UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934.
For the quarterly period ended September 26, 1997 or
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934.
For the transition period from ___________ to ____________.
Commission File Number
0-27880
CardioThoracic Systems, Inc.
----------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-3228757
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10600 N. Tantau Ave., Cupertino, CA 95014-0739
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone, including area code: (408) 342-1700
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such requirements for the past 90 days. Yes X No
------- -------
As of November 4, 1997, there were 13,651,875 shares of the Registrant's
Common Stock outstanding.
1
CARDIOTHORACIC SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
September 26, 1997 and December 31, 1996 3
Consolidated Condensed Statements of Operations
for the three and nine months ended
September 26, 1997 and September 30, 1996 4
Consolidated Condensed Statements of Cash Flows
for the nine months ended September 26, 1997
and September 30, 1996 5
Notes to Consolidated Condensed Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION 21
SIGNATURES 25
EXHIBIT INDEX 26
2
Item 1. Financial Statements
CARDIOTHORACIC SYSTEMS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
September 26, December 31,
1997 1996
-------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,806,000 $ 5,184,000
Available-for-sale securities 32,238,000 42,608,000
Trade accounts receivable, net 1,091,000 133,000
Notes receivable from officers 115,000 115,000
Inventories, net 1,184,000 220,000
Interest receivable 967,000 946,000
Prepaid expenses and other current assets 623,000 124,000
------------- -------------
Total current assets 41,024,000 49,330,000
Property and equipment, net 3,459,000 2,494,000
Available-for-sale securities 27,736,000 30,665,000
Notes receivable from officers 1,073,000 1,157,000
Other assets 52,000 45,000
------------- -------------
Total assets $ 73,344,000 $ 83,691,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Equipment note, current portion $ 287,000 $ 136,000
Accounts payable 1,121,000 831,000
Accrued liabilities 3,021,000 2,343,000
------------- -------------
Total current liabilities 4,429,000 3,310,000
Bank borrowings 1,625,000 425,000
Equipment note, less current portion 1,210,000 703,000
------------- -------------
Total liabilities 7,264,000 4,438,000
------------- -------------
Stockholders' equity:
Common stock, par value $0.001 14,000 13,000
Additional paid-in capital 102,863,000 102,040,000
Deferred compensation (4,257,000) (5,742,000)
Unrealized gain (loss) on available-for-sale
securities (49,000) 17,000
Accumulated deficit (32,491,000) (17,075,000)
------------- -------------
Total stockholders' equity 66,080,000 79,253,000
------------- -------------
Total liabilities and stockholders' equity $ 73,344,000 $ 83,691,000
------------- -------------
------------- -------------
See accompanying notes.
3
CARDIOTHORACIC SYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 26, 1997 September 30, 1996 September 26, 1997 September 30, 1996
------------------ ------------------ ------------------ ------------------
Net sales $ 1,629,000 $ 6,577,000
Cost of sales 1,115,000 $ 213,000 4,331,000 $ 213,000
------------------ ------------------ ------------------ ------------------
Gross profit 514,000 (213,000) 2,246,000 (213,000)
------------------ ------------------ ------------------ ------------------
Operating expenses:
Research and development 2,832,000 3,131,000 7,279,000 8,280,000
Sales, marketing, general and adm. 4,499,000 2,071,000 13,305,000 4,659,000
------------------ ------------------ ------------------ ------------------
Total operating expenses 7,331,000 5,202,000 20,584,000 12,939,000
------------------ ------------------ ------------------ ------------------
Loss from operations (6,817,000) (5,415,000) (18,338,000) (13,152,000)
Interest income, net 920,000 1,097,000 2,922,000 1,989,000
------------------ ------------------ ------------------ ------------------
Net loss $(5,897,000) $(4,318,000) $(15,416,000) $ (11,163,000)
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Net loss per share $ (0.44) $ (0.33) $ (1.15) $ (0.98)
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Shares used in computing
net loss per share 13,528,000 12,966,000 13,456,000 11,419,000
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
See accompanying notes.
4
CARDIOTHORACIC SYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended Nine Months Ended
September 26, 1997 September 30, 1996
------------------ ------------------
OPERATING ACTIVITIES
Net Loss $ (15,416,000) $ (11,163,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 761,000 114,000
Amortization of notes receivable from officer 84,000
Amortization of deferred compensation 1,695,000 5,063,000
Allowance for bad debts and product returns 170,000
Changes in operating assets and liabilities:
Notes receivable from officers (1,100,000)
Trade accounts receivable (1,128,000)
Inventory (964,000)
Interest receivable (21,000)
Prepaid expenses and other current assets (499,000) (145,000)
Other assets (7,000) (52,000)
Accounts payable 290,000 487,000
Accrued liabilities 678,000 1,725,000
------------------ ------------------
Net cash used in operating activities (14,357,000) (5,071,000)
------------------ ------------------
INVESTING ACTIVITIES
Purchases of property and equipment (1,726,000) (2,155,000)
Purchase of available-for-sale securities (50,679,000) (32,408,000)
Proceeds from maturities of available-for-sale
securities 63,912,000 2,583,000
------------------ ------------------
Net cash provided by (used in) investing
activities 11,507,000 (31,980,000)
------------------ ------------------
FINANCING ACTIVITIES
Proceeds from equipment note 1,083,000
Bank borrowings 1,200,000
Repayment of equipment note (425,000)
Proceeds from issuance of convertible preferred
stock 996,000
Proceeds from issuance of common stock 614,000 84,236,000
------------------ ------------------
Net cash provided by financing activities 2,472,000 85,232,000
------------------ ------------------
Net increase (decrease) in cash and cash
equivalents (378,000) 48,181,000
Cash and cash equivalents at beginning of
period 5,184,000 712,000
------------------ ------------------
Cash and cash equivalents at end of period $ 4,806,000 $ 48,893,000
------------------ ------------------
------------------ ------------------
See accompanying notes.
5
CARDIOTHORACIC SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 26, 1997
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
The operating results of the interim periods presented are not necessarily
indicative of the results for the year ending January 2, 1998 or for any other
interim period. The accompanying financial statements should be read in
conjunction with the audited financial statements and notes thereto for the year
ended December 31, 1996 included in the Company's Form 10-K filed with the
Securities and Exchange Commission.
Note 2. Formation and Business of the Company
CardioThoracic Systems, Inc. (the Company) was incorporated on June 15,
1995 and subsequently acquired all of the intellectual property assets of its
predecessor, Informed Creation, a sole proprietorship which was formed on
November 3, 1993, and expensed the purchase price to research and development as
purchased in process research and development technology. The Company designs,
develops, manufactures and markets surgical products and systems for minimally
invasive cardiothoracic surgery.
Note 3. Change in Fiscal Year-End
In January 1997, the Company changed its financial reporting year from a
fiscal year of twelve calendar months ending on December 31 to a fiscal year of
52 or 53 weeks ending on the Friday closest to December 31. Accordingly, fiscal
year 1997 will end on January 2, 1998.
6
CARDIOTHORACIC SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
September 26, 1997
(Unaudited)
Note 4. Available-for-Sale Securities
The Company has classified its investments as available-for-sale
securities. Available-for-sale securities are carried at fair value with
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. The amortized cost of available-for-sale debt
securities is adjusted for the amortization of premiums and the accretion of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in interest income.
The cost of securities sold is based on the specific identification method.
At September 26, 1997, available-for-sale securities consist of the
following:
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
U.S. Gov't notes and bonds $ 1,836,000 $ 14,000 $ - $ 1,850,000
Gov't agency notes and bonds 6,495,000 9,000 - 6,504,400
Corporate notes and bonds 51,692,000 33,000 (105,000) 51,620,000
----------- ---------- ---------- -----------
$60,023,000 $ 56,000 $(105,000) $59,974,000
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
At December 31, 1996, available-for-sale securities consist of the
following:
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
U.S. Gov't notes and bonds $15,710,000 $ 47,000 $ (3,000) $15,754,000
Gov't agency notes and bonds 12,032,000 1,000 (15,000) 12,018,000
Corporate notes and bonds 45,514,000 - (13,000) 45,501,000
----------- ---------- ---------- -----------
$73,256,000 $ 48,000 $ (31,000) $73,273,000
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Available-for-sale securities by contractual maturity at September 26, 1997
are shown below:
Amortized Estimated
Cost Fair Value
----------- -----------
Less than one year $32,228,000 $32,238,000
Due in one to two years 27,795,000 27,736,000
----------- -----------
$60,023,000 $59,974,000
----------- -----------
----------- -----------
7
CARDIOTHORACIC SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
September 26, 1997
(Unaudited)
Note 5. Inventories
Inventories, net consist of the following:
September 26, December 31,
1997 1996
------------- ------------
Raw materials $ 399,000 $ 87,000
Work-in-process 689,000 127,000
Finished goods 96,000 6,000
----------- ----------
$ 1,184,000 $ 220,000
----------- ----------
----------- ----------
Note 6. Net Loss Per Share
Except as noted below, net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares from
stock options and convertible preferred stock are excluded from the computation
as their effect is antidilutive except that, pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares issued during the period beginning twelve months prior to the Company's
April 1996 initial public offering at prices substantially below the initial
public offering price have been included in the calculation as if they were
outstanding for all periods presented prior to the effective date of the
Company's initial public offering (using the treasury stock method at the
initial offering price for stock options and the if-converted method for
convertible preferred stock).
8
CARDIOTHORACIC SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
September 26, 1997
(Unaudited)
Note 7. Recent Accounting Pronouncements
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS 128) "Earnings Per Share", and in March 1997 issued
Statement No. 129 (SFAS 129) "Disclosures of Information about Capital
Structure", both of which specify the computation, presentation and disclosure
requirements for Earnings per Share. SFAS 128 and SFAS 129 will become
effective for the Company's 1998 fiscal year. The Company is currently studying
the implications of these statements and has not yet determined the impact of
adopting such statements on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130 (SFAS 130) "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. The impact of adopting SFAS No. 130, which is effective for the
Company in 1998, has not been determined.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 (FASB 131) "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 131 requires publicly-held companies to report financial
and other information about key revenue-producing segments of the entity for
which such information is available and is utilized by the chief operating
decision maker. Specific information to be reported for individual segments
includes profit or loss, certain revenue and expense items and total assets. A
reconciliation of segment financial information to amounts reported in the
financial statements would be provided. SFAS No. 131 is effective for the
Company in 1998 and the impact of adoption has not been determined.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of the financial condition and results of
operations of CardioThoracic Systems, Inc. ("CTS" or the "Company") should be
read in conjunction with the Financial Statements and the related Notes
thereto included herein. The following Management's Discussion and Analysis
of Financial Condition and Results of Operations contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1993
and Section 21E of the Securities Exchange Act of 1934. The Company's actual
results of operations could differ materially from those anticipated by such
forward-looking statements as a result of certain factors, including those
set forth below and under "Factors Affecting Operating Results".
OVERVIEW
The business of the Company was commenced in November 1993 as a sole
proprietorship, Informed Creation, and the business was engaged primarily in
organizational, research and product development efforts. In June 1995, the
business was incorporated and as part of the Company's initial financing in
September 1995 the Company acquired all intellectual property assets of
Informed Creation, the sole proprietorship. In April 1996, the Company
raised approximately $84.2 million through the initial public offering of its
Common Stock.
Since inception, the Company has been engaged in the development of
instruments and systems designed to allow the majority of cardiothoracic
surgeons, using their existing skills coupled with Company-sponsored
training, to perform Minimally Invasive Direct Coronary Artery Bypass
("MIDCAB") surgery, a revascularization procedure performed on a beating
heart. In December 1996, the Company held its first Comprehensive Optimal
Revascularization (COR) training program and commenced shipments of the CTS
MIDCAB System.
RESULTS OF OPERATIONS
Three and nine months ended September 26, 1997 compared to the three and nine
months ended September 30, 1996.
Net sales of $1.6 million and $6.6 million in the three and nine months
ended September 26, 1997, respectively, were primarily the result of
shipments of the CTS MIDCAB System. There were no sales in the three and
nine months ended September 30, 1996.
Cost of sales increased to $1.1 million and $4.3 million in the three and
nine months ended September 26, 1997 compared to $213,000 in the same periods
last year. These increases are primarily the result of material costs
associated with products sold, a significant increase in personnel and other
costs associated with the commencement of manufacturing and assembly
operations, manufacturing engineering and support functions, and a materials
procurement and handling function.
Research and development expenses for the three and nine months ended
September 26, 1997 were $2.8 million and $7.3 million, respectively compared
to $3.1 million and $8.3 million for the three and nine months ended
September 30, 1996, respectively. These decreases were due to a reduction in
the charge for amortization of deferred compensation, offset somewhat by an
increase in research and development staff, patent legal costs, facility
costs and increased expenditures related to the continuing development of the
instruments associated with the ACCESS MV System, Saphenous
10
Vein Harvesting System and valve products. The Company expects that research
and development expenses will increase throughout 1997 as the Company expands
its research and development activities related to the Saphenous Vein
Harvesting System, valve repair and replacement and other research efforts.
The Company has entered into development and licensing agreements, and
expects to enter into additional agreements in the future, that require
milestone payments which are tied to certain events. The timing of these
milestone payments are uncertain and could have a material impact on the
operating results in the quarter in which they are expensed. During the third
quarter of 1997 the Company spent $250,000 for the right to acquire certain
intellectual property.
Marketing, general and administrative expenses increased to $4.5 million
and $13.3 million for the three and nine months ended September 26, 1997,
respectively compared to $2.1 million and $4.7 million for the three and nine
months ended September 30, 1996, respectively. These increases were due
primarily to the hiring of marketing and administrative personnel and
consultants, the Company's COR training programs, promotional efforts to
increase market awareness of the Company and the MIDCAB procedure, German
sales and marketing costs, higher facility costs and establishing the
Company's administrative infrastructure. The Company expects that sales and
marketing and administrative expenses will continue to increase throughout
1997 as the Company builds its sales and marketing and administrative
organizations, develops and sponsors surgeon training programs, establishes
financial and management information and control systems, and makes
expenditures to increase market awareness of the MIDCAB procedure and the
Company's products.
The Company has recorded deferred compensation of $14.0 million for the
difference between the option exercise price or restricted stock purchase
price and the deemed fair value of the Company's Common Stock for options
granted and restricted stock sold in 1995 and early 1996. The deferred
compensation is being amortized to operating expenses over the related
vesting period of the shares (one to four years) and will, therefore,
continue to have an adverse effect on the Company's results of operations.
Amortization of deferred compensation charged to operating expenses in the
three and nine months ended September 26, 1997 totaled $560,000 and $1.7
million, respectively compared to $1.7 million and $5.1 million for the same
periods last year, respectively.
Net interest income decreased to $920,000 for the three months ended
September 26, 1997 compared to $1.1 million in the same period last year.
The decrease is due to lower average cash and investment balances during the
period. Net interest income for the nine months ended September 26, 1997
increase to $2.9 million compared to $2.0 million for the nine months ended
September 30, 1996. The increase was primarily due to the interest received
on higher average cash and investment balances during this period resulting
from the completion of the Company's initial public offering in April 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed operations primarily from the
sale of equity securities. As of September 26, 1997, the Company had raised
approximately $89.9 million (net of stock issuance costs) from the sale of
equity securities. As of September 26, 1997, cash, cash equivalents and
available-for-sale securities totaled $64.8 million. The Company's cash used
in operations was $14.4 million for the nine months ended September 26, 1997,
reflecting expenditures made primarily to increase research and development,
to commence marketing and sales activities, and to support its administrative
infrastructure. The Company also spent $1.7 million for the purchases of
property and equipment in the nine months ended September 26, 1997.
11
The Company plans to finance its operations principally from existing
cash, cash equivalents and available-for-sale securities and interest
thereon, product revenues and, to the extent available, lines of credit. The
Company currently has no lines of credit. The Company believes that its
existing cash balances and available-for-sale securities and interest thereon
and product revenues will be sufficient to fund its operations through 1999.
The Company's capital requirements, and the availability of product revenues,
depend on numerous factors, including the progress of the Company's product
development programs, the receipt of and the time required to obtain
regulatory clearances or approvals, the resources the Company devotes to
developing, manufacturing and marketing its products, the extent to which the
Company's products receive market acceptance, and other factors. The Company
expects to devote substantial capital resources to research and development,
to hire and develop a direct sales force in the United States and Germany and
to expand manufacturing capacity and facilities. The timing and amount of
such capital requirements cannot be accurately predicted. Consequently, the
Company may be required to raise additional funds through public or private
financing, collaborative relationships or other arrangements. There can be
no assurance that the Company will not require additional funding or that
such additional funding, if needed, will be available on terms attractive to
the Company, or at all, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Any
additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive convenants.
At September 26, 1997, the Company had approximately $21.5 million in
federal and in state net operating loss carryforwards, which will expire
beginning in the years 2010 and 2003, respectively. Utilization of federal
income tax carryforwards is subject to certain limitations under Section 382
of the Internal Revenue Code of 1986. These annual limitations may result in
expiration of net operating losses and research and development credits
before they can be fully utilized.
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS 128) "Earnings Per Share", and in March 1997 issued
Statement No. 129 (SFAS 129) "Disclosures of Information about Capital
Structure", both of which specify the computation, presentation and
disclosure requirements for Earnings per Share. SFAS 128 and SFAS 129 will
become effective for the Company's 1998 fiscal year. The Company is
currently studying the implications of these statements and has not yet
determined the impact of adopting such statements on the Company's financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. The impact of adopting SFAS No. 130,
which is effective for the Company in 1998, has not been determined.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131 (FASB 131) "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 131 requires publicly-held companies to report
financial and other information about key revenue-producing segments of the
entity for which such information is available and is utilized by the chief
operating decision maker. Specific information to be reported for individual
segments includes profit or loss, certain revenue and expense items and total
assets. A reconciliation of segment financial information to amounts
reported in the financial statements would be provided. SFAS No. 131 is
effective for the Company in 1998 and the impact of adoption has not been
determined.
12
FACTORS AFFECTING OPERATING RESULTS
This quarterly report on Form 10-Q contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated by such forward-looking statements
as a result of certain factors including those set forth in the following
risk factors and elsewhere in this quarterly report on Form 10-Q.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE
LOSSES. The Company has a limited operating history upon which evaluation of
its prospects can be made. Such prospects must be considered in light of the
substantial risks, expenses and difficulties encountered by entrants into the
medical device industry, which is characterized by an increasing number of
participants, intense competition and a high failure rate. To date, the
Company has engaged primarily in organizational and research and product
development efforts, and a number of the Company's key management and
technical personnel have only recently joined the Company. The Company has
only recently generated revenues and has very limited experience in
manufacturing, marketing or selling the CTS MIDCAB System. The Company has
experienced operating losses since its inception, and, as of September 26,
1997, the Company had an accumulated deficit of approximately $32.5 million.
The development and commercialization of the Company's products will require
substantial development, regulatory, sales and marketing, manufacturing and
other expenditures. The Company expects its operating losses to continue at
least through 1998 as it continues to expend substantial resources to
continue development of the Company's products, obtain additional regulatory
clearances or approvals, build its marketing, sales, manufacturing and
finance organizations and conduct further research and development. There can
be no assurance that the Company's products will ever gain commercial
acceptance or that the Company will ever generate revenues or achieve
profitability.
HIGHLY COMPETITIVE MARKET; RISK OF ALTERNATIVE THERAPIES; RISK OF REUSE.
The medical device industry and the market for treatment of cardiovascular
disease, in particular, are characterized by rapidly evolving technology and
intense competition. A number of competitors, including Johnson & Johnson,
Boston Scientific Corporation, Cordis Corporation, Guidant Corporation and
Medtronic, Inc., are currently marketing stents, catheters, lasers, drugs and
other less invasive means of treating cardiovascular disease. Many of these
less invasive treatments, as well as coronary artery bypass graft ("CABG")
surgery, are widely accepted in the medical community and have a long history
of safe and effective use. Many of the Company's competitors have
substantially greater capital resources, name recognition and expertise in
and resources devoted to research and development, manufacturing and
marketing and obtaining regulatory clearances or approvals than does the
Company. Furthermore, competition in the emerging market for minimally
invasive cardiothoracic surgery is intense and is expected to increase.
Heartport, Inc., Medtronic, Inc., Baxter International, Guidant Corporation
Genzyme Corp, Johnson & Johnson and United States Surgical Corp. are
marketing or have announced that they are developing products to be used in
minimally invasive coronary bypass procedures. There can be no assurance that
the MIDCAB procedure will replace any current treatments. Additionally, even
if it is widely adopted, there can be no assurance that the Company's
competitors will not succeed in developing or marketing alternative
procedures and technologies or competing devices to perform the same
procedure or therapeutic drugs that are more effective than the Company's
products or that render the Company's products or technologies obsolete or
not competitive. In addition, there can be no assurance that existing
products for other surgical uses will not be used in MIDCAB procedures.
Furthermore, sales of the CTS MIDCAB System could be adversely affected by
reuse of the Company's products, notwithstanding the instructions in the
Company's clinical protocols and product labeling indicating that each of the
components of the CTS MIDCAB System is a single-use device. Such competition
or reuse could have a material adverse effect on the Company's business,
financial
13
condition and results of operations.
UNCERTAINTY OF CLINICAL ADOPTION OF MIDCAB PROCEDURE. The Company's CTS
MIDCAB System is designed to enable the majority of cardiothoracic surgeons,
using their existing skills coupled with Company sponsored training, to
perform the Minimally Invasive Direct Coronary Artery Bypass ("MIDCAB")
procedure. Accordingly, the Company's success is dependent upon acceptance of
the MIDCAB procedure by the medical community as a reliable, safe and cost
effective alternative to existing treatments for revascularizing blocked
coronary arteries. To date, the MIDCAB procedure has only been performed on a
limited basis by a small number of highly skilled cardiothoracic surgeons. Of
the procedures performed to date, the vast majority have been performed on a
single artery, typically the left anterior descending artery ("LAD") or, in
substantially fewer instances, the right coronary artery ("RCA"), and an
extremely limited number have been performed on the circumflex artery. A
significant percentage of CABG procedures are performed on multiple vessels.
To date, multiple vessel MIDCAB procedures have only been performed on an
extremely limited basis, and there can be no assurance that the MIDCAB
procedure will be effectively utilized for multiple bypasses on a more
frequent basis. The Company is unable to predict how quickly, if at all, the
MIDCAB procedure will be adopted by the medical community or, if it is
adopted, the number of MIDCAB procedures that will be performed. The medical
conditions that can be treated with the MIDCAB procedure can also be treated
by widely accepted surgical procedures such as CABG surgery and
catheter-based treatments, including balloon angioplasty, atherectomy and
coronary stenting. Broad-based clinical adoption of the MIDCAB procedure will
not occur until physicians determine that the procedure is an attractive
alternative to current treatments for coronary artery disease.
The Company believes that physician endorsements will be essential for
clinical adoption of this procedure, and there can be no assurance that any
such endorsements will be obtained in a timely manner, if at all. Clinical
adoption will also depend upon the Company's ability to facilitate training
of cardiothoracic surgeons to perform minimally invasive bypass surgery on a
beating heart, and the willingness of such surgeons to perform such a
procedure. Patient acceptance of the procedure will depend in part upon
physician recommendations as well as other factors, including the degree of
invasiveness, the effectiveness of the procedure and rate and severity of
complications associated with the procedure as compared to other treatments.
Even if the clinical efficacy of the MIDCAB procedure is established,
physicians may elect not to recommend the procedure unless acceptable
reimbursement from health care payors is available. Health care payor
acceptance may require evidence of the cost effectiveness of the MIDCAB
procedure as compared to other currently available treatments. There can be
no assurance that the MIDCAB procedure will gain clinical adoption. Failure
of the MIDCAB procedure to achieve significant clinical adoption would have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON THE CTS MIDCAB SYSTEM; UNCERTAINTY OF MARKET ACCEPTANCE OF
THE CTS MIDCAB SYSTEM. The CTS MIDCAB System is expected to account for the
great majority of the Company's revenues for the foreseeable future. The
Company has only recently commenced sales of the CTS MIDCAB System, and
there can be no assurance that market acceptance and demand for the CTS
MIDCAB System will be sufficient to allow profitable operations. Failure of
the CTS MIDCAB System to be successfully commercialized would have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON REGULATORY APPROVALS. The design, manufacturing, labeling,
distribution and marketing of the Company's products and products under
development will be subject to extensive and rigorous government regulation
in the United States and certain other countries where the process of
obtaining and maintaining required regulatory clearance or approvals is
lengthy, expensive and
14
uncertain. In order for the Company to market certain of its products under
development in the United States, the Company must obtain clearance or
approval from the United States Food and Drug Administration ("FDA"). There
can be no assurance that the FDA will act favorably or quickly on the
Company's pending or future 510(k) submissions, or that significant
difficulties and costs will not be encountered by the Company in its efforts
to obtain FDA clearance or approval. Any such difficulties could delay or
preclude obtaining regulatory clearance or approval. In addition, there can
be no assurance that the FDA will not impose strict labeling or other
requirements as a condition of its 510(k) clearance, any of which could limit
the Company's ability to market its products. Further, if the Company wishes
to modify a product after FDA clearance of a 510(k) premarket notification or
approval of a PMA, including changes in indications or other modifications
that could affect safety and efficacy, additional clearances or approvals
will be required from the FDA. Failure to receive, or delays in receipt of,
FDA clearances or approvals, including delays resulting from an FDA request
for clinical trials or additional data as a prerequisite to clearance or
approval, or any FDA conditions that limit the ability of the Company to
market its products, could have a material adverse effect on the Company's
business, financial condition and results of operations.
In order for the Company to market its products in Europe and certain
other international jurisdictions, the Company and its distributors and
agents must obtain required regulatory registrations or approvals and
otherwise comply with extensive regulations regarding safety, efficacy and
quality. These regulations, including the requirements for registrations or
approvals and the time required for regulatory review, vary from country to
country. There can be no assurance that the Company will obtain regulatory
registrations or approvals in such countries or that it will not be required
to incur significant costs in obtaining or maintaining its foreign regulatory
registrations or approvals. Delays in receipt of registrations or approvals
to market the Company's products, failure to receive these registrations or
approvals, or future loss of previously received registrations or approvals
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The European Union has promulgated rules that require that medical
products receive by mid-1998 the right to affix the CE mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. In order to obtain the right
to affix the CE mark to its future products, the Company must maintain its
quality assurance system (i.e. ISO 9000 series). Certification to ISO 9001
was granted by a Notified Body after an inspection and audit of the Company's
quality system. Additionally, the Company may need to submit design dossiers
or technical files to the Notified Body and receive approval from the
Notified Body before affixing the CE mark to new products. Delays in receipt
of the CE mark for the Company's products, failure to receive the CE mark, or
future loss of previously received CE marks or ISO 9001 certification could
have a material adverse effect on the Company's business, financial condition
and results of operations
CONTINUING GOVERNMENT REGULATION. Regulatory clearances or approvals, if
granted, may include significant limitations on the indicated uses for which
the products may be marketed. FDA enforcement policy strictly prohibits the
marketing of FDA cleared or approved medical devices for unapproved uses. In
addition, the Company's manufacturing processes will be required to comply
with the Good Manufacturing Practices ("GMP") regulations of the FDA. These
regulations include design, testing, production, control, documentation and
other requirements. Enforcement of GMP regulations has increased
significantly in the last several years, and the FDA has publicly stated that
compliance will be more strictly scrutinized. The Company's facilities and
manufacturing processes, as well as those of any future third-party
suppliers, are subject to periodic inspection by the FDA, the California
Department of Health Services and other agencies. To date, the Company has
only undergone
15
inspection for ISO 9001 certification. Failure to comply with these and other
applicable regulatory requirements could result in, among other things,
warning letters, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, refusal of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of clearances or approvals and criminal prosecution, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE ON LICENSES, PATENTS AND PROPRIETARY TECHNOLOGY. The
Company's ability to compete effectively will depend in part on its ability
to develop and maintain proprietary aspects of its technology. The Company
owns two issued United States patents. The issued patents do not contain any
claims that protect the Company's products. The Company is the licensee of a
United States patent application for bipolar electrosurgical scissors that
are used in the Saphenous Vein Harvesting System. The Company has filed
twenty-seven United States patent applications. There can be no assurance
that any issued patents or any patents which may be issued as a result of the
Company's licensed patent application or United States and international
patent applications will provide any competitive advantages for the Company's
products or that they will not be successfully challenged, invalidated or
circumvented in the future. 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, use and sell its products either in the United States or in
international markets.
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 or interference proceedings declared by the United States Patent
and Trademark Office ("USPTO") to determine the priority of inventions. The
defense and prosecution of intellectual property suits, USPTO interference
proceedings and related legal and administrative proceedings are both costly
and time-consuming. Litigation may be necessary to enforce patents issued to
the Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. Any litigation 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, including
any litigation that may arise against the Company as described in "Potential
Litigation" below, could subject the Company to significant liabilities to
third parties or require the Company to seek licenses from third parties or
prevent the Company from selling its products in certain markets, or at all.
Costs associated with settlements, licensing and similar arrangements, may be
substantial and could include ongoing royalties. Furthermore, there can be no
assurance that the necessary licenses 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.
Congress has enacted legislation, which became effective October 1, 1996,
that places certain restrictions on the ability of medical device
manufacturers to enforce certain patent claims, relating to surgical and
medical methods, against medical practitioners. Such limitation in the
enforceability of patent claims, relating to medical and surgical methods,
against medical practitioners could have a material adverse effect on the
Company's ability to protect its proprietary methods and procedures against
medical practitioners.
16
In addition to patents, the Company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through
confidentiality and proprietary information agreements. There can be no
assurance that such confidentiality or proprietary information agreements
will not be breached, that the Company would have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known
to or be independently developed by competitors.
POTENTIAL LITIGATION. Heartport, Inc. (formerly Stanford Surgical
Technologies, Inc.), the former employer of the Company's founder and Chief
Technical Officer, Charles S. Taylor, has alleged in certain correspondence
in late 1995 and again in September 1997 that Mr. Taylor and the Company may
have misappropriated trade secrets of the former employer and breached
confidentiality obligations to the former employer. The former employer also
claims an ownership interest in certain developments and products of the
Company. The Company has agreed to provide for the defense of Mr. Taylor in
the event that litigation is commenced. Litigation is subject to inherent
uncertainties, especially in cases where complex technical issues are decided
by a lay jury. Accordingly, no assurance can be given that if a lawsuit is
commenced it would not be decided against the Company. Such an adverse
determination could have a material adverse effect upon the Company's
business, financial condition and results of operations.
EARLY STAGE OF DEVELOPMENT AND COMMERCIALIZATION; NO ASSURANCE OF ABILITY
TO MANAGE GROWTH. The Company believes that the CTS MIDCAB System could
address a large potential market. There can be no assurance that the
Company's marketing efforts will result in significant demand for the CTS
MIDCAB System, or that the initial demand for the Company's products will
grow. Even if demand for the Company's products does increase, there can be
no assurance that the Company will be able to develop the necessary
manufacturing capability; build and train the necessary manufacturing, sales
and marketing teams; attract, retain and integrate the required key
personnel; or implement the financial and management systems to meet growing
demand for its products. Failure of the Company to successfully manage its
growth would have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL. The Company's ability to operate
successfully depends in significant part upon the continued service of
certain key scientific, technical, managerial and finance personnel, and its
continuing ability to attract and retain additional highly qualified
scientific, technical, managerial and finance 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, managerial and finance personnel in the future,
including key manufacturing, sales and marketing personnel. The loss of key
personnel or the inability to hire or retain qualified personnel could have a
material adverse effect upon the Company's business, financial condition and
results of operations. In addition, many employees of the Company, including
a number of its key scientific, technical and managerial personnel, are
subject to the terms of confidentiality agreements with respect to
proprietary information of their former employers. The failure of these
employees to comply with the terms of their agreements with, or other
obligations to, such former employers could result in assertion of claims
against the Company and such employees, which, if successful, could restrict
their role with the Company and have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON SCIENTIFIC ADVISORS. The Company has established a
Scientific Advisory Board including cardiothoracic surgery opinion leaders,
prominent surgeons and leading interventional cardiologists who the Company
believes have performed the vast majority of MIDCAB procedures.
17
Members of the Scientific Advisory Board consult with the Company regarding
research and development efforts at the Company, but are employed elsewhere
on a full-time basis. As a result, they can only spend a limited amount of
time on the Company's affairs. Although the Company has entered into
consulting agreements, with terms ranging from six months to four years, and
confidentiality agreements with each of the members of its Scientific
Advisory Board, there can be no assurance that the consulting and
confidentiality agreements between the Company and each of the members of the
Scientific Advisory Board will not be terminated or breached, and there can
be no assurance that any of such agreements will be renewed upon expiration.
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE. The Company
currently has a small sales and marketing organization. The Company intends
to sell the CTS MIDCAB System in the United States and certain European
countries through a direct sales force. In other markets, the Company intends
to sell its products primarily through distributors or by means of
collaborative arrangements. There can be no assurance that the Company will
be able to build a larger direct sales force or marketing organization, that
maintaining a direct sales force or marketing organization 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 agreements with distributors or collaborative arrangements, or that
such distributors or collaborators will devote adequate resources to selling
the Company's products. The Company has entered into distribution agreements
for the sale of its products in certain countries; therefore the Company will
be dependent upon the efforts of these third parties, and there can be no
assurance that such efforts will be successful. Failure to build an effective
sales and marketing organization or to establish effective distribution or
collaborative relationships could have a material adverse effect on the
Company's business, financial condition and results of operations.
NO MANUFACTURING EXPERIENCE; SCALE-UP RISK. The Company has no
experience manufacturing its products in the volumes that would be necessary
for the Company to achieve significant commercial sales. There can be no
assurance that reliable, high-volume manufacturing can be established or
maintained at commercially reasonable costs. Companies often encounter
difficulties in scaling up production, including problems involving
production yield, quality control and assurance, and shortages of qualified
personnel. In addition, the Company's manufacturing facilities will be
subject to GMP regulations, international quality standards and other
regulatory requirements. Difficulties encountered by the Company in
manufacturing scale-up or failure by the Company to implement and maintain
its facilities in accordance with GMP regulations, international quality
standards or other regulatory requirements could entail a delay or
termination of production, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON SOLE SOURCES OF SUPPLY. The
Company contracts with third parties for the manufacture of certain
components or the performance of certain processes involved in the
manufacturing cycle. Some of these components and processes are only
available from single-source vendors. Any prolonged supply interruption or
yield problems experienced by the Company due to a single-source vendor could
have a material adverse effect on the Company's ability to manufacture its
products under development until a new source of supply is qualified. As the
Company increases production, it may from time to time experience lower than
anticipated yields or production constraints, resulting in delayed product
shipments, which could have a material adverse effect on the Company's
business, financial condition and results of operation.
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT. In the United States,
health care providers, such as hospitals and physicians, that purchase
medical devices, such as the Company's products, generally rely on
third-party payors, principally Medicare, Medicaid and private health
18
insurance plans, to reimburse all or part of the cost of the procedure in
which the medical device is being used. Reimbursement for cardiovascular
surgery, including CABG surgery, using devices that have received FDA
approval has generally been available in the United States. In addition,
certain health care providers are moving toward a managed care system in
which such providers contract to provide comprehensive health care for a
fixed cost per person. The Company is unable to predict what changes will be
made in the reimbursement methods utilized by third-party health care payors.
The Company could be adversely affected by changes in reimbursement policies
of government or private health care payors, particularly to the extent any
such changes affect reimbursement for the procedures in which the Company's
products are intended to be used. Failure by physicians, hospitals and other
potential users of the Company's products under development to obtain
sufficient reimbursement from health care payors for the procedure in which
the Company's products are intended to be used or adverse changes in
government and private third-party payors' policies toward reimbursement for
such procedures could have a material adverse effect on the Company's
business, financial condition and results of operations.
Market acceptance of the Company's products in international markets will
be dependent, in part, upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country, and include
both government sponsored health care and private insurance. The Company
intends to seek international reimbursement approvals, although there can be
no assurance that any such approvals will be obtained in a timely manner, if
at all, and failure to receive international reimbursement approvals could
have a material adverse effect on market acceptance of the Company's products
in the international markets in which such approvals are sought.
RISKS RELATING TO INTERNATIONAL OPERATIONS. The Company plans to market
its products in international markets. 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
business, financial condition and results of operations. The anticipated
international nature of the Company's business is also expected to subject it
and its representatives, agents and distributors to laws and regulations of
the foreign jurisdictions in which they operate or the Company's products are
sold. The regulation of medical devices in a number of such jurisdictions,
particularly in the European Union, continues to develop and there can be no
assurance that new laws or regulations will not have an adverse effect on the
Company's business, financial condition and results of operations. In
addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States.
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE. The development,
manufacture and sale of medical products entail significant risk of product
liability claims and product recalls. The Company's current product
liability insurance coverage limits are $3,000,000 per occurrence and
$3,000,000 in the aggregate, and there can be no assurance that such coverage
limits are adequate to protect the Company from any liabilities it might
incur in connection with the development, manufacture and sale of its
products. In addition, the Company may require increased product liability
coverage as product sales increase. Product liability insurance is expensive
and in the future may not be available to the Company on acceptable terms, if
at all. A successful product liability claim or series of claims brought
against the Company in excess of its insurance coverage or a product recall
could have a material adverse effect on the Company's business, financial
condition and results of operations.
POSSIBLE FUTURE CAPITAL REQUIREMENTS. The Company's capital requirements
depend on numerous factors, including the progress of the Company's product
development programs, the receipt
19
of and the time required to obtain regulatory clearances or approvals, the
resources the Company devotes to developing, manufacturing and marketing its
products, the extent to which the Company's products generate market
acceptance and demand, and other factors. The Company expects to devote
substantial capital resources for research and development, to hire and
develop a larger direct sales force in the United States and to expand
manufacturing capacity and facilities. The timing and amount of such capital
requirements cannot be accurately predicted. Consequently, the Company may be
required to raise additional funds through public or private financing,
collaborative relationships or other arrangements. There can be no assurance
that the Company will not require additional funding or that such additional
funding, if needed, will be available on terms attractive to the Company, or
at all, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Any additional equity
financing may be dilutive to stockholders, and debt financing, if available,
may involve restrictive covenants.
POTENTIAL VOLATILITY OF STOCK PRICE. The stock markets have experienced
price and volume fluctuations that have particularly affected medical
technology companies, resulting in changes in the market prices of the stocks
of many companies that may not have been directly related to the operating
performance of those companies. Such broad market fluctuations may adversely
affect the market price of the Company's Common Stock. In addition, the
market price of the Common Stock may be highly volatile. Factors such as
variations in the Company's financial results, comments by securities
analysts, announcements of technological innovations or new products by the
Company or its competitors, changing government regulations and developments
with respect to FDA submissions, patents, proprietary rights or litigation
may have a significant adverse effect on the market price of the Common Stock.
SIGNIFICANT RESTRICTIONS ON CHANGE OF CONTROL. The Company has adopted a
number of anti-takeover measures. The Company has adopted a Preferred Shares
Rights Agreement, sometimes referred to as a poison pill, designed to prevent
hostile takeovers not approved by the Board of Directors. In addition, the
company is authorized to issue 5,100,000 shares of undesignated Preferred
Stock. Such shares of Preferred Stock may be issued by the Company without
stockholder approval upon such terms as the Company's Board of Directors may
determine. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage
bids for the Company's Common Stock at a premium over the market price of the
Common Stock and may adversely affect the market price of and the voting and
other rights of, the holders of Common Stock. At present, the Company has no
plans to issue any of the Preferred Stock.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
The following information is provided as an amendment to the initial report
on Form SR, "Report of Sales and Securities and Use of Proceeds Therefrom",
regarding the use of proceeds from the sale of securities under the
Company's Registration Statement Form S-1 (333-1840), which was declared
effective on April 18, 1996 (CUSIP number 141907). The information
provided is for the period from April 18, 1996 through September 26, 1997.
Use of Proceeds Amount
--------------- ------
Construction of plant, building and facilities $ 0
Purchase and installation of machinery and equipment 4,223,000
Purchase of real estate 0
Acquisition of other businesses 0
Repayment of indebtedness 0
Working capital 2,773,000
Cost of operations 14,490,000
Temporary Investment
--------------------
Cash 2,673,000
Commercial paper, notes and bonds $59,974,000
All amounts above represent estimates of direct or indirect payments to
third parties.
The amounts below were paid directly to officers of the Company.
Use of Proceeds Amount
--------------- ------
Loans to officers $ 798,000
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
21
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
3.2(1) Restated Certificate of Incorporation.
3.3(6) Bylaws of Registrant (as amended)
3.4(5) Certificate of Designations of Rights, Preferences and
Privileges of Series A Participating Preferred Stock
3.5(5) Preferred Shares Rights Agreement, dated as of February
14, 1997
4.1(1) Specimen Common Stock Certificate.
10.1(1) Form of Indemnification Agreement between the Company and
each of its directors and officers.
10.2(6) Incentive Stock Plan and form of Agreements thereunder (as
amended).
10.3(1) Director Option Plan and form of Director Stock Option
Agreement thereunder.
10.4(1) Employee Stock Purchase Plan and forms of agreements
thereunder.
10.5(6) Nonstatutory Stock Option Plan and form of Nonstatutory
Stock Option Agreement thereunder (as amended).
10.6(1) Form of Employment, Confidential Information and Invention
Assignment Agreement.
10.8(1) Consulting Agreement, dated June 30, 1995, between the
Company and Federico Benetti, M.D.
10.9(1) Assignment Agreement, dated June 30, 1995 (as
amended by Amendment Agreement dated August 31,
1995), between the Company and Federico Benetti, M.D.
10.10(1) Employment Letter Agreement, dated September 5, 1995,
between the Company and Charles S. Taylor.
10.11(1) Assignment Agreement, dated September 7, 1995, between the
Company and Charles S. Taylor.
10.12(1) Shareholder Rights Agreement dated September 8, 1995 (as
amended January 3, 1996) between the Company and certain
holders of the Registrant's securities.
10.13(1) Letter Agreement regarding Heartport trade secret
allegations, dated October 11, 1995, between the Company
and Charles S. Taylor.
10.14(1) Assignment, Assumption of Lease and Consent, dated
November 9, 1995, between the Company and Cardiovascular
Concepts, Inc. ("CVC") for the premises located at 3260
Alpine Road, Portola Valley, California 94028.
10.16(1) Promissory Note, dated December 4, 1995, between the
Company and Ivan Sepetka.
10.17(1) Consent to Assignment, dated December 22, 1995, among the
Company, Viking Partners, Inc. ("Viking"), CVC and Fogarty
Engineering, Inc. for the premises located at 3260 Alpine
Road, Portola
22
Valley, California 94028.
10.19(1) First Amendment to Assignment, Assumption of Lease and
Consent, dated December 22, 1995, between the Company and
CVC for the premises located at 3260 Alpine Road, Portola
Valley, California 94028.
10.21(1) Consulting Agreement, dated February 21, 1996, between the
Company and Thomas J. Fogarty, M.D.
10.22(1) Development and License Agreement, dated February 19,
1996, between the Company and Enable Medical Corp.
10.23(1) Employment Letter Agreement, dated March 15, 1996, between
the Company and Steve M. Van Dick.
10.24(1) Lease dated March 29, 1996 for space located at 10600
North Tantau Avenue, Cupertino, California between the
Company and Spieker Properties, L.P.
10.25(2) Employment Letter Agreement, dated February 22, 1996,
between the Company and Thomas Afzal.
10.26(2) Employment Letter Agreement, dated March 13, 1996, between
the Company and Robert Rosenbluth.
10.27(3) Employment Agreement, dated April 19, 1996, between the
Company and Steve Van Dick.
10.28(3) Promissory Note for $300,000 dated April 29, 1996, between
the Company and Thomas Afzal.
10.29(3) Promissory Note for $35,000 dated May 20, 1996, between
the Company and Michael J. Billig.
10.30(3) Promissory Note for $55,000 dated June 5, 1996, between
the Company and Thomas Afzal.
10.31(4) Promissory Note for $750,000 and Security Agreement dated
August 16, 1996, between the Company and Richard Ferrari.
10.32(6) Promissory Note for $200,000 dated December 3, 1996,
between the Company and Steve Van Dick.
10.33(7) Employment Letter Agreement, dated February 25, 1997,
between the Company and Jeffrey Gold.
11.1 Calculation of net loss per share.
27.1 Financial Data Schedule
---------------------
(1) Incorporated herein by reference to the same-
numbered exhibit previously filed with the
Company's Registration Statement on Form S-1
(Registration No. 333-1840).
(2) Incorporated herein by reference to the same-
numbered exhibit previously filed with the Company's
Form 10-Q for the period ended March 31, 1996.
(3) Incorporated herein by reference to the same-
numbered exhibit
23
previously filed with the Company's Form 10-Q
for the period ended June 30, 1996.
(4) Incorporated herein by reference to the same-
numbered exhibit previously filed with the Company's
Form 10-Q for the period ended September 30, 1996.
(5) Incorporated herein by reference to the Company's
Registration Statement on Form 8-A, filed with the
Securities and Exchange Commission on February 28, 1997.
(6) Incorporated herein by reference to the same-
numbered exhibit previously filed with the Company's
Form 10-K for the period ended December 31, 1996.
(7) Incorporated herein by reference to the same-
numbered exhibit previously filed with the Company's
Form 10-Q for the period ended June 27, 1997.
b) Reports on Form 8-K
None
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 7, 1997 CARDIOTHORACIC SYSTEMS, INC.
/S/ Richard M. Ferrari
-------------------------------------
Richard M. Ferrari
President and Chief Executive Officer
/S/ Steve Van Dick
-------------------------------------
Steve Van Dick
Vice President, Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer)
25
EXHIBIT INDEX
Exhibit Page
Number Exhibit Description Number
- ------ ------------------------------ ------
11.1 Calculation of net loss per share. 27
27.1 Financial Data Schedule 28
26