-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IeGRUDdGx1gm8ihnfvr/KTYvgBq5PfxtogXtzl5u/jWqQmy4zWjLAYmuY9kzA1OL ZAKaEHfVEmF68Az+uYhp6Q== 0000891618-98-001486.txt : 19980401 0000891618-98-001486.hdr.sgml : 19980401 ACCESSION NUMBER: 0000891618-98-001486 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARDIOGENESIS CORP CENTRAL INDEX KEY: 0001013465 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 770352469 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-28424 FILM NUMBER: 98583944 BUSINESS ADDRESS: STREET 1: 3110 CORONADO AVE CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4083288500 MAIL ADDRESS: STREET 1: CARDIOGENESIS CORP STREET 2: 540 OAKMEAD PKWY CITY: SUNNYVALE STATE: CA ZIP: 94086 10-K405 1 FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1997 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended DECEMBER 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No fee required] For the Transition period from ____________ to ___________ Commission File Number: 0-28424 CARDIOGENESIS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 77-0352469 --------------------------------- --------------------- (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 540 OAKMEAD PARKWAY SUNNYVALE, CALIFORNIA 94086 (Address of principal executive offices, including zip code) (408) 328-8500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.001 PAR VALUE PER SHARE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [X] The number of outstanding shares of Registrant's Common Stock on March 27, 1998 was 12,186,751 shares. The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing price of such voting stock on March 27, 1998, as reported by the Nasdaq national market, was approximately $31,067,000. Shares of Common Stock held by each executive officer and director and by each entity affiliated with such persons have been excluded from such calculation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the Registrant's definitive Proxy Statement for the 1998 Annual Stockholders Meeting to be held on June 2, 1998 are incorporated by reference in Part III of this Form 10-K to the extent stated herein. 2 FORM 10-K TABLE OF CONTENTS PART I ITEM 1. Business....................................................... 2 ITEM 2. Properties..................................................... 14 ITEM 3. Legal Proceedings.............................................. 14 ITEM 4. Submission of Matters to a Vote of Security Holders............ 15 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................... 15 ITEM 6. Selected Financial Data........................................ 16 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 16 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk..... 26 ITEM 8. Financial Statements and Supplementary Data.................... 27 ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..................................... 46 PART III ITEM 10. Directors and Executives Officers of the Registrant............ 46 ITEM 11. Executive Compensation......................................... 46 ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................................... 46 ITEM 13. Certain Relationships and Related Transactions................. 46 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................................... 46 SIGNATURES.................................................................. 50
PART I ITEM 1. BUSINESS This Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve a number of risks and uncertainties, including the factors described throughout this Report, particularly the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors." The actual results the Company achieves may differ materially from any forward-looking statements due to such risks and uncertainties. The Company has identified by an asterisk (*) various sentences within this Report which contain such forward-looking statements, and words such as "believes,""anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. The Company undertakes no obligation to revise any forward-looking statements to reflect events or circumstances that may arise after the date of this Report. Readers are urged to carefully review and consider the various disclosures made by the Company in this Report that attempt to advise interested parties of the risks and factors that may affect the Company's business. 2 3 GENERAL CardioGenesis is developing proprietary probe and catheter systems to perform both surgical and catheter-based percutaneous transmyocardial revascularization ("TMR"). TMR is used to treat patients with severe coronary artery disease ("CAD") who suffer from recurrent debilitating chest pain. Unlike coronary artery bypass graft ("CABG") surgery and percutaneous transluminal coronary angioplasty ("PTCA"), which are used to bypass, reopen or widen blocked or narrowed arteries, TMR involves the use of laser energy, delivered through probes and catheters, to create typically between 15 and 30 channels in the ischemic oxygen-starved regions of the heart muscle. Clinical studies of TMR to treat severe angina at some of the world's leading medical centers have demonstrated improvements in clinical conditions and have reported reductions in the frequency of repeated diagnostic procedures and hospitalizations. While the mechanism of the potential clinical benefit of TMR is currently unproven, and additional clinical and mechanism investigations are ongoing, the Company believes the reported benefits of TMR are associated with angiogenesis, the formation of new blood vessels. The Company is currently developing three types of TMR systems, based upon its patented technology, for use by cardiothoracic surgeons and interventional cardiologists to treat patients with severe CAD. The Company's intraoperative TMR ("ITMR(TM)") System and thoracoscopic TMR ("TTMR(TM)") System use an epicardial approach (i.e., creating channels from outside the heart into the left ventricle) and its percutaneous myocardial revascularization system ("PMR(TM)") uses an endocardial approach (i.e., creating channels from inside the left ventricle partially through the myocardium). The Company's objective is to establish TMR as a conventional therapy to treat CAD and to become the worldwide market leader of TMR systems. *To establish CardioGenesis as the leading provider of TMR systems, the Company intends to continue to conduct clinical trials at, and focus its marketing efforts on, high volume, prestigious cardiovascular centers. The Company's clinical efforts have been focused on patients with severe angina for whom existing therapies cannot be used (so-called "no-option" patients). *The Company plans to conduct clinical trials to broaden the applications for its TMR systems to cover multiple indications, including use as an adjunct to other interventional therapies, such as CABG and PTCA. *The Company intends to build upon its domestic and international intellectual property position, particularly its issued percutaneous and intraoperative TMR method patents. *The Company seeks to rapidly establish a large installed base of its TMR systems in key international markets, emerging secondary markets, and, following U.S. Food and Drug Administration ("FDA") approval, in the United States, thereby creating an opportunity for a recurring revenue stream from the sale of its disposable probes and catheters. To help achieve this goal, the Company has entered into an exclusive international distribution agreement with Boston Scientific Corporation ("BSC"), a worldwide leader in medical devices. *The Company believes this agreement, which grants BSC exclusive rights and responsibilities for sales and distribution of the full range of the Company's TMR products in all international markets, is the approach needed to capitalize on the market potential of TMR therapy and the Company's TMR probes and catheters. *Additionally, the Company intends to invest significant resources to enhance its understanding of the TMR mechanism to enable it to further develop its products and to promote widespread adoption of TMR in the medical community. CARDIOGENESIS TMR APPROACHES AND MARKETS The Company's proprietary TMR systems are designed to create channels either (i) epicardially (i.e., from outside the heart into the left ventricle) or (ii) endocardially (i.e., from inside the left ventricle partially through the myocardium). The Company's ITMR System and TTMR System use an epicardial approach and its PMR System uses an endocardial approach. ITMR. In an intraoperative TMR procedure, the heart is exposed by a cardiothoracic surgeon through either a thoracotomy (an incision through the chest wall) or a sternotomy (an incision through the sternum). The Company's ITMR probe is then applied directly onto the myocardium delivering laser energy to create channels into the left ventricle. The Company initiated Phase I feasibility clinical trials with the ITMR System in "no-option" patients in November 1995. In June 1996, the Company received approval from the FDA to expand its multi-center ITMR clinical trial to a Phase II, prospective, randomized clinical trial in "no-option" patients. Enrollment in the Phase II, randomized, no-option trial is now complete. The Company has commenced submission of data and information to the FDA on the ITMR System. The Company plans to continue submitting information and updates to the FDA throughout the next six to nine months and to respond to periodic inquiries from the FDA with respect to review of such data and information. This proactive and collaborative approach to submissions provides the Company with a means for frequent reviews by the FDA of information required for Pre-Market Release Approval ("PMA") as well as discussions regarding the ITMR System. See "--Clinical Trials." In August 1996, the Company received an Investigational Device Exemption ("IDE") from the FDA and has begun a clinical study of its ITMR system used as an adjunctive therapy to CABG in patients with severe angina who are only partially treatable by CABG. The adjunct to CABG clinical trial is on-going. See "-- Clinical Trials." PMR. The Company's percutaneous PMR System is designed to be used by an interventional cardiologist in a cardiac catheterization laboratory. In this procedure, the cardiologist accesses the heart by inserting a fiber optic equipped catheter system into the femoral 3 4 artery at the groin and then advancing it through the aorta into the left ventricle. Once in the ventricle, the fiber optic catheter is guided to the ischemic areas of the endocardial wall surface to create channels partially through the wall of the heart. *The Company believes that PMR, as a catheter-based procedure, is less invasive, less traumatic, and more cost-effective than other TMR approaches. In November 1996, the Company initiated clinical testing in Europe of its PMR System in "no-option" patients. In July 1997, the Company received an IDE from the FDA which allows a multi-center clinical trial of its PMR system to treat angina in no-option patients at up to twelve clinical sites. The PMR clinical trials are on-going. See "-- Clinical Trials." TTMR. In a thoracoscopic TMR procedure, a TTMR probe is used by a cardiothoracic surgeon in combination with endoscopic instruments to access and visualize the heart. Through these endoscopic instruments, the TTMR probe is maneuvered and placed on the beating heart delivering laser energy to create channels into the left ventricle. *The Company believes the approaches discussed above may be used for a number of CAD indications. However, none of the Company's TMR systems has received FDA approval, and there can be no assurance any of these approaches will receive FDA approval for any of the indications discussed below or will be accepted by the medical community as viable methods for the treatment of CAD. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- No Assurance of Obtaining Required Regulatory Approvals to Market Products in the United States; Significant Time Before Submission of Any PMA." POTENTIAL INDICATIONS *The Company believes the three approaches it is developing could be used to address a range of indications for TMR and estimates each year there are more than 500,000 patients in the United States and other key markets who could potentially benefit from TMR therapy. "No-option." TMR is currently being studied as a treatment for patients with severe CAD not treatable by PTCA, CABG or other interventional therapies. These patients have severe diffuse multivessel CAD and may have undergone multiple prior cardiac procedures. *The Company believes all of its TMR systems could be used in the treatment of "no-option" patients. Adjunct to CABG. TMR is also currently being studied in combination with CABG, in cases where the patient has one or more areas of the heart afflicted by severe CAD that cannot be adequately bypassed. In these cases, the coronary arteries that can be bypassed are grafted, while other areas that are ischemic and not suitable for bypass are treated with TMR. *The Company believes its ITMR and TTMR Systems could address this potential indication. Adjunct to PTCA. *The Company believes its proprietary PMR System may be used in combination with a PTCA procedure, where there is evidence of severely ischemic regions of the heart not amenable to treatment with PTCA alone. In this situation, the Company's PMR System would be used to treat the regions of the heart where PTCA is not effective. No Company has yet received approval from the FDA to market TMR systems in the United States for any indication. None of the Company's TMR systems has been proven to be safe or efficacious nor has the Company received regulatory approval to market any of its TMR systems in the United States. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- Early Stage of Clinical Trials; No Assurance of Safety or Efficacy" and "-- No Assurance of Obtaining Required Regulatory Approvals to Market Products in the United States; Significant Time Before Submission of Any PMA." PRODUCTS The Company's TMR systems include disposable fiber optic probes and catheters for transmitting laser energy to the myocardium, a Holmium YAG ("Ho:YAG") laser unit, and an electrocardiogram ("ECG") monitor, which are described below. Disposable Fiber Optic Probes and Catheters. The proprietary probes used in the Company's ITMR and TTMR Systems and the proprietary catheters used in the Company's PMR System are flexible, fiber-optic based devices for positioning and transmitting laser energy to create channels through the wall of the heart. The tip of the probe includes a proprietary lens apparatus that creates laser energy distribution to allow for progressive, controlled penetration of the myocardium. A highly flexible optical fiber, encased within a protective fiber jacket, transmits energy to the lens from the laser. The probes and catheters are designed as 4 5 disposable single-use devices. The PMR aligning catheter, with its coaxial design, can be directed anywhere into the left ventricle. The catheter system permits steering within the ventricle to guide the optical system to the appropriate areas of the heart wall. Once the catheter system is oriented toward the target to be treated, the lens is independently advanced to the ventricular wall assuring perpendicular contact on the myocardial wall. Ho:YAG Laser. The Company's TMR systems incorporate a proprietary Ho:YAG laser specifically designed for TMR applications. The Company's current laser is a portable unit, weighing approximately 140 pounds, which delivers laser energy. *The Company believes the Ho:YAG laser is optimally suited for TMR procedures because of (i) its tissue ablation characteristics; (ii) its ability to deliver treatment energy through a fiber optic device, thereby allowing percutaneous applications; (iii) its reliability when compared with other types of lasers; and (iv) its ability to be manufactured cost-effectively. ECG Monitor. The Company's TMR systems include a commercially available, microprocessor-controlled ECG monitor and a Company proprietary software algorithm. This ECG monitor provides the means for timing the firing of the Company's laser to the patient's cardiac electrical activity. *Based on early research sponsored by the Company and conducted at a major academic institution, the Company believes timing the laser to the patient's cardiac electrical activity may be a significant factor in minimizing the occurrence of arrhythmias (irregular heartbeats). The Company's TMR systems are designed to offer the following advantages: Flexible System Design. The Company's TMR systems are designed to deliver laser energy in a progressive, controlled manner through a fiber optic probe or catheter, providing the Company with a technology adaptable for multiple approaches and indications. Price/Performance. The Company has designed its TMR systems to be cost-effective, enabling flexibility in the pricing of its laser systems and disposable probes and catheters. *The Company believes that this flexibility will enable it to offer superior price/performance to its customers. Size and Portability. The Company's current TMR systems weigh approximately 140 pounds, are portable and do not occupy a significant amount of space in an operating room or cardiac catheterization laboratory. Reliability. The Ho:YAG laser used in the Company's TMR systems is a solid state laser designed for reliability, thereby minimizing maintenance costs. The Company's TMR systems are also designed to meet and withstand the rigors of shipment, installation, repeated use, and relocation within the hospital environment. In July 1996, the Company received the Conformite Europeene (CE) Mark approval to market its ITMR System in the European Community. The CE Mark is granted to companies whose products meet the essential requirements of the European Medical Device Directive ("MDD") and provides the regulatory approval necessary for commercialization in the European Community. In October 1996, at the European Association of Cardio-Thoracic Surgery's annual meeting in Prague, Czech Republic, the Company commercially launched the ITMR System in Europe. In January 1998, the Company received the CE Mark approval for use of its PMR system in the European Community. The Company is working closely with BSC, as the Company's exclusive distributor in international markets to expand the base of PMR sites and in preparing for the market launch of the System in Europe and in other international markets. The Company is not currently developing any products outside the field of TMR. Consequently, the Company is dependent on the successful development and commercialization of the Company's TMR systems. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- Dependence on TMR Product Line; Rapid Technological Change." MARKETING, SALES AND DISTRIBUTION The Company's marketing strategy is designed to generate broad market acceptance of the TMR procedure based on demonstrated clinical efficacy and cost-effectiveness. The Company's strategy includes developing and maintaining close working relationships with key cardiothoracic surgeons and interventional cardiologists who practice at major cardiac care centers. *The Company seeks to rapidly establish a large installed base of its TMR systems in key international markets and emerging secondary markets thereby creating an opportunity for a recurring revenue stream from the sale of its disposable probes and catheters. *The Company expects that education and awareness of cardiothoracic surgeons, interventional cardiologists and patients as to the benefits of the Company's TMR systems will be a key component of its marketing and sales effort for its TMR probe and catheter systems. *The Company currently supports and intends to support rigorous clinical research designed to support the safety and efficacy of its 5 6 TMR systems. *In addition, to increase awareness of its TMR systems, the Company has encouraged and intends to encourage the appropriate presentation of the results of this research by the research investigators at major national and international medical symposia and by the publication of clinical and scientific reports of such results in major peer-reviewed publications. *In the United States, the Company intends to market its products, if approved by the FDA, with a direct sales organization. The Company has deployed a U.S. sales force. However, additional resources will be required to develop a sales force capable of effectively commercializing the Company's TMR systems in the United States. Failure to build an effective sales and marketing organization could have a material adverse effect on the Company's business, financial condition and results of operations. To effectively address the international markets, in 1996 the Company entered into an exclusive international distribution agreement with BSC, a worldwide leader in medical devices. *The Company believes this agreement, which grants BSC exclusive rights and responsibilities for sales and distribution of the full range of its TMR products in all international markets, is the approach needed to capitalize on the market potential of TMR therapy and the Company's TMR probes and catheters. *The Company believes this strategic relationship should favorably position the Company in the increasingly competitive TMR technology, sales and marketing environment and should help the Company to address new marketing challenges. Until such time, if ever, as the FDA approves the Company's TMR systems for marketing in the United States, the Company anticipates it will continue to derive its revenues primarily from BSC as the Company's exclusive international distributor. The agreement with BSC does not allow the Company to control international end-market prices and may not result in the same level of sales and marketing efforts as would be the case using a direct sales force. BSC has certain rights to terminate the agreement with the Company which, if exercised, would require the Company to make alternative arrangements for the sale of its products internationally, and which, if exercised, could have a material adverse effect on the Company's business, financial condition and results of operations for the foreseeable future. Even if FDA approval is obtained, the Company expects international sales will continue to account for a significant portion of the Company's total revenues. As a result, most of the Company's revenues until such approval is obtained, and a significant portion of the Company's revenues thereafter, will be subject to the risks associated with international sales. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- Reliance on a Third Party for All International Sales" and "-- Need to Comply with International Government Regulation." CLINICAL TRIALS ITMR. Clinical data from the Company's prospective randomized ITMR trial presented at recent medical symposia indicate that patients who received treatment with the ITMR System achieved approximately a two class drop in angina class as measured on the Canadian Cardiovascular Society Angina Scale and a 45 percent improvement in exercise tolerance, as opposed to no improvement in angina class or exercise tolerance in study patients who did not receive the ITMR therapy. There are no reported operative deaths in the Company's randomized study and the mortality rate in the ITMR therapy group is less than six percent. Enrollment in the Phase II, randomized, no-option trial is now complete. The Company has commenced submission of data and information to the FDA on its ITMR System. The Company plans to continue submitting information and updates to the FDA throughout the next six to nine months and to respond to periodic inquiries from the FDA with respect to review of such data and information. This proactive and collaborative approach to submissions provides the Company with a means for frequent reviews by the FDA of information required for PMA as well as discussions regarding the Company's ITMR System. Adjunct to CABG. In August 1996, the Company launched an additional prospective, randomized, multi-center clinical study under an FDA authorized IDE to evaluate the ITMR therapy as an adjunct to CABG surgery in up to 500 patients at up to 25 clinical sites. PMR. Pilot clinical studies for the PMR System were first conducted in Europe in November 1996 and the Company treated the first U.S. human patient in July 1997. CardioGenesis was the first Company to initiate clinical studies of a minimally invasive percutaneous approach to transmyocardial revascularization. More than 100 patients have been treated with the PMR System at clinical investigation centers in the U.S. and Europe. Clinical data presented at recent medical symposia indicate patients treated with the PMR System are achieving angina class reductions and exercise tolerance improvements comparable to those achieved by patients treated with the ITMR System. 6 7 *Due to the severity of the underlying illnesses of the patients in this population, the Company expects the use of its TMR systems to be accompanied by a certain level of patient morbidity and mortality. There can be no assurance any clinical investigations the Company conducts will be completed or, if completed, will provide sufficient safety and effectiveness data and information to support a PMA application and to obtain FDA marketing approval. See "-- Government Regulation." MANUFACTURING General The Company's manufacturing activities conducted at its facility in Sunnyvale, California consist of assembly and testing of the fiber optic probe and catheter systems used for the TMR procedures. The Company has developed various proprietary processes used to manufacture its probes and catheters. Recently, the Company's manufacturing activities have increased to support the demand from commercial sales in Europe and to continue to provide probes and catheters for use in the Company's clinical trials and laboratory testing. The Company uses third party suppliers to manufacture the Ho:YAG laser and ECG monitor included in its TMR systems and for other services and operations including sterilization of its products. The Company's facilities include a controlled environment room where most assembly operations are performed. The Company has complied with various international regulatory requirements including meeting ISO 9001/EN 46001 and MDD requirements and has obtained a CE Mark approval to market both the ITMR System and the PMR System in Europe. Before the FDA will approve a PMA application, it will inspect the Company's manufacturing facilities and processes for compliance with FDA regulations. The Company's manufacturing facilities have not yet been inspected by the FDA. In the event additional manufacturing sites are added or manufacturing processes are changed, such new facilities and processes are also subject to regulatory inspection for compliance with United States and international regulations. See "-- Government Regulation." Suppliers A major component used in the Company's TMR systems, the ECG monitor, is currently available from a sole source. In addition, several other components used in the Company's TMR systems are purchased by the Company from a single supplier. The Company periodically conducts assessments of alternative vendors for various components used in its TMR systems. However, the qualification of additional or replacement vendors for certain components is a lengthy process. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- Dependence on Sole Suppliers," and "-- No Assurance of Obtaining Required Regulatory Approvals to Market Products in the United States; Significant Time Before Submission of Any PMA." The Ho:YAG laser currently used in the Company's TMR systems is manufactured by New Star Lasers ("New Star") pursuant to an OEM Supply Agreement. Under the New Star OEM Agreement and related Research Development Agreement, the Company has exclusive rights to sell or otherwise distribute the laser on a worldwide basis either incorporated into the Company's products or on a stand-alone basis. The New Star OEM Agreement prohibits the laser vendors from selling or otherwise distributing the laser to any third party unless approved in advance in writing by the Company. During the term of the New Star OEM Agreement and for a period of one year thereafter, the laser vendors are prohibited from making a laser, or any major subassembly of a laser, that is the same as or functionally equivalent to the Company's laser for use competitive with that of the Company. New Star has the exclusive right under the OEM Agreement to manufacture and supply the laser to the Company, subject to the right of the Company to obtain lasers from a second source under certain circumstances. Commencing in the fourth quarter 1997, the Company began purchasing lasers from Carl Baasel Lasertechnik GmbH pursuant to an OEM Product Development and Supply Agreement (the "Baasel OEM Agreement"). Under the Baasel OEM Agreement, the Company has exclusive rights to sell or otherwise distribute the laser on a worldwide basis either incorporated into the Company's products or on a stand-alone basis. The Baasel OEM agreement prohibits Baasel from selling or otherwise distributing the laser in the configuration developed for and used by the Company's TMR systems to any third party unless approved in advance in writing by the Company's TMR systems to any third party unless approved in advance in writing by the Company. During the term of the Baasel OEM Agreement and for a period of one year thereafter, the laser vendors are prohibited from making a laser, or any major subassembly of a laser, that is the same or as functionally equivalent to the Company's laser for use competitive with that of the Company. PATENTS AND PROPRIETARY RIGHTS The Company relies on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its TMR systems. The Company holds six patents in the United States. One of the Company's United States patents is directed to methods of PMR, in which a catheter system is inserted through a patient's vascular system into the heart, and energy is applied to the inner wall of the heart creating revascularization in the myocardium. Two of the Company's United States patents are directed to methods of ITMR 7 8 and TTMR, where a flexible probe is inserted into a patient's chest cavity and energy is applied to the outer wall of the heart creating revascularization through the heart muscle. These patents expire in the year 2012. The Company also has two patents, which expire in the year 2009, one directed to a specialized lens and means for securing the lens to an optical fiber to provide a desirable energy emission pattern and one of which is related to a system for detecting broken optical fibers. The Company also has a patent which expires in the year 2013 relating to a reinforced optical fiber system. The Company has twenty United States patent applications pending and intends to file additional patent applications on various features of its TMR systems in the future. The Company has sixteen international patent applications pending and intends to file additional international patent applications corresponding to most of the pending United States patent applications. Several of the pending patent applications have received Notices of Allowance, and the Company expects one or more U.S. patents to issue. However, there can be no assurance additional patents will issue with respect to any currently pending or future patent application. The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights, and some companies in the medical device industry have employed intellectual property litigation to attempt in whole or, in part, to gain a competitive advantage. Certain of the Company's competitors and potential competitors have obtained United States patents covering technology that could be used for certain TMR procedures, and there can be no assurance such competitors, potential competitors or others have not filed and do not hold international patents covering other TMR technology. In February 1995, the Company received a letter from PLC Medical Systems, Inc. ("PLC") advising the Company of the existence of certain of PLC's patents, including one entitled Heart-Synchronized Pulsed Laser System ("PLC Patent"). This letter requested an assessment by the Company of its activities in this area. *The Company believes, based on its review of the PLC Patent and opinions of counsel, that the Company's TMR systems do not infringe such PLC Patent. In 1996, the Company initiated a suit against PLC seeking a judgment that the PLC Patent is invalid and unenforceable. PLC has counterclaimed against the Company for patent infringement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- Risk of Infringement; Patents and Proprietary Technology." RESEARCH AND DEVELOPMENT The Company's research and development efforts to date have been focused on development of the Company's ITMR, PMR and TTMR Systems. The Company is committed to enhancing the medical community's knowledge and acceptance of TMR for the treatment of severe angina. *The Company intends to continue its basic research of the TMR mechanism and to focus on the expansion of the indications and approaches for using its TMR systems, in particular its PMR System. *In addition, the Company will continue to address improvements in the devices that are a part of the TMR systems, including improvements which may reduce the cost of its TMR systems. *Based on its research, the Company believes the reported reduction in chest pain, improvement in exercise tolerance, and perceived long-term increase in myocardial blood flow may be associated with the formation of new blood vessels (angiogenesis). Further product research and development by the Company will require substantial expenditures and has inherent risks, and there can be no assurance the Company will be successful in identifying products for which demand exists or in developing products that have the characteristics necessary to treat particular indications, or that any new products introduced by the Company will receive regulatory approval or be commercially successful. Total research and development expenses of the Company were approximately $14.2 million, $7.1 million, and $4.0 million for the years ended December 31, 1997, 1996 and 1995, respectively. Research and development work by the Company related to TMR is being carried out at Columbia University ("Columbia") pursuant to an agreement that has been extended into 1999. Under this agreement, the Company has a worldwide exclusive license to any patents that issue in connection with the research conducted. The license also includes a paid up, exclusive worldwide license to use and disclose (subject to certain nondisclosure requirements) information, data and know-how relating to the subject matter of the research and the Company's products resulting from the research. The license may become nonexclusive, at the election of Columbia, if the Company fails to use reasonable efforts to develop and market the products resulting from the research for commercial sale and distribution throughout the world. The license also contains certain most-favored licensing provisions in the event that the license becomes nonexclusive. The agreement provides for the payment of certain royalties by the Company to Columbia based on its net revenues from products to the extent such products include the patented technology developed by Columbia under the agreement, including any sales made under an IDE. These royalties are offset by funds advanced by the Company and prior sponsors to whom the Company is a successor under the Columbia agreement to fund such research of Columbia. The Company is not required to pay royalties to Columbia under the agreement until certain conditions are met, and such conditions have not been met. COMPETITION Competition in the market for the treatment of CAD, in the medical device industry generally, and in the TMR market in particular, is intense and is expected to increase. The Company competes primarily with other developers and manufacturers of TMR systems, including 8 9 PLC, Eclipse Surgical Technologies, Inc. ("Eclipse"), and U.S. Surgical Corporation ("U.S. Surgical"). Some of the Company's competitors and many of its potential competitors have substantially greater name recognition and capital resources than does the Company and also may have greater resources and expertise in the areas of research and development, obtaining regulatory approvals, manufacturing and marketing. The TMR market is characterized by rapid technical innovation. There can be no assurance the Company's competitors will not succeed in developing TMR products or procedures that are more effective or more effectively marketed than products marketed by the Company or that render the Company's technology obsolete. Additionally, even if the Company's products provide performance comparable to competing products, there can be no assurance the Company will be able to obtain necessary regulatory approvals to compete against competitors in terms of manufacturing, marketing and sales. Certain companies, including PLC and Eclipse, have completed enrollment in randomized clinical trials of products and procedures involving TMR that compete with those offered by the Company, and have received regulatory approvals in Europe to begin commercially marketing their various TMR products. Earlier entrants in the market in a therapeutic area often obtain and maintain greater market share than later entrants. *The Company believes the primary competitive factors in the market for TMR systems include clinical performance, product safety and reliability, availability of third-party reimbursement, product design specifically for TMR use, product quality, ease of use, price of systems and disposable components, customer service, and company reputation. In addition, the length of time required for products to be developed and receive regulatory approval and the ability to obtain, use and successfully enforce and defend patents or other proprietary rights to prevent sales by competitors are also important competitive factors. *The Company believes it competes favorably with respect to these factors, although certain competitors are at a more advanced stage in the clinical trial and regulatory approval processes. There can be no assurance the Company will be able to continue to compete successfully in the future with respect to any or all of the factors that are or may be relevant to success in its markets. Many of the medical indications that may be treatable with TMR are currently being treated by drug therapies or surgery and other interventional therapies, including CABG and PTCA. A number of these therapies are widely accepted in the medical community, have a long history of use and continue to be enhanced rapidly. There is no assurance that procedures using TMR will be able to replace or augment such established treatments or that clinical research will support the use of TMR. Additionally, new surgical procedures and new drug therapies are being developed to treat CAD. These new procedures and drug therapies could be more effective, safer or more cost-effective than TMR. The inability of TMR to replace or augment existing therapies or to be more effective, safer or more cost-effective than new therapies could have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION United States The Company's TMR systems and accessories are regulated in the United States as medical devices. As such, the Company is subject to extensive regulation by the FDA and state and local authorities including the California Department of Health Services ("CDHS"). Pursuant to the Federal Food, Drug, and Cosmetic Act ("FDC Act") and the regulations promulgated thereunder, the FDA regulates the pre-clinical and clinical testing, manufacture, labeling, distribution, sale, marketing, advertising and promotion of medical devices. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant PMA approval under Section 515 of the FDC Act or premarket notification clearance under Section 510(k) of the FDC Act ("510(k)"), withdrawal of marketing clearances or approvals, a recommendation by the FDA that the Company not be permitted to enter into government contracts and criminal prosecution. In certain circumstances, the FDA also has the authority to order recall, repair, replacement of or refund of the cost of, a device manufactured or distributed by the Company. To date, none of the Company's products has been approved for sale in the United States. FDA approval of a PMA for the relevant TMR system will be required before such TMR system can be marketed in the United States. In the United States, medical devices are classified as Class I, II or III on the basis of the controls deemed by the FDA to be necessary to reasonably assure their safety and effectiveness. Class I devices are subject to general controls (e.g., labeling, premarket notification and adherence to FDA-mandated current good manufacturing practice ("GMP") requirements), and Class II devices are subject to general controls and special controls (e.g., performance standards, postmarket surveillance, patient registries and FDA guidelines). Generally, Class III devices are those that must receive premarket approval by the FDA to assure their safety and effectiveness (e.g., life-sustaining, life-supporting and implantable devices, or new devices which have been found not to be substantially equivalent to legally marketed devices). Class III devices usually require clinical testing and FDA approval prior to marketing and distribution. The Company's TMR systems are Class III devices. 9 10 Before a new medical device can be introduced into the market, the manufacturer generally must obtain FDA clearance of a 510(k) or approval of a PMA under Section 515 of the FDC Act. A PMA application is required if a proposed device is not substantially equivalent to a legally marketed Class I or Class II device, or if it is a Class III device for which the FDA has called for PMAs. A PMA must be supported by valid scientific evidence that typically includes extensive data, including biocompability data, preclinical study data (e.g., bench testing, laboratory and animal studies) and clinical study data, to demonstrate the safety and efficacy of the device. If human clinical trials of a device are required and the device presents, in the FDA's view, a "significant risk," the sponsor of the trial (usually the manufacturer or the distributor of the device) is required to file an IDE application with the FDA prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and laboratory testing. If the IDE application is approved by the FDA and by one or more appropriate institutional review boards ("IRBs"), human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the sponsors and all reviewing IRBs conclude that the device presents a "nonsignificant risk" to the patient, a sponsor may begin clinical trials after obtaining approval for the study protocol by one or more of the appropriate IRBs, without the need for FDA approval of the study protocol. Sponsors of clinical trials are permitted under FDA regulations to sell devices distributed in the course of the clinical study provided such compensation does not exceed recovery of the costs of manufacture, research, development and handling. An IDE supplement must be submitted to and approved by the FDA before a sponsor or an investigator may make a change to the investigational plan that may affect its scientific soundness or the rights, safety or welfare of human subjects. The FDA has the authority to re-evaluate, alter, suspend or terminate clinical testing based on its assessment of data collected throughout the trials. The PMA must also contain a complete description of the device and its components, and a detailed description of the methods, facilities and controls used to manufacture the device. In addition, the submission must include the proposed labeling, promotional labeling and materials concerning training methods (if any). Upon submission of a PMA, the FDA makes a threshold determination as to whether the application is sufficiently complete to permit filing for a substantive review. If the FDA determines that the PMA application is sufficiently complete to permit a substantive review, the FDA will accept the application for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the PMA. An FDA review of a PMA generally takes one to three years from the date the PMA is accepted for filing, but may take significantly longer if the FDA requests additional information and/or if any major amendments to the PMA are filed. The review time is often significantly extended by the FDA's requests asking for more information or clarification of information already provided in the submission. During the review period, an advisory committee, typically a panel of clinicians, will likely be convened by the FDA to review and evaluate the application and provide recommendations to the FDA as to whether the device should be approved. The FDA is not bound by the recommendations of the advisory panel. Toward the end of the PMA review process, the FDA generally will conduct an inspection of the manufacturer's facilities to ensure that the facilities are in compliance with the applicable GMP requirements and may also conduct a bioresearch monitoring inspection to ensure the integrity and scientific validity of the clinical data. If the FDA's evaluations of both the PMA and the manufacturing facilities are favorable, the FDA will issue either an approval letter or an "approvable letter" containing a number of conditions that must be met in order to secure approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue an order approving the PMA, authorizing commercial marketing of the device for certain indications. If the FDA's evaluation of the PMA or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a "not approvable letter." The FDA may also determine that additional pre-clinical or clinical trials are necessary, in which case approval of the PMA could be delayed for up to several years while additional pre-clinical or clinical trials are conducted and submitted in an amendment to the PMA. The PMA process can be expensive, uncertain and lengthy, and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing. Any products manufactured or distributed by the Company pursuant to the IDE or subsequent FDA clearances or approvals are subject to pervasive and continuing regulatory oversight by the FDA, including record-keeping requirements and reporting of adverse experiences with the use of the device. Device manufacturers are required to register their establishments and list their devices with the FDA and certain state agencies and are subject to periodic inspections. The FDC Act requires medical devices be manufactured in accordance with the FDA's current GMP regulations. These regulations require, among other things, the manufacturing process be regulated and controlled by the use of written procedures and the ability to produce devices which meet the manufacturer's specifications be validated by extensive and detailed testing of every aspect of the process. They also require investigation of any deficiencies in the manufacturing process or in the products produced and detailed record keeping. Manufacturing facilities are subject to FDA and CDHS inspection on a periodic basis to monitor compliance with GMP requirements. If violations of the 10 11 applicable regulations are noted during FDA and CDHS inspections of the Company's, or its subcontractors' manufacturing facilities, the FDA and CDHS can, among other things, prohibit further manufacturing, distribution and sale of the Company's devices until the violations are cured. *The FDA has proposed changes to the GMP regulations that will, among other things, require design controls and maintenance of service records, which will likely increase the cost of complying with GMP requirements. Other applicable requirements include the FDA's medical device reporting regulation, which requires that the Company provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of its marketed devices, as well as product malfunctions that would likely cause or contribute to a death or serious injury if the malfunction were to recur. Labeling, advertising and promotion activities for investigational and marketed devices are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The FDA enforces statutory prohibitions against promoting and marketing of products for unapproved uses. The Company and its products are also subject to a variety of state laws and regulations in those states or localities where its products are or will be marketed. Any applicable state or local regulations may hinder the Company's ability to market its products in those states or localities. The Company is also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. Compliance with such laws and regulations now or in the future could require substantial expenditures by the Company. Changes in existing requirements or interpretations (on which regulations heavily depend) or adoption of new requirements or policies could adversely affect the ability of the Company to comply with regulatory requirements. Compliance with such laws and regulations now or in the future could require substantial expenditures by the Company. Failure to comply with regulatory requirements, or an increase in the cost of compliance, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition to the requirements for medical devices in general, the FDA places additional regulations, in the form of performance standards, upon the manufacture of medical laser products. The laser used in the Company's TMR systems is self-certified by the manufacturer for conformity to these performance standards. The Company is required to file with the FDA initial and annual reports of production quantities with respect to its laser. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- No Assurance of Obtaining Required Regulatory Approvals to Market Products in the United States; Significant Time Before Submission of Any PMA" and "-- Need to Comply with United States Manufacturing Standards; Limited Manufacturing Experience." International For the Company to market its TMR systems in European and certain other foreign countries, the Company must obtain certain regulatory approvals and clearances and otherwise comply with extensive regulations regarding product safety, manufacturing processes and quality. These regulations, including the requirements for approvals or clearance to market and the time required for regulatory review, vary from country to country. In July 1996, the Company received CE Mark approval to market its ITMR System in the European Community. The CE Mark is granted to companies whose products meet the essential requirements of the European MDD and provides the regulatory approval necessary for commercialization in Europe. In January 1998, the Company received the CE Mark approval to market its PMR system in the European Community. *The Company may rely in some circumstances on its exclusive international distributor, BSC, for the receipt of premarket approvals and compliance with clinical trial requirements in certain countries where the Company intends to market its TMR products. Any enforcement action by regulatory authorities with respect to past or future regulatory noncompliance could have a material adverse effect on the Company's business, financial condition and results of operations. The time required to obtain approval for sale in foreign countries may be longer or shorter than that required for FDA approval for U.S. sales, and the requirements may differ. In addition, there may be foreign regulatory barriers other than premarket approval. The FDA must approve exports of devices that require a PMA but are not yet approved domestically, unless they are approved for sale by any member country of the European Union and the other "listed" countries, including Australia, Canada, Israel, Japan, New Zealand, Switzerland and South Africa, in which case they can be exported for sale to any country without prior FDA approval. In addition, an unapproved device may be exported without prior FDA approval to the listed countries for investigational use in accordance with the laws of those countries. To obtain FDA export approval when required, the Company must provide the FDA with data and information to demonstrate that the device: (1) is not contrary to public health and safety; and (2) has the approval of the country to which it is intended for export. To allow the FDA to determine that export of a device is not contrary to public health and safety, the 11 12 Company is required to submit basic data regarding the safety of the device unless the device is the subject of an FDA-approved IDE and it will be marketed or used for clinical trials in the importing country for the same intended use, or at least two IRBs in the United States have determined that the device is a nonsignificant risk device and the device will be marketed or used for clinical trials in the importing country for the same intended use. The Company also must submit a letter to the FDA from the foreign country approving importation of the device. To sell its products within the European Economic Area ("EEA"), consisting of the countries of the European Union and Norway and Iceland, the Company is required to meet the requirements of the MDD and to affix the CE mark on its products to attest to such compliance. To comply, the Company's products must meet the "essential requirements," as defined under the MDD, relating to safety and performance and the Company must successfully undergo verification of its regulatory compliance ("conformity assessment") by a "notified body" selected by the Company. Under MDD, the Company's TMR systems are in Class III, the highest risk class, and therefore are subject to the most rigorous controls. In addition to having to comply with the requirements of any particular country, the authorities have the right under the MDD to prohibit a particular investigation and impose specific conditions. Since the Company obtained the CE Mark approval for its ITMR and PMR systems, it is now subject to continued supervision by the notified body and will be required to report any serious adverse incidents to the appropriate authorities. The Company also will be required to comply with additional national requirements that are outside the scope of the MDD. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- Need to Comply with International Government Regulation." THIRD-PARTY REIMBURSEMENT In the United States, hospitals, physicians and other health care providers that purchase medical devices generally rely on third-party payors, principally Medicare, Medicaid, private health insurance plans, health maintenance organizations, and other sources of reimbursement for health care costs ("Third-Party Payors"), to reimburse all or part of the cost of the procedure in which the medical device is being used. Third-party reimbursement has generally been available in the United States for cardiovascular surgery and interventional cardiology procedures using devices that have received FDA approval for marketing. *Although the Company does not anticipate receiving reimbursements for its TMR Systems from Medicare during its clinical trials, the Company does intend to seek reimbursement from other Third-Party Payors. There can be no assurance, however, that such reimbursement will be available. A failure by physicians to receive what they consider to be adequate reimbursement for the TMR procedures in which the Company's products are used could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, failure to receive international reimbursement approvals could limit market acceptance of the Company's products in the international markets in which such approvals are sought which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- Uncertain Availability of Third-Party Reimbursement." PRODUCT LIABILITY AND INSURANCE The Company's business exposes the Company to potential product liability risks or product recalls inherent in the design, development, manufacture and marketing of medical devices. The Company could be subject to product liability claims in the event the use of the Company's TMR systems is alleged to have caused adverse effects on a patient or such products are believed to be defective. The Company's products are designed to be used in high medical risk situations where there is a high risk of serious injury or death to the patient. Such risks will continue to exist with respect to those products that may in the future receive regulatory clearance for commercial sale. The failure to comply with the FDA's GMP or other regulations could have a material adverse effect on the ability of the Company to defend against product liability lawsuits. Although the Company has not experienced any product liability claims to date, any such claims could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance the Company's product liability insurance, with coverage limits of $5 million per occurrence and in the aggregate and additional coverage limits of DM1 million (approximately $546,000) per person and DM50 million (approximately $27,300,000) in the aggregate for the use of the Company's TMR systems in Germany, will be adequate for any future product liability problems or that such insurance coverage will continue to be available on commercially reasonable terms or at all. Since TMR is not well understood and the lack of data regarding the clinical safety and efficacy of the Company's TMR systems, there can be no assurance such coverage limits would be adequate to protect the Company from liabilities it might incur in connection with the development, manufacture and sale of its products. In addition, the Company may require increased product liability coverage if any products are commercialized. Product 12 13 liability insurance is expensive and in the future may not be available to the Company on terms acceptable to the Company, if at all. A successful product liability claim or series of claims brought against the Company in excess of its insurance coverage could have a material and adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES As of February 28, 1998, the Company had a total of 81 employees, including 17 in research and development, 18 in operations, 14 in clinical and regulatory affairs, 8 in quality assurance, 15 in sales and marketing and 9 in finance and administration. In addition, the Company has consulting and other contract arrangements. The Company believes the success of its business will depend, in significant part, on its ability to attract and retain qualified personnel. None of the Company's employees are represented by a collective bargaining agreement and the Company has not experienced any work stoppage. The Company considers its relations with its employees to be good. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- Dependence on Management, Other Key Personnel and Scientific Advisors." SCIENTIFIC ADVISORY BOARD The Company has a Scientific Advisory Board consisting primarily of leading physicians and scientists in the field of CAD. Scientific Advisory Board members consult regularly with the engineers, physicians and scientists at the Company and advise the Company on the specification and design of the Company's products and clinical trials. The members of the Scientific Advisory Board are prominent scholars in their field and, as a result, may serve as consultants to a variety of companies. Because the members of the Company's Scientific Advisory Board may have consulting or advisory positions with companies that may be competitors of the Company, each member of the Scientific Advisory Board has entered into a confidentiality arrangement with the Company. The Company compensates certain members of its Scientific Advisory Board for participating in meetings of the Board or for performing other services for the Company. The Company's Scientific Advisory Board consists of:
NAME OCCUPATION/TITLE ---- ---------------- Robert W. Anderson, M.D. ............. David C. Sabiston Professor and Chairman, Department of Surgery, Duke University Medical Center Daniel Burkhoff, M.D., Ph.D. ......... Director of Cardiac Physiology Laboratory, Columbia Presbyterian Medical Center; Assistant Professor of Medicine, Columbia University James L. Cox, M.D. ................... Evarts A. Graham Professor of Surgery, Chief, Division of Cardiothoracic Surgery, Washington University School of Medicine Pascal Goldschmidt, M.D., Ph.D. ...... Associate Professor of Medicine and Cell Biology and Anatomy; Co-Director, Ciccarone Center for the Prevention of Heart Disease; Co-Director, Thrombosis Center; Director, Bernard Vascular Biology Laboratory; Johns Hopkins University Keith L. March, M.D., Ph.D. .......... Associate Professor of Medicine, Krannert Institute of Cardiology, Indiana University Medical Center Craig R. Smith, M.D. ................. Chief, Division of Cardiothoracic Surgery, Columbia Presbyterian Medical Center; Associate Professor of Surgery, Columbia University Sharon Tomsen, M.D. .................. Associate Professor, Surgical Oncology and Anatomic Pathology; Program Director, Laser Biology Research Program, University of Texas M.D. Anderson Cancer Center; Adjunct Associate Professor, Biomedical Engineering Program, University of Texas, Austin
13 14 ITEM 2. PROPERTIES The Company currently maintains its primary offices, research laboratories and manufacturing and warehouse operations in a facility in Sunnyvale, California having approximately 19,000 square feet of space. These premises are leased pursuant to an agreement which expires in October 1999. *The Company believes this facility will be adequate for its operations through at least 1998, including anticipated manufacturing volume. ITEM 3. LEGAL PROCEEDINGS In September 1996, the Company filed an action for declaratory relief against PLC Systems, Inc. of Canada and its wholly-owned U.S. subsidiary, PLC Medical Systems, Inc., (collectively, "PLC"), seeking a judgment that PLC's United States patent No. 5,125,926 (the "PLC Patent") to a certain heart-synchronized pulsed laser system is not infringed, is invalid and unenforceable. In the suit, filed in the United States District Court for the Northern District of California, the Company also requested the Court to enter judgment that the Company's Transmyocardial Revascularization (TMR) systems do not infringe the PLC Patent. In October 1996, PLC responded to the complaint. In its response, PLC took the position that the PLC Patent has been infringed by the Company, but made no further claims. In September 1997, the Company filed an amended complaint asking the Federal District Court to consider evidence of inequitable conduct in the U.S. Patent Office while the PLC Patent was being obtained by PLC. The amended complaint asserts that the PLC Patent is invalid and unenforceable because material prior work of another party was withheld from the Patent Office. Trial is set to begin January 11, 1999. On February 9, 198, PLC submitted the Rudko Patent to the U.S. Patent Office seeking reissue on the basis that the Rudko Patent as granted is "wholly or partly inoperative or invalid." In January 1997, the Company filed an Opposition to a European Patent owned by PLC (the "European Patent") that is a counterpart to the PLC Patent. The Opposition seeks to have the European Patent declared invalid. The Company believes it has meritorious positions with respect to the invalidity of the European Patent and intends to pursue the Opposition proceeding vigorously. In September 1997, the Company was served with a complaint filed by PLC in Munich, Germany alleging that CardioGenesis and its former German sales agent have infringed EP 0 553 576, a European counterpart of the PLC Patent. CardioGenesis has referred the complaint to patent counsel and is proceeding in its defense on the basis of non-infringement. The prosecution and defense of intellectual property suits and related legal and administrative proceedings are costly and time consuming. The question of patent infringement involves complex legal and factual issues and there can be no assurance any conclusion reached by the Company regarding infringement will be consistent with the resolution of any such issues by a court or administrative body. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- Risk of Infringement; Patents and Proprietary Technology." 14 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been included for quotation on the Nasdaq National Market under the symbol "CGCP" since the Company's initial public offering on May 21, 1996. The following table sets forth, for the periods indicated, the range of high and low bid information for the Company's Common stock as reported by Nasdaq:
HIGH LOW ------ ------ 1996 Second Quarter $23.25 $12.75 Third Quarter $15.00 $ 8.75 Fourth Quarter $15.00 $10.5156 1997 First Quarter $17.50 $11.25 Second Quarter $13.25 $ 7.25 Third Quarter $12.625 $ 9.625 Fourth Quarter $12.625 $ 5.00
On March 27, 1998, there were approximately 88 holders of record of the Company's Common Stock. The Company has never declared or paid any cash dividends on its Common Stock, and does not anticipate paying any cash dividends in the foreseeable future. 15 16 ITEM 6. SELECTED FINANCIAL DATA
PERIOD FROM SEPTEMBER 23, 1993 (DATE OF INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------------ 1993 1994 1995 1996 1997 ------------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Statement of Operations Data: Sales .......................................... $ 3,959 $ 7,559 Cost of sales .................................. 2,866 4,991 -------- -------- Gross profit ................................. 1,093 2,568 -------- -------- Operating expenses: Research and development ..................... $ 85 $ 1,423 $ 3,967 7,140 14,210 General and administrative ................... 21 559 1,178 2,622 3,722 Sales and marketing .......................... -- -- 336 2,417 5,426 Write-off of acquired in-process research and development ................... 750 -- -- -- -- -------- -------- -------- -------- -------- Operating expenses ....................... 856 1,982 5,481 12,179 23,358 -------- -------- -------- -------- -------- Operating loss ........................... (856) (1,982) (5,481) (11,086) (20,790) Interest income, net............................ 3 198 182 2,286 2,819 -------- -------- -------- -------- -------- Net loss ................................. $ (853) $ (1,784) $ (5,299) $ (8,800) $(17,971) ======== ======== ======== ======== ======== Net loss per common share and per common share -- assuming dilution(1).......... $ -- $ -- $ -- $ (1.18) $ (1.49) ======== ======== ======== ======== ======== Shares used in computing net loss per common share and per common share -- assuming dilution............. -- -- -- 7,427 12,029 ======== ======== ======== ======== ========
DECEMBER 31, -------------------------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (IN THOUSANDS) Balance Sheet Data: Cash, cash equivalents and available-for-sale securities .......... $ 1,113 $ 5,324 $ 14,036 $ 58,208 $ 40,535 Working capital .......................... 1,120 5,321 14,192 57,324 32,575 Total assets ............................. 1,127 5,885 16,223 64,297 48,240 Redeemable convertible preferred stock.... 1,979 8,457 22,390 -- -- Total stockholders' equity (deficit)...... (852) (2,636) (7,831) 61,395 44,146
(1) Per share data has been restated to reflect the Company's adoption of Statement of Financial Accounting Standards No. 128 "Earnings per Share" and the Securities and Exchange Commission Staff Accounting Bulletin No. 98 effective December 31, 1997. For the years ended December 31, 1995 and 1994 and for the period ended December 31, 1993, the Company had 246, 0, and 0 shares of common stock outstanding. The Company does not believe the earnings per share data for these periods are meaningful. See Note 1 of Notes to Consolidated Financial Statements. (2) The Company has not declared any cash dividends on its common stock since its inception and does not anticipate paying cash dividends in the forecoming future. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its inception, CardioGenesis has been primarily engaged in the design, development, and marketing of its transmyocardial revascularization (TMR) systems. The Company has only a limited operating history and has experienced significant operating losses since its inception. The Company incurred a net loss of $18 million in 1997. The development and potential commercialization of the Company's products will continue to require significant research and development, regulatory, sales and marketing, manufacturing and other expenditures. *Operating losses are expected to continue at least through 1999 as the Company continues to perform research and development, to fund clinical trials in support of regulatory and reimbursement approvals, and to expand its marketing and sales activities in the U.S. and internationally by supporting BSC, the exclusive distributor in international markets. *There can be no assurance that the Company's TMR systems will ever generate significant revenues or the Company will achieve or sustain profitability. The research, manufacture, sale and distribution of medical devices such as the Company's TMR systems are subject to numerous regulations imposed by governmental authorities, principally the FDA and corresponding state and foreign agencies. The regulatory process is lengthy, expensive and uncertain. FDA approval of a PMA application is required before any of the Company's TMR systems can be marketed in the United States. Securing FDA approvals and clearances will 16 17 require submission to the FDA of extensive clinical data and technical information. Also, many foreign governments and the European Union also have review processes for medical devices. The Company has received CE Mark approval to market its ITMR System and PMR System in the European Union. The CE Mark is granted to companies whose products meet the essential requirements of the European MDD and provides the regulatory approval necessary for commercialization in Europe. The Company will be subject to continued supervision by regulators and will be required to report any serious adverse incidents to the appropriate authorities. The Company also will be required to comply with additional national requirements that are outside the scope of the MDD. *The Company plans to continue to seek regulatory approvals to allow for marketing and distribution of its products in international markets. The Company commenced clinical trials of its ITMR System in October 1995 and began clinical trials of its PMR System in November 1996. Clinical trials of the Company's TTMR System have not commenced. In July 1996, the Company began a Phase II clinical trial under an IDE that allowed a prospective, randomized, multi-center clinical trial of its ITMR System in "no-option" patients with severe CAD. Enrollment in the Phase II, randomized, no-option trial is now complete. The Company has commenced submission of data and information to the FDA on the Company's ITMR System. *The Company plans to continue submitting information and updates to the FDA throughout the next six to nine months and to respond to periodic inquiries from the FDA with respect to review of such data and information. *This proactive and collaborative approach to submissions provides the Company with a means for frequent reviews by the FDA of information required for PMA as well as discussions regarding the intraoperative ITMR System. In August 1996, the Company received an IDE from the FDA and has begun a major clinical study of its intraoperative ITMR System used as an adjunctive therapy to CABG surgery in patients with severe angina who are only partially treatable by CABG. The adjunct to CABG clinical trials are ongoing. Clinical trials for the Company's PMR System commenced in Europe in November 1996. In January 1998, the Company received the CE Mark approval for use of its PMR System in the European community. In July 1997, the Company received an IDE from the FDA which allows a multi-center clinical trial of the PMR system to treat angina in no-option patients at up to twelve clinical sites in the U.S. Enrollment for the U.S. clinical trial sites has begun and the trials are ongoing. In addition to treating the first U.S. human patient on July 31, 1997, more than 100 human patients have been treated with the Company's PMR system. The Company recorded sales of $7.6 million in 1997 from sales of its ITMR Systems, PMR Systems and disposable probes and catheters to its international distributor, BSC, and to clinical trial sites in the U.S. The Company recognizes product revenues upon shipment of its products to customers and fulfillment of acceptance terms, if any, and when no significant contractual obligations remain outstanding. Deferred revenue consists of shipments that have been made which are subject to limited rights of return or other contingencies. *The Company anticipates its revenues from product sales over the next several years will be primarily derived from international sales by BSC. *As a result, the revenue levels of the Company are and will be dependent on the efforts of BSC. *Any such international sales will be subject to a number of risks, including foreign currency fluctuations, economic or political instability, foreign tax laws, shipping delays, various tariffs and trade regulations and restrictions and foreign medical regulations, any of which could have a material adverse impact on the Company's revenues. * Results of the Company's operations have varied and are expected to fluctuate significantly from quarter to quarter depending on numerous factors, including: (i) reliance on BSC; (ii) demand for the Company's products, new product introductions by the Company or its competitors or transitions to new products; (iii) the timing of orders and shipments; (iv) the degree of acceptance of TMR therapy by the medical community; (v) competition, including pricing pressures; (vi) potential third-party patent infringement claims; (vii) the timing of regulatory and third-party reimbursement approvals; (viii) expansion of the Company's manufacturing capacity and the Company's ability to manufacture its products efficiently; (ix) the timing of research and development expenses, including clinical trial-related expenditures; and (x) seasonal factors affecting the number of procedures performed. *Due to such fluctuations in operating results, period-to-period comparisons of the Company's operating results are not necessarily meaningful and should not be relied upon as indicators of likely future performance. 17 18 RESULTS OF OPERATIONS Years Ended December 31, 1997, 1996, and 1995 Sales. Sales were recognized for the first time in 1996. Sales of the Company's TMR systems for commercial use in Europe and for use at clinical trial sites in both the U.S. and Europe totaled approximately $7.6 million and $4.0 million for the year ended December 31, 1997 and 1996, respectively. The increase in sales from 1996 to 1997 is primarily due to the exclusive international distribution agreement with BSC. Cost of Sales. Cost of sales for the year ended December 31, 1997 was approximately $5 million, or 66% of sales. Cost of sales for the year ended December 31, 1996 was approximately $2.9 million, or 72% of sales. The decrease in cost of sales as a percent of sales from 1996 to 1997 was primarily due to the allocation of fixed overhead costs over more units. *However, no assurance can be given that demand for the Company's products will grow sufficiently to require increased levels of production. Research and Development Expenses. Research and development expenses increased $7.1 million to $14.2 million for 1997 from $7.1 million for 1996 and increased $3.1 million in 1996 from $4.0 million for 1995. The increase from 1996 to 1997 was primarily due to increased activity in the clinical trials and continued investment in research in the field of TMR. The increase from 1995 to 1996 was primarily due to expenses related to the initiation of three additional clinical trials, two with the Company's ITMR System and one with the PMR System. Also, the Company increased its investment in mechanism research in the field of TMR. *The Company expects research and development expenses to continue to increase throughout 1998 as the Company continues to enroll patients in its ongoing clinical trials, initiates additional clinical trials, and continues to invest in TMR mechanism research. General and Administrative Expenses. General and administrative expenses increased $1.1 million to $3.7 million for 1997 from $2.6 million for 1996 and increased $1.4 million in 1996 from $1.2 million for 1995. The increase in 1997 was primarily due to increased finance and administration personnel costs to support the Company's growth, increased legal fees associated with research and development agreements and the exclusive international distribution agreement with BSC, and legal fees related to the PLC litigation. The increase from 1995 to 1996 is primarily attributed to employee growth, legal fees relating to the exclusive distribution agreement with BSC, legal fees associated with the initiation of the suit by the Company against PLC, increased property, general and product liability insurance costs, public and investor relations costs, and the costs incurred to comply with the additional requirements associated with being a public company. *The Company expects that its general and administrative expenses will continue to increase in 1998. Sales and Marketing Expenses. Sales and marketing expenses increased $3 million to $5.4 million for 1997 from $2.4 million for 1996 and increased $2.1 million in 1996 from $336,000 in 1995. The increase in 1997 was primarily due to the addition of sales and marketing personnel and the implementation of marketing and training programs, transition costs related to the BSC international sales agreement, and continued costs associated with the launch of the Company's TMR system in Europe. The increase from 1995 to 1996 is primarily attributed to preparing for and launching the ITMR system in Europe, employee growth, and the implementation of outreach programs at the clinical sites. *The Company expects that sales and marketing expenses will continue to increase in 1998 as the Company expands clinical studies, conducts physician training, and supports the sales and marketing activities of BSC. Interest Income. Interest income increased $.5 million to $2.8 million for 1997 from $2.3 million for 1996 and increased $2.1 million in 1996 from $182,000 in 1995. The increase in interest income in 1997 was attributable primarily to fluctuations in the Company's cash and cash equivalents and short-term investments balances, coupled with interest fluctuations. The increase in interest income in 1996 was due to the investment of the proceeds from the Company's initial public offering of Common Stock in May 1996 of approximately $54.5 million, net of issuance costs Deferred Compensation Expense. The Company recorded deferred compensation expense of approximately $1.4 million and $874,000 with respect to options to purchase Common Stock granted and Preferred Stock issued during 1996 and 1995, respectively. Deferred compensation expense is being amortized over the vesting period of the options, which is generally four years. The Company recognized compensation expense of $480,000, $849,000 and $104,000 for 1997, 1996 and 1995, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations since inception primarily through the private sale of capital stock and interest income on proceeds from private financings as well as proceeds and interest thereon from its initial public offering in May 1996. Through December 31, 1997, the Company had raised approximately $77.2 million from the sale of stock, net of issuance costs. Net cash used in the Company's operations was $17.4 million, $9.2 million, and $5.0 million for the years ended December 31, 1997, 1996, and 1995, respectively. The increases in net cash used in the Company's operations were primarily a result of higher research and development, general and administrative, and sales and marketing activities. The Company's acquisition of property and equipment was $360,000, $1.7 million, and $175,000 for the years ended December 31, 1997, 1996, and 1995, respectively. The 18 19 increase in capital expenditures for 1996 was primarily due to relocating the Company's facilities to Sunnyvale, California and to providing equipment for the new employees hired during the year. *The Company expects a similar level of capital expenditures in 1998. At December 31, 1997, the Company had cash, cash equivalents and available-for-sale securities, totaling $40.5 million. *The Company plans to finance its operations and capital needs principally from the cash, cash equivalents and available-for-sale securities, and, to the extent available, from bank and lease financing, and believes these sources of cash will be sufficient to fund its operations through 1998. However, the Company's future liquidity and capital requirements will depend upon numerous factors, including the level of sales of the Company's products generated by BSC in major and emerging international markets; market acceptance of, and demand for the Company's products; the Company's clinical research and product development programs; the receipt of, and the time required to obtain, regulatory clearances and approvals; the resources the Company devotes to the development, manufacture and marketing of its products; the resources required to hire and develop a direct sales force in the United States, and to expand manufacturing capacity; facilities requirements; and other factors. *Although the Company believes its current levels of cash, cash equivalents, and available-for-sale securities, together with cash generated from operations, will provide adequate funding for its operations and capital requirements through 1998, the Company may be required to raise additional funds through public or private debt or equity financings, collaborative relationships, bank facilities or other arrangements. *There can be no assurance the Company will not require additional funding sooner or that such additional funding, if needed, will be available on terms attractive to the Company, or at all. *Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. As of December 31, 1997, the Company had federal and California net operating loss carryforwards of approximately $32.5 million and $10.0 million, respectively. The federal and California net operating loss carryforwards will expire by the years 2012 and 2002, respectively, if not utilized. Utilization of net operating loss carryforwards is subject to certain limitations under the Tax Reform Act of 1986, as amended, where certain changes occur in the stock ownership of a company. *These annual limitations may result in expiration of net operating loss carryforwards before they can be fully utilized. IMPACT OF THE YEAR 2000 ON INFORMATION SYSTEMS The Company relies on computers and computer software to run its business, as do its vendors, suppliers and customers. These computers and computer software may not be able to properly recognize the dates commencing in the Year 2000. The Company has not completed an assessment of the impact this may have on its businesses and does not have a reasonable basis to conclude whether the impact of the Year 2000 dates will or will not materially affect future results. To date the Company has not found any material impact which may result from failure of its computers and computer software or that of its vendors, suppliers, and customers. However, the Company plans to make an assessment of this during 1998, and, if appropriate, develop an action plan to correct it. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period, resulting from transactions and other events and circumstances from nonowner sources. The impact of adopting SFAS No. 130, which is effective for the Company in 1998, has not been determined. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operating decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements would be provided. SFAS No. 131 is effective for the Company in 1998. The Company operates in one business segment; namely, the research, development, manufacture and sale of cardiovascular devices. RISK FACTORS Reliance on a Third Party for All International Sales Until such time, if ever, as the FDA approves the Company's TMR systems for marketing in the United States, the Company anticipates it will derive its revenues primarily from BSC as the Company's exclusive international distributor. The agreement with BSC will not allow the Company to control international end-market prices and might not result in the same level of sales and marketing efforts as would be the case if the Company used a direct sales force. BSC has certain rights to terminate the agreement with the Company which, if exercised, would require the Company to make alternative arrangements for the sale of its products internationally, and could have a material adverse effect on the Company's business, financial condition and results of operations. Even if FDA approval is obtained, the Company expects international sales will continue to account for a significant portion of the Company's total revenues. As a result, most of the Company's revenues until such approval is obtained, and a significant portion of the Company's revenues thereafter, will be subject to the risks associated with international sales, including foreign currency fluctuations, economic or political instability, foreign tax laws, shipping delays, various tariffs and trade regulations and restrictions and foreign medical regulations, any of which could have a significant impact on the Company's revenues. Future imposition of, or significant increases in the level of, customs duties, export quotas or other trade restrictions, could have a material adverse effect on the Company's business, financial condition and results of operations. The international nature of the Company's business also subjects it and BSC to laws and regulations of the international jurisdictions in which they operate or in which the Company's products may be sold. The regulation of medical devices in a number of such jurisdictions, particularly in the EEA, continues to develop and there can be no assurance new laws or regulations will not have an adverse effect on the Company's business, financial condition and results of operations. The Company has four pending international patent applications and has been issued no international patents to date. While the Company intends to file and prosecute existing and future patent applications in various European countries, the laws of certain foreign countries do not protect the Company's intellectual property rights to the same extent as do the laws of the United States. Uncertainty of Clinical Adoption of TMR; Need for Increased Understanding of TMR Mechanism 19 20 Although TMR therapy using lasers has been in development since the 1980s, TMR remains experimental and has not achieved broad clinical adoption. The Company is unable to predict whether or at what rate and how broadly TMR will be adopted by the medical community. Physician endorsements will be essential for clinical adoption of TMR. Even if the clinical efficacy of TMR is established, physicians may elect not to recommend TMR for any number of reasons. The reasons why TMR may effectively treat CAD are not well understood. Although the Company intends to use research, development and clinical efforts to enhance knowledge of the physiological effects of TMR, there can be no assurance such understanding will be achieved on a timely basis, or at all. Failure of the Company and its competitors to gain a thorough understanding of the physiological effects of TMR, and to disseminate such understanding within the medical community, could adversely effect the clinical adoption of TMR. Clinical adoption of TMR will also depend upon the Company's ability to facilitate training of cardiothoracic surgeons and interventional cardiologists in TMR therapy, and the willingness of such physicians to adopt such procedures. Patient acceptance of the procedure will depend in part upon physician recommendations as well as other factors, including the degree of invasiveness, the effectiveness of the procedure, and the rate and severity of complications associated with the procedure as compared to other procedures. Even if TMR is clinically adopted, physicians may elect not to recommend the procedure unless acceptable reimbursement from health care payors is available. Failure of TMR, for whatever reason, to achieve significant clinical adoption or failure of the Company's TMR systems to achieve any significant market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. See " -- Uncertain Availability of Third-Party Reimbursement." Early Stage of Clinical Trials; No Assurance of Safety or Efficacy The Company's ITMR and PMR Systems are at an early stage of clinical testing, and there can be no assurance regarding the clinical safety or efficacy of either of these systems. The Company has not begun clinical trials of its TTMR Systems and there can be no assurance this system will be approved for clinical trials. Clinical trials of the Company's TMR systems will require dedication by the Company of substantial financial and management resources, and completing such trials will take several years. There can be no assurance any of the Company's TMR systems will prove to be safe or effective. If the Company's TMR systems do not prove to be safe and effective in clinical trials or if the Company is otherwise unable to commercialize its TMR systems successfully, the Company's business, financial condition, and results of operations would be materially and adversely affected and could result in the cessation of the Company's business. Dependence on TMR Product Line; Rapid Technological Change The Company is not currently developing any products other than its TMR systems. Consequently, the Company is dependent on the successful development and commercialization of the Company's TMR systems. Unfavorable clinical trial results, failure to obtain regulatory approvals in a timely manner, or at all, or failure to gain widespread market acceptance for any of the Company's TMR systems would have a material adverse effect on the Company's business, financial condition and results of operations and cessation of the Company's business could occur. The medical device industry is characterized by rapid and significant technological change. Therefore, the Company's future success will depend in large part on the Company's ability to continue to respond to such changes, as well as to expand the indications and applications for which its products are used, through the timely development and successful introduction of enhanced and new versions of its TMR systems. Product research and development will require substantial expenditures and will be subject to inherent risks, and there can be no assurance the Company will be successful in identifying products for which demand exists or in developing products that have the characteristics necessary to treat particular indications, or that any new product introduced will receive regulatory approval or will be commercially successful. No Assurance of Obtaining Required Regulatory Approvals to Market Products in the United States; Significant Time Before Submission of Any PMA To date, none of the Company's products has been approved for sale in the United States. Prior to receiving regulatory approval for marketing in the United States, medical devices such as the Company's products are subject to rigorous preclinical and clinical testing mandated by the FDA and, to a lesser extent, by state regulatory authorities, such as the CDHS. The process of obtaining and maintaining requisite regulatory approvals is lengthy, expensive and uncertain. The 20 21 IDE/PMA process generally takes several years or longer to complete and is expensive. Moreover, regulatory approvals, if granted, may include significant limitations on the indicated uses for which a product may be marketed. FDA enforcement policy strictly prohibits the marketing of approved medical devices for unapproved uses. The Company's TMR systems will require approval of a PMA by the FDA before such products can be marketed in the United States. The Company has received FDA approval of three IDEs for its ITMR System. All three clinical trials - a feasibility study of ITMR; a Phase II prospective, randomized, multi-center study of ITMR; and a study of ITMR therapy as an adjunct to CABG- have begun. The Company has received FDA approval of one IDE for its Axcis PMR System for a multi-center clinical trial of no-option patients at up to ten clinical sites. The Company has not submitted an application to the FDA for an IDE for its PMR System or TTMR System. FDA regulations subject sponsors of IDEs to certain requirements, including proper monitoring of clinical investigations, selection of qualified investigators, record keeping, reporting of unanticipated adverse device events and submission of periodic progress reports. The FDA also has the authority to inspect premises where devices are held and to inspect and copy all records pertaining to an investigation. In addition, a sponsor is prohibited from promoting or commercializing a device prior to receiving PMA approval. There can be no assurance any feasibility study that the Company proposes will be approved by the FDA, will be completed or, if completed, will provide sufficient data and information to support additional clinical investigations of the type necessary to obtain FDA marketing clearance or approval. There can be no assurance any of the Company's products will ever be approved for sale in the United States. Additionally, there can be no assurance required United States regulatory filings will be made in a timely manner, approvals to commence future clinical trials will be received, clinical trials will commence or be concluded in the time frames anticipated by the Company, any such clinical trials will be successful or the Company will be able to obtain regulatory approvals on a timely basis, or at all, to market its products. Delays in initiating or completing clinical trials or in the receipt of regulatory approval of the Company's products, the failure to obtain regulatory approvals for such products, significant limitations in the indicated uses for which such products may be marketed or substantial costs incurred in obtaining such approvals would have a material adverse effect on the Company's business, financial condition and results of operations and cessation of the Company's business could occur. In January 1996, the Company reported to the FDA the existence of an error in the software incorporated into the Ho:YAG laser included in its TMR systems. The Company's laser manufacturer New Star had determined that, under certain circumstances, the laser could be fired even though its control panel indicated it was in the "stand-by" mode. The Company initiated a voluntary field correction of the lasers, categorized as a Class II recall by the FDA, and the software error has been corrected. FDA defines a Class II recall as one in which use of, or exposure to, the product may cause temporary or medically adverse health consequences or where the probability of serious adverse health consequences is remote. The FDA has acknowledged the correction of the software error and the completion of the related field activities. However, there can be no assurance the Company will not experience future product defects, malfunctions, manufacturing difficulties or recalls related to the Ho:YAG laser or any other component used in the Company's TMR systems. Any such occurrence could cause delay in regulatory approvals or adversely affect acceptance of the Company's products and could have a material adverse effect on the Company's business, financial condition and results of operations. Need to Comply with International Government Regulation International sales of medical devices often are subject to regulatory requirements in foreign countries. The regulatory review process varies from country to country. The Company's products are subject to pre-market approval in the European Union and subject to other regulatory requirements in those and other countries. In addition, the regulation of medical devices continues to change. Any enforcement action by regulatory authorities with respect to past or future regulatory noncompliance could have a material adverse effect on the Company's business, financial condition and results of operations. The time required to obtain approval for sale in foreign countries may be longer or shorter than required for FDA approval, and the requirements may differ. In addition, there may be foreign regulatory barriers other than pre-market approval. The FDA must approve exports of devices that require a PMA but are not yet approved domestically, unless they are approved for sale by any member country of the European Union and the other "listed" countries, including Australia, Canada, Israel, Japan, New Zealand, Switzerland and South Africa, in which case they can be exported for sale to any country without prior FDA approval. In addition, an unapproved device may be exported without prior FDA approval to the listed countries for investigational use in accordance with the laws of those countries. To sell its TMR Systems within the EEA, the Company has received approval to affix CE markings on its products to attest the Company's compliance with the 21 22 requirements of the MDD of the EEA (the "MDD"). The Company will be subject to continued supervision and will be required to report any serious adverse incidents to the appropriate authorities. The Company also will be required to comply with additional national requirements that are outside the scope of the MDD. In addition, the Company has received ISO 9001/EN 46001 certification, which was required to meet the CE Mark certification prerequisites. The Company has not received CE Mark certification for the sale of its other systems in the EEA. There can be no assurance the Company will be able to achieve or maintain the compliance required for CE marking on all or any of its products or it will be able to produce its products profitably and in a timely manner while complying with the requirements of the MDD and other regulatory requirements. Failure to comply with applicable regulatory requirements can result in fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspensions of production, refusals by foreign governments to permit product sales and criminal prosecution. Furthermore, changes in existing regulations or adoption of new regulations or policies could prevent the Company from obtaining, or affect the timing of, future regulatory approvals or clearances. There can be no assurance the Company will be able to obtain necessary regulatory clearances or approvals on a timely basis or at all or it will not be required to incur significant costs in obtaining or maintaining such foreign regulatory approvals. Delays in receipt of, or failure to receive, such approvals or clearances, the loss of previously obtained approvals or clearances or the failure to comply with existing or future regulatory requirements would have a material adverse effect on the Company's business, financial condition and results of operations. Risk of Infringement; Patents and Proprietary Technology The Company is dependent in large part on its ability to obtain patent protection for its products and processes, to preserve its trade secrets and proprietary technology, and to operate without infringing upon the patents or proprietary rights of third parties. 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. Certain of the Company's competitors and potential competitors have obtained United States patents covering technology that could be used for certain TMR procedures, and there can be no assurance such competitors, potential competitors or others have not filed and do not hold international patents covering other TMR technology. No assurance can be given that any such international patents would be interpreted the same as any counterpart United States patents. From time to time, the Company has been contacted by various third parties requesting the Company review and consider the applicability of certain patents to the Company's technology. In particular, in February 1995, the Company received a letter from PLC advising the Company of the existence of certain of PLC's patents, including the PLC Patent. This letter requested an assessment by the Company of the Company's activities in this area. The Company believes, based on its review of the PLC Patent and an opinion of the Company's counsel, the Company's TMR systems do not infringe such PLC Patent. In 1996, the Company initiated a suit against PLC seeking a judgment that the PLC Patent is invalid and unenforceable. PLC has counterclaimed against the Company for patent infringement. While the Company periodically reviews the scope of its patents and other relevant patents of which it is aware, the question of patent infringement involves complex legal and factual issues and there can be no assurance any conclusion reached by the Company regarding infringement will be consistent with the resolution of any such issues by a court. Further, there can be no assurance the Company will not become subject to patent infringement claims or litigation or interference proceedings declared by the U.S. Patent Office to determine the priority of inventions. The defense and prosecution of intellectual property suits, U.S. Patent office interference proceedings and related legal and administrative proceedings are both costly and time-consuming. Further 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 such litigation or interference proceedings could subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties, prevent the Company from selling its products in certain markets or at all, or require the Company to modify its products. Although patent and intellectual property disputes regarding medical devices are often settled through licensing and similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. Furthermore, there can be no assurance 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 22 23 selling its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. The validity and breadth of claims in medical technology patents involve complex legal and factual questions and, therefore, may be highly uncertain. No assurance can be given that any issued patent or patents based on pending patent applications or any future patent application will exclude competitors or provide competitive advantages to the Company, that any of the Company's patents in which it has licensed rights will be held valid if subsequently challenged or that others will not claim rights in or ownership of the patents and other proprietary rights held or licensed by the Company. Furthermore, there can be no assurance others have not developed or will not develop similar products, duplicate any of the Company's products or design around any patents issued to or licensed by the Company or that may be issued in the future to the Company. Since patent applications in the United States are maintained in secrecy until patents issue, the Company also cannot be certain others did not first file applications for inventions covered by the Company's pending patent applications, nor can the Company be certain it will not infringe any patents that may issue to others on such applications. The U.S. patent laws were recently amended to exempt physicians, other health care professionals, and affiliated entities from infringement liability for medical and surgical procedures performed on patients. The Company cannot predict whether this amendment might have a material adverse effect on the Company's ability to protect its proprietary methods and procedures. The Company typically requires its employees, consultants and advisors to execute confidentiality and assignment of inventions agreements in connection with their employment, consulting or advisory relations with the Company. There can be no assurance, however, that these agreements will not be breached or that the Company will have adequate remedies for any breach. Furthermore, no assurance can be given that competitors will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's proprietary technology, or that the Company can meaningfully protect its rights in unpatented proprietary technology. Highly Competitive Markets; Risk of Alternative Therapies Competition in the market for the treatment of CAD, in the medical device industry generally, and in the TMR market in particular, is intense and is expected to increase. The Company competes primarily with other producers of TMR systems, including PLC, Eclipse, and U.S. Surgical. Some of the Company's competitors and many of its potential competitors have substantially greater name recognition and capital resources than does the Company and also may have greater resources and expertise in the areas of research and development, obtaining regulatory approvals, manufacturing and marketing. The TMR market is characterized by rapid technical innovation. There can be no assurance the Company's competitors will not succeed in developing TMR products or procedures that are more effective or more effectively marketed than products marketed by the Company or that render the Company's technology obsolete. Additionally, even if the Company's products provide performance comparable to competing products, there can be no assurance the Company will be able to obtain necessary regulatory approvals to compete against competitors in terms of manufacturing, marketing and sales. Certain companies, including PLC and Eclipse have completed enrollment in randomized clinical trials of products and procedures involving TMR that compete with those offered by the Company, and received regulatory approvals in Europe to begin commercially marketing their various TMR products. Earlier entrants in the market in a therapeutic area often obtain and maintain greater market share than later entrants. There can be no assurance that the Company will be able to continue to compete successfully in the future. *The Company believes the primary competitive factors in the market for TMR systems include clinical performance, product safety and reliability, availability of third-party reimbursement, product design specifically for TMR use, product quality, ease of use, price, customer service and company reputation. In addition, the length of time required for products to be developed and receive regulatory approval and the ability to use patents or other proprietary rights to prevent sales by competitors are also important competitive factors. Many of the medical indications that may be treatable with TMR are currently being treated by drug therapies or surgery and other interventional therapies, including CABG and PTCA. A number of these therapies are widely accepted in the medical community, have a long history of use and continue to be enhanced rapidly. There is no assurance that procedures using TMR will be able to replace or augment such established treatments or that clinical research will support the use of TMR. Additionally, new surgical procedures and new drug therapies are being developed by other parties to treat CAD. These new procedures and drug therapies could be more effective, safer or more 23 24 cost-effective than TMR. The inability of TMR to replace or augment existing therapies or to be more effective, safer or more cost-effective than new therapies could have a material adverse effect on the Company's business, financial condition and results of operations. Uncertain Availability of Third-Party Reimbursement In the United States, hospitals, physicians and other health care providers that purchase medical devices generally rely on third-party payors to reimburse all or part of the cost of the procedure in which the medical device is being used. Few individuals are able to pay directly for the costs associated with the use of the Company's products. Certain Third-Party Payors such as Medicare determine whether to provide coverage for a particular procedure and then reimburse hospitals for inpatient medical services at a prospectively fixed rate based on the diagnosis related group ("DRG") to which the case is assigned. DRG assignment is based on the diagnosis of the patient and the procedures performed. The fixed rate of reimbursement established by Medicare is independent of the hospital's cost incurred for the specific case and the specific devices used. Medicare and other Third-Party Payors are increasingly scrutinizing whether to cover new products and the level of reimbursement for covered products. The Company intends to work with government officials to secure a DRG assignment for its TMR systems that would provide hospitals with appropriate payment. A failure by the Company to secure approval of a DRG that adequately reflects the costs associated with use of the Company's TMR system could have a material adverse effect on its business, financial condition and results of operations. *Although the Company does not anticipate receiving reimbursements for its ITMR Systems from Medicare during its clinical trials, the Company does intend to seek reimbursement from other Third-Party Payors. There can be no assurance, however, that such reimbursement will be available. Third-Party Payors that do not use prospectively fixed payments increasingly use other cost-containment processes that may pose administrative hurdles to the use of the Company's products. In addition, Third-Party Payors may deny reimbursement if they determine that the device used in a treatment is unnecessary, inappropriate, experimental, used for a non-approved indication or not cost-effective. Potential purchasers must determine the clinical benefits of the Company's TMR systems justify the additional cost or the additional effort required to obtain prior authorization or coverage and the uncertainty of actually obtaining such authorization or coverage. Physician services are reimbursed by Medicare based on a physician fee schedule as coded under the CPT-4 coding system. There is no assurance the codes that will be used for submitting claims for TMR procedures using the Company's products will result in Medicare payment levels that physicians consider to be adequate. These codes and their associated weights are used by many other Third-Party Payors in addition to Medicare. A failure by physicians to receive what they consider to be adequate reimbursement for the TMR procedures in which the Company's products are used could have a material adverse effect on the Company's business, financial condition, and results of operations. If the Company obtains the necessary foreign regulatory registrations or approvals, market acceptance of the Company's products in international markets would be dependent, in part, upon the availability of reimbursement within prevailing health care payment systems. Reimbursement and health care payment systems in international markets vary significantly by country, and include both government sponsored health care and private insurance. Although the Company intends to seek international reimbursement approvals, there can be no assurance any such approvals will be obtained in a timely manner, if at all. 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. *The Company believes the overall escalating cost of medical products and services has led, and will continue to lead, to increased pressures on the health care industry, both foreign and domestic, to reduce the cost of products and services, including products offered by the Company. There can be no assurance in either United States or international markets that third-party reimbursement and coverage will be available or adequate, that current reimbursement amounts will not be decreased in the future or that future legislation, regulation or reimbursement policies of Third-Party Payors will not otherwise adversely affect the demand for the Company's products or its ability to sell its products on a profitable basis. The unavailability of Third-Party Payor coverage or the inadequacy of reimbursement could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, fundamental reforms in the healthcare industry in the United States and Europe continue to be considered, although the Company cannot predict whether or when any healthcare reform proposals will be adopted and what impact such proposals might have. 24 25 Dependence on Sole Suppliers A major component used in the Company's TMR systems, the ECG monitor, is currently available from a sole source. In addition, several other components used in the Company's TMR systems are purchased by the Company from a single supplier. The Company periodically conducts assessments of alternative vendors for various components used in its TMR systems. However, the qualification of additional or replacement vendors for certain components is a lengthy process. In addition, if the Company were to retain different suppliers of the ECG monitor, the Company would need to obtain approval from the FDA in an IDE or PMA amendment (if the IDE or PMA were still under review) or an IDE or PMA supplement (if the IDE or PMA were already approved). There can be no assurance that such approval would be obtained on a timely basis, if at all. Although the FDA is required by law to complete its review of a PMA or PMA supplement within 180 days, the FDA may take a significantly longer period of time to complete its review. Any significant interruption in the supply of components used in the Company's TMR systems would have a material adverse effect on the Company's ability to manufacture its products and, therefore, a material adverse effect on its business, financial condition and results of operations. Certain of the Company's suppliers, including the manufacturers of its laser, could have difficulty expanding their manufacturing capacity to meet the Company's needs if demand for the Company's TMR systems were to increase rapidly or significantly. In addition, any defect or malfunction in the laser or other products provided by the Company's suppliers could cause delay in regulatory approvals or adversely affect acceptance of the Company's products. There can be no assurance materials obtained from outside suppliers will continue to be available in adequate quantities or that the Company will be able to locate alternative suppliers on a timely basis. The failure to obtain sufficient quantities of lasers or component materials would have a material adverse effect on the Company's business, financial condition and results of operations. The Company purchases lasers from its suppliers pursuant to OEM Supply Agreements, however, the Company generally operates on a purchase order basis with most of its suppliers, including the manufacturer of the ECG monitor used in the Company's TMR systems. Vendors that supply products to the Company and could at any time determine to cease the supply and production of such components, which could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Management, Other Key Personnel and Scientific Advisors The Company's ability to operate successfully depends in significant part upon the continued service of certain key scientific, technical, managerial and finance personnel and the Company's continuing ability to attract and retain additional highly qualified personnel. *In order to support market development and sales in the future and augment its long term competitive position, the Company anticipates it will be required to make significant additions of personnel in manufacturing, research and development and sales and marketing. Competition for such personnel is intense, and there can be no assurance the Company can attract or retain highly qualified scientific, technical, manufacturing, sales and marketing and finance personnel in the future. The loss of key personnel or the inability to hire or retain qualified personnel could have a material adverse effect upon the Company's business, financial condition and results of operations. In addition, many employees of the Company, including a number of its key scientific, technical and managerial personnel, are subject to the terms of confidentiality agreements with respect to proprietary information of their former employers. The failure of these employees to comply with the terms of their agreements with, or other obligations to, such former employers could result in assertion of claims against the Company and such employees, which, if successful, could restrict the role of such employees with the Company and have a material adverse effect on the Company's business, financial condition and results of operations. The Company has established a Scientific Advisory Board including experts in cardiac surgery, interventional cardiology, cardiology and basic science. Members of the Scientific Advisory Board consult with the Company regarding research and development efforts at the Company but are employed elsewhere on a full-time basis. As a result, they can only spend a limited 25 26 amount of time on the Company's affairs and there can be no assurance the members of the Company's Scientific Advisory Board will continue to serve in such capacity. Need to Comply with United States Manufacturing Standards; Limited Manufacturing Experience The Company has limited experience in manufacturing its products. Manufacturers often encounter difficulties in increasing production, including problems involving production yields, adequate supplies of components, quality control and assurance (including failure to comply with good manufacturing practices ("GMP") regulations, international quality standards and other regulatory requirements) and shortages of qualified personnel. Difficulties experienced by the Company in manufacturing scale-up could have a material adverse effect on its business, financial condition and results of operations. There can be no assurance the Company will be successful in increasing manufacturing capacity or it will not experience manufacturing difficulties or product recalls in the future. Under current law, if the Company markets its devices or manufactures finished devices in the United States, it will be required to demonstrate compliance with the FDA's current GMP regulations. In addition, the FDA will inspect the Company's manufacturing facilities on a regular basis to determine such compliance. The FDA could determine the Company's export of components is not in compliance with the FDC Act or the FDA's regulations or policies and prohibit exports in the future. Failure to comply with applicable FDA or other regulatory requirements can result in fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspensions of production and criminal prosecutions. The FDA has recently promulgated new GMP regulations. To date, the Company has no experience dealing with the new regulations. Product Liability Risk; Possible Insufficiency of Insurance The Company's business exposes the Company to potential product liability risks or product recalls that are inherent in the design, development, manufacture and marketing of medical devices. The Company could be subject to product liability claims if the use of the Company's TMR systems is alleged to have caused adverse effects on a patient or such products are believed to be defective. The Company's products are designed to be used in life-threatening situations where there is a high risk of serious injury or death. Such risks will continue to exist with respect to those products that may in the future receive regulatory clearance for commercial sale. The failure to comply with the FDA's GMP or other regulations could have a material adverse effect on the ability of the Company to defend against product liability lawsuits. Although the Company has not experienced any product liability claims to date, any such claims could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance the Company's product liability insurance, with coverage limits of $5 million per occurrence and in the aggregate and additional coverage limits of DM1 million (approximately $546,000) per person and DM50 million (approximately $27,300,000) in the aggregate for use of the Company's TMR systems in Germany, will be adequate for any future product liability problems or that such insurance coverage will continue to be available on commercially reasonable terms or at all. Particularly given that TMR is not well understood and the lack of data regarding the clinical safety and efficacy of the Company's TMR systems, there can be no assurance such coverage limits would be adequate to protect the Company from liabilities it might incur in connection with the development, manufacture and sale of its products. In addition, the Company may require increased product liability coverage if any products are commercialized. Product liability insurance is expensive and in the future may not be available to the Company on acceptable terms, if at all. If the Company was held liable for a product liability claim or series of claims brought against the Company in excess of its insurance coverage such liability could have a material and adverse effect on the Company's business, financial condition and results of operations. Item 7A Quantitative and Qualitative Disclosures about Market Risk Not Applicable. 26 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ----- Page Report of Coopers & Lybrand L.L.P., Independent Accountants...........28 Consolidated Balance Sheets...........................................29 Consolidated Statements of Operations.................................30 Consolidated Statement of Stockholders' Equity (Deficit)..............31 Consolidated Statements of Cash Flows.................................32 Notes to Consolidated Financial Statements............................34 Financial Statement Schedule The following financial statement schedule of the Company for the three years ended December 31, 1997 is filed as part of this Form 10-K and should be read in conjunction with the Consolidated Financial Statements, and related notes thereto, of the Company. Report of Independent Accountants on Financial Statement Schedule.....48 Schedule II - Valuation and Qualifying Accounts.......................49 All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 27 28 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of CardioGenesis Corporation: We have audited the accompanying consolidated balance sheets of CardioGenesis Corporation as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CardioGenesis Corporation as of December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. San Jose, California January 30, 1998 28 29 CARDIOGENESIS CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) -------
December 31, ---------------------------- ASSETS 1997 1996 ----------- ----------- Current assets: Cash and cash equivalents $ 6,047 $ 2,080 Available-for-sale securities 24,469 53,626 Accounts receivable, net of allowance for doubtful accounts of $50 in 1997 and $225 in 1996 3,293 2,024 Inventories 1,109 1,108 Interest receivable 574 934 Prepaids and other 1,177 454 ---------- ---------- Total current assets 36,669 60,226 Property and equipment, net 1,529 1,546 Available-for-sale securities, noncurrent 10,019 2,502 Other assets 23 23 ---------- ---------- Total assets $ 48,240 $ 64,297 ========== ========== LIABILITIES Current liabilities: Accounts payable $ 1,450 $ 237 Short-term note payable 40 215 Accrued expenses 1,828 1,696 Accrued compensation 626 384 Deferred revenue 150 370 ---------- ---------- Total liabilities 4,094 2,902 ---------- ---------- Commitments and contingencies (Note 6) STOCKHOLDERS' EQUITY Preferred stock, $0.001 par value: Authorized: 2,000 shares Issued and outstanding: no shares in 1997 and 1996 Common stock, $0.001 par value: Authorized: 40,000 shares Issued and outstanding: 12,067 shares in 1997 and 11,967 shares in 1996 12 12 Additional paid in capital 79,680 79,450 Deferred compensation (848) (1,328) Unrealized gains on available-for-sale securities 39 Cumulative foreign currency translation adjustments 31 (4) Accumulated deficit (34,706) (16,735) ---------- ---------- Total stockholders' equity 44,146 61,395 ---------- ---------- Total liabilities and stockholders' equity $ 48,240 $ 64,297 ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 29 30 CARDIOGENESIS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) -------
Year Ended December 31, ----------------------------------------- 1997 1996 1995 --------- -------- --------- Sales $ 7,559 $ 3,959 Cost of sales 4,991 2,866 ---------- ---------- Gross profit 2,568 1,093 ---------- ---------- Operating expenses: Research and development 14,210 7,140 $ 3,967 General and administrative 3,722 2,622 1,178 Sales and marketing 5,426 2,417 336 ---------- ---------- --------- Total operating expenses 23,358 12,179 5,481 ---------- ---------- --------- Operating loss (20,790) (11,086) (5,481) Interest income 2,855 2,319 182 Interest expense and other (36) (33) ---------- ---------- --------- Net loss $ (17,971) $ (8,800) $ (5,299) ========== ========== ========= Net loss per common share and per common share - assuming dilution $ (1.49) $ (1.18) $ -- ========== ========== ========= Shares used in computing net loss per common share and per common share - assuming dilution 12,029 7,427 -- ========== ========== =========
The accompanying notes are an integral part of these consolidated financial statements. 30 31 CARDIOGENESIS CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (in thousands) -------
Common Stock Additional -------------------------- Paid-In Deferred Shares Amount Capital Compensation ---------- ---------- ---------- ---------- Balances, January 1, 1995 Deferred compensation related to issuance of preferred stock and grants of stock options $ 874 $ (874) Amortization of deferred compensation 104 Net loss ---------- ---------- Balances, December 31, 1995 874 (770) Deferred compensation related to issuance of preferred stock and grants of stock options 1,407 (1,407) Amortization of deferred compensation 849 Issuance of common stock upon exercise of stock options and stock grants 409 75 Conversion of redeemable preferred stock to common stock in connection with Initial Public Offering in May 1996 8,558 $ 9 22,622 Issuance of common stock in Initial Public Offering, net of issuance costs of $5,533 3,000 3 54,472 Foreign currency translation adjustment Net loss ---------- ---------- ---------- ---------- Balances, December 31, 1996 11,967 12 79,450 (1,328) Amortization of deferred compensation 480 Issuance of common stock upon exercise of stock options and stock grants 83 76 Issuance of common stock under the Employee Stock Purchase Plan 17 154 Change in unrealized gains on available for sale securities Foreign currency translation adjustment Net loss ---------- ---------- ---------- ---------- Balances, December 31, 1997 12,067 $ 12 $ 79,680 $ (848) ========== ========== ========== ==========
Unrealized Cumulative Gains on Foreign Total Available- Currency Stockholders' Accumulated For-Sale Translation Equity Deficit Securities Adjustments (Deficit) ---------- ---------- ---------- ---------- Balances, January 1, 1995 $ (2,636) $ (2,636) Deferred compensation related to issuance of preferred stock and grants of stock options -- Amortization of deferred compensation 104 Net loss (5,299) (5,299) ---------- ---------- ---------- ---------- Balances, December 31, 1995 (7,935) (7,831) Deferred compensation related to issuance of preferred stock and grants of stock options -- Amortization of deferred compensation 849 Issuance of common stock upon exercise of stock options and stock grants 75 Conversion of redeemable preferred stock to common stock in connection with Initial Public Offering in May 1996 22,631 Issuance of common stock in Initial Public Offering, net of issuance costs of $5,533 54,475 Foreign currency translation adjustment $ (4) (4) Net loss (8,800) (8,800) ---------- ---------- ---------- ---------- Balances, December 31, 1996 16,735 (4) 61,395 Amortization of deferred compensation 480 Issuance of common stock upon exercise of stock options and stock grants 76 Issuance of common stock under the Employee Stock Purchase Plan 154 Change in unrealized gains on available for sale securities $ 39 39 Foreign currency translation adjustment (27) (27) Net loss (17,971) (17,971) ---------- ---------- ---------- ---------- Balances, December 31, 1997 $ (34,706) $ 39 $ (31) $ 44,146 ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 31 32 CARDIOGENESIS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) -------
Year Ended December 31, ---------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Cash flows from operating activities: Net loss $ (17,971) $ (8,800) $ (5,299) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 375 310 114 Amortization of deferred compensation 480 849 104 Loss on disposal of property and equipment 2 152 215 Changes in assets and liabilities: Accounts receivable (1,268) (1,154) (870) Inventories (1) (483) (625) Interest receivable 360 (832) (102) Prepaids and other (723) (231) (161) Accounts payable 1,213 (283) 475 Accrued expenses 132 1,395 126 Accrued compensation 242 411 129 Deferred revenue (220) (500) 870 ---------- ---------- ---------- Net cash used in operating activities (17,379) (9,166) (5,024) ---------- ---------- ---------- Cash flows from investing activities: Purchase of available-for-sale securities (129,897) (200,922) (30,235) Maturities of available-for-sale securities 151,575 154,681 23,869 Acquisition of property and equipment (360) (1,678) (175) (Increase) decrease in other assets 13 (21) ---------- ---------- ---------- Net cash provided by (used in) investing activities 21,318 (47,906) (6,562) ---------- ---------- ---------- Cash flows from financing activities: Proceeds from note payable 215 Payments on note payable (175) Proceeds from issuance of preferred stock, net of issuance costs 241 13,934 Proceeds from issuance of common stock, net of issuance costs 230 54,550 ---------- ---------- ---------- Net cash provided by financing activities 55 55,006 13,934 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 3,994 (2,066) 2,348 Effect of exchange rates on cash and cash equivalents (27) (4) Cash and cash equivalents, beginning of year 2,080 4,150 1,802 ---------- ---------- ---------- Cash and cash equivalents, end of year $ 6,047 $ 2,080 $ 4,150 ========== ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Conversion of redeemable preferred stock to common stock in connection with the Company's Initial Public Offering $ 22,631 ========== Unrealized gains on available-for-sale securities $ 39 ==========
32 33 The accompanying notes are an integral part of these consolidated financial statements. 33 34 CARDIOGENESIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 1. Summary of Significant Accounting Policies: BUSINESS: CardioGenesis Corporation, (the Company) was incorporated in September 1993 to conduct research, develop and manufacture cardiovascular surgical devices, including disposable systems, to perform both surgical and catheter based percutaneous transmyocardial revascularization. Since its inception, the Company has devoted substantially all of its efforts to developing products and bringing them to market, raising capital and recruiting personnel. The Company's principal operations commenced during 1996 at which time it emerged from the development stage. In the course of its development activities, the Company has sustained operating losses and expects such losses to continue at least through 1999. The Company will finance its operations primarily through its cash, cash equivalents and available-for-sale securities, together with existing credit facilities and future revenues. There can be no assurance that the Company will not require additional funding and should this prove necessary, the Company may sell additional shares of its common or preferred stock through private placement or further public offerings. In May 1996, the Company completed its Initial Public Offering (IPO) selling 3,000,000 shares of its common stock with net proceeds of $54.5 million. BASIS OF CONSOLIDATION: The consolidated financial statements include the accounts of CardioGenesis Corporation and its wholly owned subsidiary after all intercompany balances and transactions have been eliminated. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments purchased with an original maturity of three months or less from the date of purchase and money market funds to be cash equivalents. AVAILABLE-FOR-SALE SECURITIES: All investments are classified as available-for-sale and therefore are carried at fair market value. Unrealized gains and losses on such securities are reported as a separate component of stockholders' equity. Realized gains and losses on sales of all such securities are reported in earnings and computed using the specific identification cost method. 7 CONTINUED 34 35 CARDIOGENESIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ------- 1. Summary of Significant Accounting Policies, continued: INVENTORIES: Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets, generally two to seven years. Amortization of leasehold improvements is provided on a straight-line basis over the estimated useful life of the related asset or the lease term, whichever is shorter. Maintenance and repairs are charged to operations as incurred. REVENUE RECOGNITION: The Company recognizes product sales upon shipment of product to the customer and 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 majority of the Company's cash, cash equivalents and available-for-sale securities are invested in deposits with a major bank in the United States. Deposits in this bank may exceed the amount of insurance provided on such deposits. Sales to both international and domestic customers are generally made on open credit terms. Management performs ongoing credit evaluations of the Company's customers and maintains an allowance for potential credit losses when needed, but historically has not experienced any significant losses related to individual customers or groups of customers in any particular geographic area. The Company's products require approval of the Food and Drug Administration (FDA) or other international regulatory agencies prior to commercialized sales. The Company cannot be assured that its products will receive this regulatory approval. During 1996, the Company received approval to market its ITMR system in the European Community. If the Company was denied regulatory approval or approval was delayed, it would have a material adverse impact on the Company. CONTINUED 35 36 CARDIOGENESIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ------- 1. Summary of Significant Accounting Policies, continued: CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES, continued: The Company purchases all of its ECG monitors from one of two suppliers. Management believes that other producers could be found to supply ECG monitors to the Company's specifications with relatively consistent pricing. [Management believes that there would be minimal delay if the Company was required to change suppliers. If the Company experienced delays in locating a new supplier of ECG monitors, it would have a material adverse impact on the Company.] Export sales totaled approximately $4.5 million and $2.0 million for 1997 and 1996, respectively. The Company operates in an industry which experiences rapid technological changes, which may render inventories maintained by the Company obsolete. INCOME TAXES: Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. CONTINUED 36 37 CARDIOGENESIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ------- 1. Summary of Significant Accounting Policies, continued: 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. FOREIGN CURRENCY TRANSLATION: The Company's international subsidiary uses its local currency as its functional currency. Assets and liabilities are 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 are recorded directly to a separate component of stockholders' equity. COMPUTATION OF NET LOSS PER COMMON SHARE AND PER COMMON SHARE-ASSUMING DILUTION: The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share" and the Securities and Exchange Commission Staff Accounting Bulletin No. 98 (SAB No. 98) effective December 31, 1997; accordingly, all prior periods have been restated. Net loss per common share and per common share-assuming dilution 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. No additional shares are considered to be outstanding for either computation under the provisions of SAB No. 98. As of December 31, 1995 there were 246 shares of common stock outstanding. The Company does not believe that earnings per share for periods prior to its Initial Public Offering are meaningful. RECLASSIFICATIONS: 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 losses. CONTINUED 37 38 CARDIOGENESIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ------- 1. Summary of Significant Accounting Policies, continued: RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period, resulting from transactions and other events and circumstances from nonowner sources. The impact of adopting SFAS No. 130, which is effective for the Company in 1998, has not been determined. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operating decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements would be provided. SFAS No. 131 is effective for the Company in 1998. The Company operates in one business segment; namely, the research, development, manufacture, and sale of cardiovascular surgical devices. 2. Available-for-Sale Securities: At December 31, 1997, available-for-sale securities consisted of corporate obligations and obligations of federal government agencies, bearing interest at rates ranging from 5.51% to 8.45% per annum, and maturing from January 28, 1998, through October 10, 1999. The maturities of the available-for-sale securities do not exceed two years. CONTINUED 38 39 CARDIOGENESIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ------- 2. Available-for-Sale Securities, continued: The amortized cost and fair value of available-for-sale securities at December 31, 1997 and 1996 are as follows (in thousands):
1997 1996 ---------------------------------------------- ---------------------------- Amortized Unrealized Fair Amortized Fair Cost Gain Value Cost Value ---------- ---------- ---------- ---------- ---------- U.S. Government securities $ 8,491 $ 19 $ 8,510 $ 26,446 $ 26,446 Corporate obligations 25,958 20 25,978 29,682 29,682 ---------- ---------- ---------- ---------- ---------- $ 34,449 $ 39 $ 34,488 $ 56,128 $ 56,128 ========== ========== ========== ========== ==========
3. Inventories: Inventories consisted of the following (in thousands):
December 31, --------------------------- 1997 1996 ----------- ----------- Raw materials $ 736 $ 20 Finished goods 373 1,088 ----------- ----------- $ 1,109 $ 1,108 =========== ===========
4. Property and Equipment: Property and equipment consisted of the following (in thousands):
December 31, ------------------------ 1997 1996 ---------- ----------- Computer equipment $ 520 $ 403 Laboratory equipment 514 430 Furniture and equipment 698 447 Leasehold improvements 540 731 ---------- ----------- 2,272 2,011 Less accumulated depreciation and amortization 743 465 ---------- ----------- $ 1,529 $ 1,546 ========== ===========
CONTINUED 39 40 CARDIOGENESIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ------- 5. Accrued Expenses: Accrued expenses consisted of the following (in thousands):
December 31, ------------------------ 1997 1996 ---------- ----------- Clinical Patient Research $ 1,074 $ 333 Contract Research 231 266 Consulting 275 Distributors 400 Legal 358 176 Employee Stock Purchase Plan 73 72 Other 92 174 ---------- ----------- $ 1,828 $ 1,696 ========== ===========
6. Commitments and Contingencies: FACILITY LEASE: The Company leases its Sunnyvale, California facility under a noncancelable operating lease expiring in October 1999. In addition to monthly rent, the lease is subject to additional payments for utilities and other costs above the base amounts. The Company has the option to extend the term of this lease for an additional five years upon all of the same terms and conditions except base rent. Future minimum lease payments are as follows at December 31, 1997 (in thousands):
1998 $ 191 1999 160 --------- $ 351 =========
CONTINUED 40 41 CARDIOGENESIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ------- 6. Commitments and Contingencies, continued: FACILITY LEASE, continued: Rent expense for the years ended December 31, 1997, 1996 and 1995 was $229,000, $229,000 and $65,000, respectively. RESEARCH AGREEMENT: The Company, in its acquisition of technology in 1993, assumed certain obligations under an ongoing research and development agreement with Columbia University (Columbia). The agreement provides for a license fee of $1.5 million to be paid to Columbia on the date the technology licensed under the agreement meets all the following conditions: marketing approval from the FDA; issuance of a United States patent for the product; and demonstration of the manufacturability of the product. The Company must pay a royalty to Columbia of 1.4% of all net revenues from sales of the products subject to the license beginning twelve months preceding the issuance of the first United States patent. A royalty of 50% is required for all sublicense revenue. The agreement allows for cumulative research payments under the agreement to be deducted from future royalty payments required. Previous payments under the agreement made by the Company and the assignor to Columbia which would reduce future royalties for product sales have been expensed, as incurred, as research and development expenses. The Company has agreements to pay consultants and institutions $655,000 for various research and development efforts in 1998. LITIGATION: The Company is a party to various legal actions that have occurred in the normal course of business. In the opinion of management, the outcome of these actions will not have a material effect on the financial position, cash flows, or results of operations of the Company. 7. Stockholders' Equity COMMON STOCK: At December 31, 1997, the Company had 40 million shares of common stock authorized. In April 1996, the Company reincorporated in the State of Delaware. The financial statements have been retroactively adjusted to reflect the reincorporation. In April 1996, the Company had a 4.1-for-5 reverse stock split of the Company's common and preferred stock. The financial statements have been retroactively restated to give effect to the split. CONTINUED 41 42 CARDIOGENESIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ------- 7. Stockholders' Equity, continued: EMPLOYEE STOCK PURCHASE PLAN: In April 1996, the Board of Directors adopted the 1996 Employee Stock Purchase Plan and reserved 123,000 shares of common stock for issuance under the Plan. The Plan provides for consecutive 24 month offering periods. Each offering period is comprised of four six month purchase periods. Shares are purchased through employees' payroll deductions at exercise prices equal to 85% of the lesser of the fair market value of the Company's common stock at either the first day of the applicable offering period or the last day of the respective purchase period. 17,000 shares had been issued under this plan as of December 31, 1997. STOCK OPTION PLANS: In November 1993, the Company established the 1993 Equity Incentive Plan (the 1993 Plan) that, as amended in 1995, authorized the Board of Directors to grant 1,640,000 incentive and nonstatutory stock options to employees, officers, directors and consultants of the Company. The Plan expires in 2003. In April 1996, the Company adopted the 1996 Equity Incentive Plan (the 1996 Plan). Pursuant to the provisions of this plan, the Board of Directors may grant incentive and nonstatutory stock options to employees, officers, directors and consultants of the Company. At December 31, 1997, there were 1,120,000 shares reserved for issuance under this plan. The Plan expires in 2006. Additionally in April 1996, the Company adopted the 1996 Directors Stock Option Plan. Only nonstatutory stock options may be granted under this plan, and only to non-employee directors of the company. At December 31, 1997, there were 98,000 shares reserved for issuance under this plan. The Plan expires in 2006. CONTINUED 42 43 CARDIOGENESIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ------- 7. Stockholders' Equity, continued: STOCK OPTION PLANS, continued: Under the Plans, options must be granted at not less than the fair market value at the date of grant as determined by the Board of Directors, or committee thereof, except for options granted to a person owning greater than 10% of the total combined voting power of all classes of stock of the Company, for which the exercise price of the options must be not less than 110% of the fair market value at the time of grant as determined by the Board of Directors or committee thereof and nonstatutory stock options, for which the exercise price of the options must not be less than 85% of the fair market value at the time of grant as determined by the Board of Directors or committee thereof. The Board of Directors, or committee thereof, has the authority to set the term of the options (no longer than ten years from the date of grant, five years for greater than 10% owners of voting stock). Under the Plans, options generally vest at a rate of 25% annually after the vesting commencement date. Activity under the Plans is set forth below (in thousands, except per share data):
Options Outstanding Shares ------------------------------------------------ Available Number for of Exercise Aggregate Grant Shares Price Price ------------ ------------ ----------- ------------ Balances, January 1, 1995 740 531 $0.12-$0.24 $ 82 Additional shares reserved by plan amendment 369 Options granted (813) 813 $0.24-$0.61 233 Options canceled 8 (8) $0.24 (2) ------------ ------------ ------------ Balances, December 31, 1995 304 1,336 $0.12-$0.61 313 Additional shares reserved by plan amendment 918 Options granted (646) 646 $0.61-$14.50 5,161 Options canceled 75 (75) $0.12-$14.50 (648) Options exercised (409) $0.12-$1.83 (75) ------------ ------------ ------------ Balances, December 31, 1996 651 1,498 $0.12-$14.50 4,751 Additional shares reserved by plan amendment 300 Options granted (1,318) 1,318 $6.50-$15.25 10,153 Options canceled 692 (692) $0.12-$15.25 (7,032) Options exercised (83) $0.12-$10.75 (76) ------------ ------------ ------------ Balances, December 31, 1997 325 2,041 $0.12-$14.50 $ 7,796 ============ ============ ============
CONTINUED 43 44 CARDIOGENESIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ------- 7. Stockholders' Equity, continued: STOCK OPTION PLANS, continued: In December 1997, the Company offered employees the right to cancel certain outstanding stock options and receive new options with an exercise price of $6.50 per share, the closing price of the common stock on the date individual employees agreed to cancel their original outstanding stock options. Options to purchase a total of 502,000 shares at original exercise prices ranging from $7.25 to $15.25 per share were canceled and new options were issued in December 1997. The option term and vesting under the new options are identical to the terms of the canceled options. The options outstanding and currently exercisable by exercise price at December 31, 1997 are as follows (in thousands, except per share data):
Options Currently Options Outstanding Exercisable ------------------------------------------------ --------------------- Weighted Average Weighted Weighted Average Remaining Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ----------- ----------- ----------- -------- ----------- -------- $0.12-$0.24 751 7.13 $0.22 511 $0.21 $0.61-$0.61 160 8.00 $0.61 73 $0.61 $1.83-$1.83 149 8.17 $1.83 75 $1.83 $6.50-$14.50 981 9.32 $7.25 196 $8.16 ----- ---- 2,041 855 ===== ====
At December 31, 1997, options to purchase 855,000 shares were exercisable at an average exercise price of $2.21 per share and 2,041,000 shares of common stock are reserved in the event of options exercised. Deferred compensation to be recognized as a result of stock options granted and preferred stock issued during 1996 and 1995 totaled $1.4 million and $874,000 respectively. Amortization of deferred compensation is generally over a vesting period of four years, with compensation expense recognized in the period ended December 31, 1997, 1996 and 1995 of $480,000, $849,000 and $104,000 respectively. CONTINUED 44 45 CARDIOGENESIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ------- 7. Stockholders' Equity, continued: 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." Accordingly, no compensation cost has been recognized for the Plans (including the Employee Stock Purchase Plan). Had compensation cost for the Plans been determined based on the fair value at the grant date for awards in 1997, 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per common share and per common share-assuming dilution for the years ended December 31, 1997, 1996 and 1995 would have been increased to the pro forma amounts indicated below (in thousands, except per share data):
Year Ended December 31, --------------------------------------------- 1997 1996 1995 ----------- ---------- ---------- Net loss - as reported $ (17,971) $ (8,800) $ (5,299) =========== ========== ========== Net loss - pro forma $ (19,800) $ (9,258) $ (5,318) =========== ========== ========== Net loss per common share and per common share-assuming dilution - as reported $ (1.49) $ (1.18) $ -- =========== ========== ========== Net loss per common share and per common share-assuming dilution - pro forma $ (1.65) $ (1.25) $ -- =========== ========== ==========
The above pro forma disclosures are not necessarily representative of the effects on reported net income or loss for future years. CONTINUED 45 46 CARDIOGENESIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ------- 7. Stockholders' Equity, continued: STOCK-BASED COMPENSATION, continued: The fair value of each option grant is estimated on the date of grant using the minimum value method (prior to the IPO) and the Black-Scholes method (subsequent to the IPO) with the following weighted average assumptions by subgroup:
Option Plans Stock -------- -------- Purchase Group A Group B Plan -------- -------- -------- Risk-free interest rate 6.48% 5.86% 5.32% Expected life 4.23 4.54 0.5 Expected dividends $ -- $ -- $ -- Expected volatility 0.7633 0.7633 0.7633
The weighted average expected life was calculated based on the vesting period and the exercise behavior of each subgroup. Group A represents higher paid employees, while Group B represents lower paid employees. The risk-free interest rate was calculated in accordance with the grant date and expected life calculated for each subgroup. 8. Income Taxes: At December 31, 1997 and 1996, the components of deferred tax assets are as follows (in thousands):
1997 1996 -------- -------- Intangible assets $ (4) $ 40 Depreciation 39 6 Tax credits 972 229 Accrued expenses and other 471 219 Capitalized research and development 676 628 Deferred revenue -- 111 Net operating loss carryforwards 11,636 4,779 ------ ----- Net deferred tax assets 13,790 6,012 Less valuation allowance (13,790) (6,012) ------ ------ $ -- $ -- ====== ======
The Company had federal and state net operating loss carryforwards of approximately $32.5 million and $10.0 million, respectively, at December 31, 1997, available to offset future regular and alternative minimum taxable income. The Company's federal and state net operating loss carryforwards will expire by the years 2012 and 2002, respectively. The Tax Reform Act of 1986 substantially changed the rules relative to net operating loss carryforwards in the event of an "ownership change" of a corporation. Future changes in ownership may result in limitations on the annual utilization of net operating loss carryforwards. 9. Related Party Transactions: The Company paid $113,000, $159,000, and $178,000 for consulting fees to certain stockholders during the years ended December 31, 1997, 1996 and 1995, respectively. CONTINUED 46 47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - none - PART III ITEM 10. DIRECTORS AND EXECUTIVES OFFICERS OF THE REGISTRANT The information required by this item with respect to the directors of the Company is incorporated by reference from the definitive proxy statement for the Company's 1998 annual meeting of stockholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report (the "Proxy Statement") under the caption "Proposal No. 1-Election of Directors." The information relating to the executive officers of the Company is incorporated by reference from the Proxy Statement under the caption "Executive Officers." Information required by this item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Proxy Statement under the captions "Executive Compensation," "Proposal No. 1-Election of Directors-Director Compensation," and "Compensation Committee Interlocks and Insider Participation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Proxy Statement under the caption "Certain Relationships and Related Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form: 1. Index to Financial Statements ----------------------------- The Consolidated Financial Statements, notes thereto, and Independent Accountant's Report thereon are included in Part II, Item 8 of this Form 10-K. 2. Financial Statement Schedule The Financial Statement Schedule is included in Part II, Item 8 of this Form 10-K. 3. Exhibits The following exhibits are filed or incorporated by reference as part of this Form 10-K: EXHIBIT NUMBER EXHIBIT TITLE ------- ----------------------------------------------------------- 3.01 Restated Certificate of Incorporation.(4) 3.02 Registrant's Bylaws.(1) 4.01 Form of Specimen Certificate for Registrant's Common Stock.(1) 4.02 Registrant's Second Restated Investors' Rights Agreement, dated as of December 5, 1995 as amended.(1) 10.01 Registrant's 1993 Equity Incentive Plan and related documents.(1)* 10.02 Registrant's 1996 Equity Incentive Plan and related documents.(1)(3)* 10.03 Registrant's 1996 Directors Stock Option Plan and related documents.(1)* 10.04 Registrant's 1996 Employee Stock Purchase Plan and related documents.(1)* 10.05 Standard Industrial/Commercial Multi-Tenant Lease, dated December 18, 1995, by and between Registrant and De La Cruz Enterprises.(1) 10.06 Koll Business Center Lease, dated July 13, 1994, by and between Registrant and Fujita California Partners III.(1) 10.07 Form of Indemnity Agreement.(1)* 10.08 Agreement, dated August 1, 1991, by and among the Trustees of Columbia University in the City of New York, Eli Lilly and Company and Advanced Cardiovascular Systems, Inc. and related documents.(1)(2) 10.09 OEM Supply Agreement, dated May 31, 1995, by and between Registrant and New Star Lasers as amended.(1)(2) 10.10 Research and Development Agreement, dated June 1, 1995, by and between Registrant and New Star Lasers.(1)(2) 10.11 Product Documentation, Approval, Manufacturing and Supply Agreement, dated January 2, 1996, by and between Registrant and Indigo Medical GmbH.(1)(2) 10.12 Consulting Agreement, dated March 1, 1996, by and between Registrant and Michael Aita.(1)(2)* 10.13 Employment Terms Letter, dated November 23, 1993, issued by the Company to Michael Aita.(1)* 10.14 Consulting Agreement, dated November 23, 1993, by and among Registrant, Carl J. Simpson and Advanced Cardiovascular systems, Inc. as amended.(1)* 10.15 International Distribution Agreement, dated January 22, 1997, by and between Registrant and Boston Scientific Corporation.**(2)(5) 10.16 OEM Product Development and Supply Agreement, dated March 10, 1997, between Registrant and Carl Baasel Lasertechnik GmbH.** 23.01 Consent of Coopers & Lybrand, L.L.P., independent accountants. 27.01 Financial Data Schedule. 27.02 Restated Financial Data Schedule for Nine Months Ended September 30, 1997. 27.03 Restated Financial Data Schedule for Six Months Ended June 30, 1997. 27.04 Restated Financial Data Schedule for Three Months Ended March 31, 1997. 27.05 Restated Financial Data Schedule for Twelve Months Ended December 31, 1996. 27.06 Restated Financial Data Schedule for Nine Months Ended September 30, 1996. 27.07 Restated Financial Data Schedule for Six Months Ended June 30, 1996. - ------------------- * Management contract or compensatory arrangement. ** Confidential treatment has been requested with respect to certain portions of this exhibit. Confidential portions have been filed separately with the Securities and Exchange Commission. (1) Incorporated by reference to the Exhibits to Registrant's Registration Statement on Form SB-2 (No. 333-3752-LA), declared effective on May 21, 1996 (the "Form SB-2"). (2) Confidential treatment has been granted with respect to certain portions of this agreement. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. (3) Incorporated by reference to the Exhibit 10.20 of Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 1997. (4) Incorporated by reference to the Exhibit 3.01 of Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1996. (5) Incorporated by reference to the Exhibit 10.19 of Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1997. (b) Reports on Form 8-K ------------------- None (c) Exhibits -------- See Item 14(a) above. (d) Financial Statement Schedule ---------------------------- See Item 14(a) above. 47 48 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE In connection with our audits of the consolidated financial statements of CardioGenesis Corporation as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which financial statements are included in this Annual Report on Form 10-K, we have also audited the financial statement schedule listed in Item 8 herein. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. San Jose, California January 30, 1998 48 49 (Schedule II) CARDIOGENESIS CORPORATION VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Balance at Beginning Charged to Balance at of the Costs and End of the Description Period Expenses Deductions Period - -------------------------------------------- ---------- ---------- ---------- --------- Balance for the year ended December 31, 1995: Allowance for doubtful accounts receivable $0 $0 Balance for the year ended December 31, 1996: Allowance for doubtful accounts receivable $0 $225 -- $225 Balance for the year ended December 31, 1997: Allowance for doubtful accounts receivable $225 $207 $(382) $ 50
49 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARDIOGENESIS CORPORATION By: /s/ ALLEN W. HILL ---------------------------- Allen W. Hill President and Chief Executive Officer Date: March 31, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - ---------------------------- ---------------------------- --------------- /s/ ALLEN W. HILL President, Chief Executive March 31, 1998 - ------------------------- Officer and a Director Allen W. Hill (Principal Executive Officer) /s/ RICHARD P. POWERS Chief Financial Officer, March 31, 1998 - ------------------------- Vice President of Finance Richard P. Powers and Administration and Secretary (Principal Financial Officer and Principal Accounting Officer) /s/ DAVID B. APFELBERG Director March 31, 1998 - ------------------------- David B. Apfelberg /s/ JACK M. GILL Director March 31, 1998 - ------------------------- Jack M. Gill /s/ DAVID C. HULL, JR. Director March 31, 1998 - ------------------------- David C. Hull, Jr. /s/ THOMAS D. KILEY Director March 31, 1998 - ------------------------- Thomas D. Kiley /s/ E. WALTER LANGE Director March 31, 1998 - ------------------------- E. Walter Lange /s/ ROBERT C. STRAUSS Director March 31, 1998 - ------------------------- Robert C. Strauss
50 51 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT TITLE ------- ----------------------------------------------------------- 3.01 Restated Certificate of Incorporation.(4) 3.02 Registrant's Bylaws.(1) 4.01 Form of Specimen Certificate for Registrant's Common Stock.(1) 4.02 Registrant's Second Restated Investors' Rights Agreement, dated as of December 5, 1995 as amended.(1) 10.01 Registrant's 1993 Equity Incentive Plan and related documents.(1)* 10.02 Registrant's 1996 Equity Incentive Plan and related documents.(1)(3)* 10.03 Registrant's 1996 Directors Stock Option Plan and related documents.(1)* 10.04 Registrant's 1996 Employee Stock Purchase Plan and related documents.(1)* 10.05 Standard Industrial/Commercial Multi-Tenant Lease, dated December 18, 1995, by and between Registrant and De La Cruz Enterprises.(1) 10.06 Koll Business Center Lease, dated July 13, 1994, by and between Registrant and Fujita California Partners III.(1) 10.07 Form of Indemnity Agreement.(1)* 10.08 Agreement, dated August 1, 1991, by and among the Trustees of Columbia University in the City of New York, Eli Lilly and Company and Advanced Cardiovascular Systems, Inc. and related documents.(1)(2) 10.09 OEM Supply Agreement, dated May 31, 1995, by and between Registrant and New Star Lasers as amended.(1)(2) 10.10 Research and Development Agreement, dated June 1, 1995, by and between Registrant and New Star Lasers.(1)(2) 10.11 Product Documentation, Approval, Manufacturing and Supply Agreement, dated January 2, 1996, by and between Registrant and Indigo Medical GmbH.(1)(2) 10.12 Consulting Agreement, dated March 1, 1996, by and between Registrant and Michael Aita.(1)(2)* 10.13 Employment Terms Letter, dated November 23, 1993, issued by the Company to Michael Aita.(1)* 10.14 Consulting Agreement, dated November 23, 1993, by and among Registrant, Carl J. Simpson and Advanced Cardiovascular systems, Inc. as amended.(1)* 10.15 International Distribution Agreement, dated January 22, 1997, by and between Registrant and Boston Scientific Corporation.**(2)(5) 10.16 OEM Product Development and Supply Agreement, dated March 10, 1997, between Registrant and Carl Baasel Lasertechnik GmbH.** 23.01 Consent of Coopers & Lybrand, L.L.P., independent accountants. 27.01 Financial Data Schedule. 27.02 Restated Financial Data Schedule for Nine Months Ended September 30, 1997. 27.03 Restated Financial Data Schedule for Six Months Ended June 30, 1997. 27.04 Restated Financial Data Schedule for Three Months Ended March 31, 1997. 27.05 Restated Financial Data Schedule for Twelve Months Ended December 31, 1996. 27.06 Restated Financial Data Schedule for Nine Months Ended September 30, 1996. 27.07 Restated Financial Data Schedule for Six Months Ended June 30, 1996. - ------------------- * Management contract or compensatory arrangement. ** Confidential treatment has been requested with respect to certain portions of this exhibit. Confidential portions have been filed separately with the Securities and Exchange Commission. (1) Incorporated by reference to the Exhibits to Registrant's Registration Statement on Form SB-2 (No. 333-3752-LA), declared effective on May 21, 1996 (the "Form SB-2"). (2) Confidential treatment has been granted with respect to certain portions of this agreement. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. (3) Incorporated by reference to the Exhibit 10.20 of Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 1997. (4) Incorporated by reference to the Exhibit 3.01 of Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1996. (5) Incorporated by reference to Exhibit 10.19 of Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1997. 51 EX-10.16 2 OEM PRODUCT DEVELOPMENT AND SUPPLY AGREEMENT 1 ** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS DOCUMENT. CONFIDENTIAL PORTIONS (MARKED [**] HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT 10.16 OEM PRODUCT DEVELOPMENT AND SUPPLY AGREEMENT This Agreement (the "Agreement") is entered into effective as of March 10, 1997 (the "Effective Date") by and between CardioGenesis Corporation ("CardioGenesis"), a Delaware corporation, and Carl Baasel Lasertechnik GmbH, a corporation organized under the laws of Germany ("Baasel"). R E C I T A L S A. CardioGenesis has undertaken considerable efforts in the application of lasers, and particularly holmium:YAG ("Ho:YAG") lasers, in conjunction with a medical treatment called transmyocardial revascularization ("TMR"), and holds certain patents and patent applications in relation thereto, especially with respect to the use of catheters for directing laser energy to the heart. B. CardioGenesis is in the process of establishing its business worldwide, including sales of its products for TMR uses to customers such as, but not limited to, hospitals, catheter laboratories and other appropriate medical products end-users. C. The CardioGenesis Products, as defined below, currently include a laser, which currently is a Ho:YAG laser. D. Baasel has certain expertise with respect to the generation and control of high power laser pulses, and has extensive experience in the development and manufacture of both industrial and medical solid state lasers, and especially of Ho:YAG lasers, and holds certain patents and patent applications in relation thereto. E. CardioGenesis desires to partake of such experience and expertise of Baasel, and Baasel desires to cooperate with CardioGenesis, under the terms and conditions of this Agreement, in order: (1) to allow for the development by Baasel, in cooperation with CardioGenesis, of a laser, based upon an existing laser product of Baasel, which will be suitable, as a result of such development, for use in and as a part of CardioGenesis Products, worldwide in the CardioGenesis Use, as hereinafter defined, and (2) to allow for manufacture and sale to CardioGenesis by Baasel, on an original equipment manufacturer (OEM) basis, of such developed laser product, as provided herein. Now, therefore, in consideration of the mutual covenants contained in this Agreement, CardioGenesis and Baasel agree as follows: 1. OEM PRODUCT DEVELOPMENT. (a) General. The parties acknowledge that at the request of, and with the cooperation of, CardioGenesis, Baasel has undertaken, and CardioGenesis has funded, prior to the Effective Date, and, at the request of CardioGenesis, Baasel may continue during all or a part of the term hereof, research and development efforts (such efforts both before the Effective Date and during the term hereof referred to herein as the "Development Efforts") intended to allow the manufacture of a laser (the "OEM Product"), described generally on Exhibit A attached hereto and incorporated herein by reference, that will meet the specifications for such OEM Product as set forth on Exhibit A hereto, including without limitation specifications related to approval of 2 the OEM Product as may be required under regulations of the U.S. Food & Drug Administration (the "FDA") and other applicable U.S. and international regulatory standards and requirements. The parties acknowledge that the OEM Product will be a key component in CardioGenesis' laser-based surgical products, as they now exist and as they may exist in the future, including systems consisting of various component products or subassemblies (collectively, the "CardioGenesis Products"), for use worldwide in all cardiothoracic human and animal applications and/or involving pulsing of the laser, including without limitation TMR (such use generically referred to herein as the "CardioGenesis Use"), and as spares and replacements for CardioGenesis Products incorporating such OEM Product. (b) OEM Product Development Program; OEM Product Specifications; Change of OEM Product Specifications by CardioGenesis. (i) OEM Product Development Program. Commencing on the Effective Date, Baasel will continue, and CardioGenesis will, subject to the further terms and conditions of this Agreement, pay for, such further research and development work during the term hereof as CardioGenesis determines in good faith to be necessary to finalize the OEM Product and to make the OEM Product commercially salable by CardioGenesis as incorporated into CardioGenesis Products. Such research and development work will be conducted pursuant to the Development Program described in Exhibit B attached hereto and incorporated herein by reference (the "Schedule"), including the Phases set forth therein (each a "Phase"). Baasel will use its good faith best efforts to complete each of the Phases set forth in Exhibit B hereto. At the completion of each Phase of the Development Program, CardioGenesis will have the sole right to determine whether the Development Program will continue. CardioGenesis will immediately notify Baasel in writing of CardioGenesis' determination to continue, or not to continue, the Development Program. (ii) OEM Product Specifications. The specifications for the OEM Product as set forth in Exhibit A hereto were arrived at by mutual consensus of Baasel and CardioGenesis, and include, as attached to and included in Exhibit A, Baasel's specification offer documents denoted as MD0230/96 and MD0254/96 (the "Baasel Proposed Specifications"), and CardioGenesis' specification response documents denoted as DS000701 and DS000801 (the "CardioGenesis Proposed Specifications"). In the event of a conflict between the contents of the Baasel Proposed Specifications and the CardioGenesis Proposed Specifications, the CardioGenesis Proposed Specifications will control. In the event of a conflict between the contents of the Baasel Proposed Specifications and/or the CardioGenesis Proposed Specifications, on the one hand, and remaining contents of Exhibit A, on the other hand, such remaining contents of Exhibit A will control. (iii) Change of OEM Product Specifications By CardioGenesis. If CardioGenesis changes the specifications or requirements for the OEM Product from those set forth in Exhibit A hereto in a manner that is, in Baasel's good faith judgment after consultation with CardioGenesis, materially different from the specifications and requirements for the OEM Product as set forth in Exhibit A hereto, Baasel may request that CardioGenesis and Baasel execute an amendment of Exhibit B hereto to reflect a commercially reasonable adjustment of the payments to be made by CardioGenesis for such research and development work, to account for such changes. CardioGenesis will consider such request in good faith. If the parties reach agreement on such adjustment of payments, they will reflect such agreement in a mutually- -2- 3 signed amendment to Exhibit B hereto. If the parties do not reach agreement in writing on such adjustment of payments, [ ** ] (iv) Materially Increased Actual Cost of Development Efforts. If, in the course of performing the Development Efforts, the actual amount expended by Baasel to complete the Development Efforts, as set forth in Exhibit B hereto, exceeds [ ** ], then the parties will negotiate in good faith for a commercially reasonable increase in such total of payments. If the parties reach agreement on such increased amount, they will so reflect it in a written amendment to Exhibit B hereto. If the parties do not reach such agreement, then either party may immediately terminate this Agreement by written notice to the other. (c) Payment by CardioGenesis To Baasel For the Development Efforts. The amount to be paid by CardioGenesis to Baasel for Baasel's work in the Development Efforts from and after the Effective Date, if the relevant Phase has been successfully completed by meeting the technical specifications set forth on Exhibit B hereto upon for such Phase, is set forth for such Phase on Exhibit B hereto; provided, however, that payment by CardioGenesis for the [ ** ] units of commercial production OEM Product to be ordered by CardioGenesis in its Initial Order (as provided and defined in Section 5(b) hereof) will be paid for as provided in Section 5(b) hereof, is not included in such payment for the Development Efforts. CardioGenesis will pay to Baasel the relevant amount required under Exhibit B within forty-five (45) days after the date of delivery by Baasel to CardioGenesis of the deliverable under Exhibit B to which such payment relates. The payment by CardioGenesis to Baasel of the relevant payment for each Phase as provided herein will be the entire payment of CardioGenesis to Baasel for the Development Efforts. Baasel acknowledges receipt of a total of [ ** ] in cash from CardioGenesis prior to the Effective Date for Development Efforts undertaken by Baasel at CardioGenesis' request prior to the Effective Date. Such advance payment will be credited against any amount due from CardioGenesis to Baasel at the completion of Phase 4 or as a result of and following any termination of this Agreement by CardioGenesis prior to completion of the Development Efforts. (d) Expenses; Project Manager and Project Engineer.. The parties will pay their own respective expenses in performance of their obligations hereunder, provided that the reasonable travel and lodging expenses of Baasel personnel in connection with the review provided for in Section 1(f) hereof will be paid by CardioGenesis, and provided that CardioGenesis will pay or will at Baasel's written request accompanied by an invoice therefor in reasonable detail, reimburse Baasel for, over the course of the Development Efforts: (i) Project Manager. A total of up to [ ** ], for the aggregate amount of Baasel's costs, including consulting fees and reasonable travel and lodging and other customary incidental costs, while working on the Development Efforts, of a Project Manager who will be a consultant acceptable to -3- 4 CardioGenesis, which acceptance will not be unreasonably withheld or delayed, and who will be supplied by Baasel for the Development Efforts, provided that the parties will discuss and negotiate in good faith, and will reflect any agreement between them in writing as an amendment to this Agreement, as to any increases in the amount provided above for the Project Manager if, in the good faith judgment of Baasel, such amount needs to be increased to assist the Development Efforts; and (ii) Project Engineer. Up to a total of [ ** ] for the salary and Baasel's customary general and administrative overhead costs related thereto, and reasonable travel and lodging and other customary incidental costs, but no other costs or charges, while working on the Development Efforts, of a Project Engineer who will be supplied by Baasel for the Development Efforts. Such amount will be paid in [ ** ] installments of [ ** ] each, one of which will be paid to Baasel at the same time as the payment for the Development Efforts that is due to be paid under Exhibit B hereto next after the Effective Date, and the second of which will be paid to Baasel at the same time as the next succeeding payment for the Development Efforts that is due to be paid under Exhibit B hereto. At CardioGenesis' reasonable and good faith request, Baasel will supply, or will cause the Project Manager and/or the Project Engineer to supply, to CardioGenesis customary receipts and records of such travel and lodging costs appropriate for CardioGenesis' accounting and income tax supporting documentation purposes. (e) Certain Reimbursement by CardioGenesis to Baasel. Pursuant to the Schedule, the starting and scheduled final points of the Phases will overlap each other. In consideration of Baasel ordering long-lead items for use in such Phases and of the overlapping of such Phases, upon any such early termination by either party, CardioGenesis will reimburse Baasel all reasonable expenses, including, but not limited to development, material and labor costs (at Baasel's then current hourly rates for development engineers) through such termination, and for all penalties and amounts required to be paid by Baasel under agreements by Baasel with third parties which Baasel cannot cancel without such penalty or payment applying. Baasel will use its diligent efforts to effect such required cancellations without penalty. (f) Cooperation. The parties will cooperate in good faith to attempt to allow the completion of the Development Efforts according to the Schedule, and to allow Baasel to meet each Phase fully. In connection therewith, the parties will cooperate with each other, each at their own respective expense, provided that the costs required of Baasel for any such action are in reasonable relation to the amount of work that has been then undertaken by Baasel in the Development Efforts, with respect to all commercially reasonable requests made in good faith by one party to the other concerning documentation, and execution and delivery by the other party of documents and instruments to obtain, preserve and protect the proprietary rights of the requesting party, including, without limitation, actions in connection with patent, trademark, copyright and mask work registration and prosecution. The primary liaison person for Baasel initially will be Dr. Werner Falkenstein. The primary liaison person for CardioGenesis initially will be Dr. Kenneth Aron. The parties will promptly notify each other in writing of any change during the term of this Agreement in such primary liaison personnel designations. Members of the Baasel technical team that are designated by CardioGenesis in writing to Baasel will meet -4- 5 with CardioGenesis' technical staff at CardioGenesis' corporate headquarters to perform the second design review of the OEM Product, at times mutually convenient for the parties. (g) New Developments by Baasel. During the term of this Agreement, Baasel will: (i) Awareness of New Developments. Keep CardioGenesis apprised of new developments in Baasel products or technologies which have potential application to the OEM Product, which disclosures will be subject to the confidentiality provisions of Section 11 hereof, and (ii) Availability of New Developments to CardioGenesis. Make available such new developments for incorporation into the OEM Product, subject to written agreement between CardioGenesis and Baasel as to such incorporation into the OEM Product, and to commercially appropriate adjustments, if any, in the purchase price for the OEM Product to CardioGenesis as the parties may agree in writing by an amendment to Exhibit C attached hereto. All such developments will remain the sole property of Baasel, and Baasel will not be limited in the worldwide use of such developments, subject to such rights as Baasel may grant in writing to CardioGenesis. (h) Functional, Prototype and Pilot Units. Baasel will provide to CardioGenesis the following [ ** ] units, each having the respective specifications set forth for such relevant unit in Exhibit B hereto: (i) Functional Units. [ ** ] functional pre-production units of the OEM Product, with such housing as Baasel deems appropriate, [ ** ] of which units will be shipped by Baasel to CardioGenesis Ex Works, as defined in Incoterms 1990 ("Ex Works"), Starnberg, Germany, on or before March 12, 1997, or as soon thereafter as possible if shipment cannot be made on March 12, 1997 due to carrier unavailability (Baasel will notify CardioGenesis in writing promptly of any such unavailability, and of the revised expected shipment date), and [ ** ] of which units will remain with Baasel in Germany; and (ii) Prototype Units. [ ** ] prototype pre-production units of the OEM Product, [ ** ] of which units will have Baasel Model BLM 1000 housings, will be shipped by Baasel on or before May 15, 1997 Ex Works Starnberg, Germany, to CardioGenesis, and [ ** ] of which units, with the OEM Product housing, will remain with Baasel in Germany; and (iii) Pilot Units. [ ** ] pilot production units of the OEM Product, each of which will have the OEM Product housing, will be shipped by Baasel Ex Works Starnberg, Germany, to CardioGenesis as follows: [ ** ] units, without the CE Mark marking, will be shipped on or before August 4, 1997, and [ ** ] additional units, each with the CE Mark marking applied, will be shipped on or before August 18, 1997. Functional and prototype units may differ from the final commercial production version of the OEM Product in appearance and assembly, but will be representative of such final commercial production version of the OEM Product in fit and function, and will have the general characteristics for such functional and prototype units as are set forth in Exhibit B hereto or as otherwise agreed in writing by the parties. -5- 6 The full payment by CardioGenesis to Baasel for all functional, prototype and pilot units is included within the relevant payments made prior to and after the Effective Date by CardioGenesis for the Development Efforts, and CardioGenesis will not be liable for any other payment or charge for any such functional prototype or pilot units. (i) Modification of OEM Product. As required under regulations of the FDA or under other applicable U.S. and international regulatory standards and requirements, no engineering modifications will be initiated or implemented by Baasel to the OEM Product without prior approval in writing by CardioGenesis, provided that nothing herein will limit or prevent Baasel from initiating and implementing such changes as Baasel desires to Baasel's products apart from the OEM Product. (j) Limitations on Baasel. In view of the investment by CardioGenesis in development of the OEM Product, during the term of this Agreement and for a period of one (1) year thereafter, Baasel will not make a laser, or any major subassembly of a laser, that has been specifically designed according to CardioGenesis' requirements for the CardioGenesis Use or in any other way substantially similar, in the good faith and commercially reasonable judgment of CardioGenesis, to the OEM Product, for supply to another party for uses competitive with the CardioGenesis Use, and any such manufacture or supply by Baasel after such one-year period will in any event be subject to the provisions of this Agreement with respect to proprietary rights ownership by the parties as provided in Section 2 hereof and to the parties' obligations of confidentiality as provided in Section 11 hereof. 2. PROPRIETARY RIGHTS OWNERSHIP. (a) Baasel Ownership. All Baasel Proprietary Information will belong to Baasel, subject to the licenses granted herein to CardioGenesis. For purposes of this Agreement, "Baasel Proprietary Information" means all proprietary and confidential information and intellectual property rights of Baasel related to and used for its laser products, including without limitation Baasel Software and Updates as defined in Section 3(b)(ii) hereof, and all intellectual property rights however arising, whether under trademark, trade name, copyright, maskwork, patent or trade secret, and whether under statute or common law, and whether applied for, pending or issued by any relevant governmental authority, and whether belonging wholly to Baasel or whether subject to license or other grant of rights either by Baasel as licensor or as licensee, and as otherwise specifically set forth on Exhibit D hereto, but not including any CardioGenesis Proprietary Information. (b) CardioGenesis Ownership. All CardioGenesis Proprietary Information and all OEM Product Improvements (each as hereinafter defined) will belong to CardioGenesis, subject to the licenses granted herein to Baasel. For purposes of this Agreement (i) "CardioGenesis Proprietary Information" is defined as all proprietary and confidential information and intellectual property rights, however arising, whether under trademark, trade name, copyright, maskwork, patent or trade secret, and whether under statute or common law, and whether applied for, pending or issued by any relevant governmental authority, and whether belonging wholly to CardioGenesis or whether subject to license or other grant of rights either by CardioGenesis as licensor or as licensee, and as otherwise specifically set forth on Exhibit D -6- 7 hereto, but not including any Baasel Proprietary Information, in each case as related to and used for the creation of OEM Product Improvements, and (ii) "OEM Product Improvements" is defined as all modifications to Baasel's preexisting laser products, as such laser products existed prior the commencement by Baasel of the Development Efforts, including such work prior to and through the Effective Date, and that may be undertaken during the term of this Agreement, as part of the Development Efforts, in connection with allowing the production of the OEM Product by Baasel with the specifications as may be agreed by Baasel in writing pursuant to this Agreement that are desired and proposed by CardioGenesis (alone, as opposed to such specifications as result from the desires or requests of other customers of Baasel and which are, to the extent lawfully permitted to Baasel, and with CardioGenesis' written consent in defining the OEM Product specifications from time to time, included within the OEM Product), and includes, without limitation, user manuals, service manuals, and documents relating to software and hardware design modification and all proprietary information and intellectual property as so developed. (c) Cooperation. The parties will cooperate with each other, each at their own expense, with respect to all commercially reasonable requests made in good faith by one party to the other concerning documentation, and execution and delivery by the other party of documents and instruments to obtain, preserve and protect the proprietary rights of the requesting party, including, without limitation, actions in connection with patent, trademark, copyright and mask work registration and prosecution. 3. LICENSES BY CARDIOGENESIS AND BAASEL. (a) Development and Manufacturing License From CardioGenesis to Baasel. CardioGenesis hereby grants to Baasel a nonexclusive, nontransferable, royalty-free license during the term of this Agreement, and with respect to Baasel's work on the Development Efforts prior to the Effective Date, revocable only for the failure of Baasel to perform its obligations under this Agreement, to use CardioGenesis Proprietary Information (as defined in Section 2(b) hereof) solely as necessary (i) with respect to work completed under the Development Efforts by collaboration between CardioGenesis and Baasel, in order to attempt to develop the OEM Product, and (ii) to undertake and complete further development work on the OEM Product under the Development Efforts as is deemed necessary by the parties hereto after the Effective Date, and (iii) to manufacture and supply OEM Products and Parts to CardioGenesis pursuant to this Agreement. (b) License From Baasel to CardioGenesis For Certain Use of Baasel Proprietary Information. The parties intend that all software of Baasel that is necessary for the operation of the OEM Product, as such software may be modified during the Development Efforts, will be embedded in the OEM Product, in an electrically erasable programmable read-only memory integrated circuit (EEPROM) or similar device. Therefore: (i) General Grant of License. Baasel hereby grants to CardioGenesis the following licenses, in each case including all rights necessary in connection with the use by CardioGenesis, the customers of CardioGenesis, and third-party licensees permitted under this Agreement, to Baasel Software and Updates, as defined below: -7- 8 (A) Royalty-Free License. An exclusive, royalty-free worldwide license in perpetuity, revocable only for the failure of CardioGenesis to perform its obligations under this Agreement, with respect to such Baasel Proprietary Information (as defined in Section 2(a) hereof) as is necessary for the sale by CardioGenesis of OEM Products and Parts as incorporated into CardioGenesis Products or on a stand-alone basis, including in such license the right to use such Baasel Proprietary Information as is necessary for training with respect to and maintenance of the OEM Product; (B) Royalty-Bearing License. An exclusive, worldwide license in perpetuity, revocable only for the failure of CardioGenesis to perform its obligations under this Agreement, bearing the royalties set forth in Section 10(b) hereof, with the right to sublicense to third party manufacturers, for the manufacture and sale by CardioGenesis and/or by such third parties, of OEM Products and/or Parts, including training with respect to and maintenance of the OEM Products only while the Manufacturing License is in use by CardioGenesis pursuant to the terms of Section 10(b) of this Agreement. (ii) Software License From Baasel. (A) License Grant. Subject to the terms and conditions of this Agreement and limited to the CardioGenesis Use, Baasel hereby grants CardioGenesis a nonexclusive, royalty-free worldwide license revocable only for the failure of CardioGenesis to perform its obligations under this Agreement (the "Baasel Software License") to: (1) During the term of this Agreement, use the proprietary software of Baasel ("Baasel Software") and error corrections, updates, enhancements and/or other changes to Baasel Software (collectively, the "Updates"), in each case as embedded in the OEM Product and/or in Parts, in conjunction with the use of OEM Products, for CardioGenesis' internal purposes only, in connection with CardioGenesis' distribution, demonstration, marketing and support of the CardioGenesis Products, and of the OEM Products and Parts as permitted by this Agreement; (2) During the term of this Agreement, grant to end-users of OEM Products and Parts, a nonexclusive nontransferable sublicense to use Baasel Software as embedded in, and in conjunction with the use of, OEM Products and Parts, which sublicense will survive the termination or expiration of this Agreement; and (3) Copy and distribute the Updates to end-users of OEM Products and Parts as embedded therein. (B) Updates. Baasel will provide to CardioGenesis a master copy of Updates upon CardioGenesis' written request, and CardioGenesis will pay such payment for such master copy production [ ** ]. CardioGenesis may reproduce copies from the master copy solely for the purpose of distribution to end-users of CardioGenesis Products and/or OEM Products and/or Parts, to be used as embedded therein. -8- 9 (C) User Licensing. CardioGenesis will take all commercially reasonable steps to protect Baasel's proprietary rights in Baasel Software and Updates. If CardioGenesis licenses, under a separate software license to its customers, any rights to CardioGenesis software in connection with, and/or as embedded in, OEM Products and Parts, such license by CardioGenesis will be prepared so as to apply to and equally protect Baasel Software and Updates. If such separate license is used, then in the United States and in the other jurisdictions where an enforceable copyright covering Baasel Software and Updates exists, such license agreement may be a written agreement signed by the customer or a written agreement in the package containing Baasel Software and Updates or the user documentation for Baasel Software and Updates that is fully visible to the customer and that the customer accepts by opening the package, but in all other jurisdictions such agreement must be a written agreement signed by the customer. (D) Restrictions. Except as set forth in this Agreement or as may be permitted in writing by Baasel, CardioGenesis will not provide or otherwise make available Baasel Software or Updates or any part or copies thereof to any third party nor use Baasel Software or Updates for any purposes not specifically set forth in this Agreement. CardioGenesis will take appropriate action by instruction to or written agreement with its employees who are permitted access to Baasel Software or Updates to fulfill such obligations of CardioGenesis. CardioGenesis will use its commercially reasonable efforts to prevent any violation of Baasel's or Baasel's licensors' or suppliers' copyright in Baasel Software or Updates. Except as such source code or other confidential information may be used under the Manufacturing License in accordance with the terms of Section 10(b) of this Agreement, CardioGenesis will not, and the terms and conditions of sale or other transfer by CardioGenesis and of any third party sellers permitted under this Agreement, will prohibit, reverse assembly, decompiling or otherwise attempting to derive source code or other confidential information from Baasel Software or Updates. (c) Trademark License From CardioGenesis to Baasel. CardioGenesis grants to Baasel a nonexclusive, royalty-free, worldwide license during the term of this Agreement, revocable only for the failure of Baasel to perform its obligations under this Agreement, to use CardioGenesis' trademarks, including without limitation those trademark and names which CardioGenesis may choose to claim as trademark as listed in Exhibit E attached hereto, to the extent necessary for Baasel to perform Baasel's obligations under this Agreement. Baasel may apply CardioGenesis' trademarks only to OEM Products and Parts, instruction manuals for OEM Products and Parts, cartons for OEM Products and Parts and other relevant documents and packaging sold by Baasel to CardioGenesis under the terms of this Agreement or otherwise as authorized in writing by CardioGenesis from time to time. CardioGenesis may, at CardioGenesis' election, but only for the CardioGenesis Use, market the OEM Products and/or Parts, as incorporated in CardioGenesis Products, or on a stand-alone basis, under CardioGenesis' own name and trademarks. (d) Noncompeting Use License by CardioGenesis to Baasel. CardioGenesis hereby grants to Baasel a nonexclusive, royalty-free worldwide license in perpetuity, revocable only for the failure of Baasel to perform its obligations under this Agreement, to use solely such CardioGenesis Proprietary Information, as defined in Section 2(b) hereof, as is necessary in order -9- 10 for Baasel to develop and manufacture and sell, for Baasel's own account or for others, laser products for uses other than the CardioGenesis Use, provided that no CardioGenesis Proprietary Information, whether included in the OEM Product Improvements or not, will be disclosed to any third party without the prior written consent of CardioGenesis or unless such third party is bound, prior to such disclosure to such party, by a customary nondisclosure agreement in favor of CardioGenesis, with respect to such CardioGenesis Proprietary Information, the form of which nondisclosure agreement has been approved by CardioGenesis, whose approval will not be unreasonably withheld. Baasel will not, and will not grant to third parties any right to, reverse assemble, decompile or otherwise attempt to derive source code or other Confidential Information from the CardioGenesis Proprietary Information. (e) No Other License Rights. Other than the specific license rights granted herein by the parties to each other, neither party will have any express or implied license or other rights to any confidential or proprietary rights of the other. This Agreement grants neither party any rights to use the other party's trademarks, trade names or service marks other than those rights which are explicitly granted in this Agreement. Neither party will, nor will attempt to, acquire the other's names, marks, logos, symbols, or the like, or any that are confusingly similar thereto. 4. MANUFACTURE AND SUPPLY OF OEM PRODUCTS AND PARTS BY BAASEL. (a) Manufacture and Supply of OEM Products by Baasel. Pursuant to the terms hereof and following the completion of Phase 4 (or following the completion of Phase 3 if the parties so agree in writing), Baasel will manufacture and supply OEM Products to CardioGenesis, on an original equipment manufacturer (OEM) basis. [ ** ]. In addition, if pursuant to Section 1(c) hereof, CardioGenesis agrees in writing to any proposed engineering modification to the OEM Product, CardioGenesis will have the opportunity, in its discretion, to obtain an appropriate end-of-product-life purchase from Baasel of affected OEM Products in unmodified form, for use in CardioGenesis Products, at the purchase price in effect for such OEM Products immediately before such agreement in writing by CardioGenesis. Baasel will not manufacture the OEM Product for, nor will it sell the OEM Product to, any third party without the express prior written consent of CardioGenesis. (b) Supply Of Parts by Baasel. During the term hereof, and, if CardioGenesis declines to use the Manufacturing License provided for in Section 10(b) hereof, then also for a [ ** ] period after Baasel discontinues the manufacture of the OEM Products, Baasel will sell the replacement parts listed in Exhibit F attached hereto (the "Parts") for OEM Products -10- 11 purchased by CardioGenesis, to CardioGenesis, or, at CardioGenesis' written request to Baasel, to such customers of CardioGenesis as are specified in such request. During any use by CardioGenesis of the Manufacturing License hereunder, and at CardioGenesis' written request, Baasel will furnish vendor and part number information for commercially available Parts and for all other spare parts for OEM Products that have been purchased by CardioGenesis and by CardioGenesis' customers. (c) Notices. CardioGenesis will have the right, subject to the remainder of this Section 4(c), to remove Baasel's trademarks, trade names, and other Baasel identification appearing on such OEM Products, and all Baasel warranty cards and other Baasel documentation accompanying same before resale of such OEM Product, provided that (i) CardioGenesis will consult with Baasel in good faith as to any such removal, and (ii) CardioGenesis will only effect such removal to the extent permitted by law, and (iii) commercially reasonable and/or legally required proprietary notices incorporated in, marked on, or affixed to the OEM Products and Parts by Baasel will not be removed or obliterated by CardioGenesis without Baasel's prior written consent, and (iv) CardioGenesis will affix such other commercially reasonable proprietary notices to the OEM Products and Parts on Baasel's behalf, at CardioGenesis' expense, as Baasel reasonably requests. (d) Discontinued or Obsolete OEM Products. If Baasel intends to discontinue the manufacture or sale of, or otherwise render or treat as obsolete, the OEM Product, Baasel will give at least one (1) year's prior written notice thereof to CardioGenesis (a "Baasel Discontinue/Obsolete Notice"). (e) Manufacturing Standards For OEM Products and Parts. (i) OEM Products and Parts For Sale and/or Distribution Outside the United States. All OEM Products and Parts ordered by CardioGenesis hereunder for sale and/or distribution outside the United States will be manufactured and assembled by Baasel, in accordance with applicable regulations and standards for such manufacturing. OEM Products and Parts manufactured outside of the United States may, subject to specific written agreement by the parties, be drop-shipped to CardioGenesis' customer by Baasel at CardioGenesis' expenses and will be subject to quality assurance procedures established in writing by CardioGenesis on the basis of applicable standards (ISO 9000 and MDDE) which written procedures have been delivered to and approved by Baasel, whose approval will not be unreasonably withheld or delayed. (ii) OEM Products and Parts For Sale and/or Distribution Within the United States. All OEM Products and Parts ordered by CardioGenesis hereunder for sale and/or distribution in the United States will be manufactured by Baasel or by such subcontractor(s) as may be approved by Baasel and CardioGenesis in writing in advance (which approval will not unreasonably be withheld or delayed), to such level of, and under such conditions of, manufacturing as Baasel and CardioGenesis will agree in writing, [ ** ]. CardioGenesis will, at its own expense, either itself, through a regulatory-qualified subcontract manufacturer acceptable to Baasel, whose acceptance will not be -11- 12 unreasonably withheld or delayed, complete the manufacture of such OEM Product and/or Part as is required, under applicable U.S. government standards, including applicable regulations of the FDA and of all other applicable U.S. agencies, governing manufacturing thereof for such sale within the United States. (f) Regulatory Approval. Each of CardioGenesis and Baasel will be responsible at its own expense for obtaining and maintaining during the term of this Agreement, and after the term of this Agreement to the extent required by law as to OEM Products and Parts manufactured or sold as provided in this Agreement, all regulatory approvals required, whether U.S. or international, in order for the obtaining party to use and/or sell or otherwise distribute, in the case of CardioGenesis, the OEM Product and Parts, and in the case of Baasel, any products referred to in Section 3(d) hereof, including without limitation CE mark approval. Each party will render to the other party such commercially reasonable assistance and cooperation, at the expense of the rendering party, as the requesting party reasonably and in good faith, requests in connection with the obtaining and maintenance of such approvals. The parties will as promptly as possible inform each other in writing with respect to, and will furnish the other with a copy of, all such approvals related to OEM Products and Parts, or by Baasel as to products referred to in Section 3(d) hereof, obtained by the notifying party during the term of this Agreement. CardioGenesis will, to the extent lawfully permitted, promptly supply to Baasel all CardioGenesis clinical trials data and other relevant similar information of CardioGenesis requested by Baasel in writing in good faith in connection with Baasel's performance of Baasel's obligations hereunder with respect to regulatory compliance including obtaining and maintaining CE Mark approval. Baasel assumes no responsibility for any clinical trials of CardioGenesis, nor for the validity, acceptance and conformity of any clinical trials data to be provided by CardioGenesis to Baasel or to any third party for purposes of any regulatory approval, or for the effect upon obtaining and maintaining any such approval, including CE Mark approval, caused by any delay in obtaining or furnishing, or by the content of, any such clinical trials data. 5. ORDER AND ACCEPTANCE. (a) General. (i) Form of Purchase Orders. All orders for OEM Products and Parts submitted by CardioGenesis during the term hereof will be subject to the terms and conditions of this Agreement, except as otherwise agreed to in a writing signed by both parties, and will be initiated by written purchase orders, on CardioGenesis' then-standard form of purchase order, sent by CardioGenesis to Baasel. Orders may initially be placed by CardioGenesis by facsimile provided that CardioGenesis will deliver a confirming written copy of such purchase order to Baasel within ten (10) days after such facsimile order is sent by CardioGenesis. In the event of a conflict between the terms of any CardioGenesis purchase order or Baasel acknowledgment and the terms of this Agreement, the terms of this Agreement will control. (ii) Acceptance or Rejection of Orders By Baasel. No purchase order placed by CardioGenesis will be binding upon Baasel until accepted by Baasel in writing, which may be by facsimile with original to follow by air mail to CardioGenesis, and Baasel will have no liability to CardioGenesis with respect to purchase orders, or portions thereof, that are not so -12- 13 accepted. Baasel will notify CardioGenesis promptly of the acceptance or rejection by Baasel of a CardioGenesis purchase order, or portion thereof, and of the agreed assigned delivery date for accepted orders. Baasel will be deemed to have accepted a CardioGenesis purchase order, or any portion thereof, to which Baasel has not objected to CardioGenesis in writing (i) no later than fifteen (15) business days (a "business day" being defined for purposes of this Agreement as a day when Baasel's headquarters offices in Germany are open for business at the normal level of Baasel's operations) after the date of such CardioGenesis purchase order, if sent first by CardioGenesis by facsimile or (ii) no later than twenty (20) business days after the date of such CardioGenesis purchase order, if such purchase order is first sent by CardioGenesis by airmail or courier. (iii) Partial Shipments; Delivery Dates. Partial shipments will be allowed only to the extent agreed in writing by CardioGenesis before such partial shipment is shipped. Baasel will use its best efforts to deliver OEM Products and Parts at the times specified in its written acceptance of CardioGenesis' purchase orders. CardioGenesis will inform Baasel at the beginning of each calendar quarter in writing of the detailed delivery dates of all OEM Products under that portion of Rolling Purchase Orders (as hereinafter defined) that have become binding, as further provided in this Section 5, and that are, according to CardioGenesis' records, to be shipped by Baasel in the consecutive calendar quarter. (iv) Orders of Less Than [ ** ] Units. CardioGenesis will use its commercially reasonable efforts, but will not be obligated, to (A) order at least [ ** ] units of OEM Product as to any Rolling Purchase Order (as hereinafter defined) as initially placed by CardioGenesis, and (B) not reduce below [ ** ] the total number of OEM Products in any Rolling Purchase Order after it is initially placed. CardioGenesis will give Baasel as much notice in writing in advance as is commercially reasonable with respect to any Rolling Purchase Order which CardioGenesis anticipates placing of less than [ ** ] units, and as to any such anticipated reduction. (b) Initial Order. CardioGenesis has, on the Effective Date, placed a written binding purchase order with Baasel (the "Initial Order") for [ ** ] units of commercial production-level OEM Products for delivery in 1997, which order is accepted by Baasel's countersignature hereof. Such ordered units are apart from, and additional to, the total of [ ** ] functional, prototype and pilot units, together, ordered by CardioGenesis under Section 1(h) hereof. Payment for the OEM Products ordered by the Initial Order will be made as specified in Section 6(f) hereof. (c) Rolling Purchase Orders. (i) General. CardioGenesis will deliver to Baasel a written purchase order on CardioGenesis' standard form of purchase order (the "Rolling Purchase Order") [ ** ], for OEM Products and, as applicable, Parts. Each such Rolling Purchase Order (i) will be for the [ ** ] period commencing [** ] after the date on which the order is delivered to Baasel, and (ii) will be a [ ** ] -13- 14 [ ** ], and (iii) will set forth the desired delivery dates, subject to the provisions of Section 5(c)(viii) hereof with respect to rescheduling, by calendar date, or grouped by calendar week, for those units of OEM Product for which delivery is requested by CardioGenesis during such [ ** ] period. One such Rolling Purchase Order for such [ ** ] will be delivered to Baasel no later than [ ** ] of such year, beginning with [ ** ], and the other such Rolling Purchase Order for such [ ** ] will be delivered to Baasel no later than [ ** ] of such year, beginning with [ ** ]. (ii) Rolling Purchase Order For Deliveries During The Period From [ ** ] Through [ ** ]. No later than [ ** ], CardioGenesis will deliver to Baasel a Rolling Purchase Order for OEM Products, and Parts as applicable, with delivery dates requested during the period from and including [ ** ] through and including [ ** ] (the "[ ** ] Purchase Order"). [ ** ] (iii) Rolling Purchase Order For Deliveries During The Period From [ ** ] Through [ ** ]. No later than [ ** ], CardioGenesis will deliver to Baasel a Rolling Purchase Order for OEM Products, and Parts as applicable, with delivery dates requested during the period from and including [ ** ] through and including [ ** ] (the "[ ** ] Purchase Order"). [ ** ] (iv) Rolling Purchase Order For Deliveries During The Period From [ ** ] Through [ ** ]. No later than [ ** ], CardioGenesis will deliver to Baasel a Rolling Purchase Order for OEM Products, and Parts as applicable, with delivery dates requested during the period from and including [ ** ] through and including [ ** ] (the "[ ** ] Purchase Order"). [ ** ] -14- 15 [ ** ] (v) Rolling Purchase Order For Deliveries During Periods After [ ** ]. If the parties have agreed on unit pricing for OEM Products to be sold by Baasel to CardioGenesis hereunder for delivery after [ ** ], and after [ ** ] of the relevant then-current year thereafter, or if such pricing has been set by application of Section 6(c)(iv) hereof, then thereafter, on a rolling calendar year basis, CardioGenesis will place Rolling Purchase Orders for OEM Products and/or Parts, in the manner provided herein, which [ ** ]. (vi) Increase in Number of Units Ordered. Additional quantities up to and including [ ** ] of the quantity of OEM Products and/or Parts originally set forth in any Rolling Purchase Order may be ordered by CardioGenesis no later than [ ** ] prior to the relevant scheduled shipment dates for such original quantity; additional quantities greater than [ ** ] and through [ ** ] of the previous order quantities may be ordered by CardioGenesis no later than [ ** ] prior to the relevant scheduled shipment dates; and additional quantities greater than [ ** ] of such previous order (i.e., more than [ ** ]) may be ordered by CardioGenesis no later than [ ** ] prior to the relevant scheduled shipment dates. (vii) Delay of Shipments Upon CardioGenesis' Request. CardioGenesis may by written notice to Baasel delivered at least [ ** ] prior to Baasel's scheduled shipment date therefor, delay the shipment of not more than [ ** ] of the portion of any Rolling Purchase Order which has [ ** ] by the application of Section 5(c)(i) hereof, by up to [ ** ] after the originally scheduled delivery. Any further delay of delivery beyond such [ ** ] period that may be requested by CardioGenesis will be in writing and will be deemed as shipment of such delayed portion by Baasel to CardioGenesis, and CardioGenesis will, in addition to paying the relevant purchase price for the OEM Products and/or Parts, if so requested by Baasel in writing pay to Baasel, or for the account of Baasel, commercially reasonable storage and handling fees for the portion so delayed until shipped on the delayed date requested by CardioGenesis. 6. PRICING AND PAYMENT. (a) General Pricing Conditions. All pricing of OEM Products and Parts from Baasel to CardioGenesis will be commercially reasonable prices. Upon the purchase by CardioGenesis of OEM Products and/or Parts from Baasel during the term hereof while CardioGenesis is not using the Manufacturing License as provided in Section 10(b) hereof, CardioGenesis may sell or otherwise distribute, on a worldwide, exclusive basis, OEM Products and/or Parts either as incorporated into CardioGenesis Products, or on a stand-alone basis to third parties, for no fee or royalty or other amount additional to the purchase price therefor charged by Baasel to CardioGenesis pursuant to this Agreement. -15- 16 (b) Exchange Rate; Exchange Range. All OEM Product and Parts pricing will be in United States dollars unless the parties otherwise agree in writing. Prices for deliveries scheduled during the [ ** ] of a given Rolling Purchase Order will be based on an exchange rate of United States dollars ($) to German deutschemarks (DM) (the "Exchange Rate"), determined as provided in this Section 6(b), at the date upon which Baasel receives the Rolling Purchase Order to which such [ ** ] relates. The initial Exchange Rate will be [ ** ]. At the time each Rolling Purchase Order is placed, commencing with the [ ** ]Purchase Order to be placed by CardioGenesis by [ ** ], the following will apply to prices for the [ ** ] of such Rolling Purchase Order: (i) [ ** ] (ii) [ ** ] (iii) [ ** ] -16- 17 [ ** ] Baasel will promptly notify CardioGenesis in writing, by facsimile, of any such change in the Exchange Rate and the Exchange Range, setting forth in such notice the new Exchange Rate and new Exchange Range and the effective date thereof, and referring in reasonable detail to the binding portion of the relevant Rolling Purchase Order to which such new Exchange Rate and new Exchange Range will apply. (c) OEM Product Prices From Baasel to CardioGenesis. (i) General. Baasel's prices to CardioGenesis for OEM Products will be Ex `Works as set forth in Exhibit C hereto, as such Exhibit C may be amended after the Effective Date by mutual execution of the parties of an updated version thereof. OEM Product prices as set forth on Exhibit C do not include the costs or charges of any installation, service, repair or training for OEM Products. (ii) Two-Tier Pricing. The parties intend, as is reflected in the prices set forth in Exhibit C, that the pricing to CardioGenesis for OEM Products sold by Baasel to CardioGenesis pursuant to this Agreement will be based upon a two-tier structure contemplating completion of (A) a commercially-salable top-level OEM Product (the "Full-Feature Product") expected to be in production in September, 1997, and having the specifications set forth in Exhibit A hereto, and the initial pricing as set forth in Exhibit C hereto, and (B) a commercially-salable cost-reduced OEM Product (the "Cost-Reduced Product"), expected to be in production in January, 1998, with specifications to be agreed in writing by CardioGenesis and Baasel prior to January 31, 1998, which agreed specifications will be attached as an amendment to Exhibit A hereto. (iii) Quantity Discounts; Calculation of Unit Prices. The prices for OEM Products sold by Baasel to CardioGenesis hereunder will be based upon a decreasing price for greater numbers of units ordered in a given Rolling Purchase Order, with certain agreed pricing level division points, as is reflected in Exhibit C as attached hereto at the Effective Date. In determining the relevant price for units of OEM Product based upon the quantity ordered in a given Rolling Purchase Order, the calculation will be made separately in the Rolling Purchase Order for Full-Feature Products and Cost-Reduced Products according to the respective number of each type of unit in the relevant Rolling Purchase Order. (iv) Pricing of Cost-Reduced Product. Baasel will use its commercially diligent efforts to achieve a price to CardioGenesis for the Cost-Reduced Product of [ ** ] or less, and such figure is reflected in Exhibit C hereto as the price by Baasel to CardioGenesis for over [ ** ] units of Cost-Reduced Product scheduled for delivery in 1998. [ ** ] -17- 18 [ ** ] The parties also will discuss in good faith, and will use their commercially reasonable efforts to agree upon in writing, as an amended Exhibit C, the prices from Baasel to CardioGenesis for quantities of Cost-Reduced Product of [ ** ] units, [ ** ] through [ ** ] units, and [ ** ] through [ ** ], provided that Baasel will be under no obligation to accept orders from CardioGenesis for less than [ ** ] units of Cost-Reduced Product until pricing for quantities less than [ ** ] units has been so agreed by the parties in writing. (iii) OEM Product Prices For Deliveries Scheduled in 1997 and 1998. The OEM Product unit prices from Baasel to CardioGenesis for deliveries under the binding portion of a Rolling Purchase Order for delivery in 1997 and 1998 are set forth in Exhibit C hereto as attached at the Effective Date, subject to possible adjustment as further provided in this Agreement. (iv) Pricing For Calendar Years 1999 And Beyond. Prices for OEM Products scheduled for delivery after December 31, 1998 will reflect the quantity discount concept, according to the number of units ordered, and using the quantity levels, reflected in the OEM Product prices for deliveries in 1997 and 1998 as set forth in Exhibit C hereof as attached on the Effective Date. If the parties have not agreed in writing, as an amendment hereto, prior to June 30 of the then current calendar year (commencing with June 30, 1998 as to calendar 1999), as to prices from Baasel to CardioGenesis for OEM Products for deliveries scheduled in the next calendar year under the binding portion of the Rolling Purchase Order for such next calendar year, then the pricing from Baasel to CardioGenesis for OEM Products for deliveries scheduled in such next calendar year will be the pricing for OEM Products for deliveries scheduled in the then-current calendar year with such adjustment thereto as results from the application to such relevant current-year prices of the applicable factor provided by the German federal statistical authorities and known in German as the "Preisgleitklausel," rounded downward to the nearest whole dollar. (d) Parts Pricing. Baasel will sell Parts to CardioGenesis on a most-favored customer basis, regardless of quantity ordered by CardioGenesis, for Parts which are not unique to the OEM Product, and will charge CardioGenesis a price for any such unique Parts as bear a commercially reasonable proportional relation to such most-favored customer price for the non-unique Part nearest in form and functionality to such unique Part. The initial prices for Parts have not been determined by the parties as of the Effective Date, but will be agreed upon by the parties in good faith as soon as possible after the Effective Date, and no later than by the completion by Baasel of Phase 4 under the Development Efforts, with such agreement to be evidence by an amended executed Exhibit F hereto. (e) Taxes; Certain Price Adjustments. (i) Taxes. The purchase price from Baasel for OEM Products and Parts does not include any taxes or duties that may be applicable to the OEM Products. When Baasel has the legal obligation to collect such taxes, the appropriate amount will be added to and clearly identified in Baasel's invoice to CardioGenesis and will be paid by CardioGenesis unless -18- 19 CardioGenesis provides Baasel with a valid tax exemption certificate authorized by the appropriate taxing authority. (ii) Certain Price Adjustments. During the term of this Agreement the parties may determine to effect certain adjustments to the prices charged by Baasel to CardioGenesis for OEM Products and/or Parts as follows, as well as any other price adjustments which the parties may, but are not required to, mutually agree in writing: (A) Certain Royalties. The parties will discuss in good faith, and evidence in writing any agreement by them as to, the inclusion, within the price to be charged by Baasel to CardioGenesis hereunder for OEM Products and Parts, of any royalties which Baasel may be required to pay to third parties after the Effective Date, relating to the license to or other acquisition by Baasel after the Effective Date of intellectual property rights which are determined by CardioGenesis and Baasel to be essential or expedient for the then-current or future OEM Products, and/or Parts within the CardioGenesis Use, but not including any royalties required to be paid to any third party by Baasel by judicial order or binding settlement agreement arising from any allegation by such third party of infringement by Baasel of such third party's proprietary rights. There will be added to the prices otherwise shown on Exhibit C hereto, and CardioGenesis will pay to Baasel as part of the purchase price for, each OEM Product unit that is scheduled for delivery into, or which is otherwise intended for sale or other distribution within, the United States, a commercially reasonable amount, prorated per unit, to account for any royalties which Baasel, or Baasel's United States subsidiary, in Baasel's good faith and after consultation with its legal counsel, actually is paying or in good faith believes it will be required to pay, under so-called Patlex patent arrangements with respect to a certain third-party general laser patent, with respect to such OEM Product unit. (B) Regulatory Changes. If during the term hereof, regulatory requirements are changed so as to impose an increased burden on a manufacturer of OEM Products and/or Parts than the burden previously existing, Baasel and CardioGenesis will, on a timely basis, negotiate and agree in good faith, and will execute and deliver such written documents as the other party requests in good faith, with respect to any appropriate adjustments in the price charged to CardioGenesis by Baasel for OEM Products and Parts, which the relevant party, in its good faith judgment after consultation with the other party, believes would be appropriate in view of such greater burden, in order to meet regulatory requirements, than the requesting party was required to bear prior thereto. In such determination there will be taken into account any such increased burden upon CardioGenesis as to any final manufacturing it may perform for OEM Products and Parts to be sold within the United States. (C) Costs of Certain Baasel Insurance Premiums. There is not included in the prices for OEM Products and Parts set forth herein the amount of any insurance premium that Baasel may be required to pay in order to maintain product liability insurance covering Baasel in an amount appropriate, in Baasel's good faith judgment, after appropriate consultation with its legal counsel and products liability insurance advisors, to insure against any products liability of Baasel that may arise from the sale and distribution by CardioGenesis of OEM Products and/or Parts within the United States. The parties will discuss and agree in writing upon any adjustment to prices charged by Baasel to CardioGenesis for OEM Products -19- 20 and/or Parts that may be requested by Baasel in good faith if Baasel so determines to obtain and maintain such insurance coverage. (D) Orders Of Less Than [ ** ] Units Of OEM Product. If the [ ** ] of any Rolling Purchase Order placed by CardioGenesis is for less than [ ** ] units of OEM Product (as distinguished from any reduction to [ ** ] or less units of any binding order previously placed), and if in Baasel's good faith judgment, after consultation with CardioGenesis, [ ** ], then Baasel may, by giving written notice to CardioGenesis given at least ten (10) days before the shipment by Baasel of any unit of OEM Product in such order, [ ** ]. (iii) Effect of Increases or Decreases in Rolling Purchase Orders. (A) Effect of Increases Requested By CardioGenesis To Previously-Delivered Rolling Purchase Orders For Delivery in 1998. If, in the binding Rolling Purchase Order for deliveries in the period [ ** ] through [ ** ], CardioGenesis increases the number of units of OEM Product therein, not later than [ ** ] before the relevant scheduled delivery date for such order, by not more than [ ** ] of the number of units of OEM Product that were represented in the such portion of such Rolling Purchase Order [ ** ]. (B) [ ** ] (C) Effect of Decreases In Number Of Units of OEM Products Ordered. If CardioGenesis decreases the number of units of OEM Product in any nonbinding portion of a Rolling Purchase Order in making it a binding Rolling Purchase Order, no -20- 21 downward adjustment to prices previously determined for such order will be made, but CardioGenesis will pay to Baasel, or to such third parties as Baasel directs CardioGenesis in writing, the amount of all cancellation charges, including penalties and liquidated damages, paid or payable by Baasel to such third parties as a result of material or inventory cancellation due to such reduction. Baasel will use its commercially reasonable efforts to minimize the amount of such cancellation charges. (f) Payment. Except as the parties may otherwise specifically agree in writing, and except as to the Initial Order, CardioGenesis will pay Baasel for units of OEM Products and/or Parts ordered by CardioGenesis hereunder under the binding portion of the relevant Rolling Purchase Order, on September 30, and December 31, and March 31, and June 30, of each year, in an amount equal to fifty percent (50%) of the aggregate purchase price for the total number of units of OEM Products and/or Parts scheduled under such binding portion to be delivered during the calendar quarter commencing immediately after three (3) months after such payment date. The balance of payment for each binding Rolling Purchase Order will be paid, as to portions of such order shipped, within forty-five (45) days after the date of shipment by Baasel of each such portion of such order according to the delivery dates of such relevant order. Baasel will invoice CardioGenesis with each shipment for such balance of the order payment. Set forth below is the agreed payment schedule for the first 50% of the binding portion of the relevant Rolling Purchase Order for delivery within the time periods shown; such model, with appropriate calendar year changes, will apply to the binding portion of Rolling Purchase Orders scheduled for delivery after December 31, 1998.
- -------------------------------------------------------------------------------- Payment Due Date (No Later Than) Amount of Payment - -------------------------------------------------------------------------------- [ ** ] [ ** ] of the aggregate purchase price for the total number of units of OEM Product in the Initial Order. - -------------------------------------------------------------------------------- [ ** ] [ ** ] of the aggregate purchase price for the total number of units of OEM Product in such [ ** ] scheduled to be delivered from and including [ ** ] through and including [ ** ]. - -------------------------------------------------------------------------------- [ ** ] [ ** ] of the aggregate purchase price for the total number of units of OEM Product in such [ ** ] scheduled to be delivered from and including [ ** ] through and including [ ** ]. - -------------------------------------------------------------------------------- [ ** ] [ ** ] of the aggregate purchase price for the total number of units of OEM Product in such [ ** ] scheduled to be delivered from and including [ ** ] through and including [ ** ]. - -------------------------------------------------------------------------------- [ ** ] [ ** ] of the aggregate purchase price for the total number of units of OEM Product in such [ ** ] scheduled to be delivered from and including [ ** ] through and including [ ** ]. - --------------------------------------------------------------------------------
(g) Service Charges; Cost and Expenses; Refusal to Deliver. Any invoiced amount not received by Baasel within twenty (20) days after its due date thereafter will be subject, until paid, to a service charge of the lesser of one and one-half percent (1.5%) per month or the maximum permissible rate under applicable law. CardioGenesis will pay all of Baasel's reasonable costs and expenses, including reasonable fees and costs of attorneys, to the extent -21- 22 permitted by law, to enforce and preserve Baasel's rights under this Section 6(g). Baasel may refuse to deliver OEM Products and/or Parts to CardioGenesis if and to the extent that CardioGenesis fails to make timely payment as required hereunder. 7. DELIVERY; INSTALLATION, INSPECTION AND ACCEPTANCE; TRAINING. (a) Preferential Allocation. CardioGenesis will receive preferential allocation, among Baasel's customers, of all OEM Products and Parts necessary to meet the relevant delivery dates and quantities set forth in the binding portion of the relevant Rolling Purchase Order. (b) Shipping. All OEM Products and Parts delivered by Baasel pursuant to the terms of this Agreement will be: (i) Acceptance Criteria. Only units of OEM Product and Parts which have passed the Acceptance Criteria (as defined in Section 7(c) hereof. (ii) Packaging. Suitably packed for air freight shipment, or other appropriate common carrier as may be communicated by CardioGenesis in writing to Baasel reasonably in advance of Baasel's planned shipment date, in Baasel's standard shipping cartons for such items, which in each case will meet all packaging validation requirements worldwide for shipment of OEM Products and Parts as communicated by CardioGenesis to Baasel in writing reasonably in advance of Baasel's planed shipment date; and (iii) Marking. Marked for shipment to CardioGenesis' address set forth on the signature page hereof, or to the end of the address of such customer of CardioGenesis as CardioGenesis and Baasel agree in writing; and (iv) Delivery. Delivered to CardioGenesis, or to CardioGenesis' customer, or CardioGenesis' carrier agent Ex Works Baasel's main manufacturing plant. Unless otherwise instructed in writing by CardioGenesis, Baasel will select the carrier. All freight, insurance, and other shipping expenses, as well as any special (non-Baasel standard) packing expense, will be paid by CardioGenesis. (c) Installation, Inspection and Acceptance. OEM Products and Parts will be delivered to CardioGenesis or to the relevant CardioGenesis customer (if drop-shipped by Baasel to such customer at CardioGenesis' written request), as the case may be, and installed and made operational, pursuant to, and along with a written copy of, commercially reasonable receiving and inspection protocols and acceptance criteria (collectively, the "Acceptance Criteria"), including ISO 9000 and MDDE, and installation procedures, as will be agreed upon in writing by CardioGenesis and Baasel no later than (10) days before CardioGenesis' first Rolling Purchase Order is placed after the Initial Order. The Acceptance Criteria will be attached to this Agreement, upon such written agreement by the parties, as Exhibit G. Such written Acceptance Criteria will (i) provide that inspection and acceptance testing will be performed by an individual or individuals who have received what CardioGenesis and Baasel will agree, and which they will set forth in such inspection protocols and acceptance criteria, is proper training with respect -22- 23 thereto, and (ii) which of CardioGenesis, Baasel and/or third party personnel will perform such installation, and (iii) how the costs of such installation, and of any inspection not performed by the customer, are to be billed and paid. The Acceptance Criteria will set forth the time period after CardioGenesis', or its customer's, receipt of the relevant OEM Product and Parts within which inspection must be made. The installation procedures will require Baasel, at its expense, to provide such commercially reasonable level of technical assistance by providing instruction manuals and other customary similar documents free of charge, and providing telephone and facsimile assistance, (but not involving travel of any Baasel personnel or any other costs of such assistance except as Baasel may specifically agree in writing), to CardioGenesis and/or such third-party installation personnel as may be provided in the installation procedures, to afford the best opportunity for a successful and timely installation. The installation procedures and inspection criteria will contain Baasel's standard inspection testing procedures for such OEM Product, with such modifications thereto as CardioGenesis reasonably and in good faith requests of Baasel in writing and which lawfully may be made. Any OEM Product or Part not lawfully rejected by CardioGenesis or such customer, as the case may be, within the relevant period provided by such inspection protocols and acceptance criteria, after compliance with the relevant installation procedures and with such inspection protocols and acceptance criteria, will be deemed to have been accepted by CardioGenesis or such customer, as the case may be. (d) Training. Baasel will provide, at Baasel's premises, to a limited, commercially reasonable number of CardioGenesis' personnel (up to two persons per session) at reasonable periodic intervals: (i) training as to proper installation, service and repair of the OEM Products and Parts, and, at the specific written request of CardioGenesis as to those CardioGenesis employees whom CardioGenesis believes in good faith have a need to know, full access to the OEM Product and Parts manufacturing process of Baasel. The frequency, format and content of the training will be determined by Baasel in consultation with CardioGenesis. Such training with respect to the manufacturing process will be designed to enable CardioGenesis to be able, upon any proper exercise of the Manufacturing License, reasonably to use and to instruct its subcontractor manufacturers to use, the Manufacturing License should it become necessary to do so under the terms of this Agreement. CardioGenesis will pay its own costs of its personnel for travel, food, and lodging during such training. CardioGenesis also will pay to Baasel, upon the written request of Baasel, setting forth the calculation of the following amounts in reasonable detail, (1) Baasel's customary training fees for such training, and (2) the reasonable actual costs, without profit, of Baasel in preparing manuals and other training materials for the training to such CardioGenesis personnel . Each such CardioGenesis individual will execute such customary mutual nondisclosure agreement with Baasel with respect to such training as Baasel may reasonably request, provided that no such nondisclosure agreement will diminish or limit the rights of CardioGenesis to fully use the Manufacturing License should it become necessary to do so under the terms of this Agreement. 8. WARRANTY. Baasel will extend to CardioGenesis a standard medical laser products warranty on the OEM Products and Parts, which warranty is as set forth in Exhibit H attached hereto and incorporated herein by reference. Baasel's warranty will always be of at least one (1) year on labor and parts, in each case after the date shipped by Baasel (or, as to Parts supplied to Baasel by third parties, such longer period as such third party provides for warranty for the relevant Part). Such warranty will provide, at a minimum, that Baasel will, at the expense -23- 24 of Baasel, including inbound and outbound shipping costs but excluding duties and import or export clearance fees or taxes, repair or replace OEM Products and Parts found defective upon receipt by CardioGenesis or found defective by the end-user during the relevant warranty period. 9. TERM AND TERMINATION. (a) Term. The initial term of this Agreement will be for the period commencing on the date hereof, and, unless sooner terminated as provided in this Agreement, continuing through and including December 31, 2000, and the term hereof will be automatically renewed thereafter for successive one year terms commencing on January 1, 2001, and on January 1 of each successive calendar year unless either CardioGenesis or Baasel gives the other written notice of termination at least one hundred and eighty (180) days before the end of the then-current one year term (i.e., no later than July 1 in the year of the then-current term), or unless otherwise sooner terminated as provided in this Agreement. (b) [ ** ] (i) [ ** ] (ii) [ ** ] (iii) [ ** ] -24- 25 [ ** ] (iv) [ ** ] (v) [ ** ]. (c) Other Rights to Terminate; Timing of Termination. Either party hereto may terminate this Agreement by written notice to the other as provided in (i) Section 1(b)(i) hereof if CardioGenesis elects not to continue its Development Program, or (ii) Section 1(b)(ii) hereof for failure to agree on adjustments to OEM Product research and development payments, or (iii) Section 1(b)(iv) for failure for the parties to agree upon increased payment for the Development Efforts under certain circumstances or (iv) Section 10(a)(v) hereof due to failure to enter into the Escrow Agreement, or (v) if the other party materially breaches this Agreement (other than a Baasel breach which is a Triggering Event and other than breaches for which other time periods for cure are specifically provided herein) and such breach remains uncured for ninety (90) days following written notice of such breach, setting forth in reasonable detail the nature of the breach, given to the breaching party by the nonbreaching party. Baasel may terminate this Agreement by written notice to CardioGenesis if proceedings are commenced by or against CardioGenesis for bankruptcy, insolvency or debtor's relief or if CardioGenesis is liquidated or dissolved, or pursuant to the terms of Section 10(a)(vii) of this Agreement. Any termination hereunder for which a specific notice or other period is not required under this Agreement may be made immediately, upon the delivery of the notice to the receiving party, or at such other future time after the date of notice of termination as the party giving such notice specifies therein. (d) Fulfillment of Orders Upon Termination or Expiration. Any termination of this Agreement for any reason including CardioGenesis' breach, or expiration of the term hereof, will not prevent Baasel from fulfilling, if it so elects, all orders from CardioGenesis accepted by Baasel prior to the date of termination and purchase orders placed by CardioGenesis with Baasel within six (6) months after the date of such termination, in each case at the delivery times provided in such accepted orders or as otherwise agreed in writing by CardioGenesis and Baasel; provided, however, that if termination is as a result of breach by CardioGenesis of its obligation to pay undisputed amounts due hereunder to Baasel, Baasel may demand from CardioGenesis commercially reasonable assurance of payment, such as prepayment or letters of -25- 26 credit, prior to shipment of OEM Products and/or Parts by Baasel, to ensure payment for such post-termination fulfillment of orders. (e) Transition Assistance. In the event of any termination of this Agreement for any reason, including any breach by Baasel or by CardioGenesis other than an uncured accidental or willful breach by CardioGenesis, and if CardioGenesis is not, by virtue of the application of the terms of this Agreement, able to use the Manufacturing License from and after such termination, then Baasel will render such commercially reasonable assistance, at CardioGenesis' sole expense, as CardioGenesis may in good faith request of Baasel, with commercially reasonable advance notice in writing to Baasel, in order to assist CardioGenesis in identifying a qualified manufacturer of a laser for CardioGenesis Products as a substitution for the OEM Product, and in transitioning to manufacture of such substitute laser product as soon as possible. Baasel may require that CardioGenesis and/or third parties execute and deliver such customary nondisclosure agreements as Baasel may believe in good faith are appropriate or necessary for the protection of Baasel Confidential Information or Baasel Proprietary Information in the providing of such assistance by Baasel. 10. MANUFACTURING ESCROW: MANUFACTURING LICENSE. (a) Manufacturing Escrow. (i) Escrow Agent; Escrow Agreement; Escrowed Materials. No later than June 30, 1997, CardioGenesis and Baasel will identify and enter into a written agreement (the "Escrow Agreement") with an independent escrow agent chosen by mutual agreement of Baasel and CardioGenesis (the "Escrow Agent") to establish a Manufacturing Escrow (the "Manufacturing Escrow"), to be located at a location in Germany to be set forth in such Escrow Agreement, of the Escrowed Materials, as hereinafter defined. For purposes of this Agreement, the "Escrowed Materials" means at least one full and accurate copy, in English if such copy already exists, of all information commercially reasonably necessary in order for CardioGenesis to manufacture, or to have manufactured for CardioGenesis by third party manufacturer subcontractors, the OEM Products and Parts, in the event the Manufacturing License described in Section 10(b) hereof becomes effective as provided herein, and includes, without limitation, all drawings, schematics, manuals, software (including Baasel Software and Updates) in source code (as to third-party software licensed to Baasel, only to the extent such license allows such deposit of source code) and object code format, and all standard operating policies and procedures ("SOP's") of Baasel, including, without limitation, component, material and device specifications, manufacturing processes, test methods and procedures, validation systems, methods and tests material, and all SOP's of vendors to Baasel of materials or components for the OEM Products or Parts, and a copy of Baasel's device manufacturing license from the relevant licensing authority or authorities, a copy of Baasel's registration with the FDA (if and when obtained) and with other relevant regulatory bodies or agencies, and of other related registration files of Baasel, including all inspection reports and warning letters, and a copy of all other correspondence to or from Baasel with all other regulatory bodies relevant to the OEM Products and/or any Part, and including in each case such documents as they relate to the Development Efforts. -26- 27 (ii) Delivery of Escrowed Materials By Baasel; Notification to CardioGenesis; Inspection By CardioGenesis. The Escrow Agreement will provide that within forty-five (45) days after the date of shipment by Baasel to CardioGenesis of the last pilot unit as provided in Section 1(h)(iii) hereof, Baasel will provide to the Escrow Agent, and the Escrow Agent will hold in the Manufacturing Escrow in confidence, as hereinafter provided, the Escrowed Materials as they exist through the date of shipment of such last pilot unit. After Baasel's original deposit of Escrowed Materials, Baasel will be obligated to deliver new and/or updated Escrowed Materials to the Escrow Agent promptly after the content of the Escrowed Materials may have changed (including new items or changes to already deposited items) or new Escrowed Materials have come into existence from the most recent deposit of Escrowed Materials; provided, however, that Baasel will not be obligated to deposit into the Manufacturing Escrow any materials specifically relating to the Cost-Reduced Product, other than such materials as were deposited in Baasel's original deposit into the Manufacturing Escrow, until forty-five (45) days after the date of shipment by Baasel of the first unit of Cost-Reduced Product to CardioGenesis under a Rolling Purchase Order. Within ten (10) days after Baasel's initial deposit of Escrowed Materials into the Manufacturing Escrow, and within ten (10) days after any subsequent deposit by Baasel of Escrowed Materials into the Manufacturing Escrow as required by this Agreement, Baasel will give CardioGenesis written notification, in reasonable detail, of the nature of the Escrowed Materials so deposited by Baasel. Upon reasonable advance written notice by CardioGenesis to the Escrow Agent with a copy to Baasel, or upon such specific advance written notice as the Escrow Agent may require, CardioGenesis will have access to the Escrowed Materials, at the location specified by the Escrow Agent, solely for purposes of determining the nature and content of such Escrowed Materials and determining that, in CardioGenesis' reasonable and good faith judgment, they are sufficient to allow CardioGenesis to fully use the Manufacturing License should it become necessary to do so. Except as may be otherwise agreed in writing by CardioGenesis and Baasel in advance of any such inspection, CardioGenesis will make no copies of, and will not take away any notes as to, the contents of such inspected Escrowed Materials, and all of such Escrowed Materials will continue to be subject to provisions of Section 11 hereof with respect to confidentiality. (iii) Nature of Manufacturing Escrow. The Escrow Agent will hold all of the Escrowed Materials in the Manufacturing Escrow separate from the books, records or materials of CardioGenesis or of any other third party who may have deposited items with such Escrow Agent. The terms of the Escrow Agreement will impose upon the Escrow Agent a requirement of confidentiality with respect to the Escrowed Materials at least as protective of the Escrowed Materials as those afforded by Section 11 of this Agreement to the Confidential Information of the parties hereto and to Baasel Proprietary Information and CardioGenesis Proprietary Information. (iv) Release of Escrowed Materials To CardioGenesis or To Baasel. The Escrow Agreement will provide that (i) upon delivery by CardioGenesis of a Manufacturing License Election Notice, as provided below, and provided injunctive relief has not been granted in favor of Baasel barring such access to CardioGenesis, then CardioGenesis will be given full access to all Escrowed Materials by the Escrow Agent solely for purpose of the Manufacturing License, and (ii) Baasel's signature or acceptance as to any such release of Escrowed Materials is not required, and (iii) all Escrowed Materials will be released to Baasel upon Baasel's written -27- 28 request to the Escrow Agent at the expiration or termination of the Escrow Agreement unless CardioGenesis then is using the Manufacturing License pursuant to the terms of this Agreement. (v) Reimbursement of Certain Costs of Baasel by CardioGenesis; Payment of Escrow Agent's Fees and Costs. CardioGenesis will reimburse Baasel for Baasel's documented expenses and direct labor costs for providing such Escrowed Materials into the Manufacturing Escrow, and will pay the fees and costs of such Escrow Agent. (vi) Right of CardioGenesis or Baasel to Terminate This Agreement For Failure To Enter Into Escrow Agreement; Right of CardioGenesis to Terminate If Baasel Does Not Make Deposits of Escrowed Materials. If the parties have not entered into a mutually satisfactory Escrow Agreement by June 30, 1997, or by such later time as they may agree in writing, then either party may at any time thereafter terminate this Agreement by written notice to the other. If, upon CardioGenesis' inspection of the Escrowed Materials from time to time as permitted under Section 10(a)(ii) hereof, CardioGenesis determines in good faith, after reasonable consultation with Baasel, that the Escrowed Materials are not complete or sufficient for purposes of the operation of the Manufacturing License, CardioGenesis will deliver a written notice to Baasel specifying in reasonable detail the nature and general content of such materials as CardioGenesis believes in good faith should also be deposited into the Manufacturing Escrow as part of the Escrowed Materials. If Baasel fails to deposit such requested materials into the Manufacturing Escrow within forty-five (45) business days (as defined in Section 5(b) hereof) after the date it receives such notice, or within such longer time period, without requiring CardioGenesis' consent, as Baasel reasonably and in good faith request by notifying CardioGenesis of such longer period, but in no event to exceed ninety (90) days, then CardioGenesis may terminate this Agreement by written notice to Baasel. (vii) Right of Baasel To Terminate This Agreement For Certain Acts of CardioGenesis. (A) Unlawful Obtaining Of Escrow Materials; Unlawful Use of Manufacturing License. If CardioGenesis obtains the Escrowed Materials, or any portion of them, unlawfully (as defined in Section 10(a)(vii) hereof), or commences use of the Manufacturing License unlawfully (as so defined), then Baasel may upon written notice to CardioGenesis immediately terminate this Agreement, and upon such termination the Manufacturing License will become null and void and CardioGenesis will have no right thereafter to the Escrowed Materials or to use the Manufacturing License. (B) Definition of "Unlawful". For purposes of this Section 10(a)(vii), the term "unlawful" means (1) as to obtaining all or any portion of the Escrowed Materials, that CardioGenesis or any of its agents under its control or at its direction obtain the Escrowed Materials or any portion thereof, in whole or in part by fraud of CardioGenesis or of any such agent, in any written statement or notice, or in any oral statement, to Baasel, the Escrow Agent, or any third party, or otherwise in violation of this Agreement and/or of the Escrow Agreement, except as provided in the last sentence of this Section 10(a)(vii)(B) as to inadvertent receipt, and (2) as to use of the Manufacturing License, that CardioGenesis or any of its agents under its control or at its direction commence using the Manufacturing Agreement by fraud of -28- 29 CardioGenesis or of any such agent, in any written statement or notice, or in any oral statement, to Baasel, the Escrow Agent, or any third party, or otherwise in violation of the terms of this Agreement. If CardioGenesis obtains all or any part of the Escrowed Materials from the Escrow Agent by reason of the mistake or willful act of the Escrow Agent and/or of the agents of the Escrow Agent, and not at CardioGenesis' request, CardioGenesis will not be deemed to have received such Escrowed Materials unlawfully, for purposes of this Section 10(a)(vii), and thus will not have breached its obligations under this Agreement, if CardioGenesis (1) returns all of such Escrowed Materials to the Escrow Agent as promptly as commercially reasonable after CardioGenesis determines that it is not then supposed to have such Escrowed Materials under the terms of this Agreement and/or of the Escrow Agreement, and (2) retains no copies of such Escrowed Materials, and (3) promptly notifies the Escrow Agent and Baasel in writing of such matters. (b) Manufacturing License. (i) General Grant of License Rights. Baasel hereby grants to CardioGenesis an irrevocable, exclusive, royalty-bearing, worldwide license in perpetuity (the "Manufacturing License"), under the terms and conditions set forth herein, which CardioGenesis may use only upon the occurrence of a Noncurable Triggering Event, and only if CardioGenesis has timely delivered a Manufacturing License Election Notice to Baasel as provided in Section 10(c) hereof and such use of the Manufacturing License has not been enjoined by judicial action, to use the Escrowed Materials and the other materials described below in this Section 10(b)(i), solely in order for CardioGenesis, itself and/or through its subcontractors, to manufacture, and solely for CardioGenesis and its distributors, agents and representatives to sell and distribute, on a worldwide exclusive basis, OEM Products and Parts as incorporated in (or, as to Parts, to be incorporated in) CardioGenesis Products.. The rights of CardioGenesis under the Manufacturing License will survive any expiration or termination of this Agreement. Upon and after activation of the Manufacturing License under the terms hereof (A) CardioGenesis will have the right to use all Escrowed Materials deposited into the Manufacturing Escrow, as well as all other materials that would constitute Escrowed Materials hereunder but which have not been deposited by Baasel into the Manufacturing Escrow at the time of activation of the Manufacturing License, and (B) Baasel will supply to CardioGenesis directly, upon CardioGenesis' written request specifying in such reasonable detail as to such non-deposited materials as is known to CardioGenesis at the time, at no cost to CardioGenesis one complete and accurate copy of such other non-deposited materials so requested. The provisions of Section 11 hereof will apply to all such non-deposited materials as may be delivered by Baasel to CardioGenesis. The Manufacturing License includes the right of CardioGenesis to sublicense to CardioGenesis' designated subcontractor manufacturers. The provisions of Section 3(b) hereof with respect to Baasel's Software and Updates are incorporated into the Manufacturing License by reference. (ii) Sublicenses to Subcontract Manufacturers. The terms of any sublicense by CardioGenesis to any subcontract manufacturer will contain confidentiality provisions consistent with the provisions of Section 11 hereof with respect to the protection of Baasel Proprietary Information and Baasel Confidential Information, and will not afford such subcontract manufacturer any rights to further sublicense such rights, nor any rights to sell or otherwise distribute OEM Products or Parts other than to CardioGenesis. -29- 30 (iii) Certain Limitations of CardioGenesis' Rights. CardioGenesis may not use the Manufacturing License after expiration hereof, or after termination hereof if such termination is by Baasel by reason of CardioGenesis' uncured breach of this Agreement, or if such termination is pursuant to the provisions of (A) Section 1(b)(i) hereof due to CardioGenesis' termination of the Development Efforts, and (B) Section 1(b)(ii) hereof because the parties cannot agree on appropriate adjustments to the payments for the Development Efforts, or (C) Section 6(b) hereof because the parties cannot agree on pricing, or (D) Section 10(a)(v) hereof because the parties have not timely entered into the Escrow Agreement; provided that in each case, the provisions of Section 9(a) hereof, with respect to post-termination fulfillment of CardioGenesis' orders, and Section 9(b) hereof, with respect to certain cooperation by Baasel as to manufacturing transition, nevertheless will apply. (c) Noncurable Triggering Event Notice; Noncurable Triggering Event Notice; Manufacturing License Election Notice. Within ten (10) days after CardioGenesis believes a Noncurable Triggering Event has occurred, CardioGenesis will give written notice thereof ( a "Noncurable Triggering Event Notice") to Baasel and to the Escrow Agent, specifying in reasonable detail the nature of such Noncurable Triggering Event (including the expiration of the relevant cure period for any Curable Triggering Event). Baasel will have the right to seek judicial injunctive relief, as provided in Section 15 hereof, if it believes that the relevant Noncurable Triggering Event has not occurred. The Manufacturing License may be used by CardioGenesis only if, within thirty (30) days after the occurrence of such Noncurable Triggering Event, CardioGenesis also gives written notice (a "Manufacturing License Election Notice") to the Escrow Agent and to Baasel stating CardioGenesis' election to use the Manufacturing License (which Manufacturing License Election Notice may be included in the original Noncurable Triggering Event Notice), and provided that the use by CardioGenesis of the Manufacturing License has not been enjoined by judicial action. If CardioGenesis gives Baasel a Manufacturing License Election Notice, the Manufacturing License may not be activated and used by CardioGenesis prior to the expiration of such thirty day (30) period after occurrence of such Noncurable Triggering Event. If CardioGenesis does not elect in writing to Baasel within thirty (30) days after the occurrence of a Noncurable Triggering Event to terminate this Agreement, or if CardioGenesis' use of the Manufacturing License then is enjoined by judicial action, this Agreement will continue until otherwise terminated or expired, and the Manufacturing License will not be activated, provided that such failure to elect to so terminate, or the granting of such injunctive relief to Baasel, will not preclude CardioGenesis from electing to terminate, and to activate the Manufacturing License (subject to Baasel's rights again to seek injunctive relief), with respect to the occurrence of any future Noncurable Trigger Event. (d) Manufacturing Royalty. If CardioGenesis elects as provided herein to use the Manufacturing License, CardioGenesis will pay to Baasel, within [ ** ] after the close of each calendar quarter during which the Manufacturing License is used, a manufacturing royalty (the "Manufacturing Royalty") in an amount, in cash, equal to [ ** ]. CardioGenesis will submit to -30- 31 Baasel, with each such payment of accrued royalties, a written statement, signed by CardioGenesis' Chief Financial Officer, in reasonable detail showing the basis for the calculation of the royalty amount remitted. Baasel may at Baasel's expense, and subject to such reasonable written mutual confidentiality agreements as CardioGenesis may request, review those portions of the books and records of CardioGenesis relating to such calculation. In the event such review determines any underpayment of such royalties, CardioGenesis will promptly pay such underpayment amount to Baasel. During its use of the Manufacturing License, CardioGenesis will not be liable for payment to Baasel for any amount other than the Manufacturing Royalty with respect to the manufacture by CardioGenesis and its designated third party subcontract manufacturers, and the sale by CardioGenesis and its distributors, sales agents, and representatives, of OEM Products and/or Parts. 11. CONFIDENTIAL INFORMATION. (a) Definition. The term "Confidential Information" as used herein includes, as to CardioGenesis, the CardioGenesis Proprietary Information and as to Baasel, the Baasel Proprietary Information, and as to each party, such party's other proprietary and confidential information of whatever sort. Confidential Information of either party will not include information which: (i) is now, or hereafter becomes, through no act or failure to act on the part of the receiving party, generally known or available to the public; (ii) was acquired by the receiving party before receiving such information from the disclosing party and without restriction as to use or disclosure; (iii) is hereafter rightfully furnished to the receiving party by a third party, without restriction as to use or disclosure; (iv) is information which the receiving party can document was independently developed by the receiving party; (v) is required to be disclosed pursuant to law, provided the receiving party uses reasonable efforts to give the disclosing party reasonably detailed notice of such required disclosure; or (vi) is disclosed with the prior written consent of the disclosing party. (b) Obligations. Except as may be specifically authorized otherwise in this Agreement, or as may be otherwise specifically agreed by the parties in writing, each party will: (i) hold the other party's Confidential Information in strict confidence, (ii) not disclose such Confidential Information to any third parties and will take all reasonable steps to prevent such disclosure, which steps will include at least those taken by such party to protect its own confidential information of like kind, and -31- 32 (iii) not use any Confidential Information of the other party for any purpose except as provided in this Agreement. Each party may disclose the other party's Confidential Information to the recipient party's responsible employees and consultants who have a bona fide need to know, but only to the extent necessary to carry out the purposes of this Agreement. Each party will instruct all such employees and consultants not to disclose such Confidential Information to third parties, including other consultants, without the prior written permission of the disclosing party hereto. (c) Return of Items. Subject to the rights of the parties under other provisions of this Agreement, including without limitation the rights of CardioGenesis under Section 10 of this Agreement, upon the disclosing party's written request, the receiving party will promptly return to the disclosing party all tangible items containing or consisting of the disclosing party's Confidential Information and all copies thereof. 12. INDEMNITY; LIABILITY; INSURANCE. (a) Indemnity by Baasel. Subject to the other provisions of this Section 12, Baasel will, at its expense, defend and indemnify CardioGenesis and CardioGenesis' directors, officers, employees, consultants, agents, shareholders and customers, in any suit, claim or proceeding brought against CardioGenesis or any of such other indemnified parties: (i) Alleged Infringement. Alleging that any OEM Products or Parts sold pursuant to this Agreement, as such, as apart from their use in the CardioGenesis Use, infringe a United States patent, United States copyright, United States trademark or trade secret obligation of any third party; provided that Baasel will have no liability to the extent of any infringement alleged by third parties rights arising from the CardioGenesis Use or with respect to alleged infringement of general laser industry patents, not keyed to Baasel's specific laser before its modification into the OEM Product, for which infringement allegations CardioGenesis will be responsible; or (ii) Defect In Manufacture or Design. Due directly to any defect in manufacture or design of the OEM Product as developed by Baasel. CardioGenesis will promptly notify Baasel of any such claim. Baasel will be given reasonable assistance from CardioGenesis and will be permitted the exclusive control of the defense. Further, to the extent Baasel is required hereunder to indemnify such parties, Baasel will pay any damages and costs finally awarded against CardioGenesis and any such other indemnified parties in any such suit by reason of any such liability, but Baasel will have no liability for settlements or costs incurred without its written consent. If CardioGenesis' or its customers' use of any such OEM Products and Parts is enjoined, or Baasel desires to minimize its liability hereunder as to any alleged infringement, Baasel may, at its option and sole expense, either: (i) Substitution. Substitute to CardioGenesis or CardioGenesis 'customer, equivalent noninfringing OEM Products and/or Parts for the allegedly infringing item, -32- 33 subject to CardioGenesis' absolute right of approval as to whether such substituted OEM Products and/or Parts meet all specifications required therefor, including U.S. and international regulatory requirements, as determined by CardioGenesis in good faith, or (ii) Modification. Modify the substituted infringing item so that it no longer infringes but remains equivalent in the reasonable and good faith judgment of CardioGenesis, subject to CardioGenesis' absolute right of approval as to whether such modified OEM Products and/or Parts meet all specifications thereof, including U.S. and international regulation requirements, as determined by CardioGenesis in good faith or (iii) Obtain Rights. Obtain for CardioGenesis and CardioGenesis' customer, the right to continue using such item. If none of the foregoing is feasible in Baasel's good faith judgment, Baasel will accept a return of the OEM Products and/or Parts from CardioGenesis or CardioGenesis' customer, which are subject to the allegation or to such injunction, and Baasel then will refund, to CardioGenesis or CardioGenesis' customer, the purchase price therefor plus costs to Baasel of shipping paid by CardioGenesis or CardioGenesis' customer, less reasonable depreciation. (b) Indemnity by CardioGenesis. Subject to the other provisions of this Section 12, CardioGenesis will, at its expense, defend and indemnify Baasel and its directors, officers, employees, consultants, agents, shareholders and customers, in any suit, claim or proceeding brought against Baasel or any of such other indemnified parties, alleging that: (i) Alleged Infringement. Any CardioGenesis Proprietary Information contained in any OEM Products or Parts sold pursuant to this Agreement, as such, infringes a United States patent, United States copyright, United States trademark or trade secret obligation of any third party, or (ii) Defect in Manufacture or Design. Due directly to any defect in manufacture or design of the OEM Product other than for which Baasel is liable under Section 12(a) hereof. Baasel will promptly notify CardioGenesis of any such claim. CardioGenesis will be given reasonable assistance from Baasel and will be permitted the exclusive control of the defense. Further, to the extent CardioGenesis is required hereunder to indemnify such parties, CardioGenesis will pay any damage and costs finally awarded against Baasel and any such other indemnified parties in any such suit by reason of any such liability, but CardioGenesis will have no liability for settlements or costs incurred without its written consent. If Baasel's use of any such CardioGenesis Proprietary Information in the production by Baasel of OEM Products and Parts hereunder is enjoined, or CardioGenesis desires to minimize its liability hereunder as to such alleged infringement, CardioGenesis may, at its option and sole expense, either: -33- 34 (i) Substitution. Substitute to Baasel equivalent noninfringing CardioGenesis Proprietary Information for the allegedly infringing item, (ii) Modification. modify the allegedly infringing item so that it no longer infringes but remains equivalent in the reasonable and good faith judgment of CardioGenesis and Baasel, or (iii) Obtain Rights. Obtain for Baasel the right to continue using such item. If none of the foregoing is feasible in the good faith judgment of either Baasel or CardioGenesis, either party may give the other notice that, unless the parties negotiate and reflect in writing within thirty (30) days a commercially reasonable solution, which the parties will in good faith attempt to do, then either party may terminate this Agreement by written notice to the other party at any time after the such thirty (30) days; provided, however, that in the event of any such termination by either party, Section 10(b) hereof will not apply and CardioGenesis will have no rights thereafter under the Manufacturing License. (c) CardioGenesis Liability. Subject to Baasel's indemnities and warranties contained herein and in Baasel's relevant warranty as supplied with the OEM Products and Parts, CardioGenesis and CardioGenesis' customers assume all risk and liability arising from or connected with the operation and use of the OEM Product and Parts. Baasel's maximum liability for all damages, regardless of the legal basis therefor but excluding willful acts against CardioGenesis, will be limited to the sum of all payments made by CardioGenesis to Baasel with respect to the goods at issue in the dispute. Baasel's liability under the German Product Liability Code is reserved. (d) Limitations. (i) Baasel Limitations. Baasel will have no liability for any claim of patent or copyright infringement or other infringement of proprietary rights, or any liability for design or manufacture, to the extent resulting from: (A) CardioGenesis' or CardioGenesis' customers', use or combination of the OEM Products, or Parts, or of Baasel's Software or Updates, with products or data, other than the CardioGenesis Products, not supplied by Baasel as part of the OEM Products, or Parts, or as part of Baasel's Software or Updates, or (B) any modification or attempted modification of the OEM Products or Parts or Baasel's Software or Updates by anyone other than Baasel, or other than by third parties agreed in writing by Baasel, or (C) use of other than the latest release of Baasel's Software or Updates received by CardioGenesis or CardioGenesis' customers from Baasel. (ii) CardioGenesis Limitations. CardioGenesis will have no liability for any claim of patent or copyright infringement or other infringement of proprietary rights, or any liability for design or manufacture, to the extent resulting from: (A) Baasel's use or combination, in producing the OEM Products or Parts, or producing Baasel's Software or Updates, with products or data, other than -34- 35 the CardioGenesis Proprietary Rights or CardioGenesis Products, not supplied by CardioGenesis to Baasel in order for Baasel to produce the OEM Products, or Parts, or Baasel's Software or Updates, or (B) any modification or attempted modification of the CardioGenesis Proprietary Rights or CardioGenesis Products by anyone other than CardioGenesis, or other than by Baasel with CardioGenesis' written permission in the course of the Development Efforts. (iii) General Mutual Limitation. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER IN CONNECTION WITH THIS AGREEMENT FOR SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL OR PUNITIVE DAMAGES REGARDLESS OF WHETHER EITHER OR BOTH PARTIES OR BAASEL KNEW OF THE POSSIBILITY OF SUCH DAMAGES. (e) Insurance. Subject to the provisions of Section 6(d)(iii)(C) hereof relating to possible price adjustments deriving from the cost of products liability insurance of Baasel as to OEM Products and Parts to be sold in the United States, Baasel and CardioGenesis each will at all times during the term hereof obtain and maintain, at the obtaining party's expense, fire and casualty, general liability, business interruption, and product liability insurance relating to the business of such party, taking into account such party's respective obligations under this Agreement, and taking into account the nature of the OEM Products and Parts, in amounts (including tail coverage) customary for its industry and size, with reputable insurers, with respect to such product liability insurance. In particular, CardioGenesis will obtain and maintain product liability coverage with respect to the OEM Products in an amount, and with such coverage, and for such periods of time, as are customary, within the industry within which the OEM Products would be considered to be included by national-level United States medical products insurers, according to the type of product so considered and according to the particular use (i.e., clinical or commercial) to which the OEM Products will be used in the jurisdiction to which such insurance relates. The parties will agree in writing, as an amendment to this Section 12(e), as to the United States dollar amount of such coverage for the relevant jurisdictions, no later than June 30, 1997, after consultation by CardioGenesis with its insurance brokers and with Baasel. 13. REPRESENTATIONS AND WARRANTIES OF BAASEL. Baasel hereby represents and warrants to CardioGenesis as follows (where a representation is made "to the best knowledge" of Baasel, such representation will be based upon reasonable inquiry into the records and of the employees of Baasel and reasonable inquiry of the advisors and/or other agents of Baasel): (a) Organization and Good Standing. Baasel is a corporation duly organized and validly existing under the laws of Germany, has the corporate power and authority to own, operate and lease its properties and to carry on its business as now conducted. (b) Power, Authorization and Validity. (i) Authorization. No filing, authorization or approval with or from governmental authorities by Baasel is necessary to enable Baasel to enter into, and to perform, its obligations under this Agreement. -35- 36 (ii) Valid and Binding Obligation. This Agreement is the valid and binding obligation of Baasel, enforceable in accordance with its terms except as to the effect, if any, of (A) applicable bankruptcy and other similar laws affecting the rights of creditors generally, (B) rules of law governing specific performance, injunctive relief and other equitable remedies, and (C) the exercise of judicial discretion in accordance with general principles of equity. (c) No Violation of Existing Agreements. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will conflict with, or (with or without notice or lapse of time, or both) result in a termination, breach, impairment or violation of: (i) any provision of the Certificate of Incorporation or Bylaws of Baasel, as currently in effect, (ii) any instrument or contract to which Baasel is a party or by which Baasel is bound, or (iii) to the best knowledge of Baasel, any German, European Union or foreign judgment, writ, decree, order, statute, rule or regulation applicable to Baasel or its assets or properties in any material respect. (d) Litigation. Baasel has not received notice of any action, proceeding, claim or investigation pending against Baasel before any court or administrative agency that if determined adversely to Baasel may be expected to have a material adverse effect on the present or future operations or financial condition of Baasel. To the best knowledge of Baasel, after due inquiry, no such action, proceeding, claim or investigation has been threatened. (e) Intellectual Property. Baasel owns or has sufficient rights to use all patents, "Moral Rights" (as defined below), copyrights, trade secrets, know-how, technology and other intellectual property and proprietary rights reasonably necessary to the conduct of the business as presently conducted by Baasel and as will be required for the performance by Baasel of its obligations hereunder ("Baasel Intellectual Property"). "Moral Rights" means any rights of paternity or integrity, any right to claim authorship, formula, invention, improvement, original work of authorship, process, computer program, database or trade secret ("Invention"), and any right to object to any distortion, mutilation or other modification of, or other derogatory action in relation to, any Invention, whether or not such would be prejudicial to any developer's honor or reputation. No third party has any right of reversion or tenancy in the Baasel Intellectual Property that would impair in any way the ability of Baasel to fully perform its obligations under this Agreement or that would impair in any way the rights and benefits of CardioGenesis under this Agreement. Baasel is not aware of any infringement of Baasel Intellectual Property by any third party. To the best of Baasel's knowledge, the business of Baasel as presently conducted by Baasel and as will be required for the performance by Baasel of its obligations hereunder does not cause Baasel, and will not cause CardioGenesis, by use of Baasel as an OEM Product and Parts manufacturer and supplier to CardioGenesis as provided herein, to infringe or violate any of the patents, trademarks, service marks, trade names, copyrights, trade secrets, proprietary rights or other intellectual property of any other person, and Baasel has not received any claim or notice of infringement or potential infringement of the intellectual property of any other person. To the best knowledge of Baasel, Baasel is not using any confidential information or trade secrets of any former employer of any past or present Baasel employees or consultants. 14. REPRESENTATIONS AND WARRANTIES OF CARDIOGENESIS. -36- 37 CardioGenesis hereby represents and warrants to Baasel as follows (where a representation is made "to the best knowledge" of CardioGenesis, such representation will be based upon reasonable inquiry into the records and of the employees of CardioGenesis and reasonable inquiry of the advisors and/or other agents of CardioGenesis): (a) Organization and Good Standing. CardioGenesis is a corporation duly organized and validly existing under the laws of the State of Delaware, has the corporate power and authority to own, operate and lease its properties and to carry on its business as now conducted. (b) Power, Authorization and Validity. (i) Right, Power and Authority. CardioGenesis has the right, power, legal capacity and authority to enter into and perform its respective obligations under this Agreement, and the execution, delivery and performance of this Agreement have been duly and validly approved and authorized by CardioGenesis and no other corporate approvals are required therefor under the laws of the State of Delaware or California. (ii) Authorization. No U.S. federal or state filing, authorization or approval with or from governmental authorities by CardioGenesis is necessary to enable CardioGenesis to enter into, and to perform, its obligations under this Agreement. (iii) Valid and Binding Obligation. This Agreement is the valid and binding obligation of CardioGenesis, enforceable in accordance with its terms except as to the effect, if any, of (A) applicable bankruptcy and other similar laws affecting the rights of creditors generally, (B) rules of law governing specific performance, injunctive relief and other equitable remedies, and (C) the exercise of judicial discretion in accordance with general principles of equity. (c) No Violation of Existing Agreements. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will conflict with, or (with or without notice or lapse of time, or both) result in a termination, breach, impairment or violation of: (i) any provision of the Certificate of Incorporation or Bylaws of CardioGenesis, as currently in effect, (ii) any instrument or contract to which CardioGenesis is a party or by which CardioGenesis is bound, or (iii) to the best knowledge of CardioGenesis, any federal, state, local or foreign judgment, writ, decree, order, statute, rule or regulation applicable to CardioGenesis or its assets or properties in any material respect. (d) Intellectual Property. CardioGenesis owns or has sufficient rights to use all patents, "Moral Rights" (as defined below), copyrights, trade secrets, know-how, technology and other intellectual property and proprietary rights reasonably necessary to the licenses by CardioGenesis hereunder to Baasel and as will be required for the performance by CardioGenesis of its obligations hereunder ("CardioGenesis Intellectual Property"). "Moral Rights" means any rights of paternity or integrity, any right to claim authorship, formula, invention, improvement, original work of authorship, process, computer program, database or trade secret ("Invention"), -37- 38 and any right to object to any distortion, mutilation or other modification of, or other derogatory action in relation to, any Invention, whether or not such would be prejudicial to any developer's honor or reputation. CardioGenesis is not aware of any infringement of CardioGenesis Intellectual Property by any third party. To the best of CardioGenesis' knowledge, the use by Baasel of CardioGenesis Intellectual Property as permitted and required by this Agreement will not cause Baasel, as an OEM Product and Parts manufacturer and supplier to CardioGenesis as provided herein, to infringe or violate any of the patents, trademarks, service marks, trade names, copyrights, trade secrets, proprietary rights or other intellectual property of any other person, and CardioGenesis has not received any claim or notice of infringement or potential infringement of the intellectual property of any other person. (e) No Violation of Existing Agreements. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will conflict with, or (with or without notice or lapse of time, or both) result in a termination, breach, impairment or violation of: (i) any provision of the Articles of Incorporation or Bylaws of CardioGenesis, (ii) any instrument or contract to which CardioGenesis is a party or by which CardioGenesis is bound or (iii) to the best knowledge of CardioGenesis, any federal, other national, state, local or foreign judgment, writ, decree, order, statute, rule or regulation applicable to CardioGenesis or its assets or properties in any material respect. 15. GOVERNING LAW; DISPUTE RESOLUTION. (a) Governing Law. This Agreement will be governed by and construed under the laws of the State of California excluding the Convention on Contracts for the International Sale of Goods and excluding that body of law known as conflict of laws. The procedural laws of the court in which a good-faith injunctive relief action is brought by either party pursuant to its rights under Section 15(a)(vii) hereof will control as to the procedure of such action. (b) Dispute Resolution. Any dispute arising out of or related to this Agreement, including any dispute which relates to the Confidential Information of either party, or to Baasel Proprietary Information or to CardioGenesis Proprietary Information, will be subject to the following provisions: (i) Rules and Location. Such dispute will be determined by arbitration under the Rules of the International Chamber of Commerce (the "ICC"), in Munich, Germany if brought by CardioGenesis, or in San Francisco, California if brought by Baasel, before a panel of three (3) arbitrators to be appointed in accordance with such Rules. (ii) Language. The language of the arbitration will be English. (iii) Arbitrator Qualifications. Each arbitrator must be reasonably fluent in English, and must have reasonable experience with high technology commercial companies or with arbitration of matters involving high technology commercial companies. -38- 39 (iv) Fees and Costs. The arbitrators will rule on the fees and costs of the arbitration. (v) Governing Law of Arbitration. The laws of the State of California excluding the Convention on Contracts for the International Sale of Goods, and excluding that body of law known as conflict of laws, will be the applicable substantive law, provided that ICC procedural laws will govern the arbitration procedure. (vi) Award. The award of the arbitrators will be final and binding upon the parties, and judgment upon the award may be entered in any court having jurisdiction, and an application may be made to any such court for judicial acceptance of the award and an order of enforcement. (vii) Right to Seek Injunctive Relief. Each party retains the right to seek immediate injunctive judicial relief, in whichever court is appropriate, whether in Germany, California (federal and State courts) or elsewhere in the world, each party hereby consenting to in personam .jurisdiction of and venue in such court(s), as to alleged breaches of this Agreement which, in the good faith judgment of the initiating party, would cause irreparable harm to such party for which damages would not be a sufficient or appropriate remedy and the amount of which damages would be difficult to ascertain. (b) Legal Expenses. The prevailing party in any injunctive action brought by one party against the other and arising out of this Agreement will be entitled, in addition to any other rights and remedies it may have, to reimbursement for its expenses, including court costs and reasonable attorneys' fees and costs, provided, however, that reimbursement of such attorney's fees and costs will not exceed ten percent (10 %) of the total amount (exclusive of such fees and costs) in dispute. 16. GENERAL PROVISIONS. (a) Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges and supersedes all prior agreements between them with respect to such specific subject matter. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing signed by both parties. (b) Independent Contractors. The relationship of Baasel and CardioGenesis under this Agreement is that of independent contractors, and nothing contained in this Agreement will be construed to give either party the power to direct and control the day-to-day activities of the other, or to create or assume any obligation on behalf of the other for any purpose whatsoever. All financial obligations associated with each party's business are the sole responsibility of such party. (c) Notices. Any notice required or permitted by this Agreement will be in writing and will be sent by hand (including commercially-recognized international courier), or by prepaid registered or certified airmail, return receipt requested where possible, or by facsimile, in -39- 40 each case addressed to the other party at the address below such party's signature hereon, or at such other address for which such party gives notice hereunder. Such notice will be deemed to have been given when delivered if by hand, or five (5) days after deposit in the mail (sent airmail, postage pre-paid), or upon receipt if sent by facsimile. (d) Force Majeure. Nonperformance of either party will be excused to the extent and for the period that performance by such party is rendered impossible by strike, fire, flood, governmental acts or orders or restrictions (other than such orders or restrictions arising as a result of the action or failure to act by such nonperforming party), failure of suppliers, or any other reason where failure to perform is beyond the reasonable control of and is not caused by the negligence of the nonperforming party. (e) Nonassignability and Binding Effect. Neither CardioGenesis' nor Baasel's rights and obligations under this Agreement may be transferred or assigned without the prior written consent of the other party, which will not be unreasonably withheld. Subject to the foregoing sentence, this Agreement will be binding upon and inure to the benefit of the respective successors and assigns of the parties hereto. (f) Severability. If any provision of this Agreement is held invalid by any law, rule, order or regulation of any government, or by the final determination of any state or federal court, such invalidity will not affect the enforceability of any other provisions not held to be invalid, and such provision will be enforced to the maximum extent legally possible. (g) Import/Export Regulations. CardioGenesis and Baasel will comply with all regulations, both U.S. and international, with respect to the importation and exportation of OEM Products and Parts, and as to CardioGenesis Products, by CardioGenesis, and as to products of Baasel manufactured and/or supplied by Baasel pursuant to its rights under Section 3(d) hereof. (h) Publicity Regarding Agreement. Neither party will disclose the terms of this Agreement to any third parties except as may be mutually agreed in writing or as may be required by, and then only to the extent required by, statute, regulation or the order of a court of competent jurisdiction. (i) Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original and all of which together will constitute one instrument. (j) Construction. This Agreement has been negotiated by each of the parties with advice of counsel. This Agreement will be fairly interpreted in accordance with its terms and without any strict construction in favor of or against either party. (k) Counting of Time. Whenever time is to be counted hereunder, the first day will be ignored and counting will commence with and include the next day and continue through and including the final day of the relevant period provided for in this Agreement. -40- 41 (l) Survival. The provisions of Sections 1(c), 1(d), 1(e), 1(j), 2, 3(b) (as to OEM Products shipped by Baasel prior to such termination and those that may be shipped after termination pursuant to the provisions of Section 9(d) hereof), 3(d), 3(e), 4(b), 6(e), 6(f), 7, 8, 9(d), 9(e), 9(f), 10, 11, 12, 13, 14, 15 and 16 will survive the termination or expiration of this Agreement. -41- 42 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the Effective Date by their duly authorized representatives. CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK GMBH - ------------------------- ----------------------------- By: /s/ Allen W. Hill By: /s/ Joseph Settele ------------------------------ ----------------------------- Name: ALLEN W. HILL Name: JOSEPH SETTELE Title: PRESIDENT Title: MANAGING DIRECTOR Date signed: March 11, 1997 Dated signed: March 13, 1997 Address: 540 Oakmead Parkway Address: Petersbrunner Strasse 1b Sunnyvale, California 94086 82319 Starnberg, Germany Attention: President Attention: President Facsimile: 408-328-3816 Facsimile: 011-49-81-51-776-232 -42- 43 EXHIBIT A OEM PRODUCT DESCRIPTION CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK GMBH By: By: ------------------------------ ----------------------------- Name: Name: ---------------------------- --------------------------- Title: Title: --------------------------- --------------------------- Date signed: Date signed: --------------------- -------------------- 44 ** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE FOLLOWING 23 PAGES OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 45 EXHIBIT B OEM PRODUCT DEVELOPMENT PROGRAM AND SPECIFICATIONS FOR FUNCTIONAL, PROTOTYPE AND PILOT UNITS 1. OEM PRODUCT DEVELOPMENT PROGRAM. [ATTACHED AND INCORPORATED BY REFERENCE] 2. SPECIFICATIONS FOR FUNCTIONAL, PROTOTYPE AND PILOT UNITS. [ATTACHED AND INCORPORATED BY REFERENCE] CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK GMBH By: By: ------------------------------ ----------------------------- Name: Name: ---------------------------- --------------------------- Title: Title: --------------------------- --------------------------- Date signed: Date signed: --------------------- -------------------- 46 ** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE FOLLOWING 2 PAGES OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 47 EXHIBIT B OEM PRODUCT DEVELOPMENT PROGRAM [ATTACHED AND INCORPORATED BY REFERENCE] [ ** ] CARDIOGENESIS CORPORATION GMBHCARL BAASEL LASERTECHNIK By: By: ------------------------------ ----------------------------- Name: Name: ---------------------------- --------------------------- Title: Title: --------------------------- --------------------------- Date signed: Date signed: --------------------- -------------------- 48 ** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE FOLLOWING 2 PAGES OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 49 EXHIBIT C OEM PRODUCT PRICES TO CARDIOGENESIS ** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS PAGE. CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK GMBH By: By: ------------------------------ ----------------------------- Name: Name: ---------------------------- --------------------------- Title: Title: --------------------------- --------------------------- Date signed: Date signed: --------------------- -------------------- 50 EXHIBIT D OTHER BAASEL PROPRIETARY INFORMATION; OTHER CARDIOGENESIS PROPRIETARY INFORMATION 1. OTHER BAASEL PROPRIETARY INFORMATION. Intellectual Property Rights of Baasel ** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS PAGE. CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 2. OTHER CARDIOGENESIS PROPRIETARY INFORMATION. [ATTACHED AND INCORPORATED BY REFERENCE] CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK GMBH By: By: ------------------------------ ----------------------------- Name: Name: ---------------------------- --------------------------- Title: Title: --------------------------- --------------------------- Date signed: Date signed: --------------------- -------------------- 51 ** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS PAGE. CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 52 EXHIBIT E CARDIOGENESIS TRADEMARKS CardioGenesis ITMR TTMR PMR ITMR System TTMR System PMR System CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK GMBH By: By: ------------------------------ ----------------------------- Name: Name: ---------------------------- --------------------------- Title: Title: --------------------------- --------------------------- Date signed: Date signed: --------------------- -------------------- 53 EXHIBIT F PARTS AND PARTS PRICES [ATTACHED AND INCORPORATED BY REFERENCE] CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK GMBH By: By: ------------------------------ ----------------------------- Name: Name: ---------------------------- --------------------------- Title: Title: --------------------------- --------------------------- Date signed: Date signed: --------------------- -------------------- 54 EXHIBIT G ACCEPTANCE CRITERIA CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK GMBH By: By: ------------------------------ ----------------------------- Name: Name: ---------------------------- --------------------------- Title: Title: --------------------------- --------------------------- Date signed: Date signed: --------------------- -------------------- 55 EXHIBIT H BAASEL WARRANTY ON OEM PRODUCTS AND PARTS CardioGenesis or its end-user customer shall, throughout the whole period of operation of the OEM Product, provide and maintain all operation conditions reflected in the Baasel operating manuals and other end-user documentation of Baasel for such OEM Product (the "OEM Product Documentation"), a complete copy of which OEM Product Documentation shall be supplied with each unit of OEM Product sold to CardioGenesis or provided by CardioGenesis to its customer. Baasel warrants that the goods to which this warranty applies shall be free from defects in material and workmanship for the period of one (1) year for labor and parts. The warranty period for parts exchanged by Baasel back to the customer during the parts exchange period will be six (6) months. Damage to parts, including but not limited to lenses, optical components, flash lamps and the like, from wear and tear and caused by improper use or handling by CardioGenesis or the end-user, is not covered by this warranty. This warranty is contingent upon CardioGenesis or its customer promptly notifying Baasel in writing of any defect, to operating the relevant product within the limits of related and normal usage in accordance with the OEM Product Documentation, and, upon the written request of Baasel, returning to Baasel any defective goods or parts thereof. If CardioGenesis or its customer, after acceptance of such goods from Baasel, modifies, alters, substitutes or changes any of such goods acquired from Baasel, then Baasel's warranty with respect thereto shall be null and void. CardioGenesis', and its customers', sole and exclusive remedy with respect to any claim relating to the goods shall be limited to the repair/replacement of nonconforming or defective goods. THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING ANY WARRANTY OF FITNESS OF THE GOODS FOR A PARTICULAR PURPOSE. CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK GMBH By: By: ------------------------------ ----------------------------- Name: Name: ---------------------------- --------------------------- Title: Title: --------------------------- --------------------------- Date signed: Date signed: --------------------- -------------------- EX-23.01 3 CONSENT OF COOPERS & LYBRAND, L.L.P. 1 Exhibit 23.01 CONSENT OF COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of CardioGenesis Corporation on Form S-8 (File Numbers 333-04287 and 333-35095) of our reports dated January 30, 1998 on our audits of the consolidated financial statements and financial statement schedule of CardioGenesis Corporation as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which reports are included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. San Jose, California March 30, 1998 EX-27.01 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 6,047 24,469 3,293 50 1,109 36,669 1,529 0 48,240 4,094 0 0 0 12 0 48,240 7,559 7,559 4,991 4,991 23,358 0 (36) (17,971) 0 0 0 0 0 (17,971) (1.49) (1.49)
EX-27.02 5 FINANCIAL DATA SCHEDULE FOR QUARTER ENDED 09/30/97
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 4,702 27,899 1,644 0 1,140 2,026 1,571 0 52,663 3,112 0 0 0 49,551 0 52,663 5,509 5,509 3,448 3,448 16,658 0 0 (12,409) 0 0 0 0 0 (12,409) (1.03) (1.03)
EX-27.03 6 FINANCIAL DATA SCHEDULE FOR QUARTER ENDED 06/30/97
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 6,917 35,462 3,424 (304) 680 1,437 2,180 (588) 57,327 2,923 0 0 0 54,404 0 57,327 4,284 4,284 2,590 2,590 10,493 82 0 (7,307) 0 (7,307) 0 0 0 (7,307) (0.61) (0.61)
EX-27.04 7 FINANCIAL DATA SCHEDULE FOR QUARTER ENDED 03/31/97
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 13,690 39,054 2,639 (280) 1,175 1,129 1,504 0 61,436 3,412 0 0 0 58,204 0 61,436 1,583 1,583 1,131 1,131 4,826 0 0 (3,595) 0 (3,595) 0 0 0 (3,595) (.30) (.30)
EX-27.05 8 FINANCIAL DATA SCHEDULE FOR YEAR ENDED 12/31/96
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 2,080 53,626 2,024 225 1,108 60,226 1,546 0 64,297 2,902 0 0 0 0 0 64,297 3,959 3,959 2,866 2,866 12,179 0 (33) (8,800) 0 0 0 0 0 (8,800) (1.18) (1.18)
EX-27.06 9 FINANCIAL DATA SCHEDULE FOR QUARTER ENDED 09/30/96
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 5,638 55,589 1,748 0 1,124 64,941 0 0 66,434 2,043 0 0 0 0 0 66,434 2,968 2,968 2,032 2,032 8,027 0 0 (5,654) 0 0 0 0 0 (5,654) (.95) (.95)
EX-27.07 10 FINANCIAL DATA SCHEDULE FOR QUARTER ENDED 06/30/96
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 36,568 27,627 1,094 0 1,224 0 0 0 68,332 2,038 0 0 0 0 0 68,332 1,849 1,849 1,206 1,206 4,973 0 0 (3,761) 0 0 0 0 0 (3,761) (1.31) (1.31)
-----END PRIVACY-ENHANCED MESSAGE-----