-----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, AtUYE3Dlkf/aZrVgW1P+VBnAQvkuouPaaYUThItKFGBAIQrYV4gjIbGTrJ+M+iHy GNe/2LliXXGKCGDy+wVCzg== 0000892569-99-002213.txt : 19990816 0000892569-99-002213.hdr.sgml : 19990816 ACCESSION NUMBER: 0000892569-99-002213 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADIANCE MEDICAL SYSTEMS INC /DE/ CENTRAL INDEX KEY: 0001013606 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 680328265 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-72531 FILM NUMBER: 99687821 BUSINESS ADDRESS: STREET 1: 13700 ALTON PARKWAY STREET 2: STE 160 CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 9494579546 MAIL ADDRESS: STREET 1: 13900 ALTON PARKWAY STREET 2: SUITE 122 CITY: IRVINE STATE: CA ZIP: 92718 FORMER COMPANY: FORMER CONFORMED NAME: CARDIOVASCULAR DYNAMICS INC DATE OF NAME CHANGE: 19960506 10-Q 1 FORM 10-Q FOR QUARTER ENDED JUNE 30, 1999 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ______ TO ______ COMMISSION FILE NUMBER 0-28440 RADIANCE MEDICAL SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 68-0328265 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 13700 ALTON PARKWAY, SUITE 160, IRVINE, CALIFORNIA 92618 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (949) 457-9546 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 PRECEEDING 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 [ ] ON AUGUST 4, 1999, THE REGISTRANT HAD OUTSTANDING APPROXIMATELY 11,734,000 SHARES OF COMMON STOCK (INCLUDING 686,000 OF TREASURY SHARES) OF $.001 PAR VALUE, WHICH IS THE REGISTRANT'S ONLY CLASS OF COMMON STOCK. 2 RADIANCE MEDICAL SYSTEMS, INC. FORM 10-Q JUNE 30, 1999 TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1999 AND DECEMBER 31, 1998 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 PART II. OTHER INFORMATION ITEMS 1 THROUGH 6. 21 SIGNATURES 23 EXHIBIT INDEX 24
3 RADIANCE MEDICAL SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share and per share amounts)
June 30, December 31, 1999 1998 -------- ------------ ASSETS Current assets: Cash and equivalents $ 1,201 $ 1,437 Marketable securities available-for-sale 22,872 23,375 Trade accounts receivable, net 1,228 2,413 Inventories 890 1,623 Other current assets 465 593 -------- -------- Total current assets 26,656 29,441 Property and equipment, net 1,275 1,532 Notes receivable from officers 119 116 Goodwill 4,586 2,133 Other assets 40 559 -------- -------- Total Assets $ 32,676 $ 33,781 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 3,688 $ 4,286 Deferred revenue 1,626 250 -------- -------- Total current liabilities 5,314 4,536 Deferred revenue 500 -- STOCKHOLDERS' EQUITY Convertible preferred stock, $.001 par value; 7,560,000 shares authorized, no shares issued and outstanding -- -- Common stock, $.001 par value; 30,000,000 authorized, 11,690,000 shares and 9,578,000 shares outstanding as of June 30, 1999 and December 31, 1998, respectively 12 10 Additional paid-in capital 68,436 60,664 Deferred compensation (292) (409) Accumulated deficit (37,911) (27,807) Treasury stock at cost, 686,000 common shares as of June 30, 1999 and December 31, 1998, respectively (3,675) (3,675) Accumulated other comprehensive income 292 462 -------- -------- Total stockholders' equity 26,862 29,245 -------- -------- Total Liabilities and Stockholders' Equity $ 32,676 $ 33,781 ======== ========
See accompanying notes 3 4 RADIANCE MEDICAL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts)
Three Months Ended June 30 Six Months Ended June 30, -------------------------- ------------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Revenue: Sales $ 1,144 $ 2,457 $ 2,337 $ 4,923 License revenue 661 400 1,224 400 -------- -------- -------- -------- Total revenues 1,805 2,857 3,561 5,323 Cost of sales 1,053 1,295 1,900 2,647 -------- -------- -------- -------- Gross profit 752 1,562 1,661 2,676 Operating expenses: Charge for acquired in-process research and development -- -- 4,194 -- Research, development and clinical 2,110 1,976 4,157 3,459 Marketing and sales 461 1,199 1,228 2,563 General and administrative 674 601 1,444 1,190 Goodwill impairment charge 1,451 -- 1,451 -- -------- -------- -------- -------- Total operating expenses 4,696 3,776 12,474 7,212 -------- -------- -------- -------- Loss from operations (3,944) (2,214) (10,813) (4,536) Other income (expense): Interest income 340 387 655 807 Gain (loss) on disposal of assets (97) -- 131 -- Other expense (55) (23) (77) (95) -------- -------- -------- -------- Total other income 188 364 709 712 -------- -------- -------- -------- Net loss $ (3,756) $ (1,850) $(10,104) $ (3,824) ======== ======== ======== ======== Basic and diluted net loss per share $ (0.32) $ (0.21) $ (0.88) $ (0.43) ======== ======== ======== ======== Shares used in computing basic and diluted net loss per share 11,682 8,946 11,474 8,858 ======== ======== ======== ========
See accompanying notes 4 5 RADIANCE MEDICAL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six months ended June 30, ------------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net loss $(10,104) $ (3,824) Adjustments to reconcile net loss to net cash used in operating activities: Goodwill impairment charge 1,451 -- Depreciation and amortization 727 330 Amortization of deferred compensation 68 116 Bad debt expense 37 60 Foreign currency exchange loss 140 -- Charge for acquired in-process research and development 4,194 -- Gain on sale of assets (131) -- Changes, net of effects from purchase of Radiance: Trade accounts receivable, net 1,148 302 Inventories 29 270 Other assets 147 (58) Accounts payable and accrued expenses (1,132) (423) Deferred revenue 1,876 1,600 -------- -------- Net cash used in operating activities (1,550) (1,627) Cash flows provided by investing activities: Purchase of available-for-sale securities (15,482) (16,722) Sales of available-for-sale securities 15,877 17,605 Capital expenditures for property and equipment and other assets (112) (215) Sale of Vascular Access business unit, net 1,070 -- Purchase of Radiance, net of cash acquired (259) -- -------- -------- Net cash provided by investing activities 1,094 668 Cash flows provided by (used in) financing activities: Proceeds from sale of common stock 89 66 Proceeds from exercise of common stock options 67 88 Proceeds from repayment of affiliate debt 64 241 Purchase of treasury stock -- (1,275) -------- -------- Net cash provided by (used in) financing activities 220 (880) -------- -------- Net decrease in cash and equivalents (236) (1,839) Cash and equivalents, beginning of period 1,437 6,141 -------- -------- Cash and equivalents, end of period $ 1,201 $ 4,302 ======== ======== Supplemental disclosure of non-cash investing activities: The Company acquired the remaining common stock of RMS and, in connection with the transaction, the following liabilities were assumed: Fair Value of assets acquired $ 9,308 $ -- Cash paid (692) -- Common stock and options issued (7,569) -- -------- -------- Liabilities assumed $ 1,047 $ -- ======== ========
See accompanying notes 5 6 RADIANCE MEDICAL SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) June 30, 1999 1. Basis of Presentation Radiance Medical Systems, Inc. (formerly Cardiovascular Dynamics, Inc. and herein after referred to "Radiance" or the "Company") was incorporated in March 1992 in the State of California and reincorporated in Delaware in 1993. The Company and its subsidiaries design, develop, manufacture and market proprietary medical devices for the prevention of the recurrence of atherosclerosis, including the research and development of radiation therapy products. Accordingly, the Company operates in a single business segment. The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 1999 are not necessarily indicative of results that may be expected for the year ending December 31, 1999 or any other period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K as amended for the year ended December 31, 1998. 2. Net Loss Per Share Net loss per common share is computed using the weighted average number of common shares outstanding during the periods presented. Options to purchase shares of the Company's common stock granted under the Company's stock option plan have been excluded from the calculation of diluted earnings per share as they are anti-dilutive. 3. Inventories Inventories are stated at the lower of cost, determined on an average cost basis, or market value. Inventories consist of the following: 6 7 RADIANCE MEDICAL SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (Continued)
June 30, 1999 December 31, 1998 ------------- ----------------- Raw materials $ 437 $ 630 Work-in-process 136 87 Finished goods 317 906 ---------- ---------- $ 890 $ 1,623 ========== ==========
4. Deferred Revenue Deferred License Revenue In June of 1998, the Company signed a technology license agreement with Guidant Corporation, an international interventional cardiology products company, to grant them the ability to manufacture and distribute stent delivery products using the Company's focus technology. Under the Agreement, the Company is entitled to receive milestone payments based upon the transfer of the technology to Guidant, and royalty payments based upon the sale of products using the focus technology. Two milestone payments for $1,000 were received in the first six months of 1999. Based upon the completion of certain milestones, the Company recognized $562 and $1,124 in license revenue in the second quarter and first six months, respectively, of 1999 and will recognize the remaining $1,126 of deferred license revenue in future periods. Deferred Distributor Fees In June of 1999, the Company granted Cosmotec Co., Ltd. Of Japan distribution rights to market its vascular radiation therapy products in Japan. Radiance received $1,000 as an upfront cash payment and will recognize the income over the next two years. 5. Comprehensive Loss Statement of Financial Accounting Standards No. 130 requires disclosure of the total non-stockholder changes in equity resulting from revenue, expense, and gains and losses, including those that do not affect retained earnings. The Company's comprehensive loss included the following: 7 8 RADIANCE MEDICAL SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (Continued)
Three Months Six Months Ended June 30, Ended June 30, ------------------------- ------------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Net loss $ (3,756) $ (1,850) $(10,104) $ (3,824) Unrealized gain (loss) on available-for-sale securities (7) (66) (108) 9 Foreign currency translation adjustment 2 43 (62) 10 -------- -------- -------- -------- Comprehensive loss $ (3,761) $ (1,873) $(10,274) $ (3,805) ======== ======== ======== ========
6. Recent Accounting Pronouncements For the year beginning January 1, 1999, the Company adopted SOP 98-1, Accounting for the Costs of Computer Software Developed for or Obtained for Internal Use. The SOP requires the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The Company currently expenses such costs, and it anticipates that the impact of the SOP will not be material on its results of operations or financial position for the foreseeable future as amounts expended to develop or obtain software have not been and are not expected to be material. 7. Sale of Assets and Acquisition Sale of Assets of Vascular Access Business Unit In January 1999, the Company sold substantially all of the properties and assets used exclusively in its Vascular Access Business Unit to Escalon Medical Corporation ("Escalon"). The Company received an initial payment of $1,104 for assets transferred, including inventory ($704) and property and equipment ($146). The Company will also receive an additional $1,000 upon the completion of the transfer of the assets and technology and also is entitled to receive royalty payments upon the sale of products for a five-year period. In July, the Company extended its original commitment to manufacture certain vascular access products on a "cost plus" basis until December 1999. 8 9 RADIANCE MEDICAL SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (Continued) Acquisition of RMS In January 1999, Cardiovascular Dynamics, Inc. (now named Radiance Medical Systems, Inc.) ("Radiance," or "the Company") acquired through a merger all of the capital stock which it did not own of the (former) Radiance Medical Systems, Inc. ("RMS"). Pursuant to the Merger, the Company paid former stockholders of RMS $3.00 for each share of RMS preferred stock and $2.00 for each share of RMS common stock, for a total consideration of approximately $7,033, excluding the value of Radiance common stock options to be provided to RMS optionholders in exchange for their RMS common stock options. The consideration was paid by delivery of an aggregate of 1,900,157 shares of Company Common Stock, and $692 in cash to certain RMS stockholders who elected cash. Options for 546,250 shares of RMS common stock accelerated and vested immediately prior to the completion of the Merger. Of these, 1,250 were exercised, and holders received the same consideration for their shares of RMS Common Stock as other holders of RMS Common Stock. The options not exercised prior to the completion of the Merger were assumed by the Company and converted into options at the same exercise price to purchase an aggregate of 317,775 shares of the Company's Common Stock. In addition, former RMS share and option holders may receive product development Milestone payments of $2.00 for each share of Preferred Stock and $3.00 for each share of Common Stock. The milestone payments may be increased up to 30%, or reduced or eliminated if the milestones are reached earlier or later, respectively, than the milestone target dates. The milestones represent important steps in the United States Food and Drug Administration and European approval process that the Company believes are critical to bringing the Company's technology to the marketplace. Proforma combined results of the Company and RMS for the three month and six month periods ended June 30, 1998, on the basis that the acquisition had taken place at the beginning of 1998, would have reported the following:
Three Months Six Months Ended June 30, Ended June 30, 1998 1998 -------------- -------------- Pro forma Revenues $ 2,857 $ 5,323 Pro forma Net Loss (2,427) (4,803) Pro forma Net Loss Per Share (0.22) (0.43)
9 10 RADIANCE MEDICAL SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (Continued) Not reflected in the above pro forma results is the charge of $4,194 for acquired in-process research and development. In addition to the aforementioned charge, the Company capitalized intangible assets of $3,354 and $1,301 for developed research and development and employment contracts, respectively, as part of the cost for the remaining common stock of RMS, as described more fully above. 8. Goodwill Impairment Charge In the second quarter of 1999, due to continued operating losses, it was determined that the goodwill associated with the German sales subsidiary would not be realizable in the future, in spite of operational changes made earlier in the year. Therefore, the Company recorded an impairment charge for the full amount of the goodwill related to its German subsidiary in the amount of $1.5 million. 10 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Radiance cautions stockholders that, in addition to the historical financial information included herein, this Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are based on management's beliefs, as well as on assumptions made by and information currently available to management. All statements other than statements of historical fact included in this document, including without limitation, certain statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," and statements located elsewhere herein regarding Radiance's financial position and business strategy, may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "believes," "may," "will," "expects," "intends," "estimates," "anticipates," "plans," "seeks," or "continues," or the negative thereof or variations thereon or similar terminology. Such forward-looking statements involve known and unknown risks, including, but not limited to, economic and market conditions, the regulatory environment in which Radiance operates, competitive activities or other business conditions. There can be no assurance that Radiance's actual results, performance or achievements will not differ materially from any future results, performance or achievements expressed or implied from such forward-looking statements. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as in the Company's Annual Report on Form 10-K as amended for the year ended December 31, 1998, including but not limited to those discussed in "Item 7--Risk Factors." All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these Cautionary Statements. Overview Since its inception in 1992, Radiance Medical Systems, Inc. has engaged primarily in the research and development, manufacturing and marketing of proprietary devices for the prevention of the recurrence of atherosclerotic blockages following the interventional treatment of atherosclerosis. Radiance's primary product under development is the RDX Catheter, a balloon catheter-based delivery system designed to deliver radioactive materials to the area of the artery that has been treated with conventional interventional therapy such as Percutaneous Transluminal Coronary Angioplasty ("PTCA"), atherectomy and/or stent deployment. 11 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company is the result of an acquisition effected by the merger of the (former) Radiance Medical Systems, Inc. ("RMS") with and into Cardiovascular Dynamics, Inc. (now named Radiance Medical Systems, Inc.) in January 1999. RMS originally was formed by the Company as a separate entity to focus on the development of radiation therapy technology for the treatment of cardiovascular disease, and to obtain financing for such development from sources other than the Company. As a result of the merger, the Company acquired all of the shares of RMS that it did not own. The Company's financial results will be affected in the future by several factors, including the timing of any FDA approval to market the Company's products, FDA approval of IDE sites and the number of patients permitted to be treated, future changes in government regulations and third party reimbursement policies applicable to the Company's products, the progress of competing technologies and the ability of the Company to develop the manufacturing and marketing capabilities necessary to support commercial sales. As a result of these factors, revenue levels, gross margins and operating results may fluctuate materially from quarter to quarter. On July 15, 1996, the Company entered into co-distribution agreements with Medtronic, providing for the co-distribution of the Company's FACT, CAT and ARC balloon angioplasty catheters. Under the terms of these agreements, Medtronic was to purchase a minimum number of angioplasty catheters manufactured by the Company for distribution worldwide for a period of up to three years. Specific products to be distributed by Medtronic would differ in individual country markets. The initial term of the Medtronic agreements was for a period of three years from the date of first delivery of a product. In May of 1997, Medtronic advised the Company of its election to not make minimum purchases of product for the second year of the agreement. In June 1997, Medtronic informed CVD that it would not fulfill its commitment for the first year of the agreement and that it did not believe it was required to fulfill such commitment. This dispute adversely affected the Company's financial results for the second quarter 1998. In June 1998, the Company signed a technology license agreement with Guidant Corporation, an international interventional cardiology products company, to grant them the ability to manufacture and distribute products using the Company's focus technology. Under the terms of the Agreement, the Company is entitled to receive certain milestone payments based upon the transfer of the technological knowledge 12 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) to Guidant, and royalty payments based upon the sale of products using focus technology by Guidant. See Note 4 to the Condensed Consolidated Financial Statements. In January 1999, the Company sold substantially all of the properties and assets used exclusively in its Vascular Access Business Unit to Escalon Medical Corporation ("Escalon"). The Company received an initial payment of $1.1 million for actual inventory and equipment transferred, will receive an additional $1.0 million upon the completion of the transfer of the assets and technology, and also is entitled to receive royalty payments upon the sale of products for a five-year period. In July of 1999, the Company agreed to extend its commitment to Escalon to manufacture certain vascular access products until December of 1999. In January 1999, Cardiovascular Dynamics, Inc. (now named Radiance Medical Systems, Inc.) ("Radiance," or "the Company") acquired through a merger all of the capital stock which it did not own of the (former) Radiance Medical Systems, Inc. ("RMS"). Pursuant to the Merger, The Company paid former stockholders of RMS $3.00 for each share of RMS preferred stock and $2.00 for each share of RMS common stock, for a total consideration of approximately $7.0 million, excluding the value of Radiance common stock options to be provided to RMS optionholders in exchange for their RMS common stock options. The consideration was paid by delivery of an aggregate of 1,900,157 shares of Company Common Stock, and $0.7 million in cash to certain RMS stockholders who elected cash. Options for 546,250 shares of RMS common stock accelerated and vested immediately prior to the completion of the Merger. Of these, 1,250 were exercised, and holders received the same consideration for their shares of RMS Common Stock as other holders of RMS Common Stock. The options not exercised prior to the completion of the Merger were assumed by the Company and converted into options at the same exercise price to purchase an aggregate of 317,775 shares of the Company's Common Stock. In addition, Radiance share and option holders may receive product development milestone payments of $2.00 for each share of Preferred Stock and $3.00 for each share of Common Stock. The milestone payments may be increased up to 30%, or reduced or eliminated if the milestones are reached earlier or later, respectively, than the milestone target dates. The milestones represent important steps in the United States Food and Drug Administration and European approval process that the Company believes are critical to bringing the Company's technology to the marketplace. See Note 7 to the Condensed Consolidated Financial Statements. In June 1999, the Company granted Cosmotec Co., Ltd. ("Cosmotec") of Japan distribution rights to market its vascular radiation therapy products in Japan. 13 14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Radiance received $1.0 million as an upfront cash payment and will recognize the income over the next two years. Radiance will also receive $1.0 million from Cosmotec for a debenture issuable in June 2000 and convertible into Radiance common stock over the subsequent three-year period at a conversion price of $7 per share. Results of Operations Second quarter of 1999 compared to the same period in 1998 Sales Revenue. Sales Revenue for the second quarter of 1999 decreased 53% to $1.1 million compared to $2.5 million for the second quarter of 1998. The decrease resulted primarily from the sale of the Vascular Access business unit in January 1999 and from lower sales in Asia in the second quarter of 1999 compared with the same period of 1998. Management anticipates that product sales revenue will continue to be materially lower in subsequent periods of 1999 compared with the same periods of 1998 due to the sale of the Vascular Access business unit and the license of technology to Guidant. License Revenue. $0.7 million and $0.4 million in license revenue was recognized in the second quarter of 1999 and 1998, respectively. The revenue primarily resulted from the technology license agreement with Guidant and was recognized on the basis of the completion of certain milestones. Cost of Sales. The cost of sales for the second quarter of 1999 increased to 58% compared to 45% of revenues for the same period of 1998. The increase is attributable primarily due to the sale of Vascular Access products on a "cost plus" basis to the purchaser of the business unit, Escalon, and a switch from direct to distributor sales in Germany. Management anticipates that margins will continue to be negatively impacted by the aforementioned factors in the subsequent periods of 1999. Research and Development. Research and development expenses were $2.1 million and $2.0 million in the quarters ended June 30, 1999 and 1998, respectively. During the quarter, the Company primarily directed its development efforts on the development of the RDX catheter and expects the overall expenditures to increase in the third quarter and in the remainder of 1999 if the technology proves to be suitable for clinical trials. However, at any time during the development process, 14 15 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) work on the technology could be halted or restarted under a different design, for example, unless the efficacy of the design and technology is proven at each stage of its development. There is no certainty that the technology will ever reach the market or produce material sales due to many risks, including competitor development of superior technologies or products, an unrecoverable product cost, lack of product reimbursement, the uncertainty of regulatory approval and other factors mentioned below concerning the risks associated with Radiance's operations within this market. Marketing and Sales. Marketing and sales expenses decreased 62% to $0.5 million, down $0.7 million in the quarter ended June 30, 1999, compared to $1.2 million in the same period of 1998. This decrease primarily reflects reductions in the Company's domestic and foreign sales force and related expenses. General and Administrative. General and administrative expenses increased by 12% to $0.7 million for the quarter ended June 30, 1999, from $0.6 million for the same quarter in 1998. The increase was due primarily to legal expenses associated with a technology license agreement. Goodwill Impairment Charge. In the second quarter of 1999, due to continued operating losses, it was determined that the goodwill associated with the German sales subsidiary would not be realizable in the future, in spite of operational changes made earlier in the year. Therefore, the Company recorded an impairment charge for the full amount of the goodwill of $1.5 million. Other income (expense). Other income (expense) decreased 48% to $0.2 million in the second quarter of 1999 from $0.4 million for the same period of 1998. The decrease was primarily due to a $0.1 million loss on the disposal of assets of the Vascular Access business unit in the second quarter of 1999. First six months of 1999 compared to the same period of 1998 Sales Revenue. Revenue for the first six months of 1999 decreased 53% to $2.3 million compared to $4.9 million for the same period of 1998. The decrease resulted primarily from lower sales in Asia in the first six months of 1999 compared with the same period of 1998 and the sale of the Vascular Access business unit in January 1999. License Revenue. $1.2 million and $0.4 million in license revenue was recognized in the first six months of 1999 and 1998, respectively. The revenue 15 16 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) primarily resulted from the technology license agreement with Guidant and was recognized on the basis of the completion of certain milestones. Cost of Sales. The cost of sales for the first six months of 1999 increased to 53% compared to 50% of revenues for the same period of 1998. The increase is attributable primarily to the sale of Vascular Access products on a "cost plus" basis to the purchaser of the business unit, Escalon, and a switch from direct to distributor sales in Germany, offset somewhat by an increase in license revenue that had no associated cost of sales. Charge for Acquired In Process Research and Development. The Company incurred a charge of $4.2 million in the first quarter of 1999 in connection with the purchase of the Common Stock of RMS not previously owned. The excess of the purchase price of RMS over the fair market value of net assets was allocated to acquired in-process research and development, developed research and development and other intangibles in accordance with an independent appraisal. Research and Development. Research, development and clinical expenses increased by 20% to $4.2 million in the six-month period ended June 30, 1999 from $3.5 million in the six-month period ended June 30, 1998. The primary reason for this increase was additional spending on development of the Company's RDX catheter and continued spending on its SEAL technology stent products. Marketing and Sales. Marketing and sales expenses declined 52% to $1.2 million in the six-month period ended June 30, 1999, from $2.6 million in the six-month period ended June 30, 1998. This decrease primarily reflects reductions in the Company's domestic and foreign sales force and related expenses. General and Administrative. General and administrative expenses increased by 21% to $1.4 million for the six months ended June 30, 1999 from $1.2 million for the same period in 1998. The increase was primarily due to legal and other expenses associated with a technology license agreement and Japanese distributor agreement in the first six months of 1999. Goodwill Impairment Charge. In the second quarter of 1999, the Company recorded an impairment charge for the full amount of the goodwill, related to its German subsidiary, of $1.5 million. See additional comments, above, for the second quarter results comparison for further information. 16 17 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Other income (expense). Other income, in total, remained at $0.7 million in the first six months of 1999 compared with that for the same period of 1998. A $0.2 million reduction in interest income in the first six months of 1999, compared with the same period of 1998, was offset by a $0.1 million gain on the disposal of assets of the Vascular Access business unit. Radiance has experienced an operating loss for each of the last three years and expects to continue to incur operating losses through at least 2000. Radiance's results of operation have varied significantly from quarter to quarter. Quarterly operating results depend upon several factors, including the timing and amount of expenses associated with development of the RDX catheter, the conduct of clinical trials and the timing of regulatory approvals, new product introductions both in the United States and internationally, the mix between domestic and export sales, variations in foreign exchange rates, changes in third-party payors' reimbursement policies and healthcare reform. The Company does not operate with a significant backlog of customer orders, and therefore revenues in any quarter are significantly dependent on orders received within that quarter. In addition, the Company cannot predict ordering rates by distributors, some of whom place infrequent stocking orders. The Company's expenses are relatively fixed and difficult to adjust in response to fluctuating revenues. As a result of these and other factors, the Company expects to continue to experience significant fluctuations in quarterly operating results, and there can be no assurance that the Company will be able to achieve or maintain profitability in the future. Liquidity and Capital Resources Since its inception, the Company has financed its operations primarily through the sale of its equity securities, advances from Endosonics (Radiance's former parent company), licensing its technologies and through international product distribution agreements. Prior to the Company's initial public offering, the Company had raised an aggregate of approximately $11.4 million from the private sales of preferred and common stock and $2.7 million in working capital advances from Endosonics Corporation, which was repaid to Endosonics during the third quarter of 1996. In the third quarter of 1996, the Company closed its initial public offering of common stock, resulting in net proceeds of approximately $42.8 million after deducting underwriting discounts and commissions and other expenses of the offering. For the quarters ended June 30, 1999 and 1998, the Company's net cash used in operating activities was $1.6 million. 17 18 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) On June 30, 1999, the Company had cash, cash equivalents and marketable securities available for sale of $24.1 million. The Company expects to incur substantial costs related to, among other things, clinical testing, product development, marketing and sales expenses, and to utilize increased levels of working capital prior to achieving positive cash flow from operations. The Company anticipates that its existing capital resources will be sufficient to fund its operations through September 30, 2000. Radiance's future capital requirements will depend on many factors, including its research and development programs, the scope and results of clinical trials, the regulatory approval process, the costs involved in intellectual property rights enforcement or litigation, competitive products, the establishment of manufacturing capacity, the establishment of sales and marketing capabilities, and the establishment of collaborative relationships with other parties. The Company may need to raise funds through additional financings, including private or public equity offerings and collaborative arrangements with existing or new corporate partners. There can be no assurance that funds will be raised on favorable terms, or at all. If adequate funds are not available, the Company may be required to delay, scale back or eliminate one or more of its development programs or obtain funds through arrangements with collaborative partners or others that may require the Company to grant rights to certain technologies or products that the Company would not otherwise grant. Trade accounts receivable, net, decreased 49% to $1.2 million as of June 30, 1999, compared with $2.4 million at December 31, 1998. The decrease was primarily due to lower sales in Asia and the sale of the Vascular Access business unit in the first quarter of 1999. Inventories decreased 45% to $0.9 million as of June 30, 1999, compared with $1.6 million at December 31, 1998. This decrease primarily resulted from the sale of the inventory of the Vascular Access business unit totaling $0.7 million in the first quarter of 1999. Goodwill and other intangibles increased 115% to $4.6 million at June 30, 1999, compared with $2.1 million at the end of 1998 due to the recognition of $4.7 million in completed research and development and employment contracts obtained in the acquisition of RMS in the first quarter of 1999, offset by a $1.5 million goodwill impairment charge relating to the Company's German subsidiary. Accounts payable and accrued expenses decreased 14% to $3.7 million at March 31, 1999, compared with $4.3 million at the end of 1998 primarily due to the payment of annual incentive compensation and reorganization costs. 18 19 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Deferred revenue increased 750% to $2.1 million, including both the current and non-current amounts, at June 30, 1999 from $0.3 million at the end of 1998. The increase was due to the receipt of milestone payments of $2.0 million under the Guidant technology license agreement, offset by the recognition of $1.1 million in license revenue during the first six months of 1999, and the receipt of deferred distributor fees of $1.0 million from Cosmotec, as described above. See Note 4 to the Condensed Consolidated Financial Statements. Additional paid-in capital increased 13% to $68.4 million at June 30, 1999 from $60.7 million at the end of 1998. This increase was due to the Company's acquisition of all of the capital stock that it did not own of RMS through the issuance of the Company's common stock and options with a value of approximately $7.6 million and the payment of cash of approximately $0.7 million. See Note 7 to the Condensed Consolidated Financial Statements. Year 2000 Issue The Company has completed an assessment and upgrade of its hardware and software so that its computer systems will function properly on and after the Year 2000. Approximately $20,000 for the Year 2000 upgrade has been spent. We are contacting our vendors and customers to assess the impact the Year 2000 issue will have on the supply and service relationships we have with our vendors and customers. Though we cannot be assured of the results of the enhancements and upgrades, based upon our assessment of our systems and software, we believe that the system enhancements and upgrades should prevent related problems that could affect our ability to supply or service our customers. We anticipate completing our assessment of significant vendor and customer Year 2000 issues by the end of the third quarter of 1999 and will formulate a contingency plan based upon what we believe are the "worst-case" scenarios. However, depending upon the response level by customers and vendors and the information received from them, this assessment may not be completed as anticipated or may be inadequate to assess or address the related risks. We cannot be certain that all of our systems or software will be Year 2000 ready nor have any assurance that our vendors' or customers' systems and software will be Year 2000 ready. To prepare for any vendor problems, we will try to identify alternative supply sources, but there is no guaranty that the alternative sources will be Year 2000 ready or will be able to provide the same level of service and supply as our current vendors. If our customers' systems and software are not Year 2000 ready, any operational problems that may result could cause slowed or 19 20 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) lower demand of our products. Even if our goal is to be Year 2000 ready, there can be no assurance that our plans will be sufficient to address any third party failures, and any unresolved or undetected internal or external Year 2000 issues could materially adversely affect our business, financial condition or results of operations. 20 21 PART II. OTHER INFORMATION Items 1, 3 and 5. Not applicable Item 2. Changes in Securities and Use of Proceeds c) Recent Sales of Unregistered Securities Although the Company did not issue any unregistered securities during the quarter ended June 30, 1999, the Company entered into joint venture and distribution agreements by and among the Company and Globe Co., Ltd. And Cosmotec Co., Ltd., dated June 15, 1999. Pursuant to the agreements, Cosmotec agreed to purchase $1 million convertible debenture from the Company to be issued June 15, 2000. The debenture is convertible into shares of the Company's common stock for the face amount of the debenture plus accrued interest, at an initial conversion price of $7.00 per share. The securities to be issued by the Company pursuant to this transaction will be issued without registration under the Securities Act of 1933, as amended, in reliance upon the exemptions from registration provided under Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder by the Securities and Exchange Commission. d) Use of Proceeds The Company has used approximately $2.7 million of the net proceeds from its initial public offering on June 19, 1996, SEC file number 333-04560, the IPO for repayment of certain outstanding indebtedness to Endosonics, Inc., a holder of in excess of ten percent of the Common Stock of the Company. From the date of the IPO until March 31, 1999, in the normal course of business, the Company has paid salaries and bonuses in excess of $0.1 million each to nine present and former officers of the Company and used $11.9 million for working capital. The Company has also used approximately $1.9 million of the net proceeds for machinery and equipment and leasehold improvement purchases. Through the end of the second quarter of 1999, the Company used approximately $3.7 million to purchase 686,000 shares of the Company's Common Stock on the open market. In September of 1998, the Company exercised a Warrant to acquire 1,500,000 Series B Preferred Stock of Radiance Medical Systems, Inc. for $1.5 million. In January 1999, the Company paid $0.7 million to stockholders of RMS who elected to receive cash for their RMS common stock and $0.6 million in costs relating to the acquisition of the remaining common stock of RMS not held by the Company. At June 30, 1999, approximately $23.7 million was held in temporary investments, of which approximately $8.2 million was invested in U.S. Agency debt securities, and $15.5 million was invested in corporate debt securities. 21 22 Item 4. Submission of Matters to a Vote of Security-Holders The Company's Annual Meeting of Stockholders was held on June 9, 1999. The following action was taken at this meeting:
Abstentions and Broker Non- Affirmative Negative Votes Votes Votes Votes Withheld ----------- ----------- --------- ------- Election of Directors: Maurice Buchbinder 7,880,147 48,758 Jeffrey F. O'Donnell 7,825,133 103,772 Gerard Von Hoffmann 7,885,883 43,022
Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed herewith: Exhibit 4.2 Form of $1,000,000 5% Convertible Debenture to be issued by the Company to Cosmotec Co., Ltd. On June 15, 2000. Exhibit 10.31 Joint Venture Agreement dated June 15, 1999 between the Company and Globe Co., Ltd. The following exhibits to the Joint Venture Agreement have not been filed: Supply Agreement dated June 15, 1999 between the Company and Radiatec, Inc.; and, International Distributor Agreement dated June 15, 1999 between Radiatec, Inc. and Globe Co., Ltd.. The Registrant agrees to furnish supplementally a copy of such omitted exhibits to the Commission upon request. Exhibit 27 Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter. 22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by undersigned thereto duly authorized. RADIANCE MEDICAL SYSTEMS, INC. Date: August 12, 1999 /s/ Michael R. Henson --------------------------------------- Chief Executive Officer (Principal Executive Officer) Date: August 12, 1999 /s/ Stephen R. Kroll ---------------------------------------- Vice President-Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 23 24 EXHIBIT INDEX 4.2 Form of $1,000,000 5% Convertible Debenture to be issued by the Company to Cosmotec Co., Ltd. On June 15, 2000. 10.31 Joint Venture Agreement dated June 15, 1999 between the Company and Globe Co., Ltd. The following exhibits to the Joint Venture Agreement have not been filed: Supply Agreement dated June 15, 1999 between the Company and Radiatec, Inc.; and, International Distributor Agreement dated June 15, 1999 between Radiatec, Inc. and Globe Co., Ltd.. The Registrant agrees to furnish supplementally a copy of such omitted exhibits to the Commission upon request. 27 Financial Data Schedule - ------------------------- 24 EX-4.2 2 FORM OF $1,000,000 5% CONVERTIBLE DEBENTURE 1 EXHIBIT 4.2 THE DEBENTURE REPRESENTED BY THIS CERTIFICATE AND THE COMMON STOCK UNDERLYING SUCH DEBENTURE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF (a) AN EFFECTIVE REGISTRATION STATEMENT FOR THE DEBENTURE AND/OR COMMON STOCK UNDER THE SECURITIES ACT OF 1933 OR (b) AN OPINION REASONABLY SATISFACTORY TO RADIANCE MEDICAL SYSTEMS, INC. FROM COUNSEL FOR RADIANCE MEDICAL SYSTEMS, INC., OR FROM COUNSEL FOR THE PROPOSED TRANSFEROR REASONABLY SATISFACTORY TO RADIANCE MEDICAL SYSTEMS, INC. TO THE EFFECT THAT THE TRANSFER MAY BE EFFECTED WITHOUT SUCH REGISTRATION. RADIANCE MEDICAL SYSTEMS, INC. 5% CONVERTIBLE DEBENTURE JUNE 15, 2000 NO. 0001 $1,000,000.00 RADIANCE MEDICAL SYSTEMS, INC., a Delaware corporation (the "Company"), for value received, hereby promises to pay to the order of Cosmotec Co. Ltd. ("Holder") or its registered assigns, the sum of One Million Dollars ($1,000,000), or such lesser amount as shall then equal the outstanding principal amount hereof and any unpaid accrued interest hereon, as set forth below, on June 15, 2003. This Debenture has been issued pursuant and subject to that certain International Distributor Agreement, dated June 15, 1999, by and among the Company and the Holder, as the same may from time to time be amended, modified or supplemented (the "Distributor Agreement"). The holder of this Debenture is subject to certain restrictions set forth in the Distributor Agreement and shall be entitled to certain rights and privileges set forth in the Distributor Agreement. This Debenture is the Debenture attached as Exhibit B and referred to in Section 2(b) of the International Distributor Agreement dated June 15, 1999, by and among Holder, the Company and the joint venture under the Joint Venture. The following is a statement of the rights of the Holder of this Debenture and the conditions to which this Debenture is subject, and to which the Holder hereof, by the acceptance of this Debenture, agrees: 1. Definitions. As used in this Debenture, the following terms, unless the context otherwise requires, have the following meanings: (a) "Common Stock" means the Common Stock, $0.001 par value per share, of the Company. 1 2 (b) "Company" includes any corporation which shall succeed to or assume the obligations of the Company under this Debenture. (c) "Debenture Shares" means the Common Stock issuable or issued upon conversion of this Debenture. (d) "Holder," when the context refers to a holder of this Debenture, shall mean any person who shall at the time be the registered holder of this Debenture. 2. Interest. (a) Interest Rate. The unpaid principal balance of this Debenture shall bear simple interest at a rate equal to 5% per annum from the date hereof until paid in full. (b) Default Rate. Notwithstanding the foregoing provisions of this Section 2, but subject to applicable law, any overdue principal of and overdue interest on this Debenture shall bear interest, payable on demand in immediately available funds, for each day from the date payment thereof was due to the date of actual payment, at the rate of eight percent (8%) per annum. (c) Maximum Rate Permitted by Law. In the event that any interest rate(s) provided for in this Section 2 shall be determined to be unlawful, such interest rate(s) shall be computed at the highest rate permitted by applicable law. Any payment by the Company of any interest amount in excess of that permitted by law shall be considered a mistake, with the excess being applied to the principal amount of this Debenture without prepayment premium or penalty. 3. Voluntary Prepayment. The Company shall have the right at any time to prepay, in whole or in part this Debenture, by tender to the Holder of funds by check or wire transfer of a portion or all of the outstanding principal and accrued interest. In the event that less than all the principal and accrued interest shall be paid, such payment shall be allocated first to accrued interest and any remaining balance to principal. 4. Mandatory Prepayment Upon Liquidation of the Company. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of capital stock of the Company by reason of their ownership thereof, all outstanding principal and unpaid accrued interest on this Debenture shall be immediately due and payable. 5. Conversion. (a) The Holder has the right at the Holder's option, at any time prior to payment in full of the principal balance of this Debenture, to convert this Debenture, in whole or in part, into fully paid and nonassessable shares of Common Stock of the Company (the "Common Stock"). The number of shares of Common Stock into which this Debenture may be converted ("Conversion Shares") shall be determined by dividing the outstanding principal balance hereof to be converted by the Conversion Price (defined below) in effect at the time of conversion. The initial conversion price shall be $7.00 (as adjusted as hereinafter provided, the "Conversion Price"). (b) The Company shall pay all interest on the principal amount of this Debenture surrendered for conversion accrued to the date of conversion. (c) In order to convert this Debenture, the Holder shall surrender this Debenture at the office of the Company and shall give written notice by mail, postage prepaid, to the Company 2 3 of the election to convert this Debenture pursuant hereto and shall state therein the principal amount hereof to be converted and the name or names in which the certificate or certificates for the shares of Common Stock are to be issued. The Company shall, as soon as practicable thereafter, issue and deliver to the Holder a certificate or certificates for the number of shares of Common Stock to which the holder shall be entitled upon which conversion, and a new Debenture, evidencing the principal and interest which is not converted. The conversion shall be deemed to have been made immediately prior to the close of business on the date of the surrender of the Debenture. The person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. 6. Adjustments. The Conversion Price and the number of shares of Common Stock issuable upon the conversion of this Debenture shall be subject to adjustment from time to time as follows: (a) Dividend, Subdivision, Combination or Reclassification of Common Stock. If the Company shall, at any time after the issuance of this Debenture, or from time to time thereafter, (i) declare a dividend on the Common Stock payable in shares of its capital stock (including Common Stock), (ii) subdivide the outstanding Common Stock into a larger number of shares of Common Stock, (iii) combine the outstanding Common Stock into a smaller number of shares of its Common Stock, or (iv) issues any shares of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then in each such case, the Conversion Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date shall be proportionately adjusted so that the Holder of any Debenture converted after such date shall be entitled to receive, upon conversion, the aggregate number and kind of shares of capital stock which, if such Debenture had been converted immediately prior to such date, such Holder would have owned upon such conversion and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. Any such adjustment shall become effective immediately after the record date of such dividend or the effective date of such subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. If a dividend is declared and such dividend is not paid, the Conversion Price shall again be adjusted to be the Conversion Price in effect immediately prior to such record date (giving effect to all adjustments that otherwise would be required to be made pursuant to this Section 6 from and after such record date). (b) Issuance of Common Stock or Rights to Purchase Common Stock Below the Conversion Price. (i) If the Company shall, for two years after the issuance of this Debenture, or from time to time thereafter, sell or issue or fix a record date for the sale or issuance of, Common Stock, or rights, options, warrants or convertible or exchangeable securities to any party, including all holders of Common Stock, entitling such parties to subscribe for or purchase Common Stock, or securities convertible into Common Stock at a price per share of Common Stock or having a conversion price per share of Common Stock if a security is convertible into Common Stock (determined in either such case by dividing (x) the total consideration payable to the Company upon exercise, conversion or exchange of such rights, options, warrants or other securities convertible into Common Stock by (y) the total number of shares of Common Stock covered by such rights, options, warrants or other securities convertible into Common Stock) which is lower than the lesser of Conversion Price or 70% of the Current Market Price, then, subject to clause 6(b)(ii), the Conversion Price shall be reduced to the price determined by multiplying the Conversion Price in 3 4 effect immediately prior to such record date by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so to be offered (or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at the lesser of the Conversion Price or Current Market Price, and the denominator of which shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such price for subscription or purchase may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be determined in good faith by the Board of Directors of the Company. Any such adjustment shall become effective immediately after the record date for such rights or warrants. Such adjustment shall be made successively whenever such a record date is fixed. If such Common Stock, rights, options or warrants are not so issued, the Conversion Price shall again be adjusted to the Conversion Price in effect immediately prior to the transaction or record date (giving effect to all adjustments that otherwise would be required to be made pursuant to this Section 6 from and after such record date). (ii) No adjustment shall be made to the Conversion Price pursuant to the foregoing clause 6(b)(I) in connection with (A) shares issued upon the exercise of options granted or to be granted or common stock issued or to be issued pursuant to the Company's employee and non-employee stock option and stock purchase plans; (B) shares issued as consideration for technology licenses, distribution rights or other intangibles in connection with strategic alliances or similar transactions; (C) shares issued upon conversation of this Debenture; and (D) shares issued in any of the transactions described in Subsections 6(a) and (c) hereof. (iii) Notwithstanding any provision in Section 6 to the contrary and without limitation to any provision contained in Section 6, in event any securities of the Company (other than this Debenture), including without limitation those securities set forth as exceptions in Subsection 6(b)(ii) (for purposes of this Subsection, collectively, the "Subject Securities"), are amended or otherwise modified by operation of its terms or otherwise (including without limitation by operation of such Subject Securities anti-dilution provisions) in any manner whatsoever after the issuance of this Debenture that results in (i) the reduction of the exercise, conversion or exchange price of such Subject Securities payable upon the exercise for, or conversion or exchange into, Common Stock or other securities exercisable for, or convertible or exhangeable into Common Stock and/or (ii) such Subject Securities becoming exercisable for, or convertible or exchangeable into (A) more shares or dollar amount of such Subject Securities which are, in turn exercisable for, or convertible or exchangeable into, Common Stock, or (B) more shares of Common Stock, then such amendment or modification shall be treated for purposes of Section 6 as if the Subject Securities which have been amended or modified have been terminated and new securities have been issues with the amended or modified terms. The Company shall make all necessary adjustments (including successive adjustments if require) to the Conversion Price in accordance with Section 6, but in no event shall the Conversion Price be greater than it was immediately prior to the application of this Subsection to the transaction in question. On the expiration or termination of any such amended or modified Subject Securities for which adjustment has been made pursuant to the operation of the provisions of this Subsection, without such Subject Securities having been exercised, converted or exchanged in full pursuant to their terms, the adjusted Conversion Price shall be appropriately readjusted in the manner specified herein. (c) Certain Distributions. If the Company shall, at any time after the issuance of this Debenture, or from time to time thereafter, fix a record date for the distribution to all holders of Common Stock (including any such distribution made in connection with a consolidation or merger 4 5 in which the Company is the continuing corporation) of evidences of indebtedness, assets or other property (other than regularly scheduled cash dividends or cash distributions payable out of consolidated earnings or earned surplus or dividends payable in capital stock for which adjustment is made under Subsection 6(a)) or subscription rights, options or warrants (excluding those referred to in Subsection 6(b)), then the Conversion Price shall be reduced to the price determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction (which shall in no event be less than zero), the numerator of which shall be the Current Market Price per share of Common Stock on such record date (or, if an ex-dividend date has been established for such record date, on the next day preceding such ex-dividend date), less the fair market value (as determined in good faith by the Board of Directors of the Company) of the portion of the assets, evidences of indebtedness, other property, subscription rights or warrants so to be distributed applicable to one share of Common Stock and the denominator of which shall be such Current Market Price per share of Common stock. Any such adjustment shall become effective immediately after the record date for such distribution. Any such adjustment shall become effective immediately after the record date for such distribution period. Such adjustments may be made successively whenever such a record date is fixed. In the event that such distribution is not so made, the Conversion Price shall be adjusted to the Purchase Price in effect immediately prior to such record date (giving effect to all adjustments that otherwise would be required to be made pursuant to this Section 6 from and after such record date). (d) Determination of Current Market Price. For the purpose of any computation under Subsections (b) or (c) of this Section 6 or any other provision of this Debenture, the Current Market Price per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of Common Stock for the 10 consecutive trading days commencing before such date. If on any such date the shares of Common Stock are not listed or admitted for trading on any national securities exchange or quoted by NASDAQ or a similar service, or otherwise quoted or listed in a regularly available form then the Current Market Price shall be determined in good faith by the Board of Directors. (e) Adjustments as to Other Shares. In the event that at any time, as a result of an adjustment made pursuant to Subsection 6(a), the Holder shall become entitled to receive, upon conversion of this Debenture, any shares of capital stock of the Company other than shares of Common Stock, the number of such other shares so receivable upon conversion of the Debenture shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Common Stock contained in Subsections 6(a), (b), and (c), inclusive. (f) Reorganization, Reclassification, Merger and Sale of Assets. If after the issuance of this Debenture there occurs any capital reorganization or any reclassification of the Common Stock of the Company, the consolidation or merger of the Company with or into another person (other than a merger or consolidation of the Company in which the Company is the continuing corporation and which does not result in any reclassification or change of outstanding shares of its Common Stock) or the sale or conveyance of all or substantially all of the assets of the Company to another person, then the Holder will thereafter be entitled to receive, upon the conversion of this Debenture in accordance with the terms hereof, the same kind and amounts of securities (including shares of stock) or other assets, or both, which were issuable or distributable to the holders of outstanding Common Stock of the Company upon such reorganization, reclassification, consolidation, merger, sale or conveyance, in respect of that number of shares of Common Stock then deliverable upon the conversion of this Debenture as if this Debenture had been converted immediately prior to such reorganization, reclassification, consolidation, merger, sale or conveyance; and, in any such case, appropriate adjustments (as determined in good faith by the 5 6 Board of Directors of the Company) shall be made to assure that the provisions hereof (including provisions with respect to changes in, and other adjustments of, the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be practicable, in relation to any securities or other assets thereafter deliverable upon conversion of this Debenture. 7. Notice of Certain Events. In case at any time after the issuance of this Debenture: (a) The Company shall declare any dividend upon its Common Stock payable otherwise than in cash or in Common Stock of the Company; or (b) The Company shall offer for subscription to the holders of its Common Stock any additional shares of stock of any class or any other securities convertible into shares of stock or any rights to subscribe thereto other than the sale of any additional shares of Common Stock contemplated under the Agreement; or (c) There shall be any capital reorganization or reclassification of the capital stock of the Company, or a sale of all or substantially all of the assets of the Company, or a consolidation or merger of the Company with another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation and which does not result in any reclassification), or change of the then outstanding shares of Common Stock or other capital stock issuable upon conversion of this Debenture (other than a change in par value, or from par value or as a result of subdivision or combination); or (d) There shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company then, in any one or more of said cases, the Company shall cause to be mailed to the Holder at the earliest practicable time (and, in any event, not less than 20 days before any record date or other date set for definitive action), written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or such reorganization, reclassification, sale, consolidation, merger, dissolution, or liquidation shall take place, as the case may be. Such notice shall also set forth such facts as shall indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Conversion Price and the kind and amount of the shares of stock and other securities and property deliverable upon exercise of the Debentures. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said dividend, distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, sale, consolidation, merger, dissolution, liquidation, winding up or conversion, as the case may be (on which date, in the event of voluntary or involuntary dissolution, or liquidation of the Company, the right to exercise the Debentures shall terminate). 8. Investment Representations. By acceptance of this Debenture, Holder represents that: (a) Holder is acquiring this Debenture and will acquire the Debenture Shares for its own account, not as nominee or agent, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933 (the "Securities Act"). 6 7 (b) Holder understands that (i) this Debenture and the Debenture Shares have not been registered under the Securities Act by reason of a specific exemption therefrom, that such securities must be held by it indefinitely, and that Holder must, therefore, bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration; (ii) each certificate representing the Debenture Shares and each Debenture will be endorsed with the following legend: A) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. B) Any legend required to be placed thereon by the Company's bylaws or under applicable state securities laws; and (iii) the Company will instruct any transfer agent not to register the transfer of any of the Debenture or the Debenture Shares unless the conditions specified in the forgoing legend are satisfied; (c) Holder has been furnished with such materials and has been given access to such information relating to the Company as its qualified representative has requested and it has been afforded the opportunity to ask questions regarding the Company and the Debenture, all as it has found necessary to make an informed investment decision. 9. Registration under Securities Act of 1933. (a) If, at any time after Holder converts all or a portion of this Debenture, the Company shall receive from the Holder a written demand that the Company effect a registration under Act of the Debenture Shares held by the Holder (or issuable upon exercise of this Debenture), the Company will use its best efforts to reasonably promptly effect such registration after such notice as will permit or facilitate the sale and distribution of all or such portion of the Debenture Shares as are specified in such demand, provided that the Company shall not be obligated to take any of the following action to effect any such registration, pursuant to this Section 9(a): (i) Within 90 days immediately following the effective date of any registration statement pertaining to an underwritten public offering of securities of the Company for its own account (other than a registration on Form S-4 relating solely to an SEC Rule 145 transaction, or a registration relating solely to employee benefit plans); or (ii) After the Company has effected one such registration pursuant to this Section 9(a); or 7 8 (iii) If the Company shall furnish to the Holder a certificate signed by the President of the Company, stating that in the good faith judgment of the Board of Directors of the Company it would be materially detrimental to the Company and its stockholders for such registration statement to be filed at the date filing would be required, in which case the Company shall have an additional period of not more than 90 days within which to file such Registration Statement; provided, however, that the Company may not exercise its right under this clause more than once in any 12 month period. The Company shall use its best efforts to keep any registration statement filed pursuant to this Section 9(a) effective for such period of time requested by the Holder to sell the Debenture Shares requested to be registered, but in no event more than two hundred seventy (270) days. If the Holders intend to distribute the Debenture Shares covered by their demand by means of an underwriting, they shall so advise the Company as part of their demand made pursuant to this Section 9(a). The Company shall, together with the Holders proposing to distribute their securities through such underwriting, enter into an underwriting agreement in customary form with the underwriter or underwriters selected by the Holder. If the underwriter has not limited the number of shares of Common Stock to be underwritten, the Company may include securities for its own account (or for the account of other stockholders) in such registration if the underwriter so agrees and if the number of Debenture Shares that would otherwise have been included in such registration and underwriting will not thereby be limited. (b) The Company's obligation to include any Debenture Shares in a registration statement shall terminate when such Debenture Shares are transferable without restriction on the transferee pursuant to Rule 144(k). (c) The Company shall, upon the filing of the registration statement hereunder, furnish to the Holder (and to each underwriter, if any) such number of copies of prospectuses and preliminary prospectuses in conformity with the requirements of the Act and such other documents as the Holder may reasonably request, in order to facilitate the public sale or other disposition of all or any of the Debenture Shares; provided, however, that the obligation of the Company to deliver copies of prospectuses or preliminary prospectuses to the Holder shall be subject to the receipt by the Company of reasonable assurances from the Holder that the Holder will comply with the applicable provisions of the Act and of such other securities or blue sky laws as may be applicable in connection with any use of such prospectuses or preliminary prospectuses, (ii) use its best efforts to register or qualify such Debenture Shares under the blue sky laws (to the extent applicable) of such jurisdiction or jurisdictions as the Holders of any such Debenture Shares and each underwriter of Debenture Shares being sold by such Holders shall reasonably request and (iii) take such other actions as may be reasonably necessary or advisable to enable such Holders and such underwriters to consummate the sale or distribution in such jurisdiction or jurisdictions in which such Holders shall have reasonably requested that the Debenture Shares be sold. (d) The Company shall pay all its expenses incurred in connection with any registration or other action pursuant to the provisions of this Section 9 and the reasonable fees (not to exceed $15,000) and expenses of a single counsel to the Holder, other than underwriting discounts and commissions. (e) If the Company at any time (other than pursuant to Section 9(a) hereof) proposes to register any of its securities under the Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to registration 8 9 statements on Form S-8 or another form not available for registering Common Stock for sale to the public), each such time it will give written notice to the Holder of its intention so to do. Upon the written request of the Holder, given within 20 days after the date of any such notice, to register any of its Debenture Shares (which request shall state the intended method of disposition thereof), the Company will use its best efforts to cause the Debenture Shares as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the sale or other disposition by the Holder (in accordance with its written request). The Company may withdraw any such registration statement before it becomes effective or postpone the offering of securities contemplated by such registration statement without any obligation to the Holder. In the event that any registration pursuant to this Section 9(e) shall be, in whole or in part, an underwritten public offering of Common Stock, any request by a holder pursuant to this Section 9(e) to register Debenture Shares shall specify that either (i) such Debenture Shares are to be included in the underwriting on the same terms and conditions as the shares of Common Stock otherwise being sold through underwriters under such registration or (ii) such Debenture Shares are to be sold in the open market without any underwriting, on terms and conditions comparable to those normally applicable to offerings of common stock in reasonably similar circumstances. The number of Debenture Shares to be included in such an underwriting may be reduced if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein; provided, however, that if any shares are to be included in such underwriting for the account of any person other than the Company (other than a stockholder exercising demand registration rights), the number of shares to be included by any such persons shall be reduced first; and provided further, however, that the number of any such shares held by any person (other than a stockholder exercising demand registration rights) other than the holders of Debenture Shares hereunder shall be reduced proportionately based on the number of shares requested to be registered with the shares held by the holders of Debenture Shares. (f) If, at a time when Form S-3 is available for such registration, the Company shall receive Holder a written request or requests that the Company effect a registration on Form S-3 of any of its Debenture Shares, the Company will, as soon as practicable, effect such registration and all such related qualifications and compliances as may be requested and as would permit or facilitate the sale and distribution of all Debenture Shares as are specified in such request. The Company shall not be required to file a registration statement under Form S-3 if it would not be required to file a registration statement under Section 9(a) hereof. The Company shall have no obligation to effect a registration under this Section 9(f) unless either (i) all the outstanding Debenture Shares are requested to be sold pursuant to such registration or (ii) the aggregate offering price of the securities requested to be sold pursuant to such registration is, in the good faith judgment of the Company, expected to be equal to or greater than $1,000,000. Any registration under this Section 9(f) will be counted as a registration under Section 9(a) above. (g) The Company agrees to indemnify and hold harmless the Holder and each underwriter of Debenture Shares, and each other person, if any, who controls such Holder or underwriter within the meaning of the Act from and against any losses, claims, damages or liabilities to which the Holder may become subject (under the Act or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, any untrue or alleged untrue statement of a material fact contained in any registration statement under which Debenture Shares were registered under the Act pursuant to this Section 9, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof (collectively, the "Registration Statement"), or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make statements therein not misleading, or any failure by the Company to fulfill any undertaking included 9 10 in the Registration Statement and the Company will reimburse the Holder for any reasonable legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim; provided, however, that the Company shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of, or is based upon, an untrue statement made in such Registration Statement in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Holder specifically for use in preparation of the Registration Statement. The Holder agrees to indemnify and hold harmless the Company, and each underwriter of Debenture Shares, and each other person, if any, who controls such Holder or underwriter within the meaning of the Act, each person, if any, who controls the Company within the meaning of Section 15 of the Act, each officer of the Company who signs the Registration Statement and each director of the Company, from and against any losses, claims, damages or liabilities to which the Company (or any such officer, director or controlling person) may become subject (under the Act or otherwise), insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, any untrue or alleged untrue statement of a material fact contained in any Registration Statement under which Debenture Shares were registered under the Act pursuant to this Section 9, on the effective date thereof if such untrue statement was made in reliance upon and in conformity with written information furnished by or on behalf of the Holder specifically for use in preparation of the Registration Statement, and the Holder will reimburse the Company (or such officer, director or controlling person), as the case may be, for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim; provided, however, that the Holder will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to Holder, as such, furnished in writing to the Company by the Holder for use in the Registration Statement; provided, further, however, that the liability of the Holder hereunder shall be limited to the proportion of any such loss, claim, damage, liability or expense which is equal to the proportion that the public offering price of the Debenture Shares sold by the Holder under the Registration Statement bears to the total public offering price of all securities proceeds received by the Holder from the sale of such Debenture Shares covered by the Registration Statement. Promptly after receipt by any indemnified person of a notice of a claim or the beginning of any action in respect of which indemnity is to be sought against an indemnifying person pursuant to this Section 9(g), such indemnified person shall notify the indemnifying person in writing of such claim or of the commencement of such action, and, subject to the provisions hereinafter stated, in case any such action shall be brought against an indemnified person and such indemnifying person shall have been notified thereof, such indemnifying person shall be entitled to participate therein, and, to the extent it shall wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified person. After notice from the indemnifying person to such indemnified person of its election to assume the defense thereof, such indemnifying person shall not be liable to such indemnified person for any legal expenses subsequently incurred by such indemnified person in connection with the defense thereof; provided, however, that if there exists or shall exist a conflict of interest that would make it inappropriate, in the opinion of counsel to the indemnified person, for the same counsel to represent both the indemnified person and such indemnifying person or any affiliate or associate thereof, the indemnified person shall be entitled to retain its own counsel at the expense of such indemnifying person; provided, however, that no indemnifying person shall be responsible for the fees and expenses of more than one separate counsel for all indemnified parties. 10 11 10. No Fractional Shares. The Company shall not be required to issue certificates representing fractional shares of Common Stock, but will make a payment in cash based on the fair market value of one share of Common Stock on the date of Conversion for any fractional share. 11. Reservation of Shares. All shares which may be issued upon the conversion of this Debenture shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all preemptive rights of any stockholder and all taxes, liens and charges with respect to the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue) during the conversion period within which the conversion rights represented by this Debenture may be converted, the Company will at all times have authorized, and reserved, a sufficient number of shares of its Common Stock to provide for the conversion of this Debenture. 12. Delivery of Stock Certificates. As promptly as practicable after the conversion of this Debenture, the Company at its expense will issue and deliver to the holder of this Debenture a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion and, if applicable, a new Debenture evidencing the principal amount hereof not so converted. 13. Rights. Until the conversion of this Debenture, or portion thereof, as set forth above, the Holder shall not be deemed a stockholder of the Company and shall have no rights of a stockholder unless set forth specifically. 14. Cumulative Rights. No delay on the part of the holder of this Debenture in the exercise of any power or right under this Debenture, or under any document or instrument executed in connection herewith, shall operate as a waiver thereof, nor shall a single or partial exercise of any other power or right. Enforcement by the holder of this Debenture of any security for the payment hereof shall not constitute any election by it of remedies so as to preclude the exercise of any other remedy available to it. 15. Waiver. The Company waives demand, presentment, protest, notice of intention to accelerate, notice of acceleration, and notice of protest. 16. Subordination. The indebtedness, including interest, principal and default interest, if any, evidenced by this Debenture is hereby expressly subordinated, to the extent and in the manner set forth in this Section 16, in right of payment to the prior payment in full of all the Company's Senior Indebtedness (as hereinafter defined) whether now outstanding or hereafter defined. Notwithstanding the foregoing, for so long as there is no event of default under the Senior Indebtedness, the Company may pay, and the Holder may receive for its own account, all regular installments of interest hereunder. (a) Senior Indebtedness. As used in this Note, the term "Senior Indebtedness" shall mean the principal of and unpaid accrued interest on indebtedness of the Company to banks, insurance companies or other financial institutions regularly engaged in the business of lending money, which is for money borrowed by the Company (whether or not secured). (b) Default on Senior Indebtedness. If there should occur any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization or arrangements with creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation or any other marshaling of the assets and liabilities of the Company, or if this Debenture shall be declared due and payable upon the occurrence of an event of default with respect to any Senior Indebtedness, then (i) no amount shall 11 12 be paid by the Company in respect of the principal of or interest on this Debenture at the time outstanding, unless and until the principal of and interest on the Senior Indebtedness then outstanding shall be paid in full, and (ii) no claim or proof of claim shall be filed with the Company by or on behalf of the holder of this Debenture that shall assert any right to receive any payments in respect of the principal of and interest on this Debenture, except subject to the payment in full of the principal of and interest on all of the Senior Indebtedness then outstanding. If there occurs an event of default that has been declared in writing with respect to any Senior Indebtedness, or in the instrument under which any Senior Indebtedness is outstanding, permitting the holder of such Senior Indebtedness to accelerate the maturity thereof, then, unless and until such event of default shall have been cured or waived or shall have ceased to exist, or all Senior Indebtedness shall have been paid in full, no payment shall be made in respect of the principal of or interest on this Debenture. (c) Effect of Subordination. Subject to the rights, if any, of the holders of Senior Indebtedness under this Section 16 to receive cash, securities or other properties otherwise payable or deliverable to the holder of this Debenture, nothing contained in this Section 16 shall impair, as between the Company and the holder, the obligation of the Company, subject to the terms and conditions hereof, to pay to the holder the principal hereof and interest hereon as and when the same become due and payable, or shall prevent the holder of this Debenture, upon default hereunder, from exercising all rights, powers and remedies otherwise provided herein or by applicable law. (d) Subrogation. Subject to the payment in full of all Senior Indebtedness and until this Debenture shall be paid in full, the holder shall be subrogated to the rights of the holders of Senior Indebtedness (to the extent of payments or distributions previously made to such holders of Senior Indebtedness pursuant to the provisions of Section 16(b) above) to receive payments or distributions of assets of the Company applicable to the Senior Indebtedness. No such payments or distributions applicable to the Senior Indebtedness shall, as between the Company and its creditors, other than the holders of Senior Indebtedness and the holder, be deemed to be a payment by the Company to or on account of this Debenture; and for the purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness to which the holder would be entitled except for the provisions of this Section 16 shall, as between the Company and its creditors, other than the holders of Senior Indebtedness and the holder, be deemed to be a payment by the Company to or on account of the Senior Indebtedness. (e) Undertaking. By its acceptance of this Debenture, the holder agrees to execute and deliver such documents as may be reasonably requested from time to time by the Company or the lender of any Senior Indebtedness in order to implement the foregoing provisions of this Section 16. If the Holder receives any payment on this Debenture which is prohibited by this Section 16, such payment shall be held in trust by the Holder for the benefit of, and shall be paid and delivered upon written request to, the holders of Senior Indebtedness or their agent, for application to the payment on such Senior Indebtedness. 17. Defaults and Remedies. (a) Events of Default. An "EVENT OF DEFAULT" shall occur if: (i) the Company shall default in the payment of the principal and interest of this Debenture, when and as the same shall become due and payable, whether at maturity or at a date fixed for prepayment or by acceleration or otherwise; or (ii) the Company shall default in the due observance or performance of any material covenant, condition or agreement on the part of the Company to be observed or 12 13 performed pursuant to the terms hereof or pursuant to the terms of J.V. Agreement or the Distribution Agreement (other than those referred to in clause (i) of this Section 17(a)), and such default shall continue for 90 days after the date of written notice thereof, specifying such default and, if such default is capable of being remedied, requesting that the same be remedied, shall have been given to the Company by the Holder; or (iii) any event or condition shall occur that results in (A) the acceleration of the maturity of any indebtedness of the Company or any subsidiary, or (B) a default of any indebtedness of the Company or any subsidiary, which continues beyond any applicable period of cure and which would permit the holder to accelerate (automatically or upon notice and declaration) such Indebtedness, in either case in a principal amount aggregating $1,000,000 or more; or (iv) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (a) relief in respect of the Company, or of a substantial part of its property or assets, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (b) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company, or for a substantial part of its property or assets, or (c) the winding up or liquidation of the Company; and such proceeding or petition shall continue undismissed for 60 days, or an order or decree approving or ordering any of the foregoing shall be entered; or (v) the Company shall (a) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (b) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in paragraph (iv) of this Section 17(a), (c) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any subsidiary, or for a substantial part of its property or assets, (d) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (e) make a general assignment for the benefit of creditors, (f) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (g) take any action for the purpose of effecting any of the foregoing. (b) Acceleration. If an Event of Default occurs under Section 17(a)(iv) or (v), then the outstanding principal of and all accrued interest on this Debenture shall automatically become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived. If any other Event of Default occurs and is continuing the Holder, by written notice to the Company, may declare the principal of and accrued interest on this Debenture to be immediately due and payable. The Holder may rescind an acceleration and its consequences if all existing Events of Default have been cured or waived, except nonpayment of principal or interest that has become due solely because of the acceleration, and if the rescission would not conflict with any judgment or decree. Any notice or rescission shall be given in the manner specified in Section 18 of this Debenture. 18. Notices. All notices, claims, demands and other communications hereunder shall be in writing and shall be deemed given upon (a) confirmation of receipt of a facsimile transmission, (b) confirmed delivery by a standard overnight carrier (c) when delivered by hand or (d) the expiration of five business days after the day when mailed by registered or certified mail (postpaid prepaid, return receipt requested), addressed to the respective parties at the following addresses (or such other address for party as shall be specified by like notice): 13 14 (a) if to the registered holder of a Debenture at the address of such holder as shown on the books of the Company; or (b) if to the Company, at: Radiance Medical Systems, Inc. 13700 Alton Parkway, Suite 160 Irvine, CA 92618 Attn: Chief Executive Officer 19. Transferability. This Debenture evidenced hereby may not be pledged, sold, assigned or transferred except with the express written consent of the Company, which may be withheld in its sole discretion. Any pledge, sale, assignment or transfer in violation of the foregoing shall be null and void. 20. Headings; References. All headings used herein are used for convenience only and shall not be used to construe or interpret this Debenture. Except where otherwise indicated, all references herein to Sections refer to Sections hereof. 21. Successors and Assigns. All of the covenants, stipulations, promises, and agreements in this Debenture by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not. 22. Governing Law. This Debenture shall be governed by the laws of the State of California, and the laws of such state (other than conflicts of laws principles) shall govern the construction, validity, enforcement, and interpretation hereof, except to the extent federal laws otherwise govern the validity, construction, enforcement, and interpretation hereof. 23. Payments. Each payment on this Debenture shall be due and payable in lawful money of the United States of America, at the address of Holder as shown on the books of the Company, in funds which are or will be available for next business day use by Holder. In any case where the payment of principal and interest hereon is due on a non-business Day, the Company shall be entitled to delay such payment until the next succeeding business day, but interest shall continue to accrue until the payment is, in fact, made. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 14 15 IN WITNESS WHEREOF, the Company has caused this Debenture to be issued this 15th day of June, 1999. RADIANCE MEDICAL SYSTEMS, INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- Name of Holder: Cosmotec Co. , Ltd. Address: Twin View Ochanomizu Bldg. 1F 2-3-9 Hongo, Bunkyo-ku, Tokyo 113-0033, Japan 15 16 ELECTION TO CONVERT To RADIANCE MEDICAL SYSTEMS, INC. The undersigned owner of the accompanying Debentures hereby irrevocably exercises the option to convert to shares of Common Stock in accordance with the terms of such Debenture, and directs that the shares issuable and deliverable upon such conversion be issued in the name of and delivered to the undersigned. Dated:________________________________ COMPLETE FOR REGISTRATION OF SHARES OF COMMON STOCK ON THE STOCK TRANSFER RECORDS MAINTAINED BY THE COMPANY: ________________________________________________________________________________ Name of Debenture Holder Name(s) of Person(s) in which Common Stock Certificate(s) are to be registered: ________________________________________________________________________________ Address: _______________________________ ________________________________________________________________________________ Taxpayer Identification Number Principal Portion to be converted (if less than all) $__________________ Shares of Common Stock to be Issued _______________ shares EX-10.31 3 JOINT VENTURE AGREEMENT DATED JUNE 15, 1999 1 FINAL EXHIBIT 10.31 JOINT VENTURE AGREEMENT BETWEEN RADIANCE MEDICAL SYSTEMS, INC. AND GLOBE CO., LTD. 2 JOINT VENTURE AGREEMENT This Agreement (this "Agreement") made and entered into this 15th day of June, 1999 by and between Radiance Medical Systems, Inc. ("RADIANCE"), a corporation organized and existing under the laws of Delaware and having its principal office of business at 13900 Alton Parkway, Suite 122, Irvine, California, U.S.A. and Globe Co., Ltd. ("GLOBE"), a corporation organized and existing under the laws of Japan and having its principal office of business at #306, 1-10-12, Takakura-cho, Miyakojima-ku, Osaka, Japan. WHEREAS, RADIANCE has sophisticated technology in the field of catheters for intravascular radiation therapy, energy emitting radiation sources, angioplasty, and the like; WHEREAS, GLOBE has extensive knowledge and experience in medical supply in the field of cardiovascular applications; WHEREAS, RADIANCE and GLOBE, companies with experience and expertise in the manufacture and marketing of cardiovascular medical equipment, wish to further enhance the mutual relationship and establish a joint venture company for its supply of such medical equipment. NOW THEREFORE, in consideration of the premises and mutual covenants herein contained, the Parties hereto agree as follows: SECTION 1. DEFINITIONS When used in this Agreement, each of the terms set forth in this Section 1 shall have the meaning indicated below: 1.1 "RADIATEC" shall mean a joint-stock corporation (Kabushiki Kaisha) to be incorporated under the laws of Japan by joint venture investment by RADIANCE and GLOBE in the manner provided for in Section 2 and whose corporate name shall be Radiatec Kabushiki Kaisha in Japanese and Radiatec, Inc. in English. 1.2 "PARTIES" and "PARTY" shall mean the parties hereto, and either of them, respectively. 1.3 "PRODUCT(S)" Shall mean the radiation delivery balloon catheter irradiated for radiation on therapy for the prevention of restenosis and any other products to be added from time to time by mutual agreement between the Parties. 1.4 "GOVERNMENTAL APPROVAL(S)" shall mean the approval, authorization and permit by Japanese government and quasi-government authorities such as the Ministry of Health and Welfare and the Agency of Science and Technology for the commercial sale of the Products in Japan and such approval includes approval and establishment of the health reimbursement price with respect to the Products. 3 SECTION 2. FORMATION OF RADIATEC 2.1 ORGANIZATION AND REGISTRATION The Parties shall, as soon as possible after the date hereof, cause RADIATEC as described in this Agreement, to be organized and registered under the laws of Japan. All costs necessary therefor shall be borne by RADIATEC. The registered head office of RADIATEC shall be located at #306, 1-10-12, Takakuracho, Miyakojima-ku, Osaka, Japan. The Parties shall closely cooperate and consult with each other with respect to the procedures for and particulars relating to the organization and registration of RADIATEC. 2.2 ASSETS OF RADIATEC RADIATEC shall utilize the facilities from the existing facilities of GLOBE at no cost to RADIATEC. RADIATEC shall own the Japanese rights in the Governmental Approval(s) for the Products, provided however, that in the event of any termination for whatever reason of this Agreement, all such rights shall revert to RADIANCE or its designee and the parties shall cooperate in such transfer. 2.3 BUSINESS PURPOSES OF RADIATEC The main business activities of RADIATEC shall be to import and distribute the Product(s). At the time of the organization and registration of RADIATEC pursuant to this Section 2.1, the Articles of Incorporation of RADIATEC shall contain the following business objectives and purposes: (i) To engage in the business of importing and distributing the Product(s); and (ii) To do any and all things related or incidental to the business mentioned above. 2.4 RIGHT OF FIRST REFUSAL FOR THE PRODUCT(S) RADIATEC shall have the right of first refusal for all variations of the Product(s) for other medical applications to be developed by RADIANCE. Accordingly, if at any time RADIANCE proposes to offer a third party rights to distribute such Products for other medical applications in Japan, it shall first offer such rights to RADIATEC. Any such first offer shall set forth the terms and other conditions of such offer, and shall be made in writing by registered airmail postage prepaid, and shall state that the offer shall remain effective until whichever of the following events shall first occur: (i) Dispatch of a notice of refusal in writing by RADIATEC to whom such first offer has been made; or (ii) The lapse of thirty (30) days after the date of receipt of such first offer. Acceptance of any such first offer which has been made pursuant to this Section 2.4 shall be effective upon dispatch by RADIATEC of acceptance thereof by registered airmail, postage prepaid, if such dispatch occurs within thirty (30) days after the date of receipt of such offer. 2 4 If, after a first offer has been extended pursuant to this Section 2.4, RADIATEC refuses or fails to accept such offer, RADIANCE shall have the right to offer rights to any person, natural or juridical, who is not a Party to this Agreement, if the terms offered to such person as aforesaid are no more favorable to such person than the terms on which such rights were first offered to RADIATEC pursuant to this Section 2.4. 2.5 ARTICLES OF INCORPORATION OF RADIATEC The Articles of Incorporation of RADIATEC shall be drafted substantially in accordance with the draft Articles of Incorporation in English attached hereto as ANNEX I, and shall be separately agreed upon by the Parties. 2.6 CAPITAL OF RADIATEC AND CAPITAL CONTRIBUTION BY EACH OF THE PARTIES The authorized capital of RADIATEC shall be four thousand (4,000) shares of common stock, with par value of fifty thousand yen (Yen50,000) per share. At the time of incorporation of RADIATEC, RADIATEC shall issue one thousand (1,000) shares of common stock, with par value of fifty thousand yen (Yen50,000) per share and with aggregate par value of fifty million yen (Yen50,000,000), and all of such shares shall be subscribed for by the Parties. The number of shares to be subscribed for and the amount to be paid in cash for such subscription by the Parties shall be as follows:
NAME NUMBER OF SHARES AMOUNT TO BE PAID ---- ---------------- ----------------- GLOBE 490 Yen24,500,000 RADIANCE 510 Yen25,500,000
2.7 ADDITIONAL CONTRIBUTION BY RADIANCE AND GLOBE The Parties shall take appropriate measures to fund the costs and expenses for obtaining the Government Approval(s), in proportion to their relative interests in RADIATEC. 2.8 INTELLECTUAL PROPERTY RADIANCE and GLOBE each agree to grant a license, free of charge, to RADIATEC to use any and all intellectual property of the parties relevant to the marketing of the Product(s) whether presently owned or hereinafter created; provided, however, that with respect to the use of any intellectual property of RADIANCE, RADIATEC shall be subject to any restrictions under the Supply Agreement to be entered into by and between RADIANCE and RADIATEC. Such licenses will terminate on termination of this Agreement. 2.9 MARKETS AND NON-COMPETITION Each of the Parties intends that RADIATEC shall engage in the importation and sale of the Product(s) in order for Cosmotec Co., Ltd. to distribute such Product(s) in Japan. To that end, except as otherwise agreed by the Parties, GLOBE hereto covenants and agrees not to sell products similar to or competitive with the Product(s) in Japan, and RADIANCE covenants and agrees not to sell within Japan, directly or indirectly, any radiation delivery balloon catheters except through RADIATEC. 2.10 FISCAL YEAR 3 5 The fiscal year of RADIATEC shall commence on the first day of January each year and end on the thirty first day of December of such year. 2.11 SUPPLY AGREEMENT AND INTERNATIONAL DISTRIBUTOR AGREEMENT In addition to the incorporation of RADIATEC, the Parties shall have RADIATEC enter into (i) the Supply Agreement with RADIANCE in the form attached hereto as ANNEX II (the "Supply Agreement") and (ii) the International Distributor Agreement in the form attached hereto as ANNEX III (the "International Distributor Agreement"). 2.12 RESPONSIBILITIES FOR OBTAINING GOVERNMENTAL APPROVAL(S) GLOBE shall be responsible for assisting RADIATEC in obtaining Governmental Approval(s), including assisting it in managing, at RADIATEC's expense, all animal trials and human clinical trials required to obtain such Government Approval(s). RADIANCE shall supply to RADIATEC sample Products for the said animal trials and human clinical trials. SECTION 3. GENERAL MEETING OF SHAREHOLDERS 3.1 MEETINGS OF SHAREHOLDERS General meetings of shareholders shall be convened at the principal office of RADIATEC, or at such other place as the shareholders may agree to in writing. A notice of a general meeting of shareholders in the Japanese language together with an English translation attached thereto shall be dispatched to each shareholder at least two weeks prior to the day on which such meeting is to be held. Such notice shall set forth the items of business to come before the meeting and shall be furnished either by physical delivery, by mail or facsimile. The period of notice may be shortened by the unanimous written consent of the shareholders. 3.2 RESOLUTIONS OF MEETINGS OF SHAREHOLDERS Except as otherwise required by mandatory provisions of law, a quorum for a general meeting of the shareholders of RADIATEC shall require the presence, in person or by proxy, of shareholders of RADIATEC holding more than two-thirds (2/3) of the total issued and outstanding shares of RADIATEC entitled to vote. Except as otherwise required by mandatory provisions of law, resolutions of general meetings of shareholders of RADIATEC shall be adopted by the affirmative vote of a majority of the shares represented in person or by proxy at a meeting at which a quorum is present. SECTION 4. BOARD OF DIRECTORS 4.1 AUTHORIZATION OF THE BOARD OF DIRECTORS Except as otherwise required by mandatory provisions of law or as provided for in the Articles of Incorporation of RADIATEC, responsibility for the management, direction and control of RADIATEC shall be vested in the Board of Directors of RADIATEC. The number of directors shall, unless otherwise agreed between RADIANCE and GLOBE, be four (4). Any of the following matters shall require a resolution by the Board of Directors adopted by an affirmative vote of a majority of the number of directors authorized in accordance with the preceding sentence: 4 6 (a) approval of the proposals for any increase or decrease in the authorized capital of RADIATEC; (b) any increase or decrease in the issued capital of RADIATEC or the issuance of any indebtedness or other claim capable of being converted into an interest in the equity of RADIATEC; (c) any purchase or lease of any capital equipment other than in the ordinary course of business; (d) any borrowing or assumption of debt, whether in one or more borrowings, which would cause the total outstanding indebtedness of RADIATEC to be more than Yen100,000,000; (e) any increase in the number of Directors or Statutory Auditors or any change with respect to the Board, (including the appointment of a replacement Representative Director) in the event of any Representative Director's or other Director's resignation, death, inability to act, or other incapacity; (f) approval of the annual marketing and sales plan of Product(s); (g) approval of the price at which Product(s) will be sold to Cosmotec Co., Ltd.; and (h) approval of the proposals relating to the disposition of profits and losses (including, but not limited to, the payment of dividends to the shareholders). 4.2 ELECTION OF DIRECTORS The directors of RADIATEC shall be elected at a general meeting of shareholders. Two (2) of the directors shall be individuals nominated by RADIANCE, and two (2) shall be individuals nominated by GLOBE. Each of the Parties hereby agrees to vote its shares of RADIATEC at the general meeting so as to elect the directors nominated by the other Party. In the case of the death, resignation or other removal of a director prior to the end of his term of office, each of the Parties agrees to vote its shares of RADIATEC so as to appoint as his replacement a director nominated by the Party who nominated the director whose death, resignation or removal was the cause of such vacancy. 4.3 MEETINGS OF THE BOARD OF DIRECTORS A notice calling a meeting of the Board of Directors in the Japanese language together with an English translation attached thereto shall be issued to each director not less than one week before the meeting. Such notice shall set forth the items of business to come before the meeting and shall be dispatched either by physical delivery, by mail, or by facsimile. The term requirement of such notice period may be shortened or dispensed with by the written consent thereto of all of the directors. 4.4 RESOLUTIONS OF THE BOARD OF DIRECTORS Except as otherwise required by this Agreement or as provided for in the Articles of Incorporation of RADIATEC resolutions of the Board of Directors shall be adopted (i) at a 5 7 meeting at which a majority of the directors duly elected to office pursuant to Section 4.2 are present and (ii) by an affirmative vote of a majority of the directors present thereat. SECTION 5. REPRESENTATIVE DIRECTOR, PRESIDENT AND OFFICERS The number of representative directors of RADIATEC shall, unless otherwise agreed between RADIANCE and GLOBE, be two (2). The representative directors of RADIATEC shall be elected at a meeting of the Board of Directors. One (1) of the representative directors shall be an individual nominated by RADIANCE, and one shall be an individual nominated by GLOBE. Each of the Parties hereby agrees to have the directors it nominated to exercise their vote at the meeting of the Board of Directors so as to elect the representative director nominated by the other Party. The Parties shall jointly nominate the president of RADIATEC from among the representative directors upon mutual agreement who shall manage the day to day affairs of RADIATEC. Each of the Parties hereby agrees to have the directors it nominated to exercise their vote at a meeting of the Board of Directors so as to elect the president so nominated. Further, other officers may be elected by a meeting of the Board of Directors in accordance with agreement between the Parties. SECTION 6. AUDITOR RADIATEC shall have one (1) statutory auditor, jointly nominated by the Parties. Each of the Parties hereby agrees to vote its shares of RADIATEC at its general meeting of shareholders to elect the statutory auditor jointly nominated by the Parties. In the case of the death, resignation or other removal of the Statutory auditor prior to the end of his term of office, the Parties agree to vote their shares so as to appoint a replacement jointly nominated by the Parties. SECTION 7. TRANSFERS, ETC., OF SHARES 7.1 GENERAL RESTRICTIONS ON TRANSFERS, ETC. Except as otherwise expressly provided for in this Agreement or as agreed upon between the Parties, each of the Parties hereby covenants and agrees not to sell, assign, pledge or in any other manner transfer title or rights to, or otherwise encumber, any of the shares of RADIATEC held by it, or to take any action leading to or likely to result in any of the foregoing. 7.2 PROVISION IN THE ARTICLES OF INCORPORATION In implementation of the above Section 7.1, the Parties agree that the Articles of Incorporation of RADIATEC shall at all times contain the following provision: "Any transfer of shares of the Corporation shall require the approval of the Board of Directors." 7.3 RIGHT OF FIRST REFUSAL Each Party hereby extends to the other Party a right of first refusal with respect to acquisition of the shares of RADIATEC held by it. Accordingly, if at any time either Party desires to transfer all or some of the shares of RADIATEC held by it (other than a transfer of the shares held by RADIANCE to be made in connection with the sale or other transfer of substantially all the business of RADIANCE relating to the Product(s), such Party shall first offer to sell said shares to the other Party or its nominee. Any such first offer shall set forth the price per share at which the relevant share(s) are offered, and shall be made in writing by registered airmail postage 6 8 prepaid, and shall state that the offer shall remain effective until whichever of the following events shall first occur: (i) Dispatch of a notice of refusal in writing by the Party to whom such first offer has been made; or (ii) The lapse of thirty (30) days after the date of receipt of such first offer. Acceptance of any such first offer which has been made pursuant to this Section 7.3 shall be effective upon dispatch by the Party to whom such offer has been made of written notice of acceptance thereof by registered airmail, postage prepaid, if such dispatch occurs within thirty (30) days after the date of receipt of such offer; provided, however, that acceptance with respect to part of the shares offered to sell shall be deemed refusal of such offer. 7.4 REJECTION OF/FAILURE TO ACCEPT ETC., A FIRST OFFER If, after a first offer has been extended pursuant to Section 7.3, the offeree refuses such offer or fails to accept such offer with respect to all of the shares of RADIATEC so offered, the offeror shall have the right to offer such shares to any person, natural or juridical, who is not a Party to this Agreement, if the transfer price of the shares offered to any such person as aforesaid is equal to or greater than the price at which the same shares were first offered to the other Party pursuant to Section 7.3, and further provided that any transfer of shares of RADIATEC to a third party pursuant to this Section 7.4 shall be conditional upon the full and unconditional assumption by any such third party transferee of all of the obligations of the transferor provided for in this Agreement. SECTION 8. CONFIDENTIALITY OF INFORMATION Each Party agrees to keep strictly secret and confidential and not to disclose to any third party any information acquired from the other Party or from RADIATEC, except to the extent that disclosure to RADIATEC may be required by this Agreement, the Supply Agreement or the International Distributor Agreement or to the extent that disclosure is expressly permitted by this Agreement, the Supply Agreement or the International Distributor Agreement. Such secrecy obligations shall not apply to any information obtained from the other Party or from RADIATEC (i) which is or becomes published or otherwise generally available to the public, other than through the willful or negligent act or omission of either of the Parties or RADIATEC or any of their employees, or (ii) which is, at the time of disclosure, in the possession of the party to which such information is furnished. Such obligations, as so limited, shall survive termination of this Agreement. SECTION 9. DISPATCH OF PERSONNEL 9.1 To the extent approved by the Board of Directors, GLOBE shall dispatch to RADIATEC personnel necessary for RADIATEC to conduct its business, by seconding them to RADIATEC. 9.2 Salary or any other employment conditions of personnel as mentioned in the preceding Section 9.1 and refund, etc. of the expenses relating thereto shall be decided separately by mutual agreement between the Parties. SECTION 10. DEADLOCK PROVISIONS 7 9 If the Directors nominated by RADIANCE and the Directors nominated by GLOBE are unable to pass an identical resolution at two successive board of directors' meetings the Parties agree to negotiate for the sale of all of one Party's shares of RADIATEC to the other Party. If negotiations fail, either Party may demand the liquidation of RADIATEC, in which case each of the Parties shall vote its shares of RADIATEC at its general meeting of shareholders to approve liquidation of RADIATEC, so that RADIATEC will be liquidated in accordance with Section 11 below. SECTION 11. LIQUIDATION If RADIATEC is liquidated whether by mutual consent, according to section 10 or otherwise, the assets of RADIATEC shall, after payment to all creditors, except applicable taxes, be distributed to GLOBE and RADIANCE in accordance with the rate of each shareholding. SECTION 12. PAYMENTS AND TAXES 12.1 MANNER AND PLACE OF PAYMENTS All payments to be made to the Parties by RADIATEC and to RADIATEC by the Parties relating to this Agreement shall be made in Japanese yen. 12.2 WITHHOLDING TAXES Any sum required under the tax laws of Japan to be withheld by RADIATEC for the account of RADIANCE from payments due to RADIANCE shall be withheld and promptly paid by RADIATEC to the appropriate tax authorities, and the Parties shall cause RADIATEC to furnish official tax receipts or other appropriate evidence issued by the tax authorities sufficient to enable RADIANCE to support a claim for a foreign income tax credit in respect of any sum withheld. In connection with the payment of dividends by RADIATEC to RADIANCE, the Parties shall cause RADIATEC to cooperate fully with RADIANCE so that the reduced withholding tax rate under the Convention between Japan and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income by applied to such payment. SECTION 13. TERM AND TERMINATION 13.1 TERM OF AGREEMENT This Agreement shall become effective on the date of execution hereof, and shall remain in full force and effect for an indefinite period, unless earlier terminated pursuant to the following articles in this Section. 13.2 TERMINATION OF AGREEMENT This Agreement shall terminate: (i) Upon the acquisition by a Party of all of the common stock of RADIATEC held by the other Party; (ii) At the election of RADIANCE upon a Change in Control of GLOBE in accordance with Section 14.3 of this Agreement; 8 10 (iii) Upon the institution of any proceedings against either Party under any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, which are not discharged within thirty (30) days of institution, but only if the other Party elects to terminate this Agreement; (iv) Upon the failure of either Party to satisfy its capital and other contribution requirements as set forth in Sections 2.6 and 2.7, but only if the other Party elects to terminate this Agreement; (v) In accordance with Section 15 of this Agreement in the case of a material breach of this Agreement by either Party. 13.3 EFFECT OF TERMINATION (i) Upon termination of this Agreement in accordance with Section 13.2 (ii), RADIANCE shall have the option, at its choice, (1) to purchase all of GLOBE's shares in RADIATEC at a price per share equal to the smaller of (a) fifty thousand yen (Yen50,000) and (b) the net worth of RADIATEC appearing on the latest annual balance sheet of RADIATEC divided by the total number of the then issued and outstanding shares of RADIATEC or (2) to sell to GLOBE all of RADIANCE's shares in RADIATEC at a price per share equal to the greater of (a) fifty thousand yen (Yen50,000) and (b) the net worth of RADIATEC appearing on the latest annual balance sheet of RADIATEC divided by the total number of the then issued and outstanding shares of RADIATEC. (ii) Upon termination of this Agreement in accordance with Sections 13.2 (iii), (iv) and (v), the terminating Party shall have the option, at its choice, (1) to purchase all of the other Party's shares in RADIATEC at a price per share equal to the smaller of (a) fifty thousand yen (Yen50,000) and (b) the net worth of RADIATEC appearing on the latest annual balance sheet of RADIATEC divided by the total number of the then issued and outstanding shares of RADIATEC or (2) to sell to the other Party all of the terminating Party's shares in RADIATEC at a price per share equal to the greater of (a) fifty thousand yen (Yen50,000) and (b) the net worth of RADIATEC appearing on the latest annual balance sheet of RADIATEC divided by the total number of the then issued and outstanding shares of RADIATEC. SECTION 14. CHANGE OF CONTROL 14.1 CHANGE OF CONTROL OF RADIANCE PRIOR TO THE GOVERNMENTAL APPROVAL Upon a Change of Control of RADIANCE prior to the Governmental Approval(s) of RADIATEC's first Product for importation to and commercial sale in Japan, RADIANCE shall have the option to purchase all of GLOBE's shares in RADIATEC in consideration of the following: (i) Reimbursement to GLOBE for all cash investments in the capital of RADIATEC as well as repayment of an outstanding amount of any loan made by GLOBE. (ii) Performance of the Buyout obligations in Section 7 of the International Distributor Agreement. 9 11 14.2 CHANGE OF CONTROL OF RADIANCE FOLLOWING THE GOVERNMENTAL APPROVAL Upon a change of control of RADIANCE following the Governmental Approval(s) of RADIATEC's first Product for importation to and commercial sale in Japan, RADIANCE shall have the option to purchase all of GLOBE's shares in RADIATEC in consideration of the following: (i) Reimbursement to GLOBE for all cash investments in the capital of RADIATEC as well as repayment of an outstanding amount of any loan made by GLOBE; and (ii) Causing RADIATEC to allow Cosmotec Co., Ltd. a one year transition period to market, on an exclusive basis, any of the Products under the Governmental Approval(s) within the Territory under the International Distributor Agreement. (iii) Performance of the Buyout obligations in Section 7 of the International Distributor Agreement. 14.3 CHANGE OF CONTROL OF GLOBE Upon a Change of Control of GLOBE in which the successor is engaged in business which is competitive to the business of RADIATEC or RADIANCE, shall have the right to terminate this Agreement, without penalty, within a twenty-four (24) month period after such Change of Control, subject to a reasonable prior notice period; provided, however, that a six (6) month prior notice period shall be automatically deemed reasonable. Upon a Change of Control of GLOBE in which the successor is not engaged in business which is competitive to the business of RADIATEC or RADIANCE, this Agreement shall remain in full force and effect. 14.4 DEFINITION OF CHANGE OF CONTROL For the purpose of this Agreement, "Change of Control" means, with respect to either Party, any transaction, or series of related transactions, in which control of such Party, or substantially all of the business of such Party, is acquired by any person, whether by merger, purchase or transfer of stock, purchase of assets or otherwise. SECTION 15. CANCELLATION If a material breach of this Agreement by either Party shall occur, then, regardless of whether such breach was intentional or accidental, this Agreement may be terminated by the other Party by giving ninety (90) days prior written notice to the Party in breach. Such termination shall become effective at the end of said ninety (90)-day period unless the breach is cured during such period. SECTION 16. INTERPRETATION, DISPUTES AND GENERAL PROVISIONS 16.1 APPLICABLE LAW The validity, construction and performance of this Agreement shall be governed by and interpreted in accordance with the laws of Japan. 16.2 GOVERNING LANGUAGE 10 12 This Agreement is in the English language only, which language shall control in all respects. No translation of this Agreement into any other language shall have force or effect in the interpretation of this Agreement or in a determination of the intent of either Party. 16.3 ENTIRE AGREEMENT This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersedes any prior written or oral agreements or understandings between the Parties. 16.4 MODIFICATION, ETC. OF AGREEMENT No oral statement by either of the Parties shall alter the meaning or interpretation of this Agreement. No amendment or change hereof or addition hereto shall be effective or binding on either Party unless in writing and executed by the respective duly authorized representative of each Party. 16.5 NON-WAIVER No omission or delay on the part of either Party in requiring due and punctual fulfillment by the other Party of the obligations of such other Party hereunder shall be deemed to constitute a waiver by the omitting or delaying Party of any of its rights to require due and punctual fulfillment of any obligations hereunder, similar or otherwise, or a waiver of any remedy it might have hereunder. 16.6 FORCE MAJEURE A failure or omission by either Party in the performance of any obligation of this Agreement shall not be deemed a breach of this Agreement and shall not create any liability if the same shall arise from any cause or causes beyond the control of such Party, including, but not limited to, the following, which for the purposes of this Agreement shall be regarded as beyond the control of the Party in question: (i) Acts of God or acts or omissions of any government or any agency thereof, including compliance with requests, recommendations, rules, regulations or orders of any government authority or any officer, department, agency or instrumentality thereof; and (ii) Fire, storm, flood, earthquake, accident, acts of a public enemy, war, rebellion, insurrection, riot, invasion, strikes or lockouts. 16.7 ASSIGNMENT Unless otherwise provided for in this Agreement, neither this Agreement nor any rights and obligations hereunder shall be assigned by either Party to any third party without the prior written consent of the other Party. 16.8 NOTICES Except as otherwise provided for in this Agreement, all notices required or permitted to be given hereunder shall be in writing in the English language and shall be valid and sufficient if 11 13 dispatched by registered airmail, postage prepaid, in any post office in the United States of America in the case of such notices being dispatched from RADIANCE or in Japan in the case of such notices being dispatched from GLOBE, as the case may be, addressed to the other Party at the address first above written. Either Party may change its address by notice given to the other Party in the manner set forth above. Notices as herein provided for shall be considered to have been given ten (10) days after the mailing thereof. 16.9 ARBITRATION All disputes, controversies or differences which may arise between the Parties in relation to this Agreement, or for the breach hereof, shall be settled through bona fide negotiations between the Parties. Should such negotiations fail to result in a settlement within three (3) months from the date such negotiations began, the relevant dispute shall be finally settled by arbitration pursuant to the Rules of Conciliation and Arbitration of the International Chamber of Commerce, by which each Party agrees to be bound. The place of arbitration shall be Tokyo, Japan if filed by RADIANCE or Los Angeles, California if filed by GLOBE. 12 14 IN WITNESS WHEREOF this Agreement has been executed by the duly authorized representatives of the Parties on the date first above written. RADIANCE MEDICAL SYSTEMS, INC. GLOBE CO., LTD. By By ------------------------------ -------------------------------------- Name: Name: Title: Title: 13 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1,201 22,872 1,769 541 890 465 2,536 1,261 32,676 5,314 0 12 0 0 26,850 32,676 2,337 3,561 1,900 1,900 12,476 75 0 (10,104) 0 (10,104) 0 0 0 (10,104) (0.88) (0.88)
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