1998 FINANCIAL REVIEW
----------------------------------------
TABLE OF CONTENTS
17 Selected Financial Data
18 Management's Discussion and Analysis of
Financial Condition and Results of Operations
24 Consolidated Balance Sheets
25 Consolidated Statements of Operations
26 Consolidated Statements of Stockholders' Equity
28 Consolidated Statements of Cash Flows
29 Notes to Consolidated Financial Statements
35 Report of Independent Accountants
16
SELECTED FINANCIAL DATA
CardioThoracic Systems, Inc. and subsidiary
Company Informed Creation
---------------------------------------------------------------------------------------------
June 15, 1995
(date of January 1,
YEAR ENDED Year Ended Year Ended inception) to 1995 to Year Ended
JANUARY 1, January 2, December 31, December 31, June 14, December 31,
1999 1998 1996 1995(1) 1995(1) 1994
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
Net sales $ 16,149,000 $ 9,379,000 $ 141,000
Cost of sales and start-up
manufacturing costs 7,237,000 5,962,000 842,000
-----------------------------------------------
Gross profit (loss) 8,912,000 3,417,000 (701,000)
Operating expenses:
Research and development 11,496,000 10,806,000 11,475,000 $ 488,000 $ 2,808 $20,154
Sales, marketing, general
and administration 21,655,000 18,620,000 6,977,000 556,000 5,537 22,162
Restructuring costs 736,000
Interest income, net 2,413,000 3,645,000 3,075,000 47,000 24 63
---------------------------------------------------------------------------------------------
Net loss $(22,562,000) $(22,364,000) $(16,078,000) $ (997,000) $(8,321) $(42,253)
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Net loss per common share
and per common share --
assuming dilution $ (1.62) $ (1.66) $ (1.64) $ (0.36)
---------------------------------------------------------------
Shares used in computing
net loss per common share
and per common share --
assuming dilution 13,968,000 13,505,000 9,794,000 2,783,000
- -----------------------------------------------------------------------------------------------------
Company Informed Creation
---------------------------------------------------------------------------------------------
JANUARY 1, January 2, December 31, December 31, June 14, December 31,
1999 1998 1996 1995 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash, cash equivalents and
available-for-sale securities $ 40,253,000 $ 60,834,000 $ 78,457,000 $3,273,000 $ 6,146 $ 3,333
Working capital 25,750,000 54,871,000 54,512,000 3,149,000 4,528 2,228
Total assets 49,766,000 69,276,000 83,691,000 3,389,000 15,853 14,599
Accumulated deficit (62,001,000) (39,439,000) (17,075,000) (997,000)
Total sole proprietorship
capital or stockholders' equity 39,963,000 60,134,000 79,253,000 3,214,000 14,235 13,494
- -----------------------------------------------------------------------------------------------------------------------------------
(1) The periods beginning on or after June 15, 1995 reflects the data
of the Company. The periods to and including June 14, 1995 reflect
data of Informed Creation. The Company acquired all of the
intellectual property assets of Informed Creation for cash on
September 7, 1995.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CardioThoracic Systems, Inc. and subsidiary
The following discussion of the financial condition and results of operations
of CardioThoracic Systems, Inc. ("CTS" or the "Company") should be read in
conjunction with the Consolidated Financial Statements and the related Notes
thereto included herein.
This report 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 of operations could
vary significantly from those anticipated by such statements as a result of
factors described in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and under "Factors Affecting Results of
Operations."
OVERVIEW
The business of the Company was commenced in November 1993 as a sole
proprietorship, Informed Creation. In June 1995, the business was
incorporated and as part of the Company's initial financing in September
1995, the Company acquired all intellectual property assets of Informed
Creation. The 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 its products. The Company
has experienced operating losses since its inception, and, as of January 1,
1999, the Company had an accumulated deficit of approximately $62,001,000.
The development and commercialization of the Company's products will continue
to require 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 its products, obtain additional regulatory
clearances or approvals, continue to market, sell and manufacture its
products, support its finance and administrative organizations and conduct
further research and development. There can be no assurance that the
Company's products will gain enough commercial acceptance to allow the
Company to generate the revenues necessary to achieve profitability.
Most of the Company's current products are designed to enable the majority
of cardiothoracic surgeons to perform minimally invasive cardiac surgery
("MICS") on a beating heart. Accordingly, the Company's success is dependent
upon acceptance of this procedure by the medical community as a reliable,
safe and cost effective alternative to existing treatments for
revascularizing blocked coronary arteries. 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
medical conditions that can be treated with MICS can also be treated with
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
continued physician endorsements will be essential for clinical adoption of
MICS, and there can be no assurance that such endorsements will be continued.
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 MICS procedures. Patient acceptance of MICS 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 MICS 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. For all of these reasons, 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.
Most of the Company's current products are designed for beating heart MICS
and are expected to account for the great majority of the Company's revenues
in 1999. The Company manufactured and sold approximately 23,700 beating heart
MICS systems in the two years ended January 1, 1999, but there can be no
assurance that demand for the Company's current or future products will be
sufficient to allow profitable operations. Failure of the Company's current
and future products to be successfully commercialized at significantly higher
volumes would have a material adverse effect on the Company's business,
financial condition and results of operations.
Before the Company can market certain products under development in the
United States, the Company must obtain clearance or approval from the United
States Food and Drug Administration ("FDA"). The Company has filed or will be
filing 510(k) premarket notifications or premarket approval ("PMA")
applications with the FDA for clearance or approval to market current
products and certain products under development. There can be no assurance
that the FDA will act favorably or quickly on the Company's submissions, or
that significant difficulties and costs will not be encountered by the
Company in its efforts to obtain FDA clearance or approval for its products
under development. Any such difficulties could delay or preclude obtaining
regulatory clearance or approval. In addition, there can be no assurance that
the FDA will not impose strict labeling or other requirements as a condition
of its 510(k) clearance or PMA approval, any of which could limit the
Company's ability to market its products under development. Further, if the
Company wishes to modify a product after FDA clearance or approval, including
changes in indications or other modifications that could affect safety and
efficacy, additional clearances or approvals will be required from the FDA.
Failure to receive, or delays in receipt of, FDA clearances or approvals,
18
including delays resulting from an FDA request for clinical trials or
additional data as a prerequisite to clearance or approval, or any FDA
conditions that limit the ability of the Company to market its products under
development, could have a material adverse effect on the Company's business,
financial condition and results of operations.
In order for the Company to market its products under development in
Europe and certain other international jurisdictions, the Company and its
distributors will have to obtain required regulatory registrations or
approvals and otherwise comply with extensive regulations regarding safety,
efficacy and quality. These regulations, including the requirements for
registrations or approvals and the time required for regulatory review, vary
from country to country. The Company has received ISO 9001 certification and
the CE Mark approval for sale of its current products. The CE Mark evidences
receipt of the regulatory approval necessary for commercialization in
European Union countries and eliminates the requirement to obtain individual
country approvals. There can be no assurance that the Company will obtain
future regulatory registrations or approvals in other such countries or that
it will not be required to incur significant costs in obtaining or
maintaining its foreign regulatory registrations or approvals. Delays in
receipt of these registrations or approvals, failure to receive these
clearances or approvals, or the loss of received registrations or approvals
could have a material adverse effect on the Company's business, financial
condition and results of operations.
RESULTS OF OPERATIONS
FOR THE YEAR ENDED JANUARY 1, 1999 COMPARED TO THE YEAR ENDED JANUARY 2, 1998.
Net sales increased 72% to $16.1 million in the year ended January 1, 1999
when compared to the year ended January 2, 1998. The increase in net sales
was due primarily to a 111% increase in unit shipments of the CTS MIDCAB-TM-
Procedure System and CTS OPCAB-TM- Procedure family of products for the year
ended January 1, 1999 over the previous year. The increase in unit shipments
was offset by a 16% drop in the average selling price per procedural unit in
the year ended January 1, 1999 from the previous year.
Gross profit increased to $8.9 million (55% of net sales) in the year
ended January 1, 1999 compared to $3.4 million (36% of net sales) in the
previous year. The improvement in gross profit as a percent of net sales is
primarily due to lower material costs per unit, higher production volumes
which resulted in increased manufacturing efficiencies and a smaller
percentage of international revenue which has lower selling prices and
consequently lower gross margins.
Research and development expenses in the year ended January 1, 1999 were
$11.5 million compared to $10.8 million in the year ended January 2, 1998.
This was a result of increased research and development staff, facility
costs, and expenditures related to the continuing development and prototyping
of the instruments associated with the Company's Access MV-TM- products,
Access Ultima,-TM- Modular MIDCAB-TM- System, Ceres-TM- Saphenous Vein
Harvesting System, Aurora-TM- MultiTrac System, cannulation systems and valve
attachment products. The Company expects that research and development
expenses will continue at current levels through 1999.
The Company has entered into development and licensing agreements, and may
enter into additional agreements in the future, that require milestone
payments which are tied to certain events. The timing of these milestone
payments is uncertain and could have a material impact on the operating
results in the quarter and year in which they are expensed. During 1998 the
Company expensed $1.3 million for licensing of certain intellectual property
and other milestone payments, compared to $1.3 million in 1997.
Sales, marketing, general and administrative expenses increased to $21.7
million in the year ended January 1, 1999 compared to $18.6 million in the
same period last year. This increase was due primarily to the addition of
sales and marketing personnel, the costs associated with the support of a
larger field sales organization and higher surgeon training costs. The
Company expects that sales and marketing and administrative expenses will
decrease somewhat in 1999 as the Company reduces its costs to sell product
internationally.
The Company has recorded deferred compensation of $14.6 million, less
cancellations of $2.1 million, for the difference between the option exercise
price or restricted stock purchase price and the deemed fair value of the
Company's Common Stock for options granted and restricted stock sold in 1995
and early 1996 and for the deemed fair value of the Company's Common Stock
for options granted to non-employees since inception. The deferred
compensation is being amortized to operating expenses over the related
vesting period of the shares (one to four years) and will, therefore,
continue to have an adverse effect on the Company's results of operations
through 2001. Amortization of deferred compensation charged to operating
expenses in the year ended January 1, 1999 totaled $1.8 million compared to
$2.2 million for the same period last year.
In the fourth quarter of fiscal 1998, the Company recorded a restructuring
charge of $736,000 in connection with the closure of its German subsidiary.
In accordance with the restructuring plan, this closure resulted in the
termination of four German employees which represented all the employees of
the German subsidiary. The charge associated with employee termination
benefits was $349,000. The balance of the restructuring charge was an $88,000
non-cash charge for the loss on property and equipment and the write-down of
other recorded assets, $235,000 for lease cancellation expenses and $64,000
for other exit related costs.
Interest income decreased to $2.8 million in the year ended January 1,
1999 compared to $4.0 million in the same period last year. This decrease was
primarily due to lower average cash and investment balances.
FOR THE YEAR ENDED JANUARY 2, 1998 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1996.
Revenues were $9.4 million in the year ended January 2, 1998 compared to
$141,000 in the year ended December 31, 1996. The increase in revenues were
due primarily to the increase in shipments of the CTS MIDCAB System and
Access MV System. The year ended January 2, 1998 was the first full year of
product shipments, with shipments of the CTS MIDCAB System and Access MV
System beginning in December 1996 and September 1997, respectively.
19
Cost of sales increased to $6.0 million for the year ended January 2, 1998
compared to $842,000 in the same period last year. This increase is primarily
the result of material costs associated with products sold, a significant
increase in personnel and other costs associated with the scale-up of
manufacturing and assembly operations, manufacturing engineering and support
functions, and a materials procurement and handling function.
Research and development expenses for the year ended January 2, 1998 were
$10.8 million compared to $11.5 million for the year ended December 31, 1996.
This decrease was due to a reduction in the charge for amortization of
deferred compensation allocated to research and development from $5.3 million
in 1996 to $689,000 in 1997, partially offset by an increase in research and
development staff, patent-related costs, facility costs, costs associated
with acquiring certain intellectual property and increased expenditures
related to the continuing development of the instruments associated with the
Access MV System, CTS Saphenous Vein Harvesting System and valve products.
The Company has entered into development and licensing agreements that
require milestone payments which are tied to certain events. During 1997 the
Company expensed $1.3 million for the right to acquire certain intellectual
property and a milestone payment related to a development agreement compared
to $1.5 million in 1996 for milestone payments related to development
agreements.
Sales, marketing, general and administrative expenses increased to $18.6
million for the year ended January 2, 1998 compared to $7.0 million for the
year ended December 31, 1996. This increase was due primarily to the hiring
of marketing and administrative personnel and consultants, the CTS
CORriculum-TM- training programs, promotional efforts to increase market
awareness of the Company and MICS, sales and marketing costs associated with
the Company's German subsidiary, higher facility costs and establishing the
Company's administrative infrastructure.
Net interest income increased to $3.7 million for the year ended January
2, 1998 compared to $3.1 million in the same period last year. The increase
is due to higher average cash and investment balances during 1997 compared to
1996 resulting from the Company's April 1996 initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily from the
sale of equity securities. As of January 1, 1999, the Company had raised
approximately $90.9 million (net of stock issuance costs) from the sale of
equity securities. As of January 1, 1999, cash, cash equivalents and
available-for-sale securities totaled $40.3 million. The Company's cash used
in operations was $17.4 million for the year ended January 1, 1999,
reflecting expenditures made primarily to continue research and development
and sales and marketing activities, and to support its administrative
infrastructure. The Company also spent $1.7 million for the purchases of
property and equipment and $1.6 million for repayment of debt in the year
ended January 1, 1999.
The Company plans to finance its operations principally from existing
cash, cash equivalents and available-for-sale securities and interest
thereon, and product revenues. The Company believes that its existing cash
balances and available-for-sale securities and interest thereon, and product
revenues will be sufficient to fund its operations through 2000. The
Company's capital requirements, and the availability of product revenues,
depend on numerous factors, including the progress of the Company's product
development programs, the receipt of and the time required to obtain
regulatory clearances or approvals, the resources the Company devotes to
developing, manufacturing and marketing its products, the extent to which the
Company's products receive market acceptance, and other factors. The Company
expects to devote substantial capital resources to research and development,
to support a direct sales force and marketing operation in the United States
and to continue to support its manufacturing capacity and facilities.
Consequently, the Company may be required to raise additional funds through
public or private financing, collaborative relationships or other
arrangements. There can be no assurance that the Company will not require
additional funding or that such additional funding, if needed, will be
available on terms attractive to the Company, or at all, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
convenants.
At January 1, 1999, the Company had approximately $48.3 million in federal
and $35.3 million in state net operating loss carryforwards, which will
expire in the years 2001 through 2018, if not utilized. In addition, the
Company has federal and state research and development credits of $1.4
million and $778,000, respectively. These credits expire in the years 2011
through 2018, if not utilized. Utilization of federal income tax
carryforwards is subject to certain limitations under Section 382 of the
Internal Revenue Code of 1986. These annual limitations may result in
expiration of net operating loss carryforwards and research and development
credits before they can be fully utilized.
IMPACT OF THE YEAR 2000 ISSUE
The year 2000 Issue is the result of computer programs written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company is in the process of performing an inventory of all software
utilized by the Company and determining whether or not the software is year
2000 compliant. In late 1996 the Company acquired its manufacturing, order
entry, finance and network software from third party vendors that have
certified such software to be year 2000 compliant. The Company believes it
has no custom software in its manufacturing or development processes which
requires modification. The Company expects to complete this evaluation of
software in early 1999. The Company is not anticipating finding any
significant non-compliant software. If any such software is found it would
most likely be replaced by commercially available software that was year 2000
compliant.
20
The Company is also surveying its major suppliers to determine their year
2000 readiness. It is expected that the survey will be completed in early
1999. The Company currently has no plans to contact its customers concerning
their year 2000 readiness. The Company's products have no date sensitive
software or embedded chip technology. The Company has sold its products to
over 500 hospitals and distributors worldwide and no one customer represents
more than 10% of the Company's revenue.
Virtually all of the computer hardware currently owned by the Company is
year 2000 compliant and in any event non-compliant computer hardware will
most likely be replaced before the year 2000.
Based on a preliminary assessment, the Company believes that there will be
no material impact on the operations of the Company due to the year 2000
issue. As a result the Company is not developing any formal contingency plans.
The costs incurred to date to determine the impact of the year 2000 issue
are immaterial and no significant future costs are anticipated.
FINANCIAL RISK MANAGEMENT
As a Company with international sales, CTS faces exposure to adverse
movements in foreign currency exchange rates. These exposures may change over
time as the Company's international business grows and the Company's business
practices evolve and could have a material adverse effect on the Company's
business, financial condition and results of operations. All of the Company's
international sales are currently denominated in U.S. dollars. An increase in
the value of the U.S. dollar relative to foreign currencies could make the
Company's products more expensive and therefore, reduce demand for the
products or force the Company to reduce its selling price. Reduced demand or
lower selling prices could have a material adverse effect on the Company's
business, financial condition and results of operations. Currently, the
Company does not hedge against any foreign currencies.
The Company maintains an investment portfolio of various issuers, types
and maturities. These securities are classified as available-for-sale, and
consequently, are recorded on the balance sheet at fair value with unrealized
gains or losses reported as a separate component of stockholders' equity. At
any time, a sharp rise in interest rates could have a material adverse effect
on the fair value of the Company's investment portfolio. Conversely, declines
in interest rates could have a material adverse effect on the interest
earnings of the Company's investment portfolio. Currently, the Company does
not hedge these interest rate exposures.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"). SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair
value in the statement of financial position, and that the corresponding
gains or losses be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of hedging
relationship that exists. SFAS 133 will be effective for fiscal years
beginning after June 15, 1999. Currently, the Company does not hold
derivative instruments or engage in hedging activities.
FACTORS AFFECTING RESULTS OF OPERATIONS
HIGHLY COMPETITIVE MARKET; RISK OF ALTERNATIVE THERAPIES; RISK OF REUSE.
The medical device industry and the market for treatment of cardiovascular
disease, in particular, are characterized by rapidly evolving technology and
intense competition. A number of companies, 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. Medtronic,
Inc., Genzyme Surgical Products Corp., Johnson & Johnson, Guidant
Corporation, Baxter International, Inc., Heartport, 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
procedures will replace any current treatments. Additionally, even if MICS
procedures are 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
procedures, 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 certain components of the Company's
products are single-use devices. Such competition or reuse could 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 through a direct sales force. In certain 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 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.
21
DEPENDENCE ON LICENSES, PATENTS AND PROPRIETARY TECHNOLOGY.
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology. The
Company owns eleven issued United States patents, including one which
contains claims that cover certain aspects of the Company's FloCoil-TM-
Shunt. Additionally, the Company has fifty-three United States patent
applications and various foreign patent applications pending. The Company is
the licensee of a United States patent and several related pending
applications for a heart valve insertion and stapling device, and a United
States patent application for bipolar electrosurgical scissors. Additionally,
the Company has acquired exclusive rights to United States Patent Number RE
36,043 covering methods of minimally invasive harvesting.
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
pending 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 designed around 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 proceeding to which the Company
becomes 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.
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 are required to comply with the Good
Manufacturing Practices ("GMP") regulations of the FDA which are currently
referred to as Quality System Regulations. These regulations include design,
testing, production, control, documentation and other requirements.
Enforcement of Quality System 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. The Company has received ISO 9001
certification, has obtained its California Device Manufacturing license and
has successfully undergone a facility inspection by the FDA. 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,
any of which could 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 has also claimed in such
correspondence 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.
22
POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON SOLE SOURCES OF SUPPLY.
The Company contracts with third parties for the manufacture of certain
components or the performance of certain processes involved in the
manufacturing cycle. Some of these components and processes 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 require 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 could be significantly affected by tooling
vendors 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 are 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.
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT.
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices such as the Company's products,
generally rely on third-party payors, principally Medicare, Medicaid and
private health insurance plans, to reimburse all or part of the cost of the
procedure in which the medical device is being used. Reimbursement for
cardiovascular surgery, including CABG surgery, using devices that have
received FDA approval, has generally been available in the United States. In
addition, certain health care providers are moving toward a managed care
system in which such providers contract to provide comprehensive health care
for a fixed cost per person. The Company is unable to predict what changes,
if any, may be made in the reimbursement methods utilized by third-party
health care payors. The Company could be adversely affected by changes in
reimbursement policies of government or private health care payors,
particularly to the extent any such changes affect reimbursement for the
procedures in which the Company's products are intended to be used. Failure
by physicians, hospitals and other potential users of the Company's products
to obtain sufficient reimbursement from health care payors for the procedures
in which the Company's products are intended to be used or adverse changes in
government and private third-party payors' policies toward reimbursement for
such procedures could have a material adverse effect on the Company's
business, financial condition and results of operations.
Market acceptance of the Company's products in international markets is
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 RISK; LIMITED INSURANCE COVERAGE.
The development, manufacture and sale of medical products entail significant
risk of product liability claims and product recalls. The Company's current
product liability insurance coverage limits are $5,000,000 per occurrence and
$5,000,000 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.
23
CONSOLIDATED BALANCE SHEETS
CardioThoracic Systems, Inc. and subsidiary
JANUARY 1, 1999 January 2, 1998
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,651,000 $ 4,681,000
Available-for-sale securities 27,513,000 52,105,000
Trade accounts receivable, net of allowances of $421,000 in 1998
and $225,000 in 1997 2,894,000 1,369,000
Notes receivable from officers -- 87,000
Inventories 963,000 641,000
Interest receivable 611,000 1,158,000
Prepaid expenses and other current assets 510,000 449,000
-----------------------------------------
Total current assets 34,142,000 60,490,000
Property and equipment, net 3,374,000 3,613,000
Available-for-sale securities 11,089,000 4,048,000
Notes receivable from officers 1,045,000 1,073,000
Other assets 116,000 52,000
-----------------------------------------
Total assets $ 49,766,000 $ 69,276,000
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Equipment note, current portion $ 500,000 $ 410,000
Accounts payable 1,871,000 779,000
Accrued liabilities 6,021,000 4,430,000
-----------------------------------------
Total current liabilities 8,392,000 5,619,000
Bank borrowings -- 1,557,000
Equipment note, less current portion 1,411,000 1,966,000
-----------------------------------------
Total liabilities 9,803,000 9,142,000
Commitments (Note 8)
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.001:
Authorized: 5,000,000 shares
Issued and outstanding: none in 1998 and 1997 -- --
Common stock, par value $0.001:
Authorized: 60,000,000 shares in 1998 and 1997
Issued and outstanding: 14,219,178 shares in 1998 and 13,662,602 shares in 1997 14,000 14,000
Additional paid-in capital 103,317,000 103,156,000
Deferred compensation, net (1,460,000) (3,614,000)
Accumulated other comprehensive income 93,000 17,000
Accumulated deficit (62,001,000) (39,439,000)
-----------------------------------------
Total stockholders' equity 39,963,000 60,134,000
-----------------------------------------
Total liabilities and stockholders' equity $ 49,766,000 $ 69,276,000
- ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
24
CONSOLIDATED STATEMENTS OF OPERATIONS
CardioThoracic Systems, Inc. and subsidiary
Year Ended
--------------------------------------------------------
JANUARY 1, 1999 January 2, 1998 December 31, 1996
- ---------------------------------------------------------------------------------------------------------
Net sales $ 16,149,000 $ 9,379,000 $ 141,000
Cost of sales and start-up manufacturing costs 7,237,000 5,962,000 842,000
-------------------------------------------------------
Gross profit (loss) 8,912,000 3,417,000 (701,000)
Operating expenses:
Research and development 11,496,000 10,806,000 11,475,000
Sales, marketing, general and administrative 21,655,000 18,620,000 6,977,000
Restructuring costs 736,000 -- --
-------------------------------------------------------
Total operating expenses 33,887,000 29,426,000 18,452,000
-------------------------------------------------------
Operating loss (24,975,000) (26,009,000) (19,153,000)
Interest income 2,802,000 3,976,000 3,103,000
Interest expense (313,000) (290,000) (28,000)
Other expense (76,000) (41,000)
-------------------------------------------------------
Net loss $(22,562,000) $(22,364,000) $(16,078,000)
- ---------------------------------------------------------------------------------------------------------
Net loss per common share and per
common share assuming dilution $ (1.62) $ (1.66) $ (1.64)
- ---------------------------------------------------------------------------------------------------------
Shares used in computing net loss per common
share and per common share assuming dilution 13,968,000 13,505,000 9,794,000
- ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CardioThoracic Systems, Inc. and subsidiary
For the years ended January 1, 1999, January 2, 1998 and December 31, 1996
Series A
Preferred Stock Common Stock
------------------------- -----------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 4,025,000 $ 4,000 2,800,000 $ 3,000
Issuance of Series A preferred stock for cash at $1.00 per share
in January and February 1996, net of issuance costs of $1,000 1,000,000 1,000
Issuance of common stock through:
Initial public offering at $18.00 per share in April 1996,
net of issuance costs of $7,892,000 5,118,000 5,000
Conversion of preferred shares in connection with initial public
offering in April 1996 (5,025,000) (5,000) 5,025,000 5,000
Exercise of stock options 254,000
Exercise of purchase rights 6,000
Repurchase of common stock (89,000)
Deferred compensation related to issuance of common stock
and grants of stock options
Deferred compensation adjustment for cancellation of
stock options
Amortization of deferred compensation
Change in unrealized gain on available-for-sale securities
Net loss
----------------------------------------------------
Balances, December 31, 1996 13,114,000 13,000
Issuance of common stock through:
Exercise of stock options 504,000 1,000
Exercise of purchase rights 45,000
Deferred compensation related to issuance of common
stock and grants of stock options
Deferred compensation adjustment for cancellation of
stock options
Amortization of deferred compensation
Net loss
----------------------------------------------------
Balances, January 2, 1998 13,663,000 14,000
Issuance of common stock through:
Exercise of stock options 457,000 --
Exercise of purchase rights 99,000 --
Deferred compensation adjustment for cancellation of
stock options
Amortization of deferred compensation
Change in unrealized gain on available-for-sale securities
Net loss
----------------------------------------------------
BALANCES, JANUARY 1, 1999 -- $ -- 14,219,000 $ 14,000
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
26
Additional
Paid-In Deferred Accumulated Other
Capital Compensation Comprehensive Income
- -------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 $ 6,006,000 $ (1,802,000)
Issuance of Series A preferred stock for cash at $1.00 per share
in January and February 1996, net of issuance costs of $1,000 998,000
Issuance of common stock through:
Initial public offering at $18.00 per share in April 1996,
net of issuance costs of $7,892,000 84,218,000
Conversion of preferred shares in connection with initial public
offering in April 1996
Exercise of stock options 54,000
Exercise of purchase rights 92,000
Repurchase of common stock
Deferred compensation related to issuance of common stock
and grants of stock options 11,950,000 (11,950,000)
Deferred compensation adjustment for cancellation of
stock options (1,278,000) 1,278,000
Amortization of deferred compensation 6,732,000
Change in unrealized gain on available-for-sale securities $ 17,000
Net loss
----------------------------------------------------
Balances, December 31, 1996 102,040,000 (5,742,000) 17,000
Issuance of common stock through:
Exercise of stock options 649,000
Exercise of purchase rights 375,000
Deferred compensation related to issuance of common
stock and grants of stock options 621,000 (621,000)
Deferred compensation adjustment for cancellation of
stock options (529,000) 529,000
Amortization of deferred compensation 2,220,000
Net loss
----------------------------------------------------
Balances, January 2, 1998 103,156,000 (3,614,000) 17,000
Issuance of common stock through:
Exercise of stock options 91,000
Exercise of purchase rights 395,000
Deferred compensation adjustment for cancellation of
stock options (325,000) 325,000
Amortization of deferred compensation 1,829,000
Change in unrealized gain on available-for-sale securities 76,000
Net loss
----------------------------------------------------
BALANCES, JANUARY 1, 1999 $103,317,000 $ (1,460,000) $ 93,000
- -------------------------------------------------------------------------------------------------------------------------
Total
Accumulated Stockholders'
Deficit Equity
- -----------------------------------------------------------------------------------------------
Balances, December 31, 1995 $ (997,000) $ 3,214,000
Issuance of Series A preferred stock for cash at $1.00 per share
in January and February 1996, net of issuance costs of $1,000 999,000
Issuance of common stock through:
Initial public offering at $18.00 per share in April 1996,
net of issuance costs of $7,892,000 84,223,000
Conversion of preferred shares in connection with initial public
offering in April 1996 --
Exercise of stock options 54,000
Exercise of purchase rights 92,000
Repurchase of common stock
Deferred compensation related to issuance of common stock
and grants of stock options --
Deferred compensation adjustment for cancellation of
stock options --
Amortization of deferred compensation 6,732,000
Change in unrealized gain on available-for-sale securities 17,000
Net loss (16,078,000) (16,078,000)
---------------------------
Balances, December 31, 1996 (17,075,000) 79,253,000
Issuance of common stock through:
Exercise of stock options 650,000
Exercise of purchase rights 375,000
Deferred compensation related to issuance of common
stock and grants of stock options --
Deferred compensation adjustment for cancellation of
stock options --
Amortization of deferred compensation 2,220,000
Net loss (22,364,000) (22,364,000)
---------------------------
Balances, January 2, 1998 (39,439,000) 60,134,000
Issuance of common stock through:
Exercise of stock options 91,000
Exercise of purchase rights 395,000
Deferred compensation adjustment for cancellation of
stock options --
Amortization of deferred compensation 1,829,000
Change in unrealized gain on available-for-sale securities 76,000
Net loss (22,562,000) (22,562,000)
---------------------------
BALANCES, JANUARY 1, 1999 $(62,001,000) $ 39,963,000
- -----------------------------------------------------------------------------------------------
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
CardioThoracic Systems, Inc. and subsidiary
Year Ended
--------------------------------------------------------
JANUARY 1, 1999 January 2, 1998 December 31, 1996
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(22,562,000) $(22,364,000) $(16,078,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,895,000 1,144,000 251,000
Amortization of notes receivable from officer 71,000 112,000 68,000
Amortization of deferred compensation 1,829,000 2,220,000 6,732,000
Allowances for product returns 56,000 140,000 25,000
Allowances for doubtful accounts 140,000 60,000
Provision for restructuring 736,000 -- --
Changes in operating assets and liabilities:
Accounts receivable (1,721,000) (1,436,000) (158,000)
Inventories (322,000) (421,000) (220,000)
Prepaid expenses and other current assets 26,000 (325,000) (93,000)
Accrued interest on available-for-sale securities 547,000 (212,000) (925,000)
Other assets (27,000) (7,000) (45,000)
Accounts payable 1,092,000 (52,000) 744,000
Accrued liabilities 855,000 2,087,000 2,255,000
----------------------------------------------------
Net cash used in operating activities (17,385,000) (19,054,000) (7,444,000)
Cash flows from investing activities:
Purchases of property and equipment (1,656,000) (2,263,000) (2,682,000)
Purchases of available-for-sale securities (58,187,000) (73,105,000) (78,266,000)
Sales or maturities of available-for-sale securities 75,814,000 90,225,000 7,572,000
Issuance of notes receivable to officers (80,000) -- (1,339,000)
----------------------------------------------------
Net cash provided by (used in) investing activities 15,891,000 14,857,000 (74,715,000)
Cash flows from financing activities:
Bank borrowings 1,200,000 425,000
Proceeds from equipment note 1,785,000 849,000
Repayment of bank borrowings (1,557,000) (68,000)
Repayment of equipment note (465,000) (248,000) (11,000)
Proceeds from issuance of Series A preferred stock, net 999,000
Proceeds from issuance of common stock 486,000 1,025,000 84,369,000
----------------------------------------------------
Net cash provided by (used in) financing activities (1,536,000) 3,694,000 86,631,000
----------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3,030,000) (503,000) 4,472,000
Cash and cash equivalents, beginning of year 4,681,000 5,184,000 712,000
----------------------------------------------------
Cash and cash equivalents, end of year $ 1,651,000 $ 4,681,000 $ 5,184,000
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of preferred stock to common stock in connection
with the Company's initial public offering $ 5,025,000
Reclass of officers notes receivable to notes receivable $ 124,000
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 312,000 $ 290,000 $ 27,000
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CardioThoracic Systems, Inc. and subsidiary
NOTE 1. FORMATION AND BUSINESS OF THE COMPANY:
CardioThoracic Systems, Inc. (the Company) was incorporated in the state of
California on June 15, 1995. The Company designs, develops, manufactures and
markets surgical products and systems for minimally invasive cardiac surgery.
The Company's principal operations commenced in December 1996, at which time it
emerged from the development stage.
On March 29, 1996, the Company was reincorporated in the state of Delaware
with the associated exchange of shares of each class and series of stock of the
predecessor company for one share of each identical class and series of stock of
the Delaware successor company having a par value of $0.001 per share for both
common stock and preferred stock.
In the course of its development activities, the Company has sustained
operating losses and expects such losses to continue through 1999. The Company
plans to continue to finance its operations with proceeds from the sale of
capital stock, such as its initial public offering, borrowings, and revenues
from product sales.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CHANGE IN FISCAL YEAR-END:
In January 1997, the Company changed its financial reporting year from a fiscal
year of twelve calendar months ending on December 31 to a fiscal year of 52 or
53 weeks ending on the Friday closest to December 31. Accordingly, fiscal year
1998 and 1997 ended on January 1, 1999 and January 2, 1998, respectively.
BASIS OF CONSOLIDATION:
The Company had a wholly owned subsidiary in Germany, CardioThoracic Systems,
GmbH (see note 3). The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES:
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents include money market funds and various deposit accounts.
The Company has classified its investments as "available-for-sale." Such
investments are recorded at fair value and unrealized gains and losses, if
material, are recorded as a separate component of equity until realized.
Interest income is recorded using an effective interest rate, with associated
premium or discount amortized to "investment income." The cost of securities
sold is based upon the specific identification method.
INVENTORIES:
Inventories are stated at the lower of cost or market value. Cost is computed
using standard cost, which approximates actual cost on a first-in, first-out
basis.
DEPRECIATION AND AMORTIZATION:
Property and equipment are stated at cost and are depreciated on a straight-line
basis over their estimated useful lives of three to five years. Leasehold
improvements are amortized over their estimated useful lives, or the lease term,
if shorter. Upon sale or retirement of assets, the cost and related accumulated
depreciation or amortization are removed from the balance sheet, and the
resulting gain or loss is reflected in operations.
REVENUE RECOGNITION:
The Company recognizes revenue upon shipment of product to the customer, upon
fulfillment of acceptance terms, if any, and when no significant contractual
obligations remain outstanding.
RESEARCH AND DEVELOPMENT:
Research and development costs are charged to operations as incurred.
CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES:
The Company's cash and cash equivalents are maintained at three financial
institutions. Deposits in these institutions may exceed the amount of insurance
provided on such deposits.
For accounts receivable, management of the Company performs ongoing credit
evaluations of its customers. At January 1, 1999 and January 2, 1998, no
individual customer accounted for more than 10% of net accounts receivable or
total revenues. For the year ended December 31, 1996, one customer accounted for
13% of total revenues.
The Company's products require approvals from the Food and Drug
Administration (FDA) and international regulatory agencies prior to the
commencement of commercialized sales. There can be no assurance that the
Company's products will receive any of these required approvals. If the Company
was denied such approvals, or such approvals were delayed, it would have a
materially adverse impact on the Company.
FOREIGN CURRENCY TRANSLATION:
The Company's international subsidiary used its local currency as its functional
currency. Assets and liabilities were translated at exchange rates in effect at
the balance sheet date and income and expense accounts at average exchange rates
during the year. Resulting translation adjustments were recorded directly to a
separate component of stockholders' equity, if material.
INCOME TAXES:
The Company accounts for income taxes under Statement of Financial Accounting
Standard (SFAS) No. 109, "Accounting for Income Taxes," which prescribes the use
of the liability method whereby deferred tax asset or liability account balances
are calculated at the balance sheet date using current tax laws and rates in
effect for the year in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
29
RECLASSIFICATION:
Certain amounts in the financial statements have been reclassified to conform
with the current year's presentation. The reclassifications had no impact on
previously reported net loss.
NET LOSS PER SHARE:
Effective January 2, 1998, the Company adopted the Financial Accounting
Standards Board No. 128 "Earnings Per Share" and accordingly all prior periods
have been restated. Net loss per common share and per common share-assuming
dilution, on an historical basis, are computed using the weighted average number
of shares of Common Stock outstanding. Common equivalent shares from stock
options and preferred stock are excluded from the computation of net loss per
common share-assuming dilution as their effect is antidilutive. Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletin No. 98, issued in
February 1998, common and common equivalent shares issued at prices below the
anticipated public offering price during the 12 months immediately preceding the
initial filing date have not been included in the calculations.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable and other
accrued liabilities approximate fair value due to their short maturities. Based
on borrowing rates currently available to the Company for loans with similar
terms, the carrying value of notes payable and long-term debt approximates fair
value. Estimated fair values for marketable securities, which are separately
disclosed elsewhere, are based on quoted market prices for the same or similar
instruments.
COMPREHENSIVE INCOME (LOSS):
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," effective January 3, 1998.
This statement requires the disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income is defined as net income (loss) plus revenues, expenses, gains and losses
that, under generally accepted accounting principles, are excluded from net
income (loss). The Company's unrealized gains on investments represent the only
component of comprehensive income excluded from net loss as it is not
significant, individually or in aggregate, and therefore, no separate statement
of comprehensive income has been presented.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS 133"). SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal years beginning after June 15, 1999. Currently, the Company
does not hold derivative instruments or engage in hedging activities.
NOTE 3. RESTRUCTURING:
In the fourth quarter of fiscal 1998, the Company recorded a restructuring
charge of $736,000 in connection with the closure of its German subsidiary. In
accordance with the restructuring plan, this closure resulted in the termination
of four German employees which represented all the employees of the German
subsidiary. The charge associated with employee termination benefits was
$349,000. The balance of the restructuring charge was an $88,000 non-cash charge
for the loss on property and equipment and the write-down of other recorded
assets, $235,000 for lease cancellation expenses and $64,000 for other exit
related costs.
NOTE 4. AVAILABLE-FOR-SALE SECURITIES:
The following summarizes the Company's available-for-sale securities:
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
January 1, 1999
U.S. government notes and bonds $ 967,000 $ -- $ -- $ 967,000
Government agencies' notes and bonds 12,777,000 77,000 -- 12,854,000
Corporate notes and bonds 24,765,000 20,000 (4,000) 24,781,000
------------------------------------------------------------------------
$ 38,509,000 $ 97,000 $ (4,000) $ 38,602,000
- ------------------------------------------------------------------------------------------------------------------------
January 2, 1998
Government agencies' notes and bonds $ 10,759,000 $ 8,000 $ (1,000) $ 10,766,000
Corporate notes and bonds 45,377,000 12,000 (2,000) 45,387,000
------------------------------------------------------------------------
$ 56,136,000 $ 20,000 $ (3,000) $ 56,153,000
- ------------------------------------------------------------------------------------------------------------------------
30
Available-for-sale debt securities by contractual maturities at January 1,
1999, are shown below.
Amortized Market
Cost Value
- --------------------------------------------------------------------------------
Less than one year $27,471,000 $27,513,000
Due in one to two years 11,038,000 11,089,000
-------------------------------
$38,509,000 $38,602,000
- --------------------------------------------------------------------------------
NOTE 5. INVENTORIES:
JANUARY 1, 1999 January 2, 1998
- --------------------------------------------------------------------------------
Raw materials $503,000 $188,000
Work in progress 146,000 203,000
Finished goods 314,000 250,000
----------------------------
$963,000 $641,000
- --------------------------------------------------------------------------------
NOTE 6. PROPERTY AND EQUIPMENT:
JANUARY 1, 1999 January 2, 1998
- --------------------------------------------------------------------------------
Furniture and fixtures $ 574,000 $ 475,000
Leasehold improvements 1,267,000 1,228,000
Computer and office equipment 1,516,000 1,298,000
Machinery and equipment 3,309,000 2,009,000
-------------------------------
6,666,000 5,010,000
Less accumulated depreciation
and amortization (3,292,000) (1,397,000)
-------------------------------
$ 3,374,000 $ 3,613,000
- --------------------------------------------------------------------------------
NOTE 7. ACCRUED LIABILITIES:
JANUARY 1, 1999 January 2, 1998
- --------------------------------------------------------------------------------
Accrued payables $3,619,000 $3,249,000
Restructuring costs (note 3) 736,000 --
Accrued compensation 1,666,000 1,181,000
------------------------------
$6,021,000 $4,430,000
- --------------------------------------------------------------------------------
NOTE 8. COMMITMENTS:
OPERATING LEASES:
The Company leases its facilities under three separate operating leases, which
expire in August 2000, May 2001 and May 2001. In addition to the base rentals,
the Company is responsible for certain taxes, insurance and maintenance costs.
Two of the lease terms include annual rent adjustments under which the base rent
is increased in accordance with the published Consumer Price Index for the area.
At January 1, 1999, future minimum facility lease payments are as follows:
1999 $ 633,000
2000 635,000
2001 255,000
----------
$1,523,000
- -----------------------------------------------------------------------------
In August 1996, the Company entered into a noncancelable agreement to assign
the lease for one of its facilities through its expiration. The minimum facility
lease payments, disclosed above, have not been reduced by minimum noncancelable
rentals of $109,000, due in the future under the sublease agreement. The Company
received payments of $65,000, $65,000 and $56,000 under a sublease for the years
ended January 1, 1999, January 2, 1998 and December 31, 1996.
Rent expense for the years ended January 1, 1999, January 2, 1998 and
December 31, 1996 was $550,000, $497,000 and $387,000, respectively, net of
sublease income.
DEVELOPMENT AND LICENSE AGREEMENTS:
In February and March 1996, the Company entered into development and license
agreements with companies to develop minimally invasive cardiothoracic surgical
products. Under the development program agreements, the Company will make
development payments totaling $3.9 million upon the completion of certain
milestones. During fiscal 1998, 1997 and 1996 none, $1.0 million and $1.5
million has been charged to research and development expense in connection with
these agreements, respectively.
NOTE 9. BORROWINGS:
BANK BORROWINGS:
The Company had a $5.0 million line of credit agreement, the proceeds of which
were used for leasehold improvements and equipment purchases. The principal,
plus all accrued interest, advanced against this line of credit was paid in its
entirety in September 1998.
EQUIPMENT NOTE:
The Company had a revolving $2.5 million equipment loan credit facility with a
financial institution which expired on December 31, 1997. Borrowings under this
agreement are collateralized by the assets purchased under this equipment
facility. Three separate equipment notes had been drawn against this facility
for principal amounts of $849,000, $851,000 and $934,000, bearing interest at
11.97%, 12.27% and 11.75%, respectively. As of January 1, 1999, principal
outstanding under each of these notes was $545,000, $614,000 and $752,000, and
the final payment date is November 8, 2001, June 4, 2002 and November 11, 2002,
respectively.
At January 1, 1999, the future minimum payments under the equipment facility
are as follows:
1999 $ 500,000
2000 558,000
2001 605,000
2002 248,000
----------
$1,911,000
- -----------------------------------------------------------------------------
NOTE 10. STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
Under the Company's Articles of Incorporation, the Company's preferred stock is
issuable in series. As of January 1, 1999, 5,000,000 shares of preferred stock
were authorized and no preferred stock was issued or outstanding.
COMMON STOCK:
The Company issued shares of common stock to certain employees which contain
repurchase provisions in the event of termination of employment. These shares
are generally released from the repurchase provision ratably over 48 months
beginning on certain vesting dates. At January 1, 1999, 254,055 shares are
subject to repurchase under these stock purchase agreements.
31
STOCK OPTION PLANS:
In December 1995, the Company approved the Incentive Stock Plan under which
the officers of the Company are authorized and directed to enter into stock
option agreements with selected individuals. The Company reserved 1,200,000
shares of common stock for issuance under the Incentive Stock Plan. In
February 1996, the Company adopted the Nonstatutory Stock Option Plan and
reserved 900,000 shares of common stock for issuance. In March 1996, the
Company increased the shares reserved for the Nonstatutory Stock Option Plan
from 900,000 shares to 995,000 shares. In January 1998, the Company approved
the 1998 Nonstatutory Stock Option Plan and reserved 150,000 shares of common
stock for issuance. Under the Company's stock option plans, the Board of
Directors has the authority to determine to whom options will be granted, the
number of shares, the vesting period and the exercise price (which generally
cannot be less than fair market value at the date of the grant). The options
generally vest over four years and expire ten years from date of grant.
DIRECTOR OPTION PLAN:
In February 1996, the Company approved the Director Option Plan and reserved
200,000 shares of common stock for issuance.
Activity under the Plans is as follows:
Outstanding Options
Shares ---------------------------------------------
Available Number Exercise Aggregate
for Grant of Shares Price Price
- ---------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 740,000 460,000 $ 0.10 $ 46,000
Additional shares authorized 1,595,000
Options granted (2,121,250) 2,121,250 $0.001-$21.38 10,495,000
Options canceled 17,500 (17,500) $17.00-$20.88 (327,000)
Options exercised (254,300) $0.001-$11.00 (54,000)
---------------------------------------------------------------
Balances, December 31, 1996 231,250 2,309,450 $0.001-$21.38 10,160,000
Additional shares authorized 600,000
Options granted (1,370,200) 1,370,200 $ 4.78-$25.38 12,988,000
Options canceled 807,019 (807,019) $ 0.10-$25.38 (8,955,000)
Options exercised (503,504) $0.001-$11.00 (649,000)
---------------------------------------------------------------
Balances, January 2, 1998 268,069 2,369,127 $0.001-$21.13 13,544,000
Additional shares authorized 750,000
Options granted (1,476,525) 1,476,525 $ 3.50-$ 7.94 7,901,000
Options canceled 1,061,480 (1,061,480) $ 0.10-$21.13 (9,668,000)
Options exercised (457,249) $0.001-$ 5.75 (91,000)
---------------------------------------------------------------
Balances, January 1, 1999 603,024 2,326,923 $ 0.10-$14.88 $11,686,000
- ---------------------------------------------------------------------------------------------------------
The weighted average fair value of options granted in 1998, 1997 and 1996 was
$3.88, $6.14 and $4.40, respectively.
EMPLOYEE STOCK PURCHASE PLANS:
In February 1996, the Company approved the Employee Stock Purchase Plan and
reserved 150,000 shares of common stock for issuance. As of January 1, 1999,
January 2, 1998 and December 31, 1996, 99,326, 44,626 and 6,009 shares of
common stock had been purchased under this plan at a weighted average of
$3.97, $8.42 and $15.30 per share, respectively. In October 1998, the
stockholders approved the adoption of the 1998 Employee Stock Purchase Plan
and the reservation of 250,000 shares of common stock for sale thereunder. As
of January 1, 1999 no shares of common stock had been purchased under this
plan. Under both plans eligible employees may purchase a limited number of
shares of the Company's stock at 85% of the fair market value at certain
plan-defined dates.
STOCK-BASED COMPENSATION:
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." Had compensation cost for the Director Option
Plan, the Incentive Stock Plan, the Nonstatutory Stock Option Plans and the
Employee Stock Purchase Plans been determined based on the fair value at the
grant date for awards subsequent to January 1, 1995, according to the
provisions of SFAS No. 123, the Company's net loss and net loss per share for
the years would have been increased to the pro forma amounts indicated below:
JANUARY 1, 1999 January 2, 1998 December 31, 1996
- -----------------------------------------------------------------------------------
Net loss--as reported $(22,562,000) $(22,364,000) $(16,078,000)
- -----------------------------------------------------------------------------------
Net loss--pro forma $(26,022,000) $(24,868,000) $(16,180,000)
- -----------------------------------------------------------------------------------
Net loss per common
share and per
common share
assuming dilution
-- as reported $ (1.62) $ (1.66) $ (1.64)
- -----------------------------------------------------------------------------------
Net loss per common
share and per
common share
assuming dilution
-- pro forma $ (1.86) $ (1.84) $ (1.65)
- -----------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes model with the following weighted average assumptions:
1998 1997 1996
- --------------------------------------------------------------------------------
Risk-free interest rate 4.04%-5.77% 5.71%-6.81% 5.57%-6.44%
Expected life 4 YEARS 4 years 4 years
Expected dividends -- -- --
Expected volatility 79.23% 73.57% 38.88%
The expected life is based on the assumption that stock options on
average are exercised once they are fully vested. The risk-free interest rate
was calculated in accordance with the grant date and expected life.
32
The options outstanding and currently exercisable by exercise price at
January 1, 1999 are as follows:
Options Currently
Options Outstanding Exercisable
- ---------------------------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------------------------------------
$ 0.10 262,548 7.1 $ 0.10 129,005 $ 0.10
$ 3.50-$5.25 718,650 9.3 $ 4.88 147,250 $ 5.00
$ 5.28-$7.63 1,321,725 8.8 $ 5.94 466,734 $ 5.96
$ 8.00 9,000 8.8 $ 8.00 9,000 $ 8.00
$14.88 15,000 7.4 $14.88 15,000 $14.88
Total 2,326,923 766,989
- --------------------------------------------------------------------------------------------------------------
Deferred compensation to be recognized as a result of stock options
granted and common stock issued subject to repurchase provisions as of
January 1, 1999 totals $1.4 million. Amortization of deferred compensation is
generally over vesting periods of one to four years, with compensation
expense recognized in the years ended January 1, 1999, January 2, 1998 and
December 31, 1996 being $1.8 million, $2.2 million and $6.7 million,
respectively.
NOTE 11. RELATED PARTIES:
In June 1995, the Company entered into a consulting and assignment agreement
with a surgeon who serves on the Company's Scientific Advisory Board. Under
the agreement, the surgeon will develop prototype instruments, participate in
developing any testing protocols, provide clinical input with respect to
current surgical procedures, provide evaluations of prototype products and
test prototype and production products. In consideration, the Company will
pay this surgeon $5,000 per month. Payments under this agreement totaled
$60,000, $60,000 and $60,000 in fiscal year 1998, 1997 and 1996,
respectively. The assignment agreement assigned to the Company all this
surgeon's rights, title and interest in and to a U.S. patent application
entitled "Method For Coronary Artery Bypass." Concurrent with this agreement,
the Company sold 103,060 shares of common stock for cash at $0.001 per share
and will pay a 3% royalty on the first $10 million of net sales, 2% on the
next $15 million of net sales and 1.5% on net sales above $25 million of
future products covered by future potential patents on which this surgeon is
the sole inventor. No royalty payments were made in 1998, 1997 and 1996.
In February 1996, the company entered into a consulting agreement with a
board member. The agreement requires this board member to provide consulting
services with respect to the conception, development and clinical evaluation
of devices, instruments and techniques for minimally invasive coronary artery
bypass graft surgery for four years. In consideration for these consulting
services, the Company granted, to partnerships of which this board member is
a general partner, nonstatutory options to purchase a total of 90,000 shares
of common stock of the Company at an exercise price of $0.10 per share. The
options were immediately fully exercisable, but subject to repurchase at cost
in the event that both the agreement is terminated in accordance with its
terms and this board member is no longer a member of the Company's Board of
Directors. The repurchase right will lapse at the rate of 1/48 of the shares
each month beginning in March 1996. The Company will also pay royalties of 3%
on the aggregate net sales of certain products sold by the Company until a
total of $25,000,000 has been paid. Thereafter, the Company will have no
further royalty obligations under this agreement. The partnerships exercised
the stock options to purchase a total of 90,000 shares in February 1996. No
royalties were paid during 1998, 1997 and 1996.
Also in February 1996, the Company entered into a development program
agreement with a medical device company. This company is currently developing
several minimally invasive cardiothoracic surgical products. Under the
development program agreement, the Company issued a purchase order in the
amount of $30,000 to this company for their current prototype products. The
Company made development payments totaling $500,000 and issued a nonstatutory
option to purchase 450,000 shares of common stock of the Company at an
exercise price of $0.001 per share. All of the shares subject to the option
were exercised as of January 1, 1999. Also, the Company will pay certain
royalties based on revenue from certain product sales and sublicenses. The
Company may terminate the agreement without cause on 90 days notice by paying
a termination fee to this company in addition to all payments owed through
the notice date. No royalty payments were made during 1998, 1997 and 1996.
NOTES RECEIVABLE FROM OFFICERS:
In May 1996, the Company loaned an officer $35,000. The resultant
promissory note bears interest at 6.36% per annum and is due on the earlier
of May 20, 2000 or termination of employment. At January 1, 1999 all
principal and interest is outstanding on this note. The loan is
collateralized by the officer's option to purchase common stock.
In August 1996, the Company loaned an officer $750,000 which is due and
payable on the earlier of August 16, 2000 or termination of employment. The
resultant promissory note does not bear interest and is collateralized by the
officer's holding of 75,000 shares of the Company's common stock. At January
1, 1999 principal of $750,000 is outstanding on this note.
In December 1996, the Company loaned an officer $200,000 pursuant to a
provision in the officer's employment agreement. The resultant promissory
note bears interest at 6.31% per annum and is due on the earlier of December
31, 2000 or termination of employment. At January 1, 1999 all principal and
interest is outstanding on this note.
In June 1998, the Company loaned an officer $80,000 pursuant to a
provision in the officer's employment agreement. The resultant promissory
note bears interest at 5.77% and is due on the earlier of four annual equal
installments starting December 1, 1998 or termination. Should the officer's
association with the Company continue through the due date of any installment
payment under this note, the Company agrees to forgive all principal and
interest due by the terms of the note for the installment. At January 1, 1999
$60,000 principal is outstanding on this note.
33
NOTE 12. INCOME TAXES:
At January 1, 1999, the Company has approximately $48.3 million in federal
and $35.3 million in state net operating loss carryforwards to reduce future
taxable income. These carryforwards expire in the years 2001 through 2018, if
not utilized. In addition, the Company has federal and state research and
development credits of $1.4 million and $778,000, respectively. These
carryforwards expire in the years 2011 through 2018 if not utilized.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in the case of an "ownership change" of a corporation.
Any ownership changes, as defined, may restrict utilization of carryforwards.
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities are as follows:
JANUARY 1, 1999 January 2, 1998
- ---------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 18,527,000 $ 10,724,000
Capitalized research and
development costs 72,000 83,000
Capitalized start-up costs 929,000 1,267,000
Research and development credits 1,898,000 947,000
Other 776,000 381,000
Less: valuation allowance (22,202,000) (13,402,000)
-----------------------------------
Net deferred tax assets $ -- $ --
- ---------------------------------------------------------------------------
In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it is more likely
than not that a tax benefit may not be realized from the asset in the future.
The Company has established a valuation allowance to the extent of its
deferred tax assets due to uncertainties that a benefit can be realized in
the future.
NOTE 13. EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) Retirement Plan (the Plan) which covers
substantially all employees. Eligible employees may make salary deferral
(before tax) contributions up to a specified maximum. The Company, at its
discretion, may make additional matching contributions on behalf of the
participants of the Plan. To date, the Company has not made any contributions
to the Plan.
NOTE 14. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION:
The Company has adopted the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS 131"), effective for fiscal years
beginning after December 31, 1997. SFAS 131 supercedes Statement of Financial
Accounting Standards, "Financial Reporting for Segments of a Business
Enterprise" ("SFAS 14"). SFAS 131 changes current practice under SFAS 14 by
establishing a new framework on which to base segment reporting and also
requires interim reporting of segment information.
Management uses one measurement of profitability for its business. The
Company's cardiac surgery products are developed and marketed to cardiac
surgeons and hospitals. The Company markets its products to customers in the
United States, Canada, Europe, South America, Middle East and Asia Pacific
and operates in one business segment. All of the Company's long-lived assets
are in the United States. Revenue information by geographic area is as
follows:
Revenue
- -------------------------------------------------------------------------------
January 1, 1999:
United States $ 14,125,000
International 2,024,000
--------------
Total $ 16,149,000
- -------------------------------------------------------------------------------
January 2, 1998:
United States $ 7,725,000
International 1,654,000
--------------
Total $ 9,379,000
- -------------------------------------------------------------------------------
December 31, 1996:
United States $ 141,000
International --
--------------
Total $ 141,000
- -------------------------------------------------------------------------------
34
REPORT OF INDEPENDENT ACCOUNTANTS
CardioThoracic Systems, Inc., and subsidiary
To the Board of Directors and Stockholders of
CardioThoracic Systems, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of
CardioThoracic Systems, Inc. and subsidiary at January 1, 1999 and January 2,
1998, and the results of their operations and cash flows for each of the
three years in the period ended January 1, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 22, 1999
35
CORPORATE OFFICERS AND BOARD MEMBERS
CardioThoracic Systems, Inc.
CORPORATE OFFICERS
RICHARD M. FERRARI
President and Chief Executive Officer
JEFFREY G. GOLD
Executive Vice President and Chief Operating Officer
STEVEN M. VAN DICK
Vice President, Finance and Administration and Chief Financial Officer
MICHAEL J. BILLIG
Vice President, Regulatory, Quality and Clinical Research
GEOFFREY D. DILLON
Vice President, Sales and Marketing
RICHARD A. LOTTI
Vice President, Business Development
CHARLES S. TAYLOR
Vice President and Chief Technical Officer
BOARD MEMBERS
ROBERT C. BELLAS, JR.
General partner, Morgenthaler Ventures, a venture capital firm
RICHARD M. FERRARI
President and Chief Executive Officer, CTS
THOMAS J. FOGARTY, M.D.
Cardiovascular surgeon, Professor of Surgery, Stanford University School of
Medicine
JACK W. LASERSOHN
General partner, The Vertical Group, a venture capital firm
THOMAS C. MCCONNELL
General partner, New Enterprise Associates, a venture capital firm
CHARLES S. TAYLOR
Vice President and Chief Technical Officer, CTS
PHILIP M. YOUNG
General partner, U.S. Venture Partners, a venture capital firm
36
CORPORATE INFORMATION
CardioThoracic Systems, Inc.
CORPORATE OFFICES
CardioThoracic Systems, Inc.
10600 North Tantau Avenue
Cupertino, CA 95014-0739
(408) 342-1700 phone
(408) 342-1717 fax
TRANSFER AGENT AND REGISTRAR
Northwest Bank Minnesota, N.A.
Shareowner Services
P.O. Box 64854
St. Paul, MN 55164
(612) 450-4084 or (800) 468-9716
(612) 450-4078 fax
GENERAL COUNSEL
Wilson Sonsini Goodrich & Rosati
Professsional Corporation
Palo Alto, CA
AUDITORS
PricewaterhouseCoopers LLP
San Jose, CA
ANNUAL MEETING
The Annual Meeting of Shareholders will be held May 4, 1999 at 2:00 p.m. at
the Company's corporate offices.
FORM 10-K
A copy of the Company's Form 10-K is available, without charge, upon written
request to the Company's Investor Relations department.
MARKET PRICE OF COMMON STOCK AND DIVIDEND INFORMATION
The Company's common stock is traded on the NASDAQ National Market under the
symbol "CTSI." There were approximately 295 holders of record of the
Company's common stock on February 9, 1999. The table below provides
quarterly high/low prices on the NASDAQ national market, as reported by
NASDAQ.
1998 1997
Quarter High Low High Low
- ---------------------------------------------------
First $7 15/16 $5 1/2 $26 1/2 $18 5/8
Second 6 1/2 4 1/4 21 5/8 10 3/4
Third 5 5/16 3 3/8 14 1/8 6 3/4
Fourth 8 3/8 3 1/8 9 3/8 4 5/8
- ---------------------------------------------------
No dividends have been paid on common stock to date, and the Company has no
current plans to do so.