UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934.
For the fiscal year ended January 2, 1998 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
----------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone, including area code: (408) 342-1700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
Preferred Share Purchase Rights
-------------------------------
(Title of class)
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
----- -----
Indicate by check mark if disclosures of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate value of voting stock held by nonaffiliates of the Registrant was
approximately $66,241,000 as of March 17, 1998 based upon the closing price of
the Registrant's common stock reported for such date on the Nasdaq National
Market. Shares of common stock held by each executive officer and director and
by each person who owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed affiliates. The determination of
affiliate status is not necessarily a conclusive determination for other
purposes. As of March 17, 1998, the Registrant had outstanding 13,783,686
shares of the Common Stock.
1
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Annual Report to stockholders for Registrant's 1997 fiscal year,
filed as an exhibit hereto, are incorporated by reference into Parts II and
IV hereof; and parts of the Proxy Statement for Registrant's 1998 Annual
Meeting of Stockholders, to be filed with the Commission on or before 120
days after the end of the 1997 fiscal year, are incorporated by reference
into Part III hereof.
2
PART I
ITEM 1. BUSINESS
OVERVIEW
This annual report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities and Exchange Act of 1934. The Company's future results
could differ materially from those anticipated by such forward-looking
statements as a result of certain factors including those set forth in this
section and in the section "Other Risk Factors".
CardioThoracic Systems Inc. ("CTS" or the "Company") develops,
manufactures, and markets proprietary, disposable instruments and systems
for performing minimally invasive cardiac surgery ("MICS"). The Company's
current products are designed to enable the majority of cardiothoracic
surgeons, using their existing skills coupled with Company sponsored
training, to perform MICS on a beating heart. The MIDCAB-TM- (Minimally
Invasive Direct Coronary Artery Bypass) and OPCAB-TM- (Off Pump Coronary
Artery Bypass) procedures eliminate the need for a heart-lung machine and
recent studies indicate that the MICS procedures reduce the trauma,
procedural costs and post-surgical complications associated with coronary
artery bypass graft ("CABG") surgery while providing long-term procedural
success rates comparable to CABG surgery.
The main components of the CTS ACCESS MV-TM- System include the ACCESS
PLATFORM, which is designed to maximize access to the chest cavity through a
mid-line or mini-thoracotomy incision and the STABILIZER, which is designed
to isolate and minimize the motion of the diseased artery. The main
components of the CTS ACCESS MP-TM- System includes the LIMA LIFT-TM-, which
is designed to offset the ribs to provide a window into the chest cavity so
the surgeon can harvest the internal mammary artery (IMA) through a
mini-thoracotomy and the LIMA-LOOP-TM-, which is designed to enable the
surgeon to reach into the chest cavity through the mini-thoracotomy and help
isolate the IMA for harvest.
BACKGROUND
Heart disease is the leading cause of death in America, with the
American Heart Association reporting in the 1998 Heart and Stroke Statistical
Update that an estimated 13.9 million Americans have a history of coronary
artery or other heart disease. The report went on to project that in 1998 an
estimated 1.1 million Americans will have a new or recurrent coronary attack,
of whom about one third will die. Each year, approximately 1.4 million
patients undergo a revascularization procedure to treat coronary artery
disease. Coronary artery disease (atherosclerosis) is caused by cholesterol
and other fatty materials becoming deposited on the walls of blood vessels,
which form a build-up known as plaque. The heart needs a constant supply of
oxygen and nutrients, which are carried by the blood in the coronary
arteries. The accumulation of plaque narrows the interior of the blood
vessels, thereby reducing blood flow to the heart muscle (the myocardium).
When blood flow to the heart muscle becomes insufficient, an injury occurs,
which may result in a heart attack (myocardial infarction) and often death.
The heart has three main branches of coronary arteries: the left anterior
descending artery ("LAD"), which descends from the left across the heart; the
right coronary artery ("RCA"), which extends from the right of the heart around
to the back of the heart; and the left circumflex artery, which
3
extends from the left of the heart around to the back of the heart. The LAD
is the primary blood supply to the heart and supplies blood to a large amount
of the myocardium. Studies indicate that restoring blood flow to the LAD is
the single most important determinant of long-term, event-free survival.
Traditional treatments for coronary artery disease include drug therapy,
coronary artery bypass graft ("CABG") surgery and catheter-based treatments,
including balloon angioplasty, atherectomy and coronary stenting. CABG bypass
surgery is highly invasive and traumatic to the patient, but is considered
the most effective and long-lasting treatment for severe coronary artery
disease. While catheter-based treatments are less invasive, the procedures
are limited by high rates of restenosis, a renarrowing of the treated
coronary artery, which generally requires reintervention. Catheter-based
treatments have been increasingly adopted because they are a less invasive
treatment alternative. There are approximately 800,000 catheter-based
procedures performed annually worldwide. Notwithstanding the introduction of
less invasive catheter-based treatments, the Company believes that the number
of patients treated by CABG surgery has continued to grow each year and that
more than 600,000 CABG procedures are performed annually worldwide. The
Company believes that many of the patients currently undergoing CABG surgery
or catheter-based treatments are candidates for the MIDCAB or OPCAB procedure.
DRUG THERAPY
Drug therapy is a non-invasive treatment to improve blood flow and
alleviate some of the symptoms associated with angina (chest pain). However,
while some drug therapies may inhibit continued plaque build-up in the
arteries, drug therapy is not a cure for heart disease. The various drugs
utilized include nitroglycerin, beta blockers, calcium channel blockers and
cholesterol lowering drugs. Although drug therapy is the least invasive
treatment currently available, it is typically expensive because it must be
chronically administered. Some patients suffer from side effects as well as
require future interventional procedures.
CORONARY ARTERY BYPASS GRAFT SURGERY
CABG surgery is a treatment for severe cases of coronary artery disease
in which blood vessel grafts are used to bypass the site of the blocked
artery. This procedure restores blood flow by routing around a blockage using
a healthy blood vessel from another part of the body. Although CABG surgery
is highly effective in treating coronary artery disease, it is a highly
invasive, traumatic and expensive procedure. In the United States the cost of
undergoing CABG is approximately $36,000. The average post-operative hospital
stay for a person undergoing a CABG procedure in the United States in 1994
was five to seven days, and the average recuperation period following
discharge from the hospital was approximately eight to ten weeks.
The CABG procedure involves sawing the patient's sternum or breast bone
in half, creating a twelve inch incision (sternotomy) for the purpose of
exposing the patient's heart. The two halves are spread approximately six
inches apart with a steel sternal retractor, and the heart is exposed. With a
sternotomy, the heart is not directly under the incision and must be stopped
(going "on pump") prior to being moved into position for the procedure.
Cannulae (plastic tubes) are inserted into the aorta and right atrium of the
heart, a clamp is placed on the aorta to stop blood flow, and the heart is
connected to a heart-lung machine to be slowly cooled and eventually stopped
before the grafting can occur. The heart-lung machine is a series of
interconnected specialty medical devices that together function as the
patient's heart and lungs by temporarily circulating and oxygenating blood
while the patient's own heart and lungs are rendered inactive. The patient's
blood is circulated through plastic tubes to
4
reservoirs in the heart-lung machine where carbon dioxide is removed, oxygen
is replaced, and temperature is controlled. The patient's circulation is
maintained on the external equipment throughout much of the CABG procedure,
which averages three to six hours, depending on the patient's condition and
number of grafts that must be created. Often patients undergo multiple vessel
procedures, which may involve harvesting a saphenous vein from the leg and
bypassing several blockages to achieve revascularization. When a saphenous
vein is used as a graft, a continuous incision is often made from the ankle
to the thigh of a patient's leg, the saphenous vein is dissected and removed,
and the wound is sutured closed. A study involving over 1,000 patients
indicates that the open harvesting of the saphenous vein (saphenectomy)
results in wound healing impairment in approximately 24% of patients. As an
alternative to bypassing the blockage with a saphenous vein graft, an
internal mammary artery ("IMA"), can be grafted directly on the coronary
artery, bypassing the blocked section. At the conclusion of the CABG
procedure, cannulae and the heart-lung machine are removed, the sternal
halves are tied together with steel wire, and the skin is closed with suture
material.
Despite the invasiveness and trauma of the procedure, CABG is considered
the most effective and long lasting treatment for severe coronary artery
disease. Over 85% of bypass grafts formed from saphenous veins are patent
(open) one year after surgery and over 60% are patent ten years after
surgery. Grafts using the internal mammary arteries have patency rates of
over 85% ten years after surgery and are well documented as being highly
resistant to atherosclerosis.
While every effort is made to minimize potential adverse effects from a
procedure as traumatic as CABG surgery, published studies have shown that
approximately 68% of all CABG surgeries have some complications. Some of the
most severe complications can be attributed to the heart-lung machine
including strokes, multiple organ dysfunction, inflammatory complications,
respiratory failure and post-operative internal bleeding complications. It is
estimated that stroke, which can have devastating functional consequences,
occurs in approximately 5% of all CABG procedures. Another common
complication of the use of the heart-lung machine is cognitive dysfunction,
with patients experiencing significant loss of memory, attention span, verbal
fluency, and psychomotor speed, even as long as six months after CABG
surgery, regardless of attempts to mitigate or decrease the heart-lung
machine time and trauma.
Severe complications related to CABG procedures can also result from the
sternotomy. Significant post-operative sternal infection usually requires
reoperation and excision of the sternum and muscle flap. The rate of wound
complications after sternotomy in a major study was 1.1% overall (72 patients
out of 6,504), with 10 of those 72 dying before being discharged from the
hospital. The patients with wound complications had a median length of
hospital stay of 43 days, and triple the hospital costs of patients without
such complications.
CATHETER-BASED THERAPIES
Catheter-based therapies, such as balloon angioplasty, atherectomy and
coronary stenting, have become increasingly popular and effective over the last
ten years. Balloon angioplasty is a procedure in which a balloon-tipped
intravascular catheter is inserted into the femoral artery through a small
incision in the upper thigh, is guided to the lesion (site of plaque) and then
inflated and deflated several times to reshape the plaque and increase blood
flow. Additional interventional devices for coronary artery disease include
atherectomy devices (devices that cut or ablate and remove plaque from the
arterial wall), laser catheter devices (devices that use laser energy to reduce
plaque in arteries) and coronary stents (expandable metal frames that are
positioned within the diseased area in the coronary
5
artery to maintain the vessel opening). These treatments occur in a
catheterization laboratory and are performed on a beating heart so they do
not require a heart-lung machine. As a result, the length of stay and
recuperation period are substantially less than those required with CABG.
Currently, a common form of catheter-based treatment involves the use of
balloon angioplasty followed by the placement of a coronary stent in the
diseased artery. As a result of these minimally invasive approaches, patients
are typically discharged within 24 to 48 hours and can return to a normal
lifestyle within several days.
While less invasive and traumatic than CABG, catheter-based therapies
may not offer prolonged efficacy. Studies have indicated that within three to
six months after a balloon angioplasty, between 25% and 45% of patients
experience restenosis (a renarrowing of the treated coronary artery). In
addition, 5% to 7% of coronary balloon angioplasty patients experience abrupt
reclosure of the treated vessel, which may be caused in part by flaps or
tears of plaque that occur in the course of such treatment. In patients with
multi-vessel coronary artery disease, a randomized study has shown that
within three years of receiving treatment, only 7% of patients receiving CABG
surgery required reintervention while 40% of patients receiving balloon
angioplasty required reintervention. Additional studies have confirmed that
approximately 20% of balloon angioplasty patients with multi-vessel disease
will undergo CABG surgery within one year of receiving balloon angioplasty.
However, the efficacy of catheter-based treatments may be improving. Recent
multi-center studies indicated that restenosis rates after treatment with
stents can be reduced by approximately 30% as compared to balloon angioplasty
alone. Future advancements in stents or other catheter-based treatments may
further reduce restenosis rates.
The average cost of a balloon angioplasty procedure in the United States
is approximately $15,000 or less than one-half of the average cost of CABG
surgery. In a recent study, the cost of balloon angioplasty was equivalent to
that of CABG three years after the procedure, primarily due to the expense of
reintervention for the balloon angioplasty patient. In addition, the use of
stenting greatly increases the cost of a catheter-based procedure. One study
indicated that the average cost per procedure for elective stenting was
approximately twice the cost of balloon angioplasty treatment without
stenting (or nearly equal to the cost of CABG surgery).
THE MIDCAB PROCEDURE
A procedure known as Minimally Invasive Direct Coronary Artery Bypass
("MIDCAB") applies the techniques of minimally invasive intervention to CABG
surgery. The Company believes that this procedure will provide patients with
minimally invasive advantages similar to those of catheter-based procedures
and clinical benefits comparable to those of CABG procedures. The Company
believes the MIDCAB procedure offers the following benefits:
ELIMINATES HEART-LUNG MACHINE (OFF PUMP). Surgery is performed upon the
beating heart, eliminating the need for a heart-lung machine. The heart-lung
machine is a major contributing factor to the post-operative complications of
CABG, which include stroke, bleeding and respiratory complications.
MINIMALLY INVASIVE. Access to the heart is provided through a small
incision called a mini-thoracotomy, eliminating the need for a sternotomy, in
which a twelve inch incision is made by sawing through the sternum or
breastbone and spreading the ribcage apart to expose the heart. The healing
of the sternum adds significantly to the recovery time for a CABG procedure,
even in procedures without complications.
6
PROVIDES DIRECT ACCESS. Placement of the mini-thoracotomy provides
access to the heart and the internal mammary arteries, permitting grafts to
be performed under the surgeon's direct vision without the need for
endoscopic equipment.
REDUCES COSTS. Studies indicate that fewer complications result in
shorter hospital stays (approximately two days), less recuperation time
(approximately two weeks) and reduced patient trauma relative to CABG
surgery. The Company believes that the MIDCAB procedure represents a
significant advancement in the delivery of coronary revascularization and
will provide patients, payors and providers with a cost-effective alternative
to existing interventional procedures.
In the CTS MIDCAB procedure, the patient is placed under general
anesthesia and a mini-thoracotomy is made just below the patient's breast,
between the ribs. The procedure takes advantage of the fact that the heart
and the arteries are located directly under the incision, unlike a
conventional CABG procedure where the heart must be moved into position
during the procedure. The LIMA Lift is inserted into the mini-thoracotomy and
expanded to create an opening and offset the ribs. Under direct vision,
without the need for endoscopic equipment, the surgeon then dissects the IMA
from the chest wall. The IMA branches are gently exposed and are then clipped
and cauterized. After the IMA is harvested to a satisfactory length the LIMA
Lift is removed and the Access Platform is inserted into the chest opening. A
small incision is then made in the pericardium (a fibrous, fluid filled sac
that holds the heart in place in the chest cavity) and the coronary artery is
exposed. The CTS MIDCAB procedure requires only a small pericardial incision,
which allows the pericardium to continue to provide some support to the
heart. The surgeon positions the Stabilizer at the grafting site isolating it
and rendering it motionless. A small incision is made in coronary artery at
the site of the grafting, and the IMA artery is grafted, under the surgeon's
direct vision, onto the beating heart. After the grafting is complete, the
pericardium and the chest are sewn shut and the procedure is complete.
Despite the potential benefits of the MIDCAB procedure for the treatment
of coronary heart disease, it is regularly performed by only a limited number
of cardiothoracic surgeons. The Company believes that many cardiothoracic
surgeons have been reluctant to attempt or have stopped performing the MIDCAB
procedure because of, among other things, the difficulties of performing
surgery on the beating heart including harvesting the IMA and its perceived
limitation to single artery CABG surgery. Of the procedures performed to
date, the vast majority have been performed on a single artery, typically the
LAD or, in substantially fewer instances, the RCA, and an extremely limited
number have been performed on the circumflex artery. The LAD is the primary
blood supply to the heart and supplies a large amount of the myocardium.
Studies indicate that restoring blood flow to the LAD is the single most
important factor in predicting long-term, event-free survival. As a result,
the Company believes that many of the patients currently undergoing CABG
surgery or catheter-based treatments are candidates for the MIDCAB procedure.
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 OPCAB PROCEDURE
7
A new procedure known as Off Pump Coronary Artery Bypass ("OPCAB") has
been developed that offers the same benefits of MIDCAB except that it is done
through a mid-line incision (mini-sternotomy or sternotomy). The Company
believes that this procedure will provide surgeons the ability to do more
multi-vessel bypass procedures on a beating heart since it allows greater
visualization of the heart and more freedom in lifting and rotating the
heart. In the fourth quarter of 1997 the Company believes that approximately
1,400 OPCAB multi-vessel procedures were performed using the Access MV System.
Despite the potential benefits of the OPCAB procedure for the treatment
of coronary heart disease, it is currently performed by only a limited number
of cardiothoracic surgeons. The Company believes that some cardiothoracic
surgeons maybe reluctant to attempt the OPCAB procedure because of, among
other things, the difficulties of performing surgery on the beating heart and
the difficulties of positioning the heart to bypass certain arteries. The
Company is unable to predict how quickly, if at all, the OPCAB procedure will
be adopted by the medical community or, if it is adopted, the number of OPCAB
procedures that will be performed.
Although the Company believes that the CTS OPCAB and MIDCAB procedures
have significant advantages over competing procedures, broad-based clinical
adoption of the procedures will not occur until physicians determine that the
procedures are an attractive alternative to current treatments for coronary
artery disease. The Company believes that physician endorsements will be
essential for clinical adoption of these procedures, 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 CABG on a beating
heart, and the willingness of such surgeons to perform such a procedure.
Patient acceptance of the procedures will depend in part upon physician
recommendations as well as other factors, including the degree of
invasiveness, the effectiveness of the procedures and rate and severity of
complications associated with the procedures as compared to other treatments.
Even if the clinical efficacy of the OPCAB and MIDCAB procedures are
established, physicians may elect not to recommend the procedures unless
acceptable reimbursement from health care payors is available. Health care
payor acceptance may require evidence of the cost effectiveness of the OPCAB
and MIDCAB procedures as compared to other currently available treatments.
There can be no assurance that the OPCAB or MIDCAB procedures will gain
clinical adoption. Failure of the OPCAB and MIDCAB procedures to achieve
significant clinical adoption would have a material adverse effect on the
Company's business, financial condition and results of operations.
THE CTS ACCESS MV AND MP SYSTEMS
The Company's ACCESS MV and MP Systems are comprised of proprietary
disposable surgical instruments designed to facilitate the MIDCAB and OPCAB
procedures. The Company expects to accelerate the adoption of the beating
heart CABG by marketing the CTS ACCESS MV and MP Systems that enables the
majority of cardiothoracic surgeons, using their existing skills coupled with
Company sponsored training, to perform the MIDCAB and OPCAB procedures. The
CTS ACCESS MV and MP Systems is designed to provide the necessary accesses
to the chest cavity, simplify the harvesting of the internal mammary artery,
and optimize the conditions necessary for a quality graft to be performed on
a beating heart. Key components of the CTS ACCESS MV and MP Systems include:
8
THE ACCESS PLATFORM is designed to maximize access to the chest cavity
through a mini-thoracotomy or mid-line incision. The Access Platform creates
an operating window into the chest cavity by smoothly retracting tissue and
spreading the ribs or sternum for optimal exposure of the heart and arteries.
THE STABILIZER incorporates feet that are attached by a mounting system
to the Access Platform. The Stabilizer is designed to apply slight pressure
to the myocardium and thereby isolate the diseased artery, minimize the
motion of the beating heart and permit the surgeon to complete the graft.
THE LIMA-LIFT is a unique spreading system that offsets the ribs to
provide a window into the chest cavity so the surgeon can harvest the IMA
without using an endoscope.
THE LIMA-LOOP enables a surgeon to reach into the chest to help isolate
the IMA for harvest.
SALES, MARKETING AND DISTRIBUTION
The Company markets its products principally to cardiac surgeons. The
Company's initial marketing strategy is to generate broad based market
acceptance of the MIDCAB and OPCAB procedures and the CTS ACCESS MV and MP
Systems by sponsoring educational programs, surgeon training programs and
cultivating relationships with opinion leaders in cardiac surgery. The
Company has established a Scientific Advisory Board comprised of
cardiothoracic surgery opinion leaders, prominent surgeons and leading
interventional cardiologists. The members of the Scientific Advisory Board
participates in Company-sponsored educational and training sessions, thereby
encouraging acceptance of the MIDCAB and OPCAB procedures among
cardiothoracic surgeons and the integration of the beating heart CABG into
their hospital and surgical practices.
The Company currently has a direct sales force of sixteen people in the
United States which are supported by nine clinical specialists. The Company
has CardioThoracic Systems, GmBH, a wholly owned subsidiary, in Dusseldorf
Germany which supports a direct sales and marketing organization for Germany.
In other markets, the Company sells its products through distributors.
CUSTOMER TRAINING
The Company believes that its CORriculum training and education program
plays a important role in the adoption of the MIDCAB and OPCAB procedures.
The CORriculum is a one-day, hands-on training workshop presented by
recognized authorities in minimally invasive cardiac surgery. The CORriculum
workshop teaches surgical teams key aspects of how to perform a MIDCAB or
OPCAB procedure using the Company's products. When the surgical team returns
to their own hospital the Company's clinical specialist provides additional
training as required.
RESEARCH AND DEVELOPMENT
The Company is directing its research efforts toward development of
proprietary surgical instruments and systems for cardiothoracic minimally
invasive procedures, including coronary bypass, saphenous vein harvesting and
valve repair and reconstruction. In addition, the Company is researching
other methods of vessel attachment and stabilization of the beating heart.
Most of the products under development will require regulatory clearance or
approval prior to commercialization. As of January 2, 1998, the Company's
research and development staff consisted of 30 full-time engineers and
9
technicians who have substantial experience in the development of medical
devices, including expertise in the application of mechanical and electrical
design principles to devices for cardiovascular applications. In addition,
several of the Company's scientific advisors have roles in directing the
technical and medical research and development efforts at the Company.
Research and development expenses for the years ended January 2, 1998 and
December 31, 1996 were $10.8 million and $11.5 million, respectively.
Research and development expenses for the period June 15, 1995 (date of
inception) to December 31, 1995 was $488,000.
MANUFACTURING
To date, the Company's manufacturing activities have consisted of
assembling the CTS MIDCAB System and ACCESS MV and MP Systems and the Company
has no experience manufacturing its products in the volumes that would be
necessary for the Company to achieve profitable operations. There can be no
assurance that reliable, high-volume manufacturing can be established or
maintained at commercially reasonable costs.
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.
The Company purchases most of the components for its products from
various independent suppliers that are either standard components or are
built or molded to the Company's proprietary specifications. In addition,
the Company contracts with third parties for the performance of certain
processes involved in the manufacturing cycle such as finished product
sterilization. Some of these components and processes may only be 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 adversely affect the Company's business, financial
condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS
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 four issued United States patents. None of the issued patents
contain claims that protect the Company's current products. The Company has
received a formal notice from the United States Patent and Trademark Office
("USPTO") indicating that all claims are allowable in its patent application
covering the mechanical stabilization aspects of the Company's products.
However, the USPTO also notified the Company that the prosecution of this
application is suspended for up to six months due to a potential interference
proceeding. The Company is the licensee of a United States patent for a
heart valve insertion and stapling device and a United States patent
application for bipolar electrosurgical scissors that are used in the CTS
Saphenous Vein Harvesting System. The Company also has options for two
patent applications covering methods and devices for vessel harvesting. The
Company has filed thirty-eight
10
U.S. patent applications and various foreign 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 applications or United States and
foreign 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 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 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 limitations on 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.
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.
COMPETITION
The Company believes that the principal competitive factors in the
market for treatment of cardiovascular disease are safety, efficacy, ease of
use, reliability and cost effectiveness. The Company
11
believes that the MIDCAB and OPCAB procedures performed with the Company's
products will be substantially less costly than highly-invasive, traditional
surgical procedures and may ultimately replace these procedures in some
applications. The Company believes that the CTS ACCESS MV and MP Systems will
enable surgeons to perform coronary bypass surgery less invasively, in a
shorter period of time and with reduced patient trauma, resulting in reduced
recuperation time in the ICU, shorter hospital stays and faster recovery, as
well as lower complication rates. As a result, the Company believes that its
products will compete favorably with respect to each of these factors,
although no assurance can be given that it will compete favorably.
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, 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 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. Furthermore, competition in the emerging market for minimally
invasive cardiac surgery is intense and is expected to increase. Heartport,
Inc., Medtronic, Inc., Johnson & Johnson, Guidant Corporation, Baxter
International, Inc. and United States Surgical Corp. are marketing or have
announced that they are developing products to be used in MICS procedures.
There can be no assurance that MICS will replace any current treatments.
Additionally, even if MICS is widely adopted, there can be no assurance that
the Company's competitors will not succeed in developing or marketing
alternative procedures and technologies, 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 MICS
procedures. Furthermore, sales of the Company's products could be adversely
affected by reuse, notwithstanding the instructions in the Company's clinical
protocols and product labeling indicating that each of the components of the
Company's products is a single-use device. Such competition or reuse could
have a material adverse effect on the Company's business, financial condition
and results of operations.
GOVERNMENT REGULATION
The medical devices to be marketed and manufactured by the Company are
subject to extensive regulation by the FDA, and, in some instances, by
foreign governments. Pursuant to the Federal Food, Drug, and Cosmetic Act of
1976, as amended, and the regulations promulgated thereunder (the "FDC Act"),
the FDA regulates the clinical testing, manufacture, labeling, distribution,
and promotion of medical devices. Noncompliance with applicable requirements
can result in, among other things, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
failure of the government to grant premarket clearance or premarket approval
for devices, withdrawal of marketing approvals, and criminal prosecution. The
FDA also has the authority to request repair, replacement or refund of the
cost of any device manufactured or distributed by the Company.
In the United States, medical devices are classified into three classes
(Class I, II or III), on the basis of the controls deemed necessary by the
FDA to reasonably assure their safety and effectiveness. Under FDA
regulations, Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to good manufacturing
practices ("GMPs")) and Class II devices
12
are subject to general and special controls (for example, performance
standards, postmarket surveillance, patient registries and FDA guidelines).
Generally, Class III devices are those which must receive premarket approval
by the FDA to ensure their safety and effectiveness (for example,
life-sustaining, life-supporting and implantable devices, or new devices
which have not been found substantially equivalent to legally marketed
devices).
Before a new device can be introduced into the United States market, the
manufacturer must generally obtain marketing clearance through either a
510(k) premarket notification or a premarket approval ("PMA") application. A
510(k) clearance will be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a legally marketed
Class I or II medical device, or to a Class III medical device for which the
FDA has not called for a PMA. The FDA may determine that a proposed device is
not substantially equivalent to a legally marketed device, or that additional
information or data are needed before a substantial equivalence determination
can be made. A request for additional data may require that clinical studies
of the device's safety and efficacy be performed.
Commercial distribution of a device for which a 510(k) premarket
notification is required can begin only after the FDA issues an order finding
the device to be "substantially equivalent" to a predicate device. The FDA
has recently been requiring a more rigorous demonstration of substantial
equivalence than in the past. It generally takes from four to twelve months
from the date of submission to obtain a 510(k) clearance, but it may take
longer. The FDA may determine that a proposed device is not substantially
equivalent to a legally marketed device, or that additional information is
needed before a substantial equivalence determination can be made.
A "not substantially equivalent" determination, or a request for
additional information, could delay the market introduction of new products
that fall into this category and could have a materially adverse effect on
the Company's business, financial condition and results of operations. For
any of the Company's products that were cleared through the 510(k) process,
modifications or enhancements that could significantly affect the safety or
efficacy of the device or that constitute a major change to the intended use
of the device will require new 510(k) submissions.
A PMA application must be filed if a proposed device is not
substantially equivalent to a legally marketed Class I or Class II device, or
if it is a Class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence which typically
includes extensive data, including human clinical trial data to demonstrate
the safety and effectiveness of the device. The PMA application must also
contain the results of all relevant bench tests, laboratory and animal
studies, a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to
manufacture the device. In addition, the submission must include the proposed
labeling, advertising literature and training methods (if required).
Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to
permit a substantive review. If the FDA determines that the PMA application
is sufficiently complete to permit a substantive review, the FDA will accept
the application for filing. Once the submission is accepted for filing, the
FDA begins an in-depth review of the PMA. An FDA review of a PMA application
generally takes one to two years from the date the PMA application is
accepted for filing, but may take significantly longer. The review time is
often significantly extended by the FDA asking for more information or
clarification of information already provided in the submission. During the
review period, an advisory committee, typically a panel of
13
clinicians, will likely be convened to review and evaluate the application
and provide recommendations to the FDA as to whether the device should be
approved. The FDA is not bound by the recommendations of the advisory panel.
Toward the end of the PMA review process, the FDA generally will conduct an
inspection of the manufacturer's facilities to ensure that the facilities are
in compliance with applicable GMP requirements.
If the FDA's evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will either issue an approval
letter or an approvable letter, which usually contains a number of conditions
that must be met in order to secure final approval of the PMA. When and if
those conditions have been fulfilled to the satisfaction of the FDA, the
agency will issue a PMA approval letter, authorizing commercial marketing of
the device for certain indications. If the FDA's evaluation of the PMA
application or manufacturing facilities are not favorable, the FDA will delay
approval of the PMA application or issue a "not approvable letter." The FDA
may also determine that additional clinical trials are necessary, in which
case PMA approval may be delayed for several years while additional clinical
trials are conducted and submitted in an amendment to the PMA. The PMA
process is expensive, uncertain and lengthy and a number of devices for which
FDA approval has been sought by other companies have never been approved for
marketing. Modifications to a device that is the subject of an approved PMA,
its labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
If human clinical trials of a device are required in connection with
either a 510(k) premarket notification or a PMA, and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) is required to file an investigational device
exemption ("IDE") application prior to commencing human clinical trials. The
IDE application must be supported by data, typically including the results of
animal and laboratory testing. If the IDE application is reviewed and
approved by the FDA and one or more appropriate Institutional Review Boards
("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by one or
more appropriate IRBs, but not the FDA. Sponsors of clinical trials are
permitted to sell those devices distributed in the course of the study
provided such compensation does not exceed recovery of the costs of
manufacture, research, development and handling. An IDE supplement must be
submitted to and approved by the FDA before a sponsor or an investigator may
make a change to the investigational plan that may affect its scientific
soundness or the rights, safety or welfare of human subjects.
Any products manufactured or distributed by the Company pursuant to the
FDA clearances or approvals are subject to pervasive and continuing
regulation by the FDA, including record keeping requirements and reporting of
adverse experiences with the use of the device. Device manufacturers are
required to register their establishments and list their devices with the FDA
and certain state agencies, and are subject to periodic inspections by the
FDA and certain state agencies. The FDC Act requires devices to be
manufactured in accordance with GMP regulations which impose certain
procedural and documentation requirements upon the Company with respect to
manufacturing and quality assurance activities. The FDA has recently
finalized changes to the GMP regulations which will likely increase the cost
of complying with GMP requirements.
14
Labeling and promotion activities are subject to scrutiny by the FDA and
in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
The Company and its products under development are also subject to a variety
of state laws and regulations in those states or localities where its
products under development are or will be marketed. Any applicable state or
local regulations may hinder the Company's ability to market its products
under development in those states or localities. Manufacturers are also
subject to numerous federal, state and local laws relating to such matters as
safe working conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially hazardous
substances. There can be no assurance that the Company will not be required
to incur significant costs to comply with such laws and regulations now or in
the future or that such laws or regulations will not have a material adverse
effect upon the Company's ability to do business.
Exports of products that have market clearance from the FDA do not
require export approval. However, some foreign countries require
manufacturers to provide an FDA certificate for products for export ("CPE")
which requires the device manufacturer to certify to the FDA that the product
has been granted premarket clearance in the United States and that the
manufacturing facilities appeared to be in compliance with GMPs at the time
of the last GMP inspection. The FDA will refuse to issue a CPE if significant
outstanding GMP violations exist.
Exports of products subject to the 510(k) notification requirements, but
not yet cleared to market, are permitted without FDA export approval provided
certain requirements are met. Unapproved products subject to the PMA
requirements must be approved by FDA for export. To obtain FDA export
approval certain requirements must be met and information must be provided to
the FDA, including documentation demonstrating that the product is approved
for import into the country to which it is to be exported and, in some
instances, safety data from animal or human studies. There can be no
assurance that the FDA will grant export approval when such approval is
necessary, or that countries to which the devices are to be exported will
approve the devices for import. Failure of the Company to obtain CPEs, meet
the FDA's export requirements, or obtain FDA export approval when required to
do so, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The introduction of the Company's products in foreign markets will also
subject the Company to foreign regulatory clearances, registrations or
approvals which may impose additional substantial costs and burdens.
International sales of medical devices are subject to the regulatory
requirements of each country. The regulatory review process varies from
country to country. Many countries also impose product standards, packaging
requirements, labeling requirements and import restrictions on devices. In
addition, each country has its own tariff regulations, duties and tax
requirements. The approval by the FDA and foreign government authorities is
unpredictable and uncertain, and no assurance can be given that the necessary
clearances, registrations or approvals will be granted on a timely basis or
at all. Delays in receipt of, or a failure to receive, such clearances,
registrations or approvals, or the loss of any previously received,
clearances, registrations or approvals, could have a material adverse effect
on the business, financial condition and results of operations of the Company.
The European Union has promulgated rules that require that medical
products receive the right to affix the CE mark by mid-1998. The CE mark is
an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. In order to
obtain the right to affix the CE mark to its current and future products, the
Company will need to obtain certification that its processes meet ISO 9000
quality standards. Failure to receive the right to
15
affix the CE mark will prohibit the Company from selling its current or
future products in member countries of the European Union after mid-1998. In
January 1997 the Company received ISO 9001 certification and CE Mark approval.
There can be no assurance that the FDA will act favorably or quickly on
the Company's 510(k) submissions, and significant difficulties and costs may
be encountered by the Company in its efforts to obtain FDA clearance that
could delay or preclude the Company from selling its potential products in
the United States. Failure to receive, or delays in the receipt of FDA
clearances or approvals could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's products are subject to continued and pervasive regulation
by the FDA and other foreign and domestic regulatory authorities. Changes in
existing requirements or adoption of new requirements or policies could
adversely affect the ability of the Company to comply with regulatory
requirements. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will not be
required to incur significant costs to comply with laws and regulations in
the future or that laws or regulations will not have a material adverse
effect upon the Company's business, financial condition or results of
operations.
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 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. Although the Company believes that the cost of a
MIDCAB or OPCAB procedure performed with the Company's products will be
reimbursable under the current diagnosis-related group ("DRG") system, the
Company is unable to predict what changes will be made in the reimbursement
methods utilized by third-party health care payors. The Company anticipates
that in a prospective payment system, such as the DRG system utilized by
Medicare, and in many managed care systems used by private health care
payors, the cost of the Company's products would be incorporated into the
overall cost of the procedure and that there would be no separate, additional
reimbursement for the Company's products. The Company anticipates that
hospital administrators and physicians would justify the use of the Company's
products by the attendant cost savings and clinical benefits that the Company
believes would be derived from the use of its products. However, there can be
no assurance that this will be the case. Furthermore, 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 procedure in which the Company's products are
intended to be used. Failure by physicians, hospitals and other potential
users of the Company's products 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.
16
If the Company obtains the necessary foreign regulatory registrations or
approvals, market acceptance of the Company's products in international
markets would 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.
PRODUCT LIABILITY AND INSURANCE
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 insurance 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.
EMPLOYEES
As of January 2, 1998, the Company had 126 full-time employees. Thirty
persons are engaged in research and development and regulatory affairs
activities, fifty-one persons are engaged in sales and marketing activities,
thirty-three persons are engaged in manufacturing and quality assurance and
twelve persons are engaged in finance and administration. No employees are
covered by collective bargaining agreements, and the Company believes it
maintains good relations with its employees.
OTHER RISK FACTORS
This annual report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities and Exchange Act of 1934. The Company's future 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 factors and elsewhere in this annual report on Form 10-K.
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. The Company began
commercial sales of its products in December 1996 and has limited experience
in manufacturing, marketing and selling the CTS MIDCAB System and ACCESS MV
and MP Systems. The Company has experienced operating losses since its
inception, and, as of January 2, 1998, the Company had an accumulated deficit
of approximately $39.4 million. The development and commercialization of the
Company's products will continue to require
17
substantial development, regulatory, sales and marketing, manufacturing and
other expenditures. The Company expects its operating losses to continue at
least through 1999 as it expends 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 wide spread
commercial acceptance or that the Company will ever generate enough revenues
to achieve profitability.
UNCERTAINTY OF CLINICAL ADOPTION OF MICS PROCEDURES. The Company's
current products are designed to enable the majority of cardiothoracic
surgeons to perform minimally invasive cardiac surgery on a beating heart.
Accordingly, the Company's success is dependent upon acceptance of these
procedures by the medical community as a reliable, safe and cost effective
alternative to existing treatments for revascularizing blocked coronary
arteries. To date, MICS has been performed on a limited basis by several
hundred 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 fewer instances, the right
coronary artery ("RCA"), and a very limited number have been performed on the
circumflex artery. Currently, a significant percentage of conventional CABG
procedures are performed on multiple vessels. To date, multiple vessel MICS
procedures have only been performed on a limited basis, and there can be no
assurance that MICS will be effectively utilized for multiple bypasses on a
more wide spread or more frequent basis. The Company is unable to predict how
quickly, if at all, MICS will be adopted by the medical community or, if it
is adopted, the number of MICS procedures that will be performed. The Company
believes that in 1997 approximately three percent of CABG surgery were done
via a MICS procedure. The medical conditions that can be treated with MICS
can also be treated by widely accepted surgical procedures such as CABG
surgery and catheter-based treatments, including balloon angioplasty,
atherectomy and coronary stenting. Although the Company believes that MICS
has significant advantages over competing procedures, broad-based clinical
adoption of MICS will not occur until physicians determine that the approach
is an attractive alternative to current treatments for coronary artery
disease. The Company believes that physician endorsements will be essential
for clinical adoption of MICS , 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 MICS, 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 MICS 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 MICS as
compared to other currently available treatments. There can be no assurance
that MICS will gain clinical adoption. Failure of MICS to achieve significant
clinical adoption would have a material adverse effect on the Company's
business, financial condition and results of operations.
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE. The Company
currently has a small sales and marketing organization when compared to most
of its competitors. The Company sells its products in the United States and
in Germany through a direct sales force. In certain other international
markets, the Company sells its products through distributors. 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
18
maintain agreements with distributors, or that such distributors will devote
adequate resources to selling the Company's products. Since the Company has
entered into distribution agreements for the sale of its products in certain
countries, it will be dependent upon the efforts of these third parties, and
there can be no assurance that such efforts will be successful. Failure to
maintain or grow an effective direct sales and marketing organization or to
maintain effective distributors 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 Company's 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, will be subject to periodic inspection by the FDA, the
California Department of Health Services and other agencies. To date, the
Company has only undergone 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.
EARLY STAGE OF DEVELOPMENT AND COMMERCIALIZATION; NO ASSURANCE OF
ABILITY TO MANAGE GROWTH. The Company believes that the Company's products
could address a large potential market. There can be no assurance that the
Company's marketing efforts will result in significant demand for its
products, or that the current demand for the Company's products will grow.
Even if demand for the Company's products does grow, 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.
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.
POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON SOLE SOURCES OF SUPPLY. The
Company
19
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 may only be 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 until a new
source of supply is qualified. Many of the Company's components are molded
parts that requires custom tooling which is manufactured and maintained by
third party vendors. Should such custom tooling be damaged it could result in
a supply interruption that could have a material adverse effect on the
Company's ability to manufacture its products until a new tool is
manufactured. Also, the Company's new product development efforts and the
timeliness of new product launches can be significantly impacted by the
tooling vendor's ability to meet completion and quality commitments on the
manufacture of custom tooling. 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.
LIMITED 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 profitable operations. 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.
RISKS RELATING TO INTERNATIONAL OPERATIONS. The Company markets 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 international nature of
the Company's business is also expected to subject it and its 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.
20
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 of and the time required
to obtain additional 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 continue to devote substantial
capital resources for research and development, to market and sell its
products 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 of 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 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.
ITEM 2. PROPERTIES
The Company currently leases 23,500 and 4,125 square foot facilities in
Cupertino, California. The facilities include an environmentally controlled,
Class 10,000 clean room for assembly together with laboratory, machine shop,
warehouse and office space. The leases expire on June 1, 2001. The Company
estimates this space to be sufficient through 1998 and is currently
evaluating its requirements for 1999 and beyond.
21
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently party to any legal proceeding.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
The information required by this item is incorporated by reference to
the portion of the Registrant's 1997 annual report to stockholders entitled
"Market Price of Common Stock and Dividend Information" and included in
Exhibit 13.1 to this report.
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 January 2, 1998.
Use of Proceeds Amount
--------------- ------
Construction of plant, building and facilities $ 0
Purchase and installation of machinery and equipment 4,760,000
Purchase of real estate 0
Acquisition of other businesses 0
Repayment of indebtedness 0
Working capital 2,334,000
Cost of operations 19,756,000
Temporary Investment
---------------------
Cash 1,158,000
Commercial paper, notes and bonds $56,153,000
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 $ 770,000
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to
the portion of the Registrant's 1997 annual report to stockholders entitled
"Selected Financial Data" and included in Exhibit 13.1 to this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to
the portion of the Registrant's 1997 annual report to stockholders entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and included in Exhibit 13.1 to this report.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to
the portion of the Registrant's 1997 annual report to stockholders entitled
"1997 Financial Review" and included in Exhibit 13.1 to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
24
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file a definitive proxy statement
within 120 days after the end of its fiscal year pursuant to Regulation 14A
with respect to the 1998 Annual Meeting of Stockholders (the "Proxy
Statement") to be held May 19, 1998 and certain information included therein
is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to directors is
incorporated by reference to the information under the caption "Proposal No.
1 -- Election of Directors" in the Proxy Statement.
The executive officers of the Registrant, who are elected by the board
of directors, are as follows:
Name Age Position
- ------------------- ---- -----------------------------------------
Richard M. Ferrari 44 President, Chief Executive Officer and
Director
Jeffrey G. Gold 50 Executive Vice President and Chief Operating
Officer
Steve M. Van Dick 43 Vice President, Finance and Administration
and Chief Financial Officer
Michael J. Billig 47 Vice President, Regulatory, Quality and
Clinical Research
Geoffrey D. Dillon 43 Vice President, Sales and Marketing
Richard A. Lotti 41 Vice President, Business Development
Christian Skieller 49 Vice President, Operations
Charles S. Taylor 43 Vice President and Chief Technical Officer
RICHARD M. FERRARI joined CTS 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 currently serves on the boards of several
privately held companies. Mr. Ferrari holds an M.B.A. from the University of
South Florida.
JEFFREY G. GOLD joined the Company as Executive Vice President in March
of 1997 and was elected Chief Operating Officer in July of 1997. From 1978
through 1996 he held various positions with Cordis Corporation, a
manufacturer of cardiovascular devices. From 1993 to 1996 Mr. Gold was
President of Cordis Endovascular Systems, Inc., a supplier of devices for
interventional neuroradiology. Mr. Gold served Cordis as Vice President of
Research & Development from 1991 to
25
1993, and as Vice President of Manufacturing from 1986 to 1991. Mr. Gold
holds an Industrial Engineering degree from Northeastern University and an
MBA from the University of Florida.
STEVE M. VAN DICK joined the Company as Vice President of Finance and
Administration and Chief Financial Officer in April 1996. From March 1995
until April 1996, Mr. Van Dick was Vice President of Finance and
Administration and Chief Financial Officer of Perclose, Inc., a manufacturer
of minimally invasive systems for the surgical closure of arterial access
sites in catheterization procedures. From September 1993 until March 1995,
he was Vice President of Finance and Chief Financial Officer of CVIS. From
1992 until joining CVIS, Mr. Van Dick was Vice President, Finance and Chief
Financial Officer of Imatron, Inc., a manufacturer of specialized medical
equipment. From 1987 until joining Imatron, he held various positions with
ADAC Laboratories, serving as Vice President of Finance since 1988 and as
Chief Financial Officer since 1991. Mr. Van Dick holds an M.B.A. from Santa
Clara University and is a Certified Public Accountant.
MICHAEL J. BILLIG joined CTS as Vice President of Regulatory, Clinical
and Quality in February 1996. From January 1989 until joining the Company,
Mr. Billig served as Vice President, Regulatory, Clinical and Quality of
Cardiometrics, Inc., a company that manufactures and markets intravascular
Doppler ultrasound systems for measuring blood flow. From June 1987 to
February 1989, he served as Director, Regulatory Affairs and Quality
Assurance of Cardiometrics, Inc.
GEOFFREY D. DILLON joined the Company as Vice President, Global Sales in
August 1997 and was made Vice President, Sales and Marketing in March 1998.
From February 1997 until joining the Company, Mr. Dillon was Vice President,
Sales and Marketing of Quest Medical Inc.'s Cardiovascular Systems Division,
a manufacturer of cardiac surgery specialty products. From May 1996 to
February 1997, Mr. Dillon was Vice President, Marketing of Quest Medical
Inc.'s Cardiovascular Systems Division. From May 1995 to May 1996, Mr.
Dillon was President of Dilstar, Inc., an exclusive sales and marketing
agency for H.D.N.A. of North America, a high definition television network.
From January 1994 to April 1995, Mr. Dillon was Director of Marketing for the
Micro-Endo Division of Sofamor-Danek Group, a manufacturer of spinal implants
and spinal endoscopy systems. From 1983 to December 1993, Mr. Dillon held
various positions with Storz Instrument Company, a manufacturer of various
medical devices, serving as Product Manager, Surgical Specialties Division
since 1990. Mr. Dillon holds a BA degree from Ashland University.
RICHARD A. LOTTI joined the Company as Vice President, Business
Development in December of 1997. From June 1994 to July 1997, Mr. Lotti was
a Vice President of the NeuroCare Group and the General Manager of Camino
NeuroCare, the market leader in intracranial neuromonitoring. From January
1990 to February 1994, Mr. Lotti held various product development management
positions with Sorin Biomedical, previously Pfizer-Shiley, a manufacturer of
cardiopulmonary bypass devices and heart valve implants. Mr. Lotti served as
director of the cardiopulmonary business since February 1992. Prior to 1990,
Mr. Lotti held positions in operations, product development and international
operations at Alcon Surgical and Johnson and Johnson. He holds a BSME and an
MBA from Rensselaer Polytechnic Institute.
CHRISTIAN SKIELLER joined the Company as Vice President of Operations in
August 1996. From 1992 until joining the Company, he was Vice President of
Manufacturing for Medtronic CardioRythm, a manufacturer of electrophysiology
catheter systems. From 1990 to 1991, Mr. Skieller served as Vice President
of Operations at Abaxis, a medical diagnostics systems manufacturer. From
1987 to 1990 he was a manufacturing Consultant, assisting companies with
strategic and operational issues. Mr.
26
Skieller holds an M.S. in Chemical Engineering from Technical University of
Denmark and an M.B.A from Stanford University.
CHARLES S. TAYLOR, the founder of CTS, has been with Informed Creation,
the predecessor company to CTS, since its inception in November 1993, and has
served as Vice President, Chief Technical Officer and Director since the
Company's 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 public company that
develops and markets instruments for 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, 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.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information under the caption "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information under the caption "Share Ownership of Directors, Officers and
Certain Beneficial Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information under the caption "Certain Transaction" in the Proxy
Statement.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following Consolidated Financial Statements of
CardioThoracic Systems, Inc. and Report of Independent
Accountants are incorporated by reference in the respective
portions of the Registrant's 1997 annual report to
stockholders included in Exhibit 13.1 to the report:
Consolidated Balance Sheets; January 2, 1998 and
December 31, 1996
Consolidated Statements of Operations; Years ended
January 2, 1998 and December 31, 1996 and the period
from June 15, 1995 (date of inception) to December 31,
1995
Consolidated Statement of Stockholders' Equity; Years
ended January 2, 1998 and December 31, 1996 and the
period from June 15, 1995 (date of inception) to
December 31, 1995
Consolidated Statements of Cash Flows; Years ended
January 2, 1998 and December 31, 1996 and the period
from June 15, 1995 (date of inception) to December 31,
1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
The following Financial Statements of Informed Creation and
Report of Independent Accountants are incorporated by reference
in the respective portions of the Registrant's 1997 annual report
to stockholders included in Exhibit 13.1 to the report:
Balance Sheet; June 14, 1995
Statements of Operations; Period from January 1, 1995
to June 14, 1995, year ended December 31, 1994 and the
period from November 3, 1993 (date of inception) to
June14, 1995
Statement of Sole Proprietorship Capital; Period from
January 1, 1995 to June 14, 1995, year ended December
31, 1994 and the period from November 3, 1993 (date of
inception) to December 31, 1993
Statements of Cash Flows; Period from January 1, 1995
to June 14, 1995, year ended December 31, 1994 and the
period from November 3, 1993 (date of inception) to
June14, 1995
28
Notes to Financial Statements
Report of Independent Accountants
2. Financial Statement Schedules
All financial statement schedules are omitted because they are
not applicable or the required information is shown in the
Consolidated Financial Statements or the notes
thereto.
3. Exhibits
Refer to ( c ) below.
(b) Reports on Form 8 - K.
The Company was not required to and did not file any reports on Form
8-K during the three months ended January 2, 1998.
(c) Exhibits
Exhibit
No. Description
-- -----------------------------------------
3.2(1) Restated Certificate of Incorporation
3.3 Bylaws (as amended).
3.4(4) Certificate of Designations of Rights,
Preferences and Privileges of Series A
Participating Preferred Stock
3.5(4) Preferred Shares Rights Agreement, dated as of
February 14, 1997.
3.6 Certificate of Amendment to Restated Certificate
of Incorporation
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 Incentive Stock Plan and forms 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(5) 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
29
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.
10.17(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 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.
Development and License Agreement, dated
10.22(1) 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.
10.27(2) Employment Agreement, dated April 19, 1996,
between the Company and Steve Van Dick.
10.28(2) Promissory Note for $300,000 dated April 29,
1996, between the Company and Thomas Afzal.
10.29(2) Promissory Note for $35,000 dated May 20, 1996,
between the Company and Michael Billig.
10.30(2) Promissory Note for $55,000 dated June 5, 1996,
between the Company and Thomas Afzal.
10.31(3) Promissory Note for $750,000 and Security
Agreement dated August 16, 1996, between the
Company and Richard Ferrari.
10.32(5) Promissory Note for $200,000 dated December 3,
1996, between the Company and Steve Van Dick.
10.33(6) Employment Letter Agreement, dated February 25,
1997, between the Company and Jeffrey Gold.
30
10.34 Employment Letter Agreement, dated July 17,
1997, between the Company and Geoffrey Dillon.
10.35 Employment Letter Agreement, dated November 24,
1997, between the Company and Richard Lotti.
13.1 Portions of Annual Report to Stockholders
incorporated by reference.
23.1 Consent of Coopers & Lybrand L.L.P.,
Independent Accountants
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 June 30, 1996.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 1998 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)
32
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard M. Ferrari and Steve M. Van
Dick, jointly and severally, his or her attorneys-in-fact, and each with the
power of substitution, for him or her in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue thereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/S/ Richard M. Ferrari President, Chief Executive March 30, 1998
- ------------------------------- Officer and Director (Chief
Richard M. Ferrari Executive Officer)
/S/ Steve M. Van Dick Vice President of Finance and March 30, 1998
- ------------------------------- and Administration and Chief
Steve M. Van Dick Financial Officer (Principal
Financial and Accounting Officer)
/S/ Charles S. Taylor Vice President and Chief Technical March 30, 1998
- ------------------------------- Officer and Director
Charles S. Taylor
/S/ Joseph A. Ciffolillo Director March 30, 1998
- -------------------------------
Joseph A. Ciffolillo
/S/ Thomas J. Fogarty, M.D. Director March 30, 1998
- -------------------------------
Thomas J. Fogarty, M.D.
/S/ Jack W. Lasersohn Director March 30, 1998
- -------------------------------
Jack W. Lasersohn
/S/ Thomas C. McConnell Director March 30, 1998
- -------------------------------
Thomas C. McConnell
/S/ Robert C. Bellas Director March 30, 1998
- -------------------------------
Robert C. Bellas, Jr.
/S/ Philip M. Young Director March 30, 1998
- -------------------------------
Philip M. Young
33
EXHIBIT INDEX
Exhibit
No. Description
--- ------------------------------------------
3.2(1) Restated Certificate of Incorporation
3.3 Bylaws (as amended).
3.4(4) Certificate of Designations of Rights,
Preferences and Privileges of Series A
Participating Preferred Stock
3.5(4) Preferred Shares Rights Agreement, dated as of
February 14, 1997.
3.6 Certificate of Amendment to Restated Certificate
of Incorporation
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 Incentive Stock Plan and forms 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(5) 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.
10.17(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 Valley, California 94028.
34
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.
10.27(2) Employment Agreement, dated April 19, 1996,
between the Company and Steve Van Dick.
10.28(2) Promissory Note for $300,000 dated April 29,
1996, between the Company and Thomas Afzal.
10.29(2) Promissory Note for $35,000 dated May 20, 1996,
between the Company and Michael Billig.
10.30(2) Promissory Note for $55,000 dated June 5, 1996,
between the Company and Thomas Afzal.
10.31(3) Promissory Note for $750,000 and Security
Agreement dated August 16, 1996, between the
Company and Richard Ferrari.
10.32(5) Promissory Note for $200,000 dated December 3,
1996, between the Company and Steve Van Dick.
10.33(6) Employment Letter Agreement, dated February 25,
1997, between the Company and Jeffrey Gold.
10.34 Employment Letter Agreement, dated July 17,
1997, between the Company and Geoffrey Dillon.
10.35 Employment Letter Agreement, dated November 24,
1997, between the Company and Richard Lotti.
13.1 Portions of Annual Report to Stockholders
incorporated by reference.
23.1 Consent of Coopers & Lybrand L.L.P.,
Independent Accountants
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 June 30, 1996.
(3) 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.
(4) 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.
(5) 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.
35
(6) 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
36