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As filed with the U.S. Securities and Exchange Commission on
January 26, 2009
Registration No. 333-155887
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Amendment No. 3
to
Form S-4
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
Replidyne, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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2834
(Primary Standard
Industrial
Classification Code Number)
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84-1568247
(I.R.S. Employer
Identification No.)
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1450 Infinite Dr.
Louisville, CO 80027
(303) 996-5500
(Address, including zip code,
and telephone number, including area code, of Registrants
principal executive offices)
Kenneth J. Collins
President and Chief Executive
Officer
Replidyne, Inc.
1450 Infinite Dr.
Louisville, CO 80027
(303) 996-5500
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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James C. T. Linfield, Esq.
Laura M. Medina, Esq.
Cooley Godward Kronish LLP
380 Interlocken Crescent, Suite 900
Broomfield, CO 80021
(720) 566-4000
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David L. Martin
President and Chief Executive Officer
Cardiovascular Systems, Inc.
651 Campus Drive
St. Paul, MN 55112
(651) 259-2800
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Robert K. Ranum, Esq.
Alexander Rosenstein, Esq.
Fredrikson & Byron, P.A.
200 South Sixth Street, Suite 4000
Minneapolis, MN 55402
(612) 492-7000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effectiveness of this registration statement and the
satisfaction or waiver of all other conditions under the merger
agreement described herein.
If the securities being registered on this form are being
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check
the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment that
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
registration statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this proxy statement/prospectus is not complete
and may be changed. Replidyne may not sell its securities
pursuant to the proposed transactions until the Registration
Statement filed with the Securities and Exchange Commission is
effective. This proxy statement/prospectus is not an offer to
sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not
permitted.
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SUBJECT
TO COMPLETION, DATED JANUARY 26, 2009
We are furnishing this proxy statement/prospectus to the holders
of Replidyne, Inc.s common stock and to holders of
Cardiovascular Systems, Inc.s common stock, Series A
convertible preferred stock,
Series A-1
convertible preferred stock and Series B convertible
preferred stock.
Replidyne, Inc., or Replidyne, and Cardiovascular Systems, Inc.,
or CSI, have entered into a merger agreement pursuant to which a
wholly owned subsidiary of Replidyne will merge with and into
CSI, with CSI continuing as a wholly owned subsidiary of
Replidyne. Immediately prior to the effective time of the
merger, each share of CSI preferred stock will be converted into
shares of CSI common stock at a ratio determined in accordance
with the CSI articles of incorporation. At the effective time of
the merger, each share of CSI common stock will convert into the
right to receive that number of shares of Replidyne common stock
as determined pursuant to the conversion factor described in the
merger agreement. Replidyne will assume outstanding and
unexercised options and warrants to purchase CSI common stock,
and they will be converted into warrants and options, as
applicable, to purchase Replidyne common stock in accordance
with the same conversion factor. Replidyne stockholders,
optionholders and warrantholders will continue to own and hold,
respectively, their existing shares of and options and warrants
for Replidyne common stock. Immediately after the merger,
current stockholders of Replidyne, together with holders of
Replidyne options and warrants, are expected to own or have the
right to acquire between 16.3% and 17.0% of the combined
company, and current CSI stockholders, together with holders of
CSI options and warrants, are expected to own or have the right
to acquire between 83.0% and 83.7% of the combined company, in
each case assuming that Replidynes net assets at closing
are between $35.0 and $37.0 million as calculated in
accordance with the terms of the merger agreement, on a fully
diluted basis using the treasury stock method of accounting for
options and warrants.
Shares of Replidyne common stock are currently listed on the
Nasdaq Global Market under the symbol RDYN. After
completion of the merger, Replidyne will be renamed
Cardiovascular Systems, Inc. and expects to trade on
the Nasdaq Global Market under the symbol CSII.
On ,
2009, the last trading day before the date of this proxy
statement/prospectus, the closing sale price of Replidyne common
stock was $ per share.
Replidyne is holding a special meeting of stockholders in order
to obtain the stockholder approvals necessary to complete the
merger and related matters. At the Replidyne special meeting,
which will be held at 9:00 a.m., local time, on
February 24, 2009 at Cooley Godward Kronish LLP,
380 Interlocken Crescent, Suite 900, Broomfield,
Colorado, unless postponed or adjourned to a later date,
Replidyne will ask its stockholders to, among other things,
approve the issuance of Replidyne common stock pursuant to the
merger and approve amendments to the Replidyne certificate of
incorporation effecting a reverse stock split of Replidyne
common stock, which is referred to as the reverse stock split,
and changing the Replidyne corporate name to
Cardiovascular Systems, Inc., each as described in
the accompanying proxy statement/prospectus.
CSI is holding a special meeting of stockholders in order to
obtain the stockholder approvals necessary to complete the
merger and related matters. At the CSI special meeting, which
will be held at 9:00 a.m., local time, on February 24,
2009 at Cardiovascular Systems, Inc., 651 Campus Drive, St.
Paul, Minnesota, unless postponed or adjourned to a later date,
CSI will ask its stockholders to, among other things, approve
and adopt the merger agreement and the merger contemplated
therein.
After careful consideration, the Replidyne and CSI boards of
directors have approved the merger agreement and the respective
proposals referred to above, and each of the Replidyne and CSI
boards of directors has determined that it is advisable to enter
into the merger. The board of directors of Replidyne and CSI
each recommends that its stockholders vote FOR the
proposals described in the accompanying proxy statement. Several
CSI stockholders have agreed with Replidyne to vote shares
representing approximately 20% of the outstanding capital stock
of CSI in favor of the merger and the other actions contemplated
by the merger agreement. In addition, several Replidyne
stockholders have agreed with CSI to vote shares representing
approximately 32% of the outstanding common stock of Replidyne
in favor of the issuance of the shares of Replidyne common stock
pursuant to the merger and the other actions contemplated by the
merger agreement.
More information about Replidyne, CSI and the proposed
transaction is contained in this proxy statement/prospectus.
Replidyne and CSI urge you to read the accompanying proxy
statement/prospectus carefully and in its entirety. In
particular, you should carefully consider the matters discussed
under Risk Factors beginning on
page 18.
This proxy statement/prospectus refers to important business and
financial information about Replidyne and CSI that is not
included in or delivered with this proxy statement/prospectus.
Such information is available without charge to stockholders of
Replidyne and CSI upon written or oral request at the following
addresses: For information concerning Replidyne, Replidyne,
Inc., Attn: Investor Relations, 1450 Infinite Drive, Louisville,
Colorado 80027, or by telephone at
(303) 996-5500;
and for information concerning CSI, Cardiovascular Systems,
Inc., Attn: Investor Relations, 651 Campus Drive, St. Paul,
Minnesota 55112, or by telephone at
(651) 259-2800.
To obtain timely delivery, Replidyne stockholders must
request the information no later than five business days before
the date of the special meeting of Replidyne stockholders, or no
later than February 17, 2009, and CSI stockholders must
request the information no later than five business days before
the date of the special meeting of CSI stockholders, or no later
than February 17, 2009.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this proxy
statement/prospectus. Any representation to the contrary is a
criminal offense.
The accompanying proxy statement/prospectus is
dated ,
2009, and is first being mailed to Replidyne and CSI
stockholders on or
about ,
2009.
Replidyne,
Inc.
1450 Infinite Dr.
Louisville, CO 80027
(303) 996-5500
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
To Be Held On February 24, 2009
To the Stockholders of Replidyne, Inc.:
On behalf of the board of directors of Replidyne, Inc., a
Delaware corporation, we are pleased to deliver this proxy
statement/prospectus for the proposed merger combining
Replidyne, Inc., or Replidyne, and Cardiovascular Systems, Inc.,
or CSI, a Minnesota corporation. The special meeting of
stockholders of Replidyne will be held on February 24, 2009
at 9:00 a.m. MST, at Cooley Godward Kronish LLP,
380 Interlocken Crescent, Suite 900, Broomfield,
Colorado, for the following purposes:
1. To consider and vote upon a proposal to approve the
issuance of Replidyne common stock pursuant to the Agreement and
Plan of Merger and Reorganization, dated November 3, 2008,
by and among Replidyne, Responder Merger Sub, Inc., and CSI as
described in the attached proxy statement/prospectus.
2. To authorize Replidynes board of directors to
amend Replidynes restated certificate of incorporation in
order to effect a reverse stock split of the issued and
outstanding shares of Replidyne common stock in a ratio of up to
one for 50, if and as determined by Replidynes board of
directors.
3. To approve an amendment to Replidynes restated
certificate of incorporation to change the name Replidyne,
Inc. to Cardiovascular Systems, Inc.
4. To approve Replidynes assumption of the
Cardiovascular Systems, Inc. 2007 Equity Incentive Plan to be
used by Replidyne following the consummation of the merger,
together with an increase in the number of shares of CSI common
stock reserved for issuance under the plan from 3,379,397 to
3,879,397, which following the merger will be converted into
shares of Replidyne common stock, subject to further adjustment
for the reverse stock split anticipated before closing of the
merger.
5. To approve an amendment to the Replidyne, Inc. 2006
Employee Stock Purchase Plan to (i) increase the number of
shares of Replidyne common stock reserved under the plan from
305,872 to 1,920,872, subject to further adjustment for the
reverse stock split anticipated before the closing of the merger
and (ii) amend the evergreen provisions of the
plan to provide that on July 1st of each year,
beginning with July 1, 2009, the share reserve under the
plan automatically will be increased by a number of shares equal
to the lesser of (A) one percent (1.0%) of the total number
of shares of Replidyne common stock outstanding on such date, or
(B) 1,800,000 shares (subject to adjustment for the
reverse stock split anticipated before the closing of the
merger), unless Replidynes board of directors designates a
smaller number of shares.
6. To consider and vote upon an adjournment of the special
meeting, if necessary, if a quorum is present, to solicit
additional proxies if there are not sufficient votes in favor of
Replidyne Proposal No. 1, 2, 3, 4 or 5.
7. To transact such other business as may properly come
before the special meeting or any adjournment or postponement
thereof.
The board of directors of Replidyne has fixed January 21,
2009 as the record date for the determination of stockholders
entitled to notice of, and to vote at, the special meeting and
any adjournment or postponement thereof. Only holders of record
of shares of Replidyne common stock at the close of business on
the record date are entitled to notice of, and to vote at, the
special meeting. At the close of business on the record date,
Replidyne had 27,114,677 shares of common stock outstanding
and entitled to vote.
Your vote is important. The affirmative vote of the holders
of a majority of the shares of Replidyne common stock casting
votes in person or by proxy at the Replidyne special meeting is
required for approval of Replidyne Proposal Nos. 1, 4, 5
and 6 and the affirmative vote of the holders of a majority of
the shares of Replidyne common stock having voting power
outstanding on the record date for the Replidyne special meeting
is required for approval of Replidyne Proposal Nos. 2 and
3. Even if you plan to attend the special
meeting in person, we request that you sign and return the
enclosed proxy and thus ensure that your shares will be
represented at the special meeting if you are unable to attend.
If you sign, date and mail your proxy card without indicating
how you wish to vote, your proxy will be counted as a vote in
favor of Replidyne Proposal Nos. 1, 2, 3, 4, 5 and 6. If
you fail to return your proxy card, the effect will be that your
shares will not be counted for purposes of determining whether a
quorum is present at the special meeting. You may revoke your
proxy in the manner described in the proxy statement/prospectus
before it has been voted at the special meeting. If you decide
to attend the Replidyne special meeting, you may withdraw your
proxy and vote in person.
By Order of the Board of Directors,
Secretary
Louisville, Colorado
,
2009
THE REPLIDYNE BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES
THAT EACH OF THE REPLIDYNE PROPOSALS OUTLINED ABOVE IS
ADVISABLE, AND IN THE BEST INTERESTS OF, REPLIDYNE AND ITS
STOCKHOLDERS AND HAS APPROVED EACH SUCH PROPOSAL. THE REPLIDYNE
BOARD OF DIRECTORS RECOMMENDS THAT REPLIDYNE STOCKHOLDERS VOTE
FOR EACH SUCH PROPOSAL.
Cardiovascular
Systems, Inc.
651 Campus Dr.
St. Paul, MN 55112
(651) 259-2800
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
To Be Held On February 24, 2009
To the Stockholders of Cardiovascular Systems, Inc.:
On behalf of the board of directors of Cardiovascular Systems,
Inc., a Minnesota corporation, we are pleased to deliver this
proxy statement/prospectus for the proposed merger combining
Replidyne, Inc., or Replidyne, a Delaware corporation, and
Cardiovascular Systems, Inc., or CSI. The special meeting of
stockholders of CSI will be held on February 24, 2009 at
9:00 a.m. CST, at Cardiovascular Systems Inc.,
651 Campus Drive, St. Paul, Minnesota, for the following
purposes:
1. To consider and vote upon a proposal to approve and
adopt the Agreement and Plan of Merger and Reorganization, dated
November 3, 2008, by and among Replidyne, Responder Merger
Sub, Inc., and CSI and the merger contemplated therein, as
described in the attached proxy statement/prospectus.
2. To authorize an increase in the number of shares of CSI
common stock reserved under CSIs 2007 Equity Incentive
Plan from 3,379,397 to 3,879,397.
3. To consider and vote upon an adjournment of the special
meeting, if necessary, if a quorum is present, to solicit
additional proxies if there are not sufficient votes in favor of
CSI Proposal No. 1 or 2.
4. To transact such other business as may properly come
before the special meeting or any adjournment or postponement
thereof.
The board of directors of CSI has fixed January 26, 2009 as
the record date for the determination of stockholders entitled
to notice of, and to vote at, the special meeting and any
adjournment or postponement thereof. Only holders of record of
shares of CSI common stock or preferred stock at the close of
business on the record date are entitled to notice of, and to
vote at, the special meeting. At the close of business on the
record date, CSI
had shares
of common
stock, shares
of Series A convertible preferred
stock, shares
of
Series A-1
convertible preferred stock
and shares
of Series B convertible preferred stock outstanding and
entitled to vote. Each holder of CSI preferred stock is entitled
to such number of votes per share on each proposal to be voted
upon as shall equal the number of shares of common stock into
which each share of the preferred stock is then convertible, and
in the event each share of the preferred stock is convertible
into a number of shares of common stock including a fraction,
each holder shall be entitled to vote the sum of fractions of a
share to which the holder is entitled, rounded down to the
nearest whole number. As of the record date, each share of
Series A convertible preferred stock was convertible into
1.01 shares of common stock, each share of
Series A-1
convertible preferred stock was convertible into
1.03 shares of common stock, and each share of
Series B convertible preferred stock was convertible into
1.01 shares of common stock.
Your vote is important. The affirmative vote of (i) the
holders of a majority of the voting power of CSI common stock
and preferred stock outstanding on the record date, voting as a
single class on an as-converted to common stock basis, and
(ii) a majority of the shares of CSI preferred stock
outstanding on the record date, voting as a single class on an
as-converted to common stock basis and including the shares of
CSI preferred stock held by affiliates of Easton Capital
Investment Group and Maverick Capital, Ltd., is required for
approval of CSI Proposal No. 1. The affirmative vote
of the holders of a majority of the voting power of CSI common
stock and preferred stock, voting as a single class on an
as-converted to common stock basis, casting votes in person or
by proxy at the CSI special meeting is required for approval of
CSI Proposal Nos. 2 and 3. Even if you plan to attend the
special meeting in person, we request that you sign and return
the enclosed proxy and thus ensure that your shares will be
represented at the special meeting if you are unable to attend.
If you sign, date and mail your proxy card without indicating
how you wish to vote, your proxy will be counted as a vote in
favor of CSI Proposal Nos. 1, 2 and 3. If you fail to
return your proxy card, the effect will be that your shares will
not be counted for purposes of determining whether a quorum is
present at the special meeting. You may revoke your proxy in the
manner described in the proxy statement/prospectus
before it has been voted at the special meeting. If you
decide to attend the CSI special meeting, you may withdraw your
proxy and vote in person.
By Order of the Board of Directors,
James E. Flaherty
Secretary
St. Paul, Minnesota
,
2009
THE CSI BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES THAT
EACH OF THE CSI PROPOSALS OUTLINED ABOVE IS ADVISABLE, AND
IN THE BEST INTERESTS OF, CSI AND ITS STOCKHOLDERS AND HAS
APPROVED EACH SUCH PROPOSAL. THE CSI BOARD OF DIRECTORS
RECOMMENDS THAT CSI STOCKHOLDERS VOTE FOR EACH SUCH
PROPOSAL.
TABLE OF
CONTENTS
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129
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130
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130
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130
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132
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136
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136
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137
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141
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141
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141
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145
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147
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150
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163
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168
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173
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178
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179
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182
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183
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iv
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184
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184
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193
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248
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248
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F-1
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F-43
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A-1
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B-1
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C-1
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D-1
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E-1
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F-1
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G-1
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H-1
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EX-23.1 |
EX-23.2 |
EX-23.3 |
EX-99.4 |
v
QUESTIONS
AND ANSWERS ABOUT THE MERGER, THE REPLIDYNE SPECIAL MEETING AND
THE CSI SPECIAL MEETING
The following section provides answers to frequently asked
questions about the merger and the effect of the merger on
holders of Replidyne common stock and CSI common stock and
preferred stock, the Replidyne special meeting and the CSI
special meeting. This section, however, only provides summary
information. Replidyne and CSI urge you to read carefully the
remainder of this proxy statement/prospectus, including the
annexes to this proxy statement/prospectus, because the
information in this section does not provide all the information
that might be important to you regarding the merger and the
other matters being considered at the Replidyne special meeting
and the CSI special meeting.
As used in this proxy statement/prospectus, references to
Replidyne refer collectively to Replidyne, Inc. and
all of its subsidiaries unless the context requires otherwise,
references to CSI refer to Cardiovascular Systems,
Inc. and all of its subsidiaries unless the context requires
otherwise, and references to the combined company
refer to Replidyne following the proposed transaction described
in this proxy statement/prospectus.
|
|
|
Q: |
|
What is the merger? |
|
A: |
|
Replidyne, CSI, and Responder Merger Sub, Inc., a Minnesota
corporation and wholly owned subsidiary of Replidyne, have
entered into an Agreement and Plan of Merger dated as of
November 3, 2008, which is referred to in this proxy
statement/prospectus as the merger agreement, that contains the
terms and conditions of the proposed business combination of
Replidyne and CSI. Pursuant to the merger agreement, on the
terms and conditions set forth therein, Responder Merger Sub,
Inc. will be merged with and into CSI, with CSI surviving the
merger as a wholly owned subsidiary of Replidyne. |
|
|
|
Immediately prior to the effective time of the merger, each
share of CSI preferred stock outstanding at such time will be
converted into shares of CSI common stock at the conversion
ratio determined pursuant to CSIs articles of
incorporation. At the effective time of the merger, each share
of CSI common stock outstanding immediately prior to the
effective time of the merger (excluding certain shares to be
canceled pursuant to the merger agreement, and shares held by
stockholders who have exercised and perfected dissenters
rights) will be converted into the right to receive between
6.460 and 6.797 shares of Replidyne common stock, assuming
that the net assets of Replidyne are between $35.0 million
and $37.0 million as calculated in accordance with the
terms of the merger agreement and that the number of shares of
Replidyne and CSI common stock outstanding on a fully diluted
basis using the treasury stock method of accounting for options
and warrants immediately prior to the effective time of the
merger has not changed from the number of such shares as of
October 31, 2008, subject to adjustment to account for the
effect of a reverse stock split of Replidyne common stock to be
implemented prior to the consummation of the merger, which is
referred to as the reverse stock split. As a result of the
merger, holders of CSI stock, options and warrants are expected
to own or have the right to acquire in the aggregate between
83.0% and 83.7% of the combined company and the holders of
Replidyne stock, options and warrants are expected to own or
have the right to acquire in the aggregate between 16.3% and
17.0% of the combined company. At the effective time of the
merger, Replidyne will change its corporate name to
Cardiovascular Systems, Inc. as required by the
merger agreement. |
|
Q: |
|
Why are the two companies proposing to merge? |
|
A: |
|
The combined company that results from the merger will be a
medical device company focused on developing and commercializing
interventional treatment systems for vascular disease. The
combined company will have several potential advantages,
including a highly differentiated product, the Diamondback
360° Orbital Atherectomy System, sufficient capital to fund
its projected operating requirements for the foreseeable future,
a product that targets a large, underserved market opportunity,
and a proven and experienced management team. |
|
Q: |
|
Why am I receiving this proxy statement/prospectus? |
|
A: |
|
You are receiving this proxy statement/prospectus because you
have been identified as a stockholder of Replidyne or CSI. If
you are a stockholder of Replidyne, you are entitled to vote at
Replidynes special meeting. If you are a stockholder of
CSI, you are entitled to vote at CSIs special meeting.
This document serves as a proxy statement of Replidyne and CSI,
used to solicit proxies for the special meetings of Replidyne
and CSI, |
vi
|
|
|
|
|
and as a prospectus of Replidyne, used to offer shares of
Replidyne common stock to CSI stockholders in exchange for
shares of CSI capital stock pursuant to the terms of the merger
agreement. This document contains important information about
the merger, the shares of Replidyne common stock to be issued in
the merger and the special meetings of Replidyne and CSI
stockholders, and you should read it carefully. |
|
Q: |
|
What is required to consummate the merger? |
|
A: |
|
To consummate the merger, Replidyne stockholders must approve
the issuance of shares of Replidyne common stock in the merger
and the certificate of amendment to the restated certificate of
incorporation of Replidyne and CSI stockholders must approve and
adopt the merger agreement and the merger contemplated therein. |
|
|
|
The approval by the stockholders of Replidyne requires the
affirmative vote of the holders of a majority of the shares of
Replidyne common stock casting votes in person or by proxy at
the Replidyne special meeting for the issuance of shares of
Replidyne common stock in the merger, and the affirmative vote
of the holders of a majority of shares of Replidyne common stock
having voting power outstanding on the record date for the
Replidyne special meeting for the amendment to Replidynes
restated certificate of incorporation. |
|
|
|
The approval by the stockholders of CSI requires the affirmative
votes of (i) the holders of a majority of the outstanding
shares of CSI common stock and preferred stock, voting as a
single class on an as-converted to common stock basis, and
(ii) the holders of a majority of the outstanding shares of
CSI preferred stock, voting as a single class on an as-converted
to common stock basis and including the shares of CSI preferred
stock held by affiliates of Easton Capital Investment Group and
Maverick Capital, Ltd. |
|
|
|
Several CSI stockholders have agreed with Replidyne to vote
shares representing approximately 20% of the outstanding capital
stock of CSI in favor of the merger and the other actions
contemplated by the merger agreement. These stockholders
represented the maximum number of the outstanding shares of CSI
capital stock that could be made subject to these voting
agreements under Minnesota corporate law. In addition, several
Replidyne stockholders, who beneficially own approximately 48%
of the outstanding common stock of Replidyne, have agreed with
CSI to vote shares representing approximately 32% of the
outstanding common stock of Replidyne in favor of the issuance
of the shares of Replidyne common stock pursuant to the merger
and the other actions contemplated by the merger agreement. |
|
|
|
The stockholders of Replidyne and CSI are also being asked to
approve certain other matters in connection with the
consummation of the merger that are described more fully in this
proxy statement/prospectus. While approval of these proposals is
not required to consummate the merger, the board of directors of
Replidyne or CSI, as the case may be, recommends that you vote
for these proposals. |
|
|
|
|
|
In addition to the requirement of obtaining such stockholder
approvals and appropriate regulatory approvals, each of the
other closing conditions set forth in the merger agreement must
be satisfied or waived. For a more complete description of the
closing conditions under the merger agreement, we urge you to
read the section entitled The Merger Agreement
Conditions to the Completion of the Merger on page 82
of this proxy statement/prospectus. |
|
|
|
Q: |
|
What is the reverse stock split and why is it necessary? |
|
A: |
|
Immediately prior to the effective time of the merger, the
outstanding shares of Replidyne common stock will be
reclassified and combined into a lesser number of shares to be
determined by Replidyne and CSI prior to the effective time of
the merger and publicly announced by Replidyne. The merger
constitutes a reverse merger under applicable
marketplace rules established by Nasdaq, which requires the
combined company to comply with the initial listing standards of
the applicable Nasdaq market to continue to be listed on such
market following the merger. The Nasdaq Global Markets
initial listing standards require a company to have, among other
things, a $4.00 per share minimum bid price. Because Replidyne
common stock is required to be listed on the Nasdaq Global
Market as a condition to closing the merger and the current
price of Replidyne common stock is less than the minimum bid
prices required by the Nasdaq Global Market, the reverse stock
split is necessary to consummate the merger. |
vii
|
|
|
Q: |
|
What will CSI stockholders receive in the merger? |
|
A: |
|
Replidyne has agreed to issue, and holders of CSI capital stock
will receive, shares of Replidyne common stock such that
following the consummation of the transactions contemplated by
the merger agreement, current stockholders of Replidyne,
together with holders of Replidyne options and warrants, are
expected to own or have the right to acquire between 16.3% and
17.0% of the common stock of the combined company, and current
CSI stockholders, together with holders of CSI options and
warrants, are expected to own or have the right to acquire
between 83.0% and 83.7% of the combined company, in each case
assuming that Replidynes net assets are between
$35.0 million and $37.0 million as calculated in
accordance with the terms of the merger agreement, on a fully
diluted basis using the treasury stock method of accounting for
options and warrants. Immediately prior to the effective time of
the merger, all outstanding shares of CSI preferred stock will
convert automatically into shares of CSI common stock pursuant
to the terms of CSIs articles of incorporation and a
preferred stockholder conversion agreement. The number of shares
of Replidyne common stock each CSI stockholder will receive will
be determined using a conversion factor based on the number of
outstanding shares of capital stock of Replidyne and CSI, any
outstanding options and warrants to purchase shares of capital
stock of Replidyne and CSI, and Replidynes net assets, in
each case calculated in accordance with the terms of the merger
agreement as of immediately prior to the effective time of the
merger. |
|
Q: |
|
How will the merger affect stock options and warrants for CSI
common stock? |
|
A: |
|
Replidyne will assume options and warrants to purchase shares of
CSI common stock which will become exercisable for shares of
Replidyne common stock with the same terms, exercisability,
vesting schedule and other provisions, but with the number of
shares and exercise price being appropriately adjusted to
reflect the conversion factor between Replidyne common stock and
CSI common stock determined in accordance with the merger
agreement and described above. |
|
Q: |
|
What are the material U.S. federal income tax consequences of
the merger to me? |
|
A: |
|
The merger has been structured to qualify as a tax-free
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended. As a result of the
mergers qualification as a reorganization, it is
anticipated that CSI stockholders will not recognize gain or
loss for U.S. federal income tax purposes upon the exchange of
shares of CSI common stock for shares of Replidyne common stock,
except with respect to cash received in lieu of fractional
shares of Replidyne common stock. |
|
Q: |
|
Who will be the directors of the combined company following
the merger? |
|
|
|
A: |
|
Following the merger, the board of directors of the combined
company will be comprised of nine directors, seven of whom are
currently directors of CSI and two of whom are currently
directors of Replidyne. The current directors of CSI that are
expected to become directors of the combined company are Brent
G. Blackey, John H. Friedman, Geoffrey O. Hartzler,
Roger J. Howe, David L. Martin, Glen D. Nelson and Gary M.
Petrucci. The current directors of Replidyne that are expected
to become directors of the combined company are Edward Brown and
Augustine Lawlor. |
viii
|
|
|
Q: |
|
Who will be the executive officers of the combined company
following the merger? |
|
A: |
|
Following the merger, the executive management team of the
combined company is expected to be composed of CSIs
executive management team prior to the merger and is
contemplated to include each of the following individuals
serving in the position set forth opposite his name. Each of the
following individuals currently serves in the same position with
CSI: |
|
|
|
Name
|
|
Position in the Combined Company
|
|
David L. Martin
|
|
President and Chief Executive Officer
|
Laurence L. Betterley
|
|
Chief Financial Officer
|
James E. Flaherty
|
|
Chief Administrative Officer and Secretary
|
John Borrell
|
|
Vice President of Sales
|
Brian Doughty
|
|
Vice President of Marketing
|
Robert J. Thatcher
|
|
Executive Vice President
|
Paul Tyska
|
|
Vice President of Business Development
|
Paul Koehn
|
|
Vice President of Manufacturing
|
|
|
|
Q: |
|
What risks should I consider in deciding whether to vote in
favor of the proposals? |
|
A: |
|
You should carefully review the section of this proxy
statement/prospectus entitled Risk Factors beginning
on page 18, which sets forth certain risks and
uncertainties related to the merger, risks and uncertainties to
which the combined companys business will be subject, and
risks and uncertainties to which each of Replidyne and CSI, as
an independent company, is subject. |
|
Q: |
|
When do you expect the merger to be consummated? |
|
|
|
A: |
|
We anticipate that the merger will occur in the first calendar
quarter of 2009 and on or around February 25, 2009, shortly
after the completion of both the Replidyne special meeting and
the CSI special meeting, but we cannot predict the exact timing. |
|
|
|
Q: |
|
What do I need to do now? |
|
A: |
|
We urge you to read this proxy statement/prospectus carefully,
including its annexes, and to consider how the merger affects
you. |
|
|
|
If you are a Replidyne stockholder, you may provide your proxy
instructions in three different ways. First, you can mail your
signed proxy card in the enclosed return envelope.
Alternatively, you can provide your proxy instructions via the
toll-free call center set up for this purpose at 1-800-Proxies
(1-800-776-9437)
in the United States or 1-718-921-8500 from foreign
countries and follow the instructions. Please have your proxy
card available when you call. Finally, you can provide your
proxy instructions via the Internet at
http://www.voteproxy.com
and follow the on-screen instructions. Please have your proxy
card available when you access the web page. Please provide your
proxy instructions only once and as soon as possible so that
your shares can be voted at the special meeting of Replidyne
stockholders. |
|
|
|
|
|
If you are a CSI stockholder, you may provide your proxy
instructions in two different ways. First, you can mail your
signed proxy card in the enclosed return envelope.
Alternatively, you can provide your proxy instructions via
facsimile to 1-612-492-7077 to the attention of Bonnie Eichers
of Fredrikson & Byron, P.A. Please provide your proxy
instructions only once and as soon as possible so that your
shares can be voted at the special meeting of CSI stockholders. |
|
|
|
Q: |
|
As a Replidyne stockholder, how does Replidynes board
of directors recommend that I vote? |
|
A: |
|
After careful consideration, Replidynes board of directors
has approved the merger agreement and each of the proposals
described in this proxy statement/prospectus that the
stockholders of Replidyne are being asked to consider, and has
determined that they are advisable, fair to and in the best
interests of Replidyne stockholders. Accordingly,
Replidynes board of directors recommends that Replidyne
stockholders vote FOR each such proposal. |
ix
|
|
|
Q: |
|
As a CSI stockholder, how does CSIs board of directors
recommend that I vote? |
|
A: |
|
After careful consideration, CSIs board of directors has
approved the merger agreement and each of the proposals
described in this proxy statement/prospectus that the
stockholders of CSI are being asked to consider, and has
determined that they are advisable, fair to and in the best
interests of CSI stockholders. Accordingly, CSIs board of
directors recommends that CSI stockholders vote FOR
each such proposal. |
|
Q: |
|
What happens if I do not return a proxy card or otherwise
provide proxy instructions? |
|
|
|
A: |
|
If you are a Replidyne stockholder and you do not submit a proxy
card or vote at the Replidyne special meeting, your shares will
not be counted as present for the purpose of determining the
presence of a quorum and will have no effect on the approval of
Replidyne Proposal Nos. 1, 4, 5 and 6, but would have the
same effect as voting against Replidyne Proposal Nos. 2 and
3. Broker non-votes will similarly have no effect on the
approval of Replidyne Proposal Nos. 1, 4, 5 and 6, but
would have the same effect as voting against Replidyne
Proposal Nos. 2 and 3. If you submit a proxy card and
affirmatively elect to abstain from voting, your proxy will be
counted as present for the purpose of determining the presence
of a quorum but will not be voted at the meeting. As a result,
your abstention will have no effect on the approval of Replidyne
Proposal Nos. 1, 4, 5 and 6, but would have the same effect
as voting against Replidyne Proposal Nos. 2 and 3. |
|
|
|
|
|
If you are a CSI stockholder and you do not submit a proxy card
or vote at the CSI special meeting, your shares will not be
counted as present for the purpose of determining the presence
of a quorum and would have the same effect as voting against CSI
Proposal No. 1, but will have no effect on the
approval of CSI Proposal Nos. 2 and 3. If you submit a
proxy card and affirmatively elect to abstain from voting, your
proxy will be counted as present for the purpose of determining
the presence of a quorum but will not be voted at the meeting.
As a result, your abstention would have the same effect as
voting against CSI Proposal No. 1, but will have no
effect on the approval of CSI Proposal Nos. 2 and 3. |
|
Q: |
|
May I vote in person? |
|
|
|
A: |
|
If your shares of Replidyne common stock are registered directly
in your name with Replidynes transfer agent you are
considered, with respect to those shares, the stockholder of
record, and the proxy materials and proxy card are being sent
directly to you. If you are a Replidyne stockholder of record as
of January 21, 2009, you may attend the special meeting of
Replidyne stockholders to be held on February 24, 2009 and
vote your shares in person, rather than signing and returning
your proxy card or otherwise providing proxy instructions.
However, we urge you to return your proxy card with your voting
instructions in any event, just in case your plans should change. |
|
|
|
|
|
If your shares of Replidyne common stock are held in a brokerage
account or by another nominee, you are considered the beneficial
owner of shares held in street name, and the proxy
materials are being forwarded to you together with a voting
instruction card. As the beneficial owner, you are also invited
to attend the special meeting of Replidyne stockholders. Since a
beneficial owner is not the stockholder of record, you may not
vote these shares in person at the special meeting unless you
obtain a legal proxy from the broker, trustee or
nominee that holds your shares, giving you the right to vote the
shares at the meeting. |
|
|
|
|
|
If your shares of CSI common stock or preferred stock are
registered directly in your name on the books of CSI you are
considered, with respect to those shares, the stockholder of
record, and the proxy materials and proxy card are being sent
directly to you. If you are a CSI stockholder of record as of
January 26, 2009, you may attend the special meeting of CSI
stockholders to be held on February 24, 2009 and vote your
shares in person, rather than signing and returning your proxy
card or otherwise providing proxy instructions. However, we urge
you to return your proxy card with your voting instructions in
any event, just in case your plans should change. |
|
|
|
Q: |
|
If my Replidyne shares are held in street name by
my broker, will my broker vote my shares for me? |
|
A: |
|
Your broker will not be able to vote your shares of Replidyne
common stock without instructions from you. You should instruct
your broker to vote your shares, following the procedure
provided by your broker. |
x
|
|
|
Q: |
|
May I change my vote after I have provided proxy
instructions? |
|
A: |
|
Replidyne stockholders of record, other than those Replidyne
stockholders who have executed voting agreements, may change
their vote at any time before their proxy is voted at the
Replidyne special meeting in one of three ways. First, you can
send a written notice stating that you would like to revoke your
proxy. Second, you can submit new proxy instructions either on a
new proxy card, by telephone or via the Internet. Third, you can
attend the meeting and vote in person. Your attendance alone
will not revoke your proxy. If you have instructed a broker to
vote your shares, you must follow directions received from your
broker to change those instructions. |
|
|
|
CSI stockholders of record, other than those CSI stockholders
who have executed voting agreements, may change their vote at
any time before their proxy is voted at the CSI special meeting
in one of three ways. First, you can send a written notice
stating that you would like to revoke your proxy. Second, you
can submit new proxy instructions either on a new proxy card, by
mail or facsimile. Third, you can attend the CSI special meeting
and vote in person. Your attendance alone will not revoke your
proxy. |
|
Q: |
|
Am I entitled to appraisal or dissenters rights? |
|
A: |
|
Under Delaware law, holders of Replidyne common stock are not
entitled to appraisal rights in connection with the merger. |
|
|
|
Under Minnesota law, holders of CSI common stock and preferred
stock are entitled to dissenters rights in connection with
the merger. If you do not wish to accept shares of Replidyne
common stock in the merger and you do not vote in favor of CSI
Proposal No. 1, you have the right under Minnesota law
to seek from CSI the fair value of your shares in
lieu of the Replidyne common stock you would receive if the
merger is completed. We refer you to the information under the
heading Appraisal and Dissenters Rights on
page 73 of this proxy statement/prospectus and to the
applicable Minnesota statute attached as Annex F to
this proxy statement/prospectus for information on how to
exercise your dissenters rights. Failure to follow all of
the steps required under Minnesota law will result in the loss
of your dissenters rights. |
|
Q: |
|
Who is paying for this proxy solicitation? |
|
A: |
|
Replidyne and CSI are conducting this proxy solicitation and
will each bear one-half the cost of the proxy solicitation,
including the preparation, assembly, printing and mailing of
this proxy statement/prospectus, the proxy card and any
additional information furnished to stockholders. Replidyne and
CSI will each bear its own legal expenses. Replidyne has engaged
and will pay D. F. King & Co, Inc., a proxy
solicitation firm, to solicit proxies from Replidyne
stockholders. Replidyne may also reimburse brokerage houses and
other custodians, nominees and fiduciaries for their costs of
forwarding proxy and solicitation materials to beneficial owners. |
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Q: |
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Who can help answer my questions? |
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If you are a Replidyne stockholder and would like additional
copies, without charge, of this proxy statement/prospectus or if
you have questions about the merger, including the procedures
for voting your shares, you should contact: |
Replidyne, Inc.
Attn: Investor Relations
1450 Infinite Drive
Louisville, CO 80027
(303) 996-5500
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If you are a CSI stockholder and would like additional copies,
without charge, of this proxy statement/prospectus or if you
have questions about the merger, including the procedures for
voting your shares, you should contact: |
Cardiovascular Systems, Inc.
Attn: Investor Relations
651 Campus Drive
St. Paul, MN 55112
(651) 259-2800
xi
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus. To understand the merger fully, you should
read carefully this entire document and the documents to which
we refer, including the annexes attached hereto. See Where
You Can Find More Information on page 248. The merger
agreement is attached as Annex A to this proxy
statement/prospectus. We encourage you to read the merger
agreement as it is the legal document that governs the merger.
We have included page references in parentheses to direct you to
a more detailed description of the topics presented in this
summary.
The
Companies
Replidyne, Inc.
1450 Infinite Drive
Louisville, CO 80027
(303) 996-5500
Replidyne was incorporated in Delaware in December 2000 and
began as a biopharmaceutical company focused on discovering,
developing, in-licensing and commercializing innovative
anti-infective products. In April 2008, Replidyne suspended
enrollment in the last of its clinical trials on its lead
product candidate, faropenem medoxomil, in order to conserve its
cash assets and further support initiatives related to the
pursuit of strategic transactions. As a result of its inability
to secure a partner for the faropenem medoxomil program,
Replidyne announced in June 2008 that it would return the
license for faropenem medoxomil to its licensor, Asubio Pharma
Co., Ltd. In August 2008, Replidyne suspended the development of
REP3123, an investigational narrow-spectrum antibacterial agent
for the treatment of clostridium difficile (C.
difficile) bacteria and C. difficile infection, and
its other anti-infective programs based on its bacterial DNA
replication inhibition technology. These and subsequent related
actions have reduced the Replidyne workforce to a level of three
employees as of December 31, 2008. Replidyne is pursuing
the sale of REP3123 and its related technology and the sale of
the anti-infective programs based on its bacterial DNA
replication inhibition technology in a transaction or
transactions separate from the merger. Replidyne no longer has
employees engaged in development and commercialization
activities.
Responder Merger Sub, Inc.
1450 Infinite Drive
Louisville, CO 80027
(303) 996-5500
Responder Merger Sub, Inc. is a wholly owned subsidiary of
Replidyne that was incorporated in Minnesota in October 2008.
Responder Merger Sub, Inc. does not engage in any operations and
exists solely to facilitate the merger.
Cardiovascular Systems, Inc.
651 Campus Drive,
St. Paul, MN 55112
(651) 259-2800
CSI is a medical device company focused on developing and
commercializing interventional treatment systems for vascular
disease. CSIs initial product, the Diamondback 360°
Orbital Atherectomy System, is a minimally invasive catheter
system for the treatment of peripheral arterial disease, or PAD.
In August 2007, the U.S. Food and Drug Administration, or
FDA, granted CSI 510(k) clearance for use of the Diamondback
360° as a therapy in patients with PAD. CSI was formed in
1989 as Shturman Cardiology Systems, Inc. and is incorporated in
Minnesota.
The
Merger (see page 49)
If the merger is consummated, CSI and Responder Merger Sub, Inc.
will merge, with CSI surviving as a wholly owned subsidiary of
Replidyne. It is anticipated that shortly after the merger
Replidyne will change its name to
1
Cardiovascular Systems, Inc. A copy of the merger agreement is
attached as Annex A to this proxy
statement/prospectus. You are encouraged to read the merger
agreement in its entirety because it is the legal document that
governs the merger.
Immediately after the merger, subject to adjustments to reflect
certain events that could occur prior to closing of the merger,
CSI stockholders, optionholders and warrantholders will own or
have the right to acquire between 83.0% and 83.7% of the
combined company and Replidyne stockholders, optionholders and
warrantholders will own or have the right to acquire between
16.3% and 17.0% of the combined company, in each case calculated
on a fully diluted basis using the treasury stock method of
accounting for options and warrants. Replidyne will assume
outstanding and unexercised options and warrants to purchase CSI
common stock, and they will be converted into options and
warrants, as applicable, to purchase Replidyne common stock. The
foregoing percentages assume that Replidynes net assets at
closing are between $35.0 and $37.0 million as calculated
in accordance with the terms of the merger agreement.
For a more complete description of the merger conversion factor,
see the section entitled The Merger Agreement in
this proxy statement/prospectus.
The closing of the merger will occur no later than the fifth
business day after the last of the conditions to the merger has
been satisfied or waived, or at another time as Replidyne and
CSI agree. Replidyne and CSI anticipate that the consummation of
the merger will occur shortly after the Replidyne and CSI
special meetings. However, because the merger is subject to a
number of conditions, neither Replidyne nor CSI can predict
exactly when the closing will occur or if it will occur at all.
After completion of the merger, assuming that Replidyne receives
the required stockholder approval of Replidyne
Proposal No. 3, Replidyne will be renamed
Cardiovascular Systems, Inc.
Reasons
for the Merger (see page 55)
The combined company that results from the merger will be a
medical device company focused on developing and commercializing
interventional treatment systems for vascular disease.
CSIs initial product, the Diamondback 360° Orbital
Atherectomy System, is a minimally invasive catheter system for
the treatment of peripheral arterial disease, or PAD. Replidyne
and CSI believe that the combined company will have the
following potential advantages:
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Highly differentiated product. The Diamondback
360° Orbital Atherectomy System has received FDA clearance.
Replidyne and CSI also believe that the Diamondback 360°
has features that differentiate it from other FDA approved or
cleared minimally invasive atherectomy devices. CSIs
revenues in the four fiscal quarters since the launch of the
product and the high reorder rate among its initial customers
demonstrate CSIs ability to retain its customer base.
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Financial resources of the combined
company. CSI believes that Replidynes
projected available cash at closing, together with CSIs
other cash resources, will be sufficient to fund CSIs
currently projected operating requirements for the foreseeable
future.
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Large underserved PAD market opportunity. PAD
is a circulatory problem in which plaque deposits build up on
the walls of arteries, reducing blood flow to the limbs. As
cited by the authors of the PARTNERS study published in the
Journal of the American Medical Association in 2001, PAD affects
approximately eight to 12 million people in the United
States. Despite the severity of PAD, it remains relatively under
diagnosed. Recent emphasis on PAD education from medical
associations, insurance companies and other groups, coupled with
publications in medical journals, is increasing physician and
patient awareness of PAD risk factors, symptoms and treatment
options.
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Proven management team with deep PAD
experience. CSIs management team has a
background in developing and marketing PAD devices and has
demonstrated the ability to successfully execute CSIs
growth strategy.
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Each of the board of directors of Replidyne and CSI also
considered other reasons for the merger, as described herein.
The board of directors of Replidyne considered, among other
things:
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the strategic alternatives available to Replidyne, including a
transaction with another potential partner, liquidation of the
company and the continued development of its former product
candidates;
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the failure of Replidynes lead product candidate,
faropenem medoxomil, to receive approval from the FDA for its
new drug application;
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the early stage of development of Replidynes research
pipeline programs and the capital that would be required to
achieve regulatory approval to complete the development of those
programs; and
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the recent volatility in the public markets that, when combined
with Replidynes net cash position and its public listing,
could allow Replidyne to obtain favorable terms in a
reverse merger transaction.
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In addition, the board of directors of CSI approved the merger
based on a number of factors, including the following:
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the expectation that the merger would be a more time- and
cost-effective means to access capital than other options
considered, including an initial public offering or an
additional round of private equity financing;
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the judgment of CSIs board of directors that the merger is
the best alternative available to CSI and its stockholders; and
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the likelihood that the merger will be consummated on a timely
basis.
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Opinion
of Replidynes Financial Advisor (see
page 60)
Morgan Stanley & Co. Incorporated, or Morgan Stanley,
the financial advisor of Replidyne, delivered to the board of
directors of Replidyne a written opinion, dated November 3,
2008, addressed to the board of directors of Replidyne, to the
effect that, as of the date of the opinion and based on and
subject to the various assumptions, qualifications and
limitations set forth in the opinion, the conversion factor
pursuant to the merger agreement was fair from a financial point
of view to Replidyne. The full text of Morgan Stanleys
opinion, which sets forth, among other things, the assumptions
made, procedures followed, matters considered and limitations on
the scope of the review undertaken by Morgan Stanley in
rendering its opinion, is attached as Annex D to
this proxy statement/prospectus and is incorporated by reference
in its entirety into this proxy statement/prospectus. Holders of
Replidyne common stock are encouraged to read the opinion
carefully and in its entirety. Morgan Stanleys opinion
was directed to the board of directors of Replidyne and only
addresses the fairness from a financial point of view of the
conversion factor pursuant to the merger agreement to Replidyne
as of the date of the opinion. Morgan Stanleys opinion
does not address any other aspect of the proposed merger or any
alternative to the proposed merger. Morgan Stanley expressed no
opinion or recommendation as to how the stockholders of
Replidyne or CSI should vote at the stockholders meetings
to be held in connection with the proposed merger.
Overview
of the Merger Agreement
Merger
Consideration (see page 78)
At the effective time of the merger, each share of CSI capital
stock not held as treasury stock or owned by CSI shall be
converted into a right to receive a number of shares of
Replidyne common stock equal to the conversion
factor. The conversion factor shall equal: (i)
(A) the number of surviving Replidyne
securities divided by the Replidyne post-closing
stockholder ownership percentage minus (B) the number
of surviving Replidyne securities, divided by (ii) the
number of converting CSI securities, each as defined
in the merger agreement and explained in this proxy
statement/prospectus.
Pursuant to the terms of the merger agreement, CSI and Replidyne
have agreed upon a methodology to determine the conversion
factor as defined above. The conversion factor shall be
determined as of immediately prior to the effective time of the
merger and is subject to change based upon Replidynes net
assets as of such time, and the number of shares of CSI and
Replidyne capital stock outstanding and issuable upon exercise
of outstanding options
3
and warrants, each as calculated in accordance with the terms of
the merger agreement. For illustrative purposes only, below is a
table that sets forth several levels of net assets for Replidyne
as of the closing of the merger, and the conversion factor and
aggregate post-closing ownership percentage in the combined
company for the stockholders, optionholders and warrantholders
of each of Replidyne and CSI that would result based on each
such level of net assets, in each case calculated in accordance
with the terms of the merger agreement and assuming that the
capitalization of both Replidyne and CSI is as of
October 31, 2008, except that the acceleration of vesting
of certain outstanding options to purchase Replidyne common
stock that is expected to occur upon the consummation of the
merger is assumed to have occurred for purposes of this
calculation.
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Replidyne Securityholder
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CSI Securityholder
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Ownership Percentage
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Ownership Percentage
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in the
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in the
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Net Assets
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Conversion Factor
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Combined Company
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Combined Company
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$
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41,000,000
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6.304
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17.4%
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82.6%
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40,000,000
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6.460
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17.0%
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83.0%
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37,000,000
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6.460
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17.0%
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83.0%
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36,000,000
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6.624
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16.7%
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83.3%
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35,000,000
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6.797
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16.3%
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83.7%
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34,000,000
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6.979
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15.9%
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84.1%
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33,000,000
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7.172
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15.6%
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84.4%
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The foregoing table is presented for illustrative purposes only.
The conversion factor is subject to the variables described
above and will not be calculated until immediately prior to the
effective time of the merger. Replidyne cannot assure you that
its level of net assets as of the effective time of the merger
will fall within the range set forth in this table. The
conversion factor is subject to proportionate adjustment to
account for the effect of the reverse stock split of
Replidynes issued and outstanding common stock.
Conditions
to the Completion of the Merger (see page 82)
Each partys obligation to complete the merger is subject
to a number of conditions, which may be waived by the applicable
party, and that include, among others, and subject to specified
exceptions, the following:
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stockholders of CSI must have approved and adopted the merger
agreement and the merger contemplated therein, and stockholders
of Replidyne must have approved the issuance of Replidyne common
stock in the merger and the amendment to the restated
certificate of incorporation of Replidyne;
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no temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the
merger shall have been issued by any court of competent
jurisdiction or other governmental body and remain in effect,
and there shall not be any legal requirement enacted or deemed
applicable to the merger that makes consummation of the merger
illegal;
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the initial listing application on the Nasdaq Global Market
shall have been conditionally approved, and the shares of
Replidyne common stock to be issued in the merger shall be
conditionally approved for listing on the Nasdaq Global Market,
both subject only to the completion of the closing and
completion by Replidyne of any reverse stock split required by
Nasdaq; and
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since the signing of the merger agreement, there shall not have
occurred and be continuing any material adverse effect for
either party.
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Limitation
on Soliciting, Discussing or Negotiating Other Acquisition
Proposals (see page 85)
Pursuant to the merger agreement, each of Replidyne and CSI
agreed that, except as described below, they will not, during
the pre-closing period, directly or indirectly:
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solicit, initiate, knowingly encourage, induce or facilitate the
making, submission or announcement of any acquisition
proposal or acquisition inquiry, each as
defined in the merger agreement and explained in this proxy
statement/prospectus, or take any action that would reasonably
be expected to lead to an acquisition proposal or acquisition
inquiry;
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furnish any nonpublic information regarding CSI or Replidyne, as
the case may be, to any person in connection with or in response
to an acquisition proposal or acquisition inquiry;
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engage in discussions or negotiations with any person with
respect to any acquisition proposal or acquisition inquiry;
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approve, endorse or recommend any acquisition proposal; or
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execute or enter into any letter of intent or similar document
or any contract contemplating or otherwise relating to any
acquisition transaction.
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Notwithstanding the foregoing, prior to obtaining the consent of
its stockholders, either party may furnish information regarding
such party to, and may enter into discussions or negotiations
with, any third party in response to a superior
offer (as defined in the merger agreement and explained in
this proxy statement/prospectus) or an unsolicited bona fide
written acquisition proposal made or received after the date of
the merger agreement that is reasonably likely to result in a
superior offer, if:
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neither such party nor any representative of such party has
breached the no solicitation provisions of the merger agreement
described above with respect to that particular superior offer
or acquisition proposal;
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the board of directors of such party concludes in good faith,
based on the advice of outside legal counsel, that such action
is required in order for such partys board of directors to
comply with its fiduciary obligations to such partys
stockholders under applicable legal requirements;
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at least three business days prior to furnishing any such
information to, or entering into discussions with, such person,
such party gives the other party written notice of the identity
of such person and of such partys intention to furnish
information to, or enter into discussions with, such person;
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such party receives from such person an executed confidentiality
agreement containing provisions (including nondisclosure
provisions, use restrictions, non-solicitation provisions, no
hire provisions and standstill provisions) at least
as favorable to such party as those contained in the
confidentiality agreement previously entered into between
Replidyne and CSI; and
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at least three business days prior to furnishing any such
nonpublic information to such person, such party furnishes such
information to the other party (to the extent such nonpublic
information has not been previously furnished by such party to
the other party).
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Termination
of the Merger Agreement (see page 91)
The merger agreement may be terminated prior to the effective
time of the merger (whether before or after approval and
adoption of the merger agreement by CSI stockholders and whether
before or after approval of the amendment to Replidynes
restated certificate of incorporation and the issuance of
Replidyne common stock in the merger by Replidyne stockholders):
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by mutual written consent of Replidyne and CSI, duly authorized
by their respective boards of directors;
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subject to certain limitations, by either Replidyne or CSI if
the merger shall not have been consummated by April 30,
2009;
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by either Replidyne or CSI if a court of competent jurisdiction
or other governmental body shall have issued a final and
nonappealable order, or shall have taken any other final and
nonappealable action, having the effect of permanently
restraining, enjoining or otherwise prohibiting the consummation
of the merger;
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by either Replidyne or CSI if Replidyne stockholders fail to
approve either the amendment to Replidynes restated
certificate of incorporation or the issuance of the Replidyne
common stock pursuant to the merger agreement at the special
meeting;
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by either Replidyne or CSI if CSI stockholders fail to approve
the adoption of the merger agreement at the special meeting;
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by either Replidyne or CSI if (i) the Replidyne board of
directors has withheld, withdrawn, amended or modified its
recommendation because it has determined in good faith, based on
the advice of its outside legal counsel, that such action is
required in order for the Replidyne board of directors to comply
with its fiduciary obligations to Replidyne stockholders under
applicable legal requirements, or (ii) Replidyne enters
into a letter of intent, memorandum of understanding or
definitive agreement with respect to a superior offer;
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by either Replidyne or CSI if (i) the CSI board of
directors has withheld, withdrawn, amended or modified its
recommendation because it has determined in good faith, based on
the advice of its outside legal counsel, that such action is
required in order for the CSI board of directors to comply with
its fiduciary obligations to CSI stockholders under applicable
legal requirements, or (ii) CSI enters into a letter of
intent, memorandum of understanding or definitive agreement with
respect to a superior offer; or
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subject to certain limitations, by either party in the event of
any inaccuracy of representations and warranties of the other
party having a material adverse effect or a material breach by
the other party of its obligations or covenants under the merger
agreement.
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Termination
Fees (see page 92)
Replidyne must pay CSI a nonrefundable fee of $1.5 million
and reimburse CSI for all actual out of pocket legal, accounting
and investment advisory fees paid or payable in connection with
the merger agreement and transactions contemplated by the merger
agreement if:
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the merger agreement is terminated by Replidyne or CSI if
(i) the Replidyne board of directors has withheld,
withdrawn, amended or modified its recommendation because it has
determined in good faith, based on the advice of its outside
legal counsel, that such action is required in order for the
Replidyne board of directors to comply with its fiduciary
obligations to Replidyne stockholders under applicable legal
requirements, or (ii) Replidyne enters into a letter of
intent, memorandum of understanding or definitive agreement with
respect to a superior offer; or
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the merger agreement is terminated by Replidyne or CSI if the
stockholders of Replidyne do not approve either the amendment to
Replidynes restated certificate of incorporation or the
issuance of Replidyne common stock at the Replidyne special
meeting of stockholders, and both of the following conditions
are met:
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prior to the Replidyne special meeting of stockholders, an
acquisition proposal with respect to Replidyne has been publicly
made and not withdrawn; and
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within twelve months of the termination of the merger agreement,
Replidyne enters into any agreement for an acquisition
transaction contemplated by such acquisition proposal or
consummates an acquisition transaction contemplated by such
acquisition proposal.
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CSI must pay Replidyne a nonrefundable fee of $1.5 million
and reimburse Replidyne for all actual out of pocket legal,
accounting and investment advisory fees paid or payable in
connection with the merger agreement and transactions
contemplated by the merger agreement if:
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the merger agreement is terminated by Replidyne or CSI if
(i) the CSI board of directors has withheld, withdrawn,
amended or modified its recommendation because it has determined
in good faith, based on the advice of its outside legal counsel,
that such action is required in order for the CSI board of
directors to comply with its fiduciary obligations to CSI
stockholders under applicable legal requirements, or
(ii) CSI enters into a letter of intent, memorandum of
understanding or definitive agreement with respect to a superior
offer; or
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the merger agreement is terminated by Replidyne or CSI if the
stockholders of CSI do not approve the adoption of the merger
agreement (including the consummation of the merger) at the CSI
special meeting of stockholders, and all of the following
conditions are met:
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prior to the CSI special meeting of stockholders, an acquisition
proposal with respect to CSI has been publicly made and not
withdrawn; and
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within twelve months of the termination of the merger agreement,
CSI enters into any agreement for an acquisition transaction
contemplated by such acquisition proposal or consummates an
acquisition transaction contemplated by such acquisition
proposal.
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Voting
Agreements (see page 94)
In order to induce Replidyne to enter into the merger agreement,
several CSI stockholders entered into voting agreements with and
granted irrevocable proxies in favor of Replidyne pursuant to
which, among other things, each of these stockholders agreed,
solely in its capacity as a stockholder, to vote shares
representing approximately 20% of the outstanding capital stock
of CSI in favor of the merger, the other actions contemplated by
the merger agreement and any action in furtherance of any of the
foregoing, and against, among other things, any proposal made in
opposition to, or in competition with, the merger. These
stockholders represented the maximum number of the outstanding
shares of CSI capital stock that could be made subject to these
voting agreements under Minnesota corporate law. All of these
stockholders are executive officers, directors, or entities
controlled by such persons, or 5% stockholders, of CSI.
In addition, in order to induce CSI to enter into the merger
agreement, several Replidyne stockholders, who together with
their respective affiliates, beneficially own approximately 48%
of the outstanding common stock of Replidyne, entered into
voting agreements and irrevocable proxies in favor of CSI
pursuant to which, among other things, each of these
stockholders agreed, solely in his capacity as a stockholder, to
vote shares representing approximately 32% of the outstanding
common stock of Replidyne in favor of the merger, the other
actions contemplated by the merger agreement and any action in
furtherance of any of the foregoing, and against, among other
things, any proposal made in opposition to, or in competition
with, the merger.
Replidyne and CSI stockholders that executed these voting
agreements have agreed not to engage in certain actions that
would solicit, encourage or support acquisition transactions
other than the merger.
Lock-up
Agreements (see page 95)
The directors and certain stockholders of both Replidyne and CSI
entered into
lock-up
agreements in favor of Replidyne and CSI pursuant to which they
have agreed, subject to limited exceptions, not to sell or
otherwise dispose of any shares of CSI common stock or Replidyne
common stock or any securities convertible into or exercisable
or exchangeable for shares of CSI common stock or Replidyne
common stock or engage in certain transactions with respect
thereto during the period beginning on the date of the merger
agreement and ending 90 days after the closing of the
merger. The
lock-up
restrictions will not apply to certain transfers not involving a
disposition for value, provided that the recipient agrees to be
bound by these
lock-up
restrictions and provided that such transfers are not required
to be reported, and are not voluntarily reported, in any public
report or filing with the SEC during the
lock-up
period. As of December 31, 2008, the parties to the lock-up
agreements owned approximately 37% of Replidynes
outstanding common stock and 28% of CSIs outstanding
capital stock, calculated on an as-converted to common stock
basis.
Pursuant to the merger agreement, Replidyne and CSI have each
agreed to use commercially reasonable efforts to cause its
respective officers to enter into
lock-up
agreements in favor of Replidyne and CSI on substantially the
same terms as described above.
CSI Stock
Options and Warrants (see page 72)
Upon the consummation of the merger, Replidyne will assume all
options and warrants to purchase shares of CSI common stock.
Each CSI option and warrant will become exercisable for shares
of Replidyne common stock, and the share quantity and exercise
price of each instrument will be adjusted according to the
conversion factor between Replidyne common stock and CSI common
stock determined in accordance with the merger agreement.
Conversion
of CSI Preferred Stock (see page 95)
Concurrently with the execution of the merger agreement, the
holders of approximately 68% of CSIs outstanding preferred
stock, calculated on an as-converted to common stock basis,
entered into an agreement with
7
CSI pursuant to which all outstanding shares of CSI preferred
stock will be automatically converted into shares of CSI common
stock, effective as of immediately prior to the effective time
of the merger.
Management
Following the Merger (see page 66)
Immediately following the merger, the executive management team
of the combined company is expected to be composed of CSIs
executive management team prior to the merger and is
contemplated to include the following individuals serving in the
position set forth opposite his name. Each of the following
individuals currently serves in the same position with CSI:
|
|
|
Name
|
|
Position in the Combined Company
|
|
David L. Martin
|
|
President and Chief Executive Officer
|
Laurence L. Betterley
|
|
Chief Financial Officer
|
James E. Flaherty
|
|
Chief Administrative Officer and Secretary
|
John Borrell
|
|
Vice President of Sales
|
Brian Doughty
|
|
Vice President of Marketing
|
Robert J. Thatcher
|
|
Executive Vice President
|
Paul Tyska
|
|
Vice President of Business Development
|
Paul Koehn
|
|
Vice President of Manufacturing
|
Interests
of Certain Directors, Officers and Affiliates of Replidyne and
CSI (see page 66)
Interests
of Replidynes Executive Officers and Directors in the
Merger
When considering the recommendation by the Replidyne board of
directors, you should be aware that a number of Replidynes
executive officers and directors have interests in the merger
that are different from those of other Replidyne stockholders.
As of December 31, 2008, all directors and executive
officers of Replidyne, together with their affiliates,
beneficially owned approximately 35% of the shares of Replidyne
common stock. For a more complete description of the interests
of current and former officers and directors of Replidyne, see
the section entitled Interests of Replidynes
Executive Officers and Directors in the Merger on
page 66 of this proxy statement/prospectus.
Interests
of CSIs Executive Officers and Directors in the
Merger
You also should be aware that a number of CSIs executive
officers and directors have interests in the merger that are
different from those of other CSI stockholders. As of
December 31, 2008, all directors and executive officers of
CSI, together with their affiliates, beneficially owned
approximately 28% of the shares of CSI capital stock. For a more
complete description of the interests of current and former
officers and directors of CSI, see the section entitled
Interests of CSIs Executive Officers and Directors
in the Merger on page 70 of this proxy
statement/prospectus.
Risk
Factors (see page 18)
The merger (including the possibility that the merger may not be
completed) poses a number of risks to each company and its
respective stockholders. In addition, both Replidyne and CSI are
subject to various risks associated with their businesses and
their industries, and the combined company is subject to
additional risks. The risks are discussed in greater detail
under the caption Risk Factors beginning on
page 18 of this proxy statement/prospectus. Replidyne and
CSI both encourage you to read and consider all of these risks
carefully.
Material
U.S. Federal Income Tax Consequences of the Merger (see
page 74)
As provided in the merger agreement, Cooley Godward Kronish LLP
and Fredrikson & Byron, P.A. will each issue a tax
opinion to the effect that the merger will constitute a
reorganization under Section 368 of Internal Revenue Code
of 1986, as amended. In such a reorganization, a CSI stockholder
generally will not recognize any gain or loss for
U.S. federal income tax purposes upon the exchange of its
shares of CSI capital stock for shares of
8
Replidyne common stock. However, any cash received for any
fractional share will result in the recognition of gain or loss
as if such stockholder sold its fractional share.
Tax matters can be complicated, and the tax consequences of the
merger to you will depend on the facts of your own situation.
You should consult your own tax advisors to fully understand the
tax consequences of the merger to you, including the
applicability and effect of federal, state, local and foreign
income and other tax laws.
Regulatory
Approvals and Nasdaq Stock Market Listing (see
page 73)
As of the date of this proxy statement/prospectus, neither
Replidyne nor CSI is required to make filings or to obtain
approvals or clearances from any antitrust regulatory
authorities in the United States or other countries to
consummate the merger. In the United States, Replidyne must
comply with applicable federal and state securities laws and the
rules and regulations of any stock exchange to which it becomes
subject, in connection with the issuance of shares of Replidyne
common stock in the merger and the filing of this proxy
statement/prospectus with the Securities and Exchange Commission.
Replidyne and CSI have filed an initial listing application with
the Nasdaq Global Market pursuant to Nasdaq Stock Market LLC
reverse merger rules. If such application is
accepted, Replidyne and CSI anticipate that the combined
companys stock will be listed on the Nasdaq Global Market
following the closing of the merger under the trading symbol
CSII.
Anticipated
Accounting Treatment (see page 76)
The merger will be treated as a purchase of the net assets of
Replidyne by CSI in accordance with accounting principles
generally accepted in the United States.
Appraisal
and Dissenters Rights (see page 73)
Under Delaware law, holders of Replidyne common stock are not
entitled to appraisal rights in connection with the merger.
Under Minnesota law, holders of CSI common stock and preferred
stock are entitled to dissenters rights in connection with
the merger. A CSI stockholder that does not wish to accept
shares of Replidyne common stock in the merger and does not vote
in favor of the merger has the right under Minnesota law to seek
from CSI the fair value of the holders CSI
shares in lieu of the Replidyne common stock the CSI stockholder
would receive if the merger is completed. A CSI
stockholders failure to follow all of the steps required
under Minnesota law will result in the loss of dissenters
rights.
Comparison
of Stockholder Rights (see page 224)
Replidyne is incorporated under the laws of the State of
Delaware, and the rights of Replidyne stockholders are
accordingly governed by the Delaware General Corporation Law, or
DGCL. CSI is incorporated under the laws of the State of
Minnesota, and the rights of CSI stockholders are accordingly
governed by the Minnesota Business Corporation Act, or MBCA. If
the merger is completed, CSI stockholders will become
stockholders of Replidyne, and their rights will be governed by
the DGCL and the restated certificate of incorporation and the
bylaws of Replidyne, as they may be amended. The rights of
Replidyne stockholders under the DGCL and the restated
certificate of incorporation and bylaws of Replidyne differ from
the rights of CSI stockholders under the MBCA and the articles
of incorporation and bylaws of CSI.
9
SELECTED
HISTORICAL AND UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL DATA
The following tables present summary historical financial
data for Replidyne and CSI, summary unaudited pro forma
condensed combined financial data for Replidyne and CSI, and
comparative historical and unaudited pro forma per share data
for Replidyne and CSI.
Selected
Historical Financial Data of Replidyne
The following selected financial data should be read together
with Replidynes financial statements and accompanying
notes and Managements Discussion and Analysis of
Financial Condition and Results of Operations for
Replidyne included elsewhere in this proxy
statement/prospectus. The selected financial data in this
section is not intended to replace Replidynes financial
statements and the accompanying notes. Historical results are
not necessarily indicative of operating results to be expected
in the future.
The selected financial data presented below for each year in the
five years ended December 31, 2007 are derived from
Replidynes audited financial statements, and are qualified
by reference to such financial statements and notes thereto. The
statements of operations data for the years ended
December 31, 2005, 2006 and 2007 and the balance sheet data
as of December 31, 2006 and 2007 are derived from
Replidynes audited financial statements included elsewhere
in this proxy statement/prospectus. The statements of operations
data for the years ended December 31, 2003 and 2004 and the
balance sheet data as of December 31, 2003, 2004 and 2005
are derived from Replidynes audited financial statements
not included in this proxy statement/prospectus. The statements
of operations data for the nine months ended September 30,
2007 and 2008 and the balance sheet data as of
September 30, 2008 are derived from Replidynes
unaudited financial statements that are included elsewhere in
this proxy statement/prospectus. The unaudited financial data as
of September 30, 2008 and for the nine months ended
September 30, 2007 and 2008 include all adjustments
(consisting only of normal recurring adjustments) that Replidyne
considers necessary for a fair presentation of the financial
position and operating results for the periods presented.
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Years Ended December 31,
|
|
|
September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(1)
|
|
|
2007(1)
|
|
|
2007(1)
|
|
|
2008(1)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
726
|
|
|
$
|
834
|
|
|
$
|
441
|
|
|
$
|
15,988
|
|
|
$
|
58,571
|
|
|
$
|
58,571
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
12,331
|
|
|
|
16,282
|
|
|
|
29,180
|
|
|
|
38,295
|
|
|
|
43,313
|
|
|
|
28,462
|
|
|
|
26,842
|
|
Sales, general and administrative
|
|
|
2,155
|
|
|
|
2,994
|
|
|
|
5,329
|
|
|
|
12,187
|
|
|
|
13,020
|
|
|
|
9,803
|
|
|
|
12,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
14,486
|
|
|
|
19,276
|
|
|
|
34,509
|
|
|
|
50,482
|
|
|
|
56,333
|
|
|
|
38,265
|
|
|
|
39,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(13,760
|
)
|
|
|
(18,442
|
)
|
|
|
(34,068
|
)
|
|
|
(34,494
|
)
|
|
|
2,238
|
|
|
|
20,306
|
|
|
|
(39,132
|
)
|
Other income (expense), net
|
|
|
(190
|
)
|
|
|
(797
|
)
|
|
|
399
|
|
|
|
5,245
|
|
|
|
5,454
|
|
|
|
4,329
|
|
|
|
1,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(13,950
|
)
|
|
|
(19,239
|
)
|
|
|
(33,669
|
)
|
|
|
(29,249
|
)
|
|
|
7,692
|
|
|
|
24,635
|
|
|
|
(37,603
|
)
|
Preferred stock dividends and accretion
|
|
|
(1,294
|
)
|
|
|
(3,560
|
)
|
|
|
(7,191
|
)
|
|
|
(5,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(15,244
|
)
|
|
$
|
(22,799
|
)
|
|
$
|
(40,860
|
)
|
|
$
|
(34,640
|
)
|
|
$
|
7,692
|
|
|
$
|
24,635
|
|
|
$
|
(37,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) attributable to common stockholders per
share
|
|
$
|
(20.82
|
)
|
|
$
|
(30.55
|
)
|
|
$
|
(39.20
|
)
|
|
$
|
(2.49
|
)
|
|
$
|
0.29
|
|
|
$
|
0.92
|
|
|
$
|
(1.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) attributable to common stockholders
per share
|
|
$
|
(20.82
|
)
|
|
$
|
(30.55
|
)
|
|
$
|
(39.20
|
)
|
|
$
|
(2.49
|
)
|
|
$
|
0.28
|
|
|
$
|
0.89
|
|
|
$
|
(1.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing net (income) loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
732
|
|
|
|
746
|
|
|
|
1,042
|
|
|
|
13,908
|
|
|
|
26,730
|
|
|
|
26,696
|
|
|
|
27,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
732
|
|
|
|
746
|
|
|
|
1,042
|
|
|
|
13,908
|
|
|
|
27,666
|
|
|
|
27,666
|
|
|
|
27,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Costs and expenses for periods subsequent to December 31,
2005 include stock-based compensation expense in accordance with
SFAS No. 123(R), Share-Based Payment, which was
adopted by Replidyne on January 1, 2006. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of December 31,
|
|
|
September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
692
|
|
|
$
|
27,018
|
|
|
$
|
59,420
|
|
|
$
|
125,567
|
|
|
$
|
90,266
|
|
|
$
|
50,591
|
|
Working capital
|
|
|
(1,657
|
)
|
|
|
24,409
|
|
|
|
50,755
|
|
|
|
68,147
|
|
|
|
80,440
|
|
|
|
45,034
|
|
Total assets
|
|
|
4,169
|
|
|
|
30,067
|
|
|
|
63,579
|
|
|
|
135,561
|
|
|
|
94,690
|
|
|
|
52,112
|
|
Long-term debt, net of current portion and discount
|
|
|
1,208
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(20,105
|
)
|
|
|
(42,235
|
)
|
|
|
(83,107
|
)
|
|
|
(116,980
|
)
|
|
|
(109,288
|
)
|
|
|
(146,891
|
)
|
Preferred stock
|
|
|
20,058
|
|
|
|
69,447
|
|
|
|
136,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
|
(20,115
|
)
|
|
|
(42,202
|
)
|
|
|
(82,632
|
)
|
|
|
71,372
|
|
|
|
82,404
|
|
|
|
45,237
|
|
11
Selected
Historical Financial Data of CSI
The following table presents CSIs selected historical
consolidated financial data. CSI derived the selected statements
of operations data for the years ended June 30, 2006, 2007
and 2008 and balance sheet data as of June 30, 2007 and
2008 from CSIs audited consolidated financial statements
and related notes that are included elsewhere in this proxy
statement/prospectus. CSI derived the selected consolidated
statements of operations data for the years ended June 30,
2004 and 2005 and the balance sheet data as of June 30,
2004, 2005 and 2006 from CSIs audited consolidated
financial statements that do not appear in this proxy
statement/prospectus. CSI derived the consolidated statements of
operations data for the three months ended September 30,
2007 and 2008 and the balance sheet data as of
September 30, 2008 from CSIs unaudited consolidated
financial statements and related notes that are included
elsewhere in this proxy statement/prospectus. CSI has prepared
this unaudited information on the same basis as the audited
consolidated financial statements and has included all
adjustments, consisting only of normal recurring adjustments,
that CSI considers necessary for a fair presentation of
CSIs financial position and operating results for such
period. CSI has prepared the unaudited interim consolidated
financial statements in accordance with accounting principles
generally accepted in the United States of America, or GAAP, and
the rules and regulations of the SEC for interim financial
statements. CSIs historical results are not necessarily
indicative of the results that may be expected in the future and
the results for the three months ended September 30, 2008
are not necessarily indicative of the results for the full year.
You should read this data together with CSIs consolidated
financial statements and related notes included elsewhere in
this proxy statement/prospectus and the information under
Managements Discussion and Analysis of Financial
Condition and Results of Operations for CSI.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Years Ended June 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007(1)
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
2008(1)
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
22,177
|
|
|
$
|
|
|
|
$
|
11,646
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,927
|
|
|
|
(539
|
)
|
|
|
3,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,250
|
|
|
|
(539
|
)
|
|
|
7,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
984
|
|
|
|
1,177
|
|
|
|
1,735
|
|
|
|
6,691
|
|
|
|
35,326
|
|
|
|
3,552
|
|
|
|
16,424
|
|
Research and development
|
|
|
3,246
|
|
|
|
2,371
|
|
|
|
3,168
|
|
|
|
8,446
|
|
|
|
16,068
|
|
|
|
3,328
|
|
|
|
4,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,230
|
|
|
|
3,548
|
|
|
|
4,903
|
|
|
|
15,137
|
|
|
|
51,394
|
|
|
|
6,880
|
|
|
|
21,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,230
|
)
|
|
|
(3,548
|
)
|
|
|
(4,903
|
)
|
|
|
(15,137
|
)
|
|
|
(38,144
|
)
|
|
|
(7,419
|
)
|
|
|
(13,614
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(48
|
)
|
|
|
(1,340
|
)
|
|
|
(923
|
)
|
|
|
(300
|
)
|
|
|
(227
|
)
|
Interest income
|
|
|
18
|
|
|
|
37
|
|
|
|
56
|
|
|
|
881
|
|
|
|
1,167
|
|
|
|
278
|
|
|
|
142
|
|
Impairment on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
18
|
|
|
|
37
|
|
|
|
8
|
|
|
|
(459
|
)
|
|
|
(1,023
|
)
|
|
|
(22
|
)
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,212
|
)
|
|
|
(3,511
|
)
|
|
|
(4,895
|
)
|
|
|
(15,596
|
)
|
|
|
(39,167
|
)
|
|
|
(7,441
|
)
|
|
|
(13,699
|
)
|
Accretion of redeemable convertible preferred stock(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,835
|
)
|
|
|
(19,422
|
)
|
|
|
(4,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(4,212
|
)
|
|
$
|
(3,511
|
)
|
|
$
|
(4,895
|
)
|
|
$
|
(32,431
|
)
|
|
$
|
(58,589
|
)
|
|
$
|
(12,294
|
)
|
|
$
|
(13,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted(3)
|
|
$
|
(0.78
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(5.22
|
)
|
|
$
|
(8.57
|
)
|
|
$
|
(1.95
|
)
|
|
$
|
(1.78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted(3)
|
|
|
5,375,795
|
|
|
|
5,779,942
|
|
|
|
6,183,715
|
|
|
|
6,214,820
|
|
|
|
6,835,126
|
|
|
|
6,291,512
|
|
|
|
7,692,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses in the years ended June 30, 2007 and
2008 and three months ended September 30, 2007 and 2008
include stock-based compensation expense as a result of the
adoption of SFAS No. 123(R), Share-Based Payment on
July 1, 2006, as follows (in thousands): |
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Years Ended June 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Cost of goods sold
|
|
$
|
|
|
|
$
|
232
|
|
|
$
|
|
|
|
$
|
176
|
|
Selling, general and administrative
|
|
|
327
|
|
|
|
6,852
|
|
|
|
277
|
|
|
|
1,384
|
|
Research and development
|
|
|
63
|
|
|
|
297
|
|
|
|
73
|
|
|
|
112
|
|
|
|
|
(2) |
|
See Notes 1 and 10 of the notes to CSIs consolidated
financial statements included elsewhere in this proxy
statement/prospectus for a discussion of the accretion of
redeemable convertible preferred stock. |
|
(3) |
|
See Note 12 of the notes to CSIs consolidated
financial statements included elsewhere in this proxy
statement/prospectus for a description of the method used to
compute basic and diluted net loss per common share and basic
and diluted weighted-average number of shares used in per common
share calculations. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of June 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,144
|
|
|
$
|
1,780
|
|
|
$
|
1,554
|
|
|
$
|
7,908
|
|
|
$
|
7,595
|
|
|
$
|
14,727
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,615
|
|
|
|
|
|
|
|
|
|
Working capital(1)
|
|
|
2,868
|
|
|
|
1,349
|
|
|
|
(1,240
|
)
|
|
|
18,171
|
|
|
|
(3,118
|
)
|
|
|
(11,144
|
)
|
Total current assets
|
|
|
3,166
|
|
|
|
2,116
|
|
|
|
2,424
|
|
|
|
20,828
|
|
|
|
18,204
|
|
|
|
24,914
|
|
Total assets
|
|
|
4,031
|
|
|
|
2,874
|
|
|
|
3,296
|
|
|
|
22,025
|
|
|
|
41,958
|
|
|
|
48,612
|
|
Redeemable convertible preferred stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,094
|
|
|
|
3,986
|
|
|
|
4,047
|
|
Total liabilities
|
|
|
298
|
|
|
|
767
|
|
|
|
3,723
|
|
|
|
5,830
|
|
|
|
25,408
|
|
|
|
42,605
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,498
|
|
|
|
98,242
|
|
|
|
98,242
|
|
Total shareholders (deficiency) equity
|
|
|
3,733
|
|
|
|
2,107
|
|
|
|
(427
|
)
|
|
|
(32,303
|
)
|
|
|
(81,692
|
)
|
|
|
(92,235
|
)
|
|
|
|
(1) |
|
Working capital is calculated as total current assets less total
current liabilities as of the balance sheet date indicated. |
Quarterly
Results of Operations
The following table presents CSIs unaudited quarterly
results of operations for each of CSIs last nine quarters
ended September 30, 2008. You should read the following
table in conjunction with CSIs consolidated financial
statements and related notes included elsewhere in this proxy
statement/prospectus. CSI has prepared the unaudited information
on the same basis as CSIs audited consolidated financial
statements. These interim financial statements reflect all
adjustments consisting of normal recurring accruals, which, in
the opinion of CSIs management, are necessary to present
fairly the results of CSIs operations for the interim
periods. Results of operations for any quarter are not
necessarily indicative of results for any future quarters or for
a full year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,631
|
|
|
$
|
7,654
|
|
|
$
|
9,892
|
|
|
$
|
11,646
|
|
Gross profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(539
|
)
|
|
|
2,438
|
|
|
|
5,142
|
|
|
|
6,209
|
|
|
|
7,765
|
|
Loss from operations
|
|
|
(1,571
|
)
|
|
|
(2,964
|
)
|
|
|
(3,984
|
)
|
|
|
(6,618
|
)
|
|
|
(7,419
|
)
|
|
|
(10,187
|
)
|
|
|
(9,291
|
)
|
|
|
(11,247
|
)
|
|
|
(13,614
|
)
|
Net loss
|
|
|
(1,328
|
)
|
|
|
(3,139
|
)
|
|
|
(4,187
|
)
|
|
|
(6,942
|
)
|
|
|
(7,441
|
)
|
|
|
(9,768
|
)
|
|
|
(10,611
|
)
|
|
|
(11,347
|
)
|
|
|
(13,699
|
)
|
Net loss available to common shareholders(1)
|
|
|
(5,207
|
)
|
|
|
(7,266
|
)
|
|
|
(8,584
|
)
|
|
|
(11,374
|
)
|
|
|
(12,294
|
)
|
|
|
(10,121
|
)
|
|
|
(24,827
|
)
|
|
|
(11,347
|
)
|
|
|
(13,699
|
)
|
|
|
|
(1) |
|
Net loss available to common shareholders includes accretion of
redeemable convertible preferred stock. |
13
Selected
Unaudited Pro Forma Condensed Combined Financial Data of
Replidyne and CSI
The following unaudited pro forma financial data should be
read in conjunction with the historical financial statements and
the accompanying notes of Replidyne and CSI, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations for Replidyne and
Managements Discussion and Analysis of Financial
Condition and Results of Operations for CSI, which are
included elsewhere in this proxy statement/prospectus, and the
other information contained in this proxy statement/prospectus.
See Where You Can Find More Information beginning on
page 248 and the financial statements of Replidyne and CSI
beginning on pages F-1 and F-43, respectively.
The following selected unaudited pro forma condensed combined
financial information presents the effect of the merger of
Replidyne and CSI pursuant to the merger agreement. For
accounting purposes, CSI is considered to be acquiring the net
assets of Replidyne in the merger. The following unaudited pro
forma condensed combined balance sheet data assume that the
merger took place on September 30, 2008 and combines the
CSI historical consolidated balance sheet at September 30,
2008 with the Replidyne historical balance sheet at
September 30, 2008 and includes the effect of the issuance
of warrants to purchase 3.5 million shares of CSI common
stock to current CSI preferred stockholders in connection with
the conversion of preferred stock into common stock immediately
prior to the effective time of the proposed merger. Because as
of December 31, 2008 Replidyne had reduced its employee
headcount to three employees that are not engaged in development
or commercialization efforts and will not transition to CSI, had
returned its license to develop faropenem medoxomil to Asubio
Pharma Co., Ltd. and had suspended development of REP3123 and
its other anti-infective programs based on its bacterial DNA
replication inhibition technology, and is engaged in a process
to sell or otherwise dispose of its remaining research and
development programs, including REP3123 and its bacterial DNA
replication inhibition technology, Replidyne is not considered
to be a business for accounting purposes. The unaudited pro
forma condensed combined statements of operations data assume
that the merger took place as of July 1, 2007, and combines
the historical results of Replidyne and CSI for the three months
ended September 30, 2008 and the year ended June 30,
2008. The historical results of CSI were derived from its
unaudited consolidated statement of operations for the three
months ended September 30, 2008 and its audited
consolidated statement of operations for the year ended
June 30, 2008 included herein. The historical results of
Replidyne were derived from its unaudited statement of
operations for the three months ended September 30, 2008
included herein, and a combination of its audited statement of
operations for the year ended December 31, 2007 included
herein, and its unaudited statement of operations for the six
months ended June 30, 2007 and 2008 included in its
Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2008. The unaudited
pro forma condensed combined financial statements do not account
for the effect of a reverse stock split of Replidyne common
stock to be implemented immediately prior to the effective time
of the merger.
The selected unaudited pro forma condensed combined financial
data are presented for illustrative purposes only and are not
necessarily indicative of the combined financial position or
results of operations of future periods or the results that
actually would have been realized had the entities been a single
entity during these periods. Replidyne and CSI expect the fair
value of the net assets of Replidyne to approximate the fair
value of Replidyne common stock at the date of the merger. The
unaudited pro forma condensed combined financial statements have
been prepared using CSIs June 30 year end, as the
combined company anticipates having a June 30 year end upon
closing of the merger. The financial statements of the combined
entity after the merger will reflect the historical results of
CSI before the merger and will not include the historical
financial results of Replidyne before the completion of the
merger. The selected unaudited pro forma condensed combined
financial data as of and for the three months ended
September 30, 2008 and for the year ended June 30,
2008 are derived from the unaudited pro forma condensed combined
financial information appearing elsewhere in this proxy
statement/prospectus, and should be read in conjunction with
that information. For purposes of the unaudited pro forma
condensed combined financial statements, presented elsewhere
herein, Replidyne and CSI have made allocations of the estimated
purchase price to the assets to be acquired and liabilities to
be assumed based on preliminary estimates of their fair value. A
final determination of these estimated fair values, which cannot
be made prior to the completion of the merger, will be based on
the actual net assets of Replidyne that exist as of the date of
consummation of the merger. The actual amounts recorded as of
the consummation of the merger may differ
14
materially from the information presented in these unaudited pro
forma condensed combined financial statements as a result of:
|
|
|
|
|
net cash used in Replidynes operations between the pro
forma balance sheet date of September 30, 2008 and the
closing of the merger;
|
|
|
|
the timing of completion of the merger;
|
|
|
|
Replidynes net assets as calculated pursuant to the merger
agreement, which will partially determine the actual number of
shares of Replidynes common stock to be issued pursuant to
the merger; and
|
|
|
|
other changes in Replidynes net assets that may occur
prior to completion of the merger, which could cause material
differences in the information presented below.
|
The estimated total purchase price of Replidyne in these
unaudited pro forma condensed combined financial statements was
based on the net assets as of September 30, 2008, the date
on which the proposed merger is deemed to have occurred for
purposes of these pro forma financial statements. The Replidyne
net assets as of September 30, 2008 have been adjusted to
include estimates for costs to be incurred as a result of
ceasing its operations.
The final asset allocation may change significantly from
preliminary estimates. The actual asset allocation upon
consummation of the merger will be based on the fair value of
the consideration paid and fair values of Replidynes
assets and liabilities as determined at the time of
consummation. Replidyne continues to use its cash and other
liquid assets to finance the closing of its operations.
Replidyne and CSI will re-evaluate the determination of the
purchase price at the time of consummation of the merger. Please
see Note 2 to the unaudited pro forma combined condensed
financial statements included elsewhere in this proxy
statement/prospectus for further discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Unaudited Pro Forma Condensed Combined Statement of
Operations Data
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
22,177
|
|
|
$
|
11,646
|
|
Selling, general and administrative expenses
|
|
|
47,810
|
|
|
|
21,317
|
|
Research and development expenses
|
|
|
62,610
|
|
|
|
9,675
|
|
Loss from operations
|
|
|
(97,170
|
)
|
|
|
(23,227
|
)
|
Net loss
|
|
|
(93,824
|
)
|
|
|
(22,775
|
)
|
Basic and diluted net loss per share
|
|
|
(0.70
|
)
|
|
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Unaudited Pro Forma Condensed Combined Balance Sheet Data
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
46,786
|
|
|
|
|
|
Working capital
|
|
|
26,090
|
|
|
|
|
|
Total assets
|
|
|
100,521
|
|
|
|
|
|
Total liabilities
|
|
|
53,233
|
|
|
|
|
|
Total stockholders equity
|
|
|
47,288
|
|
|
|
|
|
15
Comparative
Historical and Unaudited Pro Forma Per Share Data
The following information reflects the historical net loss and
book value per share of CSI common stock and the historical net
loss and book value per share of Replidyne common stock in
comparison with the unaudited pro forma net loss and book value
per share after giving effect to the proposed merger of CSI with
Replidyne. The combined company pro forma per common share data
are provided for informational purposes only and are not
necessarily indications of the results that would have been
achieved had the transaction been completed as of the dates
indicated or that may be achieved in the future. CSI and
Replidyne have derived the combined company pro forma per common
share data from the unaudited pro forma condensed combined
financial statements presented elsewhere in this proxy
statement/prospectus.
You should read the tables below in conjunction with the audited
and unaudited financial statements of CSI and the notes related
thereto, the audited and unaudited financial statements of
Replidyne and the notes related thereto and the unaudited pro
forma condensed combined financial information and notes related
thereto, each included elsewhere in this proxy
statement/prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
CSI Historical Common Share Data:
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(8.57
|
)
|
|
$
|
(1.78
|
)
|
Book value per share as of the period end
|
|
|
(10.78
|
)
|
|
|
(11.93
|
)
|
Replidyne Historical Common Share Data:
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(2.10
|
)
|
|
$
|
(0.37
|
)
|
Book value per share as of the period end
|
|
|
2.02
|
|
|
|
1.67
|
|
Combined Company Pro Forma Per Common Share Data:
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.70
|
)
|
|
$
|
(0.16
|
)
|
Book value per share as of the period end
|
|
|
N/A
|
|
|
|
0.22
|
|
16
MARKET
PRICE AND DIVIDEND INFORMATION
Replidyne
Replidyne common stock is listed on the Nasdaq Global Market
under the symbol RDYN. The following table sets
forth, for the periods indicated, the high and low per share
sales prices for Replidyne common stock as reported on the
Nasdaq Global Market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
|
|
|
$
|
3.10
|
|
|
$
|
1.29
|
|
Second quarter
|
|
|
|
|
|
|
1.90
|
|
|
|
1.25
|
|
Third quarter
|
|
|
|
|
|
|
1.43
|
|
|
|
1.16
|
|
Fourth quarter
|
|
|
|
|
|
|
1.27
|
|
|
|
0.28
|
|
Fiscal Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
|
|
|
$
|
6.28
|
|
|
$
|
4.28
|
|
Second quarter
|
|
|
|
|
|
|
6.07
|
|
|
|
5.10
|
|
Third quarter
|
|
|
|
|
|
|
7.50
|
|
|
|
5.23
|
|
Fourth quarter
|
|
|
|
|
|
|
6.66
|
|
|
|
3.05
|
|
On November 3, 2008, the last day prior to the public
announcement of the merger, the closing price per share of
Replidyne common stock as reported on the Nasdaq Global Market
was $1.12, for an aggregate market value of Replidyne of
approximately $30.4 million.
On ,
2009, the last practicable date before the printing of this
proxy statement/prospectus, the closing price per share of
Replidyne common stock as reported on the Nasdaq Global Market
was $ , for an aggregate market
value of Replidyne of approximately
$ .
The number of record holders of Replidyne common stock on
January 21, 2009 was approximately 77.
Following the merger, the combined company is expected to be
renamed Cardiovascular Systems, Inc. and to change
its symbol for trading on the Nasdaq Global Market. CSI has
reserved the symbol CSII for this purpose.
CSI
CSI is a privately-held company and its shares are not publicly
traded. The number of record holders of CSI common stock on
January 26, 2009 was
approximately ,
and the number of record holders of CSI preferred stock on
January 26, 2009 was approximately .
Dividend
Policy
Neither Replidyne nor CSI has ever declared or paid any cash
dividends on its capital stock nor does either intend to do so
in the foreseeable future.
17
RISK
FACTORS
The combined company will be faced with a market environment
that cannot be predicted and that involves significant risks,
many of which will be beyond its control. In addition to the
other information contained in this proxy statement/prospectus,
you should carefully consider the material risks described below
before deciding how to vote your shares of Replidyne common
stock or CSI capital stock.
Risks
Relating to the Proposed Merger
If any
of the events described in Risks Relating to CSI and the
Combined Company occur, those events could cause the
potential benefits of the merger not to be
realized.
Following the effective time of the merger, current CSI officers
and directors will direct the business and operations of the
combined company. Additionally, CSIs business is expected
to constitute all of the business of the combined company
following the merger. As a result, the risks described below in
the section entitled Risks Relating to CSI and the
Combined Company beginning on page 24 are among the
most significant risks to the combined company if the merger is
completed. To the extent any of the events in the risks
described below in the section entitled Risks Relating to
CSI and the Combined Company occur, those events could
cause the market price of the combined companys common
stock to decline.
In the
event that Replidynes level of net assets at the effective
time of the merger, as calculated pursuant to the merger
agreement, is lower than $35.0 million, Replidyne
stockholders will hold a smaller percentage ownership of
Replidyne following the consummation of the merger than is
currently anticipated and the combined company will have less
working capital for future operations.
Subject to the terms of the merger agreement with CSI, at the
effective time of the merger, each share of CSI common stock
issued and outstanding immediately prior to the merger will be
canceled, extinguished and automatically converted into the
right to receive that number of shares of Replidyne common stock
as determined pursuant to the conversion factor described in the
merger agreement. The conversion factor depends on
Replidynes level of net assets as of the effective time of
the merger. Under the merger agreement, Replidynes net
assets is defined as Replidynes total current assets minus
all of its liabilities and other outstanding and future
obligations as of the effective time of the merger, subject to
certain adjustments. Replidyne currently anticipates that its
level of net assets as of the effective time of the merger will
be between $35.0 and $37.0 million, which would result in
Replidynes current stockholders, together with holders of
its options and warrants, owning or having the right to acquire
between 16.3% and 17.0% of the common stock of the combined
company on a fully diluted basis as calculated in accordance
with the merger agreement. However, if one or more of the
following circumstances arise, Replidynes level of net
assets may be lower than Replidyne expects and Replidyne
stockholders would hold a smaller percentage ownership of the
combined company following the consummation of the merger than
is currently anticipated, thus making the merger less attractive
to Replidyne stockholders:
|
|
|
|
|
Replidyne is unable to generate any proceeds from the sale of
its REP3123 and DNA replication inhibition programs;
|
|
|
|
Replidyne is unable to terminate, sublease or otherwise assign
to a third party its remaining obligations under the lease for
its headquarters in Louisville, Colorado;
|
|
|
|
Replidyne does not receive reimbursement from Forest
Laboratories for certain decontamination costs incurred by
Replidyne under its former supply agreement with MEDA
Manufacturing GmbH;
|
|
|
|
the costs associated with the winding up of Replidynes
business are greater than anticipated; or
|
|
|
|
Replidyne expends more resources than is currently anticipated
as a result of a delay in the closing of the merger or otherwise.
|
In addition, if Replidynes net assets are lower than
expected, the combined company will have less working capital
for future operations, which could adversely affect the ability
of the combined company to achieve its business plan.
18
The
costs associated with the merger are difficult to estimate, may
be higher than expected and may harm the financial results of
the combined company.
Replidyne and CSI estimate that they will incur aggregate direct
transaction costs of approximately $6.2 million associated
with the merger, and additional costs associated with the
commencement of CSIs operation as a public company, which
cannot be estimated accurately at this time. The costs
associated with the merger may increase if any CSI stockholders
elect to dissent from the merger and seek payment of the fair
value of their shares as permitted by Minnesota law. If the
total costs of the merger exceed Replidynes and CSIs
estimates, the combined company will have less working capital
for future operations, which will adversely affect the ability
of the combined company to achieve its business plan.
Nasdaq
considers the anticipated merger a reverse merger and therefore
requires CSI and Replidyne to submit a new listing application
with respect to the combined company, which will require certain
actions by CSI and Replidyne and may not be successful, which
would result in you having difficulty selling your
shares.
Nasdaq considers the merger proposed in this proxy
statement/prospectus as a reverse merger and requires CSI and
Replidyne to submit a new listing application with respect to
the combined company. Nasdaq may not approve this new listing
application. If this occurs and the merger is still consummated,
you may have difficulty selling your shares.
Additionally, as part of the new listing application, CSI and
Replidyne will be required to submit, among other things, a plan
for the combined company to conduct a reverse stock split. A
reverse stock split would increase the per share trading price
by a yet undetermined multiple. The change in share price may
affect the volatility and liquidity of the combined
companys stock, as well as the marketplaces
perception of the stock. As a result, the relative price of the
combined companys stock may decline
and/or
fluctuate more than in the past, and you may have trouble
converting your investments in the combined company into cash
effectively.
The
market price of Replidyne common stock has fallen significantly
since the public announcement of the proposed merger. If the
merger is completed, the market price of the combined
companys common stock may decline further.
On November 3, 2008, the last day prior to the public
announcement of the proposed merger, the closing price per share
of Replidyne common stock as reported on The Nasdaq Global
Market was $1.12.
On ,
2009, the last practicable date before the printing of this
proxy statement/prospectus, the closing price per share of
Replidyne common stock as reported on The Nasdaq Global Market
was $ , which represents
a % decrease from the closing price
on November 3, 2008. This decrease may increase the risk
that Replidyne would become subject to securities class action
litigation, which could result in substantial costs and a delay
in the completion of the merger. If the merger is completed, the
market price of the combined companys common stock may
decline further for a number of reasons, including if:
|
|
|
|
|
the effect of the merger on the combined companys business
and prospects is not consistent with the expectations of
financial or industry analysts; or
|
|
|
|
investors react negatively to the effect on the combined
companys business and prospects from the merger.
|
Because
the lack of a public market for CSIs outstanding shares
makes it difficult to evaluate the fairness of the merger, CSI
stockholders may receive consideration in the merger that is
greater than or less than the fair market value of the CSI
shares.
The outstanding capital stock of CSI is privately held and is
not traded in any public market. The lack of a public market
makes it extremely difficult to determine the fair market value
of CSI. Since the percentage of Replidynes equity to be
issued to CSI stockholders was determined based on negotiations
between the parties, it is possible that the value of the
Replidyne common stock to be issued in connection with the
merger will be greater than the fair market value of CSI.
Alternatively, it is possible that the value of the shares of
Replidyne common stock to be issued in connection with the
merger will be less than the fair market value of CSI.
19
Replidyne
and CSI executive officers and directors may have interests in
the merger that are different from, or in addition to, those of
Replidyne and CSI stockholders generally.
The executive officers and directors of Replidyne and CSI may
have interests in the merger that are different from, or are in
addition to, those of Replidyne and CSI stockholders generally.
The directors of the combined company will consist of two
directors from Replidynes board and eight directors from
CSIs board. Further, certain Replidyne executive officers
will receive change in control payments in connection with the
merger. See the sections entitled Interests of
Replidynes Executive Officers and Directors in the
Merger starting on page 66 and Interests of
CSIs Executive Officers and Directors in the Merger
starting on page 70.
Replidyne
and CSI may not be able to complete the merger or may elect to
pursue a different strategic transaction, which may not occur on
commercially reasonably terms or at all.
Neither Replidyne nor CSI can assure you that they will close
the pending merger in a timely manner or at all. The merger
agreement is subject to many closing conditions and termination
rights, as set forth in more detail in The Merger
Agreement Conditions to the Completion of the
Merger and The Merger Agreement
Termination of the Merger Agreement below. If Replidyne
and CSI do not complete the pending merger, Replidynes and
CSIs board of directors may elect to attempt to complete a
different strategic transaction. Attempting to complete a
different strategic transaction would prove to be costly and
time consuming, and neither Replidyne nor CSI can make any
assurances that a future strategic transaction will occur on
commercially reasonable terms or at all.
Failure
to complete the merger could adversely affect Replidynes
stock price and Replidynes and CSIs future business
and operations.
The merger is subject to the satisfaction of closing conditions,
including approval by Replidyne and CSI stockholders, and
neither Replidyne nor CSI can assure you that the merger will be
completed. In the event that the merger is not completed,
Replidyne and CSI may be subject to many significant costs,
including legal, accounting and advisory fees related to the
merger, which must be paid even if the merger is not completed,
and the payment of a termination fee and certain expenses under
certain circumstances. If the merger is not completed, the
market price of Replidyne common stock could decline as a
result. If the merger is not completed, CSI will need additional
debt or equity financing to carry out its business plan and
there is no assurance that such debt or equity financing will be
available on acceptable terms or at all.
During
the pendency of the merger, Replidyne and CSI may not be able to
enter into a business combination with another party because of
restrictions in the merger agreement.
The merger agreement restricts the ability of Replidyne and CSI
to make acquisitions or complete other transactions. While the
merger agreement is in effect, subject to limited exceptions,
each party is prohibited from soliciting, initiating,
encouraging or taking actions designed to facilitate any
inquiries or the making of any proposal or offer that could lead
to such party entering into certain extraordinary transactions
with any third party, such as a sale of assets, an acquisition
of common stock, a tender offer for capital stock or a merger or
other business combination outside the ordinary course of
business. Any such transactions could be favorable to Replidyne
or CSI stockholders.
The
merger may be completed even though material adverse changes may
result from the announcement of the merger, industry-wide
changes and other causes.
In general, either party can refuse to complete the merger if
there is a material adverse change affecting the other party
between November 3, 2008, the date of the merger agreement,
and the closing of the merger. However, some types of changes do
not permit either party to refuse to complete the merger, even
if such changes would have a material adverse effect on
Replidyne or CSI. If adverse changes occur but Replidyne and CSI
must still complete the merger, the combined companys
stock price may suffer.
20
Risks
Relating to Replidyne
If the
proposed merger with CSI is not consummated, Replidynes
prospects will be materially and adversely affected and its
stock price could decline.
Replidyne and CSI are targeting a closing of the merger in the
first calendar quarter of 2009. If the merger agreement is
terminated and Replidyne seeks another business combination,
Replidyne may not be able to find a third party willing to
provide equivalent or more attractive consideration than the
consideration to be provided in the proposed merger with CSI. In
such circumstances, Replidynes board of directors may
elect to, among other things, take the steps necessary to
liquidate Replidynes business and assets. In the case of a
liquidation, the consideration that Replidyne might receive may
be less attractive than the consideration to be received by it
pursuant to the merger with CSI.
Replidyne
no longer has any internal capabilities to develop its product
candidates. Replidynes ability to increase stockholder
value is dependent on Replidynes ability to successfully
complete a strategic transaction or transactions for the sale of
the company and the sale of Replidynes product development
programs, which Replidyne may be unable to
complete.
In August 2008, Replidyne commenced restructuring its operations
to reduce its employee headcount to six employees by the end of
October 2008. Replidyne suspended further development activities
of REP3123, Replidynes investigational agent for the
treatment of Clostridium difficile, or C. difficile,
bacteria and C. difficile Infection, or CDI, and
novel anti-infective compounds based on Replidynes DNA
replication inhibition technology. Previously, Replidyne had
restructured its operations in a number of actions announced in
December 2007, April 2008 and June 2008 that included
Replidynes decision to terminate its license with Asubio
Pharma, Co., Ltd, or Asubio Pharma, for faropenem medoxomil and
related contract manufacturing agreements for faropenem
medoxomil, discontinue enrollment in Replidynes
Phase III clinical trial of faropenem medoxomil for the
treatment of acute exacerbations of chronic bronchitis and
reduce employee headcount. Replidyne had previously devoted
substantially all of its clinical development and research and
development efforts and a material portion of its financial
resources toward the development of faropenem medoxomil,
REP3123, its DNA replication inhibition technologies and its
other product candidates. Replidyne currently has no product
candidates in clinical or pre-clinical development and has
further reduced its employee headcount to three employees, all
of whom are involved primarily in financial and administrative
roles. Replidyne has entered into an agreement with Morgan
Stanley to provide financial advisory services for
Replidynes strategic alternatives process.
Replidynes management has also devoted a substantial
amount of time and effort to the strategic alternatives process.
As a result of this process, Replidyne has entered into the
merger agreement with CSI and continues to pursue the sale of
its suspended REP3123 program and DNA replication inhibition
technologies.
Consummation of the merger with CSI is subject to numerous
conditions to closing, including approval from Replidyne
stockholders and the stockholders of CSI, which approval cannot
be assured. Further, Replidyne cannot predict whether its
REP3123 program and/or DNA replication inhibition technologies
can be sold on favorable terms or at all. Completing the merger
with CSI and pursuing the sale of its REP3123 program and DNA
replication inhibition technologies may require Replidyne to
incur substantial additional costs. If Replidyne is unable to
complete the merger, its business may be liquidated.
Replidyne
may not be able to generate adequate proceeds or any proceeds
from the sale of its REP3123 program and DNA replication
inhibition technology.
Replidyne is pursuing the sale of its REP3123 program and DNA
replication inhibition technology. Replidyne has solicited bids
through provision of bid instruction letters to numerous
parties. Replidynes Chief Scientific Officer is acting as
the representative for a company in formation that has indicated
an interest in acquiring and pursuing these programs. If
Replidyne does not receive an acceptable bid for its REP3123
program or DNA replication inhibition technology, Replidyne may
not be able to generate adequate proceeds or any proceeds from
the sale of these programs. The failure to generate these
proceeds would negatively impact the percentage of the combined
company that Replidyne stockholders will hold following the
merger with CSI. In particular, if Replidynes level of net
assets at the effective time of the merger is lower than
$35.0 million, Replidynes current
21
stockholders, together with holders of its options and warrants,
will own or have the right to acquire less than 16.3% of the
common stock of the combined company.
Replidyne
has received a warning letter from the FDA for Replidynes
NDA filed in December 2005 for faropenem medoxomil,
Replidynes former product candidate. Failure to resolve
the matters addressed in the warning letter could negatively
impact Replidynes or a successor companys ability to
undertake clinical trials in the future or timely complete
future IND and NDA submissions.
On January 22, 2008, Replidyne received a warning letter
from the Division of Scientific Investigation of the FDA, or
DSI, informing Replidyne of objectionable conditions found
during the DSIs investigation of Replidynes role as
applicant for Replidynes new drug application, or NDA, for
faropenem medoxomil. The FDAs observations were based on
its establishment inspection reports following on site
inspections in conjunction with the FDAs review of
Replidynes NDA. Specifically, DSI cited that Replidyne
failed to make available the underlying raw data from the
investigation for the FDAs audit and failed to provide the
FDA adequate descriptions and analyses of any other data or
information relevant to the evaluation of the safety and
effectiveness of faropenem medoxomil obtained or otherwise
received by Replidyne from any source derived from clinical
investigations. The clinical trials that supported
Replidynes NDA were conducted by Bayer as a previous
licensee of faropenem medoxomil. In June 2008, DSI made further
inquires of Replidyne related to Replidynes previous
responses to their observations in the warning letter. In July
2008, Replidyne communicated to the FDA Replidynes
decision to terminate Replidynes license for faropenem
medoxomil with Asubio Pharma and withdrew the NDA from
consideration by the FDA. Replidyne also informed DSI of these
actions. In a communication dated July 22, 2008 the FDA
advised Replidyne that since Replidyne has active
Investigational New Drug applications, or INDs, and ongoing
clinical trials, the issues raised in the warning letter
remained open. Following receipt of this communication,
Replidyne withdrew all of its open INDs that related to
faropenem medoxomil and REP8839. If Replidyne is unable to
sufficiently establish to the FDA that future clinical trials
conducted by Replidyne, or potentially a successor company,
would be in accordance with FDA regulations, Replidyne may be
subject to enforcement action by the FDA including being subject
to the FDAs Application Integrity Policy. This policy
would require third-party validation of the integrity of the raw
data underlying any of Replidynes future filings to the
FDA before those filings would be accepted for consideration.
Such a requirement would be onerous and require significant
additional time and expense for the clinical development and
potential approval of any product candidates that Replidyne may
wish to develop in the future. These requirements would make it
difficult for Replidyne to attempt to restart the development of
any of its former product candidates or commence the development
of any new product candidates in the event that the merger with
CSI is not completed. Further, Replidyne could be subject to
additional actions from the FDA that may negatively impact
Replidynes ability or the ability of a successor company
to enter into clinical trials or submit an IND or NDA in the
future.
Replidyne
has incurred significant operating losses since inception and
anticipates that it will incur continued losses for the
foreseeable future.
Replidyne has experienced significant operating losses since its
inception in December 2000. At September 30, 2008,
Replidyne had an accumulated deficit of approximately
$146.9 million. Replidyne has generated no revenue from
product sales to date. Replidyne has funded its operations to
date principally from the sale of its securities and payments by
Forest Laboratories under Replidynes former collaboration
agreement. As a result of the suspension of Replidynes
clinical development of each of faropenem medoxomil, REP3123,
its anti-bacterial agent addressing C. difficile bacteria
and C. difficile-associated disease, and its DNA
replication inhibition technology, Replidyne has no current
prospect for near term revenues. Replidyne expects to continue
to incur substantial additional operating losses during the
period in which it seeks to consummate the proposed merger and
pursue the sale of certain company assets including REP3123 and
its DNA replication inhibition technology. Because of the
numerous risks and uncertainties associated with closing the
proposed merger with CSI and transactions related to the sale of
Replidynes drug programs, Replidyne is unable to predict
the extent of any future losses or the timeline for completing
potential transactions.
22
Replidyne
may be unable to retain the senior management required to
complete the merger or pursue alternative
transactions.
Replidynes success in selling its remaining pipeline
programs and completing the merger depends in part on its
continued ability to retain and motivate qualified management
and scientific personnel and on its ability to develop and
analyze strategic alternatives. Replidyne is highly dependent
upon its senior management, particularly Kenneth Collins, its
President and Chief Executive Officer, Mark Smith, its
Chief Financial Officer, and Donald Morrissey, its Senior Vice
President of Corporate Development. The loss of services of any
of Mr. Collins, Mr. Smith or Mr. Morrissey could
delay or prevent the successful completion of the merger or its
ability to complete an alternative transaction or the sale of
REP3123 or its DNA replication inhibition technologies.
The
market price of Replidyne common stock is highly
volatile.
Replidyne cannot assure you that an active trading market for
its common stock will exist at any time. You may not be able to
sell your shares quickly or at the market price if trading in
Replidyne common stock is not active. The trading price of
Replidyne common stock has been highly volatile and could be
subject to wide fluctuations in price in response to various
factors, many of which are beyond Replidynes control,
including:
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market reaction and other developments related to the proposed
merger with CSI;
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any developments related to the business of CSI, including
during the pendency of the merger;
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the announcement of or other developments related to a sale of
part or all of the development stage assets of Replidyne;
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failure to achieve stockholder approval of the merger with CSI;
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a decision to liquidate the assets of Replidyne;
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termination of significant agreements;
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changes in laws or regulations applicable to Replidynes
assets;
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actual or anticipated variations in Replidynes results of
operations;
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actual or anticipated changes in earnings estimates or
recommendations by securities analysts;
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actions taken by regulatory agencies with respect to Replidyne;
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conditions or trends in the biotechnology and biopharmaceutical
industries;
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announcements by Replidyne or its competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
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general economic and market conditions and other factors that
may be unrelated to Replidynes operating performance or to
the operating performance of its competitors;
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changes in the market valuations of similar companies;
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sales of common stock or other securities by Replidyne or its
stockholders in the future;
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additions or departures of key scientific or management
personnel;
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the outcome of litigation or arbitration claims;
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developments relating to proprietary rights held by Replidyne or
its competitors;
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disputes or other developments relating to proprietary rights,
including patents, litigation matters and Replidynes
ability to obtain patent protection for its technologies;
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trading volume of Replidyne common stock;
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sales of Replidyne common stock by Replidyne or its
stockholders; and
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23
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any proceedings instituted by Nasdaq related to the delisting of
Replidyne common stock from the Nasdaq Global Market.
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In addition, the stock market in general and the market for
biotechnology and biopharmaceutical companies in particular have
experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of those companies. These broad market and industry
factors may seriously harm the market price of Replidyne common
stock, regardless of its operating performance. In the past,
following periods of volatility in the market, securities
class-action
litigation has often been instituted against companies. Such
litigation, if instituted against Replidyne, could result in
substantial costs and diversion of managements attention
and resources, which could materially adversely affect
Replidynes prospects and financial condition.
Replidynes
principal stockholders and management own a significant
percentage of Replidynes stock and are able to exercise
significant influence over matters subject to stockholder
approval.
Replidynes executive officers, directors and principal
stockholders, together with their respective affiliates,
currently own a significant percentage of Replidynes
voting stock, including shares subject to outstanding options
and warrants, and Replidyne expects this group will continue to
hold a significant percentage of its outstanding voting stock
until consummation of the merger, when their ownership interests
will be decreased due to the issuance of Replidyne common stock
to CSI stockholders. Accordingly, these stockholders will likely
be able to have a significant impact on the composition of
Replidynes board of directors and continue to have
significant influence over Replidynes operations and
decisions until consummation of the merger. Replidyne
stockholders with approximately 48% of Replidynes
outstanding common stock have entered into voting agreements and
irrevocable proxies in favor of CSI for approximately 32% of
Replidynes outstanding common stock, pursuant to which,
among other things, each of these stockholders agreed, solely in
his capacity as a stockholder, to vote these shares in favor of
the issuance of the shares of Replidyne common stock in the
merger and the other actions contemplated by the merger
agreement. This concentration of ownership and the voting
agreements could have the effect of delaying or preventing a
change in control, other than the merger with CSI, or otherwise
discouraging a potential acquirer from attempting to obtain
control of Replidyne, which in turn could have a material and
adverse effect on the market value of Replidyne common stock.
Risks
Relating to CSI and the Combined Company
In determining whether you should approve the issuance of shares
of Replidyne common stock pursuant to the merger, you should
carefully read the following risk factors. Replidyne and CSI
anticipate that, immediately following the merger, the business
of the combined company will be the business conducted by CSI
immediately prior to the merger. As a result, the risk factors
section of this proxy statement/prospectus entitled Risk
Factors Relating to the Proposed Merger together with the
following risk factors, are the most significant you will face
if the merger is completed.
Risks
Relating to CSIs Business and Operations
Negative
conditions in the global credit markets have impaired the
liquidity of CSIs auction rate securities, and these
securities have experienced an
other-than-temporary
decline in value, which has adversely affected CSIs
income. These circumstances, along with CSIs history of
incurring substantial operating losses and negative cash flows
from operations, raise substantial doubt about CSIs
ability to continue as a going concern.
As of September 30, 2008, CSIs investments included
$23.0 million of AAA rated auction rate securities issued
primarily by state agencies and backed by student loans
substantially guaranteed by the Federal Family Education Loan
Program. These auction rate securities are debt instruments with
a long-term maturity and with an interest rate that is reset in
short intervals, primarily every 28 days, through auctions.
The recent conditions in the global credit markets have
prevented CSI from liquidating its holdings of auction rate
securities because the amount of securities submitted for sale
has exceeded the amount of purchase orders for such securities.
In February 2008, CSI was informed that there was insufficient
demand for auction rate securities, resulting in failed auctions
for $23.0 million in auction rate securities held at
June 30, 2008 and September 30, 2008. Currently, these
affected
24
securities are not liquid and will not become liquid until a
future auction for these investments is successful or they are
redeemed by the issuer or they mature. In the event that CSI
needs to access the funds of its auction rate securities that
have experienced insufficient demand at auctions, CSI will not
be able to do so without the possible loss of principal, until a
future auction for these investments is successful or they are
redeemed by the issuer or they mature. If CSI is unable to sell
these securities in the market or they are not redeemed, then
CSI may be required to hold them to maturity and CSI may have
insufficient funds to operate its business. For the year ended
June 30, 2008, CSI recorded an
other-than-temporary
impairment loss of $1.3 million relating to these
securities in its statement of operations, and for the three
months ended September 30, 2008, CSI recorded an unrealized
loss of $0.3 million relating to these securities in other
comprehensive income (loss). CSI will continue to monitor and
evaluate the value of its investments each reporting period for
further possible impairment or unrealized loss. Although CSI
currently does not intend to do so, CSI may consider selling its
auction rate securities in the secondary markets in the future,
which may require a sale at a substantial discount to the stated
principal value of these securities.
In addition, because CSI has incurred substantial operating
losses and negative cash flows from operations, all of which
will require it to obtain additional funding to continue its
operations, management has concluded that there is substantial
doubt about CSIs ability to continue as a going concern.
Based on the factors described above, CSIs independent
registered public accountants have included an explanatory
paragraph in their report for CSIs fiscal year ended
June 30, 2008 with respect to CSIs ability to
continue as a going concern. On March 28, 2008, CSI
obtained a margin loan from UBS Financial Services, Inc., the
entity through which CSI originally purchased its auction rate
securities, for up to $12.0 million, which was secured by
the $23.0 million par value of CSIs auction rate
securities. On August 21, 2008, CSI replaced this loan with
a margin loan from UBS Bank USA, which increased maximum
borrowings available to $23.0 million, and on
September 12, 2008, CSI obtained additional debt financing
from Silicon Valley Bank with maximum available borrowings of
$13.5 million. Based on anticipated operating requirements,
combined with limited capital resources, financing CSIs
operations will require that CSI raise additional equity or debt
capital prior to or during the quarter ending September 30,
2009. CSI has entered into the merger agreement to obtain the
working capital necessary to execute its business plan. If the
merger is not completed or CSI fails to raise sufficient equity
or debt capital through other means, management would implement
cost reduction measures, including workforce reductions, as well
as reductions in overhead costs and capital expenditures. There
can be no assurance that these sources will provide sufficient
cash flows to enable CSI to continue as a going concern. CSI
currently has no commitments for additional debt or equity
financing and may experience difficulty in obtaining additional
financing on favorable terms, if at all, if the merger is not
consummated.
The existence of the explanatory paragraph may adversely affect
CSIs relationships with current and prospective customers,
suppliers and investors, and therefore could have a material
adverse effect on CSIs business, financial condition,
results of operations and cash flows.
CSI
has a history of net losses and anticipates that it will
continue to incur losses.
CSI is not profitable and has incurred net losses in each fiscal
year since its formation in 1989. In particular, CSI had net
losses of $3.5 million in fiscal 2005, $4.9 million in
fiscal 2006, $15.6 million in fiscal 2007,
$39.2 million in fiscal 2008, and $13.7 million for
the three months ended September 30, 2008. As of
September 30, 2008, CSI had an accumulated deficit of
approximately $132.0 million. CSI commenced commercial
sales of the Diamondback 360° Orbital Atherectomy System in
September 2007, and CSIs short commercialization
experience makes it difficult for it to predict future
performance. CSI also expects to incur significant additional
expenses for sales and marketing and manufacturing as CSI
continues to commercialize the Diamondback 360° and
additional expenses as CSI seeks to develop and commercialize
future versions of the Diamondback 360° and other products.
Additionally, CSI expects that its general and administrative
expenses will increase as its business grows and CSI incurs the
legal and regulatory costs associated with being a public
company. As a result, CSI expects to continue to incur
significant operating losses.
25
CSI
has a very limited history selling the Diamondback 360°,
which is currently CSIs only product, and CSIs
inability to market this product successfully would have a
material adverse effect on CSIs business and financial
condition.
The Diamondback 360° is CSIs only product and CSI is
wholly dependent on it. The Diamondback 360° received
510(k) clearance from the FDA in the United States for use as a
therapy in patients with PAD in August 2007. CSI initiated a
limited commercial introduction of the Diamondback 360° in
the United States in September 2007 and CSI therefore has very
limited experience in the commercial manufacture and marketing
of this product. CSIs ability to generate revenue will
depend upon its ability to successfully commercialize the
Diamondback 360° and to develop, manufacture and receive
required regulatory clearances and approvals and patient
reimbursement for treatment with future versions of the
Diamondback 360°. As CSI seeks to commercialize the
Diamondback 360°, CSI will need to expand its sales force
significantly to reach its target market. Developing a sales
force is expensive and time consuming and could delay or limit
the success of any product launch. Thus, CSI may not be able to
expand its sales and marketing capabilities on a timely basis or
at all. If CSI is unable to adequately increase these
capabilities, CSI will need to contract with third parties to
market and sell the Diamondback 360° and any other products
that CSI may develop. To the extent that CSI enters into
arrangements with third parties to perform sales, marketing and
distribution services on CSIs behalf, CSIs product
revenues could be lower than if CSI marketed and sold its
products on a direct basis. Furthermore, any revenues resulting
from co-promotion or other marketing and sales arrangements with
other companies will depend on the skills and efforts of others,
and CSI does not know whether these efforts will be successful.
Some of these companies may have current products or products
under development that compete with CSIs, and they may
have an incentive not to devote sufficient efforts to marketing
CSIs products. If CSI fails to successfully develop,
commercialize and market the Diamondback 360° or any future
versions of this product that CSI develops, its business will be
materially adversely affected.
The
Diamondback 360° and future products may never achieve
market acceptance.
The Diamondback 360° and future products CSI may develop
may never gain market acceptance among physicians, patients and
the medical community. The degree of market acceptance of any of
CSIs products will depend on a number of factors,
including:
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the actual and perceived effectiveness and reliability of
CSIs products;
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the prevalence and severity of any adverse patient events
involving CSIs products, including infection, perforation
or dissection of the artery wall, internal bleeding, limb loss
and death;
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the results of any long-term clinical trials relating to use of
CSIs products;
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the availability, relative cost and perceived advantages and
disadvantages of alternative technologies or treatment methods
for conditions treated by CSIs systems;
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the degree to which treatments using CSIs products are
approved for reimbursement by public and private insurers;
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the strength of CSIs marketing and distribution
infrastructure; and
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the level of education and awareness among physicians and
hospitals concerning CSIs products.
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Failure of the Diamondback 360° to significantly penetrate
current or new markets would negatively impact CSIs
business, financial condition and results of operations.
If longer-term or more extensive clinical trials performed by
CSI or others indicate that procedures using the Diamondback
360° or any future products are not safe, effective and
long lasting, physicians may choose not to use CSIs
products. Furthermore, unsatisfactory patient outcomes or
injuries could cause negative publicity for CSIs products.
Physicians may be slow to adopt CSIs products if they
perceive liability risks arising from the use of these products.
It is also possible that as CSIs products become more
widely used, latent defects could be identified, creating
negative publicity and liability problems for CSI, thereby
adversely affecting demand for its products. If the Diamondback
360° and CSIs future products do not achieve an
adequate level of acceptance by physicians, patients and the
medical community, CSIs overall business and profitability
would be harmed.
26
CSIs
future growth depends on physician adoption of the Diamondback
360°, which requires physicians to change their screening
and referral practices.
CSI believes that it must educate physicians to change their
screening and referral practices. For example, although there is
a significant correlation between PAD and coronary artery
disease, many physicians do not routinely screen for PAD while
screening for coronary artery disease. CSI targets its sales
efforts to interventional cardiologists, vascular surgeons and
interventional radiologists because they are often the primary
care physicians diagnosing and treating both coronary artery
disease and PAD. However, the initial point of contact for many
patients may be general practitioners, podiatrists,
nephrologists and endocrinologists, each of whom commonly treats
patients experiencing complications resulting from PAD. If CSI
does not educate referring physicians about PAD in general and
the existence of the Diamondback 360° in particular, they
may not refer patients to interventional cardiologists, vascular
surgeons or interventional radiologists for the procedure using
the Diamondback 360°, and those patients may instead be
surgically treated or treated with an alternative interventional
procedure. If CSI is not successful in educating physicians
about screening for PAD or referral opportunities, CSIs
ability to increase its revenue may be impaired.
CSIs
customers may not be able to achieve adequate reimbursement for
using the Diamondback 360°, which could affect the
acceptance of CSIs product and cause its business to
suffer.
The availability of insurance coverage and reimbursement for
newly approved medical devices and procedures is uncertain. The
commercial success of CSIs products is substantially
dependent on whether third-party insurance coverage and
reimbursement for the use of such products and related services
are available. CSI expects the Diamondback 360° to
generally be purchased by hospitals and other providers who will
then seek reimbursement from various public and private
third-party payors, such as Medicare, Medicaid and private
insurers, for the services provided to patients. CSI can give no
assurance that these third-party payors will provide adequate
reimbursement for use of the Diamondback 360° to permit
hospitals and doctors to consider the product cost-effective for
patients requiring PAD treatment. In addition, the overall
amount of reimbursement available for PAD treatment could
decrease in the future. Failure by hospitals and other users of
CSIs product to obtain sufficient reimbursement could
cause CSIs business to suffer.
Medicare, Medicaid, health maintenance organizations and other
third-party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of
reimbursement, and, as a result, they may not cover or provide
adequate payment for use of the Diamondback 360°. In order
to position the Diamondback 360° for acceptance by
third-party payors, CSI may have to agree to lower prices than
it might otherwise charge. The continuing efforts of
governmental and commercial third-party payors to contain or
reduce the costs of healthcare may limit CSIs revenue.
CSI expects that there will continue to be federal and state
proposals for governmental controls over healthcare in the
United States. Governmental and private sector payors have
instituted initiatives to limit the growth of healthcare costs
using, for example, price regulation or controls and competitive
pricing programs. Some
third-party
payors also require demonstrated superiority, on the basis of
randomized clinical trials, or pre-approval of coverage, for new
or innovative devices or procedures before they will reimburse
healthcare providers who use such devices or procedures. Also,
the trend toward managed healthcare in the United States and
proposed legislation intended to reduce the cost of government
insurance programs could significantly influence the purchase of
healthcare services and products and may result in necessary
price reductions for CSIs products or the exclusion of its
products from reimbursement programs. It is uncertain whether
the Diamondback 360° or any future products CSI may develop
will be viewed as sufficiently cost-effective to warrant
adequate coverage and reimbursement levels.
If third-party coverage and reimbursement for the Diamondback
360° is limited or not available, the acceptance of the
Diamondback 360° and, consequently, CSIs business
will be substantially harmed.
27
CSI
has limited data and experience regarding the safety and
efficacy of the Diamondback 360°. Any long-term data that
is generated may not be positive or consistent with CSIs
limited short-term data, which would affect market acceptance of
this product.
CSIs success depends on the acceptance of the Diamondback
360° by the medical community as safe and effective.
Because CSIs technology is relatively new in the treatment
of PAD, CSI has performed clinical trials only with limited
patient populations. The long-term effects of using the
Diamondback 360° in a large number of patients are not
known and the results of short-term clinical use of the
Diamondback 360° do not necessarily predict long-term
clinical benefit or reveal long-term adverse effects. For
example, CSI does not have sufficient experience with the
Diamondback 360° to evaluate its relative effectiveness in
different plaque morphologies, including hard, calcified lesions
and soft, non-calcified lesions. If the results obtained from
any future clinical trials or clinical or commercial experience
indicate that the Diamondback 360° is not as safe or
effective as other treatment options or as current short-term
data would suggest, adoption of this product may suffer and
CSIs business would be harmed.
Even if CSI believes that the data collected from clinical
trials or clinical experience indicate positive results, each
physicians actual experience with CSIs device will
vary. Clinical trials conducted with the Diamondback 360°
have involved procedures performed by physicians who are very
technically proficient. Consequently, both short and long-term
results reported in these studies may be significantly more
favorable than typical results achieved by physicians, which
could negatively impact market acceptance of the Diamondback
360°.
CSI
will face significant competition and may be unable to sell the
Diamondback 360° at profitable levels.
CSI competes against very large and well-known stent and balloon
angioplasty device manufacturers, including Abbott Laboratories,
Boston Scientific, Cook, Johnson & Johnson and
Medtronic. CSI may have difficulty competing effectively with
these competitors because of their well-established positions in
the marketplace, significant financial and human capital
resources, established reputations and worldwide distribution
channels. CSI also competes against manufacturers of atherectomy
catheters including, among others, ev3, Spectranetics, Boston
Scientific and Pathway Medical Technologies, as well as other
manufacturers that may enter the market due to the increasing
demand for treatment of vascular disease. Several other
companies provide products used by surgeons in peripheral bypass
procedures. Other competitors include pharmaceutical companies
that manufacture drugs for the treatment of mild to moderate PAD
and companies that provide products used by surgeons in
peripheral bypass procedures.
CSIs competitors may:
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develop and patent processes or products earlier than CSI will;
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obtain regulatory clearances or approvals for competing medical
device products more rapidly than CSI will;
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market their products more effectively than CSI will; or
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develop more effective or less expensive products or
technologies that render CSIs technology or products
obsolete or non-competitive.
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CSI has encountered and expects to continue to encounter
potential customers who, due to existing relationships with
CSIs competitors, are committed to or prefer the products
offered by these competitors. If CSI is unable to compete
successfully, CSIs revenue will suffer. Increased
competition might lead to price reductions and other concessions
that might adversely affect CSIs operating results.
Competitive pressures may decrease the demand for CSIs
products and could adversely affect its financial results.
CSIs
ability to compete depends on its ability to innovate
successfully. If CSIs competitors demonstrate the
increased safety or efficacy of their products as compared to
CSI, its revenue may decline.
The market for medical devices is highly competitive, dynamic
and marked by rapid and substantial technological development
and product innovations. CSIs ability to compete depends
on its ability to innovate successfully, and there are few
barriers that would prevent new entrants or existing competitors
from developing products that compete directly with CSIs
products. Demand for the Diamondback 360° could be
diminished by
28
equivalent or superior products and technologies offered by
competitors. CSIs competitors may produce more advanced
products than CSIs or demonstrate superior safety and
efficacy of their products. If CSI is unable to innovate
successfully, the Diamondback 360° could become obsolete
and CSIs revenue would decline as its customers purchase
competitor products.
CSI
has limited commercial manufacturing experience and could
experience difficulty in producing the Diamondback 360° or
will need to depend on third parties to manufacture the
product.
CSI has limited experience in commercially manufacturing the
Diamondback 360° and has no experience manufacturing this
product in the volume that CSI anticipates will be required if
it achieves planned levels of commercial sales. As a result, CSI
may not be able to develop and implement efficient, low-cost
manufacturing capabilities and processes that will enable it to
manufacture the Diamondback 360° or future products in
significant volumes, while meeting the legal, regulatory,
quality, price, durability, engineering, design and production
standards required to market CSIs products successfully.
If CSI fails to develop and implement these manufacturing
capabilities and processes, CSI may be unable to profitably
commercialize the Diamondback 360° and any future products
CSI may develop because the per unit cost of CSIs products
is highly dependent upon production volumes and the level of
automation in CSIs manufacturing processes. There are
technical challenges to increasing manufacturing capacity,
including equipment design and automation capabilities, material
procurement, problems with production yields and quality control
and assurance. Increasing CSIs manufacturing capacity will
require it to invest substantial additional funds and to hire
and retain additional management and technical personnel who
have the necessary manufacturing experience. CSI may not
successfully complete any required increase in manufacturing
capacity in a timely manner or at all. If CSI is unable to
manufacture a sufficient supply of its products, maintain
control over expenses or otherwise adapt to anticipated growth,
or if CSI underestimates growth, it may not have the capability
to satisfy market demand and its business will suffer.
Since CSI has little actual commercial experience with the
Diamondback 360°, the forecasts of demand CSI uses to
determine order quantities and lead times for components
purchased from outside suppliers may be incorrect. Lead times
for components may vary significantly depending on the type of
component, the size of the order, time required to fabricate and
test the components, specific supplier requirements and current
market demand for the components and subassemblies. Failure to
obtain required components or subassemblies when needed and at a
reasonable cost would adversely affect CSIs business.
In addition, CSI may in the future need to depend upon third
parties to manufacture the Diamondback 360° and future
products. CSI also cannot assure you that any third-party
contract manufacturers will have the ability to produce the
quantities of CSIs products needed for development or
commercial sales or will be willing to do so at prices that
allow the products to compete successfully in the market. In
addition, CSI can give no assurance that even if it does
contract with third-party manufacturers for production that
these manufacturers will not experience manufacturing
difficulties or experience quality or regulatory issues. Any
difficulties in locating and hiring third-party manufacturers,
or in the ability of third-party manufacturers to supply
quantities of CSIs products at the times and in the
quantities CSI needs, could have a material adverse effect on
CSIs business.
CSI
depends upon third-party suppliers, including single source
suppliers to CSI and its customers, making it vulnerable to
supply problems and price fluctuations.
CSI relies on third-party suppliers to provide it certain
components of CSIs products and to provide key components
or supplies to CSIs customers for use with CSIs
products. CSI relies on single source suppliers for the
following components of the Diamondback 360°: diamond grit
coated crowns, ABS molded products, components within the brake
assembly and the turbine assembly, and the
air-and-saline
cable assembly. CSI purchases components from these suppliers on
a purchase order basis and carries only very limited levels of
inventory for these components. If CSI underestimates its
requirements, it may not have an adequate supply, which could
interrupt manufacturing of CSIs products and result in
delays in shipments and loss of revenue. CSIs customers
depend on a single source supplier for the catheter lubricant
used with the Diamondback 360° system. If CSIs
customers are unable to obtain adequate supplies of this
lubricant, its customers may reduce or cease purchases of
CSIs product. CSI depends on these suppliers to provide it
and its customers with materials in a timely manner that meet
CSIs and their quality, quantity and cost requirements.
These suppliers may encounter problems during
29
manufacturing for a variety of reasons, including unanticipated
demand from larger customers, failure to follow specific
protocols and procedures, failure to comply with applicable
regulations, equipment malfunction, quality or yield problems,
and environmental factors, any of which could delay or impede
their ability to meet CSIs demand and its customers
demand. CSIs reliance on these outside suppliers also
subjects CSI to other risks that could harm its business,
including:
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interruption of supply resulting from modifications to, or
discontinuation of, a suppliers operations;
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delays in product shipments resulting from defects, reliability
issues or changes in components from suppliers;
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price fluctuations due to a lack of long-term supply
arrangements for key components with CSIs suppliers;
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CSIs suppliers may make errors in manufacturing
components, which could negatively affect the efficacy or safety
of CSIs products or cause delays in shipment of its
products;
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CSIs suppliers may discontinue production of components,
which could significantly delay CSIs production and sales
and impair operating margins;
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CSI and its customers may not be able to obtain adequate
supplies in a timely manner or on commercially acceptable terms;
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CSI and its customers may have difficulty locating and
qualifying alternative suppliers for CSIs and their
sole-source supplies;
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switching components may require product redesign and new
regulatory submissions, either of which could significantly
delay production and sales;
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CSI may experience production delays related to the evaluation
and testing of products from alternative suppliers and
corresponding regulatory qualifications;
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CSIs suppliers manufacture products for a range of
customers, and fluctuations in demand for the products these
suppliers manufacture for others may affect their ability to
deliver components to CSI or its customers in a timely
manner; and
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CSIs suppliers may encounter financial hardships unrelated
to CSI or its customers demand for components or other
products, which could inhibit their ability to fulfill orders
and meet requirements.
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Other than existing, unfulfilled purchase orders, CSIs
suppliers have no contractual obligations to supply CSI with,
and CSI is not contractually obligated to purchase from them,
any of its supplies. Any supply interruption from CSIs
suppliers or failure to obtain additional suppliers for any of
the components used in CSIs products would limit
CSIs ability to manufacture its products and could have a
material adverse effect on CSIs business, financial
condition and results of operations. CSI has no reason to
believe that any of its current suppliers could not be replaced
if they were unable to deliver components to CSI in a timely
manner or at an acceptable price and level of quality. However,
if CSI lost one of these suppliers and were unable to obtain an
alternate source on a timely basis or on terms acceptable to
CSI, CSIs production schedules could be delayed, its
margins could be negatively impacted, and it could fail to meet
its customers demand. CSIs customers rely upon
CSIs ability to meet committed delivery dates and any
disruption in the supply of key components would adversely
affect CSIs ability to meet these dates and could result
in legal action by CSIs customers, cause it to lose
customers or harm its ability to attract new customers, any of
which could decrease CSIs revenue and negatively impact
its growth. In addition, to the extent that CSIs suppliers
use technology or manufacturing processes that are proprietary,
CSI may be unable to obtain comparable materials or components
from alternative sources.
Manufacturing operations are often faced with a suppliers
decision to discontinue manufacturing a component, which may
force CSI or its customers to make last time purchases, qualify
a substitute part, or make a design change which may divert
engineering time away from the development of new products.
30
CSI
will need to increase the size of its organization and CSI may
experience difficulties managing growth. If CSI is unable to
manage the anticipated growth of its business, its future
revenue and operating results may be adversely
affected.
The growth CSI may experience in the future will provide
challenges to CSIs organization, requiring it to rapidly
expand its sales and marketing personnel and manufacturing
operations. CSIs sales and marketing force has increased
from six employees on January 1, 2007 to 129 employees
on December 31, 2008, and CSI expects to continue to grow
its sales and marketing force. CSI also expects to significantly
expand its manufacturing operations to meet anticipated growth
in demand for its products. Rapid expansion in personnel means
that less experienced people may be producing and selling
CSIs product, which could result in unanticipated costs
and disruptions to CSIs operations. If CSI cannot scale
and manage its business appropriately, its anticipated growth
may be impaired and CSIs financial results will suffer.
CSI
anticipates future losses and may require additional financing,
and CSIs failure to obtain additional financing when
needed could force CSI to delay, reduce or eliminate its product
development programs or commercialization efforts.
CSI anticipates significant future losses and is therefore
dependent on additional financing to execute its business plan.
CSI expects that the merger will provide additional working
capital for its business operations that, together with funds
available under CSIs debt financing arrangements and from
operations, will be sufficient to satisfy CSIs working
capital needs for the foreseeable future. If, however, the
merger is not completed or delays in CSIs business plan
reduce the amount of cash available from operations, CSI will
require additional financing in order to satisfy its capital
requirements. In particular, CSI may require additional capital
in order to continue to conduct the research and development and
obtain regulatory clearances and approvals necessary to bring
any future products to market and to establish effective
marketing and sales capabilities for existing and future
products. CSIs operating plan may change, and it may need
additional funds sooner than anticipated to meet its operational
needs and capital requirements for product development, clinical
trials and commercialization. Additional funds may not be
available when CSI needs them on terms that are acceptable to
CSI, or at all. If adequate funds are not available on a timely
basis, CSI may terminate or delay the development of one or more
of its products, or delay establishment of sales and marketing
capabilities or other activities necessary to commercialize its
products.
CSIs future capital requirements will depend on many
factors, including:
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whether the merger is completed and, if so, Replidynes
level of net assets at the effective time of the merger;
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the costs of expanding CSIs sales and marketing
infrastructure and its manufacturing operations;
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the degree of success CSI experiences in commercializing the
Diamondback 360°;
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the number and types of future products CSI develops and
commercializes;
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the costs, timing and outcomes of regulatory reviews associated
with CSIs future product candidates;
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the costs of preparing, filing and prosecuting patent
applications and maintaining, enforcing and defending
intellectual property-related claims; and
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the extent and scope of CSIs general and administrative
expenses.
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Raising
additional capital through debt financing may restrict
CSIs operations.
To the extent that CSI raises additional capital through debt
financing, the terms may include provisions that adversely
affect your rights as a stockholder. Debt financing, if
available, may involve agreements that include covenants
limiting or restricting CSIs ability to take specific
actions such as incurring additional debt, making capital
expenditures or declaring dividends. Any of these events could
adversely affect CSIs ability to achieve its product
development and commercialization goals and have a material
adverse effect on CSIs business, financial condition and
results of operations.
31
CSI
does not currently intend to market the Diamondback 360°
internationally, which will limit CSIs potential revenue
from this product.
As a part of CSIs product development and regulatory
strategy, CSI does not currently intend to market the
Diamondback 360° internationally in order to focus
CSIs resources and efforts on the U.S. market, as
international efforts would require substantial additional sales
and marketing, regulatory and personnel expenses. CSIs
decision to market this product only in the United States will
limit its ability to reach all of its potential markets and will
limit its potential sources of revenue. In addition, CSIs
competitors will have an opportunity to further penetrate and
achieve market share abroad until such time, if ever, that CSI
markets the Diamondback 360° or other products
internationally.
CSI is
dependent on its senior management team and scientific
personnel, and CSIs business could be harmed if CSI is
unable to attract and retain personnel necessary for its
success.
CSI is highly dependent on its senior management, especially
David L. Martin, CSIs President and Chief Executive
Officer. CSIs success will depend on its ability to retain
senior management and to attract and retain qualified personnel
in the future, including scientists, clinicians, engineers and
other highly skilled personnel and to integrate current and
additional personnel in all departments. Competition for senior
management personnel, as well as scientists, clinical and
regulatory specialists, engineers and sales personnel, is
intense and CSI may not be able to retain its personnel. The
loss of members of CSIs senior management, scientists,
clinical and regulatory specialists, engineers and sales
personnel could prevent it from achieving its objectives of
continuing to grow the company. The loss of a member of
CSIs senior management or professional staff would require
the remaining senior executive officers to divert immediate and
substantial attention to seeking a replacement. In particular,
CSI expects to substantially increase the size of CSIs
sales force, which will require managements attention. In
that regard, ev3 Inc., ev3 Endovascular, Inc., and FoxHollow
Technologies, Inc. have brought an action against CSI that, if
successful, could limit CSIs ability to retain the
services of certain sales personnel that were formerly employed
by those companies and make it more difficult to recruit and
hire such sales and other personnel in the future. CSI does not
carry key person life insurance on any of its employees, other
than Michael J. Kallok, CSIs Chief Scientific Officer and
former Chief Executive Officer.
CSI
has a new management team and may experience instability in the
short term as a result.
Since July 2006, CSI has added six new executives to its
management team, including its Chief Executive Officer, who
joined in February 2007, and its Chief Financial Officer, who
joined in April 2008. During the preparation for CSIs
initial public offering, which was abandoned due to unfavorable
market conditions in order to proceed with the merger,
CSIs board of directors determined that it would be in
CSIs best interests to replace James Flaherty in his role
as Chief Financial Officer due to his consent to a court order
enjoining him from any violation of certain provisions of
federal securities law in connection with events that occurred
while he was the Chief Financial Officer of Zomax Incorporated.
The board of directors desired to retain Mr. Flaherty as a
member of CSIs executive team, and, accordingly,
Mr. Flaherty became CSIs Chief Administrative
Officer, giving him responsibility over non-financial operations
matters, and Mr. Martin became Interim Chief Financial
Officer until the hiring of Laurence L. Betterley as CSIs
Chief Financial Officer. CSIs new executives lack
long-term experience with CSI. CSI may experience instability in
the short term as its new executives become integrated into the
company. Competition for qualified employees is intense and the
loss of service of any of CSIs executive officers or
certain key employees could delay or curtail CSIs
research, development, commercialization and financial
objectives.
CSI
may incur significant costs due to the application of
Section 409A of the Internal Revenue Code.
The estimated fair value of the common stock underlying
CSIs stock options was originally estimated in good faith
by CSIs board of directors based upon the best information
available regarding CSI on the dates of grant, including
financing activity, development of CSIs business, the FDA
process and launch of CSIs product, the initial public
offering process and CSIs financial results. During the
fiscal years ended June 30, 2007 and June 30,
32
2008, CSI did not obtain valuations from an independent
valuation firm contemporaneously with each option grant date. As
further discussed under Managements Discussion and
Analysis of Financial Condition and Results of Operations for
CSI Critical Accounting Policies and Significant
Judgments and Estimates, CSI hired an independent
valuation firm to determine the estimated fair value of CSI
common stock for financial reporting purposes as of various
dates, including June 29, 2007, September 30, 2007,
December 31, 2007, March 31, 2008 and June 30,
2008. CSIs board considered these estimates when
estimating the fair market value of CSI common stock on each
option grant date that followed the boards receipt of an
estimate from the valuation firm, but certain grants were later
deemed to have been made at less than fair market value when
such valuation estimates were retrospectively applied. With
respect to options granted from June 12, 2007 through
February 14, 2008, the estimated fair value of the common
stock determined by the independent valuation firm was higher
than the exercise price of stock options CSI had previously
granted at or near such dates by a weighted average per share
amount of approximately $0.79.
If the Internal Revenue Service were to determine that the fair
market value of CSI common stock was higher than the exercise
price of any of CSIs stock options as of the grant date of
such options, either in accordance with CSIs financial
reporting valuations or under a different methodology, then CSI
and CSIs optionholders may experience adverse tax
consequences under Section 409A of the Internal Revenue
Code and related provisions, including the imposition of future
tax liabilities and penalties based on the spread between the
fair market value and the exercise price at the time of option
vesting and on future increases (if any) in the value of the
stock of CSI or the combined company after the vesting date.
These liabilities may be significant. The imposition of such
liabilities may affect a significant portion of CSIs
employees and could adversely affect employee morale and
CSIs business operations.
CSI
may be subject to damages or other remedies as a result of
pending litigation.
On December 28, 2007, ev3 Inc., ev3 Endovascular, Inc. and
FoxHollow Technologies, Inc. filed a complaint against CSI and
certain of CSIs employees alleging, among other things,
misappropriation and use of their confidential information by
CSI and certain of its employees who were formerly employees of
FoxHollow. The complaint also alleges that certain of its
employees violated their employment agreements with FoxHollow
requiring them to refrain from soliciting FoxHollow employees.
This litigation is in an early stage and there can be no
assurance as to its outcome. CSI is defending this litigation
vigorously. If CSI is not successful in defending it, CSI could
be required to pay substantial damages and be subject to
equitable relief that could include a requirement that CSI
terminate the employment of certain employees, including certain
key sales personnel who were formerly employed by FoxHollow. In
any event, the defense of this litigation, regardless of the
outcome, could result in substantial legal costs and diversion
of CSIs managements time and efforts from the
operation of CSIs business. If the plaintiffs in this
litigation are successful, it could have a material adverse
effect on CSIs business, operations and financial
condition.
In addition, CSI is currently involved in a dispute with its
founder, Dr. Leonid Shturman. Although CSI settled certain
claims it had against Dr. Shturman in September 2008,
Dr. Shturman raised counterclaims with regard to two shaft
winding machines that CSI imported from Russia, which have not
been resolved. Dr. Shturman is seeking monetary damages,
which he believes to be in excess of $1.0 million. In an
attempted settlement of these counterclaims, the parties entered
into a settlement conditioned upon CSIs agreement to pay
Dr. Shturman $50,000 by November 14, 2008, and in
connection with Dr. Shturmans desire to sell
22,000 shares of CSI common stock held by him by
November 14, 2008 at a fixed price, CSI agreed to refer to
Dr. Shturman the names of parties that may be interested in
purchasing such shares in private transactions. As of
November 19, 2008, CSI had referred to Dr. Shturman
names of parties that were interested in purchasing these shares
and had also paid Dr. Shturman $50,000. In addition, CSI
and Dr. Shturman have executed a settlement agreement and
mutual releases. Dr. Shturman has since expressed his
desire to keep the funds and void the releases. On
January 22, 2009, the court denied Dr. Shturmans
request to void the releases. If Dr. Shturmans
counterclaims against CSI are not settled, it is possible that
CSI may incur substantial costs as a result of this litigation.
The technology that is the subject of these disputes is not used
in the Diamondback 360° and the shaft winding machines
represent obsolete technology that CSI will likely never use.
33
Risks
Related to Government Regulation
CSIs
ability to market the Diamondback 360° in the United States
is limited to use as a therapy in patients with PAD, and if CSI
wants to expand its marketing claims, CSI will need to file for
additional FDA clearances or approvals and conduct further
clinical trials, which would be expensive and time-consuming and
may not be successful.
The Diamondback 360° received FDA 510(k) clearance in the
United States for use as a therapy in patients with PAD. This
general clearance restricts CSIs ability to market or
advertise the Diamondback 360° beyond this use and could
affect CSIs growth. While off-label uses of medical
devices are common and the FDA does not regulate
physicians choice of treatments, the FDA does restrict a
manufacturers communications regarding such off-label use.
CSI will not actively promote or advertise the Diamondback
360° for off-label uses. In addition, CSI cannot make
comparative claims regarding the use of the Diamondback
360° against any alternative treatments without conducting
head-to-head
comparative clinical trials, which would be expensive and time
consuming. If CSIs promotional activities fail to comply
with the FDAs regulations or guidelines, CSI may be
subject to FDA warnings or enforcement action.
If CSI determines to market the Diamondback 360° in the
United States for other uses, for instance, use in the coronary
arteries, CSI would need to conduct further clinical trials and
obtain premarket approval from the FDA. Clinical trials are
complex, expensive, time consuming, uncertain and subject to
substantial and unanticipated delays. Before CSI may begin
clinical trials, it must submit and obtain approval for an
investigational device exemption, or IDE, that describes, among
other things, the manufacture of, and controls for, the device
and a complete investigational plan. Clinical trials generally
involve a substantial number of patients in a multi-year study.
CSI may encounter problems with its clinical trials, and any of
those problems could cause CSI or the FDA to suspend those
trials, or delay the analysis of the data derived from them.
A number of events or factors, including any of the following,
could delay the completion of CSIs clinical trials in the
future and negatively impact CSIs ability to obtain FDA
clearance or approval for, and to introduce, a particular future
product:
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failure to obtain approval from the FDA or any foreign
regulatory authority to commence an investigational study;
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conditions imposed on CSI by the FDA or any foreign regulatory
authority regarding the scope or design of CSIs clinical
trials;
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delays in obtaining or maintaining required approvals from
institutional review boards or other reviewing entities at
clinical sites selected for participation in CSIs clinical
trials;
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insufficient supply of CSIs future product candidates or
other materials necessary to conduct CSIs clinical trials;
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difficulties in enrolling patients in CSIs clinical trials;
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negative or inconclusive results from clinical trials, results
that are inconsistent with earlier results, or the likelihood
that the part of the human anatomy involved is more prone to
serious adverse events, necessitating additional clinical trials;
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serious or unexpected side effects experienced by patients who
use CSIs future product candidates; or
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failure by any of CSIs third-party contractors or
investigators to comply with regulatory requirements or meet
other contractual obligations in a timely manner.
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CSIs clinical trials may not begin as planned, may need to
be redesigned, and may not be completed on schedule, if at all.
Delays in CSIs clinical trials may result in increased
development costs for CSIs future product candidates,
which could cause CSIs stock price to decline and limit
CSIs ability to obtain additional financing. In addition,
if one or more of CSIs clinical trials are delayed,
competitors may be able to bring products to market before CSI
does, and the commercial viability of CSIs future product
candidates could be significantly reduced.
34
Even if CSI believes that a clinical trial demonstrates
promising safety and efficacy data, such results may not be
sufficient to obtain FDA clearance or approval. Without
conducting and successfully completing further clinical trials,
CSIs ability to market the Diamondback 360° will be
limited and CSIs revenue expectations may not be realized.
CSI
may become subject to regulatory actions if it is found to have
promoted the Diamondback 360° for unapproved
uses.
If the FDA determines that CSIs promotional materials,
training or other activities constitute promotion of CSIs
product for an unapproved use, it could request that CSI cease
use of or modify its training or promotional materials or
subject CSI to regulatory enforcement actions, including the
issuance of an untitled or warning letter, injunction, seizure,
civil fine and criminal penalties. It is also possible that
other federal, state or foreign enforcement authorities might
take action if they consider promotional, training or other
materials to constitute promotion of CSIs product for an
unapproved or uncleared use, which could result in significant
fines or penalties under other statutory authorities, such as
laws prohibiting false claims for reimbursement.
The
Diamondback 360° may in the future be subject to product
recalls that could harm CSIs reputation.
The FDA and similar governmental authorities in other countries
have the authority to require the recall of commercialized
products in the event of material regulatory deficiencies or
defects in design or manufacture. A government mandated or
voluntary recall by CSI could occur as a result of component
failures, manufacturing errors or design or labeling defects.
CSI has not had any instances requiring consideration of a
recall, although as CSI continues to grow and develop its
products, including the Diamondback 360°, CSI may see
instances of field performance requiring a recall. Any recalls
of CSIs product would divert managerial and financial
resources, harm its reputation with customers and have an
adverse effect on its financial condition and results of
operations.
If CSI
or its suppliers fail to comply with ongoing regulatory
requirements, or if CSI experiences unanticipated problems,
CSIs products could be subject to restrictions or
withdrawal from the market.
The Diamondback 360° and related manufacturing processes,
clinical data, adverse events, recalls or corrections and
promotional activities, are subject to extensive regulation by
the FDA and other regulatory bodies. In particular, CSI and its
component suppliers are required to comply with the FDAs
Quality System Regulation, or QSR, and other regulations, which
cover the methods and documentation of the design, testing,
production, control, quality assurance, labeling, packaging,
storage and shipping of any product for which CSI obtains
marketing clearance or approval. The FDA enforces the QSR
through announced and unannounced inspections. CSI and certain
of its third-party manufacturers have not yet been inspected by
the FDA. Failure by CSI or one of its component suppliers to
comply with the QSR requirements or other statutes and
regulations administered by the FDA and other regulatory bodies,
or failure to adequately respond to any observations, could
result in, among other things:
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warning or other letters from the FDA;
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fines, injunctions and civil penalties;
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product recall or seizure;
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unanticipated expenditures;
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delays in clearing or approving or refusal to clear or approve
products;
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withdrawal or suspension of approval or clearance by the FDA or
other regulatory bodies;
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orders for physician notification or device repair, replacement
or refund;
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operating restrictions, partial suspension or total shutdown of
production or clinical trials; and
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criminal prosecution.
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If any of these actions were to occur, it would harm CSIs
reputation and cause its product sales to suffer.
35
Furthermore, any modification to a device that has received FDA
clearance or approval that could significantly affect its safety
or efficacy, or that would constitute a major change in its
intended use, design or manufacture, requires a new clearance or
approval from the FDA. If the FDA disagrees with any
determination by CSI that new clearance or approval is not
required, CSI may be required to cease marketing or to recall
the modified product until CSI obtains clearance or approval. In
addition, CSI could be subject to significant regulatory fines
or penalties.
Regulatory clearance or approval of a product may also require
costly post-marketing testing or surveillance to monitor the
safety or efficacy of the product. Later discovery of previously
unknown problems with CSIs products, including
unanticipated adverse events or adverse events of unanticipated
severity or frequency, manufacturing problems, or failure to
comply with regulatory requirements such as the QSR, may result
in restrictions on such products or manufacturing processes,
withdrawal of the products from the market, voluntary or
mandatory recalls, fines, suspension of regulatory approvals,
product seizures, injunctions or the imposition of civil or
criminal penalties.
The
use, misuse or off-label use of the Diamondback 360° may
increase the risk of injury, which could result in product
liability claims and damage to CSIs
business.
The use, misuse or off-label use of the Diamondback 360°
may result in injuries that lead to product liability suits,
which could be costly to CSIs business. The Diamondback
360° is not FDA-cleared or approved for treatment of the
carotid arteries, the coronary arteries, within bypass grafts or
stents, of thrombus or where the lesion cannot be crossed with a
guidewire or a significant dissection is present at the lesion
site. CSI cannot prevent a physician from using the Diamondback
360° for off-label applications. The application of the
Diamondback 360° to coronary or carotid arteries, as
opposed to peripheral arteries, is more likely to result in
complications that have serious consequences, including heart
attacks or strokes which could result, in certain circumstances,
in death.
CSI
will face risks related to product liability claims, which could
exceed the limits of available insurance coverage.
If the Diamondback 360° is defectively designed,
manufactured or labeled, contains defective components or is
misused, CSI may become subject to costly litigation by its
customers or their patients. The medical device industry is
subject to substantial litigation, and CSI faces an inherent
risk of exposure to product liability claims in the event that
the use of CSIs product results or is alleged to have
resulted in adverse effects to a patient. In most jurisdictions,
producers of medical products are strictly liable for personal
injuries caused by medical devices. CSI may be subject in the
future to claims for personal injuries arising out of the use of
CSIs products. Product liability claims could divert
managements attention from CSIs core business, be
expensive to defend and result in sizable damage awards against
CSI. A product liability claim against CSI, even if ultimately
unsuccessful, could have a material adverse effect on its
financial condition, results of operations and reputation. While
CSI has product liability insurance coverage for its products
and intends to maintain such insurance coverage in the future,
there can be no assurance that CSI will be adequately protected
from the claims that will be brought against it.
Compliance
with environmental laws and regulations could be expensive.
Failure to comply with environmental laws and regulations could
subject CSI to significant liability.
CSIs operations are subject to regulatory requirements
relating to the environment, waste management and health and
safety matters, including measures relating to the release, use,
storage, treatment, transportation, discharge, disposal and
remediation of hazardous substances. Although CSI is currently
classified as a Very Small Quantity Hazardous Waste Generator
within Ramsey County, Minnesota, CSI cannot ensure that it will
maintain its licensed status as such, nor can CSI ensure that it
will not incur material costs or liability in connection with
its operations, or that CSIs past or future operations
will not result in claims or injury by employees or the public.
Environmental laws and regulations could also become more
stringent over time, imposing greater compliance costs and
increasing risks and penalties associated with violations.
36
CSI
and its distributors must comply with various federal and state
anti-kickback, self-referral, false claims and similar laws, any
breach of which could cause a material adverse effect on
CSIs business, financial condition and results of
operations.
CSIs relationships with physicians, hospitals and the
marketers of CSIs products are subject to scrutiny under
various federal anti-kickback, self-referral, false claims and
similar laws, often referred to collectively as healthcare fraud
and abuse laws.
Healthcare fraud and abuse laws are complex, and even minor,
inadvertent violations can give rise to claims that the relevant
law has been violated. If CSIs operations are found to be
in violation of these laws, CSI, as well as its employees, may
be subject to penalties, including monetary fines, civil and
criminal penalties, exclusion from federal and state healthcare
programs, including Medicare, Medicaid, Veterans Administration
health programs, workers compensation programs and TRICARE
(the healthcare system administered by or on behalf of the
U.S. Department of Defense for uniformed services
beneficiaries, including active duty and their dependents,
retirees and their dependents), and forfeiture of amounts
collected in violation of such prohibitions. Individual
employees may need to defend such suits on behalf of CSI or
themselves, which could lead to significant disruption in
CSIs present and future operations. Certain states in
which CSI intends to market its products have similar fraud and
abuse laws, imposing substantial penalties for violations. Any
government investigation or a finding of a violation of these
laws would likely have a material adverse effect on CSIs
business, financial condition and results of operations.
Anti-kickback laws and regulations prohibit any knowing and
willful offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of an individual or the
ordering or recommending of the use of a product or service for
which payment may be made by Medicare, Medicaid or other
government-sponsored healthcare programs. In addition, the cost
of non-compliance with these laws could be substantial, since
CSI could be subject to monetary fines and civil or criminal
penalties, and CSI could also be excluded from federally funded
healthcare programs, including Medicare and Medicaid, for
non-compliance.
CSI has entered into consulting agreements with physicians,
including some who may make referrals to CSI or order its
product. One of these physicians was one of 20 principal
investigators in CSIs OASIS clinical trial at the same
time he was acting as a paid consultant for CSI. In addition,
some of these physicians own CSIs stock, which they
purchased in arms-length transactions on terms identical
to those offered to non-physicians, or received stock options
from CSI as consideration for consulting services performed by
them. CSI believes that these consulting agreements and equity
investments by physicians are common practice in CSIs
industry, and while these transactions were structured with the
intention of complying with all applicable laws, including the
federal ban on physician self-referrals, commonly known as the
Stark Law, state anti-referral laws and other
applicable
anti-kickback
laws, it is possible that regulatory or enforcement agencies or
courts may in the future view these transactions as prohibited
arrangements that must be restructured or for which CSI would be
subject to other significant civil or criminal penalties, or
prohibit the company from accepting referrals from these
physicians. Because CSIs strategy relies on the
involvement of physicians who consult with CSI on the design of
its product, CSI could be materially impacted if regulatory or
enforcement agencies or courts interpret CSIs financial
relationships with its physician advisors who refer or order
CSIs product to be in violation of applicable laws and
determine that CSI would be unable to achieve compliance with
such applicable laws. This could harm CSIs reputation and
the reputations of its clinical advisors.
The scope and enforcement of all of these laws is uncertain and
subject to rapid change, especially in light of the lack of
applicable precedent and regulations. There can be no assurance
that federal or state regulatory or enforcement authorities will
not investigate or challenge CSIs current or future
activities under these laws. Any investigation or challenge
could have a material adverse effect on CSIs business,
financial condition and results of operations. Any state or
federal regulatory or enforcement review of CSI, regardless of
the outcome, would be costly and time consuming. Additionally,
CSI cannot predict the impact of any changes in these laws,
whether these changes are retroactive or will have effect on a
going-forward basis only.
37
The
combined company will incur significant costs as a result of
operating as a public company, and the combined companys
management will be required to devote substantial time to
compliance initiatives.
As a public company, Replidyne currently incurs significant
legal, accounting and other expenses that Replidyne did not
incur as a private company. In addition, the Sarbanes-Oxley Act,
as well as rules subsequently implemented by the Securities and
Exchange Commission and the Nasdaq Global Market, have imposed
various requirements on public companies, including requiring
establishment and maintenance of effective disclosure and
financial controls and changes in corporate governance
practices. Replidynes management and other personnel
devote a substantial amount of time to these compliance
initiatives. Moreover, these rules and regulations have
increased Replidynes legal and financial compliance costs
and made some activities more time consuming and costly. While
Replidyne has developed and instituted a corporate compliance
program based on what Replidyne believes are the current
appropriate best practices and continues to update the program
in response to newly implemented or changing regulatory
requirements, Replidyne cannot ensure that it is or will be in
compliance with all potentially applicable regulations.
The Sarbanes-Oxley Act requires, among other things, that
Replidyne maintain effective internal controls for financial
reporting and disclosure controls and procedures. In particular,
Replidyne must perform system and process evaluation and testing
of Replidynes internal controls over financial reporting
to allow management and, at certain times, Replidynes
independent registered public accounting firm to report on the
effectiveness of Replidynes internal controls over
financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. Replidynes testing, or the subsequent
testing by its independent registered public accounting firm,
when required, may reveal deficiencies in Replidynes
internal controls over financial reporting that are deemed to be
material weaknesses. Moreover, if Replidyne is not able to
comply with the requirements of Section 404 in a timely
manner, or if Replidyne or its independent registered public
accounting firm identifies deficiencies in Replidynes
internal controls over financial reporting that are deemed to be
material weaknesses, the market price of Replidynes stock
could decline and Replidyne could be subject to sanctions or
investigations by Nasdaq, the SEC or other regulatory
authorities, which would require additional financial and
management resources. The reductions in headcount that Replidyne
has recently completed may make it more difficult for Replidyne
to maintain its internal controls over financial reporting.
The combined company will be subject to all of the same
obligations, but CSIs current management will be
responsible for compliance. These obligations will require
significant additional expenditures, place additional demands on
the combined companys management and divert
managements time and attention away from the combined
companys business. These additional obligations will also
require the combined company to hire additional personnel. CSI
is currently evaluating its internal controls systems in order
to allow the combined company to report on, and the combined
companys independent registered public accounting firm to
attest to, internal controls, as required by Section 404 of
the Sarbanes-Oxley Act. CSI cannot be certain as to the timing
of completion of the evaluation, testing and remediation actions
or the impact of the same on the operations of the combined
company. The combined companys management may not be able
to effectively and timely implement controls and procedures that
adequately respond to the increased regulatory compliance and
reporting requirements that will be applicable. If the combined
company fails to staff its accounting and finance function
adequately or maintain internal controls adequate to meet the
demands that will be placed upon it as a public company,
including the requirements of the Sarbanes-Oxley Act, the
combined company may be unable to report its financial results
accurately or in a timely manner and the combined companys
business and stock price may suffer. The costs of being a public
company, as well as diversion of managements time and
attention, may have a material adverse effect on the combined
companys business, financial condition and results of
operations.
Additionally, these laws and regulations could make it more
difficult or more costly for the combined company to obtain
certain types of insurance, including director and officer
liability insurance, and the combined company may be forced to
accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. The impact
of these events could also make it more difficult for the
combined company to attract and retain qualified persons to
serve on its board of directors, board committees or as
executive officers.
38
Risks
Relating to CSIs Intellectual Property
CSIs
inability to adequately protect its intellectual property could
allow its competitors and others to produce products based on
CSIs technology, which could substantially impair
CSIs ability to compete.
CSIs success and ability to compete depends, in part, upon
its ability to maintain the proprietary nature of its
technologies. CSI relies on a combination of patents, copyrights
and trademarks, as well as trade secrets and nondisclosure
agreements, to protect its intellectual property. As of
December 31, 2008, CSI had a portfolio of 16 issued
U.S. patents and 33 issued or granted
non-U.S. patents
covering aspects of CSIs core technology, which expire
between 2017 and 2022. However, CSIs issued patents and
related intellectual property may not be adequate to protect CSI
or permit it to gain or maintain a competitive advantage. The
issuance of a patent is not conclusive as to its scope, validity
or enforceability. The scope, validity or enforceability of
CSIs issued patents can be challenged in litigation or
proceedings before the U.S. Patent and Trademark Office, or
the USPTO. In addition, CSIs pending patent applications
include claims to numerous important aspects of CSIs
products under development that are not currently protected by
any of CSIs issued patents. CSI cannot assure you that any
of its pending patent applications will result in the issuance
of patents to it. The USPTO may deny or require significant
narrowing of claims in CSIs pending patent applications.
Even if any patents are issued as a result of pending patent
applications, they may not provide CSI with significant
commercial protection or be issued in a form that is
advantageous to it. Proceedings before the USPTO could result in
adverse decisions as to the priority of CSIs inventions
and the narrowing or invalidation of claims in issued patents.
Further, if any patents CSI obtains or licenses are deemed
invalid and unenforceable, or have their scope narrowed, it
could impact CSIs ability to commercialize or license its
technology.
Changes in either the patent laws or in interpretations of
patent laws in the United States and other countries may
diminish the value of CSIs intellectual property. For
instance, the U.S. Supreme Court has recently modified some
tests used by the USPTO in granting patents during the past
20 years, which may decrease the likelihood that CSI will
be able to obtain patents and increase the likelihood of
challenge of any patents CSI obtains or licenses. In addition,
the USPTO has adopted new rules of practice (the application of
which has been enjoined as a result of litigation) that limit
the number of claims that may be filed in a patent application
and the number of continuation or
continuation-in-part
applications that may be filed. These new rules may result in
patent applicants being unable to secure all of the rights that
they would otherwise have been entitled to in the absence of the
new rules and, therefore, may negatively affect CSIs
ability to obtain comprehensive patent coverage. The laws of
some foreign countries may not protect CSIs intellectual
property rights to the same extent as the laws of the United
States, if at all.
To protect CSIs proprietary rights, CSI may, in the
future, need to assert claims of infringement against third
parties to protect CSIs intellectual property. The outcome
of litigation to enforce its intellectual property rights in
patents, copyrights, trade secrets or trademarks is highly
unpredictable, could result in substantial costs and diversion
of resources, and could have a material adverse effect on its
financial condition, reputation and results of operations
regardless of the final outcome of such litigation. In the event
of an adverse judgment, a court could hold that some or all of
CSIs asserted intellectual property rights are not
infringed, invalid or unenforceable, and could order CSI to pay
third-party attorneys fees. Despite CSIs efforts to
safeguard its unpatented and unregistered intellectual property
rights, CSI may not be successful in doing so or the steps taken
by it in this regard may not be adequate to detect or deter
misappropriation of CSIs technology or to prevent an
unauthorized third party from copying or otherwise obtaining and
using its products, technology or other information that it
regards as proprietary. In addition, CSI may not have sufficient
resources to litigate, enforce or defend its intellectual
property rights. Additionally, third parties may be able to
design around CSIs patents.
CSI also relies on trade secrets, technical know-how and
continuing innovation to develop and maintain its competitive
position. In this regard, CSI seeks to protect its proprietary
information and other intellectual property by requiring its
employees, consultants, contractors, outside scientific
collaborators and other advisors to execute non-disclosure and
assignment of invention agreements on commencement of their
employment or engagement. Agreements with CSIs employees
also forbid them from bringing the proprietary rights of third
parties to it. CSI also requires confidentiality or material
transfer agreements from third parties that receive CSIs
confidential data or materials. However, trade secrets are
difficult to protect. CSI cannot provide any assurance that
employees and third parties will abide by the confidentiality or
assignment terms of these agreements, or that CSI will be
effective
39
securing necessary assignments from these third parties. Despite
measures taken to protect CSIs intellectual property,
unauthorized parties might copy aspects of CSIs products
or obtain and use information that CSI regards as proprietary.
Enforcing a claim that a third party illegally obtained and is
using any of CSIs trade secrets is expensive and time
consuming, and the outcome is unpredictable. In addition, courts
outside the United States are sometimes less willing to protect
trade secrets. Finally, others may independently discover trade
secrets and proprietary information, and this would prevent CSI
from asserting any such trade secret rights against these
parties.
CSIs inability to adequately protect its intellectual
property could allow its competitors and others to produce
products based on CSIs technology, which could
substantially impair CSIs ability to compete.
Claims
of infringement or misappropriation of the intellectual property
rights of others could prohibit CSI from commercializing
products, require it to obtain licenses from third parties or
require it to develop non-infringing alternatives, and subject
it to substantial monetary damages and injunctive
relief.
The medical technology industry is characterized by extensive
litigation and administrative proceedings over patent and other
intellectual property rights. The likelihood that patent
infringement or misappropriation claims may be brought against
CSI increases as it achieves more visibility in the marketplace
and introduces products to market. All issued patents are
entitled to a presumption of validity under the laws of the
United States. Whether a product infringes a patent involves
complex legal and factual issues, the determination of which is
often uncertain. Therefore, CSI cannot be certain that it has
not infringed the intellectual property rights of such third
parties or others. CSIs competitors may assert that
CSIs products are covered by U.S. or foreign patents
held by them. CSI is aware of numerous patents issued to third
parties that relate to the manufacture and use of medical
devices for interventional cardiology. The owners of each of
these patents could assert that the manufacture, use or sale of
CSIs products infringes one or more claims of their
patents. Because patent applications may take years to issue,
there may be applications now pending of which CSI is unaware
that may later result in issued patents that CSI infringes. If
another party has filed a U.S. patent application on
inventions similar to CSIs, CSI may have to participate in
an interference proceeding declared by the USPTO to determine
priority of invention in the United States. The costs of these
proceedings can be substantial, and it is possible that such
efforts would be unsuccessful if unbeknownst to it, the other
party had independently arrived at the same or similar invention
prior to CSIs own invention, resulting in a loss of
CSIs U.S. patent position with respect to such
inventions. There could also be existing patents of which CSI is
unaware that one or more aspects of its technology may
inadvertently infringe. In some cases, litigation may be
threatened or brought by a patent-holding company or other
adverse patent owner who has no relevant product revenues and
against whom CSIs patents may provide little or no
deterrence.
Any infringement or misappropriation claim could cause CSI to
incur significant costs, place significant strain on CSIs
financial resources, divert managements attention from
CSIs business and harm its reputation. Some of CSIs
competitors may be able to sustain the costs of complex patent
litigation more effectively than CSI can because they have
substantially greater resources. In addition, any uncertainties
resulting from the initiation and continuation of any litigation
could have a material adverse effect on CSIs ability to
raise the funds necessary to continue its operations. Although
patent and intellectual property disputes in the medical device
area have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be
substantial and could include ongoing royalties. If the relevant
patents were upheld in litigation as valid and enforceable and
CSI were found to infringe, CSI could be prohibited from
commercializing any infringing products unless it could obtain
licenses to use the technology covered by the patent or are able
to design around the patent. CSI may be unable to obtain a
license on terms acceptable to it, if at all, and CSI may not be
able to redesign any infringing products to avoid infringement.
Further, any redesign may not receive FDA clearance or approval
or may not receive such clearance or approval in a timely
manner. Any such license could impair operating margins on
future product revenue. A court could also order CSI to pay
compensatory damages for such infringement, and potentially
treble damages, plus prejudgment interest and third-party
attorneys fees. These damages could be substantial and
could harm CSIs reputation, business, financial condition
and operating results. A court also could enter orders that
temporarily, preliminarily or permanently enjoin CSI and its
customers from making, using, selling, offering to sell or
importing infringing products, or could enter an order mandating
that CSI undertake certain remedial activities. Depending on the
nature of the relief ordered by the court, CSI could become
liable for additional damages to third parties. Adverse
determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent CSI from
manufacturing and selling its products, which would have a
significant adverse impact on its business.
40
Risks
Relating to Ownership of Common Stock of the Combined
Company
Because
there has not been a public market for CSI common stock, the
combined companys stock price is expected to be volatile
and you may not be able to resell your shares in the combined
company.
The market price of the combined companys common stock
could be subject to significant fluctuations following the
merger. Market prices for securities of early-stage
pharmaceutical, medical device, biotechnology and other life
sciences companies have historically been particularly volatile.
Some of the factors that may cause the market price of the
combined companys common stock to fluctuate include:
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difficulties in integrating Replidyne and CSI following the
merger;
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its ability to develop, obtain regulatory clearances or
approvals for and market new and enhanced products on a timely
basis;
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changes in governmental regulations or in the status of its
regulatory approvals, clearances or future applications;
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its announcements or its competitors announcements
regarding new products, product enhancements, significant
contracts, number of hospitals and physicians using CSIs
products, acquisitions or strategic investments;
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announcements of technological or medical innovations for the
treatment of vascular disease;
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delays or other problems with the manufacturing of the
Diamondback 360°;
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volume and timing of orders for the Diamondback 360° and
any future products, if and when commercialized;
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changes in the availability of third-party reimbursement in the
United States and other countries;
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quarterly variations in the combined companys or its
competitors results of operations;
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changes in earnings estimates or recommendations by securities
analysts, if any, who cover the combined companys common
stock;
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failure to meet estimates or recommendations by securities
analysts, if any, who cover the combined companys stock;
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changes in healthcare policy;
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product liability claims or other litigation involving CSI or
the combined company;
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product recalls;
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accusations that CSI or the combined company has violated a law
or regulation;
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sales of large blocks of the combined companys common
stock, including sales by CSIs executive officers,
directors and significant stockholders;
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disputes or other developments with respect to intellectual
property rights;
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changes in accounting principles; and
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general market conditions and other factors, including factors
unrelated to the combined companys operating performance
or the operating performance of its competitors.
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In addition, if securities class action litigation is initiated
against the combined company, it would incur substantial costs
and its managements attention would be diverted from
operations. All of these factors could cause the price of the
combined companys stock to decline, and you may lose some
or all of your investment.
Moreover, the stock markets in general have experienced
substantial volatility that has often been unrelated to the
operating performance of individual companies. These broad
market fluctuations may also adversely affect the trading price
of the combined companys common stock.
41
In the past, following periods of volatility in the market price
of a companys securities, stockholders have often
instituted class action securities litigation against such
company. Such litigation, if instituted, could result in
substantial costs and diversion of management attention and
resources, which could significantly harm the combined
companys profitability and reputation.
Replidyne
and CSI do not expect the combined company to pay cash
dividends, and accordingly, stockholders must rely on stock
appreciation for any return on their investment in the combined
company.
Replidyne and CSI anticipate that the combined company will
retain its earnings, if any, for future growth and therefore do
not anticipate that the combined company will pay cash dividends
in the future. As a result, appreciation of the price of the
combined companys common stock is the only potential
source of return to stockholders. Investors seeking cash
dividends should not invest in the combined companys
common stock.
If
equity research analysts do not publish research or reports
about the combined companys business or if they issue
unfavorable research or downgrade the combined companys
common stock, the price of its common stock could
decline.
Investors may look to reports of equity research analysts for
additional information regarding the combined companys
industry and operations. Therefore, any trading market for the
combined companys common stock will rely in part on the
research and reports that equity research analysts publish about
the combined company and its business. The combined company does
not control these analysts. Equity research analysts may elect
not to provide research coverage of the combined companys
common stock, which may adversely affect the market price of its
common stock. If equity research analysts do provide research
coverage of the combined companys common stock, the price
of its common stock could decline if one or more of these
analysts downgrade the common stock or if they issue other
unfavorable commentary about the combined company or its
business. If one or more of these analysts ceases coverage of
the combined company, it could lose visibility in the market,
which in turn could cause its stock price to decline.
The
combined company will not be able to utilize Replidynes
net operating loss carryforwards.
Under Section 382 of the Internal Revenue Code, if a
corporation undergoes an ownership change (generally
defined as a greater than 50% change (by value) in its equity
ownership over a three-year period), the corporations
ability to use its pre-change net operating loss carryforwards
and other pre-change tax attributes to offset its post-change
income may be limited. Further, if the continuity of
business requirement defined in Section 382 is not
met in a change of control transaction, the pre-transaction net
operating loss carryforward deductions become substantially
reduced or unavailable for use by the surviving corporation in
the transaction. An ownership change will occur as a result of
the merger and there will not be a continuation of
Replidynes business following completion of the merger,
which will substantially reduce or eliminate the ability of the
combined company to utilize Replidynes net operating loss
carryforwards.
Some
provisions of the charter documents of the combined company and
Delaware law may have
anti-takeover
effects that could discourage an acquisition of the combined
company by others, even if an acquisition would be beneficial to
the combined companys stockholders.
Provisions in Replidynes restated certificate of
incorporation and bylaws, which will be the charter documents of
the combined company, as well as provisions of Delaware law,
could make it more difficult for a third party to acquire the
combined company, even if doing so would benefit the combined
companys stockholders. These provisions include:
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authorizing the issuance of blank check preferred
stock, the terms of which may be established and shares of which
may be issued without stockholder approval;
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limiting the removal of directors by the stockholders;
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prohibiting stockholder action by written consent, thereby
requiring all stockholder actions to be taken at a meeting of
stockholders;
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eliminating the ability of stockholders to call a special
meeting of stockholders; and
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establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that
can be acted upon at stockholder meetings.
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In addition, the combined company will be subject to
Section 203 of the Delaware General Corporation Law, which
generally prohibits a Delaware corporation from engaging in any
of a broad range of business combinations with an interested
stockholder for a period of three years following the date on
which the stockholder became an interested stockholder, unless
such transactions are approved by such corporations board
of directors. This provision could have the effect of delaying
or preventing a change of control, whether or not it is desired
by or beneficial to the combined companys stockholders.
Future
sales and issuances of the combined companys common stock
or rights to purchase common stock, including pursuant to equity
incentive plans, could result in additional dilution of the
percentage ownership of the combined companys stockholders
and could cause the stock price to fall.
Sales of a substantial number of shares of the combined
companys common stock in the public market or the
perception that these sales might occur, could depress the
market price of the combined companys common stock and
could impair its ability to raise capital through the sale of
additional equity securities. Replidyne and CSI are unable to
predict the effect that sales may have on the prevailing market
price of the common stock.
To the extent the combined company raises additional capital by
issuing equity securities, including in a debt financing where
the combined company issues convertible notes or notes with
warrants, the combined companys stockholders may
experience substantial dilution. The combined company may sell
common stock in one or more transactions at prices and in a
manner it determines from time to time. If the combined company
sells common stock in more than one transaction, existing
stockholders may be materially diluted. In addition, new
investors could gain rights superior to existing stockholders,
such as liquidation and other preferences. In connection with
the merger, the combined company will assume the equity
incentive plans of CSI as well as all outstanding options and
warrants to purchase shares of CSI common stock that will become
exercisable for shares of the combined companys common
stock. In addition, the number of shares available for future
grant under the equity incentive plans that the combined company
will be assuming in connection with the merger will be
increased. In addition, Replidyne and CSI also have warrants
outstanding to purchase shares of capital stock. The combined
companys stockholders will incur dilution upon exercise of
any outstanding stock options or warrants.
All of Replidynes outstanding shares of common stock are,
and any shares that are issued in the merger will be, freely
tradable without restrictions or further registration under the
Securities Act of 1933, as amended, except for any shares
subject to
lock-up
agreements executed in connection with the merger and any shares
held by affiliates, as defined in Rule 144 under the
Securities Act. Rule 144 defines an affiliate as a person
who directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with,
the combined company and would include persons such as the
combined companys directors and executive officers.
43
FORWARD-LOOKING
INFORMATION
This proxy statement/prospectus includes forward-looking
statements within the meaning of the safe harbor
provisions of the United States Private Securities Litigation
Reform Act of 1995. Words such as anticipate,
believes, budget, continue,
could, estimate, expect,
forecast, intend, may,
plan, potential, predicts,
project, should, will and
similar expressions are intended to identify such
forward-looking statements. Forward-looking statements in this
proxy statement/prospectus include, without limitation,
statements regarding benefits of the proposed merger and future
expectations concerning available cash and cash equivalents, the
timing of regulatory filings, and other matters that involve
known and unknown risks, uncertainties and other factors that
may cause actual results, levels of activity, performance or
achievements to differ materially from results expressed in or
implied by this proxy statement/prospectus. Such risk factors
include, among others: the ability of Replidyne and CSI to
consummate the proposed merger; the ability of the combined
company to market and sell the Diamondback 360°; the
ability of the combined company to obtain the substantial
additional funding required to conduct development and
commercialization activities; the ability of the combined
company to obtain regulatory approvals; the ability of the
combined company to gain listing on the Nasdaq Global Market and
comply with Nasdaq listing standards; and the ability of the
combined company to obtain, maintain and enforce patent and
other intellectual property protection for its technology. These
and other risks are described in greater detail in the section
entitled Risk Factors beginning on page 18 of
this proxy statement/prospectus.
Actual results may differ materially from those contained in the
forward-looking statements in this proxy statement/prospectus.
You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of
this proxy statement/prospectus. All forward-looking statements
are qualified in their entirety by this cautionary statement.
MARKET
AND INDUSTRY DATA
Information and management estimates contained in this proxy
statement/prospectus concerning the medical device industry,
including general expectations and market position, market
opportunity and market share, are based on publicly available
information, such as clinical studies, academic research reports
and other research reports, as well as information from industry
reports provided by third-party sources, such as Millennium
Research Group. The management estimates are also derived from
CSIs internal research, using assumptions made by CSI that
it believes to be reasonable and CSIs knowledge of the
industry and markets in which CSI operates and expects to
compete. Other than Millennium Research Group, none of the
sources cited in this proxy statement/prospectus has consented
to the inclusion of any data from its reports, nor have
Replidyne or CSI sought their consent. CSIs internal
research has not been verified by any independent source, and
CSI has not independently verified any third-party information.
In addition, while CSI believes the market position, market
opportunity and market share information included in this proxy
statement/prospectus is generally reliable, such information is
inherently imprecise. Such data involves risks and uncertainties
and are subject to change based on various factors, including
those discussed under the heading Risk Factors.
44
THE
SPECIAL MEETING OF REPLIDYNE STOCKHOLDERS
Date,
Time and Place
The special meeting of Replidyne stockholders will be held on
February 24, 2009 at Cooley Godward Kronish LLP, 380
Interlocken Crescent, Suite 900, Broomfield, Colorado
commencing at 9:00 a.m., local time. We are sending this
proxy statement/prospectus to you in connection with the
solicitation of proxies by the Replidyne board of directors for
use at the Replidyne special meeting and any adjournments or
postponements of the special meeting. This proxy
statement/prospectus is first being furnished to Replidyne
stockholders on or
about ,
2009.
Purposes
of the Replidyne Special Meeting
1. To consider and vote upon a proposal to approve the
issuance of Replidyne common stock pursuant to the Agreement and
Plan of Merger and Reorganization, dated November 3, 2008,
by and among Replidyne, Responder Merger Sub, Inc., and CSI as
described in this proxy statement/prospectus.
2. To authorize Replidynes board of directors to
amend Replidynes restated certificate of incorporation in
order to effect a reverse stock split of the issued and
outstanding shares of Replidyne common stock in a ratio of up to
one for 50, if and as determined by Replidynes board of
directors.
3. To approve an amendment to Replidynes restated
certificate of incorporation to change the name Replidyne,
Inc. to Cardiovascular Systems, Inc.
4. To approve Replidynes assumption of the
Cardiovascular Systems, Inc. 2007 Equity Incentive Plan to be
used by Replidyne following the consummation of the merger,
together with an increase in the number of shares of CSI common
stock reserved for issuance under the plan from 3,379,397 to
3,879,397, which following the merger will be converted into
shares of Replidyne common stock, subject to further adjustment
for the reverse stock split anticipated before closing of the
merger.
5. To approve an amendment to the Replidyne, Inc. 2006
Employee Stock Purchase Plan to (i) increase the number of
shares reserved under the plan from 305,872 to 1,920,872,
subject to further adjustment for the reverse stock split
anticipated before the closing of the merger and (ii) amend
the evergreen provisions of the plan to provide that
on July 1st of each year, beginning with July 1,
2009, the share reserve under the plan automatically will be
increased by a number of shares equal to the lesser of
(A) one percent (1.0%) of the total number of shares of
Replidyne common stock outstanding on such date, or
(B) 1,800,000 shares (subject to adjustment for the
reverse stock split anticipated before the closing of the
merger), unless Replidynes board of directors designates a
smaller number of shares.
6. To consider and vote upon an adjournment of the special
meeting, if necessary, if a quorum is present, to solicit
additional proxies if there are not sufficient votes in favor of
Replidyne Proposal No. 1, 2, 3, 4 or 5.
7. To transact such other business as may properly come
before the special meeting or any adjournment or postponement
thereof.
The board of directors of Replidyne has fixed January 21,
2009 as the record date for the determination of stockholders
entitled to notice of, and to vote at, the special meeting and
any adjournment or postponement thereof. Only holders of record
of shares of Replidyne common stock at the close of business on
the record date are entitled to notice of, and to vote at, the
special meeting. At the close of business on the record date,
Replidyne had 27,114,677 shares of common stock outstanding
and entitled to vote.
Recommendation
of the Replidyne Board of Directors
THE REPLIDYNE BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES
THAT THE ISSUANCE OF SHARES OF REPLIDYNE COMMON STOCK IN THE
MERGER IS ADVISABLE TO, AND IN THE BEST INTERESTS OF, REPLIDYNE
AND ITS STOCKHOLDERS AND HAS APPROVED SUCH PROPOSAL. THE
REPLIDYNE BOARD OF DIRECTORS RECOMMENDS THAT REPLIDYNE
STOCKHOLDERS VOTE FOR REPLIDYNE
PROPOSAL NO. 1 TO APPROVE THE ISSUANCE OF SHARES OF
REPLIDYNE COMMON STOCK IN THE MERGER.
45
THE REPLIDYNE BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES
THAT THE APPROVAL OF THE AMENDMENT TO REPLIDYNES RESTATED
CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT IS
ADVISABLE TO, AND IN THE BEST INTERESTS OF, REPLIDYNE AND ITS
STOCKHOLDERS AND HAS APPROVED SUCH PROPOSAL. THE REPLIDYNE BOARD
OF DIRECTORS RECOMMENDS THAT REPLIDYNE STOCKHOLDERS VOTE
FOR REPLIDYNE PROPOSAL NO. 2 TO APPROVE
THE AMENDMENT TO REPLIDYNES RESTATED CERTIFICATE OF
INCORPORATION FOR THIS PURPOSE.
THE REPLIDYNE BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES
THAT THE APPROVAL OF THE AMENDMENT TO REPLIDYNES RESTATED
CERTIFICATE OF INCORPORATION TO EFFECT A NAME CHANGE FROM
REPLIDYNE, INC. TO CARDIOVASCULAR SYSTEMS,
INC. IS ADVISABLE TO, AND IN THE BEST INTERESTS OF,
REPLIDYNE AND ITS STOCKHOLDERS AND HAS APPROVED SUCH PROPOSAL.
THE REPLIDYNE BOARD OF DIRECTORS RECOMMENDS THAT REPLIDYNE
STOCKHOLDERS VOTE FOR REPLIDYNE
PROPOSAL NO. 3 TO APPROVE THE AMENDMENT TO
REPLIDYNES RESTATED CERTIFICATE OF INCORPORATION FOR THIS
PURPOSE.
THE REPLIDYNE BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES
THAT THE APPROVAL OF THE ASSUMPTION OF THE CARDIOVASCULAR
SYSTEMS, INC. 2007 EQUITY INCENTIVE PLAN, AS AMENDED TO INCREASE
THE NUMBER OF CSI SHARES RESERVED UNDER THE PLAN TO 3,879,397
CSI SHARES, SUBJECT TO CONVERSION UPON THE CONSUMMATION OF THE
MERGER AND FURTHER ADJUSTMENT FOR THE REVERSE STOCK SPLIT, IS
ADVISABLE TO, AND IN THE BEST INTERESTS OF, REPLIDYNE AND ITS
STOCKHOLDERS AND HAS APPROVED SUCH PROPOSAL. THE REPLIDYNE BOARD
OF DIRECTORS RECOMMENDS THAT REPLIDYNE STOCKHOLDERS VOTE
FOR REPLIDYNE PROPOSAL NO. 4 TO APPROVE
THE ASSUMPTION OF THE CARDIOVASCULAR SYSTEMS, INC. 2007 EQUITY
INCENTIVE PLAN, AS AMENDED.
THE REPLIDYNE BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES
THAT THE APPROVAL OF THE AMENDMENT TO THE REPLIDYNE 2006
EMPLOYEE STOCK PURCHASE PLAN TO INCREASE THE NUMBER OF SHARES
RESERVED UNDER THE PLAN BY 1,615,000 SHARES TO 1,920,872 SHARES,
SUBJECT TO FURTHER ADJUSTMENT FOR THE REVERSE STOCK SPLIT, AND
AMEND THE EVERGREEN PROVISIONS THEREOF AS DESCRIBED
HEREIN IS ADVISABLE TO, AND IN THE BEST INTERESTS OF, REPLIDYNE
AND ITS STOCKHOLDERS AND HAS APPROVED SUCH PROPOSAL. THE
REPLIDYNE BOARD OF DIRECTORS RECOMMENDS THAT REPLIDYNE
STOCKHOLDERS VOTE FOR REPLIDYNE
PROPOSAL NO. 5 TO APPROVE THE INCREASE IN THE NUMBER
OF SHARES RESERVED UNDER THE REPLIDYNE 2006 EMPLOYEE STOCK
PURCHASE PLAN.
THE REPLIDYNE BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES
THAT ADJOURNING THE SPECIAL MEETING, IF NECESSARY, IF A QUORUM
IS PRESENT, TO SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT
SUFFICIENT VOTES IN FAVOR OF REPLIDYNE PROPOSAL NO. 1,
2, 3, 4 OR 5 IS ADVISABLE TO, AND IN THE BEST INTERESTS OF
REPLIDYNE AND HAS APPROVED SUCH ADJOURNMENT, IF NECESSARY.
REPLIDYNES BOARD OF DIRECTORS RECOMMENDS THAT REPLIDYNE
STOCKHOLDERS VOTE FOR REPLIDYNE
PROPOSAL NO. 6 TO ADJOURN THE SPECIAL MEETING, IF
NECESSARY, IF A QUORUM IS PRESENT, TO SOLICIT ADDITIONAL PROXIES
IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF REPLIDYNE
PROPOSAL NO. 1, 2, 3, 4 OR 5.
Record
Date and Voting Power
Only holders of record of Replidyne common stock at the close of
business on the record date, January 21, 2009, are entitled to
notice of, and to vote at, the Replidyne special meeting. There
were approximately 77 holders of record of Replidyne common
stock at the close of business on the record date. Because many
of such shares are held by brokers and other institutions on
behalf of stockholders, Replidyne is unable to estimate the
total number of stockholders represented by these record
holders. At the close of business on the record date,
27,114,677 shares of
46
Replidyne common stock were issued and outstanding. Each share
of Replidyne common stock entitles the holder thereof to one
vote on each matter submitted for stockholder approval. See
Replidyne Security Ownership by Certain Beneficial Owners
and Management for information regarding persons known to
the management of Replidyne to be the beneficial owners of more
than 5% of the outstanding shares of Replidyne common stock.
Voting
and Revocation of Proxies
The proxy accompanying this proxy statement/prospectus is
solicited on behalf of Replidynes board of directors for
use at the Replidyne special meeting.
If you are a stockholder of record of Replidyne as of the record
date referred to above, you may vote in person at the special
meeting or vote by proxy over the Internet, by telephone or
using the enclosed proxy card. Whether or not you plan to attend
the special meeting, Replidyne urges you to vote by proxy to
ensure your vote is counted. You may still attend the special
meeting and vote in person if you have already voted by proxy.
If your shares are registered directly in your name, you may
vote:
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Over the Internet. Go to the web site of
Replidynes tabulator, American Stock Transfer &
Trust Company, LLC, at
http://www.voteproxy.com
and follow the instructions you will find there. You must
specify how you want your shares voted or your Internet vote
cannot be completed and you will receive an error message. Your
shares will be voted according to your instructions.
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By Telephone. Call
1-800-776-9437
toll-free from the United States or
1-718-921-8500
from foreign countries and follow the instructions. You must
specify how you want your shares voted and confirm your vote at
the end of the call or your telephone vote cannot be completed.
Your shares will be voted according to your instructions.
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By Mail. Complete, date and sign the enclosed
proxy card and mail it in the enclosed postage-paid envelope to
American Stock Transfer & Trust Company, LLC. Your
proxy will be voted according to your instructions. If you do
not specify how you want your shares voted, they will be voted
as recommended by Replidynes board of directors.
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In Person at the Meeting. If you attend the
meeting, you may deliver your completed proxy card in person or
you may vote by completing a ballot, which will be available at
the meeting.
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If your shares are held in street name for your
account by a bank broker or other nominee, you may vote:
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Over the Internet or By Telephone. You will
receive instructions from your broker or other nominee if you
are permitted to vote over the Internet or by telephone.
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By Mail. You will receive instructions from
your broker or other nominee explaining how to vote your shares.
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In Person at the Meeting. Contact the bank,
broker or other nominee that holds your shares to obtain a
brokers proxy card and bring it with you to the meeting.
A brokers proxy is not the form of proxy
enclosed with this proxy statement/prospectus. You will not be
able to vote shares you hold in street name at the
meeting unless you have a proxy from your broker issued in your
name giving you the right to vote the shares.
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All properly executed proxies that are not revoked will be voted
at the special meeting and at any adjournments or postponements
of the special meeting in accordance with the instructions
contained in the proxy. If a holder of Replidyne common stock
executes and returns a proxy and does not specify otherwise, the
shares represented by that proxy will be voted FOR
each Replidyne Proposal set forth at the special meeting.
Any Replidyne stockholder of record voting by proxy, other than
those stockholders who have executed a voting agreement and
irrevocable proxy, has the right to revoke the proxy at any time
before the polls close at the special meeting by sending a
written notice stating that it would like to revoke its proxy to
the Secretary of Replidyne, by voting again over the Internet or
by telephone, by providing a duly executed proxy card bearing a
later date than the proxy being revoked or by attending the
special meeting and voting in person. Attendance alone at the
special meeting will not revoke a proxy. A beneficial owner of
Replidyne common stock that holds shares in street
name must follow directions received from the bank, broker
or other nominee that holds the shares to change its voting
instructions.
47
Quorum
and Required Vote
The presence, in person or by proxy, at the special meeting of
the holders of a majority of the shares of Replidyne common
stock outstanding and entitled to vote at the special meeting is
necessary to constitute a quorum at the meeting. If Replidyne
stockholders do not vote by proxy or in person at the special
meeting, the shares of common stock of such stockholders will
not be counted as present for the purpose of determining a
quorum. Abstentions and broker non-votes will be counted towards
a quorum.
The affirmative vote of the holders of a majority of the shares
of Replidyne common stock casting votes in person or by proxy at
the Replidyne special meeting is required for approval of
Replidyne Proposal Nos. 1, 4, 5 and 6. The affirmative
vote of holders of a majority of the issued and outstanding
shares of Replidyne common stock having voting power on the
record date for the special meeting is required for approval of
Replidyne Proposal Nos. 2 and 3.
For Replidyne Proposal Nos. 1, 4, 5 and 6, a
failure to submit a proxy card or vote at the special meeting,
or an abstention, vote withheld or broker non-votes
will have no effect on the outcome of such proposals. For
Replidyne Proposal Nos. 2 and 3, a failure to vote by
proxy or in person at the special meeting, or an abstention,
vote withheld or broker non-vote for such proposal,
will have the same effect as a vote against the approval
Replidyne Proposal Nos. 2 and 3.
In order to induce CSI to enter into the merger agreement,
several Replidyne stockholders, who together with their
respective affiliates, beneficially own approximately 48% of the
outstanding common stock of Replidyne, entered into voting
agreements and irrevocable proxies in favor of CSI pursuant to
which, among other things, each of these stockholders agreed,
solely in his capacity as a stockholder, to vote shares
representing approximately 32% of the outstanding common stock
of Replidyne in favor of the issuance of the shares of Replidyne
common stock pursuant to the merger and the other actions
contemplated by the merger agreement.
Solicitation
of Proxies
In addition to solicitation by mail, the directors, officers,
employees and agents of Replidyne may solicit proxies from
Replidyne stockholders by telephone, other electronic means or
in person. Directors, officers, employees and agents of
Replidyne will not receive any additional compensation for their
services, but Replidyne will reimburse them for their
out-of-pocket
expenses. Replidyne also will make arrangements with banks,
brokers, nominees, custodians and fiduciaries who are record
holders of Replidyne common stock for the forwarding of
solicitation materials to the beneficial owners of Replidyne
common stock. Replidyne will reimburse these banks, brokers,
nominees, custodians and fiduciaries for the reasonable
out-of-pocket
expenses they incur in connection with the forwarding of
solicitation materials and in obtaining voting instructions from
these owners.
Replidyne has retained D. F. King & Co., Inc., a proxy
solicitation firm, to assist in the solicitation of proxies by
mail, telephone or other electronic means or in person for a fee
of $15,000, plus an additional fee of $4.50 per incoming and
outgoing telephone contact.
Other
Matters
As of the date of this proxy statement/prospectus, the Replidyne
board of directors does not know of any business to be presented
at the Replidyne special meeting other than as set forth in the
notice accompanying this proxy statement/prospectus. If any
other matters should come before the special meeting, it is
intended that the shares represented by proxies will be voted
with respect to such matters in accordance with the judgment of
the persons voting the proxies.
48
REPLIDYNE
PROPOSAL NO. 1
APPROVAL
OF ISSUANCE OF SHARES OF REPLIDYNE COMMON STOCK IN THE
MERGER
General
Description of the Merger
Replidyne, CSI, and Responder Merger Sub, Inc., a Minnesota
corporation and wholly owned subsidiary of Replidyne, have
entered into an Agreement and Plan of Merger dated as of
November 3, 2008, which is referred to in this proxy
statement/prospectus as the merger agreement, that contains the
terms and conditions of the proposed business combination of
Replidyne and CSI. Pursuant to the merger agreement, on the
terms and conditions set forth therein, Responder Merger Sub,
Inc. will be merged with and into CSI, with CSI surviving the
merger as a wholly owned subsidiary of Replidyne.
Background
of the Merger
Historical
Background for CSI
CSI has periodically considered opportunities for strategic
transactions and has from time to time engaged in preliminary
discussions and negotiations with other companies regarding
these types of transactions.
In the fall of 2007, at the direction of CSIs board of
directors, the management team of CSI began meeting with
representatives of Morgan Stanley & Co. Incorporated,
Citigroup Global Markets, Inc. and William Blair &
Company, L.L.C., as lead underwriters, to prepare for an initial
public offering of CSI common stock. Following an organizational
meeting on October 29, 2007, representatives of CSI, the
underwriters and their respective legal counsel began the
process of conducting due diligence reviews of CSIs
affairs and drafting a registration statement to be filed with
the Securities and Exchange Commission, or SEC. CSI filed the
registration statement with the SEC on January 22, 2008.
CSI filed amendments to the registration statement in response
to SEC comments on March 20, 2008, April 18, 2008,
May 9, 2008 and May 23, 2008, resolving substantially
all of the SECs comments. Due to a deterioration in
U.S. economic conditions during the spring of 2008, CSI and
its underwriters elected not to begin a road show for the
proposed initial public offering in May or June 2008 and decided
to monitor market conditions with the hope that markets might be
receptive to CSIs initial public offering after Labor Day.
At the July 22, 2008 meeting of CSIs board of
directors, the board discussed its financing plans in the event
the initial public offering was further delayed and approved a
$13.5 million debt financing facility with Silicon Valley
Bank.
On August 15, 2008, CSI filed another amendment to its
registration statement to update the financial information to
include results for the fiscal year ended June 30, 2008.
Historical
Background for Replidyne
In February 2006, Replidyne entered into a collaboration and
commercialization agreement with Forest Laboratories to be its
exclusive partner for the development and marketing of faropenem
medoxomil, or faropenem, in the United States.
In October 2006, the U.S. Food and Drug Administration, or
FDA, issued a non-approval letter with respect to
Replidynes new drug application for faropenem. In its
letter, the FDA did not raise any safety concerns for faropenem,
but indicated that for respiratory indications of acute
bacterial sinusitis and acute exacerbations of chronic
bronchitis, superiority studies may be required, and for
community-acquired pneumonia further microbiologic evaluation
may be needed. Historically, the FDA had not required
superiority design studies for the approval of antibiotics and
all of Replidynes trials were conducted using a
non-inferiority design, which required these trials to
demonstrate that a product candidate is not significantly less
effective than an approved treatment. Faropenem was
Replidynes lead product candidate and the most advanced of
its four pipeline programs.
On February 6, 2007, Replidyne announced that Forest
Laboratories intended to terminate its collaboration and
commercialization agreement with Replidyne at the end of the
90-day
termination period set forth in the agreement.
49
On May 9, 2007, Replidyne engaged Morgan Stanley to act as
its exclusive financial advisor in connection with a possible
partnership between Replidyne and one or more parties for
licensing of faropenem or a merger or sale of or business
combination involving Replidyne. Over the next several months,
Morgan Stanley and Replidyne contacted 31 potential
collaboration partners.
In July and August 2007, management presented to the interested
parties an overview of faropenem and two pharmaceutical
companies pursued
follow-up
commercial and technical diligence. On August 31, 2007,
Replidyne received a non-binding term sheet from one interested
party. By November 2007, the parties terminated discussions with
Replidyne, citing development and regulatory risks as the major
factors. One of these parties subsequently restarted discussions
with Replidyne, but those discussions were again terminated in
January 2008.
On December 6, 2007, the Replidyne board of directors met
to discuss managements recommended restructuring plan. On
December 10, 2007, Replidyne announced an operational
restructuring to properly allocate resources. Headcount was
reduced by approximately 35%, primarily in the administrative,
clinical, regulatory, and commercial functions. Replidyne
continued to advance its preclinical programs, including
REP3123, its investigational antibacterial for the treatment of
C. difficile-infections, and its DNA replication
inhibition program. Replidyne suspended the development of
topical antibiotic REP8839 after concluding that the additional
investment required to optimize the formulation was too large
relative to the niche market opportunity. Replidyne continued
its placebo-controlled Phase III trial for faropenem in
acute exacerbation of chronic bronchitis. Replidyne did not
initiate enrollment in clinical trials for faropenem in acute
bacterial sinusitis and
community-acquired
pneumonia, hoping to identify a partner to assist in financing
and conducting the trials.
In January 2008, management made a presentation to another party
that expressed interest in entering into a partnership to
commercialize the faropenem program.
In January 2008, management assembled a list of potential
companies on which Replidyne could focus its efforts in its
strategic alternatives process. A special committee of the
Replidyne board of directors reviewed this list and recommended
that Replidyne expand its focus beyond companies that were
focused on anti-infective products. Following this review by
Replidyne management and this committee, Replidyne initiated a
strategic alternatives process with a total of 72 biotechnology
and pharmaceutical companies screened by Morgan Stanley and
Replidyne over the next several months.
Discussions and due diligence regarding a potential partnership
to commercialize faropenem continued into February 2008.
On March 6, 2008, the Replidyne board of directors met to
discuss the faropenem commercialization process as well as the
strategic alternatives process. Background materials on a
potential partner for faropenem were presented and the timing
and process for decision-making were discussed. The board
reviewed the potential strategic alternatives and discussed
decision criteria for potential merger partners, including
correlation or diversification of technology and regulatory
risk, cash burn rate and stage of development. The board also
discussed the general state of the initial public offering
environment and implications for potential counterparties and
precedent transactions, as well as potential target companies,
their motivation to pursue a transaction and the due diligence
process.
In March 2008, a potential partner for faropenem completed its
own restructuring, which caused delays in its ability to
continue discussions.
From March through June 2008, Replidyne management continued its
regular meetings to review and evaluate, with the assistance of
representatives of Morgan Stanley, candidates for a strategic
transaction. If a company met Replidynes criteria and
metrics, one or more members of Replidynes management
would meet directly with a potential strategic partners
management team.
On April 17, 2008, the Replidyne board of directors met to
discuss the strategic alternatives process, faropenem program
updates and the potential sale of the REP3123 and DNA
replication inhibitor programs. The board of directors directed
management to identify potential strategic buyers who might be
interested in purchasing these assets and venture funds that
might be interested in financing a spin-out of these assets.
50
On April 23, 2008, Replidyne discontinued enrollment in a
placebo-controlled Phase III clinical trial testing
faropenem in patients with acute exacerbation of chronic
bronchitis. Replidyne took this action to conserve its cash
assets and support initiatives that included pursuing strategic
transactions and maintaining its research programs. Following
delays in discussions with potential partners, the final
discussions in the faropenem process occurred in April 2008.
In May 2008, process letters were sent to 10 potential merger
partners, requesting term sheets for a merger transaction.
In early June 2008, five term sheets were received for a
potential merger transaction. On June 5, 2008, the
Replidyne board of directors met with representatives of Morgan
Stanley present to discuss the companies that had submitted a
response, including terms submitted and a valuation analysis.
The board discussed with representatives of Morgan Stanley
present the stage of development of the lead compounds for each
potential merger partner, market potential, the probability of
success, management teams, downside risk and potential upsides
for each potential transaction. The board of directors also
discussed with representatives of Morgan Stanley present the
advantages and disadvantages to expanding the process to include
other potential merger partners, including technology areas
other than biotechnology.
Replidyne received another term sheet from a potential merger
partner in June 2008. Under the direction of Replidynes
board of directors, management conducted discussions with two
parties. Management continued to conduct due diligence and
engaged experts to assist in evaluating the potential candidates.
On June 20, 2008, one potential merger party, referred to
as Party A, agreed to the financial terms proposed by Replidyne.
Replidyne entered into merger agreement negotiations with that
party.
On June 23, 2008, Replidyne terminated its license
agreement with Asubio Pharma Co., Ltd. for faropenem and
terminated its supply agreement with Asubio Pharma Co., Ltd. and
Nippon Soda Co. Ltd. for production of faropenem.
On July 17, 2008, the Replidyne board of directors met with
representatives of Morgan Stanley present to review the status
of discussions with two potential merger partners including
recent FDA activity with respect to one of the companies, as
well as status and expected timeline of the partnership
discussions. Management updated the board that legal diligence
and review of the initial draft of merger agreement was underway.
Replidynes discussion with Party A ended after continued
diligence and merger agreement negotiation when a major
milestone was not achieved by Party A.
In August 2008, discussions with the other potential merger
party, referred to as Party B, continued. Replidyne continued to
negotiate financial terms and merger agreement provisions with
Party B.
In August 2008, the Replidyne board of directors directed
management to review companies in the medical technology
industry. A total of 61 medical technology companies were
screened by Morgan Stanley and Replidyne over the subsequent
months.
On August 8, 2008, the Replidyne board of directors met to
discuss strategic alternatives. Representatives of Morgan
Stanley presented several medical technology companies. Under
direction of the board of directors, Replidynes management
and representatives of Morgan Stanley proceeded to contact
several medical technology potential merger partners.
Over the next several weeks, Replidyne management, with the
assistance of representatives of Morgan Stanley, proceeded to
contact candidates for a strategic transaction. In August 2008,
process letters were sent to five potential merger partners
(excluding CSI), requesting term sheets for a merger transaction.
In August and September 2008, Replidyne received proposals from
five interested parties, including Party B. Replidyne
continued to conduct due diligence on the potential merger
partners and made the parties aware that Replidyne would respond
to the proposals after the Replidyne board of directors was able
to review the bids.
51
Background
of Transaction Between Replidyne and CSI
On August 22, 2008, representatives of Morgan Stanley
contacted CSI to introduce the idea of a merger with Replidyne
and inquired whether CSI would consider the opportunity to
present to the management of Replidyne.
On August 27, 2008, Replidyne announced a restructuring of
its operations that would reduce its current employee headcount
by approximately 80% to six employees during September 2008 and
October 2008. Replidyne suspended further development activities
of REP3123 and novel anti-infective compounds based on its DNA
replication inhibition technology.
On August 29, 2008, CSI management presented to the
management of Replidyne an overview of CSI and both parties
discussed the potential for a merger transaction. David Martin,
CSIs president and chief executive officer, described
CSIs business, including the growth in revenues achieved
since the introduction of its product.
On September 2, 2008, Replidyne and CSI signed a
confidentiality agreement and began exchanging confidential
information about each others business.
During August and September 2008, Replidyne continued parallel
discussions with CSI and five other companies identified by
Replidyne management and the board of directors for final stage
evaluation regarding a potential business combination. Replidyne
management engaged experts and conducted
on-site
visits and numerous teleconference calls with the interested
parties.
On September 8, 2008, CSI filed an additional amendment to
its registration statement to address additional comments from
the SEC.
On September 10, 2008, Replidyne management met with CSI to
discuss CSI and a potential merger between the two companies.
Also on September 10, 2008, the pricing committee of
CSIs board of directors met by telephone conference call
with representatives of CSIs underwriters to discuss
prospects for launching CSIs initial public offering.
Representatives of the underwriters reported that they could not
recommend proceeding with the initial public offering at that
time, but suggested that an offering remained possible in the
coming weeks if market conditions improved.
On September 11, 2008, the Replidyne board of directors met
with representatives of Morgan Stanley present to discuss the
status of the strategic alternatives process and to review the
bids received. The board also discussed with representatives of
Morgan Stanley present Party B and the possibility of continuing
discussions with this party. The board also discussed with
representatives of Morgan Stanley present the timeline that
would be associated with effecting a cash distribution. The
board decided to proceed with four parties, including Party B
and CSI.
On September 17, 2008, Replidyne sent three parties
counterproposals to the term sheets that these parties had
presented to Replidyne.
On September 18, 2008, Replidyne sent CSI a written
proposal and a draft merger agreement for a transaction between
the two companies whereby CSI stockholders would achieve fully
diluted ownership of 83% of the combined company, based on
Replidyne net assets of $40 million at closing.
On September 19, 2008, CSIs pricing committee met by
telephone conference call with representatives of CSIs
underwriters. The representatives of CSIs underwriters
reported that markets had deteriorated further since the
preceding week, with continuing uncertainty and volatility. The
representatives of the underwriters recommended waiting for
several weeks to see how market conditions would develop.
Mr. Martin reported to the pricing committee that he had
received the preceding evening the proposal from Replidyne
together with the draft merger agreement. The pricing committee
encouraged Mr. Martin to continue discussions with
Replidyne in view of the uncertainty regarding the initial
public offering.
In late September 2008, one interested party, referred to as
Party C, agreed to the terms proposed by Replidyne and Replidyne
sent the party a proposed merger agreement. Two parties,
including Party B, decided not to proceed with Replidyne based
on Replidynes requests, but remained open to continued
dialogue. Replidyne management continued to conduct due
diligence and discuss merger agreement terms with Party C.
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On or about September 23, 2008, Replidyne began providing
CSI and its legal counsel, Fredrikson & Byron, P.A.,
with access to a secure website containing due diligence
documents relating to Replidyne.
On September 24, 2008, Replidyne sent CSI a letter inviting
CSI to respond to the non-binding proposal Replidyne sent
on September 18, 2008 by September 26, 2008.
On September 26, 2008, the CSI pricing committee met again
by telephone conference call with representatives of CSIs
underwriters to discuss the market conditions for the proposed
initial public offering. Representatives of the underwriters
reported that conditions had only worsened since the last
meeting of the pricing committee, including significant declines
in the Dow Jones and Nasdaq indexes and the highest levels of
volatility seen since 2003. They explained that prospects for an
initial public offering during the rest of the year were
uncertain. CSIs board of directors also met by telephone
conference call on September 26, 2008 to discuss the
proposal from Replidyne and CSIs response. CSIs
board authorized a counterproposal to Replidyne whereby CSI
would issue 15% of its common stock to Replidyne in exchange for
$40 million and Replidyne would thereafter dissolve and
distribute the common stock to its stockholders. This proposal
was communicated to Replidyne by a letter dated
September 26, 2008.
On September 27, 2008, the Replidyne board of directors met
with representatives of Morgan Stanley present to discuss in
greater detail Party C and CSI. The board also discussed with
representatives of Morgan Stanley present the status of the
negotiations, financial and other diligence review and
discussions with Party C. Under the direction of the board,
Replidyne management responded to CSIs September 26,
2008 letter restating the September 18, 2008 financial
terms and merger structure.
On September 30, 2008, CSI responded to Replidynes
letter agreeing with the reverse merger structure proposed by
Replidyne and proposing a transaction whereby CSI stockholders
would achieve fully diluted ownership of 84% of the combined
company, based on Replidyne net assets of $40 million at
closing.
In response to the Replidyne proposals requirement that
all CSI preferred stock convert to common stock prior to the
merger, which may not otherwise have occurred automatically as a
result of the merger, representatives of CSIs preferred
stockholders proposed that CSI issue to the preferred
stockholders five-year warrants to purchase
3,500,000 shares of CSI common stock, exercisable at a
price of $5.71 per share, as consideration for the
conversion of the preferred stock and the loss of various rights
and preferences resulting from the conversion. Upon the advice
of Fredrikson & Byron, CSIs board formed a
special committee consisting of those directors not holding any
preferred stock of CSI to consider this proposal. The special
committee was formed by written action of CSIs board of
directors as of October 2, 2008.
On or about October 2, 2008, CSI began providing Replidyne
and its legal counsel, Cooley Godward Kronish LLP, with access
to a secure website containing due diligence documents relating
to CSI.
Beginning on October 3, 2008, Replidyne and CSI management,
their respective counsel and representatives of Morgan Stanley
met several times via teleconference to discuss due diligence
items and the terms of the merger agreement.
On October 3, 2008, the Replidyne board of directors met
with representatives of Morgan Stanley present to discuss the
two potential merger partners (Party C and CSI).
Replidynes management reviewed diligence efforts with the
board and the status of valuation discussions. Replidynes
management discussed with the board the perceived risks and
certainty of closing with respect to the two candidates.
Following the board of directors meeting, Replidyne responded to
CSIs letter proposing a transaction whereby CSI
stockholders would achieve fully diluted ownership of 83% of the
combined company, based on Replidyne net assets of
$40 million at closing.
On October 6, 2008, the CSI special committee met to
discuss the proposal from CSIs preferred stockholders and
authorize the issuance of the warrants as proposed in connection
with a proposed transaction with Replidyne.
Later on October 6, 2008, CSIs board of directors met
and authorized management of CSI to continue negotiating a
merger transaction with Replidyne on terms that would result in
Replidyne stockholders owning 17% of the post-merger company,
assuming Replidynes net assets were $40 million prior
to the merger. Based upon the recommendation of the special
committee, the board of directors also authorized the issuance
of the warrants as
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consideration for the conversion of the preferred stock in
connection with the closing of the merger, should the merger
proceed and be consummated. Replidyne decided to proceed with
CSI and alerted Party C.
On October 7, 2008, Replidyne and CSI entered into a mutual
exclusivity agreement. Over the next several weeks, Replidyne
and CSI conducted due diligence on each other.
On October 8, 2008, at the direction of CSI,
Fredrikson & Byron distributed comments to the draft
merger agreement to Cooley. The parties exchanged several drafts
of the merger agreement, the attachments thereto, including the
disclosure schedules, and other ancillary documents until the
execution of the merger agreement.
In connection with the ongoing negotiation of the merger
agreement and related documents and agreements, including
discussions relating to voting agreements,
Fredrikson & Byron advised CSIs board of
directors to form a committee pursuant to Section 302A.673
of the Minnesota Business Corporation Act, which prohibits
certain business combinations involving a Minnesota corporation
unless a properly-formed committee provides certain approvals
before the business combination. In response to this
recommendation, CSIs board of directors formed another
special committee consisting of all non-management directors for
this purpose by written action dated October 14, 2008.
On October 16, 2008, the Replidyne board of directors met
with representatives of Morgan Stanley present to discuss the
status of the due diligence and merger agreement discussion with
CSI, and received an update on recent developments in the market
from representatives of Morgan Stanley.
At a regularly scheduled board meeting on October 21, 2008,
CSIs special committee and board of directors discussed
with Fredrikson & Byron the terms of the merger
agreement with Replidyne as negotiated to that date and the
unresolved issues remaining in the negotiations. Among other
things, the special committee and board discussed in-depth the
mechanism for adjustment of the number of shares to be issued to
the parties based on the net assets of Replidyne available on
the date of closing, the termination provisions and termination
fees provided in the merger agreement and the governance of the
post-merger company, including Replidynes request that two
Replidyne directors be added to the combined company board.
On October 22, 2008, Replidyne management and a board
member conducted
on-site
diligence at CSIs offices.
On October 24, 2008, the Replidyne board of directors met
with representatives of Morgan Stanley present to discuss the
results of the continued diligence review, the status of the
merger agreement and the proposed timing for the transaction.
The board also received an update on recent developments in the
market from representatives of Morgan Stanley. The board also
approved managements recommendation that the exclusivity
period be extended. The board reviewed with representatives of
Morgan Stanley present certain key provisions of the merger
agreement, including among other things, matters related to
voting agreements,
lock-ups,
termination fees and termination rights.
On October 24, 2008, CSI management began consulting with
representatives of Citi on the financial aspects of the merger.
On October 25, 2008, the Replidyne board of directors
received a letter from a potential merger partner with which
Replidyne had previously discussed a merger proposing new
financial terms.
On October 27, 2008, Replidyne sent CSI a letter outlining
certain merger agreement provisions including
lock-up
agreements, voting agreements, termination fees, interim
financing by CSI and board of directors nominations. Replidyne
also suggested that Replidyne pro forma ownership be adjusted
based on Replidyne net assets above or below a collar, rather
than an adjustment for any change in net assets.
On the morning of October 28, 2008, CSIs special
committee and board of directors met by telephone conference
call to discuss with Fredrikson & Byron the current
status of the proposed merger agreement with Replidyne and the
open issues remaining to be resolved.
On October 28, 2008, CSI filed a Form 10 with the SEC
to register its common stock under Section 12(g) of the
Securities Exchange Act of 1934, due to CSI exceeding 500 record
holders of its common stock as of June 30, 2008.
54
On October 29, 2008, the Replidyne board of directors met
with representatives of Morgan Stanley present to discuss the
recent updates on the merger agreement provisions and continued
to discuss certain provisions of the merger agreement after the
meeting. Representatives of Morgan Stanley also provided an
update on recent developments in the markets.
On October 31, 2008, the special committee and board of
directors of CSI held a meeting by telephone conference call to
discuss the proposed merger with Replidyne. Prior to the
meeting, the CSI special committee and board received copies of
the merger agreement and related documents. CSI management,
together with Fredrikson & Byron, summarized the
status of the open and resolved issues in the merger agreement
and answered questions posed by members of the special committee
and board. Following the discussion, CSIs special
committee and board each unanimously approved the proposed
merger with Replidyne and the merger agreement, the voting
agreements and all other agreements related to the merger in
substantially the form presented to the CSI board, with such
changes as CSI management deemed necessary or advisable.
On November 3, 2008, the Replidyne board of directors met
with representatives of Morgan Stanley present and reviewed the
proposed transaction with CSI. Replidynes legal counsel
described the terms of the merger agreement. At the meeting,
Morgan Stanley rendered its oral opinion to the board of
directors, subsequently confirmed in writing, that, as of the
date of and based upon and subject to the various assumptions,
qualifications and limitations set forth in the opinion, the
conversion factor pursuant to the merger agreement was fair from
a financial point of view to Replidyne. After discussion, the
board of directors of Replidyne approved the merger agreement
and the transaction with CSI, subject to certain revisions to
the merger agreement specified by the board.
Later on November 3, 2008, Replidyne and CSI executed the
merger agreement, certain Replidyne directors, officers and
stockholders executed voting agreements with CSI, certain CSI
directors, officers and stockholders executed voting agreements
with Replidyne, and certain Replidyne and CSI security holders
executed
lock-up
agreements for the benefit of Replidyne and CSI.
On the morning of Tuesday, November 4, 2008, the parties
issued a joint press release announcing the execution of the
merger agreement. In addition, on November 4, 2008 at
8:30 a.m. Eastern Time, Replidyne and CSI held a joint
conference call to discuss the planned merger and a business
overview. That same morning, CSI withdrew the registration
statement for its initial public offering.
Reasons
for the Merger
Replidyne
Reasons for the Merger
In evaluating the merger, Replidynes board of directors
consulted with senior management and Replidynes legal and
financial advisors. In the course of reaching its determination
to approve the merger agreement and the transactions
contemplated by the merger agreement, Replidynes board of
directors considered a number of factors, including the
following:
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The Replidyne board believed that a merger with CSI was the most
attractive transaction among the strategic alternatives
Replidyne had reviewed. Replidynes board of directors had
considered numerous other potential transactions, had reviewed
more than 130 candidate companies from within the biotechnology,
pharmaceutical and medical technology sectors and had considered
the liquidation of the company and the restructuring of its
commercial and administrative operations to continue development
of REP3123, its product candidate for the treatment of CDI, and
its novel DNA replication inhibition program, together referred
to as Replidynes research pipeline programs.
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Replidyne noted that CSIs Diamondback 360° Orbital
Atherectomy System had received FDA clearance and has features
that differentiate it in the market from other FDA approved or
cleared minimally invasive atherectomy devices, including those
features described under the caption Information Regarding
CSIs Business CSIs Solution.
CSIs revenues in the four fiscal quarters since the launch
of the product and the high reorder rate among its initial
customers demonstrate CSIs ability to retain its customer
base.
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Replidyne believes that CSIs other cash resources,
together with Replidynes projected available cash at
closing, will be sufficient to fund CSIs currently
projected operating requirements for the foreseeable
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future, assuming that delays in CSIs business plan or
other unforseen events do not substantially reduce the amount of
cash available from operations.
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Replidyne believes that use of the Diamondback 360° for
Peripheral Arterial Disease, or PAD, represents a significant
untapped market opportunity.
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CSI plans to launch additional products to treat lesions in
larger vessels, including superficial femoral arteries of up to
7mm in diameter, and to seek pre-market approval from the FDA to
use the Diamondback 360° to treat patients with coronary
artery disease. Replidynes board believes that these
market opportunities represent potential future growth
opportunities for investors.
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CSIs management team has a background in developing and
marketing PAD devices and has demonstrated the ability to
successfully execute its growth strategy.
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The Centers for Medicare and Medicaid Services has established
reimbursement codes describing atherectomy products and
procedures using atherectomy products, and many private insurers
follow these policies. CSI believes that physicians and
hospitals that treat PAD with the Diamondback 360° will
generally be eligible to receive adequate reimbursement from
Medicare and private insurers for the cost of the single-use
catheter and the physicians services.
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CSIs atherectomy device may be complementary to products
that are currently sold by larger medical device companies such
as stents, drug coated stents and angioplasty balloons.
Replidynes board of directors believes that CSI may be an
attractive candidate for an acquisition by a larger medical
device company, which could provide an opportunity for returns
to Replidyne stockholders, particularly if future revenue growth
is achieved by CSI.
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CSI had already filed a registration statement on
Form S-1
with the SEC and had substantially completed the SECs
review process in connection with its proposed initial public
offering. CSI has also subsequently filed a registration
statement on Form 10 with the SEC. This allowed the
transaction timetable to be accelerated.
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In addition to the specific factors concerning CSI outlined
above, the Replidyne board of directors considered the following
factors in reaching its conclusion to approve the merger and to
recommend that the Replidyne stockholders approve the issuance
of shares of Replidyne common stock in the merger, all of which
it reviewed as supporting its decision to approve the business
combination with CSI.
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Replidynes net cash position and its public listing
enabled Replidyne to provide access to capital that otherwise
may not have been available to CSI or that would be available to
CSI only at less favorable valuation levels, which allowed
Replidyne to obtain favorable terms.
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Due to the recent volatility of the public markets, companies
such as CSI were unable to complete an initial public offering.
These conditions made a merger more attractive to CSI and
allowed Replidyne to obtain favorable terms.
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Faropenem did not receive approval from the FDA for its new drug
application. This resulted in loss of current value for
Replidyne stockholders and diminished the prospects for the
creation of future value for Replidyne stockholders through the
operation of its ongoing business.
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Replidynes research pipeline programs were determined to
be too early in their stage of development to sustain the
operations of a public company on a stand-alone basis, and
Replidyne expected to incur significant losses and require
substantial additional capital to complete these development
programs, and seek regulatory approval, none of which could be
assured.
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The liquidation of Replidyne likely would not have produced the
maximum potential value for Replidyne stockholders. The process
of completing a liquidation of Replidyne under applicable law
may also have resulted in delays in returning funds to Replidyne
stockholders.
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The Replidyne board of directors considered the financial
analyses of Morgan Stanley, including its written opinion to the
board of directors dated November 3, 2008 that, as of that
date, and based upon and subject to the various assumptions,
qualifications and limitations set forth in the opinion, the
conversion factor
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pursuant to the merger agreement was fair from a financial
point of view to Replidyne, as more fully described below under
the caption Opinion of Replidynes Financial
Advisor.
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Replidyne stockholders holding approximately 48% of
Replidynes outstanding common stock have entered into
voting agreements whereby they have agreed to vote approximately
32% of the outstanding shares of Replidyne in favor of the
issuance of the shares of Replidyne common stock pursuant to the
merger and the other transactions contemplated by the merger
agreement. Certain CSI stockholders have entered into voting
agreements whereby they have agreed to vote approximately 20% of
the outstanding shares of CSI in favor of the merger and the
other transactions contemplated by the merger agreement.
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The Replidyne board of directors believes that the merger has a
high likelihood of being consummated on a timely basis,
including the likelihood that the merger will receive all
necessary approvals.
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The Replidyne board of directors also considered the terms and
conditions of the merger agreement, including the following
factors:
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financial terms negotiated under the merger agreement;
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the expectation that the merger will be treated as a
reorganization for U.S. federal income tax purposes, with
the result that in the merger, the Replidyne stockholders will
generally not recognize taxable gain or loss for
U.S. federal income tax purposes;
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the limited number and nature of the conditions to CSIs
obligation to consummate the merger and the limited risk of
non-satisfaction of such conditions;
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Replidynes right under the merger agreement to consider
certain unsolicited acquisition proposals under certain
circumstances should Replidyne receive a superior proposal;
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the conclusion of the Replidyne board of directors that the
potential termination fee of $1.5 million plus certain
transaction related expenses, which would become payable upon
the termination of the merger agreement in certain
circumstances, was reasonable;
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the constraint on CSIs ability to secure debt or equity
financing or to issue debt or equity securities prior to closing
without the consent of Replidyne;
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the provisions limiting the ability of CSI to solicit, initiate
or knowingly encourage any other acquisition proposal; and
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the belief that the terms of the merger agreement, including the
parties representations, warranties and covenants, and the
conditions to their respective obligations, are reasonable under
the circumstances.
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In the course of its deliberations, the Replidyne board of
directors also considered a variety of risks and other
countervailing factors related to entering into the merger
agreement, including:
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the potential effect of the termination fee that would be
payable to CSI upon the termination of the merger agreement in
certain circumstances in deterring other potential acquirers
from proposing an alternative transaction that may be more
advantageous to Replidyne stockholders;
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the substantial expenses to be incurred in connection with the
merger;
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the possible volatility, at least in the short term, of the
trading price of the Replidyne common stock resulting from the
announcement of the merger;
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the risk that the merger might not be consummated in a timely
manner or at all and the potential adverse effect of the public
announcement of the merger or of the delay or failure to
complete the merger with CSI on the reputation of Replidyne;
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the risk to the liquidation value of Replidyne in the event that
the merger is not consummated; and
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various other risks associated with the combined company and the
merger, including those described in the section entitled
Risk Factors in this proxy statement/prospectus.
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The foregoing information and factors considered by the
Replidyne board of directors are not intended to be exhaustive
but are believed to include all of the material factors
considered by the Replidyne board of directors. In view of the
wide variety of factors considered in connection with its
evaluation of the merger and the complexity of these matters,
the Replidyne board of directors did not find it useful, and did
not attempt, to quantify, rank or otherwise assign relative
weights to these factors. In considering the factors described
above, individual members of the Replidyne board of directors
may have given different weight to different factors. The
Replidyne board of directors conducted an overall analysis of
the factors described above, including thorough discussions
with, and questioning of, the Replidyne management and the
Replidyne legal and financial advisors, and considered the
factors overall to be favorable to, and to support, its
determination.
CSI
Reasons for the Merger
In the course of their deliberations, CSIs special
committee and board of directors reviewed CSIs historical,
present and projected financials, CSIs historical and
long-term strategic objectives, the opportunities that CSI is
pursuing and the risks associated therewith, and general
economic and market conditions.
In evaluating the merger, CSIs special committee and board
of directors consulted with CSIs management and legal and
financial advisors, and in the course of reaching their
determinations to approve the merger, the merger agreement and
the other transactions contemplated by the merger agreement,
CSIs special committee and board of directors considered
various factors supporting those determinations, including,
without limitation, the following:
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CSI believes that Replidynes projected available cash at
closing, together with CSIs other cash resources, will be
sufficient to fund CSIs currently projected operating
requirements for the foreseeable future;
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the expectation that the merger would be a more time- and
cost-effective means to access capital than other options
considered, including an initial public offering or an
additional round of private equity financing, given the state of
the markets for initial public offerings and private equity
financings and the anticipated delays and complications
associated therewith;
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the familiarity of the special committee and board of directors
with the business, operations, financial condition and prospects
of CSI and general industry, economic and market conditions,
including the inherent risks and uncertainties in CSIs
business, in each case on a historical, current and prospective
basis;
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the view that the range of options available to the combined
company to access private and public equity markets should
additional capital be needed in the future will likely be
greater following the merger than if CSI did not complete the
merger;
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the judgment of the special committee and board of directors
that the merger is the best available alternative to CSI and its
stockholders;
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the terms and conditions of the merger agreement, including,
without limitation, the following:
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the determination that the expected relative percentage
ownership of Replidyne securityholders and CSI securityholders
in the combined company is appropriate and reasonable based on
the approximate valuations of each company in the judgment of
the CSI special committee and board of directors;
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that the terms of the merger agreement are reasonable, including
the parties representations, warranties and covenants and
the conditions to the parties respective obligations;
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the expectation that the merger will be treated as a
reorganization for U.S. federal income tax purposes, with
the result that in the merger CSI stockholders will generally
not recognize taxable gain or loss for U.S. federal income
tax purposes;
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the rights of CSI under the merger agreement to consider certain
unsolicited acquisition proposals under certain circumstances
should CSI receive a superior proposal;
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the fact that the merger agreement must be submitted to CSI
stockholders for approval, which allows for an informed vote of
the stockholders on the merits of the transaction, and the fact
that dissenters rights
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would be available to CSI stockholders who do not vote in favor
of the merger under the Minnesota Business Corporation Act;
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the fact that all of the officers and eight of the directors of
CSI will serve as the management of Replidyne following the
closing; and
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the conclusion of the special committee and board of directors
of CSI that the potential termination fee of up to
$1.5 million, plus the reimbursement of certain transaction
expenses incurred by CSI in connection with the merger, payable
by Replidyne to CSI and the circumstances under which such fee
may be payable, were reasonable;
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the fact that shares of Replidyne common stock to be issued to
CSI stockholders will be registered on a
Form S-4
registration statement by Replidyne and will become freely
tradable for CSI stockholders who are not affiliates of CSI and
who are not parties to
lock-up
agreements; and
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the likelihood that the merger will be consummated on a timely
basis.
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In the course of its deliberations, the CSI special committee
and board of directors also considered a variety of risks and
other countervailing factors related to entering into the merger
agreement, including, without limitation, the following:
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the possibility that the merger might not be completed and the
potential adverse effect of the public announcement of the
merger or of the delay or failure to complete the merger on the
reputation of CSI and the ability of CSI to obtain financing in
the future in the event the merger is not completed;
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the termination fee of up to $1.5 million, plus the
reimbursement of certain transaction expenses incurred by
Replidyne in connection with the merger, payable by CSI to
Replidyne upon the occurrence of certain events, and the
potential effect of such termination fee on CSIs ability
to carry out its operating plan and in deterring other potential
acquirers from proposing an alternative transaction that may be
more advantageous to CSI stockholders;
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the risk of diverting managements attention from other
strategic priorities to implement the merger and integrate each
companys operations and infrastructure following the
merger;
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the risk that the merger might not be consummated in a timely
manner or at all;
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the customary restrictions on the conduct of CSIs business
prior to the completion of the merger, requiring CSI to conduct
its business in all material respects only in the ordinary
course, subject to specified limitations, which may delay or
prevent CSI from undertaking business opportunities that may
arise pending completion of the merger;
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the requirement that CSI terminate its efforts to conduct an
initial public offering and cease any other material financing
activities and the resulting dependence of CSI on completing the
merger to provide the financing to execute its business plan;
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the expenses to be incurred in connection with, and liabilities
of Replidyne to be assumed following, the merger and related
administrative challenges associated with combining the
companies; and
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various other risks associated with the combined company and the
merger, including the risks described in the section entitled
Risk Factors in this proxy statement/prospectus.
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The foregoing information and factors considered by the CSI
special committee and board of directors are not intended to be
exhaustive but set forth the principal factors considered by the
CSI special committee and board of directors. In view of the
wide variety of factors considered in connection with its
evaluation of the merger and the complexity of these matters,
the CSI special committee and board of directors did not find it
useful, and did not attempt, to quantify, rank or otherwise
assign relative weights to these factors. In considering the
factors described above, individual members of the CSI special
committee and board of directors may have given different weight
to different factors. The CSI special committee and board of
directors conducted an overall analysis of the factors described
above, including thorough discussions with, and questioning of,
CSI management and legal advisors, and considered the factors
overall to be favorable to, and to support, their determinations.
59
Opinion
of Replidynes Financial Advisor
On May 9, 2007, Replidyne retained Morgan
Stanley & Co. Incorporated, or Morgan Stanley, to act
as its exclusive financial advisor and provide a financial
opinion letter in connection with a possible merger or sale of
or business combination involving Replidyne or a partnership
between Replidyne and one or more parties for licensing of one
or more products of Replidynes lead product candidate,
faropenem. Replidynes board of directors selected Morgan
Stanley to act as its exclusive financial advisor based on
Morgan Stanleys qualifications, expertise and reputation
and its familiarity with Replidyne. At a meeting of
Replidynes board of directors held on November 3,
2008, Morgan Stanley rendered its oral opinion, subsequently
confirmed in writing, that, as of that date of and based upon
and subject to the various assumptions, qualifications and
limitations set forth in the opinion, the conversion factor
pursuant to the merger agreement was fair from a financial point
of view to Replidyne.
The full text of Morgan Stanleys opinion, dated
November 3, 2008, which sets forth, among other things, the
assumptions made, procedures followed, matters considered and
qualifications and limitations on the scope of the review
undertaken by Morgan Stanley in rendering its opinion, is
included as Annex D to this proxy
statement/prospectus. The summary of Morgan Stanleys
fairness opinion set forth in this proxy statement/prospectus is
qualified in its entirety by reference to the full text of the
opinion. Replidyne stockholders should read this opinion
carefully and in its entirety. Morgan Stanleys opinion was
directed to the board of directors of Replidyne and only
addresses the fairness from a financial point of view of the
conversion factor to Replidyne as of the date of the opinion.
Morgan Stanleys opinion does not address any other aspect
of the proposed merger. Morgan Stanley expressed no opinion or
recommendation as to how the stockholders of Replidyne or CSI
should vote at the stockholders meetings to be held in
connection with the merger.
In connection with rendering its opinion, Morgan Stanley, among
other things:
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reviewed certain publicly available financial statements and
other business and financial information of CSI and Replidyne,
respectively;
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reviewed certain internal financial statements and other
financial and operating data, including certain financial
projections, concerning Replidyne prepared by the management of
Replidyne;
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reviewed certain financial projections concerning CSI prepared
by the management of CSI;
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discussed the past and current operations and financial
condition and the prospects of CSI with senior executives of CSI;
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reviewed the reported prices and trading activity for Replidyne
common stock;
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compared the financial performance of CSI with that of certain
other publicly traded companies comparable with CSI, and their
securities;
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reviewed the financial terms, to the extent publicly available,
of certain comparable acquisition transactions;
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participated in certain discussions and negotiations among
representatives of CSI and Replidyne and their legal advisors;
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reviewed the merger agreement in the form of a draft dated
November 2, 2008, the CSI preferred stockholder conversion
agreement in the form of a draft dated October 28, 2008 and
certain related documents; and
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performed such other analyses and considered such other factors
as Morgan Stanley deemed appropriate.
|
In arriving at its opinion, Morgan Stanley assumed and relied
upon, without independent verification, the accuracy and
completeness of the information that was publicly available or
supplied or otherwise made available to it by CSI and Replidyne
for the purposes of its opinion. With respect to the financial
projections prepared by the respective managements of Replidyne
and CSI, Morgan Stanley assumed that they had been reasonably
prepared on bases reflecting the best currently available
estimates and judgments of the respective managements of CSI and
Replidyne of the future financial performance of CSI and
Replidyne. In addition, Morgan Stanley assumed that the merger
will be consummated in accordance with the terms set forth in
the merger agreement without any waiver, amendment or delay of
any terms or conditions, including, among other things, that the
merger will be treated as a
60
tax-free reorganization pursuant to the Internal Revenue Code of
1986, as amended. Morgan Stanley assumed that, in connection
with the receipt of all the necessary governmental, regulatory
or other approvals and consents required for the merger, no
delays, limitations, conditions or restrictions will be imposed
that would have a material adverse effect on the contemplated
benefits expected to be derived in the merger. Morgan Stanley
relied upon, without independent verification, the assessment by
the managements of Replidyne or CSI of:
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their ability to retain key employees of CSI; and
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the validity of, and risks associated with, CSIs existing
and future technologies, intellectual property, products,
services and business models.
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Morgan Stanley is not a legal, tax or regulatory advisor. Morgan
Stanley is a financial advisor only and has relied upon, without
independent verification, the assessment of Replidyne and CSI
and their legal, tax or regulatory advisors with respect to
legal, tax and regulatory matters. Morgan Stanleys opinion
only addresses the fairness from a financial point of view of
the conversion factor to Replidyne as of the date of the
opinion. Morgan Stanley expressed no opinion with respect to the
fairness of the amount or nature of the compensation to any of
CSIs officers, directors or employees, or any class of
such persons, relative to the consideration to be paid to
holders of the shares of CSI common stock in the transaction.
Morgan Stanley did not make any independent valuation or
appraisal of the assets or liabilities of CSI or Replidyne, nor
was Morgan Stanley furnished with any such appraisals. Morgan
Stanleys opinion did not address the relative merits of
the merger as compared to any other alternative business
transaction, or other alternatives, including without
limitation, the potential liquidation of Replidyne, or whether
or not such alternatives could be achieved or are available.
Morgan Stanleys opinion was necessarily based on
financial, economic, market and other conditions as in effect
on, and the information made available to Morgan Stanley as of,
November 3, 2008. Events occurring after November 3,
2008 may affect this opinion and the assumptions used in
preparing it, and Morgan Stanley has not assumed any obligation
to update, revise or reaffirm its opinion.
The opinion was for the information of Replidynes board of
directors in connection with the merger. In addition, Morgan
Stanleys opinion did not in any manner address the prices
at which Replidyne common stock will trade following
consummation of the merger and expressed no opinion or
recommendation as to how the stockholders of Replidyne or CSI
should vote at the stockholders meetings to be held in
connection with the merger.
Valuation
Methods and Analyses
The following is a summary of the material financial analyses
performed by Morgan Stanley in connection with its oral opinion
and the preparation of its written opinion letter dated
November 3, 2008. The various analyses summarized below
were based on closing prices for the common stock of Replidyne
as of October 31, 2008, the last full trading day preceding
the day of the special meeting of the Replidyne board of
directors to consider and approve, adopt and authorize the
merger agreement, the merger and the issuance of shares of
Replidyne common stock to the stockholders of CSI. Although each
analysis was provided to the Replidyne board of directors, in
connection with arriving at its opinion, Morgan Stanley
considered all of its analyses as a whole and did not attribute
any particular weight to any analysis described below. Some of
these summaries of financial analyses include information
presented in tabular format. In order to fully understand the
financial analyses used by Morgan Stanley, the tables must be
read together with the text of each summary. The tables alone do
not constitute a complete description of the financial analyses
used by Morgan Stanley.
Implied
Value of the Equity of the Combined Company Based on
Replidynes Share Price
Based on Replidynes 27.280 million fully diluted
shares outstanding and the share price of Replidyne common stock
of $1.12, both as of the close of market on October 31,
2008, and by dividing Replidynes fully diluted equity
value by the 17% equity ownership percentage of the combined
company held by Replidynes equity holders, Morgan Stanley
calculated an implied value of the equity of the combined
company of $180 million.
61
Implied
Value of the Equity of the Combined Company Based on
Replidynes Net Assets
Based on Replidynes net assets at the closing of the
merger of $37 million to $40 million, and by dividing
Replidynes net assets at the closing of the merger by the
17% equity ownership percentage of the combined company held by
Replidynes equity holders, Morgan Stanley calculated an
implied value of the equity of the combined company in the range
of $218 million to $235 million.
Comparable
Company Analysis
Morgan Stanley performed a comparable company analysis, which
attempts to provide a range of implied aggregate values for
CSIs equity and the combined companys net cash at
the closing of the merger, which is referred to as the implied
pro forma equity value for CSI, by comparing it to similar
companies. Morgan Stanley reviewed the market values and trading
multiples of the following 10 publicly held companies in the
cardiovascular medical device industry that Morgan Stanley
deemed comparable to CSI, as well as the following five other
publicly held growth companies in the medical technology
industry:
Cardiovascular
Medical Device Industry Comparables
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Abiomed, Inc.
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AngioDynamics Inc.
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Edwards Lifesciences Corp.
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ev3, Inc.
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Hansen Medical, Inc.
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Micrus Endovascular Corp.
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The Spectranetics Corporation
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Thoratec Corp.
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VNUS Medical Technologies Inc.
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Volcano Corp.
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Other
Medical Technology Industry Comparables
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Conceptus, Inc.
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Insulet Corporation
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NuVasive, Inc.
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Somanetics Corp.
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TranS1, Inc.
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All multiples were based on closing stock prices on
October 31, 2008. Estimated financial data for the selected
companies were based on public filings and publicly available
equity research analysts estimates, as aggregated by the
Institutional Brokers Estimate System. Estimated financial
data for CSI were based on CSI management projections.
For each of the comparable companies, Morgan Stanley calculated
the following:
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Aggregate Value, which is defined as market value of common
equity plus debt, less cash.
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Aggregate Value/LQA Revenue, which is defined as the ratio of
Aggregate Value to the annualized value of the last
quarters revenue.
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Aggregate Value/LQA Gross Profit, which is defined as the ratio
of Aggregate Value to the annualized value of the last
quarters gross profit.
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62
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Aggregate Value/2008E Revenue, which is defined as the ratio of
Aggregate Value to estimated revenue for calendar year 2008.
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Aggregate Value/2009E Revenue, which is defined as the ratio of
Aggregate Value to estimated revenue for calendar year 2009.
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Aggregate Value/2010E Revenue, which is defined as the ratio of
Aggregate Value to estimated revenue for calendar year 2010.
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Based on the analysis of the relevant metrics for each of the
comparable companies, Morgan Stanley selected representative
ranges of financial multiples of the comparable companies and
applied these ranges of multiples to the relevant CSI financial
statistic. For purposes of estimated calendar years 2008, 2009
and 2010 CSI estimates, Morgan Stanley utilized CSI management
projections. Based on the combined companys expected
capitalization as a result of the merger, Morgan Stanley
calculated the estimated implied pro forma equity value of CSI
as of October 31, 2008 as follows:
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Comparable Company
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Representative
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Implied Pro Forma Equity
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Financial Statistic
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Multiple Range
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Value of CSI ($ millions)
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Aggregate Value/LQA Revenue
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3.6x-5.8
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x
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$
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201-$307
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Aggregate Value/LQA Gross Profit
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4.8x-8.4
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x
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$
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183-$298
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Aggregate Value/2008E Revenue
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3.8x-5.8
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x
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$
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189-$273
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Aggregate Value/2009E Revenue
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1.4x-3.2
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x
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$
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163-$332
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Aggregate Value/2010E Revenue
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1.2x-2.3
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x
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$
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249-$449
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Morgan Stanley noted that based on Replidynes number of
fully diluted shares outstanding and the share price of
Replidyne common stock, both as of the close of market on
October 31, 2008, the implied value of the equity of the
combined company is $180 million and based on
Replidynes net assets at the closing of the merger of
$37 million to $40 million, the implied value of the
equity of the combined company is in the range of
$218 million to $235 million.
Although the foregoing companies were compared to CSI for
purposes of this analysis, Morgan Stanley noted that no company
used in the comparable company analysis is identical to CSI
because of differences between the business mix, markets served,
operations, and other characteristics of CSI and the comparable
companies. In evaluating the comparable companies, Morgan
Stanley relied on publicly available equity research analyst
estimates, which estimates are based in part on judgments and
assumptions with regard to industry performance, general
business, economic, market and financial conditions, and other
matters, many of which are beyond the control of CSI, such as
the impact of competition on the business of CSI, as well as on
the industry generally, industry growth, and the absence of any
adverse material change in the financial condition and prospects
of CSI or the industry or in the markets generally. Mathematical
analysis, such as determining the average or median, is not in
itself a meaningful method of using comparable company data.
Analysis
of Precedent Transactions
Morgan Stanley performed a precedent transactions analysis,
which is designed to imply a range of equity values of a company
based on publicly available financial terms of selected
transactions involving companies with some similarities to CSI.
In connection with its analysis, Morgan Stanley compared
publicly available statistics for six selected cardiovascular
medical device transactions announced between April 30,
2007 and September 25, 2008
63
in which the target company was publicly traded and transaction
values were between $100 million and $2.025 billion.
The transactions, listed by month and year of announcement and
target/acquirer, were:
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Date
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Target/Acquirer
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9/25/08
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Cryocath Technologies Inc./Medtronic, Inc.
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9/16/08
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Datascope Corp./Getinge AB
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2/11/08
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Possis Medical, Inc./MEDRAD Inc. (Bayer Healthcare)
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7/23/07
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Arrow International Inc./Teleflex Medical
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7/22/07
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FoxHollow Technologies, Inc./ev3, Inc.
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4/30/07
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Enpath Medical Inc./Greatbatch Inc.
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For each transaction listed above, Morgan Stanley noted the
following financial statistics where available:
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the ratio of the aggregate value of the transaction to the
annualized value of the last quarters revenue; and
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the ratio of the aggregate value of the transaction to the next
12 months estimated revenue.
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Based on the analysis of the relevant metrics for each
transaction listed above, Morgan Stanley selected representative
ranges of implied financial multiples of the transactions and
applied these ranges of financial multiples to the relevant
financial statistic for CSI. For purposes of estimated next
12 months CSI estimates, Morgan Stanley utilized
quarterly projections for the quarter ending December 31,
2008 and the following three quarters provided by CSI
management. The following table summarizes Morgan Stanleys
analysis:
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Precedent Transactions
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Representative
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Implied Pro Forma Equity
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Financial Statistic
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Range
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Value of CSI ($ millions)
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Aggregate Value/LQA Revenue
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2.7x-3.9
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x
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$
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159-$218
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Aggregate Value/FTM Revenue
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3.0x-3.9
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x
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$
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250-$318
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Morgan Stanley noted that based on Replidynes number of
fully diluted shares outstanding and the share price of
Replidyne common stock, both as of the close of market on
October 31, 2008, the implied value of the equity of the
combined company is $180 million and based on
Replidynes net assets at the closing of the merger of
$37 million to $40 million, the implied value of the
equity of the combined company is in the range of
$218 million to $235 million.
No company or transaction utilized in the precedent transactions
analysis is identical to CSI or the merger. In evaluating the
precedent transactions, Morgan Stanley made judgments and
assumptions with regard to general business, market and
financial conditions and other matters, which are beyond the
control of CSI, such as the impact of competition on the
business of CSI or the industry generally, industry growth and
the absence of any adverse material change in the financial
condition of CSI or the industry or in the financial markets in
general, which could affect the public trading value of the
companies and the equity value of the transactions to which they
are being compared.
Discounted
Cash Flow Analysis
Morgan Stanley performed a discounted cash flow analysis of the
projected unlevered free cash flows of CSI for calendar years
2009 through 2013, based on forecasts prepared by the management
of CSI. Morgan Stanley calculated implied pro forma equity
values of CSI common stock by using estimated discount rates
ranging from 7% to 11% and multiples of estimated 2013 revenue
ranging from 1x to 2x. Based on selected ranges of multiples and
discount rates, this analysis yielded an implied equity
valuation range of approximately $321 million to
$662 million.
Morgan Stanley noted that based on Replidynes number of
fully diluted shares outstanding and the share price of
Replidyne common stock, both as of the close of market on
October 31, 2008, the implied value of the equity of the
combined company is $180 million and based on
Replidynes net assets at the closing of the merger of
$37 million to $40 million, the implied value of the
equity of the combined company is in the range of
$218 million to $235 million.
64
The valuation stated above is not necessarily indicative of
CSIs respective actual, present or future value or
results, which may be more or less favorable than suggested by
this type of analysis.
General
In connection with the review of the merger and the issuance of
shares of Replidyne common stock to CSI stockholders by
Replidynes board of directors, Morgan Stanley performed a
variety of financial and comparative analyses for purposes of
rendering its opinion. The preparation of a fairness opinion is
a complex process and is not necessarily susceptible to a
partial analysis or summary description. In arriving at its
opinion, Morgan Stanley considered the results of all of its
analyses as a whole and did not attribute any particular weight
to any particular analysis or factor it considered. Morgan
Stanley believes that selecting any portion of its analyses,
without considering all analyses as a whole, would create an
incomplete view of the process underlying its analyses and
opinion. In addition, Morgan Stanley may have given various
analyses and factors more or less weight than other analyses and
factors, and may have deemed various assumptions more or less
probable than other assumptions. As a result, the ranges of
valuations resulting from any particular analysis described
above should not be taken to be Morgan Stanleys view of
the actual value of CSI or Replidyne. In performing its
analysis, Morgan Stanley made numerous assumptions with respect
to industry performance, general business and economic
conditions and other matters. Many of these assumptions are
beyond the control of CSI or Replidyne. Any estimates contained
in Morgan Stanleys analyses are not necessarily indicative
of future results or actual values, which may be significantly
more or less favorable than suggested by such estimates.
Morgan Stanley conducted the analyses described above solely as
part of its analysis of the fairness of the conversion factor
pursuant to the merger agreement from a financial point of view
to Replidyne and in connection with the delivery of its opinion
dated November 3, 2008 to Replidynes board of
directors. These analyses do not purport to be appraisals or to
reflect the prices at which shares of common stock of Replidyne
or CSI might naturally trade.
The conversion factor pursuant to the merger agreement was
determined through arms-length negotiations between
Replidyne and CSI and was approved by Replidynes board of
directors. Morgan Stanley provided advice to Replidyne during
these negotiations. Morgan Stanley did not, however, recommend
any specific consideration to Replidyne or its board of
directors or that any specific consideration constituted the
only appropriate consideration for the merger.
Morgan Stanleys opinion was one of many factors taken into
consideration by Replidynes board of directors in deciding
to approve the merger and the issuance of shares of Replidyne
common stock to CSI stockholders. Consequently, the analyses as
described above should not be viewed as determinative of the
opinion of Replidynes board of directors with respect to
the conversion factor or of whether Replidynes board of
directors would have been willing to agree to different
consideration. The foregoing summary describes the material
analyses performed by Morgan Stanley but does not purport to be
a complete description of the analyses performed by Morgan
Stanley.
Replidynes board of directors retained Morgan Stanley
based upon Morgan Stanleys qualifications, experience and
expertise. Morgan Stanley is an internationally recognized
investment banking and advisory firm. Morgan Stanleys
securities business is engaged in securities underwriting,
trading and brokerage activities, foreign exchange, commodities
and derivatives trading, prime brokerage, as well as providing
investment banking, financing and financial advisory services.
Morgan Stanley, its affiliates, directors and officers may at
any time invest on a principal basis or manage funds that
invest, hold long or short positions, finance positions, and may
trade or otherwise structure and effect transactions, for their
own account or the accounts of its customers, in debt or equity
securities or loans of Replidyne, CSI, or any other company, or
any currency or commodity, that may be involved in the merger,
or any related derivative instrument.
Under the terms of its engagement letter, Morgan Stanley
provided Replidyne financial advisory services and a financial
opinion in connection with the merger, and Replidyne has agreed
to pay Morgan Stanley a customary fee for its services, a
portion of which was payable upon the execution of the merger
agreement and the remainder of which is contingent upon the
consummation of the merger. Replidyne has also agreed to
reimburse Morgan Stanley for its fees and expenses, including
attorneys fees, incurred in connection with its services.
In addition, Replidyne has agreed to indemnify Morgan Stanley
and any of its affiliates, their respective directors, officers,
agents and
65
employees and each person, if any, controlling Morgan Stanley or
any of its affiliates against certain liabilities and expenses,
including certain liabilities under the federal securities laws
relating to or arising out of its engagement and any related
transactions. In the past, Morgan Stanley and its affiliates
have provided financial advisory and financing services for
Replidyne and CSI and have received fees from Replidyne for the
rendering of these services to Replidyne. Other than the fees
disclosed above, since November 3, 2006, Morgan Stanley has
not received any investment banking fees from Replidyne or its
affiliates.
Officers
and Directors of the Combined Company Following the
Merger
The following table lists the names and ages as of
December 31, 2008, and positions of the individuals who are
expected to serve as directors and executive officers of
Replidyne upon completion of the merger:
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Name
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Age
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Position
|
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David L. Martin
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44
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President, Chief Executive Officer and Director
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Laurence L. Betterley
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54
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Chief Financial Officer
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James E. Flaherty
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55
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Chief Administrative Officer and Secretary
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John Borrell
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41
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Vice President of Sales
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Brian Doughty
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45
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Vice President of Marketing
|
Robert J. Thatcher
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54
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Executive Vice President
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Paul Tyska
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51
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Vice President of Business Development
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Paul Koehn
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46
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Vice President of Manufacturing
|
Edward Brown
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45
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Director
|
Brent G. Blackey
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50
|
|
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Director
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John H. Friedman
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55
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Director
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Geoffrey O. Hartzler
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62
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Director
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Roger J. Howe
|
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65
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Director
|
Augustine Lawlor
|
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52
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|
|
Director
|
Glen D. Nelson
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71
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Director
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Gary M. Petrucci
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67
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Director
|
Interests
of Replidynes Executive Officers and Directors in the
Merger
In considering the recommendation of the Replidyne board of
directors with respect to issuing shares of Replidyne common
stock as contemplated by the merger agreement, Replidyne
stockholders should be aware that certain members of the board
of directors and executive officers of Replidyne have interests
in the merger that are different from, or in addition to, their
interests as Replidyne stockholders. These interests relate to
or arise from, among other things:
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severance benefits to which each of Donald Morrissey, Kenneth
Collins and Mark Smith would become entitled in the event of a
change of control of Replidyne
and/or his
termination of employment within specific periods of time
relative to the consummation of the merger;
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retention transaction bonuses to which each of Donald Morrissey
and Mark Smith would become entitled in the event of such
officers continued employment with Replidyne through
consummation of the merger;
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|
the accelerated vesting of certain stock options held by the
Replidyne executive officers and non-employee board members in
connection with the consummation of the merger; and
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the agreement that two Replidyne directors will continue to
serve on the board of directors of the combined company
following the consummation of the merger.
|
Except with respect to the transactions described herein that
occurred subsequent to such decisions, each of the Replidyne and
CSI boards of directors and the CSI special committee were aware
of these potential conflicts of interest and considered them,
among other matters, in reaching their respective decisions to
approve the merger
66
agreement and the merger, and to recommend that their respective
securityholders approve the Replidyne and CSI proposals, as
applicable.
Ownership Interests
As of December 31, 2008, all directors and executive
officers of Replidyne, together with their affiliates,
beneficially owned approximately 35% of the shares of Replidyne
common stock. The affirmative vote of the holders of a majority
of the votes cast in person or by proxy at the Replidyne special
meeting is required for approval of Replidyne
Proposal Nos. 1, 4, 5 and 6 and the affirmative vote
of a majority of Replidyne issued and outstanding shares of
common stock is required for approval of
Proposal Nos. 2 and 3. Directors, and their
affiliates, have also entered into voting agreements in
connection with the merger. For a more detailed discussion of
the voting agreements see the section entitled Other
Agreements Related to the Merger Voting
Agreements in this proxy statement/prospectus.
Employment
Agreements with Executive Officers
On April 4, 2006, Replidyne entered into employment
agreements with each of Donald Morrissey, Kenneth Collins
and Mark Smith. These employment agreements were amended on
June 15, 2007. Pursuant to the employment agreements, if
the executives employment is terminated without cause or
terminated by the executive for good reason within one month
before or 13 months following a change of control, then the
executive will be entitled to the following additional benefits:
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|
|
the equivalent of 12 months (or 18 months with respect
to Mr. Collins) of the executives base salary as in
effect immediately prior to the date of termination;
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reimbursement for the cost of continued medical insurance
coverage through the end of this 12 month period (or
18 month period with respect to Mr. Collins) or if
earlier, the date on which the executive obtains alternative
group health insurance; and
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|
|
|
|
acceleration of vesting of all of the executives
outstanding unvested options to purchase Replidyne common stock,
except that 100,000 stock options granted to each of
Messrs. Collins, Smith and Morrissey in March 2008 vest
solely at the discretion of the board of directors.
|
In addition, if the executive officers employment is
terminated without cause or terminated by him for good reason
within one month before or 13 months following a change of
control of Replidyne, then he would be entitled to payment of a
bonus equal to the average of his annual bonus for the two years
prior to such termination (or one and a half times the average
of his annual bonus for the two years prior to such termination
with respect to Mr. Collins). Any such change of control
bonuses are paid at the same time as bonuses are paid pursuant
to Replidynes bonus policy.
The executives employment agreements also provide for
severance benefits in the event of the executives
termination that is not in connection with a change of control.
Replidyne may terminate the executive at any time with or
without cause. However, if the executives employment is
terminated without cause or terminated by the executive for good
reason, then the executive shall be entitled to receive a
severance package consisting of:
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|
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the equivalent of 12 months (or 18 months with respect
to Mr. Collins) of the executives base salary as in
effect immediately prior to the date of termination; and
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|
|
|
reimbursement for the cost of continued medical insurance
coverage through the end of this 12 month period (or
18 month period with respect to Mr. Collins) or, if
earlier, the date on which the executive obtains alternative
group health insurance.
|
Retention
Bonus Agreements with Replidynes Chief Financial Officer
and its Senior Vice President, Corporate
Development
On March 31, 2008, Replidyne entered into a retention bonus
agreement with each of Mark Smith, Replidynes Chief
Financial Officer, and Donald Morrissey, Replidynes Senior
Vice President, Corporate Development. Pursuant to the terms of
the retention bonus agreements, Replidyne paid each of
Mr. Smith and Mr. Morrissey a cash
67
bonus in the amount of $100,000 in October 2008 because such
executives remained employed by Replidyne through
September 30, 2008. The retention bonus agreements provide
for an additional cash bonus to each of Mr. Smith and
Mr. Morrissey in an amount of not less than $100,000 and
not greater than $150,000, which final amount will be determined
by Replidynes board of directors in its sole discretion,
provided that the executive remains employed by Replidyne
through the consummation of a strategic transaction. For
purposes of the retention bonus agreements, a strategic
transaction is defined as, subject to the sole discretion of
Replidynes board of directors, (i) a strategic
alliance or partnership with an unaffiliated third party that
relates to the development and commercialization of faropenem
medoxomil or (ii) another strategic transaction to which
Replidyne is a party.
The retention bonus agreements extend until ten days following
the consummation of a strategic transaction, subject to certain
conditions. The retention bonus agreements do not affect the
terms of the employment agreements that Replidyne has entered
into with Mr. Smith and Mr. Morrissey.
Amounts
Payable to Replidyne Executive Officers Upon Consummation of the
Merger
The consummation of the merger will constitute a change of
control for purposes of the amended employment agreements.
Assuming that Replidynes board of directors deems the
merger to be a strategic transaction for purposes of
the retention bonus agreements, set forth below is an estimate
of the sum of the value of the change of control, severance and
retention payments that would become payable to
Messrs. Morrissey, Collins and Smith under the amended
employment agreements or retention bonus agreements, as
applicable, assuming the consummation of the merger and a
termination of each executives employment as of
December 31, 2008, and excluding the value of any
accelerated vesting
and/or
exerciseability of stock awards. The amounts shown also assume
that the executives did not receive a bonus for fiscal year 2008
when calculating the change of control bonuses payable to such
executives pursuant to the terms of their amended employment
agreements. The amounts shown are in addition to the information
shown in the next table regarding the accelerated vesting of
stock options.
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|
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Estimate of
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|
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Severance Payments
|
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and Change of
|
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Estimate of
|
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|
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Control Payments
|
|
Retention Payments
|
|
|
|
|
Pursuant to
|
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Pursuant to
|
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|
Employment
|
|
Retention Bonus
|
|
|
Name of Executive Officer
|
|
Agreements
|
|
Agreements
|
|
Total
|
|
Kenneth Collins
|
|
$
|
564,375
|
|
|
|
N/A
|
|
|
$
|
564,375
|
|
Mark Smith
|
|
$
|
317,400
|
|
|
$
|
250,000
|
(1)(2)
|
|
$
|
567,400
|
|
Donald Morrissey
|
|
$
|
286,800
|
|
|
$
|
250,000
|
(1)(2)
|
|
$
|
536,800
|
|
|
|
|
(1) |
|
This amount includes a cash bonus of $100,000 paid to this
executive in October 2008 pursuant to the terms of his retention
bonus agreement which provides for such bonus in the event the
executive remained employed with Replidyne through
September 30, 2008. |
|
(2) |
|
This amount assumes a cash bonus of $150,000 payable to this
executive upon consummation of a strategic transaction per the
terms of such executives retention bonus agreement. |
Separation
Agreement and Consulting Agreement with Replidynes Former
Chief Scientific Officer
On December 8, 2008, Replidyne entered into a separation
agreement with Dr. Nebojsa Janjic, pursuant to which
Replidyne and Dr. Janjic agreed to terminate the employment
of Dr. Janjic as Replidynes Chief Scientific Officer.
Pursuant to the terms of Dr. Janjics separation
agreement, Replidyne paid to Dr. Janjic a lump sum payment
of $290,000, which was the equivalent of twelve months of his
base salary in effect immediately prior to his termination.
Replidyne also agreed to pay Dr. Janjic (i) a bonus in
the amount of $50,000 within 10 days following the
consummation of a strategic transaction to which Replidyne is a
party and (ii) a bonus in the amount of $50,000 within
10 days following the sale by Replidyne of its preclinical
programs for a defined minimum purchase price, provided such
sale occurs prior to the completion of a strategic transaction
to which Replidyne is a party. For purposes of the separation
agreement, a strategic transaction means, subject to
the sole discretion of the Replidyne board of directors, a
strategic transaction to which Replidyne is a party. In
addition, Replidyne also agreed to pay the premiums of group
health insurance COBRA continuation coverage for Dr. Janjic
and his eligible
68
dependents up to a maximum period of twelve months from his
termination date, with certain exceptions. As consideration for
the benefits of the separation agreement, Dr. Janjic
executed a full general release of claims against Replidyne and
its affiliates.
On December 9, 2008, Replidyne entered into a consultant
agreement with Dr. Janjic. Pursuant to
Dr. Janjics consultant agreement, Dr. Janjic
will advise and consult with Replidyne with respect to the
divestment of Replidynes preclinical programs,
finalization of previously initiated studies currently in
progress related to these programs and close-out of
Replidynes laboratory facilities. Dr. Janjic will
also perform such other services that relate to his areas of
expertise and which Replidynes executive officers believe
would be beneficial to Replidyne.
Pursuant to Dr. Janjics consultant agreement,
Replidyne has agreed to pay Dr. Janjic an amount equal to
$10,000 for each full month of consulting services rendered to
Replidyne by him during the period from the effective date of
the consultant agreement until the consummation of the merger
with CSI (not to exceed a period of three months), subject to
pro ration for partial months of service. For any hours in
excess of forty hours per month during this initial consulting
period, and during the period from March 9, 2009 through
June 9, 2009, Dr. Janjic will be compensated at a rate
of $300 per hour. In addition, the stock options previously
granted to Dr. Janjic during his employment with Replidyne
shall continue to vest for so long as Dr. Janjic continues
to provide continuous service (as defined in Replidynes
2006 Equity Incentive Plan) to Replidyne. Dr. Janjics
consultant agreement also provides that, in the event that
Replidyne consummates a change in control (as defined in
Replidynes 2006 Equity Incentive Plan), prior to the
termination date of the consultant agreement,
Dr. Janjics outstanding stock options shall become
fully vested and exercisable.
Dr. Janjics consultant agreement terminates on
June 9, 2009, provided that the consultant agreement will
automatically terminate immediately upon just cause
(as defined in the consultant agreement), or the consummation of
a change in control (as defined in Replidynes
2006 Equity Incentive Plan). The merger will constitute a change
of control for purposes of the consultant agreement.
Stock
Options
Each of the executive officers and non-employee directors of
Replidyne holds options to purchase shares of Replidyne common
stock that were granted under the Replidyne 2006 Equity
Incentive Plan, as amended. Each stock option grant typically
vests in a series of installments over a set number of years,
with certain exceptions. In March 2008, Replidyne granted each
of Messrs. Collins, Smith and Morrissey and Dr. Janjic
stock options to purchase 200,000 shares of Replidyne
common stock, each with an exercise price of $1.86 per share, in
two separate grants. One grant of 100,000 stock options vests
monthly over a four year period. The other grant of 100,000
stock options will vest in full, solely at the discretion of
Replidynes board of directors, immediately prior to the
consummation of a strategic transaction. All of these March 2008
option grants provide that the executive officers have three
years from the date of termination of such executives
service to Replidyne to exercise any vested shares underlying
the grants instead of the standard three month exercise period
for all other options held by the executives. With the exception
of the March 2008 grant of 100,000 options that will vest in
full solely at the discretion of Replidynes board of
directors immediately prior to the consummation of a strategic
transaction, all other stock options held by these executives
will vest in full upon the occurrence of a change of control
pursuant to the terms of the amended employment agreements.
With respect to the non-employee directors, the vesting of all
options held by such directors shall accelerate in full
immediately prior to effective time of a change of control
transaction and such options shall terminate if not exercised at
a time prior to such effective time.
69
The following table shows the total number of stock options held
as of December 31, 2008 by each executive officer and
non-employee director of Replidyne. These options to purchase
Replidyne common stock have exercise prices ranging between
$0.613 and $10.00 per share.
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Weighted Average
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Total
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Exercise Price
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Name
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Options Held
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Vested
|
|
|
Unvested
|
|
|
per Share
|
|
|
Donald Morrissey
|
|
|
404,192
|
|
|
|
133,106
|
|
|
|
271,086
|
|
|
$
|
2.804
|
|
Mark L. Smith
|
|
|
453,131
|
|
|
|
170,277
|
|
|
|
282,854
|
|
|
$
|
3.755
|
|
Kenneth J. Collins(1)(2)
|
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|
626,263
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|
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|
181,450
|
|
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|
444,813
|
|
|
$
|
3.109
|
|
Nebojsa Janjic(3)
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|
|
428,661
|
|
|
|
108,679
|
|
|
|
319,982
|
|
|
$
|
3.022
|
|
Kirk K. Calhoun(2)
|
|
|
32,625
|
|
|
|
24,469
|
|
|
|
8,156
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|
|
$
|
2.369
|
|
Geoffrey Duyk(2)
|
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32,625
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|
|
|
21,750
|
|
|
|
10,875
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|
|
$
|
6.708
|
|
Daniel Mitchell(2)
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|
32,625
|
|
|
|
21,750
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|
|
|
10,875
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|
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$
|
6.708
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|
Edward Brown
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|
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24,469
|
|
|
|
8,610
|
|
|
|
15,859
|
|
|
$
|
4.097
|
|
Augustine Lawlor
|
|
|
32,625
|
|
|
|
21,750
|
|
|
|
10,875
|
|
|
$
|
6.708
|
|
|
|
|
(1) |
|
This executive officer is also a director of Replidyne. |
|
(2) |
|
This director will not serve on the board of directors of the
combined company following the merger. |
|
(3) |
|
Dr. Janjics employment with Replidyne ceased as of
December 8, 2008. |
Combined
Companys Board of Directors After the Merger
Following the merger, the combined company will initially have a
nine member board of directors that will include two individuals
from the Replidyne board of directors, Edward Brown and
Augustine Lawlor. Each of the other current Replidyne directors
will resign effective as of the closing of the merger.
Limitations
of Liability and Indemnification
In addition to the indemnification required in Replidynes
governing documents, Replidynes officers and directors
have entered into indemnification agreements with Replidyne. The
merger agreement provides that, for a period of six years
following the consummation of the merger, the combined company
will maintain in effect Replidynes current directors
and officers liability insurance policy with respect to
matters occurring prior to the effective date of the merger. In
addition, the merger agreement provides that Replidyne shall
maintain directors and officers liability insurance
policies commencing at the effective date of the merger, with
coverage limits customary for U.S. public companies
similarly situated to Replidyne.
Interests
of CSIs Executive Officers and Directors in the
Merger
In considering the recommendation of the CSI special committee
and board of directors with respect to adopting the merger
agreement, CSI stockholders should be aware that certain members
of the board of directors and executive officers of CSI have
interests in the merger that may be different from, or in
addition to, interests they may have as CSI stockholders or the
interests of other CSI stockholders. As discussed below, certain
of CSIs directors and executive officers hold options to
purchase CSI common stock that will be assumed in the merger.
Certain of CSIs directors, including Messrs. Blackey,
Friedman, Nelson and Petrucci and Ms. Wyskiel, hold or are
affiliates of CSI investors that hold shares of CSIs
convertible preferred stock, whose interest may be different
from the interests of the CSI common stockholders. Each of the
Replidyne and CSI boards of directors and the CSI special
committee were aware of these potential conflicts of interest
and considered them, among other matters, in reaching their
respective decisions to approve the merger agreement and the
merger, and to recommend that their respective securityholders
approve the Replidyne and CSI proposals, as applicable.
Ownership Interests
As of December 31, 2008, all directors and executive
officers of CSI, together with their affiliates, beneficially
owned approximately 28% of the shares of CSI capital stock. CSI
cannot complete the merger unless the merger
70
agreement is adopted by the affirmative vote of (a) the
holders of a majority of the outstanding shares of CSI common
stock and CSI convertible preferred stock, voting as a single
class on an as-converted basis, and (b) the holders of a
majority of the outstanding shares of CSI convertible preferred
stock, voting as a single class on an
as-converted
basis and including the shares of CSI convertible preferred
stock held by entities affiliated with Easton Capital Investment
Group and entities affiliated with Maverick Capital, Ltd.
Certain CSI officers and directors, and their affiliates, have
entered into voting agreements in connection with the merger,
and have executed and delivered irrevocable proxies to approve
the merger. For a more detailed discussion of the voting
agreements see Other Agreements Related to the
Merger Voting Agreements.
Stock
Options
At the effective time of the merger, each outstanding stock
option to purchase CSI common stock not exercised prior to the
merger will be assumed by Replidyne and become exercisable for
such number of shares of Replidyne common stock as is determined
by multiplying the number of shares of CSI common stock that
were subject to such stock option immediately prior to the
effective time by the company share conversion factor and
rounding the resulting number down to the nearest whole number
of shares of Replidyne common stock, and at a per share exercise
price as is determined by dividing the existing exercise price
of the option by the company share conversion factor and
rounding the resulting exercise price up to the nearest whole
cent.
The table below sets forth, as of December 31, 2008,
information with respect to options held by each of CSIs
current executive officers and directors.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
Name
|
|
Options Held
|
|
|
Vested
|
|
|
Unvested
|
|
|
per Share
|
|
|
Executive Officers:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David L. Martin(1)
|
|
|
1,225,000
|
|
|
|
501,667
|
|
|
|
723,333
|
|
|
$
|
6.30
|
|
Laurence L. Betterley
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James E. Flaherty
|
|
|
203,000
|
|
|
|
98,333
|
|
|
|
104,167
|
|
|
$
|
6.59
|
|
Michael J. Kallok, Ph.D.(1)(2)
|
|
|
783,215
|
|
|
|
683,215
|
|
|
|
100,000
|
|
|
$
|
7.35
|
|
John Borrell
|
|
|
309,000
|
|
|
|
116,334
|
|
|
|
192,666
|
|
|
$
|
6.34
|
|
Paul Tyska
|
|
|
225,000
|
|
|
|
105,000
|
|
|
|
120,000
|
|
|
$
|
6.09
|
|
Robert J. Thatcher
|
|
|
243,000
|
|
|
|
135,000
|
|
|
|
108,000
|
|
|
$
|
7.01
|
|
Directors:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John H. Friedman
|
|
|
90,000
|
|
|
|
70,000
|
|
|
|
20,000
|
|
|
$
|
6.14
|
|
Geoffrey O. Hartzler, M.D.
|
|
|
199,809
|
|
|
|
199,809
|
|
|
|
|
|
|
$
|
8.00
|
|
Roger J. Howe, Ph.D.
|
|
|
272,775
|
|
|
|
272,775
|
|
|
|
|
|
|
$
|
7.34
|
|
Brent G. Blackey
|
|
|
70,000
|
|
|
|
30,000
|
|
|
|
40,000
|
|
|
$
|
5.11
|
|
Glen D. Nelson, M.D.
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
|
|
|
$
|
6.67
|
|
Gary M. Petrucci
|
|
|
476,161
|
|
|
|
476,161
|
|
|
|
|
|
|
$
|
7.50
|
|
Christy Wyskiel(2)
|
|
|
90,000
|
|
|
|
70,000
|
|
|
|
20,000
|
|
|
$
|
6.09
|
|
|
|
|
(1) |
|
These executive officers are also directors of CSI. |
|
(2) |
|
This director will not serve on the board of directors of the
combined company following the merger. |
Combined
Companys Board of Directors After the Merger
Following the merger, the combined company will initially have a
nine member board of directors, comprised of two individuals
from the Replidyne board of directors, Edward Brown and
Augustine Lawlor, and seven individuals who are currently
members of the CSI board of directors, Brent G. Blackey, John H.
Friedman, Geoffrey O. Hartzler, Roger J. Howe, David L. Martin,
Glen D. Nelson and Gary M. Petrucci.
Summary
of Potential Payments in Connection with the
Merger
CSI has entered into employment agreements and stock option
agreements with each of its executive officers. Stock options to
purchase an aggregate of 775,000 shares of CSI common
stock, which would have expired if CSI
71
did not complete an initial public offering or a change of
control transaction before December 31, 2008, were amended
by the CSI board to provide for vesting of 50% of the options on
the first anniversary, and 50% of the options on the second
anniversary, of the closing of the merger.
Certain of CSIs stock option and restricted stock
agreements provide that in the event of a change of
control (the sale by CSI of substantially all of its
assets and the consequent discontinuance of its business, or in
the event of a merger, exchange or liquidation of CSI), the
vesting of all options and shares of restricted stock will
accelerate and the options will be immediately exercisable as of
the effective date of the change of control. Excluding the
options to purchase 775,000 shares of CSI common stock
described in the previous paragraph, CSIs executive
officers are the holders of unvested options to purchase
791,167 shares of CSI common stock and 75,000 shares
of unvested restricted stock that are subject to a stock option
or restricted stock agreement that contains this provision. It
is a condition to the closing of the merger that CSI obtain an
acknowledgement in a form reasonably acceptable to Replidyne
from the holders of these options and shares of restricted stock
that the terms of the option or restricted stock agreements
related thereto do not provide that the vesting of such
securities will accelerate, in whole or in part, in connection
with or as a result of the consummation of the merger and the
other transactions contemplated by the merger agreement.
Limitations
of Liability and Indemnification
In addition to the indemnification required in Replidynes
governing documents, the CSI directors who will become directors
of the combined company will enter into indemnification
agreements with the combined company. CSI believes that these
indemnification agreements are necessary to attract and retain
qualified persons as directors.
The merger agreement provides that, for a period of six years
following the consummation of the merger, the combined company
will maintain in effect a directors and officers
liability insurance policy covering the directors and officers
of CSI, with coverage in amount and scope at least as favorable
as the insurance policies maintained by CSI with respect to
matters occurring prior to the effective date of the merger. In
addition, the merger agreement provides that Replidyne shall
maintain directors and officers liability insurance
policies commencing at the effective date of the merger, with
coverage limits customary for U.S. public companies
similarly situated to Replidyne.
CSI Stock
Options
Each outstanding option to purchase shares of CSI common stock
that is not exercised prior to the effective time of the merger
will be assumed by Replidyne at the effective time of the merger
in accordance with the terms of the CSI option plan under which
the option was issued and the terms of the stock option
agreement by which the option is evidenced, including the
vesting terms. Each assumed option will become an option to
purchase shares of Replidyne common stock. The number of shares
of Replidyne common stock subject to each assumed option will be
determined by multiplying the number of shares of CSI common
stock underlying the option prior to the effective time of the
merger by a conversion factor determined pursuant to the merger
agreement. Any resulting fractional shares will be rounded down
to the nearest whole number of shares of Replidyne common stock.
The per share exercise price for the assumed options will be
determined by dividing the per share exercise price of the
option as in effect immediately prior to the effective time of
the merger by the conversion factor and rounding that result up
to the nearest whole cent.
CSI
Warrants
CSI has issued warrants to purchase shares of its preferred
stock and its common stock. Each outstanding warrant to purchase
shares of CSI preferred stock will, immediately prior to the
effective time of the merger, be converted into a warrant to
purchase shares of CSI common stock concurrently with the
conversion of all outstanding shares of CSI preferred stock into
shares of CSI common stock described below. Each outstanding
warrant to purchase shares of CSI common stock will then be
assumed by Replidyne at the effective time of the merger in
accordance with its terms and will become a warrant to purchase
shares of Replidyne common stock. The number of shares of
Replidyne common stock subject to each assumed warrant will be
determined by multiplying
72
the number of shares of CSI common stock that was subject to
each warrant prior to the effective time of the merger by a
conversion factor determined pursuant to the merger agreement.
Any resulting fractional shares will be rounded down to the
nearest whole number of shares of Replidyne common stock. The
per share exercise price for the assumed warrants will be
determined by dividing the per share exercise price of the
warrant as in effect immediately prior to the effective time of
the merger by the conversion factor and rounding that result up
to the nearest whole cent.
CSI
Preferred Stock
Concurrently with the execution of the merger agreement, the
holders of approximately 68% of CSIs outstanding preferred
stock, calculated on an as-converted to common stock basis,
entered into an agreement with CSI pursuant to which all
outstanding shares of CSI preferred stock will be automatically
converted into shares of CSI common stock, effective as of
immediately prior to the effective time of the merger. For
further discussion regarding the terms of the conversion of all
shares of CSI preferred stock into shares of CSI common stock,
see Other Agreements Related to the Merger CSI
Preferred Stockholder Conversion Agreement.
Regulatory
Approvals
As of the date of this proxy statement/prospectus, neither
Replidyne nor CSI is required to obtain approvals or clearances
from any antitrust regulatory authorities in the United States
or other countries to consummate the merger. In the United
States, Replidyne must comply with applicable federal and state
securities laws and the rules and regulations of Nasdaq, in
connection with the issuance of shares of Replidyne common stock
in the merger and the filing of a registration statement, of
which this proxy statement/prospectus is a part, with the SEC.
As of the date hereof, the registration statement has not become
effective. Replidyne and CSI have filed an initial listing
application with the Nasdaq Global Market pursuant to
Nasdaqs reverse merger rules to effect the
initial listing of Replidyne common stock issuable in connection
with the merger.
Appraisal
and Dissenters Rights
Under Delaware law, holders of Replidyne common stock are not
entitled to appraisal rights in connection with the merger.
If the merger is completed, CSI stockholders as of the record
date who do not vote in favor of the merger and continue to hold
CSI common stock at the effective time of the merger, will, by
complying with the dissenters rights procedures set forth
in the Minnesota Business Corporation Act, or the MBCA, be
entitled to receive an amount equal to the fair value of their
shares. A copy of MBCA Sections 302A.471 and 302A.473 is
attached to this document as Annex F. The discussion
in this section is qualified in its entirety by the reference to
Annex F. CSI stockholders intending to exercise
dissenters rights should carefully review
Annex F. Failure to follow precisely any of the
statutory procedures set forth in Annex F may result
in a termination or waiver of these rights. This summary does
not constitute legal or other advice, nor does it constitute a
recommendation that CSI stockholders exercise their
dissenters rights under the MBCA.
Before the CSI stockholder vote on the merger is taken, a CSI
stockholder who desires to exercise dissenters rights must
notify CSI, in writing, of an intent to demand the fair value of
the shares owned by that stockholder if the merger is effected.
A stockholder who would like to exercise dissenters rights
must not vote in favor of the merger. Dissenters rights
must be exercised with respect to all, and not less than all, of
a CSI stockholders shares.
CSI will send to each dissenting stockholder a notice, after the
merger is approved, containing the address to which a demand for
payment and the dissenting stockholders stock
certificate(s) must be sent and the date by which they must be
received, a form to be used by the stockholder to demand
payment, and a copy of MBCA Sections 302A.471 and 302A.473
and a brief description of the procedures to be followed under
those sections. The dissenting stockholder is required to demand
payment and deposit the stockholders CSI stock
certificates with CSI within 30 days after such notice is
given.
Following receipt of a dissenting stockholders demand for
payment, CSI will remit to the dissenting stockholder the amount
CSI deems to be the fair value of the dissenters shares
plus interest, along with certain
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CSI financial information, a description of the method used by
CSI to determine the fair value of the shares, copies of the
applicable provisions of the MBCA and a description of the
procedures to be followed by the dissenting stockholder to
demand supplemental payment. Under the MBCA, the fair value of
the shares is the value of the shares immediately before the
effective date of the merger.
If a dissenting stockholder believes that the amount remitted by
CSI was less than the fair value of the shares plus interest,
the stockholder, within 30 days after CSI mails the
remittance, may give written notice to CSI of the
stockholders estimate of the fair value plus interest and
demand payment of the difference. Within 60 days of
receiving such notice, CSI will either pay the amount demanded
by the dissenting stockholder or file a petition with the
Minnesota district court requesting that the court determine the
fair value of the CSI shares. The fair value of CSI shares
determined by the court will be binding on all stockholders. You
should be aware that the fair value of your shares as determined
by the court could be more than, the same as or less than the
value that you are entitled to receive under the terms of the
merger agreement. The costs and expenses of such court
proceeding will be assessed against CSI, except that the court
may assess part or all of those costs and expenses against a
dissenting stockholder whose action in demanding a supplemental
payment is found to be arbitrary, vexatious or not in good faith.
Failure to follow the steps required by the MBCA to dissent may
result in the loss of dissenters rights. In view of the
complexity of the MBCA, stockholders who may wish to dissent
from the merger and pursue dissenters rights should
consult their legal advisors.
Material
U.S. Federal Income Tax Consequences of the
Merger
The following discussion summarizes the material
U.S. federal income tax consequences of the merger that are
expected to apply generally to CSI stockholders upon an exchange
of their CSI capital stock for Replidyne common stock and cash
in lieu of fractional shares of Replidyne common stock. This
summary is based upon current provisions of the Internal Revenue
Code of 1986, as amended, or the Code, existing Treasury
Regulations, and current administrative rulings and court
decisions, all of which are subject to change and to differing
interpretations, possibly with retroactive effect. Any change
could alter the tax consequences to Replidyne, CSI, or the
stockholders of CSI, as described in this summary. This summary
is not binding on the Internal Revenue Service, or the IRS, and
there can be no assurance that the IRS (or a court, in the event
of an IRS challenge) will agree with the conclusions stated
herein. No ruling has been or will be requested from the IRS in
connection with the merger. The discussion below does not
address the following: the tax consequences of the merger under
U.S. federal non-income tax laws or under state, local, or
foreign tax laws; the tax consequences of transactions
effectuated before, after, or at the same time as the merger,
whether or not they are in connection with the merger,
including, without limitation, transactions in which CSI shares
are acquired or Replidyne shares are disposed of; the tax
consequences to holders of options issued by CSI that are
assumed, replaced, exercised, or converted, as the case may be,
in connection with the merger; the tax consequences of the
receipt of Replidyne shares other than in exchange for CSI
shares; or the tax consequences for holders of CSI preferred
stock of their conversion of CSI preferred stock, their receipt
of warrants issued by CSI, or their receipt of warrants issued
by Replidyne in the merger.
No attempt has been made to comment on all U.S. federal
income tax consequences of the merger that may be relevant to
particular holders of CSI capital stock that are subject to
special treatment under U.S. federal income tax laws,
including, without limitation:
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dealers, brokers and traders in securities;
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foreign persons or entities;
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tax-exempt entities;
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financial institutions, regulated investment companies, real
estate investment trusts or insurance companies;
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partnerships or limited liability companies that are not treated
as corporations for U.S. federal income tax purposes,
subchapter S corporations and other pass-through entities
and investors in such entities;
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holders who are subject to the alternative minimum tax
provisions of the Code;
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holders who acquired their shares in connection with stock
option or stock purchase plans or in other compensatory
transactions;
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holders who hold shares that constitute small business stock
within the meaning of Section 1202 of the Code;
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holders with a functional currency other than the
U.S. dollar;
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holders who hold their shares as part of an integrated
investment such as a hedge or as part of a hedging, straddle or
other risk reduction strategy; or
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holders who do not hold their shares as capital assets within
the meaning of Section 1221 of the Code (generally,
property held for investment will be a capital asset).
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Accordingly, holders of CSI capital stock are advised and
expected to consult their own tax advisors regarding the
U.S. federal income tax consequences of the merger in light
of their personal circumstances and the consequences of the
merger under U.S. federal non-income tax laws and state,
local, and foreign tax laws.
It is a condition to the consummation of the transaction that
each of Fredrikson & Byron, P.A., outside counsel to
CSI, and Cooley Godward Kronish LLP, outside counsel to
Replidyne, render a tax opinion to their respective clients to
the effect that the merger will qualify as a reorganization
pursuant to Section 368(a) of the Code. The tax opinion of
Fredrikson & Byron, P.A., and the tax opinion of
Cooley Godward Kronish LLP, discussed in this section are each
conditioned upon certain assumptions stated in their respective
tax opinions and certain customary representations being
delivered by CSI, Responder Merger Sub, Inc., and Replidyne.
Whether counsel to CSI and counsel to Replidyne can render such
opinions also depends on certain facts that cannot be known on
the date hereof including, in particular, the percentage of CSI
capital stock held by CSI stockholders, if any, who properly
perfect dissenters rights and the value of the Replidyne
stock and warrants issued to CSI stockholders pursuant to the
merger. If the percentage of CSI capital stock exchanged for
cash due to the exercise of dissenters rights is
sufficiently high, and depending on certain other factors, the
merger would not qualify as a reorganization and counsel would
be unable to render such tax opinions. Pursuant to the terms of
the merger agreement, the condition that Replidyne and CSI
receive such tax opinions may be waived by the applicable party.
If counsel to CSI or counsel to Replidyne is unable to render
such a tax opinion and the merger will not qualify as a
reorganization pursuant to Section 368(a) of the Code,
Replidyne and CSI each currently anticipate that they would
waive the condition that such a tax opinion be delivered. In the
event of such a waiver, CSI will resolicit the consent of its
stockholders and provide them with updated information regarding
the material federal income tax consequences to them as a result
of the merger.
In addition, stockholders of CSI should be aware that as the tax
opinions discussed in this section are not binding on the IRS,
the IRS could adopt a contrary position and a contrary position
could be sustained by a court. In addition, if any of the
representations or assumptions upon which the closing tax
opinions of Fredrikson & Byron, P.A., and Cooley
Godward Kronish LLP are based are inconsistent with the actual
facts, the tax consequences of the merger could be adversely
affected. Assuming that the merger will be treated for
U.S. federal income tax purposes as a reorganization within
the meaning of Section 368 of the Code, the following
material U.S. federal income tax consequences will result:
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Replidyne, Responder Merger Sub, Inc., CSI and the Replidyne
stockholders will not recognize any gain or loss solely as a
result of the merger;
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CSI stockholders will not recognize any gain or loss upon
receipt of solely Replidyne common stock in exchange for their
CSI capital stock, other than with respect to cash received in
lieu of fractional shares of Replidyne common stock;
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the aggregate tax basis of the shares of Replidyne common stock
received by a CSI stockholder in the merger (including any
fractional share deemed received, as described below) will be
equal to the aggregate tax basis of the shares of CSI capital
stock surrendered in exchange therefor;
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the holding period of the shares of Replidyne common stock
received by a CSI stockholder in the merger (including any
fractional share deemed received as described below) will
include the holding period of the shares of CSI capital stock
surrendered in exchange therefor; and
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generally, cash payments received by CSI stockholders in lieu of
fractional shares of Replidyne common stock will be treated as
if such fractional shares were issued in the merger and then
redeemed by Replidyne for cash resulting in a recognition of
gain or loss equal to the difference, if any, between the
stockholders basis in the fractional share and the amount
of cash received. The gain or loss recognized by stockholders
will be a capital gain and will be long term capital gain if the
stockholders holding period for his, her, or its CSI
capital stock is more than one year.
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CSI stockholders that owned at least one percent (by vote or
value) of the total outstanding stock of CSI or CSI stock with a
tax basis of $1 million or more are required to attach a
statement to their tax returns for the year in which the merger
is completed that contains the information listed in Treasury
Regulations
Section 1.368-3(b).
Such statement must include the stockholders tax basis in
the stockholders CSI capital stock and the fair market
value of such stock.
For purposes of the above discussion of the bases and holding
periods for shares of CSI capital stock and Replidyne common
stock, stockholders who acquired different blocks of CSI capital
stock at different times for different prices must calculate
their basis, gains and losses, and holding periods separately
for each identifiable block of such stock exchanged, converted,
canceled or received in the merger.
The above discussion does not apply to CSI stockholders who
properly perfect dissenters rights. Generally, a CSI
stockholder who perfects dissenters rights with respect to
such stockholders shares of CSI capital stock will
recognize capital gain or loss equal to the difference between
such stockholders tax basis in those shares and the amount
of cash received in exchange for those shares.
Certain noncorporate CSI stockholders may be subject to backup
withholding, at a rate of 28%, on cash received pursuant to the
merger. Backup withholding will not apply, however, to a CSI
stockholder who (i) furnishes a correct taxpayer
identification number and certifies that the CSI stockholder is
not subject to backup withholding on IRS
Form W-9
or a substantially similar form, (ii) provides a
certification of foreign status on an appropriate
Form W-8
or successor form, or (iii) is otherwise exempt from backup
withholding. If a CSI stockholder does not provide a correct
taxpayer identification number on IRS
Form W-9
or a substantially similar form, the CSI stockholder may be
subject to penalties imposed by the IRS. Amounts withheld, if
any, are generally not an additional tax and may be refunded or
credited against the CSI stockholders U.S. federal
income tax liability, provided that the CSI stockholder timely
furnishes the required information to the IRS.
Anticipated
Accounting Treatment
The merger will be treated as an acquisition of the net assets
of Replidyne in accordance with U.S. generally accepted
accounting principles, or GAAP. For accounting purposes, CSI is
considered to be acquiring the net assets of Replidyne in this
transaction. Therefore, in accordance with GAAP, the aggregate
consideration paid in connection with the merger will be
allocated to Replidynes tangible and intangible assets and
liabilities based on their fair market values. These allocations
will be based upon managements estimates and an evaluation
of the fair value of assets and liabilities acquired.
Effects
on CSIs Exchange Act Registration
On October 28, 2008, CSI filed a registration statement on
Form 10 with the SEC to register its common stock under
Section 12(g) of the Securities Exchange Act of 1934, or
the Exchange Act, due to CSI exceeding 500 record holders of its
common stock as of June 30, 2008. This registration
statement became effective on December 29, 2008, at which
time CSI became subject to the reporting requirements of the
Exchange Act. Upon completion of the merger, registration of CSI
common stock under the Exchange Act will be terminated, and CSI
will be relieved of its
76
obligation to comply with the reporting requirements of the
Exchange Act. However, the combined company will remain subject
to the reporting requirements applicable to Replidyne and will
continue to file periodic reports.
Vote
Required; Recommendation of Replidyne Board of
Directors
The affirmative vote of the holders of a majority of the
Replidyne common stock casting votes in person or by proxy at
the Replidyne special meeting is required to approve the
issuance of Replidyne common stock pursuant to the Agreement and
Plan of Merger and Reorganization, dated November 3, 2008,
by and among Replidyne, Responder Merger Sub, Inc. and CSI.
A failure to submit a proxy card or vote at the special meeting,
or an abstention, vote withheld or broker
non-vote
will have no effect on the outcome of Replidyne
Proposal No. 1.
REPLIDYNES BOARD OF DIRECTORS RECOMMENDS THAT REPLIDYNE
STOCKHOLDERS VOTE FOR REPLIDYNE
PROPOSAL NO. 1 TO APPROVE THE ISSUANCE OF REPLIDYNE
COMMON STOCK PURSUANT TO THE AGREEMENT AND PLAN OF MERGER AND
REORGANIZATION, DATED NOVEMBER 3, 2008, BY AND AMONG
REPLIDYNE, RESPONDER MERGER SUB, INC. AND CSI.
77
THE
MERGER AGREEMENT
The following description describes the material terms of the
merger agreement. This description of the merger agreement is
qualified in its entirety by reference to the full text of the
merger agreement which is attached as Annex A to this proxy
statement/prospectus, and incorporated herein by reference. The
merger agreement has been included to provide you with
information regarding their terms. We encourage you to read the
entire merger agreement. For purposes of the merger agreement,
reference to CSI shall include each subsidiary of CSI unless the
context requires otherwise. The merger agreement is not intended
to provide any other factual information about Replidyne or CSI.
Such information can be found elsewhere in this proxy
statement/prospectus and the other public filings of Replidyne
and CSI made with the SEC, which are available without charge at
www.sec.gov.
The merger agreement contains representations and warranties
that Replidyne and Responder Merger Sub, Inc., on the one hand,
and CSI, on the other hand, have made to one another as of
specific dates. These representations and warranties have been
made for the benefit of the other parties to the merger
agreement and may be intended not as statements of fact but
rather as a way of allocating the risk to one of the parties if
those statements prove to be incorrect. In addition, the
assertions embodied in the representations and warranties are
qualified by information in confidential disclosure schedules
exchanged by the parties in connection with signing the merger
agreement. While Replidyne and CSI do not believe that these
disclosure schedules contain information required to be publicly
disclosed under the applicable securities laws, other than
information that has already been so disclosed, the disclosure
schedules do contain information that modifies, qualifies and
creates exceptions to the representations and warranties set
forth in the attached merger agreement. Accordingly, you should
not rely on the representations and warranties as current
characterizations of factual information about Replidyne or CSI,
because they were made as of specific dates, may be intended
merely as a risk allocation mechanism between Replidyne and
merger sub and CSI and are modified by the disclosure
schedules.
General
Replidyne, CSI, and Responder Merger Sub, Inc., a Minnesota
corporation and wholly owned subsidiary of Replidyne, entered
into an Agreement and Plan of Merger dated as of
November 3, 2008, which, unless otherwise indicated, is
referred to in this proxy statement/prospectus as the merger
agreement. The merger agreement contains the terms and
conditions of the proposed business combination of Replidyne and
CSI. Pursuant to the merger agreement, on the terms and
conditions set forth therein, Responder Merger Sub, Inc. will be
merged with and into CSI, with CSI surviving the merger as a
wholly owned subsidiary of Replidyne.
Closing
of the Merger
The closing of the transactions contemplated by the merger
agreement will occur no later than the fifth business day after
the last of the conditions to the transaction have been
satisfied or waived. Concurrently with, or as soon as
practicable after the closing, CSI will file articles of merger
with the Secretary of State of the State of Minnesota. The
transaction will become effective upon the filing of these
articles of merger or at another time as may be designated by
Replidyne and CSI and specified in the articles of merger.
Merger
Consideration
At the effective time of the merger, each share of CSI capital
stock not held as treasury stock or held owned by CSI shall be
converted into a right to receive a number of shares of
Replidyne common stock equal to the conversion
factor. The conversion factor shall equal:
(i) (A) the number of surviving Replidyne
securities divided by the Replidyne post-closing
stockholder ownership percentage, minus (B) the
number of surviving Replidyne securities, divided by
(ii) the number of converting CSI securities.
For purposes of determining the conversion factor:
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converting CSI securities means, as of
immediately prior to the effective time of the merger, the sum
of (i) the issued and outstanding shares of CSI common
stock as of such time and (ii) shares of CSI common stock
that are subject to any issued and outstanding subscription,
option, call, warrant, right or other convertible security
(whether or not vested) exchangeable or exercisable for any
shares of CSI common
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stock as of such time, calculated in accordance with the
treasury method of accounting for options and warrants based on
an implied share price that assigns a value to CSI of
$195,000,000. This calculation will assume the conversion of all
shares of CSI preferred stock into shares of CSI common stock
and the issuance of warrants to purchase 3,500,000 shares
of CSI common stock to the holders of CSI preferred stock in
connection with such conversion.
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surviving Replidyne securities means, as of
immediately prior to the effective time of the merger and
following the reverse stock split, the sum of (i) the
issued and outstanding shares of Replidyne common stock as of
such time and (ii) shares of Replidyne common stock that
are subject to any issued and outstanding subscription, option,
call, warrant, right or other convertible security (whether or
not currently vested, provided that in the event that the
vesting of any such shares shall cease upon the effective time
of the merger as a result of the transactions contemplated by
the merger agreement or the termination of the employment of the
holder as of the effective time of the merger, any such unvested
shares shall be excluded from the calculation of surviving
Replidyne securities) exchangeable or exercisable for any shares
of Replidyne common stock as of such time, calculated in
accordance with the treasury method of accounting for options
and warrants based on an implied share price using the
Replidyne pre-closing equity valuation.
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Replidyne pre-closing equity valuation shall
mean Replidynes net assets at the closing of
the merger plus, to the extent that Replidynes net assets
at the closing of the merger are less than $40,000,000, the
lesser of (i) the difference between $40,000,000 and
Replidynes net assets at the closing of the merger and
(ii) $3,000,000.
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Replidyne post-closing stockholder ownership
percentage means the Replidyne pre-closing equity
valuation divided by the Replidyne post-closing equity
valuation.
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Replidyne post-closing equity valuation means
the Replidyne pre-closing equity valuation plus $195,000,000.
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net assets means, as of any particular date,
without repetition or duplication: (a) Replidynes
total current assets as of such date (as determined in
accordance with United States generally accepted accounting
principles) plus (b) the specified assets minus
(c) Replidynes total liabilities as of such date (as
determined in accordance with United States generally accepted
accounting principles), including, to the extent not accrued as
a liability and not paid by Replidyne prior to such date,
without duplication, (i) the cash cost of any change of
control payments, severance payments (including any obligations
that Replidyne has to reimburse COBRA costs of former employees)
or payments under Section 280G of the Internal Revenue Code
that are payable or expected to become payable as a result of
the merger and the transactions contemplated by the merger
agreement, (ii) amounts owed or expected to become due to
Replidynes legal counsel and financial advisor in
connection with the merger agreement and the transactions
contemplated by the merger agreement and (iii) any
outstanding and future financial obligations owed by Replidyne
in respect of certain contracts and employee benefit plans of
Replidyne set forth in the merger agreement.
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specified assets means (i) the deemed
value at such date of any non-cash consideration received by
Replidyne pursuant to a transaction entered into by Replidyne in
connection with the divestment by Replidyne of its pre-clinical
programs and other non-cash assets, as calculated in accordance
with the terms of the merger agreement; (ii) any amounts
paid on or prior to such date or payable after such date by
Replidyne in satisfaction of its obligations under the merger
agreement to purchase directors and officers
insurance policies; and (iii) the amount of cash paid to
CSI stockholders with respect to fractional shares in connection
with the conversion of such shares of CSI capital stock into
shares of Replidyne common stock in connection with the merger
to the extent paid on or prior to such date or accrued as a
total current liability of Replidyne as of such date.
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For purposes of the definitions of surviving Replidyne
securities and converting CSI securities that are set forth in
the merger agreement, the number of outstanding shares is
calculated using the treasury method of accounting for options
and warrants. The treasury method is a means of adjusting the
number of shares that a company is considered to have
outstanding to reflect shares that are subject to outstanding
options and warrants. The treasury method assumes that the
proceeds that a company receives from an option or warrant
exercise in which such option
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or warrant has an exercise price that is less than the fair
market value of the underlying shares (often referred to as an
option or warrant that is
in-the-money)
are used to repurchase shares in the open market. The total
number of shares that are considered to be outstanding through
operation of the treasury method is therefore the sum of
(i) the number of outstanding shares plus (ii) the
difference between (A) the number of shares that may be
purchased pursuant to
in-the-money
options or warrants and (B) the number of shares that the
company can purchase from the market with the proceeds from
these
in-the-money
options or warrants.
Pursuant to the terms of the merger agreement, CSI and Replidyne
have agreed upon a methodology to determine the conversion
factor as defined above. The conversion factor shall be
determined as of immediately prior to the effective time of the
merger and is subject to change based upon Replidynes net
assets as of such time, and the number of shares of CSI and
Replidyne capital stock outstanding and issuable upon exercise
of outstanding options and warrants each as calculated in
accordance with the terms of the merger agreement. For
illustrative purposes only, below is a table that sets forth
several levels of net assets for Replidyne as of the closing of
the merger, and the conversion factor and aggregate post-closing
ownership percentage in the combined company for the
stockholders, optionholders and warrantholders of each of
Replidyne and CSI that would result based on each such level of
net assets, in each case calculated in accordance with the terms
of the merger agreement and assuming that the capitalization of
both Replidyne and CSI is as of October 31, 2008, except
that the acceleration of vesting of certain outstanding options
to purchase Replidyne common stock that is expected to occur
upon the consummation of the merger is assumed to have occurred
for purposes of this calculation.
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Replidyne
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CSI
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Securityholder
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Securityholder
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Ownership
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Ownership
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Conversion
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Percentage in the
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Percentage in the
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Net Assets
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Factor
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Combined Company
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Combined Company
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$41,000,000
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6.304
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17.4%
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82.6%
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40,000,000
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6.460
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17.0%
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83.0%
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37,000,000
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6.460
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17.0%
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83.0%
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36,000,000
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6.624
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16.7%
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83.3%
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35,000,000
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6.797
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16.3%
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83.7%
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34,000,000
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6.979
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15.9%
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84.1%
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33,000,000
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7.172
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15.6%
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84.4%
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The foregoing table is presented for illustrative purposes only.
The conversion factor is subject to the variables described
above and will not be calculated until immediately prior to the
effective time of the merger. Replidyne cannot assure you that
its level of net assets as of the effective time of the merger
will fall within the range set forth in this table. The
conversion factor is subject to proportionate adjustment to
account for the effect of the reverse stock split of
Replidynes issued and outstanding common stock.
Assumption
of CSI Stock Options and Warrants
Following the conversion of all outstanding warrants to purchase
shares of CSI preferred stock into warrants to purchase shares
of CSI common stock as described in this proxy
statement/prospectus, each option and warrant to purchase CSI
common stock outstanding at the effective time of the merger
shall be assumed by Replidyne. Each such option or warrant shall
be converted into an option or warrant, as applicable, to
acquire that number of shares of Replidyne common stock equal to
the product obtained by multiplying (i) the number of
shares of CSI common stock subject to such option or warrant by
(ii) the conversion factor, rounded down to the nearest
whole share of Replidyne common stock. Each such option or
warrant shall have a purchase price per share of Replidyne
common stock equal to the quotient obtained by dividing
(i) the per share purchase price of CSI common stock
subject to such option or warrant by (ii) the conversion
factor rounded up to the nearest whole cent. Each such option or
warrant shall otherwise be subject to the same terms and
conditions (including as to vesting and exercisability) as were
applicable under the respective option or warrant to purchase
CSI common stock immediately prior to the effective time of the
merger.
80
Fractional
Shares
No fractional shares of Replidyne common stock will be issuable
pursuant to the merger to CSI stockholders. Instead, each CSI
stockholder who would otherwise be entitled to receive a
fraction of a share of Replidyne common stock, after aggregating
all fractional shares of Replidyne common stock issuable to such
stockholder, will be entitled to receive in cash the dollar
amount, rounded to the nearest whole cent, without interest,
determined by multiplying such fraction by the closing price of
a share of Replidyne common stock as quoted on the Nasdaq Global
Market, on the date the merger becomes effective.
Exchange
of CSI Stock Certificates
The merger agreement provides that, at the effective time of the
merger, Replidyne will deposit with an exchange agent selected
by Replidyne and CSI stock certificates representing the shares
of Replidyne common stock issuable to the CSI stockholders and a
sufficient amount of cash to make payments in lieu of fractional
shares.
Promptly after the effective time of the merger, the exchange
agent will mail to each record holder of CSI capital stock
immediately prior to the effective time of the merger a letter
of transmittal and instructions for surrendering and exchanging
the record holders CSI stock certificates for shares of
Replidyne common stock. Upon surrender of a CSI stock
certificate for exchange to the exchange agent, together with a
duly signed letter of transmittal and such other documents as
the exchange agent or Replidyne may reasonably require, the CSI
stock certificate surrendered will be cancelled and the holder
of the CSI stock certificate will be entitled to receive the
following:
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a certificate representing the number of whole shares of
Replidyne common stock that such holder has the right to receive
pursuant to the provisions of the merger agreement; and
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cash in lieu of any fractional share of Replidyne common stock.
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If any CSI stock certificate has been lost, stolen or destroyed,
Replidyne may, in its discretion, and as a condition to the
delivery of any shares of Replidyne common stock, require the
owner of such lost, stolen or destroyed certificate to deliver
an affidavit claiming such certificate has been lost, stolen or
destroyed and post a bond indemnifying Replidyne against any
claim that may be made against Replidyne with respect to such
certificate.
From and after the effective time of the merger, until it is
surrendered, each CSI stock certificate will be deemed to
represent only the right to receive shares of Replidyne common
stock, and cash in lieu of any fractional share of Replidyne
common stock. No dividends or other distributions with respect
to Replidyne common stock with a record date after the effective
time of the merger shall be paid or otherwise delivered to the
holder of any unsurrendered CSI stock certificate with respect
to the shares of Replidyne common stock that such holder has a
right to receive in the merger until such holder surrenders such
CSI stock certificate.
Certificate
of Incorporation and Bylaws of Replidyne
The merger agreement provides that Replidyne stockholders must
approve, as a condition to closing the merger, an amendment to
Replidynes restated certificate of incorporation to effect
a reverse stock split of the issued and outstanding shares of
Replidyne common stock and change the name of the company from
Replidyne, Inc. to Cardiovascular Systems,
Inc., which requires the affirmative vote of holders of a
majority of Replidynes issued and outstanding common stock
as of the record date for the special meeting. Upon the
effectiveness of the amendment to Replidynes restated
certificate of incorporation, the outstanding shares of
Replidyne common stock will be reclassified and combined into a
lesser number of shares such that one share of Replidyne common
stock will be issued for a specified number of shares, which
shall be greater than one and equal to or less than 50, of
outstanding Replidyne common stock, with the exact number within
the range to be determined by the mutual agreement of Replidyne
and CSI prior to the effective time of such amendment. As
applicable Nasdaq Global Market initial listing standards
require Replidyne to have, among other things, a $4.00 per
share minimum bid price, the reverse stock split is necessary in
order to consummate the merger.
81
The merger agreement also provides that Replidyne will use
commercially reasonable efforts to amend and restate its bylaws
in a form reasonably acceptable to Replidyne and CSI.
Conditions
to the Completion of the Merger
In addition to the approval and filing and effectiveness of the
amendment of Replidynes restated certificate of
incorporation, each partys obligation to complete the
merger is subject to the satisfaction or waiver by each of the
parties, at or prior to the merger, of various conditions, which
include the following:
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all representations and warranties of the other party in the
merger agreement must be true and correct on the date of the
merger agreement and as of the closing date of the merger as if
made on the closing date, or as of a particular date if such
representations and warranties address matters as of that
particular date, disregarding materiality qualifications
limiting the scope of representations and warranties; except
that such inaccuracies will be disregarded if they collectively
would not reasonably be expected to have a material
adverse effect (as discussed in the section of this proxy
statement/prospectus entitled The Merger
Agreement Material Adverse Effect) on the
party making the representations and warranties;
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all of the covenants and obligations contained in the merger
agreement that Replidyne, Responder Merger Sub, Inc., and CSI
are required to comply with or to perform at or prior to the
closing shall have been complied with and performed in all
material respects;
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the registration statement on
Form S-4,
of which this proxy statement/prospectus is a part, must have
been declared effective by the SEC in accordance with the
Securities Act and must not be subject to any SEC stop order or
proceeding or threatened proceeding seeking a stop order;
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the initial listing application on the Nasdaq Global Market
shall have been conditionally approved, and the shares of
Replidyne common stock to be issued in the merger shall be
conditionally approved for listing on the Nasdaq Global Market,
both subject only to the completion of the merger and completion
by Replidyne of any reverse stock split required by Nasdaq;
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since the signing of the merger agreement, there shall not have
occurred and be continuing any material adverse effect with
respect to the other party, and no event shall have occurred or
circumstance shall exist that, in combination with any other
events or circumstances, would reasonably be expected to have or
result in a material adverse effect with respect to the other
party;
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the requisite stockholders of Replidyne must have approved the
amendment of Replidynes restated certificate of
incorporation and the issuance of the Replidyne common stock
pursuant to the merger agreement and the requisite stockholders
of CSI must have approved the merger and adopted the merger
agreement;
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the other party to the merger agreement must have received all
required third-party and governmental consents, and such
consents must be in full force and effect at the closing of the
merger;
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the other party must have delivered certain certificates and
other documents required under the merger agreement for the
closing of the merger;
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no temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the
merger shall have been issued by any court of competent
jurisdiction or other governmental body and remain in effect,
and there shall not be any legal requirement enacted or deemed
applicable to the merger that makes consummation of the merger
illegal;
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Replidyne shall have terminated certain outstanding agreements
specified by CSI and provided confirmation of such terminations
reasonably acceptable to CSI;
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CSI shall have obtained an acknowledgement from certain holders
of options to purchase shares of CSI common stock and shares of
CSI restricted stock that the terms of the option agreements and
restricted stock agreements related thereto do not provide that
the vesting of such securities accelerate, in whole or in part,
in connection with or as a result of the consummation of the
merger and the other transactions contemplated by the merger
agreement; and
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there shall be no pending or threatened any legal proceeding in
which a governmental body is or is threatened to become a party:
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challenging or seeking to restrain or prohibit the consummation
of the merger or any of the transactions contemplated by the
merger agreement;
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relating to the merger or any of the transactions contemplated
by the merger agreement and seeking to obtain from Replidyne or
CSI any damages or other relief that would reasonably be
expected to be material to Replidyne or CSI;
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seeking to prohibit or limit in any material respect
Replidynes ability to vote, transfer, receive dividends
with respect to or otherwise exercise ownership rights with
respect to the stock of the surviving corporation;
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that could materially and adversely affect the right or ability
of Replidyne or CSI to own any of the assets or operate the
business of CSI;
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seeking to compel any of CSI or Replidyne or any subsidiary of
Replidyne to dispose of or hold separate any material assets or
business as a result of the merger or any of the transactions
contemplated by the merger agreement; or
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seeking to impose (or that could result in the imposition of)
any criminal sanctions or liability on Replidyne or CSI.
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Conduct
of Business Prior to the Merger
Except as set forth in the disclosure schedules to the merger
agreement, Replidyne has agreed that it will (i) conduct
its business in the ordinary course, by taking actions relating
to the sale or disposition of assets and payment of liabilities
in connection with winding up its business, or otherwise as
necessary to maximize stockholder value and (ii) in
compliance with all applicable legal requirements and the
requirements of all material contracts.
Except as set forth in the disclosure schedules to the merger
agreement, CSI has agreed that it will (i) conduct its
business and operations in the ordinary course and in compliance
with all applicable legal requirements and the requirements of
all material contracts and (ii) preserve intact its current
business organization, keep available the services of its
current officers and other employees and maintain its relations
and goodwill with all suppliers, customers, landlords,
creditors, licensors, licensees, employees and other persons
having business relationships with CSI.
Except as set forth in the disclosure schedules to the merger
agreement, or, in the case of CSI, in the ordinary course, both
Replidyne and CSI have also agreed that they will refrain from
doing any of the following prior to the effectiveness of the
merger without the prior written consent of the other party
(which shall not be unreasonably withheld, conditioned or
delayed):
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declare, accrue, set aside or pay any dividend or made any other
distribution in respect of any shares of its capital stock, or
repurchase, redeem or otherwise reacquire any shares of its
capital stock or other securities;
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subject to limited exceptions, sell, issue, grant or authorize
the issuance of (i) any capital stock or other securities;
(ii) any option, call or right to acquire any capital stock
or any other security; (iii) any instrument convertible
into or exchangeable for any capital stock or other security; or
(iv) any additional grants or shares under its equity
incentive plans;
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amend or waive any of its rights under, or permit the
acceleration of vesting under, its equity incentive plans, any
stock options or agreement evidencing or relating to any
outstanding stock option or warrant, any restricted stock
purchase agreement, or any other contract evidencing or relating
to any equity award;
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amend its any of its constituent documents or effect or become a
party to any acquisition transaction, recapitalization,
reclassification of shares, stock split, reverse stock split or
similar transaction;
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form any subsidiary or acquire any equity interest or other
interest in any other entity;
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make any capital expenditure which, in the case of CSI, when
added to all other capital expenditures made on behalf of CSI,
exceeds $250,000;
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(i) enter into, or permit any of the assets owned or used
by it to become bound by, any contract that contemplates or
involves (A) the payment or delivery of cash or other
consideration, in an amount or having a value in excess of
$250,000 in the aggregate, in the case of CSI, or (B) the
purchase or sale of any product, or performance of services by
or to such party, that in the case of CSI, is outside the
ordinary course and has a value in excess of $250,000 in the
aggregate, or (ii) waive any right or remedy under any
contract that, in the case of CSI, is outside of the ordinary
course, or amend or prematurely terminate any contract;
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acquire, lease or license any right or other asset from any
other person, sell or otherwise dispose of, or lease or license,
any right or other asset to any other person, or waive or
relinquish any right, except for, in the case of CSI, immaterial
rights or immaterial assets acquired, leased, licensed or
disposed of in the ordinary course;
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write off as uncollectible, or establish any extraordinary
reserve with respect to, any account receivable or other
indebtedness;
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make any pledge of any of its assets or otherwise permit any of
its assets to become subject to any encumbrance, except for, in
the case of CSI, pledges of immaterial assets made in the
ordinary course;
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lend money to any person (other than pursuant to routine travel
advances made to employees in the ordinary course), incur or
guarantee any indebtedness for borrowed money (except, in the
case of CSI, in amounts that are not in excess of $250,000 in
the aggregate and other than draws under CSIs credit
facilities in effect on the date of the merger agreement) or
issue or sell any debt securities or options, warrants, calls or
similar rights to acquire any debt securities of such party;
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establish or adopt any employee benefit plan, pay any bonus or
make any profit sharing, incentive compensation or similar
payment to, or increase the amount of the wages, salary,
commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or
certain specified employees (except for payments made pursuant
to any compensation plans in effect on the date of the merger
agreement), or hire any new employee having, in the case of CSI,
an annual salary in excess of $250,000;
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change any of its personnel policies or other business policies,
or any of its methods of accounting or accounting practices in
any respect;
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make any material tax election;
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change any of its methods of accounting or accounting practices
in any respect;
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threaten, commence, settle or become subject to any legal
proceeding;
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pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or
otherwise) other than the payment, discharge or satisfaction of
non-material amounts in the ordinary course or as required by
any contract or legal requirement;
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in the case of Replidyne, enter into any transaction or taken
any other action outside of the sale or disposition of assets
and payment of liabilities in connection with winding up its
business, other than entering into the merger agreement and the
transactions contemplated by the merger agreement;
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amend or prematurely terminate, or waive any material right or
remedy under, any contract; or
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agree to take, or commit to take, any of the above-referenced
actions.
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Notwithstanding the limitations set forth above:
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CSI shall be entitled to consummate a qualified
financing, as described below;
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CSI shall not, without the prior written consent of Replidyne,
issue options, warrants or other rights to acquire any capital
stock or other securities, other than equity incentive awards
issued under CSIs 2007 Equity Incentive Plan, or the CSI
2007 Plan, to employees of and consultants to CSI in the
ordinary course that (i) do not cause the total number of
shares subject to awards under the CSI 2007 Plan to exceed the
number of shares reserved for issuance under the CSI 2007 Plan
as of the date of the merger agreement and (ii) if such
award requires exercise by the holder, have an exercise price
not less than the fair market value of a share of CSI common
stock on the applicable grant date; and
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84
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Replidyne shall be entitled to take all action it deems
appropriate in order to divest itself, whether by acquisition,
liquidation or otherwise, of its pre-clinical programs and other
non-cash assets; provided that Replidyne shall not, without the
written consent of CSI (which may be withheld at the discretion
of CSI), consummate or enter into any binding agreement to
consummate any transaction to divest itself of such programs or
other assets if Replidyne would incur any material obligations
or liabilities that would survive the closing of the merger.
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Limitation
on Soliciting, Discussing or Negotiating Other Acquisition
Proposals
Pursuant to the merger agreement, each of Replidyne and CSI
agreed that, except as described below, they will not, during
the pre-closing period, directly or indirectly:
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solicit, initiate, knowingly encourage, induce or knowingly
facilitate the communication, making, submission or announcement
of any acquisition proposal or acquisition
inquiry or take any action that would reasonably be
expected to lead to an acquisition proposal or acquisition
inquiry;
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furnish any nonpublic information regarding CSI or Replidyne, as
the case may be, to any person in connection with or in response
to an acquisition proposal or acquisition inquiry;
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engage in discussions or negotiations with any person with
respect to any acquisition proposal or acquisition inquiry;
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approve, endorse or recommend any acquisition proposal; or
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execute or enter into any letter of intent or similar document
or any contract contemplating or otherwise relating to any
acquisition transaction.
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An acquisition inquiry means any inquiry, indication
of interest or request for information (other than an inquiry,
indication of interest or request for information made or
submitted by Replidyne or CSI, as the case may be) that could
reasonably be expected to lead to an acquisition
proposal (as defined below), except for any inquiry,
indication of interest or request for information relating to
certain actions set forth on the disclosure schedules to the
merger agreement or the divestment by Replidyne of its
pre-clinical programs and other non-cash assets.
An acquisition proposal means any offer or proposal
(other than an offer or proposal made or submitted by Replidyne
or CSI, as the case may be) contemplating or otherwise relating
to any acquisition transaction (as defined below),
except for any offer or proposal related to certain matters set
forth on the disclosure schedules to the merger agreement or the
divestment by Replidyne of its pre-clinical programs and other
non-cash assets.
An acquisition transaction means any transaction or
series of transactions involving:
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any merger, consolidation, amalgamation, share exchange,
business combination, issuance of securities, financing
transaction, acquisition of securities, reorganization,
recapitalization, tender offer, exchange offer or other similar
transaction: (i) in which CSI or Replidyne, as the case may
be, is a constituent corporation; (ii) in which a person or
group (as defined in the Securities Exchange Act of
1934, or the Exchange Act, and the rules promulgated thereunder)
of persons acquires beneficial or record ownership of securities
representing more than 1% of the outstanding securities of any
class of voting securities of CSI or Replidyne, as the case may
be, or any subsidiary of CSI or Replidyne, as the case may be;
or (iii) in which CSI or Replidyne, as the case may be, or
any subsidiary of CSI or Replidyne, as the case may be, issues
any debt securities, incurs any indebtedness for borrowed money
or issues securities representing more than 1% of the
outstanding securities of any class of voting securities of CSI
or Replidyne, as the case may be, or any subsidiary of CSI or
Replidyne, as the case may be (other than issuances of CSI
common stock or CSI preferred stock or Replidyne common stock
pursuant to the exercise of options and warrants);
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in the case of CSI, any sale, lease, exchange, transfer,
license, acquisition or disposition of any business or
businesses or assets that constitute or account for (i) 1%
or more of the consolidated net revenues of CSI and its
subsidiaries, taken as a whole, consolidated net income of CSI
and its subsidiaries, taken as a whole, or consolidated book
value of the assets of CSI and its subsidiaries, taken as a
whole; or
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any liquidation or dissolution of CSI or the merger sub;
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provided, however, that both (i) any qualified
financing and (ii) any transaction or series of
transactions that relate to certain matters set forth on the
disclosure schedules to the merger agreement or the divestment
by Replidyne of its
85
pre-clinical programs and other non-cash assets and any
transactions undertaken, continued or consummated in connection
with those matters will be deemed not to be an acquisition
transaction.
A qualified financing means mean any sale by CSI of
debt or equity securities or the incurrence by CSI of
indebtedness for borrowed money in an amount not to exceed
$15,000,000 for all such issuances or incurrences in the
aggregate, provided that CSI provides notice to Replidyne within
five days of the commencement of discussions regarding any
transaction that is reasonably likely to result in a qualified
financing and continues to keep Replidyne reasonably apprised of
such discussions through the consummation of any such
transaction, and provided further that with respect to any
issuance of equity securities (including, for the avoidance of
doubt, the issuance of any indebtedness that is convertible into
other equity securities of CSI) that values CSI at less than
$181,000,000 prior to the consummation of such issuance, CSI has
obtained the consent of Replidyne to the consummation of such
issuance.
Notwithstanding the foregoing, prior to obtaining the consent of
their stockholders, either party may furnish information
regarding such party to, and may enter into discussions or
negotiations with, any third party in response to a
superior offer or an unsolicited bona fide written
acquisition proposal made or received after the date of the
merger agreement that is reasonably likely to result in a
superior offer, if:
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neither such party nor any representative of such party has
breached the no solicitation provisions of the merger agreement
described above with respect to that particular superior offer
or acquisition proposal;
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the board of directors of such party concludes in good faith,
based on the advice of outside legal counsel, that such action
is required in order for such partys board of directors to
comply with its fiduciary obligations to such partys
stockholders under applicable legal requirements;
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at least three business days prior to furnishing any such
information to, or entering into discussions with, such person,
such party gives the other party written notice of the identity
of such person and of such partys intention to furnish
information to, or enter into discussions with, such person;
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such party receives from such person an executed confidentiality
agreement containing provisions (including nondisclosure
provisions, use restrictions, non-solicitation provisions, no
hire provisions and standstill provisions) at least
as favorable to such party as those contained in the
confidentiality agreement previously entered into between
Replidyne and CSI; and
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at least three business days prior to furnishing any such
nonpublic information to such person, such party furnishes such
information to the other party (to the extent such nonpublic
information has not been previously furnished by such party to
the other party).
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A superior offer means unsolicited bona fide written
offer by a third party to enter into (i) a merger,
consolidation, amalgamation, share exchange, business
combination, issuance of securities, acquisition of securities,
reorganization, recapitalization, tender offer, exchange offer
or other similar transaction as a result of which either
(A) Replidyne or CSI stockholders, as the case may be,
prior to such transaction in the aggregate cease to own at least
50% of the voting securities of the entity surviving or
resulting from such transaction (or the ultimate parent entity
thereof) or (B) a person or group (as defined
in the Exchange Act and the rules promulgated thereunder)
directly or indirectly acquires beneficial or record ownership
of securities representing 50% or more of Replidynes or
CSIs capital stock, as the case may be, or (ii) a
sale, lease, exchange transfer, license, acquisition or
disposition of any business or other disposition of at least 50%
of the assets of Replidyne or CSI, as the case may be, or its
subsidiaries, taken as a whole, in a single transaction or a
series of related transactions that, in the case of either
clause (i) or (ii): (a) was not obtained or made as a
direct or indirect result of a breach of (or in violation of)
the merger agreement; and (b) is on terms and conditions
that the board of directors of Replidyne or CSI, as applicable,
determines, in its good faith judgment, after obtaining and
taking into account such matters that its board of directors
deems relevant following consultation with its outside legal
counsel and financial advisor: (x) is more favorable to
Replidyne stockholders or CSI stockholders, as the case may be,
than the terms of the merger; and (y) is reasonably capable
of being consummated.
Change in
Recommendation
The merger agreement provides that neither Replidyne nor CSI
shall withdraw or modify, or adopt or propose any resolution of
the board of directors or any committee to withdraw or modify,
in a manner adverse to the other
86
party its recommendation to (i) issue shares of Replidyne
common stock in connection with the merger, (ii) approve
the amendment to Replidynes restated certificate of
incorporation, or (iii) approve the merger agreement, as
the case may be. Notwithstanding the foregoing, Replidyne or CSI
may withdraw or modify their recommendation in a manner adverse
to the other party prior to the Replidyne stockholder meeting or
the CSI stockholder meeting, as the case may be, if the board of
directors of Replidyne or CSI, as the case may be, determines in
good faith, based on the advice of its outside legal counsel,
that such action is required in order for the applicable board
of directors to comply with its fiduciary obligations under
applicable legal requirements, provided, that Replidyne or CSI,
as the case may be, must receive three business days prior
written notice from the other party confirming that such
partys board of directors has determined to change its
recommendation.
Meeting
of Stockholders
Replidyne is obligated under the merger agreement to call, give
notice of and hold a special meeting of its stockholders for the
purposes of considering the issuance of shares of Replidyne
common stock and the amendment to Replidynes restated
certificate of incorporation. The meeting shall be held as
promptly as practicable after the registration statement of
which this proxy statement/prospectus is a part is declared
effective. Replidyne shall proceed with holding the stockholder
meeting despite the commencement, disclosure, announcement or
submission or any superior offer or other acquisition proposal
or Replidynes withdrawal or modification of its board
recommendation.
CSI is obligated under the merger agreement to call, give notice
of and hold a special meeting of its stockholders for the
purposes of considering the adoption of the merger agreement.
The meeting shall be held as promptly as practicable after the
registration statement of which this proxy statement/prospectus
is a part is declared effective. CSI shall proceed with holding
the stockholder meeting despite the commencement, disclosure,
announcement or submission or any superior offer or other
acquisition proposal or CSIs withdrawal or modification of
its board recommendation.
Other
Agreements
Each of Replidyne and CSI has agreed to use its commercially
reasonable efforts to:
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cause to be taken all actions necessary to complete the merger
and make effective the other transactions contemplated by the
merger agreement;
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file or otherwise submit, as soon as practicable after the date
of the merger agreement, all applications, notices, reports and
other documents required to be filed by such party with or
otherwise submitted by such party to any governmental body with
respect to the merger and the other transactions contemplated by
the merger agreement and to submit promptly any additional
information requested by any such governmental body;
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obtain each consent (if any) reasonably required to be obtained
(pursuant to any applicable legal requirement or contract, or
otherwise) by such party in connection with the merger or any of
the other transactions contemplated by the merger agreement or
for such contract to remain in full force and effect;
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lift any restraint, injunction or other legal bar to the merger
or any of the other transactions contemplated by the merger
agreement;
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satisfy the conditions precedent to the consummation of the
transactions contemplated by the merger agreement;
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cause their respective legal advisors to deliver an opinion as
to whether the merger qualifies as a reorganization within the
meaning of Section 368 of the Internal Revenue Code or
1986, as amended; and
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consult each other about any public statement or press release
either will make concerning the merger.
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Replidyne and CSI also have agreed:
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that Replidyne, with the cooperation of CSI, will file an
application for initial inclusion on The Nasdaq Global Market in
connection with the listing of Replidyne common stock pursuant
to Nasdaqs reverse merger rules and use
commercially reasonable efforts to cause the shares issued in
the merger to be approved for listing;
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that Replidyne will use commercially reasonable efforts to
obtain all regulatory approvals needed to ensure that the
Replidyne common stock to be issued pursuant to the merger will
(to the extent required) be registered or qualified or exempt
from registration or qualification under the securities law of
every jurisdiction of the United States in which any registered
holder of CSI capital stock has an address of record on the
record date applicable to CSIs special meeting of
stockholders, except that Replidyne shall not be required:
(i) to qualify to do business as a foreign corporation in
any jurisdiction in which it is not now qualified; or
(ii) to file a general consent to service of process in any
jurisdiction; or (iii) otherwise become subject to taxation
in any jurisdiction;
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from the effective time of the merger through the sixth
anniversary thereof, each of Replidyne and the surviving
corporation shall indemnify and hold harmless each person who is
now or had been at any time prior to the date of the merger
agreement, or who becomes prior to the effective time of the
merger, a director or officer of Replidyne or CSI against all
claims, losses, liabilities, damages, judgments, fines and
reasonable fees, costs and expenses, including attorneys
fees and disbursements, incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of or
pertaining to the fact that such person is or was a director or
officer of Replidyne or CSI, whether asserted or claimed prior
to, at or after the effective time of the merger, to the fullest
extent permitted under, as applicable, (i) the Delaware
General Corporation Law for directors or officers of Delaware
corporations and (ii) the Minnesota Business Corporation
Act for directors or officers of Minnesota corporations;
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that the certificate of incorporation or articles of
incorporation, as applicable, and bylaws of each of Replidyne
and the surviving corporation shall contain, and Replidyne shall
cause the articles of incorporation and bylaws of the surviving
corporation to so contain, provisions no less favorable with
respect to indemnification, advancement of expenses and
exculpation of present and former directors and officers of each
of Replidyne and CSI than are presently set forth in the
certificate of incorporation or articles of incorporation, as
applicable, and bylaws of Replidyne and CSI, as applicable,
which provisions shall not be amended, modified or repealed for
a period of six years time from the effective time of the merger
in a manner that would adversely affect the rights thereunder of
individuals who, at or prior to the effective time of the
merger, were officers or directors of Replidyne or CSI;
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that Replidyne shall purchase directors and officers
insurance policies that maintain in effect for six years from
the closing of the merger the current insurance policies
maintained by Replidyne and CSI with respect to matters
occurring prior to the closing of the merger, and shall purchase
a new directors and officers insurance policy that
is effective as of the effective time of the merger on
commercially available terms and conditions and with coverage
limits customary for U.S. public companies similarly
situated to Replidyne;
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that Replidyne shall take all action necessary to cause the
number of members of Replidynes board of directors to be
fixed at ten and the persons identified in the merger agreement
to constitute Replidynes board of directors, effective
concurrently with the effective time of the merger;
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that Replidyne shall appoint the persons identified in the
merger agreement as officers of Replidyne and shall obtain the
resignations of or otherwise terminate the employment of all
officers and other employees or Replidyne, effective as of the
effective time of the merger;
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that CSI shall use commercially reasonable efforts to obtain an
acknowledgement in a form reasonably acceptable to Replidyne
from the holders of certain CSI options and shares of restricted
CSI common stock that the terms of the option agreements and
restricted stock agreements related thereto do not provide that
the vesting of such securities will accelerate, in whole or in
part, in connection with or as a result of the consummation of
the merger and the other transactions contemplated by the merger
agreement;
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that Replidyne shall use commercially reasonable efforts to
terminate certain agreements and employee benefit plans
identified in the merger agreement;
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that Replidyne shall use commercially reasonable efforts to
terminate, sublease or otherwise assign to a third party its
remaining obligations under its lease agreement for its
headquarters in Louisville, Colorado; and
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that Replidyne and CSI shall each use commercially reasonable
efforts to cause its respective officers to enter into
lock-up
agreements in favor of Replidyne and CSI pursuant to which such
officers would agree not
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to sell, transfer or otherwise dispose of any securities of
Replidyne or CSI until the date that is 90 days after the
closing of the merger.
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Representations
and Warranties
The merger agreement contains customary representations and
warranties of Replidyne and CSI relating to, among other things:
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subsidiaries, corporate organization, authority and
qualifications;
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capital structure;
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financial statements and documents filed with the SEC and the
accuracy of information contained in those documents;
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absence of material changes or events;
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internal controls and procedures;
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in the case of Replidyne, bank accounts;
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equipment and leaseholds;
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intellectual property rights and agreements;
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material agreements, contracts and commitments;
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absence of undisclosed liabilities;
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permits and compliance with applicable laws;
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tax matters;
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employee and labor matters and employee benefit plans;
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environmental matters;
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insurance;
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related party transactions;
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legal proceedings and orders;
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authorization to enter into the merger agreement and consummate
the associated transactions;
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inapplicability of anti-takeover statutes;
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non-contravention of merger agreement with existing corporate
documents, contracts, permits or applicable legal requirements;
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the stockholder vote necessary to approve the merger and the
transactions contemplated by the merger agreement;
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brokers and finders fees;
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in the case of Replidyne, the valid issuance of the shares of
Replidyne common stock to be issued in the merger;
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absence of certain payments made by a party or its officers,
employees agents or other representatives; and
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the accuracy of information supplied in connection with this
proxy statement/prospectus and the registration statement of
which it is a part.
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Material
Adverse Effect
Several of the representations, warranties, covenants and
closing conditions of Replidyne and CSI in the merger agreement
are qualified by reference to whether the item in question has
had or could reasonably be expected to have a material
adverse effect on the applicable company.
The merger agreement provides that material adverse
effect means, when used in connection with CSI, any
effect, change, event, circumstance or development that,
considered together with all other effects, changes, events,
circumstances or developments, is or would reasonably be
expected to be or to become materially adverse to, or has
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or would reasonably be expected to have or result in a material
adverse effect on the business, financial condition,
capitalization, assets, operations or financial performance or
prospects of CSI or the ability of CSI to consummate the merger
or any of the transactions contemplated by the merger agreement
or to perform any of its covenants or obligations under the
merger agreement. None of the following, either alone or in
combination, shall constitute or be taken into account in
determining whether there has been or will be, a material
adverse effect with respect to CSI:
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any effect on the business, financial condition, capitalization,
assets, operations or financial performance or prospects of CSI
caused by, related to or resulting from the transactions
contemplated by the merger agreement or the announcement or
pendency thereof;
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any failure by CSI to meet internal revenue projections or
forecasts for any period; provided that the actual results of
CSI do not deviate by more than 20% from the results anticipated
by such projections or forecasts;
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any adverse change, effect or occurrence attributable to the
United States economy as a whole, provided that such change,
effect or occurrence does not affect CSI in a disproportionate
manner;
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any act or threat of terrorism or war anywhere in the world, any
armed hostilities or terrorist activities anywhere in the world,
any threat or escalation or armed hostilities or terrorist
activities anywhere in the world or any governmental or other
response or reaction to any of the foregoing; and
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any change in accounting requirements or principles or any
change in applicable accounting laws, rules or regulations or
the interpretation thereof.
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The entrance of any settlement, arbitration award or judgment
that results or would result in any payment in excess of
$5.0 million by CSI, or the granting of any injunctive
relief against CSI that has or would reasonably be expected to
have or result in an adverse effect on the business, financial
condition, capitalization, assets, operations or financial
performance or prospects of CSI, in connection in each case with
any legal proceeding to which CSI is a party, shall constitute a
material adverse effect with respect to CSI.
The merger agreement provides that material adverse
effect means, when used in connection with Replidyne, any
effect, change, event, circumstance or development that,
considered together with all other effects, changes, events,
circumstances or developments, is or would reasonably be
expected to be or to become materially adverse to, or has or
would reasonably be expected to have or result in a material
adverse effect on the financial condition or assets of Replidyne
or the ability of Replidyne to consummate the merger or any of
the transactions contemplated by the merger agreement or to
perform any of its covenants or obligations under the merger
agreement. None of the following, either alone or in
combination, shall constitute or be taken into account in
determining whether there has been or will be, a material
adverse effect with respect to Replidyne:
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any effect on the financial condition or assets of Replidyne
caused by, related to or resulting from the transactions
contemplated by the merger agreement or the announcement or
pendency thereof or any transactions undertaken, continued or
consummated in connection with the divestment of its
pre-clinical programs and other non-cash assets;
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any adverse change, effect or occurrence attributable to the
United States economy as a whole, provided that such change,
effect or occurrence does not affect Replidyne in a
disproportionate manner;
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any act or threat of terrorism or war anywhere in the world, any
armed hostilities or terrorist activities anywhere in the world,
any threat or escalation or armed hostilities or terrorist
activities anywhere in the world or any governmental or other
response or reaction to any of the foregoing;
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any change in the stock price or trading volume of Replidyne
independent of any other event that would be deemed to have a
material adverse effect with respect to
Replidyne; and
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any change in accounting requirements or principles or any
change in applicable accounting laws, rules or regulations or
the interpretation thereof.
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The entrance of any settlement, arbitration award or judgment
that results or would result in any payment in excess of
$5.0 million by Replidyne, or the granting of any
injunctive relief against Replidyne that has or would reasonably
be expected to have or result in an adverse effect on the
business, financial condition, capitalization, assets,
operations or financial performance or prospects of Replidyne,
in connection in each case with any legal proceeding to which
Replidyne is a party, shall constitute a material adverse effect
with respect to Replidyne. The
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amount of net assets, or any increase or decrease in net assets
above or below a particular level, shall not constitute a
material adverse effect with respect to Replidyne.
Termination
of the Merger Agreement
The merger agreement may be terminated prior to the effective
time of the merger (whether before or after adoption of the
merger agreement by CSI stockholders and whether before or after
approval of the amendment to Replidynes restated
certificate of incorporation and the issuance of Replidyne
common stock in the merger by Replidyne stockholders):
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by mutual written consent of Replidyne and CSI, duly authorized
by their respective boards of directors;
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by either Replidyne or CSI if the merger shall not have been
consummated by the April 30, 2009; provided, however, that
a party shall not be permitted to terminate the merger agreement
on this basis if the failure to consummate the merger by such
date is attributable to a failure on the part of such party to
perform any covenant or obligation in the merger agreement
required to be performed by such party at or prior to the
effective time of the merger;
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by either Replidyne or CSI if a court of competent jurisdiction
or other governmental body shall have issued a final and
nonappealable order, or shall have taken any other final and
nonappealable action, having the effect of permanently
restraining, enjoining or otherwise prohibiting the consummation
of the merger;
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by either Replidyne or CSI if: (i) the Replidyne
stockholders meeting (including any adjournments and
postponements thereof) shall have been held and Replidyne
stockholders shall have taken a final vote on the amendment to
Replidynes restated certificate of incorporation and the
issuance of shares of Replidyne common stock in the merger; and
(ii) either or both of the amendment to Replidynes
restated certificate of incorporation or the issuance of
Replidyne common stock in the merger shall not have been
approved at the Replidyne stockholders meeting;
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by either Replidyne or CSI if: (i) the CSI
stockholders meeting (including any adjournments and
postponements thereof) shall have been held and CSI stockholders
shall have taken a final vote on the adoption of the merger
agreement (including the consummation of the merger); and
(ii) the merger agreement (including the consummation of
the merger) shall not have been approved and adopted at the CSI
stockholders meeting;
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by either Replidyne or CSI if (i) the Replidyne board of
directors has withheld, withdrawn, amended or modified its
recommendation because it has determined in good faith, based on
the advice of its outside legal counsel, that such action is
required in order for the Replidyne board of directors to comply
with its fiduciary obligations to Replidyne stockholders under
applicable legal requirements, or (ii) Replidyne enters
into a letter of intent, memorandum of understanding or
definitive agreement with respect to a superior offer;
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by either Replidyne or CSI if (i) the CSI board of
directors has withheld, withdrawn, amended or modified its
recommendation because it has determined in good faith, based on
the advice of its outside legal counsel, that such action is
required in order for the CSI board of directors to comply with
its fiduciary obligations to CSI stockholders under applicable
legal requirements, or (ii) CSI enters into a letter of
intent, memorandum of understanding or definitive agreement with
respect to a superior offer;
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by CSI if: (i) any of the representations and warranties of
Replidyne or the merger sub set forth in the merger agreement
shall have been inaccurate as of the date of the merger
agreement or shall have become inaccurate as of a date
subsequent to the date of the merger agreement (as if made on
such subsequent date), provided, that any inaccuracies to such
representations and warranties will be disregarded if such
inaccuracies do not collectively constitute, and would not
reasonably be expected to have or result in, a material adverse
effect, or (ii) any of Replidynes or the merger
subs covenants or obligations contained in the merger
agreement shall have been breached such that the requirement
that Replidyne comply with or perform all of its covenants and
obligations pursuant to the merger agreement in all material
respects prior to the closing of the merger would not be
satisfied; provided, that if an inaccuracy in any of
Replidynes or the merger subs representations and
warranties as of a date subsequent to the date of the merger
agreement or breach of a covenant or obligation by Replidyne or
the merger sub is curable by Replidyne or the merger sub, and
Replidyne or the merger sub is continuing to exercise
commercially reasonable efforts to cure such
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inaccuracy or breach, then CSI may not terminate the merger
agreement on this basis on account of such inaccuracy or breach
unless such inaccuracy or breach shall remain uncured for a
period of 30 days commencing on the date that CSI gives
Replidyne notice of such inaccuracy or breach; or
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by Replidyne if: (i) any of the representations and
warranties of CSI contained in the merger agreement shall have
been inaccurate as of the date of the merger agreement or shall
have become inaccurate as of a date subsequent to the date of
the merger agreement (as if made on such subsequent date),
provided, that any inaccuracies to such representations and
warranties will be disregarded if such inaccuracies do not
collectively constitute, and would not reasonably be expected to
have or result in, a material adverse effect, or (ii) any
of CSIs covenants or obligations contained in the merger
agreement shall have been breached such that the requirement
that CSI comply with or perform all of its covenants and
obligations pursuant to the merger agreement in all material
respects prior to the closing of the merger would not be
satisfied; provided, that if an inaccuracy in any of CSIs
representations and warranties as of a date subsequent to the
date of the merger agreement or breach of a covenant or
obligation by CSI is curable by CSI, and CSI is continuing to
exercise commercially reasonable efforts to cure such inaccuracy
or breach, then Replidyne may not terminate the merger agreement
on this basis on account of such inaccuracy or breach unless
such inaccuracy or breach shall remain uncured for a period of
30 days commencing on the date that Replidyne gives CSI
notice of such inaccuracy or breach.
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Termination
Fees
Fees
Payable by Replidyne
Replidyne must pay CSI a nonrefundable fee of $1.5 million
and reimburse CSI for all actual out of pocket legal, accounting
and investment advisory fees paid or payable in connection with
the merger agreement and the transactions contemplated by the
merger agreement if:
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the merger agreement is terminated by Replidyne or CSI if
(i) the Replidyne board of directors has withheld,
withdrawn, amended or modified its recommendation because it has
determined in good faith, based on the advice of its outside
legal counsel, that such action is required in order for the
Replidyne board of directors to comply with its fiduciary
obligations to Replidyne stockholders under applicable legal
requirements, or (ii) Replidyne enters into a letter of
intent, memorandum of understanding or definitive agreement with
respect to a superior offer; or
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the merger agreement is terminated by Replidyne or CSI if the
stockholders of Replidyne do not approve either the amendment to
Replidynes restated certificate of incorporation or the
issuance of Replidyne common stock at the Replidyne special
meeting of stockholders, and all of the following conditions are
met:
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prior to the Replidyne special meeting of stockholders, an
acquisition proposal with respect to Replidyne has been publicly
made and not withdrawn; and
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within twelve months of the termination of the merger agreement,
Replidyne enters into any agreement for an acquisition
transaction contemplated by such acquisition proposal or
consummates an acquisition transaction contemplated by such
acquisition proposal.
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CSI must pay Replidyne a nonrefundable fee of $1.5 million
and reimburse Replidyne for all actual out of pocket legal,
accounting and investment advisory fees paid or payable in
connection with the merger agreement and the transactions
contemplated by the merger agreement if:
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the merger agreement is terminated by Replidyne or CSI if
(i) the CSI board of directors has withheld, withdrawn,
amended or modified its recommendation because it has determined
in good faith, based on the advice of its outside legal counsel,
that such action is required in order for the CSI board of
directors to comply with its fiduciary obligations to CSI
stockholders under applicable legal requirements, or
(ii) CSI enters into a letter of intent, memorandum of
understanding or definitive agreement with respect to a superior
offer; or
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the merger agreement is terminated by Replidyne or CSI if the
stockholders of CSI do not approve the adoption of the merger
agreement (including the consummation of the merger) at the CSI
special meeting of stockholders, and all of the following
conditions are met:
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prior to the CSI special meeting of stockholders, an acquisition
proposal with respect to CSI has been publicly made and not
withdrawn; and
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within twelve months of the termination of the merger agreement,
CSI enters into any agreement for an acquisition transaction
contemplated by such acquisition proposal or consummates an
acquisition transaction contemplated by such acquisition
proposal.
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Amendment
and Waiver of the Merger Agreement
Amendment
The merger agreement may be amended with the approval of the
respective boards of directors of CSI and Replidyne (or duly
appointed committees thereof) at any time (whether before or
after the adoption of the merger agreement by CSI stockholders
and whether before or after approval of the amendment to
Replidynes restated certificate of incorporation and the
issuance of Replidyne common stock in the merger by Replidyne
stockholders); provided, however, that after any such adoption
of the merger agreement by CSI stockholders, no amendment shall
be made which by law requires further approval of CSI
stockholders without the further approval of CSI stockholders.
The merger agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties to the merger
agreement.
Waiver
No failure on the part of Replidyne or CSI to exercise any
power, right, privilege or remedy under the merger agreement,
and no delay on the part of Replidyne or CSI in exercising any
power, right, privilege or remedy under the merger agreement,
shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power,
right, privilege or remedy shall preclude any other or further
exercise thereof or of any other power, right, privilege or
remedy.
Neither Replidyne nor CSI shall be deemed to have waived any
claim arising out of the merger agreement, or any power, right,
privilege or remedy under the merger agreement, unless the
waiver of such claim, power, right, privilege or remedy is
expressly set forth in a written instrument duly executed and
delivered on behalf of Replidyne or CSI; and any such waiver
shall not be applicable or have any effect except in the
specific instance in which it is given.
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OTHER
AGREEMENTS RELATED TO THE MERGER
Voting
Agreements
The following description of the voting agreements describes
the material terms of the voting agreements. This description of
the voting agreements is qualified in its entirety by reference
to the form of Replidyne voting agreement, which is attached as
Annex B to this proxy statement/prospectus, and by
reference to the form of CSI voting agreement, which is attached
as Annex C to this proxy statement/prospectus, and which
are incorporated herein by reference. We encourage you to read
both forms of voting agreement in their entirety.
In order to induce Replidyne to enter into the merger agreement,
several CSI stockholders entered into voting agreements and
irrevocable proxies with Replidyne pursuant to which, among
other things, each of these stockholders agreed, solely in his
capacity as a stockholder, to vote all of their shares,
representing approximately 20% of the outstanding capital stock
of CSI, in favor of the merger and the other actions
contemplated by the merger agreement. These stockholders
represented the maximum number of the outstanding shares of CSI
capital stock that could be made subject to these voting
agreements under Minnesota corporate law. All of these
stockholders are executive officers, directors, or entities
controlled by such persons, or 5% stockholders, of CSI. In
addition, in order to induce CSI to enter into the merger
agreement, several Replidyne stockholders, who together with
their respective affiliates, beneficially own approximately 48%
of the outstanding common stock of Replidyne, entered into
voting agreements and irrevocable proxies in favor of CSI
pursuant to which, among other things, each of these
stockholders agreed, solely in his capacity as a stockholder, to
vote shares representing approximately 32% of the outstanding
common stock of Replidyne in favor of the merger and the other
actions contemplated by the merger agreement. In particular,
each of the stockholders referenced above agreed to vote such
securities:
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in favor of the merger, the execution and delivery by Replidyne
or CSI, as the case may be, of the merger agreement and the
adoption and approval of the merger agreement and the terms
thereof, in favor of each of the other actions contemplated by
the merger agreement and in favor of any action in furtherance
of any of the foregoing;
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against any action or agreement that would result in a material
breach of any covenant or obligation of Replidyne or CSI, as the
case may be, in the merger agreement that would have the effect
of preventing or materially delaying the merger; and
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against the following actions (other than the merger and the
transactions contemplated by the merger agreement (including, in
the case of Replidyne, the consummation of a transaction entered
into in connection with the divestment by Replidyne of its
pre-clinical programs and other non-cash assets)):
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any extraordinary corporate transaction, such as a merger,
consolidation or other business combination involving Replidyne
or CSI, as the case may be, or any of its subsidiaries;
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any sale, lease or transfer of a material amount of assets of
Replidyne or CSI, as the case may be, or any of its subsidiaries;
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any reorganization, recapitalization, dissolution or liquidation
of Replidyne or CSI, as the case may be, or any of its
subsidiaries;
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any change in a majority of the board of directors of Replidyne
or CSI, as the case may be;
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any amendment to the restated certificate of incorporation,
articles of incorporation or bylaws of Replidyne or CSI, as the
case may be, which would materially delay the merger;
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any acquisition transaction; and
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any other action which is intended, or could reasonably be
expected, to impede, interfere with, delay, postpone, discourage
or adversely affect the merger or any of the other transactions
contemplated by the merger agreement or the voting agreement.
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These stockholders also granted Replidyne or CSI, as the case
may be, an irrevocable proxy to their respective shares in
accordance with the voting agreement. These stockholders may
vote their shares of Replidyne or CSI capital stock, as the case
may be, on all other matters not referred to in such proxy.
Under the voting agreements, subject to certain exceptions,
these stockholders also have agreed not to sell or transfer
Replidyne capital stock or CSI capital stock, as the case may
be, held by them, or any voting rights with respect thereto,
until the earlier of (i) the day after the merger is
consummated, (ii) April 30, 2009, (iii) the date
of
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any modification, waiver or amendment to the merger agreement in
a manner that reduces the amount and form of consideration
payable to such stockholders and (iv) the termination of
the merger agreement. Subject to certain exceptions, to the
extent that any such sale or transfer is permitted pursuant to
the exceptions included in the voting agreement, each person to
which any shares of Replidyne capital stock or CSI capital stock
or securities are so sold or transferred must agree in writing
to be bound by the terms and provisions of the voting agreement.
Replidyne and CSI stockholders that executed these voting
agreements have agreed not to engage in certain actions that
would solicit, encourage or support acquisition transactions
other than the merger.
The Replidyne stockholders that entered into voting agreements
and irrevocable proxies with CSI are Kenneth Collins, HealthCare
Ventures VI, L.P., HealthCare Ventures VIII, L.P., Daniel J.
Mitchell Trust, Morgenthaler Partners VII, L.P., Perseus-Soros
Biopharmaceutical Fund L.P., Sequel Limited Partnership
III, Sequel Entrepreneurs Fund III, L.P., TPG
Biotechnology Partners, L.P. and TPG Ventures, L.P. HealthCare
Investment Partners Holdings II LLC had also entered into a
voting agreement and irrevocable proxy with CSI, but was
released from its obligations thereunder in connection with the
distribution of all of the shares of Replidyne common stock held
by such stockholder to its members, none of whom are currently
subject to a voting agreement or irrevocable proxy in respect of
the shares received in connection with such distribution.
The CSI stockholders that entered into voting agreements and
irrevocable proxies with Replidyne are Brent Blackey, Easton
Hunt Capital Partners L.P., Geoffrey O. Hartzler, TTEE Geoffrey
O. Hartzler Rev Trust dtd 1/8/97, as amended, GDN Holdings LLC,
Charles Schwab & Co., Inc. Cust FBO Michael J. Kallok IRA,
David L. Martin, Maverick Fund II, Ltd., Gary M. Petrucci,
Sonora Web LLLP and Whitebox Hedged High Yield Partners, LP.
Lock-up
Agreements
The directors and certain stockholders of both Replidyne and CSI
entered into
lock-up
agreements in favor of Replidyne and CSI pursuant to which they
have agreed, subject to limited exceptions, not to offer,
pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer
or dispose of, directly or indirectly any shares of CSI common
stock or Replidyne common stock or any securities convertible
into or exercisable or exchangeable for shares of CSI common
stock or Replidyne common stock or enter into any swap or other
arrangement that transfers to another, in whole or in part, any
of the economic consequences of ownership of any shares of CSI
common stock or Replidyne common stock or engage in any short
selling of any shares of CSI common stock or Replidyne common
stock or any securities convertible into or exercisable or
exchangeable for shares of CSI common stock or Replidyne common
stock during the period beginning on the date of the merger
agreement and ending 90 days after the closing of the
merger. The
lock-up
restrictions will not apply to certain transfers not involving a
disposition for value, provided that the recipient agrees to be
bound by these
lock-up
restrictions and provided that such transfers are not required
to be reported, and are not voluntarily reported, in any public
report or filing with the SEC during the
lock-up
period. As of December 31, 2008, the parties to the lock-up
agreements owned approximately 37% of Replidynes
outstanding common stock and 28% of CSIs outstanding
capital stock.
Pursuant to the merger agreement, Replidyne and CSI have each
agreed to use commercially reasonable efforts to cause its
respective officers to enter into
lock-up
agreements in favor of Replidyne and CSI on substantially the
same terms as described above.
CSI
Preferred Stockholder Conversion Agreement
Concurrently with the execution of the merger agreement, the
holders of approximately 68% of CSIs outstanding preferred
stock, calculated on an as-converted to common stock basis,
entered into an agreement with CSI pursuant to which all
outstanding shares of CSI preferred stock will be automatically
converted into shares of CSI common stock, effective as of
immediately prior to the effective time of the merger. In
consideration of the agreement of such stockholders, CSI will
issue to the holders of CSI preferred stock warrants to purchase
3,500,000 shares of CSI common stock at an exercise price
of $5.71 per share, pro rata to each such holder based on
its percentage of the outstanding shares of CSI preferred stock
on an as-converted to common stock basis. Such warrants will be
issued immediately following the effectiveness of the conversion
of all outstanding shares of CSI preferred stock described above
but prior to the effective time of the merger. This agreement
also amends the terms of the investor rights agreement that CSI
has entered into with certain of its stockholders to provide
that such investor rights agreement will terminate upon the
consummation of the merger.
95
REPLIDYNE
PROPOSAL NO. 2
AMENDMENT
TO RESTATED CERTIFICATE OF INCORPORATION TO
EFFECT A
REVERSE STOCK SPLIT
Overview
The Replidyne board of directors has approved a proposal to
amend its restated certificate of incorporation to effect a
reverse stock split of the issued and outstanding shares of its
common stock. The board has recommended that this proposal be
presented to its stockholders for approval. The text of the form
of proposed amendment to Replidynes restated certificate
of incorporation to effect a reverse stock split of the issued
and outstanding shares of Replidyne common stock, along with the
other proposed amendments to Replidynes restated
certificate of incorporation described in this proxy
statement/prospectus, is attached to this proxy
statement/prospectus as Annex E.
The proposed amendment to Replidynes restated certificate
of incorporation would effect a reverse stock split whereby a
number of outstanding shares of Replidyne common stock between
and including 1 and 50, such number consisting only of whole
shares, will be combined into one share of Replidyne common
stock, with this exact number within the range to be determined
by the Replidyne board of directors, subject to its obligation
under the merger agreement to agree with CSI on such
determination. The Replidyne board of directors believes that
stockholder approval of an amendment granting the board this
discretion, rather than approval of a specified ratio, provides
the Replidyne board of directors with appropriate flexibility to
react to then-current market conditions and, therefore, is in
the best interests of Replidyne and its stockholders.
By approving this amendment, stockholders will approve a series
of amendments to Replidynes restated certificate of
incorporation pursuant to which any whole number of outstanding
shares of Replidyne common stock between and including 1 and 50
would be combined into one share of Replidyne common stock, and
authorize the Replidyne board of directors to file only one such
amendment, as determined by the Replidyne board of directors in
the manner described herein, and to abandon each amendment not
selected by the Replidyne board of directors. The Replidyne
board of directors may also elect not to undertake any reverse
stock split.
If approved by the stockholders, and following such approval,
the Replidyne board of directors determines that effecting a
reverse stock split is in the best interests of Replidyne and
its stockholders, the reverse stock split will become effective
upon filing one such amendment with the Secretary of State of
the State of Delaware. The amendment filed thereby will contain
the number of shares selected by the Replidyne board of
directors within the limits set forth in this proposal to be
combined into one share of Replidyne common stock.
If Replidynes board of directors elects to effect a
reverse stock split following stockholder approval, the number
of issued and outstanding shares of common stock would be
reduced in accordance with an exchange ratio determined by the
Replidyne board of directors within the limits set forth in this
proposal. Except for adjustments that may result from the
treatment of fractional shares as described below, each
stockholder will hold the same percentage of Replidynes
outstanding common stock immediately following the reverse stock
split as such stockholder held immediately prior to the reverse
stock split. The par value of Replidyne common stock would
remain unchanged at $0.001 per share.
Reasons
for the Reverse Stock Split
The Replidyne board of directors believes that a reverse stock
split may be desirable for a number of reasons. First, the
Replidyne board of directors believes that a reverse stock split
may allow Replidyne to remain listed on the Nasdaq Global
Market. Second, the Replidyne board of directors believes that a
reverse stock split could improve the marketability and
liquidity of Replidyne common stock.
Replidyne common stock is currently quoted on the Nasdaq Global
Market. According to applicable Nasdaq rules, in a transaction
constituting a reverse merger in which an issuer
combines with a non-Nasdaq entity, resulting in a change of
control of the issuer and potentially allowing the non-Nasdaq
entity to obtain a Nasdaq listing, the issuer must apply for
initial inclusion on the applicable Nasdaq market. The merger
agreement requires, as a condition to closing of the merger,
that Replidyne have received conditional approval to list the
shares issuable in connection with the merger on the Nasdaq
Global Market. The listing standards of the Nasdaq Global Market
require, among other things, a $4.00 per share minimum bid
upon the effective time of the merger. Replidyne and
96
CSI have filed an initial listing application for the Nasdaq
Global Market in connection with the merger.
On ,
2009, Replidyne common stock closed at
$ per share. Therefore, the
reverse stock split is necessary in order to consummate the
merger.
In addition to initial listing requirements for the Nasdaq
Global Market that Replidyne must satisfy in connection with the
merger, in order for Replidyne common stock to continue to be
listed on the Nasdaq Global Market after the completion of the
merger, Replidyne must satisfy certain listing maintenance
standards established by the Nasdaq Global Market. Among other
things, if the closing bid price of Replidyne common stock is
under $1.00 per share for 30 consecutive trading days and
does not thereafter reach $1.00 per share or higher for a
minimum of ten consecutive trading days during the 180 calendar
days following notification by Nasdaq, Nasdaq may delist
Replidyne common stock from trading on the Nasdaq Global Market.
On October 16, 2008, Nasdaq announced that it had suspended
the enforcement of its rules requiring a minimum bid price of
$1.00 per share through January 16, 2009. On
December 19, 2008, Nasdaq announced an extension of the
suspension of the $1.00 minimum bid price requirement through
April 17, 2009. As a result of this suspension, Replidyne
does not expect to receive a staff determination letter with
respect to the delisting of Replidyne common stock resulting
from a failure to meet the minimum bid requirement unless it has
failed to demonstrate compliance with the minimum bid
requirement on or before May 1, 2009. In the event that
Replidyne receives a determination letter from the staff at
Nasdaq with respect to its non-compliance with the minimum bid
requirement, Replidyne expects to appeal such determination and
present a plan for compliance to Nasdaq that includes the
consummation of the merger and the implementation of the reverse
stock split. The Replidyne board of directors expects that a
reverse stock split of its common stock will increase the market
price of its common stock so that Replidyne is able to achieve
the initial listing requirements for the Nasdaq Global Market
upon completion of the merger and thereafter maintain compliance
with the Nasdaq minimum bid price listing standard for the
foreseeable future. Notwithstanding the foregoing, there can be
no assurance that the market price per share following the
merger and the reverse stock split will remain in excess of the
minimum bid price for a sustained period of time. In addition,
there can be no assurance that the Replidyne common stock will
not be delisted due to a failure to meet other continued listing
requirements even if the market price per post-reverse split
share of Replidyne common stock remains in excess of the minimum
bid requirement.
The Replidyne board of directors also believes that the
increased market price of Replidyne common stock expected as a
result of implementing a reverse stock split will improve the
marketability and liquidity of Replidyne common stock and will
encourage interest and trading in Replidyne common stock.
Because of the trading volatility often associated with
low-priced stocks, many brokerage houses and institutional
investors have internal policies and practices that either
prohibit them from investing in low-priced stocks or tend to
discourage individual brokers from recommending low-priced
stocks to their customers. Some of those policies and practices
may function to make the processing of trades in low-priced
stocks economically unattractive to brokers. Additionally,
because brokers commissions on low-priced stocks generally
represent a higher percentage of the stock price than
commissions on higher-priced stocks, the current average price
per share of Replidyne common stock can result in individual
stockholders paying transaction costs representing a higher
percentage of their total share value than would be the case if
the share price were substantially higher. It should be noted
that the liquidity of Replidyne common stock may be harmed by
the proposed reverse stock split given the reduced number of
shares that would be outstanding after the reverse stock split.
The Replidyne board of directors is hopeful, however, that the
anticipated higher market price will reduce, to some extent, the
negative effects of the policies and practices of institutional
investors and brokerage houses described above on the liquidity
and marketability of the common stock.
Effects
of the Reverse Stock Split
After the effective date of the proposed reverse stock split,
each stockholder will own a reduced number of shares of
Replidyne common stock. However, the proposed reverse stock
split will affect all Replidyne stockholders uniformly and will
not affect any stockholders percentage ownership interests
in Replidyne, except to the extent that the reverse stock split
results in any of Replidyne stockholders owning a fractional
share as described below. Proportionate voting rights and other
rights and preferences of the holders of Replidyne common stock
will not be affected by the proposed reverse stock split (other
than as a result of the payment of cash in lieu of fractional
shares). For example, a holder of 2% of the voting power of the
outstanding shares of Replidyne common stock immediately prior
to reverse stock split would continue to hold 2% of the voting
power of the outstanding shares of Replidyne
97
common stock immediately after the reverse stock split. The
number of stockholders of record will not be affected by the
proposed reverse stock split (except to the extent that any
stockholder holds only a fractional share interest and receives
cash for such interest after the proposed reverse stock split).
The amendment to Replidynes restated certificate of
incorporation to effect the reverse stock split will not change
the number of authorized shares of Replidyne common stock. As a
result, one of the effects of the reverse stock split will be to
effectively increase the proportion of authorized shares which
are unissued relative to those which are issued. This could
result in the combined company being able to issue more shares
without further stockholder approval.
If a proposed reverse stock split is implemented, it will
increase the number of stockholders of Replidyne who own
odd lots of less than 100 shares of Replidyne
common stock. Brokerage commission and other costs of
transactions in odd lots are generally higher than the costs of
transactions of more than 100 shares of common stock.
Accordingly, a reverse stock split may not achieve the desired
results of increasing marketability and liquidity of Replidyne
common stock that have been outlined above.
Replidyne common stock is currently registered under
Section 12(b) of the Securities Exchange Act of 1934, or
the Exchange Act, and Replidyne is subject to the periodic
reporting and other requirements of the Exchange Act. The
proposed reverse stock split will not affect the registration of
the common stock under the Exchange Act. If the proposed reverse
stock split is implemented, and Replidynes initial listing
application with the Nasdaq Global Market is approved, Replidyne
common stock will continue to be reported on the Nasdaq Global
Market under the symbol RDYN. It is expected that
following the merger, the combined company will change its name
to Cardiovascular Systems, Inc and that its trading symbol will
be changed. CSI has reserved the ticker symbol CSII
for this purpose.
Effective
Date
The proposed reverse stock split would become effective on the
date of filing of the certificate of amendment to
Replidynes restated certificate of incorporation with the
office of the Secretary of State of the State of Delaware.
Except as explained below with respect to fractional shares, on
the effective date, shares of Replidyne common stock issued and
outstanding immediately prior to the effective date will be
combined and converted, automatically and without any action on
the part of the stockholders, into new shares of common stock in
accordance with the reverse stock split ratio determined by the
Replidyne board of directors within the limits set forth in this
proposal.
Payment
for Fractional Shares
No fractional shares of common stock will be issued as a result
of the proposed reverse stock split. Instead, Replidyne
stockholders who otherwise would be entitled to receive
fractional shares, upon surrender to the exchange agent (as
defined below) of such certificates representing such fractional
shares, will be entitled to receive cash in an amount equal to
the product obtained by multiplying (i) the closing sales
price of Replidyne common stock on the effective date of the
reverse stock split as reported on the Nasdaq Global Market by
(ii) the number of shares of Replidyne common stock held by
such Replidyne stockholder that would otherwise have been
exchanged for such fractional share interest.
Exchange
of Stock Certificates
As soon as practicable after the effective date of the reverse
stock split, stockholders will be notified that the reverse
stock split has been effected. Replidynes transfer agent
will act as exchange agent for purposes of implementing the
exchange of stock certificates. Holders of pre-reverse stock
split shares will be asked to surrender to the exchange agent
certificates representing pre-reverse stock split shares in
exchange for certificates representing post-reverse stock split
shares in accordance with the procedures to be set forth in a
letter of transmittal to be sent by Replidyne. No new
certificates will be issued to a Replidyne stockholder until
such Replidyne stockholder has surrendered such
stockholders outstanding certificate(s) together with the
properly completed and executed letter of transmittal to the
exchange agent. Replidyne stockholders should not destroy any
stock certificate and should not submit any certificates until
requested to do so.
98
Accounting
Consequences
The par value per share of Replidyne common stock would remain
unchanged at $0.001 per share after the reverse stock
split. As a result, on the effective date of the reverse stock
split, the stated capital on Replidyne balance sheet
attributable to the Replidyne common stock will be reduced
proportionally, based on the exchange ratio of the reverse stock
split, from its present amount, and the additional paid-in
capital account shall be credited with the amount by which the
stated capital is reduced. The per share common stock net income
or loss and net book value will be increased because there will
be fewer shares of Replidyne common stock outstanding. Such
reverse stock split will be reflected retroactively in
Replidynes financial statements. Replidyne does not
anticipate that any other accounting consequences would arise as
a result of the reverse stock split.
Material
U.S. Federal Income Tax Consequences of the Reverse Stock
Split
The following is a summary of important tax considerations of
the proposed reverse stock split. This summary is based upon
current provisions of the Internal Revenue Code of 1986, or the
Code, existing Treasury Regulations, and current administrative
rulings and court decisions, all of which are subject to change
and to differing interpretations, possibly with retroactive
effect. Any change could alter the tax consequences to Replidyne
or Replidyne stockholders, as described in this summary. This
summary is not binding on the IRS, and there can be no assurance
that the IRS (or a court, in the event of an IRS challenge) will
agree with the conclusions stated herein. No ruling has been or
will be requested from the IRS in connection with the reverse
stock split. The discussion below does not address the
following: the tax consequences of the reverse stock split under
U.S. federal non-income tax laws or under state, local, or
foreign tax laws; the tax consequences of transactions
effectuated before, after, or at the same time as the reverse
stock split, whether or not they are in connection with the
reverse stock split, including, without limitation, transactions
in which Replidyne shares are acquired or disposed of and in
particular the acquisition of common stock of Replidyne in
exchange for capital stock of CSI in the merger; the tax
consequences to holders of options issued by Replidyne that are
exercised, adjusted or converted, as the case may be, in
connection with the reverse stock split; or the tax consequences
of the receipt of Replidyne shares other than in exchange for
Replidyne shares in the reverse stock split.
No attempt has been made to comment on all U.S. federal
income tax consequences of the reverse stock split that may be
relevant to particular holders of Replidyne stock that are
subject to special treatment under U.S. federal income tax
laws, including, without limitation:
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dealers, brokers and traders in securities;
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foreign persons or entities;
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tax-exempt entities;
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financial institutions, regulated investment companies, real
estate investment trusts or insurance companies;
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partnerships or limited liability companies that are not treated
as corporations for U.S. federal income tax purposes,
subchapter S corporations and other pass-through entities
and investors in such entities;
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holders who are subject to the alternative minimum tax
provisions of the Code;
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holders who acquired their shares in connection with stock
option or stock purchase plans or in other compensatory
transactions;
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holders who hold shares that constitute small business stock
within the meaning of Section 1202 of the Code;
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holders with a functional currency other than the
U.S. dollar;
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holders who hold their shares as part of an integrated
investment such as a hedge or as part of a hedging, straddle or
other risk reduction strategy;
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holders who do not hold their shares as capital assets within
the meaning of Section 1221 of the Code (generally,
property held for investment will be a capital asset); and
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holders who will receive shares of Replidyne common stock in
exchange for CSI capital stock in the merger.
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Accordingly, holders of Replidyne stock are advised and
expected to consult their own tax advisors regarding the
U.S. federal income tax consequences of the reverse stock
split in light of their personal
99
circumstances and the consequences of the reverse stock split
under U.S. federal non-income tax laws and state, local,
and foreign tax laws.
The reverse stock split is expected to qualify for one or more
non-recognition provisions of the Code. Assuming the reverse
stock split so qualifies, the following consequences will result:
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no gain or loss will be recognized by Replidyne as a result of
the reverse stock split;
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a Replidyne stockholder who receives only Replidyne stock in the
reverse stock split generally will not recognize any gain or
loss on the reverse stock split, and the aggregate tax basis of
the post-reverse split shares received will be equal to the
aggregate tax basis of the pre-reverse split shares exchanged
therefor;
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a Replidyne stockholder who receives both Replidyne stock and
cash in lieu of fractional in lieu of fractional shares of
Replidyne stock in the reverse stock split generally will
recognize any gain inherent in the Replidyne stock surrendered
up to the amount of cash received, but will not recognize any
loss. The aggregate tax basis of the post-reverse split shares
received will be equal to the aggregate tax basis of the
pre-reverse split shares exchanged therefor, increased by the
amount of any gain recognized as a result of the reverse stock
split;
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the holding period of Replidyne stock received in the reverse
split will include the holding period of the
pre-reverse
split shares exchanged;
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a Replidyne stockholder who receives only cash in exchange for
Replidyne stock in the reverse stock split generally will
recognize gain or loss equal to the difference between such
stockholders tax basis in the shares of Replidyne stock
exchanged and the amount of cash received in exchange for those
shares; and
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any gain or loss recognized by a Replidyne stockholder as a
result of the reverse stock split will be a capital gain or loss
and will be long term capital gain or loss if the
stockholders holding period for the shares of Replidyne
stock exchanged is more than one year.
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Replidyne stockholders that own at least one percent (by vote or
value) of the total outstanding stock of Replidyne prior to the
reverse stock split or Replidyne stock with a tax basis of
$1 million or more may be required to attach a statement to
their tax returns for the year in which the reverse stock split
is completed that contains the information listed in Treasury
Regulations
Section 1.368-3(b).
Such statement must include the stockholders tax basis in
the stockholders Replidyne stock and the fair market value
of such stock.
For purposes of the above discussion of the bases and holding
periods for shares of Replidyne stock, and except as provided
therein, stockholders who acquired different blocks of Replidyne
stock at different times for different prices must calculate
their basis, gains and losses, and holding periods separately
for each identifiable block of such stock exchanged, converted,
canceled or received in the reverse stock split.
Certain noncorporate Replidyne stockholders may be subject to
backup withholding, at a rate of 28%, on cash received pursuant
to the reverse stock split. Backup withholding will not apply,
however, to a Replidyne stockholder who (i) furnishes a
correct taxpayer identification number and certifies that the
Replidyne stockholder is not subject to backup withholding on
IRS
Form W-9
or a substantially similar form, (ii) provides a
certification of foreign status on an appropriate
Form W-8
or successor form, or (iii) is otherwise exempt from backup
withholding. If a Replidyne stockholder does not provide a
correct taxpayer identification number on IRS
Form W-9
or a substantially similar form, the Replidyne stockholder may
be subject to penalties imposed by the IRS. Amounts withheld, if
any, are generally not an additional tax and may be refunded or
credited against the Replidyne stockholders
U.S. federal income tax liability, provided that the
Replidyne stockholder timely furnishes the required information
to the IRS.
No
Appraisal Rights
Under the DGCL, Replidyne stockholders are not entitled to
dissenters appraisal rights with respect to the proposed
amendment to the Replidyne restated certificate of incorporation
to effect the reverse stock split and Replidyne will not
independently provide Replidyne stockholders with any such right.
Vote
Required; Recommendation of Replidyne Board of
Directors
The affirmative vote of the holders of a majority of the shares
of Replidyne common stock having voting power outstanding on the
record date for the Replidyne special meeting is required to
approve the proposal to amend its restated certificate of
incorporation to effect the reverse stock split.
100
A failure to submit a proxy card or vote at the special meeting,
or an abstention, vote withheld or broker
non-vote
will have the same effect as a vote against Replidyne
Proposal No. 2.
REPLIDYNES BOARD OF DIRECTORS RECOMMENDS THAT REPLIDYNE
STOCKHOLDERS VOTE FOR REPLIDYNE
PROPOSAL NO. 2 TO APPROVE THE PROPOSAL TO AMEND
ITS RESTATED CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE
STOCK SPLIT OF THE ISSUED AND OUTSTANDING SHARES OF ITS COMMON
STOCK.
101
REPLIDYNE
PROPOSAL NO. 3
NAME
CHANGE
At the Replidyne special meeting, holders of Replidyne common
stock will be asked to approve the amendment of the restated
certificate of incorporation of Replidyne to change the name of
the corporation from Replidyne, Inc. to
Cardiovascular Systems, Inc. by filing an amendment
to Replidynes restated certificate of incorporation
immediately prior to the effective time of the merger. The
primary reason for the corporate name change is that management
believes this will allow for brand recognition of CSIs
products following the consummation of the merger. Replidyne
management believes that the current name will no longer
accurately reflect the business of the combined company and the
mission of the combined company subsequent to the consummation
of the merger. The text of the form of proposed amendment to
Replidynes restated certificate of incorporation to
implement the name change, along with the other proposed
amendments to Replidynes restated certificate of
incorporation described in this proxy statement/prospectus, is
attached to this proxy statement/prospectus as
Annex E.
Vote
Required; Recommendation of Replidyne Board of
Directors
The affirmative vote of holders of a majority of the Replidyne
common stock having voting power outstanding on the record date
for the Replidyne special meeting is required to approve the
proposal to amend its restated certificate of incorporation to
change the name Replidyne, Inc. to
Cardiovascular Systems, Inc.
A failure to submit a proxy card or vote at the special meeting,
or an abstention, vote withheld or broker
non-vote
will have the same effect as a vote against Replidyne
Proposal No. 3.
REPLIDYNES BOARD OF DIRECTORS RECOMMENDS THAT REPLIDYNE
STOCKHOLDERS VOTE FOR REPLIDYNE
PROPOSAL NO. 3 TO APPROVE THE NAME CHANGE.
102
REPLIDYNE
PROPOSAL NO. 4
APPROVAL
OF ASSUMPTION OF THE CARDIOVASCULAR SYSTEMS, INC. 2007 EQUITY
INCENTIVE
PLAN
Below is a summary of the Cardiovascular Systems, Inc. 2007
Equity Incentive Plan, as amended, which is referred to as the
2007 Plan. Replidyne stockholders will be asked to approve the
assumption of the 2007 Plan at Replidynes special meeting
of stockholders. A copy of the 2007 Plan (as amended to reflect
the proposed increase in the number of shares reserved under the
plan) is attached to this proxy statement/prospectus as
Annex G, and this summary is qualified in its
entirety by reference to the full text of the plan.
Effect of
Stockholder Vote on Replidynes Existing Plans
If the stockholders of Replidyne approve the assumption of the
2007 Plan and the merger is consummated, no further grants will
be made under the existing Replidyne equity incentive plan. If
the stockholders of Replidyne do not approve the assumption of
the 2007 Plan and the merger is consummated, Replidyne intends
to use the remaining availability under Replidynes
existing equity plan for additional equity incentive awards
following the consummation of the merger.
Reasons
for Increase in Authorized Shares
The Replidyne board of directors believes that the 2007 Plan
will help the combined company retain and motivate eligible
employees and will help further align the interests of eligible
employees with those of the stockholders. In addition, the
adoption of the 2007 Plan by Replidyne would aid in the
integration of CSIs existing equity incentive programs
with the future equity incentive programs of the combined
company.
Overview
of Cardiovascular Systems, Inc. 2007 Equity Incentive
Plan
CSIs board of directors adopted the 2007 Plan in October
2007 and approved certain amendments to the 2007 Plan in
November 2007, and its stockholders approved the 2007 Plan in
December 2007. The 2007 Plan became effective on the date of
board approval. Incentive stock options may be granted pursuant
to the 2007 Plan until October 2017 and other awards may be
granted under the plan until the 2007 Plan is discontinued or
terminated by the administrator.
Section 162(m) of the Internal Revenue Code of 1986, as
amended, or the Code, generally denies a corporate tax deduction
for annual compensation exceeding $1.0 million paid to the
chief executive officer or to certain other executive officers
of a publicly-held company. However, certain types of
compensation, including performance-based compensation, are
excluded from this limit. Generally speaking, for compensation
resulting from stock options and other awards to qualify as
performance-based within the meaning of Code
Section 162(m), the following conditions must be met:
(i) the grant of such options and awards must be made by a
compensation committee of the board of directors that consists
solely of two or more outside directors as defined
by Code Section 162(m), (ii) the compensation
resulting from an option or stock appreciation right must be
based solely on an increase in the value of the companys
common stock after the date of grant, (iii) the vesting or
payment of other types of awards must be conditioned on the
achievement of one or more objective performance criteria, the
material terms of which are approved by the stockholders,
(iv) the stockholders approve the class of employees
eligible to receive options and awards, and (v) the equity
incentive plan must state the maximum number of shares for which
such options and awards may be granted during a specified period
or the maximum amount of compensation payable to any individual
pursuant to an award if the performance criteria are met, and
the stockholders must approve such limits. Replidynes and
CSIs boards of directors believe that it is in the best
interests of the combined company and its stockholders to
preserve the ability of the combined company to deduct in full
the compensation resulting from options and awards granted in
the future under the 2007 Plan. Therefore, the 2007 Plan
provides for performance-based vesting or payment of those
awards that are intended to comply with the requirements of Code
Section 162(m).
Equity Awards. The 2007 Plan permits the
granting of incentive stock options, nonqualified options,
restricted stock awards, restricted stock units, performance
share awards, performance unit awards and stock appreciation
rights to employees, officers, consultants and directors.
Share Reserve. The aggregate number of shares
of CSI common stock issuable pursuant to stock awards under the
2007 Plan prior to July 1, 2008 was 3,000,000 shares.
The number of shares of CSI common stock
103
reserved for issuance will automatically increase on the first
day of each fiscal year, beginning on July 1, 2008, and
ending on July 1, 2017, by the lesser of
(i) 1,500,000 shares, (ii) 5% of the outstanding
shares of common stock on such date or (iii) a lesser
amount determined by the board of directors. As of July 1,
2008, the number of shares reserved under the 2007 Plan was
increased by 379,397 shares. As of September 30, 2008,
CSI had 2,158,364 options outstanding under its 2007 Plan at a
weighted average exercise price of $7.92 per share and
949,098 shares of restricted stock outstanding subject to a
risk of forfeiture. The 2007 Plan, as amended, would increase
the number of authorized shares issuable under the 2007 Plan to
3,879,397 shares, and CSI is submitting the approval of
this amendment at the CSI stockholder meeting.
Under the 2007 Plan, no person may be granted equity awards
intended to qualify as performance-based compensation covering
more than 100,000 shares of CSI common stock during any
calendar year pursuant to stock options, stock appreciation
rights, restricted stock awards or restricted stock unit awards.
If any awards granted under the 2007 Plan expire or terminate
prior to exercise or otherwise lapse, or if any awards are
settled in cash, the shares subject to such portion of the award
are available for subsequent grants of awards. Further, shares
of stock used to pay the exercise price under any award or used
to satisfy any tax withholding obligation attributable to any
award, whether withheld by CSI or tendered by the participant,
will continue to be reserved and available for awards granted
under the 2007 Plan.
The total number of shares and the exercise price per share of
common stock that may be issued pursuant to outstanding awards
under the 2007 Plan are subject to adjustment by the board of
directors upon the occurrence of stock dividends, stock splits
or other recapitalizations, or because of mergers,
consolidations, reorganizations or similar transactions in which
CSI receive no consideration. CSIs board of directors may
also provide for the protection of plan participants in the
event of a merger, liquidation, reorganization, divestiture
(including a spin-off) or similar transaction.
Administration. The 2007 Plan may be
administered by CSIs board of directors or a committee
appointed by the board. Any committee appointed by the board to
administer the 2007 Plan shall consist of at least two
non-employee
directors (as defined in
Rule 16b-3,
or any successor provision, of the General Rules and Regulations
under the Securities Exchange Act of 1934). The plan
administrator has broad powers to administer and interpret the
2007 Plan, including the authority to (i) establish rules
for the administration of the 2007 Plan, (ii) select the
participants in the 2007 Plan, (iii) determine the types of
awards to be granted and the number of shares covered by such
awards, and (iv) set the terms and conditions of such
awards. All determinations and interpretations of the plan
administrator are binding on all interested parties.
CSIs board of directors may terminate or amend the 2007
Plan, except that the terms of award agreements then outstanding
may not be adversely affected without the consent of the
participant. CSIs board of directors may not amend the
2007 Plan to materially increase the total number of shares of
CSI common stock available for issuance under the 2007 Plan,
materially increase the benefits accruing to any individual,
decrease the price at which options may be granted, or
materially modify the requirements for eligibility to
participate in the 2007 Plan without the approval of CSI
stockholders if such approval is required to comply with the
Code or other applicable laws or regulations.
Stock Options. Options granted under the 2007
Plan may be either incentive stock options within
the meaning of Code Section 422 or nonqualified
stock options that do not qualify for special tax treatment
under Code Section 422. No incentive stock option may be
granted with a per share exercise price less than the fair
market value of a share of the underlying common stock on the
date the incentive stock option is granted. Unless otherwise
determined by the plan administrator, the per share exercise
price for nonqualified stock options granted under the 2007 Plan
also will not be less than the fair market value of a share of
CSI common stock on the date the nonqualified stock option is
granted.
The period during which an option may be exercised and whether
the option will be exercisable immediately, in stages, or
otherwise is set by the administrator. An incentive stock option
generally may not be exercisable more than ten years from the
date of grant.
Participants generally must pay for shares upon exercise of
options with cash, certified check or CSI common stock valued at
the stocks then fair market value. Each incentive option
granted under the 2007 Plan is
104
nontransferable during the lifetime of the participant. A
nonqualified stock option may, if permitted by the plan
administrator, be transferred to certain family members, family
limited partnerships and family trusts.
The plan administrator may, in its discretion, modify or impose
additional restrictions on the term or exercisability of an
option. The plan administrator may also determine the effect
that a participants termination of employment with CSI or
a subsidiary may have on the exercisability of such option. The
grants of stock options under the 2007 Plan are subject to the
plan administrators discretion.
Tax Limitations on Stock
Options. Nonqualified stock options
granted under the 2007 Plan are not intended to and do not
qualify for favorable tax treatment available to
incentive stock options under Code Section 422.
Generally, no income is taxable to the participant (and CSI is
not entitled to any deduction) upon the grant of a nonqualified
stock option. When a nonqualified stock option is exercised, the
participant generally must recognize compensation taxable as
ordinary income equal to the difference between the option price
and the fair market value of the shares on the date of exercise.
CSI normally will receive a deduction equal to the amount of
compensation the participant is required to recognize as
ordinary income and must comply with applicable tax withholding
requirements.
Incentive stock options granted pursuant to
the 2007 Plan are intended to qualify for favorable tax
treatment to the participant under Code Section 422. Under
Code Section 422, a participant realizes no taxable income
when the incentive stock option is granted. If the participant
has been an employee of CSI or any subsidiary at all times from
the date of grant until three months before the date of
exercise, the participant will realize no taxable income when
the option is exercised. If the participant does not dispose of
shares acquired upon exercise for a period of two years from the
granting of the incentive stock option and one year after
receipt of the shares, the participant may sell the shares and
report any gain as capital gain. CSI will not be entitled to a
tax deduction in connection with either the grant or exercise of
an incentive stock option, but may be required to comply with
applicable withholding requirements. If the participant should
dispose of the shares prior to the expiration of the two-year or
one-year periods described above, the participant will be deemed
to have received compensation taxable as ordinary income in the
year of the early sale in an amount equal to the lesser of
(i) the difference between the fair market value of CSI
common stock on the date of exercise and the option price of the
shares, or (ii) the difference between the sale price of
the shares and the option price of shares. In the event of such
an early sale, CSI will be entitled to a tax deduction equal to
the amount recognized by the participant as ordinary income. The
foregoing discussion ignores the impact of the alternative
minimum tax, which may particularly be applicable to the year in
which an incentive stock option is exercised.
Stock Appreciation Rights. A stock
appreciation right may be granted independent of or in tandem
with a previously or contemporaneously granted stock option, as
determined by the plan administrator. Generally, upon the
exercise of a stock appreciation right, the participant will
receive cash, shares of common stock or some combination of cash
and shares having a value equal to the excess of (i) the
fair market value of a specified number of shares of CSI common
stock, over (ii) a specified exercise price. If the stock
appreciation right is granted in tandem with a stock option, the
exercise of the stock appreciation right will generally cancel a
corresponding portion of the option, and, conversely, the
exercise of the stock option will cancel a corresponding portion
of the stock appreciation right. The plan administrator will
determine the term of the stock appreciation right and how it
will become exercisable. A stock appreciation right may not be
transferred by a participant except by will or the laws of
descent and distribution.
Restricted Stock Awards and Restricted Stock Unit
Awards. The plan administrator is also authorized
to grant awards of restricted stock and restricted stock units.
Each restricted stock award granted under the 2007 Plan shall be
for a number of shares as determined by the plan administrator,
and the plan administrator, in its discretion, may also
establish continued employment, achievement of performance
criteria, vesting or other conditions that must be satisfied for
the restrictions on the transferability of the shares and the
risks of forfeiture to lapse. Each restricted stock unit
represents the right to receive cash or shares of CSI common
stock, or any combination thereof, at a future date, subject to
continued employment, achievement of performance criteria,
vesting or other conditions as determined by the plan
administrator.
If a restricted stock award or restricted stock unit award is
intended to qualify as performance-based
compensation under Code Section 162(m), the risks of
forfeiture shall lapse based on the achievement of one or more
performance objectives established in writing by the plan
administrator in accordance with Code
105
Section 162(m) and the applicable regulations. Such
performance objectives shall consist of any one, or a
combination of, (i) revenue, (ii) net income,
(iii) earnings per share, (iv) return on equity,
(v) return on assets, (vi) increase in revenue,
(vii) increase in share price or earnings,
(viii) return on investment, or (ix) increase in
market share, in all cases including, if selected by the plan
administrator, threshold, target and maximum levels.
Performance Share Awards and Performance Units
Awards. The plan administrator is also authorized
to grant performance share and performance unit awards.
Performance share awards generally provide the participant with
the opportunity to receive shares of CSI common stock and
performance units generally provide recipients with the
opportunity to receive cash awards, but only if certain
performance criteria are achieved over specified performance
periods. A performance share award or performance unit award may
not be transferred by a participant except by will or the laws
of descent and distribution.
Vote
Required; Recommendation of Replidyne Board of
Directors
The approval of Replidynes assumption of the 2007 Plan
will require the affirmative vote of the holders of a majority
of the shares of Replidyne common stock casting votes in person
or by proxy at the Replidyne special meeting.
A failure to submit a proxy card on vote at the special meeting,
or an abstention, vote withheld or broker
non-vote
will have no impact on the outcome of Replidyne
Proposal No. 4.
The approval of Replidynes assumption of the 2007 Plan is
conditioned upon the adoption of the merger proposal. Closing of
the merger is not, however, conditioned on the approval of
Replidynes assumption of the 2007 Plan.
REPLIDYNES BOARD OF DIRECTORS RECOMMENDS THAT REPLIDYNE
STOCKHOLDERS VOTE FOR REPLIDYNE
PROPOSAL NO. 4 TO APPROVE THE ASSUMPTION OF THE
CARDIOVASCULAR SYSTEMS, INC. 2007 EQUITY INCENTIVE PLAN.
106
REPLIDYNE
PROPOSAL NO. 5
APPROVAL
OF AMENDMENT TO THE REPLIDYNE 2006 EMPLOYEE STOCK PURCHASE
PLAN
Overview
The Replidyne board of directors has approved a proposal to
amend its 2006 Employee Stock Purchase Plan, or ESPP, to
(i) increase the maximum number of shares of Replidyne
common stock authorized for issuance under the ESPP by an
additional 1,615,000 shares and (ii) amend the
evergreen provisions of the ESPP to provide that on
July 1st of each year, beginning with July 1,
2009, the share reserve under the ESPP automatically will be
increased by a number of shares equal to the lesser of
(A) one percent (1.0%) of the total number of shares of
Replidyne common stock outstanding on such date, or
(B) 1,800,000 shares (subject to adjustment for the
reverse stock split anticipated before the closing of the
merger), unless Replidynes board of directors designates a
smaller number of shares. Replidynes board has recommended
that this proposal be presented to its stockholders for approval.
Currently, a total of 305,872 shares of Replidyne common
stock are authorized for issuance under the ESPP. Of these
shares, 139,584 shares have previously been purchased and
166,288 shares remain available for purchase in the current
and future offering periods. If stockholders approve this
amendment, the maximum number of shares that may be issued under
the ESPP will increase to 1,920,872 shares, subject to
further adjustment for the reverse stock split anticipated
before the closing of the merger.
Reasons
for the Proposed Amendments
The Replidyne board of directors believes that the ESPP will
help the combined company retain and motivate eligible employees
and will help further align the interests of eligible employees
with those of the stockholders. The Replidyne board of directors
approved the proposed amendments to the ESPP to help ensure that
a sufficient reserve of common stock remains available for
issuance under the ESPP to allow the combined company to
continue the plan in the future and to conform the date on which
additional shares will be reserved under the ESPP to the
beginning of the fiscal year of the combined company.
Overview
of Replidyne 2006 Employee Stock Purchase Plan
The principal terms of the ESPP are summarized below. The
following summary is qualified in its entirety by the full text
of the ESPP (as proposed to be amended), which has been filed as
Annex H to this proxy statement/prospectus.
Purpose. The purpose of the ESPP is to provide
a means by which Replidyne employees may be given an opportunity
to purchase stock of Replidyne. The ESPP is intended to provide
a means to retain the services of Replidyne employees, to secure
and retain the services of new employees, and to provide
incentives for such persons to exert maximum efforts for
Replidyne success.
Number of Shares under the ESPP. The ESPP
provides for the issuance of up to 1,920,872 shares of
Replidyne common stock (including the 1,615,000 shares of common
stock reserved subject to approval of the stockholders in this
proposal), subject to further adjustment for the reverse stock
split anticipated before the closing of the merger. As amended,
the number of shares reserved for issuance under the ESPP
automatically will be increased on July 1st of each
year, beginning with July 1, 2009, by a number of shares
equal to the lesser of (i) one percent (1.0%) of the total
number of shares of Replidyne common stock outstanding on such
date, or (ii) 1,800,000 shares (subject to adjustment
for the reverse stock split anticipated before the closing of
the merger), unless Replidynes board of directors
designates a smaller number of shares. Prior to the amendment to
these evergreen provisions, the number of shares
reserved for issuance under the ESPP was to be increased on
April 1st of each year, subject to the approval of
such increase by Replidynes board of directors by no later
than March 31st of each year, by the lesser of
(i) one percent (1.0%) of the total number of shares of
Replidyne common stock outstanding on such date, or
(ii) 101,957 shares, provided that Replidynes
board of directors could designate a smaller number of shares to
be added to the share reserve as of a particular April 1.
107
Administration. The Replidyne board of
directors administers the ESPP unless and until the board
delegates administration to a committee. Whether or not the
board delegates administration, the board has full power to
interpret the ESPP, and its decisions are final and binding upon
all participants.
Term. According to the terms of the ESPP, the
ESPP terminates on May 31, 2016, unless all shares of
common stock available for issuance under the ESPP are
distributed pursuant to the terms of the ESPP before
May 31, 2016, in which case the ESPP will terminate as of
the date of the last purchase made under the ESPP. The board of
directors may also terminate the ESPP at any time.
Eligibility. Any employee of Replidyne or any
of its participating subsidiaries will be eligible to
participate in the ESPP, provided the employee is not
customarily employed for 20 hours or less per week or five
months or less in a calendar year. However, no employee will be
eligible to participate in the ESPP if, immediately after the
grant of an option to purchase stock under the ESPP, that
employee would own 5% or more of either the voting power or the
value of Replidyne stock or of one of its subsidiaries. No
employees rights to purchase common stock pursuant to the
ESPP may accrue at a rate that exceeds $25,000 in market value
of Replidyne common stock per calendar year.
Offering. The Replidyne board of directors may
from time to time grant employees the option to purchase shares
under the ESPP, which is referred to as an offering, on a
certain date or range of dates, which is referred to as the
offering date, or the offering dates. The provisions of separate
offerings need not be identical. No period during which one
single offering is effective may exceed 27 months.
Participation. Under the ESPP, a participant
may authorize payroll deductions pursuant to an offering, which
may not exceed 20% of his or her base wages or salary during the
offering period. The Replidyne board of directors may specify a
maximum number of shares that may be purchased by any employee
in an offering as well as a maximum aggregate number of shares
that may be purchased by all employees in such offering. An
employees right to participate in the ESPP will terminate
when the employees employment with Replidyne terminates.
Each participant will automatically be granted an option to
purchase shares of Replidyne common stock for each offering. The
option generally will expire at the end of the offering or upon
termination of employment, whichever is earlier.
Purchases. Under the ESPP, shares will be
purchased at a price equal to 85% of the lesser of (i) the
fair market value of a share of Replidyne common stock on the
offering date, or (ii) the fair market value of a share of
Replidyne common stock on the purchase date.
On each purchase date for a particular offering, each
participants accumulated payroll deductions and other
additional payments specifically provided for in the offering
(without any increase for interest) will be applied to the
purchase of whole shares of Replidynes common stock, up to
the maximum number of shares permitted pursuant to the terms of
the ESPP and the applicable offering, at the purchase price
specified in the offering, No fractional shares will be issued
upon the exercise of purchase rights under the ESPP.
Adjustments Upon Changes in Stock. If through
merger, consolidation, reorganization, recapitalization, stock
dividend, dividend in property other than cash, stock split,
liquidating dividend, combination of shares, exchange of shares,
change in corporate structure or other transaction not involving
the receipt of consideration by Replidyne, any change is made in
Replidyne common stock, the ESPP and any outstanding ESPP
options to purchase shares of Replidyne common stock will be
appropriately adjusted.
Adjustments Upon Change of Control. Upon a
change of control, the Replidyne board of directors may provide
that the successor corporation will assume or substitute for
outstanding purchase rights. Alternatively, if a successor
corporation does not assume or substitute for outstanding
purchase rights, accumulated contributions shall be used to
purchase Replidyne common stock for the participants immediately
before the change of control and purchase rights under any
ongoing offerings shall terminate immediately after such
purchase.
Participant Elections. During an offering, a
participant may cease making contributions and withdraw from the
offering by delivering to Replidyne a notice of withdrawal in
such form as Replidyne may provide. Such withdrawal may be
elected at any time prior to the end of the offering, except as
otherwise provided in the offering.
108
Upon such withdrawal from the offering, Replidyne shall
distribute to such participant all of his or her contributions
that have not already been used to purchase Replidyne common
stock under the offering.
Amendment and Termination. The Replidyne board
of directors at any time, and from time to time, may amend the
ESPP or the terms of one or more offerings. However, except for
changes as provided for in the above sections entitled
Adjustments Upon Changes in Stock and Adjustments Upon
Change in Control, no amendment shall be effective unless
approved by the Replidyne stockholders within the time and to
the extent such stockholder approval is necessary for the ESPP
to satisfy the requirements of Section 423 of the Internal
Revenue Code of 1986, as amended, or the Code, or other
applicable laws and regulations.
Specific
Benefits
The benefits that will be received by or allocated to eligible
employees under the ESPP cannot be determined at this time
because the amount of contributions set aside to purchase shares
of Replidynes common stock under the ESPP (subject to the
limitations discussed above) is entirely within the discretion
of each participant.
Material
U.S. Federal Income Tax Consequences
If stockholders approve the amendment to the ESPP as described
above, the ESPP, and the right of participants to make purchases
thereunder, should qualify for treatment under the provisions of
Sections 421 and 423 of the Code. Under these provisions,
no income will be taxable to a participant for United States
federal income tax purposes until the shares purchased under the
ESPP are sold or otherwise disposed of.
Upon the sale or other disposition of the shares, the
participant will generally be subject to tax, and the amount of
the tax will depend upon the holding period. If the shares are
sold or otherwise disposed of more than one year after the
purchase date and two years or more from the applicable offering
date, or if the participant dies prior to such sale or other
disposition, then the participant generally will recognize
ordinary income measured as the lesser of: (i) the excess
of the fair market value of the shares at the time of such sale
or disposition over the purchase price, or (ii) an amount
equal to 15% of the fair market value of the shares on the last
trading day of their purchase period.
Any additional gain should be treated as long-term capital gain.
If the sales price is less than the purchase price, then the
participant shall not recognize any ordinary income and such
excess shall be treated as a long-term capital loss.
If the shares are sold or otherwise disposed of before the
expiration of the one-year or two-year holding periods described
above, the participant will recognize ordinary income generally
measured as the excess of the fair market value of the shares on
the date the shares are purchased over the purchase price. Any
additional gain or loss on such sale or disposition will be
long-term or short-term capital gain or loss, depending on the
holding period.
Replidyne is entitled to a deduction only to the extent ordinary
income is recognized by participants upon a sale or disposition
of shares prior to the expiration of the holding periods
described above. In all other cases, no deduction is allowed to
Replidyne.
The foregoing discussion is not intended to cover all tax
consequences of participation in the ESPP. The tax consequences
outlined above apply only with respect to an employee whose
income is subject to United States federal income tax during the
period beginning with the grant of an option and ending with the
disposition of the common stock acquired through the exercise of
the option. Different or additional rules may apply to
individuals who are subject to income tax in a foreign
jurisdiction
and/or are
subject to state/local income tax in the United States.
Vote
Required; Recommendation of Replidyne Board of
Directors
The approval of the proposed amendment to the ESPP will require
the affirmative vote of the holders of a majority of the shares
of Replidyne common stock casting votes in person or by proxy at
the Replidyne special meeting.
109
A failure to submit a proxy card on vote at the special meeting,
or an abstention, vote withheld or broker non-vote
will have no impact on the outcome of Replidyne
Proposal No. 5.
The adoption of Replidyne Proposal No. 5 is
conditioned upon the adoption of the merger proposal. Closing of
the merger is not, however, conditioned on the adoption of the
Replidyne Proposal No. 5.
REPLIDYNES BOARD OF DIRECTORS RECOMMENDS THAT REPLIDYNE
STOCKHOLDERS VOTE FOR REPLIDYNE
PROPOSAL NO. 5 TO AMEND THE 2006 EMPLOYEE STOCK
PURCHASE PLAN TO INCREASE THE MAXIMUM NUMBER OF SHARES OF
REPLIDYNE COMMON STOCK AUTHORIZED FOR ISSUANCE UNDER THE ESPP BY
1,615,000 SHARES TO 1,920,872 SHARES AND AMEND THE
EVERGREEN PROVISIONS THEREOF AS DESCRIBED HEREIN.
110
REPLIDYNE
PROPOSAL NO. 6
APPROVAL
OF POSSIBLE ADJOURNMENT OF THE SPECIAL MEETING
Overview
If Replidyne fails to receive a sufficient number of votes to
approve Replidyne Proposal No. 1, 2, 3, 4 or 5
Replidyne may propose to adjourn the Replidyne special meeting,
if a quorum is present, for a period of not more than
30 days for the purpose of soliciting additional proxies to
approve Replidyne Proposal No. 1, 2, 3, 4 or 5.
Replidyne currently does not intend to propose adjournment at
the special meeting if there are sufficient votes to approve
Replidyne Proposal Nos. 1, 2, 3, 4 and 5.
Vote
Required; Recommendation of Replidyne Board of
Directors
The affirmative vote of the holders of a majority of shares of
Replidyne common stock casting votes in person or by proxy at
the Replidyne special meeting is required to approve the
adjournment of the Replidyne special meeting for the purpose of
soliciting additional proxies to approve Replidyne
Proposal No. 1, 2, 3, 4 or 5.
A failure to submit a proxy card or vote at the special meeting,
or an abstention, vote withheld or broker
non-vote
will have no effect on the outcome of Replidyne
Proposal No. 6.
REPLIDYNES BOARD OF DIRECTORS RECOMMENDS THAT REPLIDYNE
STOCKHOLDERS VOTE FOR PROPOSAL NO. 6 TO
ADJOURN THE SPECIAL MEETING, IF NECESSARY, IF A QUORUM IS
PRESENT, TO SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT
SUFFICIENT VOTES IN FAVOR OF REPLIDYNE PROPOSAL NO. 1,
2, 3, 4 OR 5.
111
THE
SPECIAL MEETING OF CSI STOCKHOLDERS
Date,
Time and Place
The special meeting of CSI stockholders will be held on
February 24, 2009 at Cardiovascular Systems, Inc.,
651 Campus Drive, St. Paul, Minnesota commencing at
9:00 a.m., local time. We are sending this proxy
statement/prospectus to you in connection with the solicitation
of proxies by the CSI board of directors for use at the CSI
special meeting and any adjournments or postponements of the
special meeting. This proxy statement/prospectus is first being
furnished to CSI stockholders on or
about ,
2009.
Purposes
of the CSI Special Meeting
1. To consider and vote upon a proposal to approve and
adopt the Agreement and Plan of Merger and Reorganization, dated
November 3, 2008, by and among Replidyne, Responder Merger
Sub, Inc., and CSI and the merger contemplated therein, as
described in this proxy statement/prospectus.
2. To authorize an increase in the number of shares of CSI
common stock reserved under CSIs 2007 Equity Incentive
Plan from 3,379,397 to 3,879,397.
3. To consider and vote upon an adjournment of the special
meeting, if necessary, if a quorum is present, to solicit
additional proxies if there are not sufficient votes in favor of
CSI Proposal No. 1 or 2.
4. To transact such other business as may properly come
before the special meeting or any adjournment or postponement
thereof.
The board of directors of CSI has fixed January 26, 2009 as
the record date for the determination of stockholders entitled
to notice of, and to vote at, the special meeting and any
adjournment or postponement thereof. Only holders of record of
shares of CSI common stock and preferred stock at the close of
business on the record date are entitled to notice of, and to
vote at, the special meeting. At the close of business on the
record date, CSI
had shares
of common
stock, shares
of Series A convertible preferred
stock, shares
of
Series A-1
convertible preferred stock
and shares
of Series B convertible preferred stock outstanding and
entitled to vote.
Recommendation
of the CSI Board of Directors
THE CSI BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES THAT
THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION AND THE
MERGER CONTEMPLATED THEREIN ARE ADVISABLE TO, AND IN THE BEST
INTERESTS OF, CSI AND ITS STOCKHOLDERS AND HAS APPROVED SUCH
PROPOSAL. THE CSI BOARD OF DIRECTORS RECOMMENDS THAT CSI
STOCKHOLDERS VOTE FOR CSI PROPOSAL NO. 1
TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF MERGER AND
REORGANIZATION AND THE MERGER CONTEMPLATED THEREIN.
THE CSI BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES THAT
THE APPROVAL OF AN INCREASE IN THE RESERVED SHARES UNDER THE
2007 EQUITY INCENTIVE PLAN TO 3,879,397 SHARES IS ADVISABLE
TO, AND IN THE BEST INTERESTS OF, CSI AND ITS STOCKHOLDERS AND
HAS APPROVED SUCH PROPOSAL. THE CSI BOARD OF DIRECTORS
RECOMMENDS THAT CSI STOCKHOLDERS VOTE FOR CSI
PROPOSAL NO. 2 TO APPROVE THE INCREASE IN THE RESERVED
SHARES UNDER THE 2007 EQUITY INCENTIVE PLAN.
THE CSI BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES THAT
ADJOURNING THE SPECIAL MEETING, IF NECESSARY, IF A QUORUM IS
PRESENT, TO SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT
SUFFICIENT VOTES IN FAVOR OF CSI PROPOSAL NO. 1 OR 2 IS
ADVISABLE TO, AND IN THE BEST INTERESTS OF, CSI AND HAS APPROVED
SUCH ADJOURNMENT, IF NECESSARY. CSIS BOARD OF DIRECTORS
RECOMMENDS THAT CSI STOCKHOLDERS VOTE FOR CSI
PROPOSAL NO. 3 TO ADJOURN THE SPECIAL MEETING, IF
NECESSARY, IF A QUORUM IS PRESENT, TO SOLICIT ADDITIONAL PROXIES
IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF CSI
PROPOSAL NO. 1 OR 2.
112
Record
Date and Voting Power
Only holders of record of CSI common stock and preferred stock
at the close of business on the record date, January 26,
2009, are entitled to notice of, and to vote at, the CSI special
meeting. There were
approximately
holders of record of CSI common stock and
approximately holders
of record of CSI preferred stock at the close of business on the
record date. At the close of business on the record
date, shares
of CSI common
stock, shares
of Series A convertible preferred
stock, shares
of
Series A-1
convertible preferred stock
and shares
of Series B convertible preferred stock were issued and
outstanding. Each share of CSI common stock entitles the holder
thereof to one vote on each matter submitted for stockholder
approval. Each holder of the CSI preferred stock is entitled to
such number of votes per share on each Proposal to be voted upon
as shall equal the number of shares of common stock into which
each share of the preferred stock is then convertible, and in
the event each share of the preferred stock is convertible into
a number of shares of common stock including a fraction, each
holder shall be entitled to vote the sum of fractions of a share
to which the holder is entitled, rounded down to the nearest
whole number. As of the record date, each share of Series A
convertible preferred stock was convertible into
1.01 shares of CSI common stock, each share of
Series A-1
convertible preferred stock was convertible into
1.03 shares of CSI common stock, and each share of
Series B convertible preferred stock was convertible into
1.01 shares of CSI common stock. See CSI Security
Ownership by Certain Beneficial Owners and Management for
information regarding persons known to the management of CSI to
be the beneficial owners of more than 5% of the outstanding
shares of CSI common stock.
Voting
and Revocation of Proxies
The proxy accompanying this proxy statement/prospectus is
solicited on behalf of CSIs board of directors for use at
the CSI special meeting.
If you are a stockholder of record of CSI as of the record date
referred to above, you may vote in person at the special meeting
or by using the enclosed proxy card. Whether or not you plan to
attend the special meeting, CSI urges you to vote by proxy to
ensure your vote is counted. You may still attend the special
meeting and vote in person if you have already voted by proxy.
If your shares are registered directly in your name, you may
vote:
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By Mail. Complete, date and sign the enclosed
proxy card and mail it in the enclosed postage-paid envelope to
the attention of Bonnie Eichers of Fredrikson & Byron P.A.,
200 South Sixth Street, Suite 4000, Minneapolis, MN 55402. Your
proxy will be voted according to your instructions. If you do
not specify how you want your shares voted, they will be voted
as recommended by CSIs board of directors.
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By Fax. Complete, date and sign the enclosed
proxy card and fax it to 1-612-492-7077 to the attention of
Bonnie Eichers of Fredrikson & Byron, P.A. Your proxy will
be voted according to your instructions. If you do not specify
how you want your shares voted, they will be voted as
recommended by CSIs board of directors.
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In Person at the Meeting. If you attend the
meeting, you may deliver your completed proxy card in person or
you may vote by completing a ballot, which will be available at
the meeting.
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All properly executed proxies that are not revoked will be voted
at the special meeting and at any adjournments or postponements
of the special meeting in accordance with the instructions
contained in the proxy. If a holder of CSI common stock or
preferred stock executes and returns a proxy and does not
specify otherwise, the shares represented by that proxy will be
voted FOR each CSI Proposal set forth at the special
meeting.
Any CSI stockholder of record voting by proxy, other than those
stockholders who have executed a voting agreement and
irrevocable proxy, has the right to revoke the proxy at any time
before the polls close at the special meeting by sending a
written notice stating that it would like to revoke its proxy to
the Secretary of CSI, by providing a duly executed proxy card
bearing a later date than the proxy being revoked or by
attending the special meeting and voting in person. Attendance
alone at the special meeting will not revoke a proxy.
Quorum
and Required Vote
The presence, in person or by proxy, at the special meeting of
the holders of a majority of the voting power of CSIs
outstanding common stock and preferred stock is necessary to
constitute a quorum at the meeting. If CSI
113
stockholders do not vote by proxy or in person at the special
meeting, the shares of common stock and preferred stock of such
stockholders will not be counted as present for the purpose of
determining a quorum. Abstentions will be counted towards a
quorum.
The affirmative vote of (i) the holders of a majority of
the voting power of CSI common stock and preferred stock
outstanding on the record date, voting as a single class on an
as-converted to common stock basis, and (ii) the holders
of a majority of the shares of CSI preferred stock outstanding
on the record date, voting as a single class on an
as-converted
to common stock basis and including the shares of CSI preferred
stock held by affiliates of Easton Capital Investment Group and
Maverick Capital, Ltd., is required for approval of CSI
Proposal No. 1. The affirmative vote of the holders of
a majority of the voting power of CSI common stock and preferred
stock voting as a single class on an as-converted to common
stock basis casting votes in person or by proxy at the CSI
special meeting is required for approval of CSI
Proposal Nos. 2 and 3.
For CSI Proposal No. 1, a failure to submit a proxy
card or vote at the special meeting, or an abstention, would
have the same effect as voting against such proposal. For CSI
Proposal Nos. 2 and 3, a failure to submit a proxy
card or vote at the special meeting, or an abstention or vote
withheld will have no effect on the outcome of such proposals.
In order to induce Replidyne to enter into the merger agreement,
several CSI stockholders entered into voting agreements and
irrevocable proxies with Replidyne pursuant to which, among
other things, each of these stockholders agreed, solely in his
capacity as a stockholder, to vote shares representing
approximately 20% of the outstanding capital stock of CSI in
favor of the merger and the other actions contemplated by the
merger agreement.
Solicitation
of Proxies
In addition to solicitation by mail, the directors, officers,
employees and agents of CSI may solicit proxies from CSI
stockholders by telephone, other electronic means or in person.
Directors, officers, employees and agents of CSI will not
receive any additional compensation for their services, but CSI
will reimburse them for their
out-of-pocket
expenses. CSI also will make arrangements with banks, brokers,
nominees, custodians and fiduciaries who are record holders of
CSI common stock for the forwarding of solicitation materials to
the beneficial owners of CSI common stock. CSI will reimburse
these banks, brokers, nominees, custodians and fiduciaries for
the reasonable
out-of-pocket
expenses they incur in connection with the forwarding of
solicitation materials and in obtaining voting instructions from
these owners.
Other
Matters
As of the date of this proxy statement/prospectus, the CSI board
of directors does not know of any business to be presented at
the CSI special meeting other than as set forth in the notice
accompanying this proxy statement/prospectus. If any other
matters should come before the special meeting, it is intended
that the shares represented by proxies will be voted with
respect to such matters in accordance with the judgment of the
persons voting the proxies.
114
CSI
PROPOSAL NO. 1
APPROVAL
OF THE MERGER AGREEMENT AND THE MERGER
CSI stockholders should refer to Replidyne
Proposal No. 1 Approval of Issuance
of Shares of Replidyne Common Stock in the Merger for
information relevant to the evaluation of CSI
Proposal No. 1.
Vote
Required; Recommendation of CSI Board of Directors
The affirmative vote of (i) the holders of a majority of
the voting power of CSI common stock and preferred stock
outstanding on the record date, voting as a single class on an
as-converted to common stock basis, and (ii) the holders
of a majority of the shares of CSI preferred stock outstanding
on the record date, voting as a single class on an
as-converted
to common stock basis and including the shares of CSI preferred
stock held by affiliates of Easton Capital Investment Group and
Maverick Capital, Ltd., casting votes in person or by proxy at
the CSI special meeting is required to approve and adopt the
Agreement and Plan of Merger and Reorganization, dated
November 3, 2008, by and among Replidyne, Responder Merger
Sub, Inc. and CSI and the merger contemplated therein.
A failure to submit a proxy card or vote at the special meeting,
or an abstention or vote withheld will have the same effect as
voting against CSI Proposal No. 1.
CSIS BOARD OF DIRECTORS RECOMMENDS THAT CSI
STOCKHOLDERS VOTE FOR CSI PROPOSAL NO. 1
TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF MERGER AND
REORGANIZATION, DATED NOVEMBER 3, 2008, BY AND AMONG
REPLIDYNE, RESPONDER MERGER SUB, INC. AND CSI AND THE MERGER
CONTEMPLATED THEREIN.
115
CSI
PROPOSAL NO. 2
APPROVAL
OF INCREASE IN RESERVED SHARES UNDER THE 2007
EQUITY
INCENTIVE PLAN
Proposed
Amendment
The CSI board of directors has amended CSIs 2007 Equity
Incentive Plan, or the 2007 Plan, subject to stockholder
approval, to increase the shares of CSI common stock reserved
under the 2007 Plan for equity awards from 3,379,397 to
3,879,397.
CSI stockholders should refer to Replidyne Proposal
No. 4 Approval of Assumption of the
Cardiovascular Systems, Inc. 2007 Equity Incentive Plan
for additional information relevant to the evaluation of CSI
Proposal No. 2.
Reasons
for the Amendment
CSI believes the 2007 Plan is an important factor in attracting
and retaining skilled personnel. As of January 26, 2009,
there
were shares
of CSI common stock subject to outstanding options
and shares
of CSI common stock subject to outstanding restricted stock
awards granted pursuant to the 2007 Plan. As of that date,
exclusive of the 500,000 shares to be added pursuant to the
amendment described herein, CSI
had shares
reserved and available under the 2007 Plan for the future
awards. The CSI board of directors believes that granting fairly
priced equity awards to employees, officers, consultants and
directors is an effective means to promote the future growth and
development of the company. Such awards, among other things,
increase these individuals proprietary interest in
CSIs success and enable CSI to attract and retain
qualified personnel. The CSI board of directors also believes
that the 2007 Plan ties the employees goals and interests
to those of the company and its stockholders.
The CSI board of directors believes that it is in the best
interest of CSI and its stockholders to approve the amendment to
the 2007 Plan. Based on an estimated usage rate, CSI currently
anticipates that, without the proposed addition of 500,000
shares to the 2007 Plan, there may not be sufficient shares
available for grants under the 2007 Plan through the end of
fiscal year 2009. In order to continue to have an adequate
number of shares available for awards to recruit, hire, and
retain personnel, the CSI board of directors believes that an
additional 500,000 shares are required, for which stockholder
approval is sought.
Vote
Required; Recommendation of CSI Board of Directors
The affirmative vote of the holders of a majority of the voting
power of CSI common stock and preferred stock, voting as a
single class on an as-converted to common stock basis, casting
votes in person or by proxy at the CSI special meeting is
required to approve the increase in reserved shares under the
2007 Plan.
A failure to submit a proxy card or vote at the special meeting,
or an abstention or vote withheld will have no effect on the
outcome of CSI Proposal No. 2.
CSIS BOARD OF DIRECTORS RECOMMENDS THAT CSI
STOCKHOLDERS VOTE FOR PROPOSAL NO. 2 TO
INCREASE THE NUMBER OF RESERVED SHARES UNDER THE 2007 PLAN BY
500,000 SHARES TO 3,879,397 SHARES.
116
CSI
PROPOSAL NO. 3
APPROVAL
OF POSSIBLE ADJOURNMENT OF THE SPECIAL MEETING
Overview
If CSI fails to receive a sufficient number of votes to approve
CSI Proposal No. 1 or 2, CSI may propose to adjourn
the CSI special meeting, if a quorum is present, for a period of
not more than 30 days for the purpose of soliciting
additional proxies to approve CSI Proposal No. 1 or 2. CSI
currently does not intend to propose adjournment at the special
meeting if there are sufficient votes to approve CSI
Proposal Nos. 1 and 2.
Vote
Required; Recommendation of CSI Board of Directors
The affirmative vote of the holders of a majority of the voting
power of CSI common stock and preferred stock, voting as a
single class on an as-converted to common stock basis, casting
votes in person or by proxy at the CSI special meeting is
required to approve the adjournment of the CSI special meeting
for the purpose of soliciting additional proxies to approve CSI
Proposal No. 1 or 2.
A failure to submit a proxy card or vote at the special meeting,
or an abstention or vote withheld will have no effect on the
outcome of CSI Proposal No. 3.
CSIS BOARD OF DIRECTORS RECOMMENDS THAT CSI
STOCKHOLDERS VOTE FOR PROPOSAL NO. 3 TO
ADJOURN THE SPECIAL MEETING, IF NECESSARY, IF A QUORUM IS
PRESENT, TO SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT
SUFFICIENT VOTES IN FAVOR OF CSI PROPOSAL NO. 1 OR 2.
117
INFORMATION
ABOUT REPLIDYNES BUSINESS
Overview
Replidyne was incorporated in Delaware in December 2000 and
began as a biopharmaceutical company focused on discovering,
developing, in-licensing and commercializing innovative
anti-infective products. In December 2005, Replidyne submitted a
new drug application, or NDA, for its lead product candidate,
faropenem medoxomil, based on 11 Phase III clinical trials
for the following adult indications: acute bacterial sinusitis;
community-acquired pneumonia; acute exacerbation of chronic
bronchitis; and uncomplicated skin and skin structure
infections. In October 2006, the U.S. Food and Drug
Administration, or FDA, issued a non-approvable letter with
respect to Replidynes NDA citing the need for further
clinical trials for all indications, including trials using a
superiority design for acute bacterial sinusitis and acute
exacerbation of chronic bronchitis, more extensive microbiologic
confirmation and consideration of alternate dosing regimens. In
December 2007, Replidyne began to explore potential strategic
alternatives, established processes for identifying and
evaluating those alternatives and, over the following months,
committed to restructuring plans that reduced spending while
maintaining research and clinical development capabilities for
ongoing product candidate and research development. Replidyne
had been developing its product candidate REP3123, an
investigational narrow-spectrum antibacterial agent for the
treatment of Clostridium difficile (C. difficile)
bacteria and C. difficile infection and its other novel
anti-infective programs based on its bacterial DNA replication
inhibition technology. In April 2008, Replidyne suspended
enrollment in the last of its clinical trials on faropenem
medoxomil in order to conserve its cash assets and further
support initiatives related to the pursuit of strategic
transactions. As a result of its inability to secure a partner
for the faropenem medoxomil program, Replidyne announced in June
2008 that it would return the license for faropenem medoxomil to
its licensor, Asubio Pharma Co., Ltd. In August 2008, Replidyne
suspended the development of REP3123 and its other
anti-infective programs based on its bacterial DNA replication
inhibition technology. These and subsequent related actions have
reduced the Replidyne workforce to a level of three employees,
all of whom are involved primarily in financial and
administrative roles, as of December 31, 2008. Replidyne is
pursuing the sale of REP3123 and its related technology and the
sale of the anti-infective programs based on its bacterial DNA
replication inhibition technology in a transaction or
transactions separate from the merger with CSI. Replidyne no
longer has employees engaged in development and
commercialization activities.
Following an extensive process of evaluating strategic
alternatives for Replidyne and identifying and reviewing
potential candidates for a strategic transaction, on
November 3, 2008, Replidyne and CSI entered into a
definitive merger agreement under which Replidyne would acquire
CSI in a stock transaction. If the merger is completed, the
business of the combined company will become the business of CSI
as described on page 120 under the caption
Information About CSIs Business. If the merger
with CSI is not completed, Replidyne will reconsider its
strategic alternatives and could pursue one of the following
courses of action, which Replidyne currently believes to be the
most likely alternatives if the merger with CSI is not completed:
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Pursue another strategic transaction like the
merger. Replidyne may resume its process of
evaluating other companies with which to merge and, if a
candidate is identified, focus its attention on completing such
a transaction.
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Dissolve and liquidate its assets. If
Replidyne does not believe it can find a suitable strategic
alliance, Replidyne may dissolve and liquidate its assets.
Replidyne would be required to pay all of its debts and
contractual obligations and to set aside certain reserves for
potential future claims, and there can be no assurances as to
the amount or timing of available cash remaining to distribute
to stockholders after paying the Replidyne debts and other
obligations and setting aside funds for reserves.
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Sales and
Marketing
Replidyne currently has no marketing, sales or distribution
capabilities and does not have any current plans to develop
these capabilities.
Intellectual
Property
Replidyne acquired worldwide rights to the methionyl tRNA
synthetase inhibitor program from GlaxoSmithKline, or GSK, in
June 2003. Replidynes agreement with GSK included the
assignment of patents and patent applications to Replidyne
relating to small molecule methionyl tRNA synthetase inhibitors
and the
118
targets initially used to identify the inhibitors. Replidyne has
filed additional patent applications directed to small molecule
methionyl tRNA synthetase, uses, production methods and the
like. Replidyne has two issued U.S. patents that cover
REP8839 and additional patent applications directed to REP8839
and combinations of REP8839 and mupirocin. As of
December 31, 2008, Replidyne has 15 issued
U.S. patents, 10 pending U.S. patent applications,
nine issued foreign patent and 18 pending foreign patent
applications related generally to the methionyl tRNA synthetase
programs including the REP8839 program. These patents expire
from 2017 to 2025.
Replidyne filed four pending U.S. patent applications, one
provisional patent application, and four pending PCT patent
applications directed to composition of matter and methods of
use related to its REP3123 program that expire in 2027.
Replidyne filed patent applications directed to compounds that
inhibit DNA replication that have been identified through
Replidynes in-house screening efforts. Replidyne also owns
a portfolio of patents related to the DNA replication targets
and drug screening methods to identify inhibitors of DNA
replication. As of December 31, 2008, Replidyne had one
issued U.S. patent, four pending U.S. patent
applications, three issued foreign patents and 12 pending
foreign patent applications, including three PCT patent
applications related to Replidynes bacterial DNA
replication program. These patents expire from 2021 to 2028.
Competition
Replidyne is not currently developing any product candidates and
is therefore not subject to any competition.
Manufacturing
Replidyne does not own facilities for the manufacture of
materials for clinical or commercial use and is not currently
manufacturing, or having any third parties manufacture, any
materials.
Insurance
Replidyne maintains liability insurance for its completed
clinical trials.
Employees
As of December 31, 2008, Replidyne had three full-time
employees, all of whom are involved primarily in finance and
other administrative functions. Replidyne considers its
relationship with its employees to be good.
Facilities
Replidynes facilities currently consist of approximately
52,000 square feet of laboratory and office facilities
located at its headquarters in Louisville, Colorado, with
average annual lease payments totaling approximately
$1.3 million. The lease expires in September 2011. Subject
to the approval of the landlord under its lease, Replidyne has
entered into subleases with respect to approximately
16,500 square feet of its headquarters location. These
subleases extend through the expiration of Replidynes
lease on the premises.
Legal
Proceedings
Replidyne is not currently a party to any legal proceedings.
119
INFORMATION
ABOUT CSIS BUSINESS
Corporate
Information
CSI was formed in 1989 as Shturman Cardiology Systems, Inc. and
incorporated in Minnesota. From 1989 to 1997, CSI engaged in
research and development on several different product concepts
that were later abandoned. Since 1997, CSI has devoted
substantially all of its resources to the development of the
Diamondback 360°. In 2003, CSI changed its name to
Cardiovascular Systems, Inc.
CSIs principal executive office is located at 651 Campus
Drive, St. Paul, Minnesota 55112. CSIs telephone number is
(651) 259-2800,
and its website is www.csi360.com. The information contained in
or connected to CSIs website is not incorporated by
reference into, and should not be considered part of, this proxy
statement/prospectus.
CSI has applied for federal registration of certain marks,
including Diamondback 360° and
ViperWire. All other trademarks, trade names and
service marks appearing in this proxy statement/prospectus are
the property of their respective owners.
Business
Overview
CSI is a medical device company focused on developing and
commercializing interventional treatment systems for vascular
disease. CSIs initial product, the Diamondback 360°
Orbital Atherectomy System, is a minimally invasive catheter
system for the treatment of peripheral arterial disease, or PAD.
PAD affects approximately eight to 12 million people in the
United States, as cited by the authors of the PARTNERS study
published in the Journal of the American Medical Association in
2001. PAD is caused by the accumulation of plaque in peripheral
arteries, most commonly occurring in the pelvis and legs.
However, as reported in an article published in Podiatry Today
in 2006, only approximately 2.5 million of those eight to
12 million people are treated. PAD is a progressive
disease, and if left untreated can lead to limb amputation or
death. In August 2007, the U.S. Food and Drug
Administration, or FDA, granted CSI 510(k) clearance for use of
the Diamondback 360° as a therapy in patients with PAD. CSI
commenced a limited commercial introduction of the Diamondback
360° in the United States in September 2007. This limited
commercial introduction intentionally limited the size of
CSIs sales force and the number of customers each member
of the sales force served in order to focus on obtaining quality
and timely product feedback on initial product usages. During
the quarter ended March 31, 2008, CSI began its full
commercial launch.
The Diamondback 360°s single-use catheter
incorporates a flexible drive shaft with an offset crown coated
with diamond grit. Physicians position the crown with the aid of
fluoroscopy at the site of an arterial plaque lesion and remove
the plaque by causing the crown to orbit against it, creating a
smooth lumen, or channel, in the vessel. The Diamondback
360° is designed to differentiate between plaque and
compliant arterial tissue, a concept that CSI refers to as
differential sanding. The particles of plaque
resulting from differential sanding are generally smaller than
red blood cells and are carried away by the blood stream. The
small size of the particles avoids the need for plaque
collection reservoirs and the delay involved in removing the
collection reservoir when it fills up during the procedure.
Physicians are able to keep the Diamondback 360° in the
artery until the desired vessels have been treated, potentially
reducing the overall procedure time. As the physician increases
the rotational speed of the drive shaft, the crown not only
rotates faster but also, due to centrifugal force, begins to
orbit with an increasing circumference. The Diamondback
360° can create a lumen that is approximately 100% larger
than the actual diameter of the device, for a device-to-lumen
ratio of 1.0 to 2.0. By giving physicians the ability to create
different lumen diameters with a change in rotational speed, the
Diamondback 360° can reduce the need to use multiple
catheters of different sizes to treat a single lesion.
CSI has conducted three clinical trials involving
207 patients to demonstrate the safety and efficacy of the
Diamondback 360° in treating PAD. In particular, CSIs
pivotal OASIS clinical trial was a prospective 20-center study
that involved 124 patients with 201 lesions and met FDA
targets. CSI was the first, and so far the only, company to
conduct a prospective multi-center clinical trial with a prior
investigational device exemption, or IDE, in support of a 510(k)
clearance for an atherectomy device. CSI believes that the
Diamondback 360° provides a platform that can be leveraged
across multiple market segments. In the future, CSI expects to
launch additional products to treat lesions in larger vessels,
provided that CSI obtains appropriate 510(k) clearance from the
FDA. CSI also plans to seek premarket approval (PMA) from the
FDA to use the Diamondback 360° to treat patients with
coronary artery disease.
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Market
Overview
Peripheral
Artery Disease
PAD is a circulatory problem in which plaque deposits build up
on the walls of arteries, reducing blood flow to the limbs. The
most common early symptoms of PAD are pain, cramping or
tiredness in the leg or hip muscles while walking. Symptoms may
progress to include numbness, tingling or weakness in the leg
and, in severe cases, burning or aching pain in the leg, foot or
toes while resting. As PAD progresses, additional signs and
symptoms occur, including cooling or color changes in the skin
of the legs or feet, and sores on the legs or feet that do not
heal. If untreated, PAD may lead to critical limb ischemia, a
condition in which the amount of oxygenated blood being
delivered to the limb is insufficient to keep the tissue alive.
Critical limb ischemia often leads to large non-healing ulcers,
infections, gangrene and, eventually, limb amputation or death.
PAD affects approximately eight to 12 million people in the
United States, as cited by the authors of the PARTNERS study
published in the Journal of the American Medical Association in
2001. According to 2007 statistics from the American Heart
Association, PAD becomes more common with age and affects
approximately 12% to 20% of the population over 65 years
old. An aging population, coupled with increasing incidence of
diabetes and obesity, is likely to increase the prevalence of
PAD. In many older PAD patients, particularly those with
diabetes, PAD is characterized by hard, calcified plaque
deposits that have not been successfully treated with existing
non-invasive treatment techniques. PAD may involve arteries
either above or below the knee. Arteries above the knee are
generally long, straight and relatively wide, while arteries
below the knee are shorter and branch into arteries that are
progressively smaller in diameter.
Despite the severity of PAD, it remains relatively
underdiagnosed. According to an article published in Podiatry
Today in 2006, only approximately 2.5 million of the eight
to 12 million people in the United States with PAD are
diagnosed. Although CSI believes the rate of diagnosis of PAD is
increasing, underdiagnosis continues due to patients failing to
display symptoms or physicians misinterpreting symptoms as
normal aging. Recent emphasis on PAD education from medical
associations, insurance companies and other groups, coupled with
publications in medical journals, is increasing physician and
patient awareness of PAD risk factors, symptoms and treatment
options. The PARTNERS study advocated increased PAD screening by
primary care physicians.
Physicians treat a significant portion of the 2.5 million
people in the United States who are diagnosed with PAD using
medical management, which includes lifestyle changes, such as
diet and exercise and drug treatment. For instance, within a
reference group of over 1,000 patients from the PARTNERS
study, 54% of the patients with a prior diagnosis of PAD were
receiving antiplatelet medication treatment. While medications,
diet and exercise may improve blood flow, they do not treat the
underlying obstruction and many patients have difficulty
maintaining lifestyle changes. Additionally, many prescribed
medications are contraindicated, or inadvisable, for patients
with heart disease, which often exists in PAD patients. As a
result of these challenges, many medically managed patients
develop more severe symptoms that require procedural
intervention.
Conventional
Interventional Treatments for PAD and Their
Limitations
According to the Millennium Research Group, in 2006 there were
approximately 1.3 million procedural interventions for the
treatment of PAD in the United States, including 227,400
surgical bypass procedures, and 1,080,000 endovascular-based
interventions, such as angioplasty and stenting.
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Surgical Procedures. Bypass surgery and
amputation are the most common surgical interventions that are
used to treat PAD. In bypass surgery, the surgeon reroutes blood
around a lesion using a vessel from another part of the body or
a tube made of synthetic fabric. Bypass surgery has a high risk
of procedure-related complications from blood loss,
post-procedural infection or reaction to general anesthesia. Due
to these complications, patients may have to remain hospitalized
for several days and are exposed to mortality risk. According to
clinical research published by EuroIntervention in 2005, bypass
surgery has a five year survival rate of 60%. Amputation of all
or a portion of a limb may be necessary as critical limb
ischemia progresses to an advanced state, which results in
approximately 160,000 to 180,000 amputations per year in the
United States, according to an article published in Podiatry
Today in July 2007.
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Catheter-Based Interventions. Minimally
invasive catheter-based interventions include angioplasty,
stenting and atherectomy procedures. Angioplasty involves
inserting a catheter with a balloon tip into the site of
arterial blockage and then inflating the balloon to compress
plaque and expand the artery wall. Stenting
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involves implanting and expanding a cylindrical metal tube into
the diseased artery to hold the arterial wall open. Both
angioplasty and stenting can improve blood flow in plaque-lined
arteries by opening lumens and are relatively fast and
inexpensive compared to surgical procedures. However, these
techniques are not as effective in long or calcified lesions or
in lesions located below the knee, nor do they remove any plaque
from the artery. Moreover, most stents are not FDA-approved for
use in arteries in the lower extremities. Additional concerns
include the potential to damage the artery when the balloon is
expanded in angioplasty and the potential for stent fracture
during normal leg movement. Both angioplasty and stenting have
also been associated with high rates of restenosis, or
re-narrowing of the arteries, in the months following the
procedure.
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A third category of catheter-based interventions is atherectomy,
which involves removing plaque from the arterial wall by using
cutting technologies or energy sources, such as lasers, or by
sanding with a diamond grit coated crown. Atherectomy techniques
that preceded the introduction of the Diamondback 360°
include cutting atherectomy, laser atherectomy and rotational
atherectomy. Cutting atherectomy devices are guided into an
artery along a catheter to the target lesion, where the device
is manipulated to remove plaque by cutting the tissue when the
device is advanced. However, there is a risk that when plaque is
cut away from a vessel wall, the removed plaque will flow into
other parts of the body, where it will block the blood flow by
obstructing the lumen, known as embolization. Laser atherectomy
devices remove plaque through vaporization. Rotational
atherectomy devices remove plaque by abrading the lesion with a
spinning, abrasive burr, but lack the Diamondback
360°s ability to create larger lumen diameters by
increasing rotational speed. These earlier catheter-based
treatments also require the extensive use of fluoroscopy, which
is an imaging technique to capture real-time images of an
artery, but results in potentially harmful radiological exposure
for the physician and patient.
The atherectomy technologies that preceded the introduction of
the Diamondback 360° have significant drawbacks, including
one or more of the following:
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potential safety concerns, as these methods of plaque removal do
not always discriminate between compliant arterial tissue and
plaque, thus potentially damaging the arterial wall;
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difficulty treating calcified lesions, diffuse disease and
lesions located below the knee;
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an inability to create lumens larger than the catheter itself in
a single insertion (resulting in device-to-lumen ratios of 1.00
to 1.00 or worse), necessitating the use of multiple catheters,
which increases the time, complexity and expense of the
procedure;
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the creation of rough, uneven lumens with deep grooves, which
may impact blood flow dynamics following the procedure;
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the potential requirement for greater physician skill,
specialized technique or multiple operators to deliver the
catheter and remove plaque;
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the potential requirement for reservoirs or aspiration to
capture and remove plaque, which often necessitates larger
catheters and adds time, complexity and expense to the procedure;
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the potential need for ancillary distal embolization protection
devices to prevent large particles of dislodged plaque from
causing distal embolisms or blockages downstream;
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the potential requirement for large, expensive capital equipment
used in conjunction with the procedure; and
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the potential requirement for extensive use of fluoroscopy and
increased emitted radiation exposure for physicians and patients
during the procedure.
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CSI believes that there is a significant market opportunity for
a technology that opens lumens, similar to the lumen sizes
achieved with angioplasty and stenting, in a simple, fast,
cost-effective procedure that avoids the risks and potential
restenosis associated with those procedures and addresses the
historical limitations of atherectomy technologies.
CSIs
Solution
The Diamondback 360° represents a new approach to the
treatment of PAD that provides physicians and patients with a
procedure that addresses many of the limitations of traditional
treatment alternatives. The Diamondback 360°s
single-use catheter incorporates a flexible drive shaft with an
offset crown coated with
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diamond grit. Physicians position the crown at the site of an
arterial plaque lesion and remove the plaque by causing the
crown to orbit against it, creating a smooth lumen, or channel,
in the vessel. The Diamondback 360° is a rotational
atherectomy catheter designed to differentiate between plaque
and compliant arterial tissue, a concept that CSI refers to as
differential sanding. The particles of plaque
resulting from differential sanding are generally smaller than
red blood cells and are carried away by the blood stream. As the
physician increases the rotational speed of the drive shaft, the
crown not only rotates faster but also, due to centrifugal
force, begins to orbit with an increasing circumference. The
Diamondback 360° can create a lumen that is approximately
100% larger than the actual diameter of the device, for a
device-to-lumen ratio of 1.0 to 2.0. By giving physicians the
ability to create different lumen diameters with a change in
rotational speed, the Diamondback 360° can reduce the need
to use multiple catheters of different sizes to treat a single
lesion, thus reducing hospital inventory costs and procedure
times.
CSI believes that the Diamondback 360° offers the following
key benefits:
Strong
Safety Profile
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Differential Sanding Reduces Risk of Adverse
Events. The Diamondback 360° is designed to
differentiate between plaque and compliant arterial tissue. The
diamond grit coated offset crown engages and removes plaque from
the artery wall with minimal likelihood of penetrating or
damaging the fragile, internal elastic lamina layer of the
arterial wall because compliant tissue flexes away from the
crown. Furthermore, the Diamondback 360° rarely penetrates
even the middle inside layer of the artery and the two elastic
layers that border it. The Diamondback 360°s
perforation rates were 2.4% during CSIs pivotal OASIS
trial. Analysis by an independent pathology laboratory of more
than 436 consecutive cross sections of porcine arteries treated
with the Diamondback 360° revealed there was minimal to no
damage, on average, to the medial layer, which is typically
associated with restenosis. In addition, the safety profile of
the Diamondback 360° was found to be non-inferior to that
of angioplasty, which is often considered the safest of
interventional methods. This was demonstrated in CSIs
OASIS trial, which had a 4.0% rate of device-related serious
adverse events, or SAEs.
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Reduces the Risk of Distal Embolization. The
Diamondback 360° sands plaque away from artery walls in a
manner that produces particles of such a small size
generally smaller than red blood cells that they are
carried away by the blood stream. The small size of the
particles avoids the need for plaque collection reservoirs on
the catheter and reduces the need for ancillary distal
protection devices, commonly used with directional cutting
atherectomy, and also significantly reduces the risk that larger
pieces of removed plaque will block blood flow downstream.
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Allows Continuous Blood Flow During
Procedure. The Diamondback 360° allows for
continuous blood flow during the procedure, except when used in
chronic total occlusions. Other atherectomy devices may restrict
blood flow due to the size of the catheter required or the use
of distal protection devices, which could result in
complications such as excessive heat and tissue damage.
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Proven
Efficacy
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Efficacy Demonstrated in a 124-Patient Clinical
Trial. CSIs pivotal OASIS clinical trial
was a prospective 20-center study that involved
124 patients with 201 lesions and performance targets
established cooperatively with the FDA before the trial began.
Despite 55% of the lesions consisting of calcified plaque and
48% of the lesions having a length greater than three
centimeters, the performance of the device in the OASIS trial
met the FDAs study endpoints.
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Treats Difficult and Calcified Lesions. The
Diamondback 360° enables physicians to remove plaque from
long, calcified or bifurcated lesions in peripheral arteries
both above and below the knee. Existing PAD devices have
demonstrated limited effectiveness in treating calcified lesions.
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Orbital Motion Improves Device-to-Lumen
Ratio. The orbiting action of the Diamondback
360° can create a lumen of approximately 2.0 times the
diameter of the crown. The variable device-to-lumen ratio allows
the continuous removal of plaque as the opening of the lumen
increases during the operation of the device. Other rotational
atherectomy catheters remove plaque by abrading the lesion with
a spinning,
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abrasive burr, which acts in a manner similar to a drill and
only creates a lumen the same size or slightly smaller than the
size of the burr.
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Differential Sanding Creates Smooth
Lumens. The differential sanding of the
Diamondback 360° creates a smooth surface inside the lumen.
This feature reduces the need to introduce a balloon after
treatment to improve the surface of the artery, which is
commonly done after cutting atherectomy. CSI believes that the
smooth lumen created by the Diamondback 360° increases the
velocity of blood flow and decreases the resistance to blood
flow which may decrease potential for restenosis, or renarrowing
of the arteries.
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Ease
of Use
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Utilizes Familiar Techniques. Physicians using
the Diamondback 360° employ techniques similar to those
used in angioplasty, which are familiar to interventional
cardiologists, vascular surgeons and interventional radiologists
who are trained in endovascular techniques. The Diamondback
360°s simple user interface requires minimal
additional training and technique. The systems ability to
differentiate between diseased and compliant tissue reduces the
risk of complications associated with user error and potentially
broadens the user population beyond those currently using
atherectomy devices.
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Single Insertion to Complete Treatment. The
Diamondback 360°s orbital technology and differential
sanding process in most cases allows for a single insertion to
treat lesions. Because the particles of plaque sanded away are
of such small sizes, the Diamondback 360° does not require
a collection reservoir that needs to be repeatedly emptied or
cleaned during the procedure. Rather, the Diamondback 360°
allows for multiple passes of the device over the lesion until
plaque is removed and a smooth lumen is created.
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Limited Use of Fluoroscopy. The relative
simplicity of CSIs process and predictable crown location
allows physicians to significantly reduce fluoroscopy use, thus
limiting radiation exposure.
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Cost
and Time Efficient Procedure
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Single Crown Can Create Various Lumen Sizes Limiting Hospital
Inventory Costs. The Diamondback 360°s
orbital mechanism of action allows a single-sized device to
create various diameter lumens inside the artery. Adjusting the
rotational speed of the crown changes the orbit to create the
desired lumen diameter, thereby potentially avoiding the need to
use multiple catheters of different sizes. The Diamondback
360° can create a lumen that is 100% larger than the actual
diameter of the device, for a device-to-lumen ratio of
approximately 1.0 to 2.0.
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Less Expensive Capital Equipment. The control
unit used in conjunction with the Diamondback 360° has a
current retail list price of $19,995, significantly less than
the cost of capital equipment used with laser atherectomy, which
may cost from $125,000 to more than $150,000.
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Single Insertion Reduces Procedural
Time. Since the physician does not need to insert
and remove multiple catheters or clean a plaque collection
reservoir to complete the procedure, there is a potential for
decreased procedure time.
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CSIs
Strategy
CSIs goal is to be the leading provider of minimally
invasive solutions for the treatment of vascular disease. The
key elements of CSIs strategy include:
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Drive Adoption with Key Opinion Leaders Through Direct Sales
Organization. CSI expects to continue to drive
adoption of the Diamondback 360° through CSIs direct
sales force, which targets interventional cardiologists,
vascular surgeons and interventional radiologists. Initially,
CSI plans to focus primarily on key opinion leaders who are
early adopters of new technology and can assist in peer-to-peer
selling. CSI commenced a limited commercial introduction in
September 2007 and broadened its commercialization efforts to a
full commercial launch in the quarter ended March 31, 2008.
As of December 31, 2008, CSI had a 118 person direct
sales force. As a key element of its strategy, CSI focuses on
educating and training physicians on the Diamondback 360°
through seminars where industry leaders discuss case studies and
treatment techniques using the Diamondback 360°.
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Collect Additional Clinical Evidence on Benefits of the
Diamondback 360°. CSI is focused on using
clinical evidence to demonstrate the advantages of CSIs
system and drive physician acceptance. CSI has
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conducted three clinical trials to demonstrate the safety and
efficacy of the Diamondback 360° in treating PAD, involving
207 patients, including CSIs pivotal OASIS trial. CSI
has requested clinical data from each subsequent use of the
system following these clinical trials. These data are tabulated
and disseminated internally to CSIs sales, marketing and
research and development departments in an effort to better
understand the systems performance, identify any potential
trends in the data, and drive product improvements. The data are
also presented to groups of physicians for their education,
comments and feedback. CSI is considering other clinical studies
to further demonstrate the advantages of the Diamondback
360° but has not yet undertaken any additional studies.
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Expand Product Portfolio within the Market for Treatment of
Peripheral Arteries. CSI is currently developing
a new product generation to further reduce treatment times and
allow treatment of larger vessels.
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Leverage Technology Platform into Coronary
Market. CSI has initiated preclinical studies
investigating the use of the Diamondback 360° in the
treatment of coronary artery disease. CSI believes that the key
product attributes of the Diamondback 360° will also
provide substantial benefits in treating the coronary arteries,
subject to FDA approval.
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Pursue Strategic Acquisitions and
Partnerships. In addition to adding to CSIs
product portfolio through internal development efforts, CSI
intends to explore the acquisition of other product lines,
technologies or companies that may leverage CSIs sales
force or complement its strategic objectives. CSI may also
evaluate distribution agreements, licensing transactions and
other strategic partnerships.
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CSIs
Product
Components
of the Diamondback 360°
The Diamondback 360° consists of a single-use, low-profile
catheter that travels over CSIs proprietary ViperWire
guidewire. The system is used in conjunction with an external
control unit.
Catheter. The catheter consists of:
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a control handle, which allows precise movement of the crown and
predictable crown location;
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a flexible drive shaft with a diamond grit coated offset crown,
which tracks and orbits over the guidewire; and
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a sheath, which covers the drive shaft and permits delivery of
saline or medications to the treatment area.
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The crown is available in multiple sizes, including 1.25, 1.50,
1.75, 2.00 and 2.25 mm diameters. The catheter is available in
two lengths, 95 cm and 135 cm, to address procedural approach
and target lesion location.
ViperWire Guidewire. The ViperWire, which is
located within the catheter, maintains device position in the
vessel and is the rail on which the catheter operates. The
ViperWire is available in three levels of firmness.
Control Unit. The control unit incorporates a
touch-screen interface on an easily maneuverable, lightweight
pole. Using an external air supply, the control unit regulates
air pressure to drive the turbine located in the catheter handle
to speeds ranging up to 200,000 revolutions per minute. Saline,
delivered by a pumping mechanism on the control unit, bathes the
device shaft and crown. The constant flow of saline reduces the
risk of heat generation.
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The following diagram depicts the components of the Diamondback
360°:
Technology
Overview
The two technologies used in the Diamondback 360° are
orbital atherectomy and differential sanding.
Orbital Atherectomy. The system operates on
the principles of centrifugal force. As the speed of the
crowns rotation increases, it creates centrifugal force,
which increases the crowns orbit and presses the diamond
grit coated offset crown against the lesion or plaque, removing
a small amount of plaque with each orbit. The characteristics of
the orbit and the resulting lumen size can be adjusted by
modifying three variables:
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Speed. An increase in speed creates a larger
lumen. CSIs current system allows the user to choose
between three rotational speeds. The fastest speed can result in
a device-to-lumen ratio of 1.0 to 2.0, for a lumen that is
approximately 100% larger than the actual diameter of the device.
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Crown Characteristics. The crown can be
designed with various weights (as determined by different
materials and density) and coated with diamond grit of various
width, height and configurations. CSIs current system
offers the choice between a hollow, lightweight crown and a
solid, heavier crown, which could potentially increase the
device-to-lumen ratio.
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Drive Shaft Characteristics. The drive shaft
can be designed with various shapes and degrees of rigidity. CSI
is developing a drive shaft that CSI calls the
Sidewinder, which is a heat-set, pre-bent shaft.
When the guidewire is inserted into the Sidewinder, the shaft is
straightened, allowing for deliverability to the lesion.
However, the propensity of the Sidewinders pre-bent shaft
to return to its bent shape creates a larger diameter orbit,
which will potentially allow for the creation of a larger lumen.
CSI is also developing a version of CSIs shaft that has a
diamond grit coated tip for ease of penetrating a chronic total
occlusion.
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CSI views the Diamondback 360° as a platform that can be
used to develop additional products by adjusting one or more of
the speed, crown and shaft variables.
Differential Sanding. The Diamondback
360°s design allows the device to differentiate
between compliant and diseased arterial tissue. This property is
common with sanding material such as the diamond grit used in
the Diamondback 360°. The diamond preferentially engages
and sands harder material. The Diamondback 360° also treats
soft plaque, which is less compliant than a normal vessel wall.
Arterial lesions tend to be harder and stiffer than compliant,
undiseased tissue, and they often are calcified, and the
Diamondback 360° sands the lesion but does not damage more
compliant parts of the artery. The mechanism is a function of
the centrifugal force generated by the Diamondback 360° as
it rotates. As the crown moves outward, the centrifugal force is
offset by the counterforce exerted by the arterial wall. If the
tissue is compliant, it flexes away, rather than generating an
opposing force that would allow the Diamondback 360° to
engage and sand the wall. Diseased tissue, particularly heavily
calcified lesions, provides resistance and is able to generate
an opposing force that allows the Diamondback 360° to
engage and sand the plaque. The sanded plaque is broken down
into particles generally smaller than circulating red blood
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cells that are washed away downstream with the patients
natural blood flow. Of 36 consecutive experiments that CSI
performed in carbon blocks, animal and cadaver models:
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93.1% of particles were smaller than a red blood cell, with a
99% confidence interval; and
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99.3% of particles were smaller than the lumen of the
capillaries (which provide the connection between the arterial
and venous system), with a 99% confidence interval.
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The small particle size minimizes the risk of vascular bed
overload, or a saturation of the peripheral vessels with large
particles, which may cause slow or reduced blood flow to the
foot. CSI believes that the small size of the particle also
allows it to be managed by the bodys natural cleansing of
the blood, whereby various types of white blood cells eliminate
worn-out cells and other debris in the bloodstream.
One of CSIs competitors claims that its rotational
atherectomy catheter is also able to differentiate between
compliant and diseased tissue.
Applications
The Diamondback 360° can be delivered to the lesion by a
single physician, and on average required three minutes to treat
a lesion in CSIs OASIS trial.
Below-the-Knee Peripheral Artery
Disease. Arteries below the knee have small
diameters and may be diffusely diseased, calcified or both,
limiting the effectiveness of traditional atherectomy devices.
The Diamondback 360° is effective in both diffuse and
calcified vessels as demonstrated in the OASIS trial, where
94.5% of lesions treated were below the knee.
Above-the-Knee Peripheral Artery
Disease. Plaque in arteries above the knee may
also be diffuse and calcific; however, these arteries are
longer, straighter and wider than below-the-knee vessels. While
effective in difficult-to-treat below-the-knee vessels, and
indicated for vessels up to four millimeters in diameter,
CSIs product is also being used to treat lesions above the
knee, in particular, calcified lesions. CSI intends to seek
expanded labeling from the FDA for treatment of vessels larger
than four millimeters in diameter before the end of 2009. The
Millennium Research Group estimates that there will be
approximately 258,600 procedures to treat above-the-knee PAD in
2008 and that there will be approximately 71,220 procedures to
treat below-the-knee PAD in 2008.
Coronary Artery Disease. Given the many
similarities between peripheral and coronary artery disease, CSI
has developed and is completing pre-clinical testing of a
modified version of the Diamondback 360° to treat coronary
arteries. CSI has conducted numerous bench studies and four
pre-clinical animal studies to evaluate the Diamondback
360° in coronary artery disease. In the bench studies, CSI
evaluated the system for conformity to specifications and
patient safety, and under conditions of expected clinical use no
safety issues were observed. In three of the animal studies, the
system was used to treat a large number of stented and
non-stented arterial lesions. The system was able to safely
debulk lesions without evidence or observations of significant
distal embolization, and the treated vessels in the animal
studies showed only minimal to no damage. The fourth animal
study evaluated the safety of the system for the treatment of
coronary stenosis. There were no device-related adverse events
associated with system treatment during this study, with some
evidence of injury observed in 17% of the tissue sections
analyzed, although 75% of these injuries were minimal or mild. A
coronary application would require CSI to conduct a clinical
trial and receive PMA from the FDA. CSI participated in three
pre-IDE meetings with the FDA and completed the human
feasibility portion of a coronary trial in the summer of 2008 in
India, enrolling 50 patients. The FDA has agreed to accept
the data from the India trial to support an IDE submission
should CSI determine to proceed with an IDE submission based on
the results of this trial.
Clinical
Trials and Studies for CSIs Products
CSI has conducted three clinical trials to demonstrate the
safety and efficacy of the Diamondback 360° in treating
PAD, enrolling a total of 207 patients in CSIs PAD I
and PAD II pilot trials and CSIs pivotal OASIS trial.
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The common metrics used to evaluate the efficacy of atherectomy
devices for PAD include:
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Metric
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Description
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Absolute Plaque Reduction
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Absolute plaque reduction is the difference between the
pre-treatment percent stenosis, or the narrowing of the vessel,
and the post-treatment percent stenosis as measured
angiographically.
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Target Lesion Revascularization
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Target lesion revascularization rate, or TLR rate, is the
percentage of patients at
follow-up
who have another peripheral intervention precipitated by their
worsening symptoms, such as an angioplasty, stenting or surgery
to reopen the treated lesion site.
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Ankle Brachial Index
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The Ankle Brachial Index, or ABI, is a measurement that is
useful to evaluate the adequacy of circulation in the legs and
improvement or worsening of leg circulation over time. The ABI
is a ratio between the blood pressure in a patients ankle
and a patients arm, with a ratio above 0.9 being normal.
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The common metrics used to evaluate the safety of atherectomy
devices for PAD include:
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Metric
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Description
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Serious Adverse Events
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Serious adverse events, or SAEs, include any experience that is
fatal or life-threatening, is permanently disabling, requires or
prolongs hospitalization, or requires intervention to prevent
permanent impairment or damage. SAEs may or may not be related
to the device.
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Perforations
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Perforations occur when the artery is punctured during
atherectomy treatment. Perforations may be nonserious or an SAE
depending on the treatment required to repair the perforation.
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Inclusion criteria for trials often limit size of lesion and
severity of disease, as measured by the Rutherford Class, which
utilizes a scale of I to VI, with I being mild and VI being most
severe, and the Ankle Brachial Index.
PAD I
Feasibility Trial
CSIs first trial was a two-site, 17-patient feasibility
clinical trial in Europe, which CSI refers to as PAD I,
that began in March 2005. Patients enrolled in the trial had
lesions that were less than 10 cm in length in arteries between
1.5 mm and 6.0 mm in diameter, with Rutherford Class scores
of IV or lower. Patients were evaluated at the time of the
procedure and at 30 days following treatment. The purpose
of PAD I was to obtain the first human clinical experience and
evaluate the safety of the Diamondback 360°. This was
determined by estimating the cumulative incidence of patients
experiencing one or more SAEs within 30 days post-treatment.
The results of PAD I were presented at the Transcatheter
Therapeutics conference, or TCT, in 2005 and published in
American Journal of Cardiology. Results confirmed that the
Diamondback 360° and orbital atherectomy were safe and
established that the Diamondback 360° could be used to
treat vessels in the range of 1.5 mm to 4.0 mm, which are found
primarily below the knee. Also, PAD I showed that effective
debulking, or removal of plaque, could be accomplished and the
resulting device-to-lumen ratio was approximately 1.0 to 2.0.
The SAE rate in PAD I was 6% (one of 17 patients).
PAD II
Feasibility Trial
After being granted the CE Mark in May 2005, CSI began a
66-patient European clinical trial at seven sites, which CSI
refers to as PAD II, in August 2005. All patients had stenosis
in vessels below the femoral artery of between 1.5 mm and 4.0 mm
in diameter, with at least 50% blockage. The primary objectives
of this study were to evaluate the acute (30 days or less)
risk of experiencing an SAE post procedure and provide evidence
of device effectiveness. Effectiveness was confirmed
angiographically and based on the percentage of absolute plaque
reduction.
The PAD II results demonstrated safe and effective debulking in
vessels with diameters ranging from 1.5 mm to 4.0 mm with a mean
absolute plaque reduction of 55%. The SAE rate in PAD II was 9%
(six of 66 patients), which did not differ significantly
from existing non-invasive treatment options.
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OASIS
Pivotal Trial
CSI received an IDE to begin CSIs pivotal United States
trial, OASIS, in September 2005. OASIS was a
124-patient,
20-center, prospective trial that began enrollment in January
2006.
Patients included in the trial had:
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an ABI of less than 0.9;
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a Rutherford Class score of V or lower; and
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treated arteries of between 1.5 mm and 4.0 mm or less in
diameter via angiogram measurement, with a well-defined lesion
of at least 50% diameter stenosis and lesions of no greater than
10.0 cm in length.
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The primary efficacy study endpoint was absolute plaque
reduction of the target lesions from baseline to immediately
post procedure. The primary safety endpoint was the cumulative
incidence of SAEs at 30 days.
In the OASIS trial, 94.5% of lesions treated were below the
knee, an area where lesions have traditionally gone untreated
until they require bypass surgery or amputation. Of the lesions
treated in OASIS, 55% were comprised of calcified plaque which
presents a challenge to proper expansion and apposition of
balloons and stents, and 48% were diffuse, or greater then 3 cm
in length, which typically requires multiple balloon expansions
or stent placements. Competing atherectomy devices are often
ineffective with these difficult to treat lesions.
The average time of treatment in the OASIS trial was three
minutes per lesion, which compares favorably to the treatment
time required by other atherectomy devices. CSI believes
physicians using other atherectomy devices require approximately
ten to 20 minutes of treatment time to achieve desired results,
although treatment times may vary depending upon the nature of
the procedure, the condition of the patient and other factors.
The following table is a summary of the OASIS trial results:
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Item
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FDA Target
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OASIS Result
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Absolute Plaque Reduction
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55%
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59.4%
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SAEs at 30 days
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8% mean, with an upper
bound of 16%
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4.0% mean, device-related 9.7% mean, overall
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TLR
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20% or less
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2.4%
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Perforations
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N/A
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1 serious perforation
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ABI at baseline
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N/A
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0.68 ± 0.2*
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ABI at 30 days
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N/A
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0.9 ± 0.18*
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ABI at 6 months
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N/A
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0.83 ± 0.23*
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* |
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Mean ± Standard Deviation |
CSI submitted CSIs OASIS data and received 510(k)
clearance from the FDA for use of the Diamondback 360°,
including the initial version of the control unit, with a hollow
crown as a therapy for patients with PAD in August 2007. The
FDAs labeling requirements reflected the inclusion
criteria for the OASIS trial listed above. CSI received 510(k)
clearances in October 2007 for the updated control unit used
with the Diamondback 360° and in November 2007 for the
Diamondback 360° with a solid crown. In May 2005, CSI
received the CE mark, allowing for the commercial use of the
Diamondback 360° within the European Union; however,
CSIs current plans are to focus sales in the United States.
Sales and
Marketing
CSI markets and sells the Diamondback 360° through a direct
sales force in the United States. As of December 31, 2008,
CSI had a
118-person
direct sales force, including its Vice President of Sales,
19 associate sales managers, 77 district sales managers, 13
regional sales managers, four sales directors, a national
training manager, a director of customer operations, and two
customer service specialists. Upon receiving 510(k) clearance
from the FDA on August 30, 2007, CSI began limited
commercialization of the Diamondback 360° in September
2007. CSI commenced CSIs full commercial launch in the
quarter ended March 31, 2008.
While CSI sells directly to hospitals, CSI has targeted its
initial sales and marketing efforts to thought-leading
interventional cardiologists, vascular surgeons and
interventional radiologists with experience using similar
catheter-based procedures, such as angioplasty and cutting or
laser atherectomy. Physician referral programs
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and peer-to-peer education are other key elements of CSIs
sales strategy. Patient referrals come from general
practitioners, podiatrists, nephrologists and endocrinologists.
CSI targets its marketing efforts to practitioners through
physician education, medical conferences, seminars, peer
reviewed journals and marketing materials. CSIs sales and
marketing program focuses on:
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educating physicians regarding the proper use and application of
the Diamondback 360°;
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developing relationships with key opinion leaders; and
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facilitating regional referral marketing programs.
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CSI is not marketing its products internationally and does not
expect to do so in the near future; however, CSI will continue
to evaluate international opportunities.
Research
and Development
As of December 31, 2008, CSI had 32 employees in its
research and development department, comprised primarily of
scientists, engineers and physicians, all of whom report to its
Executive Vice President. CSIs research and development
efforts are focused in the development of products to penetrate
CSIs three key target markets: below-the-knee,
above-the-knee and coronary vessels. Research and development
expenses for fiscal 2006, fiscal 2007 and fiscal 2008 were
$3.2 million, $8.4 million and $16.1 million,
respectively, and for the three months ended September 30,
2007 and 2008 were $3.3 million and $5.0 million,
respectively.
Manufacturing
CSI uses internally-manufactured and externally-sourced
components to manufacture the Diamondback 360°. Most of the
externally-sourced components are available from multiple
suppliers; however, a few key components, including the diamond
grit coated crown, are single sourced. CSI assembles the shaft,
crown and handle components
on-site, and
test, pack, seal and label the finished assembly before sending
the packaged product to a contract sterilization facility. The
sterilization facility sends samples to an independent
laboratory to test for sterility. Upon return from the
sterilizer, product is held in inventory prior to shipping to
CSIs customers.
The current floor plan at CSIs manufacturing facility
allows for finished goods of approximately 8,000 units of
the Diamondback 360° and for approximately 50 control
units. The manufacturing areas, including the shaft
manufacturing and the controlled-environment assembly areas, are
equipped to accommodate approximately 30,000 units per
shift annually.
CSI is registered with the FDA as a medical device manufacturer.
CSI has opted to maintain quality assurance and quality
management certifications to enable it to market its products in
the member states of the European Union, the European Free Trade
Association and countries that have entered into Mutual
Recognition Agreements with the European Union. CSI is ISO
13485:2003 certified, and its renewal is due by December 2009.
During its time of commercialization, CSI has not had any
instances requiring consideration of a recall.
Third-Party
Reimbursement and Pricing
Third-party payors, including private insurers, and government
insurance programs, such as Medicare and Medicaid, pay for a
significant portion of patient care provided in the United
States. The single largest payor in the United States is the
Medicare program, a federal governmental health insurance
program administered by the Centers for Medicare and Medicaid
Services, or CMS. Medicare covers certain medical care expenses
for eligible elderly and disabled individuals, including a large
percentage of the population with PAD who could be treated with
the Diamondback 360°. In addition, private insurers often
follow the coverage and reimbursement policies of Medicare.
Consequently, Medicares coverage and reimbursement
policies are important to CSIs operations.
CMS has established Medicare reimbursement codes describing
atherectomy products and procedures using atherectomy products,
and many private insurers follow these policies. CSI believes
that physicians and hospitals that treat PAD with the
Diamondback 360° will generally be eligible to receive
reimbursement from Medicare and private insurers for the cost of
the single-use catheter and the physicians services.
The continued availability of insurance coverage and
reimbursement for newly approved medical devices is uncertain.
The commercial success of CSIs products in both domestic
and international markets will be dependent on whether
third-party coverage and reimbursement is available for patients
that use CSIs products and its
130
monitoring services. Medicare, Medicaid, health maintenance
organizations and other third-party payors are increasingly
attempting to contain healthcare costs by limiting both coverage
and the level of reimbursement of new medical devices, and, as a
result, they may not continue to provide adequate payment for
CSIs products. To position CSIs device for
acceptance by third-party payors, CSI may have to agree to a
lower net sales price than it might otherwise charge. The
continuing efforts of governmental and commercial third-party
payors to contain or reduce the costs of healthcare may limit
CSIs revenue.
In some foreign markets, pricing and profitability of medical
devices are subject to government control. In the United States,
CSI expects that there will continue to be federal and state
proposals for similar controls. Also, the trends toward managed
healthcare in the United States and proposed legislation
intended to reduce the cost of government insurance programs
could significantly influence the purchase of healthcare
services and products and may result in lower prices for
CSIs products or the exclusion of its products from
reimbursement programs.
Competition
The medical device industry is highly competitive, subject to
rapid change and significantly affected by new product
introductions and other activities of industry participants. The
Diamondback 360° competes with a variety of other products
or devices for the treatment of vascular disease, including
stents, balloon angioplasty catheters and atherectomy catheters,
as well as products used in vascular surgery. Large competitors
in the stent and balloon angioplasty market segments include
Abbott Laboratories, Boston Scientific, Cook,
Johnson & Johnson and Medtronic. CSI also competes
against manufacturers of atherectomy catheters including, among
others, ev3, Spectranetics, Boston Scientific and Pathway
Medical Technologies, as well as other manufacturers that may
enter the market due to the increasing demand for treatment of
vascular disease. Several other companies provide products used
by surgeons in peripheral bypass procedures. Other competitors
include pharmaceutical companies that manufacture drugs for the
treatment of mild to moderate PAD and companies that provide
products used by surgeons in peripheral bypass procedures. CSI
is not aware of any competing catheter systems either currently
on the market or in development that also use an orbital motion
to create lumens larger than the catheter itself.
Because of the size of the peripheral and coronary market
opportunities, competitors and potential competitors have
historically dedicated significant resources to aggressively
promote their products. CSI believes that the Diamondback
360° competes primarily on the basis of:
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safety and efficacy;
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predictable clinical performance;
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ease of use;
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price;
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physician relationships;
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customer service and support; and
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adequate third-party reimbursement.
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Patents
and Intellectual Property
CSI relies on a combination of patent, copyright and other
intellectual property laws, trade secrets, nondisclosure
agreements and other measures to protect its proprietary rights.
As of December 31, 2008, CSI held 20 issued
U.S. patents and have 24 U.S. patent applications
pending, as well as 33 issued or granted foreign patents and 20
foreign patent applications, each of which corresponds to
aspects of CSIs U.S. patents and applications.
CSIs issued U.S. patents expire between 2010 and
2022, and its most important patent, U.S. Patent
No. 6,494,890, is due to expire in 2017. CSIs issued
patents and patent applications relate primarily to the design
and operation of certain interventional atherectomy devices,
including the Diamondback 360°. These patents and
applications include claims covering key aspects of certain
rotational atherectomy devices including the design, manufacture
and therapeutic use of certain atherectomy abrasive heads, drive
shafts, control systems, handles and couplings. As CSI continues
to research and develop its atherectomy technology, CSI intends
to file additional U.S. and foreign patent applications
related to the design, manufacture and therapeutic uses of
atherectomy devices. In addition, CSI holds two registered
U.S. trademarks and has three U.S. trademark
applications pending.
131
CSI also relies on trade secrets, technical know-how and
continuing innovation to develop and maintain its competitive
position. CSI seeks to protect its proprietary information and
other intellectual property by requiring its employees,
consultants, contractors, outside scientific collaborators and
other advisors to execute non-disclosure and assignment of
invention agreements on commencement of their employment or
engagement. Agreements with CSIs employees also forbid
them from bringing the proprietary rights of third parties to
CSI. CSI also requires confidentiality or material transfer
agreements from third parties that receive CSIs
confidential data or materials.
Government
Regulation of Medical Devices
Governmental authorities in the United States at the federal,
state and local levels and in other countries extensively
regulate, among other things, the research, development,
testing, manufacture, labeling, promotion, advertising,
distribution, marketing and export and import of medical devices
such as the Diamondback 360°.
Failure to obtain approval to market CSIs products under
development and to meet the ongoing requirements of these
regulatory authorities could prevent CSI from marketing and
continuing to market its products.
United
States
The Federal Food, Drug, and Cosmetic Act, or FDCA, and the
FDAs implementing regulations govern medical device design
and development, preclinical and clinical testing, premarket
clearance or approval, registration and listing, manufacturing,
labeling, storage, advertising and promotion, sales and
distribution, export and import, and post-market surveillance.
Medical devices and their manufacturers are also subject to
inspection by the FDA. The FDCA, supplemented by other federal
and state laws, also provides civil and criminal penalties for
violations of its provisions. CSI manufactures and markets
medical devices that are regulated by the FDA, comparable state
agencies and regulatory bodies in other countries.
Unless an exemption applies, each medical device CSI wishes to
commercially distribute in the United States will require
marketing authorization from the FDA prior to distribution. The
two primary types of FDA marketing authorization are premarket
notification (also called 510(k) clearance) and premarket
approval (also called PMA approval). The type of marketing
authorization applicable to a device 510(k)
clearance or PMA approval is generally linked to
classification of the device. The FDA classifies medical devices
into one of three classes (Class I, II or
III) based on the degree of risk FDA determines to be
associated with a device and the extent of control deemed
necessary to ensure the devices safety and effectiveness.
Devices requiring fewer controls because they are deemed to pose
lower risk are placed in Class I or II. Class I
devices are deemed to pose the least risk and are subject only
to general controls applicable to all devices, such as
requirements for device labeling, premarket notification, and
adherence to the FDAs current good manufacturing practice
requirements, as reflected in its Quality System Regulation, or
QSR. Class II devices are intermediate risk devices that
are subject to general controls and may also be subject to
special controls such as performance standards, product-specific
guidance documents, special labeling requirements, patient
registries or postmarket surveillance. Class III devices
are those for which insufficient information exists to assure
safety and effectiveness solely through general or special
controls, and include life-sustaining, life-supporting or
implantable devices, and devices not substantially
equivalent to a device that is already legally marketed.
Most Class I devices and some Class II devices are
exempted by regulation from the 510(k) clearance requirement and
can be marketed without prior authorization from FDA.
Class I and Class II devices that have not been so
exempted are eligible for marketing through the 510(k) clearance
pathway. By contrast, devices placed in Class III generally
require PMA approval prior to commercial marketing. The PMA
approval process is generally more stringent, time-consuming and
expensive than the 510(k) clearance process.
510(k) Clearance. To obtain 510(k) clearance
for a medical device, an applicant must submit a premarket
notification to the FDA demonstrating that the device is
substantially equivalent to a predicate device
legally marketed in the United States. A device is substantially
equivalent if, with respect to the predicate device, it has the
same intended use and has either (i) the same technological
characteristics or (ii) different technological
characteristics and the information submitted demonstrates that
the device is as safe and effective as a legally marketed device
and does not raise different questions of safety or
effectiveness. A showing of substantial equivalence sometimes,
but not always, requires clinical data. Generally, the 510(k)
clearance process can exceed 90 days and may extend to a
year or more.
132
After a device has received 510(k) clearance for a specific
intended use, any modification that could significantly affect
its safety or effectiveness, such as a significant change in the
design, materials, method of manufacture or intended use, will
require a new 510(k) clearance or PMA approval (if the device as
modified is not substantially equivalent to a legally marketed
predicate device). The determination as to whether new
authorization is needed is initially left to the manufacturer;
however, the FDA may review this determination to evaluate the
regulatory status of the modified product at any time and may
require the manufacturer to cease marketing and recall the
modified device until 510(k) clearance or PMA approval is
obtained. The manufacturer may also be subject to significant
regulatory fines or penalties.
CSI received 510(k) clearance for use of the Diamondback
360° as a therapy in patients with PAD in the United States
on August 22, 2007. CSI received additional 510(k)
clearances for the control unit used with the Diamondback
360° on October 25, 2007 and for the solid crown
version of the Diamondback 360° on November 9, 2007.
Premarket Approval. A PMA application requires
the payment of significant user fees and must be supported by
valid scientific evidence, which typically requires extensive
data, including technical, preclinical, clinical and
manufacturing data, to demonstrate to the FDAs
satisfaction the safety and efficacy of the device. A PMA
application must also include a complete description of the
device and its components, a detailed description of the
methods, facilities and controls used to manufacture the device,
and proposed labeling. After a PMA application is submitted and
found to be sufficiently complete, the FDA begins an in-depth
review of the submitted information. During this review period,
the FDA may request additional information or clarification of
information already provided. Also during the review period, an
advisory panel of experts from outside the FDA may be convened
to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the
device. In addition, the FDA will conduct a pre-approval
inspection of the manufacturing facility to ensure compliance
with the FDAs Quality System Regulations, or QSR, which
requires manufacturers to follow design, testing, control,
documentation and other quality assurance procedures.
FDA review of a PMA application is required by statute to take
no longer than 180 days, although the process typically
takes significantly longer, and may require several years to
complete. The FDA can delay, limit or deny approval of a PMA
application for many reasons, including:
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the systems may not be safe or effective to the FDAs
satisfaction;
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the data from preclinical studies and clinical trials may be
insufficient to support approval;
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the manufacturing process or facilities used may not meet
applicable requirements; and
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changes in FDA approval policies or adoption of new regulations
may require additional data.
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If the FDA evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will either
issue an approval letter or an approvable letter, which usually
contains a number of conditions that must be met in order to
secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency
will issue a PMA approval letter authorizing commercial
marketing of the device for certain indications. If the
FDAs evaluation of the PMA or manufacturing facilities is
not favorable, the FDA will deny approval of the PMA or issue a
not approvable letter. The FDA may also determine that
additional clinical trials are necessary, in which case the PMA
approval may be delayed for several months or years while the
trials are conducted and then the data submitted in an amendment
to the PMA. Even if a PMA application is approved, the FDA may
approve the device with an indication that is narrower or more
limited than originally sought. The agency can also impose
restrictions on the sale, distribution or use of the device as a
condition of approval, or impose post approval requirements such
as continuing evaluation and periodic reporting on the safety,
efficacy and reliability of the device for its intended use.
New PMA applications or PMA supplements may be required for
modifications to the manufacturing process, labeling, device
specifications, materials or design of a device that is approved
through the PMA process. PMA approval supplements often require
submission of the same type of information as an initial PMA
application, except that the supplement is limited to
information needed to support any changes from the device
covered by the original PMA application and may not require as
extensive clinical data or the convening of an advisory panel.
CSI plans to seek PMA to use the Diamondback 360° as a
therapy in treating patients with coronary artery disease.
133
Clinical Trials. Clinical trials are almost
always required to support a PMA application and are sometimes
required for a 510(k) clearance. These trials generally require
submission of an application for an IDE to the FDA. The IDE
application must be supported by appropriate data, such as
animal and laboratory testing results, showing that it is safe
to test the device in humans and that the testing protocol is
scientifically sound. The IDE application must be approved in
advance by the FDA for a specified number of patients, unless
the product is deemed a non- significant risk device and
eligible for more abbreviated IDE requirements. Generally,
clinical trials for a significant risk device may begin once the
IDE application is approved by the FDA and the study protocol
and informed consent are approved by appropriate institutional
review boards at the clinical trial sites.
FDA approval of an IDE allows clinical testing to go forward but
does not bind the FDA to accept the results of the trial as
sufficient to prove the products safety and efficacy, even
if the trial meets its intended success criteria. With certain
exceptions, changes made to an investigational plan after an IDE
is approved must be submitted in an IDE supplement and approved
by FDA (and by governing institutional review boards when
appropriate) prior to implementation.
All clinical trials must be conducted in accordance with
regulations and requirements collectively known as good clinical
practice. Good clinical practices include the FDAs IDE
regulations, which describe the conduct of clinical trials with
medical devices, including the recordkeeping, reporting and
monitoring responsibilities of sponsors and investigators, and
labeling of investigation devices. They also prohibit promotion,
test marketing or commercialization of an investigational device
and any representation that such a device is safe or effective
for the purposes being investigated. Good clinical practices
also include the FDAs regulations for institutional review
board approval and for protection of human subjects (such as
informed consent), as well as disclosure of financial interests
by clinical investigators.
Required records and reports are subject to inspection by the
FDA. The results of clinical testing may be unfavorable or, even
if the intended safety and efficacy success criteria are
achieved, may not be considered sufficient for the FDA to grant
approval or clearance of a product. The commencement or
completion of any clinical trials may be delayed or halted, or
be inadequate to support approval of a PMA application or
clearance of a premarket notification for numerous reasons,
including, but not limited to, the following:
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the FDA or other regulatory authorities do not approve a
clinical trial protocol or a clinical trial (or a change to a
previously approved protocol or trial that requires approval),
or place a clinical trial on hold;
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patients do not enroll in clinical trials or follow up at the
rate expected;
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patients do not comply with trial protocols or experience
greater than expected adverse side effects;
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institutional review boards and third-party clinical
investigators may delay or reject the trial protocol or changes
to the trial protocol;
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third-party clinical investigators decline to participate in a
trial or do not perform a trial on the anticipated schedule or
consistent with the clinical trial protocol, investigator
agreements, good clinical practices or other FDA requirements;
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third-party organizations do not perform data collection and
analysis in a timely or accurate manner;
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regulatory inspections of the clinical trials or manufacturing
facilities, which may, among other things, require corrective
action or suspension or termination of the clinical trials;
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changes in governmental regulations or administrative actions;
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the interim or final results of the clinical trial are
inconclusive or unfavorable as to safety or efficacy; and
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the FDA concludes that the trial design is inadequate to
demonstrate safety and efficacy.
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Continuing Regulation. After a device is
approved and placed in commercial distribution, numerous
regulatory requirements continue to apply. These include:
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establishment registration and device listing upon the
commencement of manufacturing;
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the QSR, which requires manufacturers, including third-party
manufacturers, to follow design, testing, control, documentation
and other quality assurance procedure during medical device
design and manufacturing processes;
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labeling regulations, which prohibit the promotion of products
for unapproved or off-label uses and impose other
restrictions on labeling and promotional activities;
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medical device reporting regulations, which require that
manufacturers report to the FDA if a device may have caused or
contributed to a death or serious injury or malfunctioned in a
way that would likely cause or contribute to a death or serious
injury if malfunctions were to recur;
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corrections and removal reporting regulations, which require
that manufacturers report to the FDA field corrections; and
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product recalls or removals if undertaken to reduce a risk to
health posed by the device or to remedy a violation of the FDCA
caused by the device that may present a risk to health.
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In addition, the FDA may require a company to conduct postmarket
surveillance studies or order it to establish and maintain a
system for tracking its products through the chain of
distribution to the patient level.
Failure to comply with applicable regulatory requirements,
including those applicable to the conduct of clinical trials,
can result in enforcement action by the FDA, which may lead to
any of the following sanctions:
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warning letters or untitled letters;
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fines, injunctions and civil penalties;
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product recall or seizure;
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unanticipated expenditures;
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delays in clearing or approving or refusal to clear or approve
products;
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withdrawal or suspension of FDA approval;
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orders for physician notification or device repair, replacement
or refund;
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operating restrictions, partial suspension or total shutdown of
production or clinical trials; and
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criminal prosecution.
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CSI and its contract manufacturers, specification developers and
suppliers are also required to manufacture CSIs products
in compliance with current Good Manufacturing Practice, or GMP,
requirements set forth in the QSR.
The QSR requires a quality system for the design, manufacture,
packaging, labeling, storage, installation and servicing of
marketed devices, and includes extensive requirements with
respect to quality management and organization, device design,
buildings, equipment, purchase and handling of components,
production and process controls, packaging and labeling
controls, device evaluation, distribution, installation,
complaint handling, servicing and record keeping. The FDA
enforces the QSR through periodic announced and unannounced
inspections that may include the manufacturing facilities of
subcontractors. If the FDA believes that CSI or any of its
contract manufacturers or regulated suppliers is not in
compliance with these requirements, it can shut down CSIs
manufacturing operations, require recall of CSIs products,
refuse to clear or approve new marketing applications, institute
legal proceedings to detain or seize products, enjoin future
violations or assess civil and criminal penalties against CSI or
its officers or other employees. Any such action by the FDA
would have a material adverse effect on CSIs business.
Fraud
and Abuse
CSIs operations will be directly, or indirectly through
its customers, subject to various state and federal fraud and
abuse laws, including, without limitation, the FDCA, federal
Anti-Kickback Statute and False Claims Act. These laws may
impact, among other things, CSIs proposed sales, marketing
and education programs. In addition, these laws require CSI to
screen individuals and other companies, suppliers and vendors in
order to ensure that they are not debarred by the
federal government and therefore prohibited from doing business
in the healthcare industry.
The federal Anti-Kickback Statute prohibits persons from
knowingly and willfully soliciting, offering, receiving or
providing remuneration, directly or indirectly, in exchange for
or to induce either the referral of an individual, or the
furnishing or arranging for a good or service, for which payment
may be made under a federal
135
healthcare program such as the Medicare and Medicaid programs.
Several courts have interpreted the statutes intent
requirement to mean that if any one purpose of an arrangement
involving remuneration is to induce referrals of federal
healthcare covered business, the statute has been violated. The
Anti-Kickback Statute is broad and prohibits many arrangements
and practices that are lawful in businesses outside of the
healthcare industry. Many states have also adopted laws similar
to the federal Anti-Kickback Statute, some of which apply to the
referral of patients for healthcare items or services reimbursed
by any source, not only the Medicare and Medicaid programs.
The federal False Claims Act prohibits persons from knowingly
filing or causing to be filed a false claim to, or the knowing
use of false statements to obtain payment from, the federal
government. Various states have also enacted laws modeled after
the federal False Claims Act.
In addition to the laws described above, the Health Insurance
Portability and Accountability Act of 1996 created two new
federal crimes: healthcare fraud and false statements relating
to healthcare matters. The healthcare fraud statute prohibits
knowingly and willfully executing a scheme to defraud any
healthcare benefit program, including private payors. The false
statements statute prohibits knowingly and willfully falsifying,
concealing or covering up a material fact or making any
materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare
benefits, items or services.
Voluntary industry codes, federal guidance documents and a
variety of state laws address the tracking and reporting of
marketing practices relative to gifts given and other
expenditures made to doctors and other healthcare professionals.
In addition to impacting CSIs marketing and educational
programs, internal business processes will be affected by the
numerous legal requirements and regulatory guidance at the
state, federal and industry levels.
International
Regulation
International sales of medical devices are subject to foreign
government regulations, which may vary substantially from
country to country. The time required to obtain approval in a
foreign country may be longer or shorter than that required for
FDA approval and the requirements may differ. For example, the
primary regulatory environment in Europe with respect to medical
devices is that of the European Union, which includes most of
the major countries in Europe. Other countries, such as
Switzerland, have voluntarily adopted laws and regulations that
mirror those of the European Union with respect to medical
devices. The European Union has adopted numerous directives and
standards regulating the design, manufacture, clinical trials,
labeling and adverse event reporting for medical devices.
Devices that comply with the requirements of a relevant
directive will be entitled to bear the CE conformity marking,
indicating that the device conforms to the essential
requirements of the applicable directives and, accordingly, can
be commercially distributed throughout European Union, although
actual implementation of the these directives may vary on a
country-by-country
basis. The method of assessing conformity varies depending on
the class of the product, but normally involves a combination of
submission of a design dossier, self-assessment by the
manufacturer, a
third-party
assessment and, review of the design dossier by a Notified
Body. This
third-party
assessment generally consists of an audit of the
manufacturers quality system and manufacturing site, as
well as review of the technical documentation used to support
application of the CE mark to ones product and possibly
specific testing of the manufacturers product. An
assessment by a Notified Body of one country within the European
Union is required in order for a manufacturer to commercially
distribute the product throughout the European Union. CSI
obtained CE marking approval for sale of the Diamondback
360° in May 2005.
Employees
As of December 31, 2008, CSI had 231 employees,
including 47 employees in manufacturing, 118 employees
in sales, 11 employees in marketing, four employees in
clinicals, 19 employees in general and administrative, and
32 employees in research and development. None of
CSIs employees are represented by a labor union or parties
to a collective bargaining agreement, and CSI believes that its
employee relations are good.
Properties
CSIs principal executive offices are located in a
47,000 square foot facility located in St. Paul, Minnesota.
CSI has leased this facility through November 2012 with an
option to renew through November 2017. This facility
accommodates CSIs research and development, sales,
marketing, manufacturing, finance and administrative activities.
CSI believes that its current premises are substantially
adequate for CSIs current and anticipated future
136
needs through the next 12 months and that sufficient
facilities are available for any limited expansion CSI would
need to make in that time.
Legal
Proceedings
Shturman
Legal Proceedings
CSI has recently resolved a legal proceeding relating to a
dispute against Dr. Leonid Shturman, CSIs founder,
and Shturman Medical Systems, Inc., or SMS, a company owned by
Dr. Shturman, but Dr. Shturmans counterclaims
against CSI remain outstanding. The proceedings related to a
Stock Purchase Agreement dated June 30, 1998 between CSI
and SMS, and Dr. Shturmans employment agreement with
CSI, dated January 7, 2000. Pursuant to the Stock Purchase
Agreement, SMS purchased all the stock of CSIs former
Russian subsidiary, ZAO Shturman Cardiology Systems, Russia. In
exchange, SMS agreed to transfer to CSI all present and future
intellectual property and know-how associated with atherectomy
products and associated accessory products that were developed
by SMS and the Russian subsidiary. Pursuant to the employment
agreement, Dr. Shturman was required to assign to CSI
certain inventions made by him. In or around November 2006, CSI
discovered that Dr. Shturman had sought patent protection
in the United Kingdom and with the World Intellectual Property
Organization as the sole inventor for technology relating to the
use of counterbalance weights with rotational atherectomy
devices, or the counterbalance technology, which CSI maintained
should have been assigned to it under the Stock Purchase
Agreement and the employment agreement.
CSI commenced an arbitration proceeding against SMS on
August 16, 2007. Following a trial, on May 5, 2008, an
arbitrator ruled that the counterbalance technology was
developed pursuant to agreements between the parties and ordered
SMS to transfer to CSI its interest in the counterbalance
technology.
Also on August 16, 2007, CSI commenced a federal lawsuit in
the U.S. District Court in Minnesota against
Dr. Shturman for breach of his employment agreement. CSI
alleged that the counterbalance technology was disclosed or
documented during the term of Dr. Shturmans
employment agreement and sought a judgment for breach of the
employment agreement and a declaratory judgment that
Dr. Shturman must assign his interest in the counterbalance
technology to CSI. Dr. Shturman filed counterclaims against
CSI and other co-defendants asserting conversion, theft and
unjust enrichment for the alleged illegal removal and transport
to the United States of two drive shaft winding devices
purportedly developed by Shturman Cardiology Systems, Russia, as
well as raising certain affirmative defenses.
On September 4 and 5, 2008, CSI settled all of its claims in the
federal lawsuit against Dr. Shturman. As part of the
settlement, Dr. Shturman agreed that he is not the author
or owner of the counterbalance technology. However,
Dr. Shturman has the right to argue that the counterbalance
technology is separate and distinct from the inventions or
know-how contained in any current or future patent applications
made by him, and CSI has the right to argue that such patent
applications do incorporate the counterbalance technology. In
settlement of Dr. Shturmans counterclaim against CSI,
CSI agreed to pay Dr. Shturman $50,000 in cash and refer to
Dr. Shturman names of parties that may be interested in
purchasing up to 22,000 shares of CSI common stock held by
him at a fixed price. Due to market and other conditions, CSI
was unable to refer any names to Dr. Shturman. Accordingly,
a subsequent settlement agreement was reached between the
parties whereby Dr. Shturman agreed to dismiss the
counterclaim in exchange for CSI paying Dr. Shturman
$50,000 and assisting Dr. Shturman with selling
22,000 shares of CSI common stock at a revised fixed price
on or before November 14, 2008 and all parties providing
mutual releases. All parties executed the settlement agreement
and mutual releases; however, after CSI paid Dr. Shturman
$50,000 in cash and assisted Dr. Shturman with selling
22,000 shares of CSI common stock at the revised fixed
price, Dr. Shturman expressed his desire to keep the funds
and void the releases. Dr. Shturman sent a letter to the
court on January 14, 2009 requesting that the releases be
voided. On January 22, 2009, the court denied
Dr. Shturmans request to void the releases.
ev3
Legal Proceedings
On December 28, 2007, ev3 Inc., ev3 Endovascular, Inc. and
FoxHollow Technologies, Inc., together referred to as the
Plaintiffs, filed a complaint in the Ramsey County District
Court for the State of Minnesota against CSI and Sean Collins
and Aaron Lew, who are former employees of FoxHollow currently
employed by CSI, as well as against unknown former employees of
Plaintiffs currently employed by CSI, referred to in the
complaint as John Does 1-10. The complaint asserted that
Messrs. Lew and Collins and John Does 1-10 violated
provisions of their
137
employment agreements with FoxHollow relating to FoxHollow
confidential information. The complaint also asserted that
defendants Lew and John Does 1-10 violated provisions of their
employment agreements with FoxHollow barring them from
soliciting FoxHollow employees for a period of one year
following their departures from FoxHollow. The complaint also
alleged that Collins and Lew violated a common law duty of
loyalty to FoxHollow. The complaint further alleged that CSI,
Collins, Lew and John Does 1-10 misappropriated trade secrets of
the Plaintiffs, unfairly competed with the Plaintiffs, and
conspired to improperly solicit employees of FoxHollow or ev3
and to misappropriate trade secrets or confidential information
of FoxHollow or ev3. Finally, the complaint asserted that CSI
tortiously interfered with the alleged agreements between
FoxHollow and Collins, Lew and John Does 1-10.
The complaint stated that Plaintiffs were seeking an injunction
preventing Messrs. Collins and Lew and John Does 1-10
from violating the terms of their agreements with FoxHollow;
preventing all defendants from maintaining, using, or disclosing
any information belonging to Plaintiffs and requiring them to
return any such information to Plaintiffs; preventing CSI from
employing Messrs. Collins and Lew and John Does 1-10 for a
period of one year; preventing all defendants from contacting
certain of Plaintiffs customers (referred to as Key
Opinion Leaders and Thought Leaders) for one
year; and, preventing CSI and its employees from soliciting or
hiring any of Plaintiffs current employees for a period of
one year. The complaint also stated that Plaintiffs were seeking
recovery of monetary damages in an amount greater than $50,000
and payment of their attorneys fees and costs.
On December 28, 2007, the Plaintiffs filed with the court a
motion for a temporary restraining order, which the court
granted in part and denied in part in an order dated
January 10, 2008. The court denied the request for an
injunction requiring CSI to terminate the employment of
Messrs. Collins and Lew and of approximately nine former
employees of one or more of the Plaintiffs who began employment
with CSI in early 2008. The court also denied the request for an
injunction barring CSI from contacting physicians who may also
be FoxHollow Key Opinion Leaders or Thought Leaders. In the same
order, the court enjoined former employees of ev3 or FoxHollow
who are now employed with CSI from disclosing trade secrets of
ev3 or FoxHollow. The court also directed that any of CSIs
employees who were both formerly employed with any of the
Plaintiffs and who signed a FoxHollow employment agreement must
not disclose the identity of FoxHollow Key Opinion Leaders or
Thought Leaders or use this information to aid CSI. The court
further ordered that any of these persons must not maintain, use
or disclose any confidential information about the FoxHollow Key
Opinion Leaders or Thought Leaders that was received while they
were employed with FoxHollow. It also directed that if any
former employees of the Plaintiffs had already disclosed or used
the identity of FoxHollow Key Opinion Leaders or Thought
Leaders, they were required to advise the persons to whom they
made the disclosure in writing that this information is
confidential and may not be used by them or disclosed to anyone.
The court also ordered that if any employee of CSI who was
formerly employed by FoxHollow or ev3 contacts any physician who
is a FoxHollow Key Opinion Leader or Thought Leader, he must be
able to trace, document and account, with specificity, how he or
she was able to identify such prospect through information,
records or documents obtained outside his or her employment with
Plaintiffs. The court further directed that any of CSIs
employees who were formerly employed by FoxHollow or ev3 and who
are subject to a FoxHollow employee nonsolicitation agreement
must not be involved in soliciting or recruiting any current
employee of the Plaintiffs to leave that employment or to accept
employment with CSI. In the memorandum accompanying the
January 10, 2008 order, the court noted that
Mr. Collins admitted he took certain FoxHollow sales
information just prior to the conclusion of his employment with
FoxHollow, and noted that Mr. Collins had indicated a
willingness to return that information to FoxHollow.
Mr. Collins has returned the information.
CSI believes the January 10, 2008 court order and the
continuing confidentiality obligations of CSIs officers
and employees who were subject to employment agreements with
FoxHollow will have no material impact on CSIs sales
efforts and the efforts of CSIs management. In accordance
with the courts order, CSI has undertaken an effort to
document and account, with specificity, how CSIs employees
identified CSIs existing physician customers through
information, records or documents that did not originate with
FoxHollow, and CSI has implemented procedures to document how
CSI identifies new physician customers. CSI believes all of its
existing physician customers were identified through appropriate
sources, such as publicly-available information, employees
preexisting physician relationships and referrals from existing
physician customers. In addition, CSI does not believe the court
order imposes any materially adverse restriction on identifying
and contacting new physician prospects since these physicians
are typically well-known in their industry and are easily
identified through
138
appropriate sources. Accordingly, CSI does not anticipate that
the court order will materially impact CSIs sales efforts.
On July 2, 2008, Plaintiffs served and filed with the court
a second amended complaint. In this amended pleading, Plaintiffs
asserted claims against CSI as well as ten of CSIs
employees, Sean Collins, David Gardner, Aaron Lew, Michael
Micheli, Kevin Moore, Steve Pringle, Jason Proffitt, Thadd
Taylor, Rene Treanor, and Paul Tyska, all of whom were formerly
employed by one or more of the Plaintiffs. The second amended
complaint also continues to refer to John Doe 1-10
defendants, who are not identified by name.
The second amended complaint includes seven counts, which allege
as follows:
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Count 1 Alleges that individual defendants Collins,
Gardner, Lew, Pringle, Proffitt, Taylor, Treanor and the John
Doe defendants violated provisions in their employment
agreements with their former employer FoxHollow, barring them
from misusing FoxHollow confidential information.
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Count 2 Alleges that individual defendants Collins,
Lew, Micheli, Proffitt, Tyska and John Does violated a provision
in their FoxHollow employment agreements barring them, for a
period of one year following their departure from FoxHollow,
from soliciting or encouraging employees of FoxHollow to join
CSI.
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Count 3 Alleges that individual defendants Collins,
Gardner, Lew, Moore, Pringle, Proffitt, Taylor and Treanor
breached a duty of loyalty owed to FoxHollow.
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Count 4 Alleges that CSI and individual defendants
Collins, Lew, Pringle, Proffitt, Taylor, Treanor and John Does
misappropriated trade secrets of one or more of the Plaintiffs.
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Count 5 Alleges that all defendants engaged in
unfair competition.
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Count 6 Alleges (i) that CSI tortiously
interfered with the contracts between FoxHollow and individual
defendants Collins, Lew, Micheli, Proffitt, Tyska and John Does
by allegedly procuring breaches of the
non-solicitation
encouragement provision in those agreements, and (ii) that
individual defendant Lew tortiously interfered with the
contracts between individual defendants Proffitt and Taylor and
FoxHollow by allegedly procuring breaches of the confidential
information provision in those agreements.
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Count 7 Alleges that all defendants conspired to
gain an unfair competitive and economic advantage for CSI to the
detriment of the Plaintiffs.
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In the second amended complaint, the Plaintiffs seek, among
other forms of relief, an award of damages in an amount greater
than $50,000, a variety of forms of injunctive relief, exemplary
damages under the Minnesota Trade Secrets Act, and recovery of
their attorney fees and litigation costs. Although CSI has
requested the information, the Plaintiffs have not yet disclosed
what specific amount of damages they claim.
In July 2008, CSI and the individual defendants filed motions to
dismiss the action. These motions were based on the argument
that the Plaintiffs are required to resolve the claims at issue
in arbitration in accordance with arbitration provisions in the
employment agreements between at least eight of the individual
defendants and FoxHollow. In an order dated October 2,
2008, the court granted this motion with respect to the claims
against individual defendants Collins, Gardner, Micheli, Moore,
Pringle, Proffitt, Taylor and Treanor. The court determined that
the claims against these parties must be decided in arbitration
and stayed proceedings in the action against these parties
pending the outcome of any arbitration proceeding. The October
order also denied the motion to dismiss or stay the proceedings
with respect to the claims against CSI and individual defendants
Lew and Tyska.
On August 29, 2008, the court issued an Amended Scheduling
Order for the action. The Amended Scheduling Order provided,
among other deadlines, that trial, if necessary, would take
place in May or June 2009. In its October order, the court
granted a motion by the Plaintiffs to extend certain deadlines,
and as a result of these changes, the court indicated that other
deadlines in the earlier Scheduling Order shall be
extended and directed that the parties confer and provide
new proposed deadlines consistent with the changes specified in
the October order.
On October 14, the Plaintiffs in the action filed a motion
seeking additional preliminary injunctive relief. This motion
seeks an order pending trial that would: (1) expand the
scope of the prohibitions set forth in the courts January
temporary restraining order so that they apply not only with
respect to the customers of Plaintiffs who are characterized as
Key Opinion Leaders or Thought Leaders but also to any other of
Plaintiffs customers; (2) bar CSI from recruiting,
interviewing or hiring any ev3 employee; (3) enjoin
CSI from employing 18 persons who were previously employed
by one or more of the Plaintiffs in the same geographic
territory that he or she covered when
139
employed by Plaintiffs; (4) require CSI and other
defendants to return all of Plaintiffs information in
their possession and to certify compliance; and (5) require
CSI to implement certain measures aimed at preventing any
continued or future acquisition of information belonging to the
Plaintiffs. On October 27, 2008, both CSI and the
individual defendants filed briefs in opposition to ev3s
motion for additional injunctive relief. A hearing on this
motion took place on November 14, 2008. The court took the
motion under advisement and has not yet issued a ruling.
In late October 2008, both CSI and individual defendants Lew and
Tyska filed Notices of Appeal with the Minnesota Court of
Appeals indicating that these parties are appealing the October
2 order, which denied the motions to dismiss previously filed by
these parties. In connection with the appeals, CSI and
individual defendants Lew and Tyska filed with the Ramsey County
District Court motions to stay proceedings in the District Court
pending a decision on the appeals. ev3 opposed the stay motions.
A hearing on the stay motions was held on November 20,
2008. The court took the motions under advisement and has not
yet issued a ruling.
In an order dated November 17, 2008, the Minnesota Court of
Appeals consolidated the appeal CSI filed with the appeals filed
by co-defendants Lew and Tyska. The appeal briefs have been
submitted, and it is anticipated that oral argument on the
appeal will be scheduled in 2009.
The Diamondback 360° is, at least in some applications,
considered to be a direct competitor with one of
Plaintiffs products. CSIs current Chief Executive
Officer, Vice President of Sales, Vice President of Marketing
and Vice President of Business Development were formerly
employed by FoxHollow. These officers remain subject to
confidentiality provisions in their employment agreements with
FoxHollow, but the employee nonsolicitation provisions in their
agreements with FoxHollow have expired. As of December 31,
2008, 39 of the 118 members of CSIs sales department, or
33.1%, were formerly employed by one or more of the Plaintiffs.
CSI is defending this litigation vigorously. However, if CSI is
not successful in this litigation, it could be required to pay
substantial damages and could be subject to equitable relief
that could include a requirement that CSI terminate or otherwise
alter the terms or conditions of employment of certain
employees, including certain key sales personnel who were
formerly employed by FoxHollow. In any event, the defense of
this litigation, regardless of the outcome, could result in
substantial legal costs and diversion of CSI managements
time and efforts from the operation of CSIs business.
140
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR REPLIDYNE
You should read the following discussion and analysis of
financial condition and results of operations together with
Replidynes financial statements and the related notes
included elsewhere in this proxy statement/prospectus. This
discussion and analysis contains forward-looking statements
about Replidynes business and operations, based on current
expectations and related to future events and Replidynes
future financial performance, that involve risks and
uncertainties. Replidynes actual results may differ
materially from those it currently anticipates as a result of
many important factors, including the factors described under
Risk Factors and elsewhere in this proxy
statement/prospectus.
Overview
Replidyne has previously announced that it was reviewing a range
of strategic alternatives. As a result of Replidynes
review of strategic alternatives, on November 3, 2008,
Replidyne entered into the merger agreement with CSI.
In June 2008, Replidyne announced its decision to terminate its
license agreement with Asubio Pharma, Co., Ltd, or Asubio
Pharma, for the development and commercialization of faropenem
medoxomil in the U.S. and Canada. As a result of this
termination, Replidyne relinquished all of its rights to the
development and commercialization of faropenem medoxomil.
In August 2008, in connection with a restructuring of
Replidynes workforce that resulted in Replidynes
employee headcount being reduced to six employees by
October 31, 2008, Replidyne suspended the development of
REP3123, an investigational narrow-spectrum antibacterial agent
for the treatment of Clostridium difficile
(C. difficile) bacteria and C. difficile
infection and Replidynes other novel anti-infective
programs based on Replidynes bacterial DNA replication
inhibition technology. Replidyne is pursuing the sale of REP3123
and its related technology and the sale of the anti-infective
programs based on its bacterial DNA replication inhibition
technology in a transaction or transactions separate from the
merger. Replidyne had previously devoted substantially all of
its clinical development and research and development efforts
and a material portion of its financial resources toward the
development of faropenem medoxomil, REP3123, its DNA replication
inhibition technology and its other product candidates.
Replidyne has no product candidates currently in active clinical
or preclinical development and has further reduced its employee
headcount to three employees, all of whom are involved primarily
in financial and administrative roles.
As of September 30, 2008, Replidyne reported net assets of
$45.2 million. Replidyne has incurred significant operating
losses since inception on December 6, 2000, and, as of
September 30, 2008, Replidyne had an accumulated deficit of
$147 million. Replidyne has generated no sustainable
revenue or revenue from product sales to date. Replidyne has
funded operations principally from the sale of its securities
and amounts received from Forest Laboratories under
Replidynes former collaboration and commercialization
agreement. Although Replidyne reported net income for the year
ended December 31, 2007 as a result of the termination of
its agreement with Forest Laboratories, Replidyne expects to
incur substantial operating losses for the foreseeable future.
Results
of Operations
Comparison
of the Nine Months Ended September 30, 2007 and
2008
Revenue. Replidyne reported revenue of
$58.6 million for the nine months ended September 30,
2007, compared to no revenue during the nine months ended
September 30, 2008. Revenue recognized during the nine
months ended September 30, 2007 included $56.2 million
of license revenue, representing amortization of
$60 million in upfront and milestone payments recognized
upon the termination of Replidynes former collaboration
and commercialization agreement with Forest Laboratories in the
third quarter of 2007. Revenue recognized during the nine months
ended September 30, 2007 also included $2.4 million of
contract revenue for activities funded under Replidynes
agreement with Forest Laboratories.
141
Research and Development Expense. Research and
development expenses were $28.5 million for the nine months
ended September 30, 2007, compared to $26.8 million
for the nine months ended September 30, 2008. Research and
development expenditures were as follows (in thousands):
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Nine Months
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Ended
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September 30,
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Change
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2007
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2008
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$
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%
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Faropenem medoxomil program
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$
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17,808
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$
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15,871
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$
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(1,937
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(11
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)%
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Other research and development programs
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10,654
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10,971
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317
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3
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%
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$
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28,462
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$
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26,842
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$
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(1,620
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)
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(6
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)%
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Costs to support the faropenem medoxomil program were
$17.8 million for the nine months ended September 30,
2007 compared to $15.9 million during the nine months ended
September 30, 2008. Following the termination of
Replidynes license agreement with Asubio Pharma and
Replidynes supply agreement with Asubio Pharma and Nippon
Soda in June 2008, Replidynes activities related to the
faropenem medoxomil program were limited to steps required to
complete patient monitoring, database analysis and regulatory
reporting associated with the Phase III clinical trial for
the treatment of acute exacerbation of chronic bronchitis.
Patient enrollment in this clinical trial was suspended in April
2008.
As a result of terminating its faropenem medoxomil license and
supply agreements, Replidyne incurred charges related to these
agreements totaling $4.2 million during the nine months
ended September 30, 2008. Additionally, Replidyne recorded
a charge of $2.7 million during the nine months ended
September 30, 2008 related to its obligation to reimburse
MEDA Manufacturing GmbH (MEDA) for costs to decontaminate its
facility. These increases were offset by $8.0 million of
lower internal and external development costs incurred during
the nine months ended September 30, 2008.
Costs to support Replidynes other research and development
programs were $10.7 million for the nine months ended
September 30, 2007 compared to $11.0 million for the
nine months ended September 30, 2008. Compared to 2007,
costs of internal and external preclinical research for
Replidynes REP3123 and DNA replication inhibition programs
were $3.6 million higher during 2008. As these programs
advanced closer to identification of a product candidate,
development costs compared to 2007 increased in 2008. Replidyne
announced the suspension of all of its development programs in
August 2008. Compared to the first nine months of 2007,
increased research and development costs during the first nine
months of 2008 were partially offset by a decrease of
$3.5 million in costs to support the REP8839 program which
was suspended during the fourth quarter of 2007.
During the nine months ended September 30, 2008, Replidyne
incurred approximately $3.0 million in restructuring and
severance charges which are included in the costs associated
with its programs as described above. These charges consisted
primarily of severance and related benefits.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses were $9.8 million for the nine months ended
September 30, 2007 compared to $12.3 million for the
nine months ended September 30, 2008. The increase of
$2.5 million was primarily due to charges of
$2.1 million incurred in 2008 to settle a contract dispute
between Replidyne and MEDA. Additionally, during the first nine
months of 2008 Replidyne incurred approximately
$3.2 million of restructuring and other severance charges.
These increases were partially offset by $3.4 million in
decreased salaries, benefits and variable compensation as
Replidynes selling, general and administrative employee
headcount was reduced by operational restructurings announced in
December 2007 and during the nine months ended
September 30, 2008.
Investment Income and Other, net. During the
nine months ended September 30, 2007, Replidyne reported
investment income and other of $4.3 million compared to
$1.5 million for the nine months ended September 30,
2008. The decrease was primarily due to lower overall cash
available for investing and lower overall yields on investments
in 2008 compared to 2007, which contributed to $2.6 million
in lower investment income.
Comparison
of Years Ended December 31, 2006 and 2007
Revenue. Replidyne recognized
$16.0 million in revenue during 2006 compared to
$58.6 million in 2007. The increase was due to the
recognition of previously deferred revenue as a result of the
termination of Replidynes
142
collaboration and commercialization agreement with Forest
Laboratories in 2007. License revenue was $3.8 million in
2006, as compared to $56.2 million of license revenue
recognized during 2007, representing the unamortized portion of
$60 million in upfront and milestone payments Replidyne
received under its collaboration agreement with Forest
Laboratories. Revenue recognized during 2006 included
$12.2 million of contract revenue for funded activity under
Replidynes former collaboration and commercialization
agreement with Forest Laboratories, as compared to
$2.4 million of contract revenue recognized in 2007.
Research and Development Expense. Research and
development expenses were $38.3 million in 2006 as compared
to $43.3 million for 2007. Research and development
expenditures made to advance Replidynes product candidates
and other research efforts during 2006 and 2007 were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
|
2006
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Faropenem medoxomil
|
|
$
|
23,266
|
|
|
$
|
29,231
|
|
|
$
|
5,965
|
|
|
|
26
|
%
|
REP8839
|
|
|
8,363
|
|
|
|
4,550
|
|
|
|
(3,813
|
)
|
|
|
(46
|
)%
|
Other research and development
|
|
|
6,666
|
|
|
|
9,532
|
|
|
|
2,866
|
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,295
|
|
|
$
|
43,313
|
|
|
$
|
5,018
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs to support Replidynes faropenem medoxomil program
were $6.0 million higher in 2007 than in 2006. The increase
primarily reflects expenditures related to increased external
clinical trial activity and clinical trial preparations with a
clinical research organization of $10.4 million. This
increase was partially offset by a $1.4 million decrease in
preclinical research and outside services, a $1.2 million
decrease in contingent supply agreement fees and a
$1.1 million decrease in program acquisition fees. Research
and development activities in 2006 were focused on the
Phase III placebo-controlled acute exacerbation of chronic
bronchitis clinical trial as well as the Phase II clinical
trial in pediatric patients with acute bacterial otitis media
which results were reported in the first quarter of 2007.
Research and development activities in 2007 were focused on the
ongoing Phase III clinical trial for the treatment of acute
exacerbation of chronic bronchitis as well as planning
activities in preparation for potential future Phase III
clinical trials for the treatment of acute bacterial sinusitis
and community-acquired pneumonia.
Compared to 2006, costs to support Replidynes REP8839
program decreased by $3.8 million in 2007, primarily
reflecting decreased clinical and preclinical development costs
of $2.0 million. This program was suspended in December
2007 due to the incremental investment required to optimize the
formulation compared to the niche market opportunity represented
by the product candidates initial target indication of
impetigo. Additionally, in 2006 Replidyne incurred
$1.5 million under its June 2003 purchase agreement with
GlaxoSmithKline PLC, or GSK, to complete the purchase of the
inhibition of tRNA synthetase technology underlying REP8839 and
REP3123.
Compared to 2006, other research and development costs increased
by $2.9 million in 2007. Costs of internal research and
development personnel and related costs increased by
$2.1 million as Replidyne increased the activity levels of
its research and development personnel in support of REP3123 and
its DNA replication inhibition program. Other costs in support
of these programs included external preclinical research,
consulting and other services that, compared to 2006, increased
by $0.4 million in 2007.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses were $12.2 million for 2006, compared to
$13.0 million for 2007. In 2007, Replidyne incurred
incremental personnel costs of $0.9 million associated with
personnel hired during 2006 to support its commercial, finance
and administrative activities, compensation costs of
$0.5 million related to Replidynes organizational
restructuring announced in December 2007 and increased costs
associated with the adoption of SFAS 123(R), Share-Based
Payment of $0.7 million. Replidyne also incurred
increased legal, accounting and insurance fees resulting from
its first full year of compliance with Section 404 of the
Sarbanes-Oxley Act. These increases were partially offset by
reductions in market research costs of $1.4 million
primarily related to the faropenem medoxomil program.
Investment Income, net. Investment income was
$6.0 million for 2006, compared to $5.5 million for
2007. The decrease from 2006 to 2007 was primarily due to lower
overall cash available for investing in 2007. In 2006,
143
Replidyne received cash of $60 million under its former
collaboration and commercialization agreement with Forest
Laboratories and $44.5 million in net proceeds from its
initial public offering.
Interest Expense. In 2006 Replidyne incurred
interest expense of approximately $14,000. The equipment loan
and security agreement was paid in full in 2006.
Other Expense, net. Other expense was
$0.7 million in 2006, compared to $0.1 million for
2007. The decrease was primarily due to $0.4 million lower
foreign currency losses associated with Replidynes foreign
currency denominated payables and $0.1 million in losses to
adjust derivatives in 2006 to market value.
Comparison
of Years Ended December 31, 2005 and 2006
Revenue. Revenue was $0.4 million for the
year ended December 31, 2005, as compared to
$16.0 million for the year ended December 31, 2006.
The increase was due to revenue generated from Replidynes
collaboration and commercialization agreement with Forest
Laboratories which began in 2006. Revenue recognized in 2005
consists solely of license revenue generated from a research and
development project that was completed in 2005. Revenue
recognized during 2006 includes $3.8 million of license
revenue, representing a portion of the upfront and milestone
payments totaling $60 million, which was being recognized
in Replidynes financial statements as of December 31,
2006 as revenue over the estimated period of performance of
approximately 14 years, and $12.2 million of contract
revenue for funded activity under Replidynes collaboration
and commercialization agreement with Forest Laboratories.
Research and Development Expense. Research and
development expenses were $29.2 million for the year ended
December 31, 2005 compared to $38.3 million for the
year ended December 31, 2006. Research and development
expenditures made to advance Replidynes product candidates
and other research efforts during 2005 and 2006 were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
|
2005
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
Faropenem medoxomil
|
|
$
|
24,744
|
|
|
$
|
23,266
|
|
|
$
|
(1,478
|
)
|
|
|
(6
|
)%
|
REP8839
|
|
|
3,589
|
|
|
|
8,363
|
|
|
|
4,774
|
|
|
|
133
|
%
|
Other research and development
|
|
|
847
|
|
|
|
6,666
|
|
|
|
5,819
|
|
|
|
687
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,180
|
|
|
$
|
38,295
|
|
|
$
|
9,115
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs incurred for the development of faropenem medoxomil were
lower in 2006 than in 2005 primarily reflecting decreased
external clinical trial activity of $2.5 million, a
$1.6 million decrease in costs of Replidynes internal
research and development personnel and related costs and a
$1 million decrease in expense incurred under
Replidynes license agreement with Asubio Pharma. These
decreases were partially offset by $2.9 million of supply
agreement contingencies that were recognized on October 20,
2006 when the FDA issued a non-approvable letter for the NDA
Replidyne filed for faropenem medoxomil. During 2005, in
addition to the thorough QT study completed for faropenem
medoxomil in connection with Replidynes NDA submission
Replidyne incurred significant external clinical research
organization expenses supporting preparation of the NDA for
faropenem medoxomil that was filed with the FDA in December
2005. During 2006, Replidyne continued to support its ongoing
placebo controlled Phase III trial among patients with
acute exacerbation of chronic bronchitis and its Phase II
dose ranging clinical trial among pediatric patients with acute
bacterial otitis media.
Costs to support Replidynes REP8839 program increased by
$4.8 million in 2006 compared to 2005 following initiation
of its Phase I clinical trials program for this compound in July
2006, which resulted in increased external clinical trial costs
of $1.9 million and internal personnel costs of
$0.7 million. In 2006 Replidyne also incurred
$1.5 million under its June 2003 purchase agreement with
GSK due upon filing of Replidynes IND related to REP8839
with the FDA that was accounted for as research and development
expense. Replidyne has no further financial obligations due to
GSK under this agreement.
Compared to 2005, other research and development costs increased
by $5.8 million in 2006. Costs of internal research and
development personnel and related costs increased by
$2.2 million as Replidyne increased its research and
development personnel in support of its expanded development
activities specifically related to REP3123 and
144
its DNA replication inhibition program. Other costs in support
of these activities included external preclinical research,
consulting, services and chemicals, compounds and laboratory
costs that increased by $2 million.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses were $5.3 million for the year ended
December 31, 2005, as compared to $12.2 million for
the year ended December 31, 2006. The increase was
primarily due to increased personnel and related costs of
$4.3 million which resulted from additional staff required
to support Replidynes commercial organization and
administrative and finance personnel, costs of recruiting and
relocating personnel, costs associated with the initial adoption
of SFAS 123(R), Share-Based Payment, of
$0.8 million, as well as $0.8 million in additional
legal, accounting, insurance and other professional costs
related to compliance obligations associated with being a public
company. Market research expenses also increased by
$1.0 million, principally related to market research
associated with faropenem medoxomil and REP8839.
Investment Income, net. Investment income was
$0.7 million for the year ended December 31, 2005, as
compared to $6 million for the year ended December 31,
2006. The increase was primarily due to higher overall cash
available for investing following receipt of $60 million
under Replidynes collaboration and commercialization
agreement with Forest Laboratories in the first quarter of 2006
and $44.5 million in net proceeds from Replidynes
initial public offering completed in the third quarter of 2006.
Interest Expense. Interest expense was
$0.1 million for the year ended December 31, 2005, as
compared to approximately $14,000 for the year ended
December 31, 2006. The decrease was due to payment in full
of Replidynes equipment loan and security agreement during
the first quarter of 2006.
Other Expense, net. Other expense was
$0.2 million for the year ended December 31, 2005, as
compared to $0.7 million for the year ended
December 31, 2006. The increase was primarily due to the
recognition of approximately $0.4 million in foreign
currency losses associated with Replidynes foreign
currency denominated payables.
Liquidity
and Capital Resources
At September 30, 2008, Replidyne had $50.6 million in
cash, cash equivalents and short-term investments and reported
$45.2 million in net assets. Replidyne has accumulated
significant net operating losses since its inception and as of
September 30, 2008 Replidyne had an accumulated deficit of
$147 million. Replidyne has funded its operations to date
principally from private placements of its equity securities and
convertible notes of $122 million, amounts received from
Forest Laboratories under Replidynes former collaboration
and commercialization agreement of $74.6 million and net
proceeds from the initial public offering of Replidyne common
stock of $44.5 million.
In May 2007, Replidyne entered into an arrangement with a bank
to provide investment banking services. Under the terms of the
agreement, Replidyne may incur transaction fees of at least
$4 million and up to $6 million based on the value of
a completed license or strategic transaction, as defined.
Additionally, a fee of $1.0 million was due and paid under
this agreement following Replidynes announcement of the
proposed transaction with CSI in November 2008. This fee is
creditable against the final fee that would become due if the
transaction is consummated. As of September 30, 2008, no
amounts had been paid or accrued for under this agreement.
Replidyne has entered into employment agreements with its chief
executive officer and certain other executive officers that
provide for base salary, eligibility for bonuses and other
generally available benefits. The employment agreements provide
that Replidyne may terminate the employment of the executive at
any time with or without cause. If an executive is terminated
without cause or such executive resigns for good reason, as
defined, then the executive is entitled to receive a severance
package consisting of salary continuation for a period of twelve
months (or eighteen months with respect to Replidynes
chief executive officer) from the date of termination among
other benefits. If such termination occurs one month before or
thirteen months following a change of control, then the
executive is entitled to: (i) salary continuation for a
period of twelve months (or eighteen months with respect to
Replidynes chief executive officer and chief scientific
officer) from the date of termination; (ii) a bonus equal
to the average of the executives annual bonuses for the
two years prior to the change in control termination (or one and
a half times the average with respect to the chief executive
officer); (iii) acceleration of vesting of all of the
executives outstanding unvested options to purchase
Replidyne common stock; and (iv) other benefits. As of
145
September 30, 2008, Replidyne has accrued for its estimate
of unpaid benefits expected to be incurred under these
employment agreements. As of September 30, 2008, the
balance of accrued but unpaid benefits was $2.2 million.
Replidyne has also entered into retention bonus agreements with
its chief financial officer and senior vice president of
corporate development. The agreements provide that each such
executive is eligible to receive both: (i) a cash bonus in
the amount of $0.1 million, which we refer to as the
retention bonus, that was earned and fully accrued for at
September 30, 2008, and (ii) a cash bonus in an amount
of not less than $0.1 million and not greater than
$0.15 million, which final amount will be determined by
Replidynes board of directors in its sole discretion,
provided that such executive remains employed by Replidyne
through the consummation of a strategic transaction, which we
refer to as the transaction bonus. The retention bonuses were
paid in October 2008. As of September 30, 2008, the
transaction bonuses had not been paid or accrued for.
During 2007, Replidyne established a severance benefit plan that
defines termination benefits for all eligible employees, as
defined, not under an employment contract, if the employee is
terminated without cause. Under this plan, employees whose
employment is terminated without cause are provided a severance
benefit of between nine and eighteen weeks pay, based on their
employee grade level, as defined, plus an additional two weeks
pay for each year of service. As of September 30, 2008,
Replidyne has accrued for its estimate of unpaid benefits
expected to be incurred under this plan with respect to current
and former employees. As of September 30, 2008, the balance
of accrued but unpaid benefits under the severance plan was
$1.8 million.
Replidyne has not commercialized its product candidates or
generated any revenue from product sales. Replidyne anticipates
that it will continue to incur substantial net losses in the
foreseeable future. However, Replidyne believes that its current
cash, cash equivalents, short-term investments and net income
earned on these balances will be sufficient to satisfy
Replidynes anticipated cash needs for working capital and
capital expenditures through at least the next 12 months.
This forecast of the period in which Replidynes financial
resources will be adequate to support operations is a
forward-looking statement and involves risks, uncertainties and
assumptions. Replidynes actual results and the timing of
selected events may differ materially from those anticipated as
a result of many factors, including but not limited to those
discussed under Risk Factors Risks Relating to
Replidyne found above in this proxy statement/prospectus.
Replidynes future capital uses and requirements depend on
a number of factors, including but not limited to the following:
|
|
|
|
|
the costs of consummating the merger with CSI and such other
costs that may result from any delay in such consummation;
|
|
|
|
the costs to enter into and the terms and timing of any sale of
assets or strategic transactions involving Replidynes
development stage programs;
|
|
|
|
the costs to enter into and subsequently, the terms and timing
of, any merger, sale of assets including the sale of certain or
all of Replidynes development stage programs, additional
collaborative, strategic partnership or licensing agreements
that Replidyne may establish;
|
|
|
|
the costs of prosecuting, defending and enforcing any patent
claims and other intellectual property rights; and
|
|
|
|
the costs of defending any litigation or arbitration claims
related to Replidynes material agreements.
|
Contractual
Obligations
Replidynes contractual obligations, including financing
costs, at December 31, 2007, included the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
Over
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Operating lease obligations(1)
|
|
$
|
2,759
|
|
|
$
|
737
|
|
|
$
|
1,508
|
|
|
$
|
514
|
|
|
$
|
|
|
MEDA Purchase Commitments(2)
|
|
$
|
770
|
|
|
$
|
770
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Nippon Soda Delay Compensation(3)
|
|
$
|
7,795
|
|
|
$
|
935
|
|
|
$
|
6,860
|
|
|
$
|
|
|
|
$
|
|
|
146
|
|
|
(1) |
|
Operating lease obligations represented future minimum rental
commitments for non-cancelable operating leases for
Replidynes office and laboratory facilities in Colorado
and Connecticut. On October 23, 2008, Replidyne entered
into an agreement by which it terminated the lease for its
facility in Connecticut and paid a cancellation fee of $72,000
in connection therewith. |
|
(2) |
|
Purchase obligations represented annual minimum purchase
requirements of adult tablets of faropenem medoxomil with MEDA
under Replidynes supply agreement with MEDA, through the
termination of this agreement on May 11, 2007. This amount
was paid in the first quarter of 2008. |
|
(3) |
|
Delay compensation assumed, for this purpose only, that a full
commercial launch of an approved faropenem medoxomil drug would
not occur for three years and Replidynes supply agreement
with Nippon Soda Company Ltd., or Nippon Soda, for the exclusive
supply of Replidynes commercial requirements of the active
pharmaceutical ingredient in faropenem medoxomil was not
terminated. On June 20, 2008, Replidyne notified Asubio
Pharma and Nippon Soda of its decision to terminate this supply
agreement. In July 2008, Replidyne paid Nippon Soda unpaid delay
compensation fees accumulated through the effective date of
termination of this supply agreement totaling $1.0 million.
In addition, Replidyne reimbursed Nippon Soda for certain
engineering costs totaling $0.6 million. Replidyne has no
further financial obligations under this agreement. |
The table above reflects only payment obligations that were
fixed and determinable as of December 31, 2007, based on
certain of the assumptions described in the footnotes to the
table. The table above does not include information with respect
to the following contractual obligations because the amounts of
the obligations were not determinable as of December 31,
2007:
|
|
|
|
|
contractual obligations for clinical trials;
|
|
|
|
royalty obligations, which would have been payable based on any
future sales of faropenem medoxomil;
|
|
|
|
amounts due to Asubio Pharma under Replidynes license
agreement, which amounts were uncertain as to timing and
dependent on the achievement of milestones or termination of the
agreement; and
|
|
|
|
contingent amounts that may have become due under supply
agreements, including minimum purchase commitments not yet
established, the extent of delay compensation amounts determined
based on the timing of a commercial launch and fees that may
have become due on termination.
|
As of December 31, 2007, Replidyne entered into agreements
with clinical research organizations and other vendors related
to Replidynes clinical trials. Certain payments were made
based upon the number of patients enrolled. For the years ended
December 31, 2006 and 2007, Replidyne incurred external
costs of approximately $11.4 million and
$20.4 million, respectively, associated with conducting its
clinical trials. As of December 31, 2007, due to the
variability associated with these agreements, Replidyne was
unable to estimate the future patient enrollment costs it would
incur and therefore excluded these costs from the table above.
As discussed in the notes to the unaudited condensed financial
statements for the three- and nine- month period ended
September 30, 2007 and 2008, during 2008, Replidyne:
|
|
|
|
|
terminated the lease for its facility in Connecticut;
|
|
|
|
terminated its clinical trials;
|
|
|
|
terminated the supply agreement with Asubio Pharma Co. Ltd. and
Nippon Soda Company Ltd.;
|
|
|
|
terminated the supply agreement with MEDA Manufacturing GmbH; and
|
|
|
|
terminated all programs related to the development of faropenem
medoxomil.
|
Critical
Accounting Policies and Estimates
This discussion and analysis of Replidynes financial
condition and results of operations is based on its financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the U.S. The
preparation of these financial statements requires Replidyne to
make estimates and judgments that affect the reported amounts of
assets, liabilities, contingent assets and liabilities,
revenues, expenses and related disclosures. Actual results may
differ from these estimates. Replidynes significant
accounting policies are described in Note 2 to
Replidynes financial statements included elsewhere in this
proxy statement/prospectus.
147
Replidyne believes the following accounting policies affect
Replidynes more significant judgments and estimates used
in the preparation of its financial statements.
Revenue Recognition. Replidyne has generated
revenue through research, license, collaboration and
commercialization agreements. These arrangements can contain
multiple elements, including non-refundable upfront fees,
payments for reimbursement of research and commercialization
costs, non-refundable payments associated with achieving
specific milestones, and royalties based on specified
percentages of net product sales.
In determining when to recognize revenue related to upfront and
milestone payments under these arrangements, Replidyne applies
the revenue recognition criteria as outlined in the Emerging
Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21).
In applying these criteria, Replidyne considers a variety of
factors to determine the appropriate method of revenue
recognition, including whether the elements of the arrangement
are separable, whether payments received are subject to refund
or forfeiture, whether there are determinable fair values and
whether there is a unique earnings process associated with each
element of an arrangement.
When a payment is specifically tied to a separate earnings
process and the amount to be received is fixed and determinable,
revenue is recognized when the performance obligation associated
with the payment is completed. Performance obligations typically
consist of significant and substantive milestones. Revenues from
milestone payments may be considered separable from funding for
research, development or commercial activities because of the
uncertainty surrounding the achievement of the milestones.
Accordingly, these payments could be recognized as revenue when
the performance milestone is achieved as described in
EITF 00-21.
In circumstances where Replidyne cannot identify a separate
earnings process related to an upfront or milestone payment,
Replidyne records deferred revenue and recognizes revenue
ratably over the period of expected benefit, which is generally
the unexpired contract term.
Revenues derived from reimbursement of expenses for research,
development and commercial activities under Replidynes
collaboration and commercialization agreements are recorded in
compliance with EITF Issue
No. 99-19,
Reporting Revenue Gross as Principal Versus Net as an Agent
(EITF 99-19).
In accordance with the criteria established by
EITF 99-19,
in transactions where Replidyne acts as principal, with
discretion to choose suppliers, bear credit risk and perform a
substantive part of the services, revenue is recorded at the
gross amount of the reimbursement. Costs associated with these
reimbursements are reflected as a component of operating
expenses in Replidynes statements of operations.
Under Replidynes former agreement with Forest Laboratories
entered into in February 2006, Replidyne recorded the initial
$50 million upfront payment received in February 2006 as
deferred revenue and was recognizing this amount into revenue
ratably over the expected term of the agreement. In addition,
Replidyne received a development milestone payment of
$10 million in March 2006. Due to this milestone being
achieved within one month of entering into the collaboration and
commercialization agreement with Forest Laboratories, Replidyne
could not identify a separate earnings process related to this
milestone payment and was recognizing revenue related to this
payment over the expected term of the agreement. In February
2007, Replidyne and Forest Laboratories announced that the
agreement would terminate, and as a result, Replidyne reacquired
all U.S. adult and pediatric rights previously granted to
Forest Laboratories. As no further obligations existed beyond
May 7, 2007, the effective date of the termination,
Replidyne recognized the remaining unamortized deferred revenue
balance as revenue in the second quarter of 2007.
Replidyne has also received amounts from Forest Laboratories as
reimbursement for certain research and development. Replidyne
believes that, as it relates to these activities, Replidyne
acted as the principal, performing a substantive part of the
services directly, having the discretion to choose suppliers and
bearing all credit risk associated with the performance of these
activities. Replidyne therefore has recorded these amounts as
revenue in accordance with its revenue recognition policy. See
Note 2 to Replidynes financial statements included
elsewhere in this proxy statement/prospectus for more
information about Replidynes revenue recognition policies.
Clinical Trial and Other Accrued Expenses. As
part of the process of preparing Replidynes financial
statements, Replidyne is required to estimate accrued expenses.
This process involves identifying services that third parties
have performed on Replidynes behalf and estimating the
level of service performed and the associated cost incurred on
these services as of each balance sheet date in Replidynes
financial statements. Replidyne was party to agreements which
include provisions that require payments to the counterparty
under certain circumstances.
148
Replidyne develops estimates of liabilities using its judgment
based upon the facts and circumstances known and accounts for
these estimates in accordance with accounting principles
involving accrued expenses generally accepted in the
U.S. In regards to Replidynes clinical trials,
Replidyne recorded expenses based on estimates of the services
received and efforts expended pursuant to contracts with
clinical research organizations (CROs) and other third party
vendors associated with Replidynes clinical trials.
Replidyne contracted with third parties to perform a range of
clinical trial activities in the ongoing development of its
product candidates. The terms of these agreements vary and may
result in uneven payments. Payments under these contracts
depended on factors such as the achievement of certain defined
milestones, the successful enrollment of patients and other
events. The objective of Replidynes clinical trial accrual
policy is to match the recording of expenses in Replidynes
financial statements of the actual services received and efforts
expended. In doing so, Replidyne relied on information from CROs
and its clinical operations group regarding the status of
Replidynes clinical trials to calculate Replidynes
accrual for clinical expenses at the end of each reporting
period. Replidynes estimates and assumptions could differ
significantly from the amounts that Replidyne actually may incur.
Share-Based Compensation. Effective
January 1, 2006, Replidyne adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment
(SFAS 123(R)), which requires compensation costs related to
share-based transactions, including employee stock options, to
be recognized in the financial statements based on fair value.
SFAS 123(R) revises SFAS 123, as amended,
Accounting for Stock-Based Compensation, and supersedes
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Replidyne adopted
SFAS 123(R) using the prospective method. Under this
method, compensation cost is recognized for all share-based
awards granted or modified on or after January 1, 2006.
Replidyne selected the Black-Scholes option pricing model as the
most appropriate valuation method for option grants with service
and/or
performance conditions. The Black-Scholes model requires inputs
for risk-free interest rate, dividend yield, volatility and
expected lives of the options. Since Replidyne has a limited
history of stock activity, expected volatility is based on
historical data from several public companies similar in size
and value to Replidyne. Replidyne will continue to use a
weighted average approach using historical volatility and other
similar public entity volatility information until its
historical volatility is relevant to measure expected volatility
for future option grants. Replidyne estimates the forfeiture
rate based on historical data. Based on an analysis of
historical forfeitures, Replidyne applied an annual forfeiture
rate of 4.48% during 2007. During the nine months ended
September 30, 2008, Replidyne applied a weighted average
expected annual forfeiture rate of 23.07% as compared to the
expected forfeiture rate of 4.36% during 2007. The increase in
the forfeiture rate during 2008 is primarily attributable to
increased forfeitures as a result of Replidynes recent
organizational restructurings and future expectations. The
forfeiture rate is re-evaluated on a quarterly basis. The
risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect
at the time of the grant. The expected lives for options granted
represents the period of time that options granted are expected
to be outstanding and is derived from historical exercise
behavior.
During 2007, Replidyne estimated the fair value of option grants
as of the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions. Expected
volatility was estimated to be 75%. The weighted average risk
free interest rate was 4.46% and the dividend yield was 0.00%.
The weighted average expected lives for each individual vesting
tranche under the graded vesting attribution method discussed
below was estimated to be 3.05 years.
Replidyne had a choice of two attribution methods for allocating
compensation costs under SFAS No. 123(R): the
straight-line method, which allocates expense on a
straight-line basis over the requisite service period of the
last separately vesting portion of an award, or the graded
vesting attribution method, which allocates expense on a
straight-line basis over the requisite service period for each
separately vesting portion of the award as if the award was, in
substance, multiple awards. Replidyne chose the graded vesting
attribution method and accordingly, amortized the fair value of
each option over each options vesting period (requisite
service period).
Deferred Tax Asset Valuation Allowance. In
establishing a valuation allowance on Replidynes deferred
tax assets Replidyne is required to make significant estimates
and judgments about its future operating results.
Replidynes ability to realize deferred tax assets depends
on its future taxable income as well as limitations on
utilization primarily of net operating losses and tax credits.
Replidyne is required to reduce its deferred tax assets by a
valuation allowance if it is more likely than not that some
portion or all of Replidynes deferred tax asset will not
149
be realized. Although Replidyne reported net income for the year
ended December 31, 2007 as a result of the termination of
its agreement with Forest Laboratories, Replidyne expects to
incur substantial operating losses for the next several years.
Accordingly, Replidyne has recorded a full valuation allowance
on its net deferred tax assets since inception due to
uncertainties related to Replidynes ability to realize
deferred tax assets in the foreseeable future. See Note 11
to Replidynes financial statements included elsewhere in
this proxy statement/prospectus.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value in applying
generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 applies
whenever an entity is measuring fair value under other
accounting pronouncements that require or permit fair value
measurement. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007;
however, the FASB provided a one year deferral for
implementation of the standard for non-financial assets and
liabilities. Replidyne adopted SFAS 157 effective
January 1, 2008 for all financial assets and liabilities.
The adoption did not have a material impact on Replidynes
financial statements. Replidyne does not expect that the
remaining provisions of SFAS 157, when adopted, will have a
material impact on its financial statements.
150
QUALITATIVE
AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK FOR
REPLIDYNE
Replidynes exposure to market risk is primarily limited to
its cash, cash equivalents and short-term investments. Replidyne
has attempted to minimize risk by investing in quality financial
instruments, primarily money market funds, federal agency notes,
commercial paper, bank and corporate debt securities, with no
security having an effective duration in excess of two years.
The primary objective of Replidynes investment activities
is to preserve its capital for the purpose of funding its
operations while at the same time maximizing the income
Replidyne receives from its investments without significantly
increasing risk. To achieve these objectives, Replidynes
investment policy allows it to maintain a portfolio of cash
equivalents and short-term investments in a variety of
marketable securities, including U.S. government, money
market funds and under certain circumstances, derivative
financial instruments. Replidynes cash and cash
equivalents as of September 30, 2008 included a liquid
money market account. The securities in Replidynes
investment portfolio are classified as available-for-sale and
Replidyne believes, due to their short-term nature, subject to
minimal interest rate risk.
151
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR CSI
You should read the following discussion and analysis of
financial condition and results of operations together with
CSIs consolidated financial statements and the related
notes included elsewhere in this proxy statement/prospectus.
This discussion and analysis contains forward-looking statements
about CSIs business and operations, based on current
expectations and related to future events and CSIs future
financial performance, that involve risks and uncertainties.
CSIs actual results may differ materially from those it
currently anticipates as a result of many important factors,
including the factors described under Risk Factors
and elsewhere in this proxy statement/prospectus.
Overview
CSI is a medical device company focused on developing and
commercializing interventional treatment systems for vascular
disease. CSIs initial product, the Diamondback 360°
Orbital Atherectomy System, is a minimally invasive catheter
system for the treatment of peripheral arterial disease, or PAD.
CSI was incorporated in Minnesota in 1989. From 1989 to 1997,
CSI engaged in research and development on several different
product concepts that were later abandoned. Since 1997, CSI has
devoted substantially all of its resources to the development of
the Diamondback 360°.
From 2003 to 2005, CSI conducted numerous bench and animal tests
in preparation for application submissions to the FDA. CSI
initially focused testing on providing a solution for coronary
in-stent restenosis but later changed the focus to PAD. In 2006,
CSI obtained an investigational device exemption from the FDA to
conduct CSIs pivotal OASIS clinical trial, which was
completed in January 2007. The OASIS clinical trial was a
prospective 20-center study that involved 124 patients with
201 lesions.
In August 2007, the FDA granted CSI 510(k) clearance for the use
of the Diamondback 360° as a therapy in patients with PAD.
CSI commenced a limited commercial introduction of the
Diamondback 360° in the United States in September 2007.
This limited commercial introduction intentionally limited the
size of CSIs sales force and the number of customers each
member of the sales force served in order to focus on obtaining
quality and timely product feedback on initial product usages.
CSI markets the Diamondback 360° in the United States
through a direct sales force and commenced a full commercial
launch in the quarter ended March 31, 2008. CSI plans to
expend significant capital to increase the size of its sales and
marketing efforts to expand its customer base as CSI implements
full commercialization of the Diamondback 360°. CSI
manufactures the Diamondback 360° internally at its
facilities.
As of September 30, 2008, CSI had an accumulated deficit of
$132.0 million. CSI expects its losses to continue as CSI
continues its commercialization activities, develops additional
product enhancements and makes further regulatory submissions.
To date, CSI has financed its operations primarily through the
private placement of equity securities.
CSIs consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course
of business. Since inception, CSI has experienced substantial
operating losses and negative cash flows from operations. CSI
had cash and cash equivalents of $14.7 million at
September 30, 2008. During the year ended June 30,
2008 and three months ended September 30, 2008, net cash
used in operations amounted to $31.9 million and
$12.0 million, respectively. In February 2008, CSI was
notified that recent conditions in the global credit markets
have caused insufficient demand for auction rate securities,
resulting in failed auctions for $23.0 million of
CSIs auction rate securities held at June 30, 2008
and September 30, 2008. These securities are currently not
liquid, as CSI has an inability to sell the securities due to
continued failed auctions. As a result, CSI recorded an
other-than-temporary impairment loss of $1.3 million
relating to these securities in CSIs statement of
operations for the year ended June 30, 2008. On
March 28, 2008, CSI obtained a margin loan from UBS
Financial Services, Inc., the entity through which CSI
originally purchased its auction rate securities, for up to
$12.0 million, which was secured by the $23.0 million
par value of CSIs auction rate securities. The outstanding
balance on this loan at June 30, 2008 was
$11.9 million. On August 21, 2008, CSI replaced this
loan with a margin loan from UBS Bank USA, which increased
maximum borrowings available to $23.0 million. This maximum
borrowing amount is not set forth in the written agreement for
the loan and may be adjusted from time to time by UBS Bank in
its sole discretion. The margin loan has a floating
152
interest rate equal to
30-day
LIBOR, plus 1.0%. The loan is due on demand and UBS Bank will
require CSI to repay it in full from the proceeds received from
a public equity offering where net proceeds exceed
$50.0 million. In addition, if at any time any of
CSIs auction rate securities may be sold, exchanged,
redeemed, transferred or otherwise conveyed for no less than
their par value, then CSI must immediately effect such a
transfer and the proceeds must be used to pay down outstanding
borrowings under this loan. The margin requirements are
determined by UBS Bank but are not included in the written loan
agreement and are therefore subject to change. From
August 21, 2008, the date this loan was initially funded,
through the date of this proxy statement/prospectus, the margin
requirements included maximum borrowings, including interest, of
$23.0 million. If these margin requirements are not
maintained, UBS Bank may require CSI to make a loan payment in
an amount necessary to comply with the applicable margin
requirements or demand repayment of the entire outstanding
balance. CSI has maintained the margin requirements under the
loans from both UBS entities. The outstanding balance on this
loan at September 30, 2008 was $22.9 million.
In addition, on September 12, 2008, CSI entered into a loan
and security agreement with Silicon Valley Bank with maximum
available borrowings of $13.5 million. The agreement
includes a $3.0 million term loan, a $5.0 million
accounts receivable line of credit, and two term loans for an
aggregate of $5.5 million that are guaranteed by certain of
CSIs affiliates. See Liquidity and
Capital Resources for further information regarding this
loan.
CSIs ability to continue as a going concern ultimately
depends on its ability to either complete the merger with
Replidyne or raise additional debt or equity capital prior to or
during the quarter ending September 30, 2009. If the merger
is not consummated or CSI is unable to raise additional debt or
equity financing on terms acceptable to it, there will continue
to be substantial doubt about CSIs ability to continue as
a going concern.
During fiscal year 2009, CSI plans to continue to expand its
sales and marketing efforts, conduct research and development of
product improvements and increase CSIs manufacturing
capacity to support anticipated future growth.
Financial
Overview
Revenues. CSI expects to derive substantially
all of its revenues for the foreseeable future from the sale of
the Diamondback 360°. The system consists of a disposable,
single-use, low-profile catheter that travels over CSIs
proprietary ViperWire guidewire and an external control unit
that powers the system. Initial hospital orders usually include
ten single-use catheters and guidewires, along with a control
unit. Reorders for single-use catheters and guidewires occur as
hospitals utilize the single-use catheters.
CSI applies Emerging Issues Task Force Bulletin (EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables, the
primary impact of which is to treat the Diamondback 360° as
a single unit of accounting for initial customer orders until
such time as CSI has sufficient sales history to satisfy the
criteria for separate units of accounting. As such, revenues are
deferred until the title and risk of loss of all Diamondback
360° components pass to the customer. Many initial
shipments to customers included a loaner control unit, which CSI
provided, until the new control unit received clearance from the
FDA and was subsequently available for sale. The loaner control
units were company-owned property and CSI maintained legal title
to these units. The loaner control units were held in inventory
at the time they were loaned to the various accounts under
CSIs limited commercial launch. The net inventory value of
the loaner control units was $20,246 at June 30, 2007. At
June 30, 2008, the loaner control units were fully
reserved, as CSI had received FDA clearance on the new control
unit and began shipping CSIs new control unit during the
quarter ended December 31, 2007. However, CSI could not
meet the production demands of the new control units and, as a
result, CSI continued to ship loaner control units during the
quarter ended December 31, 2007. As of June 30, 2008,
CSI had deferred revenue of $116,000, reflecting all disposable
component shipments to customers pending receipt of a customer
purchase order and shipment of a new control unit. CSI is
currently meeting production demands for the new control units
and all deferred revenue was recognized during the quarter ended
September 30, 2008.
Cost of Goods Sold. CSI assembles the
single-use catheter with components purchased from third-party
suppliers, as well as with components manufactured in-house. The
control unit and guidewires are purchased from third-party
suppliers. CSIs cost of goods sold consists primarily of
direct labor, manufacturing overhead, purchased raw materials
and manufactured components. With the anticipated benefits of
future cost reduction initiatives and increased volume and
related economies of scale, CSI anticipates that gross margin
percentages on single-use
153
catheters that it assembles will be higher than those achieved
on the control unit and guidewires that CSI purchases from third
parties.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses include compensation for executive, sales, marketing,
finance, information technology, human resources and
administrative personnel, including stock-based compensation.
Other significant expenses include travel and marketing costs,
professional fees, and patent expenses.
Research and Development. Research and
development expenses include costs associated with the design,
development, testing, enhancement and regulatory approval of
CSIs products. Research and development expenses include
employee compensation including stock-based compensation,
supplies and materials, consulting expenses, travel and
facilities overhead. CSI also incurs significant expenses to
operate its clinical trials, including trial design, third-party
fees, clinical site reimbursement, data management and travel
expenses. All research and development expenses are expensed as
incurred.
Interest Income. Interest income is attributed
to interest earned on deposits in investments that consist of
money market funds, U.S. government securities, commercial
paper and auction rate securities.
Interest Expense. Interest expense results
from outstanding debt balances and the change in value of
convertible preferred stock warrants and the issuance of
convertible promissory notes in 2006. Convertible preferred
stock warrants are classified as a liability under Financial
Accounting Standards Board (FASB) Statement of Accounting
Standards (SFAS) No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity and are subject to remeasurement at each balance
sheet date with any change in value recognized as a component of
interest expense. Immediately prior to the effective time of the
merger with Replidyne, the convertible preferred stock warrants
will convert into common stock warrants, thereby eliminating the
preferred stock warrant liability.
Accretion of Redeemable Convertible Preferred
Stock. Accretion of redeemable convertible
preferred stock reflects the change in the current estimated
fair market value of the preferred stock on a quarterly basis,
as determined by management and the board of directors.
Accretion is recorded as an increase to redeemable convertible
preferred stock in the consolidated balance sheet and an
increase to the loss attributable to common shareholders in the
consolidated statement of operations. The redeemable convertible
preferred stock will be converted into common stock immediately
prior to the effective time of the merger with Replidyne. As
such, the preferred stockholders will forfeit their liquidation
preferences and CSI will no longer record accretion.
Net Operating Loss Carryforwards. CSI has
established valuation allowances to fully offset its deferred
tax assets due to the uncertainty about its ability to generate
the future taxable income necessary to realize these deferred
assets, particularly in light of its historical losses. The
future use of net operating loss carryforwards is dependent on
CSI attaining profitable operations and will be limited in any
one year under Internal Revenue Code Section 382 due to
significant ownership changes (as defined in
Section 382) resulting from CSIs equity
financings. At June 30, 2008, CSI had net operating loss
carryforwards for federal and state income tax reporting
purposes of approximately $69.0 million, which will expire
at various dates through fiscal 2028.
Critical
Accounting Policies and Significant Judgments and
Estimates
CSIs managements discussion and analysis of its
financial condition and results of operations are based on its
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of CSIs consolidated
financial statements requires CSI to make estimates, assumptions
and judgments that affect amounts reported in those statements.
CSIs estimates, assumptions and judgments, including those
related to revenue recognition, excess and obsolete inventory,
stock-based compensation, preferred stock and preferred stock
warrants are updated as appropriate, which, in most cases, is at
least quarterly. CSI uses authoritative pronouncements, its
technical accounting knowledge, cumulative business experience,
judgment and other factors in the selection and application of
CSIs accounting policies. While CSI believes that the
estimates, assumptions and judgments that CSI uses in preparing
its consolidated financial statements are appropriate, these
estimates, assumptions and judgments are subject to factors and
uncertainties regarding their outcome. Therefore, actual results
may materially differ from these estimates.
CSIs significant accounting policies are described in
Note 1 to its consolidated financial statements included
elsewhere in this proxy statement/prospectus. Some of those
significant accounting policies require CSI to make
154
subjective or complex judgments or estimates. An accounting
estimate is considered to be critical if it meets both of the
following criteria: (1) the estimate requires assumptions
about matters that are highly uncertain at the time the
accounting estimate is made, and (2) different estimates
that reasonably could have been used, or changes in the estimate
that are reasonably likely to occur from period to period, would
have a material impact on the presentation of CSIs
financial condition, results of operations, or cash flows. CSI
believes that the following are its critical accounting policies
and estimates:
Revenue Recognition. CSI recognizes revenue in
accordance with SEC Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition and EITF
No. 00-21,
Revenue Arrangements with Multiple Deliverables. Revenue
is recognized when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists;
(2) shipment of all components has occurred or delivery of
all components has occurred if the terms specify that title and
risk of loss pass when products reach their destination;
(3) the sales price is fixed or determinable; and
(4) collectability is reasonably assured. CSI has no
additional post-shipment or other contractual obligations or
performance requirements and does not provide any credits or
other pricing adjustments affecting revenue recognition once
these criteria have been met. The customer has no right of
return on any component once the above criteria have been met.
Payment terms are generally set at 30 days.
CSI derives its revenue through the sale of the Diamondback
360°, which includes single-use catheters, guidewires and
control units used in the atherectomy procedure. Initial orders
from all new customers require the customer to purchase the
entire Diamondback 360° system, which includes multiple
single-use catheters and guidewires and one control unit. Due to
delays in the final FDA clearance of the new control unit and
early production constraints of the new control unit, CSI was
not able to deliver all components of the initial order. For
these initial orders, CSI shipped and billed only for the
single-use catheters and guidewires. In addition, CSI sent an
older version of its control unit as a loaner unit with the
customers expectation that CSI would deliver and bill for
a new control unit once it became available. As CSI had not
delivered each of the individual components to all customers,
CSI had deferred the revenue for the entire amount billed for
single-use catheters and guidewires shipped to the customers
that had not received the new control unit. Those billings
totaled $116,000 at June 30, 2008, which amount had been
deferred pending receipt of a customer purchase order and
shipment of a new control unit. After the initial order,
customers are not required to purchase any additional disposable
products from CSI. Once CSI had delivered the new control unit
to a customer, CSI recognized revenue that was previously
deferred and revenue for subsequent reorders of single-use
catheters, guidewires and additional new control units when the
criteria of SAB No. 104 were met. CSI is currently
meeting production demands for the new control units and all
deferred revenue was recognized during the quarter ended
September 30, 2008.
Investments. CSI classifies all investments as
available-for-sale. Investments are recorded at fair
value and unrealized gains and losses are recorded as a separate
component of shareholders deficiency until realized.
Realized gains and losses are accounted for on the specific
identification method. CSI has historically placed its
investments primarily in auction rate securities,
U.S. government securities, and commercial paper. These
investments, a portion of which had original maturities beyond
one year, were classified as short-term based on their liquid
nature. The securities that had stated maturities beyond one
year had certain economic characteristics of short-term
investments due to a rate-setting mechanism and the ability to
sell them through a Dutch auction process that occurred at
pre-determined intervals, primarily every 28 days. For the
year ended June 30, 2008 and three months
September 30, 2008, the amount of gross realized gains and
losses related to sales of investments were insignificant.
In February 2008, CSI was informed that there was insufficient
demand for auction rate securities, resulting in failed auctions
for $23.0 million of CSIs auction rate securities
held at June 30, 2008 and September 30, 2008.
Currently, these affected securities are not liquid and will not
become liquid until a future auction for these investments is
successful, they are redeemed by the issuer, they mature, or
they are repurchased by UBS. As a result, at June 30, 2008
and September 30, 2008, CSI has classified the fair value
of the auction rate securities as a long-term asset. Starting in
February 2008, interest rates on all auction rate securities
were reset to temporary predetermined penalty or
maximum rates. These maximum rates are generally
limited to a maximum amount payable over a 12 month period
equal to a rate based on the trailing
12-month
average of
90-day
treasury bills, plus 120 basis points. These maximum
allowable rates range from 2.7% to 4.0% of par value per year.
CSI has collected all interest due on its auction rate
securities and has no reason to believe that it will not collect
all interest due in the future. CSI does not expect to receive
the principal associated with its auction rate securities until
the earlier of a
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successful auction, their redemption by the issuer or their
maturity. On March 28, 2008, CSI obtained a margin loan
from UBS Financial Services, Inc., the entity through which CSI
originally purchased CSIs auction rate securities, for up
to $12.0 million, which was secured by the
$23.0 million par value of CSIs auction rate
securities. The outstanding balance on this loan at
June 30, 2008 was $11.9 million. On August 21,
2008, CSI replaced this loan with a margin loan from UBS Bank
USA, which increased maximum borrowings available to
$23.0 million. This maximum borrowing amount is not set
forth in the written agreement for the loan and may be adjusted
from time to time by UBS Bank in its sole discretion. The margin
loan has a floating interest rate equal to
30-day
LIBOR, plus 1.0%. The loan is due on demand and UBS Bank will
require CSI to repay it in full from the proceeds received from
a public equity offering where net proceeds exceed
$50.0 million. In addition, if at any time any of
CSIs auction rate securities may be sold, exchanged,
redeemed, transferred or otherwise conveyed for no less than
their par value, then CSI must immediately effect such a
transfer and the proceeds must be used to pay down outstanding
borrowings under this loan. The margin requirements are
determined by UBS Bank but are not included in the written loan
agreement and are therefore subject to change. From
August 21, 2008, the date this loan was initially funded,
through the date of this proxy statement/prospectus, the margin
requirements included maximum borrowings, including interest, of
$23.0 million. If these margin requirements are not
maintained, UBS Bank may require CSI to make a loan payment in
an amount necessary to comply with the applicable margin
requirements or demand repayment of the entire outstanding
balance. CSI has maintained the margin requirements under the
loans from both UBS entities. The outstanding balance on this
loan at September 30, 2008 was $22.9 million.
In accordance with
EITF 03-01
and FSP
FAS 115-1
and 124-1,
The Meaning of Other Than-Temporary Impairment and Its
Application to Certain Investments, CSI reviews several
factors to determine whether a loss is other-than-temporary.
These factors include but are not limited to: (1) the
length of time a security is in an unrealized loss position,
(2) the extent to which fair value is less than cost,
(3) the financial condition and near term prospects of the
issuer, and (4) the companys intent and ability to
hold the security for a period of time sufficient to allow for
any unanticipated recovery in fair value.
CSI recorded an other-than-temporary impairment loss of
$1.3 million relating to its auction rate securities in
CSIs statement of operations for the year ended
June 30, 2008 and recorded an unrealized loss of
$0.3 million relating to its auction rate securities in
CSIs other comprehensive income (loss) for the three
months ended September 30, 2008. CSI determined the fair
value of its auction rate securities and quantified the
other-than-temporary impairment loss and the unrealized loss
with the assistance of ValueKnowledge LLC, an independent third
party valuation firm, which utilized various valuation methods
and considered, among other factors, estimates of present value
of the auction rate securities based upon expected cash flows,
the likelihood and potential timing of issuers of the auction
rate securities exercising their redemption rights at par value,
the likelihood of a return of liquidity to the market for these
securities and the potential to sell the securities in secondary
markets.
At June 30, 2008, CSI concluded that no weight should be
given to the value indicated by the secondary markets for
student loan-backed auction rate securities similar to those CSI
holds because these markets have very low transaction volumes
and consist primarily of private transactions with minimal
disclosure, transactions may not be representative of the
actions of typically-motivated buyers and sellers and CSI does
not currently intend to sell in the secondary markets. However,
CSI did consider the secondary markets for certain
mortgage-backed securities to estimate the market yields
attributable to CSIs auction rate securities, but
determined that these secondary markets do not provide a
sufficient basis of comparison for the auction rate securities
that CSI holds and, accordingly, attributed no weight to the
values of these mortgage-backed securities indicated by the
secondary markets.
At June 30, 2008, CSI attributed a weight of 66.7% to
estimates of present value of the auction rate securities based
upon expected cash flows and a weight of 33.3% to the likelihood
and potential timing of issuers of the auction rate securities
exercising their redemption rights at par value or willingness
of third parties to provide financing in the market against the
par value of those securities. The attribution of these weights
required the exercise of valuation judgment. A measure of
liquidity is available from borrowing, which led to the 33.3%
weight attributed to the likelihood and potential timing of
issuers of the auction rate securities exercising their
redemption rights at par value or the willingness of third
parties to provide financing in the market against the par value
of those securities. However, borrowing does not eliminate
exposure to the risk of holding the securities, so the weight of
66.7% attributed to the present value of the auction rate
securities based upon expected cash flows reflects the
expectation that the securities are likely to be held for an
uncertain period. CSI focused on these methodologies
156
because no certainty exists regarding how the auction rate
securities will be eventually converted to cash and these
methodologies represent the most likely possible outcomes. To
derive estimates of the present value of the auction rate
securities based upon expected cash flows, CSI used the
securities expected annual interest payments, ranging from
2.7% to 4.0% of par value, representing estimated maximum annual
rates under the governing documents of the auction rate
securities; annual market interest rates, ranging from 4.5% to
5.8%, based on observed traded, state sponsored, taxable
certificates rated AAA or lower and issued between June 15 and
June 30, 2008; and a range of expected terms to liquidity.
At June 30, 2008, CSIs weighting of the valuation
methods indicates an implied term to liquidity of approximately
3.5 years. The implied term to liquidity of approximately
3.5 years is a result of considering a range in possible
timing of the various scenarios that would allow a holder of the
auction rate securities to convert the auction rate securities
to cash ranging from zero to ten years, with the highest
probability assigned to the range of zero to five years. Several
sources were consulted but no individual source of information
was relied upon to arrive at CSIs estimate of the range of
possible timing to convert the auction rate securities to cash
or the implied term to liquidity of approximately
3.5 years. The primary reason for the fair value being less
than cost related to a lack of liquidity of the securities,
rather than the financial condition and near term prospects of
the issuer.
At September 30, 2008, CSI concluded that no weight should
be given to the value indicated by the secondary markets for
student loan backed auction rate securities similar to those CSI
holds because these markets have very low transaction volumes
and consist primarily of private transactions with minimal
disclosure and transactions may not be representative of the
actions of typically-motivated buyers and sellers and CSI does
not currently intend to sell in the secondary markets. However,
CSI did consider the secondary markets for certain
mortgage-backed securities to estimate the market yields
attributable to CSIs auction rate securities, but
determined that these secondary markets do not provide a
sufficient basis of comparison for the auction rate securities
that CSI holds and, accordingly, attributed no weight to the
values of these mortgage-backed securities indicated by the
secondary markets.
At September 30, 2008, CSI concluded that no weight should
be given to the likelihood and potential timing of issuers of
the auction rate securities exercising their redemption rights
at par value based on low issuer call activity, so CSI
attributed a weight of 100.0% to estimates of present value of
the auction rate securities based upon expected cash flows. The
attribution of weights to the valuation factors required the
exercise of valuation judgment. The selection of a weight of
100.0% attributed to the present value of the auction rate
securities based upon expected cash flows reflects the
expectation, in absence of the Auction Rate Securities Rights
Prospectus discussed below, that no certainty exists regarding
how the auction rate securities will be eventually converted to
cash and this methodology represents the possible outcome. To
derive estimates of the present value of the auction rate
securities based upon expected cash flows, CSI used the
securities expected annual interest payments, ranging from
2.1% to 5.4% of par value, representing estimated maximum annual
rates under the governing documents of the auction rate
securities; annual market interest rates, ranging from 3.9% to
5.4%, based on observed traded, state sponsored, taxable
certificates rated AAA or lower and issued between September 29
and September 30, 2008; certain mortgage-backed securities
and indices; and a range of expected terms to liquidity.
CSIs weighting of the valuation methods as of
September 30, 2008 indicates an implied term to liquidity
of approximately five years in absence of the Auction Rate
Securities Rights Prospectus discussed below. The implied term
to liquidity of approximately five years is a result of
considering a range in possible timing of the various scenarios
that would allow a holder of the auction rate securities to
convert the auction rate securities to cash ranging from zero to
ten years, with the highest probability assigned to five years.
UBS issued a comprehensive settlement, which was confirmed by an
Auction Rate Securities Rights Prospectus issued by UBS on
October 7, 2008, in which there is a possibility of
redemption by UBS at par value for the auction rate securities
held by CSI between June 30, 2010 and July 2, 2012.
Under the comprehensive settlement, UBS has committed to
purchase a total of $8.3 billion of auction rate securities
at par value from most private clients during the two-year
period beginning January 1, 2009. Private clients and
charities holding less than $1.0 million in household
assets at UBS were able to avail themselves of this relief
beginning October 31, 2008. From mid-September 2008, UBS
began to provide loans at no cost to its clients for the par
value of their auction rate security holdings. In addition, UBS
has also committed to provide liquidity solutions to
institutional investors and has agreed to purchase all or any of
a remaining $10.3 billion in auction rate securities at par
value from its institutional clients beginning June 10,
2010. These auction rate security rights are not transferable,
tradable or marginable. CSI has not considered the liquidity
157
potentially generated by UBSs comprehensive settlement or
the UBS loan in CSIs valuation of the 19 auction rate
certificates held by CSI because the settlement rights were not
enforceable at September 30, 2008. The repurchase
arrangement and lending arrangement may represent separate
contracts, securities or other assets that have not been
considered in the valuation of the auction rate securities.
CSIs auction rate securities include AAA rated auction
rate securities issued primarily by state agencies and backed by
student loans substantially guaranteed by the Federal Family
Education Loan Program. These auction rate securities continue
to be AAA rated auction rate securities subsequent to the failed
auctions that began in February 2008.
In addition to the valuation procedures described above, CSI
considered (i) its current inability to hold these
securities for a period of time sufficient to allow for an
unanticipated recovery in fair value based on the companys
current liquidity, history of operating losses, and
managements estimates of required cash for continued
product development and sales and marketing expenses, and
(ii) failed auctions and the anticipation of continued
failed auctions for all of CSIs auction rate securities.
Based on the factors described above, CSI recorded the entire
amount of impairment loss identified for the year ended
June 30, 2008 of $1.3 million as other-than-temporary
and recorded the decrease in fair value of $0.3 million as
an unrealized loss for the three months ended September 30,
2008. CSI did not identify or record any additional realized or
unrealized gains or losses for the year ended June 30, 2008
or the three months ended September 30, 2008. CSI will
continue to monitor and evaluate the value of its investments
each reporting period for further possible impairment or
unrealized loss. Although it does not currently intend to do so,
CSI may consider selling its auction rate securities in the
secondary markets in the future, which may require a sale at a
substantial discount to the stated principal value of these
securities.
Excess and Obsolete Inventory. CSI has
inventories that are principally comprised of capitalized direct
labor and manufacturing overhead, raw materials and components,
and finished goods. Due to the technological nature of
CSIs products, there is a risk of obsolescence to changes
in CSIs technology and the market, which is impacted by
exogenous technological developments and events. Accordingly,
CSI writes down its inventories as CSI becomes aware of any
situation where the carrying amount exceeds the estimated
realizable value based on assumptions about future demands and
market conditions. The evaluation includes analyses of inventory
levels, expected product lives, product at risk of expiration,
sales levels by product and projections of future sales demand.
Stock-Based Compensation. Effective
July 1, 2006, CSI adopted SFAS No. 123(R),
Share-Based Payment, as interpreted by
SAB No. 107, using the prospective application method,
to account for stock-based compensation expense associated with
the issuance of stock options to employees and directors on or
after July 1, 2006. The unvested compensation costs at
July 1, 2006, which relate to grants of options that
occurred prior to the date of adoption of
SFAS No. 123(R), will continue to be accounted for
under Accounting Principles Board (APB) No. 25,
Accounting for Stock Issued to Employees.
SFAS No. 123(R) requires CSI to recognize stock-based
compensation expense in an amount equal to the fair value of
share-based payments computed at the date of grant. The fair
value of all employee and director stock options is expensed in
the consolidated statements of operations over the related
vesting period of the options. CSI calculated the fair value on
the date of grant using a Black-Scholes option pricing model.
To determine the inputs for the Black-Scholes option pricing
model, CSI is required to develop several assumptions, which are
highly subjective. These assumptions include:
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CSI common stock volatility;
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the length of CSIs options lives, which is based on
future exercises and cancellations;
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the number of shares of common stock pursuant to which options
which will ultimately be forfeited;
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the risk-free rate of return; and
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future dividends.
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CSI uses comparable public company data to determine volatility,
as CSI common stock has not yet been publicly traded. CSI uses a
weighted average calculation to estimate the time its options
will be outstanding as prescribed by Staff Accounting
Bulletin No. 107, Share-Based Payment. CSI
estimates the number of options that are expected to be
forfeited based on CSIs historical experience. The
risk-free rate is based on the U.S. Treasury
158
yield curve in effect at the time of grant for the estimated
life of the option. CSI uses its judgment and expectations in
setting future dividend rates, which is currently expected to be
zero.
The absence of an active market for CSI common stock also
requires CSIs management and board of directors to
estimate the fair value of CSI common stock for purposes of
granting options and for determining stock-based compensation
expense. In response to these requirements, CSIs
management and board of directors estimate the fair market value
of common stock at each date at which options are granted based
upon stock valuations and other qualitative factors. CSI has
conducted stock valuations using two different valuation
methods: the option pricing method and the probability weighted
expected return method, or PWERM. The option pricing method
assumes a liquidation of a company and treats common and
preferred stock as call options on the enterprise value. The
option pricing method is often used when the possible outcomes
for a liquidity event are deemed to have equal likelihood and
when valuing securities with a high degree of uncertainty
regarding potential future values. CSI used the option pricing
method for valuations of its common stock as of July 19,
2006, December 31, 2006, June 29, 2007 and
September 30, 2007, as CSI deemed all liquidity events to
have equal likelihood at those dates. All of these valuations
were conducted retrospectively. CSI began using the PWERM in
contemporaneous valuations of its common stock as of
December 31, 2007, March 31, 2008, June 30, 2008,
and September 30, 2008, as of which time CSI had commenced
significant efforts in connection with its initial public
offering process and the probability of a public offering or
other specific liquidation event, including the merger with
Replidyne, had increased. Accordingly, management and the board
of directors determined that the PWERM would be more appropriate
than the option pricing method. For the PWERM, CSI estimated the
likely return to stockholders based upon CSI becoming a public
company through the merger with Replidyne or an initial public
offering, being acquired or remaining a private company, and
employed comparable public company, merger and acquisition
transaction, and discounted cash flow analysis. These values
were adjusted and weighted based on probability of occurrence.
As of September 30, 2008, CSI assumed a 70% probability of
completing the merger with Replidyne, a 10% probability of
completing an initial public offering, a 15% probability of
being acquired, and a 5% probability of remaining a private
company.
Both the option pricing method and the PWERM have taken into
consideration the following factors:
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Financing Activity: Between July 19, 2006
and October 3, 2006, CSI sold $27.0 million in
Series A convertible preferred stock at $5.71 per share;
between May 16, 2007 and September 19, 2007, CSI sold
$18.6 million in
Series A-1
convertible preferred stock at $8.50 per share; and between
November 13, 2007 and December 17, 2007, CSI sold
$20.0 million in Series B convertible preferred stock
at $9.25 per share. New and existing investors participated in
the convertible preferred stock offerings, while certain
existing investors declined the opportunity to participate. As
of each valuation date, management and the board of directors
considered the differences between the valuation of the common
stock and the most recent price of CSI preferred stock and
determined that such differences were reasonable and accurately
reflected the anticipated time until a liquidity event.
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Preferred Stock Rights and Preferences: The
holders of preferred stock are entitled to receive cash
dividends at the rate of 8% of the original purchase price,
which dividends accrue, whether or not earned or declared, and
whether or not CSI has legally available funds. Holders of
preferred stock have the right to require CSI to redeem in cash
30% of the original amount on the fifth year anniversary of the
purchase agreement for the applicable series of preferred stock,
30% after the sixth year and 40% after the seventh year. The
price CSI would pay for the redeemed shares would be the greater
of (i) the price per share paid for the preferred stock,
plus all accrued and unpaid dividends, or (ii) the fair
market value of the preferred stock at the time of redemption as
determined by a professional appraiser. The holders of the
preferred stock have the right to convert, at their option,
their shares into common stock on a share for share basis. The
holders of preferred stock also have the right to designate, and
have designated, two individuals to CSIs board of
directors. Finally, in the event of CSIs liquidation or
winding up, the holders of preferred stock are entitled to
receive an amount equal to (i) the price paid for the
preferred shares, plus (ii) all dividends accrued and
unpaid before any payments are made to holders of stock junior
to the preferred stock. CSIs remaining net assets, if any,
would be distributed to the holders of preferred and common
stock based on their ownership amounts assuming the conversion
of the preferred stock, except the total amount to be
distributed to the
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159
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preferred stock is subject to certain return on investment
limitations. The aggregate liquidation preferences of CSI
preferred stock at the dates listed below are as follows:
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Aggregate Liquidation
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Date
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Preference
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September 30, 2006
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$
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25.4 million
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December 31, 2006
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$
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27.9 million
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March 31, 2007
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$
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28.4 million
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June 30, 2007
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$
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37.3 million
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September 30, 2007
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$
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48.3 million
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December 31, 2007
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$
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69.3 million
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March 31, 2008
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$
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70.6 million
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June 30, 2008
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$
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72.0 million
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September 30, 2008
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$
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73.3 million
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Growth of Executive Management
Team: Management and the board of directors
considered the development and growth of CSIs executive
management team, including the hiring of CSIs Vice
President of Sales and Vice President of Business Development to
build its sales organization, CSIs Vice President of
Marketing to build its sales and marketing function, and
CSIs Chief Executive Officer.
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OASIS Clinical Trial: The progress of
CSIs OASIS clinical trial, which began enrollment in
January 2006 and was completed in January 2007.
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FDA Process: In May 2007, CSI applied for
510(k) clearance from the FDA for the Diamondback 360°
system. CSI received 510(k) clearance for use of the Diamondback
360° with a hollow crown as a therapy for patients with PAD
in August 2007, and CSI received 510(k) clearances in October
2007 for the updated control unit used with the Diamondback
360° and in November 2007 for the Diamondback 360°
with a solid crown.
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Commercial Launch: Upon receiving FDA 510(k)
clearance, CSI began shipping product to customers under
CSIs limited commercial launch plan. During the quarter
ended March 31, 2008, CSI began a full commercial launch of
the Diamondback 360°.
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Merger and Acquisition Process: During the
period from July 2007 through September 2007, CSI engaged
investment bankers to explore potential merger and acquisition
opportunities. CSI began its discussions with Replidyne in
August 2008.
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Offering Process: Beginning in the quarter
ended June 30, 2007, CSI began discussions with investment
bankers concerning its initial public offering process, and the
organizational meeting for its initial public offering occurred
in October 2007. CSI filed a registration statement on
January 22, 2008 and filed several amendments. As a result
of the volatile equity markets, as of September 30, 2008 it
was probable that CSI would not complete the initial public
offering process during the quarter ending December 31,
2008. Therefore, previously capitalized offering costs of
approximately $1.7 million were expensed during the quarter
ended September 30, 2008. On November 4, 2008, CSI
withdrew the registration statement in conjunction with the
announcement of the execution of the merger agreement with
Replidyne.
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Revenues: CSI recognized $22.2 million
and $11.6 million in revenues for the year ended
June 30, 2008 and three months ended September 30,
2008, respectively.
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CSIs management and board of directors also considered the
valuations of comparable public companies, CSIs cash and
working capital amounts, and additional objective and subjective
factors relating to CSIs business. For each valuation,
CSIs management and board of directors considered all of
the factors that they considered to be relevant at the time and
did not rely exclusively on any particular factors. Certain
factors described with respect to each valuation represented
progress in the development of CSIs business, which
reduced risk and improved the probability that CSI would achieve
its business plan. In addition, the order in which CSI has
described these factors in this proxy statement/prospectus does
not represent the relative importance or weight given to any of
the factors.
160
The following highlights key milestones that contributed to the
valuation of CSI common stock in each of its valuations:
Valuation
as of July 19, 2006
This valuation estimated that the fair market value of CSI
common stock as of July 19, 2006 was $2.43 per share,
taking into consideration the sale of Series A convertible
preferred stock at $5.71 per share and the hiring of CSIs
Vice President of Sales and Vice President of Business
Development to begin the process of building a sales
organization in the period from July 2006 through September 2006.
Valuation
as of December 31, 2006
This valuation estimated that the fair market value of CSI
common stock as of December 31, 2006 was $2.79 per share,
taking into consideration the sale of Series A convertible
preferred stock at $5.71 per share, changes in the value of
comparable public companies, the substantial completion of
enrollment for the OASIS clinical trial, and the hiring of
CSIs Vice President of Marketing to continue building
CSIs sales and marketing function.
Valuation
as of June 29, 2007
This valuation estimated that the fair market value of CSI
common stock as of June 29, 2007 was $5.95 per share,
taking into consideration the sale of
Series A-1
convertible preferred stock at $8.50 per share, the completion
of the OASIS clinical trial, the hiring of CSIs Chief
Executive Officer, CSIs application for FDA 510(k)
clearance for the Diamondback 360°, and the commencement of
discussions with investment bankers regarding the initial public
offering process.
Valuation
as of September 30, 2007
This valuation estimated that the fair market value of CSI
common stock as of September 30, 2007 was $7.36 per share,
taking into consideration the sale of
Series A-1
convertible preferred stock at $8.50 per share, expectation of
the sale of Series B convertible preferred stock at $9.25
per share, receipt of FDA 510(k) clearance for the Diamondback
360°, continued discussions with investment bankers
regarding the initial public offering process, the engagement of
investment bankers to explore potential merger and acquisition
opportunities, and the limited commercial launch of the
Diamondback 360°.
Valuation
as of December 31, 2007
This valuation estimated that the fair market value of CSI
common stock as of December 31, 2007 was $8.44 per share,
taking into consideration the sale of Series B convertible
preferred stock at $9.25 per share, receipt of FDA 510(k)
clearances for the updated control unit for the Diamondback
360° and for the Diamondback 360° with a solid crown,
revenues of $4.6 million in revenue for the quarter ended
December 31, 2007, and the holding of preparatory meetings
as part of the initial public offering process.
Valuation
as of March 31, 2008
This valuation estimated that the fair market value of CSI
common stock as of March 31, 2008 was $10.27 per share,
taking into consideration the sale of Series B convertible
preferred stock at $9.25 per share during the quarter ended
December 31, 2007, initiation of the full commercial launch
of the Diamondback 360°, revenues of $12.3 million for
the nine months ended March 31, 2008, and substantial
completion of some of the milestones in the initial public
offering process.
Valuation
as of June 30, 2008
This valuation estimated that the fair market value of CSI
common stock as of June 30, 2008 was $10.22 per share,
taking into consideration revenues of $22.2 million for the
year ended June 30, 2008 and substantial completion of
additional milestones in the initial public offering process.
This valuation also considered uncertain conditions in the
public markets, which resulted in a slightly lower valuation of
CSI common stock than the March 31, 2008 valuation.
161
Valuation
as of September 30, 2008
This valuation estimated that the fair market value of CSI
common stock as of September 30, 2008 was $10.25 per share,
taking into consideration revenues of $11.6 million for the
three months ended September 30, 2008, along with the
estimated valuations associated with various liquidation
scenarios considered under the PWERM method including the
proposed merger with Replidyne.
CSIs management and board of directors set the exercise
prices for option grants based upon their best estimate of the
fair market value of CSI common stock at the time they made such
grants, taking into account all information available at those
times. In some cases, management and the board of directors made
retrospective assessments of the valuation of CSI common stock
at later dates and determined that the fair market value of CSI
common stock at the times the grants were made was different
than the exercise prices established for those grants. In cases
in which the fair market value was higher than the exercise
price, CSI recognized stock-based compensation expense for the
excess of the fair market value of the common stock over the
exercise price.
The following table sets forth the exercise prices of options
granted during fiscal year 2008 and three months ended
September 30, 2008, and the fair market value of CSI common
stock, as determined by CSIs management and board of
directors, on the dates of the option grants:
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Fair Market
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Value per Share
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Assigned by
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Number of
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Management and
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Date of Option Grant
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Shares
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Exercise Price
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Board of Directors
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August 7, 2007
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402,500
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$
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5.11
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$
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5.95
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October 9, 2007
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331,083
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$
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5.11
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$
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7.36
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November 13, 2007
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154,917
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$
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7.36
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$
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7.90
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December 12, 2007
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775,000
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$
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7.86
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$
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8.44
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December 31, 2007
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1,056,234
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$
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7.86
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$
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8.44
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February 14, 2008
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172,213
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$
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9.04
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$
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9.36
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CSI also has granted restricted stock awards with vesting terms
ranging from 12 to 36 months. The following table sets
forth the number of shares of restricted stock awarded and the
fair market value of CSI common stock, as determined by
CSIs management and board of directors, on the dates of
the restricted stock award grants:
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Fair Market
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Value per Share
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Assigned by
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Date of Restricted
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Number of
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Management and
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Stock Award Grant
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Shares
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Board of Directors
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December 12, 2007
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204,338
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$
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8.44
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February 14, 2008
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307,200
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$
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9.36
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April 14, 2008
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75,000
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$
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10.27
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April 22, 2008
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253,600
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$
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10.27
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July 22, 2008
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161,823
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$
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10.22
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Preferred Stock. Effective in fiscal 2007,
with the sale of CSIs Series A and
A-1
convertible preferred stock, CSI began recording the current
estimated fair value of its convertible preferred stock on a
quarterly basis based on the fair market value of that stock as
determined by CSIs management and board of directors. In
accordance with Accounting Series Release No. 268,
Presentation in Financial Statements of Redeemable
Preferred Stocks and EITF Abstracts, Topic D-98,
Classification and Measurement of Redeemable Securities,
CSI records changes in the current fair value of CSIs
redeemable convertible preferred stock in the consolidated
statements of changes in shareholders (deficiency) equity
and comprehensive (loss) income and consolidated statements of
operations as accretion of redeemable convertible preferred
stock.
In connection with the preparation of CSIs financial
statements, CSIs management and board of directors
established what they believe to be the fair value of CSIs
Series A convertible preferred stock,
Series A-1
convertible preferred stock and Series B convertible
preferred stock. This determination was based on concurrent
significant stock transactions with third parties and a variety
of factors, including CSIs business milestones achieved
and future financial projections, CSIs position in the
industry relative to its competitors, external factors impacting
the value of CSIs stock in the marketplace, the stock
volatility of comparable companies in CSIs industry,
general economic trends and the application of various valuation
methodologies. The following table
162
shows the fair market value of one share of CSIs
Series A convertible preferred stock,
Series A-1
convertible preferred stock and Series B convertible
preferred stock at the dates noted during the fiscal year ended
June 30, 2008 and three months ended September 30,
2008:
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Series A
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Series A-1
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Series B
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Convertible
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Convertible
|
|
|
Convertible
|
|
Date
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
September 30, 2007
|
|
$
|
9.20
|
|
|
$
|
9.20
|
|
|
$
|
|
|
December 31, 2007
|
|
$
|
9.25
|
|
|
$
|
9.25
|
|
|
$
|
9.25
|
|
March 31, 2008
|
|
$
|
10.81
|
|
|
$
|
10.81
|
|
|
$
|
10.81
|
|
June 30, 2008
|
|
$
|
10.81
|
|
|
$
|
10.81
|
|
|
$
|
10.81
|
|
September 30, 2008
|
|
$
|
10.81
|
|
|
$
|
10.81
|
|
|
$
|
10.81
|
|
Preferred Stock Warrants. Freestanding
warrants and other similar instruments related to shares that
are redeemable are accounted for in accordance with
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, and its related interpretations. Under
SFAS No. 150, the freestanding warrant that is related
to CSIs redeemable convertible preferred stock is
classified as a liability on the balance sheet as of
June 30, 2008 and September 30, 2008. The warrant is
subject to remeasurement at each balance sheet date and any
change in fair value is recognized as a component of interest
expense. Fair value is measured using the Black-Scholes option
pricing model. CSI will continue to adjust the liability for
changes in fair value until the earlier of the exercise or
expiration of the warrant or the completion of a liquidation
event, including the completion of an initial public offering
with gross cash proceeds to CSI of at least $40.0 million,
at which time all preferred stock warrants will be converted
into warrants to purchase common stock and, accordingly, the
liability will be reclassified to equity.
Results
of Operations
The following table sets forth, for the periods indicated,
CSIs results of operations expressed as dollar amounts (in
thousands), and, for certain line items, the changes between the
specified periods expressed as percent increases or decreases:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
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|
Years Ended June 30,
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Three Months Ended September 30,
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|
|
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|
Percent
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|
|
|
|
|
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Percent
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|
|
|
|
|
|
|
|
Percent
|
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
22,177
|
|
|
|
100.0
|
%
|
|
$
|
|
|
|
$
|
11,646
|
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,927
|
|
|
|
100.0
|
|
|
|
539
|
|
|
|
3,881
|
|
|
|
620.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,250
|
|
|
|
100.0
|
|
|
|
(539
|
)
|
|
|
7,765
|
|
|
|
1,540.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
1,735
|
|
|
|
6,691
|
|
|
|
285.6
|
%
|
|
|
6,691
|
|
|
|
35,326
|
|
|
|
428.0
|
|
|
|
3,552
|
|
|
|
16,424
|
|
|
|
362.4
|
|
Research and development
|
|
|
3,168
|
|
|
|
8,446
|
|
|
|
166.6
|
|
|
|
8,446
|
|
|
|
16,068
|
|
|
|
90.2
|
|
|
|
3,328
|
|
|
|
4,955
|
|
|
|
48.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,903
|
|
|
|
15,137
|
|
|
|
208.7
|
|
|
|
15,137
|
|
|
|
51,394
|
|
|
|
239.5
|
|
|
|
6,880
|
|
|
|
21,379
|
|
|
|
210.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,903
|
)
|
|
|
(15,137
|
)
|
|
|
208.7
|
|
|
|
(15,137
|
)
|
|
|
(38,144
|
)
|
|
|
152.0
|
|
|
|
(7,419
|
)
|
|
|
(13,614
|
)
|
|
|
83.5
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(48
|
)
|
|
|
(1,340
|
)
|
|
|
2,691.7
|
|
|
|
(1,340
|
)
|
|
|
(923
|
)
|
|
|
31.1
|
|
|
|
(300
|
)
|
|
|
(227
|
)
|
|
|
24.3
|
|
Interest income
|
|
|
56
|
|
|
|
881
|
|
|
|
1,473.2
|
|
|
|
881
|
|
|
|
1,167
|
|
|
|
32.5
|
|
|
|
278
|
|
|
|
142
|
|
|
|
48.9
|
|
Impairment on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
8
|
|
|
|
(459
|
)
|
|
|
5,837.5
|
|
|
|
(459
|
)
|
|
|
(1,023
|
)
|
|
|
122.9
|
|
|
|
(22
|
)
|
|
|
(85
|
)
|
|
|
286.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,895
|
)
|
|
|
(15,596
|
)
|
|
|
218.6
|
|
|
|
(15,596
|
)
|
|
|
(39,167
|
)
|
|
|
151.1
|
|
|
|
(7,441
|
)
|
|
|
(13,699
|
)
|
|
|
84.1
|
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
(16,835
|
)
|
|
|
|
|
|
|
(16,835
|
)
|
|
|
(19,422
|
)
|
|
|
15.4
|
|
|
|
(4,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(4,895
|
)
|
|
$
|
(32,431
|
)
|
|
|
562.5
|
%
|
|
$
|
(32,431
|
)
|
|
$
|
(58,589
|
)
|
|
|
80.7
|
%
|
|
$
|
(12,294
|
)
|
|
$
|
(13,699
|
)
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of the Three Months Ended September 30, 2007 with the Three
Months Ended September 30, 2008
Revenues. CSI generated revenues of
$11.6 million during the three months ended
September 30, 2008 attributable to sales of the Diamondback
360°. Since September 2007, CSI has expanded its sales and
marketing
163
efforts and has shipped more than 10,000 single-use catheters
through September 30, 2008. CSI expects its revenue to
increase as CSI continues to expand its sales and marketing
teams to increase penetration of the U.S. PAD market and
introduce new and improved products.
CSI has applied EITF
No. 00-21,
Revenue Arrangements with Multiple Deliverables, the
primary impact of which was to treat the Diamondback 360°
as a single unit of accounting for initial customer orders. As
such, revenues were deferred until the title and risk of loss of
each Diamondback 360° component, consisting of catheters,
guidewires, and a control unit, are transferred to the customer
based on the shipping terms. Many initial shipments to customers
also included a loaner control unit, which CSI provided, until
the new control unit received clearance from the FDA and was
subsequently available for sale. The loaner control units were
company-owned property and CSI maintained legal title to these
units. Accordingly, CSI had deferred revenue of
$1.4 million as of September 30, 2007, reflecting all
component shipments to customers pending receipt of a customer
purchase order and shipment of a new control unit. CSI had
deferred revenue of $116,000 as of June 30, 2008, all of
which was recognized during the quarter ended September 30,
2008.
Cost of Goods Sold. Cost of goods sold
increased by $3.4 million, from $539,000 for the three
months ended September 30, 2007 to $3.9 million for
the three months ended September 30, 2008. These amounts
represent the cost of materials, labor and overhead for
single-use catheters, guidewires and control units, and the
increase reflects CSIs increased sales. Cost of goods sold
for the three months ended September 30, 2007 and 2008
includes $27,000 and $176,000, respectively, for stock-based
compensation. CSI expects that cost of goods sold as a
percentage of revenues will continue to decrease as CSI
implements cost reduction initiatives and benefits from
increased volume and related economies of scale.
Selling, General and Administrative
Expenses. CSIs selling, general and
administrative expenses increased by $12.8 million, from
$3.6 million for the three months ended September 30,
2007 to $16.4 million for the three months ended
September 30, 2008. The primary reasons for the increase
included the continued building of CSIs sales and
marketing team, contributing $9.6 million, and significant
consulting and professional services, contributing
$2.5 million, which includes $1.7 million in
previously capitalized offering costs. In addition, stock-based
compensation increased from $277,000 for the three months ended
September 30, 2007 to $1.4 million for the three
months ended September 30, 2008. CSI expects its selling,
general and administrative expenses to increase significantly
due primarily to the costs associated with expanding CSIs
sales and marketing organization to further commercialize
CSIs products.
Research and Development Expenses. CSIs
research and development expenses increased by
$1.6 million, from $3.3 million for the three months
ended September 30, 2007 to $5.0 million for the three
months ended September 30, 2008. Research and development
spending increased as CSI continued projects to improve its
product, such as the development of a new control unit, shaft
designs and crown designs, and continued human feasibility
trials in the coronary market. In addition, stock-based
compensation increased from $73,000 for the three months ended
September 30, 2007 to $112,000 for the three months ended
September 30, 2008. CSI expects its research and
development expenses to increase as CSI attempts to expand its
product portfolio within the market for the treatment of
peripheral arteries and leverage CSIs core technology into
the coronary market.
Interest Income. Interest income decreased by
$136,000, from $278,000 for the three months ended
September 30, 2007 to $142,000 for the three months ended
September 30, 2008. The decrease was primarily due to lower
average cash and cash equivalents and investment balances.
Average cash and cash equivalent and investment balances were
$21.6 million and $10.0 million for the three months
ended September 30, 2007 and 2008, respectively.
Interest Expense. Interest expense decreased
by $73,000, from $300,000 for the three months ended
September 30, 2007 to $227,000 for the three months ended
September 30, 2008. Interest expense during the three
months ended September 30, 2007 was due to the change in
the fair value of convertible preferred stock warrants. Interest
expense during the three months ended September 30, 2008
was due to outstanding debt balances.
Accretion of Redeemable Convertible Preferred
Stock. There was no accretion of redeemable
convertible preferred stock for the three months ended
September 30, 2008, as compared to accretion of redeemable
convertible preferred stock of $4.9 million for the three
months ended September 30, 2007. Accretion of redeemable
convertible preferred stock reflects the change in estimated
fair value of preferred stock at the balance sheet dates, and
there was no change in the estimated fair value as of
September 30, 2008 compared to June 30, 2008.
164
Comparison
of the Fiscal Year Ended June 30, 2007 with the Fiscal Year
Ended June 30, 2008
Revenues. CSI generated revenues of
$22.2 million during the year ended June 30, 2008
attributable to sales of the Diamondback 360° to customers
following FDA clearance in August 2007. CSI commenced a limited
commercial introduction of the Diamondback 360° in the
United States in September 2007, followed by a full commercial
launch in the quarter ended March 31, 2008. CSI shipped
more than 6,800 single-use catheters through June 30, 2008.
CSI has applied EITF
No. 00-21,
Revenue Arrangements with Multiple Deliverables, the
primary impact of which was to treat the Diamondback 360°
as a single unit of accounting for initial customer orders. As
such, revenues are deferred until the title and risk of loss of
each Diamondback 360° component, consisting of catheters,
guidewires, and a control unit, are transferred to the customer
based on the shipping terms. Many initial shipments to customers
also included a loaner control unit, which CSI provided, until
the new control unit received clearance from the FDA and was
subsequently available for sale. The loaner control units were
company-owned property and CSI maintained legal title to these
units. Accordingly, CSI had deferred revenue of $116,000 as of
June 30, 2008, reflecting all component shipments to
customers pending receipt of a customer purchase order and
shipment of a new control unit. All deferred revenue was
recognized during the quarter ended September 30, 2008.
Cost of Goods Sold. For the year ended
June 30, 2008, cost of goods sold was $8.9 million.
This amount represents the cost of materials, labor and overhead
for single-use catheters, guidewires and control units shipped
subsequent to obtaining FDA clearance for the Diamondback
360° in August 2007. Cost of goods sold for the year ended
June 30, 2008 includes $232,000 for stock-based
compensation.
Selling, General and Administrative
Expenses. CSIs selling, general and
administrative expenses increased by $28.6 million, from
$6.7 million for the year ended June 30, 2007 to
$35.3 million for the year ended June 30, 2008. The
primary reasons for the increase included the building of
CSIs sales and marketing team, contributing
$18.6 million, and significant consulting and professional
services, contributing $2.1 million. In addition,
stock-based compensation increased from $327,000 for the year
ended June 30, 2007 to $6.9 million for the year ended
June 30, 2008.
Research and Development Expenses. CSIs
research and development expenses increased by
$7.7 million, from $8.4 million for the year ended
June 30, 2007 to $16.1 million for the year ended
June 30, 2008. Research and development spending increased
as CSI initiated projects to improve its product, such as the
development of a new control unit, shaft designs and crown
designs, and began human feasibility trials in the coronary
market. In addition, stock-based compensation increased from
$63,000 for the year ended June 30, 2007 to $297,000 for
the year ended June 30, 2008. CSI expects its research and
development expenses to increase as CSI attempts to expand its
product portfolio within the market for the treatment of
peripheral arteries and leverage CSIs core technology into
the coronary market.
Interest Income. Interest income increased by
$286,000, from $881,000 for the year ended June 30, 2007 to
$1.2 million for the year ended June 30, 2008. The
increase was primarily due to higher average cash and cash
equivalents and investment balances and higher rates of return.
Average cash and cash equivalent and investment balances were
$18.5 million and $20.4 million for the years ended
June 30, 2007 and 2008, respectively.
Interest Expense. Interest expense decreased
by $417,000, from $1.3 million for the year ended
June 30, 2007 to $923,000 for the year ended June 30,
2008. The decrease was due to the smaller increase in the fair
value of convertible preferred stock warrants from fiscal 2007
to fiscal 2008.
Impairment
of investments
Due to the recent conditions in the global credit markets that
have prevented CSI from liquidating its holdings of auction rate
securities, CSI recorded an other-than-temporary impairment loss
of $1.3 million relating to its auction rate securities in
CSIs statement of operations for the year ended
June 30, 2008 and recorded an unrealized loss of
$0.3 million relating to its auction rate securities in
CSIs other comprehensive income (loss) for the three
months ended September 30, 2008. CSI determined the fair
value of its auction rate securities and quantified the
other-than-temporary impairment loss and the unrealized loss
with the assistance of ValueKnowledge LLC, an independent third
party valuation firm, which utilized various valuation methods
and considered, among other factors, estimates of present value
of the auction rate securities based upon expected cash flows,
the likelihood and
165
potential timing of issuers of the auction rate securities
exercising their redemption rights at par value, the likelihood
of a return of liquidity to the market for these securities and
the potential to sell the securities in secondary markets.
At June 30, 2008, CSI concluded that no weight should be
given to the value indicated by the secondary markets for
student loan-backed auction rate securities similar to those CSI
holds because these markets have very low transaction volumes
and consist primarily of private transactions with minimal
disclosure, transactions may not be representative of the
actions of typically-motivated buyers and sellers and CSI does
not currently intend to sell in the secondary markets. However,
CSI did consider the secondary markets for certain
mortgage-backed securities to estimate the market yields
attributable to CSIs auction rate securities, but
determined that these secondary markets do not provide a
sufficient basis of comparison for the auction rate securities
that CSI holds and, accordingly, attributed no weight to the
values of these mortgage-backed securities indicated by the
secondary markets.
At June 30, 2008, CSI attributed a weight of 66.7% to
estimates of present value of the auction rate securities based
upon expected cash flows and a weight of 33.3% to the likelihood
and potential timing of issuers of the auction rate securities
exercising their redemption rights at par value or willingness
of third parties to provide financing in the market against the
par value of those securities. The attribution of these weights
required the exercise of valuation judgment. A measure of
liquidity is available from borrowing, which led to the 33.3%
weight attributed to the likelihood and potential timing of
issuers of the auction rate securities exercising their
redemption rights at par value or the willingness of third
parties to provide financing in the market against the par value
of those securities. However, borrowing does not eliminate
exposure to the risk of holding the securities, so the weight of
66.7% attributed to the present value of the auction rate
securities based upon expected cash flows reflects the
expectation that the securities are likely to be held for an
uncertain period. CSI focused on these methodologies because no
certainty exists regarding how the auction rate securities will
be eventually converted to cash and these methodologies
represent the most likely possible outcomes. To derive estimates
of the present value of the auction rate securities based upon
expected cash flows, CSI used the securities expected
annual interest payments, ranging from 2.7% to 4.0% of par
value, representing estimated maximum annual rates under the
governing documents of the auction rate securities; annual
market interest rates, ranging from 4.5% to 5.8%, based on
observed traded, state sponsored, taxable certificates rated AAA
or lower and issued between June 15 and June 30, 2008; and
a range of expected terms to liquidity.
At June 30, 2008, CSIs weighting of the valuation
methods indicates an implied term to liquidity of approximately
3.5 years. The implied term to liquidity of approximately
3.5 years is a result of considering a range in possible
timing of the various scenarios that would allow a holder of the
auction rate securities to convert the auction rate securities
to cash ranging from zero to ten years, with the highest
probability assigned to the range of zero to five years. Several
sources were consulted but no individual source of information
was relied upon to arrive at CSIs estimate of the range of
possible timing to convert the auction rate securities to cash
or the implied term to liquidity of approximately
3.5 years. The primary reason for the fair value being less
than cost related to a lack of liquidity of the securities,
rather than the financial condition and near term prospects of
the issuer.
At September 30, 2008, CSI concluded that no weight should
be given to the value indicated by the secondary markets for
student loan backed auction rate securities similar to those CSI
holds because these markets have very low transaction volumes
and consist primarily of private transactions with minimal
disclosure and transactions may not be representative of the
actions of typically-motivated buyers and sellers and CSI does
not currently intend to sell in the secondary markets. However,
CSI did consider the secondary markets for certain
mortgage-backed securities to estimate the market yields
attributable to CSIs auction rate securities, but
determined that these secondary markets do not provide a
sufficient basis of comparison for the auction rate securities
that CSI holds and, accordingly, attributed no weight to the
values of these mortgage-backed securities indicated by the
secondary markets.
At September 30, 2008, CSI concluded that no weight should
be given to the likelihood and potential timing of issuers of
the auction rate securities exercising their redemption rights
at par value based on low issuer call activity, so CSI
attributed a weight of 100.0% to estimates of present value of
the auction rate securities based upon expected cash flows. The
attribution of weights to the valuation factors required the
exercise of valuation judgment. The selection of a weight of
100.0% attributed to the present value of the auction rate
securities based upon expected cash flows reflects the
expectation, in absence of the Auction Rate Securities Rights
Prospectus discussed below, that no certainty exists regarding
how the auction rate securities will be eventually converted to
cash and this
166
methodology represents the possible outcome. To derive estimates
of the present value of the auction rate securities based upon
expected cash flows, CSI used the securities expected
annual interest payments, ranging from 2.1% to 5.4% of par
value, representing estimated maximum annual rates under the
governing documents of the auction rate securities; annual
market interest rates, ranging from 3.9% to 5.4%, based on
observed traded, state sponsored, taxable certificates rated AAA
or lower and issued between September 29 and September 30,
2008; certain mortgage-backed securities and indices; and a
range of expected terms to liquidity.
CSIs weighting of the valuation methods as of
September 30, 2008 indicates an implied term to liquidity
of approximately five years in absence of the Auction Rate
Securities Rights Prospectus discussed below. The implied term
to liquidity of approximately five years is a result of
considering a range in possible timing of the various scenarios
that would allow a holder of the auction rate securities to
convert the auction rate securities to cash ranging from zero to
ten years, with the highest probability assigned to five years.
UBS issued a comprehensive settlement, which was confirmed by an
Auction Rate Securities Rights Prospectus issued by UBS on
October 7, 2008, in which there is a possibility of
redemption by UBS at par value for the auction rate securities
held by CSI between June 30, 2010 and July 2, 2012.
Under the comprehensive settlement, UBS has committed to
purchase a total of $8.3 billion of auction rate securities
at par value from most private clients during the two-year
period beginning January 1, 2009. Private clients and
charities holding less than $1.0 million in household
assets at UBS were able to avail themselves of this relief
beginning October 31, 2008. From mid-September 2008, UBS
began to provide loans at no cost to its clients for the par
value of their auction rate security holdings. In addition, UBS
has also committed to provide liquidity solutions to
institutional investors and has agreed to purchase all or any of
a remaining $10.3 billion in auction rate securities at par
value from its institutional clients beginning June 10,
2010. These auction rate security rights are not transferable,
tradable or marginable. CSI has not considered the liquidity
potentially generated by UBSs comprehensive settlement or
the UBS loan in CSIs valuation of the 19 auction rate
certificates held by CSI because the settlement rights were not
enforceable at September 30, 2008. The repurchase
arrangement and lending arrangement may represent separate
contracts, securities or other assets that have not been
considered in the valuation of the auction rate securities.
CSIs auction rate securities include AAA rated auction
rate securities issued primarily by state agencies and backed by
student loans substantially guaranteed by the Federal Family
Education Loan Program. These auction rate securities continue
to be AAA rated auction rate securities subsequent to the failed
auctions that began in February 2008.
In addition to the valuation procedures described above, CSI
considered (i) its current inability to hold these
securities for a period of time sufficient to allow for an
unanticipated recovery in fair value based on the companys
current liquidity, history of operating losses, and
managements estimates of required cash for continued
product development and sales and marketing expenses, and
(ii) failed auctions and the anticipation of continued
failed auctions for all of CSIs auction rate securities.
Based on the factors described above, CSI recorded the entire
amount of impairment loss identified for the year ended
June 30, 2008 of $1.3 million as other-than-temporary
and recorded the decrease in fair value of $0.3 million as
an unrealized loss for the three months ended September 30,
2008. CSI did not identify or record any additional realized or
unrealized gains or losses for the year ended June 30, 2008
or the three months ended September 30, 2008. CSI will
continue to monitor and evaluate the value of its investments
each reporting period for further possible impairment or
unrealized loss. Although it does not currently intend to do so,
CSI may consider selling its auction rate securities in the
secondary markets in the future, which may require a sale at a
substantial discount to the stated principal value of these
securities.
Accretion of Redeemable Convertible Preferred
Stock. Accretion of redeemable convertible
preferred stock was $16.8 million for the year ended
June 30, 2007, as compared to $19.4 million for the
year ended June 30, 2008. Accretion of redeemable
convertible preferred stock reflects the change in estimated
fair value of preferred stock at the balance sheet dates.
Comparison
of the Fiscal Year Ended June 30, 2006 with the Fiscal Year
Ended June 30, 2007
Revenues. CSI did not generate any revenues
during the fiscal years ended June 30, 2006 or 2007.
Selling, General and Administrative
Expenses. CSIs selling, general and
administrative expenses increased by $5.0 million, from
$1.7 million in fiscal 2006 to $6.7 million in fiscal
2007. The primary reasons for the increase
167
included the addition of four officers to CSIs executive
management team, contributing $1.1 million, the development
of CSIs sales and marketing team, contributing
$2.6 million, and consulting services, contributing
$300,000. CSI recorded stock-based compensation of $327,000
during the fiscal year ended June 30, 2007, while none was
recorded in 2006. The balance of the increase was spread among
CSIs general and administrative accounts and reflected the
overall growth in the business.
Research and Development Expenses. CSIs
research and development expenses increased by
$5.2 million, from $3.2 million in fiscal 2006 to
$8.4 million in fiscal 2007. Both clinical and regulatory
spending increased substantially as CSI completed European and
U.S. clinical trials and submitted CSIs 510(k)
clearance application to the FDA. In addition, CSI incurred
significant research and development costs for projects expected
to improve CSIs product, such as the development of a new
control unit and shaft designs. CSI recorded stock-based
compensation of $63,000 during the fiscal year ended
June 30, 2007.
Interest Income. Interest income increased by
$825,000, from $56,000 in fiscal 2006 to $881,000 in fiscal
2007. The increase was due to higher average cash, cash
equivalents and short-term investment balances. Average cash,
cash equivalent and short-term investment balances were
$1.6 million and $18.5 million during fiscal 2006 and
2007, respectively.
Interest Expense. Interest expense increased
by $1.3 million, from $48,000 for the fiscal year ended
June 30, 2006 to $1.3 million for the fiscal year
ended June 30, 2007. The increase was due to the change in
the estimated fair value of convertible preferred stock warrants.
Accretion of Redeemable Convertible Preferred
Stock. Accretion of redeemable convertible
preferred stock was $16.8 million for the fiscal year ended
June 30, 2007. Accretion of redeemable convertible
preferred stock reflects the change in estimated fair value of
preferred stock at the balance sheet dates.
Liquidity
and Capital Resources
CSIs consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course
of business. CSI had cash and cash equivalents of
$14.7 million at September 30, 2008. During the year
ended June 30, 2008 and three months ended
September 30, 2008, net cash used in operations amounted to
$31.9 million and $12.0 million, respectively. As of
September 30, 2008, CSI had an accumulated deficit of
$132.0 million. CSI has historically funded its operating
losses primarily from the issuance of common and preferred stock
and convertible promissory notes. CSI has incurred negative cash
flows and net losses since inception. In addition, in February
2008, CSI was notified that recent conditions in the global
credit markets have caused insufficient demand for auction rate
securities, resulting in failed auctions for $23.0 million
of CSIs auction rate securities held at June 30, 2008
and September 30, 2008. These securities are currently not
liquid, as CSI has an inability to sell the securities due to
continued failed auctions. On March 28, 2008, CSI obtained
a margin loan from UBS Financial Services, Inc., the entity
through which CSI originally purchased its auction rate
securities, for up to $12.0 million, which was secured by
the $23.0 million par value of its auction rate securities.
The outstanding balance on this loan at June 30, 2008 was
$11.9 million. On August 21, 2008, CSI replaced this
loan with a margin loan from UBS Bank USA, which increased
maximum borrowings available to $23.0 million. This maximum
borrowing amount is not set forth in the written agreement for
the loan and may be adjusted from time to time by UBS Bank in
its sole discretion. The margin loan has a floating interest
rate equal to
30-day
LIBOR, plus 1.0%. The loan is due on demand and UBS Bank will
require CSI to repay it in full from the proceeds received from
a public equity offering where net proceeds exceed
$50.0 million. In addition, if at any time any of
CSIs auction rate securities may be sold, exchanged,
redeemed, transferred or otherwise conveyed for no less than
their par value, then CSI must immediately effect such a
transfer and the proceeds must be used to pay down outstanding
borrowings under this loan. The margin requirements are
determined by UBS Bank but are not included in the written loan
agreement and are therefore subject to change. From
August 21, 2008, the date this loan was initially funded,
through the date of this proxy statement/prospectus, the margin
requirements included maximum borrowings, including interest, of
$23.0 million. If these margin requirements are not
maintained, UBS Bank may require CSI to make a loan payment in
an amount necessary to comply with the applicable margin
requirements or demand repayment of the entire outstanding
balance. CSI has maintained the margin requirements under the
loans from both UBS entities. The outstanding balance on this
loan at September 30, 2008 was $22.9 million.
168
In addition, on September 12, 2008, CSI entered into a loan
and security agreement with Silicon Valley Bank with maximum
available borrowings of $13.5 million. The agreement
includes a $3.0 million term loan, a $5.0 million
accounts receivable line of credit, and two term loans for an
aggregate of $5.5 million that are guaranteed by certain of
CSIs affiliates. The terms of each of these loans is as
follows:
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The $3.0 million term loan has a fixed interest rate of
10.5% and a final payment amount equal to 3.0% of the loan
amount due at maturity. This term loan has a 36 month
maturity, with repayment terms that include interest only
payments during the first six months followed by 30 equal
principal and interest payments. This term loan also includes an
acceleration provision that requires CSI to pay the entire
outstanding balance, plus a penalty ranging from 1.0% to 6.0% of
the principal amount, upon prepayment or the occurrence and
continuance of an event of default. As part of the term loan
agreement, CSI granted Silicon Valley Bank a warrant to purchase
13,000 shares of Series B redeemable convertible
preferred stock at an exercise price of $9.25 per share. This
warrant is immediately exercisable, has a term of ten years, and
was assigned an accounting value of $75,000. The balance
outstanding on the term loan at September 30, 2008 was
$3.0 million.
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The accounts receivable line of credit has a two year maturity
and a floating interest rate equal to the prime rate, plus 2.0%,
with an interest rate floor of 7.0%. Interest on borrowings is
due monthly and the principal balance is due at maturity.
Borrowings on the line of credit are based on 80% of eligible
domestic receivables, which is defined as receivables aged less
than 90 days from the invoice date along with specific
exclusions for contra-accounts, concentrations, and government
receivables. Accounts receivable receipts will be deposited into
a lockbox account in the name of Silicon Valley Bank. The
accounts receivable line of credit is subject to non-use fees,
annual fees and cancellation fees. There was no balance
outstanding on the line of credit at September 30, 2008.
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One of the guaranteed term loans is for $3.0 million and
the other guaranteed term loan is for $2.5 million, each
with a one year maturity. Each of the guaranteed term loans has
a floating interest rate equal to the prime rate, plus 2.25%,
with an interest rate floor of 7.0% (effective rate of 7.0% at
September 30, 2008). Interest on borrowings is due monthly
and the principal balance is due at maturity. One of CSIs
directors and two entities affiliated with two of CSIs
directors agreed to act as guarantors of these term loans. In
consideration for the guarantees, CSI issued the guarantors
warrants to purchase an aggregate of 458,333 shares of its
common stock at an exercise price of $6.00 per share. The
balance outstanding on the guaranteed term loans at
September 30, 2008 was $5.5 million (excluding debt
discount of $1.8 million).
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The guaranteed term loans and common stock warrants were
allocated using the relative fair value method. Under this
method, CSI estimated the fair value of the term loans without
the guarantees and calculated the fair value of the common stock
warrants using the Black-Scholes method. The relative fair value
of the loans and warrants were applied to the loan proceeds of
$5.5 million, resulting in an assigned value of
$3.7 million for the loans and $1.8 million for the
warrants. The assigned value of the warrants of
$1.8 million is treated as a debt discount and amortized
over the one year maturity of the loan.
Borrowings from Silicon Valley Bank are secured by all of
CSIs assets, other than its auction rate securities and
intellectual property, and the investor guarantees. The
borrowings are subject to prepayment penalties and financial
covenants, including CSIs maintaining a minimum liquidity
ratio and CSIs achievement of minimum monthly net revenue
goals. Any non-compliance by CSI under the terms of its debt
arrangements could result in an event of default under the
Silicon Valley Bank loan, which, if not cured, could result in
the acceleration of this debt.
Based on current operating levels, combined with limited capital
resources, financing its operations will require that CSI either
complete the merger with Replidyne or raise additional equity or
debt capital prior to or during the quarter ending
September 30, 2009. If CSI fails to complete the merger
with Replidyne or raise sufficient equity or debt capital,
management would implement cost reduction measures, including
workforce reductions, as well as reductions in overhead costs
and capital expenditures. These factors raise substantial doubt
about CSIs ability to continue as a going concern.
CSIs independent registered public accountants have
included an explanatory paragraph in their report for CSIs
fiscal year ended June 30, 2008 with respect to CSIs
ability to continue as a going concern.
The reported changes in cash and cash equivalents and
investments for the years ended June 30, 2006, 2007 and
2008 and for the three months September 30, 2007 and 2008
are summarized below.
169
Cash and Cash Equivalents. Cash and cash
equivalents increased by $11.4 million, from
$3.3 million at September 30, 2007 to
$14.7 million at September 30, 2008. Cash and cash
equivalents decreased by $0.3 million, from
$7.9 million at June 30, 2007 to $7.6 million at
June 30, 2008.
Investments. Short-term investments decreased
by $18.5 million, from $18.5 million at
September 30, 2007 to $0 at September 30, 2008.
Short-term investments decreased by $11.6 million, from
$11.6 million at June 30, 2007 to $0 at June 30,
2008.
CSIs investments include AAA rated auction rate securities
issued primarily by state agencies and backed by student loans
substantially guaranteed by the Federal Family Education Loan
Program, or FFELP. The federal government insures loans in the
FFELP so that lenders are reimbursed at least 97% of the
loans outstanding principal and accrued interest if a
borrower defaults. Approximately 99.2% of the par value of
CSIs auction rate securities is supported by student loan
assets that are guaranteed by the federal government under the
FFELP.
In February 2008, CSI was informed that there was insufficient
demand for auction rate securities, resulting in failed auctions
for $23.0 million of its auction rate securities held at
June 30, 2008 and September 30, 2008. Currently, these
affected securities are not liquid and will not become liquid
until a future auction for these investments is successful, they
are redeemed by the issuer, they mature, or they are repurchased
by UBS. As a result, at June 30, 2008 and
September 30, 2008, CSI has classified the fair value of
its auction rate securities as a long-term asset. CSI recorded
an other-than-temporary impairment loss of $1.3 million
relating to its auction rate securities in CSIs statement
of operations for the year ended June 30, 2008 and recorded
an unrealized loss of $0.3 million relating to its auction
rate securities in CSIs other comprehensive income (loss)
for the three months ended September 30, 2008. CSI
determined the fair value of its auction rate securities and
quantified the other-than-temporary impairment loss and the
unrealized loss with the assistance of ValueKnowledge LLC, an
independent third party valuation firm, which utilized various
valuation methods and considered, among other factors, estimates
of present value of the auction rate securities based upon
expected cash flows, the likelihood and potential timing of
issuers of the auction rate securities exercising their
redemption rights at par value, the likelihood of a return of
liquidity to the market for these securities and the potential
to sell the securities in secondary markets.
At June 30, 2008, CSI concluded that no weight should be
given to the value indicated by the secondary markets for
student loan-backed auction rate securities similar to those CSI
holds because these markets have very low transaction volumes
and consist primarily of private transactions with minimal
disclosure, transactions may not be representative of the
actions of typically-motivated buyers and sellers and CSI does
not currently intend to sell in the secondary markets. However,
CSI did consider the secondary markets for certain
mortgage-backed securities to estimate the market yields
attributable to CSIs auction rate securities, but
determined that these secondary markets do not provide a
sufficient basis of comparison for the auction rate securities
that CSI holds and, accordingly, attributed no weight to the
values of these mortgage-backed securities indicated by the
secondary markets.
At June 30, 2008, CSI attributed a weight of 66.7% to
estimates of present value of the auction rate securities based
upon expected cash flows and a weight of 33.3% to the likelihood
and potential timing of issuers of the auction rate securities
exercising their redemption rights at par value or willingness
of third parties to provide financing in the market against the
par value of those securities. The attribution of these weights
required the exercise of valuation judgment. A measure of
liquidity is available from borrowing, which led to the 33.3%
weight attributed to the likelihood and potential timing of
issuers of the auction rate securities exercising their
redemption rights at par value or the willingness of third
parties to provide financing in the market against the par value
of those securities. However, borrowing does not eliminate
exposure to the risk of holding the securities, so the weight of
66.7% attributed to the present value of the auction rate
securities based upon expected cash flows reflects the
expectation that the securities are likely to be held for an
uncertain period. CSI focused on these methodologies because no
certainty exists regarding how the auction rate securities will
be eventually converted to cash and these methodologies
represent the most likely possible outcomes. To derive estimates
of the present value of the auction rate securities based upon
expected cash flows, CSI used the securities expected
annual interest payments, ranging from 2.7% to 4.0% of par
value, representing estimated maximum annual rates under the
governing documents of the auction rate securities; annual
market interest rates, ranging from 4.5% to 5.8%, based on
observed traded, state sponsored, taxable certificates rated AAA
or lower and issued between June 15 and June 30, 2008; and
a range of expected terms to liquidity.
170
At June 30, 2008, CSIs weighting of the valuation
methods indicates an implied term to liquidity of approximately
3.5 years. The implied term to liquidity of approximately
3.5 years is a result of considering a range in possible
timing of the various scenarios that would allow a holder of the
auction rate securities to convert the auction rate securities
to cash ranging from zero to ten years, with the highest
probability assigned to the range of zero to five years. Several
sources were consulted but no individual source of information
was relied upon to arrive at CSIs estimate of the range of
possible timing to convert the auction rate securities to cash
or the implied term to liquidity of approximately
3.5 years. The primary reason for the fair value being less
than cost related to a lack of liquidity of the securities,
rather than the financial condition and near term prospects of
the issuer.
At September 30, 2008, CSI concluded that no weight should
be given to the value indicated by the secondary markets for
student loan backed auction rate securities similar to those CSI
holds because these markets have very low transaction volumes
and consist primarily of private transactions with minimal
disclosure and transactions may not be representative of the
actions of typically-motivated buyers and sellers and CSI does
not currently intend to sell in the secondary markets. However,
CSI did consider the secondary markets for certain
mortgage-backed securities to estimate the market yields
attributable to CSIs auction rate securities, but
determined that these secondary markets do not provide a
sufficient basis of comparison for the auction rate securities
that CSI holds and, accordingly, attributed no weight to the
values of these mortgage-backed securities indicated by the
secondary markets.
At September 30, 2008, CSI concluded that no weight should
be given to the likelihood and potential timing of issuers of
the auction rate securities exercising their redemption rights
at par value based on low issuer call activity, so CSI
attributed a weight of 100.0% to estimates of present value of
the auction rate securities based upon expected cash flows. The
attribution of weights to the valuation factors required the
exercise of valuation judgment. The selection of a weight of
100.0% attributed to the present value of the auction rate
securities based upon expected cash flows reflects the
expectation, in absence of the Auction Rate Securities Rights
Prospectus discussed below, that no certainty exists regarding
how the auction rate securities will be eventually converted to
cash and this methodology represents the possible outcome. To
derive estimates of the present value of the auction rate
securities based upon expected cash flows, CSI used the
securities expected annual interest payments, ranging from
2.1% to 5.4% of par value, representing estimated maximum annual
rates under the governing documents of the auction rate
securities; annual market interest rates, ranging from 3.9% to
5.4%, based on observed traded, state sponsored, taxable
certificates rated AAA or lower and issued between September 29
and September 30, 2008; certain mortgage-backed securities
and indices; and a range of expected terms to liquidity.
CSIs weighting of the valuation methods as of
September 30, 2008 indicates an implied term to liquidity
of approximately five years in absence of the Auction Rate
Securities Rights Prospectus discussed below. The implied term
to liquidity of approximately five years is a result of
considering a range in possible timing of the various scenarios
that would allow a holder of the auction rate securities to
convert the auction rate securities to cash ranging from zero to
ten years, with the highest probability assigned to five years.
UBS issued a comprehensive settlement, which was confirmed by an
Auction Rate Securities Rights Prospectus issued by UBS on
October 7, 2008, in which there is a possibility of
redemption by UBS at par value for the auction rate securities
held by CSI between June 30, 2010 and July 2, 2012.
Under the comprehensive settlement, UBS has committed to
purchase a total of $8.3 billion of auction rate securities
at par value from most private clients during the two-year
period beginning January 1, 2009. Private clients and
charities holding less than $1.0 million in household
assets at UBS were able to avail themselves of this relief
beginning October 31, 2008. From mid-September 2008, UBS
began to provide loans at no cost to its clients for the par
value of their auction rate security holdings. In addition, UBS
has also committed to provide liquidity solutions to
institutional investors and has agreed to purchase all or any of
a remaining $10.3 billion in auction rate securities at par
value from its institutional clients beginning June 10,
2010. These auction rate security rights are not transferable,
tradable or marginable. CSI has not considered the liquidity
potentially generated by UBSs comprehensive settlement or
the UBS loan in CSIs valuation of the 19 auction rate
certificates held by CSI because the settlement rights were not
enforceable at September 30, 2008. The repurchase
arrangement and lending arrangement may represent separate
contracts, securities or other assets that have not been
considered in the valuation of the auction rate securities.
CSIs auction rate securities include AAA rated auction
rate securities issued primarily by state agencies and backed by
student loans substantially guaranteed by the Federal Family
Education Loan Program. These auction
171
rate securities continue to be AAA rated auction rate securities
subsequent to the failed auctions that began in February 2008.
In addition to the valuation procedures described above, CSI
considered (i) its current inability to hold these
securities for a period of time sufficient to allow for an
unanticipated recovery in fair value based on the companys
current liquidity, history of operating losses, and
managements estimates of required cash for continued
product development and sales and marketing expenses, and
(ii) failed auctions and the anticipation of continued
failed auctions for all of CSIs auction rate securities.
Based on the factors described above, CSI recorded the entire
amount of impairment loss identified for the year ended
June 30, 2008 of $1.3 million as other-than-temporary
and recorded the decrease in fair value of $0.3 million as
an unrealized loss for the three months ended September 30,
2008. CSI did not identify or record any additional realized or
unrealized gains or losses for the year ended June 30, 2008
or the three months ended September 30, 2008. CSI will
continue to monitor and evaluate the value of its investments
each reporting period for further possible impairment or
unrealized loss. Although it does not currently intend to do so,
CSI may consider selling its auction rate securities in the
secondary markets in the future, which may require a sale at a
substantial discount to the stated principal value of these
securities.
For additional discussion of liquidity issues relating to
CSIs auction rate securities, see Qualitative and
Quantitative Disclosures About Market Risk for CSI.
Operating Activities. Net cash used in
operating activities was $5.0 million, $12.3 million
and $31.9 million in fiscal 2006, 2007 and 2008,
respectively, and $8.0 million and $12.0 million for
the three months ended September 30, 2007 and 2008,
respectively. For fiscal 2006, 2007 and 2008, CSI had a net loss
of $4.9 million, $15.6 million and $39.2 million,
respectively, and for the three months ended September 30,
2007 and 2008, CSI had a net loss of $7.4 million and
$13.7 million, respectively. Changes in working capital
accounts also contributed to the net cash used in fiscal 2006,
2007 and 2008 and the three months ended September 30, 2007
and 2008.
Investing Activities. Net cash used in
investing activities was $228,000, $11.9 million and
$12.4 million in fiscal 2006, 2007 and 2008, respectively,
and $7.0 million and $382,000 for the three months ended
September 30, 2007 and 2008, respectively. For the years
ended June 30, 2007 and 2008 and three months ended
September 30, 2007, CSI purchased investments in the amount
of $23.2 million, $31.3 million and
$12.7 million, respectively. For the years ended
June 30, 2007 and 2008 and three months ended
September 30, 2007, CSI sold investments in the amount of
$11.8 million, $20.0 million and $5.9 million,
respectively. The balance of cash used in investing activities
primarily related to the purchase of property and equipment.
Purchases of property and equipment used cash of $235,000,
$465,000 and $721,000 in fiscal 2006, 2007 and 2008,
respectively, and $207,000 and $201,000 in the three months
ended September 30, 2007 and 2008, respectively.
Financing Activities. Net cash provided by
financing activities was $5.0 million, $30.5 million
and $44.0 million in fiscal 2006, 2007 and 2008,
respectively, and $10.4 million and $19.6 million in
the three months ended September 30, 2007 and 2008,
respectively. Cash provided by financing activities during these
periods included:
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net proceeds from the sale of common stock of $2.3 million
in fiscal 2006;
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proceeds from the issuance of convertible promissory notes of
$3.1 million in fiscal 2006;
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net proceeds from the issuance of convertible preferred stock of
$30.3 million in each of fiscal 2007 and 2008 and
$10.3 million in the three months ended September 30,
2007;
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issuance of convertible preferred stock warrants of
$1.8 million in fiscal 2007;
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proceeds from a long-term debt of $16.4 million and
$19.6 million during the year ended June 30, 2008 and
three months ended September 30, 2008; and
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exercise of stock options and warrants of $1.9 million
during the year ended June 30, 2008.
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Cash used in financing activities in these periods included:
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repayment of a note payable to a stockholder of $350,000 in
fiscal 2006;
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payment of redeemable convertible preferred stock offering costs
of $1.8 million in the year ended June 30,
2007; and
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payment on a loan payable of $4.5 million during the year
ended June 30, 2008.
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CSIs future capital requirements will depend on many
factors, including its sales growth, market acceptance of its
existing and future products, the amount and timing of its
research and development expenditures, the timing of its
introduction of new products, the expansion of its sales and
marketing efforts and working capital needs. CSI expects its
long-term liquidity needs to consist primarily of working
capital and capital expenditure requirements. Based on current
operating levels, combined with limited capital resources,
financing CSIs operations will require that CSI either
complete the merger with Replidyne or raise additional equity or
debt capital prior to or during the quarter ending
September 30, 2009. If the merger is not consummated or CSI
is unable to raise additional debt or equity financing on terms
acceptable to it, there will continue to be substantial doubt
about CSIs ability to continue as a going concern. If CSI
is unable to obtain additional financing or successfully market
its products on a timely basis, CSI would need to slow its
product development, sales, and marketing efforts and may be
unable to continue its operations.
Contractual Cash Obligations. CSIs
contractual obligations and commercial commitments as of
June 30, 2008 are summarized below:
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|
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|
|
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Payments Due by Period
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|
|
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|
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|
Less
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|
|
|
|
|
|
|
|
More
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|
|
|
|
|
|
Than
|
|
|
1-3
|
|
|
3-5
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|
|
Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(In thousands)
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|
|
Operating leases(1)
|
|
$
|
2,088
|
|
|
$
|
464
|
|
|
$
|
946
|
|
|
$
|
678
|
|
|
$
|
0
|
|
Purchase commitments(2)
|
|
|
5,328
|
|
|
|
5,328
|
|
|
|
|
|
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|
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|
|
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|
|
|
|
|
|
|
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|
|
|
Total
|
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$
|
7,416
|
|
|
$
|
5,792
|
|
|
$
|
946
|
|
|
$
|
678
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts reflected in the table above for operating leases
represent future minimum payments under a non-cancellable
operating lease for CSIs office and production facility
along with equipment. |
|
(2) |
|
This amount reflects open purchase orders. |
On September 12, 2008, CSI entered into a loan and security
agreement with Silicon Valley Bank with maximum available
borrowings of $13.5 million. The agreement includes a
$3.0 million term loan, a $5.0 million accounts
receivable line of credit, and two term loans for an aggregate
of $5.5 million that are guaranteed by certain of
CSIs affiliates. As of September 30, 2008, the
balance outstanding under the Silicon Valley Bank debt totaled
$8.5 million. Repayment terms of these borrowings include
$6.1 million due in less than one year, and
$2.4 million due in one to three years.
Related
Party Transactions
For a description of CSIs related party transactions, see
the discussion under the heading Related Party
Transactions Involving Directors and Officers of the Combined
Company.
Off-Balance
Sheet Arrangements
Since inception, CSI has not engaged in any off-balance sheet
activities as defined in Item 303(a)(4) of
Regulation S-K.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This standard clarifies the
principle that fair value should be based on the assumptions
that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy
that prioritizes the information used to develop these
assumptions. On February 12, 2008, the FASB issued FASB
Staff Position, or FSP,
FAS 157-2,
Effective Date of FASB Statement No. 157, or FSP
FAS 157-2.
FSP
FAS 157-2
defers the implementation of SFAS No. 157 for certain
nonfinancial assets and nonfinancial liabilities. The portion of
SFAS No. 157 that has been deferred by FSP
FAS 157-2
will be effective for CSI beginning in the first quarter of
fiscal year 2010. SFAS No. 157 was adopted for
173
financial assets and liabilities on July 1, 2008, and did
not have a material impact on CSIs financial position or
consolidated results of operations during the three months ended
September 30, 2008.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. This standard provides companies with an option
to report selected financial assets and liabilities at fair
value and establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 was adopted on July 1,
2008, and did not have a material impact on CSIs financial
position or consolidated results of operations during the three
months ended September 30, 2008.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB
No. 51. The revised standards continue the movement
toward the greater use of fair values in financial reporting.
SFAS No. 141(R) will significantly change how business
acquisitions are accounted for and will impact financial
statements both on the acquisition date and in subsequent
periods, including the accounting for contingent consideration.
SFAS No. 160 will change the accounting and reporting
for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of
equity. SFAS No. 141(R) and SFAS No. 160 are
effective for fiscal years beginning on or after
December 15, 2008, with SFAS No. 141(R) to be
applied prospectively while SFAS No. 160 requires
retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other
requirements of SFAS No. 160 shall be applied
prospectively. Early adoption is prohibited for both standards.
CSI is currently evaluating the impact of these statements but
expect that the adoption of SFAS No. 141(R) will have
a material impact on how CSI will identify, negotiate and value
any future acquisitions and a material impact on how an
acquisition will affect CSIs consolidated financial
statements, and that SFAS No. 160 will not have a
material impact on CSIs financial position or consolidated
results of operations.
Inflation
CSI does not believe that inflation has had a material impact on
its business and operating results during the periods presented.
174
QUALITATIVE
AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK FOR CSI
The primary objective of CSIs investment activities is to
preserve CSIs capital for the purpose of funding
operations while at the same time maximizing the income CSI
receives from its investments without significantly increasing
risk or availability. To achieve these objectives, CSIs
investment policy, as amended in April 2008, allows CSI to
maintain a portfolio of cash equivalents and investments in a
variety of marketable securities, including money market funds
and U.S. government securities. CSIs cash and cash
equivalents as of September 30, 2008 include liquid money
market accounts. Due to the short-term nature of these
investments, CSI believes that there is no material exposure to
interest rate risk.
CSIs investments include AAA rated auction rate securities
issued primarily by state agencies and backed by student loans
substantially guaranteed by the Federal Family Education Loan
Program, or FFELP. The federal government insures loans in the
FFELP so that lenders are reimbursed at least 97% of the
loans outstanding principal and accrued interest if a
borrower defaults. Approximately 99.2% of the par value of
CSIs auction rate securities is supported by student loan
assets that are guaranteed by the federal government under the
FFELP.
CSIs auction rate securities are debt instruments with a
long-term maturity and with an interest rate that is reset in
short intervals, primarily every 28 days, through auctions.
The recent conditions in the global credit markets have
prevented CSI from liquidating its holdings of auction rate
securities because the amount of securities submitted for sale
has exceeded the amount of purchase orders for such securities.
When auctions for these securities fail, the investments may not
be readily convertible to cash until a future auction of these
investments is successful or they are redeemed by the issuer or
they mature.
In February 2008, CSI was informed that there was insufficient
demand for auction rate securities, resulting in failed auctions
for $23.0 million of its auction rate securities held at
June 30, 2008 and September 30, 2008. Currently, these
affected securities are not liquid and will not become liquid
until a future auction for these investments is successful, they
are redeemed by the issuer, they mature, or they are repurchased
by UBS. As a result, at June 30, 2008 and
September 30, 2008, CSI has classified the fair value of
the auction rate securities as a long-term asset. Starting in
February 2008, interest rates on all auction rate securities
were reset to temporary predetermined penalty or
maximum rates. These maximum rates are limited to a
maximum amount payable over a 12 month period generally
equal to a rate based on the trailing
12-month
average of
90-day
treasury bills, plus 120 basis points. These maximum
allowable rates range from 2.7% to 4.0% of par value per year.
CSI has collected all interest due on its auction rate
securities and have no reason to believe that CSI will not
collect all interest due in the future. CSI does not expect to
receive the principal associated with its auction rate
securities until the earlier of a successful auction, their
redemption by the issuer or their maturity. On March 28,
2008, CSI obtained a margin loan from UBS Financial Services,
Inc., the entity through which CSI originally purchased its
auction rate securities, for up to $12.0 million, which was
secured by the $23.0 million par value of CSIs
auction rate securities. The outstanding balance on this loan at
June 30, 2008 was $11.9 million. On August 21,
2008, CSI replaced this loan with a margin loan from UBS Bank
USA, which increased maximum borrowings available to
$23.0 million. This maximum borrowing amount is not set
forth in the written agreement for the loan and may be adjusted
from time to time by UBS Bank in its sole discretion The margin
loan has a floating interest rate equal to
30-day
LIBOR, plus 1.0%. The loan is due on demand and UBS Bank will
require CSI to repay it in full from the proceeds received from
a public equity offering where net proceeds exceed
$50.0 million. In addition, if at any time any of
CSIs auction rate securities may be sold, exchanged,
redeemed, transferred or otherwise conveyed for no less than
their par value, then CSI must immediately effect such a
transfer and the proceeds must be used to pay down outstanding
borrowings under this loan. The margin requirements are
determined by UBS Bank but are not included in the written loan
agreement and are therefore subject to change. From
August 21, 2008, the date this loan was initially funded,
through the date of this proxy statement/prospectus, the margin
requirements included maximum borrowings, including interest, of
$23.0 million. If these margin requirements are not
maintained, UBS Bank may require CSI to make a loan payment in
an amount necessary to comply with the applicable margin
requirements or demand repayment of the entire outstanding
balance. CSI has maintained the margin requirements under the
loans from both UBS entities. The outstanding balance on this
loan at September 30, 2008 was $22.9 million.
CSI recorded an other-than-temporary impairment loss of
$1.3 million relating to its auction rate securities in
CSIs statement of operations for the year ended
June 30, 2008 and recorded an unrealized loss of
$0.3 million
175
relating to its auction rate securities in CSIs other
comprehensive income (loss) for the three months ended
September 30, 2008. CSI determined the fair value of its
auction rate securities and quantified the other-than-temporary
impairment loss and the unrealized loss with the assistance of
ValueKnowledge LLC, an independent third party valuation firm,
which utilized various valuation methods and considered, among
other factors, estimates of present value of the auction rate
securities based upon expected cash flows, the likelihood and
potential timing of issuers of the auction rate securities
exercising their redemption rights at par value, the likelihood
of a return of liquidity to the market for these securities and
the potential to sell the securities in secondary markets.
At June 30, 2008, CSI concluded that no weight should be
given to the value indicated by the secondary markets for
student loan-backed auction rate securities similar to those CSI
holds because these markets have very low transaction volumes
and consist primarily of private transactions with minimal
disclosure, transactions may not be representative of the
actions of typically-motivated buyers and sellers and CSI does
not currently intend to sell in the secondary markets. However,
CSI did consider the secondary markets for certain
mortgage-backed securities to estimate the market yields
attributable to CSIs auction rate securities, but
determined that these secondary markets do not provide a
sufficient basis of comparison for the auction rate securities
that CSI holds and, accordingly, attributed no weight to the
values of these mortgage-backed securities indicated by the
secondary markets.
At June 30, 2008, CSI attributed a weight of 66.7% to
estimates of present value of the auction rate securities based
upon expected cash flows and a weight of 33.3% to the likelihood
and potential timing of issuers of the auction rate securities
exercising their redemption rights at par value or willingness
of third parties to provide financing in the market against the
par value of those securities. The attribution of these weights
required the exercise of valuation judgment. A measure of
liquidity is available from borrowing, which led to the 33.3%
weight attributed to the likelihood and potential timing of
issuers of the auction rate securities exercising their
redemption rights at par value or the willingness of third
parties to provide financing in the market against the par value
of those securities. However, borrowing does not eliminate
exposure to the risk of holding the securities, so the weight of
66.7% attributed to the present value of the auction rate
securities based upon expected cash flows reflects the
expectation that the securities are likely to be held for an
uncertain period. CSI focused on these methodologies because no
certainty exists regarding how the auction rate securities will
be eventually converted to cash and these methodologies
represent the most likely possible outcomes. To derive estimates
of the present value of the auction rate securities based upon
expected cash flows, CSI used the securities expected
annual interest payments, ranging from 2.7% to 4.0% of par
value, representing estimated maximum annual rates under the
governing documents of the auction rate securities; annual
market interest rates, ranging from 4.5% to 5.8%, based on
observed traded, state sponsored, taxable certificates rated AAA
or lower and issued between June 15 and June 30, 2008; and
a range of expected terms to liquidity.
At June 30, 2008, CSIs weighting of the valuation
methods indicates an implied term to liquidity of approximately
3.5 years. The implied term to liquidity of approximately
3.5 years is a result of considering a range in possible
timing of the various scenarios that would allow a holder of the
auction rate securities to convert the auction rate securities
to cash ranging from zero to ten years, with the highest
probability assigned to the range of zero to five years. Several
sources were consulted but no individual source of information
was relied upon to arrive at CSIs estimate of the range of
possible timing to convert the auction rate securities to cash
or the implied term to liquidity of approximately
3.5 years. The primary reason for the fair value being less
than cost related to a lack of liquidity of the securities,
rather than the financial condition and near term prospects of
the issuer.
At September 30, 2008, CSI concluded that no weight should
be given to the value indicated by the secondary markets for
student loan backed auction rate securities similar to those CSI
holds because these markets have very low transaction volumes
and consist primarily of private transactions with minimal
disclosure and transactions may not be representative of the
actions of typically-motivated buyers and sellers and CSI does
not currently intend to sell in the secondary markets. However,
CSI did consider the secondary markets for certain
mortgage-backed securities to estimate the market yields
attributable to CSIs auction rate securities, but
determined that these secondary markets do not provide a
sufficient basis of comparison for the auction rate securities
that CSI holds and, accordingly, attributed no weight to the
values of these mortgage-backed securities indicated by the
secondary markets.
At September 30, 2008, CSI concluded that no weight should
be given to the likelihood and potential timing of issuers of
the auction rate securities exercising their redemption rights
at par value based on low issuer call activity, so CSI
attributed a weight of 100.0% to estimates of present value of
the auction rate securities based upon expected
176
cash flows. The attribution of weights to the valuation factors
required the exercise of valuation judgment. The selection of a
weight of 100.0% attributed to the present value of the auction
rate securities based upon expected cash flows reflects the
expectation, in absence of the Auction Rate Securities Rights
Prospectus discussed below, that no certainty exists regarding
how the auction rate securities will be eventually converted to
cash and this methodology represents the possible outcome. To
derive estimates of the present value of the auction rate
securities based upon expected cash flows, CSI used the
securities expected annual interest payments, ranging from
2.1% to 5.4% of par value, representing estimated maximum annual
rates under the governing documents of the auction rate
securities; annual market interest rates, ranging from 3.9% to
5.4%, based on observed traded, state sponsored, taxable
certificates rated AAA or lower and issued between September 29
and September 30, 2008; certain mortgage-backed securities
and indices; and a range of expected terms to liquidity.
CSIs weighting of the valuation methods as of
September 30, 2008 indicates an implied term to liquidity
of approximately five years in absence of the Auction Rate
Securities Rights Prospectus discussed below. The implied term
to liquidity of approximately five years is a result of
considering a range in possible timing of the various scenarios
that would allow a holder of the auction rate securities to
convert the auction rate securities to cash ranging from zero to
ten years, with the highest probability assigned to five years.
UBS issued a comprehensive settlement, which was confirmed by an
Auction Rate Securities Rights Prospectus issued by UBS on
October 7, 2008, in which there is a possibility of
redemption by UBS at par value for the auction rate securities
held by CSI between June 30, 2010 and July 2, 2012.
Under the comprehensive settlement, UBS has committed to
purchase a total of $8.3 billion of auction rate securities
at par value from most private clients during the two-year
period beginning January 1, 2009. Private clients and
charities holding less than $1.0 million in household
assets at UBS were able to avail themselves of this relief
beginning October 31, 2008. From mid-September 2008, UBS
began to provide loans at no cost to its clients for the par
value of their auction rate security holdings. In addition, UBS
has also committed to provide liquidity solutions to
institutional investors and has agreed to purchase all or any of
a remaining $10.3 billion in auction rate securities at par
value from its institutional clients beginning June 10,
2010. These auction rate security rights are not transferable,
tradable or marginable. CSI has not considered the liquidity
potentially generated by UBSs comprehensive settlement or
the UBS loan in CSIs valuation of the 19 auction rate
certificates held by CSI because the settlement rights were not
enforceable at September 30, 2008. The repurchase
arrangement and lending arrangement may represent separate
contracts, securities or other assets that have not been
considered in the valuation of the auction rate securities.
CSIs auction rate securities include AAA rated auction
rate securities issued primarily by state agencies and backed by
student loans substantially guaranteed by the Federal Family
Education Loan Program. These auction rate securities continue
to be AAA rated auction rate securities subsequent to the failed
auctions that began in February 2008.
In addition to the valuation procedures described above, CSI
considered (i) its current inability to hold these
securities for a period of time sufficient to allow for an
unanticipated recovery in fair value based on the companys
current liquidity, history of operating losses, and
managements estimates of required cash for continued
product development and sales and marketing expenses, and
(ii) failed auctions and the anticipation of continued
failed auctions for all of CSIs auction rate securities.
Based on the factors described above, CSI recorded the entire
amount of impairment loss identified for the year ended
June 30, 2008 of $1.3 million as other-than-temporary
and recorded the decrease in fair value of $0.3 million as
an unrealized loss for the three months ended September 30,
2008. CSI did not identify or record any additional realized or
unrealized gains or losses for the year ended June 30, 2008
or the three months ended September 30, 2008. CSI will
continue to monitor and evaluate the value of its investments
each reporting period for further possible impairment or
unrealized loss. Although it does not currently intend to do so,
CSI may consider selling its auction rate securities in the
secondary markets in the future, which may require a sale at a
substantial discount to the stated principal value of these
securities.
In the event that CSI need to access the funds of its auction
rate securities that have experienced insufficient demand at
auctions, CSI will not be able to do so without the possible
loss of principal, until a future auction for these investments
is successful, they are redeemed by the issuer, they mature, or
they are repurchased by UBS. If CSI is unable to sell these
securities in the market or they are not redeemed, then CSI may
be required to hold them to maturity.
177
CSI
CONTROLS AND PROCEDURES
Prior to December 29, 2008, CSI was not subject to the
Sarbanes-Oxley Act of 2002. Therefore, CSIs management did
not perform an evaluation of CSIs disclosure controls and
procedures or changes in CSIs internal control over
financial reporting as of September 30, 2008.
178
MANAGEMENT
OF THE COMBINED COMPANY AFTER THE MERGER
Executive
Officers and Directors
Resignation
of Replidynes Current Directors and Termination of
Replidynes Current Executive Officers
Pursuant to the merger agreement, it is contemplated that all of
Replidynes current directors except Messrs. Brown and
Lawlor will resign, and the employment of all of
Replidynes current executive officers will be terminated,
effective in each case as of the completion of the merger.
Executives
Officers and Directors of Replidyne Following the
Merger
Replidynes board of directors is currently comprised of
eight directors and is divided into three classes, with each
class serving a staggered three-year term. Prior to the
effective time of the merger, the board of directors of
Replidyne will increase to nine members and continue to be
classified into three classes, with each class serving staggered
three-year terms. The restated certificate of incorporation and
bylaws of Replidyne provide that the number of directors shall
be fixed from time to time by a resolution of the majority of
the board of directors. These provisions will remain in effect
after completion of the merger.
Pursuant to the merger agreement, prior to closing, Replidyne
will take such actions as are necessary to have seven of the
nine directors be individuals that have been designated by CSI.
It is anticipated that the directors following the merger will
be appointed to the three classes of directors as follows:
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|
|
|
Messrs. Brown, Lawlor and Petrucci would be in the class of
directors whose terms expire at the 2009 annual meeting of
stockholders.
|
|
|
|
|
|
Messrs. Blackey, Friedman and Howe would be in the class of
directors whose terms expire at the 2010 annual meeting of
stockholders.
|
|
|
|
|
|
Messrs. Nelson, Hartzler and Martin would be in the class of
directors whose terms expire at the 2011 annual meeting of
stockholders.
|
The following table lists the names and ages as of
December 31, 2008, and positions of the individuals who are
expected to serve as directors and executive officers of
Replidyne upon completion of the merger:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
David L. Martin
|
|
|
44
|
|
|
President, Chief Executive Officer and Director
|
Laurence L. Betterley
|
|
|
54
|
|
|
Chief Financial Officer
|
James E. Flaherty
|
|
|
55
|
|
|
Chief Administrative Officer and Secretary
|
John Borrell
|
|
|
41
|
|
|
Vice President of Sales
|
Brian Doughty
|
|
|
45
|
|
|
Vice President of Marketing
|
Robert J. Thatcher
|
|
|
54
|
|
|
Executive Vice President
|
Paul Tyska
|
|
|
51
|
|
|
Vice President of Business Development
|
Paul Koehn
|
|
|
46
|
|
|
Vice President of Manufacturing
|
Edward Brown
|
|
|
45
|
|
|
Director
|
Brent G. Blackey
|
|
|
50
|
|
|
Director
|
John H. Friedman
|
|
|
55
|
|
|
Director
|
Geoffrey O. Hartzler
|
|
|
62
|
|
|
Director
|
Roger J. Howe
|
|
|
65
|
|
|
Director
|
Augustine Lawlor
|
|
|
52
|
|
|
Director
|
Glen D. Nelson
|
|
|
71
|
|
|
Director
|
Gary M. Petrucci
|
|
|
67
|
|
|
Director
|
David L. Martin, President, Chief Executive Officer and
Director. Mr. Martin has been CSIs
President and Chief Executive Officer since February 2007, and a
director since August 2006. Mr. Martin also served as
CSIs Interim Chief Financial Officer from January 2008 to
April 2008. Prior to joining CSI, Mr. Martin was
Chief Operating Officer of FoxHollow Technologies, Inc.
from January 2004 to February 2006, Executive Vice President of
Sales and Marketing of FoxHollow Technologies, Inc. from January
2003 to January 2004, Vice President of Global Sales and
179
International Operations at CardioVention Inc. from October 2001
to May 2002, Vice President of Global Sales for RITA Medical
Systems, Inc. from March 2000 to October 2001 and Director of
U.S. Sales, Cardiac Surgery for Guidant Corporation from
September 1999 to March 2000. Mr. Martin has also held
sales and sales management positions for The Procter &
Gamble Company and Boston Scientific Corporation.
Mr. Martin currently serves as a director of AccessClosure,
Inc. and Apieron Inc., two privately-held medical device
companies.
Laurence L. Betterley, Chief Financial
Officer. Mr. Betterley joined CSI in April
2008 as its Chief Financial Officer. Previously,
Mr. Betterley was Chief Financial Officer at Cima NanoTech,
Inc. from May 2007 to April 2008, Senior Vice President and
Chief Financial Officer of PLATO Learning, Inc. from June 2004
to January 2007, Senior Vice President and Chief Financial
Officer of Diametrics Medical, Inc. from 1996 to 2003, and Chief
Financial Officer of Cray Research Inc. from 1994 to 1996.
James E. Flaherty, Chief Administrative Officer and
Secretary. Mr. Flaherty has been CSIs
Chief Administrative Officer since January 14, 2008.
Mr. Flaherty was CSIs Chief Financial Officer from
March 2003 to January 14, 2008. As Chief Administrative
Officer, Mr. Flaherty reports directly to CSIs Chief
Executive Officer and has responsibility for information
technology, facilities, legal matters, financial analysis of
business development opportunities and business operations.
Mr. Flaherty assisted with CSIs initial public
offering process, including financial matters, and assisted with
the transition of CSIs new Chief Financial Officer. As
CSIs Chief Financial Officer, Mr. Flaherty had
primary responsibility for the preparation of historical
financial statements, but he no longer has any such
responsibility. Prior to joining CSI, Mr. Flaherty served
as an independent financial consultant from 2001 to 2003 and
Chief Financial Officer of Zomax Incorporated from 1997 to 2001.
Mr. Flaherty served as Chief Financial Officer of Racotek,
Inc. from 1990 to 1996, of Time Management Corporation from 1986
to 1990, and of Nugget Oil Corp. from 1980 to 1985.
Mr. Flaherty was an accountant at Coopers &
Lybrand from 1975 to 1980. On June 9, 2005, the Securities
and Exchange Commission filed a civil injunctive action charging
Zomax Incorporated with violations of federal securities law by
filing a materially misstated
Form 10-Q
for the period ended June 30, 2000. The SEC further charged
that in a conference call with analysts, certain of Zomaxs
executive officers, including Mr. Flaherty, misrepresented
or omitted to state material facts regarding Zomaxs
prospects of meeting quarterly revenue and earnings targets, in
violation of federal securities law. Without admitting or
denying the SECs charges, Mr. Flaherty consented to
the entry of a court order enjoining him from any violation of
certain provisions of federal securities law. In addition,
Mr. Flaherty agreed to disgorge $16,770 plus prejudgment
interest and pay a $75,000 civil penalty.
John Borrell, Vice President of
Sales. Mr. Borrell joined CSI in July 2006
as Vice President of Sales and Marketing. When Mr. Doughty
was named Vice President of Marketing in August 2007,
Mr. Borrell became CSIs Vice President of Sales.
Previously, he was employed as Director of Sales of FoxHollow
Technologies, Inc. from October 2003 to April 2006.
Mr. Borrell has more than 15 years of sales and sales
management experience and has held various positions with
Novoste Corporation (now NOVT Corporation), Medtronic Vascular,
Inc., Heartport, Inc. and Johnson & Johnson.
Brian Doughty, Vice President of
Marketing. Mr. Doughty joined CSI in
December 2006 as Director of Marketing and was named Vice
President of Marketing in August 2007. Prior to joining CSI,
Mr. Doughty was Director of Marketing at
EKOS Corporation from February 2005 to December 2006,
National Sales Initiatives Manager of FoxHollow Technologies,
Inc. from September 2004 to February 2005, National Sales
Operations Director at Medtronic from August 2000 to September
2004, and Sales Team Leader for Johnson and Johnson from
December 1998 to August 2000. Mr. Doughty has also held
sales and sales management positions for Ameritech Information
Systems.
Robert J. Thatcher, Executive Vice
President. Mr. Thatcher joined CSI as Senior
Vice President of Sales and Marketing in October 2005 and became
CSIs Vice President of Operations in September 2006.
Mr. Thatcher became CSIs Executive Vice President in
August 2007. Previously, Mr. Thatcher was Senior Vice
President of TriVirix Inc. from October 2003 to October 2005.
Mr. Thatcher has more than 29 years of medical device
experience in both large and
start-up
companies. Mr. Thatcher has held various sales management,
marketing management and general management positions at
Medtronic, Inc., Schneider USA, Inc. (a former division of
Pfizer Inc.), Boston Scientific Corporation and several startup
companies.
Paul Tyska, Vice President of Business
Development. Mr. Tyska joined CSI in August
2006 as Vice President of Business Development. Previously,
Mr. Tyska was employed at FoxHollow Technologies, Inc.
since July 2003 where he most recently served as National Sales
Director from February 2006 to August 2006. Mr. Tyska has
held
180
various positions with Guidant Corporation, CardioThoracic
Systems, Inc., W. L. Gore & Associates and
ATI Medical Inc.
Paul Koehn, Vice President of
Manufacturing. Mr. Koehn joined CSI in March
2007 as Director of Manufacturing and was promoted to Vice
President of Manufacturing in October 2007. Previously,
Mr. Koehn was Vice President of Operations for Sewall Gear
Manufacturing from 2000 to March 2007 and before joining Sewall
Gear, Mr. Koehn held various quality and manufacturing
management roles with Dana Corporation.
Brent G. Blackey, Director. Mr. Blackey
has been a member of CSIs board of directors since 2007.
Since 2004, Mr. Blackey has served as the President and
Chief Operating Officer for Holiday Companies. Between 2002 and
2004 Mr. Blackey was a Senior Partner at the accounting
firm of Ernst & Young LLP. Prior to 2002,
Mr. Blackey served most recently as a Senior Partner at the
accounting firm of Arthur Anderson LLP. Mr. Blackey serves
on the board of directors of Datalink Corporation, and also
serves on the Board of Overseers for the University of
Minnesota, Carlson School of Management.
Edward Brown, Director. Mr. Brown has
been a member of Replidynes board of directors since May
2007. Mr. Brown is a Managing Director at TPG Growth. Prior
to joining TPG, Mr. Brown was a Managing Director and
co-founder of HealthCare Investment Partners, a private equity
fund focused on healthcare investments from June 2004 to June
2007. Before HealthCare Investment Partners, Mr. Brown was
a Managing Director in the healthcare group of Credit Suisse
Group where he led the firms West Coast healthcare effort
and was one of the senior partners responsible for the
firms global life sciences practice. Mr. Brown also
serves on the board of directors of Angiotech Pharmaceuticals.
John H. Friedman, Director. Mr. Friedman
has been a member of CSIs board of directors since 2006.
Mr. Friedman is the Managing Partner of the Easton Capital
Investment Group, a private equity firm. Prior to founding
Easton Capital, Mr. Friedman was the founder and Managing
General Partner of Security Pacific Capital Investors, a
$200-million private equity fund geared towards expansion
financings and recapitalizations, from 1989 to 1992. Prior to
joining Security Pacific, Mr. Friedman was a Managing
Director and Partner at E.M. Warburg, Pincus & Co.,
Inc. from 1981 to 1989. Mr. Friedman has also served as a
Managing Director of Atrium Capital Corp., an investment firm.
Mr. Friedman currently serves on the board of directors of
Trellis Bioscience, Inc., Xoft, Inc., Sanarus Inc., Genetix
Pharmaceuticals, Inc., PlaySpan Inc. and Experimed Bioscience,
Inc., all of which are privately-held companies.
Mr. Friedman is also Co-Chairman of the Cold Spring Harbor
Presidents Council.
Geoffrey O. Hartzler, M.D.,
Director. Dr. Hartzler has been a member of
CSIs board of directors since 2002. Dr. Hartzler
commenced practice as a cardiologist in 1974, serving from 1980
to 1995 as a Consulting Cardiologist with the Mid America Heart
Institute of St. Lukes Hospital in Kansas City, Missouri.
Dr. Hartzler has co-founded three medical product companies
including Ventritex Inc. Most recently he served as Chairman of
the Board of IntraLuminal Therapeutics, Inc. from 1997 to 2004
and Vice Chairman from 2004 to 2006. Dr. Hartzler has also
served as a consultant or director to over a dozen business
entities, some of which are medical device companies.
Roger J. Howe, Ph.D.,
Director. Dr. Howe has been a member of
CSIs board of directors since 2002. Over the past
22 years, Dr. Howe has founded four successful
start-up
ventures in the technology, information systems and medical
products business sectors. Most recently, Dr. Howe served
as Chairman of the Board and Chief Financial Officer of Reliant
Technologies, Inc., a medical laser company, from 2001 to 2005.
From 1996 to 2001, Dr. Howe served as Chief Executive
Officer of Metrix Communications, Inc., a business-to-business
software development company that he founded. Dr. Howe
currently serves on the boards of directors of Stemedica Cell
Technologies, Inc., BioPharma Scientific, Inc., Americas
Back & Neck Clinic, Inc. and Reliant Pictures
Corporation, all of which are privately-held companies.
Augustine Lawlor, Director. Mr. Lawlor
has been a member of Replidynes board of directors since
March 2002. Mr. Lawlor is the Managing Partner of
HealthCare Ventures LLC, where he was a Managing Director from
2000 to 2007. Mr. Lawlor was previously Chief Operating
Officer of LeukoSite, Inc. and has also served as a management
consultant with KPMG Peat Marwick. Mr. Lawlor is a member
of the board of directors of Human Genome Sciences Inc.
Glen D. Nelson, M.D.,
Director. Dr. Nelson has been a member of
CSIs board of directors since 2003 and CSIs Chairman
since August 2007. Dr. Nelson was a member of the board of
directors of Medtronic, Inc. from 1980 until 2002.
Dr. Nelson joined Medtronic as Executive Vice President in
1986, and he was elected Vice Chairman in 1988, a position
held until his retirement in 2002. Before joining Medtronic,
Dr. Nelson
181
practiced surgery from 1969 to 1986. Dr. Nelson was
Chairman of the Board and Chief Executive Officer of American
MedCenters, Inc. from 1984 to 1986. Dr. Nelson also was
Chairman, President and Chief Executive Officer of the Park
Nicollet Medical Center, a large multi-specialty group practice
in Minneapolis, from 1975 to 1986. Dr. Nelson is on the
board of directors of DexCom, Inc. and The Travelers Companies,
Inc., both publicly-held companies, and also serves as a
director for ten private companies.
Gary M. Petrucci, Director. Mr. Petrucci
has been a member of CSIs board of directors since 1992.
Since August 2006, Mr. Petrucci has been Senior Vice
President Investments at UBS Financial Services,
Inc. Previously, Mr. Petrucci was an Investment Executive
with Piper Jaffray & Co. from 1968 until Piper
Jaffrays retail brokerage unit was sold to UBS Financial
Services in August 2006. Mr. Petrucci served on the board
of directors of Piper Jaffray & Co. from 1981 to 1995.
Mr. Petrucci achieved the Fred Sirianni Award 14 times
since the award began 25 years ago honoring the top
producing Investment Executive at Piper Jaffray. In January
2005, this award was renamed in his honor. Mr. Petrucci
received the 2002 Outstanding Alumni award from St. Cloud State
University. Mr. Petrucci is serving as a member on the
boards of directors of Americas Back & Neck
Clinic, Inc., National Urology Board, Stemedica Cell
Technologies, Inc. and the University of Minnesota Landscape
Arboretum.
Director
Independence
Under applicable Nasdaq rules, a director will only qualify as
an independent director if, in the determination of
Replidynes board of directors, that person does not have a
relationship which would interfere with the exercise of
independent judgment in carrying out the responsibilities of a
director.
Of the six current members of the Replidyne board of directors,
five have been determined to be independent within the meaning
of the applicable Nasdaq rules. In connection with the
consummation of the merger, the incumbent directors of
Replidynes board of directors will take such actions as
are necessary to fix the size of the Replidyne board at nine
directors. Daniel J. Mitchell, Geoffrey
Duyk, M.D., Ph.D., Kirk K. Calhoun and Kenneth J.
Collins will tender their resignations effective as of the
effective time of the merger and the incumbent board of
Replidyne will appoint Brent G. Blackey, John H. Friedman,
Geoffrey O. Hartzler, Roger J. Howe, David L. Martin,
Glen D. Nelson and Gary M. Petrucci to fill the vacancies
created by such resignations and the increase to the size of
Replidynes board. Prior to appointing these individuals to
Replidynes board of directors, and before the
effectiveness of the resignations of Daniel J. Mitchell,
Geoffrey Duyk, M.D., Ph.D., Kirk K. Calhoun and
Kenneth J. Collins, the incumbent directors will determine
whether the directors to be appointed to such vacancies are
independent as defined under the applicable Nasdaq rules.
Additionally, the incumbent directors of Replidyne will
determine whether those individuals meet the additional
independence requirements of
Rule 10A-3
under the Securities Exchange Act of 1934. Finally, the
incumbent directors of Replidyne will determine whether all of
the members of each of the board of directors three
standing committees will be independent as defined under the
applicable Nasdaq rules.
Committees
of the Board of Directors
The board of directors of the combined company will have three
standing committees: the compensation committee, the audit
committee and the nominating and corporate governance committee.
Compensation
Committee
The function of the compensation committee of the combined
company will be the same as that of the current compensation
committee of CSI, as described in CSI Executive
Compensation and Other Information Compensation
Discussion and Analysis Role of CSIs
Compensation Committee.
Following completion of the merger, Mr. Friedman, as the
chairperson, and Messrs. Howe, Petrucci, and Lawlor are expected
to serve on the compensation committee.
Audit
Committee
The functions of the audit committee of the combined company
will include, among other things: reviewing and pre-approving
the engagement of the combined companys independent
registered public accounting firm to perform audit services and
any permissible non-audit services; evaluating the
qualifications, independence and performance of the combined
companys independent registered public accounting firm;
reviewing and monitoring the integrity of the combined
companys financial statements; reviewing and approving all
related-party
182
transactions; reviewing with the combined companys
independent registered public accounting firm and management the
performance of the internal audit function, financial reporting
process, systems of internal controls over financial reporting
and disclosure of controls and procedures; and establishing
procedures for the receipt, retention and treatment of
complaints received by the combined company regarding financial
controls, accounting or auditing matters.
Following completion of the merger Mr. Blackey, as the
chairperson, and Messrs. Hartzler and Lawlor are expected
to serve on the audit committee. It is expected that the board
of the combined company will determine that Mr. Blackey is
an audit committee financial expert as defined in
Item 401(h) of
Regulation S-K.
Nominating
and Corporate Governance Committee
The functions of the nominating and corporate governance
committee of the combined company will include, among other
things: identifying individuals qualified to become members of
the board of directors; recommending director nominees for each
annual meeting of stockholders and director nominees to fill any
vacancies that may occur between meetings of the stockholders;
and reviewing and updating the combined companys corporate
governance standards and performing those functions specified
therein and in the committee charter.
Following completion of the merger, Mr. Hartzler, as the
chairperson, and Messrs. Nelson and Brown are expected to
serve on the nominating and corporate governance committee.
Compensation
Committee Interlocks and Insider Participation in Compensation
Decisions
None of the persons who are expected to serve on the
compensation committee of the combined company (i) has ever
been an officer or employee of either Replidyne or CSI nor any
subsidiary of CSI or Replidyne, or (ii) engaged in any
related transactions as defined in Item 404(a) of
Regulation S-K.
None of the individuals that will serve as an executive officer
of the combined company served as a member of the board of
directors or compensation committee of any entity that has one
or more executive officers serving on Replidynes or
CSIs board of directors or compensation committee.
Compensation
of Directors
It is currently anticipated that the compensation for the
directors of the combined company will be changed to conform
with the policy described under CSI Executive Compensation
and Other Information Compensation of
Directors CSI Director Compensation.
183
CSI
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Compensation
Discussion and Analysis
The following Compensation Discussion and Analysis describes the
material elements of the compensation awarded to, earned by or
paid to CSIs Chief Executive Officer, the two individuals
who served as CSIs Chief Financial Officer in fiscal
2008, and the other three most highly compensated executive
officers as determined in accordance with SEC rules, who are
collectively referred to as the named executive
officers. This discussion focuses primarily on the fiscal
2008 information contained in the tables and related footnotes
and narrative discussion but also describes compensation actions
taken during other periods to the extent it enhances the
understanding of CSIs executive compensation disclosure
for fiscal 2008. For example, although CSIs fiscal year
ends on June 30 of each year, CSIs compensation programs
have been established on a calendar year basis and, therefore,
the discussion below includes information regarding periods
before and after the fiscal year. CSIs board of directors
has adopted an interim compensation plan for the six month
period ending June 30, 2009 and CSI expects that the
compensation program for executive officers of the combined
company following the merger will be established on a fiscal
year basis. Pursuant to the merger agreement, it is contemplated
that the employment of all of Replidynes current executive
officers will be terminated immediately prior to the completion
of the merger, and the current officers of CSI will be appointed
as the officers of the combined company and will be subject to
the same compensation programs as they were as officers of CSI.
Compensation
Objectives and Philosophy
The primary objectives of CSIs compensation programs are
to:
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attract and retain talented and dedicated executives to manage
and lead the company;
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align the interests of CSIs executives and stockholders by
implementing cash incentive and equity programs designed to
reward the achievement of corporate and individual objectives
that promote growth in CSIs business; and
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motivate individuals to work as a team for the success of the
company by fairly recognizing the contributions of each
individual, including their experience, abilities and
performance, to CSIs collective success.
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To achieve these objectives, CSIs compensation committee
recommends executive compensation packages to CSIs board
of directors that are generally based on a mix of salary, cash
incentive payments and equity awards. CSIs compensation
committee has not adopted any formal guidelines for allocating
total compensation between equity and cash compensation, but
attempts to recommend equity and cash amounts that are
competitive with the amounts paid by other growth stage medical
device companies. CSI believes that performance and equity-based
compensation are important components of the total executive
compensation package for maximizing stockholder value while, at
the same time, attracting, motivating and retaining high-quality
executives.
Setting
Executive Compensation
CSIs compensation committee makes recommendations to
CSIs board of directors regarding the elements of
executive compensation, including the level of each element, the
mix among the elements and total compensation based upon the
objectives and philosophies set forth above. CSIs
compensation committee considers a number of factors, including:
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each executives position within the company and the level
of responsibility;
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the skills and experience required by an executives
position;
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the executives individual experience and qualifications;
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the competitive environment for comparable executive talent
having similar experience, skills and responsibilities;
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company performance compared to specific objectives;
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the executives current and historical compensation levels;
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the executives length of service to CSI;
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184
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compensation equity and consistency across all executive
positions; and
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the executives existing holdings and rights to acquire
equity.
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As a means of assessing the competitive market for executive
talent, CSI has consulted with Lyons, Benenson &
Company, a third-party compensation consulting firm, on
competitive compensation for companies of comparable size and
stage of development. Lyons compared executive compensation data
of the following companies: ATS Medical, Inc.; Conceptus, Inc.;
Cytokinetics, Incorporated; Emisphere Technologies, Inc.;
FoxHollow Technologies, Inc.; Geron Corporation; Hansen Medical,
Inc.; Lexicon Pharmaceuticals, Inc.; Misonix, Inc.; Nastech
Pharmaceutical Company Inc.; Sonus Pharmaceuticals, Inc.;
Tanox, Inc.; TanS1 Inc.; Vascular Solutions, Inc.; and XTENT,
Inc. CSIs compensation committee did not consider the
compensation paid by any of the individual companies in
Lyons survey, but instead reviewed the overall results of
the survey when considering its recommendations for the
compensation of CSIs executive officers. Although
CSIs compensation committee seeks to recommend executive
compensation at levels it believes to be competitive, this is
only one factor in the committees overall compensation
recommendations and is not used as a stand-alone benchmarking
tool. CSI will continue to seek information and guidance from a
compensation consultant from time to time in the future.
Executive
Compensation Components for Fiscal Year 2008
The principal elements of CSIs executive compensation
program for fiscal 2008 were:
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base salary;
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annual cash incentive compensation;
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equity-based compensation, primarily in the form of stock
options; and
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employment benefits and limited perquisites.
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In allocating compensation across these elements, CSIs
compensation committee does not follow any strict policy or
guidelines. However, consistent with the general compensation
objectives and philosophies outlined above, CSIs
compensation committee seeks to place a meaningful percentage of
an executives compensation at risk based on creating
long-term stockholder value. For example, CSIs
compensation committee sets each executives annual
incentive compensation at a level designed to motivate the
executive to achieve goals consistent with CSIs long term
business objectives, typically by establishing annual incentive
opportunities ranging from 40% to 100% of the executives
base salary. CSIs compensation committee believes this
allocation of cash compensation between base salary and annual
incentive compensation strikes the appropriate balance between
guaranteeing executives an income adequate to satisfy living
expenses and providing an incentive for the achievement of
CSIs goals. Equity-based compensation is also compensation
at risk, since the equity increases in value only if CSI is
successful in achieving CSIs business goals, and serves to
provide an incentive over a longer term. The judgment of
CSIs compensation committee regarding the appropriate mix
of compensation elements is also influenced by information they
have reviewed as to the allocations made by other medical
products companies at a similar stage of development and the
experience of the members of CSIs compensation committee.
The fiscal 2008 compensation for CSIs Chief Financial
Officer was determined in the context of negotiating the terms
under which he would join CSI as a new employee in April 2008,
but CSIs other named executive officers joined CSI prior
to fiscal 2008.
Base
Salary
Base salary is an important element of CSIs executive
compensation program as it provides executives with a fixed,
regular, non-contingent earnings stream to support annual living
and other expenses. As a component of total compensation, CSI
generally sets base salaries at levels believed to attract and
retain an experienced management team that will successfully
grow CSIs business and create stockholder value. CSI also
utilizes base salaries to reward individual performance and
contributions to CSIs overall business objectives, but
seeks to do so in a manner that does not detract from the
executives incentive to realize additional compensation
through CSIs performance-based compensation programs,
stock options and restricted stock awards.
CSIs employment agreement with David Martin provides that
his annual base salary for calendar 2007 would be $370,000 and
that his base salary for subsequent years shall be determined by
the board of directors. CSI offered this amount as part of a
package of compensation for Mr. Martin sufficient to induce
him to join CSI. The compensation package for Mr. Martin is
designed to provide annual cash compensation, including both
base salary
185
and potential cash incentive earnings, sufficient to meet his
current needs, although less than the annual cash compensation
Mr. Martin received at his previous employer and, CSI
believes, less than Mr. Martin likely could have obtained
with other, more established employers. The equity portion of
Mr. Martins compensation package, as described below,
was designed to provide sufficient potential growth in value to
induce Mr. Martin to join CSI despite the lower cash
compensation.
CSI paid each of John Borrell and Paul Tyska at an annual base
salary rate of $200,000 during calendar 2008, the same base
salaries they received in calendar 2007. The base salaries for
each of Mr. Borrell and Mr. Tyska were negotiated as
part of a compensation packages offered to induce them to join
CSI. Mr. Borrell joined CSI in July 2006 as Vice
President of Sales and Marketing and Mr. Tyska joined as
Vice President of Business Development in August 2006. In each
case the base salary was set at an amount that CSI believed to
be generally consistent with the base salaries paid by other
growth stage medical device companies for similar positions, but
substantially less than the total cash compensation each of
Mr. Borrell and Mr. Tyska received with their previous
employers and, CSI believes, less than each of Mr. Borrell
and Mr. Tyska likely could have obtained with other, more
established employers. In order to induce Mr. Borrell and
Mr. Tyska to accept positions with CSI despite lower base
salaries, CSI agreed that each would also have the opportunity
to earn performance-based incentive compensation, as described
below, as well as equity awards. CSI believed that it was
appropriate to make a significant portion of
Mr. Borrells cash compensation (a higher percentage
than most other executives) subject to the achievement of
performance objectives because of the particularly important
role the Vice President of Sales and Marketing would play in the
commercial introduction of CSIs first product.
Each of Michael J. Kallok and James E. Flaherty has served as an
officer prior to fiscal 2007 and their base salary rates are set
by CSIs compensation committee each year.
CSIs named executive officers received base salary at the
calendar 2007 rates for the first and second quarters of fiscal
2008, and effective January 1, 2008, the base salaries for
most of CSIs named executive officers were increased for
calendar 2008, which includes the third and fourth quarters of
fiscal 2008. The base salary rates for each of CSIs named
executive officers, other than CSIs Chief Financial
Officer, in effect at the end of calendar 2007 and for calendar
2008, and the percentage changes from calendar 2007 to 2008, are
set forth below.
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Annual Base Salary Rates
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Name
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Calendar 2007
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Calendar 2008
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% Change
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David L. Martin
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$
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370,000
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$
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395,000
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6.8
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James E. Flaherty
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200,000
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218,000
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9.0
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Michael J. Kallok, Ph.D.
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250,000
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255,000
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2.0
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John Borrell
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200,000
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200,000
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0
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Paul Tyska
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200,000
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200,000
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0
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With respect to each increase, CSIs compensation committee
considered the range of compensation it believed to be paid by
companies in CSIs industry at a similar stage of
development for the same position, the responsibility of the
position as compared to other positions within CSIs
management team, the tenure of the employee with CSI, and
cost-of-living adjustments. CSIs compensation committee
did not attempt to assign values to particular elements of
performance or the other factors considered and considered all
of these factors generally in making its judgment regarding base
salaries. CSI did not raise the base salaries of John Borrell or
Paul Tyska for calendar 2008 because CSI provides them with
additional incentive compensation in the form of monthly sales
commissions, as discussed below.
Laurence Betterley commenced employment as CSIs Chief
Financial Officer on April 14, 2008. Pursuant to the terms
of his employment agreement, Mr. Betterley receives an
annual base salary of $225,000. This base salary was negotiated
with Mr. Betterley as part of the compensation package
offered to induce him to join CSI. The base salary was set at an
amount that CSI believed to be generally consistent with the
base salaries paid by other growth stage medical device
companies for similar positions.
CSIs compensation committee will review CSIs Chief
Executive Officers salary annually at the end of each
calendar year. The committee may recommend adjustments to the
Chief Executive Officers base salary based upon the
committees review of his current base salary, incentive
cash compensation and equity-based compensation, as well as his
performance and comparative market data.
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CSIs compensation committee reviews other executives
salaries throughout the year, with input from the Chief
Executive Officer. The committee may recommend adjustments to
each other named executive officers base salary based upon
the Chief Executive Officers recommendation and the
reviewed executives responsibilities, experience and
performance, as well as comparative market data.
In utilizing comparative data, CSIs compensation committee
seeks to recommend salaries for each executive at a level that
is appropriate after giving consideration to experience for the
relevant position and the executives performance. CSI
reviews performance for both the company (based upon achievement
of strategic initiatives) and each individual executive. Based
upon these factors, the committee may recommend adjustments to
base salaries to better align individual compensation with
comparative market compensation, to provide merit-based
increases based upon individual or company achievement, or to
account for changes in roles and responsibilities.
Annual
Cash Incentive Compensation
Before Mr. Martin joined CSI as Chief Executive Officer CSI
generally paid annual bonus compensation to its executive
officers based on the executives performance during the
calendar year, the position and level of responsibility of the
executive and the performance of the company, with particular
focus on the executives contribution to that performance.
Because CSI had no revenues, the elements of company performance
considered typically included progress in product development
and clinical testing and achievement of financing goals.
Payments were made based on the evaluation by CSIs board
and compensation committee of a broad range of information
relating to individual and company performance rather than the
achievement of specific goals. All of CSIs executive
officers were eligible to receive these discretionary annual
bonuses, including James E. Flaherty, Michael J. Kallok, John
Borrell and Paul Tyska. For the first two quarters of fiscal
2007, the bonus amounts for Messrs. Flaherty and Kallok
were determined entirely at the discretion of the board and
compensation committee, while the bonus amounts for
Messrs. Borrell and Tyska were based upon provisions
contained in their employment agreements providing that each
executive is entitled to receive incentive pay equal to a
designated percentage of his base salary, payable quarterly and
based on performance objectives. Under the terms of his
employment agreement, Mr. Borrell is eligible to receive a
cash bonus up to $200,000 per year based upon quarterly
objectives to be determined. Mr. Tyskas employment
agreement provides that he is eligible to participate in a bonus
program that is targeted to pay out $100,000 per year based on
achieving results based upon
agreed-upon
objectives.
Shortly after Mr. Martin joined CSI in February 2007 and
upon his recommendation, CSIs compensation committee
established an incentive program for calendar 2007, which
included the third and fourth quarters of fiscal 2007 and the
first two quarters of fiscal 2008, designed to reward named
executive officers with quarterly payments for achieving
specific individual goals related to financial growth, product
development and commercialization and operational improvement.
Under the terms of the incentive program, CSIs
compensation committee set an annual target bonus amount for
each officer expressed as a percentage of that officers
base salary. The percentage assigned to each officer was
dependent in part on the position and responsibilities of the
officer, and in the case of new hires in fiscal 2007, consistent
with prior commitments made to such new hires. For each officer
other than the Chief Executive Officer, CSIs compensation
committee delegated to the Chief Executive Officer the authority
to set individual quarterly objectives that had to be achieved
to earn the bonus. Each officer that achieved the quarterly
objectives was entitled to receive partial payment of the annual
target amount, typically 25% each quarter. CSI believes that
quarterly objectives provide an incentive to maintain the rapid
pace of growth of CSIs business at its current stage.
The objectives reflected specific tasks for which the individual
executive was responsible that were consistent with CSIs
overall fiscal year operating plan established by its board of
directors. The specific objectives established for each of
CSIs named executive officers for the quarters ended
September 30, 2007 and December 31, 2007 are set forth
below:
Michael
J. Kallok, Ph.D.
|
|
|
|
Objectives
|
Receive
510(k) clearance from the FDA for the Diamondback 360°
|
Support
sales and marketing field activities
|
|
|
|
|
187
James E.
Flaherty
|
|
|
|
Objectives
|
Adequate
progress on CSIs financing plan
|
Prepare a
new financial model
|
Complete
Series A-1
and B preferred stock financings
|
|
|
|
|
John
Borrell
|
|
|
|
Objectives
|
Achieve
specified average selling price and customer reorder rates
|
Company
revenues of at least $800,000
|
Achieve
specified hiring goals
|
|
|
|
|
Paul
Tyska
|
|
|
|
Objectives
|
Make
adequate progress in strategic projects
|
Use of the
Diamondback 360° by certain key opinion leaders
|
|
|
|
|
At the end of calendar 2007, Mr. Martin and CSIs
compensation committee concluded that each of the executive
officers listed above had substantially satisfied all of the
objectives and CSI paid the full target bonus amount to each
officer for these periods, except for Mr. Borrell, who
began to receive sales commissions in lieu of the quarterly
incentive compensation following CSIs limited commercial
launch in September 2007. CSIs compensation committee did
not assign values to individual objectives or otherwise quantify
the bonus amount payable with respect to any particular
objective or group of objectives.
Generally, the objectives required performance at levels
intended to positively impact stockholder value and reflect
moderately aggressive to aggressive goals that are attainable,
but require strong performance. CSIs Chief Executive
Officer and compensation committee retain the discretion to
increase or decrease a named executive officers quarterly
or annual bonus payout to recognize either inferior or superior
individual performance in cases where this performance is not
fully represented by the achievement or non-achievement of the
pre-established objectives. For example, CSIs compensation
committee reserves the right to award an officer 100% of his or
her annual target bonus even if that officer had not achieved
any quarterly objectives. Neither the Chief Executive Officer
nor CSIs compensation committee exercised discretion to
award any bonus with respect to fiscal 2008 in circumstances
where applicable performance objectives had not been
substantially met.
CSIs compensation committee evaluated whether the Chief
Executive Officer had earned his calendar 2007 annual target
bonus amount only at the end of the calendar year based on
CSIs overall progress relative to CSIs business
plan. CSIs compensation committee did not establish
specific individual objectives for Mr. Martin under the
incentive program for calendar 2007 because the committee
concluded that defining appropriate objectives would be
difficult given that Mr. Martin was new in his position.
The committee decided that CSIs overall results would be a
more effective indicator of Mr. Martins success as
Chief Executive Officer than any specific quarterly objectives
that might be established for Mr. Martin. Accordingly,
shortly after Mr. Martin joined CSI, CSIs
compensation committee agreed, consistent with
Mr. Martins employment agreement, that
Mr. Martin would have the opportunity to earn incentive pay
of up to 25% of his base salary at the end of calendar 2007,
provided his performance was satisfactory to CSIs
compensation committee. In December 2007, CSIs
compensation committee concluded that Mr. Martin had
performed well during calendar 2007 and awarded him a bonus of
$92,500, 100% of his target bonus for calendar 2007, which
included the first and second quarters of fiscal 2008.
188
The following sets forth for each of CSIs named executive
officers the target incentive compensation as a percentage of
base salary and total incentive plan payments earned in calendar
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Calendar
|
|
|
|
Target
|
|
|
2007
|
|
|
|
Incentive
|
|
|
Non-Equity
|
|
|
|
Compensation
|
|
|
Incentive Plan
|
|
Name
|
|
as % of Base Salary
|
|
|
Payments
|
|
|
David L. Martin
|
|
|
25
|
%
|
|
$
|
92,500
|
|
James E. Flaherty(1)
|
|
|
40
|
|
|
|
77,000
|
|
Michael J. Kallok, Ph.D.
|
|
|
40
|
|
|
|
100,000
|
|
John Borrell(2)
|
|
|
100
|
|
|
|
150,000
|
|
Paul Tyska
|
|
|
50
|
|
|
|
100,000
|
|
|
|
|
(1) |
|
Mr. Flahertys base salary was raised from $185,000 to
$200,000 during calendar 2007. Accordingly, the actual incentive
payment he received for calendar 2007 does not reflect 40% of
his base salary in effect on December 31, 2007. |
|
(2) |
|
Mr. Borrell received an additional $114,517 in sales
commissions for the period commencing with CSIs limited
commercial launch in September 2007 and ending on
December 31, 2007. |
For David Martin, John Borrell and Paul Tyska the percentage of
base salary that would be available as incentive compensation
was negotiated as a term of their employment agreements at the
time of their joining CSI. For James E. Flaherty and Michael J.
Kallok, CSIs compensation committee determined that 40% of
base salary represented an appropriate short term cash
incentive, based on the experience and judgment of the members
of CSIs compensation committee. In determining these
percentages, CSIs compensation committees philosophy
was to reduce fixed compensation costs in favor of variable
compensation costs tied to performance, where possible.
In February 2008, CSIs board adopted a new incentive plan
for calendar 2008, which includes the third and fourth quarters
of fiscal 2008 and the first two quarters of fiscal 2009. This
plan conditions the payment of incentive compensation to all
participants, including Mr. Martin, upon CSIs
achievement of revenue and gross margin financial goals. None of
CSIs named executive officers is subject to individual
goals under this plan. Under this plan, CSIs named
executive officers are eligible to receive annual cash incentive
compensation with target bonus levels ranging from 50%, in the
case of CSIs President and Chief Executive Officer, to
40%, in the case of CSIs other named executive officers,
of their yearly base salaries. Participants are eligible to earn
50% to 150% of their target bonus amount depending upon
CSIs performance relative to the plan criteria; however,
in the event of extraordinary revenue performance above the
goals set by the board, all of the named executive officers
would receive incentive payments greater than 150% of their
targets based upon a formula established by the board, with no
maximum payout set under the plan. The plan provides for two
separate payments to the participants, the first based upon
company performance in the first six months of calendar 2008 and
the second based upon company performance in the entire calendar
year. The plan criteria are the same for all of CSIs named
executive officers. This plan is designed to reward the
executive officers for achieving and surpassing the financial
goals set by CSIs compensation committee and board of
directors. CSI believes that the financial goals are aggressive
but attainable if CSIs performance is strong.
189
The annual threshold, target and maximum incentive compensation
of CSIs named executive officers under this new plan are
set forth in the Grants of Plan-Based Awards in Fiscal
Year 2008 table on page 195. The target percentages
of annual base salary under this new plan are as follows:
|
|
|
|
|
|
|
Target %
|
|
|
|
of Annual Base
|
|
Name
|
|
Salary
|
|
|
David L. Martin
|
|
|
50
|
%
|
Laurence L. Betterley(1)
|
|
|
40
|
%
|
James E. Flaherty
|
|
|
40
|
%
|
Michael J. Kallok, Ph.D.
|
|
|
40
|
%
|
John Borrell
|
|
|
40
|
%
|
Paul Tyska
|
|
|
40
|
%
|
|
|
|
(1) |
|
Mr. Betterleys actual payment will be adjusted
proportionally to reflect his start date of April 14, 2008. |
In order for each officer to be eligible to receive a payment
for the first six months of calendar 2008, CSI needed to achieve
gross margins of at least 50% for that period. If CSI achieved
this goal, then upon achievement of the revenue goals set forth
below, each of the plan participants was eligible to receive the
following percentages of their annual target bonus:
|
|
|
|
|
|
|
% of
|
|
|
|
Annual Target
|
|
Revenue for the Period of January 1, 2008
June 30, 2008
|
|
Bonus
|
|
|
$10 million
|
|
|
25
|
%
|
$12 million
|
|
|
50
|
%
|
Over $12 million
|
|
|
62.5
|
%
|
Based upon CSIs achievement of the gross margin goal and
revenues in excess of $12 million for this six-month
period, on August 29, 2008 CSI made payments under this
plan to CSIs named executive officers equal to 62.5% of
their annual target incentive compensation. If CSI meets gross
margin and revenue goals for the entire calendar year, CSI will
make an additional payment to CSIs named executive
officers following the end of calendar 2008.
In addition to incentives under the new plan, Mr. Borrell
receives a monthly sales commission of 0.666% of all sales and
Mr. Tyska receives a monthly sales commission of 0.333% of
all sales. CSI believes that paying sales commissions to these
named executive officers each month of the first full year of
CSIs commercial launch provides them with significant
incentives to maximize their efforts to increase CSIs
sales throughout the year.
Stock
Option and Other Equity Awards
Consistent with CSIs compensation philosophies related to
performance-based compensation, long-term stockholder value
creation and alignment of executive interests with those of
stockholders, CSI makes periodic grants of long-term
compensation in the form of stock options or restricted stock to
CSIs named executive officers, to CSIs other
executive officers and across CSIs organization generally.
For CSIs named executive officers, CSI believes that stock
options offer the best incentives and tax attributes (by
deferring taxes until the holder is ready to exercise and sell)
necessary to motivate and retain them to enhance overall
enterprise value.
Stock options provide named executive officers with the
opportunity to purchase CSI common stock at a price fixed on the
grant date regardless of future market price. A stock option
becomes valuable only if CSI common stock price increases above
the option exercise price and the holder of the option remains
employed during the period required for the option shares to
vest. This provides an incentive for an option holder to remain
employed by CSI. In addition, stock options link a significant
portion of an employees compensation to stockholders
interests by providing an incentive to achieve corporate goals
and increase stockholder value.
Under CSIs 2007 Equity Incentive Plan, CSI may also make
grants of restricted stock awards, restricted stock units,
performance share awards, performance unit awards and stock
appreciation rights to officers and other employees. CSI adopted
this plan to give it flexibility in the types of awards that it
could grant to its executive officers and other employees.
190
In connection with the negotiations to hire Mr. Martin,
CSIs Chief Executive Officer, CSI agreed in principle that
Mr. Martin would be granted options to purchase a number of
shares which, when combined with shares subject to options that
he had already received as a board member and consultant, would
equal approximately 5.5% of CSIs then outstanding common
stock. CSIs compensation committee and board of directors
believed, based on their collective experience with other
medical device companies, that 5.5% was within the range of
equity compensation amounts typically granted at the Chief
Executive Officer level by companies of comparable size and
stage of development. They also believed that equity
compensation at 5.5% was a key element necessary to make the
entire compensation package offered to Mr. Martin
sufficiently attractive to induce him to join CSI.
CSIs compensation committee consulted Lyons,
Benenson & Company, a third-party compensation
consulting firm, to determine competitive levels of stock option
grants for officers in comparable positions with companies of
comparable size and stage of development. Based on the guidance
from Lyons and the experience of the members of CSIs
compensation committee, CSIs compensation committee
considered the relative ownership levels of each officer based
upon levels prior to a public offering and estimated levels
following a public offering and has identified target levels of
option grants for each of CSIs officers. Furthermore,
CSIs compensation committee considered each named
executive officers role and responsibilities, ability to
influence long term value creation, retention and incentive
factors and current stock and option holdings at the time of
grant, as well as individual performance, which is a significant
factor in the committees decisions. CSI granted options in
fiscal 2008 to each of its officers to bring the total number of
shares subject to options held by each such officer, including
shares subject to any previously granted options, closer to the
levels identified by CSIs compensation committee as
appropriate for that position, while also taking into
consideration performance of the officer and the limitations
imposed by number of shares authorized for issuance under
CSIs stock option plans. CSIs compensation committee
did not consider specific performance objectives but generally
concluded that each of CSIs executive officers had
performed well and deserved option grants intended to move their
equity ownership closer to CSIs compensation
committees targeted levels. The grants of stock options to
purchase 775,000 shares made to CSIs named executive
officers in December 2008 were to vest in full on the third
anniversary of the grant date, provided that CSI had completed
an initial public offering or a change of control transaction
before December 31, 2008. CSI included this vesting
restriction on the grants of stock options in order to provide
additional incentives to CSIs named executive officers to
complete an initial public offering or complete an alternate
transaction that would provide stockholder liquidity. These
options have been amended by CSIs board of directors to
provide for vesting of 50% of the options on the first
anniversary, and 50% of the options on the second anniversary,
of the closing of the merger with Replidyne.
Certain of CSIs stock option and restricted stock
agreements also provide that in the event of a change of
control (the sale by CSI of substantially all of its
assets and the consequent discontinuance of its business, or in
the event of a merger, exchange or liquidation of CSI), the
vesting of all options and shares of restricted stock will
accelerate and the options will be immediately exercisable as of
the effective date of the change of control. Excluding the
options to purchase 775,000 shares of CSI common stock
described in the previous paragraph, CSIs named executive
officers are also the holders of unvested options to purchase
615,166 shares of CSI common stock and 75,000 shares
of unvested restricted stock that are subject to a stock option
or restricted stock agreement that contains this provision. It
is a condition to the closing of the merger that CSI obtain an
acknowledgement in a form reasonably acceptable to Replidyne
from the holders of these options and shares of restricted stock
that the terms of the option or restricted stock agreements
related thereto do not provide that the vesting of such
securities will accelerate, in whole or in part, in connection
with or as a result of the consummation of the merger and the
other transactions contemplated by the merger agreement.
From time to time CSI may make one-time grants of stock options
or restricted stock to recognize promotion or consistent
long-term contribution, or for specific incentive purposes. For
example, in fiscal 2008 CSI made a grant of 348,725 vested stock
options to Dr. Kallok to replace expired and unexercised
options. Dr. Kallok would have been required to expend
substantial funds to exercise these options and pay the
associated tax liability, but he would not have been able to
benefit from liquidity of the exercised shares to cover the
exercise price or the tax liability. Dr. Kallok was
instrumental in the companys development and CSI made this
replacement grant for retention purposes and to reward
Dr. Kallok for his service.
CSI also granted stock options to its named executive officers
in connection with their initial employment. In connection with
CSIs negotiations with Mr. Betterley to join CSI as
Chief Financial Officer, CSI provided
191
Mr. Betterley with a grant of 75,000 shares of
restricted stock under CSIs 2007 Equity Incentive Plan,
which shares vest ratably in three annual installments,
beginning on April 14, 2009. CSI has made grants of
restricted stock to various employees under CSIs 2007
Equity Incentive Plan and Mr. Betterley was CSIs
first named executive officer to receive such a grant. CSI
intends to grant restricted stock instead of, or in addition to,
stock options to CSIs executive officers in the future,
because CSI can typically use fewer shares from its available
pool in making restricted stock grants. CSI believes that
restricted stock is as effective as stock options in motivating
performance of employees.
CSI has not made any grants of stock options or restricted stock
to its named executive officers since the end of fiscal 2008.
Although CSI does not have any detailed stock retention or
ownership guidelines, CSIs board of directors and
CSIs compensation committee generally encourage CSIs
executives to have a financial stake in CSI in order to align
the interests of CSIs stockholders and management, and
view stock options as a means of furthering this goal. CSI will
continue to evaluate whether to implement a stock ownership
policy for its officers and directors.
Additional information regarding the stock option and restricted
stock grants made to CSIs named executive officers for
fiscal 2008 is available in the Summary Compensation Table for
Fiscal Year 2008 below, and in the Outstanding Equity Awards at
Fiscal Year-end for Fiscal Year 2008 Table on page 197.
Limited
Perquisites; Other Benefits
It is generally CSIs policy not to extend significant
perquisites to its executives beyond those that are available to
its employees generally, such as 401(k) plan, health, dental and
life insurance benefits. CSI has given car allowances to certain
named executives and moving allowances for executives who have
relocated. CSI also pays for housing and related costs for its
Chief Executive Officer.
Changes
to Compensation for the Six Months Ending June 30,
2009
CSI adopted a new cash incentive plan for the six months ending
June 30, 2009. As described above, CSIs prior cash
incentive plans established calendar year incentive periods, and
the purpose of the new cash incentive plan is to align the
period for CSIs compensation program with its June 30
fiscal year end.
This plan conditions the payment of incentive compensation to
all participants upon CSIs achievement of revenue and
adjusted EBITDA financial goals. Target bonus amounts are split
evenly between these two goals. None of the named executive
officers is subject to individual goals under this plan. No plan
participant will receive a bonus unless CSI achieves certain
minimum adjusted EBITDA goals. Target bonus levels as a
percentage of base salary for the six-month period are 75% for
the President and Chief Executive Officer and 50% for the other
named executive officers. Depending upon CSIs performance
against the goals, participants are eligible to earn 50% to 200%
of their target bonus amount for adjusted EBITDA and 50% to 150%
of their target bonus amount for revenue; however, in the event
of extraordinary revenue performance above the goals set by the
board, the participants would receive incentive payments greater
than 150% of their targets for the revenue goal based upon a
formula established by the board, with no maximum payout set
under the plan. The plan criteria are the same for all of the
named executive officers. This plan is designed to reward the
executive officers for achieving and surpassing the financial
goals set by the compensation committee and board of directors.
In addition to incentives under the new plan, effective
January 1, 2009, John Borrell, CSIs Vice President of
Sales, receives a monthly sales commission of 0.286% of all
revenue and Paul Tyska, CSIs Vice President of Business
Development, receives a monthly sales commission of 2.667% of
sales of ancillary products (excluding guidewires).
Messrs. Borrell and Tyska are both named executive
officers. These sales commissions replace the commissions
Messrs. Borrell and Tyska were eligible to receive during
calendar year 2008.
In addition to the new cash incentive plan, effective
January 1, 2009, the base salary rate for
Mr. Betterley was increased from $225,000 to $250,000 and
the base salary rate for Mr. Flaherty was increased from
$218,000 to $233,000. The base salaries of the other named
executive officers of CSI did not change.
Role
of CSIs Compensation Committee
CSIs compensation committee was appointed by CSIs
board of directors, and consists entirely of directors who are
outside directors for purposes of
Section 162(m) and non-employee directors for
purposes of
192
Rule 16b-3
under the Exchange Act. CSIs compensation committee is
comprised of Messrs. Petrucci, Howe and Friedman. The
functions of CSIs compensation committee include, among
other things:
|
|
|
|
|
recommending the annual compensation packages, including base
salaries, incentive compensation, deferred compensation and
stock-based compensation, for CSIs executive officers;
|
|
|
|
recommending cash incentive compensation plans and deferred
compensation plans for CSIs executive officers, including
corporate performance objectives;
|
|
|
|
administering CSIs stock incentive plans, and subject to
board approval in the case of executive officers, approving
grants of stock, stock options and other equity awards under
such plans;
|
|
|
|
reviewing and making recommendations regarding the terms of
employment agreements for CSIs executive officers;
|
|
|
|
reviewing and discussing the compensation discussion and
analysis with management; and
|
|
|
|
preparing CSIs compensation committee report to be
included in CSIs annual proxy statement.
|
All compensation committee recommendations regarding
compensation to be paid or awarded to CSIs executive
officers are subject to approval by a majority of the
independent directors serving on CSIs board of directors.
CSIs Chief Executive Officer may not be present during any
board or compensation committee voting or deliberations with
respect to his compensation. CSIs Chief Executive Officer
may, however, be present during any other voting or
deliberations regarding compensation of CSIs other
executive officers, but may not vote on such items of business.
In fiscal 2008, CSIs compensation committee met without
the Chief Executive Officer present to review and determine the
compensation of CSIs Chief Executive Officer, with input
from him and CSIs third-party compensation consultant on
his annual salary and cash incentive compensation for the year.
For all other executive officers in fiscal 2008, CSIs
compensation committee met with CSIs Chief Executive
Officer to consider and determine executive compensation, based
on recommendations by CSIs Chief Executive Officer and
CSIs third-party compensation consultant.
Summary
Compensation Table for Fiscal Year 2008
The following table provides information regarding the
compensation earned during the fiscal years ended June 30,
2008 and June 30, 2007 by CSIs Chief Executive
Officer, the two individuals who served as CSIs
193
Chief Financial Officer during fiscal 2008, and each of
CSIs other three most highly compensated executive
officers. CSI refers to these persons as its named
executive officers elsewhere in this proxy
statement/prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards(1)
|
|
|
Awards(1)
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Total
|
|
Name and Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
David L. Martin
|
|
|
2008
|
|
|
$
|
377,629
|
|
|
$
|
0
|
|
|
$
|
|
|
|
$
|
314,552
|
|
|
$
|
215,928
|
|
|
$
|
94,427
|
|
|
$
|
1,002,536
|
|
President and Chief Executive Officer(2)
|
|
|
2007
|
|
|
|
129,573
|
|
|
|
0
|
|
|
|
|
|
|
|
99,108
|
|
|
|
0
|
|
|
|
47,653
|
|
|
|
276,334
|
|
Laurence L. Betterley
|
|
|
2008
|
|
|
|
43,269
|
|
|
|
0
|
|
|
|
64,011
|
|
|
|
|
|
|
|
23,438
|
|
|
|
0
|
|
|
|
130,718
|
|
Chief Financial Officer(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James E. Flaherty
|
|
|
2008
|
|
|
|
196,853
|
|
|
|
0
|
|
|
|
|
|
|
|
81,304
|
|
|
|
94,500
|
|
|
|
0
|
|
|
|
372,657
|
|
Chief Administrative Officer and former Chief Financial
Officer(4)(5)
|
|
|
2007
|
|
|
|
166,658
|
|
|
|
39,562
|
|
|
|
|
|
|
|
26,179
|
|
|
|
37,000
|
|
|
|
0
|
|
|
|
269,399
|
|
Michael J. Kallok, Ph.D.
|
|
|
2008
|
|
|
|
242,769
|
|
|
|
0
|
|
|
|
|
|
|
|
1,686,016
|
|
|
|
113,750
|
|
|
|
0
|
|
|
|
2,042,535
|
|
Chief Scientific Officer and former Chief Executive
Officer(5)(6)
|
|
|
2007
|
|
|
|
246,923
|
|
|
|
50,000
|
|
|
|
|
|
|
|
49,184
|
|
|
|
50,000
|
|
|
|
0
|
|
|
|
396,107
|
|
John Borrell
|
|
|
2008
|
|
|
|
200,000
|
|
|
|
0
|
|
|
|
|
|
|
|
75,773
|
|
|
|
331,493
|
|
|
|
7,800
|
|
|
|
615,066
|
|
Vice President of Sales(7)
|
|
|
2007
|
|
|
|
196,154
|
|
|
|
0
|
|
|
|
|
|
|
|
19,729
|
|
|
|
200,000
|
|
|
|
7,800
|
|
|
|
423,683
|
|
Paul Tyska
|
|
|
2008
|
|
|
|
200,000
|
|
|
|
0
|
|
|
|
|
|
|
|
54,270
|
|
|
|
158,429
|
|
|
|
7,800
|
|
|
|
420,499
|
|
Vice President Business Development(8)
|
|
|
2007
|
|
|
|
167,692
|
|
|
|
0
|
|
|
|
|
|
|
|
12,774
|
|
|
|
83,333
|
|
|
|
6,825
|
|
|
|
270,624
|
|
|
|
|
(1) |
|
The value of stock awards and options in this table represent
the amounts recognized for financial statement reporting
purposes for fiscal 2008 in accordance with FAS 123(R), and
thus may include amounts from awards granted in and prior to
fiscal 2008. For a discussion of valuation assumptions and
additional SFAS No. 123(R) disclosures, see
Note 6 to CSIs consolidated financial statements
included elsewhere in this proxy statement/prospectus. |
|
(2) |
|
Mr. Martin commenced employment on February 15, 2007. |
|
|
|
The amount under Non-Equity Incentive Plan
Compensation for Mr. Martin for 2008 consists of
(i) incentive compensation of $92,500 paid to
Mr. Martin at the end of calendar 2007 to satisfy
CSIs commitment to pay Mr. Martin 25% of his initial
base salary of $370,000 under his employment agreement dated
December 19, 2006, which award was based upon his
performance in the third and fourth quarters of fiscal 2007 and
the first and second quarters of fiscal 2008, and
(ii) incentive compensation of $123,428 paid for company
performance through June 30, 2008 under CSIs
incentive plan for calendar 2008. Any additional amounts earned
by Mr. Martin under the calendar 2008 incentive plan will
be paid in fiscal 2009. Also see the Grants of Plan-Based
Awards in Fiscal Year 2008 table, which discloses the full
potential amounts payable under this plan for calendar 2008. |
|
|
|
The amounts under All Other Compensation for
Mr. Martin (i) for 2008 consist of payments for
housing, furniture rental, cleaning and related expenses of
$68,499, car and transportation expenses of $17,471, and
reimbursement of $8,457 for transportation costs of visits to
Minnesota by his family, and (ii) for 2007 consist of
payments for housing, moving, furniture rental, cleaning and
related expenses of $38,483, car and transportation expenses of
$6,794, and reimbursement of $2,376 in legal fees incurred in
connection with the negotiation of his employment agreement. CSI
provided Mr. Martin with a moving allowance of $40,000 that
he used for various of these expenses in fiscal 2007 and fiscal
2008, with approximately $7,327 remaining under this allowance
following fiscal 2008. |
|
(3) |
|
Mr. Betterley commenced employment on April 14, 2008. |
|
|
|
The amount under Non-Equity Incentive Plan
Compensation for Mr. Betterley for 2008 consists of
incentive compensation paid for company performance through
June 30, 2008 under CSIs incentive plan for calendar
2008. The amount accrued through June 30, 2008 will be paid
to Mr. Betterley, along with any additional amounts earned
by Mr. Betterley under the calendar 2008 incentive plan
will be paid in fiscal 2009. Also see the |
194
|
|
|
|
|
Grants of Plan-Based Awards in Fiscal Year
2008 table, which discloses the full potential amounts
payable under this plan for calendar 2008. |
|
(4) |
|
Mr. Flaherty was CSIs Chief Financial Officer until
January 14, 2008, when he became its Chief Administrative
Officer. Mr. Martin was appointed CSIs Interim Chief
Financial Officer pending the appointment of CSIs new
Chief Financial Officer in April 2008. |
|
|
|
The amount under Non-Equity Incentive Plan
Compensation for Mr. Flaherty for 2008 consists of
(i) incentive compensation of $40,000 paid to
Mr. Flaherty for the first and second quarters of fiscal
2008 under CSIs incentive program for calendar 2007, and
(ii) incentive compensation of $54,500 paid for company
performance through June 30, 2008 under CSIs
incentive plan for calendar 2008. Any additional amounts earned
by Mr. Flaherty under the calendar 2008 incentive plan will
be paid in fiscal 2009. Also see the Grants of Plan-Based
Awards in Fiscal Year 2008 table, which discloses the full
potential amounts payable under this plan for calendar 2008. |
|
(5) |
|
Cash incentive compensation for each of Messrs. Flaherty
and Kallok for performance in the first and second quarters of
fiscal 2007 was based entirely upon the discretion of the board
and the compensation committee, and the amounts paid are
represented in the Bonus column. For performance in
the third and fourth quarters of fiscal 2007, cash incentive
compensation for these named executive officers was based upon
specific performance objectives, and the amounts paid are
represented in the Non-Equity Incentive Plan
Compensation column. |
|
(6) |
|
The amount under Non-Equity Incentive Plan
Compensation for Dr. Kallok for 2008 consists of
(i) incentive compensation of $50,000 paid to
Dr. Kallok for the first and second quarters of fiscal 2008
under CSIs incentive program for calendar 2007, and
(ii) incentive compensation of $63,750 paid for company
performance through June 30, 2008 under CSIs
incentive plan for calendar 2008. Any additional amounts earned
by Dr. Kallok under the calendar 2008 incentive plan will
be paid in fiscal 2009. Also see the Grants of Plan-Based
Awards in Fiscal Year 2008 table, which discloses the full
potential amounts payable under this plan for calendar 2008. |
|
(7) |
|
Mr. Borrell commenced employment on July 1, 2006. |
|
|
|
The amount under Non-Equity Incentive Plan
Compensation for Mr. Borrell for 2008 consists of
(i) incentive compensation of $50,000 paid to
Mr. Borrell for the first and second quarters of fiscal
2008 under CSIs incentive program for calendar 2007,
(ii) commissions of $231,493 earned in fiscal 2008, and
(iii) incentive compensation of $50,000 paid for company
performance through June 30, 2008 under CSIs
incentive plan for calendar 2008. Any additional amounts earned
by Mr. Borrell under the calendar 2008 incentive plan will
be paid in fiscal 2009. Also see the Grants of Plan-Based
Awards in Fiscal Year 2008 table, which discloses the full
potential amounts payable under this plan for calendar 2008. |
|
|
|
The amounts under All Other Compensation for
Mr. Borrell consist of a car allowance of $650 per month. |
|
(8) |
|
Mr. Tyska commenced employment on August 23, 2006. |
|
|
|
The amount under Non-Equity Incentive Plan
Compensation for Mr. Tyska for 2008 consists of
(i) incentive compensation of $50,000 paid to
Mr. Tyska for the first and second quarters of fiscal 2008
under CSIs incentive program for calendar 2007,
(ii) commissions of $58,429 earned in fiscal 2008, and
(iii) incentive compensation of $50,000 paid for company
performance through June 30, 2008 under CSIs
incentive plan for calendar 2008. Any additional amounts earned
by Mr. Tyska under the calendar 2008 incentive plan will be
paid in fiscal 2009. Also see the Grants of Plan-Based
Awards in Fiscal Year 2008 table, which discloses the full
potential amounts payable under this plan for calendar 2008. |
|
|
|
The amounts under All Other Compensation for
Mr. Tyska consist of a car allowance of $650 per month. |
Grants of
Plan-Based Awards in Fiscal Year 2008
All stock options granted to CSIs named executive officers
are incentive stock options, to the extent permissible under the
Internal Revenue Code of 1986, as amended. The exercise price
per share of each stock option granted to CSIs named
executive officers was equal to the fair market value of CSI
common stock as determined in good faith by CSIs board of
directors on the date of the grant. The options listed in the
table below were granted under CSIs 2007 Equity Incentive
Plan. See Replidyne Proposal No. 4
Approval of the Cardiovascular Systems, Inc. 2007 Equity
Incentive Plan for a description of the terms of the 2007
Equity Incentive Plan.
195
The following table sets forth certain information regarding
grants of plan-based awards to CSIs named executive
officers during the fiscal year ended June 30, 2008. CSI
omitted columns related to equity incentive plan awards as none
of CSIs named executive officers earned any such awards
during fiscal 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Awards:
|
|
|
|
|
|
Fair Market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Exercise of
|
|
|
Value of
|
|
|
|
Estimated Future Payouts Under
|
|
|
Shares of
|
|
|
Securities
|
|
|
Base Price
|
|
|
Stock and
|
|
|
|
Non-Equity Incentive Plan Awards(1)
|
|
|
Stock or
|
|
|
Underlying
|
|
|
of Option
|
|
|
Option
|
|
Name
|
|
Grant Date
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum(2)
|
|
|
Units
|
|
|
Options
|
|
|
Awards(3)
|
|
|
Awards(4)
|
|
|
David L. Martin
|
|
|
12/12/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375,000
|
|
|
$
|
7.86
|
|
|
$
|
1,621,125
|
|
|
|
|
2/13/08
|
|
|
$
|
98,750
|
|
|
$
|
197,500
|
|
|
$
|
296,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laurence L. Betterley(5)
|
|
|
4/14/08
|
|
|
$
|
45,000
|
|
|
$
|
90,000
|
|
|
$
|
135,000
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
$
|
770,250
|
|
James E. Flaherty
|
|
|
8/07/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
$
|
5.11
|
|
|
$
|
110,565
|
|
|
|
|
12/12/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
$
|
7.86
|
|
|
$
|
216,150
|
|
|
|
|
2/13/08
|
|
|
$
|
43,600
|
|
|
$
|
87,200
|
|
|
$
|
130,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Kallok, Ph.D.
|
|
|
12/12/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
$
|
7.86
|
|
|
$
|
216,150
|
|
|
|
|
12/31/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
488,215
|
|
|
$
|
7.86
|
|
|
$
|
1,630,150
|
|
|
|
|
2/13/08
|
|
|
$
|
51,000
|
|
|
$
|
102,000
|
|
|
$
|
153,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Borrell(6)
|
|
|
8/07/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
$
|
5.11
|
|
|
$
|
110,565
|
|
|
|
|
12/12/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
$
|
7.86
|
|
|
$
|
432,300
|
|
|
|
|
2/13/08
|
|
|
$
|
40,000
|
|
|
$
|
80,000
|
|
|
$
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Tyska(7)
|
|
|
8/07/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
$
|
5.11
|
|
|
$
|
110,565
|
|
|
|
|
12/12/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
$
|
7.86
|
|
|
$
|
216,150
|
|
|
|
|
2/13/08
|
|
|
$
|
40,000
|
|
|
$
|
80,000
|
|
|
$
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts in this column represent potential payments under
CSIs incentive plan for calendar 2008, which includes the
third and fourth quarters of fiscal 2008 and the first and
second quarters of fiscal 2009. See the Summary Compensation
Table for the amounts accrued for payments under this plan to
CSIs named executive officers through June 30, 2008. |
|
(2) |
|
The amounts in this column represent the maximum payments based
upon revenue and gross margin goals established by CSIs
board of directors. In the event of extraordinary revenue
performance above those goals, all of the named executive
officers would receive incentive payments greater than these
amounts based upon a formula established by the board, with no
maximum payout set under the plan. |
|
(3) |
|
See Note 6 to CSIs consolidated financial statements
included elsewhere in this proxy statement/prospectus for a
discussion of the methodology for determining the exercise price. |
|
(4) |
|
Reflects the grant date fair market value of stock and option
awards granted in fiscal 2008, computed in accordance with
SFAS No. 123(R). For a discussion of valuation
assumptions, see Note 6 to CSIs consolidated
financial statements included elsewhere in this proxy
statement/prospectus. |
|
(5) |
|
Mr. Betterleys actual incentive compensation will be
adjusted proportionally to reflect his start date of
April 14, 2008. |
|
(6) |
|
Mr. Borrell will also be paid a sales commission of 0.666%
on all sales, to be paid monthly. There are no threshold, target
or maximum amounts payable in connection with this sales
commission. |
|
(7) |
|
Mr. Tyska will also be paid a sales commission of 0.333% on
all sales, to be paid monthly. There are no threshold, target or
maximum amounts payable in connection with this sales commission. |
196
Outstanding
Equity Awards at Fiscal Year-end for Fiscal Year 2008
The following table sets forth certain information regarding
outstanding equity awards held by CSIs named executive
officers as of June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Market or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Awards:
|
|
|
Payout
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Value of
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
Unearned
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Shares,
|
|
|
Shares,
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
Units or Other
|
|
|
Units or
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
Rights that
|
|
|
Other Rights
|
|
|
|
Grant
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Expiration
|
|
|
have not
|
|
|
that have
|
|
|
|
Date
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price(1)
|
|
|
Date
|
|
|
Vested
|
|
|
not Vested
|
|
|
David L. Martin(2)(3)
|
|
|
7/17/06
|
|
|
|
45,000
|
|
|
|
65,000
|
|
|
$
|
5.71
|
|
|
|
7/16/11
|
|
|
|
|
|
|
|
|
|
|
|
|
8/15/06
|
|
|
|
20,000
|
|
|
|
40,000
|
|
|
|
5.71
|
|
|
|
8/14/11
|
|
|
|
|
|
|
|
|
|
|
|
|
2/15/07
|
|
|
|
240,000
|
|
|
|
300,000
|
|
|
|
5.71
|
|
|
|
2/14/12
|
|
|
|
|
|
|
|
|
|
|
|
|
6/12/07
|
|
|
|
46,667
|
|
|
|
93,333
|
|
|
|
5.11
|
|
|
|
6/11/17
|
|
|
|
|
|
|
|
|
|
|
|
|
12/12/07
|
|
|
|
0
|
|
|
|
375,000
|
|
|
|
7.86
|
|
|
|
12/11/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laurence L. Betterley(4)
|
|
|
4/14/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
$
|
766,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James E. Flaherty(3)(5)
|
|
|
2/17/04
|
|
|
|
20,000
|
|
|
|
0
|
|
|
|
6.00
|
|
|
|
2/16/09
|
|
|
|
|
|
|
|
|
|
|
|
|
11/16/04
|
|
|
|
7,500
|
|
|
|
0
|
|
|
|
6.00
|
|
|
|
11/15/09
|
|
|
|
|
|
|
|
|
|
|
|
|
7/01/05
|
|
|
|
16,666
|
|
|
|
8,334
|
|
|
|
8.00
|
|
|
|
6/30/10
|
|
|
|
|
|
|
|
|
|
|
|
|
11/08/05
|
|
|
|
8,000
|
|
|
|
4,000
|
|
|
|
8.00
|
|
|
|
11/7/10
|
|
|
|
|
|
|
|
|
|
|
|
|
12/19/06
|
|
|
|
4,833
|
|
|
|
9,667
|
|
|
|
5.71
|
|
|
|
12/18/16
|
|
|
|
|
|
|
|
|
|
|
|
|
4/18/07
|
|
|
|
13,000
|
|
|
|
26,000
|
|
|
|
5.71
|
|
|
|
4/17/17
|
|
|
|
|
|
|
|
|
|
|
|
|
8/07/07
|
|
|
|
0
|
|
|
|
35,000
|
|
|
|
5.11
|
|
|
|
8/06/17
|
|
|
|
|
|
|
|
|
|
|
|
|
12/12/07
|
|
|
|
0
|
|
|
|
50,000
|
|
|
|
7.86
|
|
|
|
12/11/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Kallok, Ph.D.(3)(6)
|
|
|
6/21/04
|
|
|
|
25,000
|
|
|
|
0
|
|
|
|
6.00
|
|
|
|
2/16/09
|
|
|
|
|
|
|
|
|
|
|
|
|
11/16/04
|
|
|
|
20,000
|
|
|
|
0
|
|
|
|
6.00
|
|
|
|
11/15/09
|
|
|
|
|
|
|
|
|
|
|
|
|
11/08/05
|
|
|
|
33,334
|
|
|
|
16,666
|
|
|
|
8.00
|
|
|
|
11/07/10
|
|
|
|
|
|
|
|
|
|
|
|
|
7/17/06
|
|
|
|
16,666
|
|
|
|
33,334
|
|
|
|
5.71
|
|
|
|
7/16/11
|
|
|
|
|
|
|
|
|
|
|
|
|
12/19/06
|
|
|
|
33,333
|
|
|
|
66,667
|
|
|
|
5.71
|
|
|
|
12/18/16
|
|
|
|
|
|
|
|
|
|
|
|
|
12/12/07
|
|
|
|
0
|
|
|
|
50,000
|
|
|
|
7.86
|
|
|
|
12/11/17
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/07
|
|
|
|
488,215
|
|
|
|
0
|
|
|
|
7.86
|
|
|
|
12/30/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Borrell(3)(5)
|
|
|
7/17/06
|
|
|
|
44,000
|
|
|
|
88,000
|
|
|
|
5.71
|
|
|
|
6/30/11
|
|
|
|
|
|
|
|
|
|
|
|
|
12/19/06
|
|
|
|
2,667
|
|
|
|
5,333
|
|
|
|
5.71
|
|
|
|
12/18/16
|
|
|
|
|
|
|
|
|
|
|
|
|
4/18/07
|
|
|
|
11,333
|
|
|
|
22,667
|
|
|
|
5.71
|
|
|
|
4/17/17
|
|
|
|
|
|
|
|
|
|
|
|
|
8/07/07
|
|
|
|
0
|
|
|
|
35,000
|
|
|
|
5.11
|
|
|
|
8/06/17
|
|
|
|
|
|
|
|
|
|
|
|
|
12/12/07
|
|
|
|
0
|
|
|
|
100,000
|
|
|
|
7.86
|
|
|
|
12/11/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Tyska(3)(5)
|
|
|
10/03/06
|
|
|
|
46,666
|
|
|
|
93,334
|
|
|
|
5.71
|
|
|
|
10/02/11
|
|
|
|
|
|
|
|
|
|
|
|
|
8/07/07
|
|
|
|
0
|
|
|
|
35,000
|
|
|
|
5.11
|
|
|
|
8/06/17
|
|
|
|
|
|
|
|
|
|
|
|
|
12/12/07
|
|
|
|
0
|
|
|
|
50,000
|
|
|
|
7.86
|
|
|
|
12/11/17
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 6 to CSIs consolidated financial statements
included elsewhere in this proxy statement/prospectus for a
discussion of the methodology for determining the exercise price. |
|
(2) |
|
The July 2006 options vest at the rate of 5,000 shares per
month starting on August 17, 2006. The August 2006 and June
2007 options vest at the rate of one-third per year starting on
the first anniversary of the grant date. The February 2007
options vest at the rate of 15,000 shares per month
starting March 15, 2007. The December 2007 grant was to
vest in full on the third anniversary of the grant date provided
that CSI had completed an initial public offering or a change of
control transaction before December 31, 2008. The December
2007 options have |
197
|
|
|
|
|
been amended by CSIs board of directors to provide for
vesting of 50% of the options on the first anniversary, and 50%
of the options on the second anniversary, of the closing of the
merger. |
|
(3) |
|
Certain of CSIs stock option agreements provide that in
the event of a change of control (the sale by CSI of
substantially all of its assets and the consequent
discontinuance of its business, or in the event of a merger,
exchange or liquidation of CSI), the vesting of all options will
accelerate and the options will be immediately exercisable as of
the effective date of the change of control. It is a condition
to the closing of the merger that CSI obtain an acknowledgement
in a form reasonably acceptable to Replidyne from its officers
and directors and the holders of 80% of the remainder of these
options that the terms of the option agreements related thereto
do not provide that the vesting of such securities will
accelerate, in whole or in part, in connection with or as a
result of the consummation of the merger and the other
transactions contemplated by the merger agreement. |
|
(4) |
|
Restricted stock award vests at the rate of one-third per year
starting on the first anniversary of the grant date. |
|
(5) |
|
All option awards vest at the rate of one-third per year
starting on the first anniversary of the grant date, except for
the grants made on December 12, 2007, which were to vest in
full on the third anniversary of the grant date provided that
CSI had completed an initial public offering or a change of
control transaction before December 31, 2008. The December
2007 options have been amended by CSIs board of directors
to provide for vesting of 50% of the options on the first
anniversary, and 50% of the options on the second anniversary,
of the closing of the merger. |
|
|
|
(6) |
|
All option awards received through December 2006 vest at the
rate of one-third per year starting on the first anniversary of
the grant date. The grant made on December 12, 2007 was to
vest in full on the third anniversary of the grant date provided
that CSI had completed an initial public offering or a change of
control transaction before December 31, 2008. The
December 31, 2007 grant vested immediately. The
December 12, 2007 options have been amended by CSIs
board of directors to provide for vesting of 50% of the options
on the first anniversary, and 50% of the options on the second
anniversary, of the closing of the merger. In connection with
the proposed separation of Dr. Kallok from CSI and
subsequent entry into a consulting agreement, CSIs board
of directors has authorized the amendment of all of
Dr. Kalloks option agreements to provide that
(i) such options will not terminate upon the termination of
Dr. Kalloks employment, (ii) to the extent any
such option is not fully vested at the time
Dr. Kalloks employment is terminated, vesting will
continue during the term of Dr. Kalloks consulting
relationship with CSI, and (iii) the options will terminate
on the earlier of the original termination date of each such
option, or 36 months following the commencement of
Dr. Kalloks consulting agreement with CSI. |
Option
Exercises and Stock Vested for Fiscal Year 2008
The following table sets forth certain information regarding
option exercises by CSIs named executive officers during
the fiscal year ended June 30, 2008. There was no stock
vesting for any of CSIs named executive officers during
the fiscal year ended June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
Number of Shares
|
|
|
Value Realized on
|
|
Name
|
|
Acquired on Exercise
|
|
|
Exercise(1)
|
|
|
David L. Martin
|
|
|
70,000
|
|
|
$
|
115,500
|
|
Laurence L. Betterley
|
|
|
|
|
|
|
|
|
James E. Flaherty
|
|
|
40,000
|
|
|
|
94,284
|
|
Michael J. Kallok, Ph.D.
|
|
|
|
|
|
|
|
|
John Borrell
|
|
|
|
|
|
|
|
|
Paul Tyska
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the aggregate dollar amount realized by the individual
upon exercise of the options as determined by multiplying the
number of shares acquired on exercise by the difference between
the fair market value of the shares on the date of exercise, as
determined by CSIs management and board of directors, and
the exercise price of the options. |
198
Potential
Payments Upon Termination or Change of Control
The majority of CSIs stock option agreements provide that
in the event of a change of control (the sale by CSI of
substantially all of its assets and the consequent
discontinuance of its business, or in the event of a merger,
exchange or liquidation of CSI), the vesting of all options will
accelerate and the options will be immediately exercisable as of
the effective date of the change of control. CSIs
restricted stock agreements also provide for the acceleration of
vesting as of the effective date of a change of control. CSI
estimates the potential value of acceleration of options and
restricted stock held by each of CSIs named executive
officers as of June 30, 2008 to be as follows:
|
|
|
|
|
|
|
Value of Accelerated
|
|
|
|
Options or
|
|
Name
|
|
Restricted Stock(1)
|
|
|
David L. Martin
|
|
$
|
3,214,862
|
|
Laurence L. Betterley
|
|
|
766,601
|
|
James E. Flaherty
|
|
|
485,627
|
|
Michael J. Kallok, Ph.D.
|
|
|
606,663
|
|
John Borrell
|
|
|
939,083
|
|
Paul Tyska
|
|
|
718,549
|
|
|
|
|
(1) |
|
Reflects the excess of the fair market value of the shares
underlying unvested options over the exercise price of such
options, or the fair market value of the unvested restricted
stock. Fair market value is based upon a per share price of
$10.22 as of June 30, 2008, as determined by CSIs
management and board of directors. |
Under the terms of the employment agreement with
Mr. Martin, CSI will pay Mr. Martin an amount equal to
12 months of his then current base salary and
12 months of CSIs share of health insurance costs if
Mr. Martin is terminated by CSI without cause, or if
Mr. Martin terminates his employment for good reason, as
defined in the agreement. Good reason is generally
defined as the assignment of job responsibilities to
Mr. Martin that are not comparable in status or
responsibility to those job responsibilities set forth in the
agreement, a reduction in Mr. Martins base salary
without his consent, or CSIs failure to provide
Mr. Martin the benefits promised under his employment
agreement. As a condition to receiving his severance benefits,
Mr. Martin is required to execute a release of claims
agreement in favor of CSI.
Under the terms of the employment agreement with
Mr. Betterley, CSI will pay Mr. Betterley an amount
equal to 12 months of his then current base salary and
12 months of CSIs share of health insurance costs if
Mr. Betterley is terminated by CSI without cause, or if
Mr. Betterley terminates his employment for good reason, as
defined in the agreement. Good reason is generally
defined as the assignment of job responsibilities to
Mr. Betterley that are not comparable in status or
responsibility to those job responsibilities set forth in the
agreement, a reduction in Mr. Betterleys base salary
without his consent, or CSIs failure to provide
Mr. Betterley the benefits promised under his employment
agreement. As a condition to receiving his severance benefits,
Mr. Betterley is required to execute a release of claims
agreement in favor of CSI. Mr. Betterley must have been
continuously employed by CSI for six months to be eligible to
receive any severance benefits.
Under the terms of the employment agreement with
Dr. Kallok, CSI will pay Dr. Kallok an amount equal to
12 months of his then current base salary, 12 months
of CSIs share of health insurance costs and the greater of
his prior year bonus or current bonus, as adjusted per terms of
the agreement if Dr. Kallok is terminated by CSI without
cause, or if Dr. Kallok terminates his employment for good
reason, as defined in the agreement. Good reason is
generally defined as the assignment of job responsibilities to
Dr. Kallok that are not comparable in status or
responsibility to those job responsibilities set forth in the
agreement, a reduction in Dr. Kalloks base salary
without his consent, or CSIs failure to provide
Dr. Kallok the benefits promised under his employment
agreement. As a condition to receiving his severance benefits,
Dr. Kallok is required to execute a release of claims
agreement in favor of CSI.
CSI agreed to the payment of severance benefits in the
employment agreements with Mr. Martin, Mr. Betterley
and Dr. Kallok because they each requested these severance
benefits and CSI believed it was necessary to provide such
benefits in order to obtain the agreements with them. CSI
believes that other medical device manufacturers provide
substantially similar severance benefits to their senior
officers and that providing severance benefits to
199
CSIs Chief Executive Officer and Chief Financial Officer
is therefore consistent with market practices. CSI believes that
such benefits are reasonable to protect the Chief Executive
Officer and Chief Financial Officer against the risk of having
no compensation while they seek alternative employment following
a termination of their employment with CSI. The terms of the
severance provisions for Mr. Martin and Mr. Betterley,
on the one hand, and Dr. Kallok, on the other hand, vary in
certain respects because Dr. Kalloks agreement was
negotiated in May 2003 before CSI had formed a compensation
committee and when the composition of the board was different
than the current board, and Mr. Martins agreement was
negotiated in December 2006 and Mr. Betterleys
agreement was negotiated in April 2008.
The following table shows as of June 30, 2008 the potential
payments upon termination by CSI without cause or by the
employee for good reason for Messrs. Martin and Kallok:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
12 Months Health
|
|
|
|
|
|
|
|
Name
|
|
Base Salary
|
|
|
Insurance Costs
|
|
|
Bonus
|
|
|
Total
|
|
|
David L. Martin
|
|
$
|
395,000
|
|
|
$
|
12,000
|
|
|
$
|
0
|
|
|
$
|
407,000
|
|
Michael J. Kallok, Ph.D.
|
|
|
255,000
|
|
|
|
12,000
|
|
|
|
100,000
|
|
|
|
367,000
|
|
Mr. Betterley joined CSI on April 14, 2008 and,
therefore, was not employed by CSI for at least six months at
June 30, 2008. Accordingly, he would have received no
termination payments at that time.
It is expected that CSI and Dr. Kallok will negotiate and
enter into a separation agreement pursuant to which
Dr. Kallok will resign his positions as an officer and
director of CSI, and that the parties will subsequently enter
into a consulting agreement. The terms of such separation
agreement have not yet been determined, but it is expected that
Dr. Kallok will not serve as an officer or director of the
combined company.
Compensation
of Directors
CSI
Director Compensation
The non-employee members of CSIs board of directors are
reimbursed for travel, lodging and other reasonable expenses
incurred in attending board or committee meetings. Upon initial
election to CSIs board of directors, each non-employee
director has been granted an option to purchase
60,000 shares of CSI common stock. In subsequent years,
each non-employee director has received an annual stock option
grant to purchase a quantity of CSI common stock that is
determined by CSIs board of directors on an annual basis.
For fiscal year 2008, each of CSIs non-employee directors
was granted options to purchase 30,000 shares of CSI common
stock. CSIs board has, in the past, granted additional
options to CSIs board chairman and each of CSIs
committee chairs for services in those capacities. In addition,
certain directors received additional grants in fiscal 2008 as
described in the footnotes to the CSI director compensation
table below.
CSIs board of directors has adopted a director
compensation plan to become effective upon the completion of the
merger, which plan is expected to be adopted by the board of
directors of the combined company following the merger. For the
six month period ending June 30, 2009, each former CSI
non-employee director of the combined company will receive the
following compensation:
|
|
|
|
|
$20,000 for service as a board member;
|
|
|
|
|
|
$10,000 for service as a chairman of a board committee;
|
|
|
|
|
|
$5,000 for service as a member of a board committee;
|
|
|
|
|
|
$1,200 per board or committee meeting attended in the event more
than six of each such meetings are held during the
period; and
|
|
|
|
|
|
a restricted stock unit award with a value of $50,000, to be
granted following the completion of the merger, and payable in
cash beginning six months after the termination of the
directors board membership.
|
For the twelve month period ending June 30, 2010, each
non-employee director of the combined company will receive the
following compensation:
|
|
|
|
|
$40,000 for service as a board member;
|
|
|
|
|
|
$20,000 for service as a chairman of a board committee;
|
|
|
|
|
|
$10,000 for service as a member of a board committee;
|
200
|
|
|
|
|
$1,200 per board or committee meeting attended in the event more
than 12 of each such meeting are held during the period; and
|
|
|
|
|
|
a restricted stock unit award with a value of $100,000, to be
granted following completion of the audit of the combined
companys financial statements for the year ending
June 30, 2010, and payable in cash beginning six months
after the termination of the directors board membership.
|
Replidyne
Director Compensation
Director
Cash Compensation
In April 2006, Replidynes board of directors adopted a
compensation program for non-employee directors. This
compensation program became effective immediately upon the
closing of Replidynes initial public offering in 2006.
Pursuant to this program, each member of Replidynes board
of directors who is not a Replidyne employee receives the
following cash compensation for board services, as applicable:
|
|
|
|
|
$17,500 per year for service as a board member;
|
|
|
|
$7,500 per year for service as chairman of Replidynes
audit committee;
|
|
|
|
$2,500 per year for service as chairman of Replidynes
compensation committee or nominating and corporate governance
committee;
|
|
|
|
$1,500 for each board meeting attended in person ($750 for
meetings attended by video or telephone conference);
|
|
|
|
$1,500 for each audit or compensation committee meeting attended
by the chairman of such committee in person ($750 for meetings
attended by video or telephone conference); and
|
|
|
|
$1,000 for each committee meeting attended in person by members
who are not chairman of such committee ($500 for meetings
attended by video or telephone conference).
|
Annual payments are made on the date of the Replidynes
annual meeting of stockholders as a retainer fee. Per-meeting
payments are made for meetings actually attended during the
fiscal year. Per-meeting payments were made in 2006 for all
meetings occurring after the date of the closing of
Replidynes initial public offering in 2006.
Replidyne has reimbursed and will continue to reimburse its
non-employee directors for their reasonable expenses incurred in
attending meetings of Replidynes board of directors and
committees of Replidynes board of directors.
Director
Equity Compensation
Members of Replidynes board of directors who are not
Replidyne employees receive non-statutory stock options under
the terms of a Non-Discretionary Grant Program contained in
Replidynes 2006 Equity Incentive Plan. Upon initially
joining Replidynes board of directors, each non-employee
director is automatically granted a non-statutory stock option
to purchase 16,313 shares of Replidyne common stock with an
exercise price equal to the then fair market value of Replidyne
common stock. On the date of each annual meeting of Replidyne
stockholders, each non-employee director who has served as a
non-employee director for at least six months prior to that
annual meeting will automatically be granted a non-statutory
stock option to purchase 8,156 shares of Replidyne common
stock on that date with an exercise price equal to the then fair
market value of Replidyne common stock. Initial grants vest over
three years with 33.33% of the shares vesting one year from the
date of grant and the remaining shares vesting in equal monthly
installments over the next 24 months. Automatic annual
grants vest on the first anniversary of the date of grant. All
stock options granted under Replidynes 2006 Equity
Incentive Plan have a term of 10 years. In the event of
certain significant corporate transactions constituting a change
in control, the vesting of stock awards granted under the
Non-Discretionary Grant Program will automatically accelerate in
full, unless provided otherwise in an applicable award agreement.
201
Director
Compensation Table: Combined Company Directors for
CSI
The following table shows for the fiscal year ended
June 30, 2008 certain information with respect to the
compensation of all non-employee directors of CSI that are
expected to serve as non-employee directors of the combined
company following the merger:
|
|
|
|
|
|
|
Option
|
|
Name
|
|
Awards(1)(2)(3)
|
|
|
Brent G. Blackey(4)
|
|
$
|
109,337
|
|
John H. Friedman(5)
|
|
|
137,051
|
|
Geoffrey O. Hartzler, M.D.(5)(6)
|
|
|
506,398
|
|
Roger J. Howe, Ph.D.(5)(7)
|
|
|
768,522
|
|
Glen D. Nelson, M.D.(5)
|
|
|
125,002
|
|
Gary M. Petrucci(5)(8)
|
|
|
1,408,858
|
|
|
|
|
(1) |
|
The value of options in this table represent the amounts
recognized for financial statement reporting purposes for fiscal
2008 in accordance with FAS 123(R), and thus may include
amounts from awards granted in and prior to fiscal 2008. For a
discussion of valuation assumptions and additional
SFAS No. 123(R) disclosures, see Note 6 to
CSIs consolidated financial statements included elsewhere
in this proxy statement/prospectus. |
|
(2) |
|
Certain of CSIs stock option agreements provide that in
the event of a change of control (the sale by CSI of
substantially all of its assets and the consequent
discontinuance of its business, or in the event of a merger,
exchange or liquidation of CSI), the vesting of all options will
accelerate and the options will be immediately exercisable as of
the effective date of the change of control. It is a condition
to the closing of the merger that CSI obtain an acknowledgement
in a form reasonably acceptable to Replidyne from its officers
and directors and the holders of 80% of the remainder of these
options that the terms of the option agreements related thereto
do not provide that the vesting of such securities will
accelerate, in whole or in part, in connection with or as a
result of the consummation of the merger and the other
transactions contemplated by the merger agreement. |
|
(3) |
|
The aggregate number of shares subject to outstanding option
awards held by each of the directors listed in the table above
as of June 30, 2008 was as follows:
Mr. Blackey 70,000 shares;
Mr. Friedman 90,000 shares;
Dr. Hartzler 199,809 shares;
Dr. Howe 272,775 shares;
Dr. Nelson 135,000 shares; and
Mr. Petrucci 476,161 shares. |
|
(4) |
|
In connection with his initial election to CSIs board of
directors, Mr. Blackey was granted a ten-year option to
purchase 60,000 shares of CSI common stock at $5.11 per
share on October 9, 2007, such option to vest one-third on
each of the first three anniversaries of the date of grant.
Mr. Blackey was also granted an immediately vested ten-year
option to purchase 10,000 shares of CSI common stock at
$5.11 in connection with his appointment as chairman of
CSIs audit committee. The grant date fair value of the
option awards granted to Mr. Blackey, computed in
accordance with SFAS No. 123(R), was $312,130. |
|
(5) |
|
As compensation for their continued board service, on
October 9, 2007 and November 13, 2007 each of
Messrs. Friedman, Howe and Petrucci was granted options to
purchase 6,680 shares of CSI common stock at $5.11 per
share and 23,320 shares of CSI common stock at $7.36 per
share, respectively, and each of Messrs. Hartzler and
Nelson was granted options to purchase 6,681 shares of CSI
common stock at $5.11 per share and 23,319 shares of CSI
common stock at $7.36 per share, respectively. On
November 13, 2007, Mr. Petrucci was granted an option
to purchase an additional 15,000 shares at $7.36 per share
in connection with his service as chairman of CSIs board.
The grant date fair value of the option award granted to each of
Messrs. Friedman, Hartzler, Howe and Nelson, computed in
accordance with SFAS No. 123(R), was $125,002. The
grant date fair value of the option award granted to
Mr. Petrucci, computed in accordance with SFAS No.
123(R), was $1,408,858. The options held by Mr. Friedman
are held for the benefit of Easton Capital Partners, LP and
Easton Hunt Capital Partners, L.P. |
|
(6) |
|
On February 14, 2008, Dr. Hartzler was granted a
five-year option to purchase 114,809 shares of CSI common
stock at $9.04 per share to replace an expired and unexercised
option. The grant date fair value of this option award, computed
in accordance with SFAS No. 123(R), was $381,395. |
|
(7) |
|
On December 31, 2007, Dr. Howe was granted a five-year
option to purchase 187,775 shares of CSI common stock at
$7.86 per share to replace an expired and unexercised option.
The grant date fair value of this option award, computed in
accordance with SFAS No. 123(R), was $626,981. |
202
|
|
|
(8) |
|
On December 31, 2007, Mr. Petrucci was granted a
five-year option to purchase 366,161 shares of CSI common
stock at $7.86 per share to replace an expired and unexercised
option. The grant date fair value of this option award, computed
in accordance with SFAS No. 123(R), was $1,222,612. |
Director
Compensation Table: Combined Company Directors for
Replidyne
The following table shows for the fiscal year ended
December 31, 2007 certain information with respect to the
compensation of all non-employee directors of Replidyne that are
expected to serve as non-employee directors of the combined
company following the merger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
|
Option
|
|
|
|
|
Name
|
|
Paid in Cash
|
|
|
Awards(1)(2)
|
|
|
Total
|
|
|
Edward Brown
|
|
$
|
21,250
|
|
|
$
|
18,235
|
|
|
$
|
39,485
|
|
Augustine Lawlor
|
|
$
|
29,500
|
|
|
$
|
42,837
|
|
|
$
|
72,337
|
|
|
|
|
(1) |
|
The full grant date fair value of the awards reported in this
column, as calculated under FAS 123R for financial
reporting purposes, is equal to $39,635 with respect to the
award made to Mr. Brown and $59,513 with respect to the
award made to Mr. Lawlor. See Note 2 to
Replidynes financial statements included elsewhere in this
proxy statement/prospectus and the discussion under
Managements Discussion and Analysis of Financial
Condition and Results of Operations for Replidyne. |
|
(2) |
|
As of December 31, 2007, Mr. Brown had
16,313 shares subject to stock option awards outstanding,
and Mr. Lawlor had 24,469 shares subject to stock
option awards outstanding. |
203
REPLIDYNE
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Replidynes common stock as of
December 31, 2008 for:
|
|
|
|
|
each person, or group of affiliated persons, known by Replidyne
to beneficially own more than 5% of Replidynes common
stock;
|
|
|
|
each of Replidynes named executive officers;
|
|
|
|
each of Replidynes directors; and
|
|
|
|
all of Replidynes executive officers and directors as a
group.
|
The percentage ownership information shown in the table is based
upon 27,114,741 shares of common stock outstanding as of
December 31, 2008.
This table is based upon information supplied by officers,
directors and principal stockholders of Replidyne and Schedules
13D and 13G filed with the Securities and Exchange Commission.
Replidyne has determined beneficial ownership in accordance with
the rules of the Securities and Exchange Commission. These rules
generally attribute beneficial ownership of securities to
persons who possess sole or shared voting power or investment
power with respect to those securities. In addition, the rules
include shares of common stock issuable pursuant to the exercise
of stock options or warrants that are either immediately
exercisable or exercisable on or before March 1, 2009,
which is 60 days after December 31, 2008. These shares
are deemed to be outstanding and beneficially owned by the
person holding those options or warrants for the purpose of
computing the percentage ownership of that person but they are
not treated as outstanding for the purpose of computing the
percentage ownership of any other person. Unless otherwise
indicated, the persons or entities identified in this table have
sole voting and investment power with respect to all shares
shown as beneficially owned by them, subject to the voting
agreements with CSI and applicable community property laws.
Unless otherwise noted below, the address for each person or
entity listed in the table is
c/o Replidyne,
Inc., 1450 Infinite Drive, Louisville, Colorado 80027.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Number of Shares
|
|
|
Shares Beneficially
|
|
Beneficial Owner
|
|
Beneficially Owned
|
|
|
Owned(1)
|
|
|
Named Executive Officers and Directors
|
|
|
|
|
|
|
|
|
Edward Brown(2)(20)
|
|
|
190,027
|
|
|
|
*
|
|
Kenneth J. Collins(3)
|
|
|
730,154
|
|
|
|
2.6
|
%
|
Kirk K. Calhoun(4)
|
|
|
24,469
|
|
|
|
*
|
|
Geoffrey Duyk, M.D., Ph.D.(5)(20)
|
|
|
2,775,570
|
|
|
|
10.2
|
%
|
Augustine Lawlor(6)(15)
|
|
|
4,381,725
|
|
|
|
16.2
|
%
|
Daniel J. Mitchell(7)(19)
|
|
|
1,570,741
|
|
|
|
5.8
|
%
|
Roger M. Echols, M.D.(8)
|
|
|
247,079
|
|
|
|
*
|
|
Nebojsa Janjic, Ph.D.(9)
|
|
|
518,560
|
|
|
|
1.9
|
%
|
Peter W. Letendre, Pharm.D.(10)
|
|
|
300,513
|
|
|
|
1.1
|
%
|
Mark Smith(11)
|
|
|
184,989
|
|
|
|
*
|
|
All Directors and Executive Officers as a Group
(8 individuals)(12)
|
|
|
10,071,205
|
|
|
|
36.3
|
%
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Number of Shares
|
|
|
Shares Beneficially
|
|
Beneficial Owner
|
|
Beneficially Owned
|
|
|
Owned(1)
|
|
|
5% Stockholders
|
|
|
|
|
|
|
|
|
D. E. Shaw Valence Portfolios, L.L.C. and its affiliates
|
|
|
2,408,489
|
|
|
|
8.9
|
%
|
120 W. 45th Street, Tower 45, 39th Floor
New York, NY 10036(13)
|
|
|
|
|
|
|
|
|
Duquesne Capital Management LLC and its affiliates
|
|
|
1,383,918
|
|
|
|
5.1
|
%
|
2579 Washington Road, Suite 322
Pittsburgh, PA 15241(14)
|
|
|
|
|
|
|
|
|
HealthCare Ventures VI, L.P.
|
|
|
4,359,069
|
|
|
|
16.1
|
%
|
44 Nassau Street
Princeton, NJ 08542(15)
|
|
|
|
|
|
|
|
|
Morgenthaler Partners VII, L.P.
|
|
|
2,344,546
|
|
|
|
8.6
|
%
|
50 Public Square, Suite 2700
Cleveland, OH 44113(16)
|
|
|
|
|
|
|
|
|
Perseus-Soros BioPharmaceutical Fund, LP
|
|
|
1,487,808
|
|
|
|
5.5
|
%
|
888 Seventh Avenue, 30th Floor
New York, NY 10106(17)
|
|
|
|
|
|
|
|
|
RRC Management LLC and its affiliates
|
|
|
1,391,455
|
|
|
|
5.1
|
%
|
217R Concord Avenue
|
|
|
|
|
|
|
|
|
Cambridge, MA 01238(18)
|
|
|
|
|
|
|
|
|
Sequel Limited Partnership III and its affiliates
|
|
|
1,459,459
|
|
|
|
5.4
|
%
|
4430 Arapahoe Avenue, Suite 220
Boulder, CO 80303(19)
|
|
|
|
|
|
|
|
|
Tarrant Capital Advisors, Inc. and its affiliates
|
|
|
2,752,914
|
|
|
|
10.2
|
%
|
301 Commerce Street, Suite 3300
Fort Worth, TX 76102(20)
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Less than 1% of the outstanding shares. |
|
(1) |
|
Based on 27,114,741 shares of common stock outstanding as
of December 31, 2008. Unless otherwise indicated, each
person or entity listed has sole investment and voting power
with respect to the shares listed. |
|
(2) |
|
Includes 9,516 shares Mr. Brown has the right to
acquire within 60 days of December 31, 2008 through
the exercise of vested options. |
|
(3) |
|
Includes 199,978 shares Mr. Collins has the right to
acquire within 60 days of December 31, 2008 through
the exercise of vested options, and 25,488 shares held by
Ryan D. Collins and 25,488 shares held by Brendan C.
Collins, of which Mr. Collins is custodian. |
|
(4) |
|
Includes 24,469 shares Mr. Calhoun has the right to
acquire within 60 days of December 31, 2008 through
the exercise of vested options. |
|
(5) |
|
Includes 22,656 shares Dr. Duyk has the right to
acquire within 60 days of December 31, 2008 through
the exercise of vested options. |
|
(6) |
|
Includes 22,656 shares Mr. Lawlor has the right to
acquire within 60 days of December 31, 2008 through
the exercise of vested options. |
|
(7) |
|
Includes 22,656 shares Mr. Mitchell has the right to
acquire within 60 days of December 31, 2008 through
the exercise of vested options, and 88,626 shares held by
The Daniel J. Mitchell Trust, of which Mr. Mitchell is
Trustee. |
|
(8) |
|
Includes 200,122 shares Dr. Echols has the right to
acquire within 60 days of December 31, 2008 through
the exercise of vested options. Dr. Echols ceased serving
as an officer of Replidyne as of May 1, 2008. |
|
(9) |
|
Includes 120,927 shares Dr. Janjic has the right to
acquire within 60 days of December 31, 2008 through
the exercise of vested options. Dr. Janjic ceased serving as an
officer of Replidyne as of December 8, 2008. |
|
(10) |
|
Includes 294,334 shares Dr. Letendre has the right to
acquire within 60 days of December 31, 2008 through
the exercise of vested options. Dr. Letendre ceased serving
as an officer of Replidyne as of April 15, 2008. |
205
|
|
|
(11) |
|
Includes 184,989 shares Mr. Smith has the right to
acquire within 60 days of December 31, 2008 through
the exercise of vested options. |
|
(12) |
|
Includes shares, options and warrants described in the notes
above, as applicable, and held by Replidynes directors and
executive officers. Includes an aggregate of 630,192 shares
subject to vesting conditions of unexercised stock options held
by Replidynes directors and executive officers that vest
on or prior to March 1, 2009. |
|
(13) |
|
By virtue of David E. Shaws position as President and sole
shareholder of D. E. Shaw & Co., Inc., which is the
general partner of D. E. Shaw & Co., L.P., which in
turn is the managing member and investment adviser of
D. E. Shaw Valence Portfolios, L.L.C., David E. Shaw
may be deemed to have the shared power to vote or direct the
vote of, and the shared power to dispose or direct the
disposition of, these shares and, therefore, David E. Shaw may
be deemed to be the beneficial owner of such shares. David E.
Shaw disclaims beneficial ownership of such shares. |
|
(14) |
|
Includes 1,097,509 shares held by Windmill Master Fund,
L.P., 240,681 shares held by Juggernaut Fund, L.P. and
45,728 shares held by Iron City Fund, Ltd. The Chairman and
Chief Executive Officer of Duquesne Capital Management LLC,
Stanley F. Druckenmiller, possesses voting and investment
authority over these shares. |
|
(15) |
|
Includes 746,707 shares held by HealthCare Ventures VIII,
L.P. HealthCare Ventures VI, L.P. disclaims beneficial ownership
of those shares owned by HealthCare Ventures VIII, L.P.
Mr. Lawlor is a general partner of HealthCare Partners VI,
L.P. which is the general partner of HealthCare Ventures VI,
L.P. Mr. Lawlor shares voting and investment authority over
the shares held by HealthCare Ventures VI, L.P. with Eric
Aguiar, James Cavanaugh, William Crouse, John Littlechild,
Christopher Mirabelli and Harold Werner. Mr. Lawlor is also
a managing director of HealthCare Partners VIII LLC which is the
general partner of HealthCare Partners VIII, L.P. which is the
general partner of HealthCare Ventures VIII, L.P.
Mr. Lawlor shares voting and investment authority over the
shares held by HealthCare Ventures VIII, L.P. with Eric Aguiar,
James Cavanaugh, John Littlechild, Christopher Mirabelli and
Harold Werner. Mr. Lawlor disclaims beneficial ownership of
these shares except to the extent of his proportionate pecuniary
interest in these securities. |
|
(16) |
|
Includes 16,311 shares that Morgenthaler Partners VII, L.P.
has the right to acquire from Replidyne within 60 days of
December 31, 2008 pursuant to the exercise of outstanding
warrants. Morgenthaler Management Partners VII, LLC is the
managing general partner of Morgenthaler Partners VII, L.P. The
managing members of Morgenthaler Management Partners VII, LLC,
Robert C. Bellas, Jr., Theodore A. Laufik, Gary R. Little, John
D. Lutsi, Gary J. Morgenthaler, Robert D. Pavey, G. Gary Shaffer
and Peter G. Taft, share voting and investment authority over
these shares. |
|
(17) |
|
Perseus-Soros Partners, LLC is the general partner of the
Perseus-Soros BioPharmaceutical Fund, LP. Perseus BioTech
Fund Partners, LLC and SFM Participation, L.P. are the
managing members of Perseus-Soros Partners, LLC. Perseuspur, LLC
is the managing member of Perseus BioTech Fund Partners, LLC.
Frank Pearl is the sole member of Perseuspur, LLC and in such
capacity may be deemed a beneficial owner of securities held for
the account of the Perseus-Soros BioPharmaceutical Fund, LP. SFM
AH, LLC is the general partner of SFM Participation, L.P. The
sole managing member of SFM AH, LLC is Soros
Fund Management LLC. George Soros is the Chairman of Soros
Fund Management LLC and in such capacity may be deemed a
beneficial owner of securities held for the account of the
Perseus-Soros BioPharmaceutical Fund, LP. |
|
(18) |
|
James A. Silverman (the Manager) is the manager of RRC
Management, LLC (Capital), which is the sole general partner of
RRC Bio Fund, L.P. (the Fund). The Manager is also the president
of Risk Reward Capital Management, Inc. (Risk Reward), which
serves as investment adviser to a number of discretionary
accounts. The Manager beneficially owns 1,391,455 of the shares,
the Fund and Capital each beneficially own 1,005,000 of the
shares, and Risk Reward beneficially owns 386,455 of the shares. |
|
(19) |
|
Includes 39,240 shares held by Sequel Entrepreneurs
Fund III, L.P. Also includes 8,154 shares that Sequel
Limited Partnership III and Sequel Entrepreneurs
Fund III, L.P. have the right to acquire from Replidyne
within 60 days of December 31, 2008 pursuant to the
exercise of outstanding warrants. Sequel Venture Partners III,
L.L.C. is the general partner of Sequel Limited
Partnership III and Sequel Entrepreneurs
Fund III, L.P. The managers of Sequel Venture Partners III,
L.L.C., Daniel Mitchell, Timothy Connor, Thomas Washing, John
Greff and Kinney Johnson, share voting and investment authority
over these shares. Each of Sequel Venture Partners III, L.L.C.
and its managers (including Mr. Mitchell) disclaim
beneficial ownership of these shares, except to the extent of
any pecuniary interest therein. |
206
|
|
|
(20) |
|
Tarrant Capital Advisors, Inc. (Tarrant) is the sole
shareholder of Tarrant Advisors, Inc., which is the general
partner of TPG Ventures Professionals, L.P., which is the
general partner of TPG Ventures Partners, L.P., which is the
managing member of TPG Ventures Holdings, L.L.C., which is the
sole member of each of TPG Ventures Advisors, L.L.C. and TPG
Biotechnology Advisors, L.L.C. TPG Ventures Advisors, L.L.C. is
the general partner of TPG Ventures GenPar, L.P., which is the
general partner of TPG Ventures, L.P. (TPG Ventures). TPG
Biotech Advisors, L.L.C. is the general partner of TPG
Biotechnology GenPar, L.P., which is the general partner of TPG
Biotechnology Partners, L.P. (TPG Biotech, and together with TPG
Ventures, the TPG Funds). Because of Tarrants relationship
to the TPG Funds, Tarrant may be deemed to beneficially own such
shares. David Bonderman and James G. Coulter are the sole
shareholders of Tarrant and therefore may be deemed to
beneficially own these shares. Dr. Duyk and Mr. Brown
are Managing Directors at TPG Ventures and disclaim beneficial
ownership of these shares. |
207
CSI
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the
beneficial ownership of CSI common stock and preferred stock as
of December 31, 2008 for:
|
|
|
|
|
each person, or group of affiliated persons, known by CSI to
beneficially own more than 5% of CSIs common stock or
preferred stock;
|
|
|
|
each of CSIs named executive officers;
|
|
|
|
each of CSIs directors; and
|
|
|
|
all of CSIs executive officers and directors as a group.
|
The percentage ownership information shown in the table is based
upon 7,788,655 shares of common stock and
9,088,136 shares of preferred stock outstanding as of
December 31, 2008.
Information with respect to beneficial ownership has been
furnished by each director, officer or beneficial owner of more
than 5% of CSIs common stock or preferred stock. CSI has
determined beneficial ownership in accordance with the rules of
the Securities and Exchange Commission. These rules generally
attribute beneficial ownership of securities to persons who
possess sole or shared voting power or investment power with
respect to those securities. In addition, the rules include
shares of common stock and preferred stock issuable pursuant to
the exercise of stock options or warrants that are either
immediately exercisable or exercisable on or before
March 1, 2009, which is 60 days after
December 31, 2008. These shares are deemed to be
outstanding and beneficially owned by the person holding those
options or warrants for the purpose of computing the percentage
ownership of that person but they are not treated as outstanding
for the purpose of computing the percentage ownership of any
other person. Unless otherwise indicated, the persons or
entities identified in this table have sole voting and
investment power with respect to all shares shown as
beneficially owned by them, subject to the voting agreements
with Replidyne and applicable community property laws.
208
Unless otherwise noted below, the address for each person or
entity listed in the table is
c/o Cardiovascular
Systems, Inc., 651 Campus Drive, St. Paul, Minnesota 55112.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
|
Number of
|
|
|
Percentage of
|
|
|
Number of
|
|
|
Percentage of
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
|
Beneficially
|
|
|
Beneficially
|
|
|
Beneficially
|
|
|
Beneficially
|
|
Beneficial Owner
|
|
Owned
|
|
|
Owned(1)
|
|
|
Owned
|
|
|
Owned(2)
|
|
|
Named Executive Officers and Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David L. Martin(3)
|
|
|
592,667
|
|
|
|
7.1
|
%
|
|
|
|
|
|
|
*
|
|
Laurence L. Betterley(4)
|
|
|
75,000
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
*
|
|
James E. Flaherty(5)
|
|
|
144,333
|
|
|
|
1.8
|
%
|
|
|
|
|
|
|
*
|
|
Michael J. Kallok, Ph.D.(6)
|
|
|
688,715
|
|
|
|
8.1
|
%
|
|
|
|
|
|
|
*
|
|
John Borrell(7)
|
|
|
151,469
|
|
|
|
1.9
|
%
|
|
|
11,764
|
|
|
|
*
|
|
Paul Tyska(8)
|
|
|
114,982
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
*
|
|
Robert J. Thatcher(9)
|
|
|
147,378
|
|
|
|
1.9
|
%
|
|
|
12,000
|
|
|
|
*
|
|
John H. Friedman(10)
|
|
|
70,000
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
Geoffrey O. Hartzler, M.D.(11)
|
|
|
380,472
|
|
|
|
4.8
|
%
|
|
|
|
|
|
|
*
|
|
Roger J. Howe, Ph.D.(12)
|
|
|
327,275
|
|
|
|
4.1
|
%
|
|
|
|
|
|
|
*
|
|
Brent G. Blackey(13)
|
|
|
41,135
|
|
|
|
*
|
|
|
|
10,900
|
|
|
|
*
|
|
Glen D. Nelson, M.D.(14)
|
|
|
618,112
|
|
|
|
7.5
|
%
|
|
|
245,968
|
|
|
|
2.7
|
%
|
Gary M. Petrucci(15)
|
|
|
910,957
|
|
|
|
10.9
|
%
|
|
|
41,254
|
|
|
|
*
|
|
Christy Wyskiel(16)
|
|
|
70,000
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
All Directors and Executive Officers as a Group (16 individuals)
|
|
|
4,435,215
|
|
|
|
39.7
|
%
|
|
|
325,670
|
|
|
|
3.6
|
%
|
5% Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easton Capital Investment Group(17)
|
|
|
1,644,059
|
|
|
|
17.4
|
%
|
|
|
1,400,000
|
|
|
|
15.1
|
%
|
ITX International Equity Corp.(18)
|
|
|
778,186
|
|
|
|
9.1
|
%
|
|
|
771,404
|
|
|
|
8.4
|
%
|
Maverick Capital, Ltd.(19)
|
|
|
2,640,882
|
|
|
|
25.3
|
%
|
|
|
2,343,501
|
|
|
|
25.1
|
%
|
Mitsui & Co. Venture Partners II, L.P.(20)
|
|
|
896,449
|
|
|
|
10.3
|
%
|
|
|
888,666
|
|
|
|
9.7
|
%
|
Whitebox Hedged High Yield Partners, LP(21)
|
|
|
948,748
|
|
|
|
10.9
|
%
|
|
|
939,517
|
|
|
|
10.3
|
%
|
Stockholders Agreement Group(22)
|
|
|
15,051,950
|
|
|
|
73.2
|
%
|
|
|
9,763,575
|
|
|
|
100.0
|
%
|
|
|
|
* |
|
Less than 1% of the outstanding shares. |
|
(1) |
|
Based on 7,788,655 shares of common stock outstanding as of
December 31, 2008. Unless otherwise indicated, each person
or entity listed has sole investment and voting power with
respect to the shares listed. |
|
(2) |
|
Based on an aggregate of 9,088,136 shares of preferred
stock outstanding as of December 31, 2008, consisting of
4,737,561 shares of Series A convertible preferred
stock, 2,188,425 shares of
Series A-1
convertible preferred stock and 2,162,150 shares of
Series B convertible preferred stock. Unless otherwise
indicated, each person or entity listed has sole investment and
voting power with respect to the shares listed. |
|
(3) |
|
Consists of 76,000 shares of CSI common stock and options
to acquire a total of 516,667 shares of CSI common stock
currently exercisable or exercisable within 60 days after
December 31, 2008 held by Mr. Martin. |
|
(4) |
|
Consists of 75,000 shares of restricted stock that are
subject to a risk of forfeiture. |
|
(5) |
|
Consists of 45,500 shares of CSI common stock and options
to acquire a total of 98,833 shares of CSI common stock
currently exercisable or exercisable within 60 days after
December 31, 2008 held by Mr. Flaherty. |
|
(6) |
|
Consists of 5,500 shares of CSI common stock and options to
acquire a total of 683,215 shares of CSI common stock
currently exercisable or exercisable within 60 days after
December 31, 2008 held by Dr. Kallok. |
209
|
|
|
(7) |
|
Consists of 23,000 shares of CSI common stock,
11,764 shares of CSI
Series A-1
convertible preferred stock currently convertible into
12,135 shares of CSI common stock, and options to acquire a
total of 116,334 shares of CSI common stock currently
exercisable or exercisable within 60 days after
December 31, 2008 held by Mr. Borrell. |
|
(8) |
|
Consists of 9,982 shares of CSI common stock held by
Mr. Tyska and options to acquire a total of
105,000 shares of CSI common stock currently exercisable or
exercisable within 60 days after December 31, 2008
held by Mr. Tyska. |
|
(9) |
|
Consists of 12,000 shares of CSI
Series A-1
convertible preferred stock currently convertible into
12,378 shares of CSI common stock held by Mr. Thatcher
and options to acquire a total of 135,000 shares of CSI
common stock currently exercisable or exercisable within
60 days after December 31, 2008 held by
Mr. Thatcher. |
|
(10) |
|
Consists of options to acquire a total of 70,000 shares of
CSI common stock currently exercisable or exercisable within
60 days after December 31, 2008 held by
Mr. Friedman. These options are held for the benefit of
entities affiliated with Easton Capital Investment Group. |
|
(11) |
|
Consists of 180,663 shares of CSI common stock and options
to acquire a total of 199,809 shares of CSI common stock
currently exercisable or exercisable within 60 days after
December 31, 2008 held by Dr. Hartzler. |
|
(12) |
|
Consists of 41,500 shares of CSI common stock and warrants
to acquire a total of 13,000 shares of CSI common stock
currently exercisable or exercisable within 60 days after
December 31, 2008 held by Sonora Web LLLP, of which
Dr. Howe is the general partner, and options to acquire a
total of 272,775 shares of CSI common stock currently
exercisable or exercisable within 60 days after
December 31, 2008 held by Dr. Howe. |
|
(13) |
|
Consists of 5,900 shares of CSI
Series A-1
convertible preferred stock currently convertible into
6,086 shares of CSI common stock, 5,000 shares of CSI
Series B convertible preferred stock currently convertible
into 5,049 shares of CSI common stock, and options to
acquire a total of 30,000 shares of CSI common stock
currently exercisable or exercisable within 60 days after
December 31, 2008 held by Mr. Blackey. |
|
(14) |
|
Consists of (i) 149,167 shares of CSI common stock,
131,349 shares of CSI Series A convertible preferred
stock currently convertible into 132,042 shares of CSI
common stock, 41,913 shares of CSI
Series A-1
convertible preferred stock currently convertible into
43,235 shares of CSI common stock, 54,054 shares of
CSI Series B convertible preferred stock currently
convertible into 54,585 shares of CSI common stock,
warrants to acquire a total of 85,333 shares of CSI common
stock currently exercisable or exercisable within 60 days
after December 31, 2008, and currently exercisable warrants
to acquire a total of 18,652 shares of CSI Series A
convertible preferred stock currently convertible into
18,750 shares of CSI common stock held by GDN Holdings,
LLC; and (ii) options to acquire a total of
135,000 shares of CSI common stock currently exercisable or
exercisable within 60 days after December 31, 2008
held by Dr. Nelson. |
|
(15) |
|
Consists of (i) 50,000 shares held by Applecrest
Partners LTD Partnership, of which Mr. Petrucci is the
General Partner, and (ii) 355,699 shares of CSI common
stock, 36,124 shares of CSI Series A convertible
preferred stock currently convertible into 36,314 shares of
CSI common stock, options to acquire a total of
476,161 shares and warrants to acquire a total of
23,750 shares of CSI common stock currently exercisable or
exercisable within 60 days after December 31, 2008,
and currently exercisable warrants to acquire a total of
5,130 shares of CSI Series A convertible preferred
stock currently convertible into 5,157 shares of CSI common
stock held by Mr. Petrucci. |
|
(16) |
|
Consists of options to acquire a total of 70,000 shares of
CSI common stock currently exercisable or exercisable within
60 days after December 31, 2008 held by
Ms. Wyskiel. These options are held for the benefit of
Maverick Fund II, Ltd., Maverick Fund, L.D.C. and Maverick
Fund USA, Ltd. |
|
(17) |
|
Consists of (i) 612,960 shares of CSI Series A
convertible preferred stock currently convertible into
616,197 shares of CSI common stock, currently exercisable
warrants to acquire a total of 166,667 shares of CSI common
stock and currently exercisable warrants to purchase
87,040 shares of CSI Series A convertible preferred
stock currently convertible into 87,499 shares of CSI
common stock, held by Easton Hunt Capital Partners, L.P.,
(ii) 612,960 shares of Series A convertible
preferred stock currently convertible into 616,197 shares
of CSI common stock, and currently exercisable warrants to
purchase 87,040 shares of CSI Series A convertible
preferred stock currently convertible into 87,499 shares of
CSI common stock, held by Easton Capital Partners, LP, and
(iii) options to acquire a total of 70,000 shares of
CSI common stock |
210
|
|
|
|
|
currently exercisable or exercisable within 60 days after
December 31, 2008 held by Mr. Friedman, one of
CSIs directors. Investment decisions of Easton Hunt
Capital Partners, L.P. are made by EHC GP, LP through its
general partner, EHC, Inc. Mr. Friedman is the President
and Chief Executive Officer of EHC, Inc. Investment decisions of
Easton Capital Partners, LP are made by its general partner, ECP
GP, LLC, through its manager, ECP GP, Inc. Mr. Friedman is
the President and Chief Executive Officer of EHC, Inc. and ECP
GP, Inc. Mr. Friedman shares voting and investing power
over the shares owned by Easton Hunt Capital Partners, L.P. and
Easton Capital Partners, LP. Mr. Friedman disclaims
beneficial ownership of the shares held by entities affiliated
with Easton Capital Investment Group, except to the extent of
his pecuniary interest therein. The address for the entities
affiliated with Easton Capital Investment Group is 767 Third
Avenue, 7th Floor, New York, New York 10017. |
|
(18) |
|
Consists of 350,263 shares of CSI Series A convertible
preferred stock currently convertible into 352,112 shares
of CSI common stock, 47,079 shares of CSI
Series A-1
convertible preferred stock currently convertible into
48,564 shares of CSI common stock, 324,325 shares of
CSI Series B convertible preferred stock currently
convertible into 327,511 shares of CSI common stock and
currently exercisable warrants to purchase 49,737 shares of
CSI Series A convertible preferred stock currently
convertible into 49,999 shares of CSI common stock, held by
ITX International Equity Corp. Mr. Takehito Jimbo is the
President, Chief Executive Officer and a member of the board of
directors of ITX International Equity Corp. and may be deemed to
have sole voting and dispositive power with respect to the
shares held by ITX International Equity Corp. The address of ITX
International Equity Corp. is
c/o ITX
International Holdings, Inc., 700 E. El Camino Real,
Suite 200, Mountain View, California 94040. |
|
(19) |
|
Consists of (i) 770,212 shares of Series A
convertible preferred stock currently convertible into
774,280 shares of CSI common stock, 103,524 shares of
Series A-1
convertible preferred stock currently convertible into
106,790 shares of CSI common stock, 47,545 shares of
Series B convertible preferred stock currently convertible
into 48,012 shares of CSI common stock, currently
exercisable warrants to acquire a total of 91,623 shares of
CSI common stock, and currently exercisable warrants to purchase
109,370 shares of CSI Series A convertible preferred
stock currently convertible into 109,947 shares of CSI
common stock, held by Maverick Fund, L.D.C.,
(ii) 310,952 shares of Series A convertible
preferred stock currently convertible into 312,594 shares
of CSI common stock, 41,795 shares of
Series A-1
convertible preferred stock currently convertible into
43,113 shares of CSI common stock, 19,195 shares of
Series B convertible preferred stock currently convertible into
19,383 shares of CSI common stock, currently exercisable
warrants to acquire a total of 36,990 shares of CSI common
stock, and currently exercisable warrants to purchase
44,155 shares of CSI Series A convertible preferred
stock currently convertible into 44,388 shares of CSI
common stock, held by Maverick Fund USA, Ltd.,
(iii) 670,149 shares of Series A convertible
preferred stock currently convertible into 673,688 shares
of CSI common stock, 90,075 shares of
Series A-1
convertible preferred stock currently convertible into
92,917 shares of CSI common stock, 41,368 shares of
Series B convertible preferred stock currently convertible into
41,774 shares of CSI common stock, currently exercisable
warrants to acquire a total of 79,720 shares of CSI common
stock, and currently exercisable warrants to purchase
95,161 shares of CSI Series A convertible preferred
stock currently convertible into 95,663 shares of CSI
common stock, held by Maverick Fund II, Ltd., and
(iv) options to acquire a total of 70,000 shares of
CSI common stock currently exercisable or exercisable within
60 days after December 31, 2008 held by
Ms. Wyskiel, one of CSIs directors. These options are
held for the benefit of Maverick Fund II, Ltd., Maverick
Fund, L.D.C. and Maverick Fund USA, Ltd. Maverick Capital,
Ltd. is an investment adviser registered under Section 203
of the Investment Advisers Act of 1940 and, as such, may be
deemed to have beneficial ownership of the shares held by
Maverick Fund II, Ltd., Maverick Fund, L.D.C. and Maverick
Fund USA, Ltd. through the investment discretion it
exercises over these accounts. Maverick Capital Management, LLC
is the general partner of Maverick Capital, Ltd. Lee S.
Ainslie III is the manager of Maverick Capital Management,
LLC who possesses sole investment discretion pursuant to
Maverick Capital Management, LLCs regulations. The address
for the entities affiliated with Maverick Capital, Ltd. is 300
Crescent Court, 18th Floor, Dallas, Texas 75201. |
|
(20) |
|
Consists of 675,148 shares of CSI Series A convertible
preferred stock currently convertible into 678,713 shares
of CSI common stock, 117,647 shares of CSI
Series A-1
convertible preferred stock currently convertible into
121,359 shares of CSI common stock, and currently
exercisable warrants to purchase 95,871 shares of CSI
Series A convertible preferred stock currently convertible
into 96,377 shares of CSI |
211
|
|
|
|
|
common stock held by Mitsui & Co. Venture Partners II,
L.P. Koichi Ando, President and Chief Executive Officer of
Mitsui & Co. Venture Partners, Inc., the general
partner of Mitsui & Co. Venture Partners II L.P.,
may be deemed to have voting and investment power over the
shares held by Mitsui & Co. Venture Partners II
L.P. The address of Mitsui & Co. Venture Partners II,
L.P. is 200 Park Avenue, New York, New York 10166. |
|
(21) |
|
Consists of 939,517 shares of CSI Series B convertible
preferred stock currently convertible into 948,748 shares
of CSI common stock held by Whitebox Hedged High Yield Partners,
LP. Andrew J. Redleaf is the managing member of the general
partner and has voting and investment power over the shares held
by Whitebox Hedged High Yield Partners, LP. The address of
Whitebox Hedged High Yield Partners, LP is 3033 Excelsior
Blvd., Suite 300, Minneapolis, Minnesota 55416. |
|
(22) |
|
The parties to the Stockholders Agreement dated July 19,
2006, as amended, may be deemed to be acting as a group with
regard to the CSI capital stock that is beneficially owned by
each of them. Each of the parties to the Stockholders Agreement
disclaims beneficial ownership of the shares beneficially owned
by the others. |
212
PRINCIPAL
STOCKHOLDERS OF THE COMBINED COMPANY
Except where specifically noted, the following information
and all other information contained in this proxy
statement/prospectus does not give effect to the reverse stock
split described in Replidyne Proposal No. 2.
The following table sets forth information as of
December 31, 2008 regarding the beneficial ownership of the
combined company upon consummation of the merger, by:
|
|
|
|
|
each of CSIs named executive officers who is expected to
serve as an executive officer of the combined company;
|
|
|
|
|
|
each person who is expected to serve as a director of the
combined company;
|
|
|
|
each person, or group who the management of Replidyne and CSI
expects to become the beneficial owner of more than 5% of the
common stock of the combined company upon the consummation of
the merger; and
|
|
|
|
all persons who are expected to serve as directors and executive
officers of the combined company as a group.
|
The percentage of Replidyne common stock beneficially owned is
computed on the basis of 27,114,741 shares of Replidyne
common stock outstanding upon consummation of the merger and
assumes that the conversion factor to be used in connection with
the merger is 6.624 shares of Replidyne common stock for
each share of CSI common stock, based upon assumed net assets of
Replidyne of $36 million. The shares held by existing CSI
stockholders assumes:
|
|
|
|
|
conversion of 9,088,136 shares of CSI preferred stock into
9,203,284 shares of CSI common stock at the applicable
conversion rates immediately prior to the effective time of the
merger;
|
|
|
|
conversion of all warrants to purchase shares of CSI preferred
stock into warrants to purchase shares of CSI common stock at
the applicable conversion rates immediately prior to the
effective time of the merger;
|
|
|
|
the issuance of immediately exercisable warrants to purchase an
aggregate of 3,500,000 shares of CSI common stock on a pro
rata basis to all CSI preferred stockholders immediately prior
to the effective time of the merger; and
|
|
|
|
conversion of all options and warrants to purchase CSI common
stock into options and warrants to purchase a quantity of
Replidyne common stock determined by applying the conversion
factor.
|
The number of shares to be beneficially owned by each entity,
person, director or executive officer has been determined in
accordance with the rules of the Securities and Exchange
Commission. These rules generally attribute beneficial ownership
of securities to persons who possess sole or shared voting power
or investment power with respect to those securities. In
addition, the rules include shares of common stock issuable
pursuant to the exercise of stock options or warrants that are
either immediately exercisable or exercisable within
60 days after December 31, 2008. These shares are
deemed to be outstanding and beneficially owned by the person
holding those options or warrants for the purpose of computing
the percentage ownership of that person but they are not treated
as outstanding for the purpose of computing the percentage
ownership of any other person. Unless otherwise indicated in the
footnotes to this table and subject to the voting agreements
entered into by directors and executive officers of Replidyne
and CSI, Replidyne and CSI believe that each of the persons
named in this table will have sole voting and investment power
with respect to the shares indicated as beneficially owned.
213
Unless otherwise noted below, the address for each person or
entity listed in the table is
c/o Cardiovascular
Systems, Inc., 651 Campus Drive, St. Paul, Minnesota 55112.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Percentage of
|
|
|
|
Shares
|
|
|
Shares
|
|
|
|
Beneficially
|
|
|
Beneficially
|
|
Beneficial Owner
|
|
Owned
|
|
|
Owned(1)
|
|
|
Named Executive Officers and Directors
|
|
|
|
|
|
|
|
|
David L. Martin(2)
|
|
|
3,925,826
|
|
|
|
2.7
|
%
|
Laurence L. Betterley(3)
|
|
|
496,800
|
|
|
|
*
|
|
James E. Flaherty(4)
|
|
|
956,061
|
|
|
|
*
|
|
John Borrell(5)
|
|
|
1,033,893
|
|
|
|
*
|
|
Paul Tyska(6)
|
|
|
761,640
|
|
|
|
*
|
|
Robert J. Thatcher(7)
|
|
|
1,007,410
|
|
|
|
*
|
|
Brent G. Blackey(8)
|
|
|
300,524
|
|
|
|
*
|
|
Edward Brown(9)
|
|
|
190,027
|
|
|
|
*
|
|
John H. Friedman(10)
|
|
|
463,680
|
|
|
|
*
|
|
Geoffrey O. Hartzler, M.D.(11)
|
|
|
2,520,245
|
|
|
|
1.8
|
%
|
Roger J. Howe, Ph.D.(12)
|
|
|
2,167,869
|
|
|
|
1.5
|
%
|
Augustine Lawlor(13)
|
|
|
4,381,725
|
|
|
|
3.1
|
%
|
Glen D. Nelson, M.D.(14)
|
|
|
4,673,416
|
|
|
|
3.3
|
%
|
Gary M. Petrucci(15)
|
|
|
6,125,654
|
|
|
|
4.3
|
%
|
All Directors and Executive Officers as a Group (16 individuals)
|
|
|
29,694,810
|
|
|
|
19.0
|
%
|
5% Stockholders
|
|
|
|
|
|
|
|
|
Easton Capital Investment Group(16)
|
|
|
13,994,767
|
|
|
|
9.6
|
%
|
Maverick Capital, Ltd.(17)
|
|
|
22,814,912
|
|
|
|
15.4
|
%
|
Mitsui & Co. Venture Partners II, L.P.(18)
|
|
|
7,953,534
|
|
|
|
5.6
|
%
|
Whitebox Hedged High Yield Partners, LP(19)
|
|
|
8,674,491
|
|
|
|
6.1
|
%
|
|
|
|
* |
|
Less than 1% of the outstanding shares. |
|
(1) |
|
Assumes that 112,554,604 shares of Replidyne common stock
are issued to holders of CSI common stock in connection with the
merger and 27,114,741 shares of Replidyne common stock are
held by holders of Replidyne common stock prior to the merger. |
|
(2) |
|
Includes 3,422,402 shares issuable upon the exercise of
options held by Mr. Martin within 60 days after
December 31, 2008, as converted according to the assumed
conversion factor. |
|
(3) |
|
Consists of 496,800 shares of restricted stock that are
subject to a risk of forfeiture, as converted according to the
assumed conversion factor. |
|
(4) |
|
Includes 654,669 shares issuable upon the exercise of
options held by Mr. Flaherty within 60 days after
December 31, 2008, as converted according to the assumed
conversion factor. |
|
|
|
(5) |
|
Includes 801,159 shares issuable upon the exercise of
options and warrants held by Mr. Borrell within
60 days after December 31, 2008, as converted
according to the assumed conversion factor. |
|
|
|
(6) |
|
Includes 695,520 shares issuable upon the exercise of
options held by Mr. Tyska within 60 days after
December 31, 2008, as converted according to the assumed
conversion factor. |
|
|
|
(7) |
|
Includes 925,419 shares issuable upon the exercise of
options and warrants held by Mr. Thatcher within
60 days after December 31, 2008, as converted
according to the assumed conversion factor. |
|
|
|
(8) |
|
Includes 226,766 shares issuable upon the exercise of
options and warrants held by Mr. Blackey within
60 days after December 31, 2008, as converted
according to the assumed conversion factor. |
|
|
|
(9) |
|
Includes 9,516 shares Mr. Brown has the right to
acquire within 60 days of December 31, 2008 through
the exercise of vested options. Mr. Browns address is
c/o Replidyne,
Inc., 1450 Infinite Dr., Louisville, Colorado 80027. |
214
|
|
|
(10) |
|
Includes 463,680 shares issuable upon the exercise of
options held by Mr. Friedman within 60 days after
December 31, 2008, as converted according to the assumed
conversion factor. These options are held for the benefit of
entities affiliated with Easton Capital Investment Group. |
|
|
|
(11) |
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Includes 1,323,534 shares issuable upon the exercise of
options held by Dr. Hartzler within 60 days after
December 31, 2008, as converted according to the assumed
conversion factor. |
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(12) |
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Includes 1,806,861 shares issuable upon the exercise of
options held by Dr. Howe within 60 days after
December 31, 2008, as converted according to the assumed
conversion factor. Also includes 274,896 shares and
warrants to acquire a total 86,112 shares within
60 days after December 31, 2008, each as converted
according to the assumed conversion factor, held by Sonora Web
LLLP, of which Dr. Howe is the general partner. |
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(13) |
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Includes 22,656 shares Mr. Lawlor has the right to
acquire within 60 days of December 31, 2008 through
the exercise of vested options. Also includes 3,612,362 shares
held by Health Care Ventures VI, L.P. and 746,707 shares
held by HealthCare Ventures VIII, L.P. HealthCare Ventures VI,
L.P. disclaims beneficial ownership of those shares owned by
HealthCare Ventures VIII, L.P. Mr. Lawlor is a general
partner of HealthCare Partners VI, L.P. which is the general
partner of HealthCare Ventures VI, L.P. Mr. Lawlor shares
voting and investment authority over the shares held by
HealthCare Ventures VI, L.P. with Eric Aguiar, James Cavanaugh,
William Crouse, John Littlechild, Christopher Mirabelli and
Harold Werner. Mr. Lawlor is also a managing director of
HealthCare Partners VIII LLC which is the general partner of
HealthCare Partners VIII, L.P. which is the general partner of
HealthCare Ventures VIII, L.P. Mr. Lawlor shares voting and
investment authority over the shares held by HealthCare Ventures
VIII, L.P. with Eric Aguiar, James Cavanaugh, John Littlechild,
Christopher Mirabelli and Harold Werner. Mr. Lawlor
disclaims beneficial ownership of these shares except to the
extent of his proportionate pecuniary interest in these
securities. Mr. Lawlors address is
c/o Replidyne,
Inc., 1450 Infinite Dr., Louisville, Colorado 80027. |
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(14) |
|
Includes 496,800 shares issuable upon the exercise of
options held by Dr. Nelson within 60 days after
December 31, 2008, as converted according to the assumed
conversion factor. Also includes 2,523,936 shares and
warrants to acquire a total of 1,255,240 shares within
60 days after December 31, 2008, each as converted
according to the assumed conversion factor, held by GDN
Holdings, LLC. |
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(15) |
|
Includes 3,412,206 shares issuable upon the exercise of
options and warrants held by Mr. Petrucci within
60 days after December 31, 2008, as converted
according to the assumed conversion factor. Also includes
331,200 shares, as converted according to the assumed
conversion factor, held by Applecrest Partners LTD Partnership,
of which Mr. Petrucci is the General Partner. |
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(16) |
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Consists of (i) 4,081,688 shares and
3,235,856 shares issuable upon the exercise of warrants
held by Easton Hunt Capital Partners, L.P. within 60 days
after December 31, 2008, (ii) 4,081,688 shares
and 2,131,854 shares issuable upon the exercise of warrants
held by Easton Capital Partners, LP within 60 days after
December 31, 2008, and (iii) 463,680 shares
issuable upon the exercise of options held by Mr. Friedman
within 60 days after December 31, 2008, in each case,
as converted according to the assumed conversion factor.
Investment decisions of Easton Hunt Capital Partners, L.P. are
made by EHC GP, LP through its general partner, EHC, Inc.
Mr. Friedman is the President and Chief Executive Officer
of EHC, Inc. Investment decisions of Easton Capital Partners, LP
are made by its general partner, ECP GP, LLC, through its
manager, ECP GP, Inc. Mr. Friedman is the President and
Chief Executive Officer of EHC, Inc. and ECP GP, Inc.
Mr. Friedman shares voting and investing power over the
shares owned by Easton Hunt Capital Partners, L.P. and Easton
Capital Partners, LP. Mr. Friedman disclaims beneficial
ownership of the shares held by entities affiliated with Easton
Capital Investment Group, except to the extent of his pecuniary
interest therein. The address for the entities affiliated with
Easton Capital Investment Group is 767 Third Avenue, 7th Floor,
New York, New York 10017. |
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(17) |
|
Includes (i) 6,154,239 shares and
3,675,642 shares issuable upon the exercise of warrants
held by Maverick Fund, L.D.C. within 60 days after
December 31, 2008; (ii) 2,484,596 shares and
1,483,934 shares issuable upon the exercise of warrants
held by Maverick Fund USA, Ltd. within 60 days after
December 31, 2008; and (iii) 5,354,702 shares and
3,198,119 shares issuable upon the exercise of warrants
held by Maverick Fund II, Ltd. within 60 days after
December 31, 2008, in each case, as converted according to
the assumed conversion factor. Also includes 463,680 shares
issuable upon the exercise of options held by Christy Wyskiel
within 60 days after December 31, 2008, as converted
according to the assumed conversion factor. These options are
held for the benefit of Maverick Fund II, Ltd., Maverick
Fund, L.D.C. and Maverick Fund USA, Ltd. Maverick Capital,
Ltd. is |
215
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an investment adviser registered under Section 203 of the
Investment Advisers Act of 1940 and, as such, may be deemed to
have beneficial ownership of the shares held by Maverick
Fund II, Ltd., Maverick Fund, L.D.C. and Maverick
Fund USA, Ltd. through the investment discretion it
exercises over these accounts. Maverick Capital Management, LLC
is the general partner of Maverick Capital, Ltd. Lee S.
Ainslie III is the manager of Maverick Capital Management,
LLC who possesses sole investment discretion pursuant to
Maverick Capital Management, LLCs regulations. The address
for the entities affiliated with Maverick Capital, Ltd. is 300
Crescent Court, 18th Floor, Dallas, Texas 75201. |
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(18) |
|
Includes 2,653,858 shares issuable upon the exercise of
warrants held by Mitsui & Co. Venture Partners II,
L.P. within 60 days after December 31, 2008, as
converted according to the assumed conversion factor. Koichi
Ando, President and Chief Executive Officer of
Mitsui & Co. Venture Partners, Inc., the general
partner of Mitsui & Co. Venture Partners II L.P.,
may be deemed to have voting and investment power over the
shares held by Mitsui & Co. Venture Partners II
L.P. The address of Mitsui & Co. Venture Partners II,
L.P. is 200 Park Avenue, New York, New York 10166. |
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(19) |
|
Includes 2,389,985 shares issuable upon the exercise of
warrants held by Whitebox Hedged High Yield Partners, LP within
60 days after December 31, 2008, as converted
according to the assumed conversion factor. Andrew J. Redleaf is
the managing member of the general partner and has voting and
investment power over the shares held by Whitebox Hedged High
Yield Partners, LP. The address of Whitebox Hedged High Yield
Partners, LP is 3033 Excelsior Blvd., Suite 300, Minneapolis,
Minnesota 55416. |
216
DESCRIPTION
OF REPLIDYNES CAPITAL STOCK
Replidynes authorized capital stock consists of
100,000,000 shares of common stock, par value $0.001 per
share, and 5,000,000 shares of preferred stock, par value
$0.001 per share.
The following is a summary of the rights of Replidyne common
stock and preferred stock. This summary is not complete. For
more detailed information, see Replidynes restated
certificate of incorporation and bylaws, which are filed as
exhibits to the registration statement for Replidynes
initial public offering.
Common
Stock
Outstanding
Shares
As of January 21, 2009, Replidyne had approximately
77 record holders of its common stock.
As of January 21, 2009, there were 2,759,475 shares of
Replidyne common stock subject to outstanding options, and
53,012 shares of Replidyne common stock subject to
outstanding warrants.
Voting
Rights
Each holder of Replidyne common stock is entitled to one vote
for each share on all matters submitted to a vote of Replidyne
stockholders, including the election of directors.
Replidynes restated certificate of incorporation and
bylaws do not provide for cumulative voting rights. Because of
this, the holders of a majority of the shares of Replidyne
common stock entitled to vote in any election of directors can
elect all of the directors standing for election, if they should
so choose.
Dividends
Subject to preferences that may be applicable to any then
outstanding preferred stock, holders of Replidyne common stock
are entitled to receive dividends, if any, as may be declared
from time to time by Replidynes board of directors out of
legally available funds.
Liquidation
In the event of liquidation, dissolution or winding up, holders
of Replidyne common stock will be entitled to share ratably in
the net assets legally available for distribution to
stockholders after the payment of all of Replidynes debts
and other liabilities and the satisfaction of any liquidation
preference granted to the holders of any outstanding shares of
preferred stock.
Rights
and Preferences
Holders of Replidyne common stock have no preemptive, conversion
or subscription rights, and there are no redemption or sinking
fund provisions applicable to Replidyne common stock. The
rights, preferences and privileges of the holders of Replidyne
common stock are subject to, and may be adversely affected by,
the rights of the holders of shares of any series of preferred
stock which Replidyne may designate in the future.
Fully
Paid and Nonassessable
All outstanding shares of Replidyne common stock are fully paid
and nonassessable.
Preferred
Stock
Under Replidynes restated certificate of incorporation,
the Replidyne board of directors has the authority, without
further action by Replidyne stockholders, to issue up to
5,000,000 shares of preferred stock in one or more series,
to establish from time to time the number of shares to be
included in each such series, to fix the rights, preferences and
privileges of the shares of each wholly unissued series and any
qualifications, limitations or restrictions thereon, and to
increase or decrease the number of shares of any such series
(but not below the number of shares of such series then
outstanding).
Replidynes board of directors may authorize the issuance
of preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders
of Replidyne common stock. The issuance of preferred stock,
while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other
things, have the effect of delaying, deferring or preventing a
change in control
217
and may adversely affect the market price of Replidyne common
stock and the voting and other rights of the holders of
Replidyne common stock. Replidyne has no current plans to issue
any shares of preferred stock.
Registration
Rights
Under Replidynes fourth amended and restated stockholders
agreement, the holders of 15,801,861 shares of Replidyne
common stock and warrants to purchase up to 53,012 shares
of Replidyne common stock, or their transferees, have the right
to require Replidyne to register their shares with the SEC so
that those shares may be publicly resold, or to include their
shares in any registration statement that Replidyne files.
Demand
Registration Rights
The holders of at least 50% of the shares having registration
rights have the right to demand that Replidyne files up to two
registration statements. In addition, the holders of at least
50% of the shares of Replidyne common stock issued upon
conversion of Replidynes Series D preferred stock
have the right to demand that Replidyne file up to two
registration statements. These registration rights are subject
to specified conditions and limitations, including the right of
the underwriters to limit the number of shares included in any
such registration under certain circumstances.
Form S-3
Registration Rights
If Replidyne is eligible to file a registration statement on
Form S-3,
each holder of shares having registration rights has the right
to demand that Replidyne file up to three registration
statements for such holder, but not more than two annually, on
Form S-3
so long as the aggregate amount of securities to be sold under
the registration statement on
Form S-3
is at least $1,000,000, subject to specified exceptions,
conditions and limitations.
Piggyback
Registration Rights
If Replidyne registers any securities for public sale,
stockholders with registration rights will have the right to
include their shares in the registration statement. The
underwriters of any underwritten offering will have the right to
limit the number of shares having registration rights to be
included in the registration statement, but not below 30% of the
total number of shares included in the registration statement,
except for this offering in which the underwriters have excluded
any shares by existing investors.
Expenses
of Registration
Replidyne will pay all expenses relating to all demand
registrations,
Form S-3
registrations and piggyback registrations, other than
underwriting discounts and commissions.
Expiration
of Registration Rights
The registration rights described above will terminate upon the
earlier of either five years following the completion of
Replidynes initial public offering or as to a given holder
of registrable securities, when such holder of registrable
securities holds less than one percent of Replidynes
outstanding capital stock and can sell all of such holders
registrable securities pursuant to Rule 144 promulgated
under the Securities Act.
Delaware
Anti-Takeover Law and Provisions of Replidynes Restated
Certificate of Incorporation and Bylaws
Delaware
Anti-Takeover Law
Replidyne is subject to Section 203 of the Delaware General
Corporation Law. Section 203 generally prohibits a public
Delaware corporation from engaging in a business
combination with an interested stockholder for
a period of three years after the date of the transaction in
which the person became an interested stockholder, unless:
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prior to the date of the transaction, the board of directors of
the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an
interested stockholder;
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the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of
shares outstanding (a) shares owned by persons who are
directors and also officers and (b) shares owned by
employee stock
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218
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plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
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on or subsequent to the date of the transaction, the business
combination is approved by the board and authorized at an annual
or special meeting of stockholders, and not by written consent,
by the affirmative vote of at least
662/3%
of the outstanding voting stock which is not owned by the
interested stockholder.
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Section 203 defines a business combination to include:
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any merger or consolidation involving the corporation and the
interested stockholder, any sale, transfer, pledge or other
disposition involving the interested stockholder of 10% or more
of the assets of the corporation;
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subject to exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder; and
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the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
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In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by the
entity or person.
Restated
Certificate of Incorporation and Amended and Restated
Bylaws
Provisions of Replidynes restated certificate of
incorporation and amended and restated bylaws may delay or
discourage transactions involving an actual or potential change
in control or change in management, including transactions in
which stockholders might otherwise receive a premium for their
shares, or transactions that Replidyne stockholders might
otherwise deem to be in their best interests. Therefore, these
provisions could adversely affect the price of Replidyne common
stock. Among other things, Replidynes restated certificate
of incorporation and bylaws:
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permit Replidyne board of directors to issue up to
5,000,000 shares of preferred stock, with any rights,
preferences and privileges as they may designate (including the
right to approve an acquisition or other change in control);
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provide that the authorized number of directors may be changed
only by resolution adopted by a majority of the authorized
number of directors constituting the board of directors;
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provide that all vacancies, including newly created
directorships, may, except as otherwise required by law, be
filled by the affirmative vote of a majority of directors then
in office, even if less than a quorum;
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divide the Replidyne board of directors into three classes;
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require that any action to be taken by Replidyne stockholders
must be effected at a duly called annual or special meeting of
stockholders and not be taken by written consent;
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provide that stockholders seeking to present proposals before a
meeting of stockholders or to nominate candidates for election
as directors at a meeting of stockholders must provide notice in
writing in a timely manner, and also specify requirements as to
the form and content of a stockholders notice;
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do not provide for cumulative voting rights (therefore allowing
the holders of a majority of the shares of common stock entitled
to vote in any election of directors to elect all of the
directors standing for election, if they should so
choose); and
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provide that special meetings of Replidyne stockholders may be
called only by the chairman of the board, chief executive
officer or by the board of directors pursuant to a resolution
adopted by a majority of the total number of authorized
directors.
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The amendment of any of the provisions of the restated
certificate of incorporation related to the board of directors
would require approval by the holders of at least
662/3%
of Replidynes then outstanding capital stock. Any
adoption, amendment or repeal of Replidynes amended and
restated bylaws by Replidynes board of directors requires
the approval of a majority of the authorized number of
directors, and Replidyne stockholders also have the power to
adopt, amend or repeal the bylaws provided that in addition to
any vote required by law or the restated
219
certificate, such stockholder action would require the
affirmative vote of at least
662/3%
of Replidynes then outstanding capital stock.
Transfer
Agent and Registrar
The transfer agent and registrar for Replidyne common stock is
American Stock Transfer & Trust Company. Its
address is 59 Maiden Lane, Plaza Level, New York, NY 10038 and
its telephone number is
(718) 921-8293.
Market
Listing
Shares of Replidyne common stock are listed on the Nasdaq Global
Market under the symbol RDYN.
220
RELATED
PARTY TRANSACTIONS INVOLVING DIRECTORS AND
OFFICERS OF THE COMBINED COMPANY
Described below are any transactions or series of transactions
occurring since the beginning of 2007 to which either Replidyne
or CSI was a party in which:
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the amounts involved exceeded or will exceed $120,000; and
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a person who is expected to serve as a director or officer of
the combined company, or any member of such persons
immediate family, had or will have a direct or indirect material
interest.
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Following the merger, the combined company will initially have a
nine member board of directors, comprised of two individuals who
are currently members of the Replidyne board of directors,
Edward Brown and Augustine Lawlor, and seven individuals who are
currently members of the CSI board of directors, Brent G.
Blackey, John H. Friedman, Geoffrey O. Hartzler, Roger J. Howe,
David L. Martin, Glen D. Nelson and Gary M. Petrucci. None of
the current executive officers of Replidyne will continue as
officers of the combined company.
Replidyne
Transactions
Limitations
of Liability and Indemnification Agreements
Two of Replidynes current directors will serve as
directors of the combined company. Replidyne has entered into
indemnity agreements with its directors which provide, among
other things, that Replidyne will indemnify such directors,
under the circumstances and to the extent provided for therein,
for expenses, damages, judgments, fines and settlements he may
be required to pay in actions or proceedings which he is or may
be made a party by reason of his position as a director, officer
or other agent of Replidyne, and otherwise to the fullest extent
permitted under Delaware law and Replidynes bylaws.
Stock
Options
The following current directors of Replidyne, each of whom will
continue as a director of the combined company following the
merger, have been granted the number of options to purchase
Replidyne common stock set forth opposite his or her name in the
following table:
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Total Vested
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Total Unvested
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Options to Purchase
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Options to Purchase
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Weighted Average
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Shares of Common
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Shares of Common
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Exercise Price per
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Name of Director
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Stock
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Stock
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Share ($)
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Edward Brown
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8,610
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15,859
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$
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4.097
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Augustine Lawlor
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21,750
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10,875
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6.708
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CSI
Transactions
Preferred
Stock Issuances
Issuance
of Series B Convertible Preferred Stock
In December 2007 CSI issued an aggregate of
2,162,150 shares of its Series B convertible preferred
stock at a price per share of $9.25, for an aggregate purchase
price of approximately $20 million. The table below sets
forth the number of Series B convertible preferred shares
sold to related parties and entities associated with them. The
terms of these purchases were the same as those made available
to unaffiliated purchasers.
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Number of
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Shares of
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Approximate
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Series B
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Aggregate
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Convertible
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Purchase
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Name
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Preferred Stock
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Price ($)
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Brent G. Blackey
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5,000
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$
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46,250
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GDN Holdings, LLC(1)
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54,054
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500,000
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Paul Koehn
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3,784
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35,002
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(1) |
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Glen Nelson, one of CSIs directors, is the sole owner of
GDN Holdings, LLC. |
221
Issuance
of
Series A-1
Convertible Preferred Stock
From July through October 2007, CSI issued an aggregate of
2,188,425 shares of its
Series A-1
convertible preferred stock at a price per share of $8.50, for
an aggregate purchase price of approximately $18.6 million.
The table below sets forth the number of
Series A-1
convertible preferred shares sold to CSIs related parties
and entities associated with them. The terms of these purchases
were the same as those made available to unaffiliated purchasers.
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Number of
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Shares of
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Approximate
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Series A-1
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Aggregate
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Convertible
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Purchase
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Name
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Preferred Stock
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Price ($)
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Brent G. Blackey
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5,900
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$
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50,150
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John Borrell
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11,764
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99,994
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GDN Holdings, LLC(1)
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41,913
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356,261
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Robert J. Thatcher
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12,000
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102,000
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(1) |
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Glen Nelson, one of CSIs directors, is the sole owner of
GDN Holdings, LLC. |
Investors
Rights Agreement
CSI is party to an investors rights agreement, which
provides that holders of its convertible preferred stock have
the right to demand that it file a registration statement or
request that its shares be covered by a registration statement
that it is otherwise filing. Certain related parties of CSI are
parties to this investor rights agreement. This agreement will
be terminated upon the consummation of the merger in accordance
with the preferred stockholder conversion agreement described
below.
Stockholders
Agreement
CSI is party to a stockholders agreement, which provides that
holders of its convertible preferred stock have the right to
elect up to two directors to its board of directors, to maintain
a pro rata interest in CSI through participation in offerings
that occur before CSI become a public company, and to force
other parties to the agreement to vote in favor of significant
corporate transactions such as a consolidation, merger, sale of
substantially all of the assets of CSI or sale of more than 50%
of CSIs voting capital stock. In addition, the
stockholders agreement places certain transfer restrictions upon
CSI stockholders that are parties to the agreement. Certain
related parties of CSI are parties to this stockholders
agreement. This stockholders agreement will terminate upon the
conversion of all CSI preferred stock into CSI common stock
immediately prior to the effective time of the merger as is
described elsewhere in this proxy statement/prospectus.
Preferred
Stockholder Conversion Agreement
Concurrently with the execution of the merger agreement, the
holders of approximately 68% of CSIs outstanding preferred
stock, calculated on an as-converted to common stock basis,
entered into an agreement with CSI pursuant to which all
outstanding shares of CSI preferred stock will be automatically
converted into shares of CSI common stock, effective as of
immediately prior to the effective time of the merger. Parties
to this agreement include entities affiliated with John Friedman
and Glen Nelson, who will be directors of the combined company.
In consideration of the agreement of such stockholders, CSI will
issue to the holders of CSI preferred stock warrants to purchase
3,500,000 shares of CSI common stock at an exercise price
of $5.71 per share, pro rata to each such holder based on its
percentage of the outstanding shares of CSI preferred stock on
an as-converted to common stock basis. See Other
Agreements Related to the Merger CSI Preferred
Stockholder Agreement for more information on this
agreement.
Other
Transactions
On September 12, 2008, CSI entered into a loan and security
agreement with Silicon Valley Bank. The agreement includes a
$3.0 million term loan, a $5.0 million accounts
receivable line of credit, and two term loans for an aggregate
of $5.5 million that are guaranteed by certain of
CSIs affiliates. One of CSIs directors who will be a
director of the combined company and one entity affiliated with
one of CSIs directors who will be a director of the
222
combined company agreed to act as guarantors of these term
loans. Those guarantors are Glen Nelson, who is guaranteeing
$1.0 million, and Easton Capital Investment Group, which is
guaranteeing $2.0 million. CSIs director John
Friedman is the Managing Partner of Easton Capital Investment
Group. In consideration for guaranteeing the investor guaranty
line of credit, CSI issued the guarantors warrants to purchase
shares of its common stock at an exercise price of $6.00 per
share in the following amounts: Easton Capital Investment Group,
166,667 shares, and Glen Nelson, 83,333 shares. These
warrants are immediately exercisable and have terms of five
years.
On December 12, 2007, CSI entered into an agreement with
Reliant Pictures Corporation, or RPC, to participate in a
documentary film to be produced by RPC. Portions of the film
will focus on CSIs technologies, and RPC will provide
separate filmed sections for CSIs corporate use. In
connection with that agreement, CSI agreed to contribute
$250,000 toward the production of the documentary. One of
CSIs directors, Roger J. Howe, holds more than 10% of the
equity of RPC and is a director of RPC. Additionally, Gary M.
Petrucci, another one of CSIs directors, is a shareholder
of RPC.
CSI has granted stock options to its executive officers and
certain of its directors. See CSI Executive Compensation
and Other Information Summary Compensation Table for
Fiscal Year 2008 and CSI Executive Compensation and
Other Information Compensation of
Directors Director Compensation Table: Combined
Company Directors for CSI for a description of these
option grants.
223
COMPARATIVE
RIGHTS OF REPLIDYNE AND CSI STOCKHOLDERS
Replidyne is incorporated under the laws of the State of
Delaware and, accordingly, the rights of the stockholders of
Replidyne are currently, and will continue to be, governed by
the Delaware General Corporation Law, or the DGCL. CSI is
incorporated under the laws of the State of Minnesota, and prior
to the consummation of the merger, the rights of CSI
stockholders are governed by the Minnesota Business Corporation
Act, or the MBCA. Before the consummation of the merger, the
rights of the holders of Replidyne common stock are also
governed by the restated certificate of incorporation of
Replidyne and the bylaws of Replidyne. After the consummation of
the merger, the rights of Replidyne and CSI stockholders will be
governed by the DGCL, the restated certificate of incorporation
of Replidyne and the amended and restated bylaws of Replidyne.
Due to differences between the DGCL and the MBCA and the
governing documents of Replidyne and CSI, the merger will result
in CSI stockholders having different rights once they become
stockholders of the combined company.
The following is a summary of the material differences between
the rights of Replidyne and CSI stockholders under the DGCL and
the MBCA and Replidynes restated certificate of
incorporation and bylaws and CSIs amended and restated
articles of incorporation and bylaws. While Replidyne and CSI
believe that this summary covers the material differences
between the two, this summary may not contain all of the
information that is important to you. This summary is not
intended to be a complete discussion of the respective rights of
Replidyne and CSI stockholders and is qualified in its entirety
by reference to the DGCL and the MBCA and the various documents
of Replidyne and CSI that are referred to in this summary. You
should carefully read this entire proxy statement/prospectus and
the other documents that Replidyne and CSI refer to in this
proxy statement/prospectus for a more complete understanding of
the differences between being a stockholder of Replidyne and
being a stockholder of CSI. Replidyne and CSI have filed the
documents referred to herein with the SEC and will send copies
of these documents to you upon your request.
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CSI
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Replidyne
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Authorized Capital Stock
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CSIs amended and restated articles of incorporation
currently authorize the issuance of 84,750,587 shares with
a par value of $0.01 per share solely for the purpose of a
statute or regulation imposing a tax or fee based upon the
capitalization of the corporation, and consisting of 70,000,000
common shares, 5,400,000 shares of Series A convertible
preferred stock, 2,188,425 shares of Series A-1 convertible
preferred stock, 2,175,162 shares of Series B convertible
preferred stock and 4,987,000 undesignated shares. The
undesignated shares may be issued from time to time in one or
more class or series and the board of directors may fix the
relative rights and preferences of each such class or series.
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Replidynes restated certificate of incorporation currently
authorizes the issuance of 105,000,000 shares, consisting
of two classes, common stock and preferred stock.
100,000,000 shares of common stock, par value $0.001, and
5,000,000 shares of preferred stock, par value $0.001, are
authorized. The preferred stock may be issued from time to time
in one or more series.
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Redemption
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CSIs amended and restated articles of incorporation
provides that each holder of CSI preferred stock has the right
to require CSI to redeem its preferred stock as follows:
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Replidynes restated certificate of incorporation provides
that the board of directors is authorized to fix or alter the
rights of redemption of any unissued series of preferred stock.
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224
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CSI
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Replidyne
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(i) commencing on July 19, 2011, each holder of preferred
stock shall have the right to require CSI to redeem a certain
portion of its shares as follows:
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(A) On July 19, 2011, 30% of
the original amount of such holders shares;
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(B) On July 19, 2012, 30% of
the original amount of such holders shares; and
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(C) On July 19, 2013, 40% of
the original amount of such holders shares.
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(ii) The price CSI shall pay for the redeemed shares,
referred to as the redemption price, shall be the greater of (A)
the price per share paid for the preferred stock, plus all
accrued and unpaid dividends; or (B) the fair market value of
the preferred stock, as determined by a professional appraiser.
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(iii) If CSI does not have sufficient funds legally
available to redeem all the shares to be redeemed on any
redemption date, it shall redeem such shares on a pro rata
basis, and shall redeem the remaining shares as soon as
sufficient funds are legally available.
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(iv) If all of the shares required to be redeemed are not
redeemed by CSI due to an insufficient legally available funds,
the shares shall (a) remain outstanding, (b) be entitled to all
the rights and preferences provided in the amended and restated
articles of incorporation, and (c) be entitled to receive
interest accruing daily with respect to the applicable
redemption price at the rate of 10% per annum.
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225
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CSI
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Replidyne
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Dividends
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CSIs amended and restated articles of incorporation
provide that the preferred stockholders are entitled to receive
cash dividends at the rate of 8% of the original purchase price
per share of preferred stock per annum. All such dividends shall
accrue, whether or not earned or declared, and shall be
cumulative and payable (i) when and as declared by the board of
directors, (ii) upon liquidation or dissolution of the
corporation, and (iii) upon redemption of the preferred stock by
the corporation.
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Replidynes restated certificate of incorporation provides
that the board of directors is authorized to fix or alter the
dividend rights of any unissued series of preferred stock.
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Rights on Liquidation
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CSIs amended and restated articles of incorporation
provide that where approval of stockholders is required by law,
the affirmative vote of the holders of at least a majority of
the voting power of all shares entitled to vote shall be
required to authorize the corporation to commence a voluntary
dissolution.
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Replidynes restated certificate of incorporation provides
that the board of directors is authorized to fix or alter the
liquidation rights of any unissued series of preferred stock.
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CSIs amended and restated articles of incorporation
further provide that upon any liquidation, dissolution or
winding up of the corporation and subject to certain return on
investment limitations, the preferred stockholders shall be paid
an amount equal to (i) the price per share of preferred stock,
plus (ii) all dividends accrued or declared thereon but unpaid.
If CSIs assets are insufficient to make payment in full to
all preferred stockholders, then such assets shall be
distributed among the preferred stockholders ratably in
proportion to the full amounts to which they would otherwise be
respectively entitled.
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The remaining net assets of the corporation available for
distribution shall be distributed among the holders of the
common and preferred shares in an amount per share as would have
been payable had each share of preferred stock been converted to
common stock immediately prior to such liquidation event.
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226
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CSI
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Replidyne
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Conversion Rights
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CSIs amended and restated articles of incorporation
provide that each preferred stockholder has the option, at any
time, to convert any shares of preferred stock held into shares
of CSI common stock according to a conversion formula set forth
in the amended and restated articles. A mandatory conversion of
the preferred stock shall occur in the event (i) the
corporation effects a firm commitment underwritten public
offering in which the aggregate proceeds are at least
$40,000,000, or (ii) the holders of a majority of the preferred
stock, including the shares held by entities affiliated with
Easton Capital Investment Group and Maverick Capital, Ltd., and
the two preferred stock directors (one of whom is designated by
Eason Capital Investment Group and one of whom is designated by
Maverick Capital, Ltd.) consent to a conversion.
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Replidynes restated certificate of incorporation provides
that the board of directors is authorized to fix or alter the
conversion rights of any unissued series of preferred stock.
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Asset Transfer or Acquisition Rights
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CSIs amended and restated articles of incorporation
provide that where approval of stockholders is required by law,
the affirmative vote of the holders of at least a majority of
the voting power of all shares entitled to vote shall be
required to authorize the corporation to (i) merge into or with
one or more other corporations, (ii) to exchange its shares for
shares of one or more other corporations, (iii) to sell, lease,
transfer or otherwise dispose of all or substantially all of its
property and assets, including its goodwill, or (iv) to commence
voluntary dissolution.
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Replidynes restated certificate of incorporation provides
that the board of directors is authorized to fix or alter the
rights of any unissued series of preferred stock upon an asset
transfer or acquisition.
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227
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CSI
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Replidyne
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CSIs amended and restated articles of incorporation
further provide that certain consolidations or mergers of the
corporation, asset transfers or capital stock transfers shall be
deemed to be a liquidation event that would entitle the
preferred stockholders to receive the benefits described above
in Rights on Liquidation. Additionally, should CSI
effect any such deemed liquidation event, the agreement or plan
of merger or consolidation must provide for the payment to the
preferred stockholders described above in Rights on
Liquidation, unless the holders of a majority of the
preferred stock, including the shares held by entities
affiliated with Easton Capital Investment Group and Maverick
Capital, Ltd., specifically consent in writing to a different
allocation of such consideration.
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Number of Directors and Election
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CSIs amended and restated articles of incorporation
provide that the maximum number of directors shall not exceed
nine, unless the holders of a majority of the preferred stock,
such majority to include the shares held by entities affiliated
with Easton Capital Investment Group and Maverick Capital, Ltd.,
consent to increase the maximum number of directors to a number
in excess of nine.
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Replidynes certificate of incorporation provides that the
number of directors shall be fixed exclusively by resolutions
adopted by a majority of the authorized number of directors
constituting the board.
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So long as at least 20% of the shares of the preferred stock
originally issued remain outstanding, the holders of the
preferred stock, voting separately as one class, are entitled to
elect two directors, one of whom shall be designated by Maverick
Capital, Ltd. and one of whom shall be designated by Easton
Capital Investment Group. When the outstanding preferred stock
drops below 20%, but is not less than 10%, of the shares of
preferred stock originally issued, the holders of the remaining
outstanding preferred stock, voting separately as a class, shall
be entitled to elect one director of the corporation.
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The directors are divided into three classes designated as
Class I, Class II and Class III. At each annual
meeting of stockholders or special meeting in lieu thereof,
directors elected to succeed those directors whose terms expire
shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders or special meeting in
lieu thereof after their election and until their successors are
duly elected and qualified.
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228
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CSI
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Replidyne
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Unless otherwise approved by the holders of a majority of the
preferred stock, such majority to include the shares held by
entities affiliated with Easton Capital Investment Group and
Maverick Capital, Ltd., the board of directors shall include the
chief executive officer of the corporation and three
non-employee directors with relevant industry experience
reasonably acceptable to the preferred stock directors.
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Any vacancies resulting from an increase in the authorized
number of directors, death, resignation, disqualification,
removal from office or other cause will be filled, unless the
board of directors determines by resolutions that any such
vacancies or newly created directorships will be filled by the
stockholders, will be filled only by a majority vote of the
directors then in office even though less than a quorum, or the
sole remaining director, and not by the stockholders.
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CSIs amended and restated bylaws provide that each
director serves for an indefinite term that expires at the next
regular meeting of stockholders, and until his or her successor
is elected and qualified, or until his or her earlier death,
resignation, disqualification or removal as provided by statute.
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CSIs amended and restated articles of incorporation
provide that a vacancy in any directorship elected by the
preferred stockholders may only be filled by vote of the
preferred stockholders, voting separately as one class.
CSIs amended and restated bylaws provide that other
directorship vacancies may be filled by the affirmative vote of
the remaining directors, except that newly created directorships
resulting from an increase in the authorized number of directors
must be filled by the affirmative vote of a majority of the
directors serving at the time of such increase.
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229
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CSI
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Replidyne
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Stockholder Action by Written Consent
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CSIs amended and restated articles of incorporation are
silent as to stockholder action by written consent. The MBCA
provides that an action required or permitted to be taken at a
meeting of the stockholders may be taken without a meeting by
written action signed by all of the stockholders entitled to
vote on that action.
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Replidynes restated certificate of incorporation provides
that no action shall be taken by the stockholders except at a
duly called annual or special meeting of stockholders, and that
the stockholders may not take action by written consent. The
DGCL provides that any action required or permitted to be taken
at meeting of stockholders of a corporation may be taken without
a meeting if a consent in writing is signed by the holders of
outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action
at a meeting.
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Amendment of Charter
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CSIs amended and restated articles of incorporation
provide that the affirmative vote of the holders of at least a
majority of the voting power of all shares entitled to vote, or
such greater percentage as may otherwise be prescribed by
Minnesota law, shall be required to amend, alter, change or
repeal any provision contained in the articles of incorporation.
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Replidynes restated certificate of incorporation provides
that, in addition to any other vote required by law, the
affirmative vote of the holders of at least
662/3%
of the voting power of all of the then-outstanding shares of
capital stock of the corporation entitled to vote generally in
the election of directors, voting together as a single class,
shall be required to alter, amend or repeal Articles V, VI
and VII of the restated certificate of incorporation.
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Amendment of Bylaws
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CSIs amended and restated bylaws provide that the bylaws
may be amended by the affirmative vote of a majority of the
directors, subject to the power of the stockholders to change or
repeal such bylaws. The board of directors shall not make or
alter any bylaws fixing a quorum for stockholder meetings,
prescribing procedures for removing directors or filling
directorship vacancies, or fixing the number of directors or
their classifications, qualifications or terms of office, but
the board may adopt or amend a bylaw to increase the number of
directors.
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Replidynes restated certificate of incorporation expressly
empowers the board of directors to make, alter or repeal the
bylaws of Replidyne. Notwithstanding the foregoing, the bylaws
may be rescinded, altered, amended or repealed in any respect by
the affirmative vote of the holders of at least
662/3%
of the outstanding voting stock of Replidyne, voting together as
a single class.
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Stockholder Approval Rights
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CSI stockholder approval rights are set forth in Rights on
Liquidation, Asset Transfer or Acquisition
Rights and Amendment of Charter.
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Other than the vote required above in Amendment of
Charter, Replidynes restated certificate of
incorporation is silent as to stockholder approval rights.
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230
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CSI
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Replidyne
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CSIs amended and restated articles of incorporation
provide that so long as at least 20% of the preferred stock is
outstanding, the consent of the holders of a majority of the
preferred stock, such majority to include the preferred stock
held by entities affiliated with Easton Capital Investment Group
and Maverick Capital, Ltd., shall be required for any action
which creates a series of security senior or pari passu
to the preferred stock.
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Consent of the holders of at least a majority of the preferred
stock, such majority to include the preferred stock held by
entities affiliated with Easton Capital Investment Group and
Maverick Capital, Ltd., and one preferred stock director, shall
be required for any one of the following: (i) merger,
acquisition or sale of substantially all assets of the
corporation, (ii) any change in size of the board of directors,
(iii) declaration or payment of any dividends, or the
repurchase, redemption or retirement of capital stock (other
than pursuant to employee agreements and any redemptions
pursuant to the articles), (iv) issuance or redemption of debt
securities, (v) the reservation of additional shares under the
corporations employee stock incentive plans without the
approval of the Compensation Committee of the board of
directors, (vi) assignment of patents or other intellectual
property of the corporation other than in the ordinary course of
business or with the approval of the board of directors, (vii)
an initial public offering in which the aggregate gross proceeds
from such offering to the corporation are less than $40,000,000,
(viii) any action which materially and adversely alters the
rights, preferences or privileges of the preferred stock, or
(ix) any action which increases the authorized number of
preferred stock.
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231
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CSI
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Replidyne
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Voting Rights
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CSIs amended and restated articles of incorporation are
silent as to the voting power of each common share. The MBCA
provides that where the articles are silent, a stockholder has
one vote for each share held.
CSIs amended and restated articles of incorporation
provide that except as may be otherwise provided in the articles
or by law, the preferred stock shall vote together with all
other classes and series of stock as a single class on all
actions to be taken by the stockholders of the corporation.
Each share of preferred stock shall entitle the holder to such
number of votes per share on each such action as shall equal the
number of shares of common stock into which each share of
preferred stock is then convertible, rounded down to the nearest
whole number.
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Replidynes restated certificate of incorporation provides
that each outstanding share of common stock shall entitle the
holder to one vote on each matter properly submitted to the
stockholders of Replidyne for their vote; provided, however,
that except as otherwise required by law, holders of common
stock are not entitled to vote on any amendment to the restated
certificate of incorporation that relates solely to the terms of
one or more outstanding series of preferred stock if the holders
of such affected series are entitled to vote thereon by law or
pursuant to the restated certificate of incorporation.
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Limitation of Personal Liability of Directors
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CSIs amended and restated articles of incorporation
provide that personal liability of the directors for monetary
damages for breach of fiduciary duty as a director shall be
eliminated to the fullest extent permitted by the MBCA.
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Replidynes restated certificate of incorporation provides
that the liability of the directors for monetary damages shall
be eliminated to the fullest extent under applicable law. If
the DGCL is amended to authorize corporation action further
eliminating or limiting the personal liability of directors,
then the liability of a Replidyne director shall be eliminated
to the fullest extent permitted by the DGCL, as so amended.
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Indemnification of Officers and Directors
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CSIs amended and restated bylaws provide that the
corporation shall indemnify its officers and directors to the
fullest extent permitted under MBCA section 302A.521, but to the
extent any officer or director enters into an agreement with the
corporation pertaining to such persons rights to
indemnification and advancement of expenses, that agreement
shall supersede the bylaws, unless otherwise provided in that
agreement.
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Replidynes restated certificate of incorporation does not
provide for indemnification of officers and directors.
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232
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CSI
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Replidyne
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Special Meeting of Stockholders
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CSIs amended and restated bylaws provide that special
meetings of the stockholders may be called at any time by (i)
the chairman of the board, (ii) the chief executive officer,
(iii) the chief financial officer, (iv) two or more directors,
or (v) a stockholder or stockholders holding 10% or more of the
voting power of all shares entitled to vote who shall demand
such special meeting by giving written notice of demand to the
chief executive officer or the chief financial officer
specifying the purposes of the meeting.
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Replidynes amended and restated bylaws provide that
special meetings of the stockholders may be called, for any
purpose or purposes, by (i) the chairman of the board of
directors, (ii) the chief executive officer, or (iii) the board
of directors pursuant to a resolution adopted by a majority of
the total number of authorized directors (whether or not there
exist any vacancies in previously authorized directorships at
the time any such resolution is presented to the board of
directors for adoption).
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Notice of Stockholder Meeting
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CSIs amended and restated bylaws provide that except as
otherwise provided by law, a written notice setting out the
place, date and hour of any stockholder meeting shall be given
to each holder of shares entitled to vote not less than ten days
nor more than 60 days prior to the date of the meeting;
provided, that notice of a meeting at which there is to be
considered a proposal (i) to dispose of all, or substantially
all, of the property and assets of the corporation or (ii) to
dissolve the corporation, shall be given to all stockholders of
record, whether or not entitled to vote; and provided further,
that notice of a meeting at which there is to be considered a
proposal to adopt a plan of merger or exchange shall be given to
all stockholders of record, whether or not entitled to vote, at
least 14 days prior thereto. Notice of any special meeting
shall state the purpose of the proposed meeting, and the
business transacted at all special meetings shall be confined to
the purposes stated in the notice.
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Replidynes amended and restated bylaws provide that except
as otherwise provided by law, notice, given in writing or by
electronic transmission, of each meeting of stockholders shall
be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting to each stockholder entitled to
vote at such meeting, such notice to specify the place, if any,
date and hour, in the case of special meetings, the purpose or
purposes of the meeting, and the means of remote communications,
if any, by which stockholders and proxy holders may be deemed to
be present in person and vote at any such meeting.
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233
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CSI
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Replidyne
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Quorum of Stockholder Meetings
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CSIs amended and restated bylaws provide that the holders
of a majority of the voting power of the shares entitled to vote
at a meeting, represented either in person or by proxy, shall
constitute a quorum for the transaction of business at any
meeting of stockholders.
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Replidynes amended and restated bylaws provide that at all
meetings of stockholders, except where otherwise provided by
statute or by the restated certificate of incorporation, or by
the bylaws, the presence, in person, by remote communication, if
applicable, or by proxy duly authorized, of the holders of a
majority of the outstanding shares of stock entitled to vote
shall constitute a quorum for the transaction of business.
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Election of Directors at Stockholder Meeting
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CSIs amended and restated bylaws provide that all director
elections shall be determined by a majority vote of the number
of shares entitled to vote and represented at any meeting at
which there is a quorum except in such cases as shall otherwise
be required by statute or the articles of incorporation.
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Except as otherwise provided by law, Replidynes restated
certificate of incorporation or as otherwise provided for in its
amended and restated bylaws, Replidynes amended and
restated bylaws provide that directors shall be elected by a
plurality of the votes of the shares present in person, by
remote communication, if applicable, or represented by proxy at
the meeting and entitled to vote generally on the election of
directors.
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Inspection of Stockholder Lists
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The MBCA provides that any stockholder of a corporation that is
not a publicly held corporation has an absolute right, upon
written demand, to examine and copy, in person or by a legal
representative, at any reasonable time, the corporations
share register.
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The DGCL provides that any stockholder, upon written demand
under oath stating the purpose of the demand, has the right
during usual business hours to inspect for any proper purpose a
list of stockholders and to make copies or extracts from the
list.
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Cumulative Voting
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The MBCA provides that each stockholder entitled to vote for
directors has the right to cumulate those votes in the election
of directors by giving written notice of intent to do so, unless
the corporations articles of incorporation provide
otherwise. CSIs amended and restated articles of
incorporation provide that there shall be no cumulative voting
by CSI stockholders.
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The DGCL states that the certificate of incorporation may
provide for cumulative voting. The Replidyne restated
certificate of incorporation does not provide for cumulative
voting.
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234
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CSI
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Replidyne
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Removal of Directors
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The MBCA provides that unless modified by the articles of
incorporation, bylaws or an agreement of the stockholders, any
one or all of the corporations directors may be removed at
any time by the affirmative vote of the holders of a majority of
the voting power of all shares entitled to vote at an election
of directors; provided that, if a director has been elected
solely by the holders of a class or series of shares, then that
director may be removed only by the affirmative vote of the
holders of a majority of the voting power of all shares of that
class or series entitled to vote at an election of that director.
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The DGCL provides that a director of a corporation may be
removed with or without cause by the affirmative vote of a
majority of shares entitled to vote for the election of
directors. However, a director of a Delaware corporation that
has a classified board may be removed only for cause, unless the
certificate of incorporation otherwise provides.
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Stockholder Preemptive Rights
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The MBCA provides that all stockholders are entitled to
preemptive rights unless the articles of incorporation
specifically deny or limit preemptive rights. CSIs
amended and restated articles of incorporation provide that
stockholders shall not have preemptive rights to subscribe for
or purchase additional shares of any class or series of the
corporation.
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The DGCL does not provide for stockholder preemptive rights,
unless the certificate of incorporation provides otherwise.
Replidynes restated certificate of incorporation does not
provide for any such preemptive rights.
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235
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CSI
|
|
Replidyne
|
|
Rights of Dissenting Stockholders
|
|
The MBCA provides that a stockholder of a Minnesota corporation
may dissent from, and obtain payment for the fair value of the
stockholders shares in the corporation in the event of
certain corporate actions, including, among other things, the
merger of the corporation.
|
|
The DGCL allows for appraisal rights only in connection with
certain mergers or consolidations. No such appraisal rights
exist, however, for corporations whose shares are held by more
than 2,000 stockholders or are listed on a national securities
exchange (such as Replidyne), unless the certificate of
incorporation provides that appraisal rights are available to
the stockholders or the stockholders are to receive in the
merger of consolidation anything other than (a) shares of stock
of the corporation surviving or resulting from such merger or
consolidation, (b) shares of stock of any other corporation
which at the effective date of the merger or consolidation will
be either listed on a national securities exchange or held of
record by more than 2,000 stockholders, (c) cash in lieu of
fractional shares of the corporation described in the foregoing
clauses (a) and (b), or (d) any combination of (a), (b), or (c).
Replidynes restated certificate of incorporation does not
provide for appraisal rights.
|
236
|
|
|
|
|
|
|
CSI
|
|
Replidyne
|
|
Applicable State Takeover Laws
|
|
CSI is subject to the following provisions of Minnesota law that may have anti-takeover effects:
a provision that prohibits business-combination transactions with a stockholder for four years after the stockholder acquires 10% of the voting power of the corporation unless, before the share acquisition, the transaction or share acquisition receives approval of a majority of a committee consisting of one or more disinterested directors;
a control-share-acquisition statute, which provides that a person acquiring 20% or more of the voting power of a corporation may not vote those shares in excess of the 20% level unless and until approved by holders of (a) a majority of the voting power of the corporations shares, including those held by the acquiring person, and (b) a majority of the voting power of the corporations shares held by disinterested stockholders. Additional stockholder meetings and additional approvals of disinterested stockholders are required to confer voting power for subsequent purchases from 20% to 331/3%, from 331/3% to 50% and over 50% ownership;
|
|
Replidyne is subject to the certain provisions of Delaware law that may have anti-takeover effects. In general, the DGCL prohibits, with some exceptions, a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date of the transaction in which the person became an interested stockholder, unless:
the board of directors of the corporation approved the business combination or the other transaction in which the person became an interested stockholder prior to the date of the business combination or other transaction;
upon consummation of the transaction that resulted in the person becoming an interested stockholder, the person owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers of the corporation and shares issued under employee stock plans under which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
|
237
|
|
|
|
|
|
|
CSI
|
|
Replidyne
|
|
|
|
a provision that prohibits corporations from purchasing any voting shares owned for less than two years from a greater-than-5% stockholder for more than the market value of those shares, unless the transaction has been approved by a majority of the voting power of all shares entitled to vote or unless the corporation makes an offer of at least equal value per share to all holders of shares of the class or series of stock held by the greater-than-5% stockholder and to all holders of any class or series into which those securities may be converted;
a fair price provision, which provides that no person may acquire shares of a Minnesota corporation within two years following the persons last purchase of shares in a takeover offer, unless the stockholders are given a reasonable opportunity to dispose of their shares to the person on terms substantially equivalent to those provided in the takeover offer. The provision does not apply if the acquisition is approved by a committee consisting of disinterested directors before the person acquires any shares in the takeover offer; and
a provision requiring that parties seeking to commence a tender offer for shares of a publicly held Minnesota corporation must file a disclosure statement with the Minnesota Department of Commerce describing the terms of the tender offer and certain information about the bidder and the target. The Commerce Department has the right to conduct a hearing on the transaction.
|
|
on or subsequent to the date the person
became an interested stockholder, the board of directors of the
corporation approved the business combination and the
stockholders of the corporation authorized the business
combination at an annual or special meeting of stockholders by
the affirmative vote of at least
662/3%
of the outstanding stock of the corporation not owned by the
interested stockholder.
For purposes of the anti-takeover portions, the DGCL defines a
business combination to include any of the
following:
any merger or consolidation involving
the corporation and the interested stockholder;
any sale, transfer, pledge or other
disposition of 10% or more of the corporations assets or
outstanding stock involving the interested stockholder;
in general, any transaction that results
in the issuance or transfer by the corporation of any of its
stock to the interested stockholder;
any transaction involving the
corporation that has the effect of increasing the proportionate
share of its stock owned by the interested stockholder; or
the receipt by the interested
stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the
corporation.
|
|
|
|
|
In general, the anti-takeover portions of the DGCL define an
interested stockholder as any person who, together
with the persons affiliates and associates, owns, or
within three years prior to the determination of interested
stockholder status did own, 15% or more of a corporations
voting stock.
|
238
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Except where specifically noted, the following information
and all other information contained in this proxy
statement/prospectus does not give effect to the proposed
reverse stock split described in Replidyne
Proposal No. 2.
Introduction
Assuming that the net assets of Replidyne are between $35.0 and
$37.0 million as calculated in accordance with the terms of
the merger agreement, CSI security holders will own or have the
right to acquire, after the merger, between 83.0% and 83.7% of
the combined company on a fully-diluted basis using the treasury
method of accounting for options and warrants. Further, CSI
directors will constitute a majority of the combined
companys board of directors and all members of the
executive management of the combined company will be from CSI.
Therefore, CSI will be deemed to be the acquiring company for
accounting purposes and the merger transaction will be accounted
for as a reverse merger and a recapitalization. The financial
statements of the combined entity after the merger will reflect
the historical results of CSI before the merger and will not
include the historical financial results of Replidyne before the
completion of the merger. Stockholders equity and earnings
per share of the combined entity after the merger will be
retroactively restated to reflect the number of shares of common
stock received by CSI security holders in the merger, after
giving effect to the difference between the par values of the
capital stock of CSI and Replidyne, with the offset to
additional paid-in capital.
The unaudited pro forma condensed combined financial statements
have been prepared to give effect to the proposed merger of CSI
and Replidyne as a reverse acquisition of assets and a
recapitalization. For accounting purposes, CSI is considered to
be acquiring Replidyne in the merger, and it is assumed that
Replidyne does not meet the definition of a business in
accordance with the Statements of Financial Accounting Standards
No. 141, Business Combinations, and Emerging Issues Task
Force (EITF)
No. 98-3,
Determining Whether a Nonmonetary Transaction Involves Receipt
of Productive Assets or of a Business, because as of
December 31, 2008 Replidyne had reduced its employee
headcount to three employees that are not engaged in development
or commercialization efforts and will not transition to CSI, had
returned its license to develop faropenem medoxomil to Asubio
Pharma Co., Ltd. and had suspended development of REP3123
and its other anti-infective programs based on its bacterial DNA
replication inhibition technology, and is engaged in a process
to sell or otherwise dispose of its remaining research and
development programs, including REP3123 and its bacterial DNA
replication inhibition technology. As such, at the time the
transaction is expected to be consummated, Replidynes sole
business activity will be liquidation through the merger. Under
EITF 98-3,
the total estimated purchase price, calculated as described in
Note 2 to these unaudited pro forma condensed combined
financial statements, is allocated to the assets acquired and
liabilities assumed in connection with the transaction, based on
their estimated fair values. As a result, the cost of the
proposed merger will be measured at the estimated fair value of
the net assets acquired, and no goodwill will be recognized.
While the accounting treatment of the transaction is an
acquisition of assets and assumption of certain liabilities by
CSI, the manner in which such transaction is consummated is a
merger between Replidyne and CSI whereby CSI stockholders will
control the combined entity after the transaction. Accordingly,
consistent with guidance relating to such transactions, CSI (the
legal acquiree, but the accounting acquirer) will be considered
to be the continuing reporting entity that acquires the
registrant, Replidyne (the legal acquirer, but the accounting
acquiree), and therefore the transaction is considered to be a
reverse merger.
For purposes of these unaudited pro forma condensed combined
financial statements, Replidyne and CSI have made allocations of
the estimated purchase price to the assets to be acquired and
liabilities to be assumed based on preliminary estimates of
their fair value, as described in Note 2 to these unaudited
pro forma condensed combined financial statements. Replidyne and
CSI have estimated that the fair value of Replidynes cash
and cash equivalents, short-term investments, prepaid expenses
and other current assets, and accounts payable and accrued
expenses approximate carrying values due to their short-term
maturities and expected realization and payment. Replidyne and
CSI have estimated that Replidynes property and equipment
and other assets at the time of the transaction would not be
used in future operations or would have minimal resale value at
that time, and therefore these assets have not been assigned a
fair value in the accompanying unaudited pro forma condensed
combined financial statements. Further, it is expected that at
the time of the consummation of the merger, the book and fair
value of such assets will be de minimis. A final
determination of these estimated fair values, which cannot be
made prior to the completion of the merger, will be based on the
actual net assets of Replidyne that exist as of the date of
completion of the merger. Replidyne and CSI expect the fair
value of the net assets of Replidyne to approximate the fair
value of
239
Replidyne common stock at the date of the merger. The actual
amounts recorded as of the completion of the merger may differ
materially from the information presented in these unaudited pro
forma condensed combined financial statements as a result of:
|
|
|
|
|
net cash used in Replidynes operations between the pro
forma balance sheet date of September 30, 2008 and the
closing of the merger;
|
|
|
|
the timing of completion of the merger;
|
|
|
|
Replidynes net assets as calculated pursuant to the merger
agreement, which will partially determine the actual number of
shares of Replidynes common stock to be issued pursuant to
the merger; and
|
|
|
|
other changes in Replidynes net assets that may occur
prior to completion of the merger, which could cause material
differences in the information presented below.
|
The unaudited pro forma condensed combined balance sheet as of
September 30, 2008 gives effect to the proposed merger as
if it occurred on September 30, 2008 and combines the
historical balance sheets of Replidyne and CSI as of
September 30, 2008 and includes the effect of the issuance
of warrants to purchase 3.5 million shares of CSI common
stock to existing CSI preferred stockholders in connection with
the conversion of preferred stock to common stock immediately
prior to the effective time of the proposed merger. The CSI
balance sheet information was derived from its unaudited balance
sheet as of September 30, 2008 included herein. The
Replidyne balance sheet information was derived from its
unaudited condensed consolidated balance sheet included in its
Form 10-Q
for the quarterly period ended September 30, 2008 and also
included herein. The estimated purchase price of the Replidyne
acquisition in these unaudited pro forma condensed combined
financial statements was based on the estimated fair value of
the net assets to be received by CSI assuming the proposed
merger had closed on September 30, 2008.
The final purchase price allocation may change significantly
from preliminary estimates. The actual purchase price allocation
upon consummation of the merger will be based on the fair value
of Replidynes assets and liabilities as determined at the
time of the consummation of the merger. Replidyne continues to
use its cash and other liquid assets to finance the closing of
its operations. CSI and Replidyne will re-evaluate the
determination of the purchase price at the time of consummation
of the merger. Please see the notes to these unaudited pro forma
combined condensed financial statements for further discussion.
The unaudited pro forma condensed combined statements of
operations for the three months ended September 30, 2008
and the year ended June 30, 2008 are presented as if the
merger was consummated on July 1, 2007, and combine the
historical results of Replidyne and CSI for the three months
ended September 30, 2008 and the year ended June 30,
2008, respectively. The historical results of CSI were derived
from its unaudited consolidated statement of operations for the
three months ended September 30, 2008 and its audited
consolidated statement of operations for the year ended
June 30, 2008 included herein. The historical results of
Replidyne were derived from its unaudited statement of
operations for the three months ended September 30, 2008
included in its Quarterly Report on
Form 10-Q
for the quarterly period ended September 30, 2008 and
herein, and a combination of its audited statement of operations
included in its Annual Report on
Form 10-K
for the year ended December 31, 2007 and herein, and its
unaudited statement of operations for the six months ended
June 30, 2007 and 2008 included in its Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2008.
The unaudited pro forma condensed combined financial statements
have been prepared for illustrative purposes only and are not
necessarily indicative of the financial position or results of
operations in future periods or the results that actually would
have been realized had Replidyne and CSI been a combined company
during the specified periods. Further, the unaudited pro forma
condensed combined financial statements do not reflect any
adjustments to remove the operating results of Replidyne. As
noted above, Replidyne is not expected to have any substantive
operations at the time of the merger. The unaudited pro forma
condensed combined financial statements have been prepared using
CSIs June 30 year-end, as the combined company
anticipates having a June 30 year end upon closing of the
merger. The pro forma adjustments are based on the preliminary
information available at the time of the preparation of this
proxy statement/prospectus. The unaudited pro forma condensed
combined financial statements, including the notes thereto, are
qualified in their entirety by reference to, and should be read
in conjunction with, the historical consolidated financial
statements of CSI for the three months ended September 30,
2008 and for the year ended June 30, 2008 included herein,
and the historical financial statements of Replidyne included in
its Annual Report on
Form 10-K
for the year ended December 31, 2007 and in its Quarterly
Reports on
Form 10-Q
for the quarterly periods ended September 30, 2007 and
2008, and June 30, 2007 and 2008.
240
Unaudited
Pro Forma Condensed Combined Balance Sheet
As of
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
Replidyne
|
|
|
CSI
|
|
|
Adjustments
|
|
|
|
|
|
Combined
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,059
|
|
|
$
|
14,727
|
|
|
$
|
|
|
|
|
|
|
|
$
|
46,786
|
|
Short-term investments
|
|
|
18,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,532
|
|
Accounts receivable, net
|
|
|
|
|
|
|
5,439
|
|
|
|
|
|
|
|
|
|
|
|
5,439
|
|
Inventories
|
|
|
|
|
|
|
3,930
|
|
|
|
|
|
|
|
|
|
|
|
3,930
|
|
Prepaid expenses and other current assets
|
|
|
1,318
|
|
|
|
818
|
|
|
|
|
|
|
|
|
|
|
|
2,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
51,909
|
|
|
|
24,914
|
|
|
|
|
|
|
|
|
|
|
|
76,823
|
|
Investments
|
|
|
|
|
|
|
21,390
|
|
|
|
|
|
|
|
|
|
|
|
21,390
|
|
Property and Equipment, net
|
|
|
133
|
|
|
|
1,156
|
|
|
|
(133
|
)
|
|
|
E
|
|
|
|
1,156
|
|
Patents, net
|
|
|
|
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
|
|
1,152
|
|
Other assets
|
|
|
70
|
|
|
|
|
|
|
|
(70
|
)
|
|
|
E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
52,112
|
|
|
$
|
48,612
|
|
|
$
|
(203
|
)
|
|
|
|
|
|
$
|
100,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
6,875
|
|
|
$
|
8,857
|
|
|
$
|
6,200
|
|
|
|
G
|
|
|
$
|
23,532
|
|
|
|
|
|
|
|
|
|
|
|
|
1,600
|
|
|
|
I
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
|
|
|
|
27,201
|
|
|
|
|
|
|
|
|
|
|
|
27,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,875
|
|
|
|
36,058
|
|
|
|
7,800
|
|
|
|
|
|
|
|
50,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
|
2,400
|
|
Redeemable convertible preferred stock warrants
|
|
|
|
|
|
|
4,047
|
|
|
|
(4,047
|
)
|
|
|
A
|
|
|
|
|
|
Deferred rent
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,875
|
|
|
|
42,605
|
|
|
|
3,753
|
|
|
|
|
|
|
|
53,233
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
98,242
|
|
|
|
(98,242
|
)
|
|
|
A
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
27
|
|
|
|
37,738
|
|
|
|
98,242
|
|
|
|
A
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
45,210
|
|
|
|
D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181,078
|
)
|
|
|
J
|
|
|
|
|
|
Treasury stock
|
|
|
(1
|
)
|
|
|
|
|
|
|
1
|
|
|
|
D
|
|
|
|
|
|
Additional paid-in capital
|
|
|
192,090
|
|
|
|
|
|
|
|
(192,090
|
)
|
|
|
D
|
|
|
|
180,875
|
|
|
|
|
|
|
|
|
|
|
|
|
(203
|
)
|
|
|
E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181,078
|
|
|
|
J
|
|
|
|
|
|
Common stock warrants
|
|
|
|
|
|
|
2,374
|
|
|
|
4,047
|
|
|
|
A
|
|
|
|
28,503
|
|
|
|
|
|
|
|
|
|
|
|
|
22,082
|
|
|
|
C
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
12
|
|
|
|
(343
|
)
|
|
|
(12
|
)
|
|
|
D
|
|
|
|
(343
|
)
|
Accumulated deficit
|
|
|
(146,891
|
)
|
|
|
(132,004
|
)
|
|
|
(22,082
|
)
|
|
|
C
|
|
|
|
(161,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
146,891
|
|
|
|
D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,200
|
)
|
|
|
G
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,600
|
)
|
|
|
I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
45,237
|
|
|
|
(92,235
|
)
|
|
|
94,286
|
|
|
|
|
|
|
|
47,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$
|
52,112
|
|
|
$
|
48,612
|
|
|
$
|
(203
|
)
|
|
|
|
|
|
$
|
100,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited pro forma condensed
combined financial statements
241
Unaudited
Pro Forma Condensed Combined Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2008
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
Replidyne
|
|
|
CSI
|
|
|
Adjustments
|
|
|
|
|
|
Combined
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
11,646
|
|
|
$
|
|
|
|
|
|
|
|
$
|
11,646
|
|
Cost of goods sold
|
|
|
|
|
|
|
3,881
|
|
|
|
|
|
|
|
|
|
|
|
3,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
7,765
|
|
|
|
|
|
|
|
|
|
|
|
7,765
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
5,671
|
|
|
|
16,424
|
|
|
|
(778
|
)
|
|
|
F
|
|
|
|
21,317
|
|
Research and development
|
|
|
4,780
|
|
|
|
4,955
|
|
|
|
(60
|
)
|
|
|
F
|
|
|
|
9,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
10,451
|
|
|
|
21,379
|
|
|
|
(838
|
)
|
|
|
|
|
|
|
30,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(10,451
|
)
|
|
|
(13,614
|
)
|
|
|
838
|
|
|
|
|
|
|
|
(23,227
|
)
|
Interest expense
|
|
|
|
|
|
|
(227
|
)
|
|
|
|
|
|
|
|
|
|
|
(227
|
)
|
Interest and investment income
|
|
|
537
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(9,914
|
)
|
|
|
(13,699
|
)
|
|
|
838
|
|
|
|
|
|
|
|
(22,775
|
)
|
Less: Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(9,914
|
)
|
|
$
|
(13,699
|
)
|
|
$
|
838
|
|
|
|
|
|
|
$
|
(22,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to common
stockholders
|
|
$
|
(0.37
|
)
|
|
$
|
(1.78
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing basic and diluted net
loss per share attributable to common stockholders
|
|
|
27,082,000
|
|
|
|
7,692,248
|
|
|
|
104,223,756
|
|
|
|
B
|
|
|
|
138,998,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited pro forma condensed
combined financial statements
242
Unaudited
Pro Forma Condensed Combined Statement of Operations
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, 2008
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
Replidyne
|
|
|
CSI
|
|
|
Adjustments
|
|
|
|
|
|
Combined
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
22,177
|
|
|
$
|
|
|
|
|
|
|
|
$
|
22,177
|
|
Cost of goods sold
|
|
|
|
|
|
|
8,927
|
|
|
|
|
|
|
|
|
|
|
|
8,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
13,250
|
|
|
|
|
|
|
|
|
|
|
|
13,250
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
12,824
|
|
|
|
35,326
|
|
|
|
(340
|
)
|
|
|
F
|
|
|
|
47,810
|
|
Research and development
|
|
|
47,564
|
|
|
|
16,068
|
|
|
|
(1,022
|
)
|
|
|
F
|
|
|
|
62,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
60,388
|
|
|
|
51,394
|
|
|
|
(1,362
|
)
|
|
|
|
|
|
|
110,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(60,388
|
)
|
|
|
(38,144
|
)
|
|
|
1,362
|
|
|
|
|
|
|
|
(97,170
|
)
|
Interest expense
|
|
|
|
|
|
|
(923
|
)
|
|
|
916
|
|
|
|
H
|
|
|
|
(7
|
)
|
Interest and investment income
|
|
|
3,534
|
|
|
|
1,167
|
|
|
|
|
|
|
|
|
|
|
|
4,701
|
|
Impairment of investments
|
|
|
|
|
|
|
(1,267
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,267
|
)
|
Other
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(56,935
|
)
|
|
|
(39,167
|
)
|
|
|
2,278
|
|
|
|
|
|
|
|
(93,824
|
)
|
Less: Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
(19,422
|
)
|
|
|
19,422
|
|
|
|
H
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(56,935
|
)
|
|
$
|
(58,589
|
)
|
|
$
|
21,700
|
|
|
|
|
|
|
$
|
(93,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to common
stockholders
|
|
$
|
(2.10
|
)
|
|
$
|
(8.57
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing basic and diluted net
loss per share attributable to common stockholders
|
|
|
27,103,000
|
|
|
|
6,835,126
|
|
|
|
99,403,302
|
|
|
|
B
|
|
|
|
133,341,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited pro forma condensed
combined financial statements
243
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On November 3, 2008, Replidyne and CSI entered into an
Agreement and Plan of Merger and Reorganization, under which
Responder Merger Sub, Inc., a wholly owned subsidiary formed by
Replidyne in connection with the merger, will merge with and
into CSI and CSI will become a wholly owned subsidiary of
Replidyne and the surviving corporation of the merger. Upon
completion of the merger, Replidyne will change its name to
Cardiovascular Systems, Inc. and assume CSIs fiscal year
end of June 30. Pursuant to the terms of the merger
agreement, Replidyne will issue to the stockholders of CSI
shares of Replidyne common stock and will assume all of the
stock options, restricted stock awards, and stock warrants of
CSI outstanding as of the merger closing date, such that CSI
stockholders, including holders of common stock and redeemable
convertible preferred stock, option and restricted stock holders
and warrant holders will own or have the right to acquire
between 83.0% and 83.7% of the combined company on a pro forma
fully diluted basis, calculated using the treasury stock method
of accounting for options and warrants, and Replidyne
stockholders and option and warrant holders will own or have the
right to acquire between 16.3% and 17.0% of the combined company
on a pro forma fully diluted basis, calculated using the
treasury stock method of accounting for options and warrants,
and assuming that Replidynes net assets at closing are
between $35.0 million and $37.0 million. The merger is
intended to qualify as a tax-free reorganization under the
provisions of Section 368(a) of the Internal Revenue Code.
The merger is subject to customary closing conditions, including
approval by Replidyne and CSI stockholders.
Because CSI security holders will own or have the right to
acquire between 83.0% and 83.7% of the voting stock of the
combined company after the transaction and the management of CSI
will be the management of the combined company, CSI is deemed to
be the acquiring company for accounting purposes and the
transaction will be accounted for as a reverse acquisition in
accordance with accounting principles generally accepted in the
United States. Accordingly, the assets and liabilities of
Replidyne will be recorded as of the merger closing date at
their estimated fair values.
|
|
2.
|
Purchase
of Net Assets In Accordance with EITF
No. 98-3
|
The estimated purchase price and the allocation of the estimated
purchase price discussed below have been determined in
accordance with EITF
No. 98-3,
with the anticipation that the merger will be consummated in
early 2009, and are preliminary because the proposed merger has
not yet been completed. The final allocation of the purchase
price will be based on Replidynes assets and liabilities
on the closing date. Under EITF
No. 98-3,
the total estimated purchase price is allocated to the Replidyne
tangible and identifiable intangible assets acquired and
liabilities assumed based on their estimated fair values as of
the date of the consummation of the transaction.
The unaudited pro forma condensed combined financial statements
include an estimate for contractual compensation liabilities
owed to Replidyne employees as a result of the change of control
obligations and other severance agreement payments that will
become due as a result of the merger. An estimate of costs
related to Replidynes remaining lease obligation is also
included in the unaudited pro forma condensed combined financial
statements.
The preliminary allocation of the estimated purchase price is in
part based upon preliminary management estimates, as described
below, and CSI and Replidynes estimates and assumptions
are subject to change upon the consummation of the merger.
Cash and cash equivalents, short-term investments and other
tangible assets and liabilities: The tangible
assets and liabilities were valued at their respective carrying
amounts, except for adjustments to certain property and
equipment, other assets and cessation-related liabilities, as
CSI and Replidyne believe that these amounts approximate their
current fair values.
Property and equipment and other
assets: Property and equipment and other assets
have not been assigned a fair value as CSI and Replidyne believe
that these assets would not be used in future operations or
would have minimal resale value on the date that the transaction
is consummated, and the book and fair value of these assets on
the actual date of consummation of the transaction is expected
to be de minimis.
244
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA) (Continued)
Pre-acquisition contingencies: CSI and
Replidyne have not currently identified any pre-acquisition
contingencies where a liability is probable and the amount of
the liability can be reasonably estimated.
The final determination of the purchase price allocation will be
based on the fair values of the assets acquired and liabilities
assumed as of the date the proposed merger is consummated. The
preliminary allocation of the estimated purchase price assuming
the merger had closed on September 30, 2008 is as follows
(in thousands):
|
|
|
|
|
|
|
Amount
|
|
|
Preliminary estimated purchase price allocation:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,059
|
|
Short-term investments
|
|
|
18,532
|
|
Prepaid expenses and other current assets
|
|
|
1,318
|
|
Accounts payable and accrued expenses
|
|
|
(14,675
|
)
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
37,234
|
|
|
|
|
|
|
The final purchase price allocation may change significantly
from preliminary estimates. The actual purchase price allocation
upon consummation of the merger will be based on the fair values
of Replidynes assets and liabilities as determined at the
time of consummation. Further, Replidyne continues to use its
cash and other liquid assets to finance the closing of its
operations. CSI and Replidyne will re-evaluate the determination
of the purchase price at the time of consummation of the merger.
Pro forma adjustments are necessary to reflect the estimated
purchase price and to adjust amounts related to Replidynes
tangible and identifiable intangible assets and liabilities to a
preliminary estimate of their fair values.
The pro forma adjustments included in the unaudited pro forma
condensed combined financial statements are as follows (dollar
amounts in thousands, except per share amounts):
(A) To reflect the conversion of all shares of CSI
preferred stock and preferred stock warrants to CSI common stock
and common stock warrants immediately prior to the effective
time of the proposed merger.
(B) To reflect the issuance of new shares of Replidyne
common stock at the effective time of the proposed merger. A
share conversion factor of 6.624 was determined using the
treasury method of accounting, as specified in the merger
agreement, for options and warrants, and giving effect to other
outstanding equity securities, assuming that the net assets of
Replidyne are $36,000, as calculated in accordance with the
terms of the merger agreement. The assumed conversion factor was
multiplied by the CSI common stock to be outstanding immediately
prior to the effective time of the proposed merger (including
common stock issued upon the conversion of preferred stock) to
calculate the amount of new shares to be issued by Replidyne.
The calculations are summarized as follows:
|
|
|
|
|
Three Months Ended September 30, 2008
|
|
Shares
|
|
Shares of CSI common stock outstanding at September 30, 2008
|
|
|
7,692,248
|
|
Shares of CSI common stock to be issued upon the conversion of
CSI preferred stock
|
|
|
9,203,284
|
|
Sub-total
|
|
|
16,895,532
|
|
Conversion factor
|
|
|
6.624
|
|
|
|
|
|
|
Sub-total
|
|
|
111,916,004
|
|
Less: shares of CSI common stock outstanding at
September 30, 2008
|
|
|
(7,692,248
|
)
|
|
|
|
|
|
Adjustment
|
|
|
104,223,756
|
|
|
|
|
|
|
245
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA) (Continued)
|
|
|
|
|
Year Ended June 30, 2008
|
|
Shares
|
|
Shares of CSI common stock outstanding at June 30, 2008
|
|
|
6,835,126
|
|
Shares of CSI common stock to be issued upon the conversion of
CSI preferred stock
|
|
|
9,203,284
|
|
Sub-total
|
|
|
16,038,410
|
|
Conversion factor
|
|
|
6.624
|
|
|
|
|
|
|
Sub-total
|
|
|
106,238,428
|
|
|
|
|
|
|
Less: shares of CSI common stock outstanding at
June 30, 2008
|
|
|
(6,835,126
|
)
|
|
|
|
|
|
Adjustment
|
|
|
99,403,302
|
|
|
|
|
|
|
(C) To reflect the issuance of 3.5 million common
stock warrants at $5.71 per share to existing preferred stock
holders in connection with the conversion of preferred stock to
common stock. The warrants were determined to have an estimated
value of $22,082 for accounting purposes using the Black Scholes
method, are exercisable upon issuance, and expire five years
after issuance.
(D) To reflect the elimination of Replidynes treasury
stock, additional paid-in capital, accumulated other
comprehensive income, and accumulated deficit. The adjustment to
common stock of $45,210 is calculated as follows:
|
|
|
|
|
Total book value of Replidynes assets
|
|
$
|
52,112
|
|
Less: book value of Replidynes liabilities
|
|
|
(6,875
|
)
|
Less: par value of Replidyne common stock outstanding on
September 30, 2008
|
|
|
(27
|
)
|
|
|
|
|
|
Value of shares issued by Replidyne to stockholders of CSI,
valued at the estimated fair value of the net assets of Replidyne
|
|
$
|
45,210
|
|
|
|
|
|
|
(E) To adjust Replidynes carrying value of property
and equipment and other assets. CSI and Replidyne believe that
these assets would not be used in future operations or would
have minimal resale value at the date the transaction is
consummated. At the actual date of consummation of the merger,
these assets are expected to have a book and fair value that is
de minimis. For accounting purposes, CSI is considered to
be acquiring the net assets of Replidyne in this transaction,
including tangible net assets such as property and equipment and
other assets.
(F) To reflect the elimination of Replidynes
historical depreciation and amortization expense associated with
the reduction in the carrying value of property and equipment to
fair value and as a result of the allocation process, and to
reflect the elimination of asset impairment charges recorded by
Replidyne. Had this proposed merger been consummated on
July 1, 2007, the related property and equipment would have
been eliminated.
(G) To record estimated transaction costs for CSI and
Replidyne.
(H) To reverse accretion of redeemable convertible
preferred stock and adjustment to fair value of redeemable
convertible preferred stock warrants.
(I) To reflect the estimated fair value (including
estimated subleases) of the lease obligation for
Replidynes facility, which will be abandoned upon
consummation of the merger.
(J) To adjust common stock to equal par value.
|
|
4.
|
Non-recurring
Expenses
|
Replidyne has incurred and will continue to incur certain
non-recurring expenses in connection with the transaction. These
expenses, which are reflected in the accompanying unaudited pro
forma condensed combined balance sheet as of September 30,
2008, but are not reflected in the unaudited pro forma condensed
combined
246
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA) (Continued)
statements of operations for the three months ended
September 30, 2008 and for the year ended June 30,
2008, are currently estimated as follows (in thousands):
|
|
|
|
|
Financial advisors fee
|
|
$
|
4,000
|
|
Legal, accounting, and processing costs
|
|
|
800
|
|
Transaction bonuses
|
|
|
400
|
|
|
|
|
|
|
Total fees
|
|
$
|
5,200
|
|
|
|
|
|
|
CSI will incur certain non-recurring transaction-related costs
in connection with the merger. These estimated expenses of
$1,000 are reflected in the unaudited pro forma condensed
combined balance sheet as of September 30, 2008, but are
not reflected in the unaudited pro forma condensed combined
statements of operations for the three months ended
September 30, 2008 and for the year ended June 30,
2008.
247
LEGAL
MATTERS
Cooley Godward Kronish LLP, Broomfield, Colorado, will pass upon
the validity of the Replidyne common stock to be issued in the
merger and certain federal income tax consequences of the merger
for Replidyne. Fredrikson & Byron, P.A., Minneapolis,
Minnesota, will pass upon certain federal income tax
consequences of the merger for CSI.
EXPERTS
The financial statements of Replidyne, Inc. at December 31,
2006 and 2007, and for each of the three years in the
period ended December 31, 2007, have been included herein
in reliance upon the report of KPMG LLP, independent registered
public accounting firm, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
This report refers to Replidyne, Inc.s adoption of
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, effective January 1, 2006.
The consolidated financial statements of Cardiovascular Systems,
Inc. as of June 30, 2007 and 2008, and for each of the
three years ended June 30, 2008, included in this proxy
statement/prospectus have been so included, in reliance on the
report (which contains an explanatory paragraph relating to
Cardiovascular Systems, Inc.s ability to continue as a
going concern as described in Note 2 to Cardiovascular
Systems, Inc.s consolidated financial statements) of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
HOUSEHOLDING
OF PROXY MATERIALS
The SEC has adopted rules that permit companies and
intermediaries (e.g., brokers) to satisfy the delivery
requirements for proxy statements and annual reports with
respect to two or more stockholders sharing the same address by
delivering a single proxy statement addressed to those
stockholders. This process, which is commonly referred to as
householding, potentially means extra convenience
for stockholders and cost savings for companies.
A number of brokers with account holders who are Replidyne
stockholders will be householding its proxy
materials. A single proxy statement/prospectus will be delivered
to multiple Replidyne stockholders sharing an address unless
contrary instructions have been received from the affected
stockholders. If you are a Replidyne stockholder, once you have
received notice from your broker that they will be
householding communications to your address,
householding will continue until you are notified
otherwise or until you revoke your consent. If you no longer
wish to participate in householding and would prefer
to receive a separate proxy statement/prospectus, please notify
Replidyne. Direct your written request to Replidyne, Inc., Attn:
Chief Financial Officer, 1450 Infinite Dr., Louisville, Colorado
80027. Replidyne
stockholders who currently receive multiple copies of the proxy
statement/prospectus at their addresses and would like to
request householding of their communications should
contact your broker or Replidyne at the address set forth above.
WHERE YOU
CAN FIND MORE INFORMATION
Replidyne has filed annual, quarterly and current reports, proxy
statements and other information with the SEC. CSI has filed
registration statements on Form 10 and
Form S-1
and other information with the SEC. You may read and copy any
reports, statements or other information filed by Replidyne and
CSI at the SECs public reference room at
100 F Street, NE, Washington, D.C. 20549. Please
call the SEC at
1-800-SEC-0330
for further information on the public reference room. The public
filings filed by Replidyne and CSI are also available to the
public from commercial document retrieval services and at the
Internet web site maintained by the SEC at
http://www.sec.gov.
You may obtain a free copy of Replidyne annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports on the day of filing with the
SEC on the Internet at
http://www.Replidyne.com
or by contacting the Investor Relations Department at
Replidynes corporate office by calling
(303) 996-5500
or making a request in writing to Replidyne, Inc.,
c/o Investor
Relations, 1450 Infinite Drive, Louisville, Colorado 80027.
248
Replidyne has filed a
Form S-4
registration statement to register with the SEC the offer and
sale of the shares of Replidyne common stock to be issued to CSI
stockholders in the merger. This proxy statement/prospectus is a
part of that registration statement and constitutes a prospectus
of Replidyne and a proxy statement of Replidyne and CSI.
Replidyne has supplied all information contained in this proxy
statement/prospectus relating to Replidyne and Responder Merger
Sub, Inc., and CSI has supplied all information relating to CSI.
You should rely only on the information contained in this proxy
statement/prospectus to vote your shares at the special
meetings. Replidyne and CSI have not authorized anyone to
provide you with information that differs from that contained in
this proxy statement/prospectus. This proxy statement/prospectus
is
dated ,
2009. You should not assume that the information contained in
this proxy statement/prospectus is accurate as of any date other
than that date, and neither the mailing of this proxy
statement/prospectus to stockholders nor the issuance of shares
of Replidyne common stock in the merger shall create any
implication to the contrary.
Replidyne, the Replidyne logos and all other Replidyne product
and service names are registered trademarks or trademarks of
Replidyne, Inc. in the United States and in other select
countries. CSI, the CSI logos and all other CSI product and
service names are registered trademarks or trademarks of CSI in
the United States and in other select countries.
®
and
tm
indicate U.S. registration and U.S. trademark,
respectively. Other third-party logos and product/trade names
are registered trademarks or trade names of their respective
companies.
249
Replidyne,
Inc.
For
the Years Ended December 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Replidyne, Inc.:
We have audited the accompanying balance sheets of Replidyne,
Inc. as of December 31, 2006 and 2007, and the related
statements of operations, stockholders equity (deficit),
preferred stock and comprehensive income (loss), and cash flows
for each of the years in the three-year period ended
December 31, 2007. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Replidyne, Inc. as of December 31, 2006 and 2007, and
the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2007, in
conformity with U.S. generally accepted accounting
principles.
As discussed in note 2 to the accompanying financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based
Payment, effective January 1, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Replidyne, Inc.s internal control over financial reporting
as of December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 13, 2008
expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
KPMG LLP
Boulder, Colorado
March 13, 2008
F-2
REPLIDYNE,
INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands,
|
|
|
|
except par value)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,091
|
|
|
$
|
43,969
|
|
Short-term investments
|
|
|
101,476
|
|
|
|
46,297
|
|
Receivable from Forest Laboratories
|
|
|
4,634
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
2,079
|
|
|
|
2,429
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
132,280
|
|
|
|
92,695
|
|
Property and equipment, net
|
|
|
3,170
|
|
|
|
1,905
|
|
Other assets
|
|
|
111
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
135,561
|
|
|
$
|
94,690
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
7,957
|
|
|
$
|
12,255
|
|
Deferred revenue
|
|
|
56,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
64,133
|
|
|
|
12,255
|
|
Other long-term liabilities
|
|
|
56
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
64,189
|
|
|
|
12,286
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value. Authorized
100,000 shares; issued 27,010 and 27,085 shares;
outstanding 26,979 and 27,077 shares at December 31,
2006 and 2007, respectively
|
|
|
27
|
|
|
|
27
|
|
Treasury stock, $0.001 par value; 31 and 8 shares at
December 31, 2006 and 2007, respectively, at cost
|
|
|
(2
|
)
|
|
|
(1
|
)
|
Additional paid-in capital
|
|
|
188,334
|
|
|
|
191,570
|
|
Accumulated other comprehensive income (loss)
|
|
|
(7
|
)
|
|
|
96
|
|
Accumulated deficit
|
|
|
(116,980
|
)
|
|
|
(109,288
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
71,372
|
|
|
|
82,404
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
135,561
|
|
|
$
|
94,690
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
F-3
REPLIDYNE,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
Revenue
|
|
$
|
441
|
|
|
$
|
15,988
|
|
|
$
|
58,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
29,180
|
|
|
|
38,295
|
|
|
|
43,313
|
|
Sales, general and administrative
|
|
|
5,329
|
|
|
|
12,187
|
|
|
|
13,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
34,509
|
|
|
|
50,482
|
|
|
|
56,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(34,068
|
)
|
|
|
(34,494
|
)
|
|
|
2,238
|
|
Investment income, net
|
|
|
722
|
|
|
|
5,953
|
|
|
|
5,535
|
|
Interest expense
|
|
|
(100
|
)
|
|
|
(14
|
)
|
|
|
|
|
Other expense, net
|
|
|
(223
|
)
|
|
|
(694
|
)
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(33,669
|
)
|
|
|
(29,249
|
)
|
|
|
7,692
|
|
Preferred stock dividends and accretion
|
|
|
(7,191
|
)
|
|
|
(5,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(40,860
|
)
|
|
$
|
(34,640
|
)
|
|
$
|
7,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders per
share basic
|
|
$
|
(39.20
|
)
|
|
$
|
(2.49
|
)
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders per
share diluted
|
|
$
|
(39.20
|
)
|
|
$
|
(2.49
|
)
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
1,042
|
|
|
|
13,908
|
|
|
|
26,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
1,042
|
|
|
|
13,908
|
|
|
|
27,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity (Deficit)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Series A Redeemable
|
|
|
Series B Convertible
|
|
|
Series C Redeemable
|
|
|
Series D Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Convertible Preferred Stock
|
|
|
Preferred Stock
|
|
|
Convertible Preferred Stock
|
|
|
Convertible Preferred Stock
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-In
|
|
|
Stock-Based
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
Balances, January 1, 2005
|
|
|
13,000
|
|
|
$
|
15,886
|
|
|
|
4,000
|
|
|
$
|
5,630
|
|
|
|
36,800
|
|
|
$
|
47,931
|
|
|
|
|
|
|
$
|
|
|
|
|
790
|
|
|
$
|
1
|
|
|
|
(31
|
)
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
|
(7
|
)
|
|
|
41
|
|
|
$
|
(42,235
|
)
|
|
$
|
(42,202
|
)
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,108
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
291
|
|
Issuance of Series D redeemable, convertible preferred
stock in August 2005 for cash, net of issuance costs of $2,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,722
|
|
|
|
60,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation related to stock option grants to an
employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Stock-based compensation related to stock option grants to
non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Reclassification of warrants on redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(345
|
)
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
(357
|
)
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Accretion of offering costs on redeemable preferred stock
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(207
|
)
|
|
|
(207
|
)
|
Non-cash dividends on preferred stock
|
|
|
|
|
|
|
1,040
|
|
|
|
|
|
|
|
400
|
|
|
|
|
|
|
|
3,680
|
|
|
|
|
|
|
|
1,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,984
|
)
|
|
|
(6,984
|
)
|
Realized gain on available-for-sale equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
(41
|
)
|
Unrealized gain on available-for-sale equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
479
|
|
|
|
|
|
|
|
479
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,669
|
)
|
|
|
(33,669
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005
|
|
|
13,000
|
|
|
|
16,940
|
|
|
|
4,000
|
|
|
|
6,030
|
|
|
|
36,800
|
|
|
|
51,635
|
|
|
|
34,722
|
|
|
|
62,210
|
|
|
|
1,898
|
|
|
|
2
|
|
|
|
(31
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
479
|
|
|
|
(83,107
|
)
|
|
|
(82,632
|
)
|
Issuance of Series C preferred stock upon exercise of stock
purchase warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
Reclassification of warrants on redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
446
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221
|
|
Issuance of common stock in initial public offering, net of
offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,006
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
44,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,539
|
|
Changes in restricted stock, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
Reclassification of deferred stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense related to options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,180
|
|
Accretion of offering costs on redeemable preferred stock
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(246
|
)
|
Non-cash dividends on preferred stock
|
|
|
|
|
|
|
528
|
|
|
|
|
|
|
|
203
|
|
|
|
|
|
|
|
1,873
|
|
|
|
|
|
|
|
2,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(522
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,624
|
)
|
|
|
(5,146
|
)
|
Conversion of preferred stock into common stock upon initial
public offering
|
|
|
(13,000
|
)
|
|
$
|
(12,930
|
)
|
|
|
(4,000
|
)
|
|
$
|
(5,000
|
)
|
|
|
(36,880
|
)
|
|
|
(45,980
|
)
|
|
|
(34,722
|
)
|
|
|
(60,578
|
)
|
|
|
18,067
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
124,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,488
|
|
Settlement of accrued dividends on preferred stock with common
stock upon initial public offering
|
|
|
|
|
|
|
(4,543
|
)
|
|
|
|
|
|
|
(1,233
|
)
|
|
|
|
|
|
|
(7,637
|
)
|
|
|
|
|
|
|
(4,404
|
)
|
|
|
1,782
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
17,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,819
|
|
Reversal of unrealized gain on available-for-sale equity
securities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(486
|
)
|
|
|
|
|
|
|
(486
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,249
|
)
|
|
|
(29,249
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
27,010
|
|
|
$
|
27
|
|
|
|
(31
|
)
|
|
$
|
(2
|
)
|
|
$
|
188,334
|
|
|
$
|
|
|
|
$
|
(7
|
)
|
|
$
|
(116,980
|
)
|
|
$
|
71,372
|
|
(continued)
See notes to financial statements.
F-5
REPLIDYNE,
INC.
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT), PREFERRED
STOCK, AND
COMPREHENSIVE INCOME (LOSS) (Continued)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity (Deficit)
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
Series A Redeemable
|
|
|
Series B Convertible
|
|
|
Series C Redeemable
|
|
|
Series D Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
Stockholders
|
|
|
|
Convertible Preferred Stock
|
|
|
Preferred Stock
|
|
|
Convertible Preferred Stock
|
|
|
Convertible Preferred Stock
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-In
|
|
|
Stock-Based
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
Balances, December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
27,010
|
|
|
$
|
27
|
|
|
|
(31
|
)
|
|
$
|
(2
|
)
|
|
$
|
188,334
|
|
|
$
|
|
|
|
|
(7
|
)
|
|
$
|
(116,980
|
)
|
|
$
|
71,372
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
Release of restrictions on restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
|
|
Vested shares of restricted stock returned to the company for
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
Return of unvested restricted stock by employee upon termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense related to options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,784
|
|
Issuance of restricted stock to an employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale equity securities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
103
|
|
Retirement of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
58
|
|
|
|
9
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,692
|
|
|
|
7,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,085
|
|
|
$
|
27
|
|
|
|
(8
|
)
|
|
|
(1
|
)
|
|
$
|
191,570
|
|
|
$
|
|
|
|
$
|
96
|
|
|
$
|
(109,288
|
)
|
|
$
|
82,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
F-6
REPLIDYNE,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(33,669
|
)
|
|
$
|
(29,249
|
)
|
|
$
|
7,692
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,258
|
|
|
|
1,418
|
|
|
|
1,474
|
|
Stock-based compensation
|
|
|
58
|
|
|
|
1,180
|
|
|
|
2,784
|
|
Amortization of debt discount and issuance costs
|
|
|
35
|
|
|
|
9
|
|
|
|
|
|
Amortization of discounts and premiums on short-term investments
|
|
|
(469
|
)
|
|
|
(744
|
)
|
|
|
779
|
|
Other
|
|
|
28
|
|
|
|
105
|
|
|
|
15
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from Forest Laboratories
|
|
|
|
|
|
|
(4,634
|
)
|
|
|
4,634
|
|
Prepaid expenses and other current assets
|
|
|
(182
|
)
|
|
|
(1,695
|
)
|
|
|
(349
|
)
|
Other assets
|
|
|
(288
|
)
|
|
|
150
|
|
|
|
21
|
|
Accounts payable and accrued expenses
|
|
|
6,996
|
|
|
|
(518
|
)
|
|
|
4,435
|
|
Deferred revenue
|
|
|
(307
|
)
|
|
|
56,175
|
|
|
|
(56,175
|
)
|
Other long-term liabilities
|
|
|
81
|
|
|
|
(25
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(26,459
|
)
|
|
|
22,172
|
|
|
|
(34,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments classified as
available-for-sale
|
|
|
(157,281
|
)
|
|
|
(169,827
|
)
|
|
|
(26,803
|
)
|
Purchases of short-term investments classified as
held-to-maturity
|
|
|
|
|
|
|
(60,854
|
)
|
|
|
(74,870
|
)
|
Maturities of short-term investments classified as
available-for-sale
|
|
|
125,500
|
|
|
|
147,504
|
|
|
|
59,489
|
|
Maturities of short-term investments classified as
held-to-maturity
|
|
|
|
|
|
|
36,916
|
|
|
|
96,686
|
|
Proceeds from sale of property and equipment
|
|
|
1
|
|
|
|
45
|
|
|
|
7
|
|
Acquisitions of property and equipment
|
|
|
(1,570
|
)
|
|
|
(1,214
|
)
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(33,350
|
)
|
|
|
(47,430
|
)
|
|
|
54,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
|
|
(1,173
|
)
|
|
|
(169
|
)
|
|
|
|
|
Proceeds from issuance of common stock from the exercise of
stock options and under the employee stock purchase plan
|
|
|
291
|
|
|
|
397
|
|
|
|
346
|
|
Proceeds from repayment of principal on notes receivable from
officers
|
|
|
|
|
|
|
356
|
|
|
|
|
|
Proceeds from exercise of preferred stock warrants
|
|
|
|
|
|
|
100
|
|
|
|
|
|
Proceeds from sale of common stock from initial public offering,
net of underwriters discount and offering costs
|
|
|
|
|
|
|
44,539
|
|
|
|
|
|
Bank overdraft
|
|
|
227
|
|
|
|
(227
|
)
|
|
|
|
|
Purchase of unvested restricted stock from employees upon
termination
|
|
|
|
|
|
|
|
|
|
|
(30
|
)
|
Proceeds from sale of Series D redeemable convertible
preferred stock, net
|
|
|
60,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
59,522
|
|
|
|
44,996
|
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(287
|
)
|
|
|
19,738
|
|
|
|
19,878
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
4,640
|
|
|
|
4,353
|
|
|
|
24,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
4,353
|
|
|
$
|
24,091
|
|
|
$
|
43,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
75
|
|
|
$
|
15
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable issued to officers for the exercise of stock
options
|
|
$
|
356
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of warrants from accrued liabilities to equity
|
|
$
|
|
|
|
$
|
629
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
F-7
REPLIDYNE,
INC.
|
|
1.
|
Business
and Organization
|
Replidyne, Inc. (Replidyne or the Company) is a
biopharmaceutical company focused on discovering, developing,
in-licensing and commercializing anti-infective products. The
Companys most advanced product candidate, faropenem
medoxomil, is a novel oral community antibiotic for which the
Company submitted a New Drug Application (NDA) with the
U.S. Food and Drug Administration (FDA) in December 2005
for treatment of acute bacterial sinusitis, community-acquired
pneumonia, acute exacerbation of chronic bronchitis, and
uncomplicated skin and skin structure infections in adults. In
October 2006, the FDA issued a non-approvable letter for the
NDA. According to the non-approvable letter, the FDA recommends
further clinical studies for all indications included in the
NDA, additional microbiologic confirmation and consideration of
alternate dosing of faropenem medoxomil.
The Companys research and development product pipeline
also includes REP3123, an investigational
narrow-spectrum
antibacterial agent for the treatment of Clostridium
difficile (C. difficile) bacteria and
C. difficile-associated disease (CDAD), and its
bacterial DNA replication inhibitor technology. Additionally,
the Company had also been developing REP8839, a topical
antibiotic for the treatment of skin and wound infections,
including methicillin-resistant Staphylococcus aureus
(MRSA) infections. As a result of prioritizing its
preclinical programs in December 2007, the Company suspended the
development of REP8839 due to the incremental investment
required to optimize the formulation and the niche market
opportunity for its initial indication of treating impetigo.
In February 2006, the Company entered into a collaboration and
commercialization agreement with Forest Laboratories Holding
Limited (Forest Laboratories) for the commercialization,
development and distribution of faropenem medoxomil in the
U.S. Under this agreement, in 2006 the Company received
nonrefundable upfront and milestone payments of $60 million
and during the term of the agreement received $14.6 million
of contract revenue from funded activities related to the
development of faropenem medoxomil. On May 7, 2007, the
collaboration and commercialization agreement with Forest
Laboratories terminated. As a result, the Company reacquired all
rights to faropenem medoxomil previously granted to Forest
Laboratories and recognized as revenue in 2007 all remaining
unamortized deferred revenue under this agreement totaling
$55 million.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Accounting Estimates in the Preparation of Financial
Statements. The preparation of financial
statements in conformity with accounting principles generally
accepted in the U.S. requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period.
Actual results could differ from these estimates.
Cash and Cash Equivalents. The Company
considers all highly liquid investments purchased with
maturities of 90 days or less when acquired to be cash
equivalents. Cash equivalents are carried at amortized cost,
which approximates fair value.
Short-Term Investments. Short-term investments
are investments purchased with maturities of longer than
90 days held at a financial institution. At
December 31, 2007, contractual original maturities of the
Companys short-term investments were less than two years
for investments classified as available-for-sale and less than
one year for investments classified as held-to-maturity. At
December 31, 2007, the current weighted average days to
maturity was approximately thirteen months for investments
classified as available-for-sale and approximately two months
for investments classified as held-to-maturity.
Management determines the classification of securities at
purchase based on its intent. In accordance with
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, the Company classifies its
securities as held-to-maturity or available-for-sale.
Held-to-maturity securities are those which the Company has the
positive intent and ability to hold to maturity and are reported
at amortized cost. Available-for-sale securities are those the
Company may decide to sell if needed for liquidity,
asset/liability management, or other reasons.
F-8
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Available-for-sale securities are recorded at estimated fair
value. The estimated fair value amounts are determined by the
Company using available market information. Unrealized holding
gains and losses on available-for-sale securities are excluded
from earnings and are reported as a separate component of other
comprehensive income or loss until realized. Cost is adjusted
for amortization of premiums and accretion of discounts from the
date of purchase to maturity. Such amortization is included in
investment income and other. Realized gains and losses and
declines in value judged to be other than temporary on
available-for-sale securities are also included in investment
income and other. The cost of securities sold is based on the
specific-identification method. A decline in the market value of
any available-for-sale security below cost that is deemed to be
other than temporary results in a reduction in carrying amount
to fair value. The impairment is charged to earnings and a new
cost basis for the security is established. To determine whether
an impairment is other than temporary, the Company considers
whether it has the ability and intent to hold the investment
until a market price recovery and considers whether evidence
indicating the cost of the investment is recoverable outweighs
evidence to the contrary. Evidence considered in this assessment
includes the reasons for the impairment, the severity and
duration of the impairment, changes in value subsequent to
period end, and forecasted performance of the investee. No
impairments were recorded as a result of this analysis during
2005, 2006 or 2007. The Companys investments were
classified as follows at December 31, 2006 and 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Available-for-sale securities recorded at fair value
|
|
$
|
49,525
|
|
|
$
|
16,213
|
|
Held-to-maturity securities recorded at amortized
cost
|
|
|
51,951
|
|
|
|
30,084
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
101,476
|
|
|
$
|
46,297
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the types of short-term
investments classified as available-for-sale securities (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2007
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
U.S. government agencies
|
|
$
|
40,599
|
|
|
$
|
40,601
|
|
|
$
|
3,998
|
|
|
$
|
4,005
|
|
U.S. bank and corporate notes
|
|
|
8,933
|
|
|
|
8,924
|
|
|
|
12,119
|
|
|
|
12,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,532
|
|
|
$
|
49,525
|
|
|
$
|
16,117
|
|
|
$
|
16,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains and losses on available-for-sale
securities as of December 31, 2006 were $5 thousand and $12
thousand, respectively. Unrealized holding gains and losses on
available-for-sale securities as of December 31, 2007 were
$0.1 million and $7 thousand, respectively. Net unrealized
holding gains or losses are recorded in accumulated other
comprehensive income or loss.
The following is a summary of short-term investments classified
as held-to-maturity securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2007
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
U.S. bank and corporate notes
|
|
$
|
42,962
|
|
|
$
|
42,951
|
|
|
$
|
30,084
|
|
|
$
|
30,091
|
|
U.S. government agencies
|
|
$
|
8,989
|
|
|
$
|
8,985
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,951
|
|
|
$
|
51,936
|
|
|
$
|
30,084
|
|
|
$
|
30,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains and losses on held-to-maturity
investments as of December 31, 2006 were $3 thousand and
$18 thousand, respectively. Unrealized holding gains and losses
on held-to-maturity investments as of December 31, 2007
were $10 thousand and $3 thousand, respectively.
F-9
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Concentrations of Credit Risk. Financial
instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents and short-term investments. The Company has
established guidelines to limit its exposure to credit risk by
placing investments with high credit quality financial
institutions, diversifying its investment portfolio, and making
investments with maturities that maintain safety and liquidity.
Property and Equipment. Property and equipment
are recorded at cost, less accumulated depreciation and
amortization. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally
three to seven years. Leasehold improvements are amortized over
the shorter of the life of the lease or the estimated useful
life of the assets. Repairs and maintenance costs are expensed
as incurred.
Long-Lived Assets and Impairments. The Company
periodically evaluates the recoverability of its long-lived
assets in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, and, if
appropriate, reduces the carrying value whenever events or
changes in business conditions indicate the carrying amount of
the assets may not be fully recoverable. SFAS No. 144
requires recognition of impairment of long-lived assets in the
event the net book value of such assets exceeds the fair value
less costs to sell such assets. The Company has not yet
generated positive cash flows from operations on a sustained
basis, and such cash flows may not materialize for a significant
period in the future, if ever. Additionally, the Company may
make changes to its business plan that will result in changes to
the expected cash flows from long-lived assets. As a result, it
is reasonably possible that future evaluations of long-lived
assets may result in impairment.
Accrued Expenses. As part of the process of
preparing its financial statements, the Company is required to
estimate accrued expenses. This process involves identifying
services that third parties have performed on the Companys
behalf and estimating the level of service performed and the
associated cost incurred on these services as of each balance
sheet date in the Companys financial statements. Examples
of estimated accrued expenses include contract service fees,
such as amounts due to clinical research organizations,
professional service fees, such as attorneys and independent
accountants, and investigators in conjunction with preclinical
and clinical trials, and fees payable to contract manufacturers
in connection with the production of materials related to
product candidates. Estimates are most affected by the
Companys understanding of the status and timing of
services provided relative to the actual level of services
incurred by the service providers. The date on which certain
services commence, the level of services performed on or before
a given date, and the cost of services is often subject to
judgment. Additionally, the Company is a party to agreements
which include provisions that require payments to the
counterparty under certain circumstances. The Company develops
estimates of liabilities using its judgment based upon the facts
and circumstances known and accounts for these estimates in
accordance with accounting principles involving accrued expenses
generally accepted in the U.S.
Segments. The Company operates in one segment.
Management uses one measure of profitability and does not
segment its business for internal reporting purposes.
Share-Based Compensation. Effective
January 1, 2006, the Company adopted
SFAS No. 123(R), Share-Based Payment, using the
prospective method of transition. Under that transition method,
compensation cost recognized after adoption includes:
(a) compensation costs for all share-based payments granted
prior to January 1, 2006, based on the intrinsic value
method prescribed by Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees,
and (b) compensation cost for all share-based payments
granted or modified subsequent to January 1, 2006, based on
the grant date fair value estimated in accordance with the
provisions of SFAS No. 123(R).
The Company selected the Black-Scholes option pricing model as
the most appropriate valuation method for option grants with
service
and/or
performance conditions. The Black-Scholes model requires inputs
for risk-free interest rate, dividend yield, volatility and
expected lives of the options. Since the Company has a limited
history of stock activity, expected volatility is based on
historical data from several public companies similar in size
and nature of operations to the Company. The Company will
continue to use historical volatility and other similar public
entity volatility information until its historical volatility is
relevant to measure expected volatility for future option
grants. The Company estimates the forfeiture rate based on
historical data. Based on an analysis of historical forfeitures,
the
F-10
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Company applied an annual forfeiture rate of 6.97% during 2006
and applied an annual forfeiture rate of 4.48% during 2007. The
forfeiture rate is re-evaluated on a quarterly basis. The
risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect
at the time of the grant for a period commensurate with the
expected term of the grant. The expected term (without regard to
forfeitures) for options granted represents the period of time
that options granted are expected to be outstanding and is
derived from the contractual terms of the options granted and
historical option exercise behaviors.
For certain options granted during 2006, the Company estimated
the fair value of option grants as of the date of grant using
the Black-Scholes option pricing model with the following
weighted average assumptions. Expected volatility was estimated
to be 75%. The weighted average risk-free interest rate was
4.58%, and the dividend yield was 0.00%. The weighted average
expected lives for each individual vesting tranche under the
graded vesting attribution method discussed below was estimated
to be 2.18 years.
For options granted during 2007, the Company estimated the fair
value of option grants as of the date of grant using the
Black-Scholes option pricing model with the following weighted
average assumptions. Expected volatility was estimated to be
75%. The weighted average risk-free interest rate was 4.46%, and
the dividend yield was 0.00%. The weighted average expected
lives for each individual vesting tranche under the graded
vesting attribution method discussed below was estimated to be
3.05 years.
During 2006, the Company also issued options which vest over the
earlier to be achieved service or market condition. In
determining the estimated fair value of these option awards on
the date of grant, the Company elected to use a binomial lattice
option pricing model together with Monte Carlo simulation
techniques using the following weighted average assumptions
during 2006: risk-free interest rate of 5.08%, expected dividend
yield of 0%, expected volatility of 75%, forfeiture rate of
6.97%, suboptimal exercise factor of 2, and post-vesting exit
rate of 6.97%. An expected life of 7.01 years was derived
from the model.
The lattice model requires inputs for risk-free interest rate,
dividend yield, volatility, contract term, average vesting
period, post-vest exit rate and suboptimal exercise factor. Both
the fair value and expected life are outputs from the model. The
risk-free interest rate was determined based on the yield
available on U.S. Treasury Securities over the life of the
option. The dividend yield and volatility factor was determined
in the same manner as described above for the Black-Scholes
model. The lattice model assumes that employees exercise
behavior is a function of the options remaining vested
life and the extent to which the option is in-the-money. The
lattice model estimates the probability of exercise as a
function of the suboptimal exercise factor and the post-vesting
exit rate. The suboptimal exercise factor and post-vesting exit
rate were based on actual historical exercise behavior.
The Company had a choice of two attribution methods for
allocating compensation costs under SFAS No. 123(R):
the straight-line method, which allocates expense on
a straight-line basis over the requisite service period of the
last separately vesting portion of an award, or the graded
vesting attribution method, which allocates expense on a
straight-line basis over the requisite service period for each
separately vesting portion of the award as if the award was, in
substance, multiple awards. The Company chose the graded vesting
attribution method and accordingly, amortizes the fair value of
each option over each options vesting period (requisite
service period).
Employee stock options granted by the Company are generally
structured to qualify as incentive stock options
(ISOs). Under current tax regulations, the Company does not
receive a tax deduction for the issuance, exercise or
disposition of ISOs if the employee meets certain holding
requirements. If the employee does not meet the holding
requirements, a disqualifying disposition occurs, at which time
the Company will receive a tax deduction. The Company does not
record tax benefits related to ISOs unless and until a
disqualifying disposition occurs. In the event of a
disqualifying disposition, the entire tax benefit is recorded as
a reduction of income tax expense. The Company has not
recognized any income tax benefit or related tax asset for
share-based compensation arrangements as the Company does not
believe, based on its history of operating losses, that it is
more likely than not it will realize any future tax benefit from
such compensation cost recognized since inception of the Company.
Under SFAS 123(R), the estimated fair value of share-based
compensation, including stock options granted under the
Companys Equity Incentive Plan and discounted purchases of
common stock by employees under the
F-11
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Employee Stock Purchase Plan, is recognized as compensation
expense. The estimated fair value of stock options is expensed
over the requisite service period as discussed above.
Compensation expense under the Companys Employee Stock
Purchase Plan is calculated based on participant elected
contributions and estimated fair values of the common stock and
the purchase discount at the date of the offering. See
Note 10 for further information on share-based compensation
under these plans. Share-based compensation included in the
Companys statement of operations was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Research and development
|
|
$
|
58
|
|
|
$
|
385
|
|
|
$
|
1,234
|
|
Sales, general and administrative
|
|
|
|
|
|
|
795
|
|
|
|
1,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58
|
|
|
$
|
1,180
|
|
|
$
|
2,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 123(R) was applied only to awards granted or
modified after the required effective date of January 1,
2006. Awards granted prior to the Companys implementation
of SFAS No. 123(R) are accounted for under the
recognition and measurement provisions of APB Opinion
No. 25 and related interpretations.
Stock-Based Compensation under APB
No. 25. Prior to January 1, 2006, the
Company applied the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees,
and related interpretations, including Financial Accounting
Standards Board (FASB) Interpretation No. 44, Accounting
for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25, in accounting for
its employee stock options. Under this method, compensation
expense is generally recorded on the date of grant only if the
estimated fair value of the underlying stock exceeds the
exercise price. Given the absence of an active market for the
Companys common stock prior to its initial public
offering, the board of directors historically determined the
estimated fair value of common stock on the dates of grant based
on several factors, including progress against regulatory,
clinical and product development milestones; sales of redeemable
convertible preferred stock and the related liquidation
preference associated with such preferred stock; progress toward
establishing a collaborative development and commercialization
partnership for faropenem medoxomil; changes in valuation of
comparable publicly-traded companies; overall equity market
conditions; and the likelihood of achieving a liquidity event
such as an initial public offering or sale of the Company. The
Company also considered the guidance set forth in the American
Institute of Certified Public Accountants Practice Guide,
Valuation of Privately Held-Company Equity Securities Issued
As Compensation. In addition, the Company obtained
independent valuations of its common stock at September,
November and December 2005. These independent valuations
supported the fair value of the Companys common stock
established by the board of directors in 2005. Based on these
factors, during 2005 the Company valued its common stock and set
exercises prices for common stock options at each date of grant
within the range of $0.61 to $1.32 per share.
SFAS No. 123, Accounting for Stock-Based
Compensation, and SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure,
an amendment of FASB Statement No. 123, established
accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation
plans. As permitted by existing accounting standards, the
Company elected to continue to apply the intrinsic-value-based
method of accounting described above, for options granted
through December 31, 2005. The following table illustrates
the effect on net loss as if the fair-value-based method had
been applied to all outstanding and unvested
F-12
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
awards in the year ended December 31, 2005, prior to the
adoption of SFAS 123(R), on January 1, 2006 (in
thousands, except per share data):
|
|
|
|
|
Net loss attributable to common stockholders, as reported
|
|
$
|
(40,860
|
)
|
Add: stock-based employee compensation expense included in
reported net loss attributable to common stockholders
|
|
|
57
|
|
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards
|
|
|
(98
|
)
|
|
|
|
|
|
Pro forma net loss attributable to common stockholders
|
|
$
|
(40,901
|
)
|
|
|
|
|
|
Net loss attributable to common stockholders per
share basic and diluted, as reported
|
|
$
|
(39.20
|
)
|
|
|
|
|
|
Pro forma net loss attributable to common stockholders per
share basic and diluted
|
|
$
|
(39.24
|
)
|
|
|
|
|
|
Prior to January 1, 2006, the fair value of each employee
stock option award was estimated on the date of grant based on
the minimum value method using the Black-Scholes option pricing
valuation model. For options granted during 2005, the Company
used the following weighted average assumptions: weighted
average risk-free interest rate of 4.19%; dividend yield of
0.00%; expected life of 5 years and volatility, under the
minimum value method, of .0001%.
Clinical Trial Expenses. The Company records
clinical trial expenses based on estimates of the services
received and efforts expended pursuant to contracts with
clinical research organizations (CROs) and other third party
vendors associated with its clinical trials. The Company
contracts with third parties to perform a range of clinical
trial activities in the ongoing development of its product
candidates. The terms of these agreements vary and may result in
uneven payments. Payments under these contracts depend on
factors such as the achievement of certain defined milestones,
the successful enrollment of patients and other events. The
objective of the Companys clinical trial accrual policy is
to match the recording of expenses in its financial statements
to the actual services received and efforts expended. In doing
so, the Company relies on information from CROs and its clinical
operations group regarding the status of its clinical trials to
calculate the accrual for clinical expenses at the end of each
reporting period.
Net Income (Loss) Per Share. Net income (loss)
per share is computed using the weighted average number of
shares of common stock outstanding and is presented for basic
and diluted net income (loss) per share. Basic net income (loss)
per share is computed by dividing net income (loss) attributable
to common stockholders by the weighted average number of common
shares outstanding during the period, excluding common stock
subject to vesting provisions. Diluted net income (loss) per
share is computed by dividing net income (loss) attributable to
common stockholders by the weighted average number of common
shares outstanding during the period increased to include, if
dilutive, the number of additional common shares that would have
been outstanding if the potential common shares had been issued
or restrictions lifted on restricted stock. The dilutive effect
of common stock equivalents such as outstanding stock options,
warrants and restricted stock is reflected in diluted net income
(loss) per share by application of the treasury stock method.
F-13
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted net income (loss) per share (amounts in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(33,669
|
)
|
|
$
|
(29,249
|
)
|
|
$
|
7,692
|
|
Preferred stock dividends and accretion
|
|
|
(7,191
|
)
|
|
|
(5,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(40,860
|
)
|
|
$
|
(34,640
|
)
|
|
$
|
7,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, excluding unvested
restricted stock
|
|
|
1,042
|
|
|
|
13,908
|
|
|
|
26,730
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
|
|
|
1,042
|
|
|
|
13,908
|
|
|
|
27,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) earnings per share
|
|
$
|
(39.20
|
)
|
|
$
|
(2.49
|
)
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) earnings per share
|
|
$
|
(39.20
|
)
|
|
$
|
(2.49
|
)
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities representing approximately
19.4 million, 2.5 million and 1.5 million shares
of common stock for the years ended December 31, 2005, 2006
and 2007, respectively, were excluded from the computation of
diluted earnings per share for these periods because their
effect would have been antidilutive. Potentially dilutive
securities include stock options, warrants, shares to be
purchased under the employee stock purchase plan, restricted
stock and shares which would be issued under convertible
preferred stock.
Fair Value of Financial Instruments. The
carrying amounts of financial instruments, including cash and
cash equivalents, receivables from Forest Laboratories, and
accounts payable approximate fair value due to their short-term
maturities.
Revenue Recognition. The Companys
commercial collaboration agreements can contain multiple
elements, including nonrefundable upfront fees, payments for
reimbursement of research costs, payments for ongoing research,
payments associated with achieving specific milestones and
royalties based on specified percentages of net product sales,
if any. The Company applies the revenue recognition criteria
outlined in Emerging Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21),
in accounting for upfront and milestone payments under the
agreement. In applying the revenue recognition criteria within
EITF 00-21,
the Company considers a variety of factors in determining the
appropriate method of revenue recognition under these
arrangements, such as whether the elements are separable,
whether there are determinable fair values and whether there is
a unique earnings process associated with each element of a
contract.
Where the Company does not believe that an upfront fee or
milestone payment is specifically tied to a separate earnings
process, revenues are recognized ratably over the estimated term
of the agreement. When the Companys obligations under such
arrangements are completed, any remaining deferred revenue is
recognized.
Payments received by the Company for the reimbursement of
expenses for research, development and commercial activities
under commercial collaboration and commercialization agreements
are recorded in accordance with EITF Issue
99-19,
Reporting Revenue Gross as Principal Versus Net as an Agent
(EITF 99-19).
Per EITF 99-19,
in transactions where the Company acts as principal, with
discretion to choose suppliers, bears credit risk and performs a
substantive part of the services, revenue is recorded at the
gross amount of the reimbursement. Costs associated with these
reimbursements are reflected as a component of operating
expenses in the Companys statements of operations.
F-14
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Research and Development. Research and
development costs are expensed as incurred. These costs consist
primarily of salaries and benefits, licenses to technology,
supplies and contract services relating to the development of
new products and technologies, allocated overhead, clinical
trial and related clinical manufacturing costs, and other
external costs.
The Company is currently producing clinical and commercial grade
product in its facilities and through third parties. Prior to
filing for regulatory approval of its products for commercial
sale, and such approval being assessed as probable, these costs
are expensed as incurred to research and development.
Comprehensive Income (Loss). The Company
applies the provisions of SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for
reporting comprehensive income or loss and its components in
financial statements. The Companys comprehensive income
(loss) is comprised of its net income or loss and unrealized
gains and losses on securities available-for-sale. For the years
ended December 31, 2005 and 2006, the Company reported
comprehensive losses of $33.2 million and
$29.7 million, respectively, and for the year ended
December 31, 2007 comprehensive income was
$7.8 million.
Income Taxes. The Company accounts for income
taxes pursuant to SFAS No. 109, Accounting for
Income Taxes, which requires the use of the asset and
liability method of accounting for deferred income taxes.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. A valuation
allowance is recorded to the extent it is more likely than not
that a deferred tax asset will not be realized. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in operations in the period that
includes the enactment date.
Based on an analysis of historical equity transactions under the
provisions of Section 382 of the Internal Revenue Code, the
Company believes that ownership changes have occurred at two
points since its inception. These ownership changes limit the
annual utilization of the Companys net operating losses in
future periods. The Company does not believe that these
ownership changes will result in the loss of any of its net
operating loss carryforwards existing on the date of each
ownership change. The Companys only significant deferred
tax assets are its net operating loss carryforwards. The Company
has provided a valuation allowance for its entire net deferred
tax asset since its inception as, due to uncertainty as to
future utilization of its net operating loss carryforwards, due
primarily to its history of operating losses, the Company has
concluded that it is more likely than not that its deferred tax
asset will not be realized.
FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes An Interpretation of
FASB Statement No. 109, defines a recognition threshold
and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. At the
adoption date of January 1, 2007, the Company had no
unrecognized tax benefits which would affect its effective tax
rate if recognized. At December 31, 2007, the Company has
no unrecognized tax benefits. The Company classifies interest
and penalties arising from the underpayment of income taxes in
the statements of operations as general and administrative
expenses. As of December 31, 2007, the Company has no
accrued interest or penalties related to uncertain tax
positions. The tax years 2003 to 2006 federal returns remain
open to examination, and the tax years 2002 to 2006 remain open
to examination by other taxing jurisdictions to which we are
subject.
Recent Accounting Pronouncements. In September
2006, the FASB issued Statement of Financial Accounting Standard
(SFAS) No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value in applying
generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 applies
whenever an entity is measuring fair value under other
accounting pronouncements that require or permit fair value
measurement. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007,
but the FASB provided a one year deferral for implementation of
F-15
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
the standard for non-financial assets and liabilities. The
Company does not expect that the adoption of SFAS 157 will
have a material impact on its financial statements.
In June 2007, the FASB ratified EITF Issue
No. 07-03,
Accounting for Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities
(EITF 07-03).
The scope of
EITF 07-03
is limited to nonrefundable advance payments for goods and
services to be used or rendered in future research and
development activities pursuant to an executory contractual
arrangement. This issue provides that nonrefundable advance
payments for goods or services that will be used or rendered for
future research and development activities should be deferred
and capitalized. Such amounts should be recognized as an expense
as the related goods are delivered or the related services are
performed. The Company will be required to adopt
EITF 07-03
for new contracts entered into in 2008. The Company does not
expect that the adoption of
EITF 07-03
will have a material impact on its financial statements.
In December 2007, the FASB ratified EITF Issue
No. 07-01,
Accounting for Collaborative Arrangements
(EITF 07-01).
EITF 07-01
defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a
collaborative arrangement and between participants in the
arrangement and third parties.
EITF 07-01
also establishes the appropriate income statement presentation
and classification for joint operating activities and payments
between participants, as well as disclosures related to these
arrangements.
EITF 07-01
is effective for fiscal years beginning after December 15,
2008. The Company does not expect that the adoption of
EITF 07-01
will have a material impact on its financial statements.
|
|
3.
|
Property
and Equipment
|
Property and equipment at December 31, 2006 and 2007
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Equipment
|
|
$
|
4,760
|
|
|
$
|
5,011
|
|
Furniture and fixtures
|
|
|
820
|
|
|
|
700
|
|
Leasehold improvements
|
|
|
2,195
|
|
|
|
2,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,775
|
|
|
|
7,931
|
|
Less accumulated depreciation and amortization
|
|
|
(4,605
|
)
|
|
|
(6,026
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
3,170
|
|
|
$
|
1,905
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2005, 2006 and 2007
depreciation and amortization expense was $1.3 million,
$1.4 million and $1.5 million, respectively.
|
|
4.
|
Agreement
with Forest Laboratories Holdings Limited
|
In February 2006, the Company entered into a collaboration and
commercialization agreement with Forest Laboratories for the
commercialization, development and distribution of faropenem
medoxomil in the U.S. In October 2006, the Company received
a non-approvable letter from the FDA for the NDA it submitted
for faropenem medoxomil in December 2005. According to the
non-approvable letter, the FDA recommended further clinical
studies for all indications included in the NDA, additional
microbiologic confirmation and consideration of alternate dosing
of faropenem medoxomil. In May 2007, the collaboration and
commercialization agreement with Forest Laboratories was
terminated. In accordance with the terms of the agreement,
following the termination, all of Forest Laboratories
rights and licenses with respect to faropenem medoxomil have
ceased.
The Company received $60 million in upfront and milestone
payments from Forest Laboratories in 2006, which the Company was
recognizing into revenue through 2020, the then estimated term
of the agreement. Effective May 7, 2007, the termination
date of the agreement with Forest Laboratories, the Company
recognized all remaining deferred revenue related to the upfront
and milestone payments of approximately $55 million.
F-16
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
5.
|
Accounts
Payable and Accrued Expenses
|
Accounts payable and accrued expenses at December 31, 2006
and 2007 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Accounts payable trade
|
|
$
|
3,223
|
|
|
$
|
4,553
|
|
Accrued employee compensation
|
|
|
1,313
|
|
|
|
2,692
|
|
Accrued clinical trial costs
|
|
|
894
|
|
|
|
1,227
|
|
Accrued contingent supply agreement fees
|
|
|
882
|
|
|
|
2,641
|
|
Other accrued expenses
|
|
|
1,645
|
|
|
|
1,142
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,957
|
|
|
$
|
12,255
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Commitments
and Contingencies
|
Operating Leases. The Company has entered into
a 74-month
sub-lease agreement for its Colorado corporate office and
laboratory facility and a
60-month
lease agreement for its Connecticut office facility. These lease
agreements include rent concessions and escalating rent payments
throughout the term of the lease. The rent expense related to
these leases is recorded monthly on a straight-line basis in
accordance with U.S. generally accepted accounting
principles. Additionally, the Company received leasehold
incentives which have been recorded as a deferred credit and are
being amortized monthly on a straight-line basis to rent expense
over the term of the lease.
At December 31, 2007, future minimum lease payments under
the Companys noncancelable operating leases are as follows
(in thousands):
|
|
|
|
|
For the Year Ending December 31,
|
|
|
|
|
2008
|
|
$
|
737
|
|
2009
|
|
|
779
|
|
2010
|
|
|
729
|
|
2011
|
|
|
514
|
|
Total Future Minimum Lease Payments
|
|
$
|
2,759
|
|
During the years ended December 31, 2005, 2006 and 2007 the
Company recognized $0.6 million, $0.6 million and
$0.7 million in rent expense, respectively.
Indemnifications. The Company has agreements
whereby it indemnifies directors and officers for certain events
or occurrences while the director or officer is, or was, serving
in such capacity at the Companys request. The maximum
potential amount of future payments the Company could be
required to make under these indemnification agreements is
unlimited.
Employment Agreements. The Company has entered
into employment agreements with its chief executive officer and
other named executive officers that provide for base salary,
eligibility for bonuses and other generally available benefits.
The employment agreements provide that the Company may terminate
the named executive officer employment at any time with or
without cause. If a named executive officer is terminated by the
Company without cause or such officer resigns for good reason,
then the named executive officer is entitled to receive a
severance package consisting of salary continuation for a period
of twelve months from the date of termination among other
benefits. If such termination occurs one month before or
thirteen months following a change of control, then the
executive is entitled to salary continuation for a period of
twelve months (or eighteen months with respect to
Mr. Collins and Dr. Janjic) from the date of
termination and acceleration of vesting of all of the
executives outstanding unvested options to purchase the
Companys common stock among other benefits. In addition,
during 2007 the Company established a severance benefit plan
that defines termination benefits for all eligible employees,
F-17
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
as defined, not under an employment contract, if the employee is
terminated without cause. Under this plan, employees whose
employment is terminated without cause are provided a severance
benefit of between nine and eighteen weeks pay, based on grade
level, plus an additional two weeks pay for each year of service.
Asubio Pharma License Agreement. In 2004, the
Company entered into a license agreement with Asubio Pharma Co.,
Ltd., or Asubio Pharma to develop and commercialize faropenem
medoxomil in the U.S. and Canada for adult and pediatric
use, which was amended as to certain terms in 2006. The Company
has an exclusive option to license rights to faropenem medoxomil
for the rest of the world excluding Japan. The Company bears the
cost of and manages development, regulatory approvals and
commercialization efforts. Asubio Pharma is entitled to upfront
fees, milestone payments and royalties.
In consideration for the license, in 2003 and 2004 the Company
paid Asubio Pharma an initial license fee of
¥400 million ($3.8 million). In December 2005,
the Company submitted its first NDA for adult use of faropenem
medoxomil and, at that time, recorded an accrual in the amount
of ¥250 million ($2.1 million) for the first
milestone due to Asubio Pharma under this agreement. This amount
was expensed to research and development in 2005 and paid in
2006. In February 2006, this milestone payment was increased to
¥375 million (approximately $3.2 million). The
increased milestone amount of ¥125 million
($1.1 million) was accounted for as research and
development expense in the quarter ended March 31, 2006
when the modified terms of the license were finalized. Under the
modified license agreement the Company is further obligated to
make future payments of up to ¥375 million
(approximately $3.3 million at December 31,
2007) upon filing of an NDA at a higher dose and up to
¥1,250 million (approximately $11.1 million at
December 31, 2007) in subsequent regulatory and
commercial milestone payments for faropenem medoxomil. If it is
determined that the Company has ceased development or
commercialization of faropenem medoxomil as defined, or the
Company terminates its license agreement with Asubio Pharma, it
will be obligated to pay a termination fee of up to
¥375 million (approximately $3.3 million as of
December 31, 2007). Additionally, the Company is
responsible for royalty payments to Asubio Pharma based upon net
sales of faropenem medoxomil. The license term extends to the
later of: (i) the expiration of the last to expire of the
licensed patents owned or controlled by Asubio Pharma or
(ii) 12 years after the first commercial launch of
faropenem medoxomil. The Company has recorded payments made to
date as research and development expense, as faropenem medoxomil
has not been approved by the FDA.
Asubio Pharma and Nippon Soda Supply
Agreement. Under a supply agreement entered into
in December 2004 between Asubio Pharma, Nippon Soda Company
Ltd., or Nippon Soda, and the Company, the Company is obligated
to purchase, and Nippon Soda is obligated to supply, all of the
Companys commercial requirements of the active
pharmaceutical ingredient in faropenem medoxomil for the
U.S. and Canadian markets. During the three years
following placement of an initial purchase order by the Company,
which has not occurred, with Nippon Soda, the Company becomes
obligated to make certain annual minimum purchases of drug
substance to be determined initially by the Company and Nippon
Soda at the time of a commercial launch. Since full commercial
launch of faropenem medoxomil has been delayed, the Company is
currently obligated to pay Nippon Soda escalating annual delay
compensation fees of up to ¥280 million (approximately
$2.5 million as of December 31, 2007) per year,
which commenced on July 1, 2007. As a result of the
non-approvable letter the Company received from the FDA in
October 2006 and subsequent activities related to the
development of faropenem medoxomil, the Company recorded delay
compensation fees of $0.9 million in the year ended
December 31, 2007 and delay compensation fees of
$0.9 million and an initial order cancellation fee of
$0.6 million in the year ended December 31, 2006.
These amounts were recorded as research and development expense.
If commercial launch of faropenem medoxomil is further delayed
or if the Company is unable to obtain a collaboration partner
for faropenem medoxomil under its current expected timeframe,
the Company may incur additional delay compensation fees of up
to ¥105 million ($0.9 million as of
December 31, 2007) for 2008 and up to
¥280 million annually ($2.5 million as of
December 31, 2007) for all periods following
January 1, 2009. If the Company terminates this agreement,
abandons the development or commercialization of faropenem
medoxomil or is unable to notify Nippon Soda of the faropenem
medoxomil launch go date, as defined, by July 1, 2009, the
Company will be obligated to pay Nippon Soda prorated delay
compensation fees through the effective date of termination and
reimburse Nippon Soda for up to ¥65 million
($0.6 million as of December 31, 2007) in
engineering costs. As of December 31, 2007, the Company
F-18
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
has accrued $1.9 million in delay compensation under this
agreement, $0.9 million of which is based upon the
Companys expectations as to the timing of activities
related to the faropenem medoxomil program. The Company
continues to evaluate amounts which may become payable to Asubio
Pharma and Nippon Soda under the terms of the agreement, and
adjusts its accrual accordingly.
MEDA Supply Agreement. In 2005, the Company
and MEDA Manufacturing GmbH (formerly Tropon GmbH), or MEDA,
entered into a supply agreement for production of 300 mg
adult tablets of faropenem medoxomil, which was amended as to
certain terms in 2006. Beginning in 2006, the Company became
obligated to make annual minimum purchases of 300 mg adult
tablets from MEDA of 2.3 million (approximately
$3.4 million at December 31, 2007). If in any year the
Company did not satisfy its minimum purchase commitments, the
Company was required to pay MEDA the shortfall amount. Fifty
percent (50%) of the shortfall amount, if applicable, may be
credited against future drug product purchases. The Company was
required to buy all of its requirements for 300 mg adult
oral faropenem medoxomil tablets from MEDA until cumulative
purchases exceed 22 million (approximately
$32.4 million at December 31, 2007). The agreement
provided that, upon termination, up to 1.7 million
(approximately $2.5 million at December 31,
2007) would be payable for decontamination fees.
This agreement was amended in March 2006 such that the
Companys obligations with respect to all purchase
commitments and facility decontamination costs were suspended
and deemed satisfied by Forest Laboratories pursuant to an
agreement between MEDA and Forest Laboratories. Under its
agreement with Forest Laboratories, the Company remained liable
for any shortfall amount in 2006 that may not have been credited
against future drug product purchases. In 2006, the Company
incurred $1.5 million relating to its portion of the 2006
shortfall in minimum purchases under these agreements. The
amount was accounted for as research and development expense in
2006. In May 2007, concurrent with Forest Laboratories
termination of its supply agreements with MEDA, the previously
suspended provisions in the Companys agreements with MEDA
were no longer suspended, and the Companys obligations
with respect to purchase commitments and facility
decontamination costs were no longer waived. In April 2007, the
Company provided notice to MEDA of its termination of the supply
agreement in accordance with the termination provisions of the
agreement as future clinical development of faropenem medoxomil
adult tablets would use 600 mg dosing. As this notice
occurred before the termination date of the Companys
collaboration agreement with Forest Laboratories, the Company
believes that Forest Laboratories, under the terms of the
collaboration agreement, was responsible for supply chain
obligations related to faropenem medoxomil, including minimum
purchase commitments and decontamination obligations under the
MEDA agreement, through May 7, 2007 (the term of the
collaboration agreement). At December 31, 2007, the Company
accrued for minimum purchase fees and interest through date of
termination of its agreement with MEDA. MEDA has indicated that
it disputes the Companys right to terminate the agreement
on the basis indicated in its notice of termination. The Company
believes that it terminated the agreement in accordance with its
terms. If it is determined that the Company has obligations to
MEDA beyond May 7, 2007 under the agreement, then
additional costs may be incurred which may include additional
amounts for minimum future drug purchases that were not made and
for decontamination of MEDAs facility.
Other. The Company entered into an arrangement
with an investment bank to assist the Company in identifying a
licensing partner for its faropenem medoxomil program and to
provide other investment banking services. Under the terms of
the agreement, the Company may incur transaction fees of up to
$6 million based on the value of a license or strategic
transaction as defined.
During the fourth quarter of 2007, the Company announced plans
to restructure its operations to align critical resources with
strategic priorities. As a result, the Company reduced its
headcount, primarily in the administrative, clinical, commercial
and regulatory functions. The aggregate charge to the
Companys net earnings to restructure its operations was
$1.4 million. The restructuring costs related primarily to
employee severance and benefits which are expected to be paid in
2008. All expenses are recorded as operating expenses in the
Companys statement of operations for the year ended
December 31, 2007.
F-19
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
8.
|
Employee
Benefit Plans
|
The Company has a 401(k) plan and matches an amount equal to
50 percent of the employees current contributions,
limited to $2 thousand per participant annually. The Company
commenced its matching contribution program in 2006 and
contributed $0.1 million during each of the years ended
December 31, 2006 and 2007.
The Companys Certificate of Incorporation, as amended and
restated on July 3, 2006, authorizes the Company to issue
105,000,000 shares of $0.001 par value stock which is
comprised of 100,000,000 shares of common stock and
5,000,000 shares of preferred stock. Each share of common
stock is entitled to one vote on each matter properly submitted
to the stockholders of the Company for their vote. The holders
of common stock are entitled to receive dividends when and as
declared or paid by the board of directors, subject to prior
rights of the Preferred Stockholders, if any.
Common Stock Warrants. In connection with the
issuance of debt and convertible notes in 2002 and 2003, the
Company issued warrants to certain lenders and investors to
purchase shares of the Companys then outstanding
redeemable convertible preferred stock. The warrants were
initially recorded as liabilities at their fair value. In July
2006, upon completion of the Companys initial public
offering, all outstanding preferred stock warrants were
automatically converted into common stock warrants and
reclassified to equity at the then current fair value. As of
December 31, 2006 and 2007, warrants for the purchase of
53,012 shares of common stock were outstanding and
exercisable with exercise prices ranging from $4.90 to $6.13 per
share.
|
|
10.
|
Share-Based
Compensation
|
Stock Option Plan. The Companys Equity
Incentive Plan, as amended (the Option Plan), provides for
issuances of up to 7,946,405 shares of common stock for
stock option grants. Options granted under the Option Plan may
be either incentive or nonqualified stock options. Incentive
stock options may only be granted to Company employees,
including its officers. Nonqualified stock options may be
granted to Company employees, which include its officers,
directors, and consultants to the Company. Generally, options
granted under the Option Plan expire ten years from the date of
grant and vest over four years: 25% on the first anniversary
from the grant date and ratably in equal monthly installments
over the remaining 36 months. This plan is considered a
compensatory plan and subject to the provisions of
SFAS No. 123(R).
Stock options outstanding at December 31, 2007, changes
during the year then ended and options exercisable at
December 31, 2007 are presented below (share amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic Value
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
(In millions)
|
|
|
Options outstanding at January 1, 2007
|
|
|
2,068
|
|
|
$
|
4.10
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,150
|
|
|
|
5.36
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(52
|
)
|
|
|
1.23
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(286
|
)
|
|
|
6.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2007
|
|
|
2,880
|
|
|
|
4.42
|
|
|
|
8.37
|
|
|
$
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2007
|
|
|
823
|
|
|
$
|
3.56
|
|
|
|
7.75
|
|
|
$
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Additional information regarding outstanding common stock
options as of December 31, 2007 is presented below (in
thousands, except for exercise price and weighted average data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Exercise Price
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
$ 0.49
|
|
|
21
|
|
|
|
5.03
|
|
|
$
|
0.49
|
|
|
|
21
|
|
|
$
|
0.49
|
|
0.61
|
|
|
413
|
|
|
|
7.08
|
|
|
|
0.61
|
|
|
|
270
|
|
|
|
0.61
|
|
1.32
|
|
|
37
|
|
|
|
7.77
|
|
|
|
1.32
|
|
|
|
23
|
|
|
|
1.32
|
|
3.19
|
|
|
861
|
|
|
|
8.05
|
|
|
|
3.19
|
|
|
|
273
|
|
|
|
3.19
|
|
5.20
|
|
|
172
|
|
|
|
8.19
|
|
|
|
5.20
|
|
|
|
80
|
|
|
|
5.20
|
|
5.35
|
|
|
907
|
|
|
|
9.18
|
|
|
|
5.35
|
|
|
|
|
|
|
|
|
|
5.40
|
|
|
10
|
|
|
|
9.58
|
|
|
|
5.40
|
|
|
|
|
|
|
|
|
|
5.46
|
|
|
57
|
|
|
|
9.36
|
|
|
|
5.46
|
|
|
|
|
|
|
|
|
|
5.54
|
|
|
27
|
|
|
|
9.36
|
|
|
|
5.54
|
|
|
|
|
|
|
|
|
|
6.11
|
|
|
5
|
|
|
|
9.79
|
|
|
|
6.11
|
|
|
|
|
|
|
|
|
|
6.18
|
|
|
32
|
|
|
|
8.96
|
|
|
|
6.18
|
|
|
|
8
|
|
|
|
6.18
|
|
8.97
|
|
|
141
|
|
|
|
8.37
|
|
|
|
8.97
|
|
|
|
64
|
|
|
|
8.97
|
|
9.00
|
|
|
20
|
|
|
|
8.76
|
|
|
|
9.00
|
|
|
|
8
|
|
|
|
9.00
|
|
9.38
|
|
|
16
|
|
|
|
8.78
|
|
|
|
9.38
|
|
|
|
5
|
|
|
|
9.38
|
|
9.51
|
|
|
10
|
|
|
|
8.79
|
|
|
|
9.51
|
|
|
|
4
|
|
|
|
9.51
|
|
9.64
|
|
|
50
|
|
|
|
8.79
|
|
|
|
9.64
|
|
|
|
14
|
|
|
|
9.64
|
|
9.82
|
|
|
1
|
|
|
|
8.69
|
|
|
|
9.82
|
|
|
|
1
|
|
|
|
9.82
|
|
10.00
|
|
|
93
|
|
|
|
8.51
|
|
|
|
10.00
|
|
|
|
45
|
|
|
|
10.00
|
|
10.03
|
|
|
7
|
|
|
|
8.62
|
|
|
|
10.03
|
|
|
|
7
|
|
|
|
10.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,880
|
|
|
|
|
|
|
|
4.42
|
|
|
|
823
|
|
|
|
3.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted
during the years ended December 31, 2005, 2006 and 2007 was
$0.15, $2.52 and $2.75 per share, respectively. The total
intrinsic value of options exercised during 2005, 2006 and 2007
was $0.2 million, $0.5 million, and $0.2 million,
respectively.
Restricted Shares of Common
Stock. Historically, the Company had granted
options for shares of common stock that were eligible to be
exercised prior to vesting, provided that the shares issued upon
such exercise are subject to restrictions which will be released
consistent with the original option vesting period. In the event
of termination of the service of an employee, the Company may
repurchase all unvested shares from the optionee at the original
issue price. Options granted under the Option Plan expire no
later than 10 years from the date of grant.
A summary of the changes in these restricted shares of common
stock during 2007 is presented below (in thousands):
|
|
|
|
|
Restricted, non-vested shares outstanding at December 31,
2006
|
|
|
400
|
|
Shares vested upon release of restrictions
|
|
|
(151
|
)
|
Restricted stock repurchased upon termination
|
|
|
(26
|
)
|
|
|
|
|
|
Restricted, non-vested shares outstanding at December 31,
2007
|
|
|
223
|
|
|
|
|
|
|
As of December 31, 2007, restrictions on approximately
145,000 of these shares will be released at an accelerated rate
if an NDA for faropenem medoxomil is approved by the FDA.
F-21
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Stock Based Compensation Stock
Options. During the years ended December 31,
2005, 2006 and 2007, the Company recognized $0.1 million,
$1.1 million and $2.6 million of stock based
compensation for employee awards, respectively. As of
December 31, 2007, the Company had $2.6 million of
total unrecognized compensation costs (net of expected
forfeitures) from options granted under the Option Plan to be
recognized over a weighted average remaining period of
approximately 1.77 years.
Employee Stock Purchase Plan. The Company has
reserved 305,872 shares of common stock for issuance under
its Employee Stock Purchase Plan (the Purchase Plan). The
Purchase Plan allows eligible employees to purchase common stock
of the Company at the lesser of 85% of its market value on the
offering date or the purchase date as established by the Board
of Directors. Employee purchases are funded through after-tax
payroll deductions, which participants can elect from one
percent to twenty percent of compensation, subject to the
federal limit. The Purchase Plan is considered a compensatory
plan and subject to the provisions of SFAS No. 123(R).
To date, 111,679 shares have been issued pursuant to the
Purchase Plan. During the years ended December 31, 2006 and
2007, the Company recognized $39 thousand and $0.2 million
in share-based compensation expense under
SFAS No. 123(R) related to the Purchase Plan,
respectively.
SFAS No. 109 requires that a valuation allowance be
provided if it is more likely than not that some portion or all
of the Companys deferred tax assets will not be realized.
The Companys ability to realize the benefit of its
deferred tax assets will depend on the generation of future
taxable income through profitable operations. Due to the
uncertainty of future profitable operations, the Company has
recorded a full valuation allowance against its net deferred tax
assets.
The Company has had no provision for income taxes since
inception due to its net operating losses.
The income tax effects of temporary differences that give rise
to significant portions of the Companys net deferred tax
assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
36,702
|
|
|
$
|
32,632
|
|
Research and experimentation credits
|
|
|
2,383
|
|
|
|
4,540
|
|
Depreciation and amortization
|
|
|
455
|
|
|
|
681
|
|
Accrued expenses and other
|
|
|
505
|
|
|
|
739
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
40,045
|
|
|
|
38,592
|
|
Valuation allowance
|
|
|
(40,045
|
)
|
|
|
(38,592
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The benefit for income taxes differs from the amount computed by
applying the United States of America federal income tax rate of
35% to the loss before income taxes as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
U.S. federal income tax benefit at statutory rates
|
|
$
|
(11,784
|
)
|
|
$
|
(10,237
|
)
|
|
$
|
2,692
|
|
State income tax benefit, net of federal impact
|
|
|
(1,094
|
)
|
|
|
(951
|
)
|
|
|
250
|
|
Non-deductible expenses
|
|
|
39
|
|
|
|
235
|
|
|
|
588
|
|
Research and experimentation credits
|
|
|
(905
|
)
|
|
|
(940
|
)
|
|
|
(2,157
|
)
|
Other items
|
|
|
12
|
|
|
|
69
|
|
|
|
81
|
|
Change in valuation allowance
|
|
|
13,732
|
|
|
|
11,824
|
|
|
|
(1,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
REPLIDYNE,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
At December 31, 2007, the Company had approximately
$85 million of net operating loss carryforwards and
approximately $4.5 million of research and experimentation
credits which may be used to offset future taxable income. The
carryforwards will expire in 2020 through 2027. The Internal
Revenue Code places certain limitations on the annual amount of
net operating loss carryforwards that can be utilized if certain
changes in the Companys ownership occur. The Company
believes, based on an analysis of historical equity transactions
under the provisions of Section 382, that ownership changes
have in fact occurred at two points since its inception. These
ownership changes will limit the annual utilization of the
Companys net operating losses in future periods. The
Company does not believe, however, that these ownership changes
will result in the loss of any of its net operating loss
carryforwards existing on the date of the ownership changes.
|
|
12.
|
Selected
Quarterly Financial Data (unaudited)
|
The following is a summary of the quarterly results of
operations for the years ended December 31, 2006 and 2007
(unaudited, in thousands, except for income (loss) per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Net
|
|
|
Diluted Net
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
Income (Loss)
|
|
|
Income (Loss)
|
|
|
|
|
|
|
|
|
|
(Loss)
|
|
|
Attributable to
|
|
|
Attributable to
|
|
|
|
|
|
|
|
|
|
Attributable to
|
|
|
Common
|
|
|
Common
|
|
|
|
|
|
|
Net Income
|
|
|
Common
|
|
|
Stockholders
|
|
|
Stockholders
|
|
|
|
Revenue
|
|
|
(Loss)
|
|
|
Stockholders
|
|
|
per Share
|
|
|
per Share
|
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
2,877
|
|
|
$
|
(7,702
|
)
|
|
$
|
(10,355
|
)
|
|
$
|
(7.21
|
)
|
|
$
|
(7.21
|
)
|
Second quarter
|
|
|
4,045
|
|
|
|
(6,208
|
)
|
|
|
(8,862
|
)
|
|
|
(5.79
|
)
|
|
|
(5.79
|
)
|
Third quarter
|
|
|
3,679
|
|
|
|
(5,722
|
)
|
|
|
(5,806
|
)
|
|
|
(0.23
|
)
|
|
|
(0.23
|
)
|
Fourth quarter
|
|
|
5,387
|
|
|
|
(9,617
|
)
|
|
|
(9,617
|
)
|
|
|
(0.36
|
)
|
|
|
(0.36
|
)
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
2,925
|
|
|
$
|
(8,552
|
)
|
|
$
|
(8,552
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(0.32
|
)
|
Second quarter
|
|
|
55,646
|
|
|
|
45,490
|
|
|
|
45,490
|
|
|
|
1.71
|
|
|
|
1.65
|
|
Third quarter
|
|
|
|
|
|
|
(12,303
|
)
|
|
|
(12,303
|
)
|
|
|
(0.46
|
)
|
|
|
(0.46
|
)
|
Fourth quarter
|
|
|
|
|
|
|
(16,943
|
)
|
|
|
(16,943
|
)
|
|
|
(0.63
|
)
|
|
|
(0.63
|
)
|
On January 22, 2008, the Company received a Warning Letter
from the FDA. The Warning Letter was issued pursuant to the
completion of the FDAs review of clinical trials performed
in connection with the December 2005 NDA filed by the Company in
support of faropenem medoxomil 300 mg tablets twice per day
dose, in respect of which the FDA issued a non-approvable letter
in October 2006. The Company intends to respond to the Warning
Letter within the time limits required by the FDA.
F-23
Replidyne,
Inc.
Index to
Unaudited Financial Statements
For the Three and Nine Months Ended September 30, 2007 and
2008
F-24
REPLIDYNE,
INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except par value)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
43,969
|
|
|
$
|
32,059
|
|
Short-term investments
|
|
|
46,297
|
|
|
|
18,532
|
|
Prepaid expenses and other current assets
|
|
|
2,429
|
|
|
|
1,187
|
|
Property and equipment held for sale
|
|
|
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
92,695
|
|
|
|
51,909
|
|
Property and equipment, net
|
|
|
1,905
|
|
|
|
133
|
|
Other assets
|
|
|
90
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
94,690
|
|
|
$
|
52,112
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
12,255
|
|
|
$
|
6,875
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
12,255
|
|
|
|
6,875
|
|
Other long-term liabilities
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
12,286
|
|
|
|
6,875
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 5)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value. Authorized
100,000 shares; issued 27,085 and 27,159 shares;
outstanding 27,077 and 27,118 shares at December 31,
2007 and September 30, 2008, respectively
|
|
|
27
|
|
|
|
27
|
|
Treasury stock, $0.001 par value; 8 and 41 shares at
December 31, 2007 and September 30, 2008,
respectively, at cost
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Additional paid-in capital
|
|
|
191,570
|
|
|
|
192,090
|
|
Accumulated other comprehensive income
|
|
|
96
|
|
|
|
12
|
|
Accumulated deficit
|
|
|
(109,288
|
)
|
|
|
(146,891
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
82,404
|
|
|
|
45,237
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
94,690
|
|
|
$
|
52,112
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
financial statements.
F-25
REPLIDYNE,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
58,571
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
10,651
|
|
|
|
4,780
|
|
|
|
28,462
|
|
|
|
26,842
|
|
Sales, general and administrative
|
|
|
2,988
|
|
|
|
5,671
|
|
|
|
9,803
|
|
|
|
12,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
13,639
|
|
|
|
10,451
|
|
|
|
38,265
|
|
|
|
39,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(13,639
|
)
|
|
|
(10,451
|
)
|
|
|
20,306
|
|
|
|
(39,132
|
)
|
Investment income and other, net
|
|
|
1,336
|
|
|
|
537
|
|
|
|
4,329
|
|
|
|
1,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(12,303
|
)
|
|
$
|
(9,914
|
)
|
|
$
|
24,635
|
|
|
$
|
(37,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic
|
|
$
|
(0.46
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
0.92
|
|
|
$
|
(1.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share diluted
|
|
$
|
(0.46
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
0.89
|
|
|
$
|
(1.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
26,780
|
|
|
|
27,082
|
|
|
|
26,696
|
|
|
|
27,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
26,780
|
|
|
|
27,082
|
|
|
|
27,666
|
|
|
|
27,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
financial statements.
F-26
REPLIDYNE,
INC.
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
24,635
|
|
|
$
|
(37,603
|
)
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,190
|
|
|
|
797
|
|
Share-based compensation
|
|
|
2,135
|
|
|
|
345
|
|
Discounts and premiums on short-term investments
|
|
|
614
|
|
|
|
171
|
|
Impairment of short-term investments
|
|
|
|
|
|
|
236
|
|
Loss on sale, disposition or impairment of property and equipment
|
|
|
|
|
|
|
839
|
|
Other
|
|
|
13
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivable from Forest Laboratories
|
|
|
4,634
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
(844
|
)
|
|
|
1,262
|
|
Accounts payable and accrued expenses
|
|
|
441
|
|
|
|
(5,245
|
)
|
Deferred revenue
|
|
|
(56,176
|
)
|
|
|
|
|
Other long-term liabilities
|
|
|
(19
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(23,377
|
)
|
|
|
(39,229
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of short-term investments classified as
available-for-sale
|
|
|
(19,172
|
)
|
|
|
(7,923
|
)
|
Purchases of short-term investments classified as
held-to-maturity
|
|
|
(64,840
|
)
|
|
|
(1,453
|
)
|
Maturities of short-term investments classified as
available-for-sale
|
|
|
53,747
|
|
|
|
5,124
|
|
Maturities of short-term investments classified as
held-to-maturity
|
|
|
69,304
|
|
|
|
31,526
|
|
Acquisitions of property and equipment
|
|
|
(171
|
)
|
|
|
(3
|
)
|
Proceeds from sale of property and equipment
|
|
|
7
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
38,875
|
|
|
|
27,277
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock from the exercise of
stock options
|
|
|
61
|
|
|
|
27
|
|
Proceeds from issuance of common stock under the employee stock
purchase plan
|
|
|
225
|
|
|
|
32
|
|
Purchase of unvested restricted stock from employees
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
286
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
15,784
|
|
|
|
(11,910
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
24,091
|
|
|
|
43,969
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
39,875
|
|
|
$
|
32,059
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
financial statements.
F-27
REPLIDYNE,
INC.
(unaudited)
|
|
1.
|
Nature of
Business and Proposed Transaction
|
Replidyne, Inc. (Replidyne or the Company) has previously
announced that it was reviewing a range of strategic
alternatives that could result in potential changes to the
Companys current business strategy and future operations.
As a result of its strategic alternatives process, on
November 3, 2008, the Company entered into an Agreement and
Plan of Merger and Reorganization (Merger Agreement) with
Cardiovascular Systems, Inc. (CSI). Pursuant to the terms of the
Merger Agreement, a wholly owned subsidiary of the Company will
be merged with and into CSI (Merger), with CSI continuing after
the Merger as the surviving corporation.
The Company and CSI are targeting a closing of the Merger in the
first quarter of 2009. Upon the terms and subject to the
conditions set forth in the Merger Agreement, the Company will
issue, and holders of CSI capital stock will receive, shares of
common stock of the Company, such that following the
consummation of the transactions contemplated by the Merger
Agreement, current stockholders of the Company, together with
holders of Company options and warrants, are expected to own
between 16.3% and 17.0% of the common stock of the combined
company and current CSI stockholders, together with holders of
CSI options and warrants, are expected to own or have the right
to acquire between 83.0% and 83.7% of the common stock of the
combined company, in each case assuming that the Companys
net assets at closing are between $35.0 and $37.0 million
as calculated in accordance with the terms of the Merger
Agreement, on a fully diluted basis using the treasury stock
method of accounting for options and warrants.
Subject to the terms of the Merger Agreement, upon consummation
of the transactions contemplated by the Merger Agreement, at the
effective time of the Merger, each share of CSI common stock
issued and outstanding immediately prior to the Merger will be
canceled, extinguished and automatically converted into the
right to receive that number of shares of the Company common
stock as determined pursuant to the exchange ratio described in
the Merger Agreement. In addition, the Company will assume
options and warrants to purchase shares of CSI common stock
which will become exercisable for shares of the Companys
common stock, adjusted in accordance with the same exchange
ratio. The exchange ratio will be based on the number of
outstanding shares of capital stock of the Company and CSI, and
any outstanding options and warrants to purchase shares of
capital stock of the Company and CSI, and the Companys net
assets, in each case calculated in accordance with the terms of
the Merger Agreement as of immediately prior to the effective
time of the Merger, and will not be calculated until such time.
Following consummation of the Merger, the Company will be
renamed Cardiovascular Systems, Inc. and its headquarters will
be located in St. Paul, Minnesota, at CSIs headquarters.
The Company has agreed to appoint directors designated by CSI to
the Companys Board of Directors, specified current
directors of the Company will resign from the Board of Directors
and the Company will appoint new officers designated by CSI.
Consummation of the Merger is subject to closing conditions,
including among other things, (i) the filing by the Company
with the Securities and Exchange Commission (SEC) of a
registration statement with respect to the registration of the
shares of Company common stock to be issued in the Merger and a
declaration of its effectiveness by the SEC, (ii) approval
and adoption of the Merger Agreement and Merger by the requisite
vote of the stockholders of CSI, (iii) approval of the
issuance of shares of Company common stock in connection with
the Merger and approval of the certificate of amendment
effecting a reverse stock split by the requisite vote of Company
stockholders; and (iv) conditional approval for the listing
of Company common stock to be issued in the Merger on the Nasdaq
Global Market.
The Merger Agreement contains certain termination rights for
both the Company and CSI, and further provides that, upon
termination of the Merger Agreement under specified
circumstances, the Company or CSI may be required to pay the
other party a termination fee of $1.5 million plus
reimbursement to the applicable party of all actual
out-of-pocket legal, accounting and investment advisory fees
paid or payable by such party in connection with the Merger
Agreement and the transactions contemplated thereby.
If the Merger Agreement is terminated and the Company determines
to seek another business combination, the Company may not be
able to find a third party willing to provide equivalent or more
attractive consideration than the
F-28
REPLIDYNE,
INC.
NOTES TO
CONDENSED FINANCIAL
STATEMENTS (Continued)
consideration to be provided in the proposed Merger with CSI. In
such circumstances, the Companys board of directors may
elect to, among other things, take the steps necessary to
liquidate the Companys business and assets. In the case of
a liquidation, the consideration that the Company might receive
may be less attractive than the consideration to be received by
the Company and its stockholders pursuant to the Merger with CSI.
In August 2008, in connection with a restructuring of the
Companys workforce that will result in its headcount being
reduced to six employees by October 31, 2008, the Company
suspended the development of its lead product candidate REP3123,
an investigational narrow-spectrum antibacterial agent for the
treatment of Clostridium difficile ( C. difficile
) bacteria and C. difficile infection (CDI) and
its other novel anti-infective programs based on its bacterial
DNA replication inhibition technology. The Company is pursuing
the sale of REP3123 and its related technology and the sale of
anti-infective programs based on the Companys bacterial
DNA replication inhibition technology in a transaction or
transactions separate from the Merger. The Company had
previously devoted substantially all of its clinical development
and research and development efforts and a material portion of
its financial resources toward the development of faropenem
medoxomil, REP3123, its DNA replication inhibition technology
and other product candidates. The Company has no product
candidates currently in active clinical or pre-clinical
development.
Unaudited
Interim Financial Statements
The condensed balance sheet as of September 30, 2008,
condensed statements of operations for the three and nine months
ended September 30, 2007 and 2008, and cash flows for the
nine months ended September 30, 2007 and 2008 and related
disclosures, respectively, have been prepared by the Company,
without an audit, in accordance with generally accepted
accounting principles for interim information. Accordingly, they
do not contain all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. All disclosures for the three and nine months ended
September 30, 2007 and 2008 and as of September 30,
2008 and, presented in the notes to the condensed financial
statements are unaudited. In the opinion of management, all
adjustments, which include only normal recurring adjustments,
considered necessary to present fairly results of operations for
the three and nine months ended September 30, 2007 and
2008, the financial condition as of September 30, 2008 and
cash flows for the nine months ended September 30, 2007 and
2008 have been made. These interim results of operations for the
three and nine months ended September 30, 2008 are not
indicative of the results that may be expected for the full year
ended December 31, 2008. The December 31, 2007 balance
sheet and related disclosures were derived from the
Companys audited financial statements.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue
and expenses during the reporting period. Actual results could
differ from these estimates.
Fair
Value of Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 157,
Fair Value Measurements (SFAS 157) establishes
a fair value hierarchy that requires companies to maximize the
use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. SFAS 157s valuation
techniques are based on observable and unobservable inputs.
Observable inputs reflect readily obtainable data from
independent sources, while unobservable inputs reflect the
Companys market assumptions. SFAS 157 classifies
these inputs into the following hierarchy:
|
|
|
|
|
Level 1 Inputs quoted prices in active
markets for identical assets and liabilities
|
|
|
|
Level 2 Inputs observable inputs other
than quoted prices in active markets for identical assets and
liabilities
|
F-29
REPLIDYNE,
INC.
NOTES TO
CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Level 3 Inputs unobservable inputs
|
As of September 30, 2008, those assets and liabilities that
are measured at fair value on a recurring basis consisted of the
Companys short-term securities it classifies as
available-for-sale. The Company believes that the carrying
amounts of its other financial instruments, including cash and
cash equivalents and accounts payable and accrued expenses,
approximate their fair value due to the short-term maturities of
these instruments.
The following table sets forth the fair value of our financial
assets that were measured on a recurring basis as of
September 30, 2008. Assets are measured on a recurring
basis if they are remeasured at least annually (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
|
Money market funds
|
|
$
|
3,602
|
|
|
$
|
|
|
|
$
|
3,602
|
|
Commercial paper
|
|
|
|
|
|
|
19,399
|
|
|
|
19,399
|
|
U.S. bank and corporate notes
|
|
|
|
|
|
|
12,659
|
|
|
|
12,659
|
|
U.S. government agencies
|
|
|
|
|
|
|
9,872
|
|
|
|
9,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,602
|
|
|
$
|
41,930
|
|
|
$
|
45,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
The Company considers all highly liquid investments purchased
with initial maturities of three months or less to be cash
equivalents. Cash equivalents are carried at amortized cost,
which approximates market value.
Short-Term
Investments
Short-term investments are investments with a maturity of more
than three months when purchased. At September 30, 2008,
initial contractual maturities of the Companys short-term
investments were less than two years. At September 30,
2008, the weighted average days to maturity was less than ten
months.
Management determines the classification of securities in
accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, at
purchase based on its intent. The Company classifies its
marketable equity and debt securities into one of two
categories: held-to-maturity or available-for-sale.
Held-to-maturity securities are those debt securities which the
Company has the positive intent and ability to hold to maturity
and are reported at amortized cost. Those securities not
classified as held-to maturity are considered
available-for-sale. These securities are recorded at estimated
fair value with unrealized gains and losses excluded from
earnings and reported as a separate component of other
comprehensive loss until realized. Cost is adjusted for
amortization of premiums and accretion of discounts from the
date of purchase to maturity. Such amortization is included in
investment income and other.
Unrealized losses are charged against Investment income
and other, net when a decline in fair value is determined
to be other-than-temporary. In accordance with FASB Staff
Position
FAS 115-1
and
FAS 124-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, the Company
reviews several factors to determine whether a loss is
other-than-temporary. These factors include but are not limited
to: (i) the extent to which the fair value is less than
cost and the cause for the fair value decline, (ii) the
financial condition and near term prospects of the issuer,
(iii) the length of time a security is in an unrealized
loss position and (iv) the Companys ability to hold
the security for a period of time sufficient to allow for any
anticipated recovery in fair value.
If the estimated fair value of a security is below its carrying
value, the Company evaluates whether it has the intent and
ability to retain its investment for a period of time sufficient
to allow for any anticipated recovery in market value and
whether evidence indicating that the cost of the investment is
recoverable within a reasonable period of time outweighs
evidence to the contrary. If the impairment is considered to be
other-than-temporary, the security is written down to its
estimated fair value. Other-than-temporary declines in estimated
fair value of all marketable securities are charged to
investment income and other, net. The cost of all
securities sold is based on
F-30
REPLIDYNE,
INC.
NOTES TO
CONDENSED FINANCIAL
STATEMENTS (Continued)
the specific identification method. The Company recognized no
charges during the three and nine months ended
September 30, 2007 and a charge of $0.3 million during
the corresponding periods in 2008 related to
other-than-temporary declines in the estimated fair values of
certain of the Companys marketable equity and debt
securities.
The following table sets forth the classification of the
Companys investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Available-for-sale securities recorded at fair value
|
|
$
|
16,213
|
|
|
$
|
18,532
|
|
Held-to-maturity securities recorded at amortized
cost
|
|
|
30,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
46,297
|
|
|
$
|
18,532
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the types of short-term
investments the Company has classified as available-for-sale
securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
September 30, 2008
|
|
|
|
Amortized
|
|
|
Estimated Fair
|
|
|
Amortized
|
|
|
Estimated Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
U.S. government agencies
|
|
$
|
3,998
|
|
|
$
|
4,005
|
|
|
$
|
12,644
|
|
|
$
|
12,659
|
|
U.S. bank and corporate notes
|
|
|
12,119
|
|
|
|
12,208
|
|
|
|
5,877
|
|
|
|
5,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,117
|
|
|
$
|
16,213
|
|
|
$
|
18,521
|
|
|
$
|
18,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains and losses on available-for-sale
securities as of December 31, 2007 were $0.1 million
and $7 thousand, respectively. Unrealized holding gains and
losses on available-for-sale securities as of September 30,
2008 were $33 thousand and $11 thousand, respectively. The
Company recognized an other-than-temporary impairment charge of
$0.3 million during the three and nine months ended
September 30, 2008 and has reclassified this amount from
accumulated other comprehensive income to
investment income and other, net.
The following is a summary of short-term investments classified
as held-to-maturity securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
September 30, 2008
|
|
|
|
Amortized
|
|
|
Estimated Fair
|
|
|
Amortized
|
|
|
Estimated Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
U.S. bank and corporate notes
|
|
$
|
30,084
|
|
|
$
|
30,091
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains and losses on held-to-maturity
investments as of December 31, 2007 were $10 thousand and
$3 thousand, respectively.
Concentrations
of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents and short-term investments. Cash, cash equivalents
and investments consist of commercial paper, corporate and bank
notes, U.S. government securities and money market funds
all held with financial institutions.
Property
and Equipment
Property and equipment are recorded at cost, less accumulated
depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives of the
assets, generally three to seven years. Leasehold improvements
are amortized over the shorter of the life of the lease or the
estimated useful life of the assets. Repairs and maintenance
costs are expensed as incurred.
Impairment
of Long-Lived Assets
The Company periodically evaluates the recoverability of its
long-lived assets in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, and, if appropriate, reduces
F-31
REPLIDYNE,
INC.
NOTES TO
CONDENSED FINANCIAL
STATEMENTS (Continued)
the carrying value whenever events or changes in business
conditions indicate the carrying amount of the assets may not be
fully recoverable. SFAS No. 144 requires recognition
of impairment of long-lived assets in the event the net book
value of such assets exceeds the fair value, and in the case of
assets classified as held-for-sale, fair value is adjusted for
costs to sell such assets.
In conjunction with the restructuring of its operations
announced in August 2008, the Company concluded that changes in
its business indicated the carrying amount of certain of its
property and equipment may not be fully recoverable. The Company
recorded as selling, general and administrative expenses an
impairment charge of $0.8 million during the third quarter
of 2008.
Accrued
Expenses
As part of the process of preparing its financial statements,
the Company is required to estimate accrued expenses. This
process involves identifying services that third parties have
performed on the Companys behalf and estimating the level
of service performed and the associated cost incurred on these
services as of each balance sheet date in the Companys
financial statements. Examples of estimated accrued expenses
include contract service fees, such as amounts due to clinical
research organizations, professional service fees, such as
attorneys, independent accountants and investigators in
conjunction with preclinical and clinical trials, and fees
payable to contract manufacturers in connection with the
production of materials related to product candidates. Estimates
are most affected by the Companys understanding of the
status and timing of services provided relative to the actual
level of services provided by the service providers. The date on
which certain services commence, the level of services performed
on or before a given date, and the cost of services is often
subject to judgment. The Company is also party to agreements
which include provisions that require payments to the
counterparty under certain circumstances. Additionally, the
Company may be required to estimate and accrue for certain loss
contingencies related to litigation or arbitration claims. The
Company develops estimates of liabilities using its judgment
based upon the facts and circumstances known and accounts for
these estimates in accordance with accounting principles
involving accrued expenses generally accepted in the U.S.
Restructuring
Liabilities
The Company has and may continue to restructure its operations
to better align its resources with its operating and strategic
plans. Restructuring charges can include amounts related to
employee severance, employee benefits, property impairment,
facility abandonment and other costs. The Company is often
required to use estimates and assumptions when determining the
amount and in which period to record charges and obligations
related to restructuring activities.
Segments
The Company operates in one segment. Management uses one measure
of profitability and does not segment its business for internal
reporting purposes.
Clinical
Trial Expenses
Currently, the Company has one clinical trial that it
discontinued enrolling in April 2008 and expects to finalize the
related regulatory reports during the fourth quarter of 2008.
The Company records clinical trial expenses based on estimates
of the services received and efforts expended pursuant to
contracts with clinical research organizations (CROs) and other
third party vendors associated with its clinical trials. The
Company contracts with third parties to perform a range of
clinical trial activities in the ongoing development of its
product candidates. The terms of these agreements vary and may
result in uneven payments. Payments under these contracts depend
on factors such as the achievement of certain defined
milestones, the successful enrollment of patients and other
events. The objective of the Companys clinical trial
accrual policy is to match the recording of expenses in its
financial statements to the actual services received and efforts
expended. In doing so, the Company relies on information from
CROs and its clinical operations group regarding the status of
its clinical trials to calculate the accrual for clinical
expenses at the end of each reporting period.
F-32
REPLIDYNE,
INC.
NOTES TO
CONDENSED FINANCIAL
STATEMENTS (Continued)
Share-Based
Compensation
The Company accounts for share-based compensation in accordance
with SFAS No. 123(R), Share-Based Payment,
which was adopted on January 1, 2006 under the prospective
transition method. The Company selected the Black-Scholes option
pricing model as the most appropriate valuation method for
option grants with service
and/or
performance conditions. The Black-Scholes model requires inputs
for risk-free interest rate, dividend yield, volatility and
expected lives of the options. Since the Company has a limited
history of stock purchase and sale activity, expected volatility
is based on historical data from several public companies
similar in size and nature of operations to the Company. The
Company will continue to use historical volatility and other
similar public entity volatility information until its
historical volatility is relevant to measure expected volatility
for option grants. The Company estimates forfeitures based upon
historical forfeiture rates and assumptions regarding future
forfeitures. The Company will adjust its estimate of forfeitures
if actual forfeitures differ, or are expected to differ, from
such estimates. Based on an analysis of historical forfeiture
rates and assumptions regarding future forfeitures, the Company
applied a weighted average annual forfeiture rate of 4.36% and
23.07% during the nine months ended September 30, 2007 and
2008, respectively. The increase in the forfeiture rate during
2008 is primarily attributable to the Companys recent
organizational restructurings and future expectations. The
risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect
at the time of the grant for a period commensurate with the
expected term of the grant. The expected term (without regard to
forfeitures) for options granted represents the period of time
that options granted are expected to be outstanding and is
derived from the contractual terms of the options granted and
historical and expected option exercise behaviors.
For options granted during the three months ended
September 30, 2007, the Company estimated the fair value of
option grants as of the date of grant using the Black-Sholes
option pricing model with the following weighted average
assumptions: expected volatility of 75%, risk-free interest rate
of 4.60%, and a dividend yield of 0.00%. No options were granted
during the three months ended September 30, 2008.
Stock options granted by the Company to its employees are
generally structured to qualify as incentive stock
options (ISOs). Under current tax regulations, the Company
does not receive a tax deduction for the issuance, exercise or
disposition of ISOs if the employee meets certain holding
requirements. If the employee does not meet the holding
requirements, a disqualifying disposition occurs, at which time
the Company will receive a tax deduction. The Company does not
record tax benefits related to ISOs unless and until a
disqualifying disposition occurs. In the event of a
disqualifying disposition, the entire tax benefit is recorded as
a reduction of income tax expense. The Company has not
recognized any income tax benefit or related tax asset for
share-based compensation arrangements as the Company does not
believe, based on its history of operating losses, that it is
more likely than not it will realize any future tax benefit from
such tax deductions.
Under SFAS No. 123(R), the estimated fair value of
share-based compensation, including stock options granted under
the Companys Equity Incentive Plan and discounted
purchases of common stock by employees under the Employee Stock
Purchase Plan, is recognized as compensation expense. The
estimated fair value of stock options is expensed over the
requisite service period as discussed above. Compensation
expense under the Companys Employee Stock Purchase Plan is
calculated based on participant elected contributions and
estimated fair values of the common stock and the purchase
discount at the date of the offering. See Note 9 for
further information on share-based compensation under these
plans. Share-based compensation included in the Companys
statements of operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Research and development
|
|
$
|
335
|
|
|
$
|
(41
|
)
|
|
$
|
939
|
|
|
$
|
32
|
|
Sales, general and administrative
|
|
|
412
|
|
|
|
342
|
|
|
|
1,196
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
747
|
|
|
$
|
301
|
|
|
$
|
2,135
|
|
|
$
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
REPLIDYNE,
INC.
NOTES TO
CONDENSED FINANCIAL
STATEMENTS (Continued)
The decrease in share-based compensation expense in 2008 was
primarily related to a change in the Companys estimate of
expected forfeitures. The Company bases its estimate of expected
forfeitures on historical forfeiture rates and assumptions
regarding future forfeitures. During the nine months ended
September 30, 2007, the Company applied a weighted average
expected annual forfeiture rate of 4.36% as compared to an
expected forfeiture rate of 23.07% that was applied during the
nine months ended September 30, 2008. The increase in the
expected forfeiture rate is primarily attributable to increased
forfeitures as a result of the Companys recent
organizational restructurings and future expectations.
SFAS No. 123(R) is applied only to awards granted or
modified after the required effective date of January 1,
2006. Awards granted prior to the Companys implementation
of SFAS No. 123(R) are accounted for under the
recognition and measurement provisions of APB Opinion
No. 25 and related interpretations unless modified
subsequent to the Companys adoption of
SFAS No. 123(R).
For stock options granted as consideration for services rendered
by nonemployees and for options that may continue to vest upon
the change in status from an employee to a nonemployee who
continues to provide services to the Company, the Company
recognizes compensation expense in accordance with the
requirements of SFAS No. 123(R), Emerging Issues Task
Force (EITF) Issue
No. 96-18,
Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services and
EITF No. 00-18,
Accounting Recognition for Certain Transactions Involving
Equity Instruments Granted to Other Than Employees, as
amended. The Company has historically estimated the fair value
of share-based payments issued to nonemployees based on the
estimated fair value of the stock options granted, rather than
basing its estimate on the fair value of the services received,
as the Company has determined that the value of the stock
options granted was more reliably determinable. The estimated
fair value of options granted to nonemployees is expensed over
the service period (which is generally equal to the period over
which the options vest) and remeasured each reporting date until
the options vest or performance is complete.
If an employee becomes a nonemployee and continues to vest in an
option grant under its original terms, the option is treated as
an option granted to a nonemployee prospectively, provided the
individual is required to continue providing services. The
option is accounted for prospectively under EITF
No. 96-18
such that the fair value of the option is remeasured at each
reporting date until the earlier of: i) the performance
commitment date or ii) the date the services have been
completed. Only the portion of the newly measured cost
attributable to the remaining requisite service period is
recognized as compensation cost prospectively from the date of
the change in status. In 2007, the Company recognized no expense
for share-based compensation expense relating to nonemployee
options. During the three and nine months ended
September 30, 2008 the Company recognized share-based
compensation expense relating to nonemployee options of
$0.1 million and $0.2 million, respectively.
Comprehensive
Income (Loss)
The Company applies the provisions of SFAS No. 130,
Reporting Comprehensive Income, which establishes
standards for reporting comprehensive loss and its components in
financial statements. The Companys comprehensive income
(loss) is comprised of its net income (loss) and unrealized
gains and losses on securities available-for-sale. For the three
months ended September 30, 2007 and 2008, comprehensive
loss was $12.3 million and $10 million, respectively.
For the nine months ended September 30, 2007 the Company
reported comprehensive income of $24.7 million. For the
nine months ended September 30, 2008 comprehensive loss was
$37.7 million.
Income
Taxes
The Company accounts for income taxes pursuant to
SFAS No. 109, Accounting for Income Taxes,
which requires the use of the asset and liability method of
accounting for deferred income taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. A valuation allowance is recorded to the
extent it is more likely than not that a deferred tax asset will
not be realized. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary
F-34
REPLIDYNE,
INC.
NOTES TO
CONDENSED FINANCIAL
STATEMENTS (Continued)
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in operations in the period that includes the
enactment date.
Based on an analysis of historical equity transactions under the
provisions of Section 382 of the Internal Revenue Code, the
Company believes that ownership changes have occurred at two
points since its inception. These ownership changes limit the
annual utilization of the Companys net operating losses in
future periods. The Companys only significant deferred tax
assets are its net operating loss carryforwards. The Company has
provided a valuation allowance for its entire net deferred tax
asset since its inception as, due to uncertainty as to future
utilization of its net operating loss carryforwards, and the
Companys history of operating losses, the Company has
concluded that it is more likely than not that its deferred tax
asset will not be realized.
FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes An Interpretation of
FASB Statement No. 109, defines a recognition threshold
and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. At the
adoption date of January 1, 2007, the Company had no
unrecognized tax benefits which would affect its effective tax
rate if recognized. At September 30, 2008, the Company had
no unrecognized tax benefits. The Company classifies interest
and penalties arising from the underpayment of income taxes in
the statements of operations as general and administrative
expenses. At September 30, 2008, the Company has no accrued
interest or penalties related to uncertain tax positions. The
tax years 2004 to 2007 federal returns remain open to
examination, and the tax years 2004 to 2007 also remain open to
examination by other taxing jurisdictions to which the Company
is subject.
Net
Income (Loss) Per Share
Net income (loss) per share is computed using the weighted
average number of shares of common stock outstanding and is
presented for basic and diluted net income (loss) per share.
Basic net income (loss) per share is computed by dividing net
income (loss) attributable to common stockholders by the
weighted average number of common shares outstanding during the
period, excluding common stock subject to vesting provisions.
Diluted net income (loss) per share is computed by dividing net
income (loss) attributable to common stockholders by the
weighted average number of common shares outstanding during the
period, increased to include, if dilutive, the number of
additional common shares that would have been outstanding if the
potential common shares had been issued or if restrictions had
been lifted on restricted stock. The dilutive effect of common
stock equivalents such as outstanding stock options, warrants
and restricted stock is reflected in diluted net loss per share
by application of the treasury stock method.
Potentially dilutive securities representing approximately
3.4 million and 3.5 million shares of common stock for
the three months ended September 30, 2007 and 2008,
respectively, and 1.5 million and 3.5 million shares
of common stock for the nine months ended September 30,
2007 and 2008, respectively, were excluded from the computation
of diluted earnings per share for these periods because their
effect would have been antidilutive. Potentially dilutive
securities include stock options, warrants, shares to be
purchased under the employee stock purchase plan and restricted
stock.
Research
and Development
Research and development costs are expensed as incurred. These
costs consist primarily of salaries and benefits, licenses to
technology, supplies and contract services relating to the
development of new products and technologies, allocated
overhead, clinical trial and related clinical manufacturing
costs, and other external costs.
The Company has historically produced, but no longer produces,
clinical and commercial grade product in its Colorado facility
and through third parties. Prior to filing for regulatory
approval of its products for commercial sale, and such
regulatory approval being assessed as probable, these costs have
been expensed as research and development expense when incurred.
F-35
REPLIDYNE,
INC.
NOTES TO
CONDENSED FINANCIAL
STATEMENTS (Continued)
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value in applying
generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 applies
whenever an entity is measuring fair value under other
accounting pronouncements that require or permit fair value
measurement. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007;
however, the FASB provided a one year deferral for
implementation of the standard for non-financial assets and
liabilities. The Company adopted SFAS 157 effective
January 1, 2008 for all financial assets and liabilities.
The adoption did not have a material impact on the
Companys financial statements. The Company does not expect
that the remaining provisions of SFAS 157, when adopted,
will have a material impact on its financial statements.
|
|
3.
|
Property
and Equipment
|
The following table sets forth the Companys property and
equipment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
At Cost
|
|
|
|
|
|
|
|
|
Equipment and software
|
|
$
|
5,011
|
|
|
$
|
3,838
|
|
Furniture and fixtures
|
|
|
700
|
|
|
|
371
|
|
Leasehold improvements
|
|
|
2,220
|
|
|
|
1,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,931
|
|
|
|
6,159
|
|
Less: accumulated depreciation and amortization
|
|
|
(6,026
|
)
|
|
|
(5,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,905
|
|
|
$
|
264
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,905
|
|
|
$
|
131
|
|
Property and equipment held for sale
|
|
|
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,905
|
|
|
$
|
264
|
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2007 and 2008,
depreciation and amortization expense was $0.4 million and
$0.2 million, respectively. During the nine months ended
September 30, 2007 and 2008, depreciation and amortization
expense was $1.2 million and $0.8 million,
respectively. The Company also recorded an impairment charge
against property and equipment of $0.8 million during the
third quarter of 2008.
At September 30, 2008, the net carrying value of property
and equipment held for sale was $0.1 million. Property and
equipment held for sale are stated at the lower of carrying
amount of fair value less cost to sell.
|
|
4.
|
Accounts
Payable and Accrued Expenses
|
The following table sets forth the Companys accounts
payable and accrued expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Accounts payable, trade
|
|
$
|
4,553
|
|
|
$
|
685
|
|
Accrued restructuring charges and other severance costs
|
|
|
1,378
|
|
|
|
4,825
|
|
Other accrued employee compensation, benefits, withholdings and
taxes
|
|
|
1,737
|
|
|
|
451
|
|
Accrued clinical trial costs
|
|
|
1,227
|
|
|
|
330
|
|
Accrued manufacturing supply agreement fees and termination costs
|
|
|
2,641
|
|
|
|
|
|
Other
|
|
|
719
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,255
|
|
|
$
|
6,875
|
|
|
|
|
|
|
|
|
|
|
F-36
REPLIDYNE,
INC.
NOTES TO
CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Commitments
and Contingencies
|
Indemnifications
The Company has agreements whereby it indemnifies directors and
officers for certain events or occurrences while the director or
officer is, or was, serving in such capacity at the
Companys request. The maximum potential amount of future
payments the Company could be required to make under these
indemnification agreements is unlimited.
Employment
Agreements
The Company has entered into employment agreements with its
chief executive officer and certain other executive officers
that provide for base salary, eligibility for bonuses and other
generally available benefits. The employment agreements provide
that the Company may terminate the employment of the executive
at any time with or without cause. If an executive is terminated
by the Company without cause or such executive resigns for good
reason, as defined, then such executive is entitled to receive a
severance package consisting of salary continuation for a period
of twelve months (or eighteen months with respect to its chief
executive officer) from the date of termination among other
benefits. If such termination occurs one month before or
thirteen months following a change of control, then the
executive is entitled to: i) salary continuation for a
period of twelve months (or eighteen months with respect to its
chief executive officer and chief scientific officer) from the
date of termination, ii) a bonus equal to the average of
such executives annual bonuses for the two years prior to
the change in control termination (or one and a half times the
average with respect to the chief executive officer),
iii) acceleration of vesting of all of the executives
outstanding unvested options to purchase the Companys
common stock, and iv) other benefits. As of
September 30, 2008, the Company has an accrued but unpaid
balance of $2.2 million for its estimate of unpaid benefits
expected to be incurred under these employment agreements.
In addition, the Company has entered into retention bonus
agreements with its chief financial officer and senior vice
president of corporate development. The agreements provide that
each such executive is eligible to receive both: i) a cash
bonus in the amount of $0.1 million (Retention Bonuses),
which was earned and fully accrued for at September 30,
2008, and ii) a cash bonus in an amount of not less than
$0.1 million and not greater than $0.2 million
(Transaction Bonuses), which final amount will be determined by
the Companys board of directors in its sole discretion,
provided that such executive remains employed by the Company
through the consummation of a strategic transaction. The
Retention Bonuses were paid in October 2008. Management
evaluates the probability of triggering the Transaction Bonuses
each quarter and, when the bonuses are deemed to be probable of
being incurred, the Company will begin expensing the Transaction
Bonuses accordingly. As of September 30, 2008, the
Transaction Bonuses have not been paid or accrued for.
During 2007 the Company established a severance benefit plan
that defines termination benefits for eligible employees. The
severance plan does not apply to employees who have entered into
separate employment agreements with the Company. Under the
severance plan, employees whose employment is terminated without
cause are provided a severance benefit of between nine and
eighteen weeks pay, based on their employee grade level as
defined by the Company, plus an additional two weeks pay for
each year of service. Employees are also entitled to receive
other benefits such as health insurance during the period of
severance under the plan. As of September 30, 2008, the
Company has accrued for its estimate of unpaid benefits expected
to be incurred under this plan with respect to current and
former employees. As of September 30, 2008, the balance of
accrued but unpaid benefits under the severance plan was
$1.8 million.
Asubio
Pharma and Nippon Soda Supply Agreement
On June 20, 2008 the Company notified Asubio Pharma Co.
Ltd., or Asubio Pharma, and Nippon Soda Company Ltd., or Nippon
Soda, of its decision to terminate the supply agreement for the
exclusive supply of the Companys commercial requirements
of the active pharmaceutical ingredient in faropenem medoxomil.
In July 2008, the Company paid Nippon Soda unpaid delay
compensation fees accumulated through the effective date of
termination of the supply agreement totaling $1.0 million.
In addition, the Company reimbursed Nippon
F-37
REPLIDYNE,
INC.
NOTES TO
CONDENSED FINANCIAL
STATEMENTS (Continued)
Soda for certain engineering costs totaling $0.6 million.
These fees were recorded as research and development expense in
prior periods. The Company has no further financial obligations
under this agreement.
MEDA
Supply Agreement Arbitration Settlement
In July 2008, MEDA Manufacturing GmbH (MEDA) filed an amended
demand for arbitration after the Company terminated its license
agreement with Asubio Pharma and relinquished all rights to the
faropenem medoxomil program. In its amended demand, MEDA claimed
that the Company terminated its supply agreement with MEDA in
June 2008 when it returned the faropenem medoxomil program to
Asubio Pharma and did not have the right to terminate its supply
agreement with MEDA in April 2007. During the third quarter of
2008, the Company and MEDA settled this claim and the Company
paid MEDA $2.1 million. The Company has no further
financial obligations under this agreement.
Other
The Company entered into an agreement with a bank to provide
investment banking services. Under the terms of the agreement,
the Company may incur transaction fees of at least
$4 million and up to $6 million based on the value of
a completed license or strategic transaction, as defined.
Additionally, a fee of $1.0 million was due and payable
under this agreement following the Companys announcement
of the proposed transaction with CSI in November 2008. This fee
is creditable against the final fee that would become due if the
proposed transaction is consummated. As of September 30,
2008, no amounts have been paid or accrued for under this
agreement.
In the fourth quarter of 2007, the Company announced a
restructuring of its operations to align its organization with
its strategic priorities. As a result of this restructuring, the
Company reduced its headcount, primarily in administrative,
clinical, commercial and regulatory functions, and recognized
related expense of $1.4 million.
The following table summarizes activity in the restructuring
accrual related to the 2007 restructuring (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
|
|
|
|
|
|
|
|
|
|
Related Benefits
|
|
|
Other
|
|
|
Total
|
|
|
Remaining costs accrued at December 31, 2007
|
|
$
|
1,353
|
|
|
$
|
25
|
|
|
$
|
1,378
|
|
Cash payments
|
|
|
(1,320
|
)
|
|
|
(25
|
)
|
|
|
(1,345
|
)
|
Non-cash adjustments
|
|
|
(33
|
)
|
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining costs accrued at September 30, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In April and June 2008, the Company completed additional
restructurings of its operations under which it recorded
$2.5 million of expense in the second quarter of 2008.
These restructurings included the termination of
23 employees from the clinical, commercial, research and
administrative functions of the Company, and closure of the
Companys office in Milford, Connecticut. In addition, the
Company discontinued enrollment in its placebo-controlled
Phase III clinical trial of faropenem medoxomil in patients
with acute exacerbations of chronic bronchitis. The charges
associated with the restructuring included approximately
$2.1 million of cash expenditures for employee severance
benefits, $0.1 million of cash expenditures for facility
related costs, and $0.3 million for non-cash expenses
related primarily to accelerated depreciation of certain
property and equipment. The following table summarizes activity
in the restructuring accrual related to the April and June 2008
restructurings (in thousands):
|
|
|
|
|
|
|
Severance and
|
|
|
|
Related Benefits
|
|
|
Costs recognized through September 30, 2008
|
|
$
|
2,132
|
|
Cash payments
|
|
|
(1,336
|
)
|
Non-cash adjustments
|
|
|
(100
|
)
|
|
|
|
|
|
Remaining costs accrued at September 30, 2008
|
|
$
|
696
|
|
|
|
|
|
|
F-38
REPLIDYNE,
INC.
NOTES TO
CONDENSED FINANCIAL
STATEMENTS (Continued)
In August 2008, the Company announced an additional
restructuring of its operations resulting in the termination of
19 employees among clinical, research and development and
administrative functions. The August restructuring will reduce
the number of employees to 6 in actions that are scheduled to
take place through October 2008. In conjunction with these
actions, the Company suspended further development activities of
its C. difficile and DNA replication inhibition programs.
The Company recorded $3.1 million of costs related to the
August restructuring during the third quarter of 2008 which
comprised of $1.6 million of cash expenditures for employee
severance benefits, $0.8 million in cash expenditures for
lease payments in excess of expected sub-lease income, and
$0.7 million for non-cash expense related to the impairment
of property and equipment. The following table summarizes
activity in the restructuring accrual related to the August
restructuring (in thousands):
|
|
|
|
|
|
|
Severance and
|
|
|
|
Related Benefits
|
|
|
Costs recognized through September 30, 2008
|
|
$
|
1,550
|
|
Cash payments
|
|
|
(44
|
)
|
Non-cash adjustments
|
|
|
(15
|
)
|
|
|
|
|
|
Remaining costs accrued at September 30, 2008
|
|
$
|
1,491
|
|
|
|
|
|
|
Additionally, during the third quarter of 2008 the Company
determined that severance and related benefits for its remaining
five employees was both probable of being paid and estimable.
Accordingly, the Company accrued for an additional
$1.8 million for employee severance and related benefits in
accordance with individual employment agreements or the
Companys severance plan.
|
|
7.
|
Employee
Benefit Plans
|
The Company has a 401(k) plan and matches an amount equal to
50 percent of employee contributions, limited to $2
thousand per participant annually. During the three months ended
September 30, 2007 and 2008, the Company provided matching
contributions under this plan of $29 thousand and $2 thousand,
respectively. During each of the nine months ended
September 30, 2007 and 2008, the Company provided matching
contributions of $0.1 million.
The Companys Certificate of Incorporation, as amended and
restated on July 3, 2006, authorizes the Company to issue
105,000,000 shares of $0.001 par value stock which is
comprised of 100,000,000 shares of common stock and
5,000,000 shares of preferred stock. Each share of common
stock is entitled to one vote on each matter properly submitted
to the stockholders of the Company for their vote. The holders
of common stock are entitled to receive dividends when and as
declared or paid by the board of directors, subject to prior
rights of the preferred stockholders, if any.
Common
Stock Warrants
In connection with the issuance of debt and convertible notes in
2002 and 2003, the Company issued warrants to certain lenders
and investors to purchase shares of the Companys then
outstanding redeemable convertible preferred stock. The warrants
were initially recorded as liabilities at their fair value. In
July 2006, upon completion of the Companys initial public
offering, all outstanding preferred stock warrants were
automatically converted into common stock warrants and
reclassified to equity at the then current fair value. As of
December 31, 2007 and September 30, 2008, warrants for
the purchase of 53,012 shares of common stock were
outstanding and exercisable with exercise prices in the range of
$4.90 to $6.13 per share.
|
|
9.
|
Share-Based
Compensation
|
Stock
Option Plan
The Companys Equity Incentive Plan, as amended (the Option
Plan), provides for issuances of up to 7,946,405 shares of
common stock for stock option grants. Options granted under the
Option Plan may be either incentive or nonqualified stock
options. Incentive stock options may only be granted to Company
employees.
F-39
REPLIDYNE,
INC.
NOTES TO
CONDENSED FINANCIAL
STATEMENTS (Continued)
Nonqualified stock options may be granted by the Company to its
employees, directors, and nonemployee consultants. Generally,
options granted under the Option Plan expire ten years from the
date of grant and vest over four years. Options granted in prior
years generally vest 25% on the first anniversary from the grant
date and ratably in equal monthly installments over the
remaining 36 months. Options granted in 2008 generally vest
in equal monthly installments over 48 months. This plan is
considered a compensatory plan and subject to the provisions of
SFAS No. 123(R).
The following is a summary of stock option activity (share
amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Options outstanding at January 1, 2008
|
|
|
2,880
|
|
|
$
|
4.42
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,569
|
|
|
|
1.83
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(46
|
)
|
|
|
0.59
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(974
|
)
|
|
|
4.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2008
|
|
|
3,429
|
|
|
$
|
3.35
|
|
|
|
7.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2008
|
|
|
1,400
|
|
|
$
|
3.63
|
|
|
|
6.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes outstanding and exercisable
options at September 30, 2008 (share amounts in
thousands ):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
|
Stock Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number of
|
|
|
Average
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Contractual Life
|
|
|
Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
$0.49 to $1.64
|
|
|
537
|
|
|
|
6.74
|
|
|
$
|
0.87
|
|
|
|
411
|
|
|
$
|
0.78
|
|
1.86 to 1.86
|
|
|
989
|
|
|
|
8.38
|
|
|
|
1.86
|
|
|
|
99
|
|
|
|
1.86
|
|
3.19 to 3.19
|
|
|
777
|
|
|
|
6.85
|
|
|
|
3.19
|
|
|
|
317
|
|
|
|
1.40
|
|
5.20 to 5.20
|
|
|
163
|
|
|
|
7.44
|
|
|
|
5.20
|
|
|
|
102
|
|
|
|
1.64
|
|
5.35 to 10.00
|
|
|
963
|
|
|
|
6.77
|
|
|
|
6.07
|
|
|
|
471
|
|
|
|
1.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,429
|
|
|
|
|
|
|
$
|
3.35
|
|
|
|
1,400
|
|
|
$
|
3.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted to
employees during the three months ended September 30, 2007
was $2.78 per share, and during the nine months ended
September 30, 2007 and 2008 was $2.75 and $1.09 per share,
respectively. No options were granted during the three months
ended September 30, 2008. The total intrinsic value of
options exercised during the three months ended
September 30, 2007 and 2008 was $45 thousand and $15
thousand, respectively, and during the nine months ended
September 30, 2007 and 2008 was $0.2 million and $37
thousand, respectively.
Performance
Options
In March 2008, the Company issued 400,000 options to certain of
its executives. The options contain performance vesting
conditions and were granted at an exercise equal to the fair
value of the underlying common stock on the date of grant of
$1.86 per share. Currently, these options will vest in full, at
the sole discretion of the Companys board of directors,
immediately prior to the consummation of a strategic
transaction. Vested options, if any, continue to be exercisable
three years following termination of the employees
continued service with the Company. These options currently
remain unvested. The Company evaluates the probability of
meeting the performance conditions on a quarterly basis and, as
of September 30, 2008, has not recognized any share-based
compensation expense related to these options.
F-40
REPLIDYNE,
INC.
NOTES TO
CONDENSED FINANCIAL
STATEMENTS (Continued)
Restricted
Shares of Common Stock
The Company had granted options to certain of its employees to
purchase shares of its common stock that were eligible to be
exercised prior to vesting, provided that the shares issued upon
such exercise are subject to restrictions which will be released
in parallel with the vesting schedule of the option. In the
event of termination of the service of an employee, the Company
may repurchase all unvested shares from the option holder at the
price paid to exercise such options.
The table below provides a summary of restricted stock activity
(in thousands):
|
|
|
|
|
Restricted, non-vested shares outstanding at January 1, 2008
|
|
|
223
|
|
Shares vested upon release of restrictions
|
|
|
(175
|
)
|
Restricted stock repurchased upon termination of employment
|
|
|
(33
|
)
|
|
|
|
|
|
Restricted, non-vested shares outstanding at September 30,
2008
|
|
|
15
|
|
|
|
|
|
|
Share-Based
Compensation Stock Options
During the three months ended September 30, 2007 and 2008,
the Company recognized share-based compensation expense of
$0.7 million and $0.3 million, respectively, and
during the nine months ended September 30, 2007 and 2008
recognized $2.0 million and $0.3 million,
respectively. As of September 30, 2008, the Company had
$2.1 million of total unrecognized compensation costs (or
$1.0 million net of expected forfeitures) from options
granted to employees under the Option Plan to be recognized over
a weighted average remaining period of 2.86 years.
Additionally, as of September 30, 2008, the Company had
$0.6 million of total unrecognized share-based compensation
costs (net of expected forfeitures) from options granted with
performance conditions.
Nonemployee
Options
During the three and nine months ended September 30, 2008,
the Company granted 100,000 stock options to certain former
employees in their new capacity as consultants to the Company at
exercise prices equal to the fair value of the underlying shares
of common stock on the date of grant. The options vest over
eight months and have a contractual life of ten years.
Additionally, certain former employees who have changed their
status with the Company from employee to nonemployee, have met
the continued service requirements of the Companys equity
incentive plan and have continued to vest in options previously
granted to them as employees. Vesting continues until their
continued service to the Company is terminated. The Company
recorded $0.1 million and $0.2 million in compensation
expense during the three and nine months ended
September 30, 2008, respectively, related to the
nonemployee options, and will re-measure compensation expense
until these options vest. Based on the Companys current
estimate of fair value and the period under which continued
service will be terminated, the Company expects to recognize
approximately $0.1 million of remaining unamortized expense
in the fourth quarter of 2008.
Employee
Stock Purchase Plan
The Company has reserved approximately 306,000 shares of
its common stock for issuance under its Employee Stock Purchase
Plan (the Purchase Plan). The Purchase Plan allows eligible
employees to purchase common stock of the Company at the lesser
of 85% of its market value on the offering date or the purchase
date as established by the board of directors. Employee
purchases are funded through after-tax payroll deductions, which
participants can elect from one percent to twenty percent of
compensation, subject to the federal limit. The Purchase Plan is
considered a compensatory plan and subject to the provisions of
SFAS No. 123(R). To date, approximately
140,000 shares have been issued pursuant to the Purchase
Plan. During the three months ended September 30, 2007 and
2008, the Company recognized $45 thousand and $14 thousand in
share-based compensation expense, respectively, and during the
nine months ended September 30, 2007 and 2008, the Company
recognized $0.2 million and $41 thousand, respectively. No
employees remain as participants in the current offering period
which ends on December 31, 2008.
F-41
REPLIDYNE,
INC.
NOTES TO
CONDENSED FINANCIAL
STATEMENTS (Continued)
SFAS No. 109 requires that a valuation allowance
should be provided if it is more likely than not that some or
all of the Companys deferred tax assets will not be
realized. The Companys ability to realize the benefit of
its deferred tax assets will depend on the generation of future
taxable income. Due to the uncertainty of future profitable
operations and taxable income, the Company has recorded a full
valuation allowance against its net deferred tax assets.
F-42
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Cardiovascular Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, changes in
shareholders (deficiency) equity and comprehensive (loss)
income and cash flows present fairly, in all material respects,
the financial position of Cardiovascular Systems, Inc. (the
Company) at June 30, 2007 and 2008, and the
results of its operations and its cash flows for each of the
three years in the period ended June 30, 2008, in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for
stock-based compensation effective July 1, 2006.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the financial
statements, the Company has incurred substantial operating
losses, negative cash flows from operations, liquidity
constraints due to investments in auction rate securities and
has limited capital to fund future operations, which raise
substantial doubt about its ability to continue as a going
concern. Managements plans in regard to these matters are
also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
/s/ PricewaterhouseCoopers
LLP
Minneapolis, Minnesota
August 15, 2008, except as to the Companys loan and
security agreement and margin loan payable as described in
paragraphs 1 through 4 in Note 4 for which the date is
September 12, 2008
F-44
Cardiovascular
Systems, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands, except per share and share amounts)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,908
|
|
|
$
|
7,595
|
|
|
$
|
14,727
|
|
Short-term investments
|
|
|
11,615
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
|
|
|
|
4,897
|
|
|
|
5,439
|
|
Inventories
|
|
|
1,050
|
|
|
|
3,776
|
|
|
|
3,930
|
|
Prepaid expenses and other current assets
|
|
|
255
|
|
|
|
1,936
|
|
|
|
818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
20,828
|
|
|
|
18,204
|
|
|
|
24,914
|
|
Investments
|
|
|
|
|
|
|
21,733
|
|
|
|
21,390
|
|
Property and equipment, net
|
|
|
585
|
|
|
|
1,041
|
|
|
|
1,156
|
|
Patents, net
|
|
|
612
|
|
|
|
980
|
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
22,025
|
|
|
$
|
41,958
|
|
|
$
|
48,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,909
|
|
|
$
|
5,851
|
|
|
$
|
5,150
|
|
Accrued expenses
|
|
|
748
|
|
|
|
3,467
|
|
|
|
3,707
|
|
Deferred revenue
|
|
|
|
|
|
|
116
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
|
|
|
|
11,888
|
|
|
|
27,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,657
|
|
|
|
21,322
|
|
|
|
36,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
2,400
|
|
Redeemable convertible preferred stock warrants
|
|
|
3,094
|
|
|
|
3,986
|
|
|
|
4,047
|
|
Deferred rent
|
|
|
79
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
3,173
|
|
|
|
4,086
|
|
|
|
6,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,830
|
|
|
|
25,408
|
|
|
|
42,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A redeemable convertible preferred stock, no par
value; authorized 5,400,000 shares, issued and outstanding
4,728,547 at June 30, 2007 and 4,737,561 at June 30,
2008 and September 30, 2008 (unaudited), respectively;
aggregate liquidation value $29,034, $31,230 and $31,782 at
June 30, 2007 and 2008, and September 30, 2008
(unaudited), respectively
|
|
|
40,193
|
|
|
|
51,213
|
|
|
|
51,213
|
|
Series A-1
redeemable convertible preferred stock, no par value; authorized
1,470,589 at June 30, 2007 and 2,188,425 shares at
June 30, 2008 and September 30, 2008 (unaudited),
respectively; issued and outstanding 977,046 at June 30,
2007 and 2,188,425 at June 30, 2008 and September 30,
2008 (unaudited), respectively; aggregate liquidation value
$8,305, $19,862 and $20,243 at June 30, 2007 and 2008, and
September 30, 2008 (unaudited), respectively
|
|
|
8,305
|
|
|
|
23,657
|
|
|
|
23,657
|
|
Series B redeemable convertible preferred stock, no par
value; authorized 2,162,162 shares, issued and outstanding
2,162,150 at June 30, 2008 and September 30, 2008
(unaudited), aggregate liquidation value $20,871 and $21,280 at
June 30, 2008 and September 30, 2008 (unaudited),
respectively
|
|
|
|
|
|
|
23,372
|
|
|
|
23,372
|
|
Shareholders (deficiency) equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, no par value; authorized 25,000,000 common shares
at June 30, 2007 and 70,000,000 common shares and 5,000,000
undesignated shares at June 30, 2008 and September 30,
2008 (unaudited); issued and outstanding 6,267,454, 7,575,206,
7,731,450 at June 30, 2007 and 2008, and September 30,
2008 (unaudited), respectively
|
|
|
26,054
|
|
|
|
35,933
|
|
|
|
37,738
|
|
Common stock warrants
|
|
|
1,366
|
|
|
|
680
|
|
|
|
2,374
|
|
Accumulated other comprehensive (loss) income
|
|
|
(7
|
)
|
|
|
|
|
|
|
(343
|
)
|
Accumulated deficit
|
|
|
(59,716
|
)
|
|
|
(118,305
|
)
|
|
|
(132,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders (deficiency) equity
|
|
|
(32,303
|
)
|
|
|
(81,692
|
)
|
|
|
(92,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders (deficiency) equity
|
|
$
|
22,025
|
|
|
$
|
41,958
|
|
|
$
|
48,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-45
Cardiovascular
Systems, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands, except per share and share amounts)
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
22,177
|
|
|
$
|
|
|
|
$
|
11,646
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
8,927
|
|
|
|
539
|
|
|
|
3,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
13,250
|
|
|
|
(539
|
)
|
|
|
7,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
1,735
|
|
|
|
6,691
|
|
|
|
35,326
|
|
|
|
3,552
|
|
|
|
16,424
|
|
Research and development
|
|
|
3,168
|
|
|
|
8,446
|
|
|
|
16,068
|
|
|
|
3,328
|
|
|
|
4,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,903
|
|
|
|
15,137
|
|
|
|
51,394
|
|
|
|
6,880
|
|
|
|
21,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,903
|
)
|
|
|
(15,137
|
)
|
|
|
(38,144
|
)
|
|
|
(7,419
|
)
|
|
|
(13,614
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(48
|
)
|
|
|
(1,340
|
)
|
|
|
(923
|
)
|
|
|
(300
|
)
|
|
|
(227
|
)
|
Interest income
|
|
|
56
|
|
|
|
881
|
|
|
|
1,167
|
|
|
|
278
|
|
|
|
142
|
|
Impairment on investments
|
|
|
|
|
|
|
|
|
|
|
(1,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
8
|
|
|
|
(459
|
)
|
|
|
(1,023
|
)
|
|
|
(22
|
)
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,895
|
)
|
|
|
(15,596
|
)
|
|
|
(39,167
|
)
|
|
|
(7,441
|
)
|
|
|
(13,699
|
)
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
(16,835
|
)
|
|
|
(19,422
|
)
|
|
|
(4,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(4,895
|
)
|
|
$
|
(32,431
|
)
|
|
$
|
(58,589
|
)
|
|
$
|
(12,294
|
)
|
|
$
|
(13,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.79
|
)
|
|
$
|
(5.22
|
)
|
|
$
|
(8.57
|
)
|
|
$
|
(1.95
|
)
|
|
$
|
(1.78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
6,183,715
|
|
|
|
6,214,820
|
|
|
|
6,835,126
|
|
|
|
6,291,512
|
|
|
|
7,692,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-46
Cardiovascular
Systems, Inc.
Comprehensive
(Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Warrants
|
|
|
Deficit
|
|
|
(Loss) Income
|
|
|
Total
|
|
|
(Loss) Income
|
|
|
|
(Dollars in thousands, except per share and share amounts)
|
|
|
Balances at June 30, 2005
|
|
|
5,911,579
|
|
|
|
23,248
|
|
|
|
1,249
|
|
|
|
(22,390
|
)
|
|
|
|
|
|
|
2,107
|
|
|
$
|
|
|
Shares issued for cash, $8.00 per share, net of offering costs
of $20
|
|
|
287,625
|
|
|
|
2,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,281
|
|
|
|
|
|
Stock options and warrants expensed for outside consulting
services
|
|
|
|
|
|
|
49
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,895
|
)
|
|
|
|
|
|
|
(4,895
|
)
|
|
$
|
(4,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2006
|
|
|
6,199,204
|
|
|
|
25,578
|
|
|
|
1,280
|
|
|
|
(27,285
|
)
|
|
|
|
|
|
|
(427
|
)
|
|
$
|
(4,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants at $1.00 per share
|
|
|
68,250
|
|
|
|
86
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
Value assigned to warrants issued in connection with
Series A redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,835
|
)
|
|
|
|
|
|
|
(16,835
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390
|
|
|
|
|
|
Unrealized loss on short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
$
|
(7
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,596
|
)
|
|
|
|
|
|
|
(15,596
|
)
|
|
|
(15,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2007
|
|
|
6,267,454
|
|
|
|
26,054
|
|
|
|
1,366
|
|
|
|
(59,716
|
)
|
|
|
(7
|
)
|
|
|
(32,303
|
)
|
|
$
|
(15,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock awards
|
|
|
840,138
|
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,152
|
|
|
|
|
|
Forfeiture of restricted stock awards
|
|
|
(27,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants at $1.00
$8.00 per share
|
|
|
495,448
|
|
|
|
2,382
|
|
|
|
(570
|
)
|
|
|
|
|
|
|
|
|
|
|
1,812
|
|
|
|
|
|
Expiration of warrants
|
|
|
|
|
|
|
116
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,422
|
)
|
|
|
|
|
|
|
(19,422
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
6,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,229
|
|
|
|
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
|
$
|
7
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,167
|
)
|
|
|
|
|
|
|
(39,167
|
)
|
|
|
(39,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2008
|
|
|
7,575,206
|
|
|
$
|
35,933
|
|
|
$
|
680
|
|
|
$
|
(118,305
|
)
|
|
$
|
|
|
|
$
|
(81,692
|
)
|
|
$
|
(39,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock awards
|
|
|
161,823
|
|
|
|
1,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,296
|
|
|
|
|
|
Forfeiture of restricted stock awards
|
|
|
(25,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants at $5.00
$5.71 per share
|
|
|
19,450
|
|
|
|
133
|
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
Issuance of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
1,814
|
|
|
|
|
|
|
|
|
|
|
|
1,814
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
376
|
|
|
|
|
|
Unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(343
|
)
|
|
|
(343
|
)
|
|
$
|
(343
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,699
|
)
|
|
|
|
|
|
|
(13,699
|
)
|
|
|
(13,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2008 (unaudited)
|
|
|
7,731,450
|
|
|
$
|
37,738
|
|
|
$
|
2,374
|
|
|
$
|
(132,004
|
)
|
|
$
|
(343
|
)
|
|
$
|
(92,235
|
)
|
|
$
|
(14,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-47
Cardiovascular
Systems, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands, except per share and share amounts)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,895
|
)
|
|
$
|
(15,596
|
)
|
|
$
|
(39,167
|
)
|
|
$
|
(7,441
|
)
|
|
$
|
(13,699
|
)
|
Adjustments to reconcile net loss to net cash used in operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
|
|
73
|
|
|
|
153
|
|
|
|
264
|
|
|
|
47
|
|
|
|
86
|
|
Provision for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
164
|
|
|
|
14
|
|
|
|
28
|
|
Amortization of patents
|
|
|
45
|
|
|
|
45
|
|
|
|
29
|
|
|
|
|
|
|
|
9
|
|
Change in carrying value of the convertible preferred stock
warrants
|
|
|
|
|
|
|
1,327
|
|
|
|
916
|
|
|
|
300
|
|
|
|
(14
|
)
|
Amortization of debt discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
Stock-based compensation
|
|
|
|
|
|
|
390
|
|
|
|
7,381
|
|
|
|
350
|
|
|
|
1,672
|
|
Expense for stock, options and warrants granted for outside
consulting services
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal of property and equipment
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of discount on investments
|
|
|
|
|
|
|
(293
|
)
|
|
|
(52
|
)
|
|
|
(52
|
)
|
|
|
|
|
Impairment on investments
|
|
|
|
|
|
|
|
|
|
|
1,267
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
|
|
(5,061
|
)
|
|
|
(1,395
|
)
|
|
|
(570
|
)
|
Inventories
|
|
|
(438
|
)
|
|
|
(322
|
)
|
|
|
(2,726
|
)
|
|
|
(1,522
|
)
|
|
|
(154
|
)
|
Prepaid expenses and other current assets
|
|
|
(96
|
)
|
|
|
(113
|
)
|
|
|
(1,323
|
)
|
|
|
13
|
|
|
|
1,118
|
|
Accounts payable
|
|
|
30
|
|
|
|
1,709
|
|
|
|
3,631
|
|
|
|
(430
|
)
|
|
|
(701
|
)
|
Accrued expenses and deferred rent
|
|
|
216
|
|
|
|
424
|
|
|
|
2,693
|
|
|
|
632
|
|
|
|
240
|
|
Deferred revenue
|
|
|
|
|
|
|
|
|
|
|
116
|
|
|
|
1,428
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operations
|
|
|
(4,988
|
)
|
|
|
(12,276
|
)
|
|
|
(31,868
|
)
|
|
|
(8,056
|
)
|
|
|
(12,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment
|
|
|
(235
|
)
|
|
|
(465
|
)
|
|
|
(721
|
)
|
|
|
(207
|
)
|
|
|
(201
|
)
|
Proceeds from sale of property and equipment
|
|
|
7
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
|
|
|
|
(23,169
|
)
|
|
|
(31,314
|
)
|
|
|
(12,700
|
)
|
|
|
|
|
Sales of investments
|
|
|
|
|
|
|
11,840
|
|
|
|
19,988
|
|
|
|
5,874
|
|
|
|
|
|
Costs incurred in connection with patents
|
|
|
|
|
|
|
(58
|
)
|
|
|
(397
|
)
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(228
|
)
|
|
|
(11,852
|
)
|
|
|
(12,443
|
)
|
|
|
(7,033
|
)
|
|
|
(382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from the sale of common stock
|
|
|
2,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of redeemable convertible preferred stock
|
|
|
|
|
|
|
30,294
|
|
|
|
30,296
|
|
|
|
10,296
|
|
|
|
|
|
Payment of offering costs
|
|
|
|
|
|
|
(1,776
|
)
|
|
|
(51
|
)
|
|
|
(10
|
)
|
|
|
|
|
Issuance of common stock warrants
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
1,814
|
|
Issuance of convertible preferred stock warrants
|
|
|
|
|
|
|
1,767
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
Exercise of stock options and warrants
|
|
|
|
|
|
|
69
|
|
|
|
1,865
|
|
|
|
160
|
|
|
|
13
|
|
Proceeds from long-term debt
|
|
|
|
|
|
|
|
|
|
|
16,398
|
|
|
|
|
|
|
|
17,712
|
|
Payment on long-term debt
|
|
|
|
|
|
|
|
|
|
|
(4,510
|
)
|
|
|
|
|
|
|
(78
|
)
|
Proceeds from convertible promissory notes
|
|
|
3,059
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable to shareholder, common stock repurchase
|
|
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,990
|
|
|
|
30,482
|
|
|
|
43,998
|
|
|
|
10,446
|
|
|
|
19,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(226
|
)
|
|
|
6,354
|
|
|
|
(313
|
)
|
|
|
(4,643
|
)
|
|
|
7,132
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
1,780
|
|
|
|
1,554
|
|
|
|
7,908
|
|
|
|
7,908
|
|
|
|
7,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
1,554
|
|
|
$
|
7,908
|
|
|
$
|
7,595
|
|
|
$
|
3,265
|
|
|
$
|
14,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible promissory notes and accrued interest
into Series A redeemable convertible preferred stock
|
|
$
|
|
|
|
$
|
(3,145
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Capitalized financing costs included in accounts payable
|
|
|
|
|
|
|
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
Capitalized financing costs included in accrued expenses
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
16,835
|
|
|
|
19,422
|
|
|
|
4,853
|
|
|
|
|
|
Net unrealized (loss) gain on investments
|
|
|
|
|
|
|
(7
|
)
|
|
|
7
|
|
|
|
6
|
|
|
|
(343
|
)
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-48
CARDIOVASCULAR
SYSTEMS, INC.
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
|
|
1.
|
Summary
of Significant Accounting Policies
|
Company
Description
Cardiovascular Systems, Inc. (the Company) was
incorporated on February 28, 1989, to develop, manufacture
and market devices for the treatment of vascular diseases. The
Company has completed a pivotal clinical trial in the United
States to demonstrate the safety and efficacy of the
Companys Diamondback 360° orbital atherectomy system
in treating peripheral arterial disease. On August 30,
2007, the U.S. Food and Drug Administration, or FDA,
granted the Company 510(k) clearance to market the Diamondback
360° for the treatment of peripheral arterial disease. The
Company commenced a limited commercial introduction of the
Diamondback 360° in the United States in September
2007. During the quarter ended March 31, 2008, the Company
began its full commercial launch of the Diamondback 360°.
For the fiscal year ended June 30, 2007, the Company was
considered a development stage enterprise as
prescribed in Statement of Financial Accounting Standards
(SFAS) No. 7, Accounting and Reporting by
Development Stage Enterprises. During that time, the
Companys major emphasis was on planning, research and
development, recruitment and development of a management and
technical staff, and raising capital. These development stage
activities were completed during the first quarter of fiscal
2008. The Companys management team, organizational
structure and distribution channel are in place. The
Companys primary focus is on the sale and
commercialization of its current product to end user customers.
During the year ended June 30, 2008 and three months ended
September 30, 2008 (unaudited), the Company no longer
considered itself a development stage enterprise.
Principles
of Consolidation
The consolidated balance sheets, statements of operations,
changes in shareholders (deficiency) equity and
comprehensive (loss) income, and cash flows include the accounts
of the Company and its wholly owned inactive Netherlands
subsidiary, SCS B.V., after elimination of all significant
intercompany transactions and accounts. SCS B.V. was formed for
the purpose of conducting human trials and the development of
production facilities. Operations of the subsidiary ceased in
fiscal 2002; accordingly, there are no assets or liabilities
included in the consolidated financial statements related to SCS
B.V.
Interim
Financial Statements
The Company has prepared the unaudited interim consolidated
financial statements and related unaudited financial information
in the footnotes in accordance with accounting principles
generally accepted in the United States of America
(GAAP) and the rules and regulations of the
Securities and Exchange Commission (SEC) for interim
financial statements. These interim consolidated financial
statements reflect all adjustments consisting of normal
recurring accruals, which, in the opinion of management, are
necessary to present fairly the Companys consolidated
financial position, the results of its operations and its cash
flows for the interim periods. These interim consolidated
financial statements should be read in conjunction with the
consolidated annual financial statements and the notes thereto
contained herein. The nature of the Companys business is
such that the results of any interim period may not be
indicative of the results to be expected for the entire year.
Cash
and Cash Equivalents
The Company considers all money market funds and other
investments purchased with an original maturity of three months
or less to be cash and cash equivalents.
F-49
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
Investments
The Company classifies all investments as
available-for-sale. Investments are recorded at fair
value and unrealized gains and losses are recorded as a separate
component of shareholders deficiency until realized.
Realized gains and losses are accounted for on the specific
identification method. The Company has historically placed its
investments primarily in auction rate securities,
U.S. government securities and commercial paper. These
investments, a portion of which had original maturities beyond
one year, were classified as short-term based on their liquid
nature. The securities which had stated maturities beyond one
year had certain economic characteristics of short-term
investments due to a rate-setting mechanism and the ability to
sell them through a Dutch auction process that occurred at
pre-determined intervals of less than one year. For the years
ended June 30, 2007 and 2008, and three months ended
September 30, 2008 (unaudited), the amount of gross
realized gains and losses related to sales of investments were
insignificant.
The Companys investments include AAA rated auction rate
securities issued primarily by state agencies and backed by
student loans substantially guaranteed by the Federal Family
Education Loan Program (FFELP). The federal government insures
loans in the FFELP so that lenders are reimbursed at least 97%
of the loans outstanding principal and accrued interest if
a borrower defaults. Approximately 99.2% of the par value of the
Companys auction rate securities is supported by student
loan assets that are guaranteed by the federal government under
the FFELP.
The Companys auction rate securities are debt instruments
with a long-term maturity and with an interest rate that is
reset in short intervals, primarily every 28 days, through
auctions. The recent conditions in the global credit markets
have prevented the Company from liquidating its holdings of
auction rate securities because the amount of securities
submitted for sale has exceeded the amount of purchase orders
for such securities. When auctions for these securities fail,
the investments may not be readily convertible to cash until a
future auction of these investments is successful or they are
redeemed by the issuer or they mature.
In February 2008, the Company was informed that there was
insufficient demand for auction rate securities, resulting in
failed auctions for $23.0 million of the Companys
auction rate securities held at June 30, 2008. Currently,
these affected securities are not liquid and will not become
liquid until a future auction for these investments is
successful or they are redeemed by the issuer or they mature. As
a result, at June 30, 2008 and September 30, 2008
(unaudited), the Company has classified the fair value of the
auction rate securities as a long-term asset. Interest rates on
all failed auction rate securities were reset to a temporary
predetermined penalty or maximum rate.
These maximum rates are generally limited to a maximum amount
payable over a 12 month period equal to a rate based on the
trailing
12-month
average of
90-day
treasury bills, plus 120 basis points. These maximum
allowable rates range from 2.7% to 4.0% of par value per year.
The Company has collected all interest due on its auction rate
securities and has no reason to believe that it will not collect
all interest due in the future. The Company expects to receive
the principal associated with its auction rate securities upon
the earlier of a successful auction, their redemption by the
issuer or their maturity. On March 28, 2008, the Company
obtained a margin loan from UBS Financial Services, Inc., the
entity through which it originally purchased the auction rate
securities, for up to $12.0 million, with a floating
interest rate equal to
30-day
LIBOR, plus 0.25%. The loan was secured by the
$23.0 million par value of the Companys auction rate
securities. The maximum borrowing amount was not set forth in
the written agreement for the loan and may have been adjusted
from time to time by UBS Financial Services at its discretion.
The loan was due on demand and UBS Financial Services may have
required the Company to repay it in full from any loan or
financing arrangement or a public equity offering. The margin
requirements were determined by UBS Financial Services but were
not included in the written loan agreement and were therefore
subject to change. As of June 30, 2008, the margin
requirements provided that UBS Financial Services would require
a margin call on this loan if at any time the outstanding
borrowings, including interest, exceeded $12.0 million or
75% of
F-50
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
UBS Financial Services estimate of the fair value of the
Companys auction rate securities. If these margin
requirements were not maintained, UBS Financial Services may
have required the Company to make a loan payment in an amount
necessary to comply with the applicable margin requirements or
demand repayment of the entire outstanding balance. As of
June 30, 2008, the Company maintained these margin
requirements and the outstanding balance on the loan was
$11.9 million.
On August 21, 2008, the Company replaced this loan with a
margin loan from UBS Bank USA, which increased maximum
borrowings available to $23.0 million. This maximum
borrowing amount is not set forth in the written agreement for
the loan and may be adjusted from time to time by UBS Bank at
its discretion The margin loan has a floating interest rate
equal to
30-day
LIBOR, plus 1.0%. The loan is due on demand and UBS Bank will
require the Company to repay it in full from the proceeds
received from a public equity offering where net proceeds exceed
$50.0 million. In addition, if at any time any of the
Companys auction rate securities may be sold, exchanged,
redeemed, transferred or otherwise conveyed for no less than
their par value, then the Company must immediately effect such a
transfer and the proceeds must be used to pay down outstanding
borrowings under this loan. The margin requirements are
determined by UBS Bank but are not included in the written loan
agreement and are therefore subject to change. As of
August 21, 2008, the margin requirements include maximum
borrowings, including interest, of $23.0 million. If these
margin requirements are not maintained, UBS Bank may require the
Company to make a loan payment in an amount necessary to comply
with the applicable margin requirements or demand repayment of
the entire outstanding balance. The Company has maintained the
margin requirements under the loans from both UBS entities. The
outstanding balance on this loan at September 30, 2008
(unaudited) was $22.9 million.
In accordance with
EITF 03-01
and FSP
FAS 115-1
and 124-1,
The Meaning of Other Than-Temporary Impairment and Its
Application to Certain Investments, the Company reviews
several factors to determine whether a loss is
other-than-temporary. These factors include but are not limited
to: (1) the length of time a security is in an unrealized
loss position, (2) the extent to which fair value is less
than cost, (3) the financial condition and near term
prospects of the issuer, and (4) the Companys intent
and ability to hold the security for a period of time sufficient
to allow for any unanticipated recovery in fair value.
The Company recorded an other-than-temporary impairment loss of
$1.3 million relating to its auction rate securities in its
statement of operations for the year ended June 30, 2008
and recorded an unrealized loss of $0.3 million relating to
its auction rate securities in other comprehensive income (loss)
for the three months ended September 30, 2008 (unaudited).
The Company determined the fair value of its auction rate
securities and quantified the other-than-temporary impairment
loss and the unrealized loss with the assistance of
ValueKnowledge LLC, an independent third party valuation firm,
which utilized various valuation methods and considered, among
other factors, estimates of present value of the auction rate
securities based upon expected cash flows, the likelihood and
potential timing of issuers of the auction rate securities
exercising their redemption rights at par value, the likelihood
of a return of liquidity to the market for these securities and
the potential to sell the securities in secondary markets.
At June 30, 2008, the Company concluded that no weight
should be given to the value indicated by the secondary markets
for student loan-backed auction rate securities similar to those
the Company holds because these markets have very low
transaction volumes and consist primarily of private
transactions with minimal disclosure, transactions may not be
representative of the actions of typically-motivated buyers and
sellers and the Company does not currently intend to sell in the
secondary markets. However, the Company did consider the
secondary markets for certain mortgage-backed securities to
estimate the market yields attributable to the Companys
auction rate securities, but determined that these secondary
markets do not provide a sufficient basis of comparison for the
auction rate securities that the Company holds and, accordingly,
attributed no weight to the values of these mortgage-backed
securities indicated by the secondary markets.
F-51
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
At June 30, 2008, the Company attributed a weight of 66.7%
to estimates of present value of the auction rate securities
based upon expected cash flows and a weight of 33.3% to the
likelihood and potential timing of issuers of the auction rate
securities exercising their redemption rights at par value or
willingness of third parties to provide financing in the market
against the par value of those securities. The attribution of
these weights required the exercise of valuation judgment. A
measure of liquidity is available from borrowing, which led to
the 33.3% weight attributed to the likelihood and potential
timing of issuers of the auction rate securities exercising
their redemption rights at par value or the willingness of third
parties to provide financing in the market against the par value
of those securities. However, borrowing does not eliminate
exposure to the risk of holding the securities, so the weight of
66.7% attributed to the present value of the auction rate
securities based upon expected cash flows reflects the
expectation that the securities are likely to be held for an
uncertain period. The Company focused on these methodologies
because no certainty exists regarding how the auction rate
securities will be eventually converted to cash and these
methodologies represent the most likely possible outcomes. To
derive estimates of the present value of the auction rate
securities based upon expected cash flows, the Company used the
securities expected annual interest payments, ranging from
2.7% to 4.0% of par value, representing estimated maximum annual
rates under the governing documents of the auction rate
securities; annual market interest rates, ranging from 4.5% to
5.8%, based on observed traded, state sponsored, taxable
certificates rated AAA or lower and issued between June 15 and
June 30, 2008; and a range of expected terms to liquidity.
At June 30, 2008, the Companys weighting of the
valuation methods indicates an implied term to liquidity of
approximately 3.5 years. The implied term to liquidity of
approximately 3.5 years is a result of considering a range
in possible timing of the various scenarios that would allow a
holder of the auction rate securities to convert the auction
rate securities to cash ranging from zero to ten years, with the
highest probability assigned to the range of zero to five years.
Several sources were consulted but no individual source of
information was relied upon to arrive at the Companys
estimate of the range of possible timing to convert the auction
rate securities to cash or the implied term to liquidity of
approximately 3.5 years. The primary reason for the fair
value being less than cost related to a lack of liquidity of the
securities, rather than the financial condition and near term
prospects of the issuer.
At September 30, 2008, the Company concluded that no weight
should be given to the value indicated by the secondary markets
for student loan backed auction rate securities similar to those
the Company holds because these markets have very low
transaction volumes and consist primarily of private
transactions with minimal disclosure and transactions may not be
representative of the actions of typically-motivated buyers and
sellers and the Company does not currently intend to sell in the
secondary markets. However, the Company did consider the
secondary markets for certain mortgage-backed securities to
estimate the market yields attributable to the Companys
auction rate securities, but determined that these secondary
markets do not provide a sufficient basis of comparison for the
auction rate securities that the Company holds and, accordingly,
attributed no weight to the values of these mortgage-backed
securities indicated by the secondary markets.
At September 30, 2008, the Company concluded that no weight
should be given to the likelihood and potential timing of
issuers of the auction rate securities exercising their
redemption rights at par value based on low issuer call
activity, so the Company attributed a weight of 100.0% to
estimates of present value of the auction rate securities based
upon expected cash flows. The attribution of weights to the
valuation factors required the exercise of valuation judgment.
The selection of a weight of 100.0% attributed to the present
value of the auction rate securities based upon expected cash
flows reflects the expectation, in absence of the Auction Rate
Securities Rights Prospectus discussed below, that no certainty
exists regarding how the auction rate securities will be
eventually converted to cash and this methodology represents the
possible outcome. To derive estimates of the present value of
the auction rate securities based upon expected cash flows, the
Company used the securities expected annual interest
payments, ranging from 2.1% to 5.4% of par value, representing
estimated maximum annual rates under the
F-52
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
governing documents of the auction rate securities; annual
market interest rates, ranging from 3.9% to 5.4%, based on
observed traded, state sponsored, taxable certificates rated AAA
or lower and issued between September 29 and September 30,
2008; certain mortgage-backed securities and indices; and a
range of expected terms to liquidity.
The Companys weighting of the valuation methods as of
September 30, 2008 indicates an implied term to liquidity
of approximately five years in absence of the Auction Rate
Securities Rights Prospectus discussed below. The implied term
to liquidity of approximately five years is a result of
considering a range in possible timing of the various scenarios
that would allow a holder of the auction rate securities to
convert the auction rate securities to cash ranging from zero to
ten years, with the highest probability assigned to five years.
UBS issued a comprehensive settlement, which was confirmed by an
Auction Rate Securities Rights Prospectus issued by UBS on
October 7, 2008, in which there is a possibility of
redemption by UBS at par value for the auction rate securities
held by the Company between June 30, 2010 and July 2,
2012. Under the comprehensive settlement, UBS has committed to
purchase a total of $8.3 billion of auction rate securities
at par value from most private clients during the two-year
period beginning January 1, 2009. Private clients and
charities holding less than $1.0 million in household
assets at UBS were able to avail themselves of this relief
beginning October 31, 2008. From mid-September 2008, UBS
began to provide loans at no cost to its clients for the par
value of their auction rate security holdings. In addition, UBS
has also committed to provide liquidity solutions to
institutional investors and has agreed to purchase all or any of
a remaining $10.3 billion in auction rate securities at par
value from its institutional clients beginning June 10,
2010. These auction rate security rights are not transferable,
tradable or marginable. The Company has not considered the
liquidity potentially generated by UBSs comprehensive
settlement or the UBS loan in the Companys valuation of
the 19 auction rate certificates held by the Company because the
settlement rights were not enforceable at September 30,
2008. The repurchase arrangement and lending arrangement may
represent separate contracts, securities or other assets that
have not been considered in the valuation of the auction rate
securities.
The Companys auction rate securities include AAA rated
auction rate securities issued primarily by state agencies and
backed by student loans substantially guaranteed by the Federal
Family Education Loan Program. These auction rate securities
continue to be AAA rated auction rate securities subsequent to
the failed auctions that began in February 2008.
In addition to the valuation procedures described above, the
Company considered (i) its current inability to hold these
securities for a period of time sufficient to allow for an
unanticipated recovery in fair value based on The Companys
current liquidity, history of operating losses, and
managements estimates of required cash for continued
product development and sales and marketing expenses, and
(ii) failed auctions and the anticipation of continued
failed auctions for all of the Companys auction rate
securities.
Based on the factors described above, the Company recorded the
entire amount of impairment loss identified for the year ended
June 30, 2008 of $1.3 million as other-than-temporary
and recorded the decrease in fair value of $0.3 million as
an unrealized loss for the three months ended September 30,
2008 (unaudited). The Company did not identify or record any
additional realized or unrealized gains or losses for the year
ended June 30, 2008 or the three months ended
September 30, 2008 (unaudited). The Company will continue
to monitor and evaluate the value of its investments each
reporting period for further possible impairment or unrealized
loss. Although it does not currently intend to do so, the
Company may consider selling its auction rate securities in the
secondary markets in the future, which may require a sale at a
substantial discount to the stated principal value of these
securities.
F-53
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
The amortized cost and fair value of available-for-sale
investments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Amortized
|
|
|
Aggregate
|
|
|
Unrealized
|
|
|
|
Cost(1)
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Auction rate securities (original maturities greater than ten
years)
|
|
$
|
21,733
|
|
|
$
|
21,733
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
21,733
|
|
|
$
|
21,733
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Amortized
|
|
|
Aggregate
|
|
|
Unrealized
|
|
|
|
Cost(1)
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(Unaudited)
|
|
|
Auction rate securities (original maturities greater than ten
years)
|
|
$
|
21,733
|
|
|
$
|
21,390
|
|
|
$
|
(343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
21,733
|
|
|
$
|
21,390
|
|
|
$
|
(343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amortized cost at June 30, 2008 and September 30, 2008
includes unamortized premiums, discounts and other cost basis
adjustments, as well as other-than-temporary impairment losses. |
Accounts
Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. Customer credit terms are established
prior to shipment with the standard being net 30 days.
Collateral or any other security to support payment of these
receivables generally is not required. The Company maintains
allowances for doubtful accounts. This allowance is an estimate
and is regularly evaluated by the Company for adequacy by taking
into consideration factors such as past experience, credit
quality of the customer base, age of the receivable balances,
both individually and in the aggregate, and current economic
conditions that may affect a customers ability to pay.
Provisions for the allowance for doubtful accounts attributed to
bad debt are recorded in general and administrative expenses. If
the financial condition of the Companys customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. The following
table shows allowance for doubtful accounts activity for the
fiscal year ended June 30, 2008 and three months ended
September 30, 2008 (unaudited):
|
|
|
|
|
|
|
Amount
|
|
|
Balance at June 30, 2007
|
|
$
|
|
|
Provision for doubtful accounts
|
|
|
164
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
164
|
|
Provision for doubtful accounts
|
|
|
28
|
|
|
|
|
|
|
Balance at September 30, 2008 (unaudited)
|
|
$
|
192
|
|
|
|
|
|
|
Inventories
Inventories are stated at the lower of cost or market with cost
determined on a
first-in,
first-out (FIFO) method of valuation. The
establishment of inventory allowances for excess and obsolete
inventories is based on estimated exposure on specific inventory
items.
F-54
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
Property
and Equipment
Property and equipment is carried at cost, less accumulated
depreciation and amortization. Depreciation of equipment is
computed using the straight-line method over estimated useful
lives of three to seven years and amortization of leasehold
improvements over the shorter of their estimated useful lives or
the lease term. Expenditures for maintenance and repairs and
minor renewals and betterments which do not extend or improve
the life of the respective assets are expensed as incurred. All
other expenditures for renewals and betterments are capitalized.
The assets and related depreciation accounts are adjusted for
property retirements and disposals with the resulting gains or
losses included in operations.
Operating
Lease
The Company leases office space under an operating lease. The
lease arrangement contains a rent escalation clause for which
the lease expense is recognized on a straight-line basis over
the terms of the lease. Rent expense that is recognized but not
yet paid is included in deferred rent on the consolidated
balance sheets.
Patents
The capitalized costs incurred to obtain patents are amortized
using the straight-line method over their remaining estimated
lives, not exceeding 20 years. The recover ability of
capitalized patent costs is dependent upon the Companys
ability to derive revenue-producing products from such patents
or the ultimate sale or licensing of such patent rights. Patents
that are abandoned are written off at the time of abandonment.
Long-Lived
Assets
The Company regularly evaluates the carrying value of long-lived
assets for events or changes in circumstances that indicate that
the carrying amount may not be recoverable or that the remaining
estimated useful life should be changed. An impairment loss is
recognized when the carrying amount of an asset exceeds the
anticipated future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition. The
amount of the impairment loss to be recorded, if any, is
calculated by the excess of the assets carrying value over
its fair value.
Revenue
Recognition
The Company recognizes revenue in accordance with SEC Staff
Accounting Bulletin (SAB) No. 104, Revenue
Recognition and Emerging Issues Task Force
(EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables. Revenue
is recognized when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists;
(2) shipment of all components has occurred or delivery of
all components has occurred if the terms specify that title and
risk of loss pass when products reach their destination;
(3) the sales price is fixed or determinable; and
(4) collectability is reasonably assured. The Company has
no additional post-shipment or other contractual obligations or
performance requirements and does not provide any credits or
other pricing adjustments affecting revenue recognition once
those criteria have been met. The customer has no right of
return on any component once these criteria have been met.
Payment terms are generally set at 30 days.
The Company derives its revenue through the sale of the
Diamondback 360°, which includes single-use catheters,
guidewires and control units used in the atherectomy procedure.
Initial orders from all new customers require the customer to
purchase the entire Diamondback 360° system, which includes
multiple single-use catheters and guidewires and one control
unit. Due to delays in the final FDA clearance of the new
control unit and early production constraints of the new control
unit, the Company was not able to deliver all components of the
initial
F-55
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
order. For these initial orders, the Company shipped and billed
only for the single-use catheters and guidewires. In addition,
the Company sent an older version of its control unit as a
loaner unit with the customers expectation that the
Company would deliver and bill for a new control unit once it
becomes available. As the Company had not delivered each of the
individual components to all customers, the Company had deferred
the revenue for the entire amount billed for single-use
catheters and guidewires shipped to the customers that had not
received the new control unit. Those billings totaled $116 at
June 30, 2008, which amount had been deferred until the new
control units were delivered during the three months ended
September 30, 2008 (unaudited). After the initial order,
customers are not required to purchase any additional disposable
products from the Company. Once the Company had delivered the
new control unit to a customer, the Company recognized revenue
that was previously deferred and revenue for subsequent reorders
of single-use catheters, guidewires and additional new control
units when the criteria of SAB No. 104 are met.
The legal title and risk of loss of each of Diamondback
360° components, consisting of disposable catheters,
disposable guidewires, and a control unit, are transferred to
the customer based on the shipping terms. Many initial shipments
to customers included a loaner control unit, which the Company
provided, until the new control unit received clearance from the
FDA and was subsequently available for sale. The loaner control
units were Company-owned property and the Company maintained
legal title to these units.
Costs related to products delivered are recognized when the
legal title and risk of loss of individual components are
transferred to the customer based on the shipping terms. At June
30 and September 30, 2008 (unaudited), the legal title and
risk of loss of each disposable component had transferred to the
customer and the Company has no future economic benefit in these
disposables. As a result, the cost of goods sold related to
these disposable units has been recorded during the year ended
June 30, 2008 and three months ended September 30,
2008 (unaudited).
Warranty
Costs
The Company provides its customers with the right to receive a
replacement if a product is determined to be defective at the
time of shipment. Warranty reserve provisions are estimated
based on Company experience, volume, and expected warranty
claims. Warranty reserve, provisions and claims for the fiscal
year ended June 30, 2008 and three months ended
September 30, 2008 (unaudited) were as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Balance at June 30, 2007
|
|
$
|
|
|
Provision
|
|
|
137
|
|
Claims
|
|
|
(125
|
)
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
12
|
|
Provision
|
|
|
122
|
|
Claims
|
|
|
(102
|
)
|
|
|
|
|
|
Balance at September 30, 2008 (unaudited)
|
|
$
|
32
|
|
|
|
|
|
|
Income
Taxes
Deferred income taxes are recorded to reflect the tax
consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting
amounts based on enacted tax rates applicable to the periods in
which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
F-56
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
Developing a provision for income taxes, including the effective
tax rate and the analysis of potential tax exposure items, if
any, requires significant judgment and expertise in federal and
state income tax laws, regulations and strategies, including the
determination of deferred tax assets. The Companys
judgment and tax strategies are subject to audit by various
taxing authorities.
Research
and Development Expenses
Research and development expenses include costs associated with
the design, development, testing, enhancement and regulatory
approval of the Companys products. Research and
development expenses include employee compensation, including
stock-based compensation, supplies and materials, consulting
expenses, travel and facilities overhead. The Company also
incurs significant expenses to operate clinical trials,
including trial design, third-party fees, clinical site
reimbursement, data management and travel expenses. Research and
development expenses are expensed as incurred.
Concentration
of Credit Risk
Financial instruments that potentially expose the Company to
concentration of credit risk consist primarily of cash and cash
equivalents, investments and accounts receivable. The Company
maintains its cash and investment balances primarily with two
financial institutions. At times, these balances exceed
federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any
significant credit risk in cash and cash equivalents.
Fair
Value of Financial Instruments (unaudited)
Effective July 1, 2008, the Company adopted
SFAS No. 157, Fair Value Measurements
(SFAS No. 157), which provides a
framework for measuring fair value under Generally Accepted
Accounting Principles and expands disclosures about fair value
measurements. In February 2008, the Financial Accounting
Standards Board (FASB) issued FASB Staff Position
No. 157-2,
Effective Date of FASB Statement No. 157, which
provides a one-year deferral on the effective date of
SFAS No. 157 for non-financial assets and
non-financial liabilities, except those that are recognized or
disclosed in the financial statements at least annually.
Therefore, the Company has adopted the provisions of
SFAS No. 157 with respect to financial assets and
financial liabilities only.
SFAS 157 classifies these inputs into the following
hierarchy:
Level 1 Inputs quoted prices in active
markets for identical assets and liabilities
Level 2 Inputs observable inputs other
than quoted prices in active markets for identical assets and
liabilities
Level 3 Inputs unobservable inputs
As of September 30, 2008, those assets and liabilities that
are measured at fair value on a recurring basis consisted of the
Companys auction rate securities it classifies as
available-for-sale. The Company believes that the carrying
amounts of its other financial instruments, including accounts
payable and accrued liabilities approximate their fair value due
to the short-term maturities of these instruments.
F-57
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
The following table sets forth the fair value of the
Companys auction rate securities that were measured on a
recurring basis as of September 30, 2008. Assets are
measured on a recurring basis if they are remeasured at least
annually:
|
|
|
|
|
|
|
Level 3
|
|
|
Balance at June 30, 2008
|
|
$
|
21,733
|
|
Total unrealized losses included in other comprehensive income
(loss)
|
|
|
(343
|
)
|
|
|
|
|
|
Balance at September 30, 2008 (unaudited)
|
|
$
|
21,390
|
|
|
|
|
|
|
Use of
Estimates
The preparation of the Companys consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Stock-Based
Compensation
Effective July 1, 2006, the Company adopted Financial
Accounting Standards Board (FASB)
SFAS No. 123(R), Share-Based Payment, as
interpreted by SAB No. 107, using the prospective
application method, to account for stock-based compensation
expense associated with the issuance of stock options to
employees and directors on or after July 1, 2006. The
unvested compensation costs at July 1, 2006, which relate
to grants of options that occurred prior to the date of adoption
of SFAS No. 123(R), will continue to be accounted for
under Accounting Principles Board (APB) No. 25,
Accounting for Stock Issued to Employees.
SFAS No. 123(R) requires the Company to recognize
stock-based compensation expense in an amount equal to the fair
value of share-based payments computed at the date of grant. The
fair value of all employee and director stock option awards is
expensed in the consolidated statements of operations over the
related vesting period of the options. The Company calculated
the fair value on the date of grant using a Black-Scholes model.
For all options granted prior to July 1, 2006, in
accordance with the provisions of APB No. 25, compensation
costs for stock options granted to employees were measured at
the excess, if any, of the value of the Companys stock at
the date of the grant over the amount an employee would have to
pay to acquire the stock.
As a result of adopting SFAS No. 123(R) on
July 1, 2006, net loss for the years ended June 30,
2007 and 2008 and the three months ended September 30, 2007
and 2008 (unaudited) were $390, $7,646, $350 and $1,672,
respectively, higher than if the Company had continued to
account for stock-based compensation consistent with prior
years. This expense is included in cost of goods sold, selling,
general and administrative and research and development
expenses. Note 6 to the consolidated financial statements
contains the significant assumptions used in determining the
underlying fair value of options.
Preferred
Stock
The Company records the current estimated fair value of its
redeemable convertible preferred stock based on the fair market
value of that stock as determined by management and the Board of
Directors. In accordance with Accounting Series Release
No. 268, Presentation in Financial Statements of
Redeemable Preferred Stocks, and EITF Abstracts,
Topic D-98, Classification and Measurement of Redeemable
Securities, the Company records changes in the current fair
value of its redeemable convertible preferred stock in the
consolidated statements of
F-58
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
changes in shareholders (deficiency) equity and
comprehensive (loss) income and consolidated statements of
operations as accretion of redeemable convertible preferred
stock.
Preferred
Stock Warrants
Freestanding warrants and other similar instruments related to
shares that are redeemable are accounted for in accordance with
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, and its related interpretations. Under
SFAS No. 150, the freestanding warrant that is related
to the Companys redeemable convertible preferred stock is
classified as a liability on the consolidated balance sheets as
of June 30, 2007 and 2008, and September 30, 2008
(unaudited). The warrant is subject to remeasurement at each
balance sheet date and any change in fair value is recognized as
a component of interest (expense) income. Fair value on the
grant date is measured using the Black-Scholes option pricing
model and similar underlying assumptions consistent with the
issuance of stock option awards. The Company will continue to
adjust the liability for changes in fair value until the earlier
of the exercise or expiration of the warrants or the completion
of a liquidity event, including the completion of an initial
public offering with gross cash proceeds to the Company of at
least $40,000 (Qualified IPO), at which time all
preferred stock warrants will be converted into warrants to
purchase common stock and, accordingly, the liability will be
reclassified to equity.
Comprehensive
(Loss) Income
Comprehensive (loss) income for the Company includes net loss
and unrealized (loss) gain on investments that are charged or
credited to comprehensive (loss) income. These amounts are
presented in the consolidated statements of changes in
shareholders (deficiency) equity and comprehensive (loss)
income.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This standard clarifies the
principle that fair value should be based on the assumptions
that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy
that prioritizes the information used to develop these
assumptions. On February 12, 2008, the FASB issued FASB
Staff Position, or FSP,
FAS 157-2,
Effective Date of FASB Statement No. 157, or FSP
FAS 157-2.
FSP
FAS 157-2
defers the implementation of SFAS No. 157 for certain
nonfinancial assets and nonfinancial liabilities. The portion of
SFAS No. 157 that has been deferred by FSP
FAS 157-2
will be effective for the Company beginning in the first quarter
of fiscal year 2010. SFAS No. 157 was adopted for
financial assets and liabilities on July 1, 2008 and did
not have a material impact on the Companys financial
position or consolidated results of operations during the three
months ended September 30, 2008 (unaudited).
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. This standard provides companies with an option
to report selected financial assets and liabilities at fair
value and establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 was adopted on July 1,
2008 and did not have a material impact on the Companys
financial position or consolidated results of operations during
the three months ended September 30, 2008 (unaudited).
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB
No. 51. The revised standards continue the movement
toward the greater use of fair values in financial reporting.
SFAS 141(R) will significantly change how business
acquisitions are accounted for and will impact financial
statements both on the
F-59
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
acquisition date and in subsequent periods including the
accounting for contingent consideration. SFAS 160 will
change the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS 141(R) and
SFAS 160 are effective for fiscal years beginning on or
after December 15, 2008 with SFAS 141(R) to be applied
prospectively while SFAS 160 requires retroactive adoption
of the presentation and disclosure requirements for existing
minority interests. All other requirements of SFAS 160
shall be applied prospectively. Early adoption is prohibited for
both standards. The Company is currently evaluating the impact
of these statements, but expects that the adoption of
SFAS No. 141(R) will have a material impact on how the
Company will identify, negotiate, and value any future
acquisitions and a material impact on how an acquisition will
affect its consolidated financial statements, and that
SFAS No. 160 will not have a material impact on its
financial position or consolidated results of operations.
The Companys consolidated financial statements have been
prepared on the going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. The Company has cash and cash
equivalents of $7.6 million and $14.7 million at
June 30, 2008 and September 30, 2008 (unaudited),
respectively. During the year ended June 30, 2008 and the
three months ended September 30, 2008 (unaudited), net cash
used in operations amounted to $31.9 million and
$12.0 million, respectively. As of June 30, 2008 and
September 30, 2008 (unaudited), the Company had an
accumulated deficit of $118.3 million and
$132.0 million, respectively. The Company has incurred
negative cash flows and losses since inception. In addition, in
February 2008, the Company was notified that recent conditions
in the global credit markets have caused insufficient demand for
auction rate securities, resulting in failed auctions for
$23.0 million of the Companys auction rate securities
held at June 30, 2008 and September 30, 2008
(unaudited). These securities are currently not liquid, as the
Company has an inability to sell the securities due to continued
failed auctions.
On March 28, 2008, the Company obtained a margin loan from
UBS Financial Services, Inc., the entity through which it
originally purchased the auction rate securities, for up to
$12.0 million, with a floating interest rate equal to
30-day
LIBOR, plus 0.25%. The loan was secured by the
$23.0 million par value of the Companys auction rate
securities. The maximum borrowing amount was not set forth in
the written agreement for the loan and may have been adjusted
from time to time by UBS Financial Services at its discretion.
The loan was due on demand and UBS Financial Services may have
required the Company to repay it in full from any loan or
financing arrangement or a public equity offering. The margin
requirements were determined by UBS Financial Services but were
not included in the written loan agreement and were therefore
subject to change. As of June 30, 2008, the margin
requirements provided that UBS Financial Services would require
a margin call on this loan if at any time the outstanding
borrowings, including interest, exceeded $12.0 million or
75% of UBS Financial Services estimate of the fair value
of the Companys auction rate securities. If these margin
requirements were not maintained, UBS Financial Services may
have required the Company to make a loan payment in an amount
necessary to comply with the applicable margin requirements or
demand repayment of the entire outstanding balance. As of
June 30, 2008, the Company maintained these margin
requirements. See Note 4 for a description of the
replacement of this loan and the additional loan and security
agreement entered into with Silicon Valley Bank.
Based on current operating levels, combined with limited capital
resources, financing the Companys operations will require
that the Company raise additional equity or debt capital prior
to or during the quarter ending September 30, 2009. If the
Company fails to raise sufficient equity or debt capital,
management would implement cost reduction measures, including
workforce reductions, as well as reductions in overhead costs
and capital expenditures. There can be no assurance that these
sources will provide sufficient cash flows to enable the Company
to continue as a going concern. The Company currently has no
commitments for additional financing and
F-60
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
may experience difficulty in obtaining additional financing on
favorable terms, if at all. All of these factors raise
substantial doubt about the Companys ability to continue
as a going concern.
|
|
3.
|
Selected
Consolidated Financial Statement Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Accounts Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
|
|
|
$
|
5,061
|
|
|
$
|
5,631
|
|
Less: Allowance for doubtful accounts
|
|
|
|
|
|
|
(164
|
)
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
4,897
|
|
|
$
|
5,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
513
|
|
|
$
|
2,338
|
|
|
$
|
2,471
|
|
Work in process
|
|
|
134
|
|
|
|
117
|
|
|
|
232
|
|
Finished goods
|
|
|
403
|
|
|
|
1,321
|
|
|
|
1,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,050
|
|
|
$
|
3,776
|
|
|
$
|
3,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
804
|
|
|
$
|
1,360
|
|
|
$
|
1,554
|
|
Furniture
|
|
|
85
|
|
|
|
169
|
|
|
|
169
|
|
Leasehold improvements
|
|
|
14
|
|
|
|
90
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
903
|
|
|
|
1,619
|
|
|
|
1,820
|
|
Less: Accumulated depreciation and amortization
|
|
|
(318
|
)
|
|
|
(578
|
)
|
|
|
(664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
585
|
|
|
$
|
1,041
|
|
|
$
|
1,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
990
|
|
|
$
|
1,279
|
|
|
$
|
1,460
|
|
Less: Accumulated amortization
|
|
|
(378
|
)
|
|
|
(299
|
)
|
|
|
(308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
612
|
|
|
$
|
980
|
|
|
$
|
1,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008, future estimated amortization of
patents and patent licenses will be:
|
|
|
|
|
2009
|
|
$
|
37
|
|
2010
|
|
|
37
|
|
2011
|
|
|
36
|
|
2012
|
|
|
35
|
|
2013
|
|
|
35
|
|
Thereafter
|
|
|
800
|
|
|
|
|
|
|
|
|
$
|
980
|
|
|
|
|
|
|
F-61
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
As of September 30, 2008 (unaudited), future estimated
amortization of patents and patent licenses will be:
|
|
|
|
|
Nine months ending June 30, 2009
|
|
$
|
28
|
|
2010
|
|
|
37
|
|
2011
|
|
|
36
|
|
2012
|
|
|
35
|
|
2013
|
|
|
35
|
|
Thereafter
|
|
|
981
|
|
|
|
|
|
|
|
|
$
|
1,152
|
|
|
|
|
|
|
This future amortization expense is an estimate. Actual amounts
may vary from these estimated amounts due to additional
intangible asset acquisitions, potential impairment, accelerated
amortization or other events.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Accrued expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and bonus
|
|
$
|
612
|
|
|
$
|
1,229
|
|
|
$
|
898
|
|
|
|
|
|
Commissions
|
|
|
|
|
|
|
1,493
|
|
|
|
1,840
|
|
|
|
|
|
Accrued vacation
|
|
|
124
|
|
|
|
554
|
|
|
|
708
|
|
|
|
|
|
Other
|
|
|
12
|
|
|
|
191
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
748
|
|
|
$
|
3,467
|
|
|
$
|
3,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
and Security Agreement with Silicon Valley Bank
On September 12, 2008, the Company entered into a loan and
security agreement with Silicon Valley Bank with maximum
available borrowings of $13.5 million. The agreement
includes a $3.0 million term loan, a $5.0 million
accounts receivable line of credit, and two term loans for an
aggregate of $5.5 million that are guaranteed by certain of
the Companys affiliates. The terms of each of these loans
is as follows:
|
|
|
|
|
The $3.0 million term loan has a fixed interest rate of
10.5% and a final payment amount equal to 3.0% of the loan
amount due at maturity. This term loan has a 36 month
maturity, with repayment terms that include interest only
payments during the first six months followed by 30 equal
principal and interest payments. This term loan also includes an
acceleration provision that requires the Company to pay the
entire outstanding balance, plus a penalty ranging from 1.0% to
6.0% of the principal amount, upon prepayment or the occurrence
and continuance of an event of default. As part of the term loan
agreement, the Company granted Silicon Valley Bank a warrant to
purchase 13,000 shares of Series B redeemable
convertible preferred stock at an exercise price of $9.25 per
share. This warrant was assigned a value of $75 for accounting
purposes, is immediately exercisable, and expires ten years
after issuance. The balance outstanding on the term loan at
September 30, 2008 (unaudited) was $3.0 million.
|
|
|
|
|
|
The accounts receivable line of credit has a two year maturity
and a floating interest rate equal to the prime rate, plus 2.0%,
with an interest rate floor of 7.0%. Interest on borrowings is
due monthly and the principal balance is due at maturity.
Borrowings on the line of credit are based on 80% of eligible
domestic receivables, which is defined as receivables aged less
than 90 days from the invoice date along with specific
exclusions for contra-accounts, concentrations, and government
receivables. The Companys accounts receivable receipts
will be
|
F-62
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
|
|
|
|
|
deposited into a lockbox account in the name of Silicon Valley
Bank. The accounts receivable line of credit is subject to
non-use fees, annual fees and cancellation fees. There was no
balance outstanding on the line of credit at September 30,
2008 (unaudited).
|
|
|
|
|
|
One of the guaranteed term loans is for $3.0 million and
the other guaranteed term loan is for $2.5 million, each
with a one year maturity. Each of the guaranteed term loans has
a floating interest rate equal to the prime rate, plus 2.25%,
with an interest rate floor of 7.0% (effective rate of 7.0% at
September 30, 2008). Interest on borrowings is due monthly
and the principal balance is due at maturity. One of the
Companys directors and shareholders and two entities who
hold the Companys preferred shares and are also affiliated
with two of the Companys directors agreed to act as
guarantors of these term loans. In consideration for guarantees,
the Company issued the guarantors warrants to purchase an
aggregate of 458,333 shares of the Companys common
stock at an exercise price of $6.00 per share. The balance
outstanding on the guaranteed term loans at September 30,
2008 (unaudited) was $5.5 million (excluding debt discount
of $1.8 million).
|
The guaranteed term loans and common stock warrants were
allocated using the relative fair value method. Under this
method, the Company estimated the fair value of the term loans
without the guarantees and calculated the fair value of the
common stock warrants using the Black-Scholes method. The
relative fair value of the loans and warrants were applied to
the loan proceeds of $5.5 million, resulting in an assigned
value of $3.7 million for the loans and $1.8 million
for the warrants. The assigned value of the warrants of
$1.8 million is treated as a debt discount and amortized
over the one year maturity of the loan.
Borrowings from Silicon Valley Bank are collateralized by all of
the Companys assets, other than the Companys auction
rate securities and intellectual property, and the investor
guarantees. The borrowings are subject to prepayment penalties
and financial covenants, including the Company maintaining a
minimum liquidity ratio and the Companys achievement of
minimum monthly net revenue goals. Any non-compliance by the
Company under the terms of the Companys debt arrangements
could result in an event of default under the Silicon Valley
Bank loan, which, if not cured, could result in the acceleration
of this debt.
Loan
Payable
On March 28, 2008, the Company obtained a margin loan from
UBS Financial Services, Inc. for up to $12.0 million, with
a floating interest rate equal to
30-day
LIBOR, plus 0.25%. The loan was secured by the
$23.0 million par value of the Companys auction rate
securities. The maximum borrowing amount was not set forth in
the written agreement for the loan and may have been adjusted
from time to time by UBS Financial Services in its sole
discretion. The loan was due on demand and UBS Financial
Services may have required the Company to repay it in full from
any loan or financing arrangement or a public equity offering.
The margin requirements were determined by UBS Financial
Services but were not included in the written loan agreement and
were therefore subject to change. As of June 30, 2008, the
margin requirements provided that UBS Financial Services would
require a margin call on this loan if at any time the
outstanding borrowings, including interest, exceed
$12.0 million or 75% of UBS Financial Services
estimate of the fair value of the Companys auction rate
securities. If these margin requirements were not maintained,
UBS Financial Services may have required the Company to make a
loan payment in an amount necessary to comply with the
applicable margin requirements or demand repayment of the entire
outstanding balance. As of June 30, 2008, the Company
maintained these margin requirements.
On August 21, 2008, the Company replaced this loan with a
margin loan from UBS Bank USA, which increased maximum
borrowings available to $23.0 million. This maximum
borrowing amount is not set forth in the written agreement for
the loan and may be adjusted from time to time by UBS Bank at
its discretion. The margin loan has a floating interest rate
equal to
30-day
LIBOR, plus 1.0%. The loan is due on demand and UBS Bank will
F-63
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
require the Company to repay it in full from the proceeds
received from a public equity offering where net proceeds exceed
$50.0 million. In addition, if at any time any of the
Companys auction rate securities may be sold, exchanged,
redeemed, transferred or otherwise conveyed for no less than
their par value, then the Company must immediately effect such a
transfer and the proceeds must be used to pay down outstanding
borrowings under this loan. The margin requirements are
determined by UBS Bank but are not included in the written loan
agreement and are therefore subject to change. As of
August 21, 2008, the margin requirements include maximum
borrowings, including interest, of $23.0 million. If these
margin requirements are not maintained, UBS Bank may require the
Company to make a loan payment in an amount necessary to comply
with the applicable margin requirements or demand repayment of
the entire outstanding balance. The Company has maintained the
margin requirements under the loans from both UBS entities. The
outstanding balance on this loan at September 30, 2008
(unaudited) was $22.9 million.
As of September 30, 2008 (unaudited), debt maturities were
as follows:
|
|
|
|
|
Nine months ending June 30, 2009
|
|
$
|
21,853
|
|
2010
|
|
|
6,248
|
|
2011
|
|
|
1,200
|
|
2012
|
|
|
300
|
|
|
|
|
|
|
Total
|
|
$
|
29,601
|
|
Less: Current Maturities
|
|
|
(27,201
|
)
|
|
|
|
|
|
Long-term debt
|
|
$
|
2,400
|
|
|
|
|
|
|
Additional
Financing
In conjunction with the proceeds received through the signing of
the loan and security agreement with Silicon Valley Bank and new
margin loan from UBS Bank USA, the Company reassessed its need
for additional equity or debt capital. Based on current
operating levels, combined with limited capital resources and
proceeds received from the loan and security agreement with
Silicon Valley Bank and new margin loan from UBS Bank USA,
financing the Companys operations will require that the
Company raise additional equity or debt capital prior to or
during the quarter ending September 30, 2009. See
Note 2 for additional discussion of the assessment of the
Companys ability to continue as a going concern.
Convertible
Promissory Notes
At various dates in fiscal 2006 and 2007, the Company obtained
$3,084 in financing from the issuance of convertible promissory
notes (the Notes) that accrued interest at a rate of
8% per annum. Under the terms of the Notes, interest and
principal were due on February 28, 2009, unless earlier
prepaid or converted into Series A redeemable convertible
preferred stock. The interest and principal of the notes convert
at the per share price of any future offerings. On July 19,
2006, all Notes and accrued interest were converted into the
Series A redeemable convertible preferred stock
(Note 10).
In fiscal 2007, the Company issued warrants to purchase
131,349 shares of common stock at $5.71 per share to agents
in connection with the Series A redeemable convertible
preferred stock offering. The warrants expire seven years after
issuance and are exercisable immediately. The warrants were
assigned a value of $99 for accounting purposes. In fiscal 2006
and 2007, the Company also issued warrants to purchase 6,400 and
6,000 shares of common
F-64
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
stock to consultants resulting in expense for services of $31
and $4, respectively. The warrants granted to consultants in
2007 were 50% immediately exercisable and 50% exercisable one
year from the date of issuance. During September 2008
(unaudited), the Company issued the guarantors of the Silicon
Valley Bank guaranteed term loans warrants to purchase an
aggregate of 458,333 shares of the Companys common
stock at an exercise price of $6.00 per share. The warrants
issued in September 2008 were assigned a value of
$1.8 million for accounting purposes, are immediately
exercisable, and expire five years after issuance. The following
summarizes common stock warrant activity:
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Price Range
|
|
|
|
Outstanding
|
|
|
per Share
|
|
|
Warrants outstanding at June 30, 2005
|
|
|
259,925
|
|
|
$
|
1.00 - $6.00
|
|
Warrants issued
|
|
|
6,400
|
|
|
$
|
8.00
|
|
Warrants expired
|
|
|
(3,600
|
)
|
|
$
|
5.00
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at June 30, 2006
|
|
|
262,725
|
|
|
$
|
1.00 - $8.00
|
|
Warrants issued
|
|
|
137,349
|
|
|
$
|
5.71
|
|
Warrants exercised
|
|
|
(3,250
|
)
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at June 30, 2007
|
|
|
396,824
|
|
|
$
|
1.00 - $8.00
|
|
Warrants exercised
|
|
|
(117,948
|
)
|
|
$
|
1.00 - $8.00
|
|
Warrants expired
|
|
|
(34,602
|
)
|
|
$
|
5.00
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at June 30, 2008
|
|
|
244,274
|
|
|
$
|
1.00 - $8.00
|
|
Warrants issued
|
|
|
458,333
|
|
|
$
|
6.00
|
|
Warrants exercised
|
|
|
(10,450
|
)
|
|
$
|
5.00
|
|
Warrants expired
|
|
|
(6,000
|
)
|
|
$
|
5.00
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at September 30, 2008 (unaudited)
|
|
|
686,157
|
|
|
$
|
1.00 - $8.00
|
|
|
|
|
|
|
|
|
|
|
Warrants have exercise prices ranging from $1.00 to $8.00 and
are immediately exercisable, unless noted above. The following
assumptions were utilized in determining the fair value of
warrants issued under the Black-Scholes model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended June 30,
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Weighted average fair value of warrants granted
|
|
$
|
4.90
|
|
|
$0.69 - $0.76
|
|
$
|
6.17
|
|
Risk-free interest rates
|
|
|
4.34
|
%
|
|
4.70% - 5.02%
|
|
|
3.01
|
%
|
Expected life
|
|
|
5 years
|
|
|
5 - 7 years
|
|
|
5 years
|
|
Expected volatility
|
|
|
70.0
|
%
|
|
44.9% - 45.1%
|
|
|
46.7
|
%
|
Expected dividends
|
|
|
None
|
|
|
None
|
|
|
None
|
|
|
|
6.
|
Stock
Options and Restricted Stock Awards
|
The Company has a 1991 Stock Option Plan (the 1991
Plan), a 2003 Stock Option Plan (the 2003
Plan), and a 2007 Equity Incentive Plan (the 2007
Plan) (collectively the Plans) under which
options to purchase common stock and restricted stock awards
have been granted to employees, directors and consultants at
exercise prices determined by the Board of Directors. The 1991
Plan and 2003 Plan permitted the granting of incentive stock
F-65
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
options and nonqualified options. A total of 750,000 shares
were originally reserved for issuance under the 1991 Plan, but
with the execution of the 2003 Plan no additional options were
granted under it. A total of 3,800,000 shares of the
Companys common stock were originally reserved for
issuance under the 2003 Plan but with the approval of the 2007
Plan no additional options will be granted under it. The 2007
Plan allows for the granting of up to 3,000,000 shares of
common stock as approved by the Board of Directors in the form
of nonqualified or incentive stock options, restricted stock
awards, restricted stock unit awards, performance share awards,
performance unit awards or stock appreciation rights to
officers, directors, consultants and employees of the Company.
The 2007 Plan also includes a renewal provision whereby the
number of shares shall automatically be increased on the first
day of each fiscal year beginning July 1, 2008, and ending
July 1, 2017, by the lesser of
(i) 1,500,000 shares, (ii) 5% of the outstanding
common shares on such date, or (iii) a lesser amount
determined by the Board of Directors.
For the year ended June 30, 2008, the Company had granted
the following amount of stock options and restricted stock
awards:
|
|
|
|
|
|
|
Number of
|
|
Grant Type
|
|
Shares
|
|
|
Service based stock options (2007 Plan)
|
|
|
1,383,364
|
|
Performance based stock options (2007 Plan)
|
|
|
775,000
|
|
Service based stock options (2003 Plan)
|
|
|
663,583
|
|
|
|
|
|
|
Total
|
|
|
2,821,947
|
(1)
|
|
|
|
|
|
Restricted stock awards (2007 Plan)
|
|
|
840,138
|
|
|
|
|
(1) |
|
Excludes 70,000 shares of service based stock options
granted outside of the plans. |
The Company had granted the following amount of stock options
and restricted stock awards through September 30, 2008
(unaudited):
|
|
|
|
|
|
|
Number of
|
|
Grant Type
|
|
Shares
|
|
|
Service based stock options (2007 Plan)
|
|
|
1,383,364
|
|
Performance based stock options (2007 Plan)
|
|
|
775,000
|
|
Service based stock options (2003 Plan)
|
|
|
663,583
|
|
|
|
|
|
|
Total
|
|
|
2,821,947
|
(1)
|
|
|
|
|
|
Restricted stock awards (2007 Plan)
|
|
|
1,001,961
|
|
|
|
|
(1) |
|
Excludes 70,000 shares of service based stock options
granted outside of the plans. |
All options granted under the Plans become exercisable over
periods established at the date of grant. The option exercise
price is generally not less than the estimated fair market
values of the Companys common stock at the date of grant,
as determined by the Companys management and Board of
Directors. In addition, the Company has granted nonqualified
stock options to employees, directors and consultants outside of
the Plans.
In estimating the value of the Companys common stock for
purposes of granting options and determining stock-based
compensation expense, the Companys management and board of
directors conducted stock valuations using two different
valuation methods: the option pricing method and the probability
weighted expected return method. Both of these valuation methods
have taken into consideration the following factors: financing
activity, rights and preferences of the Companys preferred
stock, growth of the executive management team, clinical trial
F-66
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
activity, the FDA process, the status of the Companys
commercial launch, the Companys mergers and acquisitions
and public offering processes, revenues, the valuations of
comparable public companies, the Companys cash and working
capital amounts, and additional objective and subjective factors
relating to the Companys business. The Companys
management and board of directors set the exercise prices for
option grants based upon their best estimate of the fair market
value of the common stock at the time they made such grants,
taking into account all information available at those times. In
some cases, management and the board of directors made
retrospective assessments of the valuation of the common stock
at later dates and determined that the fair market value of the
common stock at the times the grants were made was different
than the exercise prices established for those grants. In cases
in which the fair market was higher than the exercise price, the
Company recognized stock-based compensation expense for the
excess of the fair market value of the common stock over the
exercise price.
Stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares Available
|
|
|
Number of
|
|
|
Average
|
|
|
|
for Grant(a)
|
|
|
Options(b)
|
|
|
Exercise Price
|
|
|
Options outstanding at June 30, 2005
|
|
|
995,750
|
|
|
|
1,552,861
|
|
|
|
3.12
|
|
Options granted
|
|
|
(484,500
|
)
|
|
|
484,500
|
|
|
|
7.53
|
|
Options forfeited or expired
|
|
|
113,500
|
|
|
|
(213,500
|
)
|
|
|
2.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2006
|
|
|
624,750
|
|
|
|
1,823,861
|
|
|
|
3.93
|
|
Shares reserved
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,622,850
|
)
|
|
|
2,622,850
|
|
|
|
5.64
|
|
Options exercised
|
|
|
|
|
|
|
(65,000
|
)
|
|
|
1.00
|
|
Options forfeited or expired
|
|
|
79,850
|
|
|
|
(94,850
|
)
|
|
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2007
|
|
|
581,750
|
|
|
|
4,286,861
|
|
|
|
4.96
|
|
Shares reserved
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
Options granted(c)
|
|
|
(2,821,947
|
)
|
|
|
2,891,947
|
|
|
|
7.21
|
|
Options exercised
|
|
|
|
|
|
|
(377,500
|
)
|
|
|
3.28
|
|
Options forfeited or expired
|
|
|
81,833
|
|
|
|
(923,167
|
)
|
|
|
2.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2008
|
|
|
841,636
|
|
|
|
5,878,141
|
|
|
|
6.59
|
|
Shares reserved
|
|
|
379,397
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(9,000
|
)
|
|
|
5.39
|
|
Options forfeited or expired
|
|
|
|
|
|
|
(27,666
|
)
|
|
|
5.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2008 (unaudited)
|
|
|
1,221,033
|
|
|
|
5,841,475
|
|
|
|
6.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Excludes the effect of options granted, exercised, forfeited or
expired related to activity from options granted outside the
stock option plans described above; excludes the effect of
restricted stock awards granted or forfeited under the 2007 Plan. |
|
(b) |
|
Includes the effect of options granted, exercised, forfeited or
expired from the 1991 Plan, 2003 Plan, 2007 Plan, and options
granted outside the stock option plans described above. |
|
(c) |
|
Excludes 70,000 options granted outside of the plans. |
F-67
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
The following table summarizes information about stock options
granted during the years ended June 30, 2007 and 2008 and
three months ended September 30, 2008 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Number of Shares
|
|
|
|
|
|
Fair Value of
|
|
Grant Date
|
|
Subject to Options
|
|
|
Exercise Price
|
|
|
Common Stock
|
|
|
July 1, 2006
|
|
|
132,000
|
|
|
$
|
5.71
|
|
|
$
|
2.43
|
|
July 17, 2006
|
|
|
230,000
|
|
|
$
|
5.71
|
|
|
$
|
2.43
|
|
August 15, 2006
|
|
|
239,500
|
|
|
$
|
5.71
|
|
|
$
|
2.43
|
|
October 3, 2006
|
|
|
375,000
|
|
|
$
|
5.71
|
|
|
$
|
2.58
|
|
December 19, 2006
|
|
|
446,100
|
|
|
$
|
5.71
|
|
|
$
|
2.79
|
|
February 14, 2007
|
|
|
46,000
|
|
|
$
|
5.71
|
|
|
$
|
3.58
|
|
February 15, 2007
|
|
|
540,000
|
|
|
$
|
5.71
|
|
|
$
|
3.58
|
|
April 18, 2007
|
|
|
299,250
|
|
|
$
|
5.71
|
|
|
$
|
4.63
|
|
June 12, 2007
|
|
|
315,000
|
|
|
$
|
5.11
|
|
|
$
|
5.95
|
|
August 7, 2007
|
|
|
402,500
|
|
|
$
|
5.11
|
|
|
$
|
5.95
|
|
October 9, 2007
|
|
|
331,083
|
|
|
$
|
5.11
|
|
|
$
|
7.36
|
|
November 13, 2007
|
|
|
154,917
|
|
|
$
|
7.36
|
|
|
$
|
7.90
|
|
December 12, 2007
|
|
|
775,000
|
|
|
$
|
7.86
|
|
|
$
|
8.44
|
|
December 31, 2007
|
|
|
1,056,234
|
|
|
$
|
7.86
|
|
|
$
|
8.44
|
|
February 14, 2008
|
|
|
172,213
|
|
|
$
|
9.04
|
|
|
$
|
9.36
|
|
Options outstanding and exercisable at June 30, 2008, were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Exercisable
|
|
|
Contractual
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
$5.00
|
|
|
94,000
|
|
|
|
0.31
|
|
|
$
|
5.00
|
|
|
|
94,000
|
|
|
|
0.31
|
|
|
$
|
5.00
|
|
$5.11
|
|
|
972,583
|
|
|
|
9.11
|
|
|
$
|
5.11
|
|
|
|
162,083
|
|
|
|
9.06
|
|
|
$
|
5.11
|
|
$5.71
|
|
|
2,122,083
|
|
|
|
5.08
|
|
|
$
|
5.71
|
|
|
|
875,466
|
|
|
|
5.18
|
|
|
$
|
5.71
|
|
$6.00
|
|
|
185,500
|
|
|
|
1.19
|
|
|
$
|
6.00
|
|
|
|
185,500
|
|
|
|
1.19
|
|
|
$
|
6.00
|
|
$7.36
|
|
|
154,917
|
|
|
|
9.38
|
|
|
$
|
7.36
|
|
|
|
154,917
|
|
|
|
9.38
|
|
|
$
|
7.36
|
|
$7.86
|
|
|
1,831,234
|
|
|
|
6.60
|
|
|
$
|
7.86
|
|
|
|
1,056,234
|
|
|
|
4.50
|
|
|
$
|
7.86
|
|
$8.00
|
|
|
297,000
|
|
|
|
2.32
|
|
|
$
|
8.00
|
|
|
|
226,332
|
|
|
|
2.33
|
|
|
$
|
8.00
|
|
$9.04
|
|
|
172,213
|
|
|
|
4.63
|
|
|
$
|
9.04
|
|
|
|
172,213
|
|
|
|
4.63
|
|
|
$
|
9.04
|
|
$12.00
|
|
|
48,611
|
|
|
|
7.76
|
|
|
$
|
12.00
|
|
|
|
48,611
|
|
|
|
7.76
|
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,878,141
|
|
|
|
6.00
|
|
|
$
|
6.59
|
|
|
|
2,975,356
|
|
|
|
4.76
|
|
|
$
|
6.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-68
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
Options issued to employees and directors that are vested or
expected to vest at June 30, 2008, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Life (Years)
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Options vested or expected to vest
|
|
|
5,584,234
|
|
|
|
6.00
|
|
|
$
|
6.59
|
|
|
$
|
20,369
|
|
Options outstanding and exercisable at September 30, 2008
(unaudited), were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Exercisable
|
|
|
Contractual
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
$5.00
|
|
|
64,000
|
|
|
|
0.14
|
|
|
$
|
5.00
|
|
|
|
64,000
|
|
|
|
0.14
|
|
|
$
|
5.00
|
|
$5.11
|
|
|
972,583
|
|
|
|
8.85
|
|
|
$
|
5.11
|
|
|
|
290,915
|
|
|
|
8.83
|
|
|
$
|
5.11
|
|
$5.71
|
|
|
2,115,417
|
|
|
|
4.81
|
|
|
$
|
5.71
|
|
|
|
1,130,132
|
|
|
|
4.48
|
|
|
$
|
5.71
|
|
$6.00
|
|
|
185,500
|
|
|
|
0.94
|
|
|
$
|
6.00
|
|
|
|
185,500
|
|
|
|
0.94
|
|
|
$
|
6.00
|
|
$7.36
|
|
|
154,917
|
|
|
|
9.13
|
|
|
$
|
7.36
|
|
|
|
154,917
|
|
|
|
9.13
|
|
|
$
|
7.36
|
|
$7.86
|
|
|
1,831,234
|
|
|
|
6.35
|
|
|
$
|
7.86
|
|
|
|
1,056,234
|
|
|
|
4.25
|
|
|
$
|
7.86
|
|
$8.00
|
|
|
297,000
|
|
|
|
2.07
|
|
|
$
|
8.00
|
|
|
|
234,666
|
|
|
|
2.07
|
|
|
$
|
8.00
|
|
$9.04
|
|
|
172,213
|
|
|
|
4.38
|
|
|
$
|
9.04
|
|
|
|
172,213
|
|
|
|
4.38
|
|
|
$
|
9.04
|
|
$12.00
|
|
|
48,611
|
|
|
|
7.50
|
|
|
$
|
12.00
|
|
|
|
48,611
|
|
|
|
7.50
|
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,841,475
|
|
|
|
5.78
|
|
|
$
|
6.60
|
|
|
|
3,337,188
|
|
|
|
4.59
|
|
|
$
|
6.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options issued to employees and directors that are vested or
expected to vest at September 30, 2008 (unaudited), were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Value
|
|
|
Options vested or expected to vest
|
|
|
5,549,401
|
|
|
|
5.78
|
|
|
$
|
6.60
|
|
|
$
|
20,357
|
|
Effective July 1, 2006, the Company adopted
SFAS No. 123(R) using the prospective application
method. Under this method, as of July 1, 2006, the Company
has applied the provisions of this statement to new and modified
awards. The adoption of this pronouncement had no effect on net
loss in fiscal 2006.
An additional requirement of SFAS No. 123(R) is that
estimated pre-vesting forfeitures be considered in determining
stock-based compensation expense. As previously permitted, the
Company recorded forfeitures when they occurred for pro forma
presentation purposes. As of June 30, 2007 and 2008 and
September 30, 2008 (unaudited), the Company estimated its
forfeiture rate at 5.0% per annum. As of June 30, 2007 and
2008 and September 30, 2008 (unaudited), the total
compensation cost for nonvested awards not yet recognized in the
consolidated statements of operations was $2,367, $6,316, and
$4,821, respectively, net of the effect of estimated
forfeitures. These amounts are expected to be recognized over a
weighted-average period of 2.72, 2.17, and 3.04 years,
respectively.
Options typically vest over three years. An employees
unvested options are forfeited when employment is terminated;
vested options must be exercised at or within 90 days of
termination to avoid forfeiture. The Company determines the fair
value of options using the Black-Scholes option pricing model.
The estimated fair value of
F-69
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
options, including the effect of estimated forfeitures, is
recognized as expense on a straight-line basis over the
options vesting periods. The following assumptions were
used in determining the fair value of stock options granted
under the Black-Scholes model:
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
2006
|
|
2007
|
|
2008
|
|
Weighted average fair value of options granted
|
|
$1.16
|
|
$1.07
|
|
$3.74
|
Risk-free interest rates
|
|
3.71% - 4.77%
|
|
4.56% - 5.18%
|
|
2.45% - 4.63%
|
Expected life
|
|
4 years
|
|
3.5 - 6 years
|
|
3.5 - 6 years
|
Expected volatility
|
|
None
|
|
43.8% - 45.1%
|
|
43.1% - 46.4%
|
Expected dividends
|
|
None
|
|
None
|
|
None
|
The risk-free interest rate for periods within the five and ten
year contractual life of the options is based on the
U.S. Treasury yield curve in effect at the grant date and
the expected option life of 3.5 to 6 years. Expected
volatility is based on the historical volatility of the stock of
companies within the Companys peer group. Generally, the
3.5 to 6 year expected life of stock options granted to
employees represents the weighted average of the result of the
simplified method applied to plain
vanilla options granted during the period, as provided
within SAB No. 110.
The aggregate intrinsic value of a stock award is the amount by
which the market value of the underlying stock exceeds the
exercise price of the award. The aggregate intrinsic value for
outstanding options at June 30, 2006, 2007 and 2008 and
September 30, 2007 and 2008 (unaudited) was $1,301, $5,181,
$21,441, $11,475, and $21,428, respectively. The aggregate
intrinsic value for exercisable options at June 30, 2006,
2007 and 2008 and September 30, 2007 and 2008 (unaudited)
was $1,301, $4,417 $9,692, $6,869 and $11,459, respectively. The
total aggregate intrinsic value of options exercised during the
years ended June 30, 2006 and 2007 was negligible while the
aggregate intrinsic value of options exercised during the year
ended June 30, 2008 and three months ended
September 30, 2008 (unaudited) was $1,435 and $43,
respectively. Shares supporting option exercises are sourced
from new share issuances.
On December 12, 2007, the Company granted 775,000
performance based incentive stock options to certain executives.
The options shall become exercisable in full on the third
anniversary of the date of grant provided that the Company has
completed its initial public offering of common stock or a
change of control transaction before December 31, 2008 and
shall terminate on the tenth anniversary of the date of the
grant. For this purpose change of control
transaction shall be defined as an acquisition of the
Company through the sale of substantially all of the
Companys assets and the consequent discontinuance of its
business or through a merger, consolidation, exchange,
reorganization or similar transaction. The Company has not
recorded any stock-based compensation expense related to
performance based incentive stock options for the year ended
June 30, 2008 or three months ended September 30, 2008
(unaudited) as it was not probable that the performance based
criteria would be achieved.
As of June 30, 2008 and September 30, 2008
(unaudited), the Company had granted 840,138 and 1,001,961
restricted stock awards, respectively. The fair value of each
restricted stock award was equal to the fair market value of the
Companys common stock at the date of grant. Vesting of
restricted stock awards range from one to three years. The
estimated fair value of restricted stock awards, including the
effect of estimated forfeitures, is recognized
F-70
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
on a straight-line basis over the restricted stocks
vesting period. Restricted stock award activity for the three
months ended September 30, 2008 (unaudited) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Restricted stock awards outstanding at June 30, 2007
|
|
|
|
|
|
$
|
|
|
Restricted stock awards granted
|
|
|
840,138
|
|
|
|
9.49
|
|
Restricted stock awards forfeited
|
|
|
(27,834
|
)
|
|
|
9.29
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards outstanding at June 30, 2008
|
|
|
812,304
|
|
|
|
9.50
|
|
Restricted stock awards granted
|
|
|
161,823
|
|
|
|
10.22
|
|
Restricted stock awards forfeited
|
|
|
(25,029
|
)
|
|
|
10.09
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards outstanding at September 30, 2008
(unaudited)
|
|
|
949,098
|
|
|
$
|
9.60
|
|
|
|
|
|
|
|
|
|
|
The following amounts were recognized as stock-based
compensation expense in the consolidated statements of
operations for the year ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Restricted
|
|
|
|
|
|
|
Options
|
|
|
Stock Awards
|
|
|
Total
|
|
|
Cost of goods sold
|
|
$
|
91
|
|
|
$
|
141
|
|
|
$
|
232
|
|
Selling, general and administrative
|
|
|
5,957
|
|
|
|
895
|
|
|
|
6,852
|
|
Research and development
|
|
|
181
|
|
|
|
116
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,229
|
|
|
$
|
1,152
|
|
|
$
|
7,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following amounts were recognized as stock-based
compensation expense in the consolidated statements of
operations for the three months ended September 30, 2008
(unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Restricted
|
|
|
|
|
|
|
Options
|
|
|
Stock Awards
|
|
|
Total
|
|
|
Cost of goods sold
|
|
$
|
38
|
|
|
$
|
138
|
|
|
$
|
176
|
|
Selling, general and administrative
|
|
|
297
|
|
|
|
1,087
|
|
|
|
1,384
|
|
Research and development
|
|
|
41
|
|
|
|
71
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
376
|
|
|
$
|
1,296
|
|
|
$
|
1,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-71
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
The components of the Companys overall deferred tax assets
and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
76
|
|
|
$
|
2,423
|
|
Accrued expenses
|
|
|
54
|
|
|
|
181
|
|
Inventories
|
|
|
226
|
|
|
|
409
|
|
Deferred rent
|
|
|
24
|
|
|
|
40
|
|
Deferred revenue
|
|
|
|
|
|
|
46
|
|
Accounts receivable
|
|
|
|
|
|
|
66
|
|
Research and development credit carryforwards
|
|
|
|
|
|
|
1,798
|
|
Net operating loss carryforwards
|
|
|
16,524
|
|
|
|
25,825
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
16,904
|
|
|
|
30,788
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Accelerated depreciation and amortization
|
|
|
(15
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(15
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(16,889
|
)
|
|
|
(30,768
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Company has established valuation allowances to fully offset
its deferred tax assets due to the uncertainty about the
Companys ability to generate the future taxable income
necessary to realize these deferred assets, particularly in
light of the Companys historical losses. The future use of
net operating loss carryforwards is dependent on the Company
attaining profitable operations, and will be limited in any one
year under Internal Revenue Code Section 382 (IRC
Section 382) due to significant ownership changes, as
defined under the Code Section, as a result of the
Companys equity financings.
At June 30, 2008, the Company had net operating loss
carryforwards for federal and state income tax reporting
purposes of approximately $69,000 which will expire at various
dates through fiscal 2028.
The Company adopted the provisions of FIN 48 on
July 1, 2007. Under FIN 48, the Company recognizes the
financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely
than not sustain the position following an audit. For tax
positions meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit
that has a greater than 50% likelihood of being realized upon
ultimate settlement with the relevant tax authority. At the
adoption date, the Company applied FIN 48 to all tax
positions for which the statute of limitations remained open.
The Company did not record any adjustment to the liability for
unrecognized income tax benefits or accumulated deficit for the
cumulative effect of the adoption of FIN 48.
In addition, the amount of unrecognized tax benefits as of
July 1, 2007, June 30, 2008 and September 30,
2008 (unaudited) was zero. There have been no material changes
in unrecognized tax benefits since July 1, 2007, and the
Company does not anticipate a significant change to the total
amount of unrecognized tax benefits within the next
12 months. The Company recognizes penalties and interest
accrued related to unrecognized tax benefits in income
F-72
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
tax expense for all periods presented. The Company did not have
an accrual for the payment of interest and penalties related to
unrecognized tax benefits as of June 30, 2008 or
September 30, 2008 (unaudited).
The Company is subject to income taxes in the U.S. federal
jurisdiction and various state jurisdictions. Tax regulations
within each jurisdiction are subject to the interpretation of
the related tax laws and regulations and require significant
judgment to apply. The Company is potentially subject to income
tax examinations by tax authorities for the tax years ended
June 30, 2006, 2007 and 2008. The Company is not currently
under examination by any taxing jurisdiction.
|
|
8.
|
Commitment
and Contingencies
|
Operating
Lease
The Company leases manufacturing and office space and equipment
under various lease agreements which expire at various dates
through November 2012. Rental expenses were $201, $341 and $572
for the years ended June 30, 2006, 2007 and 2008,
respectively and $132 and $161 for the three months ended
September 30, 2007 and 2008 (unaudited), respectively.
Future minimum lease payments under the agreements as of
June 30, 2008 are as follows:
|
|
|
|
|
2009
|
|
$
|
464
|
|
2010
|
|
|
471
|
|
2011
|
|
|
475
|
|
2012
|
|
|
476
|
|
2013
|
|
|
202
|
|
|
|
|
|
|
|
|
$
|
2,088
|
|
|
|
|
|
|
Future minimum lease payments under the agreements as of
September 30, 2008 (unaudited) are as follows:
|
|
|
|
|
Nine months ended June 30, 2009
|
|
$
|
350
|
|
2010
|
|
|
471
|
|
2011
|
|
|
475
|
|
2012
|
|
|
476
|
|
2013
|
|
|
202
|
|
|
|
|
|
|
|
|
$
|
1,974
|
|
|
|
|
|
|
Related
Party Transaction
On December 12, 2007, the Company entered into an agreement
with Reliant Pictures Corporation, or RPC, to participate in a
documentary film to be produced by RPC. Portions of the film
will focus on the Companys technologies, and RPC will
provide separate filmed sections for the Companys
corporate use. In connection with that agreement, the Company
contributed $150 in December 2007 and an additional $100 in
January 2008 towards the production of the documentary. One of
the Companys directors holds more than 10% of the equity
of RPC and is a director of RPC. Another director of the Company
is a shareholder of RPC.
F-73
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
The Company offers a 401(k) plan to its employees. Eligible
employees may authorize up to $16 of their annual compensation
as a contribution to the plan, subject to Internal Revenue
Service limitations. The plan also allows eligible employees
over 50 years old to contribute an additional $5 subject to
Internal Revenue Service limitations. All employees must be at
least 21 years of age to participate in the plan. The
Company did not provide any employer matching contributions for
the years ended June 30, 2006, 2007 and 2008 or for the
three months ended September 30, 2008 (unaudited).
|
|
10.
|
Redeemable
Convertible Preferred Stock and Convertible Preferred Stock
Warrants
|
During the period from July 2006 to October 2006, the Company
completed the sale of 4,728,547 shares of Series A
redeemable convertible preferred stock, no par value, at a
purchase price of $5.71 per share for a total of $27,000. In
addition, Series A convertible preferred stock warrants
were issued to purchase 671,453 shares of Series A
redeemable convertible preferred stock in connection with the
sale of the Series A redeemable convertible preferred
stock. The Series A convertible preferred stock warrants
have a purchase price of $5.71 per share with a five-year term
and were assigned an initial value of $1,767 for accounting
purposes using the Black-Scholes model. The change in value of
the Series A convertible preferred stock warrants due to
accretion as a result of remeasurement was $916, $300, and ($14)
as of June 30, 2008 and September 30, 2007 and 2008
(unaudited), respectively, and is included in interest expense
on the consolidated statements of operations. The Series A
redeemable convertible preferred stock offering included the
conversion of $3,145 of convertible promissory notes and accrued
interest previously sold by the Company at various dates in
fiscal 2006 and 2007 (Note 4).
In connection with the Series A redeemable convertible
preferred stock offering, the Company incurred offering costs of
$1,742 and issued warrants to purchase 131,349 shares of
common stock at a purchase price of $5.71 with a term of seven
years. The warrants were assigned a value of $99 for accounting
purposes (Note 5).
As of June 30, 2007, the Company had sold
977,046 shares of
Series A-1
redeemable convertible preferred stock, no par value, at a
purchase price of $8.50 per share for total proceeds of $8,271,
net of offering costs of $34. During the period from July 2007
to September 2007, the Company sold an additional
1,211,379 shares of
Series A-1
redeemable convertible preferred stock for total proceeds of
$10,282, net of offering costs of $14.
On December 17, 2007, the Company completed the sale of
2,162,150 shares of Series B redeemable convertible
preferred stock at a price of $9.25 per share for total proceeds
of $19,963, net of offering costs of $37.
In connection with the preparation of the Companys
financial statements as of June 30, 2007 and 2008, and
September 30, 2008 (unaudited), the Companys
management and Board of Directors established what it believes
to be a fair market value of the Companys Series A,
Series A-1,
and Series B redeemable convertible preferred stock. This
determination was based on concurrent significant stock
transactions with third parties and a variety of factors,
including the Companys business milestones achieved and
future financial projections, the Companys position in the
industry relative to its competitors, external factors impacting
the value of the Company in its marketplace, the stock
volatility of comparable companies in its industry, general
economic trends and the application of various valuation
methodologies.
Changes in the current market value of the Series A,
Series A-1,
and Series B redeemable convertible preferred stock are
recorded as accretion of redeemable convertible preferred stock
and as accumulated deficit in the consolidated statements of
changes in shareholders (deficiency) equity and in the
consolidated statements of operations as accretion of redeemable
convertible preferred stock.
F-74
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
The rights, privileges and preferences of the Series A,
Series A-1,
and Series B redeemable convertible preferred stock
(collectively, the Preferred Stock) are as follows:
Dividends
The holders of Preferred Stock are entitled to receive cash
dividends at the rate of 8% of the original purchase price. All
dividends shall accrue, whether or not earned or declared, and
whether or not the Company has legally available funds. All such
dividends shall be cumulative and shall be payable only
(i) when and as declared by the Board of Directors,
(ii) upon liquidation or dissolution of the Company and
(iii) upon redemption of the Preferred Stock by the
Company. As of June 30, 2008 and September 30, 2007
and 2008 (unaudited), $6,362, $2,714, and $7,703, respectively,
of dividends had accumulated but had not yet been declared by
the Companys Board of Directors, or paid by the Company as
of such respective dates. The holders of the Preferred Stock
have the right to participate in dividends with the common
shareholders on an as converted basis.
Conversion
The holders of the Preferred Stock shall have the right to
convert, at their option, their shares into common stock on a
share for share basis (subject to adjustments for events of
dilution). Each preferred share shall be automatically converted
into unregistered shares of the Companys common stock
without any Company action, thereby providing conversion of all
preferred shares, upon the approval of a majority of the
preferred shareholders or upon the completion of an underwritten
public offering of the Companys shares, pursuant to a
registration statement on
Form S-1
under the Securities Act of 1933, as amended, of which the
aggregate proceeds to the Company exceed $40,000 (a
Qualified Public Offering). Upon conversion, each
share of the preferred stock shall be converted into one share
of common stock (subject to adjustment as defined in the
preferred stock sale agreement), dividends will no longer
accumulate, and previously accumulated, undeclared and unpaid
dividends will not be payable by the Company.
In the event the holders of the Preferred Stock elect to convert
their preferred shares into shares of common stock, and those
holders request that the Company register those shares of common
stock, the Company is obligated to use its best efforts to
effect a registration of the Companys common shares. In
the event that the common shares are not registered, the Company
is not subject to financial penalties.
Redemption
The Company shall not have the right to call or redeem at any
time any shares of Preferred Stock. Holders of Preferred Stock
shall have the right to require the Company to redeem in cash,
30% of the original amount on the fifth year anniversary of the
Purchase Agreement, 30% after the sixth year and 40% after the
seventh year. The price the Company shall pay for the redeemed
shares shall be the greater of (i) the price per share paid
for the Preferred Stock, plus all accrued and unpaid dividends;
or (ii) the fair market value of the Preferred Stock at the
time of redemption as determined by a professional appraiser.
Liquidation
In the event of any liquidation or winding up of the Company,
the holders of preferred stock are entitled to receive an amount
equal to (i) the price paid for the preferred shares, plus
(ii) all dividends accrued and unpaid before any payments
shall be made to holders of stock junior to the preferred stock.
The remaining net assets of the Company, if any, would be
distributed to the holders of preferred and common stock based
on their ownership amounts assuming the conversion of the
preferred stock. The amount is limited based on the overall
return on
F-75
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
investment earned by the preferred stock holders. At
June 30, 2008 and September 30, 2007 and 2008
(unaudited), the liquidation value of the Series A
redeemable convertible preferred stock was $31,230, $29,586, and
$31,782, respectively, and
Series A-1
redeemable convertible preferred stock were $19,862, $18,730,
and $20,243, respectively. At June 30, 2008 and
September 30, 2008 (unaudited), the liquidation value of
the Series B redeemable convertible preferred stock was
$20,871 and $21,280, respectively.
Voting
Rights
The holders of Preferred Stock have the right to vote on all
actions to be taken by the Company based on such number of votes
per share as shall equal the number of shares of common stock
into which each share of redeemable convertible preferred stock
is then convertible. The holders of Preferred Stock also have
the right to designate, and have designated, two individuals to
the Companys Board of Directors.
Registration
Rights
Pursuant to the terms of an investor rights agreement dated
July 19, 2006, entered into with certain holders of the
preferred stock and the holder of a warrant to purchase shares
of the Companys common stock if, at any time after the
earlier of four years after the date of the agreement or six
months after the Companys IPO, the Company receives a
written request from the holders of a majority of the
registrable securities then outstanding, the Company has agreed
to file up to three registration statements on
Form S-3.
Shturman
Legal Proceedings
The Company is party to two legal proceedings relating to a
dispute with Dr. Leonid Shturman, the Companys
founder, and Shturman Medical Systems, Inc., or SMS, a company
owned by Dr. Shturman. On or about November 2006, the
Company discovered that Dr. Shturman had sought patent
protection in the United Kingdom and with the World Intellectual
Property Organization as the sole inventor for technology
relating to the use of counterbalance weights with rotational
atherectomy devices, or the counterbalance technology, which the
Company believes should have been assigned to it.
On August 16, 2007, the Company served and filed a Demand
for Arbitration against SMS alleging that SMS should have
assigned the counterbalance technology to the Company, and
SMSs failure to assign the technology violated the
assignment provision of the Stock Purchase Agreement. On
September 28, 2007, SMS filed a Statement of Answer and
Motion to Dismiss alleging the Stock Purchase Agreement had
expired, thus ending Dr. Shturmans obligation to
assign atherectomy technology. Following a trial, the arbitrator
ruled on May 5, 2008 that the technology in question was
developed pursuant to the Stock Purchase Agreement and working
relationship agreements between the parties, and that SMS
breached the agreements by failing to transfer the technology to
the Company in 2002. The panel ordered SMS to transfer to the
Company its interest in the technology and SMS did so. The
Hennepin County District Court affirmed the arbitrators
award.
Also on August 16, 2007, the Company filed a complaint in
the U.S. District Court in Minnesota against
Dr. Shturman for a breach of his employment agreement.
Specifically, under the employment agreement, Dr. Shturman
was obligated to assign any inventions for the diagnosis or
treatment of coronary or periphery vessels that were disclosed
to patent attorneys or otherwise documented by Dr. Shturman
during the employment term. The Company alleged that the
counterbalance technology was disclosed
and/or
documented during the term of his employment agreement and the
Company was seeking judgment against Dr. Shturman for
breach of the employment agreement and a declaratory judgment
that Dr. Shturman must assign his interest in the
counterbalance
F-76
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
technology to the Company. On October 31, 2007,
Dr. Shturman filed an answer and counterclaim against the
Company and other co- defendants asserting conversion, theft and
unjust enrichment for the alleged illegal removal and transport
to the United States of two drive shaft winding devices
purportedly developed by Shturman Cardiology Systems, Russia, as
well as raising certain affirmative defenses. The Company filed
its answer on November 16, 2007. Dr. Shturman filed a
motion to stay this lawsuit on the basis that it should be
stayed pending the resolution of alleged proceedings in the
U.S. Patent and Trademark Office. On July 7, 2008 the
motion was heard by the court, but the court did not rule on
Dr. Shturmans motion at that time. Instead, the court
ordered a settlement conference with the court, which occurred
on September 4 and 5, 2008.
On September 4 and 5, 2008, the Company settled all of its
claims against Dr. Shturman. In settlement of the
Companys claim against him, Dr. Shturman agreed that
he is not the author or owner of the counterbalance technology,
as defined in the May 5, 2008 award of the arbitrator.
However, as part of the settlement, Dr. Shturman has the
right to argue that the counterbalance technology, as defined in
the award of the arbitrator, is separate and distinct from the
inventions or know-how contained in any current or future patent
applications made by him, and the Company has the right to argue
that such patent applications do incorporate the counterbalance
technology, as defined by the arbitrator in the award. In
settlement of Dr. Shturmans counterclaim against the
Company, the parties entered into a settlement that is
conditioned upon the Companys agreement to pay
Dr. Shturman $50 by November 14, 2008, and in
connection with Dr. Shturmans desire to sell
22,000 shares of the Companys common stock held by
him by November 14, 2008 at a fixed price, the Company
agreed to refer to Dr. Shturman the names of parties that
may be interested in purchasing such shares in private
transactions. As of November 19, 2008, the Company had
referred to Dr. Shturman names of parties that are
interested in purchasing these shares and had also paid
Dr. Shturman $50. In addition, the Company and
Dr. Shturman have executed a settlement agreement, and
pending a stipulation of dismissal with prejudice to be filed by
Dr. Shturmans counsel, the Company anticipates that
Dr. Shturmans counterclaim against the Company will
be dismissed.
The Company is defending this litigation vigorously and believes
that Dr. Shturmans counterclaims and affirmative
defenses are without merit and the outcome of this case will not
have a material adverse effect on the Companys business,
operations, cash flows or financial condition. The Company
recognized the $50 expense related to the settlement of this
matter but believes additional expense and an adverse outcome of
this claim are not probable and cannot be reasonably estimated.
ev3
Legal Proceedings
On December 28, 2007, ev3 Inc., ev3 Endovascular, Inc. and
FoxHollow Technologies, Inc., together referred to as the
Plaintiffs, filed a complaint in the Ramsey County District
Court for the State of Minnesota against the Company and two
former employees of FoxHollow currently employed by the Company,
as well as against unknown former employees of Plaintiffs
currently employed by the Company referred to in the complaint
as John Does 1-10. On July 2, 2008, the Plaintiffs in this
lawsuit served and filed a Second Amended Complaint. In this
amended pleading, Plaintiffs now assert claims against the
Company as well as ten of its employees, all of whom were
formerly employed by one or more of the Plaintiffs. The Second
Amended Complaint also continues to refer to John Doe
1-10 defendants, who are not identified by name.
The Second Amended Complaint includes seven counts, which allege
as follows:
|
|
|
|
|
Individual defendants violated provisions in their employment
agreements with their former employer FoxHollow, barring them
from misusing FoxHollow Confidential Information.
|
F-77
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
|
|
|
|
|
Individual defendants violated a provision in their FoxHollow
employment agreements barring them, for a period of one year
following their departure from FoxHollow, from soliciting or
encouraging employees of FoxHollow to join the Company.
|
|
|
|
Individual defendants breached a duty of loyalty owed to
FoxHollow.
|
|
|
|
The Company and individual defendants misappropriated trade
secrets of one or more of the Plaintiffs.
|
|
|
|
All defendants engaged in unfair competition.
|
|
|
|
The Company tortiously interfered with the contracts between
FoxHollow and individual defendants by allegedly procuring
breaches of the non-solicitation/encouragement provision in
those agreements, and an individual defendant tortiously
interfered with the contracts between certain individual
defendants and FoxHollow by allegedly procuring breaches of the
confidential information provision in those agreements.
|
|
|
|
All defendants conspired to gain an unfair competitive and
economic advantage for the Company to the detriment of the
Plaintiffs.
|
In the Second Amended Complaint, the Plaintiffs seek, among
other forms of relief, an award of damages in an amount greater
than $50, a variety of forms of injunctive relief, exemplary
damages under the Minnesota Trade Secrets Act, and recovery of
their attorney fees and litigation costs. Although the Company
has requested the information, the Plaintiffs have not yet
disclosed what specific amount of damages they claim.
The action is presently in the discovery phase. The Company has
responded to interrogatories and document requests served by the
Plaintiffs and has also served written discovery requests
directed to the Plaintiffs. Two depositions were taken before
July 31, 2008 and it is expected that numerous witness
depositions will be taken in the coming months.
In July 2008, the Company and the individual defendants filed
motions to dismiss the action. These motions were based on the
argument that the Plaintiffs are required to resolve the claims
at issue in arbitration in accordance with arbitration
provisions in the employment agreements between at least eight
of the individual defendants and FoxHollow.
The Company is defending this litigation vigorously, and
believes that the outcome of this litigation will not have a
materially adverse effect on the Companys business,
operations, cash flows or financial condition. The Company has
not recognized any expense related to the settlement of this
matter as an adverse outcome of this action is not probable and
cannot be reasonably estimated.
F-78
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
The following table presents a reconciliation of the numerators
and denominators used in the basic and diluted earnings per
common share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available in basic calculation
|
|
$
|
4,895
|
|
|
$
|
15,596
|
|
|
$
|
39,167
|
|
|
$
|
7,441
|
|
|
$
|
13,699
|
|
Plus: Accretion of redeemable convertible preferred stock(a)
|
|
|
|
|
|
|
16,835
|
|
|
|
19,422
|
|
|
|
4,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stock- holders plus assumed conversions
|
|
$
|
4,895
|
|
|
$
|
32,431
|
|
|
$
|
58,589
|
|
|
$
|
12,294
|
|
|
$
|
13,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic
|
|
|
6,183,715
|
|
|
|
6,214,820
|
|
|
|
6,835,126
|
|
|
|
6,291,512
|
|
|
|
7,692,248
|
|
Effect of dilutive stock options and warrants(b)(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
6,183,715
|
|
|
|
6,214,820
|
|
|
|
6,835,126
|
|
|
|
6,291,512
|
|
|
|
7,692,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share basic and diluted
|
|
$
|
(0.79
|
)
|
|
$
|
(5.22
|
)
|
|
$
|
(8.57
|
)
|
|
$
|
(1.95
|
)
|
|
$
|
(1.78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The calculation for accretion of redeemable convertible
preferred stock marks the redeemable convertible preferred stock
to fair value, which equals or exceeds the amount of any
undeclared dividends on the redeemable convertible preferred
stock. |
|
(b) |
|
At June 30, 2006, 2007 and 2008, 262,725, 1,068,277 and
906,713 warrants, respectively, and at September 30, 2007
and 2008 (unaudited), 1,068,277 and 1,361,596 warrants,
respectively, were outstanding. The effect of the shares that
would be issued upon exercise of these warrants has been
excluded from the calculation of diluted loss per share because
those shares are anti-dilutive. |
|
(c) |
|
At June 30, 2006, 2007 and 2008, 1,823,861, 4,286,861 and
5,878,141 stock options, respectively, and at September 30,
2007 and 2008 (unaudited), 4,599,361 and 5,841,475 stock
options, respectively, were outstanding. The effect of the
shares that would be issued upon exercise of these options has
been excluded from the calculation of diluted loss per share
because those shares are anti-dilutive. |
On December 6, 2007, the shareholders of the Company
approved the increase of authorized shares of common stock to
70,000,000 shares and undesignated shares of 5,000,000.
|
|
14.
|
Initial
Public Offering Costs (unaudited)
|
The Company withdrew the registration statement for its initial
public offering in conjunction with the announcement of the
execution of the merger agreement with Replidyne, Inc., as
described in Note 15. Therefore,
F-79
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information
presented as of and for the three months
ended September 30, 2007 and 2008 is unaudited)
(dollars in thousands, except per share and share
amounts)
previously capitalized offering costs of approximately
$1.7 million were included in selling, general and
administrative during the three months ended September 30,
2008.
|
|
15.
|
Subsequent
Events (unaudited)
|
Reverse
Merger Agreement
On November 3, 2008 the Company entered into a definitive
merger agreement with Replidyne, Inc. in an all-stock
transaction. Under terms of the agreement, Replidyne will issue
new shares of its common stock to Company shareholders whereby
former Company shareholders are expected to own 83% of the
combined company and Replidyne stockholders are expected to own
17% of the combined company on a fully diluted basis using the
treasury stock method, subject to adjustments as described in
the merger agreement, and assuming that Replidynes net
assets at closing are between $37 million and
$40 million, as calculated in accordance with the terms of
the merger agreement. The merger is subject to shareholder
approval, and is expected to be consummated in the first quarter
of calendar 2009.
Stock
Options Amended
On December 15, 2008, the Company amended the vesting
provisions of 775,000 performance based incentive stock options
that had been granted to certain executives on December 12,
2007. Previously, the stock options were exercisable in full on
the third anniversary of the date of grant provided the Company
completed its initial public offering of common stock or a
change in control transaction before December 31, 2008. The
vesting provisions were updated to provide that exercisability
of the options are conditioned upon the closing of the
Companys proposed merger with Replidyne, Inc. and the
options shall vest to the extent of 50% of the total shares on
the first anniversary of the merger and the remaining 50% on the
second anniversary of the merger.
F-80
AGREEMENT
AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this
Agreement) is made and entered into as
of November 3, 2008, by and among Replidyne, Inc., a
Delaware corporation (Replidyne); Responder
Merger Sub, Inc., a Minnesota corporation and wholly owned
subsidiary of Replidyne (Merger Sub); and
Cardiovascular Systems, Inc., a Minnesota corporation (the
Company). Certain capitalized terms used in
this Agreement are defined in Exhibit A. For
purposes of this Agreement, reference to the Company
shall include each Subsidiary of the Company unless the context
requires otherwise.
RECITALS
A. Replidyne and the Company intend to enter into a
business combination transaction pursuant to which Merger Sub
will merge with and into the Company (the
Merger) in accordance with and subject to the
terms of this Agreement and the MBCA.
B. Replidyne and the Company intend that the Merger qualify
as a tax-free reorganization within the meaning of
Section 368 of the Code.
C. The board of directors of Replidyne (i) has
determined that the Merger is fair to, and in the best interests
of, Replidyne and its stockholders, (ii) has approved this
Agreement, the Merger, the issuance of shares of Replidyne
Common Stock to the stockholders of the Company pursuant to the
terms of this Agreement, and the other actions contemplated by
this Agreement and (iii) has determined to recommend that
the stockholders of Replidyne vote to approve the issuance of
shares of Replidyne Common Stock to the stockholders of the
Company pursuant to the terms of this Agreement and such other
actions as contemplated by this Agreement.
D. Each of the board of directors of the Company and the
Special Committee (i) has unanimously determined that the
Merger is advisable and fair to, and in the best interests of,
the Company and its stockholders, (ii) has unanimously
approved this Agreement, the Merger and the other actions
contemplated by this Agreement and has deemed this Agreement
advisable and (iii) has unanimously approved and determined
to recommend the adoption of this Agreement to the stockholders
of the Company.
E. In order to induce Replidyne to enter into this
Agreement and to cause the Merger to be consummated,
(i) the stockholders of the Company listed on
Schedule 1A hereto are executing voting agreements and
irrevocable proxies in favor of Replidyne concurrently with the
execution and delivery of this Agreement pursuant to which such
stockholders have agreed to vote in favor of the adoption of the
Merger Agreement at the Company Stockholders Meeting (the
Company Stockholder Voting Agreements)
and (ii) the stockholders of the Company listed on
Schedule 1B hereto are executing
lock-up
agreements in favor of Replidyne and the Company concurrently
with the execution and delivery of this Agreement pursuant to
which such stockholders have agreed not to sell, transfer or
otherwise dispose of any securities of Replidyne or the Company
until the date that is 90 days after the closing of the
Merger (the Company Stockholder
Lock-up
Agreements).
F. In order to induce the Company to enter into this
Agreement and to cause the Merger to be consummated,
(i) the stockholders of Replidyne listed on
Schedule 2A hereto are executing voting agreements and
irrevocable proxies in favor of the Company concurrently with
the execution and delivery of this Agreement pursuant to which
such stockholders have agreed to vote certain shares held by
them in favor of the issuance of Replidyne Common Stock pursuant
to the Merger and the approval of the Replidyne Certificate of
Amendment at the Replidyne Stockholders Meeting (the
Replidyne Stockholder Voting Agreements) and
(ii) the stockholders of Replidyne listed on
Schedule 2B hereto are executing
lock-up
agreements in favor of Replidyne and the Company concurrently
with the execution and delivery of this Agreement pursuant to
which such stockholders have agreed not to sell, transfer or
otherwise dispose of any securities of Replidyne or the Company
until the date that is 90 days after the closing of the
Merger (the Replidyne Stockholder
Lock-up
Agreements).
G. Concurrently with the execution and delivery of this
Agreement, the holders of a majority of the outstanding shares
of Company Preferred Stock (including the shares of Company
Preferred Stock held by Easton and Maverick) have delivered an
agreement to convert all of the outstanding shares of Company
Preferred Stock
A-1
into shares of Company Common Stock, effective as of immediately
prior to the Effective Time (the Company Stockholder
Conversion Agreement).
AGREEMENT
The Parties to this Agreement, intending to be legally bound,
agree as follows:
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1.
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DESCRIPTION
OF TRANSACTION
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1.1 The Merger. Upon the terms and
subject to the conditions set forth in this Agreement, at the
Effective Time (as defined in Section 1.3), Merger Sub
shall be merged with and into the Company, the separate
existence of Merger Sub shall cease, and the Company shall
continue as the surviving corporation in the Merger (the
Surviving Corporation).
1.2 Effects of the Merger. The
Merger shall have the effects set forth in this Agreement and in
the applicable provisions of the MBCA. Without limiting the
generality of the foregoing, and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and
franchises of the Company and Merger Sub shall vest in the
Surviving Corporation, and all debts, liabilities and duties of
the Company and Merger Sub shall become the debts, liabilities
and duties of the Surviving Corporation.
1.3 Closing; Effective
Time. Unless this Agreement is earlier
terminated pursuant to the provisions of Section 9.1 of
this Agreement, and subject to the satisfaction or waiver of the
conditions set forth in Sections 6, 7 and 8 of this
Agreement, the consummation of the Merger (the
Closing) shall take place at the offices of
Fredrikson & Byron, P.A., 200 South Sixth Street,
Minneapolis, Minnesota 55402, as promptly as practicable (but in
no event later than the fifth Business Day) following the
satisfaction or waiver of the last to be satisfied or waived of
the conditions set forth in Sections 6, 7 and 8 (other than
those conditions that by their nature are to be satisfied at the
Closing, but subject to the satisfaction or waiver of each of
such conditions) or at such other time, date and place as the
Company and Replidyne may mutually agree in writing. The date on
which the Closing actually takes place is referred to as the
Closing Date. At the Closing, the Parties
hereto shall cause the Merger to be consummated by executing and
filing with the Secretary of State of the State of Minnesota
Articles of Merger with respect to the Merger, satisfying the
applicable requirements of the MBCA and in a form reasonably
acceptable to Replidyne and the Company (the Articles
of Merger). The Merger shall become effective at the
time of the filing of such Articles of Merger with the Secretary
of State of the State of Minnesota or at such later time as may
be agreed upon by Replidyne and the Company and specified in
such Articles of Merger (the time as of which the Merger becomes
effective being referred to as the Effective
Time).
1.4 Articles of Incorporation and
Bylaws. At the Effective Time:
(a) the Articles of Incorporation of the Surviving
Corporation shall be amended and restated as of the Effective
Time to be identical to the Articles of Incorporation of Merger
Sub as in effect immediately prior to the Effective Time, until
thereafter amended in accordance with the MBCA and as provided
in such Articles of Incorporation; provided, however, that, at
the Effective Time, Article I of the Articles of
Incorporation of the Surviving Corporation shall be amended and
restated in its entirety to read as follows: The name of
the corporation is CSI Minnesota, Inc.; and
(b) The Bylaws of Merger Sub, as in effect immediately
prior to the Effective Time, shall be the Bylaws of the
Surviving Corporation at the Effective Time until thereafter
amended in accordance with the MBCA and as provided in the
Articles of Incorporation of the Surviving Corporation and such
Bylaws.
1.5 Recapitalization of Replidyne Common Stock;
Amendments to Certificate of Incorporation and Bylaws.
(a) Immediately prior to the Effective Time, and subject to
receipt of the requisite stockholder approval at the Replidyne
Stockholders Meeting (as defined in Section 5.3(a)
below), Replidyne shall cause to be filed a Certificate of
Amendment to its Certificate of Incorporation, substantially in
the form attached hereto as Exhibit B
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(the Replidyne Certificate of Amendment),
whereby without any further action on the part of Replidyne, the
Company or any stockholder of Replidyne:
(i) each share of Replidyne Common Stock issued and
outstanding immediately prior to the filing of the Replidyne
Certificate of Amendment shall be automatically combined into
and become a fractional number of fully paid and non-assessable
shares of Replidyne Common Stock to be determined by Replidyne
and the Company by mutual agreement (the Reverse Stock
Split); and
(ii) any shares of Replidyne Common Stock held as treasury
stock or held or owned by Replidyne immediately prior to the
filing of the Replidyne Certificate of Amendment shall each be
converted into and become an identical fractional number of
shares of Replidyne Common Stock as provided in the Reverse
Stock Split.
(b) No fractional shares of Replidyne Common Stock shall be
issued in connection with the Reverse Stock Split, and no
certificates or scrip for any such fractional shares shall be
issued. Any holder of Replidyne Common Stock who would otherwise
be entitled to receive a fraction of a share of Replidyne Common
Stock (after aggregating all fractional shares of Replidyne
Common Stock issuable to such holder) shall, in lieu of such
fraction of a share and upon surrender of such holders
certificate representing such fractional shares of Replidyne
Common Stock, be paid in cash the dollar amount (provided to the
nearest whole cent), without interest, determined by multiplying
such fraction by the closing price of a share of Replidyne
Common Stock on the Nasdaq Global Market on the date immediately
preceding the effective date of the Reverse Stock Split.
(c) Replidyne shall use commercially reasonable efforts to
amend and restate its Bylaws in a form reasonably acceptable to
Replidyne and the Company (the Replidyne Bylaws
Amendment), provided that the failure to mutually
agree upon the form of the Replidyne Bylaws Amendment shall not
be deemed a breach of any covenant or obligation pursuant to
this Agreement or give rise to any Partys rights or
remedies hereunder.
1.6 Conversion of Company Shares.
(a) At the Effective Time, by virtue of the Merger and
without any further action on the part of Replidyne, the Company
or any stockholder of the Company:
(i) any shares of Company Common Stock held as treasury
stock or held or owned by the Company immediately prior to the
Effective Time shall be canceled and shall cease to exist, and
no consideration shall be delivered in exchange
therefor; and
(ii) subject to Section 1.6(c), each share of Company
Common Stock issued and outstanding immediately prior to the
Effective Time (including shares issued as a result of the
conversion described in the Company Stockholder Conversion
Agreement but excluding shares to be canceled pursuant to
Section 1.6(a)(i) and excluding Dissenting Shares) shall be
converted solely into the right to receive a number of shares of
Replidyne Common Stock equal to the Company Share Conversion
Factor.
(b) If any shares of Company Common Stock outstanding
immediately prior to the Effective Time are unvested or are
subject to a repurchase option or the risk of forfeiture or
under any applicable restricted stock purchase agreement or
other agreement with the Company, then the shares of Replidyne
Common Stock issued in exchange for such shares of Company
Common Stock will, to the same extent, be unvested and subject
to the same repurchase option or risk of forfeiture, and the
certificates representing such shares of Replidyne Common Stock
shall accordingly be marked with appropriate legends. The
Company shall take all action that may be necessary to ensure
that, from and after the Effective Time, Replidyne is entitled
to exercise any such repurchase option or other right set forth
in any such restricted stock purchase agreement or other
agreement.
(c) No fractional shares of Replidyne Common Stock shall be
issued in connection with the Merger, and no certificates or
scrip for any such fractional shares shall be issued. Any holder
of Company Common Stock who would otherwise be entitled to
receive a fraction of a share of Replidyne Common Stock (after
aggregating all fractional shares of Replidyne Common Stock
issuable to such holder) shall, in lieu of such fraction of a
share and upon surrender of such holders Company Stock
Certificate(s) (as defined in Section 1.9), be paid in cash
the dollar amount (rounded to the nearest whole cent), without
interest, determined by multiplying such fraction by the closing
price of a share of Replidyne Common Stock on the Nasdaq Global
Market on the date the Merger becomes
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effective. The aggregate of cash necessary to effect the
provisions of this Section 1.6(c) shall be referred to as
the Fractional Cash Amount.
(d) All Company Options outstanding immediately prior to
the Effective Time under the Company Stock Option Plans and all
Company Warrants outstanding immediately prior to the Effective
Time (including any Company Warrants issued pursuant to the
Company Stockholder Conversion Agreement) shall be converted
into options to purchase Replidyne Common Stock or warrants to
purchase Replidyne Common Stock, as applicable, in accordance
with Section 5.5.
(e) Each share of Common Stock, no par value per share, of
Merger Sub issued and outstanding immediately prior to the
Effective Time shall be converted into and exchanged for one
validly issued, fully paid and non-assessable share of Common
Stock, no par value per share, of the Surviving Corporation.
Each stock certificate of Merger Sub evidencing ownership of any
such shares shall, as of the Effective Time, evidence ownership
of such shares of Common Stock of the Surviving Corporation.
(f) For purposes of this Agreement:
(i) Company Pre-Closing Equity
Valuation shall mean $195,000,000.
(ii) Company Share Conversion
Factor shall mean (A) (x) the number of
Surviving Replidyne Securities divided by the Replidyne
Post-Closing Stockholder Ownership Percentage minus (y) the
number of Surviving Replidyne Securities divided by (B) the
number of Converting Company Securities.
(iii) Converting Company
Securities shall mean, as of immediately prior to
the Effective Time, the sum of (A) the issued and
outstanding shares of Company Common Stock (including shares
issued as a result of the conversion described in the Company
Stockholder Conversion Agreement) as of such time and
(B) shares of Company Common Stock (including shares
reserved as a result of the conversion described in the Company
Stockholder Conversion Agreement) that are subject to any issued
and outstanding subscription, option, call, warrant, right or
other convertible security (whether or not currently vested)
exchangeable or exercisable for any shares of Company Common
Stock (including without limitation the Company Options and the
Company Warrants) as of such time (excluding shares to be
canceled pursuant to Section 1.6(a)(i) and Dissenting
Shares but including any Company Warrants issued pursuant to the
terms of the Company Stockholder Conversion Agreement),
calculated in accordance with the treasury method of accounting
for options and warrants based on an implied share price using
the Company Pre-Closing Equity Valuation.
(iv) Replidyne Post-Closing Equity
Valuation shall mean (x) the Replidyne
Pre-Closing Equity Valuation plus (y) the Company
Pre-Closing Equity Valuation.
(v) Replidyne Post-Closing Stockholder
Ownership Percentage shall mean the Replidyne
Pre-Closing Equity Valuation divided by the Replidyne
Post-Closing Equity Valuation.
(vi) Replidyne Pre-Closing Equity
Valuation shall mean Net Assets at Closing plus,
to the extent that Net Assets at Closing are less than
$40,000,000 (the Base Net Assets), the lesser
of (A) the difference between Base Net Assets and Net
Assets at Closing and (B) $3,000,000.
(vii) Surviving Replidyne
Securities shall mean, as of immediately prior to
the Effective Time and following the Reverse Stock Split, the
sum of (A) the issued and outstanding shares of Replidyne
Common Stock as of such time and (B) shares of Replidyne
Common Stock that are subject to any issued and outstanding
subscription, option, call, warrant, right or other convertible
security (whether or not currently vested, provided that in the
event that the vesting of any such shares shall cease upon the
Effective Time as a result of the Contemplated Transactions or
the termination of the employment of the holder as of the
Effective Time, any such unvested shares shall be excluded from
the calculation of Surviving Replidyne Securities) exchangeable
or exercisable for any shares of Replidyne Common Stock
(including, without limitation, any Replidyne Options and
Replidyne Warrants) as of such time, calculated in accordance
with the treasury method of accounting for options and warrants
based on an implied share price using the Replidyne Pre-Closing
Equity Valuation.
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1.7 Calculation of Net Assets.
(a) Replidyne and the Company shall agree upon an
anticipated date for Closing (the First Anticipated
Closing Date) at least 10 Business Days prior to the
Replidyne Stockholders Meeting. At least five Business
Days prior to the First Anticipated Closing Date, but not more
than 10 Business Days prior to such date, Replidyne shall
deliver to the Company a schedule (a Net Assets
Schedule) setting forth, in reasonable detail,
Replidynes estimate of Net Assets (the Net Assets
Estimation) as of the First Anticipated Closing Date.
Replidyne shall provide the Company with the work papers and
back-up
materials used in preparing the applicable Net Assets Schedule
and shall make available to the Company and its accountants,
counsel and other advisors additional supporting documentation
as may be reasonably requested.
(b) Within ten Business Days after Replidyne delivers the
applicable Net Assets Schedule (a Lapse
Date), the Company shall have the right to dispute any
part of such Net Assets Schedule by delivering a written notice
to that effect to Replidyne (a Dispute
Notice). Any Dispute Notice shall identify in
reasonable detail the nature of the objection and identify any
applicable proposed revisions to the applicable Net Assets
Estimation.
(c) If on or prior to any Lapse Date, (i) the Company
notifies Replidyne that it has no objections to the applicable
Net Assets Estimation or (ii) the Company fails to deliver
a Dispute Notice as provided above, then the Net Assets
Estimation as set forth in the Net Assets Schedule shall be
deemed, on the date of such notification (in the case of
(i) above) or on the applicable Lapse Date (in the case of
(ii) above) (the applicable date being referred to herein
as the Non-Dispute Net Assets Determination
Date), to have been finally determined for purposes of
this Agreement and to represent the Net Assets at Closing for
purposes of Sections 1.6 and 1.7(a), so long as the Closing
occurs within five Business Days after the applicable
Non-Dispute Net Assets Determination Date.
(d) If the Company delivers a Dispute Notice on or prior to
the applicable Lapse Date, then Representatives of Replidyne and
the Company shall promptly meet and attempt in good faith to
resolve the disputed item(s) and negotiate an
agreed-upon
determination of Net Assets as of a particular date to be agreed
to by Replidyne and the Company, which Net Assets amount shall
be deemed, on the date of agreement between Replidyne and the
Company as to such amount (a Dispute Net Assets
Determination Date), as the final determination for
purposes of this Agreement of Net Assets at Closing for purposes
of Sections 1.6 and 1.7(a), so long as the Closing occurs
within five Business Days after the applicable Dispute Net
Assets Determination Date.
(e) If Representatives of Replidyne and the Company
pursuant to clause (d) above are unable to negotiate an
agreed-upon
determination of Net Assets as of a particular date within five
days, then any items in dispute shall be submitted to an
accounting firm of national standing other than KPMG LLP or
PricewaterhouseCoopers LLP (the Neutral
Accountant). The Representatives of Replidyne and the
Company shall cooperate with the Neutral Accountant so that the
Neutral Accountant shall be able to make a determination of Net
Assets within 10 days, provided that any delay by the
Neutral Accountant in delivering such determination shall not
invalidate such determination or deprive the Neutral Accountant
of its authority to resolve the items in dispute. All
determinations pursuant to this Section 1.7(e) shall be in
writing and shall be delivered to Replidyne and the Company. The
determination of the Neutral Accountant as to the determination
of Net Assets shall be binding and conclusive on Replidyne and
the Company. A judgment on the determination made by the Neutral
Accountant pursuant to this Section 1.7(e) may be entered
in and enforced by any court having jurisdiction thereover.
The fees and expenses of the Neutral Accountant shall be shared
equally by Replidyne and the Company; provided, that, if the
Neutral Accountant determines that one such Party has adopted a
position or positions with respect to the Net Assets calculation
that is frivolous or clearly without merit, the Neutral
Accountant may, in its discretion, assign a greater portion of
any such fees and expenses to such Party.
(f) If Closing does not occur within five Business Days
after determination of the Net Assets (whether pursuant to
Section 1.7(c), 1.7(d) or 1.7(e) hereof), then Replidyne
and the Company shall agree upon a new date for Closing (a
Subsequent Anticipated Closing Date) and
thereafter follow the procedures set forth in
Sections 1.7(a) through 1.7(e) above (and replacing the
First Anticipated Closing Date with the Subsequent Anticipated
Closing Date).
1.8 Determination of Deemed Value.
(a) In the event that Replidyne will consummate the closing
of a Pipeline Transaction on or before the Closing Date,
Replidyne shall deliver to the Company, at least 20 days
prior to the First Anticipated Closing Date, a notice of
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such fact and a description of the terms of such Pipeline
Transaction (the date of the delivery of such notice, the
Pipeline Transaction Notice Date).
Representatives of Replidyne and the Company shall promptly meet
and attempt in good faith to agree on the value of any non-cash
consideration to be paid to Replidyne before the Closing in
connection with such Pipeline Transaction (the
Pre-Closing Consideration) as of the First
Anticipated Closing Date (it being understood that the value of
any cash consideration to be paid to Replidyne before the
Closing shall be such cash consideration).
(b) If Representatives of Replidyne and the Company
pursuant to clause (a) above are unable to agree on the
value of the Pre-Closing Consideration of such Pipeline
Transaction within five days of the Pipeline Transaction Notice
Date (the Valuation Period), each of
Replidyne and the Company shall, within two days of the end of
the Valuation Period, appoint an independent investment bank of
national standing (each, a Valuation Party)
to complete a good faith analysis of the value of the
Pre-Closing Consideration of such Pipeline Transaction as of the
First Anticipated Closing Date. The Representatives of Replidyne
and the Company shall cooperate with each Valuation Party so
that each such Valuation Party shall be able to make a
determination of the value of the Pre-Closing Consideration
within 10 days, provided that any delay by a Valuation
Party in delivering such determination shall not invalidate such
determination or deprive such Valuation Party of its authority
to resolve the items in dispute. All determinations made by the
Valuation Parties pursuant to this Section 1.8(b) shall be
in writing and shall be delivered to Replidyne and the Company.
The value of the Pre-Closing Consideration of such Pipeline
Transaction shall be deemed for purposes of this Agreement to be
the average of the respective valuations determined by such
Valuation Parties. The determination of the value of the
Pre-Closing Consideration of such Pipeline Transaction set forth
in the preceding sentence shall be binding and conclusive on
Replidyne and the Company. A judgment on the determination of
the value of the Pre-Closing Consideration of such Pipeline
Transaction made pursuant to this Section 1.8(b) may be
entered in and enforced by any court having jurisdiction
thereover. The fees and expenses of the Valuation Parties shall
be shared equally by Replidyne and the Company.
(c) If Closing does not occur on the First Anticipated
Closing Date, Replidyne and the Company shall thereafter follow
the procedures set forth in this Section 1.8 (and replacing
the First Anticipated Closing Date with the Subsequent
Anticipated Closing Date).
(d) Any value of the Pre-Closing Consideration of a
Pipeline Transaction determined in accordance with the
provisions of this Section 1.8 (whether pursuant to
Section 1.8(a) or 1.8(b) hereof) shall be referred to for
purposes of this Agreement as the Deemed
Value of the Pre-Closing Consideration of such
Pipeline Transaction.
1.9 Closing of the Companys Transfer
Books. At the Effective Time: (a) all
shares of Company Common Stock and Company Preferred Stock
outstanding immediately prior to the Effective Time shall
automatically be canceled and shall cease to exist, and all
holders of certificates representing shares of Company Common
Stock or Company Preferred Stock that were outstanding
immediately prior to the Effective Time shall cease to have any
rights as stockholders of the Company except as otherwise
provided herein; and (b) the stock transfer books of the
Company shall be closed with respect to all shares of Company
Common Stock and Company Preferred Stock outstanding immediately
prior to the Effective Time. No further transfer of any such
shares of Company Common Stock or Company Preferred Stock shall
be made on such stock transfer books after the Effective Time.
If, after the Effective Time, a valid certificate previously
representing any shares of Company Common Stock or Company
Preferred Stock outstanding immediately prior to the Effective
Time (a Company Stock Certificate) is
presented to the Exchange Agent (as defined in
Section 1.10) or to the Surviving Corporation, such Company
Stock Certificate shall be canceled and shall be exchanged as
provided in Section 1.10.
1.10 Surrender of Certificates.
(a) On or prior to the Closing Date, Replidyne and the
Company shall agree upon and select a reputable bank, transfer
agent or trust company to act as exchange agent in the Merger
(the Exchange Agent). At the Effective Time,
Replidyne shall deposit with the Exchange Agent:
(i) certificates representing the shares of Replidyne
Common Stock issuable pursuant to Section 1.6; and
(ii) cash sufficient to make payments in lieu of fractional
shares in accordance with Sections 1.5(b) and 1.6(c). The
shares of Replidyne Common Stock and cash amounts to satisfy
payment obligations in lieu of fractional shares so deposited
with the Exchange Agent, together with any dividends or
distributions received by the Exchange Agent with respect to
such shares, are referred to collectively as the
Exchange Fund.
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(b) Promptly after the Effective Time, but in no event more
than five Business Days after the Effective Time, the Parties
shall cause the Exchange Agent to mail to the Persons who were
record holders of Company Stock Certificates immediately prior
to the Effective Time: (i) a letter of transmittal in
customary form and containing such provisions as Replidyne may
reasonably specify (including a provision confirming that
delivery of Company Stock Certificates shall be effected, and
risk of loss and title to Company Stock Certificates shall pass,
only upon delivery of such Company Stock Certificates to the
Exchange Agent); and (ii) instructions for use in effecting
the surrender of Company Stock Certificates in exchange for
certificates representing Replidyne Common Stock. Upon surrender
of a Company Stock Certificate to the Exchange Agent for
exchange, together with a duly executed letter of transmittal
and such other documents as may be reasonably required by the
Exchange Agent or Replidyne: (A) the holder of such Company
Stock Certificate shall be entitled to receive in exchange
therefor a certificate representing the number of whole shares
of Replidyne Common Stock that such holder has the right to
receive pursuant to the provisions of Section 1.6 (and cash
in lieu of any fractional share of Replidyne Common Stock
pursuant to Section 1.6(c)); and (B) the Company Stock
Certificate so surrendered shall be canceled. In the event of a
transfer of ownership of Company Common Stock or Company
Preferred Stock which is not registered in the transfer records
of the Company, a certificate representing the proper number of
shares of Replidyne Common Stock plus cash in lieu of fractional
shares pursuant to Section 1.6(c) may be issued or paid to
a Person other than the Person in whose name the applicable
Company Stock Certificate so surrendered is registered, if such
Company Stock Certificate is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect
such transfer and by evidence that any applicable stock transfer
taxes have been paid, along with an applicable affidavit with
respect to such Company Stock Certificate and such bond
indemnifying Replidyne against any claims suffered by Replidyne
related to such Company Stock Certificate or any Replidyne
Common Stock issued in exchange therefor as Replidyne may
reasonably request. Until surrendered as contemplated by this
Section 1.10(b), each Company Stock Certificate shall be
deemed, from and after the Effective Time, to represent only the
right to receive shares of Replidyne Common Stock (and cash in
lieu of any fractional share of Replidyne Common Stock pursuant
to Section 1.6(c)) as contemplated by Section 1.6. If
any Company Stock Certificate shall have been lost, stolen or
destroyed, Replidyne may, in its discretion and as a condition
precedent to the delivery of any shares of Replidyne Common
Stock with respect to the shares of Company Common Stock
previously represented by such Company Stock Certificate,
require the owner of such lost, stolen or destroyed Company
Stock Certificate to provide an applicable affidavit with
respect to such Company Stock Certificate and post a bond
indemnifying Replidyne against any claim suffered by Replidyne
related to the lost, stolen or destroyed Company Stock
Certificate or any Replidyne Common Stock issued in exchange
therefor as Replidyne may reasonably request.
(c) No dividends or other distributions declared or made
with respect to Replidyne Common Stock with a record date after
the Effective Time shall be paid to the holder of any
unsurrendered Company Stock Certificate with respect to the
shares of Replidyne Common Stock that such holder has the right
to receive pursuant to the Merger until such holder surrenders
such Company Stock Certificate (or, with respect to any lost,
stolen or destroyed Company Stock Certificate, an affidavit and
bond in lieu thereof) in accordance with this Section 1.10
(at which time such holder shall be entitled, subject to the
effect of applicable abandoned property, escheat or similar
laws, to receive all such dividends and distributions, without
interest).
(d) Any portion of the Exchange Fund that remains
undistributed to holders of Company Stock Certificates as of the
date 180 days after the Closing Date shall be delivered or
made available to Replidyne upon demand, and any holders of
Company Stock Certificates who have not theretofore surrendered
their Company Stock Certificates in accordance with this
Section 1.10 shall thereafter look only to Replidyne for
satisfaction of their claims for Replidyne Common Stock, cash in
lieu of fractional shares of Replidyne Common Stock and any
dividends or distributions with respect to shares of Replidyne
Common Stock.
(e) Each of the Exchange Agent and Replidyne shall be
entitled to deduct and withhold from any consideration
deliverable pursuant to this Agreement to any holder of any
Company Stock Certificate such amounts as Replidyne determines
in good faith are required to be deducted or withheld from such
consideration under the Code or any provision of state, local or
foreign tax law or under any other applicable Legal Requirement.
To the extent such amounts are so deducted or withheld, such
amounts shall be treated for all purposes under this Agreement
as having been paid to the Person to whom such amounts would
otherwise have been paid.
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(f) No party to this Agreement shall be liable to any
holder of any Company Stock Certificate or to any other Person
with respect to any shares of Replidyne Common Stock (or
dividends or distributions with respect thereto), or for any
cash amounts, delivered to any public official pursuant to any
applicable abandoned property law, escheat law or similar Legal
Requirement.
1.11 Dissenters Rights.
(a) Notwithstanding any provision of this Agreement to the
contrary, shares of Company Common Stock (including shares
issued as a result of the conversion described in the Company
Stockholder Conversion Agreement) that are outstanding
immediately prior to the Effective Time and that are held by
stockholders who have exercised and perfected dissenters
rights for such shares of Company Common Stock in accordance
with the MBCA (collectively, the Dissenting
Shares) shall not be converted into or represent the
right to receive the per share amount of the merger
consideration described in Section 1.6 attributable to such
Dissenting Shares. Such stockholders shall instead be entitled
to receive payment of the appraised value of such shares of
Company Common Stock held by them in accordance with the MBCA,
unless and until such stockholders fail to perfect or
effectively withdraw or otherwise lose their dissenters
rights under the MBCA. All Dissenting Shares held by
stockholders who shall have failed to perfect or who effectively
shall have withdrawn or lost their dissenters rights under
the MBCA shall thereupon be deemed to be converted into and to
have become exchangeable for, as of the Effective Time, the
right to receive the per share amount of the merger
consideration described in Section 1.6 attributable to such
Dissenting Shares upon their surrender in the manner provided in
Section 1.10.
(b) The Company shall give Replidyne prompt written notice
of any demands by dissenting stockholders received by the
Company, withdrawals of such demands and any other instruments
served on the Company and any material correspondence received
by the Company in connection with such demands.
1.12 Further Action. If, at any
time after the Effective Time, any further action is determined
by the Surviving Corporation to be necessary or desirable to
carry out the purposes of this Agreement or to vest the
Surviving Corporation with full right, title and possession of
and to all rights and property of the Company, then the officers
and directors of the Surviving Corporation shall be fully
authorized, and shall use their commercially reasonable efforts
(in the name of the Company and otherwise) to take such action.
1.13 Tax Consequences. For federal
income tax purposes, the Merger is intended to constitute a
reorganization within the meaning of Section 368(a) of the
Code. The Parties to this Agreement adopt this Agreement as a
plan of reorganization within the meaning of
Sections 1.368-2(g)
and 1.368-3(a) of the United States Treasury Regulations.
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2.
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REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
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The Company represents and warrants to Replidyne as follows,
except as set forth in the written disclosure schedule delivered
by the Company to Replidyne concurrently with the execution of
this Agreement (the Company Disclosure
Schedule). The Company Disclosure Schedule shall be
arranged in sections and subsections corresponding to the
numbered and lettered sections and subsections contained in this
Section 2. The disclosure in any section or subsection of
the Company Disclosure Schedule shall qualify other sections and
subsections in this Section 2 if the applicability of the
disclosure contained in such section or subsection of the
Company Disclosure Schedule to the other representations in this
Section 2 is readily apparent on its face.
2.1 Due Organization; Subsidiaries; Etc.
(a) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Minnesota and has all necessary corporate power and authority:
(i) to conduct its business in the manner in which its
business is currently being conducted and as its business is
presently proposed to be conducted; (ii) to own and use its
assets in the manner in which its assets are currently owned and
used; and (iii) to perform its obligations under all
Company Contracts.
(b) The Company has not conducted any business under or
otherwise used, for any purpose or in any jurisdiction, any
fictitious name, assumed name, trade name or other name, other
than the names Cardiovascular Systems, Inc.,
CSI, Shturman Cardiology Systems, Inc.,
and Laser Cardiology Systems, Inc.
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(c) The Company is not and has not been required to be
qualified, authorized, registered or licensed to do business as
a foreign corporation in any jurisdiction other than the
jurisdictions identified in Part 2.1(c) of the Company
Disclosure Schedule, except where the failure to be so
qualified, authorized, registered or licensed, individually or
in the aggregate, has not had, and would not reasonably be
expected to have, a Company Material Adverse Effect. The Company
is in good standing as a foreign corporation in each of the
jurisdictions identified in Part 2.1(c) of the Company
Disclosure Schedule.
(d) Part 2.1(d) of the Company Disclosure Schedule
accurately sets forth (i) the names of the members of the
board of directors of the Company, (ii) the names of the
members of each committee of the board of directors of the
Company and (iii) the names and titles of the officers of
the Company.
(e) The Company has no Subsidiaries except for the Entities
identified in Part 2.1(e) of the Company Disclosure
Schedule. Except as set forth in Part 2.1(e) of the Company
Disclosure Schedule, each Company Subsidiary is duly organized,
validly existing and in good standing in its jurisdiction of
organization and has the requisite power and authority:
(i) to conduct its business in the manner in which its
business is currently being conducted and as its business is
presently proposed to be conducted; (ii) to own and use its
assets in the manner in which its assets are currently owned and
used; and (iii) to perform its obligations under all
Company Contracts. Each Company Subsidiary is in good standing
as a foreign corporation or other organization in each of the
jurisdictions identified in Part 2.1(e) of the Company
Disclosure Schedule. Except as set forth in Part 2.1(e) of
the Company Disclosure Schedule, the Company owns all of the
capital stock of each Company Subsidiary free from liens,
encumbrances and defects. There is no: (i) outstanding
subscription, option, call, warrant or right (whether or not
currently exercisable) to acquire any shares of capital stock or
other securities of any Company Subsidiary;
(ii) outstanding security, instrument or obligation that is
or may become convertible into or exchangeable for any shares of
capital stock or other securities of any Company Subsidiary;
(iii) Contract under which any Company Subsidiary is or may
become obligated to sell or otherwise issue any shares of its
capital stock or any other securities of any Company Subsidiary;
or (iv) condition or circumstance that would give rise to
or provide a basis for the assertion of a claim by any Person to
the effect that such Person is entitled to acquire or receive
any shares of capital stock or other securities of any Company
Subsidiary. No Company Subsidiary has issued any debt securities
which grant the holder thereof any right to vote on, or veto,
any action of any Company Subsidiary.
(f) Except with respect to the Company Subsidiaries
identified on Part 2.1(e) of the Company Disclosure
Schedule or as set forth in Part 2.1(f) of the Company
Disclosure Schedule, the Company does not own any controlling
interest in any Entity, and the Company has never owned,
beneficially or otherwise, any shares or other securities of, or
any direct or indirect equity or other financial interest in,
any Entity. The Company has not agreed and is not obligated to
make any future investment in or capital contribution to any
Entity. Neither the Company nor any of its stockholders has ever
approved, or commenced any proceeding or made any election
contemplating, the dissolution or liquidation of the business or
affairs of the Company. The Company has not guaranteed and is
not responsible or liable for any obligation of any of the
Entities in which it owns or has owned any equity or other
financial interest.
2.2 Articles of Incorporation and Bylaws;
Records. Except as set forth in Part 2.2
of the Company Disclosure Schedule, the Company has delivered or
made available to Replidyne accurate and complete copies of:
(a) the Articles of Incorporation (as amended and restated,
the Company Articles of Incorporation) and
Bylaws, including all amendments thereto, of the Company;
(b) the stock records of the Company; and (c) the
minutes and other records of the meetings and other proceedings
(including any actions taken by written consent or otherwise
without a meeting) of the stockholders of the Company, the board
of directors of the Company and all committees of the board of
directors of the Company (the items described in (a) and
(b) above, collectively, the Company Constituent
Documents). Except as set forth in Part 2.2 of
the Company Disclosure Schedule, there have been no formal
meetings or actions taken by written consent or otherwise
without a meeting of the stockholders of the Company, the board
of directors of the Company or any committee of the board of
directors of the Company that are not fully reflected in the
minutes and other records delivered or made available to
Replidyne pursuant to clause (c) above. There has not been
any violation of the Company Constituent Documents, and the
Company has not taken any action that is inconsistent with the
Company Constituent Documents. Except as set forth in
Part 2.2 of the Company Disclosure Schedule, the books of
account, stock records, minute books and
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other records of the Company are accurate, up to date and
complete in all material respects and have been maintained in
accordance with prudent business practices.
2.3 Capitalization, Etc.
(a) The authorized capital stock of the Company consists of
70,000,000 shares of Company Common Stock,
5,400,000 shares of Company Series A Preferred Stock,
2,188,425 shares of Company
Series A-1
Preferred Stock, 2,175,162 shares of Company Series B
Preferred Stock and 5,000,000 undesignated shares. As of the
date of this Agreement, 7,724,137 shares of Company Common
Stock, 4,737,561 shares of Company Series A Preferred
Stock, 2,188,425 shares of Company
Series A-1
Preferred Stock and 2,162,150 shares of Company
Series B Preferred Stock are issued and outstanding. All of
the outstanding shares of Company Common Stock and Company
Preferred Stock have been duly authorized and validly issued,
and are fully paid and non assessable. As of the date of this
Agreement, Part 2.3(a) of the Company Disclosure Schedule
sets forth the names of the Companys stockholders and the
class, series and number of shares of the Companys capital
stock owned of record by such stockholders. All outstanding
shares of Company Common Stock and Company Preferred Stock have
been issued and granted in compliance with (i) all
applicable federal and state securities laws, (ii) all
other applicable Legal Requirements, except as would not
reasonably be expected to have a Company Material Adverse
Effect, and (iii) all requirements set forth in Company
Constituent Documents and applicable Contracts. Part 2.3(a)
of the Company Disclosure Schedule provides an accurate and
complete description of the terms of each repurchase option
which is held by the Company and to which any shares of capital
stock of the Company is subject and identifies the Contract
underlying such right. The Company has no authorized shares
other than as set forth in this Section 2.3(a) and as of
the date of this Agreement there are no issued and outstanding
shares of the Companys capital stock other than the shares
of Company Common Stock and Company Preferred Stock as set forth
in this Section 2.3(a). Except as set forth in
Part 2.3(a) of the Company Disclosure Schedule, each share
of Company Preferred Stock is convertible into Company Common
Stock on a one-for-one basis. There are no declared but unpaid
dividends with respect to any shares of capital stock of the
Company. There are no shares of capital stock of the Company
held in the Companys treasury.
(b) The Company has reserved 7,929,397 shares of
Company Common Stock for issuance under the Company Stock Option
Plans, of which options to purchase 5,711,475 shares of
Company Common Stock granted under the Company Stock Option
Plans are outstanding as of the date of this Agreement. Options
to purchase an additional 130,000 shares of Company Common
Stock granted outside of the Company Stock Option Plans are
outstanding as of the date of this Agreement. No shares of
Company Common Stock remain available for future issuance under
the Companys 1991 Stock Option Plan and 2003 Stock Option
Plan, and 279,848 shares of Company Common Stock remain
available for future issuance under the Companys 2007
Equity Incentive Plan. Part 2.3(b) of the Company
Disclosure Schedule accurately sets forth, with respect to each
Company Option that is outstanding as of the date of this
Agreement: (i) the name of the holder of such Company
Option; (ii) the total number of shares of Company Common
Stock that are subject to such Company Option and the number of
shares of Company Common Stock with respect to which such
Company Option is immediately exercisable; (iii) the date
on which such Company Option was granted and the term of such
Company Option; and (iv) the exercise price per share of
Company Common Stock purchasable under such Company Option. Each
grant of a Company Option was duly authorized no later than the
date on which the grant of such Company Option was by its terms
to be effective (the Grant Date) by all
necessary corporate action, including, as applicable, approval
by the board of directors or compensation committee of the
Company and any required stockholder approval by the necessary
number of votes or written consents, and the award agreement
governing such grant (if any) was duly executed and delivered by
each party thereto, each such grant was made in accordance with
the terms of the Company Stock Option Plans and all other
applicable Legal Requirements and, except as set forth in
Part 2.3(b) of the Company Disclosure Schedule, the per
share exercise price of each Company Option was equal to the
fair market value of a share of Company Common Stock on the
applicable Grant Date.
(c) Except as described in Section 2.3(b) or in
Part 2.3(c) of the Company Disclosure Schedule, there is
no: (i) outstanding subscription, option, call, warrant or
right (whether or not currently exercisable) to acquire any
shares of capital stock or other securities of the Company;
(ii) outstanding security, instrument or obligation that is
or may become convertible into or exchangeable for any shares of
capital stock or other securities of the Company;
(iii) Contract under which the Company is or may become
obligated to sell or otherwise issue any shares of its
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capital stock or any other securities of the Company; or
(iv) condition or circumstance that would give rise to or
provide a basis for the assertion of a claim by any Person to
the effect that such Person is entitled to acquire or receive
any shares of capital stock or other securities of the Company.
Except as set forth in Part 2.3(c) of the Company
Disclosure Schedule, the Company has not issued any debt
securities which grant the holder thereof any right to vote on,
or veto, any action of the Company.
(d) Except for repurchases of securities made pursuant to
their terms or as set forth in Part 2.3(d) of the Company
Disclosure Schedule, the Company has never repurchased, redeemed
or otherwise reacquired any shares of capital stock or other
securities of the Company.
2.4 Financial Statements.
(a) The Company has delivered or made available to
Replidyne the following financial statements (collectively, the
Company Financial Statements):
(i) the audited consolidated balance sheets of the Company
as of June 30, 2006, 2007 and 2008 and the related audited
consolidated statements of operations, statements of changes in
shareholders deficiency (equity) and comprehensive (loss)
income and statements of cash flows of the Company for each of
the three years in the period ended June 30, 2008, together
with the notes thereto and the reports and opinions of
PricewaterhouseCoopers LLP relating thereto; and
(ii) the unaudited consolidated balance sheet of the
Company as of September 30, 2008 (the Company
Balance Sheet) and the related unaudited consolidated
statement of operations, statement of changes in
shareholders deficiency (equity) and comprehensive (loss)
income and statement of cash flows of the Company for the three
months then ended.
(b) The Company Financial Statements fairly present in all
material respects the consolidated financial position of the
Company as of the respective dates thereof and the consolidated
results of operations and cash flows of the Company for the
periods covered thereby. To the extent contained in the Company
SEC Documents, the Company Financial Statements complied as to
form in all material respects with the published rules and
regulations of the SEC applicable thereto. Except as may be
indicated in the notes to the Company Financial Statements, the
Company Financial Statements have been prepared in accordance
with generally accepted accounting principles
(GAAP) applied on a consistent basis
throughout the periods covered.
2.5 Absence of Changes. Except as
set forth in Part 2.5 of the Company Disclosure Schedule,
from September 30, 2008 through the date of this Agreement:
(a) there has not been any Company Material Adverse Effect,
and no event has occurred that will, or would reasonably be
expected to, cause a Company Material Adverse Effect;
(b) there has not been any material loss, damage or
destruction to, or any material interruption in the use of, any
of the assets of the Company (whether or not covered by
insurance);
(c) the Company has not declared, accrued, set aside or
paid any dividend or made any other distribution in respect of
any shares of its capital stock, and has not repurchased,
redeemed or otherwise reacquired any shares of its capital stock
or other securities;
(d) the Company has not sold, issued, granted or authorized
the issuance of (i) any capital stock or other securities
of the Company (other than upon the exercise of outstanding
Company Options or Company Warrants or pursuant to the Company
Stock Option Plans); (ii) any option, call or right to
acquire any capital stock or any other security of the Company
(other than pursuant to the Company Stock Option Plans);
(iii) any instrument convertible into or exchangeable for
any capital stock or other security of the Company; or
(iv) reserved for issuance any additional grants or shares
under the Company Stock Option Plans;
(e) the Company has not amended or waived any of its rights
under, or permitted the acceleration of vesting under, the
Company Stock Option Plans, any Company Option or agreement
evidencing or relating to any outstanding stock option or
warrant, any restricted stock purchase agreement, or any other
Contract evidencing or relating to any equity award;
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(f) there has been no amendment to any Company Constituent
Document and the Company has not effected or been a party to any
Acquisition Transaction, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(g) the Company has not formed any Company Subsidiary or
acquired any equity interest or other interest in any other
Entity;
(h) the Company has not made any capital expenditure which,
when added to all other capital expenditures made on behalf of
the Company, exceeds $100,000;
(i) the Company has not (i) entered into, or permitted
any of the assets owned or used by it to become bound by, any
Contract that contemplates or involves (A) the payment or
delivery of cash or other consideration in an amount or having a
value in excess of $100,000 in the aggregate, or (B) the
purchase or sale of any product, or performance of services by
or to the Company outside the Ordinary Course of Business having
a value in excess of $100,000 in the aggregate, or
(ii) waived any right or remedy under any Contract other
than in the Ordinary Course of Business, or amended or
prematurely terminated any Contract;
(j) the Company has not (i) acquired, leased or
licensed any right or other asset from any other Person,
(ii) sold or otherwise disposed of, or leased or licensed,
any right or other asset to any other Person, or
(iii) waived or relinquished any right, except for
immaterial rights or immaterial assets acquired, leased,
licensed or disposed of in the Ordinary Course of Business;
(k) the Company has not written off as uncollectible, or
established any extraordinary reserve with respect to, any
account receivable or other indebtedness;
(l) the Company has not made any pledge of any of its
assets or otherwise permitted any of its assets to become
subject to any Encumbrance, except for pledges of immaterial
assets made in the Ordinary Course of Business;
(m) the Company has not (i) lent money to any Person
(other than pursuant to routine travel advances made to
employees in the Ordinary Course of Business) or
(ii) incurred or guaranteed any indebtedness for borrowed
money in the aggregate in excess of $100,000 (other than draws
under the Companys credit facilities in effect on the date
of this Agreement) or (iii) issued or sold any debt
securities or options, warrants, calls or similar rights to
acquire any debt securities of the Company;
(n) the Company has not (i) established or adopted any
employee benefit plan, (ii) paid any bonus or made any
profit sharing, incentive compensation or similar payment to, or
increased the amount of the wages, salary, commissions, fringe
benefits or other compensation or remuneration payable to, any
of its directors or Key Employees with an annual salary in
excess of $100,000, except for payments made pursuant to any
compensation plans in effect on the date of this Agreement, or
(iii) hired any new employee having an annual salary in
excess of $100,000;
(o) the Company has not changed any of its personnel
policies or other business policies, or any of its methods of
accounting or accounting practices in any respect;
(p) the Company has not made any material Tax election;
(q) the Company has not changed any of its methods of
accounting or accounting practices in any respect;
(r) the Company has not threatened, commenced, settled or
become subject to any Legal Proceeding;
(s) the Company has not entered into any transaction or
taken any other action outside the Ordinary Course of Business,
other than entering into this Agreement and the Contemplated
Transactions;
(t) the Company has not paid, discharged or satisfied any
claim, liability or obligation (absolute, accrued, asserted or
unasserted, contingent or otherwise) other than the payment,
discharge or satisfaction of non-material amounts in the
Ordinary Course of Business or as required by any Company
Contract or Legal Requirement;
(u) the Company has not amended or prematurely terminated,
or waived any material right or remedy under, any Company
Contract; and
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(v) the Company has not agreed to take, or committed to
take, any of the actions referred to in clauses (c)
through (u) above.
2.6 [Reserved].
2.7 Equipment; Leasehold.
(a) Except as set forth in Part 2.7(a) of the Company
Disclosure Schedule, the Company owns, and has good and valid
title to, all equipment and other tangible assets purported to
be owned by it, free and clear of any liens or other
Encumbrances. All items of equipment and other tangible assets
owned by or leased to the Company (i) are adequate for the
uses to which they are being put and (ii) are adequate for
the conduct of the Companys business in the manner in
which such business is currently being conducted and as it is
proposed to be conducted.
(b) The Company does not own any real property or any
interest in real property, except for the leasehold interest
created under the real property leases identified in
Part 2.7(b) of the Company Disclosure Schedule. All
premises leased or subleased by the Company are supplied with
utilities and other services necessary for the operation of
their respective businesses.
2.8 Intellectual Property.
(a) Part 2.8(a) of the Company Disclosure Schedule
accurately identifies (i) each item of Company Registered
IP and (ii) the jurisdiction in which such item of Company
Registered IP has been registered or filed and the applicable
registration or serial number. The Company has delivered or made
available to Replidyne complete and accurate copies of all
applications, correspondence, and other material documents
related to each such item of Company Registered IP.
(b) Part 2.8(b) of the Company Disclosure Schedule
accurately identifies (i) each Company Contract pursuant to
which any Person has been granted any license under, or
otherwise has received or acquired any right (whether or not
currently exercisable) or interest in, any Company IP Rights and
(ii) each Company Contract involving Company IP Rights
licensed to the Company (other than any non-customized software
that is so licensed solely in executable or object code form
pursuant to a non-exclusive, internal use, software license
granted in the Ordinary Course of Business). The Company is not
bound by, and no Company IP Rights are subject to, any Contract
containing any covenant or other provision that in any way
limits or restricts the ability of the Company to use, exploit,
assert, or enforce any Company IP Rights anywhere in the world.
(c) Part 2.8(c) of the Company Disclosure Schedule
accurately identifies all Contracts in which Intellectual
Property Rights or Intellectual Property embodied or
incorporated in the Company Products are licensed to the Company
(other than any non-customized software that (i) is so
licensed solely in executable or object code form pursuant to a
non-exclusive, internal use software license, (ii) is not
incorporated into, or used directly in the development,
manufacturing, or distribution of, any of the Companys
products or services, and (iii) was licensed to the Company
in the Ordinary Course of Business).
(d) The Company has delivered or made available to
Replidyne a complete and accurate copy of each standard form of
Company IP Rights Agreement used by the Company, including each
standard form of (i) license agreement;
(ii) distribution or reseller agreement,
(iii) employee agreement containing intellectual property
assignment or license of Company IP Rights or any
confidentiality provision; (iv) consulting or independent
contractor agreement containing intellectual property assignment
or license of Company IP Rights or any confidentiality
provision; and (v) confidentiality or nondisclosure
agreement, and no Company IP Rights Agreement deviates in any
material respect from the corresponding standard form agreement
delivered or made available to Replidyne.
(e) Except as set forth in Part 2.8(e) of the Company
Disclosure Schedule, the Company exclusively owns all right,
title, and interest to and in Company IP Rights (other than
Company IP Rights exclusively licensed to the Company, as
identified in Part 2.8(b) of the Company Disclosure
Schedule) free and clear of any Encumbrances
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(other than non-exclusive licenses granted pursuant to the
Company Contracts listed in Part 2.8(b) of the Company
Disclosure Schedule). Without limiting the generality of the
foregoing:
(i) To the Knowledge of the Company, all documents and
instruments necessary to register or apply for or renew
registration of Company Registered IP have been validly
executed, delivered, and filed in a timely manner with the
appropriate Governmental Body.
(ii) Each Person who is or was an employee or contractor of
the Company and who is or was involved in the creation or
development of any Company IP Rights has signed a valid,
enforceable agreement containing an assignment of Intellectual
Property Rights to the Company and confidentiality provisions
protecting trade secrets and confidential information of the
Company. No current or former stockholder, officer, director, or
employee of the Company has any claim, right (whether or not
currently exercisable), or interest to or in any Company IP
Rights. Except as set forth in Part 2.8(e) of the Company
Disclosure Schedule, no employee of the Company is
(a) bound by or otherwise subject to any Contract
restricting him or her from performing his or her duties for the
Company or (b) in breach of any Contract with any former
employer or other Person concerning Company IP Rights or
confidentiality obligations due to his or her activities as an
employee of the Company.
(iii) No funding, facilities, or personnel of any
Governmental Body were used, directly or indirectly, to develop
or create, in whole or in part, any Company IP Rights in which
the Company has an ownership interest.
(iv) The Company has taken all reasonable steps to maintain
the confidentiality of and otherwise protect and enforce their
rights in all proprietary information that the Company holds, or
purports to hold, as a trade secret.
(v) The Company has not assigned or otherwise transferred
ownership of, or agreed to assign or otherwise transfer
ownership of, any Company IP Rights to any other Person.
(vi) The Company is not now nor has it ever been a member
or promoter of, or a contributor to, any industry standards body
or similar organization that could require or obligate the
Company to grant or offer to any other Person any license or
right to any Company IP Rights.
(vii) The Company IP Rights constitute all Intellectual
Property Rights necessary for the Company to conduct its
business as currently conducted and planned to be conducted.
(f) To the Companys Knowledge, all Company Registered
IP is valid and enforceable. Without limiting the generality of
the foregoing:
(i) Each U.S. patent application and U.S. patent
in which the Company has or purports to have an ownership
interest was filed within one year of the first printed
publication, public use, or offer for sale of each invention
described in the U.S. patent application or
U.S. patent. Each foreign patent application and foreign
patent in which the Company has or purports to have an ownership
interest was filed or claims priority to a patent application
filed prior to each invention described in the foreign patent
application or foreign patent being first made available to the
public.
(ii) To the Companys Knowledge, no trademark (whether
registered or unregistered) or trade name owned, used, or
applied for by the Company conflicts or interferes with any
trademark (whether registered or unregistered) or trade name
owned, used, or applied for by any other Person. None of the
goodwill associated with or inherent in any trademark (whether
registered or unregistered) in which the Company has or purports
to have an ownership interest has been impaired.
(iii) Each item of Company IP Rights that is Company
Registered IP is and at all times has been filed and maintained
in compliance with all applicable Legal Requirements and all
filings, payments, and other actions required to be made or
taken to maintain such item of Company Registered IP in full
force and effect have been made by the applicable deadline.
(iv) No interference, opposition, reissue, reexamination,
or other proceeding is pending or, to the Companys
Knowledge, threatened, in which the scope, validity, or
enforceability of any Company IP Rights is being, has been, or
could reasonably be expected to be contested or challenged. To
the Companys Knowledge,
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there is no basis for a claim that any Company IP Rights are
invalid or, excluding pending patent applications, unenforceable.
(g) To the Companys Knowledge, no Person has
infringed, misappropriated, or otherwise violated, and no Person
is currently infringing, misappropriating, or otherwise
violating, any Company IP Rights, except as set forth in
Part 2.8(g) of the Company Disclosure Schedule.
Part 2.8(g) of the Company Disclosure Schedule accurately
identifies, and, except as set forth in Part 2.8(g) of the
Company Disclosure Schedule, the Company has delivered or made
available to Replidyne a complete and accurate copy of, each
letter or other written or electronic communication or
correspondence that has been sent or otherwise delivered in the
last five (5) years by or to the Company or any
Representative of the Company regarding any actual, alleged, or
suspected infringement or misappropriation of any Company IP
Rights, and provides a brief description of the current status
of the matter referred to in such letter, communication, or
correspondence.
(h) Neither the execution, delivery, or performance of this
Agreement (or any of the agreements contemplated by this
Agreement) nor the consummation of any of the Contemplated
Transactions will, with or without notice or lapse of time,
result in, or give any other Person the right or option to cause
or declare, (a) a loss of, or Encumbrance on, any Company
IP Rights; (b) a breach by the Company of any Company IP
Rights Agreement; (c) the release, disclosure, or delivery
of any Company IP Rights by or to any escrow agent or other
Person; or (d) the grant, assignment, or transfer to any
other Person of any license or other right or interest under,
to, or in any of Company IP Rights.
(i) To the Companys Knowledge, the Company has never
infringed (directly, contributorily, by inducement, or
otherwise), misappropriated, or otherwise violated any
Intellectual Property Right of any other Person. Without
limiting the generality of the foregoing:
(i) No infringement, misappropriation, or similar claim or
Legal Proceeding is pending or, to the Companys Knowledge,
threatened against the Company or against any other Person who
may be entitled to be indemnified, defended, held harmless, or
reimbursed by the Company with respect to such claim or Legal
Proceeding. The Company has never received any notice or other
communication (in writing or otherwise) alleging any actual,
alleged, or suspected infringement, misappropriation, or
violation of any Intellectual Property Rights of another Person.
(ii) Except in connection with customary indemnification
obligations to the Companys directors and officers, the
Company is not bound by any Contract to indemnify, defend, hold
harmless, or reimburse any other Person with respect to any
intellectual property infringement, misappropriation, or similar
claim. The Company has never assumed, or agreed to discharge or
otherwise take responsibility for, any existing or potential
liability of another Person for infringement, misappropriation,
or violation of any Intellectual Property Right.
(j) No claim or Legal Proceeding involving any Company IP
Rights is pending or, to the Companys Knowledge, has been
threatened, except for any such claim or Legal Proceeding that,
if adversely determined, would not adversely affect (i) the
use or exploitation of Company IP Rights by the Company, or
(ii) the design, development, manufacturing, distribution,
licensing, or sale of any product or service being developed by
the Company, or that is being commercially sold by the Company.
2.9 Contracts.
(a) Part 2.9(a) of the Company Disclosure Schedule
identifies, as of the date of this Agreement:
(i) (A) each Company Contract relating to the
employment of, or the performance of employment-related services
by, any Person, including any employee, consultant or
independent contractor; (B) each Company Contract pursuant
to which the Company is or may become obligated to make any
severance, termination, change in control or similar payment to
any director, officer or employee of the Company; and
(C) any Company Contract pursuant to which the Company is
or may become obligated to make any bonus or similar payment
(other than payment in respect of salary) to any director,
officer or employee of the Company;
(ii) each Company Contract that provides for
indemnification of any officer, director, employee or agent of
the Company;
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(iii) each Company Contract relating to the voting and any
other rights or obligations of a stockholder of the Company;
(iv) each Company Contract relating to the merger,
consolidation, reorganization or any similar transaction with
respect to the Company;
(v) each Company Contract relating to the acquisition,
transfer, use, development, sharing or license of any technology
or any Intellectual Property or Company IP Rights;
(vi) each Company Contract imposing any restriction on the
Companys right or ability (A) to compete with any
other Person, (B) to acquire any product or other asset or
any services from any other Person, to sell any product or other
asset to, or perform any services for, any other Person or to
transact business or deal in any other manner with any other
Person, or (C) develop or distribute any technology or
product;
(vii) each Company Contract creating or involving any
agency relationship, distribution arrangement or franchise
relationship;
(viii) each Company Contract relating to the creation of
any Encumbrance with respect to any asset of the Company;
(ix) each Company Contract involving or incorporating any
guaranty, any pledge, any performance or completion bond, any
indemnity or any surety arrangement;
(x) each Company Contract creating or relating to any
collaboration or joint venture or any sharing of technology,
revenues, profits, losses, costs or liabilities, including
Company Contracts involving investments by the Company in, or
loans by the Company to, any other Entity;
(xi) each Company Contract relating to the purchase or sale
of any product or other asset by or to, or the performance of
any services by or for, or otherwise involving as a
counterparty, any Related Party of the Company;
(xii) each Company Contract relating to indebtedness for
borrowed money;
(xiii) each Company Contract related to the acquisition or
disposition of material assets of the Company or any other
Person;
(xiv) any other material Company Contract that has a term
of more than 30 days and that may not be terminated by the
Company (without penalty) within 30 days after the delivery
of a termination notice by the Company;
(xv) any other Company Contract that contemplates or
involves (A) the payment or delivery of cash or other
consideration in an amount or having a value in excess of
$100,000 in the aggregate, or (B) the purchase or sale of
any product, or performance of services by or to the Company
outside the Ordinary Course of Business having a value in excess
of $100,000 in the aggregate;
(xvi) each Company Contract constituting a commitment of
any Person to purchase products (including products in
development) of the Company;
(xvii) each Company Contract regarding the acquisition,
issuance or transfer of any securities and each Company Contract
affecting or dealing with any securities of the Company
including any restricted share agreements or escrow
agreements; and
(xviii) each Company Contract with any Person, including
without limitation any financial advisor, broker, finder,
investment banker or other Person, providing advisory services
to the Company in connection with the Contemplated Transactions.
(b) The Company has delivered or made available to
Replidyne accurate and complete (except for applicable
redactions thereto) copies of all Company Contracts set forth on
Parts 2.9(a)(i) through (xviii) of the Company Disclosure
Schedule, including all amendments thereto (collectively, the
Material Company Contracts). There are no
Material Company Contracts that are not in written form. Each
Material Company Contract is valid and in full force and effect,
is enforceable by the Company in accordance with its terms, and,
after the Effective Time, will
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continue to be legal, valid, binding and enforceable on
identical terms. The consummation of the Contemplated
Transactions shall not (either alone or upon the occurrence of
additional acts or events) result in any payment or payments
becoming due from the Company, the Surviving Corporation or
Replidyne to any Person under any Material Company Contract or
give any Person the right to terminate or alter the provisions
of any Material Company Contract.
(c) The Company has not materially violated or breached, or
committed any material default under, any Material Company
Contract, and, to the Knowledge of the Company, no other Person
has violated or breached, or committed any default under, any
Material Company Contract.
(d) Except as set forth in Part 2.9(d) of the Company
Disclosure Schedule, to the Companys Knowledge, no event
has occurred, and no circumstance or condition exists, that
(with or without notice or lapse of time) will, or would
reasonably be expected to, (i) result in a material
violation or breach of any of the provisions of any Material
Company Contract, (ii) give any Person the right to declare
a default or exercise any remedy under any Material Company
Contract, (iii) give any Person the right to accelerate the
maturity or performance of any Material Company Contract, or
(iv) give any Person the right to cancel, terminate or
modify any Material Company Contract.
(e) The Company has not received any written notice or
other communication regarding any actual or possible violation
or breach of, or default under, any Material Company Contract.
(f) The Company has not waived any rights under any
Material Company Contract.
(g) No Person is renegotiating, or has a right pursuant to
the terms of any Material Company Contract to renegotiate, any
amount paid or payable to the Company under any Material Company
Contract or any other material term or provision of any Material
Company Contract.
(h) Part 2.9(h) of the Company Disclosure Schedule
provides an accurate and complete list of all Consents required
under any Company Contract to consummate the Merger and the
other Contemplated Transactions.
2.10 Liabilities; Fees, Costs and Expenses.
(a) The Company does not have any accrued, contingent or
other liabilities of any nature, either matured or unmatured and
whether due or to become due, that are required to be reflected
in financial statements in accordance with GAAP, except for:
(i) liabilities identified as such in the
liabilities column of the Company Balance Sheet;
(ii) current liabilities that have arisen since the date of
the Company Balance Sheet in the Ordinary Course of Business;
and (iii) liabilities for legal, accounting and other
expenses in connection with the Contemplated Transactions.
(b) The Company has never effected or otherwise been
involved in any off-balance sheet arrangements (as
defined in Item 303(a)(4)(ii) of
Regulation S-K
under the Exchange Act).
2.11 Compliance with Legal
Requirements. The Company is, and has at all
times been, in compliance with all applicable Legal
Requirements, except where the failure to be so in compliance,
individually or in the aggregate, has not had, and would not
reasonably be expected to have, a Company Material Adverse
Effect. No event has occurred, and no condition or circumstance
exists, that will (with or without notice or lapse of time)
constitute or result in a violation by the Company of, or a
failure on the part of the Company to comply with, any Legal
Requirement. The Company has not received any written notice or
other communication from any Governmental Body or any other
Person regarding (a) any actual, alleged, possible or
potential violation of, or failure to comply with, any Legal
Requirement, or (b) any actual, alleged, possible or
potential obligation on the part of the Company to undertake, or
to bear all or any portion of the cost of, any cleanup or any
remedial, corrective or responsive action of any nature. To the
Knowledge of the Company, no Governmental Body has proposed or
is considering any Legal Requirement that, if adopted or
otherwise put into effect, (a) will, or would reasonably be
expected to, cause a Company Material Adverse Effect,
(b) would be reasonably expected to have an adverse effect
on the Companys ability to comply with or perform any
covenant or obligation under this Agreement or any of the
Related Agreements, or (c) would reasonably be expected to
have the effect of preventing, delaying, making illegal or
otherwise interfering with the Merger or any of the Contemplated
Transactions.
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2.12 Governmental
Authorizations. Part 2.12 of the Company
Disclosure Schedule identifies each material Governmental
Authorization held by the Company, and the Company has delivered
or made available to Replidyne accurate and complete copies of
all Governmental Authorizations identified in Part 2.12 of
the Company Disclosure Schedule. The Governmental Authorizations
identified in Part 2.12 of the Company Disclosure Schedule
are valid and in full force and effect, and collectively
constitute all Governmental Authorizations necessary to enable
the Company to conduct its business in the manner in which its
business is currently being conducted and is proposed to be
conducted. The Company is in compliance in all material respects
with the terms and requirements of the respective Governmental
Authorizations identified in Part 2.12 of the Company
Disclosure Schedule. The Company has not received any notice or
other communication from any Governmental Body regarding
(a) any actual or possible violation of or failure to
comply with any term or requirement of any Governmental
Authorization, or (b) any actual or possible revocation,
withdrawal, suspension, cancellation, termination or
modification of any Governmental Authorization.
2.13 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of
the Company with any Governmental Body with respect to any
taxable period ending on or before the Closing Date (the
Company Returns) (i) have been or will
be filed on or before the applicable due date (including any
extensions of such due date), and (ii) have been, or will
be when filed, accurately and completely prepared in all
material respects. All Taxes due on or before the Closing Date
(whether or not shown on the Company Returns) have been or will
be paid on or before the Closing Date. The Company has delivered
or made available to Replidyne accurate and complete copies of
all Company Returns filed which have been requested by
Replidyne. The Company shall establish in its books and records,
in the Ordinary Course of Business, reserves adequate for the
payment of all unpaid Taxes by the Company for the period from
January 1, 2008 through the Closing Date.
(b) All Taxes that the Company was required by law to
withhold or collect have been duly withheld or collected and, to
the extent required, have been properly paid to the appropriate
Governmental Body.
(c) No Company Return has ever been examined or audited by
any Governmental Body and no examination or audit of any Company
Return is currently in progress or, to the Knowledge of the
Company, threatened or contemplated. The Company has delivered
or made available to Replidyne accurate and complete copies of
all audit reports, private letter rulings, revenue agent
reports, information document requests, notices of proposed
deficiencies, deficiency notices, protests, petitions, closing
agreements, settlement agreements, pending ruling requests and
any similar documents submitted by, received by, or agreed to by
or on behalf of the Company relating to the Company Returns. No
extension or waiver of the limitation period applicable to any
of the Company Returns has been granted (by the Company or any
other Person), no such extension or waiver has been requested
from the Company and the Company has not executed or filed any
power of attorney with any taxing authority.
(d) The Company (i) has never been a member of an
affiliated group (within the meaning of Section 1504(a) of
the Code) filing (or which it has been required to file) a
consolidated federal income Tax Return (other than a group the
common parent of which was the Company), (ii) does not have
any liability for the Taxes of any person under
Section 1.1502-6
of the Treasury Regulations (or any similar provision of state,
local or foreign law), as a transferee or successor, or
otherwise, and (iii) has never been a party to any joint
venture, collaboration, partnership or other agreement that
could be treated as a partnership for Tax purposes. The Company
is not, and has never been, a party to or bound by any tax
indemnity agreement, tax-sharing agreement, tax allocation
agreement or similar Contract. The Company has not been either a
distributing corporation or a controlled
corporation in a distribution of stock intended to qualify
for tax-free treatment under Section 355 of the Code
(y) in the two years prior to the date of this Agreement or
(z) which could otherwise constitute part of a
plan or series of related transactions
(within the meaning of Section 355(e) of the Code) in
conjunction with the Merger.
(e) No Company Subsidiary is or has been a passive foreign
investment company within the meaning of
Sections 1291-1297
of the Code.
(f) The Company has not incurred (or been allocated) an
overall foreign loss as defined in
Section 904(f)(2) of the Code which has not been previously
recaptured in full as provided in Sections 904(f)(1)
and/or
904(f)(3) of the Code.
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(g) The Company is not a party to a gain recognition
agreement under Section 367 of the Code.
(h) No claim or Legal Proceeding is pending or has been
threatened against or with respect to the Company in respect of
any Tax. There are no unsatisfied liabilities for Taxes with
respect to any notice of deficiency or similar document received
by the Company with respect to any Tax (other than liabilities
for Taxes asserted under any such notice of deficiency or
similar document which are being contested in good faith by the
Company and with respect to which adequate reserves for payment
have been established). There are no liens for Taxes upon any of
the assets of the Company except liens for current Taxes not yet
due and payable.
(i) The Company will not be required to include any item of
income in, or exclude any item of deduction from, taxable income
for any period (or any portion thereof) ending after the Closing
Date as a result of any (i) deferred intercompany gain or
any excess loss account described in Treasury Regulations under
Section 1502 of the Code (or any corresponding provision of
state, local or foreign Tax law), (ii) closing agreement as
described in Section 7121 of the Code (or any corresponding
or similar provision of state, local or foreign Tax law)
executed on or prior to the Closing Date, (iii) installment
sale or other open transaction disposition made on or prior to
the Closing Date, (iv) prepaid amount received on or prior
to the Closing Date, or (v) any adjustment pursuant to
Section 481(a) of the Code in its current or in any future
taxable period by reason of a change in accounting method. To
the Knowledge of the Company, the Internal Revenue Service (or
other taxing authority) has not proposed nor is considering
proposing any such change in accounting method and the Company
does not have an application pending with any taxing authority
requesting permission for any change in accounting method.
(j) The Company is not, and has never been, a party to a
transaction or agreement that is in conflict with the Tax rules
on transfer pricing in any relevant jurisdiction.
(k) Part 2.13(k) of the Company Disclosure Schedule
sets forth a complete and accurate list of any Company
Subsidiaries for which a check-the-box election
under Section 7701 has been made.
(l) The Company has not engaged in any listed
transaction for purposes of Treasury Regulation
sections 1.6011-4(b)(2)
or 301.6111-2(b)(2) or any analogous provision of state or local
law.
2.14 Employee and Labor Matters; Benefit
Plans.
(a) Part 2.14(a) of the Company Disclosure Schedule
accurately sets forth, as of the date of this Agreement:
(i) with respect to each Key Employee of the Company, the
name of such employee and the date as of which such employee was
originally hired by the Company;
(ii) with respect to each Key Employee of the Company, such
employees title;
(iii) the base salary and potential bonus payable for 2008
for each Key Employee of the Company as of the date of this
Agreement;
(iv) any Governmental Authorization that is held by each
Key Employee of the Company and that is used in the
Companys business;
(v) the citizenship status of each Key Employee of the
Company (whether such employee is a U.S. citizen or
otherwise) and, with respect to non U.S. citizens,
identifies the visa or other similar permit under which such
employee is working for the Company and the dates of issuance
and expiration of such visa or other permit; and
(vi) with respect to all employees of the Company who are
not Key Employees, the aggregate number of such employees and
the aggregate base salary of such employees in effect as of the
date of this Agreement.
(b) The employment of the Companys employees is
terminable by the Company at will. The Company has delivered or
made available to Replidyne accurate and complete copies of all
employee manuals and handbooks, disclosure materials, policy
statements and other materials governing the terms and
conditions of employment of the employees of the Company.
(c) To the Knowledge of the Company:
(i) no Key Employee of the Company intends to terminate his
employment with the Company;
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(ii) no Key Employee of the Company has received an offer
that remains outstanding to join a business that may be
competitive with the Companys business; and
(iii) no employee of the Company is a party to or is bound
by any confidentiality agreement, noncompetition agreement or
other Contract (with any Person) that would be reasonably
expected to have an adverse effect on: (A) the performance
by such employee of any of his duties or responsibilities as an
employee of the Company; or (B) the Companys business
or operations.
(d) The Company is not a party to or bound by, and the
Company has never been a party to or bound by, any union
contract, collective bargaining agreement or similar Contract.
(e) The Company is not engaged, and the Company has never
been engaged, in any unfair labor practice of any nature. There
has never been any slowdown, work stoppage, labor dispute or
union organizing activity, or any similar activity or dispute,
affecting the Company. To the Companys Knowledge, no event
has occurred, and no condition or circumstance exists, that
might directly or indirectly give rise to the commencement of
any such slowdown, work stoppage, labor dispute or union
organizing activity or any similar activity or dispute. There
are no actions, suits, claims, labor disputes or grievances
pending or, to the Knowledge of the Company, threatened or
reasonably anticipated relating to any labor, safety or
discrimination matters involving any employee of the Company,
including, without limitation, charges of unfair labor practices
or discrimination complaints. The Company has good labor
relations, and no reason to believe that the consummation of the
Merger or any of the other Contemplated Transactions will have a
material adverse effect on the Companys labor relations.
(f) Except as set forth on Part 2.14(f) of the Company
Disclosure Schedule, since January 1, 2006, there have not
been any independent contractors who have provided services to
the Company for a period of six consecutive months or longer.
(g) Part 2.14(g) of the Company Disclosure Schedule
identifies each Company Plan sponsored, maintained, contributed
to or required to be contributed to by the Company for the
benefit of any employee of the Company. Except to the extent
required to comply with Legal Requirements, the Company does not
intend nor has it committed to establish or enter into any new
Company Plan (as defined in paragraph (s) below), or to
modify any Company Plan.
(h) The Company has delivered or made available to
Replidyne: (i) correct and complete copies of all documents
setting forth the terms of each Company Plan, including all
amendments thereto and all related trust documents;
(ii) the three most recent annual reports
(Form Series 5500 and all schedules and financial
statements attached thereto), if any, required under ERISA or
the Code in connection with each Company Plan; (iii) if the
Company Plan is subject to the minimum funding standards of
Section 302 of ERISA, the most recent annual and periodic
accounting of Company Plan assets; (iv) the most recent
summary plan description together with the summaries of material
modifications thereto, if any, required under ERISA with respect
to each Company Plan; (v) all material written Contracts
relating to each Company Plan, including administrative service
agreements and group insurance contracts; (vi) all written
materials provided to any employee of the Company relating to
any Company Plan and any proposed Company Plans, in each case,
relating to any amendments, terminations, establishments,
increases or decreases in benefits, acceleration of payments or
vesting schedules or other events that would result in any
liability to the Company; (vii) all material correspondence
from the last six years to or from any Governmental Body
relating to any Plan; (viii) the form of all COBRA forms
and related notices; (ix) all insurance policies in the
possession of the Company pertaining to fiduciary liability
insurance covering the fiduciaries for each Company Plan; and
(x) the most recent Internal Revenue Service determination
or opinion letter issued with respect to each Company Plan
intended to be qualified under Section 401(a) of the Code.
(i) Each Company Plan has been established and maintained
substantially in accordance with its terms and in substantial
compliance with all applicable Legal Requirements, including
ERISA and the Code. Any Company Plan intended to be qualified
under Section 401(a) of the Code has obtained a favorable
determination letter (or opinion letter, if applicable) as to
its qualified status under the Code or has remaining a period of
time under applicable Treasury regulations or Internal Revenue
Service pronouncements in which to apply for such a letter and
make any amendments necessary to obtain a favorable
determination as to the qualified status of that Company Plan.
To the Knowledge of the Company, no prohibited
transaction, within the meaning of Section 4975 of
the Code or
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Sections 406 and 407 of ERISA, and not otherwise exempt
under Section 408 of ERISA, has occurred with respect to
any Company Plan subject to ERISA or Section 4975 of the
Code. There are no claims or Legal Proceedings pending, or, to
the Knowledge of the Company, threatened or reasonably
anticipated (other than routine claims for benefits), against
any Company Plan or against the assets of any Company Plan. Each
Company Plan (other than any Company Plan to be terminated prior
to the Closing in accordance with this Agreement) can be
amended, terminated or otherwise discontinued after the Closing
in accordance with its terms, without liability to Replidyne,
the Company or the Surviving Corporation (other than ordinary
administration expenses). There are no audits, inquiries or
Legal Proceedings pending or, to the Knowledge of the Company,
threatened by any Governmental Body with respect to any Company
Plan. The Company has never incurred any penalty or tax with
respect to any Company Plan under Section 502(i) of ERISA
or Sections 4975 through 4980 of the Code. The Company has
made all contributions and other payments required by and due
under the terms of each Company Plan.
(j) The Company has never maintained, established,
sponsored, participated in, or contributed to any:
(i) employee benefit pension plan (as defined in
Section 3(2) of ERISA) (Pension Plan)
subject to Title IV of ERISA; or
(ii) multiemployer plan within the meaning of
Section (3)(37)(A) of ERISA. The Company has never maintained,
established, sponsored, participated in or contributed to, any
Pension Plan in which stock of the Company is or was held as a
plan asset. The Company has never maintained a Pension Plan or
multiemployer plan, or the equivalent thereof, in a foreign
jurisdiction.
(k) No Company Plan provides (except at no cost to the
Company), or reflects or represents any liability of the Company
to provide retiree life insurance, retiree health benefits or
other retiree employee welfare benefits to any Person for any
reason, except as may be required by COBRA or other applicable
Legal Requirements, or any deferred compensation other than
tax-qualified employee benefit pension plans (as
defined under ERISA), (such welfare and deferred compensation
benefits, collectively, Post-Retirement
Benefits). Other than commitments made that involve no
future costs to the Company, the Company has never represented,
promised or contracted (whether in oral or written form) to any
employee of the Company (either individually or to employees of
the Company as a group) or any other Person that such
employee(s) or other Person would be provided with
Post-Retirement Benefits, except to the extent required by
applicable Legal Requirements. Part 2.14(k) of the Company
Disclosure Schedule accurately identifies each former employee
of the Company who is receiving or is scheduled to receive (or
whose spouse or other dependent is receiving or is scheduled to
receive) any benefits.
(l) Except as set forth in Part 2.14(l) of the Company
Disclosure Schedule, neither the execution of this Agreement nor
the consummation of the Contemplated Transactions will (either
alone or upon the occurrence of any additional or subsequent
events) constitute an event under any Company Plan, Company
Contract, trust or loan that will or may result (either alone or
in connection with any other circumstance or event) in any
payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in
benefits or obligation to fund benefits with respect to any
employees of the Company.
(m) The Company: (i) is, and at all times has been, in
substantial compliance with all applicable Legal Requirements
respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case, with
respect to their employees, including the requirements of FMLA
and any similar provision of state law; (ii) have withheld
and reported all amounts required by applicable Legal
Requirements or by Contract to be withheld and reported with
respect to wages, salaries and other payments to their
employees; (iii) is not liable for any arrears of wages or
any taxes or any penalty for failure to comply with the Legal
Requirements applicable to the foregoing; and (iv) is not
liable for any payment to any trust or other fund governed by or
maintained by or on behalf of any Governmental Body with respect
to unemployment compensation benefits, social security or other
benefits or obligations for their employees (other than routine
payments to be made in the normal course of business and
consistent with past practice). There are no pending or, to the
Knowledge of the Company, threatened or reasonably anticipated
claims or Legal Proceedings against the Company under any
workers compensation policy or long-term disability policy.
(n) The Company is not required to be, and, to the
Knowledge of the Company, has never been required to be, treated
as a single employer with any other Person under
Section 4001(b)(1) of ERISA or Section 414(b), (c),
(m) or (o) of the Code. The Company has never been a
member of an affiliated service group within the
meaning of Section 414(m) of the Code.
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(o) There is no agreement, plan, arrangement or other
Contract covering any employee or independent contractor or
former employee or independent contractor of the Company that,
considered individually or considered collectively with any
other such Contracts
and/or other
events, will, or could reasonably be expected to, give rise
directly or indirectly to the payment of any amount that would
not be deductible pursuant to Section 280G or
Section 162(m) of the Code. The Company is not a party to
any Contract, nor does the Company have any obligation (current
or contingent), to compensate any individual for excise taxes
paid pursuant to Section 4999 of the Code.
(p) Any employee plan of the Company, which includes any
and all employment agreements, change in control agreements and
any other similar individual agreements with employees or
consultants, salary, bonus, deferred compensation, incentive
compensation, stock purchase, stock option, severance pay,
termination pay, hospitalization, medical, life or other
insurance, supplemental unemployment benefits, profit-sharing,
pension or retirement plan, any other material program or
agreement, whether or not subject to ERISA (collectively, the
Company Plans) sponsored, maintained,
contributed to or required to be contributed to by the Company
for the benefit of any employee of the Company and which is a
nonqualified deferred compensation plan (as defined
in Section 409A(d)(1) of the Code) has been operated since
January 1, 2006 in good faith compliance with
Section 409A of the Code and the proposed regulations and
other guidance issued with respect thereto as to avoid any
additional Tax pursuant to Section 409A(a)(1)(B)(i)(II) of
the Code.
2.15 Environmental Matters. The
Company is in compliance in all material respects with all
applicable Environmental Laws, which compliance includes the
possession by the Company of all permits and other Governmental
Authorizations required under applicable Environmental Laws, and
compliance with the terms and conditions thereof. The Company
has not received any written notice or other communication (in
writing or otherwise), whether from a Governmental Body,
citizens group, employee or otherwise, that alleges that the
Company is not in compliance with any Environmental Law, and, to
the Knowledge of the Company, there are no circumstances that
may prevent or interfere with the Companys compliance with
any Environmental Law in the future. To the Knowledge of the
Company: (i) no current or prior owner of any property
leased or controlled by the Company has received any written
notice or other communication relating to property owned or
leased at any time by the Company, whether from a Governmental
Body, citizens group, employee or otherwise, that alleges that
such current or prior owner or the Company is not in compliance
with or violated any Environmental Law relating to such property
and (ii) it has no liability under any Environmental Law
(including without limitation corrective, investigatory or
remedial obligations). All Governmental Authorizations currently
held by the Company pursuant to Environmental Laws are
identified in Part 2.15 of the Company Disclosure Schedule.
2.16 Insurance. The Company
maintains insurance policies with reputable insurance carriers
against all risks of a character as usually insured against, and
in such coverage amounts as are usually maintained, by similarly
situated companies in the same or similar businesses. Each such
insurance policy is in full force and effect. Since
January 1, 2006, the Company has not made any claim under
any insurance policy or received any written notice or other
communication regarding any actual or possible
(a) cancellation or invalidation of any insurance policy,
(b) refusal of any coverage or rejection of any claim under
any insurance policy, or (c) material adjustment in the
amount of the premiums payable with respect to any insurance
policy.
2.17 Related Party
Transactions. Except as set forth in
Part 2.17 of the Company Disclosure Schedule, (a) no
Company Related Party has, and no Company Related Party has at
any time since January 1, 2006 had, any direct or indirect
interest in any asset used in or otherwise relating to the
business of the Company; (b) no Company Related Party is,
or has been, indebted to the Company; (c) since
January 1, 2006, no Company Related Party has entered into,
or has had any direct or indirect financial interest in, any
Company Contract, transaction or business dealing involving the
Company; (d) no Company Related Party is competing, or has
at any time since January 1, 2006 competed, directly or
indirectly, with the Company; and (e) no Company Related
Party has any claim or right against the Company (other than
rights under capital stock of the Company and rights to receive
compensation for services performed as an employee of the
Company).
2.18 Legal Proceedings; Orders.
(a) Except as set forth in Part 2.18(a) of the Company
Disclosure Schedule, there is no pending Legal Proceeding, and
to the Knowledge of the Company, no Person has threatened to
commence any Legal Proceeding:
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(i) that involves the Company or any of its directors or
officers (in their capacities as such) or any of the assets
owned, used or controlled by the Company; or (ii) that
challenges, or that may have the effect of preventing, delaying,
making illegal or otherwise interfering with, the Merger or any
of the other Contemplated Transactions. To the Knowledge of the
Company, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that will, or that would
reasonably be expected to, give rise to or serve as a basis for
the commencement of any such Legal Proceeding.
(b) There is no order, writ, injunction, judgment or decree
to which the Company or any of the assets owned or used by the
Company, is subject. To the Knowledge of the Company, none of
its Related Parties is subject to any order, writ, injunction,
judgment or decree that relates to the Companys business
or to any assets owned or used by the Company.
2.19 Authority; Binding Nature of
Agreement. The Company has the absolute and
unrestricted corporate right, power and authority to enter into
and to perform its obligations under this Agreement and the
Related Agreements to which it is a party; and the execution,
delivery and performance by the Company of this Agreement and
the Related Agreements to which it is a party have been duly
authorized by all necessary corporate action on the part of the
Company, the Special Committee and the board of directors and
stockholders of the Company, subject only to obtaining the
Required Company Stockholder Vote and the filing and recordation
of the Articles of Merger pursuant to the MBCA. This Agreement
and each of the Related Agreements to which the Company is a
party has been duly executed and delivered by the Company, and
assuming due authorization, execution and delivery by the other
Parties thereto, constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in
accordance with its terms, subject to (a) laws of general
application relating to bankruptcy, insolvency and the relief of
debtors, and (b) rules of law governing specific
performance, injunctive relief and other equitable remedies.
2.20 Non-Contravention;
Consents. Subject to compliance with the
applicable requirements of the HSR Act, obtaining the Required
Company Stockholder Vote for the applicable Contemplated
Transactions and obtaining the Company Consents, and the filing
of Articles of Merger as required by MBCA, neither (a) the
execution, delivery or performance of this Agreement or any of
the Related Agreements, nor (b) the consummation of the
Merger or any of the other Contemplated Transactions, will
directly or indirectly (with or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of
any of the provisions of the Company Constituent Documents;
(b) contravene, conflict with or result in a violation of,
or give any Governmental Body or other Person the right to
challenge any of the Contemplated Transactions or to exercise
any remedy or obtain any relief under, any Legal Requirement or
any order, writ, injunction, judgment or decree to which the
Company, or any of the assets owned or used by the Company, is
subject;
(c) contravene, conflict with or result in a violation of
any of the terms or requirements of, or give any Governmental
Body the right to revoke, withdraw, suspend, cancel, terminate
or modify, any Governmental Authorization that is held by the
Company or that otherwise relates to the Companys business
or to any of the assets owned or used by the Company;
(d) result in a material conflict, violation or breach of,
or result in a material default under, any provision of any
Material Company Contract, or give any Person the right to
(i) declare a default or exercise any remedy under any such
Material Company Contract, (ii) accelerate the maturity or
performance of any such Material Company Contract, or
(iii) cancel, terminate or modify any such Material Company
Contract; or
(e) result in the imposition or creation of any Encumbrance
upon or with respect to any asset owned or used by the Company
(except for minor liens that will not, in any case or in the
aggregate, materially detract from the value of the assets
subject thereto or materially impair the operations of the
Company).
Except for those filings, notices or Consents disclosed in
Part 2.20 of the Company Disclosure Schedule (the
Company Consents), no filing with, notice to
or Consent from any Person is required in connection with
(y) the
A-23
execution, delivery or performance of this Agreement or any of
the Related Agreements, or (z) the consummation of the
Merger or any of the other Contemplated Transactions.
2.21 Vote Required. The
affirmative vote of (i) the holders of a majority of the
outstanding shares of Company Common Stock and Company Preferred
Stock entitled to vote thereon, voting as a single class on an
as-converted basis, and (ii) the holders of a majority of
the outstanding shares of Company Preferred Stock entitled to
vote thereon, voting as a single class on an as-converted basis
and including the shares of Company Preferred Stock held by
Easton and Maverick (the Required Company Stockholder
Vote), are the only votes of the holders of any class
or series of capital stock of the Company necessary to adopt
this Agreement and approve the consummation of the Merger and
the other Contemplated Transactions.
2.22 Regulatory Compliance. All
Company Products that are subject to the jurisdiction of any
Governmental Body are being manufactured, labeled, stored,
tested, developed, distributed, and marketed in compliance in
all material respects with all applicable Legal Requirements.
2.23 Anti-Takeover Law. Each of
the board of directors of the Company and the Special Committee
has taken all action necessary or required to render
inapplicable to the Merger, this Agreement or any agreement
contemplated hereby and the Contemplated Transactions
(a) any takeover provision in the Company Constituent
Documents, (b) any takeover provision in any Company
Contract, and (c) any takeover provision in any applicable
state law.
2.24 No Financial Advisor. No
broker, finder or investment banker is entitled to any brokerage
fee, finders fee, opinion fee, success fee, transaction
fee or other fee or commission in connection with the Merger or
any of the other Contemplated Transactions based upon
arrangements made by or on behalf of the Company.
2.25 Certain Payments. Neither the
Company nor to the Companys Knowledge any officer,
employee, agent or other Person associated with or acting for or
on behalf of the Company, has at any time, directly or
indirectly:
(a) used any corporate funds (i) to make any unlawful
political contribution or gift or for any other unlawful purpose
relating to any political activity, (ii) to make any
unlawful payment to any governmental official or employee, or
(iii) to establish or maintain any unlawful or unrecorded
fund or account of any nature;
(b) made any false or fictitious entry, or failed to make
any entry that should have been made, in any of the books of
account or other records of the Company;
(c) made any payoff, influence payment, bribe, rebate,
kickback or unlawful payment to any Person;
(d) performed any favor or given any gift which was not
deductible for federal income tax purposes;
(e) made any payment (whether or not lawful) to any Person,
or provided (whether lawfully or unlawfully) any favor or
anything of value (whether in the form of property or services,
or in any other form) to any Person, for the purpose of
obtaining or paying for (i) favorable treatment in securing
business, or (ii) any other special concession; or
(f) agreed or committed to take any of the actions
described in clauses (a) through
(e) above.
2.26 SEC Filings.
(a) The Company has made all filings with the SEC required
under the applicable requirements of the Securities Act and the
Exchange Act. The Company has delivered or made available
(including through EDGAR) to the Company accurate and complete
copies (excluding copies of exhibits) of each report, schedule,
registration statement and definitive proxy statement filed by
the Company with the SEC on or after September 30, 2008
(the Company SEC Documents). All Company SEC
Documents (x) were filed on a timely basis, (y) at the
time filed (or, if amended or superseded by a later filing prior
to the date of this Agreement, than on the date of such later
filing), were prepared in compliance in all material respects
with the applicable requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations
of the SEC thereunder applicable to such Company SEC Documents,
and (z) did not at the time they were filed contain any
untrue statement of a material fact
A-24
or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light
of the circumstances in which they were made, not misleading.
(b) PricewaterhouseCoopers LLP, the Companys auditors
are, and have been at all times during their engagement by the
Company (i) independent with respect to the
Company within the meaning of
Regulation S-X
and (ii) to the Knowledge of the Company, in compliance
with subsections (g) through (l) of Section 10A
of the Exchange Act (to the extent applicable) and the related
rules of the SEC and the public company accounting oversight
board, in each case as such subsections and rules apply to
PricewaterhouseCoopers LLPs engagement with the Company.
2.27 Controls and Procedures, Certifications and
Other Matters Relating to the Sarbanes-Oxley Act.
(a) The Company maintains internal control over financial
reporting that provide assurance that (i) records are
maintained in reasonable detail and accurately and fairly
reflect the transactions and dispositions of the Companys
assets, (ii) transactions are executed with
managements authorization, and (iii) transactions are
recorded as necessary to permit preparation of the consolidated
financial statements of the Company and to maintain
accountability for the Companys consolidated assets.
(b) The Company maintains disclosure controls and
procedures required by
Rules 13a-15
or 15d-15
under the Exchange Act, and such controls and procedures are
effective to ensure that all material information concerning the
Company is made known on a timely basis to the individuals
responsible for the preparation of the Companys filings
with the SEC and other public disclosure documents.
(c) Neither the Company nor any of its officers has
received notice from any Governmental Entity questioning or
challenging the accuracy, completeness or manner of filing or
submission of any filing with the SEC, including without
limitation any certifications required by Section 906 of
the Sarbanes-Oxley Act.
(d) The Company has not, since September 30, 2008,
extended or maintained credit, arranged for the extension of
credit, modified or renewed an extension of credit, in the form
of a personal loan or otherwise, to or for any director or
officer of the Company.
2.28 Disclosure.
(a) This Agreement (including the Company Disclosure
Schedule) does not, and the certificate to be delivered pursuant
to Section 7.4(a) will not: (i) contain any
representation, warranty or information that is inaccurate or
misleading with respect to any material facts; or (ii) omit
to state any material fact necessary in order to make the
representations, warranties and information contained and to be
contained herein, in the light of the circumstances under which
such representations, warranties and information were or will be
made or provided, not false or misleading.
(b) The information supplied by or on behalf of the Company
for inclusion or incorporation by reference in the
Form S-4
Registration Statement (including any Company Financial
Statements) will not, as of the time the
Form S-4
Registration Statement is filed with the SEC or at the time it
becomes effective under the Securities Act, (i) contain any
statement that is inaccurate or misleading with respect to any
material facts, or (ii) omit to state any material fact
necessary in order to make such information, in the light of the
circumstances under which such information will be provided, not
false or misleading. The information supplied by or on behalf of
the Company for inclusion or incorporation by reference in the
Joint Proxy Statement/Prospectus (including any Company
Financial Statements) will not, as of the date the Joint Proxy
Statement/Prospectus is mailed to the stockholders of Replidyne
or the Company or at the time of the Replidyne
Stockholders Meeting or the Company Stockholders
Meeting, (i) contain any statement that is inaccurate or
misleading with respect to any material facts, or (ii) omit
to state any material fact necessary in order to make such
information, in the light of the circumstances under which such
information will be provided, not false or misleading.
|
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3.
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REPRESENTATIONS
AND WARRANTIES OF REPLIDYNE AND MERGER SUB
|
Replidyne and Merger Sub represent and warrant to the Company as
follows, except as set forth in the written disclosure schedule
delivered or made available by Replidyne to the Company (the
Replidyne Disclosure Schedule). The Replidyne
Disclosure Schedule shall be arranged in sections and
subsections corresponding to the numbered and lettered sections
and subsections contained in this Section 3. The disclosure
in any section or
A-25
subsection of the Replidyne Disclosure Schedule shall qualify
other sections and subsections in this Section 3 if the
applicability of the disclosure contained in such section or
subsection of the Replidyne Disclosure Schedule to the other
representations in this Section 3 is readily apparent on
its face.
3.1 Due Organization; Subsidiaries; Etc.
(a) Replidyne is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Delaware, with the corporate power and authority to carry on its
business as now being conducted and as currently proposed to be
conducted. Merger Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Minnesota, with the corporate power and authority to carry on
its business as now being conducted and as currently proposed to
be conducted.
(b) Replidyne has not conducted any business under or
otherwise used, for any purpose or in any jurisdiction, any
fictitious name, assumed name, trade name or other name, other
than the name Replidyne, Inc.
(c) Replidyne and Merger Sub are not and have not been
required to be qualified, authorized, registered or licensed to
do business as a foreign corporation in any jurisdiction other
than the jurisdictions identified in Part 3.1(c) of the
Replidyne Disclosure Schedule, except where the failure to be so
qualified, authorized, registered or licensed has not had, and
would not reasonably be expected to have, a Replidyne Material
Adverse Effect. Replidyne and Merger Sub and each of their
respective Subsidiaries are each in good standing as a foreign
corporation in each of the jurisdictions identified in
Part 3.1(c) of the Replidyne Disclosure Schedule.
(d) Part 3.1(d) of the Replidyne Disclosure Schedule
accurately sets forth (i) the names of the members of the
board of directors of Replidyne, (ii) the names of the
members of each committee of the board of directors of Replidyne
and (iii) the names and titles of Replidynes officers.
(e) Replidyne has no Subsidiaries (other than Merger Sub).
Replidyne has not agreed and is not obligated to make any future
investment in or capital contribution to any Entity. Replidyne
has not guaranteed and is not responsible or liable for any
obligation of any of the Entities in which it owns or has owned
any equity or other financial interest.
3.2 Certificate of Incorporation and Bylaws;
Records. Replidyne and Merger Sub have
delivered or made available to the Company accurate and complete
copies of: (a) Replidynes Certificate of
Incorporation and Bylaws, and the Articles of Incorporation and
Bylaws of Merger Sub, in each case including all amendments
thereto; (b) the stock records of Replidyne and Merger Sub;
and (c) the minutes and other records of the meetings and
other proceedings (including any actions taken by written
consent or otherwise without a meeting) of the stockholders, the
boards of directors and all committees of the boards of
directors of Replidyne and Merger Sub (the items described in
(a) and (b) above, collectively, the
Replidyne Constituent Documents). There have
been no formal meetings or actions taken by written consent or
otherwise without a meeting of the stockholders of Replidyne or
Merger Sub, the board of directors of Replidyne or Merger Sub or
any committee of the board of directors of Replidyne or Merger
Sub that are not fully reflected in the minutes and other
records delivered or made available to the Company pursuant to
clause (c) above. There has not been any violation of the
Replidyne Constituent Documents, and Replidyne has not taken any
action that is inconsistent with the Replidyne Constituent
Documents. Except as set forth in Part 3.2 to the Replidyne
Disclosure Schedule, the books of account, stock records, minute
books and other records of Replidyne are accurate, up to date
and complete in all material respects, and have been maintained
in accordance with prudent business practices.
3.3 Capitalization, Etc.
(a) As of the date of this Agreement, the authorized
capital stock of Replidyne consists of: 100,000,000 shares
of Replidyne Common Stock and 5,000,000 shares of Preferred
Stock, par value $0.001 per share. As of the date of this
Agreement, 27,109,545 shares of Replidyne Common Stock and
no shares of Replidyne Preferred Stock are issued and
outstanding. All of the outstanding shares of Replidyne Common
Stock have been duly authorized and validly issued, and are
fully paid and non assessable. Part 3.3(a) of the Replidyne
Disclosure Schedule provides an accurate and complete
description of the terms of each repurchase option which is held
by Replidyne and to which any shares of capital stock of
Replidyne is subject and identifies the Contract underlying such
right. Except as provided in the Replidyne Certificate of
Amendment, Replidyne has not authorized shares other than as set
forth in
A-26
this Section 3.3(a) and as of the date of this Agreement
there are no issued and outstanding shares of Replidynes
capital stock other than the shares of Replidyne Common Stock as
set forth in this Section 3.3(a). There are no declared but
unpaid dividends with respect to any shares of capital stock of
Replidyne. As of the date of this Agreement, there are
49,882 shares of capital stock of Replidyne held in
Replidynes treasury.
(b) As of the date of this Agreement, Replidyne has
reserved 7,946,405 shares of Replidyne Common Stock for
issuance under the Replidyne 2006 Equity Incentive Plan, of
which options to purchase 3,385,617 shares of Replidyne
Common Stock are outstanding as of the date of this Agreement.
Each grant of a Replidyne Option was duly authorized no later
than the date on which the grant of such Replidyne Option was by
its terms to be effective by all necessary corporate action,
including, as applicable, approval by the board of directors or
compensation committee of Replidyne and any required stockholder
approval by the necessary number of votes or written consents,
and the award agreement governing such grant (if any) was duly
executed and delivered by each party thereto, each such grant
was made in accordance with the terms of the Replidyne 2006
Equity Incentive Plan and all other applicable Legal
Requirements and the per share exercise price of each Replidyne
Option was equal to the fair market value of a share of
Replidyne Common Stock on the applicable date of grant. As of
the date of this Agreement, Replidyne has reserved
305,872 shares of Replidyne Common Stock for issuance under
its Replidyne 2006 Employee Stock Purchase Plan, of which
139,584 shares of Replidyne Common Stock are outstanding as
of the date of this Agreement. Except as set forth in this
Section 3.3(b) or in Part 3.3(b) of the Replidyne
Disclosure Schedule, there is no: (i) outstanding
subscription, option, call, warrant or right (whether or not
currently exercisable) to acquire any shares of capital stock or
other securities of Replidyne; (ii) outstanding security,
instrument or obligation that is or may become convertible into
or exchangeable for any shares of capital stock or other
securities of Replidyne; (iii) Contract under which
Replidyne is or may become obligated to sell or otherwise issue
any shares of its capital stock or any other securities of
Replidyne; or (iv) condition or circumstance that would
give rise to or provide a basis for the assertion of a claim by
any Person to the effect that such Person is entitled to acquire
or receive any shares of capital stock or other securities of
Replidyne. Replidyne has not issued any debt securities which
grant the holder thereof any right to vote on, or veto, any
action of Replidyne.
(c) Except as set forth in Part 3.3(c) of the
Replidyne Disclosure Schedule, all outstanding shares of
Replidyne Common Stock, and all outstanding Replidyne Options,
have been issued and granted in compliance with (i) all
applicable federal and state securities laws, (ii) all
other applicable Legal Requirements, except as would not
reasonably be expected to have a Replidyne Material Adverse
Effect, and (iii) all requirements set forth in Replidyne
Constituent Documents and applicable Contracts.
3.4 SEC Filings; Financial Statements.
(a) Replidyne has made all filings with the SEC required
under the applicable requirements of the Securities Act and the
Exchange Act. Replidyne has delivered or made available
(including through EDGAR) to the Company accurate and complete
copies (excluding copies of exhibits) of each report, schedule,
registration statement and definitive proxy statement filed by
Replidyne with the SEC on or after January 1, 2006 (the
Replidyne SEC Documents). Replidyne has
resolved with the staff of the SEC any comments it may have
received since January 1, 2006 and prior to the date of
this Agreement with respect to the Replidyne SEC Documents in
comment letters to Replidyne from the staff of the SEC or, to
the extent such comments are unresolved, has disclosed such
unresolved comments in the Replidyne SEC Documents. All
Replidyne SEC Documents (x) were filed on a timely basis,
(y) at the time filed (or, if amended or superseded by a
later filing prior to the date of this Agreement, than on the
date of such later filing), were prepared in compliance in all
material respects with the applicable requirements of the
Securities Act or the Exchange Act, as the case may be, and the
rules and regulations of the SEC thereunder applicable to such
Replidyne SEC Documents, and (z) did not at the time they
were filed contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances in which they were made, not misleading.
(b) The financial statements contained in the Replidyne SEC
Documents (including, in each case, any related notes thereto):
(i) complied as to form in all material respects with the
published rules and regulations of the SEC applicable thereto;
(ii) were prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered, except as may
be indicated in the notes to such financial statements and
except that the unaudited interim financial statements contained
in the Replidyne SEC Documents do not contain footnotes as
permitted by
A-27
Form 10-Q
of the Exchange Act; and (iii) fairly present in all
material respects the financial position of Replidyne as of the
respective dates thereof and the results of operations and cash
flows of Replidyne for the periods covered thereby, except that
the unaudited interim consolidated financial statements
contained in the Replidyne SEC Documents were or are subject to
normal year-end audit adjustments.
(c) KPMG LLP, Replidynes auditors are, and have been
at all times during their engagement by Replidyne
(i) independent with respect to Replidyne
within the meaning of
Regulation S-X
and (ii) to the Knowledge of Replidyne, in compliance with
subsections (g) through (l) of Section 10A of the
Exchange Act (to the extent applicable) and the related rules of
the SEC and the public company accounting oversight board, in
each case as such subsections and rules apply to KPMG LLPs
engagement with Replidyne.
3.5 Absence of Changes. Except as
set forth in Part 3.5 of the Replidyne Disclosure Schedule,
from June 30, 2008 through the date of this Agreement:
(a) there has not been any Replidyne Material Adverse
Effect, and no event has occurred that will, or would reasonably
be expected to, cause a Replidyne Material Adverse Effect;
(b) there has not been any material loss, damage or
destruction to, or any material interruption in the use of, any
of the assets of Replidyne (whether or not covered by insurance);
(c) Replidyne has not declared, accrued, set aside or paid
any dividend or made any other distribution in respect of any
shares of its capital stock, and has not repurchased, redeemed
or otherwise reacquired any shares of its capital stock or other
securities;
(d) Replidyne has not sold, issued, granted or authorized
the issuance of (i) any capital stock or other securities
of Replidyne (other than upon the exercise of outstanding
Replidyne Options or Replidyne Warrants); (ii) any option,
call or right to acquire any capital stock or any other security
of Replidyne; (iii) any instrument convertible into or
exchangeable for any capital stock or other security of
Replidyne; or (iv) reserved for issuance any additional
grants or shares under the Replidyne 2006 Equity Incentive Plan
or the Replidyne 2006 Employee Stock Purchase Plan;
(e) Replidyne has not amended or waived any of its rights
under, or permitted the acceleration of vesting under, the
Replidyne 2006 Equity Incentive Plan, the Replidyne 2006
Employee Stock Purchase Plan, any Replidyne Option or agreement
evidencing or relating to any outstanding stock option or
warrant, any restricted stock purchase agreement, or any other
Contract evidencing or relating to any equity award;
(f) there has been no amendment to any Replidyne
Constituent Document and Replidyne has not effected or been a
party to any Acquisition Transaction, recapitalization,
reclassification of shares, stock split, reverse stock split or
similar transaction;
(g) Replidyne has not formed any Replidyne Subsidiary or
acquired any equity interest or other interest in any other
Entity;
(h) Replidyne has not made any capital expenditure which,
when added to all other capital expenditures made on behalf of
Replidyne, exceeds $100,000;
(i) Replidyne has not (i) entered into or permitted
any of the assets owned or used by it to become bound by any
Contract that contemplates or involves (A) the payment or
delivery of cash or other consideration in an amount or having a
value in excess of $100,000 in the aggregate, or (B) the
purchase or sale of any product, or performance of services by
or to Replidyne having a value in excess of $100,000 in the
aggregate, or (ii) waived any right or remedy under any
Contract, or amended or prematurely terminated any Contract;
(j) Replidyne has not (i) acquired, leased or licensed
any right or other asset from any other Person, (ii) sold
or otherwise disposed of, or leased or licensed, any right or
other asset to any other Person, or (iii) waived or
relinquished any right;
(k) Replidyne has not written off as uncollectible, or
established any extraordinary reserve with respect to, any
account receivable or other indebtedness;
A-28
(l) Replidyne has not made any pledge of any of its assets
or otherwise permitted any of its assets to become subject to
any Encumbrance;
(m) Replidyne has not (i) lent money to any Person
(other than pursuant to routine travel advances made to
employees in the Ordinary Course of Business or otherwise in
accordance with its normal operations and consistent with its
past practices), or (ii) incurred or guaranteed any
indebtedness for borrowed money or (iii) issued or sold any
debt securities or options, warrants, calls or similar rights to
acquire any debt securities of Replidyne;
(n) Replidyne has not (i) established or adopted any
employee benefit plan, (ii) paid any bonus or made any
profit sharing, incentive compensation or similar payment to, or
increased the amount of the wages, salary, commissions, fringe
benefits or other compensation or remuneration payable to, any
of its directors, officers or employees, or (iii) hired any
new employee;
(o) Replidyne has not changed any of its personnel policies
or other business policies, or any of its methods of accounting
or accounting practices in any respect;
(p) Replidyne has not made any material Tax election;
(q) Replidyne has not changed any of its methods of
accounting or accounting practices in any respect;
(r) Replidyne has not threatened, commenced, settled or
become subject to any Legal Proceeding;
(s) Replidyne has not paid, discharged or satisfied any
claim, liability or obligation (absolute, accrued, asserted or
unasserted, contingent or otherwise) other than the payment,
discharge or satisfaction of non-material amounts as required by
any Replidyne Contract or Legal Requirement;
(t) Replidyne has not entered into any transaction or taken
any other action outside of the sale or disposition of assets
and payment of liabilities in connection with winding up its
business, other than entering into this Agreement and the
Contemplated Transactions;
(u) Replidyne has not amended or prematurely terminated, or
waived any material right or remedy under, any Replidyne
Contract; and
(v) Replidyne has not agreed to take, or committed to take,
any of the actions referred to in clauses (c)
through (u) above.
3.6 Liabilities; Fees, Costs and Expenses.
(a) Except as set forth on Part 3.6(a) of the
Replidyne Disclosure Schedule, Replidyne does not have any
accrued, contingent or other liabilities of any nature, either
matured or unmatured and whether due or to become due, that are
required to be reflected in financial statements in accordance
with GAAP, except for: (i) liabilities identified as such
in the liabilities column of the unaudited balance
sheet of Replidyne as of June 30, 2008 (the
Replidyne Balance Sheet); (ii) current
liabilities that have arisen since the date of the Replidyne
Balance Sheet in the Ordinary Course of Business or otherwise in
accordance with its normal operations and consistent with its
past practices; and (iii) liabilities for legal, accounting
and other expenses in connection with the Contemplated
Transactions.
(b) Replidyne has never effected or otherwise been involved
in any off-balance sheet arrangements (as defined in
Item 303(a)(4)(ii) of
Regulation S-K
under the Exchange Act).
3.7 Compliance with Legal
Requirements. Replidyne is and at all times
has been in compliance with all applicable Legal Requirements,
except where the failure to be so in compliance, individually or
in the aggregate, has not had, and would not reasonably be
expected to have, a Replidyne Material Adverse Effect. No event
has occurred, and no condition or circumstance exists, that will
(with our without notice or lapse of time) constitute or result
in a violation by Replidyne of, or a failure on the party of
Replidyne to comply with, any Legal Requirement. Except as set
forth in Part 3.7 of the Replidyne Disclosure Schedule,
Replidyne has not received any written notice or other
communication from any Governmental Body or any other person
regarding (a) any actual, alleged, possible or potential
violation of, or failure to comply with, any Legal Requirement,
or (b) any actual, alleged, possible or potential
obligation on the part of Replidyne to undertake, or to bear
all, or any portion of the cost of, any cleanup or any remedial,
corrective or responsive action of any nature. To the Knowledge
of Replidyne, no
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Governmental Body has proposed or is considering any Legal
Requirement that, if adopted or otherwise put into effect,
(a) will, or would reasonably be expected to, cause a
Replidyne Material Adverse Effect, (b) would be reasonably
expected to have an adverse effect on Replidynes ability
to comply with or perform any covenant or obligation under this
Agreement or the Related Agreements, or (c) would be
reasonably expected to have the effect of preventing, delaying,
making illegal or otherwise interfering with the Merger or any
of the Contemplated Transactions.
3.8 Equipment; Leasehold.
(a) Except as set forth in Part 3.8(a) of the
Replidyne Disclosure Schedule, Replidyne owns, and has good and
valid title to, all equipment and other tangible assets
purported to be owned by it, free and clear of any liens or
other Encumbrances. All items of equipment and other tangible
assets owned by or leased to Replidyne (i) are adequate for
the uses to which they are being put and (ii) are adequate
for the conduct of Replidynes business in the manner in
which such business is currently being conducted and as it is
proposed to be conducted.
(b) Replidyne does not own any real property or any
interest in real property, except for the leasehold interest
created under the real property leases identified in
Part 3.8(b) of the Replidyne Disclosure Schedule. All
premises leased or subleased by Replidyne are supplied with
utilities and other services necessary for the operation of
their respective businesses.
3.9 Intellectual Property.
(a) Part 3.9(a) of the Replidyne Disclosure Schedule
accurately identifies (i) each item of Replidyne Registered
IP; and (ii) the jurisdiction in which such item of
Replidyne Registered IP has been registered or filed and the
applicable registration or serial number. Replidyne has
delivered or made available to the Company complete and accurate
copies of all applications, correspondence, and other material
documents related to each such item of Replidyne Registered IP.
(b) Part 3.9(b) of the Replidyne Disclosure Schedule
accurately identifies (i) each Replidyne contract pursuant
to which any Person has been granted any license under, or
otherwise has received or acquired any right (whether or not
currently exercisable) or interest in, any Replidyne IP Rights;
and (ii) each Replidyne contract involving Replidyne IP
Rights licensed to Replidyne (other than any non-customized
software that is so licensed solely in executable or object code
form pursuant to a non-exclusive, internal use, software license
granted in the Ordinary Course of Business or otherwise in
accordance with its normal operations and consistent with its
past practices). Replidyne is not bound by, and no Replidyne IP
Rights are subject to, any Contract containing any covenant or
other provision that in any way limits or restricts the ability
of Replidyne to use, exploit, assert, or enforce any Replidyne
IP Rights anywhere in the world.
(c) Part 3.9(c) of the Replidyne Disclosure Schedule
accurately identifies all Contracts in which Intellectual
Property Rights or Intellectual Property embodied or
incorporated in the Replidyne Products are licensed to Replidyne
(other than any non-customized software that (i) is so
licensed solely in executable or object code form pursuant to a
non-exclusive, internal use software license, (ii) is not
incorporated into, or used directly in the development,
manufacturing, or distribution of, any of Replidynes
products or services, and (iii) was licensed to Replidyne
in the Ordinary Course of Business or otherwise in accordance
with its normal operations and consistent with its past
practices).
(d) Replidyne has delivered or made available to the
Company a complete and accurate copy of each standard form of
Replidyne IP Rights Agreement used by Replidyne, including each
standard form of (i) license agreement;
(ii) distribution or reseller agreement;
(iii) employee agreement containing intellectual property
assignment or license of Replidyne IP Rights or any
confidentiality provision; (iv) consulting or independent
contractor agreement containing intellectual property assignment
or license of Replidyne IP Rights or any confidentiality
provision; and (v) confidentiality or nondisclosure
agreement, and no Replidyne IP Rights Agreement deviates in any
material respect from the corresponding standard form agreement
delivered or made available to the Company.
(e) Replidyne and Replidynes Subsidiaries exclusively
own all right, title, and interest to and in Replidyne IP Rights
(other than Replidyne IP Rights exclusively licensed to
Replidyne or Replidynes Subsidiaries) free and
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clear of any Encumbrances (other than non-exclusive licenses of
Replidyne IP Rights). Without limiting the generality of the
foregoing:
(i) To the Knowledge of Replidyne, all documents and
instruments necessary to register or apply for or renew
registration of Replidyne in Replidyne Registered IP have been
validly executed, delivered, and filed in a timely manner with
the appropriate Governmental Body.
(ii) Each Person who is or was an employee or contractor of
Replidyne and who is or was involved in the creation or
development of any Replidyne IP Rights has signed a valid,
enforceable agreement containing an assignment of Intellectual
Property Rights to Replidyne and confidentiality provisions
protecting trade secrets and confidential information of
Replidyne. No current or former stockholder, officer, director,
or employee of Replidyne has any claim, right (whether or not
currently exercisable), or interest to or in any Replidyne IP
Rights. No employee of Replidyne is (a) bound by or
otherwise subject to any Contract restricting him or her from
performing his or her duties for Replidyne or (b) in breach
of any Contract with any former employer or other Person
concerning Replidyne IP Rights or confidentiality obligations
due to his or her activities as an employee of Replidyne.
(iii) No funding, facilities, or personnel of any
Governmental Body were used, directly or indirectly, to develop
or create, in whole or in part, any Replidyne IP Rights in which
Replidyne has an ownership interest.
(iv) Replidyne has taken all reasonable steps to maintain
the confidentiality of and otherwise protect and enforce their
rights in all proprietary information that Replidyne holds, or
purports to hold, as a trade secret.
(v) Replidyne has not assigned or otherwise transferred
ownership of, or agreed to assign or otherwise transfer
ownership of, any Replidyne IP Rights to any other Person.
(vi) Replidyne is not now and has never been a member or
promoter of, or a contributor to, any industry standards body or
similar organization that could require or obligate Replidyne to
grant or offer to any other Person any license or right to any
Replidyne IP Rights.
(vii) The Replidyne IP Rights constitute all Intellectual
Property Rights necessary for Replidyne to conduct its business
as currently conducted and planned to be conducted.
(f) To Replidynes Knowledge, all Replidyne Registered
IP is valid and enforceable. Without limiting the generality of
the foregoing:
(i) Each U.S. patent application and U.S. patent
in which Replidyne has or purports to have an ownership interest
was filed within one year of the first printed publication,
public use, or offer for sale of each invention described in the
U.S. patent application or U.S. patent. Each foreign
patent application and foreign patent in which Replidyne has or
purports to have an ownership interest was filed or claims
priority to a patent application filed prior to each invention
described in the foreign patent application or foreign patent
being first made available to the public.
(ii) To Replidynes Knowledge, no trademark (whether
registered or unregistered) or trade name owned, used, or
applied for by Replidyne or any Replidyne conflicts or
interferes with any trademark (whether registered or
unregistered) or trade name owned, used, or applied for by any
other Person. None of the goodwill associated with or inherent
in any trademark (whether registered or unregistered) in which
Replidyne has or purports to have an ownership interest has been
impaired.
(iii) Each item of Replidyne IP Rights that is Replidyne
Registered IP is and at all times has been filed and maintained
in compliance with all applicable Legal Requirements and all
filings, payments, and other actions required to be made or
taken to maintain such item of Replidyne Registered IP in full
force and effect have been made by the applicable deadline.
(iv) No interference, opposition, reissue, reexamination,
or other proceeding is pending or, to Replidynes
Knowledge, threatened, in which the scope, validity, or
enforceability of any Replidyne IP Rights is being, has been or
could reasonably be expected to be contested or challenged. To
Replidynes Knowledge, there is no basis for a claim that
any Replidyne IP Rights are invalid or, excluding pending patent
applications, unenforceable.
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(g) To Replidynes Knowledge, no Person has infringed,
misappropriated, or otherwise violated, and no Person is
currently infringing, misappropriating, or otherwise violating,
any Replidyne IP Rights. Replidyne has delivered or made
available to the Company a complete and accurate copy of, each
letter or other written or electronic communication or
correspondence that has been sent or otherwise delivered in the
last five (5) years by or to Replidyne or any
Representative of Replidyne regarding any actual, alleged, or
suspected infringement or misappropriation of any Replidyne IP
Rights, and provides a brief description of the current status
of the matter referred to in such letter, communication, or
correspondence.
(h) Neither the execution, delivery, or performance of this
Agreement (or any of the agreements contemplated by this
Agreement) nor the consummation of any of the Contemplated
Transactions will, with or without notice or lapse of time,
result in, or give any other Person the right or option to cause
or declare, (i) a loss of, or Encumbrance on, any Replidyne
IP Rights; (ii) a breach by Replidyne of any Replidyne IP
Rights Agreement; (iii) the release, disclosure, or
delivery of any Replidyne IP Rights by or to any escrow agent or
other Person; or (iv) the grant, assignment, or transfer to
any other Person of any license or other right or interest
under, to, or in any of Replidyne IP Rights.
(i) To Replidynes Knowledge, Replidyne has never
infringed (directly, contributorily, by inducement, or
otherwise), misappropriated, or otherwise violated any
Intellectual Property Right of any other Person. Without
limiting the generality of the foregoing:
(i) No infringement, misappropriation, or similar claim or
Legal Proceeding is pending or, to Replidynes Knowledge,
threatened against Replidyne or against any other Person who may
be entitled to be indemnified, defended, held harmless, or
reimbursed by Replidyne with respect to such claim or Legal
Proceeding. Replidyne and Replidynes Subsidiaries have
never received any notice or other communication (in writing or
otherwise) alleging any actual, alleged, or suspected
infringement, misappropriation, or violation of any Intellectual
Property Right of another Person.
(ii) Except as set forth in Part 3.9(i)(ii) of the
Replidyne Disclosure Schedule or in connection with customary
indemnification obligations to Replidynes directors and
officers, Replidyne is not bound by any Contract to indemnify,
defend, hold harmless, or reimburse any other Person with
respect to any intellectual property infringement,
misappropriation, or similar claim. Replidyne and
Replidynes Subsidiaries have never assumed, or agreed to
discharge or otherwise take responsibility for, any existing or
potential liability of another Person for infringement,
misappropriation, or violation of any Intellectual Property
Right.
(j) No claim or Legal Proceeding involving any Replidyne IP
Rights is pending or, to Replidynes Knowledge, has been
threatened, except for any such claim or Legal Proceeding that,
if adversely determined, would not adversely affect (i) the
use or exploitation of Replidyne IP Rights by Replidyne, or
(ii) the design, development, manufacturing, distribution,
licensing, or sale of any product or service being developed by
Replidyne, or that is being commercially sold by Replidyne.
3.10 Contracts.
(a) Part 3.10(a) of the Replidyne Disclosure Schedule
identifies, as of the date of this Agreement:
(i) (A) each Replidyne Contract relating to the
employment of, or the performance of employment-related services
by, any Person, including any employee, consultant or
independent contractor; (B) each Replidyne Contract
pursuant to which Replidyne is or may become obligated to make
any severance, termination, change in control or similar payment
to any director, officer or employee of Replidyne; and
(C) any Replidyne Contract pursuant to which Replidyne is
or may become obligated to make any bonus or similar payment
(other than payment in respect of salary) to any director,
officer or employee of Replidyne;
(ii) each Replidyne Contract that provides for
indemnification of any officer, director, employee or agent of
Replidyne;
(iii) each Replidyne Contract relating to the voting and
any other rights or obligations of a stockholder of Replidyne;
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(iv) each Replidyne Contract relating to the merger,
consolidation, reorganization or any similar transaction with
respect to Replidyne;
(v) each Replidyne Contract relating to the acquisition,
transfer, use, development, sharing or license of any technology
or any Intellectual Property or Replidyne IP Rights;
(vi) each Replidyne Contract imposing any restriction on
Replidynes right or ability (A) to compete with any
other Person, (B) to acquire any product or other asset or
any services from any other Person, to sell any product or other
asset to, or perform any services for, any other Person or to
transact business or deal in any other manner with any other
Person, or (C) develop or distribute any technology or
product;
(vii) each Replidyne Contract creating or involving any
agency relationship, distribution arrangement or franchise
relationship;
(viii) each Replidyne Contract relating to the creation of
any Encumbrance with respect to any asset of Replidyne;
(ix) each Replidyne Contract involving or incorporating any
guaranty, any pledge, any performance or completion bond, any
indemnity or any surety arrangement;
(x) each Replidyne Contract creating or relating to any
collaboration or joint venture or any sharing of technology,
revenues, profits, losses, costs or liabilities, including
Replidyne Contracts involving investments by Replidyne in, or
loans by Replidyne to, any other Entity;
(xi) each Replidyne contract relating to the purchase or
sale of any product or other asset by or to, or the performance
of any services by or for, or otherwise involving as a
counterparty, any Replidyne Related Party;
(xii) each Replidyne Contract relating to indebtedness for
borrowed money;
(xiii) each Replidyne Contract related to the acquisition
or disposition of material assets of Replidyne or any other
Person;
(xiv) any other material Replidyne Contract that has a term
of more than 30 days and that may not be terminated by
Replidyne (without penalty) within 30 days after the
delivery of a termination notice by Replidyne;
(xv) any other Replidyne Contract pursuant to which
Replidyne is actively performing as of the date hereof that
contemplates or involves (A) the payment or delivery of
cash or other consideration, or (B) the purchase or sale of
any product, or performance of services by or to Replidyne;
(xvi) each Replidyne Contract constituting a commitment of
any Person to purchase products (including products in
development) of Replidyne;
(xvii) each Replidyne Contract regarding the acquisition,
issuance or transfer of any securities and each Replidyne
Contract affecting or dealing with any securities of Replidyne
including any restricted share agreements or escrow
agreements; and
(xviii) each Replidyne Contract with any Person, including
without limitation any financial advisor, broker, finder,
investment banker or other Person, providing advisory services
to Replidyne in connection with the Contemplated Transactions.
(b) Replidyne has delivered or made available to the
Company accurate and complete (except for applicable redactions
thereto) copies of all Replidyne Contracts set forth on Parts
3.10(a)(i) through (xviii) of the Replidyne Disclosure
Schedule, including all amendments thereto (collectively, the
Material Replidyne Contracts). There are no
Material Replidyne Contracts that are not in written form. Each
Material Replidyne Contract is valid and in full force and
effect, is enforceable by Replidyne in accordance with its
terms, and, after the Effective Time, will continue to be legal,
valid, binding and enforceable on identical terms. The
consummation of the Contemplated Transactions hereby shall not
(either alone or upon the occurrence of additional acts or
events) result in any payment or payments becoming due from
Replidyne, the Surviving Corporation or the Company to any
Person under any
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Material Replidyne Contract or give any Person the right to
terminate or alter the provisions of any Material Replidyne
Contract.
(c) Replidyne has not materially violated or breached, or
committed any material default under, any Material Replidyne
Contract, and, except as set forth in Part 3.10(c) of the
Replidyne Disclosure Schedule, to the Knowledge of Replidyne, no
other Person has violated or breached, or committed any default
under, any Material Replidyne Contract.
(d) Except as set forth in Part 3.10(d) of the
Replidyne Disclosure Schedule, to Replidynes Knowledge, no
event has occurred, and no circumstance or condition exists,
that (with or without notice or lapse of time) will, or would
reasonably be expected to, (i) result in a material
violation or breach of any of the provisions of any Material
Replidyne Contract, (ii) give any Person the right to
declare a default or exercise any remedy under any Material
Replidyne Contract, (iii) give any Person the right to
accelerate the maturity or performance of any Material Replidyne
Contract, or (iv) give any Person the right to cancel,
terminate or modify any Material Replidyne Contract.
(e) Except as set forth in Part 3.10(e) of the
Replidyne Disclosure Schedule, Replidyne has not received any
written notice or other communication regarding any actual or
possible violation or breach of, or default under, any Material
Replidyne Contract.
(f) Replidyne has not waived any rights under any Material
Replidyne Contract.
(g) Except as set forth in Part 3.10(g) of the
Replidyne Disclosure Schedule, no Person is renegotiating, or
has a right pursuant to the terms of any Material Replidyne
Contract to renegotiate, any amount paid or payable to Replidyne
under any Material Replidyne Contract or any other material term
or provision of any Material Replidyne Contract.
(h) Part 3.10(h) of the Replidyne Disclosure Schedule
provides an accurate and complete list of all Consents required
under any Replidyne Contract to consummate the Merger and the
other Contemplated Transactions.
3.11 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of
Replidyne with any Governmental Body with respect to any taxable
period ending on or before the Closing Date (the
Replidyne Returns) (i) have been or will
be filed on or before the applicable due date (including any
extensions of such due date), and (ii) have been, or will
be when filed, accurately and completely prepared in all
material respects. All Taxes due on or before the Closing Date
(whether or not shown on the Replidyne Returns) have been or
will be paid on or before the Closing Date. Replidyne has
delivered or made available to the Company accurate and complete
copies of all Replidyne Returns filed which the Company has
requested. Replidyne shall establish in its books and records,
in the Ordinary Course of Business or otherwise in accordance
with its normal operations and consistent with its past
practices, reserves adequate for the payment of all unpaid Taxes
by Replidyne for the period from January 1, 2008 through
the Closing Date.
(b) All Taxes that Replidyne was required by law to
withhold or collect have been duly withheld or collected and, to
the extent required, have been properly paid to the appropriate
Governmental Body.
(c) Except as set forth in Part 3.11(c) of the
Replidyne Disclosure Schedule, no Replidyne Return has ever been
examined or audited by any Governmental Body and no examination
or audit of any Replidyne Return is currently in progress or, to
the Knowledge of Replidyne, threatened or contemplated.
Replidyne has delivered or made available to the Company
accurate and complete copies of all audit reports, private
letter rulings, revenue agent reports, information document
requests, notices of proposed deficiencies, deficiency notices,
protests, petitions, closing agreements, settlement agreements,
pending ruling requests and any similar documents submitted by,
received by, or agreed to by or on behalf of Replidyne relating
to the Replidyne Returns. No extension or waiver of the
limitation period applicable to any of the Replidyne Returns has
been granted (by Replidyne or any other Person), no such
extension or waiver has been requested from Replidyne and
Replidyne has not executed or filed any power of attorney with
any taxing authority.
(d) No claim or Legal Proceeding is pending or, to the
Knowledge of Replidyne, has been threatened against or with
respect to Replidyne in respect of any Tax. There are no
unsatisfied liabilities for Taxes with respect to any
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notice of deficiency or similar document received by Replidyne
with respect to any Tax (other than liabilities for Taxes
asserted under any such notice of deficiency or similar document
which are being contested in good faith by Replidyne and with
respect to which adequate reserves for payment have been
established). There are no liens for Taxes upon any of the
assets of Replidyne except liens for current Taxes not yet due
and payable.
(e) Replidyne (i) has never been a member of an
affiliated group (within the meaning of Section 1504(a) of
the Code) filing (or which it has been required to file) a
consolidated federal income Tax Return (other than a group the
common parent of which was Replidyne), (ii) does not have
any liability for the Taxes of any person under
Section 1.1502-6
of the Treasury Regulations (or any similar provision of state,
local or foreign law), as a transferee or successor, or
otherwise, and (iii) has never been a party to any joint
venture, collaboration, partnership or other agreement that
could be treated as a partnership for Tax purposes. Replidyne is
not, and never has been, a party to or bound by any Tax
indemnity agreement, Tax-sharing agreement, Tax allocation
agreement or similar Contract. Replidyne has not been either a
distributing corporation or a controlled
corporation in a distribution of stock intended to qualify
for tax-free treatment under Section 355 of the Code
(y) in the two years prior to the date of this Agreement or
(z) which could otherwise constitute part of a
plan or series of related transactions
(within the meaning of Section 355(e) of the Code) in
conjunction with the Merger.
(f) Replidyne has not incurred (or been allocated) an
overall foreign loss as defined in
Section 904(f)(2) of the Code which has not been previously
recaptured in full as provided in Sections 904(f)(1)
and/or
904(f)(3) of the Code.
(g) Replidyne is not a party to a gain recognition
agreement under Section 367 of the Code.
(h) Replidyne will not be required to include any item of
income in, or exclude any item of deduction from, taxable income
for any period (or any portion thereof) ending after the Closing
Date as a result of any (i) deferred intercompany gain or
any excess loss account described in Treasury Regulations under
Section 1502 of the Code (or any corresponding provision of
state, local or foreign Tax law), (ii) closing agreement as
described in Section 7121 of the Code (or any corresponding
or similar provision of state, local or foreign Tax law)
executed on or prior to the Closing Date, (iii) installment
sale or other open transaction disposition made on or prior to
the Closing Date, (iv) prepaid amount received on or prior
to the Closing Date, or (v) any adjustment pursuant to
Section 481(a) of the Code in its current or in any future
taxable period by reason of a change in accounting method. To
the Knowledge of Replidyne, the Internal Revenue Service (or
other taxing authority) has not proposed nor is considering
proposing any such change in accounting method and Replidyne
does not have an application pending with any taxing authority
requesting permission for any change in accounting method.
(i) Replidyne is not, and has never been, a party to a
transaction or agreement that is in conflict with the Tax rules
on transfer pricing in any relevant jurisdiction.
(j) Replidyne has never engaged in any listed
transaction for purposes of Treasury Regulation
sections 1.6011-4(b)(2)
or 301.6111-2(b)(2) or any analogous provision of state or local
law.
3.12 Employee and Labor Matters; Benefit
Plans.
(a) Part 3.12(a) of the Replidyne Disclosure Schedule
accurately sets forth, with respect to each employee of
Replidyne, as of the date of this Agreement:
(i) the name of such employee;
(ii) such employees title; and
(iii) the base salary for such employee and any other
compensatory agreements or arrangements pursuant to which
Replidyne may be obligated to pay additional compensation to
such employee.
(b) The employment of Replidynes employees is
terminable by Replidyne at will. Replidyne has delivered or made
available to the Company accurate and complete copies of all
employee manuals and handbooks, disclosure materials, policy
statements and other materials governing the terms and
conditions of the employment of the employees of Replidyne.
A-35
(c) To the Knowledge of Replidyne, no Key Employee of
Replidyne has received an offer that remains outstanding to join
a business that may be competitive with Replidynes
business.
(d) Replidyne is not a party to or bound by, and Replidyne
has never been a party to or bound by, any union contract,
collective bargaining agreement or similar Contract.
(e) Replidyne is not engaged, and Replidyne has never been
engaged, in any unfair labor practice of any nature. There has
never been any slowdown, work stoppage, labor dispute or union
organizing activity, or any similar activity or dispute,
affecting Replidyne. To Replidynes Knowledge, no event has
occurred, and no condition or circumstance exists, that might
directly or indirectly give rise to the commencement of any such
slowdown, work stoppage, labor dispute or union organizing
activity or any similar activity or dispute. There are no
actions, suits, claims, labor disputes or grievances pending or,
to the Knowledge of Replidyne, threatened or reasonably
anticipated relating to any labor, safety or discrimination
matters involving any employee of Replidyne, including, without
limitation, charges of unfair labor practices or discrimination
complaints. Replidyne has good labor relations, and no reason to
believe that the consummation of the Merger or any of the other
Contemplated Transactions will have a material adverse effect on
Replidynes labor relations.
(f) Except as set forth on Part 3.12(f) of the
Replidyne Disclosure Schedule, there are no independent
contractors who are providing services to Replidyne as of the
date of this Agreement.
(g) Part 3.12(g) of the Replidyne Disclosure Schedule
identifies each Replidyne Plan sponsored, maintained,
contributed to or required to be contributed to by Replidyne for
the benefit of any employee of Replidyne. Except to the extent
required to comply with Legal Requirements, Replidyne does not
intend and has not committed to establish or enter into any new
Replidyne Plan, or to modify any Replidyne Plan.
(h) Replidyne has delivered or made available to the
Company: (i) correct and complete copies of all documents
setting forth the terms of each Replidyne Plan, including all
amendments thereto and all related trust documents;
(ii) the three most recent annual reports
(Form Series 5500 and all schedules and financial
statements attached thereto), if any, required under ERISA or
the Code in connection with each Replidyne Plan; (iii) if
the Replidyne Plan is subject to the minimum funding standards
of Section 302 of ERISA, the most recent annual and
periodic accounting of Replidyne Plan assets; (iv) the most
recent summary plan description together with the summaries of
material modifications thereto, if any, required under ERISA
with respect to each Replidyne Plan; (v) all material
written Contracts relating to each Replidyne Plan, including
administrative service agreements and group insurance contracts;
(vi) all written materials provided to any employee of
Replidyne relating to any Replidyne Plan and any proposed
Replidyne Plans, in each case, relating to any amendments,
terminations, establishments, increases or decreases in
benefits, acceleration of payments or vesting schedules or other
events that would result in any liability to Replidyne;
(vii) all material correspondence from the last six years
to or from any Governmental Body relating to any Replidyne Plan;
(viii) the form of all COBRA forms and related notices;
(ix) all insurance policies in the possession of Replidyne
pertaining to fiduciary liability insurance covering the
fiduciaries for each Replidyne Plan; and (x) the most
recent Internal Revenue Service determination or opinion letter
issued with respect to each Replidyne Plan intended to be
qualified under Section 401(a) of the Code.
(i) Each Replidyne Plan has been established and maintained
substantially in accordance with its terms and in substantial
compliance with all applicable Legal Requirements, including
ERISA and the Code. Any Replidyne Plan intended to be qualified
under Section 401(a) of the Code has obtained a favorable
determination letter (or opinion letter, if applicable) as to
its qualified status under the Code or has remaining a period of
time under applicable Treasury regulations or Internal Revenue
Service pronouncements in which to apply for such a letter and
make any amendments necessary to obtain a favorable
determination as to the qualified status of that Replidyne Plan.
To the Knowledge of Replidyne, no prohibited
transaction, within the meaning of Section 4975 of
the Code or Sections 406 and 407 of ERISA, and not
otherwise exempt under Section 408 of ERISA, has occurred
with respect to any Replidyne Plan subject to ERISA or
Section 4975 of the Code. There are no claims or Legal
Proceedings pending, or, to the Knowledge of Replidyne,
threatened or reasonably anticipated (other than routine claims
for benefits), against any Replidyne Plan or against the assets
of any Replidyne Plan. Each Replidyne Plan (other than any
Replidyne Plan to be terminated prior to the Closing in
accordance with this Agreement) can be amended, terminated or
otherwise discontinued after the Closing in accordance with its
terms, without liability to the Company, Replidyne or the
Surviving Corporation (other than ordinary administration
expenses). There are no
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audits, inquiries or Legal Proceedings pending or, to the
Knowledge of Replidyne, threatened by any Governmental Body with
respect to any Replidyne Plan. Replidyne has never incurred any
penalty or tax with respect to any Replidyne Plan under
Section 502(i) of ERISA or Sections 4975 through 4980
of the Code. Replidyne has made all contributions and other
payments required by and due under the terms of each Replidyne
Plan.
(j) Replidyne has never maintained, established, sponsored,
participated in, or contributed to any: (i) Pension Plan
subject to Title IV of ERISA; or
(ii) multiemployer plan within the meaning of
Section (3)(37)(A) of ERISA. Replidyne has never maintained,
established, sponsored, participated in or contributed to, any
Pension Plan in which stock of Replidyne is or was held as a
plan asset. The fair market value of the assets of each funded
Pension Plan or multiemployer plan, or the equivalent thereof,
maintained by Replidyne in a foreign jurisdiction (a
Replidyne Foreign Plan) the liability of each
insurer for any Replidyne Foreign Plan funded through insurance,
or the book reserve established for any Replidyne Foreign Plan,
together with any accrued contributions, is sufficient to
procure or provide in full for the accrued benefit obligations,
with respect to all current and former participants in such
Replidyne Foreign Plan according to the actuarial assumptions
and valuations most recently used to determine employer
contributions to and obligations under such Replidyne Foreign
Plan, and none of the Contemplated Transactions shall cause any
such assets or insurance obligations to be less than such
benefit obligations.
(k) No Replidyne Plan provides (except at no cost to
Replidyne) or reflects or represents any liability of Replidyne
to provide, retiree life insurance, retiree health benefits or
other retiree employee welfare benefits to any Person for any
reason, except as may be required by COBRA or other applicable
Legal Requirements, or any deferred compensation other than
tax-qualified employee pension benefit plans (as
defined under ERISA). Other than commitments made that involve
no future costs to Replidyne, Replidyne has never represented,
promised or contracted (whether in oral or written form) to any
employee of Replidyne (either individually or to employees of
Replidyne as a group) or any other Person that such employee(s)
or other Person would be provided with Post-Retirement Benefits,
except to the extent required by applicable Legal Requirements.
Part 3.12(k) of the Replidyne Disclosure Schedule
accurately identifies each former employee of Replidyne who is
receiving or is scheduled to receive (or whose spouse or other
dependent is receiving or is scheduled to receive) any benefits.
(l) Except as set forth in Part 3.12(l) of the
Replidyne Disclosure Schedule, neither the execution of this
Agreement nor the consummation of the Contemplated Transactions
hereby will (either alone or upon the occurrence of any
additional or subsequent events) constitute an event under any
Replidyne Plan, Replidyne Contract, trust or loan that will or
may result (either alone or in connection with any other
circumstance or event) in any payment (whether of severance pay
or otherwise), acceleration, forgiveness of indebtedness,
vesting, distribution, increase in benefits or obligation to
fund benefits with respect to any employees of Replidyne.
(m) Replidyne: (i) is, and at all times has been, in
substantial compliance with all applicable Legal Requirements
respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case, with
respect to its employees, including the requirements of FMLA and
any similar provisions of state law; (ii) has withheld and
reported all amounts required by applicable Legal Requirements
or by Contract to be withheld and reported with respect to
wages, salaries and other payments to its employees;
(iii) is not liable for any arrears of wages or any taxes
or any penalty for failure to comply with the Legal Requirements
applicable to the foregoing; and (iv) is not liable for any
payment to any trust or other fund governed by or maintained by
or on behalf of any Governmental Body with respect to
unemployment compensation benefits, social security or other
benefits or obligations for its employees (other than routine
payments to be made in the normal course of business and
consistent with past practice). There are no pending or, to the
Knowledge of Replidyne, threatened or reasonably anticipated
claims or Legal Proceedings against Replidyne under any
workers compensation policy or long-term disability policy.
(n) Replidyne is not required to be, and, to the Knowledge
of Replidyne, has not ever been required to be, treated as a
single employer with any other Person under
Section 4001(b)(1) of ERISA or Section 414(b), (c),
(m) or (o) of the Code. Replidyne has never been a
member of an affiliated service group within the
meaning of Section 414(m) of the Code.
(o) There is no agreement, plan, arrangement or other
Contract covering any employee or independent contractor or
former employee or independent contractor of Replidyne that,
considered individually or considered collectively with any
other such Contracts
and/or other
events, will, or could reasonably be expected to, give rise
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directly or indirectly to the payment of any amount that would
not be deductible pursuant to Section 280G or
Section 162(m) of the Code. Replidyne is not a party to any
Contract, nor does Replidyne have any obligation (current or
contingent), to compensate any individual for excise taxes paid
pursuant to Section 4999 of the Code.
(p) Any Replidyne employee plan, which includes any and all
employment agreements, change in control agreements and any
other similar individual agreements with employees or
consultants, salary, bonus, deferred compensation, incentive
compensation, stock purchase, stock option, severance pay,
termination pay, hospitalization, medical, life or other
insurance, supplemental unemployment benefits, profit-sharing,
pension or retirement plan, any other material program or
agreement, whether or not subject to ERISA (collectively, the
Replidyne Plans, and each individually a
Replidyne Plan) sponsored, maintained,
contributed to or required to be contributed to by Replidyne for
the benefit of any employee of Replidyne and which is a
nonqualified deferred compensation plan (as defined
in Section 409A(d)(1) of the Code) has been operated since
January 1, 2006 in good faith compliance with
Section 409A of the Code and the proposed regulations and
other guidance issued with respect thereto so as to avoid any
additional Tax pursuant to Section 409A(a)(1)(B)(i)(II) of
the Code.
3.13 Environmental
Matters. Replidyne is in compliance in all
material respects with all applicable Environmental Laws, which
compliance includes the possession by Replidyne of all permits
and other Governmental Authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions
thereof. Replidyne has not received any written notice or other
communication (in writing or otherwise), whether from a
Governmental Body, citizens group, employee or otherwise, that
alleges that Replidyne is not in compliance with any
Environmental Law, and, to the Knowledge of Replidyne, there are
no circumstances that may prevent or interfere with
Replidynes compliance with any Environmental Law in the
future. To the Knowledge of Replidyne: (i) no current or
prior owner of any property leased or controlled by Replidyne
has received any written notice or other communication relating
to property owned or leased at any time by Replidyne, whether
from a Governmental Body, citizens group, employee or otherwise,
that alleges that such current or prior owner or Replidyne is
not in compliance with or violated any Environmental law
relating to such property and (ii) Replidyne does not have
any liability under any Environmental Laws (including without
limitation corrective, investigatory or remedial obligations).
All Governmental Authorizations currently held by Replidyne
pursuant to Environmental Laws are identified in Part 3.13
of the Replidyne Disclosure Schedule.
3.14 Bank Accounts. Part 3.14
of the Replidyne Disclosure Schedule provides accurate
information with respect to each account maintained by or for
the benefit of Replidyne at any bank or other financial
institution, including the name of the bank or financial
institution, the type of account, the account number, the
balance as of the date hereof and the names of all individuals
authorized to draw on or make withdrawals from such accounts.
3.15 Legal Proceedings; Orders.
(a) Except as described in the Replidyne SEC Documents,
there is no pending Legal Proceeding, and to the Knowledge of
Replidyne, no Person has threatened to commence any Legal
Proceeding: (i) that involves Replidyne or any of its
directors or officers (in their capacities as such) or any
assets owned or used by Replidyne; or (ii) that challenges,
or that may have the effect of preventing, delaying, making
illegal or otherwise interfering with the Merger or any of the
Contemplated Transactions. To the Knowledge of Replidyne, no
event has occurred, and no claim, dispute or other condition or
circumstance exists, that will, or that would reasonably be
expected to, give rise to or serve as a basis for the
commencement of any such Legal Proceeding.
(b) There is no order, writ, injunction, judgment or decree
to which Replidyne, or any of the assets owned or used by
Replidyne, is subject. To the Knowledge of Replidyne, no officer
or other employee of Replidyne is subject to any order, writ,
injunction, judgment or decree that relates to Replidynes
business or to any assets owned or used by Replidyne.
3.16 Non-Contravention;
Consents. Subject to compliance with the
applicable requirements of the HSR Act, obtaining the Required
Replidyne Stockholder Vote for the applicable Contemplated
Transactions and obtaining the Replidyne Consents, adoption of
this Agreement by Replidyne as the sole stockholder of Merger
Sub, the filing of the Replidyne Certificate of Amendment, and
the filing of Articles of Merger as required by the MBCA,
neither (a) the execution, delivery or performance of this
Agreement or any of the Related Agreements, nor
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(b) the consummation of the Merger or any of the other
Contemplated Transactions, will (with or without notice or lapse
of time):
(a) contravene, conflict with or result in a violation of
any of the provisions of the Replidyne Constituent Documents;
(b) contravene, conflict with or result in a violation of,
or give any Governmental Body or other Person the right to
challenge any of the Contemplated Transactions or to exercise
any remedy or obtain any relief under, any Legal Requirement or
any order, writ, injunction, judgment or decree to which
Replidyne or the Merger Sub, or any of the assets owned or used
by Replidyne, is subject;
(c) contravene, conflict with or result in a violation of
any of the terms or requirements of, or give any Governmental
Body the right to revoke, withdraw, suspend, cancel, terminate
or modify, any Governmental Authorization that is held by
Replidyne or Merger Sub or that otherwise relates to
Replidynes or Merger Subs business or to any of the
assets owned or used by Replidyne or Merger Sub;
(d) except as set forth in Part 3.16(d) of the
Replidyne Disclosure Schedule, result in a material conflict,
violation or breach of, or result in a material default under,
any provision of any material Replidyne Contract, or give any
Person the right to (i) declare a default or exercise any
remedy under any such Replidyne Contract, (ii) accelerate
the maturity or performance of any such Replidyne Contract, or
(iii) cancel, terminate or modify any such Replidyne
Contract; or
(e) result in the imposition or creation of any Encumbrance
upon or with respect to any asset owned or used by Replidyne or
Merger Sub (except for minor liens that will not, in any case or
in the aggregate, materially detract from the value of the
assets subject thereto or materially impair the operations of
Replidyne or Merger Sub).
Except for those filings, notices or Consents disclosed in
Part 3.16 of the Replidyne Disclosure Schedule (the
Replidyne Consents), Replidyne is not and
will not be required to make any filing with or give any notice
to, or to obtain any Consent from, any Person in connection with
(y) the execution, delivery or performance of this
Agreement or any of the Related Agreements, or (z) the
consummation of the Merger or any of the other Contemplated
Transactions.
3.17 Vote Required. The
affirmative vote of (i) the holders of a majority of the
Replidyne Common Stock casting votes in person or by proxy at
the Replidyne Stockholders Meeting is the only vote of the
holders of any class or series of Replidyne capital stock
necessary to approve the issuance of Replidyne Common Stock in
the Merger and (ii) the holders of a majority of the
Replidyne Common Stock entitled to vote thereon at the Replidyne
Stockholders Meeting is the only vote necessary to approve
the Replidyne Certificate of Amendment ((i) and
(ii) together, the Required Replidyne Stockholder
Vote).
3.18 No Financial Advisor. Except
for Morgan Stanley & Co. Incorporated, no broker,
finder or investment banker is entitled to any brokerage fee,
finders fee, opinion fee, success fee, transaction fee or
other fee or commission in connection with the Merger or any of
the other Contemplated Transactions based upon arrangements made
by or on behalf of Replidyne or Merger Sub.
3.19 Authority; Binding Nature of
Agreement. Replidyne and Merger Sub have the
absolute and unrestricted corporate right, power and authority
to enter into and perform their obligations under this
Agreement; and the execution, delivery and performance by
Replidyne and Merger Sub of this Agreement (including the
contemplated issuance of Replidyne Common Stock pursuant to the
Merger in accordance with this Agreement and the effectuation of
the Replidyne Certificate of Amendment) have been duly
authorized by all necessary corporate action on the part of
Replidyne and Merger Sub and their respective boards of
directors and stockholders, subject only to the adoption of this
Agreement by Replidyne as the sole stockholder of Merger Sub,
obtaining the Required Replidyne Stockholder Vote for the
applicable Contemplated Transactions, the filing of the
Replidyne Certificate of Amendment and the filing and
recordation of Articles of Merger pursuant to the MBCA. This
Agreement has been duly executed and delivered by Replidyne and
Merger Sub, and, assuming due authorization, execution and
delivery by the other Parties hereto, constitutes the legal,
valid and binding obligation of Replidyne and Merger Sub,
enforceable against them in accordance with its terms, subject
to (a) laws of general application relating to
A-39
bankruptcy, insolvency and the relief of debtors, and
(b) rules of law governing specific performance, injunctive
relief and other equitable remedies.
3.20 Anti-Takeover Law. The board
of directors of Replidyne has taken all action necessary and
required to render inapplicable to the Merger, this Agreement or
any agreement contemplated hereby and the Contemplated
Transactions any anti-takeover provision in Replidynes
Certificate of Incorporation or Bylaws, any takeover provision
in any Replidyne Contract, and any takeover provision in any
applicable state law.
3.21 Valid Issuance. The Replidyne
Common Stock to be issued pursuant to the Merger will, when
issued in accordance with the provisions of this Agreement, be
validly issued, fully paid and nonassessable.
3.22 Controls and Procedures, Certifications and
Other Matters Relating to the Sarbanes-Oxley Act.
(a) Replidyne maintains internal control over financial
reporting that provide assurance that (i) records are
maintained in reasonable detail and accurately and fairly
reflect the transactions and dispositions of Replidynes
assets, (ii) transactions are executed with
managements authorization, and (iii) transactions are
recorded as necessary to permit preparation of the consolidated
financial statements of Replidyne and to maintain accountability
for Replidynes consolidated assets.
(b) Replidyne maintains disclosure controls and procedures
required by
Rules 13a-15
or 15d-15
under the Exchange Act, and such controls and procedures are
effective to ensure that all material information concerning
Replidyne is made known on a timely basis to the individuals
responsible for the preparation of Replidynes filings with
the SEC and other public disclosure documents.
(c) Neither Replidyne nor any of its officers has received
notice from any Governmental Entity questioning or challenging
the accuracy, completeness or manner of filing or submission of
any filing with the SEC, including without limitation any
certifications required by Section 906 of the
Sarbanes-Oxley Act.
(d) Replidyne has not, since June 28, 2006, extended
or maintained credit, arranged for the extension of credit,
modified or renewed an extension of credit, in the form of a
personal loan or otherwise, to or for any director or executive
officer of Replidyne.
3.23 Section 203 of the
DGCL. The board of directors of Replidyne has
taken all actions necessary so that the restrictions contained
in Section 203 of the DGCL applicable to a business
combination (as defined in Section 203) shall
not apply to the execution, delivery or performance of this
Agreement or the consummation of the Merger or any other
Contemplated Transaction.
3.24 Governmental
Authorizations. Part 3.24 of the
Replidyne Disclosure Schedule identifies each material
Governmental Authorization held by Replidyne, and Replidyne has
delivered or made available to the Company accurate and complete
copies of all Governmental Authorizations identified in
Part 3.24 of the Replidyne Disclosure Schedule. The
Governmental Authorizations identified in Part 3.24 of the
Replidyne Disclosure Schedule are valid and in full force and
effect, and collectively constitute all Governmental
Authorizations necessary to enable Replidyne to conduct its
business in the manner in which its business is currently being
conducted and is proposed to be conducted. Replidyne is in
compliance in all material respects with the terms and
requirements of the respective Governmental Authorizations
identified in Part 3.24 of the Replidyne Disclosure
Schedule. Replidyne has not received any notice or other
communication from any Governmental Body regarding (a) any
actual or possible violation of or failure to comply with any
term or requirement of any Governmental Authorization, or
(b) any actual or possible revocation, withdrawal,
suspension, cancellation, termination or modification of any
Governmental Authorization.
3.25 Insurance. Replidyne
maintains insurance policies with reputable insurance carriers
against all risks of a character as usually insured against, and
in such coverage amounts as are usually maintained, by similarly
situated companies in the same or similar businesses. Each such
insurance policy is in full force and effect. Since
January 1, 2006, Replidyne has not made any claim under any
insurance policy or received any written notice or other
communication regarding any actual or possible
(a) cancellation or invalidation of any insurance policy,
(b) refusal of any coverage or rejection of any claim under
any insurance policy, or (c) material adjustment in the
amount of the premiums payable with respect to any insurance
policy.
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3.26 Related Party
Transactions. Except as set forth in the
Replidyne SEC Documents, (a) no Replidyne Related Party
has, and no Replidyne Related Party has at any time since
January 1, 2006 had, any direct or indirect interest in any
asset used in or otherwise relating to the business of
Replidyne; (b) no Replidyne Related Party is, or has been,
indebted to Replidyne; (c) since January 1, 2006, no
Replidyne Related Party has entered into, or has had any direct
or indirect financial interest in, any Replidyne Contract,
transaction or business dealing involving Replidyne; (d) no
Replidyne Related Party is competing, or has at any time since
January 1, 2006 competed, directly or indirectly, with
Replidyne; and (e) no Replidyne Related Party has any claim
or right against Replidyne (other than rights under capital
stock of Replidyne and rights to receive compensation for
services performed as an employee of Replidyne).
3.27 Certain Payments. Neither
Replidyne nor to Replidynes Knowledge any officer,
employee, agent or other Person associated with or acting for or
on behalf of Replidyne, has at any time, directly or indirectly:
(a) used any corporate funds (i) to make any unlawful
political contribution or gift or for any other unlawful purpose
relating to any political activity, (ii) to make any
unlawful payment to any governmental official or employee, or
(iii) to establish or maintain any unlawful or unrecorded
fund or account of any nature;
(b) made any false or fictitious entry, or failed to make
any entry that should have been made, in any of the books of
account or other records of Replidyne;
(c) made any payoff, influence payment, bribe, rebate,
kickback or unlawful payment to any Person;
(d) performed any favor or given any gift which was not
deductible for federal income tax purposes;
(e) made any payment (whether or not lawful) to any Person,
or provided (whether lawfully or unlawfully) any favor or
anything of value (whether in the form of property or services,
or in any other form) to any Person, for the purpose of
obtaining or paying for (i) favorable treatment in securing
business, or (ii) any other special concession; or
(f) agreed or committed to take any of the actions
described in clauses (a) through (e)
above.
3.28 Disclosure.
(a) This Agreement (including the Replidyne Disclosure
Schedule) does not, and the certificate delivered pursuant to
Section 8.4(a) will not: (i) contain any
representation, warranty or information that is inaccurate or
misleading with respect to any material facts; or (ii) omit
to state any material fact necessary in order to make the
representations, warranties and information contained and to be
contained herein, in the light of the circumstances under which
such representations, warranties and information were or will be
made or provided, not false or misleading.
(b) The information supplied by or on behalf of Replidyne
for inclusion or incorporation by reference in the
Form S-4
Registration Statement (including any Replidyne Financial
Statements) will not, as of the time the
Form S-4
Registration Statement is filed with the SEC or at the time it
becomes effective under the Securities Act, (i) contain any
statement that is inaccurate or misleading with respect to any
material facts, or (ii) omit to state any material fact
necessary in order to make such information, in the light of the
circumstances under which such information will be provided, not
false or misleading. The information supplied by or on behalf of
Replidyne for inclusion or incorporation by reference in the
Joint Proxy Statement/Prospectus (including any Replidyne
Financial Statements) will not, as of the date the Joint Proxy
Statement/Prospectus is mailed to the stockholders of Replidyne
or the Company or at the time of the Replidyne
Stockholders Meeting or the Company Stockholders
Meeting, (i) contain any statement that is inaccurate or
misleading with respect to any material facts, or (ii) omit
to state any material fact necessary in order to make such
information, in the light of the circumstances under which such
information will be provided, not false or misleading.
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4.
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CERTAIN
COVENANTS OF THE PARTIES
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4.1 Access and
Investigation. Subject to the terms of the
Confidentiality Agreement which the Parties agree will continue
in full force following the date of this Agreement, during the
period commencing on the date of this Agreement and ending at
the earlier of the termination of this Agreement pursuant to
Section 9.1 or the Effective
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Time (the Pre-Closing Period), upon
reasonable notice Replidyne and the Company shall, and shall
cause such Partys Representatives to: (a) provide the
other Party and such other Partys Representatives with
reasonable access during normal business hours to such
Partys Representatives, personnel and assets and to all
existing books, records, Tax Returns, work papers and other
documents and information relating to such Party and its
Subsidiaries; (b) provide the other Party and such other
Partys Representatives with such copies of the existing
books, records, Tax Returns, work papers, product data, and
other documents and information relating to such Party and its
Subsidiaries, and with such additional financial, operating and
other data and information regarding such Party and its
Subsidiaries as the other Party may reasonably request; and
(c) permit the other Partys officers and other
employees to meet, upon reasonable notice and during normal
business hours, with the officers and managers of such Party
responsible for such Partys financial statements and the
internal controls of such Party to discuss such matters as the
other Party may deem necessary or appropriate in order to enable
the other Party to satisfy its obligations under the
Sarbanes-Oxley Act and the rules and regulations relating
thereto. Without limiting the generality of any of the
foregoing, during the Pre-Closing Period, each of Replidyne and
the Company shall promptly provide the other Party with copies
of:
(i) the unaudited monthly consolidated balance sheets of
such Party as of the end of each calendar month and the related
unaudited monthly consolidated statements of operations,
statements of stockholders equity and statements of cash
flows for such calendar month, which shall be delivered within
20 days after the end of such calendar month;
(ii) all material operating and financial reports prepared
by such Party for its senior management, including sales
forecasts, marketing plans, development plans, discount reports,
write off reports, hiring reports and capital expenditure
reports prepared for its senior management;
(iii) any written materials or communications sent by or on
behalf of a Party to its stockholders;
(iv) any notice, document or other communication sent by or
on behalf of a Party to any party to any material Replidyne
Contract or material Company Contract, as applicable, or sent to
a Party by any party to any material Replidyne Contract or
material Company Contract, as applicable (other than any
communication that relates solely to routine commercial
transactions between such Party and the other party to any such
material Replidyne Contract or material Company Contract, as
applicable, and that is of the type sent in the Ordinary Course
of Business);
(v) any notice, report or other document filed with or
otherwise furnished, submitted or sent to any Governmental Body
on behalf of a Party in connection with the Merger or any of the
Contemplated Transactions;
(vi) any non-privileged notice, document or other
communication sent by or on behalf of, or sent to, a Party
relating to any pending or threatened Legal Proceeding involving
or affecting such Party; and
(vii) any material notice, report or other document
received by a Party from any Governmental Body.
Notwithstanding the foregoing, any Party may restrict the
foregoing access to the extent that any Legal Requirement
applicable to such Party requires such Party or its Subsidiaries
to restrict or prohibit access to any such properties or
information.
4.2 Operation of Replidynes Business.
(a) Except as set forth on Part 4.2(a) of the
Replidyne Disclosure Schedule, during the Pre-Closing Period
Replidyne shall conduct its business and operations (i) in
the Ordinary Course of Business or as otherwise necessary to
maximize stockholder value and (ii) in compliance with all
applicable Legal Requirements and the requirements of all
Contracts that constitute material Contracts. In addition,
during the Pre-Closing Period, Replidyne shall promptly notify
the Company of: (A) any notice or other communication from
any Person alleging that the Consent of such Person is or may be
required in connection with any of the Contemplated
Transactions; and (B) any Legal Proceeding against,
relating to, involving or otherwise affecting Replidyne that is
commenced, or, to the Knowledge of Replidyne, threatened
against, Replidyne.
(b) Except as set forth in Part 4.2(b) of the
Replidyne Disclosure Schedule, and subject to any Legal
Requirement applicable to Replidyne, during the Pre-Closing
Period, Replidyne shall not, without the prior written consent
of the Company (which shall not be unreasonably withheld,
conditioned or delayed), take any action set
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forth in
Section 3.5(c)-(u);
provided that, for purposes of this Section 4.2(b), all
references to $100,000 in Section 3.5 (the Dollar
Thresholds) shall be disregarded and the provisions of
Section 3.5 shall be read as if no such Dollar Threshold
qualified such provisions.
(c) Notwithstanding the provisions of Sections 4.2(a)
and (b) hereof, during the Pre-Closing Period, Replidyne
shall be entitled to take all action it deems appropriate in
order to divest itself, whether by acquisition, liquidation or
otherwise, of its pre-clinical programs and other non-cash
assets; provided that Replidyne shall not, without the written
consent of the Company (which may be withheld at the discretion
of the Company), consummate or enter into any binding agreement
to consummate any transaction to divest itself of such programs
or other assets if Replidyne would incur any material
obligations or liabilities that would survive the Closing Date.
4.3 Operation of the Companys Business.
(a) Except as set forth on Part 4.3 of the Company
Disclosure Schedule, during the Pre-Closing Period: (i) the
Company shall conduct its business and operations: (A) in
the Ordinary Course of Business; and (B) in compliance with
all applicable Legal Requirements and the requirements of all
Contracts that constitute material Contracts; (ii) the
Company shall preserve intact its current business organization,
keep available the services of its current officers and other
employees and maintain its relations and goodwill with all
suppliers, customers, landlords, creditors, licensors,
licensees, employees and other Persons having business
relationships with the Company; and (iii) the Company shall
promptly notify Replidyne of: (A) any notice or other
communication from any Person alleging that the Consent of such
Person is or may be required in connection with any of the
Contemplated Transactions; and (B) any Legal Proceeding
against, relating to, involving or otherwise affecting the
Company that is commenced, or, to the Knowledge of the Company,
threatened against, the Company.
(b) Except as set forth in Part 4.3 of the Company
Disclosure Schedule or in the Ordinary Course of Business, and
subject to any Legal Requirement applicable to the Company and
its Subsidiaries, during the Pre-Closing Period, the Company
agrees that it shall not, without the prior written consent of
Replidyne (which shall not be unreasonably withheld, conditioned
or delayed), take any action set forth in
Section 2.5(c)-(u);
provided that, (i) for purposes of this
Section 4.3(b), all references to $100,000 in
Section 2.5 shall be replaced with $250,000 and
(ii) notwithstanding the provisions of Section 2.5(e)
or anything set forth in Part 4.3 of the Company Disclosure
Schedule (except for the issuance of Company Warrants
contemplated in the Company Stockholder Conversion Agreement),
the Company shall not, without the prior written consent of
Replidyne, issue options, warrants or other rights to acquire
any capital stock or other securities of the Company, other than
equity incentive awards issued under the Companys 2007
Equity Incentive Plan (the Company 2007 Plan)
to employees of and consultants to the Company in the Ordinary
Course of Business that (i) do not cause the total number
of shares subject to awards under the Company 2007 Plan to
exceed the number of shares reserved for issuance under the
Company 2007 Plan as of the date hereof and (ii) if such
award requires exercise by the holder, have an exercise price
not less than the fair market value of a share of Company Common
Stock on the applicable Grant Date. Notwithstanding the
foregoing, in the event any of the Company Options granted to
the Companys officers under the Company 2007 Plan set
forth on Part 2.9(d) of the Company Disclosure Schedule are
terminated, the Company may grant replacement options to such
officers for the same number of shares and at the same exercise
price (subject to appropriate adjustments to shares and price
for stock splits or combinations) as currently set forth in
agreements referenced on Part 2.9(d) without the approval
of Replidyne.
(c) Notwithstanding the provisions of Sections 4.3(a)
and (b) hereof, during the Pre-Closing Period, the Company
shall be entitled to consummate any Qualified Financing.
4.4 Disclosure
Schedule Updates. During the Pre-Closing
Period, the Company on the one hand, and Replidyne on the other,
shall promptly notify the other Party in writing, by delivery of
an updated Company Disclosure Schedule or Replidyne Disclosure
Schedule, as the case may be, of: (i) the discovery by such
Party of any event, condition, fact or circumstance that
occurred or existed on or prior to the date of this Agreement
and that caused or constitutes a material inaccuracy in any
representation or warranty made by such Party in this Agreement;
(ii) any event, condition, fact or circumstance that
occurs, arises or exists after the date of this Agreement and
that would cause or constitute a material inaccuracy in any
representation or warranty made by such Party in this Agreement
if: (A) such representation or warranty had been made as of
the time of the occurrence, existence or discovery of such
event, condition, fact or circumstance; or (B) such event,
condition, fact or circumstance had
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occurred, arisen or existed on or prior to the date of this
Agreement; (iii) any material breach of any covenant or
obligation of such Party; and (iv) any event, condition,
fact or circumstance that could reasonably be expected to make
the timely satisfaction of any of the conditions set forth in
Sections 6, 7 or 8 impossible or materially less likely.
Without limiting the generality of the foregoing, the Company on
the one hand, and Replidyne on the other, shall promptly advise
the other Party in writing of any Legal Proceeding or claim
threatened, commenced or asserted against or with respect to, or
otherwise affecting, such Party or (to the Knowledge of such
Party) any director, officer or Key Employee of such Party.
Except as set forth in Section 8.1, no notification given
pursuant to this Section 4.4 shall change, limit or
otherwise affect any of the representations, warranties,
covenants or obligations of the notifying Party contained in
this Agreement or its Disclosure Schedule for purposes of
Section 7.1 or 7.2, in the case of the Company, or
Section 8.1 or 8.2, in the case of Replidyne.
4.5 No Solicitation.
(a) Each Party agrees that neither it nor any of its
Subsidiaries shall, nor shall it nor any of its Subsidiaries
authorize or permit any of the officers, directors, investment
bankers, attorneys or accountants retained by it or any of its
Subsidiaries to, and that it shall use commercially reasonable
efforts to cause its and its Subsidiaries non-officer
employees and other agents not to (and shall not authorize any
of them to) directly or indirectly: (i) solicit, initiate,
knowingly encourage, induce or knowingly facilitate the
communication, making, submission or announcement of any
Acquisition Proposal or Acquisition Inquiry or take any action
that could reasonably be expected to lead to an Acquisition
Proposal or Acquisition Inquiry; (ii) furnish any
information regarding such Party to any Person in connection
with or in response to an Acquisition Proposal or Acquisition
Inquiry; (iii) engage in discussions or negotiations with
any Person with respect to any Acquisition Proposal or
Acquisition Inquiry; (iv) approve, endorse or recommend any
Acquisition Proposal; or (v) execute or enter into any
letter of intent or similar document or any Contract
contemplating or otherwise relating to any Acquisition
Transaction; provided, however, that, notwithstanding anything
contained in this Section 4.5(a), prior to obtaining the
Required Replidyne Stockholder Vote or the Required Company
Stockholder Vote, as applicable, each Party may furnish
information regarding such Party to, and enter into discussions
or negotiations with, any Person in response to a Superior Offer
or a bona fide, unsolicited written Acquisition Proposal made or
received after the date of this Agreement that is reasonably
likely to result in a Superior Offer that is submitted to such
Party by such Person (and not withdrawn) if : (A) neither
such Party nor any Representative of such Party shall have
breached this Section 4.5 with respect to that particular
Superior Offer or Acquisition Proposal; (B) the board of
directors of such Party concludes in good faith, based on the
advice of outside legal counsel, that such action is required in
order for such Partys board of directors to comply with
its fiduciary obligations to such Partys stockholders
under applicable Legal Requirements; (C) at least three
(3) Business Days prior to furnishing any such information
to, or entering into discussions with, such Person, such Party
gives the other Party written notice of the identity of such
Person and of such Partys intention to furnish information
to, or enter into discussions with, such Person; (D) such
Party receives from such Person an executed confidentiality
agreement containing provisions (including nondisclosure
provisions, use restrictions, non-solicitation provisions, no
hire provisions and standstill provisions) at least
as favorable to such Party as those contained in the
Confidentiality Agreement; and (E) at least three
(3) Business Days prior to furnishing any such nonpublic
information to such Person, such Party furnishes such
information to the other Party (to the extent such nonpublic
information has not been previously furnished by such Party to
the other Party). Without limiting the generality of the
foregoing, each Party acknowledges and agrees that, in the event
any Representative of such Party (whether or not such
Representative is purporting to act on behalf of such Party)
takes any action that, if taken by such Party, would constitute
a breach of this Section 4.5 by such Party, the taking of
such action by such Representative shall be deemed to constitute
a breach of this Section 4.5 by such Party for purposes of
this Agreement.
(b) If any Party or any Representative of such Party
receives an Acquisition Proposal or Acquisition Inquiry at any
time during the Pre-Closing Period, then such Party shall
promptly (and in no event later than 24 hours after such
Party becomes aware of such Acquisition Proposal or Acquisition
Inquiry) advise the other Party orally and in writing of such
Acquisition Proposal or Acquisition Inquiry (including the
identity of the Person making or submitting such Acquisition
Proposal or Acquisition Inquiry and the terms thereof). Such
Party shall keep the other Party fully informed with respect to
the status and terms of any such Acquisition Proposal or
Acquisition Inquiry and any modification or proposed
modification thereto.
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(c) Each Party shall immediately cease and cause to be
terminated any existing discussions with any Person that relate
to any Acquisition Proposal or Acquisition Inquiry as of the
date of this Agreement.
(d) Each Party shall not release or permit the release of
any Person from, or waive or permit the waiver of any provision
of or right under, any confidentiality, non-solicitation, no
hire, standstill or similar agreement (whether
entered into prior to or after the date of this Agreement) to
which such Party is a party or under which such Party has any
rights, and shall enforce or cause to be enforced each such
agreement to the extent requested by the other Party. Each Party
shall promptly request each Person that has executed a
confidentiality or similar agreement in connection with its
consideration of a possible Acquisition Transaction or equity
investment to return to such Party all confidential information
heretofore furnished to such Person by or on behalf of such
Party.
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5.
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ADDITIONAL
AGREEMENTS OF THE PARTIES
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5.1 Registration Statement; Joint Proxy
Statement/Prospectus.
(a) As promptly as practicable after the date of this
Agreement, the Parties shall prepare and cause to be filed with
the SEC the Joint Proxy Statement/Prospectus and Replidyne shall
prepare and cause to be filed with the SEC the
Form S-4
Registration Statement, in which the Joint Proxy
Statement/Prospectus will be included as a prospectus. Each of
the Parties shall use commercially reasonable efforts to cause
the
Form S-4
Registration Statement and the Joint Proxy Statement/Prospectus
to comply with the applicable rules and regulations promulgated
by the SEC, to respond promptly to any comments of the SEC or
its staff and to have the
Form S-4
Registration Statement declared effective under the Securities
Act as promptly as practicable after it is filed with the SEC.
Prior to the
Form S-4
Registration Statement being declared effective under the
Securities Act by the SEC, (a) Replidyne and Merger Sub
shall execute and deliver to Cooley Godward Kronish LLP and to
Fredrikson & Byron, P.A. tax representation letters in
a form reasonably acceptable to such counsel; and (b) the
Company shall execute and deliver to Fredrikson &
Byron, P.A. and to Cooley Godward Kronish LLP tax representation
letters in a form reasonably acceptable to such counsel.
Following the delivery of the tax representation letters
pursuant to the preceding sentence, (x) Replidyne shall use
its commercially reasonable efforts to cause Cooley Godward
Kronish LLP to deliver to it a tax opinion satisfying the
requirements of Item 601 of
Regulation S-K
under the Securities Act; and (y) the Company shall use its
commercially reasonable efforts to cause Fredrikson &
Byron, P.A. to deliver to it a tax opinion satisfying the
requirements of Item 601 of
Regulation S-K
under the Securities Act. In rendering such opinions, each of
such counsel shall be entitled to rely on the tax representation
letters referred to in this Section 5.1(a). Each of the
Parties shall use commercially reasonable efforts to cause the
Joint Proxy Statement/Prospectus to be mailed to the
stockholders of the Company and the stockholders of Replidyne as
promptly as practicable after the
Form S-4
Registration Statement is declared effective under the
Securities Act. Each Party shall promptly furnish to the other
Party all information concerning such Party and such
Partys stockholders that may be required or reasonably
requested in connection with any action contemplated by this
Section 5.1. If any event relating to the Company occurs,
or if the Company becomes aware of any information, that should
be disclosed in an amendment or supplement to the
Form S-4
Registration Statement or the Joint Proxy Statement/Prospectus,
then the Company shall promptly inform Replidyne thereof and
shall cooperate with Replidyne in filing such amendment or
supplement with the SEC and, if appropriate, in mailing such
amendment or supplement to the stockholders of the Company.
(b) Prior to the Effective Time, Replidyne shall use
commercially reasonable efforts to obtain all regulatory
approvals needed to ensure that the Replidyne Common Stock to be
issued pursuant to the Merger will (to the extent required) be
registered or qualified or exempt from registration or
qualification under the securities law of every jurisdiction of
the United States in which any registered holder of Company
Common Stock or Company Preferred Stock has an address of record
on the record date applicable to the Required Company
Stockholder Vote; provided, however, that Replidyne shall not be
required: (i) to qualify to do business as a foreign
corporation in any jurisdiction in which it is not now
qualified; or (ii) to file a general consent to service of
process in any jurisdiction; or (iii) otherwise become
subject to taxation in any jurisdiction.
5.2 Company Stockholders Meeting.
(a) The Company shall take all action necessary under
applicable Legal Requirements to call, give notice of and hold a
meeting of the holders of Company Common Stock and Company
Preferred Stock to vote on adopting
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this Agreement (such meeting, the Company
Stockholders Meeting). The Company
Stockholders Meeting shall be held as promptly as
practicable after the
Form S-4
Registration Statement is declared effective under the
Securities Act. The Company shall ensure that all proxies
solicited in connection with the Company Stockholders
Meeting are solicited in compliance with all applicable Legal
Requirements.
(b) The Company agrees that, subject to
Section 5.2(c): (i) the board of directors of the
Company and Special Committee shall each recommend that the
holders of Company Common Stock and Company Preferred Stock vote
to adopt this Agreement, and shall use commercially reasonable
efforts to solicit such approval, (ii) the Joint Proxy
Statement/Prospectus shall include a statement to the effect
that the board of directors of the Company and Special Committee
each recommends that the holders of Company Common Stock and
Company Preferred Stock vote to adopt this Agreement (the
recommendation of the board of directors of the Company and
Special Committee that the stockholders of the Company vote to
adopt this Agreement being referred to as the Company
Board Recommendation); and (iii) the Company
Board Recommendation shall not be withdrawn or modified in a
manner adverse to Replidyne, and no resolution by the board of
directors of the Company or any committee thereof to withdraw or
modify the Company Board Recommendation in a manner adverse to
Replidyne shall be adopted or proposed.
(c) Notwithstanding anything to the contrary contained in
Section 5.2(b), at any time prior to the adoption of this
Agreement by the Required Company Stockholder Vote, the board of
directors of the Company
and/or
Special Committee may withhold, amend, withdraw or modify the
Company Board Recommendation in a manner adverse to Replidyne if
the board of directors of the Company
and/or
Special Committee determines in good faith, based on the advice
of its outside legal counsel, that such action is required in
order for the Companys board of directors to comply with
its fiduciary obligations to the Companys stockholders
under applicable Legal Requirements, provided, that Replidyne
must receive three (3) Business Days prior written notice
from the Company confirming that the Companys board of
directors
and/or
Special Committee has determined to change its recommendation.
(d) The Companys obligation to call, give notice of
and hold the Company Stockholders Meeting in accordance
with Section 5.2(a) shall not be limited or otherwise
affected by the commencement, disclosure, announcement or
submission of any Superior Offer or other Acquisition Proposal,
or by any withdrawal or modification of the Company Board
Recommendation.
5.3 Replidyne Stockholders Meeting.
(a) Replidyne shall take all action necessary under
applicable Legal Requirements to call, give notice of and hold a
meeting of the holders of Replidyne Common Stock to vote on the
issuance of Replidyne Common Stock pursuant to the Merger and
the approval of the Replidyne Certificate of Amendment (such
meeting, the Replidyne Stockholders
Meeting). The Replidyne Stockholders Meeting
shall be held as promptly as practicable after the
Form S-4
Registration Statement is declared effective under the
Securities Act. Replidyne shall ensure that all proxies
solicited in connection with the Replidyne Stockholders
Meeting are solicited in compliance with all applicable Legal
Requirements.
(b) Replidyne agrees that, subject to Section 5.3(c):
(i) the board of directors of Replidyne shall recommend
that the holders of Replidyne Common Stock vote to approve
(A) the Replidyne Certificate of Amendment, and
(B) the issuance of Replidyne Common Stock pursuant to the
Merger, and shall use commercially reasonable efforts to solicit
such approval, (ii) the Joint Proxy Statement/Prospectus
shall include a statement to the effect that the board of
directors of Replidyne recommends that the stockholders of
Replidyne vote to approve the Replidyne Certificate of Amendment
and the issuance of Replidyne Common Stock pursuant to the
Merger (the recommendation of the board of directors of
Replidyne that the stockholders of Replidyne vote to approve
(A) the Replidyne Certificate of Amendment and (B) the
issuance of Replidyne Common Stock pursuant to the Merger being
referred to as the Replidyne Board
Recommendation); and (iii) the Replidyne Board
Recommendation shall not be withdrawn or modified in a manner
adverse to the Company, and no resolution by the board of
directors of Replidyne or any committee thereof to withdraw or
modify the Replidyne Board Recommendation in a manner adverse to
the Company shall be adopted or proposed.
(c) Notwithstanding anything to the contrary contained in
Section 5.3(b), at any time prior to the adoption of this
Agreement by the Required Replidyne Stockholder Vote, the board
of directors of Replidyne may withhold,
A-46
amend, withdraw or modify the Replidyne Board Recommendation in
a manner adverse to the Company if the board of directors of
Replidyne determines in good faith, based on the advice of its
outside legal counsel, that such action is required in order for
Replidynes board of directors to comply with its fiduciary
obligations to Replidynes stockholders under applicable
Legal Requirements, provided, that the Company must receive
three (3) Business Days prior written notice from Replidyne
confirming that Replidynes board of directors has
determined to change its recommendation.
(d) Replidynes obligation to call, give notice of and
hold the Replidyne Stockholders Meeting in accordance with
Section 5.3(a) shall not be limited or otherwise affected
by the commencement, disclosure, announcement or submission of
any Superior Offer or other Acquisition Proposal, or by any
withdrawal or modification of the Replidyne Board Recommendation.
5.4 Regulatory Approvals. Each
Party shall use commercially reasonable efforts to file or
otherwise submit, as soon as practicable after the date of this
Agreement, all applications, notices, reports and other
documents reasonably required to be filed by such Party with or
otherwise submitted by such Party to any Governmental Body with
respect to the Merger and the other Contemplated Transactions,
and to submit promptly any additional information requested by
any such Governmental Body. Without limiting the generality of
the foregoing, the Parties shall, promptly after the date of
this Agreement, prepare and file, if any, (a) the
notification and report any forms required to be filed under the
HSR Act and (b) any notification or other document required
to be filed in connection with the Merger under any applicable
foreign Legal Requirement relating to antitrust or competition
matters. The Company and Replidyne shall as promptly as
practicable respond in compliance with: (i) any inquiries
or requests received from the Federal Trade Commission or the
Department of Justice for additional information or
documentation; and (ii) any inquiries or requests received
from any state attorney general, foreign antitrust or
competition authority or other Governmental Body in connection
with antitrust or competition matters.
5.5 Company Stock Options; Company Warrants.
(a) Subject to Section 5.5(e), at the Effective Time,
each Company Option that is outstanding and unexercised
immediately prior to the Effective Time and following the
conversion described in the Company Stockholder Conversion
Agreement, whether or not vested, shall be converted into and
become an option to purchase Replidyne Common Stock, and
Replidyne shall assume each such Company Option in accordance
with the terms (as in effect as of the date of this Agreement)
of the stock option plan, if any, under which such Company
Option was issued and the terms of the stock option agreement by
which such Company Option is evidenced. All rights with respect
to Company Common Stock under Company Options assumed by
Replidyne shall thereupon be converted into rights with respect
to Replidyne Common Stock. Accordingly, from and after the
Effective Time: (i) each Company Option assumed by
Replidyne may be exercised solely for shares of Replidyne Common
Stock; (ii) the number of shares of Replidyne Common Stock
subject to each Company Option assumed by Replidyne shall be
determined by multiplying (A) the number of shares of
Company Common Stock that were subject to such Company Option
immediately prior to the Effective Time and following the
conversion described in the Company Stockholder Conversion
Agreement by (B) the Company Share Conversion Factor and
rounding the resulting number down to the nearest whole number
of shares of Replidyne Common Stock; (iii) the per share
exercise price for the Replidyne Common Stock issuable upon
exercise of each Company Option assumed by Replidyne shall be
determined by dividing the effective per share exercise price of
Company Common Stock subject to such Company Option, as in
effect immediately prior to the Effective Time and following the
conversion described in the Company Stockholder Conversion
Agreement, by the Company Share Conversion Factor and rounding
the resulting exercise price up to the nearest whole cent; and
(iv) any restriction on the exercise of any Company Option
assumed by Replidyne shall continue in full force and effect and
the term, exercisability, vesting schedule and other provisions
of such Company Options shall otherwise remain unchanged
including, with respect to Company Options that were intended to
qualify as incentive stock options under
Section 422 of the Code, such provisions shall remain
unchanged as are necessary to ensure that such Company Options
continue to qualify as incentive stock options under
Section 422 of the Code; provided, however, that:
(A) each Company Option assumed by Replidyne in accordance
with this Section 5.5(a) shall, in accordance with its
terms, be subject to further adjustment as appropriate to
reflect any stock split, division or subdivision of shares,
stock dividend, reverse stock split, consolidation of shares,
reclassification, recapitalization or other similar transaction
with respect to Replidyne Common Stock subsequent to the
Effective Time; and (B) the board of directors of Replidyne
or a committee thereof shall succeed to the authority and
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responsibility of the board of directors of the Company or any
committee thereof with respect to each Company Option assumed by
Replidyne.
(b) Subject to Section 5.5(e), at the Effective Time,
each Company Warrant that is outstanding and unexercised
immediately prior to the Effective Time and following the
conversion described in the Company Stockholder Conversion
Agreement (including without limitation each Company Warrant
issued pursuant to the Company Stockholder Conversion
Agreement), shall become converted into and become a warrant to
purchase Replidyne Common Stock and Replidyne shall assume each
such Company Warrant in accordance with its terms. All rights
with respect to Company Common Stock or Company Preferred Stock
under Company Warrants assumed by Replidyne shall thereupon be
converted into rights with respect to Replidyne Common Stock.
Accordingly, from and after the Effective Time: (i) each
Company Warrant assumed by Replidyne may be exercised solely for
shares of Replidyne Common Stock; (ii) the number of shares
of Replidyne Common Stock subject to each Company Warrant
assumed by Replidyne shall be determined by multiplying
(A) the number of shares of Company Common Stock or Company
Preferred Stock, as the case may be, that were subject to such
Company Warrant immediately prior to the Effective Time and
following the conversion described in the Company Stockholder
Conversion Agreement by (B) the Company Share Conversion
Factor, and rounding the resulting number down to the nearest
whole number of shares of Replidyne Common Stock; (iii) the
per share exercise price for the Replidyne Common Stock issuable
upon exercise of each Company Warrant assumed by Replidyne shall
be determined by dividing the effective per share exercise price
of Company Common Stock or Company Preferred Stock, as the case
may be, that were subject to such Company Warrant, as in effect
immediately prior to the Effective Time and following the
conversion described in the Company Stockholder Conversion
Agreement, by the Company Share Conversion Factor, and rounding
the resulting exercise price up to the nearest whole cent; and
(iv) any restriction on any Company Warrant assumed by
Replidyne shall continue in full force and effect and the term
and other provisions of such Company Warrant shall otherwise
remain unchanged.
(c) Replidyne shall file with the SEC, no later than
30 days after the Effective Time, a registration statement
on
Form S-8
relating to the shares of Replidyne Common Stock issuable with
respect to Company Options assumed by Replidyne in accordance
with Section 5.5(a).
(d) Replidyne and the Company shall each use commercially
reasonable efforts to submit to its respective stockholders a
proposal that Replidyne assume the Company Stock Option Plans
from and after the Effective Time, with such amendments as the
Company may deem reasonably necessary to effect the provisions
of this Section 5.5 and an increase in the number of shares
reserved for issuance under the 2007 Equity Incentive Plan of
the Company in an amount mutually agreed upon by Replidyne and
the Company.
(e) Prior to the Effective Time, Replidyne and the Company
shall use commercially reasonable efforts (under the Company
Stock Option Plans and otherwise) to effectuate the provisions
of this Section 5.5 and to ensure that, from and after the
Effective Time, holders of Company Options have no rights with
respect thereto other than those specifically provided in this
Section 5.5.
5.6 Indemnification of Officers and Directors.
(a) From the Effective Time through the sixth anniversary
of the date on which the Effective Time occurs, each of
Replidyne and the Surviving Corporation shall, jointly and
severally, indemnify and hold harmless each person who is now,
or has been at any time prior to the date hereof, or who becomes
prior to the Effective Time, a director or officer of Replidyne
or the Company (the D&O Indemnified
Parties), against all claims, losses, liabilities,
damages, judgments, fines and reasonable fees, costs and
expenses, including attorneys fees and disbursements
(collectively, Costs), incurred in connection
with any claim, action, suit, proceeding or investigation,
whether civil, criminal, administrative or investigative,
arising out of or pertaining to the fact that the D&O
Indemnified Party is or was a director or officer of Replidyne
or the Company, whether asserted or claimed prior to, at or
after the Effective Time, to the fullest extent permitted under,
as applicable, (i) the DGCL for directors or officers of
Delaware corporations and (ii) the MBCA for directors or
officers of Minnesota corporations. Each D&O Indemnified
Party will be entitled to advancement of expenses incurred in
the defense of any such claim, action, suit, proceeding or
investigation from each of Replidyne and the Surviving
Corporation, jointly and severally, upon receipt by Replidyne or
the Surviving Corporation from the D&O Indemnified Party of
a request therefor; provided that any person to whom expenses
are advanced provides an undertaking, to the extent then
required by the DGCL
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or MBCA, as applicable, to repay such advances if it is
ultimately determined that such person is not entitled to
indemnification.
(b) The Certificate of Incorporation or Articles of
Incorporation, as applicable, and Bylaws of each of Replidyne
and the Surviving Corporation shall contain, and Replidyne shall
cause the Articles of Incorporation and Bylaws of the Surviving
Corporation to so contain, provisions no less favorable with
respect to indemnification, advancement of expenses and
exculpation of present and former directors and officers of each
of Replidyne and the Company than are presently set forth in the
Certificate of Incorporation or Articles of Incorporation, as
applicable, and Bylaws of Replidyne and the Company, as
applicable, which provisions shall not be amended, modified or
repealed for a period of six years time from the Effective Time
in a manner that would adversely affect the rights thereunder of
individuals who, at or prior to the Effective Time, were
officers or directors of Replidyne or the Company.
(c) Replidyne shall purchase an insurance policy, with an
effective date as of the Closing, that maintains in effect for
six years from the Closing the current directors and
officers liability insurance policies maintained by the
Company (provided that Replidyne may substitute therefor
policies of at least the same coverage containing terms and
conditions that are not materially less favorable) with respect
to matters occurring prior to the Closing.
(d) Replidyne shall purchase an insurance policy, with an
effective date as of the Closing, that maintains in effect for
six years from the Closing the current directors and
officers liability insurance policies maintained by
Replidyne with respect to matters occurring prior to the Closing.
(e) Replidyne shall purchase directors and
officers liability insurance policies, with an effective
date as of the Closing, on commercially available terms and
conditions and with coverage limits customary for
U.S. public companies similarly situated to Replidyne.
(f) Replidyne shall pay all expenses, including reasonable
attorneys fees, that may be incurred by the persons
referred to in this Section 5.6 in connection with their
enforcement of their rights provided in this Section 5.6.
(g) The provisions of this Section 5.6 are intended to
be in addition to the rights otherwise available to the current
and former officers and directors of Replidyne and the Company
by law, charter, statute, by-law or agreement, and shall operate
for the benefit of, and shall be enforceable by, each of the
D&O Indemnified Parties, their heirs and their
representatives.
(h) In the event Replidyne or the Surviving Corporation or
any of their respective successors or assigns
(i) consolidates with or merges into any other person and
shall not be the continuing or surviving corporation or entity
of such consolidation or merger, or (ii) transfers all or
substantially all of its properties and assets to any person,
then, and in each such case, proper provision shall be made so
that the successors and assigns of Replidyne or the Surviving
Corporation, as the case may be, shall succeed to the
obligations set forth in this Section 5.6.
(i) Replidyne shall cause the Surviving Corporation to
perform all of the obligations of the Surviving Corporation
under this Section 5.6.
5.7 Additional Agreements.
(a) Subject to Section 5.7(b), the Parties shall use
commercially reasonable efforts to cause to be taken all actions
necessary to consummate the Merger and make effective the other
Contemplated Transactions. Without limiting the generality of
the foregoing, but subject to Section 5.7(b), each Party to
this Agreement: (i) shall make all filings and other
submissions (if any) and give all notices (if any) required to
be made and given by such Party in connection with the Merger
and the other Contemplated Transactions; (ii) shall use
commercially reasonable efforts to obtain each Consent (if any)
reasonably required to be obtained (pursuant to any applicable
Legal Requirement or Contract, or otherwise) by such Party in
connection with the Merger or any of the other Contemplated
Transactions or for such Contract to remain in full force and
effect, (iii) shall use commercially reasonable efforts to
lift any injunction prohibiting, or any other legal bar to, the
Merger or any of the other Contemplated Transactions and
(iv) shall use commercially reasonable efforts to satisfy
the conditions precedent to the consummation of this Agreement.
Each Party shall provide to the other Party a copy of each
proposed filing with or other submission to any Governmental
Body relating to any of the Contemplated Transactions, and shall
give the other Party a reasonable time prior to making such
filing or other submission in which to review and comment on
such proposed
A-49
filing or other submission. Each Party shall promptly deliver to
the other Party a copy of each such filing or other submission
made, each notice given and each Consent obtained by such Party
during the Pre-Closing Period.
(b) Notwithstanding anything to the contrary contained in
this Agreement, no Party shall have any obligation under this
Agreement: (i) to dispose of or transfer any assets;
(ii) to discontinue offering any product or service;
(iii) to license or otherwise make available to any Person
any Intellectual Property; (iv) to hold separate any assets
or operations (either before or after the Closing Date);
(v) to make any commitment (to any Governmental Body or
otherwise) regarding its future operations; or (vi) to
contest any Legal Proceeding or any order, writ, injunction or
decree relating to the Merger or any of the other Contemplated
Transactions if such Party determines in good faith that
contesting such Legal Proceeding or order, writ, injunction or
decree might not be advisable.
5.8 Disclosure. Without limiting
any of either Partys obligations under the Confidentiality
Agreement, each Party shall not, and shall not permit any of its
Subsidiaries or any Representative of such Party to, issue any
press release or make any disclosure (to any customers or
employees of such Party, to the public or otherwise) regarding
the Merger or any of the other Contemplated Transactions unless:
(a) the other Party shall have approved such press release
or disclosure in writing; or (b) such Party shall have
determined in good faith, upon the advice of outside legal
counsel, that such disclosure is required by applicable Legal
Requirements and, to the extent practicable, before such press
release or disclosure is issued or made, such Party advises the
other Party of, and consults with the other Party regarding, the
text of such press release or disclosure.
5.9 Listing. Replidyne shall
promptly (i) to the extent required by the rules and
regulations of the Nasdaq Global Market, prepare and submit a
notification form for the listing of the shares of Replidyne
Common Stock to be issued in the Merger and use its commercially
reasonable efforts to cause such shares to be approved for
listing (subject to notice of issuance), and (ii) to the
extent required by Nasdaq Marketplace Rule 4340, file an
initial listing for the Replidyne Common Stock on the Nasdaq
Global Market (the Nasdaq Listing
Application) and use its commercially reasonable
efforts to cause such Nasdaq Listing Application to be
conditionally approved prior to the Effective Time with respect
to the then-outstanding shares of Replidyne Common Stock. The
Company shall cooperate with Replidyne as reasonably requested
by Replidyne to cause the Nasdaq Listing Application to be
approved and the shares of Replidyne Common Stock to be issued
in the Merger to be approved for listing on the Nasdaq Global
Market and shall promptly furnish to Replidyne all information
concerning the Company and its stockholders that may be required
or reasonably requested in connection with any action
contemplated by this Section 5.9.
5.10 Directors and Officers.
(a) Prior to the Effective Time, and subject to the receipt
of any required stockholder vote, Replidyne shall take all
action necessary (i) to cause the number of members of the
board of directors of Replidyne to be fixed at ten and the
persons identified on Schedule 3A, concurrently with the
Effective Time, to constitute the board of directors of
Replidyne, with each such member to be of the class of directors
as shall be designated by the Company, which action will be
effective concurrently with the Effective Time, and (ii) to
obtain the necessary resignations of the directors of Replidyne
serving immediately prior to the Effective Time, which
resignations will be effective concurrently with the
effectiveness of the elections referred to in clause (i). If any
person so designated to be a director shall, prior to the
Effective Time, be unable or unwilling to hold office beginning
concurrently with the Effective Time, a majority of the
directors of Replidyne immediately after the Effective Time
shall designate another to be appointed as a director in his or
her place.
(b) At the Effective Time, Replidyne and the Surviving
Corporation shall take all action necessary (i) to cause
the number of members of the Surviving Corporations board
of directors to be fixed at one and the person identified on
Schedule 3B to be elected to the Surviving
Corporations board of directors, which action will be
effective concurrently with the Effective Time, and
(ii) effective concurrently with such appointment, to
obtain the resignations, or to cause the removal without cause,
of the directors identified on Schedule 3B. If any person
so designated to be a director shall prior to the Effective Time
be unable or willing to hold office beginning concurrently with
the Effective Time, the Company (if such person is an Affiliate
of the Company) shall designate another person to be appointed
as a director to his or her place.
A-50
(c) The board of directors of Replidyne, effective as of
the Effective Time, shall appoint the Persons set forth on
Schedule 3C as officers of Replidyne to the offices set
forth opposite their respective names on Schedule 3C.
(d) Replidyne shall take all action necessary to obtain the
resignations of all officers and other employees of Replidyne
that are serving as of immediately prior to the Effective Time,
or otherwise terminate the employment of such officers and other
employees, which resignations or terminations will be effective
as of the Effective Time.
5.11 Tax Matters.
(a) Replidyne, Merger Sub and the Company each agree to use
their respective commercially reasonable efforts to cause the
Merger to qualify, and will not take any actions that to their
Knowledge could reasonably be expected to prevent the Merger
from qualifying, as a reorganization under
Section 368(a) of the Code.
(b) This Agreement is intended to constitute, and the
Parties hereto hereby adopt this Agreement as, a plan or
reorganization within the meaning Treasury
Regulation Sections 1.368-2(g)
and 1.368-3(a). Replidyne, Merger Sub and the Company shall
report the Merger as a reorganization within the meaning of
Section 368(a) of the Code, unless otherwise required by
applicable law.
(c) On or prior to the Closing, the Company shall deliver
to Replidyne a notice that Company Common Stock (including
shares issued as a result of the conversion described in the
Company Stockholder Conversion Agreement) are not
U.S. real property interests in accordance with
Treasury Regulations under Sections 897 and 1445 of the
Code, together with evidence reasonably satisfactory to
Replidyne that the Company delivered or made available notice to
the Internal Revenue Service in accordance with the provisions
of
Section 1.897-2(h)(2)
of the Treasury Regulations. If Replidyne does not receive the
notice described above on or before the Closing Date, Replidyne
shall be permitted to withhold from the payments to be made
pursuant to this Agreement any required withholding tax under
Section 1445 of the Code.
(d) Replidyne, Merger Sub and the Company each agree to use
their respective commercially reasonable efforts to obtain the
opinions referred to in Sections 7.4(d) and 8.4(c),
respectively, including by executing letters of representation
as described in Section 5.1(a).
5.12 Registration Statement on
Form S-1.
Immediately following the execution and delivery of this
Agreement by the Parties, the Company shall take all necessary
action to permanently withdraw from consideration by the SEC its
outstanding Registration Statement on
Form S-1
(registration
no. 333-148798)
originally filed with the SEC on January 22, 2008.
5.13 Amendment to Equity
Agreements. The Company shall use
commercially reasonable efforts to obtain an acknowledgement in
a form reasonably acceptable to Replidyne from the holders of
those Company Options and shares of Company Common Stock
described on Part 2.9(d) of the Company Disclosure Schedule
(the Non-Vesting Securities) that the terms
of the restricted stock agreements and option agreements related
thereto do not provide that the vesting of such Non-Vesting
Securities will accelerate, in whole or in part, in connection
with or as a result of the consummation of the Merger and the
other Contemplated Transactions (the Equity
Acknowledgments). Notwithstanding the foregoing, the
Company may allow the acceleration of vesting of up to 775,000
Company Options (as adjusted for any stock splits, combinations,
recapitalizations and the like) held by officers of the Company
that were issued prior to the date of this Agreement pursuant to
the Company 2007 Plan and are identified on Part 2.9(d) of
the Company Disclosure Schedule, and such Company Options shall
be deemed not to be Non-Vesting Securities for
purposes of this Agreement.
5.14 Termination of
Agreements. Replidyne shall use commercially
reasonable efforts to terminate the agreements and employee
benefit plans set forth on Schedule 4 hereto.
5.15 Replidyne Lease. Replidyne
shall use commercially reasonable efforts to terminate, sublease
or otherwise assign to a third party its remaining obligations
under that certain Lease between Triumph 1450 LLC and Replidyne,
dated October 25, 2005, as amended (the Replidyne
Lease). The Parties agree that Replidynes
inability to complete any such termination, sublease or
assignment shall not constitute a breach of this
Section 5.15, provided that any future financial
obligations owed by Replidyne in respect of the Replidyne Lease
shall constitute a liability for purposes of the definition of
Net Assets.
A-51
5.16 Officer
Lock-up
Agreements. Replidyne and the Company shall
each use commercially reasonable efforts to cause its respective
officers to enter into
lock-up
agreements in favor of Replidyne and the Company pursuant to
which such officers would agree not to sell, transfer or
otherwise dispose of any securities of Replidyne or the Company
until the date that is 90 days after the closing of the
Merger. Such
lock-up
agreements shall be in substantially the same form of, and shall
be considered for purposes of this Agreement to be, Replidyne
Stockholder
Lock-up
Agreements and the Company Stockholder
Lock-up
Agreements, respectively.
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6.
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CONDITIONS
PRECEDENT TO OBLIGATIONS OF EACH PARTY
|
The obligations of each Party to effect the Merger and otherwise
consummate the transactions to be consummated at the Closing are
subject to the satisfaction or, to the extent permitted by
applicable law, the written waiver by each of the Parties, at or
prior to the Closing, of each of the following conditions:
6.1 Effectiveness of Registration
Statement. The
Form S-4
Registration Statement shall have become effective in accordance
with the provisions of the Securities Act, and shall not be
subject to any stop order or proceeding (or threatened
proceeding by the SEC) seeking a stop order with respect to the
Form S-4
Registration Statement.
6.2 No Restraints. No temporary
restraining order, preliminary or permanent injunction or other
order preventing the consummation of the Merger shall have been
issued by any court of competent jurisdiction or other
Governmental Body and remain in effect, and there shall not be
any Legal Requirement which has the effect of making the
consummation of the Merger illegal.
6.3 Stockholder Approval. This
Agreement shall have been duly adopted by the Required Company
Stockholder Vote, and the Replidyne Certificate of Amendment and
the issuance of shares of Replidyne Common Stock to the
stockholders of the Company pursuant to the terms of this
Agreement shall have been duly approved by the Required
Replidyne Stockholder Vote.
6.4 Governmental
Authorization. Any Governmental Authorization
or other Consent required to be obtained by any of the Parties
under any applicable antitrust or competition law or regulation
or other Legal Requirement shall have been obtained and shall
remain in full force and effect.
6.5 Listing. The Nasdaq Listing
Application shall have been conditionally approved, and
Replidyne shall have caused the shares of Replidyne Common Stock
being issued in the Merger to be conditionally approved for
listing on the Nasdaq Global Market, both subject only to
completion of the Closing and completion by Replidyne of the
Reverse Stock Split.
6.6 Regulatory Matters. Any
waiting period applicable to the consummation of the Merger
under the HSR Act or any material applicable foreign antitrust
requirements reasonably determined to apply to the Merger shall
have expired or been terminated, and there shall not be in
effect any voluntary agreement between Replidyne, Merger Sub or
the Company and the Federal Trade Commission, the Department of
Justice or any foreign Governmental Body pursuant to which such
Party has agreed not to consummate the Merger for any period of
time; provided, that neither the Company, on the one hand, nor
Replidyne on the other hand, shall enter into any such voluntary
agreement without the written consent of the other Party.
6.7 Legal Proceedings. There
shall not be pending any Legal Proceeding, and neither Replidyne
nor the Company shall have received any written communication
from any Governmental Body or any other third party in which
such Governmental Body or third party indicates a material
likelihood of commencing any Legal Proceeding or taking any
other action: (a) challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other
transactions contemplated by this Agreement; (b) relating
to the Merger or any of the other transactions contemplated by
this Agreement and seeking to obtain from the Company or
Replidyne any damages or other relief that may be material to
the Company or Replidyne, respectively; (c) seeking to
prohibit or limit in any material respect Replidynes
ability to vote, transfer, receive dividends with respect to or
otherwise exercise ownership rights with respect to the stock of
the Surviving Corporation; (d) that could materially and
adversely affect the right or ability of the Company or
Replidyne to own the assets or operate the business of the
Company; (e) seeking to compel any of the Company or
Replidyne or any Subsidiary of Replidyne to dispose of or hold
separate any material
A-52
assets as a result of the Merger or any of the other
transactions contemplated by this Agreement; or (f) seeking
to impose (or that could result in the imposition of) any
criminal sanctions or liability.
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7.
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ADDITIONAL
CONDITIONS PRECEDENT TO OBLIGATIONS OF REPLIDYNE AND MERGER
SUB
|
The obligations of Replidyne and Merger Sub to effect the Merger
and otherwise consummate the transactions to be consummated at
the Closing are subject to the satisfaction or the written
waiver by Replidyne, at or prior to the Closing, of each of the
following conditions:
7.1 Accuracy of
Representations. The representations and
warranties of the Company contained in this Agreement shall have
been true and correct as of the date of this Agreement and shall
be true and correct on and as of the Closing Date with the same
force and effect as if made on the Closing Date except
(A) in each case, or in the aggregate, where the failure to
be true and correct would not reasonably be expected to have a
Company Material Adverse Effect, or (B) for those
representations and warranties that address matters only as of a
particular date (which representations shall have been true and
correct, subject to the qualifications as set forth in the
preceding clause (A), as of such particular date) (it being
understood that, for purposes of determining the accuracy of
such representations and warranties, (i) all Company
Material Adverse Effect qualifications and other
qualifications based on the word material contained
in such representations and warranties shall be disregarded and
(ii) any update of or modification to the Company
Disclosure Schedule made or purported to have been made after
the date of this Agreement shall be disregarded).
7.2 Performance of Covenants. Each
of the covenants and obligations in this Agreement that the
Company is required to comply with or to perform at or prior to
the Closing shall have been complied with and performed by the
Company in all material respects.
7.3 Consents. All of the Consents
set forth on Part 2.20 of the Company Disclosure Schedule
shall have been obtained and shall be in full force and effect.
7.4 Agreements and Other
Documents. Replidyne shall have received the
following agreements and other documents, each of which shall be
in full force and effect:
(a) a certificate executed by the Chief Executive Officer
and Chief Financial Officer of the Company confirming that the
conditions set forth in Sections 7.1, 7.2, 7.3, 7.5 and 7.6
have been duly satisfied and certifying, as of immediately prior
to the Effective Time, (i) the number of Converting Company
Securities, (ii) the Company Share Conversion Factor (as
determined in accordance with the methodology as set forth in
Section 1.6(f)), and (iii) the following information
with respect to each holder of Converting Company Securities:
(A) such holders record address, (B) the number
of each of such securities and rights held by such holder and,
if applicable, the certificate numbers related thereto,
(C) the exercise price(s) of each of such holders
Company Options and Company Warrants, (D) the number of
shares of Replidyne Common Stock such holder is entitled to
receive pursuant to Section 1.6(a), (E) the amount of
cash such holder is entitled to receive pursuant to
Section 1.6(c), and (F) the number of shares of
Replidyne Common Stock into which each of such holders
Company Options and Company Warrants are convertible pursuant to
Sections 5.5 and 1.6(d) together with the adjusted exercise
price with respect thereto.
(b) certificates of good standing (or equivalent
documentation) of the Company in its jurisdiction of
organization and the various foreign jurisdictions in which it
is qualified, certified charter documents, certificates as to
the incumbency of officers and the adoption of resolutions of
the board of directors of the Company authorizing the execution
of this Agreement and the consummation of the Contemplated
Transactions to be performed by the Company;
(c) a written opinion dated as of the Closing Date from
Fredrikson & Byron, P.A., addressed to Replidyne,
regarding the matters set forth on
Exhibit C; and
(d) a written opinion dated as of the Closing Date from
Cooley Godward Kronish LLP, addressed to Replidyne, to the
effect that the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of
Section 368(a) of the Code (it being agreed that Replidyne
and the Company shall each provide
A-53
reasonable cooperation, including making reasonable and
customary representations, to Cooley Godward Kronish LLP to
enable it to render such opinion and that counsel shall be
entitled to rely on such representations and such assumptions as
they deem appropriate in rendering such opinion).
7.5 No Material Adverse
Effect. Since the date of this Agreement,
there shall not have occurred and be continuing any Company
Material Adverse Effect, and no event shall have occurred or
circumstance shall exist that, in combination with any other
events or circumstances, would reasonably be expected to have or
result in a Company Material Adverse Effect.
7.6 Accelerating Equity
Agreements. The Company shall have received
Equity Acknowledgements in accordance with Section 5.13
relating to (i) any Non-Vesting Securities held by any
director or officer of the Company and (ii) not less than
80% of the Non-Vesting Securities held by any Person that is not
a director or officer of the Company.
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8.
|
ADDITIONAL
CONDITIONS PRECEDENT TO OBLIGATION OF THE COMPANY
|
The obligations of the Company to effect the Merger and
otherwise consummate the transactions to be consummated at the
Closing are subject to the satisfaction or the written waiver by
the Company, at or prior to the Closing, of each of the
following conditions:
8.1 Accuracy of Representations.
The representations and warranties of Replidyne
and Merger Sub contained in this Agreement shall have been true
and correct as of the date of this Agreement and shall be true
and correct on and as of the Closing Date with the same force
and effect as if made on the Closing Date except (A) in
each case, or in the aggregate, where the failure to be true and
correct would not reasonably be expected to have a Replidyne
Material Adverse Effect, or (B) for those representations
and warranties which address matters only as of a particular
date (which representations shall have been true and correct,
subject to the qualifications as set forth in the preceding
clause (A), as of such particular date) (it being understood
that, for purposes of determining the accuracy of such
representations and warranties, (i) all Replidyne
Material Adverse Effect qualifications and other
qualifications based on the word material contained
in such representations and warranties shall be disregarded and
(ii) any update of or modification to the Replidyne
Disclosure Schedule made or purported to have been made after
the date of this Agreement shall be disregarded, except that any
update or modification that relates to (x) the termination
of any Replidyne Contract or (y) any action that Replidyne
deems appropriate in order to divest itself, whether by
acquisition, liquidation or otherwise, of its pre-clinical
programs and other non-cash assets shall not be so disregarded
and shall act to update and modify the applicable representation
or warranty).
8.2 Performance of Covenants. All
of the covenants and obligations in this Agreement that
Replidyne or Merger Sub is required to comply with or to perform
at or prior to the Closing shall have been complied with and
performed in all material respects.
8.3 Consents. All the Consents set
forth on Part 8.3 of the Replidyne Disclosure Schedule
shall have been obtained and shall be in full force and effect.
8.4 Documents. The Company shall
have received the following documents:
(a) a certificate executed by the Chief Executive Officer
and Chief Financial Officer of Replidyne confirming that the
conditions set forth in Sections 8.1, 8.2, 8.3, 8.6 and 8.7
have been duly satisfied and certifying, as of immediately prior
to the Effective Time, the number of Surviving Replidyne
Securities; and
(b) certificates of good standing of each of Replidyne and
Merger Sub in its jurisdiction of organization and the various
foreign jurisdictions in which it is qualified, certified
charter documents, certificates as to the incumbency of officers
and the adoption of resolutions of its board of directors
authorizing the execution of this Agreement and the consummation
of the Contemplated Transactions to be performed by Replidyne
and Merger Sub hereunder.
(c) the Company shall have received the opinion dated as of
the Closing Date of Fredrikson & Byron, P.A.,
addressed to the Company, to the effect that the Merger will be
treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code (it being
agreed that Replidyne and the Company shall each provide
reasonable cooperation, including making reasonable and
customary representations, to
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Fredrikson & Byron, P.A. to enable them to render such
opinion and that counsel shall be entitled to rely on such
representations and such assumptions as they deem appropriate in
rendering such opinion).
8.5 Certificate of Amendment. The
Replidyne Certificate of Amendment shall have become effective
under the DGCL.
8.6 No Material Adverse
Effect. Since the date of this Agreement,
there shall not have occurred and be continuing any Replidyne
Material Adverse Effect, and no event shall have occurred or
circumstance shall exist that, in combination with any other
events or circumstances, would reasonably be expected to have or
result in a Replidyne Material Adverse Effect.
8.7 Termination of Certain
Agreements. Replidyne shall have taken all
action necessary to terminate the Replidyne Contracts and
Encumbrances set forth on Schedule 5 and provided
confirmation thereof reasonably acceptable to the Company.
9.1 Termination. This Agreement
may be terminated prior to the Effective Time (whether (except
as set forth below) before or after adoption of this Agreement
by the Companys stockholders and whether (except as set
forth below) before or after approval of this Agreement and the
Replidyne Certificate of Amendment by Replidynes
stockholders):
(a) by mutual written consent duly authorized by the boards
of directors of Replidyne and the Company;
(b) by either Replidyne or the Company if the Merger shall
not have been consummated by April 30, 2009; provided,
however, that a Party shall not be permitted to terminate this
Agreement under this Section 9.1(b) if the failure to
consummate the Merger by such date is attributable to the
failure on the part of such Party to perform any covenant or
obligation in this Agreement required to be performed by such
Party at or prior to the Effective Time;
(c) by either Replidyne or the Company if a court of
competent jurisdiction or other Governmental Body shall have
issued a final and non-appealable order, decree or ruling, or
shall have taken any other final and non-appealable action,
having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger;
(d) by either Replidyne or the Company if (i) the
Replidyne Stockholders Meeting (including any adjournments
and postponements thereof) shall have been held and the
stockholders of Replidyne shall have taken a final vote to
approve (A) the Replidyne Certificate of Amendment and
(B) the issuance of shares of Replidyne Common Stock in the
Merger, and (ii) either or both of the Replidyne
Certificate of Amendment and the issuance of Replidyne Common
Stock pursuant to the Merger shall not have been approved at the
Replidyne Stockholders Meeting (and shall not have been
approved at any adjournment or postponement thereof) by the
applicable Required Replidyne Stockholder Vote;
(e) by either Replidyne or the Company if (i) the
Company Stockholders Meeting (including any adjournments
and postponements thereof) shall have been held and completed
and the stockholders of the Company shall have taken a final
vote to approve the adoption of this Agreement (including the
consummation of the Merger) and (ii) the adoption of this
Agreement (including the consummation of the Merger) shall not
have been approved at the Company Stockholders Meeting by
the Required Company Stockholder Vote;
(f) by either Replidyne or the Company if (i) the
Replidyne Board Recommendation has been withheld, withdrawn,
amended or modified in accordance with Section 5.3(c) or
(ii) Replidyne enters into a letter of intent, memorandum
of understanding or definitive agreement with respect to any
Superior Offer;
(g) by either Replidyne or the Company if (i) the
Company Board Recommendation has been withheld, withdrawn,
amended or modified in accordance with Section 5.2(c) or
(ii) the Company enters into a letter of intent, memorandum
of understanding or definitive agreement with respect to any
Superior Offer;
(h) by the Company, if: (i) any of the representations
and warranties of Replidyne or Merger Sub set forth in this
Agreement shall have been inaccurate as of the date of this
Agreement or shall have become inaccurate as of a date
subsequent to the date of this Agreement (as if made on such
subsequent date), such that the condition set forth in
Section 8.1 would not be satisfied; or (ii) any of
Replidynes or Merger Subs covenants or obligations
set forth in
A-55
this Agreement shall have been breached such that the condition
set forth in Section 8.2 would not be satisfied; provided,
that, if an inaccuracy in any of Replidynes or Merger
Subs representations and warranties as of date subsequent
to the date of this Agreement or breach of a covenant or
obligation by Replidyne or Merger Sub is curable by Replidyne or
Merger Sub, and Replidyne or Merger Sub is continuing to
exercise commercially reasonable efforts to cure such inaccuracy
or breach, then the Company may not terminate this Agreement
pursuant to this Section 9.1(h) as a result of such
particular inaccuracy or breach unless such inaccuracy or breach
shall remain uncured for a period of 30 days commencing on
the date that the Company gives Replidyne notice of such
inaccuracy or breach; or
(i) by Replidyne, if: (i) any of the representations
and warranties of the Company set forth in this Agreement shall
have been inaccurate as of the date of this Agreement or shall
have become inaccurate as of a date subsequent to the date of
this Agreement (as if made on such subsequent date), such that
the condition set forth in Section 7.1 would not be
satisfied; or (ii) any of the Companys covenants or
obligations set forth in this Agreement shall have been breached
such that the condition set forth in Section 7.2 would not
be satisfied; provided, that, if an inaccuracy in any of the
Companys representations and warranties as of date
subsequent to the date of this Agreement or breach of a covenant
or obligation by the Company is curable by the Company, and the
Company is continuing to exercise commercially reasonable
efforts to cure such inaccuracy or breach, then Replidyne may
not terminate this Agreement pursuant to this
Section 9.1(i) as a result of such particular inaccuracy or
breach unless such inaccuracy or breach shall remain uncured for
a period of 30 days commencing on the date that Replidyne
gives the Company notice of such inaccuracy or breach.
9.2 Effect of Termination. In the
event of the termination of this Agreement as provided in
Section 9.1, this Agreement shall be of no further force or
effect; provided, however, that (i) this Section 9.2,
Section 9.3, and Section 10 shall survive the
termination of this Agreement and shall remain in full force and
effect, and (ii) the termination of this Agreement shall
not relieve any Party from any liability for any material breach
of any representation, warranty, covenant, obligation or other
provision contained in this Agreement.
9.3 Expenses; Termination Fees.
(a) Except as set forth in this Section 9.3, all fees
and expenses incurred in connection with this Agreement and the
Contemplated Transactions shall be paid by the Party incurring
such expenses, whether or not the Merger is consummated.
Notwithstanding the foregoing, the Parties shall each pay 50% of
the S-4
Expenses.
(b) If this Agreement is terminated (i) by Replidyne
or the Company pursuant to Section 9.1(d) and (A) at
any time before the Replidyne Stockholders Meeting an
Acquisition Proposal with respect to Replidyne shall have been
publicly announced, disclosed or otherwise communicated to the
board of directors or stockholders of Replidyne and
(B) within 12 months after the termination of this
Agreement, Replidyne enters into any agreement for an
Acquisition Transaction contemplated by such Acquisition
Proposal or consummates an Acquisition Transaction contemplated
by such Acquisition Proposal, or (ii) by Replidyne or the
Company pursuant to Section 9.1(f), in either case, without
duplication, Replidyne shall, within 24 hours of the
earlier of entering into such agreement or such consummation, in
the case of (i), or termination, in the case of (ii), pay to the
Company a non-refundable fee in an amount equal to $1,500,000
and reimburse the Company for all actual out-of-pocket legal,
accounting and investment advisory fees paid or payable by the
Company in connection with this Agreement and the Contemplated
Transactions.
(c) If this Agreement is terminated (i) by Replidyne
or the Company pursuant to Section 9.1(e) and (A) at
any time before the Company Stockholders Meeting an
Acquisition Proposal with respect to the Company shall have been
publicly announced, disclosed or otherwise communicated to the
board of directors or stockholders of the Company and
(B) within 12 months after the termination of this
Agreement, the Company enters into any agreement for an
Acquisition Transaction contemplated by such Acquisition
Proposal or consummates an Acquisition Transaction contemplated
by such Acquisition Proposal, or (ii) by Replidyne or the
Company pursuant to Section 9.1(g), in either case, without
duplication, the Company shall, within 24 hours after the
earlier of entering into such agreement or such consummation, in
the case of (i), or termination, in the case of (ii), pay to
Replidyne a non-refundable fee in an amount equal to $1,500,000
and reimburse Replidyne for all actual out-of-pocket legal,
accounting and investment advisory fees paid or payable by
Replidyne in connection with this Agreement and the Contemplated
Transactions.
A-56
(d) If either Party fails to pay when due any amount
payable by such Party under Section 9.3, then (i) such
Party shall reimburse the other Party for reasonable costs and
expenses (including reasonable fees and disbursements of
counsel) incurred in connection with the collection of such
overdue amount and the enforcement by the other Party of its
rights under this Section 9.3, and (ii) such Party
shall pay to the other Party interest on such overdue amount
(for the period commencing as of the date such overdue amount
was originally required to be paid and ending on the date such
overdue amount is actually paid to the other Party in full) at a
rate per annum equal to the prime rate (as announced
by Bank of America or any successor thereto) in effect on the
date such overdue amount was originally required to be paid.
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10.
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MISCELLANEOUS
PROVISIONS
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10.1 Non-Survival of Representations and
Warranties. The representations and
warranties of the Company, Merger Sub and Replidyne contained in
this Agreement or any certificate or instrument delivered
pursuant to this Agreement shall terminate at the Effective Time.
10.2 Amendment. This Agreement may
be amended with the approval of the respective boards of
directors (or duly appointed committees thereof) of the Company
and Replidyne at any time (whether before or after the adoption
of this Agreement by the stockholders of the Company or before
or after the approval of the Replidyne Certificate of Amendment
or the issuance of shares of Replidyne Common Stock to the
stockholders of the Company pursuant to the terms of this
Agreement by the stockholders of Replidyne); provided, however,
that after any such adoption of this Agreement by the
stockholders of the Company, no amendment shall be made that by
law requires further approval of the stockholders of the Company
without the further approval of such stockholders. This
Agreement may not be amended except by an instrument in writing
signed on behalf of each of the Company and Replidyne.
10.3 Waiver.
(a) No failure on the part of any Party to exercise any
power, right, privilege or remedy under this Agreement, and no
delay on the part of any Party in exercising any power, right,
privilege or remedy under this Agreement, shall operate as a
waiver of such power, right, privilege or remedy; and no single
or partial exercise of any such power, right, privilege or
remedy shall preclude any other or further exercise thereof or
of any other power, right, privilege or remedy.
(b) No Party shall be deemed to have waived any claim
arising out of this Agreement, or any power, right, privilege or
remedy under this Agreement, unless the waiver of such claim,
power, right, privilege or remedy is expressly set forth in a
written instrument duly executed and delivered on behalf of such
Party; and any such waiver shall not be applicable or have any
effect except in the specific instance in which it is given.
10.4 Entire Agreement; Counterparts; Exchanges by
Facsimile. This Agreement and the other
agreements referred to in this Agreement constitute the entire
agreement and supersede all prior agreements and understandings,
both written and oral, among or between any of the Parties with
respect to the subject matter hereof and thereof; provided,
however, that the Confidentiality Agreement shall not be
superseded and shall remain in full force and effect in
accordance with its terms. This Agreement may be executed in
several counterparts, each of which shall be deemed an original
and all of which shall constitute one and the same instrument.
The exchange of a fully executed Agreement (in counterparts or
otherwise) by all Parties by facsimile or electronic
transmission shall be sufficient to bind the Parties to the
terms and conditions of this Agreement.
10.5 Applicable Law;
Jurisdiction. This Agreement shall be
governed by, and construed in accordance with, the laws of the
State of Delaware, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws. Each of
the Parties to this Agreement (a) consents to submit itself
to the personal jurisdiction of the state and federal courts
located in the State of Delaware in any action or proceeding
arising out of or relating to this Agreement or any of the
Contemplated Transactions, (b) agrees that all claims in
respect of such action or proceeding may be heard and determined
in any such court, (c) agrees that it shall not attempt to
deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, and (d) agrees not
to bring any action or proceeding (including counter-claims)
arising out of or relating to this Agreement or any of the
Contemplated Transactions in any other court. Each of the
Parties hereto waives any defense of inconvenient forum to the
A-57
maintenance of any action or proceeding so brought and waives
any bond, surety or other security that might be required of any
other Party with respect thereto. Any Party hereto may make
service on another Party by sending or delivering a copy of the
process to the Party to be served at the address and in the
manner provided for the giving of notices in Section 10.8.
Nothing in this Section 10.5, however, shall affect the
right of any Party to serve legal process in any other manner
permitted by law.
10.6 Attorneys Fees. In any
action at law or suit in equity to enforce this Agreement or the
rights of any of the Parties under this Agreement, the
prevailing Party in such action or suit shall be entitled to
receive a reasonable sum for its attorneys fees and all
other reasonable costs and expenses incurred in such action or
suit.
10.7 Assignability; No Third Party
Beneficiaries. This Agreement shall be
binding upon, and shall be enforceable by and inure solely to
the benefit of, the Parties hereto and their respective
successors and assigns; provided, however, that neither this
Agreement nor any of a Partys rights or obligations
hereunder may be assigned or delegated by such Party without the
prior written consent of the other Party, and any attempted
assignment or delegation of this Agreement or any of such rights
or obligations by such Party without the other Partys
prior written consent shall be void and of no effect. Nothing in
this Agreement, express or implied, is intended to or shall
confer upon any Person (other than: (a) the Parties hereto;
(b) rights pursuant to Section 1, and (c) the
D&O Indemnified Parties to the extent of their respective
rights pursuant to Section 5.6) any right, benefit or
remedy of any nature whatsoever under or by reason of this
Agreement.
10.8 Notices. Any notice or other
communication required or permitted to be delivered to any Party
under this Agreement shall be in writing and shall be deemed
properly delivered, given and received when delivered by hand,
by registered mail, by courier or express delivery service or by
facsimile to the address or facsimile telephone number set forth
beneath the name of such Party below (or to such other address
or facsimile telephone number as such Party shall have specified
in a written notice given to the other Parties hereto):
If to the Company, to:
Cardiovascular Systems, Inc.
651 Campus Drive
St. Paul, MN
55112-3495
Attention: Chief Executive Officer
Facsimile:
651-259-1696
with a copy to:
Fredrikson & Byron, P.A.
200 South Sixth Street
Suite 4000
Minneapolis, MN 55402
Attention: Robert K. Ranum
Facsimile:
612-492-7077
If to Replidyne or Replidyne Merger Sub, to:
Replidyne, Inc.
1450 Infinite Drive,
Louisville, CO 80027
Attention: Chief Financial Officer
Facsimile:
303-996-5599
with a copy to:
Cooley Godward Kronish LLP
380 Interlocken Crescent, Suite 900
Broomfield, CO
80021-8023
Attention: James C.T. Linfield
Facsimile:
720-566-4099
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10.9 Cooperation. Each Party
agrees to cooperate fully with the other Party and to execute
and deliver such further documents, certificates, agreements and
instruments and to take such other actions as may be reasonably
requested by the other Party to evidence or reflect the
Contemplated Transactions and to carry out the intent and
purposes of this Agreement.
10.10 Severability. Any term or
provision of this Agreement that is invalid or unenforceable in
any situation in any jurisdiction shall not affect the validity
or enforceability of the remaining terms and provisions of this
Agreement or the validity or enforceability of the offending
term or provision in any other situation or in any other
jurisdiction. If a final judgment of a court of competent
jurisdiction declares that any term or provision of this
Agreement is invalid or unenforceable, the Parties hereto agree
that the court making such determination shall have the power to
limit such term or provision, to delete specific words or
phrases or to replace such term or provision with a term or
provision that is valid and enforceable and that comes closest
to expressing the intention of the invalid or unenforceable term
or provision, and this Agreement shall be valid and enforceable
as so modified. In the event such court does not exercise the
power granted to it in the prior sentence, the Parties hereto
agree to replace such invalid or unenforceable term or provision
with a valid and enforceable term or provision that will
achieve, to the extent possible, the economic, business and
other purposes of such invalid or unenforceable term or
provision.
10.11 Other Remedies; Specific
Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a
Party will be deemed cumulative with and not exclusive of any
other remedy conferred hereby, or by law or equity upon such
Party, and the exercise by a Party of any one remedy will not
preclude the exercise of any other remedy. The Parties hereto
agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the Parties shall be entitled to
seek an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having
jurisdiction, this being the addition to any other remedy to
which they are entitled at law or in equity.
10.12 Construction.
(a) For purposes of this Agreement, whenever the context
requires: the singular number shall include the plural, and vice
versa; the masculine gender shall include the feminine and
neuter genders; the feminine gender shall include the masculine
and neuter genders; and the neuter gender shall include
masculine and feminine genders.
(b) The Parties hereto agree that any rule of construction
to the effect that ambiguities are to be resolved against the
drafting Party shall not be applied in the construction or
interpretation of this Agreement.
(c) As used in this Agreement, the words
include and including, and variations
thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words without
limitation.
(d) Except as otherwise indicated, all references in this
Agreement to Sections, Exhibits and
Schedules are intended to refer to Sections of this
Agreement and Exhibits and Schedules to this Agreement.
(e) The bold-faced headings contained in this Agreement are
for convenience of reference only, shall not be deemed to be a
part of this Agreement and shall not be referred to in
connection with the construction or interpretation of this
Agreement.
[Remainder
of page intentionally left blank]
A-59
IN WITNESS WHEREOF, the Parties have caused this Agreement and
Plan of Merger and Reorganization to be executed as of the date
first above written.
REPLIDYNE, INC.
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By:
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/s/ Kenneth
J. Collins
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Name: Kenneth J. Collins
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Title:
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President and Chief Executive Officer
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RESPONDER MERGER SUB, INC.
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By:
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/s/ Kenneth
J. Collins
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Name: Kenneth J. Collins
CARDIOVASCULAR SYSTEMS, INC.
Name: David Martin
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Title:
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Chief Executive Officer
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[SIGNATURE
PAGE TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION]
A-60
EXHIBITS AND
SCHEDULES
Exhibit A Defined Terms
Exhibit B Form of Replidyne Certificate of
Amendment
Exhibit C Form of Fredrikson &
Byron Opinion
Schedule 1A Company Stockholders
Delivering a Company Stockholder Voting Agreement
Schedule 1B Company Stockholders
Delivering a Company Stockholder
Lock-up
Agreement
Schedule 2A Replidyne Stockholders
Delivering a Replidyne Stockholder Voting Agreement
Schedule 2B Replidyne Stockholders
Delivering a Replidyne Stockholder
Lock-up
Agreement
Schedule 3A Board of Directors of Replidyne
Schedule 3B Board of Directors of
Surviving Corporation
Schedule 3C Officers of Replidyne
Schedule 4 Replidyne Agreements and
Employee Benefit Plans that Replidyne Will Use Commercially
Reasonable Efforts to Terminate
Schedule 5 Replidyne Agreements and
Encumbrances to be Terminated
Company Disclosure Schedule
Replidyne Disclosure Schedule
A-61
EXHIBIT A
CERTAIN
DEFINITIONS
For purposes of the Agreement (including this
Exhibit A):
Acquisition Inquiry shall mean, with
respect to a Party, an inquiry, indication of interest or
request for information (other than an inquiry, indication of
interest or request for information made or submitted by the
Company, on the one hand or Replidyne, on the other hand, to the
other Party) that could reasonably be expected to lead to an
Acquisition Proposal with such Party; provided however, that any
inquiry, indication of interest or request for information
related to the matters described on Part 4.2 of the
Replidyne Disclosure Schedule or Part 4.3 of the Company
Disclosure Schedule or pursuant to the provisions of
Section 4.2(c) and any transactions undertaken, continued
or consummated in connection with those matters will be deemed
not to be an Acquisition Inquiry.
Acquisition Proposal shall mean, with
respect to a Party, any offer or proposal (other than an offer
or proposal made or submitted by the Company, on the one hand or
Replidyne, on the other hand to the other Party) contemplating
or otherwise relating to any Acquisition Transaction with such
Party; provided however, that any offer or proposal related to
the matters described on Part 4.2 of the Replidyne
Disclosure Schedule or Part 4.3 of the Company Disclosure
Schedule or pursuant to the provisions of Section 4.2(c)
and any transactions undertaken, continued or consummated in
connection with those matters will be deemed not to be an
Acquisition Proposal.
Acquisition Transaction shall mean any
transaction or series of transactions involving:
(a) any merger, consolidation, amalgamation, share
exchange, business combination, issuance of securities,
financing transaction, acquisition of securities,
reorganization, recapitalization, tender offer, exchange offer
or other similar transaction: (i) in which a Party is a
constituent corporation; (ii) in which a Person or
group (as defined in the Exchange Act and the rules
promulgated thereunder) of Persons acquires beneficial or record
ownership of securities representing more than 1% of the
outstanding securities of any class of voting securities of a
Party or any of its Subsidiaries (provided that this shall not
apply to Replidyne); or (iii) in which a Party or any of
its Subsidiaries issues any debt securities, incurs any
indebtedness for borrowed money or issues securities
representing more than 1% of the outstanding securities of any
class of voting securities of such Party or any of its
Subsidiaries (other than issuances of Company Common Stock or
Company Preferred Stock or Replidyne Common Stock pursuant to
the exercise of Company Options, Company Warrants, Replidyne
Options or Replidyne Warrants, respectively);
(b) in the case of the Company, any sale, lease, exchange,
transfer, license, acquisition or disposition of any business or
businesses or assets that constitute or account for: (i) 1%
or more of the consolidated net revenues of the Company and its
Subsidiaries, taken as a whole, consolidated net income of the
Company and its Subsidiaries, taken as a whole, or consolidated
book value of the assets of the Company and its Subsidiaries,
taken as a whole; or (ii) 1% or more of the fair market
value of the assets of the Company and its Subsidiaries, taken
as a whole; or
(c) any liquidation or dissolution of a Party (other than
Replidyne);
provided, however, that both (i) any Qualified Financing
and (ii) any transaction or series of transactions
involving circumstances set forth in clauses (a)-(c) of this
definition that relate to the matters described on Part 4.2
of the Replidyne Disclosure Schedule or Part 4.3 of the
Company Disclosure Schedule or pursuant to the provisions of
Section 4.2(c) and any transactions undertaken, continued
or consummated in connection with those matters will be deemed
not to be an Acquisition Transaction.
Affiliate shall have the meaning set
forth in
Rule 12b-2
under the Securities Act.
Agreement shall mean the Agreement and
Plan of Merger and Reorganization to which this
Exhibit A is attached, as it may be amended from
time to time.
Business Day shall mean any day other
than a day on which banks in the State of Colorado or Minnesota
are authorized or obligated to be closed.
COBRA shall mean the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended.
Code shall mean the Internal Revenue
Code of 1986, as amended.
A-62
Company Common Stock shall mean the
Common Stock, no par value per share, of the Company.
Company Contract shall mean any
Contract: (a) to which the Company is a Party; (b) by
which any of the Company or any Company IP Rights or any other
asset of the Company is or may become bound or under which the
Company has, or may become subject to, any obligation; or
(c) under which the Company has or may acquire any right or
interest.
Company IP Rights shall mean
(a) all Intellectual Property Rights in the Company
Products and (b) all Intellectual Property Rights owned,
licensed, or Controlled by the Company that are necessary or
used in the Companys business as presently conducted.
Company IP Rights Agreement shall mean
any Contract governing, related or pertaining to any Company IP
Rights.
Company Material Adverse Effect shall
mean any effect, change, event, circumstance or development
(each such item, an Effect) that, considered
together with all other Effects that had occurred prior to the
date of determination of the occurrence of the Company Material
Adverse Effect, is or would reasonably be expected to be or to
become materially adverse to, or has or would reasonably be
expected to have or result in a material adverse effect on:
(a) the business, financial condition, capitalization,
assets, operations or financial performance or prospects of the
Company; or (b) the ability of the Company to consummate
the Merger or any of the other Contemplated Transactions or to
perform any of its covenants or obligations under the Agreement;
provided, however, that none of the following shall be deemed in
themselves, either alone or in combination, to constitute, and
none of the following shall be taken into account in determining
whether there has been or will be a Company Material Adverse
Effect: (i) any Effect on the business, financial
condition, capitalization, assets, operations or financial
performance or prospects of the Company caused by, related to or
resulting from the Contemplated Transactions or the announcement
or pendency thereof; (ii) any failure by the Company to
meet internal revenue projections or forecasts for any period;
provided that the actual results of the Company do not deviate
by more than 20% from the results anticipated by such
projections or forecasts; (iii) any adverse change, effect
or occurrence attributable to the United States economy as a
whole, provided that such change, effect or occurrence does not
affect the Company in a disproportionate manner; (iv) any
act or threat of terrorism or war anywhere in the world, any
armed hostilities or terrorist activities anywhere in the world,
any threat or escalation or armed hostilities or terrorist
activities anywhere in the world or any governmental or other
response or reaction to any of the foregoing; or (v) any
change in accounting requirements or principles or any change in
applicable accounting laws, rules or regulations or the
interpretation thereof. For the avoidance of doubt, (i) the
entrance of any settlement, arbitration award or judgment that
results or would result in any payment in excess of $5,000,000
by the Company, or (ii) the granting of any injunctive
relief against the Company that has or would reasonably be
expected to have or result in an adverse effect on the business,
financial condition, capitalization, assets, operations or
financial performance or prospects of the Company, in connection
in each case with any Legal Proceeding to which the Company is a
party, shall constitute a Company Material Adverse Effect.
Company Options shall mean options to
purchase shares of Company Common Stock issued by the Company.
Company Preferred Stock shall mean
Company Series A Preferred Stock, Company
Series A-1
Preferred Stock and Company Series B Preferred Stock.
Company Products shall mean all
products being manufactured, distributed or developed by or on
behalf of the Company.
Company Registered IP shall mean all
Company IP Rights that are registered, filed or issued under the
authority of, with or by any Governmental Body, including all
patents, registered copyrights and registered trademarks and all
applications for any of the foregoing.
Company Related Party shall mean
(i) each stockholder of the Company that is the holder of
greater than 5% of any class of the Companys capital
stock; (ii) each individual who is an officer or director
of the Company; (iii) each member of the immediate family
of each of the individuals referred to in clause (i) and
(ii) above; and (iv) any trust or other Entity (other
than the Company) in which any one of the Persons referred to in
clauses (i),
A-63
(ii) or (iii) above holds (or in which more than one
of such Persons collectively hold), beneficially or otherwise, a
material voting, proprietary, equity or other financial interest.
Company Series A Preferred Stock
shall mean shares of Companys Series A Convertible
Preferred Stock, no par value per share.
Company
Series A-1
Preferred Stock shall mean shares of
Companys
Series A-1
Convertible Preferred Stock, no par value per share.
Company Series B Preferred Stock
shall mean shares of Companys Series B Convertible
Preferred Stock, no par value per share.
Company Stock Option Plans shall mean,
collectively, the 1991 Stock Option Plan, the 2003 Stock Option
Plan and the 2007 Equity Incentive Plan of the Company.
Company Warrants shall mean warrants
to purchase Company Common Stock or Company Preferred Stock.
Confidentiality Agreement shall mean
the Mutual Non-Disclosure Agreement dated August 22, 2008,
between the Company and Replidyne.
Consent shall mean any approval,
consent, ratification, permission, waiver or authorization
(including any Governmental Authorization).
Contemplated Transactions shall mean
the Merger and the other transactions and actions contemplated
by the Agreement.
Contract shall, with respect to any
Person, mean any written, oral or other agreement, contract,
subcontract, lease (whether real or personal property),
mortgage, understanding, arrangement, instrument, note, option,
warranty, purchase order, license, sublicense, insurance policy,
benefit plan or legally binding commitment or undertaking of any
nature to which such Person is a party or by which such Person
or any of its assets are bound or affected under applicable law.
Controlled means, with respect to any
item of Intellectual Property or Intellectual Property Right,
that a Party owns or has a license to such item or right and has
the ability to disclose such item or grant to the other Party
access to or a license or sublicense under such item or right as
provided for in this Agreement without violating the terms of
any agreement or other arrangement with any third party in
existence at the time of such disclosure or grant, as applicable.
DGCL shall mean the General
Corporation Law of the State of Delaware.
Easton means, collectively, Easton
Hunt Capital Partners, L.P. and Easton Capital Partners, L.P.
Encumbrance shall mean any lien,
pledge, hypothecation, charge, mortgage, security interest,
encumbrance, claim, infringement, interference, option, right of
first refusal, preemptive right, community property interest or
restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any
security or other asset, any restriction on the receipt of any
income derived from any asset, any restriction on the use of any
asset and any restriction on the possession, exercise or
transfer of any other attribute of ownership of any asset) other
than (a) mechanics, materialmens and similar
liens, (b) liens arising under workers compensation,
unemployment insurance and similar legislation, and
(c) liens on goods in transit incurred pursuant to
documentary letters of credit, in each case arising in the
Ordinary Course of Business.
Entity shall mean any corporation
(including any non-profit corporation), partnership (including
any general partnership, limited partnership or limited
liability partnership), joint venture, estate, trust, company
(including any company limited by shares, limited liability
company or joint stock company), firm, society or other
enterprise, association, organization or entity.
Environmental Law shall mean any
federal, state, local or foreign Legal Requirement relating to
pollution or protection of human health or the environment
(including ambient air, surface water, ground water, land
surface or subsurface strata), including any law or regulation
relating to emissions, discharges, releases or threatened
releases
A-64
of Materials of Environmental Concern, or otherwise relating to
the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of
Environmental Concern.
ERISA shall mean the Employee
Retirement Income Security Act of 1974, as amended.
Exchange Act shall mean the Securities
Exchange Act of 1934, as amended.
FMLA shall mean the Family Medical
Leave Act of 1993, as amended.
Form S-4
Registration Statement shall mean the registration
statement on
Form S-4
to be filed with the SEC by Replidyne in connection with
issuance of Replidyne Common Stock pursuant to the Merger, as
said registration statement may be amended prior to the time it
is declared effective by the SEC.
Governmental Authorization shall mean
any: (a) permit, license, certificate, franchise,
permission, variance, exceptions, orders, clearance,
registration, qualification or authorization issued, granted,
given or otherwise made available by or under the authority of
any Governmental Body or pursuant to any Legal Requirement; or
(b) right under any Contract with any Governmental Body.
Governmental Body shall mean any:
(a) nation, state, commonwealth, province, territory,
county, municipality, district or other jurisdiction of any
nature; (b) federal, state, local, municipal, foreign or
other government; (c) governmental or quasi-governmental
authority of any nature (including any governmental division,
department, agency, commission, instrumentality, official,
ministry, fund, foundation, center, organization, unit, body or
Entity and any court or other tribunal, and for the avoidance of
doubt, any Taxing authority); or (d) self-regulatory
organization (including the Nasdaq Global Market).
HSR Act shall mean the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
Intellectual Property shall mean and
includes all software (in any form including source code and
executable or object code), algorithms, marks (including trade
dress, brand names, logos, and source identifiers), URLs, web
sites, works of authorship, formulae, chemical compositions or
structures, assay components, biological materials, cell lines,
clinical data, inventions (whether or not patentable), know-how,
methods, processes, protocols, specifications, techniques, and
other forms of technology (whether or not embodied in any
tangible form and including all tangible embodiments of the
foregoing, such as laboratory notebooks, samples, studies and
summaries).
Intellectual Property Rights shall
mean and includes all rights of the following types, which may
exist or be created under the laws of any jurisdiction in the
world: (a) patents, patent applications, including
provisional applications, statutory invention registrations,
invention disclosures, (b) trademarks and rights in service
marks, trade names, domain names, URLs, trade dress, logos and
other source identifiers, (c) rights associated with works
of authorship, including copyrights, moral rights, and mask
works, (d) trade secret rights, (e) other proprietary
rights in Intellectual Property of every kind, and (f) all
registrations, renewals, extensions, continuations, divisions,
or reissues of and applications for, any of the rights referred
to in clauses (a) through (f) above.
IRS shall mean the United States
Internal Revenue Service.
Joint Proxy Statement/Prospectus shall
mean the joint proxy statement/prospectus to be sent to the
stockholders of Replidyne in connection with the Replidyne
Stockholders Meeting and the stockholders of the Company
in connection with the Company Stockholders Meeting.
Key Employee shall mean an officer of
the Company or Replidyne, as applicable, or any employee that
reports directly to the board of directors or chief executive
officer of the Company or Replidyne, as applicable.
Knowledge shall mean, with respect to
an individual, that such individual is actually aware of the
relevant fact or such individual would reasonably be expected to
know such fact in the ordinary course of the performance of the
individuals employee or professional responsibility. Any
Person that is an Entity shall have Knowledge if any officer or
director of such Person as of the date such knowledge is imputed
has Knowledge of such fact or other matter.
Legal Proceeding shall mean any
action, suit, litigation, arbitration, proceeding (including any
civil, criminal, administrative, investigative or appellate
proceeding), hearing, inquiry, audit, examination or
A-65
investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental
Body or any arbitrator or arbitration panel.
Legal Requirement shall mean any
federal, state, foreign, material local or municipal or other
law, statute, constitution, principle of common law, resolution,
ordinance, code, edict, decree, rule, regulation, ruling or
requirement issued, enacted, adopted, promulgated, implemented
or otherwise put into effect by or under the authority of any
Governmental Body (or under the authority of the Nasdaq Global
Market or the Financial Industry Regulatory Authority).
Materials of Environmental Concern
include chemicals, pollutants, contaminants, wastes, toxic
substances, petroleum and petroleum products and any other
substance that is now or hereafter regulated by any
Environmental Law or that is otherwise a danger to health,
reproduction or the environment.
Maverick means, collectively, Maverick
Fund LDC, Maverick Fund USA, Ltd. and Maverick
Fund II, Ltd.
MBCA means the Minnesota Business
Corporation Act.
Net Assets shall mean, as of any
particular date (actual or future), without repetition or
duplication: (a) Replidynes total current assets as
of such date (as determined in accordance with GAAP) plus
(b) the Specified Assets minus (c) Replidynes
total liabilities as of such date (as determined in accordance
with GAAP), including, to the extent not accrued as a liability
and not paid by Replidyne prior to such date, without
duplication, (i) the cash cost of any change of control
payments, severance payments (including any obligations that
Replidyne has to reimburse COBRA costs of former employees) or
payments under Section 280G of the Code that are payable or
expected to become payable as a result of the Merger and the
Contemplated Transactions, (ii) amounts owed or expected to
become due to Replidynes legal counsel and financial
advisor in connection with this Agreement and the Contemplated
Transactions and (iii) any outstanding and future financial
obligations owed by Replidyne in respect of the Replidyne
Contracts and employee benefit plans set forth on
Schedule 4.
Ordinary Course of Business shall
mean, in the case of the Company, such reasonable and prudent
actions taken in the ordinary course of its normal operations
and consistent with its past practices, and, in the case of
Replidyne, any actions relating to the sale or disposition of
assets and payment of liabilities in connection with winding up
its business.
Party or
Parties shall mean the Company, Merger
Sub and Replidyne.
Person shall mean any individual,
Entity or Governmental Body.
Pipeline Transaction shall mean any
transaction entered into in connection with the divestment,
whether by acquisition, liquidation or otherwise, by Replidyne
of its pre-clinical programs and other non-cash assets.
Qualified Financing shall mean any
sale by the Company of debt or equity securities or the
incurrence by the Company of indebtedness for borrowed money in
an amount not to exceed $15,000,000 for all such issuances or
incurrences in the aggregate, provided that the Company provides
notice to Replidyne within five days of the commencement of
discussions regarding any transaction that is reasonably likely
to result in a Qualified Financing and continues to keep
Replidyne reasonably apprised of such discussions through the
consummation of any such transaction, and provided further that
with respect to any issuance of equity securities (including,
for the avoidance of doubt, the issuance of any indebtedness
that is convertible into other equity securities of the Company)
that values the Company at less than $181,000,000 prior to the
consummation of such issuance, the Company has obtained the
consent of Replidyne to the consummation of such issuance.
Related Agreements shall mean the
Replidyne Certificate of Amendment, the Replidyne Bylaws
Amendment, the Replidyne Stockholder Voting Agreements, the
Company Stockholder Voting Agreements, the Company Stockholder
Lock-up
Agreements, the Replidyne Stockholder
Lock-up
Agreements, the Company Stockholder Conversion Agreement, the
Articles of Merger, the Joint Proxy Statement/Prospectus and any
other documents or agreements executed in connection with this
Agreement or the Contemplated Transactions.
Replidyne Common Stock shall mean the
Common Stock, $0.001 par value per share, of Replidyne.
A-66
Replidyne Contract shall mean any
Contract: (a) to which Replidyne or any of its Subsidiaries
is a party; (b) by which Replidyne or any Replidyne IP
Rights or any other asset of Replidyne is or may become bound or
under which Replidyne has, or may become subject to, any
obligation; or (c) under which Replidyne or any of its
Subsidiaries has or may acquire any right or interest.
Replidyne IP Rights shall mean
(a) Intellectual Property Rights in the Replidyne Products
and (b) all Intellectual Property Rights owned, licensed,
or Controlled by Replidyne and its Subsidiaries that is
necessary or used in Replidynes business as presently
conducted.
Replidyne IP Rights Agreement shall
mean any instrument or agreement governing any Replidyne IP
Rights.
Replidyne Material Adverse Effect
shall mean any Effect that, considered together with all other
Effects that had occurred prior to the date of determination of
the occurrence of the Replidyne Material Adverse Effect, is or
would reasonably be expected to be or to become materially
adverse to, or has or would reasonably be expected to have or
result in a material adverse effect on: (a) the financial
condition or assets of Replidyne; or (b) the ability of
Replidyne to consummate the Merger or any of the other
Contemplated Transactions or to perform any of its covenants or
obligations under the Agreement; provided, however, that none of
the following shall be deemed in themselves, either alone or in
combination, to constitute, and none of the following shall be
taken into account in determining whether there has been or will
be a Replidyne Material Adverse Effect: (i) any Effect on
the financial condition or assets of Replidyne caused by,
related to or resulting from the Contemplated Transactions or
the announcement or pendency thereof or any transactions
undertaken, continued or consummated in connection with the
matters described on Part 4.2 of the Replidyne Disclosure
Schedule or as provided in Section 4.2(c); (ii) any
adverse change, effect or occurrence attributable to the United
States economy as a whole, provided that such change, effect or
occurrence does not affect Replidyne in a disproportionate
manner; (iii) any act or threat of terrorism or war
anywhere in the world, any armed hostilities or terrorist
activities anywhere in the world, any threat or escalation of
armed hostilities or terrorist activities anywhere in the world
or any governmental or other response or reaction to any of the
foregoing; (iv) any change in accounting requirements or
principles or any change in applicable accounting laws, rules or
regulations or the interpretation thereof; and (v) any
change in the stock price or trading volume of Replidyne
independent of any other event that would be deemed to have a
Replidyne Material Adverse Effect. For the avoidance of doubt,
(i) (A) the entrance of any settlement, arbitration award
or judgment that results or would result in any payment in
excess of $5,000,000 by Replidyne, or (B) the granting of
any injunctive relief against Replidyne that has or would
reasonably be expected to have or result in an adverse effect on
the business, financial condition, capitalization, assets,
operations or financial performance or prospects of Replidyne,
in connection in each case with any Legal Proceeding to which
Replidyne is a party, shall constitute a Replidyne Material
Adverse Effect, and (ii) the amount of Net Assets, or any
increase or decrease in Net Assets above or below a particular
level, shall not constitute a Replidyne Material Adverse Effect.
Replidyne Options shall mean options
to purchase shares of Replidyne Common Stock issued by Replidyne.
Replidyne Preferred Stock shall mean
the Preferred Stock, $0.001 par value per share, of
Replidyne.
Replidyne Products shall mean all
products being manufactured, distributed or developed by or on
behalf of Replidyne.
Replidyne Registered IP shall mean all
Replidyne IP Rights that are registered, filed or issued under
the authority of, with or by any Governmental Body, including
all patents, registered copyrights and registered trademarks and
all applications for any of the foregoing.
Replidyne Related Party shall mean any
Affiliate of Replidyne.
Replidyne Warrants shall mean warrants
to purchase shares of Replidyne Common Stock issued by Replidyne.
Representatives shall mean directors,
officers, other employees, agents, attorneys, accountants,
advisors and representatives.
A-67
S-4
Expenses shall mean all fees and expenses (other
than attorneys and accountants fees and expenses)
incurred in relation to the printing, mailing and filing with
the SEC of the
Form S-4
Registration Statement (including any financial statements and
exhibits) and the Joint Proxy Statement/Prospectus (including
any preliminary materials related thereto) and any amendments or
supplements thereto.
Sarbanes-Oxley Act shall mean the
Sarbanes-Oxley Act of 2002, as it may be amended from time to
time.
SEC shall mean the United States
Securities and Exchange Commission.
Securities Act shall mean the
Securities Act of 1933, as amended.
Special Committee shall mean the
special committee of the board of directors of the Company
formed in connection with the Contemplated Transactions.
Specified Assets means (a) the
Deemed Value at such date of any Pre-Closing Consideration
pursuant to any Pipeline Transaction; (b) any amounts paid
on or prior to such date or payable after such date by Replidyne
in satisfaction of its obligations under Sections 5.6(c),
(d) or (e); and (c) the Fractional Cash Amount to the
extent paid on or prior to such date or accrued as a total
current liability of Replidyne as of such date.
Subsidiary shall mean, with respect to
a given Person, any entity that the Person directly or
indirectly owns or purports to own, beneficially or of record,
(a) an amount of voting securities of other interests in
such entity that is sufficient to enable such Person to elect at
least a majority of the members of such entitys board of
directors or other governing body, or (b) at least 50% of
the outstanding equity, voting, beneficial or financial
interests in such Entity.
Superior Offer shall mean an
unsolicited bona fide written offer by a third party to enter
into (i) a merger, consolidation, amalgamation, share
exchange, business combination, issuance of securities,
acquisition of securities, reorganization, recapitalization,
tender offer, exchange offer or other similar transaction as a
result of which either (A) the Partys stockholders
prior to such transaction in the aggregate cease to own at least
50% of the voting securities of the entity surviving or
resulting from such transaction (or the ultimate parent entity
thereof) or (B) a Person or group (as defined
in the Exchange Act and the rules promulgated thereunder)
directly or indirectly acquires beneficial or record ownership
of securities representing 50% or more of the Partys
capital stock, or (ii) a sale, lease, exchange transfer,
license, acquisition or disposition of any business or other
disposition of at least 50% of the assets of the Party or its
Subsidiaries, taken as a whole, in a single transaction or a
series of related transactions that, in the case of either
clause (i) or (ii): (a) was not obtained or made as a
direct or indirect result of a breach of (or in violation of)
the Agreement; and (b) is on terms and conditions that the
board of directors of Replidyne or the Company, as applicable,
determines, in its good faith judgment, after obtaining and
taking into account such matters that its board of directors
deems relevant following consultation with its outside legal
counsel and financial advisor: (x) is more favorable to
Replidynes stockholders or the Companys
stockholders, as applicable, than the terms of the Merger; and
(y) is reasonably capable of being consummated.
Tax shall mean any U.S. federal,
state, local, foreign or other taxes, levies, charges and fees
or other similar assessments or liabilities in the nature of a
tax, including, without limitation, any income tax, franchise
tax, capital gains tax, gross receipts tax, value-added tax,
surtax, estimated tax, unemployment tax, national health
insurance tax, excise tax, ad valorem tax, transfer tax, stamp
tax, sales tax, use tax, property tax, business tax, withholding
tax, payroll tax, customs duty, alternative or add-on minimum or
other tax of any kind whatsoever, and including any penalty,
assessment, addition to tax or interest, whether disputed or not.
Tax Return shall mean any return
(including any information return), report, statement,
declaration, estimate, schedule, notice, notification, form,
election, certificate or other document or information, and any
amendment or supplement to any of the foregoing, filed with or
submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination,
assessment, collection or payment of any Tax or in connection
with the administration, implementation or enforcement of or
compliance with any Legal Requirement relating to any Tax.
A-68
EXHIBIT B
FORM OF
REPLIDYNE CERTIFICATE OF AMENDMENT
A-69
CERTIFICATE
OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
REPLIDYNE, INC.
REPLIDYNE, INC. (the Corporation), a
corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware (the
DGCL), hereby certifies as follows:
FIRST: The name of the Corporation is
Replidyne, Inc. A Certificate of Incorporation of the
Corporation originally was filed by the Corporation with the
Secretary of State of Delaware on December 6, 2000.
SECOND: This Certificate of Amendment amends
the Restated Certificate of Incorporation of the Corporation and
was duly adopted by the board of directors of the Corporation in
accordance with the provisions of Sections 141 and 242 of
the DGCL.
THIRD: The text of the Restated Certificate of
Incorporation of the Corporation is hereby amended as follows:
1. Article I of the Restated Certificate of
Incorporation of the Corporation is hereby amended and restated
as follows:
The name of this corporation is Cardiovascular Systems,
Inc.
2. Article IV of the Restated Certificate of
Incorporation of the Corporation is hereby amended and restated
as follows:
A. Without regard to any other provision of this Restated
Certificate of Incorporation, each one (1) share of Common
Stock, either issued and outstanding or held by the corporation
as treasury stock, immediately prior to the time this
Certificate of Amendment becomes effective shall be and is
hereby automatically reclassified and changed (without any
further act)
into 1
of a fully-paid and nonassessable share of Common Stock;
provided, that no fractional shares shall be issued to any
stockholder and no certificates or scrip for any such fractional
shares shall be issued, each stockholder otherwise entitled to
receive a fractional share shall receive the next lower whole
number of shares of Common Stock, and the corporation shall pay
in cash the dollar amount of such fractional shares (to the
nearest whole cent), without interest, determined in each case
by multiplying such fraction by the closing price of a share of
Common Stock on the Nasdaq Global Market on the date immediately
preceding the date on which this Certificate of Amendment
becomes effective.
B. This corporation is authorized to issue two classes of
stock to be designated, respectively, Common Stock
and Preferred Stock. The total number of shares
which the corporation is authorized to issue
is
( )
shares. ( )
shares shall be Common Stock, each having a par value of
one-tenth of one cent
($.001).
( )
shares shall be Preferred Stock, each having a par value of
one-tenth of one cent ($.001).
C. The Preferred Stock may be issued from time to time in
one or more series. The Board of Directors is hereby expressly
authorized to provide for the issue of all or any of the shares
of the Preferred Stock in one or more series, and to fix the
number of shares and to determine or alter for each such series,
such voting powers, full or limited, or no voting powers, and
such designation, preferences, and relative, participating,
optional, or other rights and such qualifications, limitations,
or restrictions thereof, as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors
providing for the issuance of such shares and as may be
permitted by the DGCL. The Board of Directors is also expressly
authorized to increase or decrease the number of shares of any
series subsequent to the issuance of shares of that series, but
not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be decreased in
accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of
shares of such series. The number of
1 Shall
be a number less than one and equal to or greater than 0.02, the
exact number within the range to be determined prior to the
Effective Time in accordance with the Merger Agreement.
A-70
authorized shares of Preferred Stock may be increased or
decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a
majority of the Common Stock, without a vote of the holders of
the Preferred Stock, or of any series thereof, unless a vote of
any such holders is required pursuant to the terms of any
certificate of designation filed with respect to any series of
Preferred Stock.
D. Each outstanding share of Common Stock shall entitle the
holder thereof to one vote on each matter properly submitted to
the stockholders of the Corporation for their vote; provided,
however, that, except as otherwise required by law, holders
of Common Stock shall not be entitled to vote on any amendment
to this Certificate of Incorporation (including any certificate
of designation filed with respect to any series of Preferred
Stock) that relates solely to the terms of one or more
outstanding series of Preferred Stock if the holders of such
affected series are entitled, either separately or together as a
class with the holders of one or more other such series, to vote
thereon by law or pursuant to this Certificate of Incorporation
(including any certificate of designation filed with respect to
any series of Preferred Stock).
FOURTH: Thereafter pursuant to a resolution
of the board of directors of the Corporation, this Certificate
of Amendment was submitted to the stockholders of the
Corporation for their approval, and was duly adopted at a
special meeting of the stockholders in accordance with the
provisions of Section 242 of the DGCL.
A-71
IN WITNESS
WHEREOF,
Replidyne,
Inc. has caused this Certificate of Amendment to be
signed by its duly authorized officer
this
day
of ,
.
Replidyne,
Inc.
Kenneth J. Collins
President and Chief Executive Officer
A-72
EXHIBIT C
FORM OF
FREDRIKSON & BYRON OPINION
Regarding the outstanding capital stock of the Company, we have
relied upon certificates of the Companys officers stating:
(i) that the Companys stock, option and warrant
registers reflect all of the Companys outstanding shares
of capital stock, options and warrants, and (ii) the
conversion ratio applicable to each class of outstanding
Preferred Stock. We have assumed for purposes of this opinion
that the conversion ratio of each class of Preferred Stock
stated in the certificate will continue to be effective at the
time of conversion of all outstanding shares of Preferred Stock
in accordance with the terms of the Merger Agreement and the
Company Stockholder Conversion Agreement.
The Companys authorized capital stock consists of
(a)
( )
shares of Common Stock, no par value, and
(b)
( )
shares of Preferred Stock, no par value, of which
(i)
( )
shares have been designated Series A Preferred Stock, no
par value,
(ii)
( )
shares have been designated
Series A-1
Preferred Stock, no par value, and
(iii)
( )
shares have been designated Series B Preferred Stock, no
par value. As of immediately prior to the Effective Time (but
prior to the conversion of all outstanding Preferred Stock in
accordance with the terms of the Merger Agreement (the
Conversion)), the Companys issued and
outstanding capital stock consisted
of
( )
shares of Common
Stock,
( )
shares of Series A Preferred
Stock,
( )
shares of
Series A-1
Preferred Stock
and
( )
shares of Series B Preferred Stock. Following the
effectiveness of the Conversion, the Companys issued and
outstanding capital stock consisted
of
( )
shares of Common Stock and no shares of Preferred Stock. The
outstanding shares of Common Stock and of Preferred Stock have
been duly authorized and validly issued and are fully paid and
nonassessable. To our knowledge, there are no options, warrants,
conversion privileges, preemptive rights or other rights
presently outstanding to purchase any of the authorized but
unissued capital stock of the Company, other than as described
in Section 2.3 of the Merger Agreement or on the Company
Disclosure Schedule.
A-73
Annex B
VOTING
AGREEMENT
This Voting Agreement
(Agreement) is entered into as of
November 3, 2008, by and between Cardiovascular Systems,
Inc., a Minnesota corporation (the Company),
and
[ ]
(Stockholder).
Recitals
A. Stockholder is a holder of record and the
beneficial owner (within the meaning of
Rule 13d-3
under the Securities Exchange Act of 1934) of certain
shares of capital stock of Replidyne, Inc., a Delaware
corporation (the Replidyne).
B. Replidyne, Responder Merger Sub, Inc., a Minnesota
corporation (Merger Sub), and the Company are
entering into an Agreement and Plan of Merger and Reorganization
of even date herewith (the Merger Agreement)
which provides (subject to the conditions set forth therein) for
the merger of Merger Sub into the Company (the
Merger).
C. In the Merger, the outstanding shares of capital stock
of the Company are to be converted into the right to receive
shares of Common Stock of Replidyne.
D. In order to induce the Company to enter into the Merger
Agreement, Stockholder is entering into this Agreement.
Agreement
The parties to this Agreement, intending to be legally bound,
agree as follows:
Section 1. Certain
Definitions
1.1 Specified Terms. For purposes of this
Agreement:
(a) Stockholder shall be deemed to Own
or to have acquired Ownership of a security
if Stockholder: (i) is the record owner of such security;
or (ii) is the beneficial owner (within the
meaning of
Rule 13d-3
under the Securities Exchange Act of 1934) of such security.
(b) Subject Securities shall mean
all outstanding shares of capital stock of Replidyne (including
all shares of Replidyne Common Stock) Owned by Stockholder as of
the date of this Agreement.
(c) A Person shall be deemed to have effected a
Transfer of a security if such Person
directly or indirectly: (i) sells, pledges, encumbers,
grants an option with respect to, transfers or disposes of such
security or any interest in such security to any Person other
than the Company; (ii) enters into an agreement or
commitment contemplating the possible sale of, pledge of,
encumbrance of, grant of an option with respect to, transfer of
or disposition of such security or any interest therein to any
Person other than the Company; or (iii) reduces such
Persons beneficial ownership of, interest in or risk
relating to such security.
(d) Voting Covenant Expiration Date
shall mean the earlier of (i) the date upon which the
Merger Agreement is validly terminated, (ii) the date upon
which the Merger is consummated and (iii) the date upon
which this Agreement is terminated.
1.2 Other Terms. Capitalized terms used
herein and not defined shall have the meanings set forth in the
Merger Agreement.
Section 2. Transfer
of Subject Securities and Voting Rights
2.1 Restriction on Transfer of Subject
Securities. Subject to Section 2.3, during
the period from the date of this Agreement through the Voting
Covenant Expiration Date, Stockholder shall not, directly or
indirectly, cause or permit any Transfer of any of the Subject
Securities to be effected.
B-1
2.2 Restriction on Transfer of Voting
Rights. During the period from the date of this
Agreement through the Voting Covenant Expiration Date,
Stockholder shall ensure that: (a) none of the Subject
Securities is deposited into a voting trust; and (b) no
proxy is granted, and no voting agreement or similar agreement
is entered into, with respect to any of the Subject Securities,
other than a proxy granted to the Company.
2.3 Permitted Transfers. Section 2.1
shall not prohibit a transfer of Replidyne Common Stock by
Stockholder (i) to any member of his immediate family, or
to a trust for the benefit of Stockholder or any member of his
immediate family, (ii) upon the death of Stockholder, or
(iii) if Stockholder is a partnership or limited liability
company, to one or more partners or members of Stockholder or to
an affiliated corporation under common control with Stockholder;
provided, however, that a transfer referred to in this sentence
shall be permitted only if, as a precondition to such transfer,
the transferee agrees in a writing, reasonably satisfactory in
form and substance to the Company, to be bound by the terms of
this Agreement.
Section 3. Voting
of Shares
3.1 Voting Covenant. Stockholder hereby
agrees that, prior to the Voting Covenant Expiration Date, at
any meeting of the stockholders of Replidyne, however called,
and in any written action by consent of stockholders of
Replidyne, unless otherwise directed in writing by the Company,
Stockholder shall cause not less than 68.0% of the Subject
Securities to be voted:
(a) in favor of the Merger, the execution and delivery by
Replidyne of the Merger Agreement and the adoption and approval
of the Merger Agreement and the terms thereof, in favor of each
of the other actions contemplated by the Merger Agreement and in
favor of any action in furtherance of any of the foregoing;
(b) against any action or agreement that would result in a
material breach of any covenant or obligation of Replidyne in
the Merger Agreement that would have the effect of preventing or
materially delaying the Merger; and
(c) against the following actions (other than the Merger
and the transactions contemplated by the Merger Agreement
(including, for the avoidance of doubt, the consummation of a
Pipeline Transaction and any actions relating to the winding up
of Replidynes business in accordance with the Merger
Agreement)): (A) any extraordinary corporate transaction,
such as a merger, consolidation or other business combination
involving Replidyne or any subsidiary of Replidyne; (B) any
sale, lease or transfer of a material amount of assets of
Replidyne or any subsidiary of Replidyne; (C) any
reorganization, recapitalization, dissolution or liquidation of
Replidyne or any subsidiary of Replidyne; (D) any change in
a majority of the board of directors of Replidyne; (E) any
amendment to Replidynes certificate of incorporation or
bylaws which would prevent or materially delay the Merger;
(F) any Acquisition Transaction; and (G) any other
action which is intended, or could reasonably be expected, to
impede, interfere with, delay, postpone, discourage or adversely
affect the Merger or any of the other transactions contemplated
by the Merger Agreement or this Agreement.
Prior to the Voting Covenant Expiration Date, Stockholder shall
not enter into any agreement or understanding with any Person to
vote or give instructions in any manner inconsistent with clause
(a), (b), or (c) of the
preceding sentence.
3.2 Proxy. Contemporaneously with the
execution of this Agreement Stockholder shall deliver to the
Company a proxy in the form attached to this Agreement as
Exhibit A, which shall be irrevocable to the fullest
extent permitted by law (at all times prior to the Voting
Covenant Expiration Date) with respect to the shares referred to
therein (the Proxy).
Section 4. Waiver
of Appraisal Rights
Stockholder hereby irrevocably and unconditionally waives, and
agrees to cause to be waived and to prevent the exercise of, any
rights of appraisal, any dissenters rights and any similar
rights relating to the Merger or any related transaction that
Stockholder may have by virtue of any outstanding shares of
Replidyne Common Stock Owned by Stockholder.
B-2
Section 5. No
Solicitation
Stockholder agrees that, during the period from the date of this
Agreement through the Voting Covenant Expiration Date,
Stockholder shall not, directly or indirectly, and Stockholder
shall ensure that his or its Representatives (as defined in the
Merger Agreement) do not, directly or indirectly:
(i) solicit, initiate, knowingly encourage, induce or
knowingly facilitate the communication, making, submission or
announcement of any Acquisition Proposal or Acquisition Inquiry
or take any action that could reasonably be expected to lead to
an Acquisition Proposal or Acquisition Inquiry;
(ii) furnish any information regarding Replidyne or any
subsidiary of Replidyne to any Person in connection with or in
response to an Acquisition Proposal or Acquisition Inquiry;
(iii) engage in discussions or negotiations with any Person
with respect to any Acquisition Proposal or Acquisition Inquiry;
(iv) approve, endorse or recommend any Acquisition
Proposal; or (v) execute or enter into any letter of intent
or similar document or any Contract contemplating or otherwise
relating to any Acquisition Transaction. Stockholder shall
immediately cease and discontinue, and Stockholder shall ensure
that his or its Representatives immediately cease and
discontinue, any existing discussions with any Person that
relate to any Acquisition Proposal.
Section 6. Representations
and Warranties of Stockholder
Stockholder hereby represents and warrants to the Company as
follows:
6.1 Authorization, etc. Stockholder has
the absolute and unrestricted right, power, authority and
capacity to execute and deliver this Agreement and the Proxy and
to perform his or its obligations hereunder and thereunder. This
Agreement and the Proxy have been duly executed and delivered by
Stockholder and constitute legal, valid and binding obligations
of Stockholder, enforceable against Stockholder in accordance
with their terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies. If
Stockholder is a general or limited partnership, then
Stockholder is a partnership duly organized, validly existing
and in good standing under the laws of the jurisdiction in which
it was organized. If Stockholder is a limited liability company,
then Stockholder is a limited liability company duly organized,
validly existing and in good standing under the laws of the
jurisdiction in which it was organized.
6.2 No Conflicts or Consents.
(a) The execution and delivery of this Agreement and the
Proxy by Stockholder do not, and the performance of this
Agreement and the Proxy by Stockholder will not:
(i) conflict with or violate any law, rule, regulation,
order, decree or judgment applicable to Stockholder or by which
he or it or any of his or its properties is or may be bound or
affected; or (ii) result in or constitute (with or without
notice or lapse of time) any breach of or default under, or give
to any other Person (with or without notice or lapse of time)
any right of termination, amendment, acceleration or
cancellation of, or result (with or without notice or lapse of
time) in the creation of any encumbrance or restriction on any
of the Subject Securities pursuant to, any contract to which
Stockholder is a party or by which Stockholder or any of his or
its affiliates or properties is or may be bound or affected.
(b) The execution and delivery of this Agreement and the
Proxy by Stockholder do not, and the performance of this
Agreement and the Proxy by Stockholder will not, require any
consent or approval of any Person which shall not have already
been obtained.
6.3 Title to Securities. As of the date
of this Agreement: (a) Stockholder holds of record (free
and clear of any encumbrances or restrictions except those
created under the Securities Act of 1933, as amended (the
Act), and under any agreement with Replidyne
which has been disclosed to the Company) the number of
outstanding shares of Replidyne Common Stock set forth under the
heading Shares Held of Record on the signature page
hereof; (b) Stockholder holds (free and clear of any
encumbrances or restrictions except those created under the Act,
and under any agreement with Replidyne which has been disclosed
to the Company) the options, warrants and other rights to
acquire shares of Replidyne Common Stock set forth under the
heading Options and Other Rights on the signature
page hereof; (c) Stockholder Owns the additional securities
of Replidyne set forth under the heading Additional
Securities Beneficially Owned on the signature page
hereof; and (d) Stockholder does not directly or
B-3
indirectly Own any shares of capital stock or other securities
of Replidyne, or any option, warrant or other right to acquire
(by purchase, conversion or otherwise) any shares of capital
stock or other securities of Replidyne, other than the shares
and options, warrants and other rights set forth on the
signature page hereof.
6.4 Accuracy of Representations. The
representations and warranties contained in this Agreement are
accurate in all material respects as of the date of this
Agreement and will be accurate in all material respects as of
the date of the consummation of the Merger as if made on that
date, subject to the acquisition of additional securities of
Replidyne by Stockholder following the date hereof.
Section 7. Additional
Covenants of Stockholder
7.1 Further Assurances. From time to time
and without additional consideration, Stockholder shall execute
and deliver, or cause to be executed and delivered, such
additional transfers, assignments, endorsements, proxies,
consents and other instruments, and shall (at Stockholders
sole expense) take such further actions, as the Company may
reasonably request in writing for the purpose of carrying out
and furthering the intent of this Agreement.
7.2 Legends. If requested by the Company,
immediately after the execution of this Agreement, Stockholder
shall cause each certificate evidencing any outstanding shares
of Replidyne Common Stock Owned by Stockholder to be surrendered
so that the transfer agent for such securities may affix thereto
a legend in the following form:
THE SECURITY OR SECURITIES REPRESENTED BY THIS CERTIFICATE MAY
NOT BE SOLD, EXCHANGED OR OTHERWISE TRANSFERRED OR DISPOSED OF
EXCEPT IN COMPLIANCE WITH THE TERMS AND PROVISIONS OF A VOTING
AGREEMENT DATED AS OF NOVEMBER 3, 2008, AS IT MAY BE AMENDED, A
COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF
THE ISSUER.
Section 8. Miscellaneous
8.1 Survival of Representations, Warranties and
Agreements. All representations, warranties,
covenants and agreements made by Stockholder in this Agreement
shall survive (i) the consummation of the Merger,
(ii) any termination of the Merger Agreement, and
(iii) the Voting Covenant Expiration Date.
8.2 Expenses. Except as otherwise may be
agreed to, all costs and expenses incurred in connection with
the transactions contemplated by this Agreement shall be paid by
the party incurring such costs and expenses.
8.3 Notices. Any notice or other
communication required or permitted to be delivered to either
party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by
hand, by registered mail, by courier or express delivery service
or by facsimile) to the address or facsimile telephone number
set forth beneath the name of such party below (or to such other
address or facsimile telephone number as such party shall have
specified in a written notice given to the other party):
if to Stockholder:
at the address set forth on the signature page hereof; and
if to the Company:
Cardiovascular Systems, Inc.
651 Campus Drive
St. Paul, MN
55112-3495
Attention: Chief Executive Officer
Facsimile:
651-259-1696
8.4 Severability. Any term or provision
of this Agreement that is invalid or unenforceable in any
situation in any jurisdiction shall not affect the validity or
enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or
provision in any other situation or in any other jurisdiction.
If the final judgment of a court of competent jurisdiction
declares that any term or provision hereof is invalid or
unenforceable, the parties hereto agree that the court making
such determination shall have the power to limit the
B-4
term or provision, to delete specific words or phrases, or to
replace any invalid or unenforceable term or provision with a
term or provision that is valid and enforceable and that comes
closest to expressing the intention of the invalid or
unenforceable term or provision, and this Agreement shall be
enforceable as so modified. In the event such court does not
exercise the power granted to it in the prior sentence, the
parties hereto agree to replace such invalid or unenforceable
term or provision with a valid and enforceable term or provision
that will achieve, to the extent possible, the economic,
business and other purposes of such invalid or unenforceable
term.
8.5 Entire Agreement. This Agreement, the
Proxy and any other documents delivered by the parties in
connection herewith constitute the entire agreement between the
parties with respect to the subject matter hereof and thereof
and supersede all prior agreements and understandings between
the parties with respect thereto. No addition to or modification
of any provision of this Agreement shall be binding upon either
party unless made in writing and signed by both parties.
8.6 Assignment; Binding Effect. Except as
provided herein, neither this Agreement nor any of the interests
or obligations hereunder may be assigned or delegated by
Stockholder, and any attempted or purported assignment or
delegation of any of such interests or obligations shall be
void. Subject to the preceding sentence, this Agreement shall be
binding upon Stockholder and his heirs, estate, executors and
personal representatives and his or its successors and assigns,
and shall inure to the benefit of the Company and its successors
and assigns. Without limiting any of the restrictions set forth
in Section 2 or Section 7.1 or elsewhere in this
Agreement, this Agreement shall be binding upon any Person to
whom any Subject Securities are transferred. Nothing in this
Agreement is intended to confer on any Person (other than the
Company and its successors and assigns) any rights or remedies
of any nature.
8.7 Specific Performance. The parties
agree that irreparable damage would occur in the event that any
of the provisions of this Agreement or the Proxy were not
performed in accordance with its specific terms or were
otherwise breached. Stockholder agrees that, in the event of any
breach or threatened breach by Stockholder of any covenant or
obligation contained in this Agreement or in the Proxy, the
Company shall be entitled (in addition to any other remedy that
may be available to it, including monetary damages) to seek and
obtain (a) a decree or order of specific performance to
enforce the observance and performance of such covenant or
obligation, and (b) an injunction restraining such breach
or threatened breach. Stockholder further agrees that neither
the Company nor any other Person shall be required to obtain,
furnish or post any bond or similar instrument in connection
with or as a condition to obtaining any remedy referred to in
this Section 8.7, and Stockholder irrevocably waives any
right he or it may have to require the obtaining, furnishing or
posting of any such bond or similar instrument.
8.8 Non-Exclusivity. The rights and
remedies of the Company under this Agreement are not exclusive
of or limited by any other rights or remedies which it may have,
whether at law, in equity, by contract or otherwise, all of
which shall be cumulative (and not alternative). Without
limiting the generality of the foregoing, the rights and
remedies of the Company under this Agreement, and the
obligations and liabilities of Stockholder under this Agreement,
are in addition to their respective rights, remedies,
obligations and liabilities under common law requirements and
under all applicable statutes, rules and regulations.
8.9 Governing Law; Venue.
(a) This Agreement and the Proxy shall be construed in
accordance with, and governed in all respects by, the laws of
the State of Delaware (without giving effect to principles of
conflicts of laws).
(b) Any legal action or other legal proceeding relating to
this Agreement or the Proxy or the enforcement of any provision
of this Agreement or the Proxy may be brought or otherwise
commenced in any state or federal court located in the State of
Delaware. Stockholder:
(i) expressly and irrevocably consents and submits to the
jurisdiction of each state and federal court located in the
State of Delaware in connection with any such legal proceeding;
(ii) agrees that service of any process, summons, notice or
document by U.S. mail addressed to him or it at the address
set forth on the signature page hereof shall constitute
effective service of such process, summons, notice or document
for purposes of any such legal proceeding;
B-5
(iii) agrees that each state and federal court located in
the State of Delaware shall be deemed to be a convenient
forum; and
(iv) agrees not to assert (by way of motion, as a defense
or otherwise), in any such legal proceeding commenced in any
state or federal court located in the State of Delaware, any
claim that Stockholder is not subject personally to the
jurisdiction of such court, that such legal proceeding has been
brought in an inconvenient forum, that the venue of such
proceeding is improper or that this Agreement or the subject
matter of this Agreement may not be enforced in or by such court.
Nothing contained in this Section 8.9 shall be deemed to
limit or otherwise affect the right of the Company to commence
any legal proceeding or otherwise proceed against Stockholder in
any other forum or jurisdiction.
(c) STOCKHOLDER IRREVOCABLY WAIVES THE RIGHT TO A JURY
TRIAL IN CONNECTION WITH ANY LEGAL PROCEEDING RELATING TO THIS
AGREEMENT OR THE PROXY OR THE ENFORCEMENT OF ANY PROVISION OF
THIS AGREEMENT OR THE PROXY.
8.10 Counterparts. This Agreement may be
executed in separate counterparts, each of which when so
executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same
instrument.
8.11 Captions. The captions contained in
this Agreement are for convenience of reference only, shall not
be deemed to be a part of this Agreement and shall not be
referred to in connection with the construction or
interpretation of this Agreement.
8.12 Attorneys Fees. If any legal
action or other legal proceeding relating to this Agreement or
the enforcement of any provision of this Agreement is brought
against Stockholder, the prevailing party shall be entitled to
recover reasonable attorneys fees, costs and disbursements
(in addition to any other relief to which the prevailing party
may be entitled).
8.13 Waiver. No failure on the part of
the Company to exercise any power, right, privilege or remedy
under this Agreement, and no delay on the part of the Company in
exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right,
privilege or remedy; and no single or partial exercise of any
such power, right, privilege or remedy shall preclude any other
or further exercise thereof or of any other power, right,
privilege or remedy. The Company shall not be deemed to have
waived any claim available to the Company arising out of this
Agreement, or any power, right, privilege or remedy of the
Company under this Agreement, unless the waiver of such claim,
power, right, privilege or remedy is expressly set forth in a
written instrument duly executed and delivered on behalf of the
Company; and any such waiver shall not be applicable or have any
effect except in the specific instance in which it is given.
8.14 Term. This Agreement and all
obligations hereunder shall terminate upon the earlier of
(i) the day after the Merger is consummated,
(ii) April 30, 2009, (iii) the date of any
modification, waiver or amendment to the Merger Agreement in a
manner that reduces the amount and form of consideration payable
thereunder to Stockholder, and (iv) the termination of the
Merger Agreement.
8.15 No Limitation on Actions of Stockholder as
Director. In the event Stockholder or any of its
Representatives is a member of the board of directors of
Replidyne, notwithstanding anything to the contrary in this
Agreement, nothing in this Agreement is intended or shall be
construed to require the Stockholder or such Representative to
take any action, or limit any action the Stockholder or such
Representative may take, to the extent that doing so would be
inconsistent with Stockholder or such Representatives
fiduciary duties as a director of Replidyne. Notwithstanding
anything in this Agreement to the contrary, Stockholder makes no
agreement or understanding herein in any capacity other than in
its capacity as a record holder and beneficial owner of the
Subject Securities.
B-6
8.16 Construction.
(a) For purposes of this Agreement, whenever the context
requires: the singular number shall include the plural, and vice
versa; the masculine gender shall include the feminine and
neuter genders; the feminine gender shall include the masculine
and neuter genders; and the neuter gender shall include
masculine and feminine genders.
(b) The parties agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting
party shall not be applied in the construction or interpretation
of this Agreement.
(c) As used in this Agreement, the words
include and including, and variations
thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words without
limitation.
(d) Except as otherwise indicated, all references in this
Agreement to Sections and Exhibits are
intended to refer to Sections of this Agreement and Exhibits to
this Agreement.
[Signature
Page Follows]
B-7
In Witness Whereof,
the Company and Stockholder have caused this
Agreement to be executed as of the date first written above.
CARDIOVASCULAR SYSTEMS, INC.
Name:
Title:
STOCKHOLDER
Name:
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Shares Held of Record
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Options and Other Rights
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Additional Securities Beneficially Owned
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B-8
Exhibit A
Form Of
Irrevocable Proxy
The undersigned stockholder (the Stockholder)
of Replidyne, Inc.,a Delaware corporation
(Replidyne), hereby irrevocably (to the
fullest extent permitted by law) appoints and constitutes David
L. Martin, Laurence L. Betterley and Cardiovascular Systems,
Inc., a
Minnesota corporation (the Company), and each
of them, the attorneys and proxies of the Stockholder with full
power of substitution and resubstitution, to the full extent of
the Stockholders rights with respect to the outstanding
shares of capital stock of Replidyne owned of record by the
Stockholder as of the date of this proxy, which shares are
specified on the final page of this proxy (the
Shares). Upon the execution hereof, all prior
proxies given by the Stockholder with respect to any of the
Shares are hereby revoked, and the Stockholder agrees that no
subsequent proxies will be given with respect to any of the
Shares.
This proxy is irrevocable, is coupled with an interest and is
granted in connection with the Voting Agreement, dated as of the
date hereof, between the Company and the Stockholder (the
Voting Agreement), and is granted in
consideration of the Company entering into the Agreement and
Plan of Merger and Reorganization, dated as of the date hereof,
among Replidyne, Responder Merger Sub, Inc. and the Company (the
Merger Agreement). This proxy will terminate
on the Voting Covenant Expiration Date (as defined in the Voting
Agreement).
The attorneys and proxies named above will be empowered, and may
exercise this proxy, to vote not less than 68.0% of the Shares
at any time until the Voting Covenant Expiration Date at any
meeting of the stockholders of Replidyne, however called, and in
connection with any written action by consent of stockholders of
Replidyne:
(i) in favor of the Merger (as defined in the Merger
Agreement), the execution and delivery by Replidyne of the
Merger Agreement and the adoption and approval of the Merger
Agreement and the terms thereof, in favor of each of the other
actions contemplated by the Merger Agreement and in favor of any
action in furtherance of any of the foregoing; and
(ii) against any action or agreement that would result in a
material breach of any covenant or obligation of Replidyne in
the Merger Agreement that would have the effect of preventing or
materially delaying the Merger; and
(iii) against the following actions (other than the Merger
and the other transactions contemplated by the Merger Agreement
(including, for the avoidance of doubt, the consummation of a
Pipeline Transaction (as defined in the Merger Agreement) and
any actions relating to the winding up of Replidynes
business in accordance with the Merger Agreement)): (A) any
extraordinary corporate transaction, such as a merger,
consolidation or other business combination involving Replidyne
or any subsidiary of Replidyne; (B) any sale, lease or
transfer of a material amount of assets of Replidyne or any
subsidiary of Replidyne; (C) any reorganization,
recapitalization, dissolution or liquidation of Replidyne or any
subsidiary of Replidyne; (D) any change in a majority of
the board of directors of Replidyne; (E) any amendment to
Replidynes certificate of incorporation or bylaws that
would prevent or materially delay the Merger; (F) any
Acquisition Transaction; and (G) any other action which is
intended, or could reasonably be expected to impede, interfere
with, delay, postpone, discourage or adversely affect the Merger
or any of the other transactions contemplated by the Merger
Agreement or the Voting Agreement.
The Stockholder may vote the Shares on all other matters not
referred to in this proxy, and the attorneys and proxies named
above may not exercise this proxy with respect to such other
matters.
This proxy shall be binding upon the heirs, estate, executors,
personal representatives, successors and assigns of the
Stockholder (including any transferee of any of the Shares).
Any term or provision of this proxy that is invalid or
unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and
provisions hereof or the validity or enforceability of the
offending term or provision in any other situation or in any
other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision
hereof is invalid or unenforceable, the Stockholder agrees that
the court making such determination shall have the power to
limit the term or provision, to delete specific words or
phrases, or to replace any invalid or unenforceable term or
provision with a term or provision that is valid and enforceable
and that comes closest to expressing the intention of the
invalid or unenforceable term or provision, and this proxy shall
be enforceable as so modified. In the event such court does not
exercise the power granted to it in the prior sentence, the
Stockholder agrees to replace such invalid or unenforceable term
or provision with a valid and enforceable term or provision that
will achieve, to the extent possible, the economic, business and
other purposes of such invalid or unenforceable term.
[Signature Page Follows]
B-9
Dated: November 3, 2008
Name
Number of shares of Common Stock of
Replidyne owned of record as of the
date of this proxy:
B-10
Annex C
VOTING
AGREEMENT
This Voting Agreement
(Agreement) is entered into as of
November 3, 2008, by and between Replidyne, Inc., a
Delaware corporation (Replidyne), and
[ ]
(Stockholder).
Recitals
A. Stockholder is a holder of record and the
beneficial owner (within the meaning of
Rule 13d-3
under the Securities Exchange Act of 1934) of certain
shares of capital stock of Cardiovascular Systems, Inc., a
Minnesota corporation (the Company).
B. Replidyne, Responder Merger Sub, Inc., a Minnesota
corporation (Merger Sub), and the Company are
entering into an Agreement and Plan of Merger and Reorganization
of even date herewith (the Merger Agreement)
which provides (subject to the conditions set forth therein) for
the merger of Merger Sub into the Company (the
Merger).
C. In the Merger, the outstanding shares of capital stock
of the Company are to be converted into the right to receive
shares of Common Stock of Replidyne.
D. In order to induce Replidyne to enter into the Merger
Agreement, Stockholder is entering into this Agreement.
E. Other shareholders of the Company are entering into
similar voting agreements with Replidyne concurrently with the
execution of this Agreement (the Other Voting
Agreements).
Agreement
The parties to this Agreement, intending to be legally bound,
agree as follows:
Section 1. Certain
Definitions
1.1 Specified Terms. For purposes of this
Agreement:
(a) Stockholder shall be deemed to Own
or to have acquired Ownership of a security
if Stockholder: (i) is the record owner of such security;
or (ii) is the beneficial owner (within the
meaning of
Rule 13d-3
under the Securities Exchange Act of 1934) of such security.
(b) Subject Securities shall mean
all outstanding shares of capital stock of the Company
(including all shares of Company Common Stock and Company
Preferred Stock) Owned by Stockholder as of the date of this
Agreement.
(c) A Person shall be deemed to have effected a
Transfer of a security if such Person
directly or indirectly: (i) sells, pledges, encumbers,
grants an option with respect to, transfers or disposes of such
security or any interest in such security to any Person other
than Replidyne; (ii) enters into an agreement or commitment
contemplating the possible sale of, pledge of, encumbrance of,
grant of an option with respect to, transfer of or disposition
of such security or any interest therein to any Person other
than Replidyne; or (iii) reduces such Persons
beneficial ownership of, interest in or risk relating to such
security.
(d) Voting Covenant Expiration
Date shall mean the earlier of (i) the date
upon which the Merger Agreement is validly terminated,
(ii) the date upon which the Merger is consummated and
(iii) the date upon which this Agreement is terminated.
1.2 Other Terms. Capitalized terms used
herein and not defined shall have the meanings set forth in the
Merger Agreement.
C-1
Section 2. Transfer
of Subject Securities and Voting Rights
2.1 Restriction on Transfer of Subject
Securities. Subject to Section 2.3, during
the period from the date of this Agreement through the Voting
Covenant Expiration Date, Stockholder shall not, directly or
indirectly, cause or permit any Transfer of any of the Subject
Securities to be effected.
2.2 Restriction on Transfer of Voting
Rights. During the period from the date of this
Agreement through the Voting Covenant Expiration Date,
Stockholder shall ensure that: (a) none of the Subject
Securities is deposited into a voting trust; and (b) no
proxy is granted, and no voting agreement or similar agreement
is entered into, with respect to any of the Subject Securities,
other than a proxy granted to Replidyne.
2.3 Permitted Transfers. Section 2.1
shall not prohibit a transfer of Company Common Stock or Company
Preferred Stock by Stockholder (i) to any member of his
immediate family, or to a trust for the benefit of Stockholder
or any member of his immediate family, (ii) upon the death
of Stockholder, or (iii) if Stockholder is a partnership or
limited liability company, to one or more partners or members of
Stockholder or to an affiliated corporation under common control
with Stockholder; provided, however, that a transfer referred to
in this sentence shall be permitted only if, as a precondition
to such transfer, the transferee agrees in a writing, reasonably
satisfactory in form and substance to Replidyne, to be bound by
the terms of this Agreement.
Section 3. Voting
of Shares
3.1 Voting Covenant. Stockholder hereby
agrees that, prior to the Voting Covenant Expiration Date, at
any meeting of the shareholders of the Company, however called,
and in any written action by consent of shareholders of the
Company, unless otherwise directed in writing by Replidyne,
Stockholder shall cause the Subject Securities to be voted:
(a) in favor of the Merger, the execution and delivery by
the Company of the Merger Agreement and the adoption and
approval of the Merger Agreement and the terms thereof, in favor
of each of the other actions contemplated by the Merger
Agreement and in favor of any action in furtherance of any of
the foregoing;
(b) against any action or agreement that would result in a
material breach of any covenant or obligation of the Company in
the Merger Agreement that would have the effect of preventing or
materially delaying the Merger; and
(c) against the following actions (other than the Merger
and the transactions contemplated by the Merger Agreement):
(A) any extraordinary corporate transaction, such as a
merger, consolidation or other business combination involving
the Company or any subsidiary of the Company; (B) any sale,
lease or transfer of a material amount of assets of the Company
or any subsidiary of the Company; (C) any reorganization,
recapitalization, dissolution or liquidation of the Company or
any subsidiary of the Company; (D) any change in a majority
of the board of directors of the Company; (E) any amendment
to the Companys articles of incorporation or bylaws that
would prevent or materially delay the Merger; (F) any
Acquisition Transaction; and (G) any other action which is
intended, or could reasonably be expected, to impede, interfere
with, delay, postpone, discourage or adversely affect the Merger
or any of the other transactions contemplated by the Merger
Agreement or this Agreement.
Prior to the Voting Covenant Expiration Date, Stockholder shall
not enter into any agreement or understanding with any Person to
vote or give instructions in any manner inconsistent with clause
(a), (b), or (c) of the
preceding sentence.
3.2 Proxy. Contemporaneously with the
execution of this Agreement Stockholder shall deliver to
Replidyne a proxy in the form attached to this Agreement as
Exhibit A, which shall be irrevocable to the fullest
extent permitted by law (at all times prior to the Voting
Covenant Expiration Date) with respect to the shares referred to
therein (the Proxy).
3.3 Maximum Restricted
Amount. Notwithstanding anything to the contrary
set forth in this Agreement, at no time and in no event shall
the Subject Securities and any and all shares of capital stock
of the Company subject to the Other Voting Agreements
(collectively, the Voting Shares)
collectively exceed nineteen and nine-tenths percent (19.9%) of
the outstanding capital stock of the Company (the
Maximum Restricted Amount), and if the
C-2
Voting Shares exceed the Maximum Restricted Amount, then only
such number of shares as equals the Maximum Restricted Amount
shall be subject to this Agreement and the Other Voting
Agreements (with any such exclusion of Voting Shares effected on
a pro rata basis for each shareholder subject to this Agreement
and the Other Voting Agreements in accordance with the number of
shares of capital stock of the Company held by such shareholders
and subject to this Agreement and the Other Voting Agreements).
Section 4. Waiver
of Appraisal Rights
Stockholder hereby irrevocably and unconditionally waives, and
agrees to cause to be waived and to prevent the exercise of, any
rights of appraisal, any dissenters rights and any similar
rights relating to the Merger or any related transaction that
Stockholder or any other Person may have by virtue of any
outstanding shares of Company Common Stock and Company Preferred
Stock Owned by Stockholder.
Section 5. No
Solicitation
Stockholder agrees that, during the period from the date of this
Agreement through the Voting Covenant Expiration Date,
Stockholder shall not, directly or indirectly, and Stockholder
shall ensure that his or its Representatives (as defined in the
Merger Agreement) do not, directly or indirectly:
(i) solicit, initiate, knowingly encourage, induce or
knowingly facilitate the communication, making, submission or
announcement of any Acquisition Proposal or Acquisition Inquiry
or take any action that could reasonably be expected to lead to
an Acquisition Proposal or Acquisition Inquiry;
(ii) furnish any information regarding the Company or any
subsidiary of the Company to any Person in connection with or in
response to an Acquisition Proposal or Acquisition Inquiry;
(iii) engage in discussions or negotiations with any Person
with respect to any Acquisition Proposal or Acquisition Inquiry;
(iv) approve, endorse or recommend any Acquisition
Proposal; or (v) execute or enter into any letter of intent
or similar document or any Contract contemplating or otherwise
relating to any Acquisition Transaction. Stockholder shall
immediately cease and discontinue, and Stockholder shall ensure
that his or its Representatives immediately cease and
discontinue, any existing discussions with any Person that
relate to any Acquisition Proposal.
Section 6. Representations
and Warranties of Stockholder
Stockholder hereby represents and warrants to Replidyne as
follows:
6.1 Authorization, etc. Stockholder has
the absolute and unrestricted right, power, authority and
capacity to execute and deliver this Agreement and the Proxy and
to perform his or its obligations hereunder and thereunder. This
Agreement and the Proxy have been duly executed and delivered by
Stockholder and constitute legal, valid and binding obligations
of Stockholder, enforceable against Stockholder in accordance
with their terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies. If
Stockholder is a general or limited partnership, then
Stockholder is a partnership duly organized, validly existing
and in good standing under the laws of the jurisdiction in which
it was organized. If Stockholder is a limited liability company,
then Stockholder is a limited liability company duly organized,
validly existing and in good standing under the laws of the
jurisdiction in which it was organized.
6.2 No
Conflicts or Consents.
(a) The execution and delivery of this Agreement and the
Proxy by Stockholder do not, and the performance of this
Agreement and the Proxy by Stockholder will not:
(i) conflict with or violate any law, rule, regulation,
order, decree or judgment applicable to Stockholder or by which
he or it or any of his or its properties is or may be bound or
affected; or (ii) result in or constitute (with or without
notice or lapse of time) any breach of or default under, or give
to any other Person (with or without notice or lapse of time)
any right of termination, amendment, acceleration or
cancellation of, or result (with or without notice or lapse of
time) in the creation of any encumbrance or restriction on any
of the Subject Securities pursuant to, any contract to which
Stockholder is a party or by which Stockholder or any of his or
its affiliates or properties is or may be bound or affected.
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(b) The execution and delivery of this Agreement and the
Proxy by Stockholder do not, and the performance of this
Agreement and the Proxy by Stockholder will not, require any
consent or approval of any Person that shall not have already
been obtained.
6.3 Title to Securities. As of the date
of this Agreement: (a) Stockholder holds of record (free
and clear of any encumbrances or restrictions except those
created under the Securities Act of 1933, as amended (the
Act), and under any agreement with the Company that
has been disclosed to Replidyne) the number of outstanding
shares of Company Common Stock
and/or
Company Preferred Stock set forth under the heading Shares
Held of Record on the signature page hereof;
(b) Stockholder holds (free and clear of any encumbrances
or restrictions except those created under the Act and under any
agreement with the Company that has been disclosed to Replidyne)
the options, warrants and other rights to acquire shares of
Company Common Stock
and/or
Company Preferred Stock set forth under the heading
Options and Other Rights on the signature page
hereof; (c) Stockholder Owns the additional securities of
the Company set forth under the heading Additional
Securities Beneficially Owned on the signature page
hereof; and (d) Stockholder does not directly or indirectly
Own any shares of capital stock or other securities of the
Company, or any option, warrant or other right to acquire (by
purchase, conversion or otherwise) any shares of capital stock
or other securities of the Company, other than the shares and
options, warrants and other rights set forth on the signature
page hereof.
6.4 Accuracy of Representations. The
representations and warranties contained in this Agreement are
accurate in all material respects as of the date of this
Agreement and will be accurate in all material respects as of
the date of the consummation of the Merger as if made on that
date, subject to the acquisition of additional securities of the
Company by Stockholder following the date hereof.
Section 7. Additional
Covenants of Stockholder
7.1 Further Assurances. From time to time
and without additional consideration, Stockholder shall execute
and deliver, or cause to be executed and delivered, such
additional transfers, assignments, endorsements, proxies,
consents and other instruments, and shall (at Stockholders
sole expense) take such further actions, as Replidyne may
reasonably request in writing for the purpose of carrying out
and furthering the intent of this Agreement.
7.2 Legends. If requested by Replidyne,
immediately after the execution of this Agreement (and from time
to time upon the acquisition by Stockholder of Ownership of any
shares of Company Common Stock or Company Preferred Stock prior
to the Voting Covenant Expiration Date), Stockholder shall cause
each certificate evidencing any outstanding shares of Company
Common Stock, Company Preferred Stock or other securities of the
Company Owned by Stockholder to be surrendered so that the
transfer agent for such securities may affix thereto a legend in
the following form:
THE SECURITY OR SECURITIES REPRESENTED BY THIS CERTIFICATE MAY
NOT BE SOLD, EXCHANGED OR OTHERWISE TRANSFERRED OR DISPOSED OF
EXCEPT IN COMPLIANCE WITH THE TERMS AND PROVISIONS OF A VOTING
AGREEMENT DATED AS OF NOVEMBER 3, 2008, AS IT MAY BE AMENDED, A
COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF
THE ISSUER.
Section 8. Miscellaneous
8.1 Survival of Representations, Warranties and
Agreements. All representations, warranties,
covenants and agreements made by Stockholder in this Agreement
shall survive (i) the consummation of the Merger,
(ii) any termination of the Merger Agreement, and
(iii) the Voting Covenant Expiration Date.
8.2 Expenses. Except as otherwise may be
agreed to, all costs and expenses incurred in connection with
the transactions contemplated by this Agreement shall be paid by
the party incurring such costs and expenses.
8.3 Notices. Any notice or other
communication required or permitted to be delivered to either
party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by
hand, by registered mail, by courier or express delivery service
or by facsimile) to the address or facsimile telephone
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number set forth beneath the name of such party below (or to
such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other
party):
if to Stockholder:
at the address set forth on the signature page hereof; and
if to Replidyne:
Replidyne, Inc.
1450 Infinite Drive
Louisville, CO 80027
Attn: Chief Financial Officer
Fax:
(303) 996-5599
8.4 Severability. Any term or provision
of this Agreement that is invalid or unenforceable in any
situation in any jurisdiction shall not affect the validity or
enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or
provision in any other situation or in any other jurisdiction.
If the final judgment of a court of competent jurisdiction
declares that any term or provision hereof is invalid or
unenforceable, the parties hereto agree that the court making
such determination shall have the power to limit the term or
provision, to delete specific words or phrases, or to replace
any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest
to expressing the intention of the invalid or unenforceable term
or provision, and this Agreement shall be enforceable as so
modified. In the event such court does not exercise the power
granted to it in the prior sentence, the parties hereto agree to
replace such invalid or unenforceable term or provision with a
valid and enforceable term or provision that will achieve, to
the extent possible, the economic, business and other purposes
of such invalid or unenforceable term.
8.5 Entire Agreement. This Agreement, the
Proxy and any other documents delivered by the parties in
connection herewith constitute the entire agreement between the
parties with respect to the subject matter hereof and thereof
and supersede all prior agreements and understandings between
the parties with respect thereto. No addition to or modification
of any provision of this Agreement shall be binding upon either
party unless made in writing and signed by both parties.
8.6 Assignment; Binding Effect. Except as
provided herein, neither this Agreement nor any of the interests
or obligations hereunder may be assigned or delegated by
Stockholder, and any attempted or purported assignment or
delegation of any of such interests or obligations shall be
void. Subject to the preceding sentence, this Agreement shall be
binding upon Stockholder and his heirs, estate, executors and
personal representatives and his or its successors and assigns,
and shall inure to the benefit of Replidyne and its successors
and assigns. Without limiting any of the restrictions set forth
in Section 2 or Section 7.1 or elsewhere in this
Agreement, this Agreement shall be binding upon any Person to
whom any Subject Securities are transferred. Nothing in this
Agreement is intended to confer on any Person (other than
Replidyne and its successors and assigns) any rights or remedies
of any nature.
8.7 Specific Performance. The parties
agree that irreparable damage would occur in the event that any
of the provisions of this Agreement or the Proxy were not
performed in accordance with its specific terms or were
otherwise breached. Stockholder agrees that, in the event of any
breach or threatened breach by Stockholder of any covenant or
obligation contained in this Agreement or in the Proxy,
Replidyne shall be entitled (in addition to any other remedy
that may be available to it, including monetary damages) to seek
and obtain (a) a decree or order of specific performance to
enforce the observance and performance of such covenant or
obligation, and (b) an injunction restraining such breach
or threatened breach. Stockholder further agrees that neither
Replidyne nor any other Person shall be required to obtain,
furnish or post any bond or similar instrument in connection
with or as a condition to obtaining any remedy referred to in
this Section 8.7, and Stockholder irrevocably waives any
right he or it may have to require the obtaining, furnishing or
posting of any such bond or similar instrument.
8.8 Non-Exclusivity. The rights and
remedies of Replidyne under this Agreement are not exclusive of
or limited by any other rights or remedies which it may have,
whether at law, in equity, by contract or otherwise, all of
which shall be cumulative (and not alternative). Without
limiting the generality of the foregoing, the rights and
remedies of Replidyne under this Agreement, and the obligations
and liabilities of Stockholder under this
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Agreement, are in addition to their respective rights, remedies,
obligations and liabilities under common law requirements and
under all applicable statutes, rules and regulations.
8.9 Governing Law; Venue.
(a) This Agreement and the Proxy shall be construed in
accordance with, and governed in all respects by, the laws of
the State of Minnesota (without giving effect to principles of
conflicts of laws).
(b) Any legal action or other legal proceeding relating to
this Agreement or the Proxy or the enforcement of any provision
of this Agreement or the Proxy may be brought or otherwise
commenced in any state or federal court located in the State of
Delaware. Stockholder:
(i) expressly and irrevocably consents and submits to the
jurisdiction of each state and federal court located in the
State of Delaware in connection with any such legal proceeding;
(ii) agrees that service of any process, summons, notice or
document by U.S. mail addressed to him or it at the address
set forth on the signature page hereof shall constitute
effective service of such process, summons, notice or document
for purposes of any such legal proceeding;
(iii) agrees that each state and federal court located in
the State of Delaware shall be deemed to be a convenient
forum; and
(iv) agrees not to assert (by way of motion, as a defense
or otherwise), in any such legal proceeding commenced in any
state or federal court located in the State of Delaware, any
claim that Stockholder is not subject personally to the
jurisdiction of such court, that such legal proceeding has been
brought in an inconvenient forum, that the venue of such
proceeding is improper or that this Agreement or the subject
matter of this Agreement may not be enforced in or by such court.
Nothing contained in this Section 8.9 shall be deemed to
limit or otherwise affect the right of Replidyne to commence any
legal proceeding or otherwise proceed against Stockholder in any
other forum or jurisdiction.
(c) STOCKHOLDER IRREVOCABLY WAIVES THE RIGHT TO A JURY
TRIAL IN CONNECTION WITH ANY LEGAL PROCEEDING RELATING TO THIS
AGREEMENT OR THE PROXY OR THE ENFORCEMENT OF ANY PROVISION OF
THIS AGREEMENT OR THE PROXY.
8.10 Counterparts. This Agreement may be
executed in separate counterparts, each of which when so
executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same
instrument.
8.11 Captions. The captions contained in
this Agreement are for convenience of reference only, shall not
be deemed to be a part of this Agreement and shall not be
referred to in connection with the construction or
interpretation of this Agreement.
8.12 Attorneys Fees. If any legal
action or other legal proceeding relating to this Agreement or
the enforcement of any provision of this Agreement is brought
against Stockholder, the prevailing party shall be entitled to
recover reasonable attorneys fees, costs and disbursements
(in addition to any other relief to which the prevailing party
may be entitled).
8.13 Waiver. No failure on the part of
Replidyne to exercise any power, right, privilege or remedy
under this Agreement, and no delay on the part of Replidyne in
exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right,
privilege or remedy; and no single or partial exercise of any
such power, right, privilege or remedy shall preclude any other
or further exercise thereof or of any other power, right,
privilege or remedy. Replidyne shall not be deemed to have
waived any claim available to Replidyne arising out of this
Agreement, or any power, right, privilege or remedy of Replidyne
under this Agreement, unless the waiver of such claim, power,
right, privilege or remedy is expressly set forth in a written
instrument duly executed and delivered on behalf of Replidyne;
and any such waiver shall not be applicable or have any effect
except in the specific instance in which it is given.
8.14 Term. This Agreement and all
obligations hereunder shall terminate upon the earlier of
(i) the day after the Merger is consummated,
(ii) April 30, 2009, (iii) the date of any
modification, waiver or amendment to the
C-6
Merger Agreement in a manner that reduces the amount and form of
consideration payable thereunder to Stockholder, and
(iv) the termination of the Merger Agreement.
8.15 No Limitation on Actions of Stockholder as
Director. In the event Stockholder or any of its
Representatives is a member of the board of directors of the
Company, notwithstanding anything to the contrary in this
Agreement, nothing in this Agreement is intended or shall be
construed to require the Stockholder or such Representative to
take any action, or limit any action the Stockholder or such
Representative may take, to the extent that doing so would be
inconsistent with Stockholders or such
Representatives fiduciary duties as a director of the
Company. Notwithstanding anything in this Agreement to the
contrary, Stockholder makes no agreement or understanding herein
in any capacity other than in its capacity as a record holder
and beneficial owner of the Subject Securities.
8.16 Construction.
(a) For purposes of this Agreement, whenever the context
requires: the singular number shall include the plural, and vice
versa; the masculine gender shall include the feminine and
neuter genders; the feminine gender shall include the masculine
and neuter genders; and the neuter gender shall include
masculine and feminine genders.
(b) The parties agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting
party shall not be applied in the construction or interpretation
of this Agreement.
(c) As used in this Agreement, the words
include and including, and variations
thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words without
limitation.
(d) Except as otherwise indicated, all references in this
Agreement to Sections and Exhibits are
intended to refer to Sections of this Agreement and Exhibits to
this Agreement.
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In Witness Whereof,
Replidyne and Stockholder have caused this Agreement
to be executed as of the date first written above.
REPLIDYNE, INC.
Name:
Title:
STOCKHOLDER
Name:
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Shares Held of Record
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Options and Other Rights
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Additional Securities Beneficially Owned
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C-8
Exhibit A
Form Of
Irrevocable Proxy
The undersigned shareholder (the Stockholder)
of Cardiovascular Systems,
Inc., a
Minnesota corporation (the Company), hereby
irrevocably (to the fullest extent permitted by law) appoints
and constitutes Kenneth Collins, Mark Smith and Replidyne,
Inc.,a Delaware corporation (Replidyne), and
each of them, the attorneys and proxies of the Stockholder with
full power of substitution and resubstitution, to the full
extent of the Stockholders rights with respect to the
outstanding shares of capital stock of the Company owned of
record by the Stockholder as of the date of this proxy, which
shares are specified on the final page of this proxy (the
Shares). Upon the execution hereof, all prior
proxies given by the Stockholder with respect to any of the
Shares are hereby revoked, and the Stockholder agrees that no
subsequent proxies will be given with respect to any of the
Shares.
This proxy is irrevocable, is coupled with an interest and is
granted in connection with the Voting Agreement, dated as of the
date hereof, between Replidyne and the Stockholder (the
Voting Agreement), and is granted in
consideration of Replidyne entering into the Agreement and Plan
of Merger and Reorganization, dated as of the date hereof, among
Replidyne, Responder Merger Sub, Inc. and the Company (the
Merger Agreement). This proxy will terminate
on the Voting Covenant Expiration Date (as defined in the Voting
Agreement).
The attorneys and proxies named above will be empowered, and may
exercise this proxy, to vote the Shares at any time until the
Voting Covenant Expiration Date at any meeting of the
shareholders of the Company, however called, and in connection
with any written action by consent of shareholders of the
Company:
(i) in favor of the Merger (as defined in the Merger
Agreement), the execution and delivery by the Company of the
Merger Agreement and the adoption and approval of the Merger
Agreement and the terms thereof, in favor of each of the other
actions contemplated by the Merger Agreement and in favor of any
action in furtherance of any of the foregoing; and
(ii) against any action or agreement that would result in a
material breach of any covenant or obligation of the Company in
the Merger Agreement that would have the effect of preventing or
materially delaying the Merger; and
(iii) against the following actions (other than the Merger
and the other transactions contemplated by the Merger
Agreement): (A) any extraordinary corporate transaction,
such as a merger, consolidation or other business combination
involving the Company or any subsidiary of the Company;
(B) any sale, lease or transfer of a material amount of
assets of the Company or any subsidiary of the Company;
(C) any reorganization, recapitalization, dissolution or
liquidation of the Company or any subsidiary of the Company;
(D) any change in a majority of the board of directors of
the Company; (E) any amendment to the Companys
articles of incorporation or bylaws that would prevent or
materially delay the Merger; (F) any Acquisition
Transaction (as defined in the Merger Agreement); and
(G) any other action which is intended, or could reasonably
be expected to impede, interfere with, delay, postpone,
discourage or adversely affect the Merger or any of the other
transactions contemplated by the Merger Agreement or the Voting
Agreement.
The Stockholder may vote the Shares on all other matters not
referred to in this proxy, and the attorneys and proxies named
above may not exercise this proxy with respect to such other
matters.
Notwithstanding anything to the contrary set forth herein, at no
time and in no event shall the Shares subject to this proxy and
any and all shares of capital stock of the Company subject to
similar irrevocable proxies (the Other
Proxies) executed by other shareholders of the Company
concurrently with the execution of this proxy (collectively, the
Voting Shares) collectively exceed nineteen
and nine-tenths percent (19.9%) of the outstanding capital stock
of the Company (the Maximum Restricted
Amount), and if the Voting Shares exceed the Maximum
Restricted Amount, then only such number of shares as equals the
Maximum Restricted Amount shall be subject to this proxy and the
Other Proxies (with any such exclusion of Voting Shares effected
on a pro rata basis for each shareholder subject to this proxy
and the Other Proxies in accordance with the number of shares of
capital stock of the Company held by such shareholders and
subject to this proxy and the Other Proxies).
C-9
This proxy shall be binding upon the heirs, estate, executors,
personal representatives, successors and assigns of the
Stockholder (including any transferee of any of the Shares).
Any term or provision of this proxy that is invalid or
unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and
provisions hereof or the validity or enforceability of the
offending term or provision in any other situation or in any
other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision
hereof is invalid or unenforceable, the Stockholder agrees that
the court making such determination shall have the power to
limit the term or provision, to delete specific words or
phrases, or to replace any invalid or unenforceable term or
provision with a term or provision that is valid and enforceable
and that comes closest to expressing the intention of the
invalid or unenforceable term or provision, and this proxy shall
be enforceable as so modified. In the event such court does not
exercise the power granted to it in the prior sentence, the
Stockholder agrees to replace such invalid or unenforceable term
or provision with a valid and enforceable term or provision that
will achieve, to the extent possible, the economic, business and
other purposes of such invalid or unenforceable term.
Dated: November 3, 2008
Shares Held of Record
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1999 Avenue of the Stars
Suite 2400
Los Angeles, CA 90067
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Annex
D
November 3, 2008
Board of Directors
Replidyne, Inc.
1450 Infinite Drive
Louisville, CO 80027
Members of the Board:
We understand that Replidyne, Inc. (the Buyer),
Responder Merger Sub, Inc., a wholly owned subsidiary of the
Buyer (Acquisition Sub), and Cardiovascular Systems,
Inc. (the Company) propose to enter into an
Agreement and Plan of Merger and Reorganization, substantially
in the form of the draft dated November 2, 2008 (the
Merger Agreement), which provides, among other
things, for (i) the conversion of each share of common
stock, $0.001 par value per share, of the Buyer (the
Buyer Common Stock) into a fractional number of
shares of Buyer Common Stock, as more fully described in the
Merger Agreement (the Reverse Stock Split) and
(ii) the merger (the Merger) of Acquisition Sub
with and into the Company. Pursuant to the Merger, the Company
will become a wholly owned subsidiary of the Buyer, and each
share of common stock, no par value per share, of the Company
(the Company Common Stock) outstanding immediately
prior to the Effective Time, other than shares held in treasury,
by the Company or its Subsidiaries (as defined in the Merger
Agreement) or as to which dissenters rights have been
perfected, and including shares issued as a result of the
conversion described in the Company Stockholder Conversion
Agreement (as defined in the Merger Agreement) shall be
converted solely into the right to receive a certain number of
shares (the Exchange Ratio) of Buyer Common Stock
determined pursuant to the formula set forth in the Merger
Agreement. The terms and conditions of the Reverse Stock Split
and the Merger are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the Exchange Ratio
pursuant to the Merger Agreement is fair from a financial point
of view to the Buyer.
For purposes of the opinion set forth herein, we have:
i) reviewed certain publicly available financial statements
and other business and financial information of the Company and
the Buyer, respectively;
ii) reviewed certain internal financial statements and
other financial and operating data, including certain financial
projections, concerning the Buyer prepared by the management of
the Buyer;
iii) reviewed certain financial projections concerning the
Company prepared by the management of the Company;
iv) discussed the past and current operations and financial
condition and the prospects of the Company with senior
executives of the Company;
v) reviewed the reported prices and trading activity for
the Buyer Common Stock;
vi) compared the financial performance of the Company with
that of certain other publicly traded companies comparable with
the Company, and their securities;
vii) reviewed the financial terms, to the extent publicly
available, of certain comparable acquisition transactions;
viii) participated in certain discussions and negotiations
among representatives of the Company and the Buyer and their
legal advisors;
D-1
ix) reviewed the Merger Agreement, the Company Stockholder
Conversion Agreement in the form of a draft dated
October 28, 2008 and certain related documents; and
x) performed such other analyses and considered such other
factors as we have deemed appropriate.
We have assumed and relied upon, without independent
verification, the accuracy and completeness of the information
that was publicly available or supplied or otherwise made
available to us by the Company and the Buyer, and formed a
substantial basis for this opinion. With respect to the
financial projections, we have assumed that they have been
reasonably prepared on bases reflecting the best currently
available estimates and judgments of the respective managements
of the Company and the Buyer of the future financial performance
of the Company and the Buyer. In addition, we have assumed that
the Merger will be consummated in accordance with the terms set
forth in the Merger Agreement without any waiver, amendment or
delay of any terms or conditions, including, among other things,
that the Merger will be treated as a tax-free reorganization
pursuant to the Internal Revenue Code of 1986, as amended.
Morgan Stanley has assumed that in connection with the receipt
of all the necessary governmental, regulatory or other approvals
and consents required for the proposed Merger, no delays,
limitations, conditions or restrictions will be imposed that
would have a material adverse effect on the contemplated
benefits expected to be derived in the proposed Merger. We have
relied upon, without independent verification, the assessment by
the managements of the Company and the Buyer of: (i) their
ability to retain key employees of the Company and (ii) the
validity of, and risks associated with, the Companys
existing and future technologies, intellectual property,
products, services and business models. We are not legal, tax or
regulatory advisors. We are financial advisors only and have
relied upon, without independent verification, the assessment of
the Buyer and the Company and their legal, tax or regulatory
advisors with respect to legal, tax or regulatory matters. We
express no opinion with respect to the fairness of the amount or
nature of the compensation to any of the Companys
officers, directors or employees, or any class of such persons,
relative to the consideration to be paid to the holders of
shares of the Company Common Stock in the transaction. We have
not made any independent valuation or appraisal of the assets or
liabilities of the Company or the Buyer, nor have we been
furnished with any such appraisals. Our opinion does not address
the relative merits of the Merger as compared to any other
alternative business transaction, or other alternatives,
including, without limitation, the potential liquidation of the
Buyer, or whether or not such alternatives could be achieved or
are available. Our opinion is necessarily based on financial,
economic, market and other conditions as in effect on, and the
information made available to us as of, the date hereof. Events
occurring after the date hereof may affect this opinion and the
assumptions used in preparing it, and we do not assume any
obligation to update, revise or reaffirm this opinion.
We have acted as financial advisor to the Board of Directors of
the Buyer in connection with this transaction and will receive a
fee for our services, a substantial portion of which is
contingent upon the closing of the Merger. In the two years
prior to the date hereof, we have provided financial advisory
and financing services for the Buyer and the Company and have
received fees from the Buyer in connection with such services.
Morgan Stanley may also seek to provide such services to the
Buyer and the Company in the future and expects to receive fees
for the rendering of these services.
Please note that Morgan Stanley is a global financial services
firm engaged in the securities, investment management and
individual wealth management businesses. Our securities business
is engaged in securities underwriting, trading and brokerage
activities, foreign exchange, commodities and derivatives
trading, prime brokerage, as well as providing investment
banking, financing and financial advisory services. Morgan
Stanley, its affiliates, directors and officers may at any time
invest on a principal basis or manage funds that invest, hold
long or short positions, finance positions, and may trade or
otherwise structure and effect transactions, for their own
account or the accounts of its customers, in debt or equity
securities or loans of the Buyer, the Company, or any other
company, or any currency or commodity, that may be involved in
this transaction, or any related derivative instrument.
This opinion has been approved by a committee of Morgan Stanley
investment banking and other professionals in accordance with
our customary practice. This opinion is for the information of
the Board of Directors of the Buyer and may not be used for any
other purpose without our prior written consent, except that a
copy of this opinion may be included in its entirety in any
filing the Buyer is required to make with the Securities and
Exchange Commission in connection with this transaction if such
inclusion is required by applicable law. In addition, this
D-2
opinion does not in any manner address the prices at which the
Buyer Common Stock will trade following consummation of the
Merger and Morgan Stanley expresses no opinion or recommendation
as to how the stockholders of the Buyer and the Company should
vote at the stockholders meetings to be held in connection
with the Merger.
Based on and subject to the foregoing, we are of the opinion on
the date hereof that the Exchange Ratio pursuant to the Merger
Agreement is fair from a financial point of view to the Buyer.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
David Cohen
Executive Director
D-3
Annex E
CERTIFICATE
OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
REPLIDYNE, INC.
REPLIDYNE, INC. (the Corporation), a
corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware (the
DGCL), hereby certifies as follows:
FIRST: The name of the Corporation is
Replidyne, Inc. A Certificate of Incorporation of the
Corporation originally was filed by the Corporation with the
Secretary of State of Delaware on December 6, 2000.
SECOND: This Certificate of Amendment amends
the Restated Certificate of Incorporation of the Corporation and
was duly adopted by the board of directors of the Corporation in
accordance with the provisions of Sections 141 and 242 of
the DGCL.
THIRD: The text of the Restated Certificate of
Incorporation of the Corporation is hereby amended as follows:
1. Article I of the Restated Certificate of
Incorporation of the Corporation is hereby amended and restated
as follows:
The name of this corporation is Cardiovascular Systems,
Inc.
2. Article IV of the Restated Certificate of
Incorporation of the Corporation is hereby amended and restated
as follows:
A. Without regard to any other provision of this Restated
Certificate of Incorporation, each one (1) share of Common
Stock, either issued and outstanding or held by the corporation
as treasury stock, immediately prior to the time this
Certificate of Amendment becomes effective shall be and is
hereby automatically reclassified and changed (without any
further act)
into 1
of a fully-paid and nonassessable share of Common Stock;
provided, that no fractional shares shall be issued to any
stockholder and no certificates or scrip for any such fractional
shares shall be issued, each stockholder otherwise entitled to
receive a fractional share shall receive the next lower whole
number of shares of Common Stock, and the corporation shall pay
in cash the dollar amount of such fractional shares (to the
nearest whole cent), without interest, determined in each case
by multiplying such fraction by the closing price of a share of
Common Stock on the Nasdaq Global Market on the date immediately
preceding the date on which this Certificate of Amendment
becomes effective.
B. This corporation is authorized to issue two classes of
stock to be designated, respectively, Common Stock
and Preferred Stock. The total number of shares
which the corporation is authorized to issue is one hundred five
million (105,000,000) shares. One hundred million (100,000,000)
shares shall be Common Stock, each having a par value of
one-tenth of one cent ($.001). Five million (5,000,000) shares
shall be Preferred Stock, each having a par value of one-tenth
of one cent ($.001).
C. The Preferred Stock may be issued from time to time in
one or more series. The Board of Directors is hereby expressly
authorized to provide for the issue of all or any of the shares
of the Preferred Stock in one or more series, and to fix the
number of shares and to determine or alter for each such series,
such voting powers, full or limited, or no voting powers, and
such designation, preferences, and relative, participating,
optional, or other rights and such qualifications, limitations,
or restrictions thereof, as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors
providing for the issuance of such shares and as may be
permitted by the DGCL. The Board of Directors is also expressly
authorized to increase or decrease the number of shares of any
series subsequent to the issuance of shares of that series, but
not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be decreased in
1
Shall be a number less than one and equal to or greater than
0.02, the exact number within the range to be determined prior
to the Effective Time in accordance with the Merger Agreement.
E-1
accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of
shares of such series. The number of authorized shares of
Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative
vote of the holders of a majority of the Common Stock, without a
vote of the holders of the Preferred Stock, or of any series
thereof, unless a vote of any such holders is required pursuant
to the terms of any certificate of designation filed with
respect to any series of Preferred Stock.
D. Each outstanding share of Common Stock shall entitle the
holder thereof to one vote on each matter properly submitted to
the stockholders of the Corporation for their vote; provided,
however, that, except as otherwise required by law, holders
of Common Stock shall not be entitled to vote on any amendment
to this Certificate of Incorporation (including any certificate
of designation filed with respect to any series of Preferred
Stock) that relates solely to the terms of one or more
outstanding series of Preferred Stock if the holders of such
affected series are entitled, either separately or together as a
class with the holders of one or more other such series, to vote
thereon by law or pursuant to this Certificate of Incorporation
(including any certificate of designation filed with respect to
any series of Preferred Stock).
FOURTH: Thereafter pursuant to a resolution
of the board of directors of the Corporation, this Certificate
of Amendment was submitted to the stockholders of the
Corporation for their approval, and was duly adopted at a
special meeting of the stockholders in accordance with the
provisions of Section 242 of the DGCL.
E-2
IN WITNESS
WHEREOF,
Replidyne,
Inc. has caused this Certificate of Amendment to be
signed by its duly authorized officer
this
day
of ,
.
Replidyne,
Inc.
Kenneth J. Collins
President and Chief Executive Officer
E-3
Annex F
MINNESOTA
STATUTES
CORPORATIONS (CH.
300-319B)
CHAPTER 302A. BUSINESS CORPORATIONS
SHARES; SHAREHOLDERS
302A.471. Rights
of dissenting shareholders
Subdivision 1. Actions creating
rights. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the
shareholders shares in the event of, any of the following
corporate actions:
(a) unless otherwise provided in the articles, an amendment
of the articles that materially and adversely affects the rights
or preferences of the shares of the dissenting shareholder in
that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a
sinking fund for the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of
the shares to acquire shares, securities other than shares, or
rights to purchase shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote
on a matter, or to cumulate votes, except as the right may be
excluded or limited through the authorization or issuance of
securities of an existing or new class or series with similar or
different voting rights; except that an amendment to the
articles of an issuing public corporation that provides that
section 302A.671 does not apply to a control share
acquisition does not give rise to the right to obtain payment
under this section; or
(5) eliminates the right to obtain payment under this
subdivision;
(b) a sale, lease, transfer, or other disposition of
property and assets of the corporation that requires shareholder
approval under section 302A.661, subdivision 2, but not
including a disposition in dissolution described in
section 302A.725, subdivision 2, or a disposition pursuant
to an order of a court, or a disposition for cash on terms
requiring that all or substantially all of the net proceeds of
disposition be distributed to the shareholders in accordance
with their respective interests within one year after the date
of disposition;
(c) a plan of merger, whether under this chapter or under
chapter 322B, to which the corporation is a constituent
organization, except as provided in subdivision 3, and except
for a plan of merger adopted under section 302A. 626;
(d) a plan of exchange, whether under this chapter or under
chapter 322B, to which the corporation is a party as the
corporation whose shares will be acquired by the acquiring
organization, except as provided in subdivision 3;
(e) a plan of conversion adopted by the corporation; or
(f) any other corporate action taken pursuant to a
shareholder vote with respect to which the articles, the bylaws,
or a resolution approved by the board directs that dissenting
shareholders may obtain payment for their shares.
Subd. 2. Beneficial owners. (a) A
shareholder shall not assert dissenters rights as to less
than all of the shares registered in the name of the
shareholder, unless the shareholder dissents with respect to all
the shares that are beneficially owned by another person but
registered in the name of the shareholder and discloses the name
and address of each beneficial owner on whose behalf the
shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder
has dissented and the other shares were registered in the names
of different shareholders.
(b) A beneficial owner of shares who is not the shareholder
may assert dissenters rights with respect to shares held
on behalf of the beneficial owner, and shall be treated as a
dissenting shareholder under the terms of this section
F-1
and section 302A.473, if the beneficial owner submits to
the corporation at the time of or before the assertion of the
rights a written consent of the shareholder.
Subd. 3. Rights not to
apply. (a) Unless the articles, the bylaws,
or a resolution approved by the board otherwise provide, the
right to obtain payment under this section does not apply to a
shareholder of (1) the surviving corporation in a merger
with respect to shares of the shareholder that are not entitled
to be voted on the merger and are not canceled or exchanged in
the merger or (2) the corporation whose shares will be
acquired by the acquiring organization in a plan of exchange
with respect to shares of the shareholder that are not entitled
to be voted on the plan of exchange and are not exchanged in the
plan of exchange.
(b) If a date is fixed according to section 302A.445,
subdivision 1, for the determination of shareholders entitled to
receive notice of and to vote on an action described in
subdivision 1, only shareholders as of the date fixed, and
beneficial owners as of the date fixed who hold through
shareholders, as provided in subdivision 2, may exercise
dissenters rights.
(c) Notwithstanding subdivision 1, the right to obtain
payment under this section, other than in connection with a plan
of merger adopted under section 302A.621, is limited in
accordance with the following provisions:
(1) The right to obtain payment under this section is not
available for the holders of shares of any class or series of
shares that is listed on the New York Stock Exchange, the
American Stock Exchange, the NASDAQ Global Market, or the NASDAQ
Global Select Market.
(2) The applicability of clause (1) is determined as
of:
(i) the record date fixed to determine the shareholders
entitled to receive notice of, and to vote at, the meeting of
shareholders to act upon the corporate action described in
subdivision 1; or
(ii) the day before the effective date of corporate action
described in subdivision 1 if there is no meeting of
shareholders.
(3) Clause (1) is not applicable, and the right to
obtain payment under this section is available pursuant to
subdivision 1, for the holders of any class or series of shares
who are required by the terms of the corporate action described
in subdivision 1 to accept for such shares anything other than
shares, or cash in lieu of fractional shares, of any class or
any series of shares of a domestic or foreign corporation, or
any other ownership interest of any other organization, that
satisfies the standards set forth in clause (1) at the time
the corporate action becomes effective.
Subd. 4. Other rights. The
shareholders of a corporation who have a right under this
section to obtain payment for their shares, or who would have
the right to obtain payment for their shares absent the
exception set forth in paragraph (c) of subdivision 3, do
not have a right at law or in equity to have a corporate action
described in subdivision 1 set aside or rescinded, except when
the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473. Procedures
for asserting dissenters rights
Subdivision
1. Definitions. (a) For
purposes of this section, the terms defined in this subdivision
have the meanings given them.
(b) Corporation means the issuer of the
shares held by a dissenter before the corporate action referred
to in section 302A.471, subdivision 1 or the successor by
merger of that issuer.
(c) Fair value of the shares means the
value of the shares of a corporation immediately before the
effective date of the corporate action referred to in
section 302A.471, subdivision 1.
(d) Interest means interest commencing
five days after the effective date of the corporate action
referred to in section 302A.471, subdivision 1, up to and
including the date of payment, calculated at the rate provided
in section 549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a
corporation calls a shareholder meeting at which any action
described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of
the
F-2
right to dissent and shall include a copy of
section 302A.471 and this section and a brief description
of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If the
proposed action must be approved by the shareholders and the
corporation holds a shareholder meeting, a shareholder who is
entitled to dissent under section 302A.471 and who wishes
to exercise dissenters rights must file with the
corporation before the vote on the proposed action a written
notice of intent to demand the fair value of the shares owned by
the shareholder and must not vote the shares in favor of the
proposed action.
Subd. 4. Notice of procedure; deposit of
shares. (a) After the proposed action has been approved
by the board and, if necessary, the shareholders, the
corporation shall send to (i) all shareholders who have
complied with subdivision 3, (ii) all shareholders who did
not sign or consent to a written action that gave effect to the
action creating the right to obtain payment under
section 302A.471, and (iii) all shareholders entitled
to dissent if no shareholder vote was required, a notice that
contains:
(1) the address to which a demand for payment and
certificates of certificated shares must be sent in order to
obtain payment and the date by which they must be received;
(2) any restrictions on transfer of uncertificated shares
that will apply after the demand for payment is received;
(3) a form to be used to certify the date on which the
shareholder, or the beneficial owner on whose behalf the
shareholder dissents, acquired the shares or an interest in them
and to demand payment; and
(4) a copy of section 302A.471 and this section and a
brief description of the procedures to be followed under these
sections.
(b) In order to receive the fair value of the shares, a
dissenting shareholder must demand payment and deposit
certificated shares or comply with any restrictions on transfer
of uncertificated shares within 30 days after the notice
required by paragraph (a) was given, but the dissenter
retains all other rights of a shareholder until the proposed
action takes effect.
Subd. 5. Payment; return of shares.
(a) After the corporate action takes effect, or after the
corporation receives a valid demand for payment, whichever is
later, the corporation shall remit to each dissenting
shareholder who has complied with subdivisions 3 and 4 the
amount the corporation estimates to be the fair value of the
shares, plus interest, accompanied by:
(1) the corporations closing balance sheet and
statement of income for a fiscal year ending not more than
16 months before the effective date of the corporate
action, together with the latest available interim financial
statements;
(2) an estimate by the corporation of the fair value of the
shares and a brief description of the method used to reach the
estimate; and
(3) a copy of section 302A.471 and this section, and a
brief description of the procedure to be followed in demanding
supplemental payment.
(b) The corporation may withhold the remittance described
in paragraph (a) from a person who was not a shareholder on
the date the action dissented from was first announced to the
public or who is dissenting on behalf of a person who was not a
beneficial owner on that date. If the dissenter has complied
with subdivisions 3 and 4, the corporation shall forward to the
dissenter the materials described in paragraph (a), a statement
of the reason for withholding the remittance, and an offer to
pay to the dissenter the amount listed in the materials if the
dissenter agrees to accept that amount in full satisfaction. The
dissenter may decline the offer and demand payment under
subdivision 6. Failure to do so entitles the dissenter only to
the amount offered. If the dissenter makes demand, subdivisions
7 and 8 apply.
(c) If the corporation fails to remit payment within
60 days of the deposit of certificates or the imposition of
transfer restrictions on uncertificated shares, it shall return
all deposited certificates and cancel all transfer
F-3
restrictions. However, the corporation may again give notice
under subdivision 4 and require deposit or restrict transfer at
a later time.
Subd. 6. Supplemental payment;
demand. If a dissenter believes that the amount
remitted under subdivision 5 is less than the fair value of the
shares plus interest, the dissenter may give written notice to
the corporation of the dissenters own estimate of the fair
value of the shares, plus interest, within 30 days after
the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is
entitled only to the amount remitted by the corporation.
Subd. 7. Petition;
determination. If the corporation receives a
demand under subdivision 6, it shall, within 60 days after
receiving the demand, either pay to the dissenter the amount
demanded or agreed to by the dissenter after discussion with the
corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The
petition shall be filed in the county in which the registered
office of the corporation is located, except that a surviving
foreign corporation that receives a demand relating to the
shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last
registered office of the constituent corporation was located.
The petition shall name as parties all dissenters who have
demanded payment under subdivision 6 and who have not reached
agreement with the corporation. The corporation shall, after
filing the petition, serve all parties with a summons and copy
of the petition under the Rules of Civil Procedure. Nonresidents
of this state may be served by registered or certified mail or
by publication as provided by law. Except as otherwise provided,
the Rules of Civil Procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court
may appoint appraisers, with powers and authorities the court
deems proper, to receive evidence on and recommend the amount of
the fair value of the shares. The court shall determine whether
the shareholder or shareholders in question have fully complied
with the requirements of this section, and shall determine the
fair value of the shares, taking into account any and all
factors the court finds relevant, computed by any method or
combination of methods that the court, in its discretion, sees
fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the
court is binding on all shareholders, wherever located. A
dissenter is entitled to judgment in cash for the amount by
which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under
subdivision 5, but shall not be liable to the corporation for
the amount, if any, by which the amount, if any, remitted to the
dissenter under subdivision 5 exceeds the fair value of the
shares as determined by the court, plus interest.
Subd. 8. Costs; fees; expenses. (a) The
court shall determine the costs and expenses of a proceeding
under subdivision 7, including the reasonable expenses and
compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except
that the court may assess part or all of those costs and
expenses against a dissenter whose action in demanding payment
under subdivision 6 is found to be arbitrary, vexatious, or not
in good faith.
(b) If the court finds that the corporation has failed to
comply substantially with this section, the court may assess all
fees and expenses of any experts or attorneys as the court deems
equitable. These fees and expenses may also be assessed against
a person who has acted arbitrarily, vexatiously, or not in good
faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and
expenses to an attorney for the dissenters out of the amount
awarded to the dissenters, if any.
F-4
Annex G
CARDIOVASCULAR
SYSTEMS, INC.
2007 EQUITY INCENTIVE PLAN
Section 1. Definitions
As used herein, the following terms shall have the meanings
indicated below:
(a) Administrator shall mean the Board
of Directors of the Company, or one or more Committees appointed
by the Board, as the case may be.
(b) Affiliate(s) shall mean a Parent or
Subsidiary of the Company.
(c) Award shall mean any grant of an
Option, Restricted Stock Award, Restricted Stock Unit Award,
Stock Appreciation Right or Performance Award.
(d) Committee shall mean a Committee of
two or more directors who shall be appointed by and serve at the
pleasure of the Board. To the extent necessary for compliance
with
Rule 16b-3,
or any successor provision, each of the members of the Committee
shall be a non-employee director. Solely for
purposes of this Section 1(d), non-employee
director shall have the same meaning as set forth in
Rule 16b-3,
or any successor provision, as then in effect, of the General
Rules and Regulations under the Securities Exchange Act of 1934,
as amended. Further, to the extent necessary for compliance with
the limitations set forth in Internal Revenue Code
Section 162(m), each of the members of the Committee shall
be an outside director within the meaning of Code
Section 162(m) and the regulations issued thereunder.
(e) The Company shall mean Cardiovascular
Systems, Inc., a Minnesota corporation.
(f) Fair Market Value as of any date
shall mean (i) if such stock is listed on the Nasdaq
National Market, Nasdaq SmallCap Market, or an established stock
exchange, the price of such stock at the close of the regular
trading session of such market or exchange on such date, as
reported by The Wall Street Journal or a comparable
reporting service, or, if no sale of such stock shall have
occurred on such date, on the next preceding date on which there
was a sale of stock; (ii) if such stock is not so listed on
the Nasdaq National Market, Nasdaq SmallCap Market, or an
established stock exchange, the average of the closing
bid and asked prices quoted by the OTC
Bulletin Board, the National Quotation Bureau, or any
comparable reporting service on such date or, if there are no
quoted bid and asked prices on such
date, on the next preceding date for which there are such
quotes; or (iii) if such stock is not publicly traded as of
such date, the per share value as determined by the Board, or
the Committee, in its sole discretion by applying principles of
valuation with respect to the Companys Common Stock.
(g) The Internal Revenue Code or
Code is the Internal Revenue Code of 1986, as
amended from time to time.
(h) Option means an incentive stock
option or nonqualified stock option granted pursuant to the Plan.
(i) Parent shall mean any corporation
which owns, directly or indirectly in an unbroken chain, fifty
percent (50%) or more of the total voting power of the
Companys outstanding stock.
(j) The Participant means (i) a key
employee or officer of the Company or any Affiliate to whom an
incentive stock option has been granted pursuant to
Section 9; (ii) a consultant or advisor to, or
director, key employee or officer, of the Company or any
Affiliate to whom a nonqualified stock option has been granted
pursuant to Section 10; (iii) a consultant or advisor
to, or director, key employee or officer, of the Company or any
Affiliate to whom a Restricted Stock Award or Restricted Stock
Unit Award has been granted pursuant to Section 11;
(iv) a consultant or advisor to, or director, key employee
or officer, of the Company or any Affiliate to whom a
Performance Award has been granted pursuant to Section 12;
or (v) a consultant or advisor to, or director, key
employee or officer, of the Company or any Affiliate to whom a
Stock Appreciation Right has been granted pursuant to
Section 13.
G-1
(k) Performance Award shall mean any
Performance Shares or Performance Units granted pursuant to
Section 12 hereof.
(l) Performance Objective(s) shall mean
one or more performance objectives established by the
Administrator, in its sole discretion, for Awards granted under
this Plan. For any Awards that are intended to qualify as
performance-based compensation under Code
Section 162(m), the Performance Objectives shall be limited
to any one, or a combination of, (i) revenue, (ii) net
income, (iii) earnings per share, (iv) return on
equity, (v) return on assets, (vi) increase in
revenue, (vii) increase in share price or earnings,
(viii) return on investment, or (ix) increase in
market share, in all cases including, if selected by the
Administrator, threshold, target and maximum levels.
(m) Performance Period shall mean the
period, established at the time any Performance Award is granted
or at any time thereafter, during which any Performance
Objectives specified by the Administrator with respect to such
Performance Award are to be measured.
(n) Performance Share shall mean any
grant pursuant to Section 12 hereof of an Award, which
value, if any, shall be paid to a Participant by delivery of
shares of Common Stock of the Company upon achievement of such
Performance Objectives during the Performance Period as the
Administrator shall establish at the time of such grant or
thereafter.
(o) Performance Unit shall mean any
grant pursuant to Section 12 hereof of an Award, which
value, if any, shall be paid to a Participant by delivery of
cash upon achievement of such Performance Objectives during the
Performance Period as the Administrator shall establish at the
time of such grant or thereafter.
(p) The Plan means the Cardiovascular Systems,
Inc. 2007 Equity Incentive Plan, as amended hereafter from time
to time, including the form of Agreements as they may be
modified by the Administrator from time to time.
(q) Restricted Stock Award or
Restricted Stock Unit Award shall mean any grant of
restricted shares of Stock of the Company or the grant of any
restricted stock units pursuant to Section 11 hereof.
(r) Stock, Option Stock or
Common Stock shall mean Common Stock of the
Company (subject to adjustment as described in Section 14).
(s) Stock Appreciation Right shall mean
a grant pursuant to Section 13 hereof.
(t) A Subsidiary shall mean any corporation of
which fifty percent (50%) or more of the total voting power of
the Companys outstanding Stock is owned, directly or
indirectly in an unbroken chain, by the Company.
Section 2. Purpose
The purpose of the Plan is to promote the success of the Company
and its Affiliates by facilitating the employment and retention
of competent personnel and by furnishing incentive to officers,
directors, employees, consultants, and advisors upon whose
efforts the success of the Company and its Affiliates will
depend to a large degree.
It is the intention of the Company to carry out the Plan through
the granting of Options which will qualify as incentive
stock options under the provisions of Section 422 of
the Internal Revenue Code, or any successor provision, pursuant
to Section 9 of this Plan; through the granting of
nonqualified stock options pursuant to
Section 10 of this Plan; through the granting of Restricted
Stock Awards and Restricted Stock Unit Awards pursuant to
Section 11 of this Plan; through the granting of
Performance Awards pursuant to Section 12 of this Plan; and
through the granting of Stock Appreciation Rights pursuant to
Section 13 of this Plan. Adoption of this Plan shall be and
is expressly subject to the condition of approval by the
shareholders of the Company within twelve (12) months
before or after the adoption of the Plan by the Board of
Directors. Awards may be granted prior to the date this Plan is
approved by the shareholders of the Company; provided, however,
that any incentive stock options granted after adoption of the
Plan by the Board of Directors shall be treated as nonqualified
stock options if shareholder approval is not obtained within
such twelve-month period.
G-2
Section 3. Effective
Date of Plan
The Plan shall be effective as of the date of adoption by the
Board of Directors, subject to approval by the shareholders of
the Company as required in Section 2.
Section 4. Administration
The Plan shall be administered by the Board of Directors of the
Company (hereinafter referred to as the Board) or by
a Committee which may be appointed by the Board from time to
time to administer the Plan (hereinafter collectively referred
to as the Administrator). Except as otherwise
provided herein, the Administrator shall have all of the powers
vested in it under the provisions of the Plan, including but not
limited to exclusive authority to determine, in its sole
discretion, whether an Award shall be granted; the individuals
to whom, and the time or times at which, Awards shall be
granted; the number of shares subject to each Award; the option
price; and the performance criteria, if any, and any other terms
and conditions of each Award. The Administrator shall have full
power and authority to administer and interpret the Plan, to
make and amend rules, regulations and guidelines for
administering the Plan, to prescribe the form and conditions of
the respective agreements evidencing each Award (which may vary
from Participant to Participant), and to make all other
determinations necessary or advisable for the administration of
the Plan. The Administrators interpretation of the Plan,
and all actions taken and determinations made by the
Administrator pursuant to the power vested in it hereunder,
shall be conclusive and binding on all parties concerned.
No member of the Board or the Committee shall be liable for any
action taken or determination made in good faith in connection
with the administration of the Plan. In the event the Board
appoints a Committee as provided hereunder, any action of the
Committee with respect to the administration of the Plan shall
be taken pursuant to a majority vote of the Committee members or
pursuant to the written resolution of all Committee members.
Section 5. Participants
The Administrator shall from time to time, at its discretion and
without approval of the shareholders, designate those employees,
officers, directors, consultants, and advisors of the Company or
of any Affiliate to whom Awards shall be granted under this
Plan; provided, however, that consultants or advisors shall not
be eligible to receive Awards hereunder unless such consultant
or advisor renders bona fide services to the Company or any
Affiliate and such services are not in connection with the offer
or sale of securities in a capital raising transaction and do
not directly or indirectly promote or maintain a market for the
Companys securities. The Administrator shall, from time to
time, at its discretion and without approval of the
shareholders, designate those employees of the Company or any
Affiliate to whom Awards, including incentive stock options
shall be granted under this Plan. The Administrator may grant
additional Awards, including incentive stock options, under this
Plan to some or all Participants then holding Awards, or may
grant Awards solely or partially to new Participants. In
designating Participants, the Administrator shall also determine
the number of shares to be optioned or awarded to each such
Participant and the performance criteria applicable to each
Performance Award. The Administrator may from time to time
designate individuals as being ineligible to participate in the
Plan.
Notwithstanding anything in the Plan to the contrary, for any
Awards granted under the Plan that are intended to qualify as
performance-based compensation under Code
Section 162(m), the following limits will apply:
(a) In no event shall a Participant be granted Options or
Stock Appreciation Rights during any fiscal year of the Company
covering in the aggregate more than One Hundred Thousand
(100,000) shares of Stock, subject to adjustment as provided in
Section 14; provided, however, that a share of Stock
subject to a Stock Appreciation Right that is granted in tandem
with an Option shall count as one share against this limitation.
(b) In no event shall a Participant be granted Restricted
Stock Awards or, to the extent payable in or measured by the
value of shares of Stock, Restricted Stock Unit Awards during
any fiscal year of the Company covering in the aggregate more
than One Hundred Thousand (100,000) shares of Stock, subject to
adjustment as provided in Section 14.
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(c) To the extent payable in or measured by the value of
shares of Stock, in no event shall a Participant be granted
Performance Awards during any fiscal year of the Company
covering in the aggregate more than One Hundred Thousand
(100,000) shares of Stock, subject to adjustment as provided in
Section 14.
Section 6. Stock
The Stock to be optioned under this Plan shall consist of
authorized but unissued shares of Common Stock. The maximum
aggregate number of shares of Stock reserved and available for
Awards under the Plan is three million eight hundred seventy
nine thousand three hundred ninety seven
(3,879,397) shares; provided, however, that the number of
shares shall automatically be increased on the first day of each
fiscal year of the Company, beginning on July 1, 2008, and
ending on July 1, 2017, by the lesser of
(i) 1,500,000 shares, (ii) 5% of the outstanding
shares of Common Stock on such date or (iii) a lesser
amount determined by the Board; and provided, further, that all
shares of Stock reserved and available under the Plan shall
constitute the maximum aggregate number of shares of Stock that
may be issued through incentive stock options. The following
shares of Stock shall continue to be reserved and available for
Awards granted pursuant to the Plan: (i) any outstanding
Award that expires for any reason, (ii) any portion of an
outstanding Option or Stock Appreciation Right that is
terminated prior to exercise, (iii) any portion of an Award
that is terminated prior to the lapsing of the risks of
forfeiture on such Award, (iv) shares of Stock used to pay
the exercise price under any Award, (v) shares of Stock
used to satisfy any tax withholding obligation attributable to
any Award, whether such shares are withheld by the Company or
tendered by the Participant, and (vi) shares of Stock
covered by an Award to the extent the Award is settled in cash.
Section 7. Duration
of Plan
Incentive stock options may be granted pursuant to the Plan from
time to time during a period of ten (10) years from the
effective date as defined in Section 3. Other Awards may be
granted pursuant to the Plan from time to time after the
effective date of the Plan and until the Plan is discontinued or
terminated by the Administrator.
Section 8. Payment
Participants may pay for shares upon exercise of Options granted
pursuant to this Plan (i) in cash, or with a personal check
or certified check, (ii) by the transfer from the
Participant to the Company of previously acquired shares of
Common Stock, (iii) through the withholding of shares of
Stock from the number of shares otherwise issuable upon the
exercise of the Option (e.g., a net share settlement), or
(iv) by a combination thereof. Any stock tendered as part
of such payment shall be valued at such stocks then Fair
Market Value, or such other form of payment as may be authorized
by the Administrator. In the event the Optionee elects to pay
the exercise price in whole or in part with previously acquired
shares of Common Stock or through a net share settlement, the
Fair Market Value of the shares of Stock delivered or withheld
shall equal the total exercise price for the shares being
purchased in such manner. The Administrator may, in its sole
discretion, limit the forms of payment available to the
Participant and may exercise such discretion any time prior to
the termination of the Option granted to the Participant or upon
any exercise of the Option by the Participant.
Previously-owned shares means shares of the
Companys Common Stock which the Participant has owned for
at least six (6) months prior to the exercise of the
Option, or for such other period of time, if any, as may be
required by generally accepted accounting principles. With
respect to payment in the form of Common Stock of the Company,
the Administrator may require advance approval or adopt such
rules as it deems necessary to assure compliance with
Rule 16b-3,
or any successor provision, as then in effect, of the General
Rules and Regulations under the Securities Exchange Act of 1934,
if applicable.
Section 9. Terms
and Conditions of Incentive Stock Options
Each incentive stock option granted pursuant to this
Section 9 shall be evidenced by a written incentive stock
option agreement (the Option Agreement). The Option
Agreement shall be in such form as may be approved from
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time to time by the Administrator and may vary from Participant
to Participant; provided, however, that each Participant and
each Option Agreement shall comply with and be subject to the
following terms and conditions:
(a) Number of Shares and Option
Price. The Option Agreement shall state the
total number of shares covered by the incentive stock option.
Except as permitted by Code Section 424(a), or any
successor provision, the option price per share shall not be
less than one hundred percent (100%) of the per share Fair
Market Value of the Common Stock on the date the Administrator
grants the Option; provided, however, that if a Participant owns
stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or
of its Parent or any Subsidiary, the option price per share of
an incentive stock option granted to such Participant shall not
be less than one hundred ten percent (110%) of the per share
Fair Market Value of the Companys Common Stock on the date
of the grant of the Option. The Administrator shall have full
authority and discretion in establishing the option price and
shall be fully protected in so doing.
(b) Term and Exercisability of Incentive Stock
Option. The term during which any incentive
stock option granted under the Plan may be exercised shall be
established in each case by the Administrator. Except as
permitted by Code Section 424(a), in no event shall any
incentive stock option be exercisable during a term of more than
ten (10) years after the date on which it is granted;
provided, however, that if a Participant owns stock possessing
more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of its Parent or any
Subsidiary, the incentive stock option granted to such
Participant shall be exercisable during a term of not more than
five (5) years after the date on which it is granted.
The Option Agreement shall state when the incentive stock option
becomes exercisable and shall also state the maximum term during
which the Option may be exercised. In the event an incentive
stock option is exercisable immediately, the manner of exercise
of the Option in the event it is not exercised in full
immediately shall be specified in the Option Agreement. The
Administrator may accelerate the exercisability of any incentive
stock option granted hereunder which is not immediately
exercisable as of the date of grant.
(c) Nontransferability. No
incentive stock option shall be transferable, in whole or in
part, by the Participant other than by will or by the laws of
descent and distribution. During the Participants
lifetime, the incentive stock option may be exercised only by
the Participant. If the Participant shall attempt any transfer
of any incentive stock option granted under the Plan during the
Participants lifetime, such transfer shall be void and the
incentive stock option, to the extent not fully exercised, shall
terminate.
(d) No Rights as Shareholder. A
Participant (or the Participants successor or successors)
shall have no rights as a shareholder with respect to any shares
covered by an incentive stock option until the date of the
issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property),
distributions or other rights for which the record date is prior
to the date such stock certificate is actually issued (except as
otherwise provided in Section 14 of the Plan).
(e) Withholding. The Company or
its Affiliate shall be entitled to withhold and deduct from
future wages of the Participant all legally required amounts
necessary to satisfy any and all withholding and
employment-related taxes attributable to the Participants
exercise of an incentive stock option or a disqualifying
disposition of shares acquired through the exercise of an
incentive stock option as defined in Code Section 421(b).
In the event the Participant is required under the Option
Agreement to pay the Company, or make arrangements satisfactory
to the Company respecting payment of, such withholding and
employment-related taxes, the Administrator may, in its
discretion and pursuant to such rules as it may adopt, permit
the Participant to satisfy such obligation, in whole or in part,
by delivering shares of the Companys Common Stock or by
electing to have the Company withhold shares of Common Stock
otherwise issuable to the Participant as a result of the
exercise of the incentive stock option. Such shares shall have a
Fair Market Value equal to the minimum required tax withholding,
based on the minimum statutory withholding rates for federal and
state tax purposes, including payroll taxes, that are applicable
to the supplemental income resulting from such exercise or
disqualifying disposition. In no event may the Participant
deliver shares, nor may the Company or any Affiliate withhold
shares, having a Fair Market Value in excess of such statutory
minimum required tax withholding. The Participants
election to have shares withheld for this purpose shall be made
on or before the later of (i) the date the incentive stock
option is exercised or the date of the disqualifying
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disposition, as the case may be, or (ii) the date that the
amount of tax to be withheld is determined under applicable tax
law. Such election shall be approved by the Administrator and
otherwise comply with such rules as the Administrator may adopt
to assure compliance with
Rule 16b-3,
or any successor provision, as then in effect, of the General
Rules and Regulations under the Securities Exchange Act of 1934,
if applicable.
(f) Other Provisions. The Option
Agreement authorized under this Section 9 shall contain
such other provisions as the Administrator shall deem advisable.
Any such Option Agreement shall contain such limitations and
restrictions upon the exercise of the Option as shall be
necessary to ensure that such Option will be considered an
incentive stock option as defined in
Section 422 of the Internal Revenue Code or to conform to
any change therein.
Section 10. Terms
and Conditions of Nonqualified Stock Options
Each nonqualified stock option granted pursuant to this
Section 10 shall be evidenced by a written nonqualified
stock option agreement (the Option Agreement). The
Option Agreement shall be in such form as may be approved from
time to time by the Administrator and may vary from Participant
to Participant; provided, however, that each Participant and
each Option Agreement shall comply with and be subject to the
following terms and conditions:
(a) Number of Shares and Option
Price. The Option Agreement shall state the
total number of shares covered by the nonqualified stock option.
Unless otherwise determined by the Administrator, the option
price per share shall be one hundred percent (100%) of the per
share Fair Market Value of the Common Stock on the date the
Administrator grants the Option.
(b) Term and Exercisability of Nonqualified Stock
Option. The term during which any
nonqualified stock option granted under the Plan may be
exercised shall be established in each case by the
Administrator. The Option Agreement shall state when the
nonqualified stock option becomes exercisable and shall also
state the maximum term during which the Option may be exercised.
In the event a nonqualified stock option is exercisable
immediately, the manner of exercise of the Option in the event
it is not exercised in full immediately shall be specified in
the Option Agreement. The Administrator may accelerate the
exercisability of any nonqualified stock option granted
hereunder which is not immediately exercisable as of the date of
grant.
(c) Transferability. A
nonqualified stock option shall be transferable, in whole or in
part, by the Participant by will or by the laws of descent and
distribution. In addition, the Administrator may, in its sole
discretion, permit the Participant to transfer any or all
nonqualified stock options to any member of the
Participants immediate family as such term is
defined in
Rule 16a-1(e)
promulgated under the Securities Exchange Act of 1934, or any
successor provision, or to one or more trusts whose
beneficiaries are members of such Participants
immediate family or partnerships in which such
family members are the only partners; provided, however, that
the Participant cannot receive any consideration for the
transfer and such transferred nonqualified stock option shall
continue to be subject to the same terms and conditions as were
applicable to such nonqualified stock option immediately prior
to its transfer.
(d) No Rights as Shareholder. A
Participant (or the Participants successor or successors)
shall have no rights as a shareholder with respect to any shares
covered by a nonqualified stock option until the date of the
issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property),
distributions or other rights for which the record date is prior
to the date such stock certificate is actually issued (except as
otherwise provided in Section 14 of the Plan).
(e) Withholding. The Company or
its Affiliate shall be entitled to withhold and deduct from
future wages of the Participant all legally required amounts
necessary to satisfy any and all withholding and
employment-related taxes attributable to the Participants
exercise of a nonqualified stock option. In the event the
Participant is required under the Option Agreement to pay the
Company, or make arrangements satisfactory to the Company
respecting payment of, such withholding and employment-related
taxes, the Administrator may, in its discretion and pursuant to
such rules as it may adopt, permit the Participant to satisfy
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such obligation, in whole or in part, by delivering shares of
the Companys Common Stock or by electing to have the
Company withhold shares of Common Stock otherwise issuable to
the Participant as a result of the exercise of the nonqualified
stock option. Such shares shall have a Fair Market Value equal
to the minimum required tax withholding, based on the minimum
statutory withholding rates for federal and state tax purposes,
including payroll taxes, that are applicable to the supplemental
income resulting from such exercise. In no event may the
Participant deliver shares, nor may the Company or any Affiliate
withhold shares, having a Fair Market Value in excess of such
statutory minimum required tax withholding. The
Participants election to deliver shares or to have shares
withheld for this purpose shall be made on or before the later
of (i) the date the nonqualified stock option is exercised,
or (ii) the date that the amount of tax to be withheld is
determined under applicable tax law. Such election shall be
approved by the Administrator and otherwise comply with such
rules as the Administrator may adopt to assure compliance with
Rule 16b-3,
or any successor provision, as then in effect, of the General
Rules and Regulations under the Securities Exchange Act of 1934,
if applicable.
(f) Other Provisions. The Option
Agreement authorized under this Section 10 shall contain
such other provisions as the Administrator shall deem advisable.
Section 11. Restricted
Stock and Restricted Stock Unit Awards
Each Restricted Stock Award or Restricted Stock Unit Award
granted pursuant to the Plan shall be evidenced by a written
restricted stock or restricted stock unit agreement (the
Restricted Stock Agreement or Restricted Stock
Unit Agreement, as the case may be). The Restricted Stock
Agreement or Restricted Stock Unit Agreement shall be in such
form as may be approved from time to time by the Administrator
and may vary from Participant to Participant; provided, however,
that each Participant and each Restricted Stock Agreement or
Restricted Stock Unit Agreement shall comply with and be subject
to the following terms and conditions:
(a) Number of Shares. The
Restricted Stock Agreement or Restricted Stock Unit Agreement
shall state the total number of shares of Stock covered by the
Restricted Stock Award or Restricted Stock Unit Award.
(b) Risks of Forfeiture. The
Restricted Stock Agreement or Restricted Stock Unit Agreement
shall set forth the risks of forfeiture, if any, including risks
of forfeiture based on Performance Objectives, which shall apply
to the shares of Stock covered by the Restricted Stock Award or
Restricted Stock Unit Award, and shall specify the manner in
which such risks of forfeiture shall lapse. The Administrator
may, in its sole discretion, modify the manner in which such
risks of forfeiture shall lapse but only with respect to those
shares of Stock which are restricted as of the effective date of
the modification.
(c) Issuance of Shares; Rights as Shareholder.
(i) With respect to a Restricted Stock Award, the Company
shall cause to be issued a stock certificate representing such
shares of Stock in the Participants name, and shall
deliver such certificate to the Participant; provided, however,
that the Company shall place a legend on such certificate
describing the risks of forfeiture and other transfer
restrictions set forth in the Participants Restricted
Stock Agreement and providing for the cancellation and return of
such certificate if the shares of Stock subject to the
Restricted Stock Award are forfeited. Until the risks of
forfeiture have lapsed or the shares subject to such Restricted
Stock Award have been forfeited, the Participant shall be
entitled to vote the shares of Stock represented by such stock
certificates and shall receive all dividends attributable to
such shares, but the Participant shall not have any other rights
as a shareholder with respect to such shares.
(ii) With respect to a Restricted Stock Unit Award, as the
risks of forfeiture on the restricted stock units lapse, the
Participant shall be entitled to payment of the Restricted Stock
Units. The Administrator may, in its sole discretion, pay
Restricted Stock Units in cash, shares of Stock or any
combination thereof. If payment is made in shares of Stock, the
Administrator shall cause to be issued one or more stock
certificates in the Participants name and shall deliver
such certificates to the Participant in satisfaction of such
restricted stock units. Until the risks of forfeiture on the
restricted stock units have lapsed, the Participant shall not be
entitled to vote any shares of stock which may be acquired
through the restricted stock units, shall not receive any
dividends attributable to such shares, and shall not have any
other rights as a shareholder with respect to such shares.
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(d) Withholding Taxes. The
Company or its Affiliate shall be entitled to withhold and
deduct from future wages of the Participant all legally required
amounts necessary to satisfy any and all withholding and
employment-related taxes attributable to the Participants
Restricted Stock Award or Restricted Stock Unit Award. In the
event the Participant is required under the Restricted Stock
Agreement or Restricted Stock Unit Agreement to pay the Company,
or make arrangements satisfactory to the Company respecting
payment of, such withholding and employment-related taxes, the
Administrator may, in its discretion and pursuant to such rules
as it may adopt, require the Participant to satisfy such
obligations, in whole or in part, by delivering shares of Common
Stock, including shares of Stock received pursuant to the
Restricted Stock Award or Restricted Stock Unit Award on which
the risks of forfeiture have lapsed. Such shares shall have a
Fair Market Value equal to the minimum required tax withholding,
based on the minimum statutory withholding rates for federal and
state tax purposes, including payroll taxes, that are applicable
to the supplemental income resulting from the lapsing of the
risks of forfeiture on such restricted stock or restricted stock
unit. In no event may the Participant deliver shares having a
Fair Market Value in excess of such statutory minimum required
tax withholding. The Participants election to deliver
shares of Common Stock for this purpose shall be made on or
before the date that the amount of tax to be withheld is
determined under applicable tax law. Such election shall be
approved by the Administrator and otherwise comply with such
rules as the Administrator may adopt to assure compliance with
Rule 16b-3,
or any successor provision, as then in effect, of the General
Rules and Regulations under the Securities Exchange Act of 1934,
if applicable.
(e) Nontransferability. No
Restricted Stock Award or Restricted Stock Unit Award shall be
transferable, in whole or in part, by the Participant, other
than by will or by the laws of descent and distribution, prior
to the date the risks of forfeiture described in the Restricted
Stock Agreement or Restricted Stock Unit Agreement have lapsed.
If the Participant shall attempt any transfer of any Restricted
Stock Award or Restricted Stock Unit Award granted under the
Plan prior to such date, such transfer shall be void and the
Restricted Stock Award or Restricted Stock Unit Award shall
terminate.
(f) Other Provisions. The
Restricted Stock Agreement or Restricted Stock Unit Agreement
authorized under this Section 11 shall contain such other
provisions as the Administrator shall deem advisable.
Section 12. Performance
Awards
Each Performance Award granted pursuant to this Section 12
shall be evidenced by a written performance award agreement (the
Performance Award Agreement). The Performance Award
Agreement shall be in such form as may be approved from time to
time by the Administrator and may vary from Participant to
Participant; provided, however, that each Participant and each
Performance Award Agreement shall comply with and be subject to
the following terms and conditions:
(a) Awards. Performance Awards in
the form of Performance Units or Performance Shares may be
granted to any Participant in the Plan. Performance Units shall
consist of monetary awards which may be earned or become vested
in whole or in part if the Company or the Participant achieves
certain Performance Objectives established by the Administrator
over a specified Performance Period. Performance Shares shall
consist of shares of Stock or other Awards denominated in shares
of Stock that may be earned or become vested in whole or in part
if the Company or the Participant achieves certain Performance
Objectives established by the Administrator over a specified
Performance Period.
(b) Performance Objectives, Performance Period and
Payment. The Performance Award Agreement
shall set forth:
(i) the number of Performance Units or Performance Shares
subject to the Performance Award, and the dollar value of each
Performance Unit;
(ii) one or more Performance Objectives established by the
Administrator;
(iii) the Performance Period over which Performance Units
or Performance Shares may be earned or may become vested;
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(iv) the extent to which partial achievement of the
Performance Objectives may result in a payment or vesting of the
Performance Award, as determined by the Administrator; and
(v) the date upon which payment of Performance Units will
be made or Performance Shares will be issued, as the case may
be, and the extent to which such payment or the receipt of such
Performance Shares may be deferred.
(c) Withholding Taxes. The
Company or its Affiliates shall be entitled to withhold and
deduct from future wages of the Participant all legally required
amounts necessary to satisfy any and all withholding and
employment-related taxes attributable to the Participants
Performance Award. In the event the Participant is required
under the Performance Award Agreement to pay the Company or its
Affiliates, or make arrangements satisfactory to the Company or
its Affiliates respecting payment of, such withholding and
employment-related taxes, the Administrator may, in its
discretion and pursuant to such rules as it may adopt, permit
the Participant to satisfy such obligations, in whole or in
part, by delivering shares of Common Stock, including shares of
Stock received pursuant to the Performance Award. Such shares
shall have a Fair Market Value equal to the minimum required tax
withholding, based on the minimum statutory withholding rates
for federal and state tax purposes, including payroll taxes. In
no event may the Participant deliver shares having a Fair Market
Value in excess of such statutory minimum required tax
withholding. The Participants election to deliver shares
of Common Stock for this purpose shall be made on or before the
date that the amount of tax to be withheld is determined under
applicable tax law. Such election shall be approved by the
Administrator and otherwise comply with such rules as the
Administrator may adopt to assure compliance with
Rule 16b-3,
or any successor provision, as then in effect, of the General
Rules and Regulations under the Securities Exchange Act of 1934,
if applicable.
(d) Nontransferability. No
Performance Award shall be transferable, in whole or in part, by
the Participant, other than by will or by the laws of descent
and distribution. If the Participant shall attempt any transfer
of any Performance Award granted under the Plan, such transfer
shall be void and the Performance Award shall terminate.
(e) No Rights as Shareholder. A
Participant (or the Participants successor or successors)
shall have no rights as a shareholder with respect to any shares
covered by a Performance Award until the date of the issuance of
a stock certificate evidencing such shares. No adjustment shall
be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other
rights for which the record date is prior to the date such stock
certificate is actually issued (except as otherwise provided in
Section 14 of the Plan).
(f) Other Provisions. The
Performance Award Agreement authorized under this
Section 12 shall contain such other provisions as the
Administrator shall deem advisable.
Section 13. Stock
Appreciation Rights
Each Stock Appreciation Right granted pursuant to this
Section 13 shall be evidenced by a written stock
appreciation right agreement (the Stock Appreciation Right
Agreement). The Stock Appreciation Right Agreement shall
be in such form as may be approved from time to time by the
Administrator and may vary from Participant to Participant;
provided, however, that each Participant and each Stock
Appreciation Right Agreement shall comply with and be subject to
the following terms and conditions:
(a) Awards. A Stock Appreciation
Right shall entitle the Participant to receive, upon exercise,
cash, shares of Stock, or any combination thereof, having a
value equal to the excess of (i) the Fair Market Value of a
specified number of shares of Stock on the date of such
exercise, over (ii) a specified exercise price. Unless
otherwise determined by the Administrator, the specified
exercise price shall not be less than 100% of the Fair Market
Value of such shares of Stock on the date of grant of the Stock
Appreciation Right. A Stock Appreciation Right may be granted
independent of or in tandem with a previously or
contemporaneously granted Option.
(b) Term and Exercisability. The
term during which any Stock Appreciation Right granted under the
Plan may be exercised shall be established in each case by the
Administrator. The Stock Appreciation Right Agreement shall
state when the Stock Appreciation Right becomes exercisable and
shall also state the
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maximum term during which such Stock Appreciation Right may be
exercised. In the event a Stock Appreciation Right is
exercisable immediately, the manner of exercise of such Stock
Appreciation Right in the event it is not exercised in full
immediately shall be specified in the Stock Appreciation Right
Agreement. The Administrator may accelerate the exercisability
of any Stock Appreciation Right granted hereunder which is not
immediately exercisable as of the date of grant. If a Stock
Appreciation Right is granted in tandem with an Option, the
Stock Appreciation Right Agreement shall set forth the extent to
which the exercise of all or a portion of the Stock Appreciation
Right shall cancel a corresponding portion of the Option, and
the extent to which the exercise of all or a portion of the
Option shall cancel a corresponding portion of the Stock
Appreciation Right.
(c) Withholding Taxes. The
Company or its Affiliate shall be entitled to withhold and
deduct from future wages of the Participant all legally required
amounts necessary to satisfy any and all withholding and
employment-related taxes attributable to the Participants
Stock Appreciation Right. In the event the Participant is
required under the Stock Appreciation Right to pay the Company
or its Affiliate, or make arrangements satisfactory to the
Company or its Affiliate respecting payment of, such withholding
and employment-related taxes, the Administrator may, in its
discretion and pursuant to such rules as it may adopt, permit
the Participant to satisfy such obligation, in whole or in part,
by delivering shares of the Companys Common Stock or by
electing to have the Company withhold shares of Common Stock
otherwise issuable to the Participant as a result of the
exercise of the Stock Appreciation Right. Such shares shall have
a Fair Market Value equal to the minimum required tax
withholding, based on the minimum statutory withholding rates
for federal and state tax purposes, including payroll taxes,
that are applicable to the supplemental income resulting from
such exercise. In no event may the Participant deliver shares,
nor may the Company or any Affiliate withhold shares, having a
Fair Market Value in excess of such statutory minimum required
tax withholding. The Participants election to deliver
shares or to have shares withheld for this purpose shall be made
on or before the later of (i) the date the Stock
Appreciation Right is exercised, or (ii) the date that the
amount of tax to be withheld is determined under applicable tax
law. Such election shall be approved by the Administrator and
otherwise comply with such rules as the Administrator may adopt
to assure compliance with
Rule 16b-3,
or any successor provision, as then in effect, of the General
Rules and Regulations under the Securities Exchange Act of 1934,
if applicable.
(d) Nontransferability. No Stock
Appreciation Right shall be transferable, in whole or in part,
by the Participant, other than by will or by the laws of descent
and distribution. If the Participant shall attempt any transfer
of any Stock Appreciation Right granted under the Plan, such
transfer shall be void and the Stock Appreciation Right shall
terminate.
(e) No Rights as Shareholder. A
Participant (or the Participants successor or successors)
shall have no rights as a shareholder with respect to any shares
covered by a Stock Appreciation Right until the date of the
issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property),
distributions or other rights for which the record date is prior
to the date such stock certificate is actually issued (except as
otherwise provided in Section 14 of the Plan).
(f) Other Provisions. The Stock
Appreciation Right Agreement authorized under this
Section 13 shall contain such other provisions as the
Administrator shall deem advisable, including but not limited to
any restrictions on the exercise of the Stock Appreciation Right
which may be necessary to comply with
Rule 16b-3
of the Securities Exchange Act of 1934, as amended.
Section 14. Recapitalization,
Sale, Merger, Exchange or Liquidation
In the event of an increase or decrease in the number of shares
of Common Stock resulting from a stock dividend, stock split,
reverse split, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration
by the Company, the Board may, in its sole discretion, adjust
the number of shares of Stock reserved under Section 6
hereof, the number of shares of Stock covered by each
outstanding Award, and, if applicable, the price per share
thereof to reflect such change. Additional shares which may
become covered by the Award pursuant to such adjustment shall be
subject to the same restrictions as are applicable to the shares
with respect to which the adjustment relates.
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Unless otherwise provided in the agreement evidencing an Award,
in the event of an acquisition of the Company through the sale
of substantially all of the Companys assets and the
consequent discontinuance of its business or through a merger,
consolidation, exchange, reorganization, reclassification,
extraordinary dividend, divestiture (including a spin-off),
liquidation, recapitalization, stock split, stock dividend or
otherwise (collectively referred to as a
transaction), the Board may provide for one or more
of the following:
(a) the equitable acceleration of the exercisability of any
outstanding Options or Stock Appreciation Rights, the vesting
and payment of any Performance Awards, or the lapsing of the
risks of forfeiture on any Restricted Stock Awards or Restricted
Stock Unit Awards;
(b) the complete termination of this Plan, the cancellation
of outstanding Options or Stock Appreciation Rights not
exercised prior to a date specified by the Board (which date
shall give Participants a reasonable period of time in which to
exercise such Option or Stock Appreciation Right prior to the
effectiveness of such transaction), the cancellation of any
Performance Award and the cancellation of any Restricted Stock
Awards or Restricted Stock Unit Awards for which the risks of
forfeiture have not lapsed;
(c) that Participants holding outstanding Options and Stock
Appreciation Rights shall receive, with respect to each share of
Stock subject to such Option or Stock Appreciation Right, as of
the effective date of any such transaction, cash in an amount
equal to the excess of the Fair Market Value of such Stock on
the date immediately preceding the effective date of such
transaction over the price per share of such Options or Stock
Appreciation Rights; provided that the Board may, in lieu of
such cash payment, distribute to such Participants shares of
Common Stock of the Company or shares of stock of any
corporation succeeding the Company by reason of such
transaction, such shares having a value equal to the cash
payment herein;
(d) that Participants holding outstanding Restricted Stock
Awards, Restricted Stock Unit Awards and Performance Share
Awards shall receive, with respect to each share of Stock
subject to such Awards, as of the effective date of any such
transaction, cash in an amount equal to the Fair Market Value of
such Stock on the date immediately preceding the effective date
of such transaction; provided that the Board may, in lieu of
such cash payment, distribute to such Participants shares of
Common Stock of the Company or shares of stock of any
corporation succeeding the Company by reason of such
transaction, such shares having a value equal to the cash
payment herein;
(e) the continuance of the Plan with respect to the
exercise of Options or Stock Appreciation Rights which were
outstanding as of the date of adoption by the Board of such plan
for such transaction and the right to exercise such Options and
Stock Appreciation Rights as to an equivalent number of shares
of stock of the corporation succeeding the Company by reason of
such transaction; and
(f) the continuance of the Plan with respect to Restricted
Stock Awards or Restricted Stock Unit Awards for which the risks
of forfeiture have not lapsed as of the date of adoption by the
Board of such plan for such transaction and the right to receive
an equivalent number of shares of stock of the corporation
succeeding the Company by reason of such transaction.
(g) the continuance of the Plan with respect to Performance
Awards and, to the extent applicable, the right to receive an
equivalent number of shares of stock of the corporation
succeeding the Company by reason for such transaction.
The Board may restrict the rights of or the applicability of
this Section 14 to the extent necessary to comply with
Section 16(b) of the Securities Exchange Act of 1934, the
Internal Revenue Code or any other applicable law or regulation.
The grant of an Award pursuant to the Plan shall not limit in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or
business structure or to merge, exchange or consolidate or to
dissolve, liquidate, sell or transfer all or any part of its
business or assets.
Section 15. Investment
Purpose
No shares of Stock shall be issued pursuant to the Plan unless
and until there has been compliance, in the opinion of
Companys counsel, with all applicable legal requirements,
including without limitation, those relating to securities laws
and stock exchange listing requirements. As a condition to the
issuance of Stock to Participant, the
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Administrator may require Participant to (a) represent that
the shares of Stock are being acquired for investment and not
resale and to make such other representations as the
Administrator shall deem necessary or appropriate to qualify the
issuance of the shares as exempt from the Securities Act of 1933
and any other applicable securities laws, and (b) represent
that Participant shall not dispose of the shares of Stock in
violation of the Securities Act of 1933 or any other applicable
securities laws.
As a further condition to the grant of any Option or the
issuance of Stock to Participant, Participant agrees to the
following:
(a) In the event the Company advises Participant that it
plans an underwritten public offering of its Common Stock in
compliance with the Securities Act of 1933, as amended, and the
underwriter(s) seek to impose restrictions under which certain
shareholders may not sell or contract to sell or grant any
option to buy or otherwise dispose of part or all of their stock
purchase rights of the Common Stock underlying Awards,
Participant will not, for a period not to exceed 180 days
from the prospectus, sell or contract to sell or grant an option
to buy or otherwise dispose of any Option granted to Participant
pursuant to the Plan or any of the underlying shares of Common
Stock without the prior written consent of the underwriter(s) or
its representative(s).
(b) In the event the Company makes any public offering of
its securities and determines in its sole discretion that it is
necessary to reduce the number of issued but unexercised stock
purchase rights so as to comply with any states securities
or Blue Sky law limitations with respect thereto, the Board of
Directors of the Company shall have the right (i) to
accelerate the exercisability of any Option and the date on
which such Option must be exercised, provided that the Company
gives Participant prior written notice of such acceleration, and
(ii) to cancel any Options or portions thereof which
Participant does not exercise prior to or contemporaneously with
such public offering.
(c) In the event of a transaction (as defined in
Section 14 of the Plan), Participant will comply with
Rule 145 of the Securities Act of 1933 and any other
restrictions imposed under other applicable legal or accounting
principles if Participant is an affiliate (as
defined in such applicable legal and accounting principles) at
the time of the transaction, and Participant will execute any
documents necessary to ensure compliance with such rules.
The Company reserves the right to place a legend on any stock
certificate issued in connection with an Award pursuant to the
Plan to assure compliance with this Section 15.
Section 16. Amendment
of the Plan
The Board may from time to time, insofar as permitted by law,
suspend or discontinue the Plan or revise or amend it in any
respect; provided, however, that no such revision or amendment,
except as is authorized in Section 14, shall impair the
terms and conditions of any Award which is outstanding on the
date of such revision or amendment to the material detriment of
the Participant without the consent of the Participant.
Notwithstanding the foregoing, no such revision or amendment
shall (i) materially increase the number of shares subject
to the Plan except as provided in Section 14 hereof,
(ii) change the designation of the class of employees
eligible to receive Awards, (iii) decrease the price at
which Options may be granted, or (iv) materially increase
the benefits accruing to Participants under the Plan without the
approval of the shareholders of the Company if such approval is
required for compliance with the requirements of any applicable
law or regulation. Furthermore, the Plan may not, without the
approval of the shareholders, be amended in any manner that will
cause incentive stock options to fail to meet the requirements
of Section 422 of the Internal Revenue Code.
Section 17. No
Obligation to Exercise Option
The granting of an Option shall impose no obligation upon the
Participant to exercise such Option. Further, the granting of an
Award hereunder shall not impose upon the Company or any
Affiliate any obligation to retain the Participant in its employ
for any period.
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Annex H
REPLIDYNE,
INC.
2006
EMPLOYEE STOCK PURCHASE PLAN
Adopted
by the Board of Directors on June 1, 2006
Approved by the Stockholders on June 22, 2006
1. Purpose.
(a) The purpose of this Plan is to provide a means
by which Employees of the Company and certain designated
Subsidiaries may be given an opportunity to purchase stock of
the Company.
(b) The Company, by means of the Plan, seeks to
retain the services of its Employees, to secure and retain the
services of new Employees, and to provide incentives for such
persons to exert maximum efforts for the success of the Company.
(c) The Company intends that the Purchase Rights
granted under the Plan be considered options issued under an
Employee Stock Purchase Plan.
2. Definitions.
As used in the Plan and any Offering, unless otherwise
specified, the following terms have the meanings set forth below:
(a) Affiliate means (i) any
corporation (other than the Company) in an unbroken chain of
corporations ending with the Company, provided each corporation
in the unbroken chain (other than the Company) owns, at the time
of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock
in one of the other corporations in such chain, and
(ii) any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company,
provided each corporation (other than the last corporation) in
the unbroken chain owns, at the time of the determination, stock
possessing fifty percent (50%) or more of the total combined
voting power of all classes of stock in one of the other
corporations in such chain. The Board shall have the authority
to determine (i) the time or times at which the ownership
tests are applied, and (ii) whether Affiliate
includes entities other than corporations within the foregoing
definition.
(b) Board means the Board of
Directors of the Company.
(c) Code means the Internal
Revenue Code of 1986, as amended.
(d) Committee means a committee
of one (1) or more members of the Board to whom authority
has been delegated by the Board in accordance with
Section 3(c).
(e) Common Stock means the common
stock of the Company.
(f) Company means Replidyne,
Inc., a Delaware corporation.
(g) Contributions means the
payroll deductions, and other additional payments specifically
provided for in the Offering, that a Participant contributes to
fund the exercise of a Purchase Right. A Participant may make
additional payments into his or her account, if specifically
provided for in the Offering, and then only if the Participant
has not already had the maximum permitted amount withheld
through payroll deductions during the Offering.
(h) Corporate Transaction means
the occurrence, in a single transaction or in a series of
related transactions, of any one or more of the following events:
(1) a dissolution or liquidation of the Company;
(2) a lease, sale, or other disposition of all or
substantially all of the assets of the Company;
(3) the consummation of a merger, consolidation or
similar transaction following which the Company is not the
surviving corporation; or
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(4) the consummation of a merger, consolidation or
similar transaction following which the Company is the surviving
corporation but the shares of Common Stock outstanding
immediately preceding the merger, consolidation or similar
transaction are converted or exchanged by virtue of the merger,
consolidation or similar transaction into other property,
whether in the form of securities, cash or otherwise.
(5) the acquisition by any person, entity or group
within the meaning of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the Exchange
Act), or any comparable successor provisions (excluding
any employee benefit plan, or related trust, sponsored or
maintained by the Company or any Subsidiary) of the beneficial
ownership (within the meaning of
Rule 13d-3
promulgated under the Exchange Act, or comparable successor
rule) of securities of the Company representing at least fifty
percent (50%) of the combined voting power entitled to vote in
the election of directors; or
(6) the individuals who, as of the date of the
adoption of this Plan, are members of the Board (the
Incumbent Board) cease for any reason to constitute
at least fifty percent (50%) of the Board, provided that
if the election, or nomination for election by the
Companys stockholders, of a new director was approved by a
vote of at least fifty percent (50%) of the members of the Board
then comprising the Incumbent Board, such new director shall
upon his or her election be considered a member of the Incumbent
Board.
(i) Director means a member of
the Board.
(j) Earnings of an Employee with
respect to any Offering has the meaning defined in such Offering.
(k) Eligible Employee means an
Employee who meets the requirements set forth in the Offering
for eligibility to participate in the Offering, provided that
such Employee also meets the requirements for eligibility to
participate set forth in the Plan.
(l) Employee means any person,
including Officers and Directors, who is employed for purposes
of Section 423(b)(4) of the Code by the Company or a
Subsidiary. Neither service as a Director nor payment of a
directors fee shall be sufficient to make an individual an
Employee of the Company or a Subsidiary.
(m) Employee Stock Purchase Plan
means a plan that grants Purchase Rights intended to be
options issued under an employee stock purchase
plan, as that term is defined in Section 423(b) of
the Code.
(n) Exchange Act means the
Securities Exchange Act of 1934, as amended.
(o) Fair Market Value means the
value of a security, as determined in good faith by the Board.
If the security is listed on any established stock exchange or
traded on the Nasdaq National Market or the Nasdaq SmallCap
Market, the Fair Market Value of the security, unless otherwise
determined by the Board, shall be the closing sales price
(rounded up where necessary to the nearest whole cent) for such
security (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market
with the greatest volume of trading in the relevant security of
the Company) on the last Trading Day prior to the date of
determination, as reported in The Wall Street Journal or
such other source as the Board deems reliable.
(p) Initial Offering means the
first Offering under this Plan.
(q) Non-Employee Director means a
Director who either (i) is not a current employee or
officer of the Company or an Affiliate, does not receive
compensation, either directly or indirectly, from the Company or
an Affiliate for services rendered as a consultant or in any
capacity other than as a Director (except for an amount as to
which disclosure would not be required under Item 404(a) of
Regulation S-K
promulgated pursuant to the Securities Act
(Regulation S-K)),
does not possess an interest in any other transaction for which
disclosure would be required under Item 404(a) of
Regulation S-K,
and is not engaged in a business relationship for which
disclosure would be required pursuant to Item 404(b) of
Regulation S-K;
or (ii) is otherwise considered a non-employee
director for purposes of
Rule 16b-3.
(r) Offering means the grant of
Purchase Rights to purchase shares of Common Stock under the
Plan to Eligible Employees.
(s) Offering Date means a date
selected by the Board for an Offering to commence.
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(t) Officer means a person who is
an officer of the Company within the meaning of Section 16
of the Exchange Act and the rules and regulations promulgated
thereunder
(u) Outside Director means a
Director who either (i) is not a current employee of the
Company or an affiliated corporation (within the
meaning of Treasury Regulations promulgated under
Section 162(m) of the Code), is not a former employee of
the Company or an affiliated corporation who
receives compensation for prior services (other than benefits
under a tax-qualified retirement plan) during the taxable year,
has not been an officer of the Company or an affiliated
corporation, and does not receive remuneration from the
Company or an affiliated corporation, either
directly or indirectly, in any capacity other than as a
Director, or (ii) is otherwise considered an outside
director for purposes of Section 162(m) of the Code.
(v) Participant means an Eligible
Employee who holds an outstanding Purchase Right granted
pursuant to the Plan.
(w) Plan means this Replidyne,
Inc. 2006 Employee Stock Purchase Plan.
(x) Purchase Date means one or
more dates during an Offering established by the Board on which
Purchase Rights shall be exercised and as of which purchases of
shares of Common Stock shall be carried out in accordance with
such Offering.
(y) Purchase Period means a
period of time specified within an Offering beginning on the
Offering Date or on the next day following a Purchase Date
within an Offering and ending on a Purchase Date. An Offering
may consist of one or more Purchase Periods.
(z) Purchase Right means an
option to purchase shares of Common Stock granted pursuant to
the Plan.
(aa) Related Corporation means
any parent corporation or subsidiary corporation, whether now or
hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(bb) Securities Act means the
Securities Act of 1933, as amended.
(cc) Subsidiary means any
subsidiary corporation of the Company, whether now or hereafter
existing, as such term is defined in Section 424(f) of the
Code.
(dd) Trading Day means any day
the exchange(s) or market(s) on which shares of Common Stock are
listed, whether it be any established stock exchange, the Nasdaq
National Market, the Nasdaq SmallCap Market or otherwise, is
open for trading.
3. Administration.
(a) The Plan shall be administered by the Board
unless and until the Board delegates administration to a
Committee, as provided in subparagraph 3(c). Whether or not the
Board has delegated administration, the Board shall have the
final power to determine all questions of policy and expediency
that may arise in the administration of the Plan.
(b) The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine when and how Purchase Rights shall
be granted and the provisions of each offering of such Purchase
Rights (which need not be identical).
(ii) To designate from time to time which
Subsidiaries shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and
Purchase Rights granted under it, and to establish, amend and
revoke rules and regulations for its administration. The Board,
in the exercise of this power, may correct any defect, omission
or inconsistency in the Plan, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully
effective.
(iv) To amend the Plan as provided in
paragraph 14.
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(v) Generally, to exercise such powers and to
perform such acts as the Board deems necessary or expedient to
promote the best interests of the Company and its Subsidiaries
and to carry out the intent that the Plan be treated as an
Employee Stock Purchase Plan.
(c) The Board may delegate administration of the
Plan to a Committee of the Board composed of two (2) or
more members, all of the members of which Committee may be, in
the discretion of the Board, Non-Employee Directors
and/or
Outside Directors. If administration is delegated to a
Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by
the Board, including the power to delegate to a subcommittee of
two (2) or more Outside Directors any of the administrative
powers the Committee is authorized to exercise (and references
in this Plan to the Board shall thereafter be to the Committee
or such a subcommittee), subject, however, to such resolutions,
not inconsistent with the provisions of the Plan, as may be
adopted from time to time by the Board. The Board may abolish
the Committee at any time and revest in the Board the
administration of the Plan. If administration is delegated to a
Committee, references to the Board in this Plan and in the
Offering document shall thereafter be deemed to be to the Board
or the Committee, as the case may be.
(d) Any interpretation of the Plan by the Board of
any decision made by it under the Plan shall be final and
binding on all persons.
4. Shares
Subject to the Plan.
(a) Subject to the provisions of paragraph 13
relating to adjustments upon changes in stock, the stock that
may be sold pursuant to Purchase Rights granted under the Plan
(the Reserved Shares), shall not exceed in
the aggregate 1,920,872 shares of the Common Stock.
Effective as of each July 1st, beginning with July 1,
2009 and continuing through and including July 1, 2016, the
number of Reserved Shares will be increased by the lesser of
(i) one percent (1.0%) of the total number of shares of the
Common Stock outstanding on such date, or
(ii) 1,800,000 shares. Notwithstanding the
foregoing, the Board may designate a smaller number of shares to
be added to the share reserve as of a particular July 1. If
any Purchase Right granted under the Plan shall for any reason
terminate without having been exercised, the Common Stock not
purchased under such Purchase Right shall again become available
for the Plan.
(b) The stock subject to the Plan may be unissued
shares or reacquired shares, bought on the market or otherwise.
5. Grant of
Rights; Offering.
(a) The Board or the Committee may from time to time
grant or provide for the grant of Purchase Rights under the Plan
to Eligible Employees in an Offering on an Offering Date or
Offering Dates selected by the Board or the Committee. Each
Offering shall be in such form and shall contain such terms and
conditions as the Board or the Committee shall deem appropriate,
which shall comply with the requirements of
Section 423(b)(5) of the Code that all Employees granted
Purchase Rights under the Plan shall have the same rights and
privileges. The terms and conditions of an Offering shall be
incorporated by reference into the Plan and treated as part of
the Plan. The provisions of separate Offerings need not be
identical, but each Offering shall include (through
incorporation of the provisions of this Plan by reference in the
document comprising the Offering or otherwise) the period during
which the Offering shall be effective, which period shall not
exceed twenty-seven (27) months beginning with the Offering
Date, and the substance of the provisions contained in
paragraphs 6 through 9, inclusive.
(b) If a Participant has more than one
(1) Purchase Right outstanding under the Plan, unless he or
she otherwise indicates in agreements or notices delivered
hereunder, a Purchase Right with a lower exercise price (or an
earlier-granted Purchase Right if two (2) Purchase Rights
have identical exercise prices), will be exercised to the
fullest possible extent before a Purchase Right with a higher
exercise price (or a later-granted Purchase Right if two
(2) Purchase Rights have identical exercise prices) will be
exercised.
6. Eligibility.
(a) Rights may be granted only to Employees of the
Company or, as the Board or the Committee may designate as
provided in subparagraph 3(b), to Employees of any Subsidiary of
the Company. Except as provided in subparagraph 6(b), an
Employee of the Company or any Subsidiary shall not be eligible
to be granted Purchase Rights under the Plan unless, on the
Offering Date, such Employee has been in the employ of the
Company or any
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Subsidiary for such continuous period preceding such grant as
the Board or the Committee may require, but in no event shall
the required period of continuous employment be greater than two
(2) years. In addition, unless otherwise determined by the
Board or the Committee and set forth in the terms of the
applicable Offering, no Employee of the Company or any
Subsidiary shall be eligible to be granted Purchase Rights under
the Plan unless, on the Offering Date, such Employees
customary employment with the Company or such Subsidiary is for
at least twenty (20) hours per week and at least five
(5) months per calendar year.
(b) The Board or the Committee may provide that each
person who, during the course of an Offering, first becomes an
Eligible Employee of the Company or designated Subsidiary will,
on a date or dates specified in the Offering which coincides
with the day on which such person becomes an Eligible Employee
or a date which occurs thereafter, receive a Purchase Right
under that Offering, which Purchase Right shall thereafter be
deemed to be a part of that Offering. Such Purchase Right shall
have the same characteristics as any Purchase Rights originally
granted under that Offering, as described herein, except that:
(i) the date on which such Purchase Right is granted
shall be the Offering Date of such Purchase Right
for all purposes, including determination of the exercise price
of such Purchase Right;
(ii) the period of the Offering with respect to such
Purchase Right shall begin on its Offering Date and end
coincident with the end of such Offering; and
(iii) the Board or the Committee may provide that if
such person first becomes an Eligible Employee within a
specified period of time before the end of the Offering, he or
she will not receive any Purchase Right under that Offering.
(c) No Employee shall be eligible for the grant of
any Purchase Rights under the Plan if, immediately after any
such Purchase Rights are granted, such Employee owns stock
possessing five percent (5%) or more of the total combined
voting power or value of all classes of stock of the Company or
of any Related Corporation. For purposes of this subparagraph
6(c), the rules of Section 424(d) of the Code shall apply
in determining the stock ownership of any Employee, and stock
which such Employee may purchase under all outstanding Purchase
Rights and options (whether vested or unvested) shall be treated
as stock owned by such Employee.
(d) An Eligible Employee may be granted Purchase
Rights under the Plan only if such Purchase Rights, together
with any other Purchase Rights granted under Employee Stock
Purchase Plans of the Company and any Related Corporations do
not permit such Employees Purchase Rights or any Related
Corporation to accrue at a rate which exceeds twenty five
thousand dollars ($25,000) of Fair Market Value of such stock
(determined at the time such Purchase Rights are granted) for
each calendar year in which such Purchase Rights are outstanding
at any time.
(e) Officers of the Company and any designated
Subsidiary shall be eligible to participate in Offerings under
the Plan; provided, however, that the Board may provide in an
Offering that certain Employees who are highly compensated
Employees within the meaning of Section 423(b)(4)(D) of the
Code shall not be eligible to participate.
7. Rights;
Purchase Price.
(a) On each Offering Date, each Eligible Employee,
pursuant to an Offering made under the Plan, shall be granted a
Purchase Right to purchase up to the number of shares of Common
Stock of the Company purchasable with a percentage designated by
the Board or the Committee not exceeding twenty percent (20%) of
such Employees Earnings during the period which begins on
the Offering Date (or such later date as the Board or the
Committee determines for a particular Offering) and ends on the
date stated in the Offering, which date shall be no later than
the end of the Offering. The Board or the Committee shall
establish one (1) or more Purchase Dates during an Offering
on which Purchase Rights granted under the Plan shall be
exercised and purchases of Common Stock carried out in
accordance with such Offering.
(b) In connection with each Offering made under the
Plan, the Board or the Committee may specify a maximum number of
shares that may be purchased by any Participant as well as a
maximum aggregate number of shares that may be purchased by all
Participants pursuant to such Offering. In addition, in
connection with each Offering that contains more than one
(1) Purchase Date, the Board or the Committee may specify a
maximum aggregate number of shares which may be purchased by all
Participants on any given Purchase Date under the Offering. If
the aggregate purchase of shares upon exercise of Purchase
Rights granted under the Offering would
H-5
exceed any such maximum aggregate number, the Board or the
Committee shall make a pro rata allocation of the shares
available in as nearly a uniform manner as shall be practicable
and as it shall deem to be equitable.
(c) The per share purchase price of stock acquired
pursuant to Purchase Rights granted under the Plan shall be not
less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of
the Fair Market Value of a share of Common Stock on the Offering
Date; or
(ii) an amount equal to eighty-five percent (85%) of
the Fair Market Value of a share of Common Stock on the Purchase
Date.
8. Participation;
Withdrawal; Termination.
(a) A Participant may elect to authorize payroll
deductions pursuant to an Offering under the Plan by completing
and delivering to the Company, within the time specified in the
Offering, an enrollment form (in such form as the Company may
provide). Each such enrollment form shall authorize an amount of
Contributions expressed as a percentage of the submitting
Participants Earnings during the Offering (not to exceed
any maximum percentage or amount specified by the Board). Each
Participants Contributions shall be credited to a
bookkeeping account for such Participant under the Plan and
shall be deposited with the general funds of the Company except
where applicable law requires that Contributions be deposited
with a third party. To the extent provided in the Offering, a
Participant may begin such Contributions after the beginning of
the Offering. To the extent provided in the Offering, a
Participant may thereafter reduce (including to zero) or
increase his or her Contributions. To the extent specifically
provided in the Offering, in addition to making Contributions by
payroll deductions, a Participant may make Contributions through
the payment by cash or check prior to a specified Purchase Date
of the Offering.
(b) During an Offering, a Participant may cease
making Contributions and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as
the Company may provide. Such withdrawal may be elected at any
time prior to the end of the Offering, except as provided
otherwise in the Offering. Upon such withdrawal from the
Offering by a Participant, the Company shall distribute to such
Participant all of his or her accumulated Contributions (reduced
to the extent, if any, such deductions have been used to acquire
shares of Common Stock for the Participant) under the Offering,
and such Participants Purchase Rights in that Offering
shall thereupon terminate. A Participants withdrawal from
an Offering shall have no effect upon such Participants
eligibility to participate in any other Offerings under the
Plan, but such Participant shall be required to deliver a new
enrollment form in order to participate in subsequent Offerings.
(c) Rights granted pursuant to any Offering under
the Plan shall terminate immediately upon a Participant ceasing
to be an Employee for any reason or for no reason (subject to
any post-employment participation period required by law) or
other lack of eligibility. The Company shall distribute to such
terminated or otherwise ineligible Employee all of his or her
accumulated Contributions (reduced to the extent, if any, such
deductions have been used to acquire shares of Common Stock for
the terminated or otherwise ineligible Employee) under the
Offering.
(d) Rights shall not be transferable by a
Participant otherwise than by will or the laws of descent and
distribution, or by a beneficiary designation as provided in
Section 15 and, during a Participants lifetime, shall
be exercisable only by such Participant.
(e) Unless otherwise specified in an Offering, the
Company shall have no obligation to pay interest on
Contributions.
9. Exercise.
(a) On each Purchase Date specified therefor in the
relevant Offering, each Participants accumulated payroll
deductions and other additional payments specifically provided
for in the Offering (without any increase for interest) will be
applied to the purchase of whole shares of stock of the Company,
up to the maximum number of shares permitted pursuant to the
terms of the Plan and the applicable Offering, at the purchase
price specified in the Offering. No fractional shares shall be
issued upon the exercise of Purchase Rights granted under the
Plan. The amount, if any, of accumulated payroll deductions
remaining in each Participants account after the purchase
of
H-6
shares which is less than the amount required to purchase one
share of Common Stock on the final Purchase Date of an Offering
shall be held in each such Participants account for the
purchase of shares under the next Offering under the Plan,
unless such Participant withdraws from such next Offering, as
provided in subparagraph 8(b), or is no longer eligible to be
granted Purchase Rights under the Plan, as provided in
paragraph 6, in which case such amount shall be distributed
to the Participant after such final Purchase Date, without
interest. The amount, if any, of accumulated payroll deductions
remaining in any Participants account after the purchase
of shares which is equal to the amount required to purchase one
or more whole shares of Common Stock on the final Purchase Date
of an Offering shall be distributed in full to the Participant
after such Purchase Date, without interest.
(b) No Purchase Rights granted under the Plan may be
exercised to any extent unless the shares to be issued upon such
exercise under the Plan (including Purchase Rights granted
thereunder) are covered by an effective registration statement
pursuant to the Securities Act and the Plan is in material
compliance with all applicable state, foreign and other
securities and other laws applicable to the Plan. If on a
Purchase Date in any Offering hereunder the Plan is not so
registered or in such compliance, no Purchase Rights granted
under the Plan or any Offering shall be exercised on such
Purchase Date, and the Purchase Date shall be delayed until the
Plan is subject to such an effective registration statement and
such compliance, except that the Purchase Date shall not be
delayed more than twelve (12) months and the Purchase Date
shall in no event be more than twenty-seven (27) months
from the Offering Date. If on the Purchase Date of any Offering
hereunder, as delayed to the maximum extent permissible, the
Plan is not registered and in such compliance, no Purchase
Rights granted under the Plan or any Offering shall be exercised
and all payroll deductions accumulated during the Offering
(reduced to the extent, if any, such deductions have been used
to acquire stock) shall be distributed to the participants,
without interest.
10. Covenants
of the Company.
(a) During the terms of the Purchase Rights granted
under the Plan, the Company shall keep available at all times
the number of shares of Common Stock required to satisfy such
Purchase Rights, provided that the Company shall not be
obligated to keep available shares in excess of the limits set
forth or described in paragraphs 4 and 7 of the Plan and
any corresponding or additional limits set forth in an Offering.
(b) The Company shall seek to obtain from each
federal, state, foreign or other regulatory commission or agency
having jurisdiction over the Plan such authority as may be
required to issue and sell shares of stock upon exercise of the
Purchase Rights granted under the Plan. If, after reasonable
efforts, the Company is unable to obtain from any such
regulatory commission or agency the authority which counsel for
the Company deems necessary for the lawful issuance and sale of
stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell stock upon exercise of
such Purchase Rights unless and until such authority is obtained.
11. Use of
Proceeds from Stock.
Proceeds from the sale of stock pursuant to Purchase Rights
granted under the Plan shall constitute general funds of the
Company.
12. Rights
as a Stockholder.
A Participant shall not be deemed to be the holder of, or to
have any of the rights of a holder with respect to, any shares
subject to Purchase Rights granted under the Plan unless and
until the participants shareholdings acquired upon
exercise of Purchase Rights under the Plan are recorded in the
books of the Company (or its transfer agent).
13. Adjustments
upon Changes in Stock; Corporate Transactions.
(a) If any change is made in the stock subject to
the Plan, or subject to any Purchase Rights granted under the
Plan (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or
other transaction not involving the receipt of consideration by
the Company), the Plan and outstanding Purchase Rights will be
appropriately adjusted in the class(es) and maximum number of
shares subject to the Plan and the class(es) and number of
shares and price per share of stock subject to outstanding
Purchase Rights. Such adjustments shall be made by the Board or
the Committee, the determination of which shall be final,
binding and conclusive. (The conversion of any convertible
securities of the Company shall not be treated as a
transaction not involving the receipt of consideration by
the Company.)
H-7
(b) In the event of a Corporate Transaction, then:
(i) any surviving or acquiring corporation may continue or
assume Purchase Rights outstanding under the Plan or may
substitute similar rights (including a right to acquire the same
consideration paid to stockholders in the Corporate Transaction)
for those outstanding under the Plan, or (ii) if any
surviving or acquiring corporation does not continue or assume
such Purchase Rights or does not substitute similar rights for
Purchase Rights outstanding under the Plan, then, the
Participants accumulated Contributions shall be used to
purchase shares of Common Stock within five (5) business
days prior to the Corporate Transaction under the ongoing
Offering, and the Participants Purchase Rights under the
ongoing Offering shall terminate immediately after such purchase.
14. Amendment
of the Plan or Offerings.
(a) The Board at any time, and from time to time,
may amend the Plan or the terms of one or more Offerings.
However, except as provided in paragraph 13 relating to
adjustments upon changes in stock, no amendment shall be
effective unless approved by the stockholders of the Company
within the time and to the extent stockholder approval is
necessary for the Plan to satisfy the requirements of
Section 423 of the Code or other applicable laws or
regulations. It is expressly contemplated that the Board may
amend the Plan or an Offering in any respect the Board deems
necessary or advisable to provide Eligible Employees with the
maximum benefits provided or to be provided under the provisions
of the Code and the regulations promulgated thereunder relating
to Employee Stock Purchase Plans
and/or to
bring the Plan
and/or
Purchase Rights granted under an Offering into compliance
therewith.
(b) The Board may, in its sole discretion, submit
any amendment to the Plan or an Offering for stockholder
approval.
(c) Purchase Rights and obligations under any
Purchase Rights granted before amendment of the Plan or Offering
shall not be impaired by any amendment of the Plan, except with
the consent of the person to whom such Purchase Rights were
granted, or except as necessary to comply with any laws or
governmental regulations, or except as necessary to ensure that
the Plan
and/or
Purchase Rights granted under an Offering comply with the
requirements of Section 423 of the Code.
15. Designation
of Beneficiary.
(a) A Participant may file a written designation of
a beneficiary who is to receive any shares and cash, if
applicable, from the Participants account under the Plan
in the event of such Participants death subsequent to the
end of an Offering but prior to delivery to the participant of
such shares and cash. In addition, a Participant may file a
written designation of a beneficiary who is to receive any cash
from the Participants account under the Plan in the event
of such Participants death during an Offering.
(b) Such designation of beneficiary may be changed
by the Participant at any time by written notice in the form
prescribed by the Company. In the event of the death of a
Participant and in the absence of a beneficiary validly
designated under the Plan who is living (or if an entity, is
otherwise in existence) at the time of such Participants
death, the Company shall deliver such shares
and/or cash
to the executor or administrator of the estate of the
Participant, or if no such executor or administrator has been
appointed (to the knowledge of the Company), the Company, in its
sole discretion, may deliver such shares
and/or cash
to the spouse or to any one (1) or more dependents or
relatives of the Participant, or if no spouse, dependent or
relative is known to the Company, then to such other person as
the Company may determine.
16. Termination
or Suspension of the Plan.
(a) The Board in its discretion, may suspend or
terminate the Plan at any time. Unless sooner terminated, the
Plan shall terminate on the day before the tenth (10th)
anniversary of the date the Plan is adopted by the Board. The
Plan shall automatically terminate if all the shares subject to
the Plan pursuant to subparagraph 4(a) are issued. No Purchase
Rights may be granted under the Plan while the Plan is suspended
or after it is terminated.
(b) Rights and obligations under any Purchase Rights
granted while the Plan is in effect shall not be impaired by
suspension or termination of the Plan, except as expressly
provided in the Plan or with the consent of the person to whom
such Purchase Rights were granted, or except as necessary to
comply with any laws or governmental regulation, or except as
necessary to ensure that the Plan
and/or
Purchase Rights granted under an Offering comply with the
requirements of Section 423 of the Code.
H-8
17. Effective
Date of Plan.
The Plan shall become effective on the same day on which the
Companys registration statement under the Securities Act
with respect to the initial public offering of shares of the
Companys Common Stock becomes effective (the
Effective Date), but no Purchase Rights granted
under the Plan shall be exercised unless and until the Plan had
been approved by the stockholders of the Company within twelve
(12) months before or after the date the Plan is adopted by
the Board or the Committee, which date may be prior to the
Effective Date.
18. Miscellaneous
Provisions.
(a) All questions concerning the construction,
validity and interpretation of this Plan shall be governed by
the law of the State of Delaware, without regard to such
states conflict of laws rules.
(b) The Plan and Offering do not constitute an
employment contract. Nothing in the Plan or in the Offering
shall in any way alter the at will nature of a
Participants employment or be deemed to create in any way
whatsoever any obligation on the part of any Participant to
continue in the employ of the Company or a Related Corporation,
or on the part of the Company or a Related Corporation to
continue the employment of a Participant.
H-9
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
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Item 20.
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Indemnification
of Directors and Officers
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As permitted by Section 102 of the Delaware General
Corporation Law, Replidyne has adopted provisions in its
restated certificate of incorporation and amended and restated
bylaws that limit or eliminate the personal liability of its
directors for a breach of their fiduciary duty of care as a
director. The duty of care generally requires that, when acting
on behalf of the corporation, directors exercise an informed
business judgment based on all material information reasonably
available to them. Consequently, a director will not be
personally liable to Replidyne or its stockholders for monetary
damages or breach of fiduciary duty as a director, except for
liability for:
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any breach of the directors duty of loyalty to Replidyne
or its stockholders;
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any act or omission not in good faith or that involves
intentional misconduct or a knowing violation of law;
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any act related to unlawful stock repurchases, redemptions or
other distributions or payment of dividends; or
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any transaction from which the director derived an improper
personal benefit.
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These limitations of liability do not affect the availability of
equitable remedies such as injunctive relief or rescission.
Replidynes restated certificate of incorporation also
authorizes it to indemnify its officers, directors and other
agents to the fullest extent permitted under Delaware law.
As permitted by Section 145 of the Delaware General
Corporation Law, Replidynes amended and restated bylaws
provide that:
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Replidyne may indemnify its directors, officers, and employees
to the fullest extent permitted by the Delaware General
Corporation Law, subject to limited exceptions;
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Replidyne may advance expenses to its directors, officers and
employees in connection with a legal proceeding to the fullest
extent permitted by the Delaware General Corporation Law,
subject to limited exceptions; and
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the rights provided in Replidynes amended and restated
bylaws are not exclusive.
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Replidynes restated certificate of incorporation and its
amended and restated bylaws provide for the indemnification
provisions described above and elsewhere herein. In addition,
Replidyne has entered into separate indemnification agreements
with its directors and officers which may be broader than the
specific indemnification provisions contained in the Delaware
General Corporation Law. These indemnification agreements may
require Replidyne, among other things, to indemnify its officers
and directors against liabilities that may arise by reason of
their status or service as directors or officers, other than
liabilities arising from willful misconduct. These
indemnification agreements also may require Replidyne to advance
any expenses incurred by the directors or officers as a result
of any proceeding against them as to which they are indemnified.
In addition, Replidyne has purchased a policy of directors
and officers liability insurance that insures its
directors and officers against the cost of defense, settlement
or payment of a judgment in some circumstances. These
indemnification provisions and the indemnification agreements
may be sufficiently broad to permit indemnification of its
officers and directors for liabilities, including reimbursement
of expenses incurred, arising under the Securities Act of 1933,
as amended.
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Item 21.
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Exhibits
and Financial Statement Schedules
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Exhibits.
The exhibit index immediately following the signature page to
this registration/proxy statement is incorporated herein by
reference as the list of exhibits required as part of this
registration statement.
II-1
The undersigned Registrant hereby undertakes:
(1) That, prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part
of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the
applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form;
(2) That every prospectus (i) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of
the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof;
(3) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and
included in the registration statement when it became effective;
(4) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue; and
(5) To respond to requests for information that is
incorporated by reference into the prospectus pursuant to
Item 4 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the
effective date of the registration statement through the date of
responding to the request.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Louisville, State of Colorado, on
January 26, 2009.
REPLIDYNE, INC.
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By:
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/s/ Kenneth
J. Collins
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Kenneth J. Collins
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
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Signatures
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Title
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Date
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/s/ Kenneth
J. Collins
Kenneth
J. Collins
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President, Chief Executive Officer and Member of the Board of
Directors (Principal Executive Officer)
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January 26, 2009
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*
Mark
L. Smith
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Chief Financial Officer, Treasurer and Secretary (Principal
Financial and
Accounting Officer)
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January 26, 2009
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*
Edward
Brown
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Member of the Board of Directors
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January 26, 2009
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*
Kirk
K. Calhoun
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Member of the Board of Directors
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January 26, 2009
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*
Geoffrey
Duyk, M.D., Ph.D.
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Member of the Board of Directors
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January 26, 2009
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*
Augustine
Lawlor
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Member of the Board of Directors
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January 26, 2009
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*
Daniel
J. Mitchell
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Member of the Board of Directors
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January 26, 2009
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*
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/s/ Kenneth
J. Collins
By:
Kenneth J. Collins
Attorney-in-Fact
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II-3
EXHIBIT INDEX
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Exhibit
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Number
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Note
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Description of Document
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2
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.1
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Agreement and Plan of Merger and Reorganization, dated as of
November 3, 2008, by and among Replidyne, Inc., Responder Merger
Sub, Inc. and Cardiovascular Systems, Inc. (included as Annex
A to the proxy statement/prospectus forming a part of this
Registration Statement).
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2
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.2
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Form of Voting Agreement between Cardiovascular Systems, Inc.
and certain stockholders of Replidyne, Inc. (included as
Annex B to the proxy statement/prospectus forming a part
of this Registration Statement).
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2
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.3
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Form of Voting Agreement between Replidyne, Inc. and certain
stockholders of Cardiovascular Systems, Inc. (included as
Annex C to the proxy statement/prospectus forming a part
of this Registration Statement).
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3
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.1
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(1)
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Restated Certificate of Incorporation.
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3
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.2
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(1)
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Amended and Restated Bylaws.
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4
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.1
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(1)
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Reference is made to exhibits 3.1 and 3.2.
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4
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.2
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(1)
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Specimen Common Stock Certificate.
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4
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.3
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(1)
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Form of Warrant to purchase shares of Series A Convertible
Preferred Stock (together with schedule prepared in accordance
with Instruction 2 to Item 601 of Regulation S-K).
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4
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.4
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(1)
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Form of Warrant to purchase shares of Series C Preferred Stock
(together with schedule prepared in accordance with Instruction
2 to Item 601 of Regulation S-K).
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4
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.5
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(1)
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Fourth Amended and Restated Stockholders Agreement, dated
August 17, 2005, between Replidyne, Inc. and certain of its
stockholders, as amended March 7, 2006.
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5
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.1^
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Opinion of Cooley Godward Kronish LLP.
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8
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.1^
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Opinion of Cooley Godward Kronish LLP regarding tax matters.
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8
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.2^
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Opinion of Fredrikson & Byron, P.A. regarding tax matters.
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10
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.1+
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(1)
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Form of Indemnification Agreement for Directors.
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10
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.2+
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(1)
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Form of Indemnification Agreement for Executive Officers.
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10
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.3+
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(1)
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2006 Equity Incentive Plan.
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10
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.4+
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(1)
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Form of Option Grant Notice and Form of Option Agreement under
2006 Equity Incentive Plan.
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10
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.5+
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(1)
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2006 Employee Stock Purchase Plan.
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10
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.6+
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(1)
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Form of Offering Document under 2006 Employee Stock Purchase
Plan.
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10
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.7+
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(1)
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Employment Agreement, dated April 3, 2006, between Replidyne,
Inc. and Kenneth J. Collins.
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10
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.7.1+
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(3)
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Amendment, dated June 15, 2007, to Employment Agreement, dated
April 3, 2006, between Replidyne, Inc. and Kenneth J. Collins.
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10
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.8+
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(1)
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Employment Agreement, dated April 3, 2006, between Replidyne,
Inc. and Nebojsa Janjic, Ph.D.
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10
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.8.1+
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(3)
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Amendment, dated June 15, 2007, to Employment Agreement, dated
April 3, 2006, between Replidyne, Inc. and Nebojsa
Janjic, Ph.D.
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10
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.9+
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(1)
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Employment Agreement, dated April 3, 2006, between Replidyne,
Inc. and Peter Letendre, Pharm.D.
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10
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.9.1+
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(3)
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Amendment, dated June 15, 2007, to Employment Agreement, dated
April 3, 2006, between Replidyne, Inc. and Peter Letendre,
Pharm.D.
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10
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.10+
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(1)
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Employment Agreement, dated April 3, 2006, between Replidyne,
Inc. and Roger M. Echols, M.D.
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10
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.10.1+
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(3)
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Amendment, dated June 15, 2007, to Employment Agreement, dated
April 3, 2006, between Replidyne, Inc. and Roger M.
Echols, M.D.
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II-4
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Exhibit
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Number
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Note
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Description of Document
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10
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.11+
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(1)
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Employment Agreement, dated April 3, 2006, between Replidyne,
Inc. and Mark Smith.
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10
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.11.1+
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(3)
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Amendment, dated June 15, 2007, to Employment Agreement, dated
April 3, 2006, between Replidyne, Inc. and Mark Smith.
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10
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.12+
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(1)
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Employment Agreement, dated April 3, 2006, between Replidyne,
Inc. and Donald Morrissey.
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10
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.13+
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(1)
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Summary of Director Compensation Program.
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10
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.14*
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(1)
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License Agreement, dated March 15, 2004, between Replidyne, Inc.
and Daiichi Suntory Pharma Co., Ltd.
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10
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.14.1*
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(1)
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Amendment, dated April 5, 2005, to License Agreement, dated
March 15, 2004, between the Registrant and Daiichi Suntory
Pharma Co., Ltd.
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10
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.14.2*
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(1)
|
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|
Second Amendment, dated February 10, 2006, to License Agreement,
dated March 15, 2004, between the Registrant and Daiichi Suntory
Pharma Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
10
|
.15*
|
|
|
(1)
|
|
|
Supply Agreement, dated December 20, 2004, among the Registrant,
Daiichi Suntory Pharma Co., Ltd. and Nippon Soda Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
10
|
.16
|
|
|
(1)
|
|
|
Lease Agreement, dated March 22, 2005, by and between the
Registrant and Crown Milford LLC.
|
|
|
|
|
|
|
|
|
|
|
10
|
.17
|
|
|
(1)
|
|
|
Lease Agreement, dated October 25, 2005, by and between the
Registrant and Triumph 1450 LLC.
|
|
|
|
|
|
|
|
|
|
|
10
|
.18*
|
|
|
(1)
|
|
|
Collaboration and Commercialization Agreement, dated February
10, 2006, between the Registrant and Forest Laboratories
Holdings Limited.
|
|
|
|
|
|
|
|
|
|
|
10
|
.19+
|
|
|
(2)
|
|
|
Replidyne, Inc. Variable Incentive Bonus Plan for Calendar Year
2007.
|
|
|
|
|
|
|
|
|
|
|
10
|
.20+
|
|
|
(4)
|
|
|
Retention Bonus Agreement, dated March 27, 2008, by and between
Replidyne, Inc. and Mark Smith.
|
|
|
|
|
|
|
|
|
|
|
10
|
.21+
|
|
|
(4)
|
|
|
Retention Bonus Agreement, dated March 27, 2008, by and between
Replidyne, Inc. and Donald Morrissey.
|
|
|
|
|
|
|
|
|
|
|
10
|
.22+*
|
|
|
(5)
|
|
|
Separation Agreement, dated April 15, 2008, by and between
Replidyne, Inc. and Peter Letendre.
|
|
|
|
|
|
|
|
|
|
|
10
|
.23+*
|
|
|
(5)
|
|
|
Consulting Agreement, effective as of April 16, 2008, by and
between Replidyne, Inc. and Peter Letendre.
|
|
|
|
|
|
|
|
|
|
|
10
|
.24+*
|
|
|
(5)
|
|
|
Separation Agreement, dated May 1, 2008, by and between
Replidyne, Inc. and Roger Echols.
|
|
|
|
|
|
|
|
|
|
|
10
|
.25+*
|
|
|
(5)
|
|
|
Consulting Agreement, effective as of May 2, 2008, by and
between Replidyne, Inc. and Roger Echols.
|
|
|
|
|
|
|
|
|
|
|
10
|
.26+^
|
|
|
|
|
|
Separation Agreement, dated December 8, 2008, by and
between Replidyne, Inc. and Nebojsa Janjic.
|
|
|
|
|
|
|
|
|
|
|
10
|
.27+^
|
|
|
|
|
|
Consultant Agreement, effective as of December 9, 2008, by
and between Replidyne, Inc. and Nebojsa Janjic.
|
|
|
|
|
|
|
|
|
|
|
23
|
.1
|
|
|
|
|
|
Consent of KPMG LLP, independent registered public accounting
firm to Replidyne, Inc.
|
|
|
|
|
|
|
|
|
|
|
23
|
.2
|
|
|
|
|
|
Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm to Cardiovascular Systems, Inc.
|
|
|
|
|
|
|
|
|
|
|
23
|
.3
|
|
|
|
|
|
Consent of ValueKnowledge LLC.
|
|
|
|
|
|
|
|
|
|
|
23
|
.4^
|
|
|
|
|
|
Consent of Cooley Godward Kronish LLP (included in
Exhibit 5.1 hereto).
|
|
|
|
|
|
|
|
|
|
|
23
|
.5^
|
|
|
|
|
|
Consent of Cooley Godward Kronish LLP (included in Exhibit 8.1
hereto).
|
|
|
|
|
|
|
|
|
|
|
23
|
.6^
|
|
|
|
|
|
Consent of Fredrikson & Byron, P.A. (included in Exhibit
8.2 hereto).
|
|
|
|
|
|
|
|
|
|
|
24
|
.1^
|
|
|
|
|
|
Power of Attorney.
|
II-5
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Note
|
|
Description of Document
|
|
|
|
|
|
|
|
|
|
|
|
99
|
.1^
|
|
|
|
|
|
Form of Proxy Card for Replidyne, Inc. Special Meeting of
Stockholders.
|
|
|
|
|
|
|
|
|
|
|
99
|
.2^
|
|
|
|
|
|
Form of Proxy Card for Cardiovascular Systems, Inc. Special
Meeting of Stockholders.
|
|
|
|
|
|
|
|
|
|
|
99
|
.3
|
|
|
|
|
|
Opinion of Morgan Stanley & Co. Incorporated, financial
advisor to Replidyne, Inc. (included as Annex D to the
proxy statement/prospectus forming a part of this Registration
Statement).
|
|
|
|
|
|
|
|
|
|
|
99
|
.4
|
|
|
|
|
|
Consent of Morgan Stanley & Co. Incorporated, financial
advisor to Replidyne, Inc.
|
|
|
|
|
|
|
|
|
|
|
99
|
.5
|
|
|
|
|
|
Proposed Certificate of Amendment to the Restated Certificate of
Incorporation of Replidyne, Inc. (included as Annex E to
the proxy statement/prospectus forming a part of this
Registration Statement).
|
|
|
|
|
|
|
|
|
|
|
99
|
.6
|
|
|
|
|
|
Cardiovascular Systems, Inc. 2007 Equity Incentive Plan
(included as Annex G to this proxy
statement/prospectus forming a part of this Registration
Statement).
|
|
|
|
|
|
|
|
|
|
|
99
|
.7^
|
|
|
|
|
|
Consent of Brent G. Blackey to be named as a director of the
combined company.
|
|
|
|
|
|
|
|
|
|
|
99
|
.8^
|
|
|
|
|
|
Consent of Edward Brown to be named as a director of the
combined company.
|
|
|
|
|
|
|
|
|
|
|
99
|
.9^
|
|
|
|
|
|
Consent of John H. Friedman to be named as a director of the
combined company.
|
|
|
|
|
|
|
|
|
|
|
99
|
.10^
|
|
|
|
|
|
Consent of Geoffrey O. Hartzler to be named as a director of the
combined company.
|
|
|
|
|
|
|
|
|
|
|
99
|
.11^
|
|
|
|
|
|
Consent of Roger J. Howe to be named as a director of the
combined company.
|
|
|
|
|
|
|
|
|
|
|
99
|
.12^
|
|
|
|
|
|
Consent of Michael J. Kallok to be named as a director of the
combined company.
|
|
|
|
|
|
|
|
|
|
|
99
|
.13^
|
|
|
|
|
|
Consent of Augustine Lawlor to be named as a director of the
combined company.
|
|
|
|
|
|
|
|
|
|
|
99
|
.14^
|
|
|
|
|
|
Consent of David L. Martin to be named as a director of the
combined company.
|
|
|
|
|
|
|
|
|
|
|
99
|
.15^
|
|
|
|
|
|
Consent of Glen D. Nelson to be named as a director of the
combined company.
|
|
|
|
|
|
|
|
|
|
|
99
|
.16^
|
|
|
|
|
|
Consent of Gary M. Petrucci to be named as a director of the
combined company.
|
|
|
|
+ |
|
Indicates management contract or compensatory plan. |
|
* |
|
Confidential treatment has been granted with respect to certain
portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission. |
|
(1) |
|
Incorporated by reference to the same numbered exhibit filed
with Replidyne, Inc.s Registration Statement on
Form S-1
(File
No. 333-133021),
as amended, declared effective June 29, 2006. |
|
(2) |
|
Incorporated by reference to Replidyne, Inc.s Current
Report on
Form 8-K
filed on March 9, 2007. |
|
(3) |
|
Incorporated by reference to Replidyne, Inc.s Current
Report on
Form 8-K
filed on June 19, 2007. |
|
(4) |
|
Incorporated by reference to Replidyne, Inc.s Current
Report on
Form 8-K
filed on April 1, 2008. |
|
(5) |
|
Incorporated by reference to Replidyne, Inc.s Quarterly
Report on
Form 10-Q
filed on August 5, 2008. |
|
^ |
|
Previously Filed |
II-6