
regulation. All necessary consents, approvals, licenses, permits, orders
and authorizations of, or registrations, declarations and filings with, any
governmental or administrative agency or of any other person with respect
to any of the transactions contemplated hereby shall have been duly
obtained or made and shall be in full force and effect.
(j) Proceedings and Documents. All instruments and corporate
proceedings in connection with the transactions specifically contemplated
by this Agreement to be consummated at the Closing shall be satisfactory in
form and substance to each Purchaser, and each Purchaser shall have
received copies (executed or certified, as may be appropriate) of all
documents which such Purchaser may have reasonably requested in connection
with such transactions.
(k) Securities Compliance. The Company shall have taken all action
necessary to comply with any federal or state securities laws applicable to
the transactions contemplated by this Agreement.
(l) Compliance Certificate. The Company shall deliver to each
Purchaser at the Closing a certificate signed by the President of the
Company stating that the Company has complied with or
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satisfied each of the conditions to the Purchaser's obligation to
consummate the Closing set forth in Sections 7.1(a)-(b), 7.1(d)-(i) and
7.1(k), unless waived in writing by such Purchaser.
(m) Opinion of Counsel. The Company shall deliver to each Purchaser at
Closing an opinion of counsel for the Company, dated as of the Closing
Date, in the form attached hereto as Exhibit B.
(n) Stock Certificate. The Company shall deliver to each Purchaser at
the Closing a duly executed stock certificate evidencing the shares of
Common Stock purchased by such Purchaser at the Closing.
7.2 Conditions to the Obligation of the Company to Consummate the
Closing. The obligation of the Company to consummate the Closing and to issue
and sell the Shares at the Closing is subject to the satisfaction of the
following conditions precedent:
(a) Representations and Warranties. Each of the representations and
warranties contained herein of the Purchasers shall be true and correct on
and as of the Closing Date in all material respects with the same force and
effect as though made on and as of the Closing Date (it being understood
and agreed by the Company that, in the case of any representation and
warranty of each Purchaser contained herein which is hereinabove qualified
by application thereto of a materiality standard, such representation and
warranty need be true and correct in all respects in order to satisfy as to
such representation or warranty the condition precedent set forth in the
foregoing provisions of this Section 7.2(a)).
(b) Rights Agreement. The Registration Rights Agreement shall have
been executed and delivered by each Purchaser.
(c) Performance. Each Purchaser shall have performed all obligations
and conditions herein required to be performed or observed by such
Purchaser on or prior to the Closing Date.
(d) Stockholder Approval. The Company shall have received the approval
of its stockholders required under applicable law, including provisions of
the Nasdaq Stock Market, or any other exchange or market on which the
Common Stock is then listed or traded, with respect to the issuance of
twenty percent (20%) or more of the Company's Common Stock.
(e) Series B Preferred Approval. The Company shall have received the
required approval of the holders of the outstanding Series B Convertible
Preferred Stock of the Company for the sale of the Shares.
(f) HSR Act. All waiting periods, if any, under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 relating to the transactions
contemplated hereby will have expired or terminated early.
(g) Absence of Litigation. No proceeding challenging this Agreement or
the transactions contemplated hereby, or seeking to prohibit, alter,
prevent or materially delay the Closing, shall have been instituted before
any court, arbitrator or governmental body, agency or official and shall be
pending.
(h) Investors' Questionnaire. Each Purchaser shall have executed and
delivered to the Company and the Placement Agent a Purchaser's
Questionnaire, in the form attached hereto as Exhibit C, pursuant to which
each Purchaser shall provide information necessary to confirm each of the
Purchasers' status as an "accredited investor" (as such term is defined in
Rule 501 promulgated under the Securities Act)".
(i) Payment. Each Purchaser shall have paid the Purchase Price set
forth in Section 2.3.
8. Termination; Liabilities Consequent Thereon.
8.1 Termination. This Agreement may be terminated and the transactions
contemplated hereunder abandoned by the Company with respect to a Purchaser
and/or by a Purchaser (but, in either case, only with respect to that Purchaser)
at any time prior to the Closing only as follows:
(a) by a Purchaser, upon notice to the Company, if the conditions set
forth in Section 7.1 shall not have been satisfied on or prior to January
31, 2001;
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(b) by the Company, upon notice to a Purchaser, if the conditions set
forth in Section 7.2 shall not have been satisfied with respect to such
Purchaser on or prior to January 31, 2001;
(c) at any time by mutual agreement of the Company and a Purchaser;
(d) by a Purchaser, if there has been any material breach of any
representation or warranty or any material breach of any covenant of the
Company contained herein and the same has not been cured within 15 days
after notice thereof, (it being understood and agreed by such Purchaser
that, in the case of any representation or warranty of the Company
contained herein which is hereinabove qualified by application thereto of a
materiality standard, such representation or warranty will be deemed to
have been breached for purposes of this Section 8.1(d) if such
representation or warranty was not true and correct in all respects at the
time such representation or warranty was made by the Company); or
(e) by the Company with respect to a Purchaser, if there has been any
material breach of any representation, warranty or any material breach of
any covenant by such Purchaser contained herein and the same has not been
cured within 15 days after notice thereof (it being understood and agreed
by the Company that, in the case of any representation and warranty of a
Purchaser contained herein which is hereinabove qualified by application
thereto of a materiality standard, such representation or warranty will be
deemed to have been breached for purposes of this Section 8.1(e) if such
representation or warranty was not true and correct in all respects at the
time such representation or warranty was made by such Purchaser).
8.2 Liability. Any termination pursuant to this Section 8 shall be without
liability on the part of any party, unless such termination is the result of a
material breach of this Agreement by a party to this Agreement (which is not
cured as permitted under Section 8.1(d) or 8.1(e)) in which case such breaching
party shall remain liable for such breach notwithstanding any termination of
this Agreement.
9. Miscellaneous Provisions.
9.1 Public Statements or Releases. None of the parties to this Agreement
shall make, issue, or release any announcement, whether to the public generally,
or to any of its suppliers or customers, with respect to this Agreement or the
transactions provided for herein, or make any statement or acknowledgment of the
existence of, or reveal the status of, this Agreement or the transactions
provided for herein, without the prior consent of the other parties, which shall
not be unreasonably withheld or delayed, provided, that nothing in this Section
9.1 shall prevent any of the parties hereto from making such public
announcements as it may consider necessary in order to satisfy its legal
obligations, but to the extent not inconsistent with such obligations, it shall
provide the other parties with an opportunity to review and comment on any
proposed public announcement before it is made.
9.2 Further Assurances. Each party agrees to cooperate fully with the
other party and to execute such further instruments, documents and agreements
and to give such further written assurances, as may be reasonably requested by
the other party to better evidence and reflect the transactions described herein
and contemplated hereby, and to carry into effect the intents and purposes of
this Agreement.
9.3 Rights Cumulative. Each and all of the various rights, powers and
remedies of the parties shall be considered to be cumulative with and in
addition to any other rights, powers and remedies which such parties may have at
law or in equity in the event of the breach of any of the terms of this
Agreement. The exercise of any right, power or remedy shall neither constitute
the exclusive election thereof nor the waiver of any other right, power or
remedy available to such party.
9.4 Notices
(a) Any notices, reports or other correspondence (hereinafter collectively
referred to as "correspondence") required or permitted to be given hereunder
shall be sent by postage prepaid first class mail, overnight courier or telecopy
or delivered by hand to the party to whom such correspondence is required or
permitted to be given hereunder. Any notice or other communication delivered by
hand shall be deemed to have been delivered and received on the date on which
such notice or communication is actually received, or in the case of certified
mail deposited with the appropriate postal authorities on the date when such
notice or
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communication is actually received, and in any other case shall be deemed to
have been delivered on the date on which such notice or communication is
actually received.
(b) All correspondence to the Company shall be addressed as follows:
Cardiac Pathways Corporation
995 Benecia Avenue
Sunnyvale, California 94086
Telephone: (408) 737-0505
Facsimile: (408) 737-1700
Attention: Eldon Bullington, Chief Financial Officer
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Telephone: (650) 493-9300
Facsimile: (650) 845-5000
Attention: Chris F. Fennell
(c) All correspondence to any Purchaser shall be sent to such Purchaser at
the address set forth across from such Purchaser's name on Schedule A.
(d) Any entity may change the address to which correspondence to it is to
be addressed by notification as provided for herein.
9.5 Captions. The captions and paragraph headings of this Agreement are
solely for the convenience of reference and shall not affect its interpretation.
9.6 Severability. Should any part or provision of this Agreement be held
unenforceable or in conflict with the applicable laws or regulations of any
jurisdiction, the invalid or unenforceable part or provisions shall be replaced
with a provision which accomplishes, to the extent possible, the original
business purpose of such part or provision in a valid and enforceable manner,
and the remainder of this Agreement shall remain binding upon the parties
hereto.
9.7 Governing Law; Injunctive Relief
(a) This Agreement shall be governed by and construed in accordance with
the internal and substantive laws of California and without regard to any
conflicts of laws concepts which would apply the substantive law of some other
jurisdiction.
(b) Each of the parties hereto acknowledges and agrees that damages will
not be an adequate remedy for any material breach or violation of this Agreement
if such material breach or violation would cause immediate and irreparable harm
(an "Irreparable Breach"). Accordingly, in the event of a threatened or ongoing
Irreparable Breach, each party hereto shall be entitled to seek, in any state or
federal court in the County of Alameda, State of California, equitable relief of
a kind appropriate in light of the nature of the ongoing or threatened
Irreparable Breach, which relief may include, without limitation, specific
performance or injunctive relief; provided, however, that if the party bringing
such action is unsuccessful in obtaining the relief sought, the moving party
shall pay the non-moving party's reasonable costs, including attorney's fees,
incurred in connection with defending such action. Such remedies shall not be
the parties' exclusive remedies, but shall be in addition to all other remedies
provided in this Agreement.
9.8 Amendments. This Agreement may not be amended, modified or terminated,
and no rights or provisions may be waived, except with the written consent of
the Company and those Purchasers holding a majority of the aggregate number of
Shares held by all of the Purchasers. Notwithstanding the foregoing, the Company
may at its election, by notifying the Purchasers, amend this Agreement to add as
parties to this Agreement additional purchasers of Common Stock pursuant to
Section 2.4 hereof.
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9.9 Expenses. Each party will bear its own costs and expenses in
connection with this Agreement, except that the Company shall pay the legal fees
and expenses of Shartsis, Friese & Ginsburg LLP ("SF&G"), counsel for Van
Wagoner Capital Management and its Affiliates (collectively, "VWCM"), regardless
of whether or not the Closing occurs, in an amount not to exceed $25,000
incurred in connection with the negotiation and preparation of this Agreement,
the Registration Rights Agreement and the transactions contemplated hereby and
thereby, which payment shall be made within ten (10) days after receiving an
invoice therefor. For the avoidance of doubt, no fees paid to SF&G pursuant to
this Section 9.9 shall be deemed to be payment to counsel for the "Investors"
(as defined in the Registration Rights Agreement) as required to be made by the
Company pursuant to Section 8 of the Registration Rights Agreement.
9.10 Assignment.
(a) The rights and obligations of the parties hereto shall inure to the
benefit of and shall be binding upon the authorized successors and permitted
assigns of each party. Neither party may assign its rights or obligations under
this Agreement or designate another person (i) to perform all or part of its
obligations under this Agreement or (ii) to have all or part of its rights and
benefits under this Agreement, in each case without the prior written consent of
the other party. In the event of any assignment in accordance with the terms of
this Agreement, the assignee shall specifically assume and be bound by the
provisions of the Agreement by executing and agreeing to an assumption agreement
reasonably acceptable to the other party.
(b) Notwithstanding anything set forth herein, the Company may assign all
of its rights and obligations under this Agreement in connection with a merger
or similar reorganization or the sale of all or substantially all of its assets.
This Agreement shall survive any such merger or reorganization of either party
with or into, or such sale of assets to, another party and no consent for such
merger, reorganization or sale shall be required hereunder.
(c) Notwithstanding anything set forth herein, a Purchaser may assign all
of its rights and obligations under this Agreement to an affiliated pooled
investment partnership or fund under common investment management with such
Purchaser without the consent of the Company.
9.11 Survival. The respective representations and warranties given by the
parties hereto, and the other covenants and agreements contained herein, shall
survive the Closing Date and the consummation of the transactions contemplated
herein for a period of two years, without regard to any investigation made by
any party.
9.12 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto respecting the subject matter hereof and supersedes
all prior agreements, negotiations, understandings, representations and
statements respecting the subject matter hereof, whether written or oral. No
modification, alteration, waiver or change in any of the terms of this Agreement
shall be valid or binding upon the parties hereto unless made in writing and in
accordance with the provisions of Section 9.8 hereof.
9.13 Attorneys' Fees. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement or the Registration Rights
Agreement, the prevailing party shall be entitled to reasonable attorneys' fees,
costs and necessary disbursements in addition to any other relief to which such
party may be entitled.
9.14 Exculpation Among Purchasers. Each Purchaser acknowledges that it is
not relying upon any person, firm or corporation, other than the Company and its
officers and directors, in making its investment or decision to invest in the
Company. Each Purchaser agrees that no Purchaser nor the respective controlling
person, officers, directors, partners, agents or employees of any Purchaser
shall be liable to any other Purchaser for any action heretofore or hereafter
taken or omitted to be taken by any of them in connection with the purchase of
the Common Stock or the execution of or performance under any of this Agreement
or the Registration Rights Agreement.
9.15 Representation. Each party hereto acknowledges that (a) VWCM has
retained SF&G to represent VWCM in connection with this Agreement, the
Registration Rights Agreement and the transaction
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related hereto and thereto, (b) the interests of VWCM may not necessarily
coincide with the interests of other Purchasers, (c) SF&G does not represent any
Purchaser other than VWCM, and (d) each Purchaser has consulted with, or has had
an opportunity to consult with, its own legal counsel and has not relied on SF&G
for legal counsel in connection with this Agreement, the Registration Rights
Agreement and the transactions related hereto and thereto.
9.16 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall constitute an original, and all of which
together shall be considered one and the same agreement.
[REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the day and year first above written.
CARDIAC PATHWAYS CORPORATION
By: /s/ THOMAS M. PRESCOTT
------------------------------------
Name: Thomas M. Prescott
Title: President and Chief Executive
Officer
VAN WAGONER FUNDS
By: /s/ GARRETT R. VAN WAGONER
------------------------------------
Name: Garrett R. Van Wagoner
Title: President
VAN WAGONER CAPITAL PARTNERS, L.P.
by Van Wagoner Management LLC, its
General
Partner
By: /s/ GARRETT R. VAN WAGONER
------------------------------------
Name: Garrett R. Van Wagoner
Title: Member
VAN WAGONER CROSSOVER FUND, LP
by Van Wagoner Management LLC, its
General
Partner
By: /s/ GARRETT R. VAN WAGONER
------------------------------------
Name: Garrett R. Van Wagoner
Title: Member
BANK OF AMERICA VENTURES
By: /s/ MARK BROOKS
------------------------------------
Name: Mark Brooks
Title: Principal
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BA VENTURE PARTNERS V
By: /s/ MARK BROOKS
----------------------------------
Name: Mark Brooks
Title: General Partner
STATE OF WISCONSIN INVESTMENT BOARD
By: /s/ THERESA LAU
------------------------------------
Name:
Title:
SPECIAL SITUATIONS PRIVATE EQUITY
FUND, L.P.
By: /s/ STEVEN BECKER
------------------------------------
Name:
Title:
MORGAN STANLEY VENTURE PARTNERS III,
L.P.
By: Morgan Stanley Venture Partners
III, LLC
its General Partner
By: Morgan Stanley Venture Capital
III, Inc.,
its Institutional Managing Member
By: /s/ DEBRA ABRAMAWITZ
------------------------------------
Name: M. Fazle Husain
Title:
MORGAN STANLEY VENTURE INVESTORS III,
L.P.
By: Morgan Stanley Venture Partners
III, LLC
its General Partner
By: Morgan Stanley Venture Capital
III, Inc.,
its Institutional Managing Member
By: /s/ DEBRA ABRAMAWITZ
------------------------------------
Name: M. Fazle Husain
Title:
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THE MORGAN STANLEY VENTURE
PARTNERS ENTREPRENEUR FUND, L.P.
By: Morgan Stanley Venture Partners
III, LLC
its General Partner
By: Morgan Stanley Venture Capital
III, Inc.,
its Institutional Managing Member
By: /s/ DEBRA ABRAMAWITZ
------------------------------------
Name: M. Fazle Husain
Title:
POGUE CAPITAL MANAGEMENT
By: /s/ MAI POGUE
------------------------------------
Name:
Title:
TRELLIS HEALTH VENTURES, L.P.
By: /s/ PAUL FELTON
------------------------------------
Name:
Title:
By: /s/ THOMAS FOGARTY
------------------------------------
Name: Thomas J. Fogarty, M.D.
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SCHEDULE A
SCHEDULE OF PURCHASERS
COMMON AGGREGATE
PURCHASES SHARES PROCEEDS
--------- ---------- -----------
Van Wagoner Funds...........................................
Van Wagoner Capital Partners, L.P. .........................
Van Wagoner Crossover Fund, L.P. ...........................
345 California Street, Suite 2450
San Francisco, CA 94104
Subtotal.......................................... 3,529,412 $15,000,000
BankAmerica Ventures........................................ 500,000 $ 2,125,000
BA Venture Partners V....................................... 88,235 $ 375,000
950 Tower Lane, Suite 700
Foster City, CA 94404
Subtotal.......................................... 588,235 $ 2,500,000
Morgan Stanley Dean Witter Venture Partners IV, L.P. ....... 516,062 $ 2,193,264
Morgan Stanley Dean Witter Venture Investors IV, L.P. ...... 49,551 $ 210,592
Morgan Stanley Dean Witter Venture Offshore Investors IV,
L.P. ..................................................... 22,622 $ 96,144
1221 Avenue of the Americas
New York, NY 10020
Subtotal.......................................... 588,235 $ 2,500,000
State of Wisconsin Investment Board......................... 588,235 $ 2,500,000
Lake Terrace
121 E Wilson Street
P.O. Box 7842
Madison, WI 53707
Special Situations Funds.................................... 470,588 $ 2,000,000
153 East 53rd Street, Floor 55
New York, NY 10022
Pogue Capital Management.................................... 47,059 $ 200,000
60 Patterson Avenue
Greenwich, CT 06830
Thomas J. Fogarty, M.D...................................... 23,529 $ 100,000
3270 Alpine Road
Greenwich, CT 06830
Trellis Health Ventures, L.P................................ 23,529 $ 100,000
1 Sansome Street, Suite 2100
San Francisco, CA 94014
Total............................................. 5,858,823 $24,900,000
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EXHIBIT A
REGISTRATION RIGHTS AGREEMENT
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REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of
November 3, 2000 by and among (i) Cardiac Pathways Corporation, a Delaware
corporation (the "Company"), (ii) Van Wagoner Funds, Van Wagoner Capital
Partners, L.P., Van Wagoner Crossover Fund, BankAmerica Ventures, BA Venture
Partners V, Morgan Stanley Dean Witter Venture Partners IV, L.P., Morgan Stanley
Dean Witter Venture Investors IV, L.P., Morgan Stanley Dean Witter Venture
Offshore Investors IV, L.P., State of Wisconsin Investment Board, Special
Situations Fund, Pogue Capital Management and Trellis Health Ventures, L.P.
(collectively the "Initial Investors") and (iii) each person or entity that
subsequently becomes a party to this Agreement pursuant to, and in accordance
with, (x) the provisions of Section 2.4 of the Stock Purchase Agreement (defined
below) or (y) the provisions of Section 13 hereof (collectively, the "Investor
Permitted Transferees" and each individually an "Investor Permitted
Transferee").
WHEREAS, the Company has agreed to issue and sell to the Initial Investors,
and the Initial Investors have agreed to purchase from the Company, 5,835,293
shares (the "Purchased Shares") of the Company's common stock, $0.001 par value
per share (the "Common Stock"), all upon the terms and conditions set forth in
that certain Stock Purchase Agreement, dated of even date herewith, between the
Company and the Initial Investors (the "Stock Purchase Agreement"); and
WHEREAS, the terms of the Stock Purchase Agreement provide that it shall be
a condition precedent to the closing of the transactions thereunder for the
Company and the Initial Investors to execute and deliver this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto hereby agree as follows:
1. Definitions. The following terms shall have the meanings provided
therefor below or elsewhere in this Agreement as described below:
"Board" shall mean the board of directors of the Company.
"Closing" shall have the meaning ascribed to such term in the Stock
Purchase Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and all of the rules and regulations promulgated thereunder.
"Investors" shall mean, collectively, the Initial Investors and the
Investor Permitted Transferees; provided, however, that the term "Investors"
shall not include any Initial Investors or any of the Investor Permitted
Transferees that cease to own or hold any Registrable Shares.
"Majority Holders" shall mean, at the relevant time of reference thereto,
those Investors holding more than fifty percent (50%) of the Registrable Shares
held by all of the Investors.
"Qualifying Holder" shall have the meaning ascribed thereto in Section 13
hereof.
"Registrable Shares" shall mean (i) the Purchased Shares and any shares
issued in respect thereof, (ii) shares of the Company's Common Stock issuable on
exercise of the Warrants (as defined in Section 4 hereof) issued pursuant to
this Agreement and (iii) any Common Stock of the Company issued as (or issuable
on the conversion or exercise of any warrant, right or other security that is
issued as) a dividend or other distribution with respect to, or in exchange for,
or in replacement of, the shares referenced in clauses (i) and (ii) above.
"Rule 144" shall mean Rule 144 promulgated under the Securities Act and any
successor or substitute rule, law or provision.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended, and all
of the rules and regulations promulgated thereunder.
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2. Effectiveness; Termination. This Agreement shall become effective and
legally binding only if the Closing occurs. This Agreement shall terminate and
be of no further force or effect, automatically and without any action being
required of any party hereto, if the Stock Purchase Agreement is terminated
pursuant to Section 8 thereof.
3. Mandatory Registration.
(a) Within thirty days after the Closing, the Company will prepare and file
with the SEC a registration statement on Form S-3 (or, if Form S-3 is not then
available to the Company, on such form of registration statement that is then
available to effect a registration of all Registrable Shares, subject to the
consent of the Investors holding at least a majority of the Registrable Shares)
for the purpose of registering under the Securities Act all of the Registrable
Shares for resale by, and for the account of, the Investors as selling
stockholders thereunder (the "Registration Statement"). The Registration
Statement shall permit the Investors to offer and sell, on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act, any or all of
the Registrable Shares. The Company agrees to use best efforts to cause the
Registration Statement to become effective as soon as practicable after filing.
The Company shall be required to keep the Registration Statement effective until
such date that is the earlier of (i) the date when all of the Registrable Shares
registered thereunder shall have been sold, (ii) such time as all the
Registrable Shares held by the Investors can be sold pursuant to Rule 144 within
a given three-month period without volume limitation and without compliance with
the registration requirements of the Securities Act or (iii) the second
anniversary of the date on which the Registration Statement is declared
effective, subject to extension as set forth below (such date is referred to
herein as the "Mandatory Registration Termination Date"). Thereafter, the
Company shall be entitled to withdraw the Registration Statement and the
Investors shall have no further right to offer or sell any of the Registrable
Shares pursuant to the Registration Statement (or any prospectus relating
thereto).
(b) The offer and sale of the Registrable Shares pursuant to the
Registration Statement shall not be underwritten.
4. Warrant Coverage.
(a) In the event the Company has not filed the Registration Statement with
the SEC within thirty (30) days after the Closing, the Company shall issue to
each Investor a warrant in the form attached hereto as Exhibit A (each,
a"Warrant" and, collectively, the "Warrants") to acquire that number of shares
of Common Stock of the Company equal to (i) three percent (3%) of the aggregate
amount of shares of common stock sold pursuant to the Stock Purchase Agreement,
multiplied by, (ii) a fraction, the numerator of which is the number of shares
of Common Stock acquired by that Investor pursuant to the Stock Purchase
Agreement and the denominator of which is equal to the aggregate number of
shares of Common Stock sold pursuant to the Stock Purchase Agreement. The
exercise price of each such Warrant will be $4.25 per share of Common Stock
issuable on exercise of the Warrant (as adjusted for stock splits, stock
combinations, reorganizations and the like effected after the date of this
Agreement).
(b) At the end of each thirty (30) day period (or a portion thereof), after
the initial thirty day period referred to in Section 4(a), that the Registration
Statement has not been filed with the SEC, the Company shall issue to each
Investor a Warrant to acquire that number of shares of Common Stock equal to (i)
three percent (3%) of the aggregate amount of shares of common stock sold
pursuant to the Stock Purchase Agreement, multiplied by, (ii) a fraction, the
numerator of which is the number of shares of Common Stock acquired by that
Investor pursuant to the Stock Purchase Agreement and the denominator of which
is equal to the aggregate number of shares of Common Stock sold pursuant to the
Stock Purchase Agreement, multiplied by (iii) a fraction, the numerator of which
is the number of days during such thirty-day period before the date on which the
Registration Statement was filed with the SEC and the denominator of which is
thirty. The exercise price of each such Warrant will be $4.25 per share of
Common Stock issuable on exercise of the Warrant (as adjusted for stock splits,
stock combinations, reorganizations and the like effected after the date of this
Agreement).
(c) In the event the Registration Statement has not been declared effective
by the SEC within seventy (70) days after the Closing, the Company shall issue
to each Investor a Warrant to acquire that number of
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shares of Common Stock of the Company equal to (i) three percent (3%) of the
aggregate amount of shares of common stock sold pursuant to the Stock Purchase
Agreement, multiplied by, (ii) a fraction, the numerator of which is the number
of shares of Common Stock acquired by that Investor pursuant to the Stock
Purchase Agreement and the denominator of which is equal to the aggregate number
of shares of Common Stock sold pursuant to the Stock Purchase Agreement. The
exercise price of each such Warrant will be $4.25 per share of Common Stock
issuable on exercise of the Warrant (as adjusted for stock splits, stock
combinations, reorganizations and the like effected after the date of this
Agreement).
(d) At the end of each thirty-day period (or a portion thereof), after the
initial seventy (70) day period referred to in Section 4(c), that the
Registration Statement has not been declared effective by the SEC, the Company
shall issue to each Investor a Warrant to acquire that number of shares of
Common Stock equal to (i) three percent (3%) of the aggregate amount of shares
of common stock sold pursuant to the Stock Purchase Agreement, multiplied by,
(ii) a fraction, the numerator of which is the number of shares of Common Stock
acquired by that Investor pursuant to the Stock Purchase Agreement and the
denominator of which is equal to the aggregate number of shares of Common Stock
sold pursuant to the Stock Purchase Agreement, multiplied by (iii) a fraction,
the numerator of which is the number of days during such thirty-day period
before the date on which the Registration Statement was declared effective by
the SEC and the denominator of which is thirty. The exercise price of each such
Warrant will be $4.25 per share of Common Stock issuable on exercise of the
Warrant (as adjusted for stock splits, stock combinations, reorganizations and
the like effected after the date of this Agreement).
(e) The Company shall execute such other and further certificates,
instruments and other documents as may be reasonably requested by the Investors
or reasonably necessary or proper to implement, complete and perfect the
Investors' rights under this Section 4 and Section 3 and to freely trade the
Registrable Shares without limitation or restriction imposed or created by the
Company or securities law.
5. "Piggyback" Registration Rights.
(a) If, at any time after the Mandatory Registration Termination Date, the
Company proposes to register any of its Common Stock under the Securities Act,
whether as a result of a primary or secondary offering of Common Stock or
pursuant to registration rights granted to holders of other securities of the
Company (whether as a demand registration right or a Form S-3 registration
right, but excluding in all cases any registrations to be effected on Forms S-4
or S-8 or other applicable successor Forms), the Company shall, each such time,
give to the Investors holding Registrable Shares written notice of its intent to
do so. If, within twenty (20) days of giving such notice, the Company shall
receive from an Investor a written request to include its Registrable Shares in
such registration, the Company shall use commercially reasonable efforts to
cause to be included in such registration the Registrable Shares of such selling
Investor, to the extent requested to be registered; provided, however, that (i)
the number of Registrable Shares proposed to be sold by such selling Investor
will be at least ten percent (10%) of the total number of Registrable Shares
then held by such participating selling Investor (or a lesser percentage if the
gross proceeds to the selling Investor resulting from the sale of such
Registrable Shares will equal at least $2,000,000), (ii) such selling Investor
may not include its Registrable Shares in such registration if the Investor can
sell all such Registrable Shares pursuant to Rule 144 within a given three-month
period without volume limitation and without compliance with the registration
requirements of the Securities Act, (iii) such selling Investor agrees to sell
those of its Registrable Shares to be included in such registration in the same
manner and on the same terms and conditions as the other shares of Common Stock
which the Company proposes to register and (iv) in the event (x) the
registration is to include shares of Common Stock to be sold for the account of
the Company or any party exercising registration rights pursuant to any other
agreement with the Company and (y) the proposed managing underwriter advises the
Company that in its opinion the inclusion of such selling Investor's Registrable
Shares (without any reduction in the number of shares to be sold for the account
of the Company or such party exercising registration rights) is likely to affect
materially and adversely the success of the offering or the price that would be
received for any shares of Common Stock offered, then the rights of such selling
Investor shall be as provided in Section 5(b) hereof.
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(b) If a registration pursuant to Section 5(a) hereof involves an
underwritten offering and the managing underwriter shall advise the Company in
writing that, in its opinion, the number of shares of Common Stock requested by
the Investors to be included in such registration is likely to affect materially
and adversely the success of the offering or the price that would be received
for any shares of Common Stock offered in such offering, then, notwithstanding
anything in Section 5(a) to the contrary, the Company shall only be required to
include in such registration, to the extent of the number of shares of Common
Stock which the Company is so advised can be sold in such offering, (i) first,
the number of shares of Common Stock proposed to be included in such
registration for the account of the Company and/or any stockholders of the
Company (other than the Investors) that have exercised demand registration
rights, in accordance with the priorities, if any, then existing among the
Company and/or such stockholders of the Company with registration rights (other
than the Investors), and (ii) second, the shares of Common Stock requested to be
included in such registration by all other stockholders of the Company who have
piggyback registration rights (including, without limitation, the Investors),
pro rata among such other stockholders (including, without limitation, the
Investors) on the basis of the number of shares of Common Stock that each of
them beneficially owns.
(c) In connection with any offering involving an underwriting of shares,
the Company shall not be required under Section 5 hereof or otherwise to include
the Registrable Shares of any Investor therein unless such Investor accepts and
agrees to the terms of the underwriting, which shall be reasonable and
customary, as agreed upon between the Company and the underwriters selected by
the Company.
6. Obligations of the Company. In connection with the Company's obligation
under Section 3 and 5 hereof to file a Registration Statement with the SEC and
to use its best efforts to cause the Registration Statement to become effective
as soon as practicable after filing, the Company shall, as expeditiously as
reasonably possible, subject to Section 12 hereof:
(a) Prepare and file with the SEC such amendments and supplements to
the Registration Statement and the prospectus used in connection therewith
as may be necessary to comply with the provisions of the Securities Act
with respect to the disposition of all Registrable Shares covered by the
Registration Statement;
(b) Furnish to the selling Investors such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents (including,
without limitation, prospectus amendments and supplements as are prepared
by the Company in accordance with Section 6(a) above) as the selling
Investors may reasonably request in order to facilitate the disposition of
such selling Investors' Registrable Shares;
(c) Notify the selling Investors, at any time when a prospectus
relating to the Registration Statement is required to be delivered under
the Securities Act, of the happening of any event as a result of which the
prospectus included in or relating to the Registration Statement contains
an untrue statement of a material fact or omits any fact necessary to make
the statements therein not misleading; and, thereafter, subject to Section
12 hereof the Company will promptly prepare (and, when completed, deliver
to each selling Investor) a supplement or amendment to such prospectus so
that, as thereafter delivered to the purchasers of such Registrable Shares,
such prospectus will not contain an untrue statement of a material fact or
omit to state any fact necessary to make the statements therein not
misleading; provided that upon such notification by the Company, the
selling Investors will not offer or sell Registrable Shares until the
Company has notified the selling Investors that it has prepared a
supplement or amendment to such prospectus and delivered copies of such
supplement or amendment to the selling Investors (it being understood and
agreed by the Company that the foregoing proviso shall in no way diminish
or otherwise impair the Company's obligation to promptly prepare a
prospectus amendment or supplement as above provided in this Section 6(c)
and deliver copies of same as above provided in Section 6(b) hereof);
(d) Use commercially reasonable efforts to register and qualify the
Registrable Shares covered by the Registration Statement under such other
securities or Blue Sky laws of all states requiring such securities or Blue
Sky registration or qualification, provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to
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service of process in any such states or jurisdictions, and provided
further that (notwithstanding anything in this Agreement to the contrary
with respect to the bearing of expenses) if any jurisdiction in which any
of such Registrable Shares shall be qualified shall require that expenses
incurred in connection with the qualification therein of any such
Registrable Shares be borne by the selling Investors, then the selling
Investors shall, to the extent required by such jurisdiction, pay their pro
rata share of such qualification expenses;
(e) Cause all such Registrable Shares registered hereunder to be
listed on each securities exchange on which securities of the same class
issued by the Company are then listed;
(f) Provide a transfer agent and registrar for all Registrable Shares
registered hereunder and a CUSIP number for all such Registrable Shares, in
each case not later than the effective date of such registration; and
(g) If an Investor's Registrable Shares are being sold through an
underwritten public offering, the Company shall furnish to each selling
Investor whose shares of Registrable Shares are being registered pursuant
to Section 5, on the date that such Registrable Shares are delivered to the
underwriters for sale, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters and (ii) a "comfort" letter signed
by the independent public accountants who have certified the Company's
financial statements included in the Registration Statement, covering
substantially the same matters with respect to the Registration Statement
(and the prospectus included therein) and with respect to events subsequent
to the date of the financial statements, as are customarily covered in
accountants' letters delivered to the underwriters in underwritten public
offerings of securities addressed to the underwriters.
7. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement that
the selling Investors shall furnish to the Company such information regarding
them and the securities held by them as the Company shall reasonably request and
as shall be required in order to effect any registration by the Company pursuant
to this Agreement.
8. Expenses of Registration. All expenses incurred in connection with the
registration of the Registrable Shares pursuant to this Agreement (excluding
underwriting, brokerage and other selling commissions and discounts), including
without limitation all registration and qualification and filing fees, printing
expenses, fees and disbursements of counsel for the Company, and the reasonable
fees and disbursements of one counsel for the selling Investors selected by the
selling Investors, shall be borne by the Company.
9. Delay of Registration. The Investors shall not take any action to
restrain, enjoin or otherwise delay any registration as the result of any
controversy which might arise with respect to the interpretation or
implementation of this Agreement.
10. Indemnification.
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each selling Investor (including, without limitation, the partners or
officers, directors and stockholders of such Investor, legal counsel and
accountants for such Investor), any investment banking firm acting as an
underwriter for the selling Investors, any broker/dealer acting on behalf of any
selling Investors and each officer and director of such selling Investor, such
underwriter, such broker/dealer and each person, if any, who controls such
selling Investor, such underwriter or broker/dealer within the meaning of the
Securities Act, against any losses, claims, damages or liabilities, joint or
several, to which they may become subject under the Securities Act, the Exchange
Act, and other federal or state securities laws, or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) (i) arise
out of or are based upon any untrue or alleged untrue statement of any material
fact contained in the Registration Statement, in any preliminary prospectus or
final prospectus relating thereto or in any amendments or supplements to the
Registration Statement or any such preliminary prospectus or final prospectus,
(ii) arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the
statements therein not misleading or (iii) arise out of any violation or alleged
violation by the Company of the Securities Act, the
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Exchange Act, any other federal or state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any other
federal or state securities law; and will reimburse such selling Investor, such
underwriter, broker/dealer or such officer, director or controlling person for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 10(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld or delayed), nor shall
the Company be liable in any such case for any such loss, damage, liability or
action to the extent that it arises out of or is based upon an untrue statement
or alleged untrue statement or omission made in connection with the Registration
Statement, any preliminary prospectus or final prospectus relating thereto or
any amendments or supplements to the Registration Statement or any such
preliminary prospectus or final prospectus, in reliance upon and in conformity
with written information furnished expressly for use in connection with the
Registration Statement or any such preliminary prospectus or final prospectus by
the selling Investors, any underwriter for them, any broker/dealer acting on
their behalf or controlling person with respect to them.
(b) To the extent permitted by law, each selling Investor will severally
and not jointly indemnify and hold harmless the Company, each of its directors,
each of its officers who have signed the Registration Statement, each person, if
any, who controls the Company within the meaning of the Securities Act, any
investment banking firm acting as underwriter for the Company or the selling
Investors, or any broker/dealer acting on behalf of the Company or any selling
Investors, and all other selling Investors against any losses, claims, damages
or liabilities to which the Company or any such director, officer, controlling
person, underwriter, or broker/dealer or such other selling Investor may become
subject to, under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereto) arise out of or
are based upon any untrue or alleged untrue statement of any material fact
contained in the Registration Statement or any preliminary prospectus or final
prospectus, relating thereto or in any amendments or supplements to the
Registration Statement or any such preliminary prospectus or final prospectus,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent and only to the
extent that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, in any preliminary
prospectus or final prospectus relating thereto or in any amendments or
supplements to the Registration Statement or any such preliminary prospectus or
final prospectus, in reliance upon and in conformity with written information
furnished by the selling Investor expressly for use in connection with the
Registration Statement, or any preliminary prospectus or final prospectus; and
such selling Investor will reimburse any legal or other expenses reasonably
incurred by the Company or any such director, officer, controlling person,
underwriter, broker/dealer or other selling Investor in connection with
investigating or defending any such loss, claim, damage, liability or action,
provided, however, that the liability of each selling Investor hereunder (when
aggregated with amounts contributed, if any, pursuant to Section 10(d)) shall be
limited to the proceeds (net of underwriting discounts and commissions, if any)
received by such selling Investor from the sale of Registrable Shares covered by
the Registration Statement, and provided, further, however, that the indemnity
agreement contained in this Section 10(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of those selling Investor(s) against
which the request for indemnity is being made (which consent shall not be
unreasonably withheld or delayed).
(c) Promptly after receipt by an indemnified party under this Section 10 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party under this
Section 10, notify the indemnifying party in writing of the commencement thereof
and the indemnifying party shall have the right to participate in and, to the
extent the indemnifying party desires, jointly with any other indemnifying party
similarly noticed, to assume at its expense the defense thereof with counsel
mutually satisfactory to the indemnifying parties with the consent of the
indemnified party which consent will not be unreasonably withheld, conditioned
or delayed. In the event that the indemnifying party assumes any such defense,
the indemnified party may participate in such defense with its own counsel and
at its own expense, provided, however, that the counsel for the indemnifying
party shall act as lead counsel in all
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matters pertaining to such defense or settlement of such claim and the
indemnifying party shall only pay for such indemnified party's reasonable legal
fees and expenses for the period prior to the date of its participation on such
defense. The failure to notify an indemnifying party promptly of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 10, but the omission so to notify the
indemnifying party will not relieve him of any liability which he may have to
any indemnified party otherwise other than under this Section 10.
(d) If the indemnification provided in this Section 10 is held by a court
of competent jurisdiction to be unavailable to an indemnified party with respect
to any loss, liability, claim, damage or expense referred to herein, then the
indemnifying party, in lieu of indemnifying such indemnified party hereunder,
shall contribute to the amount paid or payable by such indemnified party as a
result of such loss, liability, claim, damage or expense in such proportion as
is appropriate to reflect the relative fault of the indemnifying party on the
one hand and of the indemnified party on the other in connection with the
statements or omissions that shall have resulted in such loss, liability, claim,
damage or expense, as well as any other relevant equitable considerations;
provided that in no event shall any contribution by an Investor under this
Section 10(d), when aggregate with amounts paid, if any, pursuant to Section
10(b), exceed the proceeds (net of underwriting discounts and commissions, if
any) from the sale of Registrable Shares hereunder received by such Investor.
The relative fault of the indemnifying party and of the indemnified party shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) The obligations of the Company and Investors under this Section 10
shall survive the completion of any offering of Registrable Shares in a
Registration Statement under Sections 3 and 5, and otherwise.
(f) Notwithstanding anything to the contrary herein, the indemnifying party
shall not be entitled to settle any claim, suit or proceeding unless in
connection with such settlement the indemnified party receives an unconditional
release with respect to the subject matter of such claim, suit or proceeding and
such settlement does not contain any admission of fault by the indemnified
party.
11. Reports Under the Exchange Act. With a view to making available to the
Investors the benefits of Rule 144 and any other rule or regulation of the SEC
that may at any time permit the Investors to sell the Registrable Shares to the
public without registration, the Company agrees to use best efforts: (i) to make
and keep public information available, as those terms are understood and defined
in the General Instructions to Form S-3, or any successor or substitute form,
and in Rule 144, (ii) to file with the SEC in a timely manner all reports and
other documents required to be filed by an issuer of securities registered under
the Securities Act or the Exchange Act, (iii) as long as any Investor owns any
Registrable Shares, to furnish in writing upon such Investor's request a written
statement by the Company that it has complied with the reporting requirements of
Rule 144 and of the Securities Act and the Exchange Act, and to furnish to such
Investor a copy of the most recent annual or quarterly report of the Company,
and such other reports, documents and other information as may be reasonably
requested in availing such Investor of any rule or regulation of the SEC
permitting the selling of any such Registrable Shares without registration and
(iv) undertake any additional actions reasonably necessary to maintain the
availability of the Registration Statement or the use of Rule 144.
12. Deferral. Notwithstanding anything in this Agreement to the contrary,
if the Company shall furnish to the selling Investors a certificate signed by
the President or Chief Executive Officer of the Company stating that the Board
of Directors of the Company has made the good faith determination (i) that
continued use by the selling Investors of the Registration Statement for
purposes of effecting offers or sales of Registrable Shares pursuant thereto
would require, under the Securities Act, premature disclosure in the
Registration Statement (or the prospectus relating thereto) of material,
nonpublic information concerning the Company, its business or prospects or any
proposed material transaction involving the Company, (ii) that such premature
disclosure would be materially adverse to the Company, its business or prospects
or any such proposed
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material transaction or would make the successful consummation by the Company of
any such material transaction significantly less likely and (iii) that it is
therefore essential to suspend the use by the Investors of such Registration
Statement (and the prospectus relating thereto) for purposes of effecting offers
or sales of Registrable Shares pursuant thereto, then the right of the selling
Investors to use the Registration Statement (and the prospectus relating
thereto) for purposes of effecting offers or sales of Registrable Shares
pursuant thereto shall be suspended for a period (the "Suspension Period") of
not more than 30 days after delivery by the Company of the certificate referred
to above in this Section 12; provided, however, that the Company may not utilize
this right more than two (2) times in any twelve month period and that the
Company shall not register shares for its own account during the Suspension
Period except in connection with a merger or the registration of shares relating
to a stock option, stock purchase or similar plan. During the Suspension Period,
none of the Investors shall offer or sell any Registrable Shares pursuant to or
in reliance upon the Registration Statement (or the prospectus relating
thereto).
13. Transfer of Registration Rights. None of the rights of any Investor
under this Agreement shall be transferred or assigned to any person unless (i)
such person is a Qualifying Holder (as defined below), and (ii) such person
agrees to become a party to, and be bound by, all of the terms and conditions
of, this Agreement by duly executing and delivering to the Company an Instrument
of Adherence in the form attached as Exhibit B hereto. For purposes of this
Section 13, the term "Qualifying Holder" shall mean, with respect to any
Investor, (i) any partner thereof, (ii) any corporation or partnership
controlling, controlled by, under common control or under common investment
management with, such Investor or any partner thereof, or (iii) any other direct
transferee from such Investor of at least 50% of those Registrable Shares held
or that may be acquired by such Investor. None of the rights of any Investor
under this Agreement shall be transferred or assigned to any Person (including,
without limitation, a Qualifying Holder) that acquires Registrable Shares in the
event that and to the extent that such Person is eligible to resell such
Registrable Shares pursuant to Rule 144(k) of the Securities Act or may
otherwise resell all such Registrable Shares pursuant to an exemption from the
registration provisions of the Securities Act.
14. Entire Agreement. This Agreement (including the exhibits hereto)
constitutes and contains the entire agreement and understanding of the parties
with respect to the subject matter hereof, and it also supersedes any and all
prior negotiations, correspondence, agreements or understandings with respect to
the subject matter hereof.
15. Miscellaneous.
(a) This Agreement may not be amended, modified or terminated, and no
rights or provisions may be waived, except with the written consent of the
Majority Holders and the Company. Notwithstanding the foregoing, the Company may
at its election by notifying the Initial Investors amend this Agreement to add
as parties to this Agreement additional purchasers of Common Stock pursuant to
the Stock Purchase Agreement.
(b) This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of California, and shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors or assigns, provided that the terms and
conditions of Section 13 hereof are satisfied. This Agreement shall also be
binding upon and inure to the benefit of any transferee of any of the
Registrable Shares provided that the terms and conditions of Section 13 hereof
are satisfied. Notwithstanding anything in this Agreement to the contrary, if at
any time any Investor shall cease to own any Registrable Shares, all of such
Investor's rights under this Agreement shall immediately terminate.
(c)(i) Any notices, reports or other correspondence (hereinafter
collectively referred to as "correspondence") required or permitted to be given
hereunder shall be sent by mail, courier (overnight or same day) or
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telecopy or delivered by hand to the party to whom such correspondence is
required or permitted to be given hereunder. The date of giving any notice shall
be the date of its actual receipt.
(ii) All correspondence to the Company shall be addressed as follows:
Cardiac Pathways Corporation
995 Benecia Avenue
Sunnyvale, CA 94086
Attention: Eldon Bullington
Title: Chief Financial Officer
Fax: (408) 720-2171
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attention: Chris F. Fennell
Fax (650) 845-5000
(iii) All correspondence to any Investor shall be sent to the most recent
address furnished by the Investor to the Company.
(d) Any Investor may change the address to which correspondence to it is to
be addressed by notification as provided for herein.
(e) The parties acknowledge and agree that in the event of any breach of
this Agreement, remedies at law may be inadequate, and each of the parties
hereto shall be entitled to seek specific performance of the obligations of the
other parties hereto and such appropriate injunctive relief as may be granted by
a court of competent jurisdiction.
(f) If any action at law or in equity is necessary to enforce or interpret
any of the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees, costs and necessary disbursements in addition to any
other relief to which such party may be entitled.
(g) If any provision of this Agreement is held by a court of competent
jurisdiction to be unenforceable under applicable law, such provision shall be
replaced with a provision that accomplishes, to the extent possible, the
original business purpose of such provision in a valid and enforceable manner,
and the balance of the Agreement shall be interpreted as if such provision were
so modified and shall be enforceable in accordance with its terms.
(h) Registrable Shares held or acquired by affiliated entities or persons
shall be aggregated together for the purpose of determining the availability of
any rights under this Agreement.
(i) This Agreement may be executed in a number of counterparts, any of
which together shall for all purposes constitute one Agreement, binding on all
the parties hereto notwithstanding that all such parties have not signed the
same counterpart.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement as of the date and year first above written.
CARDIAC PATHWAYS CORPORATION
By:
------------------------------------
Name: Thomas M. Prescott
Title: President and Chief Executive
Officer
VAN WAGONER FUNDS
By:
------------------------------------
Name: Garrett R. Van Wagoner
Title: President
VAN WAGONER CAPITAL PARTNERS, L.P.
by Van Wagoner Management LLC, its
General
Partner
By:
------------------------------------
Name: Garrett R. Van Wagoner
Title: Member
VAN WAGONER CROSSOVER FUND, LP
by Van Wagoner Management LLC, its
General
Partner
By:
------------------------------------
Name: Garrett R. Van Wagoner
Title: Member
BANK OF AMERICA VENTURES
By:
------------------------------------
Name: Mark Brooks
Title: Principal
BA VENTURE PARTNERS V
By:
------------------------------------
Name: Mark Brooks
Title: General Partner
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STATE OF WISCONSIN INVESTMENT BOARD
By:
------------------------------------
Name:
Title:
SPECIAL SITUATIONS PRIVATE EQUITY
FUND, L.P.
By:
------------------------------------
Name:
Title:
MORGAN STANLEY VENTURE
PARTNERS III, L.P.
By: Morgan Stanley Venture Partners
III, LLC
its General Partner
By: Morgan Stanley Venture Capital
III, Inc.,
its Institutional Managing Member
By:
------------------------------------
Name: M. Fazle Husain
Title:
MORGAN STANLEY
VENTURE INVESTORS III, L.P.
By: Morgan Stanley Venture Partners
III, LLC
its General Partner
By: Morgan Stanley Venture Capital
III, Inc.,
its Institutional Managing Member
By:
------------------------------------
Name: M. Fazle Husain
Title:
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THE MORGAN STANLEY VENTURE
PARTNERS ENTREPRENEUR FUND, L.P.
By: Morgan Stanley Venture Partners
III, LLC
its General Partner
By: Morgan Stanley Venture Capital
III, Inc.,
its Institutional Managing Member
By:
------------------------------------
Name: M. Fazle Husain
Title:
POGUE CAPITAL MANAGEMENT
By:
------------------------------------
Name:
Title:
TRELLIS HEALTH VENTURES, L.P.
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name: Thomas J. Fogarty, M.D.
Title:
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EXHIBIT A
FORM OF WARRANT
THIS WARRANT AND THE SHARES OF EQUITY SECURITIES THAT MAY BE PURCHASED PURSUANT
TO THE EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, PLEDGED OR
TRANSFERRED UNLESS (I) THERE IS AN EFFECTIVE REGISTRATION STATEMENT COVERING
SUCH OFFER, SALE OR TRANSFER OR (II) THERE IS AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO THE COMPANY, THAT AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAWS FOR
SUCH OFFER, SALE OR TRANSFER IS AVAILABLE.
VOID AFTER ,
CARDIAC PATHWAYS CORPORATION
COMMON STOCK PURCHASE WARRANT
NO. -- ,
THIS CERTIFIES THAT, for value received, (together with its
permitted assignees, the "Holder") is entitled, upon the terms and subject to
the conditions hereinafter set forth, to subscribe for and purchase (subject to
Section 1 hereof) up to shares (the "Shares") of fully paid and
nonassessable Common Stock, par value $0.001 per share, of Cardiac Pathways
Corporation, a Delaware corporation (the "Company"), at an exercise price of
$4.25 per Share (as the same may be adjusted from time to time in accordance
with Section 4 hereof, the "Exercise Price").
The Warrant is one of a series of warrants (collectively, the "Warrants")
issued to certain investors of the Company, dated of even date herewith, in
accordance with the provisions of Section 4 of the Registration Rights Agreement
entered into between the Company and the Investors named therein and dated as of
November 3, 2000 (the "Registration Rights Agreement"). Any terms used herein
and not otherwise defined shall have the meanings ascribed thereto in the
Registration Rights Agreement.
1. Expiration of Warrant. This Warrant shall expire and shall no longer be
exercisable at 5:00 p.m., local time in Santa Clara, California, on
, [5 YEARS AFTER THE DATE OF GRANT OF THE
WARRANT].
2. Exercise of Warrant.
(a) General. This Warrant may be exercised by the Holder as to the whole or
any lesser number of the Shares covered hereby, upon surrender of this Warrant
to the Company at its principal executive office together with the Notice of
Exercise and Investment Representation Statement attached hereto as Exhibit A,
duly completed and executed by the Holder, and payment to the Company of the
aggregate exercise price for the Shares to be purchased, as determined in
accordance with the terms hereof, in the form of (i) a check made payable to the
Company, (ii) a wire transfer according to the Company's instructions, or (iii)
any combination of (i) and (ii). The exercise of this Warrant shall be deemed to
have been effected on the day on which the Holder surrenders this Warrant to the
Company and satisfies all of the requirements of this Section 2. Upon such
exercise, the Holder will be deemed a stockholder of record of those Shares for
which the warrant has been exercised with all rights of a stockholder
(including, without limitation, all voting rights with respect to such Shares
and all rights to receive any dividends with respect to such Shares). If this
Warrant is to be exercised in respect of less than all of the Shares covered
hereby, the Holder shall be entitled to receive, and the Company shall issue, a
new warrant covering the number of Shares in respect of which this Warrant shall
not have been exercised and for which it remains subject to exercise. Such new
warrant shall be in all other respects identical to this Warrant.
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(b) Net Issue Exercise. In lieu of exercising this Warrant via cash
payment, the Holder may elect to receive Shares equal to the value of this
Warrant (or the portion thereof being canceled) by surrender of this Warrant at
the principal office of the Company together with notice of election to exercise
by means of a net issuance exercise, in which event the Company shall issue to
the Holder a number of Shares computed using the following formula:
X = Y (A - B)
A
Where X = the number of Shares to be issued to the Holder.
Y = the number of Shares purchasable under this Warrant or, if
only a portion of the Warrant is being exercised, the
portion of the Warrant being cancelled (at the date of such
calculation).
A = the Fair Market Value (as defined below) of one Share (at
the date of such calculation).
B = the exercise price for the Shares (as adjusted to the date
of such calculation).
If the above calculation results in a negative number, then no Shares shall
be issued or issuable upon conversion of this Warrant.
(c) Fair Market Value. For purposes of this Section 2, the "Fair Market
Value" of one Share shall be determined as follows: (i) if the Common Stock of
the Company is traded on a securities exchange, the Fair Market Value of one
Share shall be deemed to be the average of the closing prices of the Common
Stock of the Company on such exchange over the 30-day period ending five
business days prior to the date of determination of Fair Market Value; (ii) if
the Common Stock of the Company is traded on the Nasdaq Stock Market or other
over-the-counter system, the fair market value of the Common Stock shall be
deemed to be the average of the closing bid and asked prices of the Common Stock
of the Company over the 30-day period ending five business days prior to the
date of determination of Fair Market Value; and (iii) if there is no public
market for the Common Stock of the Company, then fair market value shall be
determined by mutual agreement of the Holder and the Company.
(d) Stock Certificates. In the event of any exercise of the rights
represented by this Warrant, certificates for the Shares so purchased shall be
delivered to the Holder within a reasonable time, but in any event, not later
than ten business days after the date of exercise.
3. Covenants of the Company. The Company covenants and agrees that: (i) all
Shares that may be issued upon the exercise of the rights represented by the
Warrants will, upon issuance pursuant to the terms and conditions herein, be
fully paid and nonassessable, free from all preemptive rights of any
stockholders, free from all taxes, liens and charges with respect to the issue
thereof and free and clear of any restrictions on transfer (other than under the
Securities Act and state securities laws); and (ii) that during the period
within which the rights represented by this Warrant may be exercised, the
Company will, at all times, have authorized, and reserved for the purpose of the
issue upon exercise of the purchase rights evidenced by this Warrant, a
sufficient number of shares of Common Stock to provide for the exercise of the
rights represented by this Warrant. The offer, sale and issuance of the Shares
issued on the exercise of this Warrant shall be exempt from the registration
requirements of the Securities Act and applicable state securities laws, and
neither the Company nor any authorized agent acting on its behalf has taken or
will take any action hereafter that would cause the loss of such exemption.
4. Adjustment of Exercise Price and Number of Shares. The number and kind
of securities purchasable upon the exercise of this Warrant and the Exercise
Price therefor shall be subject to adjustment from time to time upon the
occurrence as follows:
(a) Merger. If at any time there shall be a merger or consolidation of
the Company with or into another corporation where the Company is not the
surviving corporation or as a result of which all of the outstanding
capital stock of the Company is exchanged for capital stock of another
corporation or other entity, then, as a part of such merger or
consolidation, lawful provision shall be made so that the holder of this
Warrant shall thereafter be entitled to receive upon exercise of this
Warrant, during the period specified herein and upon payment of the
aggregate Exercise Price then in effect, the number of shares of
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stock or other securities or property of the surviving or successor
corporation or other entity resulting from such merger or consolidation (or
the corporation the capital stock of which is issued in exchange for the
capital stock of the Company), to which a holder of the stock deliverable
upon exercise of this Warrant would have been entitled in such merger or
consolidation if this Warrant had been exercised immediately before such
merger or consolidation and the surviving or successor corporation or other
entity in such merger or consolidation shall duly execute and deliver to
the Holder a supplement hereto acknowledging such corporation's or entity's
obligations under this Warrant. In any such case, appropriate adjustment
shall be made in the application of the provisions of this Warrant with
respect to the rights and interests of the Holder after the merger or
consolidation.
(b) Reclassification, etc. If the Company shall, at any time, by
subdivision, combination, or reclassification of securities or otherwise,
change any of the securities as to which purchase rights under this Warrant
exist into a different number of securities of the same class or classes or
into the same or a different number of securities of any other class or
classes, the Exercise Price shall be adjusted such that this Warrant shall
thereafter represent the right to acquire such number and kind of
securities as would have been issuable as the result of such change with
respect to the securities which were subject to the purchase rights under
this Warrant immediately prior to such subdivision, combination,
reclassification or other change.
(c) Split, Subdivision or Combination of Shares. If the Company at any
time while this Warrant remains outstanding and unexpired shall split,
subdivide or combine the securities as to which purchase rights under this
Warrant exist, (i) the Exercise Price shall be proportionately decreased in
the case of a split or subdivision or proportionately increased in the case
of a combination, and (ii) the number of securities issuable upon exercise
of this Warrant shall be proportionately increased in the case of a split
or subdivision or proportionately decreased in the case of a combination.
(d) Payment of Dividend. In case the Company shall make or issue, or
shall fix a record date for the determination of eligible holders entitled
to receive, a dividend or other distribution payable with respect to the
Shares that is payable in (i) securities of the Company (other than
issuances with respect to which adjustment is made under this Section 4),
or (ii) assets (other than cash dividends paid or payable solely out of
retained earnings), then, and in each such case, the Holder, upon exercise
of this Warrant at any time after the consummation, effective date or
record date of such event, shall receive, in addition to the Shares
issuable upon such exercise prior to such date, the securities or such
other assets of the Company to which the Holder would have been entitled
upon such date if the Holder had exercised this Warrant immediately prior
thereto (all subject to further adjustment as provided in this Warrant).
5. Notice of Adjustments; Notices. Whenever the Exercise Price or number of
Shares issuable upon exercise hereof shall be adjusted pursuant to Section 4
hereof, the Company shall issue a written notice setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated and the Exercise Price and number
of Shares purchasable hereunder after giving effect to such adjustment, and
shall cause a copy of such notice to be mailed to the Holder. The form of this
Warrant need not be changed because of any adjustment in the Exercise Price or
the number of Shares issuable upon its exercise. The Company shall provide the
Holder with not less than 10 days prior written notice of (i) any event
resulting in an adjustment under Section 4 and (ii) any sale, lease or other
disposition of all or substantially all of the assets of the Company.
6. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which such Holder would otherwise be
entitled, such Holder shall be entitled, at its option, to receive either (a) a
cash payment equal to the excess of the Fair Market Value for such fractional
share above the Exercise Price for such fractional share (as mutually determined
by the Company and the Holder) or (b) a whole share if the Holder tenders the
Exercise Price for one whole share.
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7. Compliance with Securities Act; Disposition of Warrant or Shares of
Common Stock.
(a) Compliance with Securities Act. The Holder, by acceptance hereof,
agrees that this Warrant, and the Shares to be issued upon exercise hereof are
being acquired for investment and that such Holder will not offer, sell or
otherwise dispose of this Warrant, or any Shares except under circumstances
which will not result in a violation of the Securities Act or any applicable
state securities laws. Upon exercise of this Warrant, unless the Shares being
acquired are registered under the Securities Act and any applicable state
securities laws or an exemption from such registration is available, the Holder
hereof shall confirm in writing that the Shares so purchased are being acquired
for investment and not with a view toward distribution or resale in violation of
the Securities Act and shall confirm such other matters related thereto as may
be reasonably requested by the Company. This Warrant and all Shares issued upon
exercise of this Warrant (unless registered under the Securities Act and any
applicable state securities laws) shall be stamped or imprinted with a legend in
substantially the following form:
"THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED,
SOLD, PLEDGED OR TRANSFERRED UNLESS (I) THERE IS AN EFFECTIVE REGISTRATION
STATEMENT COVERING SUCH OFFER, SALE OR TRANSFER OR (II) THERE IS AN OPINION
OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR ANY APPLICABLE STATE
SECURITIES LAWS FOR SUCH OFFER, SALE OR TRANSFER IS AVAILABLE."
Said legend shall be removed by the Company, upon the request of a Holder,
at such time as the restrictions on the transfer of the applicable security
shall have terminated. In addition, in connection with the issuance of this
Warrant, the Holder specifically represents to the Company by acceptance of this
Warrant as follows:
(i) The Holder is aware of the Company's business affairs and
financial condition, and has acquired information about the Company
sufficient to reach an informed and knowledgeable decision to acquire this
Warrant. The Holder is acquiring this Warrant for its own account for
investment purposes only and not with a view to, or for the resale in
connection with, any "distribution" thereof in violation of the Securities
Act.
(ii) The Holder understands that this Warrant has not been registered
under the Securities Act in reliance upon a specific exemption therefrom,
which exemption depends upon, among other things, the bona fide nature of
the Holder's investment intent as expressed herein.
(iii) The Holder further understands that this Warrant must be held
indefinitely unless subsequently registered under the Securities Act and
qualified under any applicable state securities laws, or unless exemptions
from registration and qualification are otherwise available. The Holder is
aware of the provisions of Rule 144, promulgated under the Securities Act.
(iv) The Holder is an "accredited investor" as such term is defined in
Rule 501 of Regulation D promulgated under the Securities Act.
(b) Transfer of Warrant. This Warrant may be transferred or assigned by the
Holder, in whole or in part, provided that the Holder (i) provides written
notice to the Company prior to such transfer or assignment, and (ii) delivers to
the Company, on the Company's reasonable request, a written opinion of such
Holder's counsel reasonably satisfactory to the Company (or other evidence
reasonably satisfactory to the Company) that such transfer does not require
registration or qualification under the Securities Act and any applicable state
securities law; provided, however, that this Warrant may be transferred by (i) a
Holder which is a partnership or limited liability company to a partner, former
partner, member, former member, or other affiliate of such partnership or
limited liability company, as the case may be, or (ii) a Holder to any
corporation or partnership controlling, controlled by, or under common
investment management with such Holder, if, in each case, (a) the transferee
agrees in writing to be subject to the terms of this Warrant; and
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(b) the Holder delivers notice of such transfer to the Company. The rights and
obligations of the Company and the Holder under this Warrant shall be binding
upon and benefit their respective permitted successors, assigns, heirs,
administrators and transferees.
8. Rights as Stockholders; Information. No Holder, as such, shall be
entitled to vote or receive dividends or be deemed the holder of Common Stock or
any other securities which may at any time be issuable on the exercise hereof
for any purpose, nor shall anything contained herein be construed to confer upon
the Holder, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to receive notice of meetings, or to
receive dividends or subscription rights or otherwise until this Warrant shall
have been exercised and the Shares purchasable upon the exercise hereof shall
have become deliverable, as provided herein.
9. Lost Warrants or Stock Certificates. The Company covenants to the Holder
that, upon receipt of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant or any stock certificate
and, in the case of any such loss, theft or destruction, upon receipt of an
indemnity reasonably satisfactory to the Company, or in the case of any such
mutilation upon surrender and cancellation of such Warrant or stock certificate,
the Company will make and deliver a new Warrant or stock certificate, of like
tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock
certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday or a Sunday or shall be a legal holiday, then such action
may be taken or such right may be exercised on the next succeeding day not a
Saturday or a Sunday or a legal holiday.
11. Miscellaneous.
(a) Successors and Assigns. This Warrant shall be binding upon any
successors or assigns of the Company.
(b) Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of California without giving effect to the
conflict of laws principles thereof.
(c) Attorneys' Fees. In any litigation, arbitration, or court proceeding
between the Company and a Holder relating hereto, the prevailing party shall be
entitled to reasonable fees and expenses incurred in enforcing this Warrant,
including attorney's fees.
(d) Amendments. This Warrant may be amended and the observance of any term
of this Warrant may be waived only with the written consent of the Company and
the Majority Holders.
(e) Notices
(i) Any notices, reports or other correspondence (hereinafter
collectively referred to as "correspondence") required or permitted to be
given hereunder shall be sent by postage prepaid first class mail,
overnight courier or telecopy or delivered by hand to the party to whom
such correspondence is required or permitted to be given hereunder. Any
notice or other communication delivered by hand shall be deemed to have
been delivered and received on the date on which such notice or
communication is actually received, or in the case of certified mail
deposited with the appropriate postal authorities on the date when such
notice or communication is actually received, and in any other case shall
be deemed to have been delivered on the date on which such notice or
communication is actually received.
(ii) All correspondence to the Company shall be addressed as follows:
Cardiac Pathways Corporation
995 Benecia Avenue
Sunnyvale, California 94086
Facsimile: (408) 737-1700
Attention: Eldon Bullington, Chief Financial Officer
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with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Facsimile: (650) 845-5000
Attention: Chris F. Fennell
(iii) All correspondence to any Holder shall be sent to such Holder at
the address set forth under such Holder's name on the signature page
hereto.
(iv) Any party may, at any time, by providing ten days' advance notice
to the other party hereto, designate any other address in substitution of
an address established pursuant to the foregoing.
(f) Severability. If one or more provisions of this Warrant are held to be
unenforceable under applicable law, such provision(s) shall be excluded from
this Warrant and the balance of the Warrant shall be interpreted as if such
provision(s) were so excluded and shall be enforceable in accordance with its
terms.
(g) Registration Rights. All Shares issuable upon exercise of this Warrant
shall be deemed to be "Registrable Shares" or such other definition of
securities entitled to registration rights pursuant to the Registration Rights
Agreement, and are entitled, subject to the terms and conditions of that
agreement, to all registration rights granted to holders of Registrable Shares
thereunder.
(h) No Impairment. The Company will not, by amendment of its Amended and
Restated Certificate of Incorporation or Bylaws, or through reorganization,
consolidation, merger, dissolution, issue or sale of securities, sale of assets
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Holder of this Warrant against impairment. Without limiting the generality of
the foregoing, the Company will take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and non-assessable Shares upon exercise of this Warrant.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Company and the Holder have caused this Common
Stock Purchase Warrant to be executed as of the date first above written.
CARDIAC PATHWAYS CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
ACKNOWLEDGED AND AGREED:
[NAME OF HOLDER]
By:
- ----------------------------------------------------
Name:
- -------------------------------------------------
Title:
- --------------------------------------------------
Address:
- -----------------------------------------------
Telephone:
- --------------------------------------------
Facsimile:
- ---------------------------------------------
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EXHIBIT A
NOTICE OF EXERCISE
COMMON STOCK WARRANT AND
INVESTMENT REPRESENTATION STATEMENT
To: Cardiac Pathways Corporation
1. Exercise Notice. The undersigned hereby elects to purchase
shares of Common Stock (the "Shares") of Cardiac Pathways
Corporation (the "Company") pursuant to the terms of the attached Warrant, and
(check the applicable box):
[ ] Tenders herewith payment of the exercise price in full in the form of cash
or a certified or official bank check in same-day funds in the amount of
$ for shares of such securities and any transfer
taxes payable pursuant to the terms of the Warrant.
[ ] Elects the Net Issue Exercise option pursuant to Section 2(b) of the
Warrant, and accordingly requests delivery of a net of shares
of such securities.
2. Investment Representation Statement. Any terms used herein and not
otherwise defined shall have the meanings ascribed thereto in that certain
Registration Rights Agreement entered into between the Company and those
Investors named therein and dated as of November 3, 2000 (the "Registration
Rights Agreement"). In connection with the purchase of the above-listed Shares,
the undersigned represents to the Company the following:
(a) The Holder is aware of the Company's business affairs and
financial condition, and has acquired information about the Company
sufficient to reach an informed and knowledgeable decision to acquire the
Shares. The Holder is acquiring the Shares for its own account for
investment purposes only and not with a view to, or for the resale in
connection with, any "distribution" thereof in violation of the Securities
Act.
(b) The Holder understands that these Shares have not been registered
under the Securities Act in reliance upon a specific exemption therefrom,
which exemption depends upon, among other things, the bona fide nature of
the Holder's investment intent as expressed herein.
(c) The Holder further understands that these Shares must be held
indefinitely unless subsequently registered under the Securities Act and
qualified under any applicable state securities laws, or unless exemptions
from registration and qualification are otherwise available. The Holder is
aware of the provisions of Rule 144, promulgated under the Securities Act.
(d) The Holder is an "accredited investor" as such term is defined in
Rule 501 of Regulation D promulgated under the Securities Act.
3. Legend. The undersigned understands the instruments evidencing the
Shares may bear the following legend, in addition to any legend required by
applicable state securities laws:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT
BE OFFERED, SOLD, PLEDGED OR TRANSFERRED UNLESS (I) THERE IS AN EFFECTIVE
REGISTRATION STATEMENT COVERING SUCH OFFER, SALE OR TRANSFER OR (II) THERE
IS AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR ANY
APPLICABLE STATE SECURITIES LAWS FOR SUCH OFFER, SALE OR TRANSFER IS
AVAILABLE."
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4. Name of Registered Certificate Holder. Please issue a certificate or
certificates representing said shares of Stock in the name of the undersigned:
Name:
---------------------------------------------------
Address:
-------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
IN WITNESS WHEREOF, the Holder has executed this Notice of Exercise and
Investment Representation Statement effective this day of ,
.
WARRANT HOLDER
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
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EXHIBIT B
ASSIGNMENT FORM
(To assign the foregoing Common Stock Purchase Warrant,
execute this form and supply required information. Do not use this form to
purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby
are hereby assigned to
- --------------------------------------------------------------------------------
(Please Print)
whose address is
- --------------------------------------------------------------------------------
(Please Print)
- --------------------------------------------------------------------------------
Dated:
- --------------- ,
- ------
Holder's Signature:
------------------------------------------------------------------------------
Holder's Address:
-------------------------------------------------------------------------------
--------------------------------------
Signature Guaranteed:
--------------------------------------------------------------------------
NOTE: The signature to this Assignment Form must correspond with the name
as it appears on the face of the Warrant, without alteration or enlargement or
any change whatever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
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EXHIBIT B
INSTRUMENT OF ADHERENCE
Reference is hereby made to that certain Registration Rights Agreement,
dated as of , 2000, among Cardiac Pathways Corporation, a Delaware
corporation (the "Company"), the Initial Investors and the Investor Permitted
Transferees, as amended and in effect from time to time (the "Registration
Rights Agreement"). Capitalized terms used herein without definition shall have
the respective meanings ascribed thereto in the Registration Rights Agreement.
The undersigned, in order to become the owner or holder of
shares of common stock, par value $0.001 per share (the "Common Stock"), of the
Company, hereby agrees that, from and after the date hereof, the undersigned has
become a party to the Registration Rights Agreement in the capacity of an
Investor Permitted Transferee, and is entitled to all of the benefits under, and
is subject to all of the obligations, restrictions and limitations set forth in,
the Registration Rights Agreement that are applicable to Investor Permitted
Transferees. This Instrument of Adherence shall take effect and shall become a
part of the Registration Rights Agreement immediately upon execution.
Executed under seal as of the date set forth below under the laws of
.
Signature:
--------------------------------------
Name:
Title:
Accepted:
COMPANY
By:
- --------------------------------------
Name: [name]
Title: President and Chief
Executive Officer
Date:
- --------------------------------------
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EXHIBIT B
FORM OF OPINION
December , 2000
TO EACH OF THE PURCHASERS LISTED ON SCHEDULE A TO THE CARDIAC PATHWAYS
CORPORATION COMMON STOCK PURCHASE AGREEMENT DATED AS OF NOVEMBER , 2000
Ladies and Gentlemen:
Reference is made to the Common Stock Purchase Agreement, dated as of
November 3, 2000 (the "Purchase Agreement"), complete with all exhibits and
schedules attached thereto, by and among Cardiac Pathways Corporation, a
Delaware corporation (the "Company"), and each of you (collectively, the
"Investors"), which provides for the issuance by the Company to the Investors of
shares of Common Stock of the Company (the "Shares"). This opinion is rendered
to you pursuant to Section 7.1(m) of the Purchase Agreement, and all terms used
herein have the meanings defined for them in the Purchase Agreement unless
otherwise defined herein.
We have acted as counsel for the Company in connection with the negotiation
of the Purchase Agreement, the Registration Rights Agreement (collectively, with
the Purchase Agreement, the "Agreements") and the issuance of the Shares. As
such counsel, we have made such legal and factual examinations and inquiries as
we have deemed advisable or necessary for the purpose of rendering this opinion.
In addition, we have examined, among other things, originals or copies of such
corporate records of the Company, certificates of public officials and such
other documents and questions of law that we consider necessary or advisable for
the purpose of rendering this opinion. In such examination we have assumed the
genuineness of all signatures on original documents, the authenticity and
completeness of all documents submitted to us as originals, the conformity to
original documents of all copies submitted to us as copies thereof, the legal
capacity of natural persons, and the due execution and delivery of all documents
(except as to due execution and delivery by the Company) where due execution and
delivery are a prerequisite to the effectiveness thereof.
As used in this opinion, the expression "to our knowledge", "known to us"
or similar language with reference to matters of fact means that, after an
examination of the SEC Documents and the documents made available to us by the
Company, and after inquiries of officers of the Company, but without any further
independent factual investigation, we find no reason to believe that the
opinions expressed herein are factually incorrect. Further, the expression "to
our knowledge", "known to us" or similar language with reference to matters of
fact refers to the current actual knowledge of the attorneys of this firm who
are presently employed by the firm and have worked on matters for the Company.
Except to the extent expressly set forth herein or as we otherwise believe to be
necessary to our opinion, we have not undertaken any independent investigation
to determine the existence or absence of any fact, and no inference as to our
knowledge of the existence or absence of any fact should be drawn from our
representation of the Company or the rendering of the opinion set forth below.
For purposes of this opinion, we are assuming that you have all the
requisite power and authority, and have taken any and all necessary corporate or
partnership action, to execute and deliver the Agreements, and we are assuming
that the representations and warranties made by you in the Purchase Agreement
and pursuant thereto are true and correct. We are also assuming that you have
purchased the Shares for value, in good faith and without notice of any adverse
claims within the meaning of the California Uniform Commercial Code.
The opinions hereinafter expressed are subject to the following
qualifications:
(a) We express no opinion as to the effect of applicable bankruptcy,
insolvency, reorganization, moratorium or other similar federal or state
laws affecting the rights of creditors.
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(b) We express no opinion as to the effect or availability of rules of
law governing specific performance, injunctive relief or other equitable
remedies (regardless of whether any such remedy is considered in a
proceeding at law or in equity).
(c) We express no opinion as to compliance with applicable anti-fraud
provisions of federal or state securities laws.
(d) We express no opinion as to the enforceability of the
indemnification provisions of the Registration Rights Agreement to the
extent the provisions thereof may be subject to limitations of public
policy and the effect of applicable statutes and judicial decisions.
(e) We are members of the Bar of the State of California and, except
as set forth in paragraphs 5 and 6 below with respect to the securities
laws of other states, we express no opinion as to any matter relating to
the laws of any jurisdiction other than the federal laws of the United
States of America, the laws of the State of California and the General
Corporation Law of the State of Delaware. To the extent this opinion
addresses applicable securities laws of states other than the State of
California, we have not retained nor relied on the opinion of counsel
admitted to the bar of such states, but rather have relied on compilations
of the securities laws of such states contained in reporting services
presently available to us.
(f) In rendering the opinion set forth in paragraph 4 below, we have
not made any independent investigation of court records to determine
whether any actions have been filed.
Based upon and subject to the foregoing, and except as set forth in the
Disclosure Schedule to the Agreement, we are of the opinion that:
1. The Company is a corporation duly organized and validly existing
under, and by virtue of, the laws of the State of Delaware, and is in good
standing under such laws. The Company has the requisite corporate power to
own and operate its properties and assets, and to carry on its business as
presently conducted. The Company is qualified to do business as a foreign
corporation and is in good standing in each state in which the failure to
be so qualified or in good standing would result in a Material Adverse
Effect.
2. The Company has the requisite legal and corporate power to execute
and deliver the Agreements and to issue and sell the Shares under the
Purchase Agreement, and to carry out and perform its obligations under the
terms of the Agreements.
3. All corporate action on the part of the Company, its directors and
its stockholders necessary for the authorization, execution, delivery and
performance of the Agreements by the Company, the authorization, sale,
issuance and delivery of the Shares and the performance of the Company's
obligations under the Agreements has been taken. The Agreements have been
duly executed and delivered by the Company and constitute valid and binding
obligations of the Company enforceable in accordance with their terms. The
Shares have been validly issued and are fully paid and nonassessable and
the certificates representing the Shares are in due and proper form and
have been validly executed by the officers of the Company named thereon.
4. To our knowledge, there are no actions, suits, proceedings or
investigations pending or threatened against the Company, or its properties
before any court or governmental agency in any case or in the aggregate,
are likely to result in a Material Adverse Effect, or which question the
validity or enforceability of, or seeks to enjoin or invalidate, the
Agreements or any action to be taken by the Company in connection
therewith.
5. Except as obtained and in effect at the Closing, no consent,
approval or authorization of or designation or filing with any governmental
authority on the part of the Company is required in connection with the
valid execution and delivery of the Agreements, or the offer, sale or
issuance of the Shares or the consummation of any other transaction
contemplated by the Agreements, except the qualification (or taking such
action as may be necessary to secure an exemption from qualification, if
available) under applicable blue sky laws (but excluding jurisdictions
outside of the United States) of the offer and sale of the Shares that may,
under applicable law, be made on or after the Closing Date. Our
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opinion herein is otherwise subject to the timely and proper completion of
all filings and other actions contemplated herein where such filings and
actions are to be undertaken on or after the date hereof.
6. Subject to the accuracy of the Purchasers' representations in
Section 4 of the Purchase Agreement and their responses (if any) to the
Company's inquiries, we are of the opinion that the offer, sale and
issuance of the Shares in conformity with the terms of the Purchase
Agreement constitute transactions exempt from the registration requirements
of Section 5 of the Securities Act of 1933, as amended, and the
qualification requirements of applicable state securities laws.
7. The Company's execution and delivery of, and performance of its
obligations under, the Agreements do not and will not violate any provision
of the Company's Amended and Restated Certificate of Incorporation or
Bylaws, or any provision of any applicable federal or state law, rule or
regulation. To our knowledge, the Company's execution, delivery and
performance of and compliance with the Agreements do not (i) violate, or
consitute a default under any material contract, agreement, instrument,
judgment or decree binding upon the Company, or (ii) breach or otherwise
violate any existing obligation of or restriction on the Company under any
order, judgment or decree of any California or federal court or
governmental authority binding on the Company.
This opinion is solely for your benefit and may not be relied on by, nor
may copies be delivered to, any other person without our prior written consent.
We assume no obligation to inform you of any facts, circumstances, events or
changes in the law that may hereafter be brought to our attention that may
alter, affect or modify the opinion expressed herein.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
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EXHIBIT C
INVESTORS QUESTIONNAIRE
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INVESTOR QUESTIONNAIRE
CARDIAC PATHWAYS CORPORATION
(ALL INFORMATION FURNISHED IN COMPLETING THIS
QUESTIONNAIRE WILL BE TREATED CONFIDENTIALLY)
Cardiac Pathways Corporation (the "Company") will use the responses to this
questionnaire to qualify prospective investors for purposes of federal and state
securities laws.
Please complete, sign, date and return one copy of this questionnaire as
soon as possible to Don Harrison, Wilson, Sonsini, Goodrich & Rosati, 650 Page
Mill Road, Palo Alto, CA 94304.
If the answer to any question below is "none" or "not applicable", please
so indicate.
Your answers will be kept confidential at all times. However, by signing
this questionnaire, you agree that the Company may present this questionnaire to
such parties as it deems appropriate to establish the availability of exemptions
from registration under state and federal security laws.
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I. INDIVIDUAL INVESTORS
(INVESTORS OTHER THAN INDIVIDUALS SHOULD TURN TO PAGE 6)
1. Personal
Name
- --------------------------------------------------------------------------------
(Exact name as it should appear on stock certificate)
Amount of proposed investment
----------------------------------------------------------------------------
Residence Address
- --------------------------------------------------------------------------------
Home Telephone
- --------------------------------------------------------------------------------
Date of Birth
- --------------------------------------------------------------------------------
Social Security Number
- --------------------------------------------------------------------------------
2. Business
- --------------------------------------------------------------------------------
Occupation
- --------------------------------------------------------------------------------
Number of Years
- --------------------------------------------------------------------------------
Present Employer
- --------------------------------------------------------------------------------
Position/Title
- --------------------------------------------------------------------------------
Business Address
- --------------------------------------------------------------------------------
Business Telephone
- --------------------------------------------------------------------------------
3. Residence Information
(a) Set forth in the space provided below the state(s) in which you have
maintained your principal residence during the past three years and the
dates during which you resided in each state.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(b) Are you registered to vote in, or do you have a driver's license issued
by, or do you maintain a residence in any other state? If yes, in which
state(s)?
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. Income
(a) Do you reasonably expect either your own income from all sources during
the current year to exceed $200,000 or the joint income of you and your
spouse (if married) from all sources during the current year to exceed
$300,000?
Yes
------ No
------ If not, please specify amount
------------------
(b) What percentage of your income as shown above is anticipated to be
derived from sources other than salary?
- --------------------------------------------------------------------------------
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(c) Was either your yearly income from all sources during each of the last
two years in excess of $200,000 or was the joint income of you and your
spouse (if married) from all sources during each of such years in excess
of $300,000?
Yes
------ No
------
If no, please specify amount for:
Last Year:
---------------------------------------------
Year Before Last:
---------------------------------------------
5. Net Worth
Will your net worth as of the date you purchase the securities offered,
together with the net worth of your spouse (if married), be in excess of
$1,000,000?
Yes
------ No
------ If not, please specify amount
------------------
6. Education
Please describe your educational background and degrees obtained, if any.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7. Affiliation
If you have any pre-existing personal or business relationship with the
Company or any of its officers, directors or controlling persons, please
describe the nature and duration of such relationship.
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
8. Business and Financial Experience
(a) Please describe in reasonable detail the nature and extent of your
business, financial and investment experience which you believe gives you
the capacity to evaluate the merits and risks of the proposed investment
and the capacity to protect your interests.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Are you purchasing the securities offered for your own account and for
investment purposes only?
Yes
------------- No
-------------
If no, please state for whom you are investing and/or the reason for
investing.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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9. Financial Advisors
In evaluating this investment, will you use the services of any of the
following advisors? (If so, please identify, providing address and telephone
number.)
Accountant:
--------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
Attorney:
- --------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
Other:
- -----------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
PLEASE TURN TO PAGE 8 AND SIGN AND DATE THIS QUESTIONNAIRE
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II. NON-INDIVIDUAL INVESTORS
(Please answer Part II only if the purchase is proposed to be undertaken by a
corporation, partnership or other entity.)
IF INVESTMENT WILL BE MADE BY MORE THAN ONE AFFILIATED ENTITY, PLEASE COMPLETE A
COPY OF THIS QUESTIONNAIRE FOR EACH ENTITY.
1. Identification
Name
- --------------------------------------------------------------------------------
(Exact name as it will appear on stock certificate)
Address of Principal Place of Business
---------------------------------------------------------------------
Jurisdiction of Formation or Incorporation
-----------------------------------------------------------------
Contact Person
- --------------------------------------------------------------------------------
Telephone Number ( )
- --------------------------------------------------------------------------------
Type of Entity (corporation, partnership, trust, etc.)
------------------------------------------------------
Was entity formed for the purpose of this investment?
Yes ________ No ________
If the answer is yes, all shareholders, partners or other equity owners must
answer Part I of this Questionnaire. If the above answer is no, please
continue completing this form.
2. Proposed Investment
Please indicate the amount of your proposed investment: $________
Please state the investing entity's net worth at the time the securities will
be purchased: $________
3. Business
Please check the appropriate box to indicate which of the following accurately
describes the nature of the business conducted by the investing entity:
[ ] a corporation, organization described in Section 501(c)(3) of the
Internal Revenue Code, a Massachusetts or similar business trust or a
partnership, in each case, not formed for the purpose of this investment,
with total assets in excess of $5,000,000;
[ ] private business development company as defined in Section 202(a)(22) of
the Investment Advisers Act of 1940;
[ ] a U.S. venture capital fund which invests primarily through private
placements in non-publicly traded securities and makes available (either
directly or through co-investors) to the portfolio companies significant
guidance concerning management, operations or business objectives;
[ ] a Small Business Investment Company licensed by the U.S. Small Business
Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958;
[ ] an investment company registered under the Investment Company Act of 1940
or a business development company as defined in Section 2(a)(48) of that
Act;
[ ] a bank as defined in Section 3(a)(2) or a savings and loan association or
other institution defined in Section 3(a)(5)(A) of the Securities Act of
1933 acting in either an individual or fiduciary capacity;
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[ ] an insurance company as defined in Section 2(13) of the Securities Act of
1933;
[ ] an employee benefit plan within the meaning of Title I of the Employee
Retirement Income Security Act of 1974 whose investment decision is made
by a fiduciary which is either a bank, savings and loan association,
insurance company, or registered investment advisor, or whose total
assets exceed $5,000,000, or, if a self-directed plan, a plan whose
investment decisions are made solely by persons who are accredited
investors;
[ ] an entity not located in the U.S. and whose equity owners are neither
U.S. citizens nor U.S. residents;
[ ] a trust with total assets in excess of $5,000,000 whose purchase is
directed by a sophisticated person as described in Rule 506(b)(2)(ii) of
the Securities Act of 1933.
[ ] Other. Describe:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4.Investment Experience
Please provide information detailing the business, financial and investment
experience of the entity and investment manager of such entity.
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
III. SIGNATURE
The above information is true and correct in all material respects and the
undersigned recognizes that the Company and its counsel are relying on the truth
and accuracy of such information in reliance on the exemption contained in
Subsection 4(2) of the Securities Act of 1933, as amended, and Regulation D
promulgated thereunder. The undersigned agrees to notify the Company promptly of
any changes in the foregoing information which may occur prior to the
investment.
Executed at , on , 2000.
--------------------------------------
(Signature)
--------------------------------------
(Title if for Entity)
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CARDIAC PATHWAYS CORPORATION
2000 STOCK PLAN
1. Purposes of the Plan. The purposes of this 2000 Stock Plan are:
- to attract and retain the best available personnel for positions of
substantial responsibility,
- to provide additional incentive to Employees, Directors and Consultants,
and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as shall
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the
applicable laws of any foreign country or jurisdiction where Options or
Stock Purchase Rights are, or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the Board
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
(g) "Company" means Cardiac Pathways Corporation, a Delaware
corporation.
(h) "Consultant" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
(j) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider shall not cease to be an Employee in the case of (i) any
leave of absence approved by the Company or (ii) transfers between
locations of the Company or between the Company, its Parent, any
Subsidiary, or any successor. For purposes of Incentive Stock Options, no
such leave may exceed ninety days, unless reemployment upon expiration of
such leave is guaranteed by statute or contract. If reemployment upon
expiration of a leave of absence approved by the Company is not so
guaranteed, on the 181st day of such leave any Incentive Stock Option held
by the Optionee shall cease to be treated as an Incentive Stock Option and
shall be treated for tax purposes as a Nonstatutory Stock Option. Neither
service as a Director nor payment of a director's fee by the Company shall
be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
1
139
(m) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock
Market, its Fair Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market
Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last market trading day
prior to the day of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option or Stock Purchase
Right grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
(s) "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
Options are surrendered in exchange for Options with a lower exercise
price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this Cardiac Pathways Corporation 2000 Stock Plan.
(y) "Restricted Stock" means shares of Common Stock acquired pursuant
to a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted
Stock Purchase Agreement is subject to the terms and conditions of the Plan
and the Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised
with respect to the Plan.
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(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
(cc) "Service Provider" means an Employee, Director or Consultant.
(dd) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 500,000 Shares. The Shares may be authorized, but unissued, or
reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. Different Committees with respect
to different groups of Service Providers may administer the Plan.
(ii) Section 162(m). To the extent that the Administrator determines
it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of
the Code, the Plan shall be administered by a Committee of two or more
"outside directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption
under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan, and
in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be covered
by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Option or Stock Purchase Right granted hereunder.
Such terms and conditions include, but are not limited to, the exercise
price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting
acceleration or waiver of forfeiture
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restrictions, and any restriction or limitation regarding any Option or
Stock Purchase Right or the shares of Common Stock relating thereto, based
in each case on such factors as the Administrator, in its sole discretion,
shall determine;
(vi) to reduce the exercise price of any Option or Stock Purchase
Right to the then current Fair Market Value if the Fair Market Value of the
Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations relating to
the Plan, including rules and regulations relating to sub-plans established
for the purpose of qualifying for preferred tax treatment under foreign tax
laws;
(x) to modify or amend each Option or Stock Purchase Right (subject to
Section 15(c) of the Plan), including the discretionary authority to extend
the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having
a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined. All elections by
an Optionee to have Shares withheld for this purpose shall be made in such
form and under such conditions as the Administrator may deem necessary or
advisable;
(xii) to authorize any person to execute on behalf of the Company any
instrument required to effect the grant of an Option or Stock Purchase
Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or advisable
for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
(a) Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this Section 6(a),
Incentive Stock Options shall be taken into account in the order in which they
were granted. The Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall confer
upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of the
Company, Options to purchase more than 200,000 Shares.
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(ii) In connection with his or her initial service, a Service Provider
may be granted Options to purchase up to an additional 200,000 Shares,
which shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 13.
(iv) If an Option is cancelled in the same fiscal year of the Company
in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if
the exercise price of an Option is reduced, the transaction will be treated
as a cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
effective upon its adoption by the Board. It shall continue in effect for a term
of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110%
of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price shall be
no less than 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per
Share exercise price shall be no less than 100% of the Fair Market Value
per Share on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a per
Share exercise price of less than 100% of the Fair Market Value per Share
on the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is granted,
the Administrator shall fix the period within which the Option may be exercised
and shall determine any conditions that must be satisfied before the Option may
be exercised.
(c) Form of Consideration. The Administrator shall determine the acceptable
form of consideration for exercising an Option, including the method of payment.
In the case of an Incentive Stock Option, the
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Administrator shall determine the acceptable form of consideration at the time
of grant. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised;
(v) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the issuance
of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Unless the Administrator provides otherwise, vesting of
Options granted hereunder shall be tolled during any unpaid leave of absence. An
Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i) written
or electronic notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the Shares
are issued (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to the
Optioned Stock, notwithstanding the exercise of the Option. The Company shall
issue (or cause to be issued) such Shares promptly after the Option is
exercised. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the Shares are issued, except as provided
in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence of
a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to
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the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service Provider
as a result of the Optionee's Disability, the Optionee may exercise his or her
Option within such period of time as is specified in the Option Agreement to the
extent the Option is vested on the date of termination (but in no event later
than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider, the
Option may be exercised within such period of time as is specified in the Option
Agreement (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquires the right to exercise the Option by bequest or inheritance, but
only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy out
for a payment in cash or Shares an Option previously granted based on such terms
and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either alone,
in addition to, or in tandem with other awards granted under the Plan and/or
cash awards made outside of the Plan. After the Administrator determines that it
will offer Stock Purchase Rights under the Plan, it shall advise the offeree in
writing or electronically, by means of a Notice of Grant, of the terms,
conditions and restrictions related to the offer, including the number of Shares
that the offeree shall be entitled to purchase, the price to be paid, and the
time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise, the
Restricted Stock Purchase Agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service with the Company for any reason (including death or Disability). The
purchase price for Shares repurchased pursuant to the Restricted Stock Purchase
Agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The repurchase
option shall lapse at a rate determined by the Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall contain
such other terms, provisions and conditions not inconsistent with the Plan as
may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is exercised,
the purchaser shall have the rights equivalent to those of a shareholder, and
shall be a shareholder when his or her purchase is entered upon the records of
the duly authorized transfer agent of the Company. No adjustment will be made
for a dividend or other right for which the record date is prior to the date the
Stock Purchase Right is exercised, except as provided in Section 13 of the Plan.
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12. Non-Transferability of Options and Stock Purchase Rights. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, the Administrator shall notify each Optionee as soon
as practicable prior to the effective date of such proposed transaction. The
Administrator in its discretion may provide for an Optionee to have the right to
exercise his or her Option until ten (10) days prior to such transaction as to
all of the Optioned Stock covered thereby, including Shares as to which the
Option would not otherwise be exercisable. In addition, the Administrator may
provide that any Company repurchase option applicable to any Shares purchased
upon exercise of an Option or Stock Purchase Right shall lapse as to all such
Shares, provided the proposed dissolution or liquidation takes place at the time
and in the manner contemplated. To the extent it has not been previously
exercised, an Option or Stock Purchase Right will terminate immediately prior to
the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the assets of the
Company, each outstanding Option and Stock Purchase Right shall be assumed or an
equivalent option or right substituted by the successor corporation or a Parent
or Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the Option or Stock Purchase
Right, the Optionee shall fully vest in and have the right to exercise the
Option or Stock Purchase Right as to all of the Optioned Stock, including Shares
as to which it would not otherwise be vested or exercisable. If an Option or
Stock Purchase Right becomes fully vested and exercisable in lieu of assumption
or substitution in the event of a merger or sale of assets, the Administrator
shall notify the Optionee in writing or electronically that the Option or Stock
Purchase Right shall be fully vested and exercisable for a period of fifteen
(15) days from the date of such notice, and the Option or Stock Purchase Right
shall terminate upon the expiration of such period. For the purposes of this
paragraph, the Option or Stock Purchase Right shall be considered assumed if,
following the merger or sale of assets, the option or right confers the right to
purchase or receive, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the
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consideration to be received upon the exercise of the Option or Stock Purchase
Right, for each Share of Optioned Stock subject to the Option or Stock Purchase
Right, to be solely common stock of the successor corporation or its Parent
equal in fair market value to the per share consideration received by holders of
Common Stock in the merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder approval of
any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the exercise
of an Option or Stock Purchase Right unless the exercise of such Option or Stock
Purchase Right and the issuance and delivery of such Shares shall comply with
Applicable Laws and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an Option
or Stock Purchase Right, the Company may require the person exercising such
Option or Stock Purchase Right to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
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CARDIAC PATHWAYS CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1998 Employee Stock
Purchase Plan of Cardiac Pathways Corporation.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the common stock of the Company.
(d) "Company" shall mean Cardiac Pathways Corporation and any
Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
earnings, commissions, overtime, shift premium, incentive compensation,
incentive payments, and bonuses but exclusive of payments for any other
compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first Trading Day of each
Offering Period.
(i) "Exercise Date" shall mean the last Trading Day of each
Purchase Period.
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(j) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day on the date of such determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable;
(2) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable; or
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(k) "Offering Periods" shall mean the periods of approximately
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after May 1 and November
1 (beginning in 1998) of each year and terminat ing on the last Trading Day in
the periods ending twenty-four months later. The first Offering Period shall be
the period commencing with December 1, 1998 and terminating on the last Trading
Day on or before October 31, 2000. The duration and timing of Offering Periods
may be changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this 1998 Employee Stock Purchase Plan.
(m) "Purchase Period" shall mean the approximately six month
period commencing after one Exercise Date and ending with the next Exercise
Date, except that the first Purchase Period of any Offering Period shall
commence on the Enrollment Date and end with the next Exercise Date.
(n) "Purchase Price" shall mean 85% of the Fair Market Value of a
share of Common Stock on the Enrollment Date or on the Exercise Date, whichever
is lower; provided however, that the Purchase Price may be adjusted by the Board
pursuant to Section 20.
(o) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
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(p) "Subsidiary" shall mean a corporation, domestic or foreign,
of which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding,
no Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 1 and November 1 of each year, or on such other date
as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof. The first Offering Period shall begin on
December 1, 1998 and shall end on the last Trading Day on or before October 31,
2000. The Board shall have the power to change the duration of Offering Periods
(including the commencement dates thereof) with respect to future offerings
without stockholder approval if such change is announced prior to the scheduled
beginning of the first Offering Period to be affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such
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authorization is applicable, unless sooner terminated by the participant as
provided in Section 10 hereof.
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding fifteen percent (15%) of
the Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to zero percent (0%) at any
time during a Purchase Period. Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of the
first Purchase Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or
at the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
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7. Grant of Option. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 5,000
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19), and provided further that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future
Offering Periods, increase or decrease, in its absolute discretion, the maximum
number of shares of the Company's Common Stock an Employee may purchase during
each Purchase Period of such Offering Period. Exercise of the option shall occur
as provided in Section 8 hereof, unless the participant has withdrawn pursuant
to Section 10 hereof. The option shall expire on the last day of the Offering
Period.
8. Exercise of Option.
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date, the
number of shares with respect to which options are to be exercised may exceed
(i) the number of shares of Common Stock that were available for sale under the
Plan on the Enrollment Date of the applicable Offering Period, or (ii) the
number of shares available for sale under the Plan on such Exercise Date, the
Board may in its sole discretion (x) provide that the Company shall make a pro
rata allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Exercise Date, and continue all Offering Periods then in effect, or (y) provide
that the Company shall make a pro rata allocation of the shares available for
purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform
a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Exercise Date, and terminate any or all Offering Periods
then in effect pursuant to Section 20 hereof. The Company may make pro rata
allocation of the shares available on the
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Enrollment Date of any applicable Offering Period pursuant to the preceding
sentence, notwithstanding any authorization of additional shares for issuance
under the Plan by the Company's stockholders subsequent to such Enrollment Date.
9. Delivery. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not
have any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company or in succeeding Offering Periods
which commence after the termination of the Offering Period from which the
participant withdraws.
11. Termination of Employment.
Upon a participant's ceasing to be an Employee, for any reason,
he or she shall be deemed to have elected to withdraw from the Plan and the
payroll deductions credited to such participant's account during the Offering
Period but not yet used to exercise the option shall be returned to such
participant or, in the case of his or her death, to the person or persons
entitled thereto under Section 15 hereof, and such participant's option shall be
automatically terminated. The preceding sentence notwithstanding, a participant
who receives payment in lieu of notice of termination of employment shall be
treated as continuing to be an Employee for the participant's customary number
of hours per week of employment during the period in which the participant is
subject to such payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. Stock.
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(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 150,000 shares, plus an annual increase to be added on the first day of
the Company's fiscal year beginning in 1999 equal to the lesser of (i) 150,000
shares, (ii) 1.5% of the outstanding shares on the last day of the Company's
prior fiscal year or (iii) such amount as may be determined by the Board.
(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall
be registered in the name of the participant or in the name of the participant
and his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such partici pant's death subsequent to an
Exercise Date on which the option is exercised but prior to delivery to such
participant of such shares and cash. In addition, a participant may file a
written designation of a beneficiary who is to receive any cash from the
participant's account under the Plan in the event of such participant's death
prior to exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment,
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transfer, pledge or other disposition shall be without effect, except that the
Company may treat such act as an election to withdraw funds from an Offering
Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
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(c) Merger or Asset Sale. In the event of a proposed sale of all
or substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and for
any reason terminate or amend the Plan. Except as provided in Section 19 hereof,
no such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its stockholders. Except as provided
in Section 19 and this Section 20 hereof, no amendment may make any change in
any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any successor rule or provision or any other applicable law, regulation or stock
exchange rule), the Company shall obtain stockholder approval in such a manner
and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation
of the Plan may result in unfavorable financial accounting consequences, the
Board may, in its discretion and, to the extent necessary or desirable, modify
or amend the Plan to reduce or eliminate such accounting consequence including,
but not limited to:
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(1) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(2) shortening any Offering Period so that the Offering
Period ends on a new Exercise Date, including an Offering Period underway at the
time of the Board action; and
(3) allocating shares.
Such modifications or amendments shall not require
stockholder approval or the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may
require the person exercising such option to represent and warrant at the time
of any such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
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EXHIBIT A
CARDIAC PATHWAYS CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. __________________________ hereby elects to participate in the Cardiac
Pathways Corporation 1998 Employee Stock Purchase Plan (the "Employee
Stock Purchase Plan") and subscribes to purchase shares of the Company's
Common Stock in accordance with this Sub scription Agreement and the
Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of ____% of my Compensation on each payday (from 1 to 15%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is
in all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is
subject to stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):
_____________________________ __________________.
6. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after
the Exercise Date, I will be treated for federal income tax purposes
as having received ordinary income at the time of such disposition in an
amount equal to the
158
excess of the fair market value of the shares at the time such shares
were purchased by me over the price which I paid for the shares. I
hereby agree to notify the Company in writing within 30 days after the
date of any disposition of my shares and I will make adequate provision
for Federal, state or other tax withholding obligations, if any, which
arise upon the disposition of the Common Stock. The Company may, but
will not be obligated to, withhold from my compensation the amount
necessary to meet any applicable withholding obligation including any
withholding necessary to make available to the Company any tax
deductions or benefits attributable to sale or early disposition of
Common Stock by me. If I dispose of such shares at any time after the
expiration of the 2-year and 1-year holding periods, I understand that I
will be treated for federal income tax purposes as having received
income only at the time of such disposition, and that such income will
be taxed as ordinary income only to the extent of an amount equal to the
lesser of (1) the excess of the fair market value of the shares at the
time of such disposition over the purchase price which I paid for the
shares, or (2) 15% of the fair market value of the shares on the first
day of the Offering Period. The remainder of the gain, if any,
recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)___________________________________________________________
(First) (Middle) (Last)
__________________________________ ____________________________________
Relationship
____________________________________
(Address)
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159
Employee's Social
Security Number: ____________________________________
Employee's Address: ____________________________________
____________________________________
____________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_________________________ ____________________________________________
Signature of Employee
____________________________________________
Spouse's Signature (If beneficiary other
than spouse)
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160
EXHIBIT B
CARDIAC PATHWAYS CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Cardiac
Pathways Corporation 1998 Employee Stock Purchase Plan which began on
____________, 19____ (the "Enrollment Date") hereby notifies the Company that he
or she hereby withdraws from the Offering Period. He or she hereby directs the
Company to pay to the undersigned as promptly as practicable all the payroll
deductions credited to his or her account with respect to such Offering Period.
The under signed understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to partici
pate in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
_________________________________________
_________________________________________
_________________________________________
Signature:
_________________________________________
Date:____________________________________
161
APPENDIX C
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PROXY CARDIAC PATHWAYS CORPORATION PROXY
PROXY FOR 2000 ANNUAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of CARDIAC PATHWAYS CORPORATION, a Delaware
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Shareholders and Proxy Statement, each dated November __, 2000, and hereby
appoints Thomas M. Prescott and Eldon M. Bullington, and each of them, proxies
and attorneys-in-fact, with full power to each of substitution, on behalf and in
the name of the undersigned, to represent the undersigned at the 2000 Annual
Meeting of Shareholders of CARDIAC PATHWAYS CORPORATION to be held on December
18, 2000 at 12:00 p.m., local time, at 995 Benecia Avenue, Sunnyvale, California
94086 and at any adjournment or adjournments thereof, and to vote all shares of
voting stock which the undersigned would be entitled to vote if then and there
personally present, on the matters set forth on below.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE ELECTION OF DIRECTORS, FOR THE ADOPTION OF THE
2000 STOCK PLAN, FOR THE AMENDMENT OF THE 1998 EMPLOYEE STOCK PURCHASE PLAN, FOR
THE ISSUANCE OF COMMON STOCK TO CERTAIN INVESTORS AND FOR THE APPOINTMENT OF
ERNST & YOUNG LLP, OR AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS
MAY PROPERLY COME BEFORE THE MEETING, INCLUDING, AMONG OTHER THINGS,
CONSIDERATION OF ANY MOTION MADE FOR ADJOURNMENT OF THE MEETING.
(Continued, and to be signed on the other side)
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FOLD AND DETACH HERE
162
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[X] Please mark
your votes
as indicated in
this sample.
1. Elections of Directors:
WITHHOLD
INSTRUCTION: if you wish to FOR FOR ALL
withhold authority to vote for any [ ] [ ]
individual nominee, strike
a line through that nominee's
name in the list below:
M. Fazle Husain, Mark J. Brooks
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2. Proposal to approve the 2000 Stock Plan with FOR AGAINST ABSTAIN
500,000 shares of Common Stock reserved for [ ] [ ] [ ]
issuance thereunder.
3. Proposal to amend the 1998 Employee Stock Purchase
Plan to provide for a one-time increase to the amount [ ] [ ] [ ]
of shares of Common Stock reserved for issuance
thereunder and to modify to annual increase provisions:
4. Proposal to approve the issue and sale of
5,882,353 shares of Common Stock to certain [ ] [ ] [ ]
investors in the Company:
5. Proposal to ratify appointment of ERNST & YOUNG LLP as
independent auditors of Cardiac Pathways [ ] [ ] [ ]
Corporation for the fiscal year ending June 30, 2001:
and, in their discretion, upon such other
matter or matters which may properly come
before the meeting or any adjournment or
adjournments thereof.
MARK HERE FOR ADDRESS CHANGE.
______________________________________________________ [ ]
______________________________________________________
Signature(s) _______________________________________________________ Dated _________, 2000
(This Proxy should be marked, dated and signed by the shareholder(s) exactly as his or her name
appears hereon, and returned promptly in the enclosed envelope.
Persons signing in a fiduciary capacity should so indicate. If Shares are held by joint tenants
or as community property, both should sign.)
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FOLD AND DETACH HERE
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