SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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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 Section240.14a-11(c) or
Section240.14a-12
CARDIOTHORACIC SYSTEMS, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
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and 0-11.
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CARDIOTHORACIC SYSTEMS, INC.
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
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TO BE HELD ON MAY 27, 1997
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
CARDIOTHORACIC SYSTEMS, INC., a Delaware corporation (the "Company") will be
held on Tuesday, May 27, 1997, at 1:30 p.m., local time, at the Company's
principal executive offices, 10600 N. Tantau Ave., Cupertino, California 95014
for the following purposes (as more fully described in the Proxy Statement
accompanying this Notice):
1. To elect eight directors of the Company to serve until their successors
are duly elected and designated;
2. To amend the Delaware Certificate of Incorporation and Bylaws
(collectively, the "Charter Documents") to establish a classified Board
of Directors with the following classes and terms:
i. two Class I directors, whose terms shall continue until the date
of the Annual Meeting of Stockholders in 1998 and thereafter shall be
3-year terms;
ii. three Class II directors, whose terms shall continue until the
date of the Annual Meeting of Stockholders in 1999 and thereafter shall
be 3-year terms;
iii. three Class III directors, whose terms shall continue until the
date of the Annual Meeting of Stockholders in 2000 and thereafter shall
be 3-year terms;
3. To approve and ratify an amendment of the Company's Incentive Stock Plan
to increase the number of shares of Common Stock reserved for issuance
thereunder by 600,000 shares to a new total of 2,200,000 shares.
4. To approve and ratify an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock
by 40,000,000 shares to a new total of 60,000,000 shares.
5. To ratify the appointment of Coopers & Lybrand L.L.P. as the independent
auditors of the Company for the fiscal year ending December 31, 1997.
6. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Only stockholders of record at the close of
business on April 1, 1997 are entitled to notice of and to vote at the Annual
Meeting. All stockholders are cordially invited to attend the meeting. However,
to ensure your representation at the meeting, you are urged to mark, sign, date
and return the enclosed proxy as promptly as possible in the postage-prepaid
envelope enclosed for that purpose. If you attend the meeting, you may vote in
person even if you return a proxy.
FOR THE BOARD OF DIRECTORS
Richard M. Ferrari
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Cupertino, California
April 21, 1997
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING,
YOU MAY VOTE IN PERSON, EVEN IF YOU RETURN A PROXY.
CARDIOTHORACIC SYSTEMS, INC.
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PROXY STATEMENT FOR
1997 ANNUAL MEETING OF STOCKHOLDERS
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MAY 27, 1997
INFORMATION CONCERNING VOTING AND PROXY SOLICITATION
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
CardioThoracic Systems, Inc. ("CardioThoracic Systems" or the "Company") for use
at the Annual Meeting of Stockholders to be held on Tuesday, May 27, 1997 at
1:30 p.m., local time, or at any adjournment thereof. The Annual Meeting will be
held at the Company's principal executive offices, 10600 N. Tantau Ave.,
Cupertino, California 95014. The telephone number at the meeting location is
(408) 342-1700.
These proxy solicitation materials and the Annual Report to stockholders for
the fiscal year ended December 31, 1996 (the "Last Fiscal Year"), including
financial statements, were first mailed on or about April 21, 1997, to all
stockholders entitled to vote at the Annual Meeting.
RECORD DATE AND VOTING SECURITIES
Stockholders of record at the close of business on April 1, 1997 (the
"Record Date") are entitled to notice of and to vote at the Annual Meeting. At
the Record Date, 13,399,505 shares of the Company's Common Stock, $.001 par
value (the "Common Stock"), were issued and outstanding and held of record by
approximately 95 stockholders.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy bearing a later
date or by attending the meeting and voting in person. Attending the Annual
Meeting in and of itself may not constitute a revocation of a proxy.
VOTING AND SOLICITATION
Each stockholder is entitled to one vote for each share held as of the
record date. Stockholders will not be entitled to cumulate their votes in the
election of directors.
The cost of soliciting proxies will be borne by the Company. The Company
expects to reimburse brokerage firms and other persons representing beneficial
owners of shares for their expense in forwarding solicitation material to such
beneficial owners. Proxies may be solicited by certain of the Company's
directors, officers and regular employees, without additional compensation, in
person or by telephone or facsimile.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the Inspector of Elections (the "Inspector") with the assistance of the
Company's Transfer Agent. The Inspector will also determine whether or not a
quorum is present. Except in certain specific circumstances, the affirmative
vote of a majority of shares present in person or represented by proxy at a duly
held meeting at which a quorum is present is required under Delaware law for
approval of proposals presented to stockholders. In general,
2
Delaware law also provides that a quorum consists of a majority of shares which
are entitled to vote and which are present or represented by proxy at the
meeting.
The Inspector will treat shares that are voted "WITHHELD" or "ABSTAIN" as
being present and entitled to vote for purposes of determining the presence of a
quorum but will not be treated as votes in favor of approving any matter
submitted to the stockholders for a vote. Any proxy which is returned using the
form of proxy enclosed and which is not marked as to a particular item will be
voted for the election of the eight directors, for approval of the amendment of
the Certificate of Incorporation, the Bylaws and of the Incentive Stock Plan,
for the increase in the number of authorized shares of Common Stock, for the
confirmation of the appointment of the designated independent auditors and, as
the proxy holders deem advisable, on other matters that may come before the
meeting, as the case may be with respect to the items not marked.
If a broker indicates on the enclosed proxy or its substitute that it does
not have discretionary authority as to certain shares to vote on a particular
matter ("Broker Non-Votes"), those shares will not be considered as present with
respect to that matter. The Company believes that the tabulation procedures to
be followed by the Inspector are consistent with the general statutory
requirements in Delaware concerning voting of shares and determination of a
quorum.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS TO BE PRESENTED AT 1998 ANNUAL
MEETING
Proposals that are intended to be presented by stockholders of the Company
at the 1998 Annual Meeting must be received by the Company no later than
December 22, 1997 in order to be considered for inclusion in the proxy statement
and form of proxy relating to that meeting.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers and directors and
persons who own more than ten percent of a registered class of the Company's
equity securities to file an initial report of ownership on Form 3 and changes
in ownership on Form 4 or 5 with the Securities and Exchange Commission (the
"SEC") and the National Associates of Securities Dealers, Inc. Executive
officers, directors and greater than ten percent stockholders are also required
by SEC rules to furnish the Company 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 certain reporting persons, the Company believes
that, with respect to fiscal year 1996, all filing requirements applicable to
its officers, directors and ten percent stockholders were complied with, except
that Joseph S. Ciffolillo and Christian Skieller each did not timely file their
initial reports of ownership on Form 3 (such forms were filed approximately one
month late).
SHARE OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Common Stock of the Company as of
April 1, 1997, by: (i) each person who is known to the Company to beneficially
own more than five percent of the outstanding shares of its Common Stock, (ii)
each director and nominee for election, (iii) each officer named in the Summary
Compensation Table below, and (iv) all directors, nominees for election and
executive officers as a group. Unless otherwise indicated, officers and
directors can be reached at the Company's principal executive
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offices. A total of 13,399,505 shares of the Company's Common Stock were issued
and outstanding as of April 1, 1997.
SHARES
BENEFICIALLY APPROXIMATE
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(1) PERCENT OF TOTAL(2)
- -------------------------------------------------------------- ----------- --------------------
Morgenthaler Venture Partners IV ............................. 840,000 6.3%
2730 Sand Hill Road
Suite 280
Menlo Park, CA 94025
Entities affiliated with The Vertical Group, L.P.(3) ......... 690,000 5.1
18 Bank Street
Summit, N.J. 07901
Richard M. Ferrari............................................ 945,042 7.1
Charles S. Taylor............................................. 948,152 7.1
Michael J. Billig (4)......................................... 46,666 *
Thomas A. Afzal (5)........................................... 35,100 *
Steve M. Van Dick (6)......................................... 90,568 *
Christian Skieller (7)........................................ 7,500 *
Joseph A. Ciffolillo.......................................... -- --
Robert C. Bellas, Jr.(8)...................................... 840,000 6.3
Thomas J. Fogarty, M.D.(9).................................... 590,000 4.4
Jack W. Lasersohn(10)......................................... 670,000 5.0
Thomas C. McConnell(11)....................................... 650,000 4.9
Philip M. Young(12)........................................... 651,700 4.9
All directors and executive officers as a group (12
persons).................................................... 5,474,728 40.5
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* Less than 1%.
(1) Except as otherwise indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock.
(2) Applicable percentage ownership is based on 13,399,505 shares of Common
Stock outstanding as of April 1, 1997 together with applicable options 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. Shares of Common Stock
subject to options currently exercisable, or exercisable within 60 days
after April 1, 1997, are deemed outstanding for computing the percentage
ownership of the person holding such options, but are not deemed outstanding
for computing the percentage ownership of any other person.
(3) Consists of 650,000 shares held by The Vertical Fund Associates, L.P.,
20,000 shares held by Vertical Life Sciences, L.P., and 20,000 shares held
by Stephen D. Baksa.
(4) Includes 46,666 options which will become exercisable within 60 days of
April 1, 1997.
(5) Includes 31,250 options which will become exercisable within 60 days of
April 1, 1997, 1,000 shares held by Mr. Afzal, 1,350 shares held jointly by
Mr. Afzal and his wife, and 1,500 shares held in Mr. Afzal's name for his
children.
(6) Includes 40,000 options which will become exercisable within 60 days of
April 1, 1997.
(7) Includes 7,500 options which will become exercisable within 60 days of April
1, 1997.
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(8) Consists of 840,000 shares held by Morgenthaler Venture Partners IV. Mr.
Bellas, a director of the Company, is a general partner of Morgenthaler
Venture Partners IV. Mr. Bellas shares voting or investment control over the
shares held by Morgenthaler Venture Partners IV.
(9) Consists of 481,644 shares held by Three Arch Partners, L.P., 108,356 shares
held by Three Arch Associates, L.P., and 90,000 shares held by Dr. Fogarty
(some of which remain subject to repurchase by the Company). Dr. Fogarty is
a director of the Company and a general partner of Three Arch Partners, L.P.
and Three Arch Associates, L.P. Dr. Fogarty disclaims beneficial ownership
of the shares held by such entities except to the extent of his
proportionate partnership interest therein.
(10) Consists of 650,000 shares held by Vertical Fund Associates L.P. and 20,000
shares held by Vertical Life Sciences L.P. Jack W. Lasersohn is a director
of the Company, a managing director of the Vertical Group G.P., the general
partner of Vertical Fund Associates L.P., and the general partner of
Vertical Life Sciences L.P. Mr. Lasersohn disclaims beneficial ownership of
the shares held by Vertical Fund Associates L.P. and Vertical Life Sciences
L.P. except to the extent of his proportionate partnership interest therein.
(11) Consists of 640,000 shares held by New Enterprise Associates VI, L.P. and
10,000 shares held by NEA Ventures 1996, L.P. Thomas C. McConnell is a
director of the Company and a general partner of New Enterprise Associates
VI, L.P. and NEA Ventures 1996, L.P. Mr. McConnell disclaims beneficial
ownership of the shares held by New Enterprise Associates VI, L.P. and NEA
Ventures 96, L.P. except to the extent of his proportionate partnership
interest therein.
(12) Consists of 560,300 shares held by U.S. Venture Partners IV, L.P., 68,250
shares held by Second Ventures II, L.P., 19,500 shares held by USVP
Entrepreneur Partners II, L.P., 1,950 shares held by 2180 Associates Fund,
and 1,700 shares held by Philip M. Young. Mr. Young is a director of the
Company and a general partner of each of U.S. Venture Partners IV, L.P.,
Second Ventures II, L.P., USVP Entrepreneur Partners II, L.P. and 2180
Associates Fund. Mr. Young disclaims beneficial ownership of the shares held
by such entities except to the extent of his proportionate partnership
interest therein.
5
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Company's Board of Directors currently consists of eight persons, each
serving a one-year term ending on the date of the annual meeting. All eight
directors are seeking re-election to serve for the full duration of the next
term of office. The term of office for all eight director slots will be one year
from the date of the 1997 Annual Meeting, unless Proposal No. 2 for the
classification of the Board of Directors is approved, in which case the
directors will be divided into three classes: Class I will contain two directors
who will hold office until the date of the Annual Meeting of Stockholders in
1998 and thereafter for 3-year terms; Class II will contain three directors who
will hold office until the date of the Annual Meeting of Stockholders in 1999
and thereafter for 3-year terms; and Class III will contain three directors who
will hold office until the date of the Annual Meeting of Stockholders in 2000
and thereafter for 3-year terms (and, in each case, until their successors are
duly elected and qualified or until their earlier resignation, removal from
office or death).
In the event that any of such persons becomes unavailable or declines to
serve as a director at the time of the Annual Meeting, the proxy holders will
vote the proxies in their discretion for any nominee who is designated by the
current Board of Directors to fill the vacancy. It is not expected that any of
the nominees will be unavailable to serve.
The names of the Class I, Class II, and Class III nominees for election to
the Board of Directors at the Annual Meeting, their ages as of the Record Date,
and certain information about them are set forth below:
NAME AGE POSITION WITH THE COMPANY CLASS (3)
- ----------------------------------- --- ------------------------------------------------------------ ---------
Robert C. Bellas, Jr.(1)........... 55 Director II
Joseph A. Ciffolillo............... 58 Director I
Richard M. Ferrari................. 43 Chief Executive Officer, President, Director III
Thomas J. Fogarty, M.D............. 63 Director I
Jack W. Lasersohn(2)............... 44 Director III
Thomas C. McConnell(1)(2).......... 42 Director II
Charles S. Taylor.................. 42 Vice President, Chief Technical Officer, Director II
Philip M. Young(1)................. 57 Director III
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(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) In the event the stockholders approve Proposal No. 2 for classification of
the Board of Directors, the nominees shall be divided into Classes I, II,
and III with terms as described above.
There are no family relationships among directors or executive officers of
the Company.
ROBERT C. BELLAS, JR. has served as a Director of the Company since
September 1995. Since January 1984, Mr. Bellas has been a General Partner of
Morgenthaler Ventures, a venture capital firm, where he is responsible for the
firm's investment in health care services, medical devices and biomedical
ventures. Mr. Bellas also serves on the Board of Directors of Vical, Inc. and
Medaphis Corporation. Mr. Bellas holds an M.B.A. from Stanford University
Graduate School of Business.
JOSEPH A. CIFFOLILLO joined the Company as a Director in August 1996. From
1983 until April 1996, he served as Chief Operating Officer of Boston Scientific
Corporation. From 1963 to 1983 he was employed by Johnson & Johnson in a number
of positions, including Senior Vice President of Codman, (a Johnson & Johnson
company) and President of Johnson & Johnson Orthopedic Company. Mr. Ciffolillo
serves on the
6
Board of Directors of Boston Scientific Corp., CompDent Corp., and Innovasive
Devices, Inc. Mr. Ciffolillo holds a B.S. in Finance from Bucknell University,
where he currently serves as a director.
RICHARD M. FERRARI joined the Company as Chief Executive Officer and a
Director in June 1995 and was elected President in August 1995. From January
1991 until joining the Company, he was President and Chief Executive Officer of
Cardiovascular Imaging Systems, Inc. ("CVIS"), a manufacturer of intravascular
ultrasound systems, which is currently a subsidiary of Boston Scientific
Corporation. From March 1990 until joining CVIS, he served as President and
Acting Chief Executive Officer of Medstone International, Inc., a manufacturer
of lithotripsy equipment for treatment of gall and kidney stones. From 1981 to
February 1990, he was employed with ADAC Laboratories, a supplier of diagnostic
imaging equipment, serving most recently as Executive Vice President and General
Manager responsible for the Nuclear Medicine, Digital Cardiology, Information
Management and Radiation Therapy business units. Mr. Ferrari serves on the Board
of Directors of FemRx, Inc. Mr. Ferrari holds an M.B.A. from the University of
South Florida.
THOMAS J. FOGARTY, M.D. joined the Company as a Director in February 1996.
Dr. Fogarty is an internationally recognized cardiovascular surgeon, inventor
and venture capitalist. He is a General Partner of Three Arch Partners, a
venture capital firm investing primarily in medical device companies, and has
held the position of Professor of Surgery at Stanford University Medical Center
since July 1993. Dr. Fogarty also serves as a director of Raytel Medical
Corporation, Biopsys Medical, Inc., Cardiac Pathways, Inc., and General Surgical
Innovations, Inc. Dr. Fogarty holds an M.D. from the University of Cincinnati
College of Medicine.
JACK W. LASERSOHN joined the Company as a Director in September 1995. He has
been a Managing Director of The Vertical Group, Inc., a venture capital firm
investing primarily in medical technology companies, since its formation in
1989. From 1981 to 1989, Mr. Lasersohn was the director of the venture capital
division of F. Eberstadt & Co., Inc. Mr. Lasersohn also serves as a director of
VitalCom Inc. and Uroquest Medical Corp. He holds an M.A. from Tufts University
and a J.D. from Yale University.
THOMAS C. MCCONNELL joined the Company as a Director in September 1995. He
has been a General Partner of New Enterprise Associates ("NEA"), a venture
capital investment entity, since 1989 and has been associated with NEA since
1985. Mr. McConnell also serves as a director of Conceptus, Inc., Applied
Imaging Corp., Innovasive Devices Inc., and Sequana Therapeutics, Inc. He holds
an M.B.A. from Stanford University Graduate School of Business.
CHARLES S. TAYLOR, the founder of the Company, was with Informed Creation,
the predecessor company to CardioThoracic Systems, since its inception in
November 1993, and has served as Vice President, Chief Technical Officer and
Director of the Company since its incorporation in June 1995. From June 1992
until November 1993, Mr. Taylor was a member of the research and development
group at Stanford Surgical Technologies, Inc. (now Heartport, Inc., a publicly
traded company), that develops instruments for advanced cardiac surgical
procedures. From January 1992 to May 1992, Mr. Taylor managed the establishment
of a new development group for Eli Lilly's Medical Instrument Systems division
(now Guidant Corp., a publicly traded company), the Technology Development
Center ("TDC"), which develops surgical devices for vascular intervention
procedures. From May 1986 to December 1991, he was an Engineer and Manager for
Advanced Cardiovascular Systems, Inc. where he directed teams of engineers
developing new manufacturing technologies and custom research and development
equipment.
PHILIP M. YOUNG joined CTS as a Director in September 1995. He has been a
general partner of U.S. Venture Partners, a venture capital firm, since April
1990. Mr. Young serves as a director of The Immune Response Corporation, FemRx,
Inc., Vical, Inc. and Zoran Corporation. He holds an M.B.A. from Harvard
University.
7
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held six meetings during the fiscal
year ended December 31, 1996. No director attended fewer than 75% of the
meetings of the Board of Directors during the fiscal year ended December 31,
1996, with the exception of directors Fogarty and Ciffolillo. Director Fogarty,
who joined the Company as a director in February 1996, attended three meetings
of the Board of Directors. Director Ciffolillo, who joined the Company as a
director in August 1996, attended one meeting of the Board of Directors. The
Board of Directors has an Audit Committee and a Compensation Committee. It does
not have a nominating committee or a committee performing the functions of a
nominating committee. From time to time, the Board has created various ad hoc
committees for special purposes. No such committee is currently functioning.
The Audit Committee consisted of directors Bellas and Young until June 1996,
when it was reconstituted to consist of directors Lasersohn and McConnell. The
Audit Committee is responsible for reviewing the results and scope of the audit
and other services provided by the Company's independent auditors. The Audit
Committee held one meeting during the last fiscal year.
The Compensation Committee consists of directors Bellas, McConnell, and
Young. The Compensation Committee reviews and makes recommendations to the Board
concerning salaries and incentive compensation for employees of the Company and
administers the Company's equity incentive plans. The Compensation Committee
held two meetings during the last fiscal year.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash compensation for services they
provide as directors, aside from out-of-pocket expenses incurred in connection
with attendance at board meetings. From time to time, certain directors who are
not employees of the Company have received grants of options to purchase shares
of the Company's Common Stock. Under the Company's 1996 Director Option Plan,
directors who are not employees or consultants of the Company receive options to
purchase up to 12,000 shares of Common Stock upon joining the Board of
Directors. Thereafter, each Outside Director who has served on the Board of
Directors for at least six months shall receive an option to acquire 3,000
shares of Common Stock on the date of each of the Company's annual meetings of
stockholders, provided such Outside Director is re-elected.
During the fiscal year ended December 31, 1996, the Company granted options
to purchase 42,000 shares of the Company's common stock to director Joseph
Ciffolillo.
In February 1996, the Company entered into a 4-year consulting arrangement
with director Thomas J. Fogarty for the development of devices, instruments, and
techniques for minimally invasive coronary artery bypass graft surgery. The
Company granted to Three Arch Associates L.P. and Three Arch Partners L.P.
options for the purchase of 90,000 shares of common stock. Dr. Fogarty is a
general partner of these two partnerships. In February 1996, the partnerships
exercised the options, which are subject to a right of repurchase in the event
of termination of the agreement and Dr. Fogarty's services as a board member.
The consulting agreement also provides for certain royalty payments to Dr.
Fogarty based on certain product sales by the Company. No such royalty payments
were made in 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company. The Compensation Committee also administers various
incentive compensation plans. During the year ended December 31, 1996, Messrs.
Bellas, McConnell, and Young served as the compensation committee of the
Company's board of directors. Mr. Ferrari, who is President and Chief Executive
Officer of the Company, participates in all discussions and decisions regarding
salaries and incentive compensation for all employees and consultants
8
to the Company, except that Mr. Ferrari is excluded from discussions regarding
his own salary and incentive compensation. No member of the Compensation
Committee has a relationship that would constitute an interlocking relationship
with executive officers or directors of another entity.
VOTE REQUIRED
The eight nominees receiving the highest number of affirmative votes of the
shares entitled to vote on this matter shall be elected as the directors.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
NOMINEES SET FORTH HEREIN.
PROPOSAL NO. 2
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors currently consists of eight persons, each
serving a one-year term ending on May 27, 1997. Delaware law permits a
corporation to establish in its certificate of incorporation a classified board,
which typically consists of two or more classes of directors with staggered
terms of office.
The Certificate of Incorporation of CardioThoracic Systems, Inc. will
provide for a classified board of directors effective as of May 27, 1997. The
directors will thereupon be divided into three classes. Class I will contain two
directors who will hold office until the date of the Annual Meeting of
Stockholders in 1998; Class II will contain three directors who will hold office
until the date of the Annual Meeting of Stockholders in 1999; and Class III will
contain three directors who will hold office until the date of the Annual
Meeting of Stockholders in 2000 (and, in each case, until their successors are
duly elected and qualified or until their earlier resignation, removal from
office or death). After each such election, the directors in each such class
will then serve in succeeding terms of three years and until their successors
are duly elected and qualified. As a result, after the 1997 Annual Meeting, only
one class of directors will be elected at each annual meeting of stockholders
with the rest of the directors continuing to serve for their respective terms.
Upon the classification of the Board of Directors, it would ordinarily
require at least two annual meetings for a majority of the voting stock to elect
a majority of the Board of Directors unless, prior to the end of such two years,
stockholders were able: (a) to obtain the approval of the then existing Board of
Directors to increase the number of authorized directors; (b) to amend the
Certificate of Incorporation, which provides for a classified Board of
Directors; (c) amend or cause the directors to amend the Bylaws to increase the
number of directors; (d) remove, or induce to resign, a sufficient number of
directors; or (e) call a special meeting and vote to remove directors and elect
persons to fill the resulting vacancies. The Certificate of Incorporation and
Bylaws of CardioThoracic Systems, Inc. provide that directors may be removed
without cause by the affirmative vote of the holders of a majority of the voting
power of all of the then outstanding shares of capital stock entitled to vote
generally in the election of directors.
The classification system of electing directors may tend to maintain the
incumbency of the Board of Directors as it generally makes it more difficult for
stockholders to change a majority of the directors. The Board of Directors
believes that classification will better enable the Board of Directors to
protect the interests of nontendering or minority stockholders in the event that
another person, through a tender offer or otherwise, should obtain a substantial
amount of the CardioThoracic Systems, Inc. shares. A classified Board of
Directors also may contribute to continuity and stability in leadership and
policy.
VOTE REQUIRED
The approval of the classification of the Board of Directors requires the
affirmative vote of a majority of the shares entitled to vote on this matter.
9
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
PROPOSAL SET FORTH HEREIN.
PROPOSAL NO. 3
INCREASE IN NUMBER OF SHARES AUTHORIZED
UNDER THE COMPANY'S INCENTIVE STOCK PLAN
The Company's Board of Directors and stockholders have previously adopted
and approved the Incentive Stock Plan (the "Stock Plan"). A total of 1,600,000
shares of Common Stock have been reserved for issuance under the Stock Plan, and
only 94,167 shares were available for future grant as of the Record Date. In
January 1997, the Board of Directors authorized an amendment to the Stock Plan,
subject to shareholder approval, to increase the shares reserved for issuance
thereunder by 600,000, bringing the total number of shares issuable under the
Stock Plan to 2,200,000.
At the Annual Meeting, the stockholders are being requested to consider and
approve the proposed amendment of the Stock Plan to increase the number of
shares of Common Stock reserved for issuance thereunder. The Board of Directors
believes that the amendment is necessary to enable the Company to, among other
things, continue its policy of employee stock ownership as a means to motivate
high levels of performance and to recognize key employee accomplishments. A
summary of the Stock Plan is set forth below.
SUMMARY OF THE STOCK PLAN
GENERAL. The Stock Plan was originally adopted by the Board of Directors in
August 1995 and approved by the stockholders in August 1995. The Stock Plan
authorizes the Board of Directors (the "Board"), or one or more committees which
the Board may appoint from among its members (the "Committee"), to grant options
and rights to purchase Common Stock. Options granted under the Stock Plan may be
either "incentive stock options" as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or nonstatutory stock options, as
determined by the Board or the Committee.
PURPOSE. The general purpose of the Stock Plan is to attract and retain the
best available personnel for positions of substantial responsibility, to provide
additional incentive to employees and consultants and to promote the success of
the Company's business.
ADMINISTRATION. The Stock Plan may be administered by the Board or the
Committee. Subject to the other provisions of the Stock Plan, the Administrator
has the authority: (i) to determine the Fair Market Value; (ii) to select the
Employees or Consultants to whom Options and Stock Purchase Rights may be
granted under the Stock Plan; (iii) to determine the number of shares of Common
Stock to be covered by each Option and Stock Purchase Right granted under the
Stock Plan; (iv) to approve forms of agreement for use under the Stock Plan; (v)
to determine the terms and conditions, not inconsistent with the terms of the
Stock Plan, of any Option or Stock Purchase Right granted under the Stock Plan,
including 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 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 Stock Plan and awards granted
pursuant to the Stock Plan; (ix) to prescribe, amend and rescind rules and
regulations relating to the Stock 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
10
Right (subject to Section 15(c) of the Stock Plan), including the discretionary
authority to extend the post-termination exercisability period of Options longer
than is otherwise provided for in the Stock 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; (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; and (xiii) to make all other
determinations deemed necessary or advisable for administering the Stock Plan.
In August 1996, the Compensation Committee authorized the Chief Executive
Officer to make initial option grants of up to 15,000 shares to new employees.
The Chief Executive Officer has authority to grant such options to new employees
who do not report directly to him; the Chief Financial Officer's approval is
required to grant such options to new employees who report directly to the Chief
Executive Officer. The Chief Executive Officer and Chief Financial Officer
report to the Compensation Committee with regard to such matters.
ELIGIBILITY. The Stock Plan provides that options and rights may be granted
to the Company's employees and independent contractors, including members of the
Board of Directors who are not employees of the Company. Incentive stock options
may be granted only to employees. Any optionee who owns more than 10% of the
combined voting power of all classes of outstanding stock of the Company (a "10%
Stockholder") is not eligible for the grant of an incentive stock option unless
the exercise price of the option is at least 110% of the fair market value of
the Common Stock on the date of grant.
TERMS AND CONDITIONS OF OPTIONS. Each option granted under the Stock Plan
is evidenced by a written stock option agreement between the optionee and the
Company and is subject to the following terms and conditions:
(a) EXERCISE PRICE. The Board or the Committee determines the exercise
price of options to purchase shares of Common Stock at the time the options are
granted. However, excluding options issued to 10% Stockholders, the exercise
price under an incentive stock option must not be less than 100% of the fair
market value of the Common Stock on the date the option is granted. If the
Common Stock is listed on any established stock exchange or a national market
system, the fair market value shall be the closing sale price for such stock (or
the closing bid if no sales were reported) on the date the option is granted. If
the Common Stock is traded on the over-the-counter market, the fair market value
shall be the mean of the high bid and high ask prices on the date the option is
granted.
(b) FORM OF CONSIDERATION. The means of payment for shares issued upon
exercise of an option is specified in each option agreement and generally may be
made by cash, check, promissory note, other shares of Common Stock of the
Company owned by the optionee, consideration received by the Company under a
formal cashless exercise program adopted by the Company, a reduction in the
amount of any Company liability to the Optionee, or by a combination thereof.
(c) EXERCISE OF THE OPTION. Each stock option agreement specifies the term
of the option and the date when the option is to become exercisable. However, in
no event shall an option granted under the Stock Plan be exercised more than 10
years after the date of grant. Moreover, in the case of an incentive stock
option granted to a 10% Stockholder, the term of the option shall be for no more
than five years from the date of grant.
(d) TERMINATION OF EMPLOYMENT. If an optionee's employment terminates for
any reason (other than death or permanent disability), then all options held by
such optionee under the Stock Plan expire upon the earlier of (i) such period of
time as is set forth in his or her option agreement (but not to exceed ninety
days after the termination of his or her employment in the event of an incentive
stock option) or (ii) the expiration date of the option. The optionee may
exercise all or part of his or her option at any time before such expiration to
the extent that such option was exercisable at the time of termination of
employment.
11
(e) PERMANENT DISABILITY. If an employee is unable to continue employment
with the Company as a result of permanent and total disability (as defined in
the Code), then all options held by such optionee under the Stock Plan shall
expire upon the earlier of (i) 12 months after the date of termination of the
optionee's employment or (ii) the expiration date of the option. The optionee
may exercise all or part of his or her option at any time before such expiration
to the extent that such option was exercisable at the time of termination of
employment.
(f) DEATH. If an optionee dies while employed by the Company, his or her
option shall expire upon the earlier of (i) 12 months after the optionee's death
or (ii) the expiration date of the option. The executors or other legal
representative or the optionee may exercise all or part of the optionee's option
at any time before such expiration to the extent that such option was
exercisable at the time of death.
(g) TERMINATION OF OPTIONS. Each stock option agreement will specify the
term of the option and the date when all or any installment of the option is to
become exercisable. Notwithstanding the foregoing, however, the term of any
incentive stock option shall not exceed 10 years from the date of grant. No
options may be exercised by any person after the expiration of its term.
(h) NONTRANSFERABILITY OF OPTIONS. Unless determined otherwise by the
Administrator, during an optionee's lifetime, his or her option(s) shall be
exercisable only by the optionee and shall not be transferable other than by
will or laws of descent and distribution.
(i) VALUE LIMITATION. If the aggregate fair market value of all shares of
Common Stock subject to an optionee's incentive stock option which are
exercisable for the first time during any calendar year exceeds $100,000, the
excess options shall be treated as nonstatutory options.
(j) OTHER PROVISIONS. The stock option agreement may contain such terms,
provisions and conditions not inconsistent with the Stock Plan as may be
determined by the Board or Committee.
ADJUSTMENT UPON CHANGES IN CAPITALIZATION, CORPORATE TRANSACTIONS. In the
event that the stock of the Company is changed by reason of any stock split,
reverse stock split, stock dividend, recapitalization or other change in the
capital structure of the Company, appropriate proportional adjustments shall be
made in the number and class of shares of stock subject to the Stock Plan, the
number and class of shares of stock subject to any option or right outstanding
under the Stock Plan, and the exercise price of any such outstanding option or
night. Any such adjustment shall be made upon approval of the Board and, if
required, the stockholders of the Company, whose determination shall be
conclusive. Notwithstanding the above, in connection with any merger,
consolidation, acquisition of assets or like occurrence involving the Company,
each outstanding option and right shall be assumed or an equivalent option or
right substituted by a successor corporation. If the successor corporation does
not assume the options or substitute substantially equivalent options, then the
exercisability of all outstanding options and rights shall be accelerated. In
the event of the proposed dissolution or liquidation of the Company, the
exercisability of all outstanding options and rights may be accelerated at the
discretion of the Administrator. To the extent they have not been previously
exercised, options shall terminate upon consummation of the proposed action.
AMENDMENT, SUSPENSIONS AND TERMINATION OF THE STOCK PLAN. The Board may
amend, suspend or terminate the Stock Plan at any time; provided, however, that
the Company shall obtain stockholder approval of any amendment to the extent
necessary and desirable to comply with Section 422 of the Code or any other
applicable rule or statute. In any event, the Stock Plan will terminate
automatically in 2005.
FEDERAL TAX INFORMATION. Options granted under the Stock Plan may be either
incentive stock options, as defined in Section 422 of the Code, or nonstatutory
options.
An optionee who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or upon its exercise,
although the exercise may subject the optionee to the alternative minimum tax.
Upon the sale or exchange of the shares more than two years after grant of the
12
option and one year after exercising the option, any gain or loss will be
treated as long-term capital gain or loss. If these holding periods are not
satisfied, the optionee will recognize ordinary income at the time of sale or
exchange 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. A different rule for measuring ordinary income
upon such a premature disposition may apply if the optionee is also an officer,
director, or 10% stockholder of the Company. The Company will be entitled to a
deduction in the same amount as the ordinary income recognized by the optionee.
Any gain or loss recognized on such a premature disposition of the shares in
excess of the amount treated as ordinary income will be characterized as
long-term or short-term capital gain or loss, depending on the holding period.
All other options which do not quality as incentive stock options are
referred to as nonstatutory options. An optionee will not recognize any taxable
income at the time he is granted a nonstatutory option. However, upon its
exercise, the optionee will recognize taxable income generally measured as the
excess of the then fair market value of the shares purchased over the purchase
price. Any taxable income recognized in connection with an option exercise by an
optionee who is also an employee of the Company will be subject to tax
withholding by the Company. Upon resale of such shares by the optionee, any
difference between the sales price and the optionee's purchase price, to the
extent not recognized as taxable income as described above, will be treated as
long-term or short-term capital gain or loss, depending on the holding period.
Subject to Section 162(m) of the Code, the Company will be entitled to a tax
deduction in the same amount as the ordinary income recognized by the optionee
with respect to shares acquired upon exercise of a nonstatutory option.
Stock purchase rights are taxed in substantially the same manner as
nonstatutory options.
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the Stock Plan, does not purport to be complete, and does not
discuss the tax consequences of the optionee's death or the income tax laws of
any municipality, state or foreign country in which an optionee may reside.
VOTE REQUIRED
The approval of the amendment of the Stock Plan requires the affirmative
vote of a majority of the shares of the Company's Common Stock present and
voting at the Annual Meeting.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
AMENDMENT OF THE INCENTIVE STOCK PLAN SET FORTH HEREIN.
PROPOSAL NO. 4
APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION
INCREASING NUMBER OF SHARES OF COMMON STOCK
The Company's Certificate of Incorporation, as currently in effect (the
"Certificate"), provides that the Company is authorized to issue two classes of
stock: 20,000,000 shares of Common Stock, $0.001 par value per share; and
5,100,000 shares of Preferred Stock. On January 28, 1997, the Board of Directors
authorized an amendment to the Certificate to increase the authorized number of
shares of Common Stock from 20,000,000 to 60,000,000 shares. The stockholders
are being asked to approve at the Annual Meeting such amendment to the
Certificate. Under the proposed amendment, the first paragraph of Article IV of
the Restated Certificate of Incorporation would be amended to read as follows:
The Corporation is authorized to issue two classes of shares of stock to be
designated, respectively, Common Stock, $0.001 par value, and Preferred
Stock, $0.001 par value. The total number of shares
13
that the Corporation is authorized to issue is 65,100,000 shares. The number
of shares of Common Stock authorized is 60,000,000. The number of shares of
Preferred authorized is 5,100,000.
The Company currently has 20,000,000 authorized shares of Common Stock. As
of April 1, 1997, 13,399,505 shares of Common Stock were issued and outstanding.
In addition, 2,488,408 shares of Common Stock were reserved for future grant or
for issuance upon the exercise of outstanding options under the Company's
Incentive Stock Plan, Nonstatutory Option Plan, 1996 Director Option Plan and
1996 Employee Stock Purchase Plan.
PURPOSE AND EFFECT OF THE AMENDMENT
The principal purpose of the proposed amendment to the Certificate is to
authorize additional shares of Common Stock which will be available in the event
the Board of Directors determines that it is necessary or appropriate to permit
future stock dividends or stock splits, to raise additional capital through the
sale of securities, to acquire another company or its business or assets, to
create negotiating leverage and flexibility in the event of an unfriendly
takeover bid, or to establish a strategic relationship with a corporate partner.
The Board of Directors has no present agreement or arrangement to issue any of
the shares for which approval is sought. If the amendment is approved by the
stockholders, the Board of Directors does not intend to solicit further
stockholder approval prior to the issuance of any additional shares of Common
Stock, except as may be required by applicable law.
The increase in authorized Common Stock will not have any immediate effect
on the rights of existing stockholders. However, the Board will have the
authority to issue authorized Common Stock without requiring future stockholder
approval of such issuances, except as may be required by applicable law. To the
extent that the additional authorized shares are issued in the future, they will
decrease the existing stockholders' percentage equity ownership and, depending
on the price at which they are issued, could be dilutive to the existing
stockholders. The holders of Common Stock have no preemptive rights.
POTENTIAL ANTI-TAKEOVER EFFECT
The increase in the authorized number of shares of Common Stock and the
subsequent issuance of such shares could have the effect of delaying or
preventing a change in control of the Company without further action by the
stockholders. Shares of authorized and unissued Common Stock could (within the
limits imposed by applicable law) be issued in one or more transactions which
would make a change in control of the Company more difficult, and therefore less
likely. Any such issuance of additional stock could have the effect of diluting
the earnings per share and book value per share of outstanding shares of Common
Stock, and such additional shares could be used to dilute the stock ownership or
voting rights of a person seeking to obtain control of the Company. The Company
has previously adopted certain measures that may have the effect of helping to
resist an unsolicited takeover attempt, including: (i) a Preferred Shares Rights
Agreement dated as of February 14, 1997, providing for the distribution of
rights to purchase additional shares of the Company's Preferred Stock in the
event of certain attempts to acquire control of the Company; (ii) provisions in
the Stock Plan providing for acceleration of exercisability of outstanding
options under certain circumstances in the event of a sale of assets or merger;
and (iii) provisions of the Certificate authorizing the Board to issue up to
5,100,000 shares of Preferred Stock with terms, provisions and rights fixed by
the Board.
REQUIRED VOTE
The approval of the amendment to the Certificate requires the affirmative
vote of a majority of the outstanding shares of Common Stock of the Company. An
abstention or non-vote is not an affirmative vote and, therefore, will have the
same effect as a vote against the proposal.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
AMENDMENT TO THE CERTIFICATE SET FORTH HEREIN.
14
PROPOSAL NO. 5
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected Coopers & Lybrand L.L.P., independent
auditors, to audit the financial statements of the Company for the fiscal year
ending December 31, 1997 and recommends that the stockholders vote FOR
confirmation of such selection. In the event of a negative vote on such
ratification, the Board of Directors will reconsider its selection. Coopers &
Lybrand L.L.P. has audited the Company's financial statements since its
inception. Representatives of Coopers & Lybrand L.L.P. are expected to be
present at the Annual 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 COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
RATIFICATION OF THE APPOINTMENT OF COOPERS & LYBRAND L.L.P. AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1997.
EXECUTIVE COMPENSATION
COMPENSATION TABLES
SUMMARY COMPENSATION TABLE. The following table sets forth certain
compensation paid by the Company to the Chief Executive Officer, the four other
most highly compensated executive officers of the Company, and certain other
officers (the "Named Executive Officers") for services rendered during the
fiscal years ended December 31, 1995 and 1996:
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
-------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
---------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS COMPENSATION
- --------------------------------------------- ---- ---------- ------ ---------- ---------- ------------
Richard M. Ferrari 1995 $47,065(1) -- --(2) -- $2,100(3)
President and Chief 1996 189,583 $70,000 --(2) -- 9,770(4)
Executive Officer
Charles S. Taylor 1995 48,750(5) -- --(6) -- --
Vice President and Chief 1996 130,121 -- --(6) -- 1,100(7)
Technical Officer
Steve M. Van Dick 1995 --(8) -- -- -- --
Vice President of Finance 1996 99,167(8) 26,123 -- 200,000 976(9)
and Administration and
Chief Financial Officer
Michael J. Billig 1995 --(10) -- -- -- --
Vice President of Regulatory, 1996 115,104 46,089 -- 140,000 1,100(11)
Quality, and Clinical Research
Thomas A. Afzal 1995 --(12) -- -- -- --
Vice President of Sales and 1996 97,500(12) 25,453 -- 100,000 917(13)
Marketing
- ------------------------
(1) Mr. Ferrari joined the Company as Chief Executive Officer in June 1995 and
was elected President in August 1995. He received an annualized salary of
$175,000 in 1995. Mr. Ferrari's annualized salary was raised to $225,000 in
September 1996.
15
(2) As of December 31, 1996, Mr. Ferrari held 945,041 shares of the Company's
Common Stock having a value of $17,483,259, based upon the closing price of
$18.50 per share on December 31, 1996. Pursuant to the terms of a Common
Stock Purchase Agreement dated August 1, 1995, the shares are subject to
repurchase by the Company at $0.00097 per share in the event of a
termination of Mr. Ferrari's employment with the Company. The shares are
subject to the following vesting schedule: (1) One twenty-fourth (1/24) of
206,120 of the shares were released from the repurchase option on each of
May 31, June 30, July 31 and August 31, 1995; on September 8, 1995, an
additional 103,060 shares were released from the repurchase option; pursuant
to the terms of an Amendment Agreement dated September 8,1995, one
forty-eighth (1/48) of the remaining 68,707 shares were and will continue to
be released at the end of each month thereafter, contingent upon Mr.
Ferrari's continued employment with the Company. (2) One forty-eighth (1/48)
of 738,921 of the shares were released from the repurchase option on August
31, 1995; pursuant to the terms of an Amendment Agreement dated September 8,
1995, 1/48 of the remaining 723,527 shares subject to the Company's
repurchase option following September 8, 1995 have been and will continue to
be released from the repurchase option at the end of each month thereafter,
contingent upon Mr. Ferrari's continued employment with the Company. As of
December 31, 1996, a total of 425,886 shares had been released from the
Company's repurchase options. None of the shares will be subject to the
repurchase options after September 30, 1999.
(3) Consists of three payments of a $700 monthly automobile allowance.
(4) Consists of twelve payments of a $700 monthly automobile allowance plus
payment of life insurance premiums for the benefit of Mr. Ferrari in the
amount of $1,370.
(5) Mr. Taylor, a founder of the Company, has served as Vice President and Chief
Technical Officer since June 1995 and received an annualized salary of
$130,000 in 1995.
(6) As of December 31, 1996, Mr. Taylor held 948,152 shares of Common Stock
having a value of $17,540,812, based upon the closing price of $18.50 per
share on December 31, 1996. Pursuant to the terms of a Common Stock Purchase
Agreement dated August 1, 1995, all of the shares are subject to repurchase
by the Company at $0.00097 per share in the event of a termination of Mr.
Taylor's employment with the Company. One forty-eighth (1/48) of the shares
were released from the repurchase option as of the last day of each month
from November 1993 through August 1995. Pursuant to the terms of an
Amendment Agreement dated September 8, 1995, 1/48 of the 513,582 shares
still subject to the Company's repurchase option following September 8, 1995
have been and will continue to be released from the repurchase option at the
end of each month thereafter, contingent upon Mr. Taylor's continued
employment with the Company. As of December 31, 1996, a total of 605,765
shares had been released from the Company's repurchase option. None of the
shares will be subject to the repurchase option after September 30, 1999.
(7) Consists of payments by the Company for life insurance premiums for the
benefit of Mr. Taylor during the fiscal year ended December 31, 1996.
(8) Mr. Van Dick accepted employment with the Company as Vice President of
Finance and Administration and Chief Financial Officer in March 1996, which
employment began in April 1996 at an annualized salary of $140,000.
(9) Consists of payments by the Company for life insurance premiums for the
benefit of Mr. Van Dick during the fiscal year ended December 31, 1996.
(10) Michael J. Billig joined the Company as Vice President, Regulatory,
Quality, and Clinical Research in February 1996 at an annualized salary of
$130,000.
(11) Consists of payments by the Company of life insurance premiums for the
benefit of Mr. Billig during the fiscal year ended December 31, 1996.
16
(12) Mr. Afzal has served as Vice President of Sales since March 1996 and became
Vice President of Sales and Marketing in July 1996.
(13) Consists of payments by the Company of life insurance premiums for the
benefit of Mr. Afzal during the last fiscal year.
STOCK OPTION INFORMATION
The following table sets forth certain information concerning stock options
granted during the fiscal year ended December 31, 1996 to the Named Executive
Officers. In accordance with the rules of the Securities and Exchange
Commission, the following table also sets forth the potential realizable value
over the term of the options (the period from the grant date to the expiration
date) based on assumed rates of stock appreciation of 5% and 10%, compounded
annually. These amounts do not represent the Company's estimate of future stock
prices. Actual realizable values, if any, of stock options will depend on the
future performance of the Common Stock.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1996
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF PRICE APPRECIATION
UNDERLYING TOTAL OPTIONS EXERCISE OR FOR OPTION TERM(3)
OPTIONS GRANTED IN FISCAL BASE PRICE EXPIRATION ---------------------
NAME GRANTED 1996(1) ($/SH)(2) DATE 5%($) 10%($)
- ------------------------------------- ----------- ----------------- ------------- ---------- --------- ----------
Thomas A. Afzal...................... 100,000 4.7% $ 5.00 2/19/06 314,447 796,871
Michael J. Billig.................... 140,000 6.6% $ 0.10 1/25/06 8,805 22,312
Steve M. Van Dick.................... 200,000 9.5% $ 5.00 3/18/06 628,895 1,593,742
- ------------------------
(1) Based on an aggregate of 2,108,750 options granted by the Company in the
year ended December 31, 1996 to employees of and consultants to the Company,
including the Named Executive Officers.
(2) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board of
Directors.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the fair
market value of the Company's Common Stock on the date of grant appreciates
at the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its term
for the appreciated stock price.
17
FISCAL YEAR END OPTION VALUES
The following table sets forth, for each of the Named Executive Officers in
the Summary Compensation Table above, information with respect to the value of
unexercised stock options held by such individuals at December 31, 1996. None of
the Named Executive Officers exercised stock options during the fiscal year
ended December 31, 1996.
OPTION EXERCISES IN FISCAL 1996 AND
YEAR-END OPTION VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
Thomas A. Afzal........................................... -- 100,000 -- $ 1,350,000
Michael J. Billig......................................... -- 140,000 -- $ 2,576,000
Steve M. Van Dick......................................... 50,000 150,000 $ 675,000 $ 2,025,000
- ------------------------
(1) Based on a value of $18.50 per share, the closing price on December 31,
1996, less the per share exercise price shown in the Option Grant Table
above, multiplied by the number of shares underlying the Option.
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL AGREEMENTS
Under the terms of a letter dated September 5, 1995, setting forth the terms
of Charles S. Taylor's employment with the Company, the Company has agreed to
provide Mr. Taylor with a base salary continuation, subject to certain
conditions, for three months following a termination of Mr. Taylor's employment
without cause or a mutual agreement for separation from the Company.
Under the terms of a letter dated March 15, 1996, setting forth the terms of
Steve M. Van Dick's employment with the Company, which began in April 1996, the
Company has agreed to provide Mr. Van Dick with an employment agreement having a
term of five years and providing, upon a change in control of the Company, for
salary and benefits to continue for one year and for accelerated vesting of all
outstanding stock options. In addition, the Company has agreed to provide Mr.
Van Dick with a loan for the purchase of a home having a principal amount of
$200,000 with simple interest payable at the rate of 6.31% per annum and a term
of five years.
Under the terms of a letter dated August 1, 1996, setting forth the terms of
Christian Skieller's employment with the Company, the Company has agreed to
provide Mr. Skieller with a continuation of base salary for one year following
any termination of employment with the Company, except in event of termination
for cause or voluntary termination.
BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
THE FOLLOWING IS PROVIDED TO STOCKHOLDERS BY THE MEMBERS OF THE COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS:
The Compensation Committee of the Board of Directors (the "Committee"),
comprising three outside directors, is responsible for the administration of the
Company's compensation programs. These programs include base salary for
executive officers and both annual and long-term incentive compensation
programs. The Company's compensation programs are designed to provide a
competitive level of total
18
compensation and include incentive and equity ownership opportunities linked to
the Company's performance and stockholder return.
COMPENSATION PHILOSOPHY
The design and implementation of the Company's executive compensation
programs are based on a series of guiding principles derived from the Company's
values, business strategy and management requirements. These principles may be
summarized as follows:
- Align the financial interests of the management team with the Company and
its stockholders;
- Attract, motivate and retain high-caliber individuals necessary to
increase total return to stockholders;
- Provide a total compensation program where a significant portion of pay is
linked to individual achievement and short- and long-term Company
performance; and
- Emphasize reward for performance at the individual, team and Company
levels.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
The Committee has considered the potential impact of Section 162(m) of the
Internal Revenue Code adopted under the Federal Revenue Reconciliation Act of
1993. Section 162(m) disallows a tax deduction for any publicly-held corporation
for individual compensation exceeding $1 million in any taxable year for any of
the named executive officers, unless compensation is performance based. Since
the targeted cash compensation of each of the named executive officers is well
below the $1 million threshold and the Committee believes that any options
granted under the Company's stock option plan will meet the requirement of being
performance based under the transition provisions provided in the regulations
under Section 162(m), the Committee believes that Section 162(m) will not reduce
the tax deduction available to the Company. The Company's policy is to qualify
to the extent reasonable its executive officers' compensation for deductibility
under applicable tax laws.
COMPENSATION PROGRAM
In 1996, the Company retained iQuantic, Inc., a compensation consulting
firm, to research and prepare a report regarding the Company's chief executive
officer's compensation package, other officers' compensation and the employee
bonus program. In August 1996 iQuantic submitted to the Compensation Committee a
report regarding the Company's cash and equity bonus structure and officer
compensation issues. The Compensation Committee considered the report in its
September 1996 meeting and made certain adjustments to the chief executive
officer's compensation package, the other officers' compensation, and the
employee bonus program.
The Company's executive compensation program has three major components, all
of which are intended to attract, retain and motivate executive officers
consistent with the principles set forth above. The Committee considers these
components of compensation individually as well as collectively in determining
total compensation for executive officers.
1. BASE SALARY. Each fiscal year the Committee establishes base salaries
for individual executive officers based upon (i) industry and peer group
surveys, (ii) responsibilities, scope and complexity of each position and (iii)
performance judgments as to each individual's past and expected future
contributions. The Committee reviews with the Chief Executive Officer and
approves, with appropriate modifications, an annual base salary plan for the
Company's executive officers other than the Chief Executive Officer. The
Committee reviews and fixes the base salary of the Chief Executive Officer based
on similar competitive compensation data and the Committee's assessment of his
past performance and its expectations as to his future contributions in leading
the Company.
19
2. ANNUAL CASH (SHORT-TERM) INCENTIVES. Annual cash incentives are
established to provide a direct linkage between individual pay and annual
corporate performance. Target annual bonus awards are established for executive
officer positions based upon industry and peer group surveys and range from 10%
to 40% of base salary, with 40% for the chief executive officer position. Each
officer who served in an executive capacity during the Last Fiscal Year,
including the Chief Executive Officer, received a cash bonus for such service
ranging in amount from 0% to approximately 40% of base salary. In establishing
bonus amounts, the Committee generally considers the performance of each officer
in his or her respective area of accountability, each officer's respective
contribution to the success of the Company, the Company's overall performance,
and competitive data for similar positions. In establishing bonus awards for the
Last Fiscal Year, the Committee also considered the Company's successful product
development programs and training programs during the year, as well as financial
performance for the Last Fiscal Year. The Compensation Committee establishes
corporate and individual objectives for each officer at the beginning of each of
the Company's fiscal quarters. The Compensation Committee makes a quarterly
determination of the bonus for each officer. The determination is based on set
proportions of the corporate and individual objectives, and each officer is
rated separately on the attainment of those objectives. Each officer may receive
a portion or the full amount of his targeted annual performance based bonus. The
bonus award to the Chief Executive Officer for the Last Fiscal Year was
approximately 37% of his base salary.
3. EQUITY BASED INCENTIVE COMPENSATION. Long-term incentives for the
Company's employees are provided under the Company's stock option plans. Each
fiscal year, the Committee considers the desirability of granting to executive
officers long-term incentives in the form of stock options. These option grants
are intended to motivate the executive officers to manage the business to
improve long-term Company performance and align the financial interests of the
management team with the Company and its stockholders. The Committee established
the grants of stock options to executive officers (other than the Chief
Executive Officer) in the Last Fiscal Year, based upon a review of proposed
individual awards, taking into account each officer's scope of responsibility
and specific assignments, strategic and operational goals applicable to the
officer, anticipated performance requirements and contributions of the officer
and competitive data for similar positions. During the Last Fiscal Year, option
awards were granted to the following officers in the following amounts: (1)
140,000 shares of Common Stock to the Vice President, Regulatory, Quality, and
Clinical Research, (2) 200,000 shares of Common Stock to the Vice President,
Finance and Administration, and (3) 100,000 shares of Common Stock to the Vice
President, Sales and Marketing.
Respectfully submitted,
Robert C. Bellas
Thomas C. McConnell
Philip M. Young
THE FOREGOING COMPENSATION COMMITTEE REPORT SHALL NOT BE DEEMED TO BE
"SOLICITING MATERIAL" OR TO BE "FILED" WITH THE SEC, NOR SHALL SUCH INFORMATION
BE INCORPORATED BY REFERENCE INTO ANY FUTURE FILING UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE EXCHANGE ACT, EXCEPT TO THE
EXTENT THE COMPANY SPECIFICALLY INCORPORATES IT BY REFERENCE INTO SUCH FILING.
20
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return to stockholders of
the Company's Common Stock at December 31, 1996 since April 18, 1996 (the date
the Company first became subject to the reporting requirements of the Exchange
Act) to the cumulative total return over such period of (i) "Nasdaq Stock Market
- -- U.S." index, and (ii) the Hambrecht & Quist "Healthcare -- Excluding
Biotechnology" index. The graph assumes the investment of $100 in the Company's
Common Stock and each of such indices (from April 18, 1996) and reflect the
change in the market price of the Company's Common Stock relative to the noted
indices at December 31, 1996 (and not for any interim period). The performance
shown is not necessarily indicative of future price performance.
COMPARISON OF 8 MONTH CUMULATIVE TOTAL RETURN*
AMONG CARDIOTHORACIC SYSTEMS, INC., THE NASDAQ STOCK MARKET-US INDEX
AND THE HAMBRECHT & QUIST HEALTHCARE-EXCLUDING BIOTECHNOLOGY INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CARDIOTHORACIC SYSTEMS, INC. NASDAQ STOCK MARKET-US
4/18/1996 $100.00 $100.00
4/96 106.00 105.00
5/96 98.00 110.00
6/96 60.00 105.00
7/96 49.00 95.00
8/96 72.00 101.00
9/96 92.00 108.00
10/96 85.00 107.00
11/96 83.00 114.00
12/96 83.00 114.00
HAMBRECHT & QUIST HEALTHCARD-EXCLUDING BIOTECHNOLOGY
4/18/1996 $100.00
4/96 102.00
5/96 102.00
6/96 98.00
7/96 90.00
8/96 95.00
9/96 107.00
10/96 102.00
11/96 105.00
12/96 108.00
* $100 INVESTED ON 4/18/96 IN STOCK OR INDEX-
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
THE INFORMATION CONTAINED IN THE STOCK PERFORMANCE GRAPH SHALL NOT BE DEEMED
TO BE "SOLICITING MATERIAL" OR TO BE FILED WITH THE SEC, NOR SHALL SUCH
INFORMATION BE INCORPORATED BY REFERENCE INTO ANY FUTURE FILING UNDER THE
SECURITIES ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT THE COMPANY
SPECIFICALLY INCORPORATES IT BY REFERENCE INTO SUCH FILING.
21
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal year ended December 31, 1996, the Company made no payments
pursuant to consulting arrangements to any members of its Board of Directors
except Thomas J. Fogarty, M.D. In February 1996, the Company entered into a
Consulting Agreement with Dr. Fogarty pursuant to which the Company agreed to
pay Dr. Fogarty up to $25,000,000 in royalties calculated on sales of certain
products sold by the Company and granted to Three Arch Partners, L.P. and Three
Arch Associates, L.P., partnerships of which Dr. Fogarty is a general partner,
nonstatutory options to purchase a total of 90,000 shares of Common Stock at
$0.10 per share. The options granted to Three Arch Partners, L.P. and Three Arch
Associates, L.P. were granted under the Company's Incentive Stock Plan and were
immediately exercisable, but shares issued upon the exercise of the options are
subject to repurchase at cost in the event that both the consulting agreement
between the Company and Dr. Fogarty is terminated in accordance with its terms
and Dr. Fogarty is no longer a member of the Company's Board of Directors. The
repurchase right lapses at the rate of 1/48 of the shares per month beginning in
March 1996. Three Arch Partners, L.P. and Three Arch Associates, L.P. exercised
the options in full on February 21, 1996. During the last fiscal year, the
Company paid Dr. Fogarty for expenses incurred in connection with consulting
services performed for the Company in the amount of $5,199.
During the fiscal year ended December 31, 1996, the Company made loans to
certain of its executive officers. On April 29, 1996 and June 5, 1996, the
Company loaned to Thomas A. Afzal, an officer of the Company, the aggregate
principal amount of $355,000 at the rate of 5.88% per annum, due in two equal
installments on January 5, 1997 and January 5, 1998. Should the officer's
association with the Company continue through the due date of any installment
payment under the notes, then the Company has agreed to forgive all principal
and interest due by the terms of the note for such installment. On August 16,
1996, the Company loaned to Richard M. Ferrari, the Chief Executive Officer of
the Company, the principal amount of $750,000, secured by 75,000 shares of the
Company's Common Stock. The note does not bear interest and is due and payable
on the earlier of August 16, 2000 or the termination of employment. On May 20,
1996, the Company loaned to Michael J. Billig, an officer of the Company, the
principal amount of $35,000, with interest to accrue at 6.36% per annum, due and
payable on the earlier of May 20, 2000 or the termination of employment. On
December 3, 1996, the Company loaned to Steve Van Dick, an officer of the
Company, the principal amount of $200,000, with interest to accrue at a rate of
6.31% per annum, due and payable on the earlier of December 31, 2000 or the
termination of employment.
On January 4, 1996, the Company sold 500,000 shares of Series A Preferred,
at $1.00 per share, to Boston Scientific Corp. Joseph A. Ciffolillo, a director
of the Company, is also a director of Boston Scientific. On February 21, 1996,
the Company sold 408,173 shares of its Series A Preferred, at $1.00 per share,
to Three Arch Partners, L.P., and 91,827 shares of its Series A Preferred, at
$1.00 per share, to Three Arch Associates, L.P. Dr. Fogarty, a director of the
Company, is a general partner of both partnerships.
All transactions, including any loans from the Company to its officers,
directors, principal stockholders or affiliates, have been or will be approved
by a majority of the Board of Directors, including a majority of the independent
and disinterested members of the Board of Directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
22
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If any
other matters properly come before the meeting, it is the intention of the
persons named in the accompanying form of proxy to vote the shares they
represent as the Board of Directors may recommend.
THE COMPANY WILL MAIL WITHOUT CHARGE TO ANY STOCKHOLDER UPON WRITTEN REQUEST
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL
STATEMENTS, SCHEDULES AND A LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO
INVESTOR RELATIONS, CARDIOTHORACIC SYSTEMS, INC., 10600 N. TANTAU AVE.,
CUPERTINO, CALIFORNIA 95014.
THE BOARD OF DIRECTORS
Dated: April 21, 1997
23
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
CARDIOTHORACIC SYSTEMS, INC.
1997 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 27, 1997
The undersigned shareholder of CARDIOTHORACIC SYSTEMS, INC., a Delaware
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Shareholders and Proxy Statement, each dated April 21, 1997 and hereby appoints
Richard M. Ferrari and Steve M. Van Dick 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 1997 Annual Meeting
of Shareholders of CARDIOTHORACIC SYSTEMS, INC. to be held on May 27, 1997 at
1:30 p.m. local time, at the Company's principal executive offices at 10600 N.
Tantau Ave., Cupertino, California and at any adjournment or adjournments
thereof, and to vote all shares of Common Stock which the undersigned would be
entitled to vote if then and there personally present, on the matters set forth
below:
1. ELECTION OF DIRECTORS:
/ / FOR all nominees listed below (except as
indicated) / /
ABSTAIN / / AGAINST
all nominees listed below
IF YOU WISH TO WITHHOLD AUTHORITY TO VOTE FOR ANY
INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THAT
NOMINEE'S NAME IN THE LIST BELOW:
ROBERT C. BELLAS, JR., JOSEPH A. CIFFOLILLO, RICHARD
M. FERRARI, THOMAS J. FOGARTY, M.D., JACK W.
LASERSOHN, THOMAS C. MCCONNELL,
CHARLES S. TAYLOR, AND PHILIP M. YOUNG
2. AMENDMENT OF CHARTER DOCUMENTS TO ESTABLISH A
CLASSIFIED BOARD OF DIRECTORS:
/ / FOR / / AGAINST / / ABSTAIN
3. AMENDMENT OF INCENTIVE STOCK PLAN TO INCREASE THE
NUMBER OF SHARES RESERVED FOR GRANT THEREUNDER:
/ / FOR / / AGAINST / / ABSTAIN
4. AMENDMENT OF CHARTER DOCUMENTS TO INCREASE THE NUMBER
OF SHARES OF COMMON STOCK AUTHORIZED THEREUNDER:
/ / FOR / / AGAINST / / ABSTAIN
PROPOSAL TO RATIFY THE APPOINTMENT OF COOPERS &
5. LYBRAND LLP AS THE INDEPENDENT AUDITORS OF THE COMPANY
FOR THE FISCAL PERIOD ENDING DECEMBER 31, 1997:
/ / FOR / / AGAINST / / ABSTAIN
and, in their discretion, upon such other matter or matters which may properly
come before the meeting or any adjournment or adjournments thereof.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE ELECTION OF DIRECTORS, FOR THE CLASSIFICATION
OF THE BOARD OF DIRECTORS, FOR THE AMENDMENT OF THE 1995 INCENTIVE STOCK PLAN,
FOR THE AMENDMENT OF THE CHARTER DOCUMENTS TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK, FOR THE RATIFICATION OF THE APPOINTMENT OF COOPERS &
LYBRAND LLP AS INDEPENDENT AUDITORS, AND AS SAID PROXIES DEEM ADVISABLE ON SUCH
OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
Dated: _____________________ , 1997
___________________________________
Signature
___________________________________
Signature
(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.)