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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1996 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM
------------------------ TO
------------------------.
COMMISSION FILE NUMBER: 000-28372
CARDIAC PATHWAYS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 77-0278792
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
995 BENECIA AVENUE, SUNNYVALE, CALIFORNIA 94086
(Address of principal executive office) (zip code)
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Registrant's telephone number, including area code: (408) 737-0505
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
--------------------- ---------------------
None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X*
* Registrant has been subject to such requirements since June 12, 1996 and has
filed all required reports during such time.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on July
31, 1996 as reported on the Nasdaq National Market, was approximately
$68,355,058. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of July 31, 1996, the registrant had outstanding 9,279,195 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for the Annual Meeting of Stockholders to
be held October 9, 1996.
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PART I
ITEM 1. BUSINESS
This Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors
including those set forth below under "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview," "-- Liquidity and
Capital Resources," the second paragraph of "Business -- Overview" and elsewhere
in this Report.
OVERVIEW
Cardiac Pathways Corporation (the "Company") designs, develops and
manufactures minimally invasive systems to diagnose and treat cardiac
tachyarrhythmias (abnormally rapid heart rhythms) which, if untreated, can cause
palpitations, fainting and sudden cardiac arrest (a fatal heart rhythm). The
Company is developing products designed to provide integrated system solutions
for the successful diagnosis and treatment of ventricular tachycardia and atrial
fibrillation, two of the most serious and prevalent types of abnormally rapid
heart rhythms. The Company's products consist of systems for diagnostic mapping,
or locating the source of the tachyarrhythmia within the heart, and for
performing ablation treatment, a nonsurgical, minimally invasive technique for
neutralizing heart tissue responsible for starting or maintaining a dangerous
heart rhythm. Current mapping and ablation procedures can take many hours to
complete. The Company believes its systems will substantially shorten mapping
and ablation procedure time and provide safe and more effective treatments of
ventricular tachycardia and atrial fibrillation than other current forms of
therapy. The Company's strategy is to establish its Ventricular Tachycardia
Ablation System, Arrhythmia Mapping Systems and Atrial Fibrillation Ablation
System as the preferred means for the diagnosis and treatment of ventricular
tachycardia and atrial fibrillation.
The Company has generated only limited revenues from sales of
supraventricular tachycardia and diagnostic catheters in certain markets. The
Company does not have any experience in manufacturing, marketing or selling in
commercial quantities its products for diagnosis and treatment of ventricular
tachycardia and atrial fibrillation. There can be no assurance that the
Company's development efforts will result in commercially available products for
diagnosis and treatment of ventricular tachycardia and atrial fibrillation, that
any such product will prove to be safe and efficacious in clinical trials, that
required regulatory approvals will be obtained in a timely manner, or at all, or
that the Company will be successful in introducing any such product. Any
commercialization of the Company's products will require substantial
development, clinical, regulatory, manufacturing, sales and marketing and other
expenditures. The Company expects its operating losses to continue through at
least the end of calendar 1998 as it continues to expend substantial funds for
clinical trials in support of regulatory approvals, expansion of research and
development activities, establishment of commercial-scale manufacturing
capabilities and expansion of sales and marketing activities. There can be no
assurance that any of the Company's potential products for diagnosis and
treatment of ventricular tachycardia and atrial fibrillation will be
successfully commercialized or that the Company will achieve significant
revenues from either international or domestic sales. In addition, there can be
no assurance that the Company will achieve or sustain profitability in the
future.
BACKGROUND
The heart consists of four chambers: the ventricles, the lower two
chambers, and the atria, the upper two chambers. A healthy heart at rest beats
between 60 to 100 times per minute and pumps over 1,800 gallons of blood per
day. A normal heartbeat is the coordinated contraction of each of the heart's
chambers resulting from the conduction of organized electrical signals generated
by the heart's natural pacemaker, the sinoatrial node ("SA node"). The SA node,
located in the right atrium, initiates the heartbeat by generating an electrical
signal that causes the atria to contract and helps to fill the ventricles, the
heart's primary pumping chambers. Once spread throughout the atria, the
electrical activity of the SA node conducts an electrical signal to the
atrioventricular node ("AV node"). The AV node serves as a delay timer and
electrical signal conductor, allowing the atria to complete their contraction
thus filling the ventricles with blood, then
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facilitating the organized spread of the electrical signal to the ventricles,
causing them to contract and distribute deoxygenated blood to the lungs from the
right ventricle and freshly oxygenated blood to the rest of the body from the
left ventricle.
When defects compromise the normal conduction of this electrical activity,
the pumping rhythm of the heart can be affected, resulting in cardiac
arrhythmias (abnormal heart rhythms). Cardiac arrhythmias have numerous causes,
including congenital defects, tissue damage due to heart attacks or
arteriosclerosis (the deposition of fatty substances in the inner layer of the
arteries) and other diseases, that accelerate, delay or redirect the
transmission of electrical activity, thereby disrupting the normal coordinated
contractions of the chambers. During a cardiac arrhythmia, the heart beats
either too slowly or too rapidly. Cardiac arrhythmias characterized by an
abnormally slow heart rate, usually defined as a rate lower than 60 beats per
minute, are generally treated by implantation of a pacemaker that delivers
electrical impulses to increase the heart rate. Cardiac arrhythmias
characterized by an abnormally high rate of more than 100 beats per minute are
known as cardiac tachyarrhythmias. The following diagrams illustrate the four
chambers of the heart and a typical location of electrical signals associated
with ventricular tachycardia and atrial fibrillation in the heart's chambers.
LOGO
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THE FOUR CHAMBERS TYPICAL LOCATION OF
OF THE HEART ATRIAL FIBRILLATION AND
VENTRICULAR TACHYCARDIA
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Ventricular Tachycardia
Disease Characteristics. Ventricular tachycardia is a life-threatening
condition characterized by the ventricles beating at an abnormally rapid rate,
significantly interfering with the pumping of oxygenated blood throughout the
body. When the ventricles beat at an abnormally rapid rate, they lack sufficient
time to fill with blood prior to each contraction. As a result, less blood is
pumped out of the heart and less oxygen is carried to the tissues and organs of
the body. This lack of oxygen can cause dizziness, loss of consciousness and
sudden cardiac arrest. Individuals with ventricular tachycardia are at risk of
imminent death due to the unpredictable nature of ventricular tachycardia. Most
ventricular tachycardias result from myocardial infarctions (heart attacks)
caused by coronary artery disease. When a myocardial infarction occurs due to a
blockage in one or more coronary arteries, a portion of the heart muscle (most
often in the left ventricle) dies. After the portion of the left ventricle heart
muscle that was served by the blocked artery dies, an irregular border
consisting of
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intermixed healthy and scar tissue forms. Ventricular tachycardias typically
originate at this irregular border of healthy and scar tissue.
Disease Incidence. Each year more than 300,000 people in the United States
experience a sudden cardiac arrest episode. Of these, approximately 50,000
individuals survive primarily through emergency defibrillation. These survivors
are at risk for ventricular tachycardia or another sudden cardiac arrest
episode. The Company believes that over 100,000 individuals who have never had a
sudden cardiac arrest episode are diagnosed each year with symptomatic
ventricular tachycardia. In addition, the American Heart Association estimates
that approximately 1.5 million individuals suffer myocardial infarctions
annually in the United States, of which, approximately 1.0 million survive.
Approximately 30% of the survivors of a myocardial infarction are at risk of
suffering an episode of ventricular tachycardia within one year of surviving the
myocardial infarction. If safe and cost-effective diagnosis and treatment were
available, these individuals would be candidates for early diagnosis and
treatment of ventricular tachycardia.
Current Therapies. The currently prescribed therapies for ventricular
tachycardia are not curative and in many instances have undesirable side
effects. Antiarrhythmic drugs have been the most common treatment of ventricular
tachycardia. In 1989, a major multi-center randomized trial evaluating the
antiarrhythmic capabilities of several different drugs indicated that these
drugs in many instances, actually induced the ventricular tachycardias they were
designed to prevent. Furthermore, toxic side effects, including pulmonary
fibrosis, corneal micro deposits and liver dysfunction, often prevent patients
from long-term usage of these drugs. The automatic implantable cardioverter
defibrillator ("ICD") has also become a standard therapy in the treatment of
ventricular tachycardia. The cost of an ICD system averages $25,000 and total
costs associated with the implant including hospitalization average $55,000. The
ICD detects and stops an arrhythmia once it has started by pacing or by applying
high energy pulses, but does not cure the ventricular tachycardia or remove the
arrhythmia-causing tissue. Significant side effects that result from the ICD
include pain associated with high energy defibrillation pulses, physical
discomfort at the implant site, adverse psychological effects from dependence
upon the device for life saving intervention and a risk of infection. Many ICD
patients also receive antiarrhythmic drug therapy in an attempt to minimize the
frequency of ventricular tachycardia episodes. An infrequently used procedure to
treat ventricular tachycardia is open heart surgery, where a highly trained
cardiovascular surgeon removes the arrhythmia causing tissue.
While not a mainstay therapy, single point radiofrequency catheter ablation
for ventricular tachycardia is being performed throughout the United States and
Western Europe. Currently, mapping and ablation of ventricular tachycardia is a
slow and tedious process because physicians are able to evaluate only a single
point in the heart at a time. Ventricular tachycardia can best be treated when
the patient is actually experiencing an episode of arrhythmia, which must be
induced and carefully monitored by the physician. In the vast majority of
individuals suffering from ventricular tachycardia, single point mapping
techniques are not effective because of the rapid rate of the ventricular
tachycardia. A patient with rapid rate ventricular tachycardia cannot be left in
this unstable heart rhythm for a sufficient length of time to identify the
origins of the ventricular tachycardia. Another limiting factor of ventricular
tachycardia ablation has been the inability of current catheters to generate a
lesion that is deep enough to effectively ablate the thick ventricular scar
tissue that results from a previous myocardial infarction.
Atrial Fibrillation
Disease Characteristics. Atrial fibrillation is a condition in which the
regular pumping function of the atria is replaced by a disorganized, ineffective
quivering caused by chaotic conduction of electrical signals through the upper
chambers of the heart. Atrial fibrillation is often associated with other forms
of cardiovascular disease, including congestive heart failure, rheumatic heart
disease, coronary artery disease, left ventricular hypertrophy, cardiomyopathy
or hypertension. The progression of atrial fibrillation varies among
individuals. Initial episodes of atrial fibrillation are generally symptomatic,
intermittent (paroxysmal) episodes. Certain individuals suffer recurring
episodes of atrial fibrillation that progress to a chronic state. Although not
immediately life threatening, atrial fibrillation may cause up to a 30%
reduction in cardiac output and a reduction in cerebral blood flow during the
fibrillation episode, resulting in shortness of breath, fainting, fatigue and
reduced exercise capacity. Ventricular rates can also rise dangerously high when
the
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chaotic signals of the atria are conducted to these lower chambers of the heart.
More seriously, since the atria provide minimal pumping function during atrial
fibrillation, blood pools in the chambers, which can lead to the formation of
blood clots. Blood clots in the left atrium can dislodge and travel to the brain
resulting in stroke. Considered for years to be a benign disorder, atrial
fibrillation is now recognized as placing affected patients at a significantly
increased risk for stroke. The American Heart Association estimates that 75,000
strokes per year in the United States (approximately 25% of all strokes) are
related to atrial fibrillation, with published reports of up to 70% of patients
dying or suffering significant neurologic deficit. The mortality rate of
patients with atrial fibrillation associated stroke is high in relation to other
causes of stroke, with a reported 23% of these patients dying within 30 days of
the stroke, compared to only 8% of stroke patients who do not have atrial
fibrillation. Moreover, based upon studies estimating the average lifetime cost
for a stroke patient, the Company estimates an annual cost to the United States
health care system for the estimated 75,000 strokes related to atrial
fibrillation of in excess of $7.4 billion.
Disease Incidence. Atrial fibrillation affects up to 4% of the United
States population over the age of 60 years. The National Center for Health
Statistics reported that atrial fibrillation was the primary diagnosis for
130,000 emergency room visits and 227,000 hospitalizations in the United States
in 1992, more hospitalizations than any other cardiac arrhythmia. In addition,
there were approximately 1.4 million hospital discharges in which atrial
fibrillation was a listed diagnosis and more than 1.5 million outpatient visits
by individuals who have atrial fibrillation as a primary diagnosis.
Current Therapies. Currently, the only curative treatment for atrial
fibrillation is a rarely performed open heart surgical procedure (the surgical
maze procedure) in which the surgeon makes several incisions in the right and
left atria creating scar tissue to electrically isolate portions of the atria.
This open heart surgical procedure is complex, costly and associated with high
morbidity and mortality and therefore only used in extreme cases. There are a
limited number of patients for whom a reversible cause for atrial fibrillation
can be readily identified (for example patients with hyperthyroidism, alcoholism
or diabetes) and in whom atrial fibrillation does not recur once the cause has
been alleviated. Goals for managing patients with atrial fibrillation are to
restore and maintain the normal atrial rhythm and pumping function, control the
ventricular rate and prevent stroke. None of the commonly prescribed alternative
therapeutic options is curative and most have undesirable side effects.
Antiarrhythmic drugs, which control the ventricular rate during atrial
fibrillation, increase the risk of the patient developing life-threatening
ventricular arrhythmias. In addition, the rate of recurrence of atrial
fibrillation in patients using antiarrhythmic drugs is high, with trials
reporting as many as 60% of the patients failing to sustain normal heart rhythm
for one year. Side effects can include nausea, diarrhea, difficulty in
urinating, thyroid dysfunction, pulmonary fibrosis and liver dysfunction.
Anticoagulation drugs are generally recommended for use in concert with
antiarrhythmic drugs to reduce the risk of stroke. Anticoagulation therapy
requires attentive and frequent patient follow-up, generally including monthly
prothrombin time testing (an indicator of the blood's ability to form clots) and
dose adjustments to prevent hemorrhage complications.
Internal electrical cardioversion, in which an implantable atrial
defibrillator automatically detects the onset of atrial fibrillation and
delivers low-energy shocks, has recently been introduced as a method to convert
atrial fibrillation to normal heart rhythm. Clinical trials of this proposed
treatment are in their early stages. A recent study indicated that initial
conversion rates are near 85%. However, reversion rates to atrial fibrillation
are high, and the automatic implantable atrial defibrillator is not a curative
therapy. In addition, the level of patient discomfort is often unacceptable.
Less invasive treatments of atrial fibrillation include permanent
destruction of the AV node by catheter ablation accompanied by implantation of a
pacemaker, a procedure generally reserved for symptomatic individuals
experiencing prolonged or chronic episodes of atrial fibrillation where control
of the ventricular rate is the primary objective. The procedure ensures a
regular, controlled ventricular rate and improved cardiac output (with enhanced
quality of life), but the risks of stroke remain, and the atrial contribution to
cardiac output is not restored since the atria continue to fibrillate. In
addition, the patient becomes dependent upon the pacemaker to maintain an
adequate heart rate, and failure of the pacemaker can result in sudden loss of
consciousness or death. Several institutions in Europe and the United States
have undertaken procedures in which conventional radiofrequency ablation
catheters are dragged along the inside surface of the right and/or
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left atrium, applying radiofrequency energy to electrically isolate portions of
the atria with scar tissue. However, it has been difficult to create a
continuous line of block to electrically isolate portions of the atria using
conventional radiofrequency catheters. In addition, although results achieved
for atrial fibrillation ablation at St. Francis Hospital in Tulsa, Oklahoma have
been encouraging, the mean time of this center's ablation procedures has been
approximately 10 hours.
Supraventricular Tachycardia
Supraventricular tachycardias affect ventricular rate from an origin above
the ventricles. During in-utero development, incomplete separation of the top
and bottom chambers of the heart leaves small muscle bundles that can rapidly
conduct electrical signals between chambers, resulting in a rapid heart rhythm.
The most common types of supraventricular tachycardias are Wolff-Parkinson-White
("WPW") syndrome and Atrioventricular Nodal Reentrant Tachycardia ("AVNRT"). WPW
syndrome involves a congenital remnant of muscle tissue, an accessory pathway,
between the atria and ventricles that can very rapidly conduct electrical
signals between the top and bottom chambers of the heart. AVNRT, primarily a
congenital condition, is characterized by a circuit of conductive tissue between
a part of the AV node and either the atria or the ventricles. This circuit, like
that of WPW syndrome, can conduct the electrical signals from the AV node
rapidly, leading to a symptomatic tachycardia.
These two common types of supraventricular tachycardias are readily
treatable using standard radiofrequency catheter ablation techniques. Since its
introduction in 1986, the success of radiofrequency catheter ablation has led to
a rapid decrease in the existing untreated population of patients with WPW
syndrome and AVNRT. While radiofrequency catheter ablation is the most common
treatment for the WPW syndrome and AVNRT types of supraventricular tachycardia,
antiarrhythmic drug therapy is also a prescribed treatment. Antiarrhythmic drugs
do not successfully control the supraventricular tachycardia in many patients
and often result in undesirable side effects. Given the low morbidity and
mortality, and high success rate associated with radiofrequency catheter
ablation, the Company believes that this curative procedure has become the
treatment of choice for WPW syndrome and AVNRT.
THE CARDIAC PATHWAYS SOLUTION
The Company is developing products to provide a comprehensive solution for
the successful diagnosis and treatment of ventricular tachycardia and atrial
fibrillation. The Company's systems are designed to allow the
electrophysiologist to perform high resolution mapping, which facilitates
location of cardiac tachyarrhythmias and assesses the effectiveness of the
minimally invasive ablation treatment. Current mapping and ablation procedures
can take many hours to complete. The Company believes its systems will
substantially shorten mapping and ablation procedure time and provide safe and
more effective treatments than other forms of therapy. The Company has also
developed and is currently marketing products for the diagnosis and treatment of
supraventricular tachycardia. The following are features and benefits of the
core technologies used in the Company's products.
High Resolution Mapping for Ventricular Tachycardia. The Company's
Arrhythmia Mapping System for ventricular tachycardia utilizes a patented,
basket-shaped, multi-site, high resolution device which is placed in the
ventricle with a minimally invasive procedure, similar to a conventional heart
catheterization. This device is designed to allow the electrophysiologist to
quickly locate high rate ventricular tachycardia at multiple sites, thus
providing a significant improvement over currently used single point mapping
techniques. The Company believes that this ability to locate the source of the
ventricular tachycardia will enable a large population of patients to receive
successful treatment using the Company's Ventricular Tachycardia Ablation
System. Currently, these patients have no reliable minimally invasive means to
locate their high rate ventricular tachycardia.
Cooled Ablation for Ventricular Tachycardia. The Company's Ventricular
Tachycardia Ablation System utilizes a patented electrode-cooling catheter that
allows the electrophysiologist to deliver greater energy levels than existing
technologies to the site that is causing the ventricular tachycardia without a
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significant risk of producing charred blood particles that could lead to stroke.
The Company believes that the ability to make deeper and wider lesions enables
more effective treatment.
Linear Lesion Ablation for Atrial Fibrillation. The Company's Atrial
Fibrillation Ablation System utilizes a proprietary, non-metallic conformable
electrode device that conforms to the irregular surface in the atrium and
delivers radiofrequency energy for lesion creation through a conductive fluid
medium. With this technology, the electrophysiologist is able to create an
unbroken transmural lesion in the atrium causing disruption of the electrical
wavefronts associated with atrial fibrillation. The Company believes ablation
procedures utilizing this technology will be more effective and significantly
less time consuming than other types of catheter ablation techniques and as
effective as the surgical maze procedure, which currently is the only curative
treatment.
High Resolution Mapping for Atrial Fibrillation. The Company's Arrhythmia
Mapping System for atrial fibrillation utilizes a basket-shaped, multi-site,
high resolution device similar to that used in its Arrhythmia Mapping System for
ventricular tachycardia, but which has been designed to conform to the atria.
This technology provides high resolution, multi-site, simultaneous mapping and
is designed to be used to quickly locate the source of the arrhythmia and to
quickly assess the effectiveness of the ablation treatment. The Company believes
this approach will significantly shorten the length of ablation procedures.
STRATEGY
The Company's strategy is to establish its Ventricular Tachycardia Ablation
System, Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System as
the preferred means for the diagnosis and treatment of ventricular tachycardia
and atrial fibrillation. The following are the key elements of the Company's
strategy:
Demonstrate clinical efficacy and safety of the Company's mapping and
ablation systems leading to commercialization. The Company expects to market
its systems in the United States and internationally. Successful clinical trials
leading to regulatory approval are critical for market acceptance of the
Company's systems. The Company has established scientifically rigorous clinical
studies to assess the efficacy and safety of its Arrhythmia Mapping System for
use in the left ventricle and its Ventricular Tachycardia Ablation System. In
addition, the Company has obtained regulatory approval for a clinical study of
its Arrhythmia Mapping System for use in the right atria and has applied for
regulatory approval of a clinical study for its Atrial Fibrillation Ablation
System. The results of these trials will be used to seek FDA regulatory approval
to market its mapping and ablation systems in the United States. The Company
also intends to seek regulatory approval to market these products
internationally. See "-- Clinical Trials."
Build upon relationships with electrophysiologists. The Company has
developed strong relationships with prominent electrophysiologists worldwide who
have been involved and will continue to be involved in the Company's clinical
and product development. The Company intends to continue to build these
substantial relationships through clinical investigator meetings, participation
in physician-run symposia and meetings to discuss clinical issues and
treatments. The Company's strategy is to leverage these relationships with
leading electrophysiologists to gain market acceptance of its products in the
United States and internationally. The Company believes there are approximately
600 board certified electrophysiologists practicing in the United States.
Provide integrated system solutions for diagnosing and treating Ventricular
Tachycardia and Atrial Fibrillation. The Company's mapping baskets and
integrated mapping computer system are designed to quickly identify the source
of an arrhythmia. The Company's catheters, including its cooled ablation and
linear lesion catheters, and integrated radiofrequency generator and
programmable fluid pump are designed to provide safe, effective ablation of the
heart tissue. The Company believes that its integrated systems approach provides
solutions for diagnosing and treating a significant portion of the patients who
suffer from ventricular tachycardia and atrial fibrillation. The Company also
believes its integrated systems solution offers advantages over other products.
All of the Company's products are designed to work together and thereby
eliminate incompatibility problems that may arise from using products from
several vendors. This makes the products easier to use, shortens procedure times
and increases the efficiency of the treatment. In addition, the Company
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plans to be a single source provider of complete mapping and ablation systems,
thereby making its products more cost-effective.
Maintain technological leadership and achieve market leadership. The
Company's goal is to be a market leader in the commercialization of integrated
systems to diagnose and treat ventricular tachycardia and atrial fibrillation.
The Company believes that its technological innovations have overcome the
principal obstacles to the development of such systems. In addition, the
Company's goal is to be a leading provider of these integrated systems and the
Company intends to continue to invest significant resources to enhance its
technological position and to increase market acceptance of its products.
Protect and enhance proprietary position. The Company currently holds
issued and allowed patents and has pending patents covering a number of
fundamental aspects of the Company's Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System. The Company
owns 32 issued United States patents, owns an exclusive field-of-use license on
one issued United States patent and licenses to 12 United States patents and two
issued foreign patents. In addition, the Company has 20 pending United States
patent applications of which six are licensed, five of which have been allowed
by the United States Patent and Trademark Office (including three licensed), and
has filed 36 corresponding patent applications (including two licensed) that are
currently pending in Europe, Japan, Australia and Canada. The Company intends to
continue to pursue its patent filing strategy and to vigorously defend its
intellectual property position against infringement.
PRODUCTS AND SYSTEMS
The Company's product line is designed to provide an integrated systems
solution to the mapping and ablation of cardiac arrhythmias. The Company has
focused its product development and clinical applications on systems that
diagnose and treat ventricular tachycardia and atrial fibrillation. The
following table summarizes products that have been released and those that are
currently under development:
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PRODUCTS DESCRIPTION STATUS(1)(2)
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VENTRICULAR TACHYCARDIA CATHETERS
Mercator Left Ventricular A high density mapping Approved IDE feasibility
Mapping Basket catheter and associated study in January 1996;
catheter deployment guide currently in clinical trial:
used to assess electrical Planned IDE submission in
conduction throughout the early calendar 1997 for PMA
left ventricle. approval process.
Mercator Local Sector Variation of the Mercator Planned IDE supplemental
Mapping Basket Left Ventricular Mapping submission in calendar 1996
Basket that focuses mapping for PMA approval process.
electrodes in a sector or
region of the left
ventricle.
Transseptal Guide Catheter A set of catheter deployment Planned IDE supplemental
tools that uses a venous submission in calendar 1996
approach to deploy the for 510(k) or PMA approval
Mercator Left Ventricular process.
Mapping Basket.
Chilli Cooled Ablation An ablation catheter that Approved IDE June 1995;
Catheter includes lumens to cool the currently in clinical trial
catheter tip during radio for PMA approval process.
frequency energy delivery.
ATRIAL FIBRILLATION
CATHETERS
Nexus Linear Lesion Catheter An ablation catheter used to IDE feasibility study
make long lesions in the submitted for right atrium
atria. in June 1996 and expect
approval to begin clinical
trial in late 1996; Planned
IDE submission in calendar
1997 for PMA approval
process.
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<TABLE>
<CAPTION>
PRODUCTS DESCRIPTION STATUS(1)(2)
- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C>
Mercator Atrial Mapping A high density mapping Approved IDE for right
Basket catheter used to assess atrium in June 1996 for
atrial arrhythmias. 510(k) clearance process.
SUPRAVENTRICULAR TACHYCARDIA/DIAGNOSTIC CATHETERS
Radii Mapping and Ablation A family of deflectable Available in international
Catheters catheters for mapping and markets.
ablation of supraventricular
tachycardia.
Trio/Ensemble Diagnostic A set of three, uniquely 510(k) submitted by Arrow
Catheters small multielectrode International, Inc.
catheters and a triple-lumen ("Arrow") and cleared in
guide catheter for use in December 1995. Available in
diagnostic electrophysiology the United States and
procedures international markets.
HIGH RESOLUTION MAPPING EQUIPMENT
Model 8100/8300 Arrhythmia An integrated mapping Approved IDE feasibility
Mapping System Release 1 computer system that study in January 1996 with
analyzes and displays data Mercator Left Ventricular
from high density mapping Mapping Basket; currently in
catheters; designed to be clinical trials: Planned IDE
used with Mercator Left submission with Mercator
Ventricular Mapping Baskets Left Ventricular Mapping
and Mercator Atrial Mapping Basket in early calendar
Baskets. 1997 for PMA approval
process.
Model 8100/8300 Arrhythmia Adds functionality and Planned IDE supplemental
Mapping System Release 2 enhancements to Release 1 submission with Mercator
for local sector mapping,a Left Ventricular Mapping
dvanced mapping techniques Basket in calendar 1996 for
and basic electrophysiology PMA approval process.
lab procedures.
ABLATION EQUIPMENT
Model 8002 Radiofrequency An integrated radiofrequency Approved IDE with Chilli
Generator and Integrated generator energy source and Ablation Cooled Catheter in
Fluid Pump fluid pump for cooled June 1995; currently in
ablation applications. clinical trials for PMA
approval process. Submitted
with Nexus Linear Lesion
Catheter for IDE feasibility
study.
Model 8004 Radiofrequency Adds to functionality and Planned IDE supplemental
Generator and Integrated ease of use of the Model submission for use with
Fluid Pump 8002 for further pump Chilli Cooled Ablation
integration and for printing Catheter in calendar 1996.
of ablation data.
</TABLE>
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(1) The status column includes the Company's current estimates of the planned
submission time periods of Feasibility IDEs or IDEs for certain of the
Company's products. These estimates are forward-looking statements that
involve risks and uncertainties. The actual submission times could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including the Company's success in completing
any remaining development of the products, the efficacy and safety of the
products in laboratory testing and the other factors set forth elsewhere in
this report.
(2) At the earliest, the Company does not anticipate filing a PMA application
for any system for at least the next two years, and does not anticipate
receiving a PMA for any such system until at least one to three years after
such PMA application is accepted for filing, if at all. See "Government
Regulation."
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The following table sets forth the Company's current and planned systems
for mapping and ablation of ventricular tachycardia and atrial fibrillation and
their component catheters and equipment.
VENTRICULAR TACHYCARDIA
ARRHYTHMIA MAPPING SYSTEM
- Mercator Left Ventricular Mapping Basket or Mercator Local Sector Mapping
Basket
- Model 8100/8300 Arrhythmia Mapping System
VENTRICULAR TACHYCARDIA ABLATION SYSTEM
- Chilli Cooled Ablation Catheter
- Models 8002 and 8004 Radiofrequency Generator and Integrated Fluid Pump
ATRIAL FIBRILLATION
ARRHYTHMIA MAPPING SYSTEM
- Mercator Atrial Mapping Basket
- Model 8100/8300 Arrhythmia Mapping System
ATRIAL FIBRILLATION ABLATION SYSTEM
- Nexus Linear Lesion Catheter
- Models 8002 and 8004 Radiofrequency Generator and Integrated Fluid Pump
Ventricular Tachycardia Catheters
The Company's ventricular tachycardia catheters, which consists of the
Chilli Cooled Ablation Catheter and Mercator Left Ventricular Mapping Basket,
currently in clinical trials, and the Mercator Local Sector Mapping Basket and
Transseptal Guide Catheters, currently under development, are designed to allow
the physician to locate the source of the ventricular tachycardia and perform an
ablation treatment that can reach wide and deep within the heart tissue to
successfully treat the patient's ventricular tachycardia.
Mercator Left Ventricular Mapping Basket. The Mercator Left Ventricular
Mapping Basket is a high density 64-electrode, three dimensional basket for use
in left ventricular electrophysiology diagnostic procedures. Based on the
Company's proprietary high-density electrode mapping technology, this basket-
shaped mapping catheter has eight highly flexible electrode-carrying arms that
allow the basket to conform to the shape of the left ventricular chamber. This
design enables mapping with electrodes in contact with the heart tissue. Various
basket sizes have been designed and are currently being evaluated in clinical
trials for optimal fit in ventricular tachycardia patients. The Company
currently anticipates that it will develop mapping baskets in several different
sizes to allow for variations in the size of the left ventricle. The Company
believes
that the Mercator Left Ventricular Mapping Basket will reduce procedure time and
allow the mapping of a given ventricular tachycardia rhythm using a single
cardiac cycle (a single heartbeat). Ventricular tachycardia can best be
diagnosed while the patient is actually experiencing an episode of
tachyarrhythmia, which must be carefully monitored by the physician. Current
single point mapping techniques are often not appropriate because the patient
cannot be left in the unstable heart rhythm for a sufficient length of time to
determine the origins of the ventricular tachycardia. The Mercator Left
Ventricular Mapping Basket is designed to allow rapid mapping of a large portion
of the left ventricle. The Mercator Left Ventricular Mapping Basket captures,
within a few seconds, a large amount of electrical conduction information that
is useful in identifying
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appropriate sites for ablation. All ventricular mapping baskets are intended for
single use due to the inability of the catheter's biocompatible,
anti-coagulation coating to withstand resterilization.
The Mercator Left Ventricular Mapping Basket is combined with the Company's
Model 8100/8300 Arrhythmia Mapping System to form the Company's Arrhythmia
Mapping System for diagnostic mapping of ventricular tachycardia. This system
captures the conduction activity in the left ventricle and displays the
information, allowing the physician to evaluate and manipulate the data to
determine the source of the ventricular tachycardia and the appropriate location
for ablation. The Company believes that the Mercator Left Ventricular Mapping
Basket will also be usable with existing computerized electrophysiology signal
display systems after appropriate interface connections have been implemented.
Mercator Local Sector Mapping Basket. The Company is currently developing
the Mercator Local Sector Mapping Basket, a variation of the Mercator Left
Ventricular Mapping Basket, which clusters the electrode-carrying arms together,
providing a one-sided grouping of the electrodes. This product is designed to
allow the electrophysiologist to focus the electrodes of the mapping basket in
the specific region or sector of the left ventricle believed to be implicated in
the patient's ventricular tachycardia. Focusing the electrodes in a limited area
increases the amount and usefulness of the data collected for the specific
target area. Use of the Mercator Local Sector Mapping Basket allows the
electrophysiologist to concentrate on the ventricular septal wall, the location
of the heart where the vast majority of ventricular tachycardias occur. The
Mercator Local Sector Mapping Basket is designed to be used with the Model
8100/8300 Arrhythmia Mapping System for diagnostic mapping of ventricular
tachycardia. The Mercator Local Sector Mapping Basket is intended for single use
due to the inability of the catheter's biocompatible, anticoagulation coating to
withstand resterilization.
Transseptal Guide Catheter. The Company is currently developing a
Transseptal Guide Catheter designed to allow electrophysiologists to introduce
the mapping basket catheter into the left ventricle using a venous approach
rather than an arterial approach. The Company believes that some
electrophysiologists will prefer to use the venous approach in order to reduce
complications and patient risk associated with introducing the mapping basket
through an artery. In addition, introduction of the mapping basket using a
venous approach allows the electrophysiologist to simultaneously introduce an
ablation catheter into the left ventricle through an artery (a typical approach
used in WPW syndrome ablation procedures).
Chilli Cooled Ablation Catheter. The Chilli Cooled Ablation Catheter is a
minimally invasive device designed to treat ventricular tachycardia using
radiofrequency energy ablation to create lesions in the ventricle. Although
leading electrophysiologists have recently begun to use radiofrequency ablation
to treat ventricular tachycardia, excessive heating of the tissue and the
ablation electrode often limits the level of energy delivered and therefore the
success of the treatment. Incorporating a closed system of fluid circulation,
the Chilli Cooled Ablation Catheter allows circulating fluid to cool the
catheter ablation electrode during delivery of radiofrequency energy. A
programmable pump injects fluid into a catheter lumen that circulates the fluid
to the tip electrode and back to the fluid pump. The circulation of fluid draws
heat away from the metal electrode and from the electrode-to-tissue interface,
which the Company believes will allow the delivery of higher radiofrequency
energy power levels without excessive heating. Higher power levels allow for
creation of wider and deeper lesions than those created with lower power levels,
increasing the likelihood of a successful ablation. The Chilli Cooled Ablation
Catheter will be labeled for single use due to its closed system of fluid
circulation through catheter lumens.
Atrial Fibrillation Catheters
The Company is currently developing catheters to allow the physician to
treat atrial fibrillation. The Nexus Linear Lesion Catheter is designed to
create long lesions in the atria and the Atrial Mapping Basket is designed to
map the atria to assess the effectiveness of the ablation treatment.
Nexus Linear Lesion Catheter. Currently, the only curative treatment for
atrial fibrillation is the surgical maze procedure in which the surgeon makes
several incisions in the right and left atria creating scar tissue to
electrically isolate portions of the atria. The Company is designing the Nexus
Linear Lesion Catheter to enable a minimally invasive ablation procedure to
treat atrial fibrillation. The Company is initially designing
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the Nexus Linear Lesion Catheter for use in the right atrium. The Company
believes that the Nexus Linear Lesion Catheter, through the use of a conductive
fluid medium for radiofrequency energy delivery, will produce a homogenous
lesion that will create a continuous line of block through the tissue, creating
lesions similar to those created with the surgical maze- procedure. The unique
design of the Nexus Linear Lesion Catheter mounts several electrodes together
and provides a highly adjustable deployment system. This novel deployment
technique provides specific directional tissue contact for the conformable
electrode and a self-stabilizing support structure. A non-metallic electrode
allows the Nexus Linear Lesion Catheter to conform to irregular surfaces in the
endocardium and efficiently deliver radiofrequency energy for ablating heart
tissue. The Company believes that these features will substantially reduce
ablation procedure time compared to other current catheter based treatments. As
a result of the non-metallic electrode design, the Nexus Linear Lesion Catheter
will be a single-use catheter.
The Nexus Linear Lesion Catheter will be used with the Company's Model 8002
Radiofrequency Generator and Integrated Fluid Pump. The Atrial Fibrillation
Ablation System will combine the unique features to be included in the Nexus
Linear Lesion Catheter with an instrument that incorporates the widely accepted
radiofrequency energy method for creating lesions in the heart tissue and a
programmable pump for fluid delivery during the ablation.
Mercator Atrial Mapping Basket. The Mercator Atrial Mapping Basket is a
high density, 64-electrode basket that the Company believes will be useful in
atrial electrophysiology studies. This mapping catheter is based on the same
technology as the Mercator Left Ventricular Mapping Basket and has similar
design characteristics. The use of the Company's proprietary technology for
constructing high density electrode arms will be leveraged in this design, and
the arm shapes will be designed specifically with consideration for the anatomy
of human atria. A range of basket sizes is being developed to account for
variations in size and shape of human atria. Initially the Company has focused
its product development efforts on a mapping basket for the right atrium. The
Company believes that a mapping system for the atria will be important in
reducing the procedure time and assessing the effectiveness of ablation
procedures for treating the patient's atrial fibrillation. The Mercator Atrial
Mapping Basket is intended for single use due to the inability of the catheter's
biocompatible, anticoagulation coating to withstand resterilization.
The Mercator Atrial Mapping Basket will be used with the Company's Model
8100/8300 Arrhythmia Mapping System. The Company believes that the mapping
catheter will also be compatible with existing computerized electrophysiology
signal display systems after appropriate interface connections have been
implemented.
Supraventricular Tachycardia and Diagnostic Catheters
The Company's Trio/Ensemble diagnostic catheters and Radii supraventricular
tachycardia mapping and ablation Catheters, currently sold commercially, are
used for electrophysiological diagnostic mapping and ablation of
supraventricular tachycardia. These catheters employ single point mapping and
ablation techniques that are effective methods of locating the appropriate
ablation site for curing supraventricular tachycardia.
Trio/Ensemble Diagnostic Catheters. Many diagnostic electrophysiological
studies are performed with placement of multi-electrode catheters in three or
four locations of the right heart chambers. The placement of these diagnostic
catheters provides the electrophysiologist with an overall tool to assess
electrical conduction between the atria and the ventricle. The Company believes
the Ensemble catheter is the world's smallest general purpose electrophysiology
diagnostic catheter. The Ensemble is available with five curve shapes to assist
placement of the catheters in different locations within the heart. The
Trio/Ensemble diagnostic catheters allow the placement of three diagnostic
catheters through a single patient introduction site rather than a separate
introduction site for each catheter, reducing patient preparation time,
lessening patient trauma and facilitating the electrophysiology study to be
performed on an outpatient basis. The FDA granted 510(k) clearance for the
Trio/Ensemble diagnostic catheter to Arrow in December 1995. Arrow distributes
the product in the United States and Arrow and a limited number of other
distributors market the Trio/Ensemble in certain international markets. The
Trio/Ensemble diagnostic catheters currently have list prices ranging from $150
to $250, depending upon configurations and distribution territory.
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Radii Mapping and Ablation Catheters. The Company's Radii family of
supraventricular tachycardia mapping and ablation catheters is similar to
catheters widely used in conjunction with ablation procedures. Each catheter has
a deflectable, steerable shaft that can be used with single-point mapping
techniques to locate potential arrhythmia sites prior to application of
radiofrequency energy to ablate the tissue. Unlike ventricular tachycardia,
single-point mapping techniques are appropriate for supraventricular tachycardia
because the arrhythmia can be induced and maintained in the patient for a
sufficient length of time to identify the origins of the supraventricular
tachycardia without threatening the patient's life. The radius of the
deflectable curve may be adjusted by the clinician. This feature allows small
catheter tip movements and slight curve changes that are necessary to reach
different anatomical sites. Some Radii models contain a temperature sensor
embedded into the ablation electrode to provide additional information about the
performance of the radiofrequency energy delivery. The Company believes that the
Radii is compatible with competing models of radiofrequency generators for use
in supraventricular tachycardia ablation procedures. The Radii supraventricular
tachycardia mapping and ablation catheters are distributed internationally by
Arrow and other international distributors. Commercialization of the Radii
family of catheters in the United States would require full PMA regulatory
approval and the related devotion of substantial financial and management
resources. As a result, the Company currently does not intend to sell these
products domestically. The Radii supraventricular tachycardia mapping and
ablation catheters have list prices ranging from $545 to $675, depending upon
model and distribution territory.
High Resolution Mapping Equipment
Electrophysiologists use dedicated signal amplifier systems to diagnose
information gathered during an electrophysiology study. Typical systems amplify
the signals recorded from the heart, convert these signals into digital
information and permanently store the digital information. A printer provides
paper display of signals for analysis by the electrophysiologist and medical
records storage. Currently, some electrophysiologists still rely on older analog
amplifier systems that merely display signals on a monitor and print them on a
paper strip chart recorder for medical records storage. These systems force the
electrophysiologist to perform a tedious process of manual measurement of the
signals printed on paper. More modem systems, while utilizing computerized
technology, are limited in their ability to support high resolution mapping
devices such as the Company's Mercator Left Ventricular Mapping Basket.
The Model 8100/8300 Arrhythmia Mapping System records, amplifies and
displays the unique electrical activity recorded from catheter electrodes that
have been passed into the heart. The system supports complex mapping catheters
by offering software that intuitively displays information abstracted from the
timing information in the electrical signals using a type of color display known
as an isochronal map. The isochronal maps represent those parts of the heart's
left ventricle that contract at the same time by using the same color. With this
technique, color indicates when parts of the heart contract relative to each
other. Colors provide rapid visual indication of a segment of the heart that
could be a source of the tachycardia.
Ablation Equipment
Radiofrequency energy is the most common energy source used in catheter
ablation procedures. When radiofrequency energy is passed through heart tissue,
the tissue resists the flow of electricity, generating heat in a process known
as resistive heating. Resistive heating destroys the cardiac tissue in contact
with the catheter. The treatment of many arrhythmias requires that ablation
produce large, deep lesions. However, when the tissue becomes too hot from
resistive heating, heat conducts back from within the tissue to the catheter
electrode tip causing the formation of charred blood particles. This inhibits
the flow of electricity to the heart tissue and the depth of the lesion that can
be produced. In addition, this overheating poses a risk as the removal of the
catheter from the heart can dislodge charred blood particles that can travel
through the arteries exiting the heart into the brain, causing a stroke.
Cooled ablation addresses these shortcomings of radiofrequency energy
ablation. By cooling the catheter tip, the Company believes heat is removed from
the electrode-to-tissue interface, allowing more energy to be delivered to the
heart without blood coagulating on the catheter tip, resulting in what the
Company believes are larger and deeper lesions created in a safer manner. The
Model 8002 Radiofrequency Generator and
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Integrated Fluid Pump incorporates the widely accepted radiofrequency energy
method for creating endocardial lesions with a programmable fluid pump for fluid
delivery during ablation. The Company believes this is the only radiofrequency
generator featuring an integrated fluid pump for catheter electrode cooling.
Software design limits the radiofrequency energy output to a maximum of 50
watts, a level of energy delivery believed to be both safe and sufficiently
strong to produce an effective lesion. The Model 8004 Radiofrequency Generator
and Integrated Fluid Pump adds functionality to the Model 8002, including
additional pump integration and printing of ablation data.
The Company's Ventricular Tachycardia Ablation System, Arrhythmia Mapping
Systems and Atrial Fibrillation Ablation System will require additional
development and clinical trials and regulatory approvals before they can be
marketed in the United States and internationally. At the earliest, the Company
does not anticipate filing a pre-market approval ("PMA") application for any
system for at least the next two years, and does not anticipate receiving a PMA
for any such system until at least one to three years after such PMA application
is accepted for filing, if at all. The Company will not generate any significant
revenue in the United States until such time, if ever, as its Ventricular
Tachycardia Ablation System, Arrhythmia Mapping Systems or Atrial Fibrillation
Ablation System obtain clearance or approval from the United States Food and
Drug Administration (the "FDA"). There can be no assurance that the Company's
development efforts will be successful or that the Ventricular Tachycardia
Ablation System, Arrhythmia Mapping Systems or Atrial Fibrillation Ablation
System or any other product developed by the Company will be safe or effective,
approved by appropriate regulatory and reimbursement authorities, capable of
being manufactured in commercial quantities at acceptable costs or successfully
marketed. Furthermore, because the Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System represent the
Company's sole near-term product focus, the Company could be required to cease
operations if these systems are not successfully commercialized.
There can be no assurance that the Company's Ventricular Tachycardia
Ablation System, Arrhythmia Mapping Systems or Atrial Fibrillation Ablation
System or the component catheters and equipment will gain any significant degree
of market acceptance among physicians, patients and health care payors. even if
clinical trials demonstrate safety and efficacy and necessary regulatory and
reimbursement approvals are obtained. The Company believes that physicians'
acceptance of procedures performed using the Company's systems will be essential
for market acceptance of its systems. Physicians will not recommend that
procedures be performed using the Company's systems until such time, if at all,
as clinical data or other factors demonstrate the efficacy of such procedures as
compared to conventional drug, surgical and other treatments. Even if the
clinical efficacy of procedures using the Company's systems is established,
electrophysiologists, cardiologists and other physicians may elect not to
recommend the procedures for any number of other reasons. The Company believes
that, as with any novel medical procedure, there will be a significant learning
process involved for physicians to become proficient. Broad use of the Company's
systems will require training of physicians, and the time required to complete
such training could adversely affect market acceptance. Failure of the Company's
products to achieve significant market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations.
CLINICAL TRIALS
The Company is currently conducting a clinical trial of the Chilli Cooled
Ablation Catheter and the Model 8002 Radio Frequency Generator and Integrated
Fluid Pump, the products that together form the Company's Ventricular
Tachycardia Ablation System. In addition, the Company has recently begun to
conduct clinical trials of the Mercator Left Ventricular Mapping Basket and the
Model 8100/8300 Arrhythmia Mapping System, the products that together form the
Company's Arrhythmia Mapping System for diagnostic mapping of ventricular
tachycardia. In June 1996, the Company received IDE approval from the FDA to
conduct a clinical trial of the Mercator Atrial Mapping Basket for the right
atrium.
Ventricular Tachycardia Ablation System. The Company initiated a clinical
trial for the Ventricular Tachycardia Ablation System in the United States and
Europe in November 1995 under an IDE approved by the FDA. The clinical trials
will be conducted at a maximum of 16 clinical sites and will involve a total of
approximately 200 patients randomized using the Ventricular Tachycardia Ablation
System versus antiar-
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rhythmic drugs. Pursuant to the IDE, the FDA will evaluate the safety and
efficacy of Ventricular Tachycardia Ablation System. The primary endpoint of the
clinical trial is clinical recurrence of ventricular tachycardia in patients
receiving ablation treatment versus patients in the control group. The Company
has not yet established with the FDA the length of the required post-treatment
follow-up prior to submission of a PMA. However, the Company is required to
follow up with each patient for 24 months. The Company intends to submit a PMA
to the FDA for filing following a six-month patient follow-up period. The
Company anticipates that this clinical trial will not be completed prior to
early calendar 1998. At the conclusion of the clinical trials, the Company plans
to file a PMA application for approval to market the Ventricular Tachycardia
Ablation System and its component catheters and equipment in the United States.
As of August 12, 1996, 37 patients had been enrolled in the clinical trial,
of whom twenty-one had received ablation treatment. Although seventeen of the
twenty-one patients who have received ablation treatment have not experienced a
recurrence of ventricular tachycardia, the treatments have only recently been
performed. As a result, patient follow-up has been limited (less than six
months) and the results of the treatment are very preliminary. Nine of the
sixteen patients who received drug treatment experienced a recurrence of
ventricular tachycardia. The regulatory requirement for a randomized protocol
utilizing a control population has limited the number of enrolled patients that
have received the ablation therapy. In April 1996, the Company received from the
FDA a modification of the protocol that the Company believes will result in more
rapid enrollment in the clinical trial. The original protocol required that the
patient first be treated with an ICD prior to being enrolled in the clinical
trial, a requirement that has been removed in the modified protocol. In
addition, the randomization ratio in the modified protocol is three ablation
patients for every one control group patient, compared to one ablation patient
for every one control group patient in the original protocol. In addition,
control patients that experience a recurrence of ventricular tachycardia will be
eligible to cross over into the ablation arm of the study.
Pursuant to a compassionate use protocol, as of August 12, 1996, 18
additional patients in the United States and Europe had received ablation
treatment in procedures unrelated to the clinical trials. Most of these patients
suffered from incessant ventricular tachycardia prior to the procedure.
Compassionate use of an experimental device is reserved for patients who have no
other treatment options and who are experiencing life threatening conditions. As
of August 12, 1996, the follow-up period ranged from one month to 12 months in
the 18 patients, with data indicating that only three patients had a recurrence
of ventricular tachycardia. The ablation treatment was not completed in one of
the 18 patients as a result of technical problems unassociated with the
Company's device.
Arrhythmia Mapping System for Ventricular Tachycardia. In January 1996,
the Company received FDA approval to conduct an IDE feasibility study to
evaluate the safety of the Arrhythmia Mapping System for diagnostic mapping of
ventricular tachycardia. The feasibility study is being conducted at two
clinical sites in the United States and will involve a total of 12 patients. The
purpose of the clinical trial is to evaluate and test the success of the
deployment of the Mercator Left Ventricular Mapping Basket into the ventricle,
the fit of the catheter and the system's ability to accurately map the
electrical signals of the left ventricle. At the conclusion of the feasibility
study, currently expected to occur in early calendar 1997, the Company intends
to submit an IDE to the FDA to perform additional clinical trials. Enrollment in
the clinical trial began in March 1996, and as of August 12, 1996 one patient
had been enrolled. Evaluation of the enrolled patient following the procedure
showed asymptomatic mild aortic value regurgitation that the Company believes
resulted from deployment difficulties. In response, the Company made a slight
modification to the deployment system of the Mercator Left Ventricular Mapping
Basket. In June 1996, the Company received an IDE supplement approval for the
modification to the deployment system.
The Company is also testing the Mercator Left Ventricular Mapping Basket
and Arrhythmia Mapping System in Europe. As of August 12, 1996, the ventricular
tachycardia of seven patients has been mapped, and none of the patients has had
complications as a result of the Mercator Left Ventricular Mapping Basket and
Arrhythmia Mapping System. The Mercator Left Ventricular Mapping Basket was
safely deployed and fit properly in the left ventricle for all eight patients,
and in the two patients where independent corroboration was possible, the system
accurately mapped the location of the ventricular tachycardia.
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Arrhythmia Mapping System for Atrial Fibrillation. In June 1996, the
Company received IDE approval by the FDA to conduct a clinical trial of the
Mercator Atrial Mapping Basket for the right atrium and Arrhythmia Mapping
System for atrial fibrillation. The clinical trial will be conducted at five
clinical sites in the United States. The purpose of this clinical trial will be
to demonstrate the equivalency of the Right Mercator Atrial Mapping Basket and
the Arrhythmia Mapping System to commercially available mapping catheters.
The Company is also testing the Mercator Atrial Mapping Basket for the
right atrium in Europe. As of August 12, 1996, the Mercator Atrial Mapping
Basket was safely deployed and fit properly in the right atrium in seven
patients. In addition, the Mercator Atrial Mapping Basket for the left atrium
was also tested in Europe in one patient. None of the patients had complications
as a result of the Mercator Atrial Mapping Basket and Arrhythmia Mapping System.
Atrial Fibrillation Ablation System. The Company intends to seek FDA
approval of an IDE feasibility study to evaluate the safety of the Atrial
Fibrillation Ablation System. The purpose of the IDE feasibility study for the
Atrial Fibrillation Ablation System will be to assess the safety and performance
in creating continuous linear lesions. In June 1996, the Company submitted an
IDE for the feasibility study covering the Atrial Fibrillation Ablation System
for the right atrium.
The Company is also testing the Nexus Linear Lesion Catheter for atrial
fibrillation ablation in Europe. As of August 12, 1996, the Nexus Linear Lesion
Catheter was used in two patients. The purpose of the clinical test was to
verify that a linear lesion could be made in a location in the atrium
anticipated to eliminate atrial fibrillation. In the first patient, incomplete
linear lesions were created and the patient did not have complications. The
second patient resulted in successful creation of linear lesions in the atrium
and the patient did not have complications. The creation of the linear lesions
in the second patient was verified by changes of the electrical activity in the
atrium.
Portions of the discussion above under "Clinical Trials" include the
Company's current estimates of the planned submission dates of IDE feasibility
studies or IDEs, and other statements regarding clinical trials for certain of
the Company's products. These estimates are forward-looking statements that
involve risks and uncertainties. The actual submission dates and other events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the Company's success in
completing any remaining development of the products, the efficacy and safety of
the products in laboratory testing and the other factors set forth in the
following paragraph and elsewhere in this report.
The Ventricular Tachycardia Ablation System and Arrhythmia Mapping System
for diagnostic mapping of ventricular tachycardia are in the early stages of
clinical testing. Clinical data obtained to date are insufficient to demonstrate
the safety and efficacy of these products under applicable FDA regulatory
guidelines. There can be no assurance that any of the Company's products will
prove to be safe and effective in clinical trials under applicable United States
or international regulatory guidelines or that additional modifications to the
Company's products will not be necessary. In addition, the clinical trials may
identify significant technical or other obstacles to be overcome prior to
obtaining necessary regulatory or reimbursement approvals. In addition, the
ablation catheter and ablation equipment that together form the Company's Atrial
Fibrillation Ablation System and the mapping catheter and mapping equipment that
together form the Company's Arrhythmia Mapping Systems for atrial fibrillation
are still under development. There can be no assurance that the Company will be
successful in completing development of the atrial fibrillation products and
submitting the appropriate IDEs or that the FDA will permit the Company to
undertake clinical trials of the atrial fibrillation products. If the
Ventricular Tachycardia Ablation System, Arrhythmia Mapping Systems and Atrial
Fibrillation Ablation System and their component catheters and equipment do not
prove to be safe and effective in clinical trials or if the Company is otherwise
unable to commercialize these products successfully, the Company's business,
financial condition and results of operations will be materially adversely
affected. In addition, because ablation treatment of these cardiac arrhythmias
is a relatively new and to date untested treatment, the long-term effects of
radiofrequency ablation on patients are unknown. As a result, the long-term
success of ablation therapy in treating ventricular tachycardia and atrial
fibrillation will not be known for several years.
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MARKETING AND DISTRIBUTION
The Company markets its Trio/Ensemble diagnostic catheters and Radii
supraventricular tachycardia mapping and ablation catheters internationally
through established distributors of specialty cardiovascular products. The
Company's agreement with Arrow provides distribution rights for the
Trio/Ensemble diagnostic catheters throughout the world except for the
territories of Japan and southern Europe. For distribution of the Company's
Radii supraventricular tachycardia mapping and ablation catheters, the Company
has agreements with distributors in Canada, Europe and Japan and with Arrow in
Germany and the rest of the world, except for the United States, Japan and
southern Europe, Scandinavia and the Benelux countries. Arrow has the right to
manufacture the Radii supraventricular tachycardia mapping and ablation
catheter. If Arrow exercises this right, its territory for the distribution of
the Radii supraventricular tachycardia mapping and ablation catheters will
expand to include the United States. Sales to Japan Lifeline Company, Ltd.
("Japan Lifeline"), the Company's distributor in Japan, and Sorin, S.p.A., the
Company's distributor in southern Europe, accounted for 15% and 57%,
respectively, of the Company's net sales in fiscal 1995. Sales to Japan Lifeline
and Arrow accounted for 54% and 33%, respectively, of the Company's net sales in
fiscal 1996. International sales accounted for 100% and 67% of the Company's net
sales in fiscal 1995 and 1996, respectively.
The Company generally operates under written distribution agreements that
grant exclusive rights to sell the Company's products within a defined
territory. These agreements generally grant the Company the right to terminate
the distributor for cause (which includes failure to satisfy specified minimum
performance obligations) or the failure of the distributor to obtain required
governmental approvals to distribute the Company's products in the territory.
These distributors also market medical products of other companies, although the
Company has obtained covenants from its distributors granting the Company rights
to terminate given distribution agreements with distributors that market medical
devices that compete directly with those of the Company. Distributors typically
purchase the Company's products at a discount to list price and resell the
products to hospitals and physicians. Sales to international distributors are
usually denominated in United States dollars. The end-user price is determined
by the distributor and varies from country to country.
The Company currently has only a limited sales and marketing organization.
The Company's Vice President, International and Technical Marketing manages
distributor relationships throughout the world. The Company has also retained an
independent consultant clinical specialist to provide support for marketing
efforts in Germany. If FDA clearances or approvals are received for the
Company's ventricular tachycardia or atrial fibrillation products, the Company
intends to market its products primarily through a direct sales force in the
United States and indirect sales channels internationally. The Company believes
that the concentrated nature of the market of practicing electrophysiologists in
the United States will allow it to address this market with a small, targeted
sales force. The Company believes that fewer than 200 of the practicing
electrophysiologists account for approximately two- thirds of the
electrophysiological procedures performed for ventricular tachycardia. The
Company's existing distributors in Japan and southern Europe for the
Trio/Ensemble diagnostic catheters and Radii supraventricular tachycardia
mapping and ablation catheters have the right to elect to become the exclusive
distributors of the ventricular tachycardia and atrial fibrillation products in
their respective territories.
The Company expects to expand its sales and marketing efforts to include
marketing managers and clinical specialists to assist in the sales and marketing
efforts. The Company's marketing and sales strategy in the United States will
involve the use of a combination of sales representatives directly employed by
the Company and field clinical engineers to provide technical expertise. The
role of the sales representative will be to demonstrate the use of the Company's
products while educating physicians as to the clinical benefits of catheter
ablation for atrial fibrillation and ventricular tachycardia, using marketing
techniques similar to those commonly employed in the cardiovascular device
industry. The role of the field clinical engineer will be to provide
installations of the Company's systems and provide training to physicians and
their staff on appropriate operation of the Company's equipment. The Company
also intends to establish a resource to provide physicians with relevant
clinical information regarding the Company's products. The Company believes that
this combination of sales representatives and field clinical engineers will
provide an appropriate balance of professional selling skills while maintaining
an appropriate level of technical expertise in the field.
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A key element of the Company's marketing strategy has been to develop
relationships with prominent academic physicians who have a history of research
and publications in peer reviewed literature on ablation for ventricular
tachycardia and atrial fibrillation. The Company's strategy is to leverage off
these relationships with leading electrophysiologists to gain market acceptance
of its products in the United States and internationally. The Company believes
there are approximately 600 board certified electrophysiologists practicing in
the United States. These physicians have been involved and will continue to be
involved in the Company's clinical and product development efforts. The Company
intends to continue to build these relationships through clinical investigator
meetings, participation in physician-run symposia and meetings to discuss
clinical issues and treatments. Because of the sub-specialty nature of
electrophysiology, electrophysiologists with high patient volume are found in
referral centers usually associated with major academic medical centers in large
urban population centers. These electrophysiologists have been identified by the
Company as potential prospects and will be the object of concentrated sales
efforts in the future if the Company's ventricular tachycardia or atrial
fibrillation products receive regulatory approvals.
Establishing a marketing and sales capability sufficient to support sales
in commercial quantities will require substantial efforts and require
significant management and financial resources. There can be no assurance that
the Company will be able to build such a marketing staff or sales force, that
establishing such a marketing staff or sales force will be cost-effective or
that the Company's sales and marketing efforts will be successful. In addition,
the Company has not begun discussions with all needed international
distributors. If the Company is successful in obtaining the necessary regulatory
approvals for its ventricular tachycardia and atrial fibrillation products in
international markets, it expects to establish a sales and marketing capability
in those markets primarily through distributors. The Company has not begun
discussions with all needed international distributors. There can be no
assurance that the Company will be able to enter into agreements with desired
distributors on a timely basis or at all, or that such distributors will devote
adequate resources to selling the Company's products. Failure to establish
appropriate distribution relationships could have a material adverse effect upon
the Company's business, financial condition and results of operations.
The Company currently sells its Radii supraventricular tachycardia mapping
and ablation catheters and Trio/Ensemble diagnostic catheters through
distributors in certain international markets. In addition, the Company plans to
market its ventricular tachycardia and atrial fibrillation products in
international markets, subject to receipt of required regulatory approvals.
Changes in overseas economic conditions, currency exchange rates, foreign tax
laws, or tariffs or other trade regulations could have a material adverse effect
on the Company's ability to market its products internationally and therefore on
its business, financial condition and results of operations.
STRATEGIC RELATIONSHIPS
The Company intends to pursue strategic relationships with corporations and
research institutions with respect to the research, development, international
regulatory approval, manufacturing and marketing of certain of its products. In
March 1995, the Company formed a strategic relationship with Arrow, a
manufacturer of medical products for critical care medicine, interventional
cardiology and radiology. The relationship included Arrow's equity investment of
$9.1 million in the Company. The Company and Arrow entered into agreements
pursuant to which the Company granted to Arrow certain manufacturing and
distribution rights to the Trio/Ensemble diagnostic catheters and Radii
supraventricular tachycardia mapping and ablation catheters. In addition, the
Company is currently exploring an international distribution relationship with
Arrow for the Ventricular Tachycardia Ablation System and Arrhythmia Mapping
System for ventricular tachycardia. Although the Company intends to pursue
additional strategic relationships in the future, there can be no assurance that
the Company will be successful in establishing or maintaining any such
relationships or that any such relationship will be successful.
RESEARCH AND DEVELOPMENT
Substantially all of the Company's research and development activities are
performed internally by the Company's team of research scientists, engineers and
technicians. The Company's research and development team is generally divided
into three groups. The Systems and Software Group, consisting of 16 persons at
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June 30, 1996, is responsible for all development activities related to the
Company's ablation and mapping instruments. The Catheter Development Group,
consisting of 10 persons at June 30, 1996, is responsible for all development
activities related to ablation and mapping catheters. The Advanced Product
Development Group, consisting of five persons at June 30, 1996, is responsible
for all development activities related to ablation therapy catheters for atrial
fibrillation. The Company's primary research and development programs involve
completing development of the Atrial Fibrillation Ablation System and developing
improvements to the Ventricular Tachycardia Mapping System, including new
mapping and ablation catheter configurations and new versions of the mapping and
ablation equipment and related software in order to increase the efficacy of the
procedures, increase manufacturing reliability and reduce component and
manufacturing costs.
Research and development expenses for fiscal 1994, 1995 and 1996 were $5.1
million, $5.7 million and $6.8 million, respectively. The Company intends to
continue to make significant investments in research and development.
MANUFACTURING
The Company has a 9,000 square feet manufacturing facility consisting of
approximately 4,000 square feet for catheter manufacturing and approximately
5,000 square feet of manufacturing support area at its facilities in Sunnyvale,
California. The Company currently manufactures its catheters and systems in
limited quantities for laboratory testing, United States clinical trials,
international clinical trials and, in the case of its Radii supraventricular
tachycardia mapping and ablation catheters and Trio/Ensemble diagnostic
catheters, limited commercial sales. The manufacture of catheters is a complex
operation involving a number of separate processes and components. Each catheter
is assembled and individually tested by the Company prior to sterilization in
accordance with FDA requirements. The manufacturing process for the mapping and
ablation equipment consists primarily of assembly of purchased components and
testing operations.
Components and raw materials are purchased from various qualified suppliers
and subjected to stringent quality specifications. The Company conducts quality
audits of suppliers and is establishing a vendor certification program. A number
of the components such as the computer workstation, the fluid pump, integrated
circuit components, flex circuit and biocompatible coating are provided by sole
source suppliers. For certain of these components, there are relatively few
alternative sources of supply, and establishing additional or replacement
vendors for such components, particularly flex circuits, could not be
accomplished quickly. The Company plans to qualify additional suppliers if and
as future production volumes increase. Because of the long lead time for some
components that are currently available from a single source, a vendor's
inability to supply such components in a timely manner could have a material
adverse effect on the Company's ability to manufacture the mapping basket,
mapping equipment and ablation equipment and therefore on its business,
financial condition and ability to market its products as currently
contemplated.
The Company has no experience manufacturing its products in the volumes
that will be necessary for the Company to achieve significant commercial sales,
and there can be no assurance that reliable, high-volume manufacturing capacity
can be established or maintained at commercially reasonable costs. If the
Company receives FDA clearance or approval for its products, it will need to
expend significant capital resources and develop manufacturing expertise to
establish large-scale manufacturing capabilities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply
shortages, shortages of qualified personnel, compliance with FDA regulations,
and the need for further FDA approval of new manufacturing processes. In
addition, the Company believes that substantial cost reductions in its
manufacturing operations will be required for it to commercialize its catheters
and systems on a profitable basis. Any inability of the Company to establish and
maintain large-scale manufacturing capabilities would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's manufacturing facilities are subject to periodic inspection
by regulatory authorities, and its operations must undergo GMP compliance
inspections conducted by the FDA. To date, the Company's facilities and
manufacturing processes have not undergone any such inspections. The Company
will be required to comply with GMP requirements in order to produce products
for sale in the United States and
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with ISO 9001 standards in order to produce products for sale in Europe. Any
failure of the Company to comply with GMP or ISO 9001 standards may result in
the Company being required to take corrective actions, such as modification of
its policies and procedures. The State of California also requires that the
Company obtain a license to manufacture medical devices. To date, the Company's
facilities and manufacturing processes have not undergone any such inspection.
If the Company is unable to maintain such a license, it would be unable to
manufacture or ship any product, which inability would have a material adverse
effect on the Company's business, financial condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain patent
and copyright protection for its products and processes, to preserve its trade
secrets and to operate without infringing or violating the proprietary rights of
third parties. The Company's strategy is to actively pursue patent protection in
the United States and foreign jurisdictions for technology that it believes to
be proprietary and that offers a potential competitive advantage for its
products. The Company holds issued and allowed Patents covering a number of
fundamental aspects of the Company's Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System. The Company
owns 32 issued United States patents and owns an exclusive field-of-use license
on one issued United States patent and licenses to 12 United States patents and
two issued foreign patents. In addition, the Company has 20 pending United
States patent applications of which six are licensed, five of which have been
allowed by the United States Patent and Trademark Office (including three
licensed), and has filed 36 corresponding patent applications (including, two
licensed) that are currently pending in Europe, Japan, Australia and Canada. The
Company's patents and patent applications relate to a number of aspects of the
Company's technology, including the technology related to the Company's basket
approach to diagnostic mapping, the integration of mapping and ablation in a
single device, the cooled ablation catheters, bend location and radius
adjustment in the ablation catheters and the multipart introducer. The Company
intends to file additional patent applications to seek protection for other
proprietary aspects of its technology in the future. The patent positions of
medical device companies, including those of the Company, are uncertain and
involve complex and evolving legal and factual questions. The coverage sought in
a patent application either can be denied or significantly reduced before or
after the patent is issued. Consequently, there can be no assurance that any
patents from pending patent applications or from any future patent application
will be issued, that the scope of any patent protection will exclude competitors
or provide competitive advantages to the Company, that any of the Company's
patents will be held valid if subsequently challenged or that others will not
claim rights in or ownership of the patents and other proprietary rights held by
the Company. Since patent applications are secret until patents are issued in
the United States or corresponding applications are published in international
countries, and since publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, the Company cannot be certain
that it was the first to make the inventions covered by each of the its pending
patent applications or that it was the first to file patent applications for
such inventions. In addition, there can be no assurance that competitors, many
of which have substantial resources and have made substantial investments in
competing technologies, will not seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or in international markets. Further, the
laws of certain foreign countries do not protect the Company's intellectual
property rights to the same extent as do the laws of the United States.
Litigation or regulatory proceedings, which could result in substantial cost and
uncertainty to the Company may also be necessary to enforce patent or other
intellectual property rights of the Company or to determine the scope and
validity of other parties' proprietary rights. There can be no assurance that
the Company will have the financial resources to defend its patents from
infringement or claims of invalidity.
The Company also relies on licensed technology from others for certain
components of its mapping and ablation systems. The Company relies on an
exclusive royalty-bearing license for the use of patents relating to a device
for ablating atrial fibrillation. The license will convert into a fully paid
nonexclusive license on the later of ten years from the first commercial sale of
products based on the patents or the expiration date of the last-to-expire
licensed patent.
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The Company obtained the rights to its biocompatible coating material
through a nonexclusive royalty bearing license that will terminate upon the
later of ten years from the first commercial sale of catheters treated with the
coating material or the expiration of the last-to-expire licensed patent. The
license can also be terminated if the Company does not begin commercial sales of
catheters using the biocompatible coating by July 1998.
In addition to patents, the Company relies on trade secrets and proprietary
know-how to compete, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. These agreements
generally provide that all confidential information developed or made known to
individuals by the Company during the course of the relationship with the
Company is to be kept confidential and not disclosed to third parties, except in
specific circumstances. The agreements also generally provide that all
inventions conceived by the individual in the course of rendering service to the
Company shall be the exclusive property of the Company. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to or independently developed by competitors.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the United States Patent and Trademark
Office ("USPTO") to determine the priority of inventions or an opposition to a
patent grant in a foreign jurisdiction. The defense and prosecution of
intellectual property suits, USPTO interference or opposition proceedings and
related legal and administrative proceedings are both costly and time-consuming.
Any litigation, opposition or interference proceedings will result in
substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology. 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. Furthermore, there can be no assurance that
necessary licenses from others would be available to the Company on satisfactory
terms, if at all. Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is aware of certain patents owned or licensed by others and relating
to cardiac catheters and cardiac monitoring. Certain enhancements of the
Company's products are still in the design and pre-clinical testing phase.
Depending on the ultimate design specifications and results of pre-clinical
testing of these enhancements there can be no assurance that the Company would
be able to obtain a license to such patents or that a court would find that such
patents are either not infringed by such enhancements or are invalid. Further,
there can be no assurance that owners or licensees of these patents will not
attempt to enforce their patent rights against the Company in a patent
infringement suit or other legal proceeding, regardless of the likely outcome of
such suit or proceeding.
COMPETITION
At present, the Company considers its primary competition to be companies
involved in current, more established therapies for the treatment of ventricular
tachycardia and atrial fibrillation, including drugs, external electrical
cardioversion and defibrillation, implantable defibrillators, ablation
accompanied by pacemaker implantation, and open-heart surgery. In addition,
several competitors are also developing new approaches and new products for the
treatment and mapping of ventricular tachycardia and atrial fibrillation,
including ablation systems using ultrasound, microwave, laser and cryoablation
technologies and mapping systems using contact mapping, single-point spacial
mapping and non-contact, multisite electrical mapping technologies. Many of the
Company's competitors have an established presence in the field of
interventional
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cardiology and electrophysiology, including Boston Scientific Corporation, C.R.
Bard, Inc., Johnson & Johnson through its Cordis Division and Medtronic, Inc.
Many of these competitors have substantially greater financial and other
resources than the Company, including larger research and development staffs and
more experience and capabilities in conducting research and development
activities, testing products in clinical trials, obtaining regulatory approvals,
and manufacturing, marketing and distributing products. There can be no
assurance that the Company will succeed in developing and marketing technologies
and products that are more clinically efficacious and cost-effective than the
more established treatments or the new approaches and products developed and
marketed by its competitors. Furthermore, there can be no assurance that the
Company will succeed in developing new technologies and products that are
available prior to its competitors' products. The failure of the Company to
demonstrate the efficacy and cost-effective advantages of its products over
those of its competitors or the failure to develop new technologies and products
before its competitors could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company believes that the primary competitive factors in the market for
cardiac ablation and mapping devices are safety, efficacy, ease of use and
price. In addition, the length of time required for products to be developed and
to receive regulatory and, in some cases, reimbursement approval is an important
competitive factor. The medical device industry is characterized by rapid and
significant technological change. Accordingly, the Company's success will depend
in part on its ability to respond quickly to medical and technological changes
through the development and introduction of new products. Product development
involves a high degree of risk and there can be no assurance that the Company's
new product development efforts will result in any commercially successful
products. The Company believes it competes favorably with respect to these
factors, although there is no assurance that it will be able to continue to do
so.
GOVERNMENT REGULATION
United States
Clinical testing, manufacture and sale of the Company's products are
subject to regulation by numerous governmental authorities, principally the FDA
and corresponding state and foreign regulatory agencies. Pursuant to the FDC
Act, the FDA regulates the clinical testing, manufacture, labeling, distribution
and promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing approvals, a recommendation by the FDA that the Company
not be permitted to enter into government contracts and criminal prosecution.
The FDA also has the authority to request repair, replacement or refund of the
cost of any device manufactured or distributed by the Company.
In the United States, medical devices are classified into one of three
classes, Class I, II or III, on the basis of the controls deemed by the FDA to
be necessary to reasonably ensure their safety and effectiveness. Class I
devices are subject to general controls (e.g. labeling, premarket notification
and adherence to GMPs). Class II devices are subject to general controls and to
special controls (e.g., performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those that
must receive premarket approval by the FDA to assure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices,
or new devices which have not been found substantially equivalent to legally
marketed devices), and require clinical testing to assure safety and
effectiveness and FDA approval prior to marketing and distribution.
Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through a premarket notification under
Section 510(k) of the FDC Act ("510(k)") or an approval of a PMA application
under Section 515 of the FDC Act. A 510(k) clearance typically will be granted
if the submitted information establishes that the proposed device is
"substantially equivalent" to a legally marketed Class I or 11 medical device or
to a Class III medical device for which the FDA has not called for PMAs. A
510(k) notification must contain information to support a claim of substantial
equivalence, which may include laboratory test results or the results of
clinical studies of the device in humans. Commercial distribution of a device
for which a 510(k) clearance is required can begin only after the FDA
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issues an order finding the device to be "substantially equivalent" to a
predicate device. The FDA recently has been requiring a more rigorous
demonstration of substantial equivalence than in the past and is more likely to
require the submission of human clinical trial data. Based upon industry and FDA
publications, the Company believes that it generally takes from four to twelve
months from the date of submission to obtain a 510(k) clearance, but it may take
longer. The FDA may determine that a proposed device is not substantially
equivalent to a legally marketed device, or that additional information is
needed before a substantial equivalence determination can be made. A "not
substantially equivalent" determination, or a request for additional
information, could delay the market introduction of new products that fall into
this category.
For any devices that are cleared through the 510(k) process, modifications
or enhancements that could significantly affect safety or effectiveness, or
constitute a major change in the intended use of the device, will require new
510(k) submissions. The FDA granted 510(k) clearance to Arrow in December 1995
for Trio/Ensemble diagnostic Catheters and Arrow distributes the product in the
United States and internationally. The Company has made certain modifications to
the Trio/Ensemble diagnostic catheters which the Company believes do not require
submission of a new 510(k) notification. There can be no assurance, however,
that the FDA will not require the submission of a new 510(k) notification for
any of the modifications. If the FDA were to take such action, marketing the
modified device could be delayed until a new 510(k) notification was cleared by
the FDA.
If the Company cannot establish that a proposed device is substantially
equivalent to a legally marketed predicate device, the Company must seek
premarket approval of the proposed device from the FDA through the submission of
a PMA application. A PMA application must be supported by valid scientific
evidence that typically includes extensive data, including preclinical and
clinical trial data, to demonstrate the safety and efficacy of the device. If
human clinical trials of a device are required and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) is required to file an IDE application with the FDA
prior to commencing human clinical trials. The IDE application must be supported
by data, typically including the results of animal and laboratory testing. If
the IDE application is approved by the FDA and one or more appropriate
institutional review boards ("IRBs"), human clinical trials may begin at a
specific number of investigational sites with a specific number of patients, as
approved by the FDA. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin the clinical trial after obtaining approval for the
study by one or more appropriate IRBs without the need for FDA approval.
Sponsors of clinical trials are permitted to sell investigational devices
distributed in the course of the study provided such compensation does not
exceed recovery of the costs of manufacture, research, development and handling.
An IDE supplement must be submitted to and approved by the FDA before a sponsor
or an investigator may make a change to the investigational plan that may affect
its scientific soundness or the rights, safety or welfare of human subjects.
The Company initiated a clinical trial for the Ventricular Tachycardia
Ablation System in the United States and Europe in November 1995 under an IDE
approved by the FDA. Although the Company is currently conducting clinical
trials with the device, there can be no assurance that such trials will be
completed, or if completed, that such trials will provide sufficient safety and
effectiveness data and information to support a PMA application and to obtain
FDA marketing approval. In January 1996, the Company received FDA approval to
conduct an IDE feasibility study to evaluate the safety of the Arrhythmia
Mapping System for diagnostic mapping of ventricular tachycardia. In June 1996,
the Company received an IDE supplement approval to the feasibility study
relating to a slight modification to the deployment system of the Arrhythmia
Mapping System for ventricular tachycardia in response to a complication noted
in the evaluation of a patient enrolled in the feasibility study. See
"-- Clinical Trials -- Arrhythmia Mapping System for Ventricular Tachycardia."
An IDE feasibility study is a limited investigation that is intended to provide
data on the device's form, function and feasibility for diagnosis or therapeutic
use. IDE applications for feasibility studies vary in scope, but typically will
include one investigator at one site with a limited number of subjects, usually
consisting of ten or less. Data from the IDE feasibility study will not be
considered by the FDA as pivotal evidence of safety and effectiveness, but
rather as a basis to finalize and confirm the device's design and determine its
potential for further development. There can be no assurance that any IDE
feasibility study that the Company proposes will be approved by the FDA, will be
completed or, if completed, will provide sufficient
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data and information to support additional clinical investigations of the type
necessary to obtain FDA marketing clearance or approval. There can be no
assurance that the Company will be able to obtain necessary regulatory approvals
on a timely basis or at all, and delays in receipt of or failure to receive such
approvals, the loss of previously received approvals, or failure to comply with
existing or future regulatory requirements would have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company received an IDE of its Mercator Atrial Mapping Basket for use
in the right atrium in June 1996. The Company also plans to submit a
supplemental IDE for its Transseptal Guide Catheter in calendar 1996. Failure to
receive such regulatory approval or clearance would have a material adverse
effect on the business, financial condition or results of operations. The
Company's current estimates of planned submission time periods of IDEs for
certain of the Company's products are set out above in "Products and Systems"
and involve risks and uncertainties. The actual submission times could differ
materially from those anticipated as a result of certain factors, including the
Company's success in completing any remaining development of the products, the
efficacy and safety of the products in laboratory testing and the other factors
set forth elsewhere in this report. The PMA application must contain the results
of clinical trials, the results of all relevant bench tests, laboratory and
animal studies, a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission must include the proposed labeling,
advertising literature and training methods (if required). Upon receipt of a PMA
application, the FDA makes a threshold determination as to whether the
application is sufficiently complete to permit a substantive review. If the FDA
determines that the PMA application is sufficiently complete to permit a
substantive review, the FDA will accept the application for filing. Once the
submission is accepted for filing, the FDA begins an in-depth review of the PMA
application. Based upon industry and FDA publications, the Company believes that
an FDA review of a PMA application generally takes one to three years from the
date the PMA application is accepted for filing, but may take significantly
longer. The review time is often significantly extended by the FDA asking for
more information or clarification of information already provided in the
submission. During the review period, an advisory committee, typically a panel
of clinicians, will likely be convened to review and evaluate the application
and provide recommendations to the FDA as to whether the device should be
approved. The FDA is not bound by the recommendations of the advisory panel.
Toward the end of the PMA application review process, the FDA generally will
conduct an inspection of the manufacturer's facilities to ensure that the
facilities are in compliance with applicable GMP requirements.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either 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 application. When and if those
conditions have been fulfilled to the satisfaction of the FDA, the agency will
issue a PMA, authorizing commercial marketing of the device for certain
indications. If the FDA evaluation of the PMA application or manufacturing
facilities is not favorable, the FDA will deny approval of the PMA application
or issue a "not approvable" letter. The FDA may also determine that additional
clinical trials are necessary, in which case the PMA may be delayed for several
years while additional clinical trials are conducted and submitted in an
amendment to the PMA application. The PMA process can be expensive, uncertain
and lengthy, and a number of devices for which FDA approval has been sought by
other companies have never been approved for marketing.
Modifications to a device that is the subject of an approved PMA, its
labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA. Although under the
FDC Act, the FDA is required to complete its review of a PMA or PMA supplement
within 180 days, the agency may take a significantly longer period of time to
complete its review.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation by FDA
and certain state agencies, including record keeping requirements and reporting
of adverse experience with the use of the device. Labeling and promotional
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activities are subject to scrutiny by FDA and, in certain circumstances, by the
Federal Trade Commission. Current FDA enforcement policy prohibits the marketing
of approved medical devices for unapproved uses.
Manufacturers of medical devices for marketing in the United States are
required to adhere to applicable regulations setting forth detailed GMP
requirements, which include testing, control and documentation requirements to
register their establishments with the FDA; and to submit device listing
information regarding the devices marketed in the United States. Manufacturers
must also comply with Medical Device Reporting ("MDR") requirements that a firm
report to FDA any incident in which its product may have caused or contributed
to a death or serious injury, or in which its product malfunctioned and, if the
malfunction were to recur, it would be likely to cause or contribute to a death
or serious injury.
The Company has applied for a device manufacturing license from the
California Department of Health Services ("CDHS"); however, the Company has not
yet received an inspection by the state agency, which is required before a
license can be issued. The Company is subject to routine inspection by FDA and
the CDHS for compliance with GMP requirements, MDR requirements, and other
applicable regulations. The Company has not yet been inspected by the FDA or the
CDHS. FDA has proposed changes to the GMP regulations, including design control
requirements, which will likely increase the cost of compliance with GMP
requirements. Changes in existing requirements or adoption of new requirements
could have a material adverse effect on the Company's business, financial
condition, and results of operation. There can be no assurance that the Company
will not incur significant costs to comply with laws and regulations in the
future or that laws and regulations will not have a material adverse effect upon
the Company's business, financial condition or results of operation.
Labeling and promotional activities are subject to scrutiny by the FDA and,
in certain circumstances, by the FTC. FDA enforcement policy strictly prohibits
the marketing of FDA cleared or approved medical devices for unapproved or
"off-label" uses. The Company also is subject to numerous federal, state and
local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. There can be no assurance that
the Company will not be required to incur significant costs to comply with such
laws and regulations in the future or that such laws or regulations will not
have a material adverse effect upon the Company's ability to do business.
In summary, the process of obtaining a PMA and other required regulatory
approvals can be expensive, uncertain, and lengthy, and there can be no
assurance that the Company will ever obtain such approvals. At the earliest, the
Company does not anticipate filing a PMA application for any system for at least
the next two years, and does not anticipate receiving a PMA for any such system
until at least one to three years after such PMA application is accepted for
filing, if at all. There can be no assurance that the FDA will act favorably or
quickly on any of the Company's submissions to the FDA. and significant
difficulties and costs may be encountered by the Company in its efforts to
obtain FDA clearance that could delay or preclude the Company from selling its
products in the United States. Furthermore, there can be no assurance that the
FDA will not request additional data, require that the Company conduct further
clinical studies, causing the Company to incur substantial cost and delay. In
addition, there can be no assurance that the FDA will not impose strict labeling
requirements, onerous operator training requirements or other requirements as a
condition of its PMA approval, any of which could limit the Company's ability to
market its systems. Labeling and promotional activities are subject to scrutiny
by the FDA and, in certain circumstances, by the Federal Trade Commission
("FTC"). FDA enforcement policy strictly prohibits the marketing of FDA cleared
or approved medical devices for unapproved uses. Further, if a company wishes to
modify a product after FDA approval of a PMA, including changes in indications
or other modifications that could affect safety or efficacy, additional
clearances or approvals will be required from the FDA. Failure to receive or
delays in receipt of FDA clearances or approvals, including the need for
additional clinical trials or data as a prerequisite to clearance or approval,
or any FDA conditions that limit the ability of the Company to market its
systems, could have a material adverse effect on the Company's business,
financial condition and results of operations.
25
<PAGE> 26
INTERNATIONAL
In order for the Company to market its products in Europe and certain other
foreign jurisdictions, the Company must obtain required regulatory approvals and
clearances and otherwise comply with extensive regulations regarding safety and
manufacturing processes and quality. These regulations, including the
requirements for approvals or clearance to market and the time required for
regulatory review, vary from country to country. There can be no assurance that
the Company will obtain regulatory approvals in such countries or that it will
not be required to incur significant costs in obtaining or maintaining its
foreign regulatory approvals. Delays in receipt of approvals to market the
Company's products, failure to receive these approvals or future loss of
previously received approvals could have a material adverse effect on the
Company's business, financial condition and results of operations.
The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA approval, and the requirements may
differ. In addition, there may be foreign regulatory barriers other than
premarket approval, and the FDA must approve exports of devices that require a
PMA but are not yet approved domestically. The current rules provide that, in
order to obtain FDA export approval, the Company must provide the FDA with data
and information to demonstrate that the device: (1) is not contrary to public
health and safety and (2) has the approval of the country to which it is
intended for export. So that the FDA can determine that export of a device is
not contrary to public health and safety, the Company is required to submit
basic data regarding the safety of the device unless the device is the subject
of an FDA approved IDE and it will be marketed or used for clinical trials in
the importing country for the same intended use, or at least two IRBs in the
United States have determined that the device is a nonsignificant risk device
and the device will be marketed or used for clinical trials in the importing
country for the same intended use. The Company also must submit a letter to the
FDA from the foreign country approving importation of the device. The Company is
in the process of obtaining approvals and initiating clinical trials in the
United Kingdom, Germany, France, Canada, Australia, and Asia.
The European Union ("EU") has promulgated rules which require that medical
products receive by mid-calendar 1998 the right to affix the CE mark, an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. The Company plans to
implement policies and procedures intended to allow the Company to receive ISO
9001 certification, one of the CE mark certification prerequisites for its
manufacturing facility in Sunnyvale, California. While the Company intends to
satisfy the requisite policies and procedures that will permit it to receive the
CE Mark Certification, there can be no assurance that the Company will be
successful in meeting the European certification requirements and failure to
receive the right to affix the CE mark will prohibit the Company from selling
its products in member countries of the European Union. See "-- Clinical
Trials."
THIRD-PARTY REIMBURSEMENT AND UNCERTAINTY RELATED TO HEALTH CARE REFORM
In the United States, health care providers, including hospitals and
physicians, that purchase medical products for treatment of their patients,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or a part of the
costs and fees associated with the procedures performed using these products.
The Company's success will be dependent upon, among other things, the ability of
health care providers to obtain satisfactory reimbursement from third-party
payors for medical procedures in which the Company's products are used.
Third-party payors may deny reimbursement if they determine that a prescribed
device has not received appropriate regulatory clearances or approvals, is not
used in accordance with cost-effective treatment methods as determined by the
payor, or is experimental, unnecessary or inappropriate. If FDA clearance or
approval is received, third-party reimbursement would also depend upon decisions
by HCFA for Medicare, as well as by individual health maintenance organizations,
private insurers and other payors. Government agencies, private insurers and
other payors determine whether to provide coverage for a particular procedure
and reimburse health care providers for medical treatment at a fixed rate based
on the diagnosis-related group ("DRG") established by the United States HCFA.
The fixed rate of reimbursement is based on the procedure performed, and is
unrelated to the specific type of number of devices used in a procedure. If a
procedure is not covered by a DRG, payors may deny reimbursement. The Company
intends to obtain an appropriate Medicare DRG assignment by HCFA
26
<PAGE> 27
for procedures performed using its devices. As part of this process, during
clinical trials the Company will collect economic data regarding resources
expended in performing procedures with the devices. The Company will use these
data to document differences in resource use between procedures performed with
the Company's devices and procedures currently categorized under existing DRGS.
The Company intends to meet with HCFA policy staff to request and support
development of appropriate hospital payment policies for the procedures
performed using the Company's devices. In addition, the Company may also collect
resource use data regarding physician services to support establishment of
appropriate fee schedules by third-party payers. The Company believes these
efforts will also support reimbursement among private payers.
In addition, Medicare traditionally has considered items or services
involving devices that have not been approved or cleared for marketing by FDA to
be precluded from Medicare coverage. However, under a new policy which has been
in effect since November 1, 1995, Medicare coverage will not be precluded for
items and related services involving devices that have been classified by FDA as
"non-experimental/investigational" (Category B) devices and that are furnished
in accordance with the FDA-approved IDE governing clinical trials. Even with
items or services involving Category B devices, however, Medicare coverage may
be denied if any other coverage requirements are not met, for example if the
treatment is not medically needed for the specific patient. In June 1995, the
FDA assigned the IDE covering the clinical trial for the Ventricular Tachycardia
Ablation System to Category B and in January 1996, assigned the IDE covering the
clinical trial for the Arrhythmia Mapping System for ventricular tachycardia to
Category B and in June 1996 assigned the IDE covering the clinical trial for the
Arrhythmia Mapping System for atrial fibrillation to Category B. There can be no
assurance that the Company's systems will be covered when they are used in
clinical trials and, if covered, whether the payment amounts for their use will
be considered to be adequate by hospitals and physicians. If the devices are not
covered or the payments are considered to be inadequate, the Company may need to
bear additional costs to sponsor such trials, and such costs could have a
material adverse effect on the Company's business, financial condition and
results of operation.
Capital costs for medical equipment purchased by hospitals are currently
reimbursed separately from DRG payments. Recent federal legislation reduced
capital cost reimbursements under the Medicare capital cost pass-through system.
The legislation requires that the aggregate amount of reimbursements in fiscal
years 1992 through 1995 be reduced by approximately 10% per year. Such
reductions have had an adverse impact on reimbursements to hospitals for the
capital cost of equipment such as the system components of the Company's
products.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in international
markets targeted by the Company. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
time, for a particular amount, or at all.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. In addition, the Company believes that a patient's
underlying arrhythmia will typically not recur after treatment with the
Company's procedures. The Company anticipates that hospital administrators and
physicians would justify the use of the Company's products by the attendant cost
savings and clinical benefits that the Company believes would be derived from
the use of its products. However, there can be no assurance that this will be
the case. There can be no assurance that reimbursement for the Company's
products will be available in the United States or in international markets
under either government or private reimbursement systems, or that physicians
will support and advocate reimbursement for procedures using the Company's
products. Failure by hospitals and other users of the Company's products to
obtain reimbursement from third party payors, or changes in government and
private third-party payors' policies toward reimbursement for procedures
employing the Company's products, would have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover, the
Company is unable to predict what
27
<PAGE> 28
additional legislation or regulation, if any, relating to the health care
industry or third-party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation would have on the Company.
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. The Company
anticipates that Congress, state legislatures and the private sector will
continue to review and assess alternative health care delivery and payment
systems. Potential approaches that have been considered include mandated basic
health care benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups, price controls and
other fundamental changes to the health care delivery system. Legislative debate
is expected to continue in the future, and market forces are expected to demand
reduced costs. The Company cannot predict what impact the adoption of any
federal or state health care reform measures, future private sector reform or
market forces may have on its business.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical products entail
significant risk of product liability claims and product failure claims. The
Company has conducted only limited clinical trials and does not yet have, and
will not have for a number of years, sufficient clinical data to allow the
Company to measure the risk of such claims with respect to its products. The
Company faces an inherent business risk of financial exposure to product
liability claims in the event that the use of its products results in personal
injury or death. The Company also faces the possibility that defects in the
design or manufacture of the Company's products might necessitate a product
recall. There can be no assurance that the Company will not experience losses
due to product liability claims or recalls in the future. The Company currently
maintains product liability insurance with coverage limits of $5.0 million per
occurrence and $7.0 million annually in the aggregate and there can be no
assurance that the coverage limits of the Company's insurance policies will be
adequate. In addition, the Company will require increased product liability
coverage if any potential products are successfully commercialized. Such
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms, or at all. Any claims against the Company,
regardless of their merit or eventual outcome, could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
EMPLOYEES
As of June 30, 1996, the Company had 76 employees, 40 of whom were engaged
directly in research, development, regulatory and clinical activities, 25 in
manufacturing and quality assurance and 11 in marketing, sales, and
administrative positions. No employee of the Company is covered by collective
bargaining agreements, and the Company believes that its relationship with its
employees is good.
The Company's ability to operate successfully depends in significant part
upon the continued service of certain key scientific, technical, clinical,
regulatory and managerial personnel, and its continuing ability to attract and
retain additional highly qualified scientific, technical, clinical, regulatory
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that the Company can retain such personnel or that it can
attract or retain other highly qualified scientific, technical, clinical,
regulatory and managerial personnel in the future, including key sales and
marketing personnel. The loss of key personnel or the inability to hire and
retain qualified personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations.
In addition, in order to complete clinical trials in progress, prepare
additional products for clinical trials, and develop future products, the
Company believes that it will be required to expand its operations, particularly
in the areas of research and development, manufacturing and sales and marketing.
As the Company expands its operations in these areas, such expansion will likely
result in new and increased responsibilities for management personnel and place
significant strain upon the Company's management, operating and financial
systems and resources. To accommodate any such growth and compete effectively,
the Company will be required to implement and improve information systems,
procedures, and controls, and to expand, train, motivate and manage its work
force. The Company's future success will depend to a significant
28
<PAGE> 29
extent on the ability of its current and future management personnel to operate
effectively, both independently and as a group. There can be no assurance that
the Company's personnel, systems, procedures and controls will be adequate to
support the Company's future operations. Any failure to implement and improve
the Company's operational, financial and management systems or, to expand,
train, motivate or manage employees as required by future growth, if any, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
ITEM 2. PROPERTIES
The Company leases approximately 36,000 square feet in Sunnyvale,
California, approximately 6,000 square feet of which is subleased to a
third-party through May 1997. The facility is leased through October 1998, at
which time the Company has an option to extend the lease for an additional
five-year term. The Company believes that this facility will be adequate to meet
its needs through fiscal 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In March and April 1996, the Company solicited the written consent of
stockholders to approve certain matters. The following is a brief description of
the matters approved by written consent of the stockholders and a statement of
the number of votes cast for and against, and, if applicable, the number of
abstentions as to each matter. There were no broker non-votes with respect to
any matter.
1. To approve an amendment to the Company's Restated Articles of
Incorporation to (i) effect a two-for-three reverse split of the
Company's Common Stock and Preferred Stock, (ii) set the authorized
number of shares of Common Stock at 30,000,000 post-split shares, (iii)
eliminate, so long as the Company's initial public offering is
consummated prior to September 30, 1996, the minimum per share public
offering price and the minimum aggregate public offering proceeds at
which each share of Preferred Stock is automatically converted to shares
of Common Stock, and (iv) amend Article IV, Section 4(e)(ii)(H) to
increase from 1,540,030 post-split shares to 1,907,030 post-split shares
the number of shares of Common Stock that may be issued or issuable to
officers, directors, consultants or employees of the Company without
triggering the antidilution protections of the Preferred Stock.
FOR: 5,557,408 AGAINST: 3,514 ABSTAIN: 670,341
2. To approve a change of the Company's state of incorporation from
California to Delaware.
FOR: 6,018,176 AGAINST: 24,198 ABSTAIN: 188,889
3. To approve a restatement of the Company's Certificate of Incorporation
to be effective upon the conversion of the outstanding Preferred Stock
to provide for 5,000,000 post-split authorized shares of Preferred
Stock.
FOR: 6,000,041 AGAINST: 23,010 ABSTAIN: 207,612
4. To approve and ratify a form of Indemnification Agreement to be entered
into between the Company and its directors, officers and agents.
FOR: 6,019,364 AGAINST: 23,010 ABSTAIN: 188,889
5. To approve amendments to the 1991 Stock Option Plan, to (i) increase the
number of shares of Common Stock reserved for issuance thereunder by
347,000 post-split shares, (ii) cause the 1991 Stock Option Plan to
comply with the provisions of Rule 16b-3 under the Securities Exchange
Act of 1934, as amended, (iii) limit the maximum number of shares which
can be granted to any employee during any fiscal year, (iv) allow the
grant of nonstatutory stock options at any such exercise price as may be
determined by the Board of Directors on the date of grant, and (v)
require the assumption of
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<PAGE> 30
outstanding options or, in the absence of such assumption, the
acceleration of vesting of outstanding options, in the event of a merger
or the sale of all or substantially all of the assets of the Company.
FOR: 6,013,731 AGAINST: 23,010 ABSTAIN: 194,522
6. To approve the adoption of the 1996 Employee Stock Purchase Plan
pursuant to which 53,000 post-split shares of Common Stock are reserved
for issuance.
FOR: 6,040,819 AGAINST: 1,222 ABSTAIN: 189,222
7. To approve the adoption of the 1996 Director Option Plan pursuant to
which 20,000 post-split shares of Common Stock are reserved for
issuance.
FOR: 6,017,134 AGAINST: 23,010 ABSTAIN: 191,119
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ------------------------------------------------------
<S> <C> <C>
William N. Starling.............. 43 President, Chief Executive Officer and Chairman of the
Board of Directors
Earle L. Canty................... 44 Vice President, Regulatory Affairs and Quality
Assurance
David W. Gryska.................. 40 Vice President, Finance and Chief Financial Officer
Harold A. Heitzmann, Ph.D. ...... 48 Vice President, Catheter Development
Mark L. Pomeranz................. 35 Vice President, Advanced Product Development
Richard E. Riley................. 41 Vice President, Product Development
Donald J. Santel................. 35 Vice President, International Sales and Technical
Marketing
</TABLE>
William N. Starling has been a Director of the Company since its inception.
Mr. Starling became President and Chief Executive Officer of the Company in
January 1992 and Chairman of the Board of Directors in January 1996. Prior to
joining the Company, Mr. Starling co-founded and was a director and a vice
president of Ventritex, Inc., a medical device company, from 1985 to 1991. From
1982 to 1985, Mr. Starling was the Director of Marketing of Advanced
Cardiovascular Systems, a division of Guidant, Inc. Mr. Starling serves on the
Board of Visitors of the University of North Carolina at Chapel Hill.
Earle L. Canty has been Vice President, Regulatory Affairs and Quality
Assurance of the Company since April 1996. Prior to joining the Company, Mr.
Canty was Vice President, Regulatory Affairs and Quality Assurance at Symphonix
Devices, Inc., a medical device company, from September 1995 to March 1996. From
October 1994 to September 1995, Mr. Canty was the principal of Earle L. Canty
Medical Device Regulatory Affairs and Product Assurance Consulting. From 1987 to
September 1994, Mr. Canty was the Vice President of Regulatory Affairs and
Quality Assurance at Ventritex, Inc., a medical device company.
David W. Gryska has been Vice President, Finance and Chief Financial
Officer of the Company since October 1993. From 1982 to September 1993, Mr.
Gryska was with Ernst & Young, LLP, as a partner from 1989 to September 1993.
Harold A. Heitzmann, Ph.D. has been Vice President, Catheter Development of
the Company since September 1995. From September 1991 to April 1995, Dr.
Heitzmann was Director of Engineering at InnerSpace, Inc., a medical device
company. From 1983 to September 1991, Dr. Heitzmann held various engineering
management positions with Baxter Healthcare Corp., most recently as Director of
Advanced Cardiology Projects.
Mark L. Pomeranz has been Vice President, Advanced Product Development of
the Company since May 1995. From October 1991 to May 1995, Mr. Pomeranz was
Director of Catheter Engineering of the Company. From 1989 to 1991, Mr. Pomeranz
was a Project Manager at Cardiovascular Imaging Systems, Inc., a medical device
company. From 1986 to 1989, Mr. Pomeranz held various senior engineering
positions with MCM Laboratories, Baxter Healthcare Corp. and Mallinckrodt
Interventional Products.
Richard E. Riley has been Vice President, Product Development of the
Company since July 1994. From July 1992 to July 1994, Mr. Riley was Vice
President, Software Development of the Company. From 1982 to June 1992, Mr.
Riley held various engineering positions, including Project Director with
Medtronic, Inc., a medical device company.
Donald J. Santel has been Vice President, International Sales and Technical
Marketing of the Company since January 1995. From January 1992 to January 1995,
Mr. Santel was Vice President, Clinical Engineering of the Company. From 1982 to
1991, Mr. Santel was with Medtronic, Inc., a medical device company, most
recently as United States Marketing Product Manager.
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<PAGE> 32
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has been traded on the Nasdaq National
Market under the symbol CPWY since the Company's initial public offering on June
12, 1996. Prior to that time there was no public market for the Company's Common
Stock. The following table sets forth for the period indicated the high and low
sale prices of the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1996
Fourth Quarter (from June 12, 1996).............................. $21 3/4 $12 5/8
</TABLE>
As of July 31, 1996, there were approximately 265 holders of record of the
Common Stock.
The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain its future earnings for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below should be read in conjunction with the
consolidated financial statements and related notes attached to the report on
Form 10-K as pages F-1 through F-16.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ -- $ -- $ -- $ 115 $ 1,684
Operating expenses:
Manufacturing start-up and cost of
goods sold....................... -- 202 1,432 2,520 2,408
Research and development............ 648 2,494 5,103 5,666 6,819
Selling, general and
administrative................... 548 1,021 1,152 1,745 1,981
------- ------- -------- -------- --------
Total operating expenses.... 1,196 3,717 7,687 9,931 11,208
------- ------- -------- -------- --------
Loss from operations.................. (1,196) (3,717) (7,687) (9,816) (9,524)
Other income (expense), net........... 172 232 257 156 155
------- ------- -------- -------- --------
Net loss.............................. $(1,024) $(3,485) $ (7,430) $ (9,660) $ (9,369)
======= ======= ======== ======== ========
Pro forma net loss per share(1)....... $ (1.39) $ (1.33)
======== ========
Shares used in computing pro forma net
loss per share(1)................... 6,959 7,032
======== ========
</TABLE>
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<PAGE> 33
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------------
1992 1993 1994 1995 1996(2)
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments......................... $ 2,601 $ 5,475 $ 15,819 $ 11,652 $ 52,873
Working capital....................... 2,529 5,099 14,861 10,632 52,028
Total assets.......................... 2,858 6,212 17,777 15,139 57,188
Long-term liabilities, net of current
portion............................. -- -- 5,050 5,978 8,877
Accumulated deficit................... (1,109) (4,594) (12,024) (21,684) (31,053)
Stockholders' equity.................. 2,778 5,826 11,483 7,440 46,051
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing pro forma net loss per share.
(2) The selected consolidated balance sheet data as of June 30, 1996 reflect the
Company's initial public offering completed in June 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth below and elsewhere in this Report.
OVERVIEW
The Company was founded in April 1991 and to date has engaged primarily in
researching, developing, testing and obtaining regulatory clearances for its
products. The Company has experienced significant operating losses since
inception and, as of June 30, 1996, had an accumulated deficit of approximately
$31.0 million. The Company has generated only limited revenues from sales of
Radii supraventricular tachycardia mapping and ablation catheters and
Trio/Ensemble diagnostic catheters. The Company expects its operating losses to
continue through at least the end of fiscal 1998 as it continues to expend
substantial funds for clinical trials in support of regulatory approvals,
expansion of research and development activities, establishment of
commercial-scale manufacturing capabilities and expansion of sales and marketing
activities.
The Company believes that its Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System and their
component catheters and equipment are currently the Company's only significant
potential products. The Ventricular Tachycardia Ablation System and Arrhythmia
Mapping System for diagnostic mapping of ventricular tachycardia are in the
early stages of clinical testing, and clinical data obtained to date are
insufficient to demonstrate the safety and efficacy of these products under
applicable FDA regulatory guidelines. In addition, the ablation catheter and
ablation equipment that together form the Atrial Fibrillation Ablation System
and the mapping catheter and mapping equipment that together form the Arrhythmia
Mapping System for atrial fibrillation are still under development. The design,
manufacturing, labeling, distribution and marketing of the Company's products
are subject to extensive and rigorous government regulation in the United States
and certain other countries where the process of obtaining required regulatory
approvals is lengthy, expensive and uncertain. In order for the Company to
market the Ventricular Tachycardia Ablation System, Arrhythmia Mapping Systems
or Atrial Fibrillation Ablation System and related catheters and equipment in
the United States, the Company must obtain clearance or approval from the FDA.
At the earliest, the Company does not anticipate filing a PMA application for
any system for at least the next two years, and does not anticipate receiving a
PMA for any such system until at least one to three years after such PMA
application is accepted for filing, if at all. The Company will not generate any
significant revenue in the United States until such time, if ever, as its
Ventricular Tachycardia Ablation System, Arrhythmia Mapping Systems or Atrial
Fibrillation Ablation System obtain clearance or
33
<PAGE> 34
approval from the FDA. Even if one or more of the Company's products obtain FDA
clearance or approval, there can be no assurance that any of the Company's
products for diagnosis and treatment of ventricular tachycardia and atrial
fibrillation will be successfully commercialized or that the Company will
achieve significant revenues from either international or domestic sales.
The Company does not have any experience in manufacturing, marketing or
selling its products for diagnosis and treatment of ventricular tachycardia and
atrial fibrillation in commercial quantities. If the Company receives FDA
clearance or approval for its products, it will need to expend significant
capital resources and develop manufacturing expertise to establish large-scale
manufacturing capabilities. Manufacturers often encounter difficulties in
scaling up production of new products, including problems involving production
yields, quality control and assurance, component supply shortages, shortages of
qualified personnel, compliance with FDA regulations, and the need for further
FDA approval of new manufacturing processes. In addition, if FDA clearances or
approvals are received, the Company intends to market its products primarily
through a direct sales force in the United States and indirect sales channels
internationally. Establishing a marketing and sales capability sufficient to
support sales in commercial quantities will require substantial efforts and
require significant management and financial resources.
RESULTS OF OPERATIONS
Years Ended June 30, 1995 and 1996
Net Sales. The Company's net sales to date have resulted primarily from
limited sales of the Trio/Ensemble diagnostic catheters and Radii
supraventricular tachycardia mapping and ablation catheters. During the year
ended June 30, 1996, the Company also sold a limited number of the Model 8002
Radio frequency Generator and Integrated Fluid Pump for use in clinical trials.
The Company's net sales increased from $115,000 for the year ended June 30, 1995
to $1.7 million for the year ended June 30, 1996. The increase in net sales was
primarily attributable to increased sales of the Trio/Ensemble and Radii
catheters following the establishment of distribution arrangements in certain
European markets and Japan.
In December 1995, the Company received $3.0 million pursuant to a royalty
agreement with Arrow. This amount was recorded as deferred royalty income and
will be amortized to income for those Trio/Ensemble catheters that Arrow
manufactures and sells. The royalty rate is 5% of the Trio/Ensemble catheter's
sales price. To date no royalty income has been earned by the Company because
Arrow has not manufactured the Trio/Ensemble catheter. For the year ended June
30, 1996, the Company earned revenue from sales of Trio/Ensemble catheters to
Arrow. The Company believes that Arrow will begin manufacturing the
Trio/Ensemble product by the end of calendar 1996. As a result, by the end of
calendar 1996, Arrow will no longer purchase the Trio/Ensemble catheter from the
Company. At such time the Company will begin to recognize royalty income from
Arrow's sales of the Trio/Ensemble catheter. The prepaid royalty will be
amortized to income based on 5% of the selling price paid by Arrow's customers
for the Trio/Ensemble diagnostic catheters.
Manufacturing Start-Up and Cost of Goods Sold. Manufacturing start-up and
cost of goods sold primarily includes raw materials costs, catheter fabrication
costs and system assembly and test costs. The Company's manufacturing activities
include pilot manufacturing for catheters sold internationally and for catheters
and ablation and mapping equipment used in clinical trials. Manufacturing
start-up and cost of goods sold decreased 4.4% from $2.5 million for the year
ended June 30, 1995 to $2.4 million for the year ended June 30, 1996. The
decrease was primarily attributable to the nonrecurrence of manufacturing
start-up costs associated with the expansion of catheter and ablation and
mapping equipment production capacity, partially offset by increased
compensation and associated labor costs for assembly personnel and increased raw
materials and supply costs supporting higher production and sales levels.
Research and Development. Research and development expenses include costs
associated with product research, clinical trials, prototype development,
obtaining regulatory approvals and costs associated with hiring regulatory,
clinical, research and engineering personnel. Research and development expenses
increased 20.4% from $5.7 million for the year ended June 30, 1995 to $6.8
million for the year ended June 30, 1996. This increase was primarily
attributable to increased costs associated with the hiring of additional
engineering,
34
<PAGE> 35
regulatory and clinical personnel, increased prototype development costs,
increased costs related to the manufacture and placement of Ventricular
Tachycardia Ablation and Arrhythmia Mapping Systems at clinical sites in the
United States and Europe as clinical trials commenced. The Company believes that
research and development expenditures will increase in the future as the Company
invests in product and process improvements related to its ventricular
tachycardia and atrial fibrillation products, expands clinical research
activities and increases its research and development efforts related to new
products and technologies.
Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, senior
management and administrative personnel, professional fees in connection with
obtaining patent protection, and costs of trade shows. Selling, general and
administrative expenses increased 13.5% from $1.7 million for the year ended
June 30, 1995 to $2.0 million for the year ended June 30, 1996. The increase was
primarily attributable to increased expenditures for administrative personnel
and services to support expanding international sales and marketing activities,
increased costs associated with expanded participation in trade shows, increased
professional fees related to the filing and registration of the Company's
patents, and costs related to the Company's internal computer network and
related administrative services, partially offset by the termination of a
distributor arrangement and the non-recurrence of certain one-time costs related
to expansion of administrative and sales and marketing functions. The Company
anticipates that selling, general and administrative expenses will increase in
future periods as additional personnel are added to support growing business
operations in all functional areas.
Other Income (Expense), Net. Other income (expense), net decreased from
net other income of $157,000 for the year ended June 30, 1995 to net other
income of $155,000 for the year ended June 30, 1996. The net decrease resulted
from increased interest expense in connection with increased equipment lease
financing activity.
Net Loss. Due to the factors described above, the Company recognized net
losses of $9.7 million and $9.4 million for the year ended June 30, 1995 and
1996, respectively.
Net Operating Loss and Research Tax Credit Carry Forwards. As of June 30,
1996, the Company's reported net operating loss carryforwards were approximately
$26.0 million and $5.0 million for federal and state income tax purposes,
respectively. The Company's research tax credit carryforwards were approximately
$1.6 million. If not utilized, the net operating loss and credit carryforwards
will expire at various dates beginning in the years between 1998 through 2011.
Approximately $7.0 million of the federal net operating loss carryforward is
subject to an annual limitation on utilization of approximately $1.0 million due
to an ownership change as defined by the provisions of Internal Revenue Code
Section 382. In the event of additional ownership changes in the future as a
result of issuances or additional stock transfers, there could be further annual
limitations on the Company's ability to utilize its net operating loss and
credit carryforwards.
Years Ended June 30, 1994 and 1995
Net Sales. Net sales were $115,000 for the year ended June 30, 1995 and
there were no sales for the year ended June 30, 1994. During fiscal 1995, the
Company made initial shipments of the Trio/Ensemble and Radii catheters to
distributors in Japan and Europe. These shipments, consisting of both
demonstration units and units for field use at electrophysiology centers,
reflected reduced introductory pricing arrangements.
Manufacturing Start-Up and Cost of Goods Sold. Manufacturing start-up and
cost of goods sold increased 75.9% from $1.4 million for the year ended June 30,
1994 to $2.5 million for the year ended June 30, 1995. The increase was
primarily attributable to the initial establishment and overall expansion of
production capacity and quality control operations, including the hiring of
assembly personnel and technicians, and increased expenditures for raw materials
and supplies supporting early production runs. In fiscal 1994 and 1995, the
Company anticipated completing product development efforts of its Radii and
Trio/Ensemble catheters and hired manufacturing personnel to support the
anticipated United States and international commercialization of these products.
The Company was delayed in completing the development of these products and in
obtaining certain United States and international product registrations. In
addition, the Company experienced lower than expected production yields as it
increased manufacturing capacity for the
35
<PAGE> 36
catheters. Accordingly, the Company incurred manufacturing start-up costs of
approximately $4.0 million, and had insignificant or no revenue during these
fiscal years.
Research and Development. Research and development expenses increased
11.0% from $5.1 million for the year ended June 30, 1994 to $5.7 million for the
year ended June 30, 1995. The increase in research and development expenses were
primarily attributable to the establishment and growth of the Company's clinical
research operations during fiscal 1994 and 1995 and the expansion of the
Company's overall research and development organization which reflects costs
associated with the hiring of engineering personnel for the design, development,
prototyping and testing of the Company's products.
Selling, General and Administrative. Selling, general and administrative
expenses increased 51.5% from $1.2 million for the year ended June 30, 1994 to
$1.7 million for the year ended June 30, 1995. The increase in selling, general
and administrative expenses was primarily attributable to increased personnel
costs as the Company established and expanded the finance, accounting and human
resource functions, increased costs associated with facilities and related
services supporting expanding operations, and increased professional fees in
connection with the filing and registration of the Company's patents.
Other Income (Expense), Net. Other income (expense), net decreased from
net other income of $257,000 for the year ended June 30, 1994 to net other
income of $157,000 for the year ended June 30, 1995. The decrease in net other
income resulted from increased interest expense in connection with the Company's
$4.5 million financing and increased equipment lease financing activity during
fiscal 1995, partially offset by increased interest income on higher average
cash, cash equivalent and short-term investment balances.
Net Loss. Due to the factors described above, the Company recognized net
losses of $7.4 million and $9.7 million for the years ended June 30, 1994 and
1995, respectively.
Impact of Adoption of New Accounting Standards. In October 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123") which
established a fair value based method of accounting for stock-based compensation
plans and requires additional disclosures for those companies who elect not to
adopt the new method of accounting. The Company will be required to adopt FAS
123 in fiscal 1997. The Company intends to continue to account for employee
stock awards in accordance with APB Opinion No. 25 and to adopt the "disclosure
only" alternative described in FAS 123.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " ("FAS 121")
which requires the Company to review for impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
might not be recoverable. In certain situations, an impairment loss would be
recognized. FAS 121 will become effective for the Company's year ending June 30,
1997. The Company has studied the implications of FAS 121 and, based on its
initial evaluation, does not expect its adoption to have a material impact on
the Company's financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through a
combination of private placements of equity securities yielding approximately
$33.5 million, a private placement of debt securities yielding approximately
$4.5 million, equipment lease financing arrangements yielding approximately $2.3
million and a prepaid royalty arrangement yielding $3.0 million. In addition,
the Company closed its initial public offering in June 1996 raising net proceeds
of approximately $43.1 million. As of June 30, 1996, the Company had
approximately $52.9 million in cash, cash equivalents and investment securities.
Net cash used in operating activities was approximately $6.7 million, $9.0
million and $5.0 million for the years ended June 30, 1994, 1995 and 1996,
respectively. For such periods, net cash used in operating activities resulted
primarily from net losses. Net cash used in investing activities was
approximately $7.7 million and $18.5 for the years ended June 30, 1994 and 1996,
respectively, and net cash provided by investing activities was approximately
$2.6 million for the year ended June 30, 1995. The net cash used in investing
activities was
36
<PAGE> 37
primarily attributable to the purchase of short-term investments and the
purchase of property and equipment. Net cash provided by investing activities
was primarily attributable to maturities of short-term investments. Net cash
provided by financing activities was approximately $17.5 million, $5.2 million
and $47.3 million for the years ended June 30, 1994, 1995 and 1996,
respectively. The net cash provided by financing activities was primarily
attributable to the sale of preferred stock and proceeds from long-term
borrowings, and the closing of the Company's initial public offering during June
1996.
As of June 30, 1996, the Company had capital equipment of $4.6 million less
accumulated depreciation and amortization of $1.8 million to support its
clinical, development, manufacturing and administrative activities. The Company
has financed approximately $2.3 million from capital lease obligations through
June 30, 1996. The Company currently has an unused equipment lease line facility
of $823,000 which expires on December 31, 1996, and expects to fully utilize
this lease line and a portion of its existing cash resources in connection with
the purchase of additional capital equipment over the next 12 months. In
addition, as of June 30, 1996, the Company had approximately $180,000 in
noncancelable purchase commitments to acquire certain equipment components from
two vendors. The Company expects to use approximately $15 to $18 million of the
net proceeds of its initial public offering for funding research and
development, including clinical trials, approximately $4 to $6 million for
marketing and sales, approximately $3 to $4 million for general and
administrative support, approximately $3.5 million for capital expenditures and
the remainder for working capital. The Company expects capital expenditures to
increase over the next several years as it expands facilities and acquires
equipment to support the planned expansion of manufacturing capabilities.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the progress of the Company's product development
efforts, the progress of the Company's clinical trials, actions relating to
regulatory matters, the costs and timing of expansion of product development,
manufacturing, marketing and sales activities, the extent to which the Company's
products gain market acceptance, and competitive developments. Although the
Company believes that the proceeds from its initial public offering together
with the Company's current cash balances and cash generated from the future sale
of products will be sufficient to meet the Company's operating and capital
requirements through calendar 1998, there can be no assurance that the Company
will not require additional financing within this time frame.
The Company's forecast of the period of time through which its financial
resources will be adequate to support its operations is a forward-looking
statement that involves risks and uncertainties, and actual results could vary.
The factors described earlier in this report will impact the Company's future
capital requirements and the adequacy of its available funds. The Company may be
required to raise additional funds through public or private financing,
collaborative relationships or other arrangements. There can be no assurance
that such additional funding, if needed, will be available on terms attractive
to the Company, or at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Collaborative arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain of
its technologies, products or marketing territories. The failure of the Company
to raise capital when needed could have a material adverse effect on the
Company's business, financial condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and the report of independent auditors
appear on pages F-1 through F-16 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
37
<PAGE> 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's directors is
incorporated by reference from the section captioned "Election of Directors"
contained in the Company's Proxy Statement related to the Annual Meeting of
Stockholders to be held October 9, 1996, to be filed by the Company with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy
Statement"). The information required by this item concerning executive officers
is set forth in Part I of this Report. The information required by this item
concerning compliance with Section 16(a) of the Exchange Act is incorporated by
reference from the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section captioned "Executive Compensation" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
sections captioned "Compensation Committee Interlocks and Insider Participation"
and "Certain Transactions With Management" contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following financial statements are filed as part of this Report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................. F-2
Consolidated Balance Sheets................................................... F-3
Consolidated Statements of Operations......................................... F-4
Consolidated Statements of Stockholders' Equity............................... F-5
Consolidated Statements of Cash Flows......................................... F-6
Notes to Consolidated Financial Statements.................................... F-7
</TABLE>
(a)(2) Financial Statement Schedules
<TABLE>
<S> <C>
II -- Valuation and Qualifying Accounts........................................ S-1
</TABLE>
All other Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
38
<PAGE> 39
(a)(3) Exhibits
<TABLE>
<S> <C>
3.1 Restated Articles of Incorporation of the Registrant.
3.2 Bylaws of Registrant.
4.1++ Specimen Common Stock Certificate.
10.1++ Form of Indemnification Agreement between the Registrant and each of its
directors and officers.
10.2++ 1991 Stock Plan and form of Stock Option Agreement thereunder.
10.3++ 1996 Director Option Plan and form of Director Stock Option Agreement
thereunder.
10.4++ 1996 Employee Stock Purchase Plan and forms of agreement thereunder.
10.5+++ OEM Agreement between Registrant and Liebel-Flarsheim Company dated June
22, 1994.
10.6+++ License Agreement between Registrant and BSI Corporation dated October 21,
1994.
10.7++ Loan Agreement between the Registrant and Dideco S.p.A. dated June 23,
1994, as amended by Amendment to Loan Agreement dated June 22, 1995 and
Amendment No. 2 to Loan Agreement dated April 10, 1996.
10.8+++ Exclusive License Agreement dated May 24, 1995.
10.9++ Manufacturing and Supply Agreement between the Registrant and Arrow
International Inc. dated March 8, 1995.
10.10++ Exclusive International Distributor Agreement between the Registrant and
Arrow International dated March 8, 1995.
10.11++ Lease dated June 25, 1993 between the Registrant and Brock Properties.
10.12++ Master Lease Agreement dated December 1, 1993 between the Registrant and
Linc Capital Management Services, Ltd., as amended.
10.13++ Shareholder Rights Agreement, as amended to date, dated June 13, 1995,
between the Registrant and certain holders of the Company's securities.
10.14++ Consulting Agreement dated June 1, 1995 between the Registrant and Mir
Imran.
11.1 Statement Regarding Computation of Net Loss Per Share.
22.1++ Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 40).
27.1 Financial Data Schedule
</TABLE>
- ---------------
+ Confidential treatment has been granted for portions of these agreements.
Omitted portions have been filed separately with the Commission.
++ Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (Reg. No. 333-3616) as declared effective by the
Commission on June 12, 1996.
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the quarter ended June 30, 1996.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CARDIAC PATHWAYS CORPORATION
By: /s/ WILLIAM N. STARLING
------------------------------------
William N. Starling
President, Chief Executive Officer
and Director
Date: August 21, 1996
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William N. Starling and David W. Gryska,
and each of them, his true and lawful attorneys-in-fact and agents, each with
full power of substitution and resubstitution, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or their substitute or substitutes, or any of them, shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ WILLIAM N. President, Chief Executive August 21, 1996
STARLING Officer and Director (Principal
- ------------------------------------------ Executive Officer)
(William N. Starling)
/s/ DAVID W. Vice President of Finance and August 21, 1996
GRYSKA Chief Financial Officer
- ------------------------------------------ (Principal Financial and
(David W. Gryska) Accounting Officer)
/s/ ANNETTE J. CAMPBELL-WHITE Director August 21, 1996
- ------------------------------------------
(Annette J. Campbell-White)
/s/ MICHAEL L. Director August 21, 1996
EAGLE
- ------------------------------------------
(Michael L. Eagle)
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ THOMAS J. FOGARTY, M.D. Director August 21, 1996
- ------------------------------------------
(Thomas J. Fogarty, M.D.)
/s/ JOSEPH P. ILVENTO, Director August 21, 1996
M.D.
- ------------------------------------------
(Joseph P. Ilvento, M.D.)
/s/ LAWRENCE G. MOHR, JR. Director August 21, 1996
- ------------------------------------------
(Lawrence G. Mohr, Jr.)
</TABLE>
41
<PAGE> 42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996.............................. F-3
Consolidated Statements of Operations for the years ended June 30, 1994, 1995 and
1996................................................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1994,
1995 and 1996....................................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1994, 1995, and
1996................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 43
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cardiac Pathways Corporation
We have audited the accompanying consolidated balance sheets of Cardiac
Pathways Corporation as of June 30, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cardiac
Pathways Corporation at June 30, 1995 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material aspects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
July 30, 1996
F-2
<PAGE> 44
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 5,372,945 $ 29,112,255
Short-term investments........................................ 6,279,361 23,760,812
Accounts receivable, net of allowance for doubtful accounts of
$9,500 at June 30, 1995 and 1996........................... 50,871 398,997
Receivable from related party................................. 135,800 21,725
Inventories................................................... 211,693 162,516
Prepaid expenses.............................................. 141,073 234,339
Notes receivable from related parties......................... -- 256,656
Other current assets.......................................... 160,955 340,291
------------ ------------
Total current assets.................................. 12,352,698 54,287,591
Property and equipment, net..................................... 2,508,125 2,835,355
Notes receivable from related parties........................... 221,334 5,760
Deposits and other assets....................................... 56,972 59,188
------------ ------------
$ 15,139,129 $ 57,187,894
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 579,597 $ 511,386
Accrued compensation and related benefits..................... 98,655 193,511
Other accrued expenses........................................ 481,355 883,569
Current obligations under capital leases...................... 561,379 671,538
------------ ------------
Total current liabilities............................. 1,720,986 2,260,004
Long-term obligations under capital leases...................... 1,102,996 602,574
Deferred royalty income......................................... -- 3,000,000
Note payable.................................................... 4,500,000 4,500,000
Interest payable................................................ 374,765 774,421
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; no shares authorized, issued
and outstanding at June 30, 1995; 5,000,000 shares
authorized, and none issued and outstanding at June 30,
1996....................................................... -- --
Convertible preferred stock, $.001 par value; issuable in
series, 6,122,666 shares authorized, 5,149,702 shares
issued and outstanding at June 30, 1995; no shares
authorized, issued and outstanding at June 30, 1996........ 5,150 --
Common stock, $.001 par value; 30,000,000 shares authorized;
925,185 shares issued and outstanding at June 30, 1995 and
9,269,332 at June 30, 1996................................. 925 9,270
Additional paid-in capital.................................... 29,129,381 77,656,634
Receivables from stockholders................................. (11,000) (406,000)
Accumulated deficit........................................... (21,684,074) (31,053,238)
Deferred compensation......................................... -- (155,771)
------------ ------------
Total stockholders' equity............................ 7,440,382 46,050,895
------------ ------------
$ 15,139,129 $ 57,187,894
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 45
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $ -- $ 115,316 $ 1,684,107
Operating expenses:
Manufacturing start-up and cost of goods sold..... 1,432,273 2,519,785 2,407,655
Research and development.......................... 5,102,532 5,666,176 6,819,647
Selling, general and administrative............... 1,152,381 1,745,556 1,981,309
----------- ----------- -----------
Total operating expenses.................. 7,687,186 9,931,517 11,208,611
----------- ----------- -----------
Loss from operations................................ (7,687,186) (9,816,201) (9,524,504)
Other income (expense):
Interest income................................... 296,369 543,073 700,934
Interest expense.................................. (41,319) (495,450) (568,802)
Other, net........................................ 2,290 109,035 23,208
----------- ----------- -----------
Total other income (expense).............. 257,340 156,658 155,340
----------- ----------- -----------
Net loss............................................ $(7,429,846) $(9,659,543) $(9,369,164)
=========== =========== ===========
Pro forma net loss per share........................ $(1.39) $(1.33)
------ ------
------ ------
Shares used in computing pro forma net loss per
share............................................. 6,959,000 7,032,000
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 46
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK RECEIVABLES TOTAL
------------------- ----------------- ADDITIONAL FROM ACCUMULATED DEFERRED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL STOCKHOLDERS DEFICIT COMPENSATION EQUITY
---------- ------- --------- ------ --------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
June 30,
1993........ 3,316,111 $ 3,317 777,515 $ 778 $10,416,402 $ -- $ (4,594,685) $ -- $ 5,825,812
Issuance of
Series D
convertible
preferred
stock, less
$455,985 in
issuance
costs....... 1,270,114 1,270 -- -- 10,592,742 -- -- -- 10,594,012
Issuance of
Series E
convertible
preferred
stock, less
$60,236 in
issuance
costs....... 190,476 190 -- -- 2,439,572 -- -- -- 2,439,762
Issuance of
Series D
preferred
stock
warrants.... -- -- -- -- 34,799 -- -- -- 34,799
Exercise of
options to
purchase
common
stock....... -- -- 56,056 56 17,988 -- -- -- 18,044
Net loss...... -- -- -- -- -- -- (7,429,846) -- (7,429,846)
---------- ------- --------- ------ ----------- --------- ----------- --------- -----------
Balance at
June 30,
1994........ 4,776,701 4,777 833,571 834 23,501,503 -- (12,024,531) -- 11,482,583
Issuance of
Series F
convertible
preferred
stock, less
$38,257 in
issuance
costs....... 373,001 373 -- -- 5,556,370 -- -- -- 5,556,743
Issuance of
Series E
preferred
stock
warrants.... -- -- -- -- 7,799 -- -- -- 7,799
Issuance of
common stock
for
technology
and
services.... -- -- 7,333 7 10,273 -- -- -- 10,280
Issuance of
nonqualified
stock
options for
services.... -- -- -- -- 11,623 -- -- -- 11,623
Exercise of
options to
purchase
common
stock....... -- -- 84,281 84 41,813 (11,000) -- -- 30,897
Net loss...... -- -- -- -- -- -- (9,659,543) -- (9,659,543)
---------- ------- --------- ------ ----------- --------- ----------- --------- -----------
Balance at
June 30,
1995........ 5,149,702 5,150 925,185 925 29,129,381 (11,000) (21,684,074) -- 7,440,382
Issuance of
Series F
convertible
preferred
stock, less
$997 in
issuance
costs....... 300,000 300 -- -- 4,498,702 -- -- -- 4,499,002
Issuance of
Series F
preferred
stock
warrants.... -- -- -- -- 33,000 -- -- -- 33,000
Issuance of
nonqualified
stock
options for
services.... -- -- -- -- 34,131 -- -- -- 34,131
Exercise of
warrant to
purchase
common
stock....... -- -- 6,667 7 57,993 -- -- -- 58,000
Exercise of
options to
purchase
common
stock....... -- -- 387,778 388 576,887 (395,000) -- -- 182,275
Conversion of
preferred
stock to
common
stock....... (5,449,702) (5,450) 5,449,702 5,450 -- -- -- -- --
Issuance of
common stock
in
connection
with initial
public
offering,
less
$1,037,725
in issuance
costs....... -- -- 2,500,000 2,500 43,134,775 -- -- -- 43,137,275
Deferred
compensation... -- -- -- -- 191,765 -- -- (191,765) --
Amortization
of deferred
compensation... -- -- -- -- -- -- -- 35,994 35,994
Net loss...... -- -- -- -- -- -- (9,369,164) -- (9,369,164)
---------- ------- --------- ------ ----------- --------- ----------- --------- -----------
Balance at
June 30,
1996........ -- $ -- 9,269,332 $9,270 $77,656,634 $ (406,000) $(31,053,238) $ (155,771) $46,050,895
========== ======= ========= ====== =========== ========= =========== ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 47
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................... $ (7,429,846) $ (9,659,543) $ (9,369,164)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 257,285 579,671 818,072
Amortization of deferred compensation.......... -- -- 35,994
Loss on disposal of property and equipment..... 24,224 -- 12,860
Issuance of preferred stock warrants........... 34,799 7,799 33,000
Issuance of nonqualified stock options for
services.................................... -- 11,623 34,131
Issuance of common stock for technology and
services.................................... -- 10,280 --
Changes in operating assets and liabilities:
Accounts receivable............................ -- (50,871) (348,126)
Receivable from related party.................. (15,000) (120,800) 114,075
Inventories.................................... -- (211,693) 49,177
Prepaid expenses............................... (114,743) (26,330) (93,266)
Other current assets........................... (89,685) (4,583) (179,336)
Accounts payable............................... 423,774 70,142 (68,211)
Accrued compensation and related benefits...... 159,677 (111,964) 94,856
Other accrued expenses......................... 82,983 148,931 402,214
Interest payable............................... -- 374,765 399,656
Deferred royalty income........................ -- -- 3,000,000
------------ ------------ ------------
Net cash used in operating activities............ (6,666,532) (8,982,573) (5,064,068)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments............... (21,322,869) (11,920,680) (27,761,202)
Maturities and sales of short-term investments... 14,043,548 14,905,122 10,279,751
Purchase of property and equipment............... (439,927) (341,533) (981,344)
Proceeds from sale of equipment.................. 11,291 -- --
(Increase) decrease in notes receivable.......... -- (21,334) 4,000
(Increase) in deposits and other assets.......... (17,718) (12,381) (47,298)
------------ ------------ ------------
Net cash provided by (used in) investing
activities..................................... (7,725,675) 2,609,194 (18,506,093)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from initial public offering, net....... -- -- 43,137,275
Principal payments under capital lease
obligations.................................... (94,620) (396,742) (567,081)
Proceeds from sale of preferred stock............ 13,033,774 5,556,743 4,499,002
Proceeds from note payable....................... 4,500,000 -- --
Proceeds from sale of common stock............... 18,044 41,897 250,275
Notes receivable from stockholders............... -- (11,000) (10,000)
------------ ------------ ------------
Net cash provided by financing activities........ 17,457,198 5,190,898 47,309,471
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.................................... 3,064,991 (1,182,481) 23,739,310
Cash and cash equivalents at beginning of year... 3,490,435 6,555,426 5,372,945
------------ ------------ ------------
Cash and cash equivalents at end of year......... $ 6,555,426 $ 5,372,945 $ 29,112,255
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 48
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Cardiac Pathways Corporation (the "Company"), a Delaware corporation,
designs, develops and manufactures minimally invasive systems to diagnose and
treat cardiac tachyarrhythmias.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Cardiac Pathways B.V. and Cardiac
Pathways S.A. All significant intercompany accounts and transactions have been
eliminated.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reincorporation
On March 15, 1996, the Board of Directors of the Company authorized the
reincorporation of the Company in the state of Delaware and a 2-for-3 reverse
stock split. Following stockholder approval, the reincorporation was effected on
May 31, 1996.
Effective upon the closing of the Company's initial public offering in June
1996, the Company became authorized to issue 5,000,000 shares of $.001 par value
preferred stock and 30,000,000 shares of $.001 par value common stock (see Note
4). All par value, share and per share amounts, as well as the dividend and
liquidation preferences for preferred stock, included in the accompanying
consolidated financial statements, have been retroactively adjusted to reflect
the reverse stock split and the Company's reincorporation in Delaware.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents and short-term investments approximate fair value. The fair value of
short-term investments is based on quoted market prices.
The carrying amount of the Company's note payable approximates its fair
value. The fair value of the Company's note payable is estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
Concentrations of Credit Risk
The Company is potentially subject to concentrations of credit risk with
respect to its cash investments and trade accounts receivable. The Company
invests its excess cash in a diversified portfolio of investment grade interest
bearing instruments. The Company is exposed to credit risk in the event of
default by the financial institutions or issuers of investments only to the
extent recorded on the balance sheet. To date, the Company has not experienced
any losses on its investments.
The Company sells its products to distributors primarily in the United
States, Japan and Europe. The Company does not require collateral and maintains
reserves for estimated credit losses. To date, such losses have been within
management's expectations and have not been significant.
F-7
<PAGE> 49
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 -- (CONTINUED)
Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. All other liquid
investments are classified as short-term investments and consist primarily of
U.S. government agency instruments, corporate obligations and money market
instruments.
Management currently classifies the Company's investment portfolio as
held-to-maturity and available-for-sale. Available-for-sale securities are
carried at fair value with unrealized gains and losses reported as a separate
component of stockholders' equity. To date, the Company has not experienced any
significant unrealized gains or losses on available-for-sale securities and,
accordingly, no adjustments have been made to stockholders' equity.
The cost of held-to-maturity securities is adjusted for the amortization of
premiums and the accretion of discounts to maturity. Such amortization of
premiums and accretion of discounts are included in interest income. At June 30,
1995 and 1996, these securities were valued at amortized cost, which
approximates fair value.
The following is a summary of held-to-maturity and available-for-sale
securities at June 30, 1995:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DESCRIPTION COST GAINS LOSSES FAIR VALUE
------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. government agency............. $ 528,403 $1,954 $-- $ 530,357
U.S. corporate bonds............... 3,750,958 7,741 -- 3,758,699
Available-for-sale:
Money market instruments........... 2,000,000 -- -- 2,000,000
--
---------- ------ ----------
$6,279,361 $9,695 $-- $6,289,056
========== ====== == ==========
</TABLE>
During the year ended June 30, 1995 the Company purchased approximately
$9,921,000 and $2,000,000 of held-to-maturity and available-for-sale securities,
respectively. Maturities of held-to-maturity securities were approximately
$14,305,000, and sales of available-for-sale securities were approximately
$600,000 during the same period. There were no realized gains or losses during
the year ended June 30, 1995. The cost of securities sold is based on the
specific identification method.
The following is a summary of held-to-maturity and available-for-sale
securities at June 30, 1996:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DESCRIPTION COST GAINS LOSSES FAIR VALUE
----------------------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. government agency........... $ 1,999,879 $ -- $ (289) $ 1,999,590
U.S. corporate bonds............. 16,760,933 2,938 (4,418) 16,759,453
Available-for-sale:
Money market instruments......... 5,000,000 -- -- 5,000,000
----------- ------ ------- -----------
$23,760,812 $2,938 $ (4,707) $23,759,043
=========== ====== ======= ===========
</TABLE>
During the year ended June 30, 1996 the Company purchased approximately
$24,761,000 of held-to-maturity securities and $3,000,000 of available-for-sale
securities. Maturities of held-to-maturity securities were approximately
$10,280,000, and there were no sales or maturities of available-for-sale
securities during
F-8
<PAGE> 50
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 -- (CONTINUED)
the same period. There were no realized gains or losses during the year ended
June 30, 1996. Held-to-maturity securities at June 30, 1996 mature at various
dates through March 1997.
Inventory
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market and consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1996
-------- --------
<S> <C> <C>
Raw materials................................................ $124,341 $125,459
Finished goods............................................... 87,352 37,057
-------- --------
$211,693 $162,516
======== ========
</TABLE>
Property and Equipment
Property and equipment, including equipment under capital leases, are
carried at cost less accumulated depreciation and amortization. Property and
equipment are depreciated using the straight-line method over estimated useful
lives of three to five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful life of the asset
or the remaining term of the lease. Depreciation expense includes amortization
of capital leases and leasehold improvements.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1995 1996
---------- ----------
<S> <C> <C>
Property and equipment:
Equipment............................................... $2,464,586 $3,472,535
Leasehold improvements.................................. 57,303 83,047
Equipment-in-process.................................... 916,263 1,027,872
-------- --------
3,438,152 4,583,454
Less accumulated depreciation and amortization............ 930,027 1,748,099
-------- --------
$2,508,125 $2,835,355
======== ========
</TABLE>
Revenue Recognition
Revenue from product sales is recognized at the time of shipment.
Product Warranties
The Company warrants its equipment for a period of one year. The Company
provides for estimated warranty costs concurrent with the recognition of
revenue.
Royalty Income
At June 30, 1996, the Company had $3,000,000 of deferred royalty income
related to one of its diagnostic catheter systems (see Note 9). Income earned
from this royalty agreement will be recorded as a component of net sales.
F-9
<PAGE> 51
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 -- (CONTINUED)
Research and Development Costs
Research and development costs, which include clinical and regulatory
costs, are charged to expense as incurred.
Foreign Currency Translation
The functional currency of the Company's two foreign subsidiaries is the
U.S. dollar. Monetary assets and liabilities denominated in foreign currencies
are remeasured at the year-end exchange rate. Inventory, property, and other
nonmonetary assets and liabilities are remeasured at historical rates.
Adjustments resulting from these remeasurements are included in the results of
operations and have been immaterial to date.
Net Loss Per Share
Except as noted below, historical net loss per share is computed using the
weighted average number of shares of common stock outstanding. Common equivalent
shares from stock options and convertible preferred stock and warrants are
excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent shares issued at prices substantially below the
public offering price during the twelve-month period prior to the filing of the
initial public offering have been included in the calculation as if they were
outstanding for all periods through June 13, 1996 (using the treasury stock
method).
Historical net loss per share information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net loss per share............................ $ (3.47) $ (4.43) $ (3.95)
========= ========= =========
Shares used in computing net loss per share... 2,139,000 2,182,000 2,375,000
========= ========= =========
</TABLE>
Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of convertible preferred shares not included
above that automatically converted upon completion of the Company's initial
public offering (using the if-converted method) from the original date of
issuance.
Recent Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation" which permits a fair value based method of accounting for
stock-based compensation plans and requires additional disclosures for those
companies who elect not to adopt the new method of accounting. The Company will
be required to adopt FAS 123 in fiscal 1997. The Company's intention is to
continue to account for employee stock awards in accordance with APB Opinion No.
25 and to adopt the "disclosure only" alternative described in FAS 123.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires the Company to review for impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets whenever events
or changes in circumstances indicate that the carrying amount of an asset might
not be recoverable. In certain situations, an impairment loss would be
recognized. FAS 121 will become effective for the Company's year ending June 30,
1997. The
F-10
<PAGE> 52
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 -- (CONTINUED)
Company has studied the implications of FAS 121 and, based on its initial
evaluation, does not expect its adoption to have a material impact on the
Company's financial condition or results of operations.
2. COMMITMENTS
The Company leases facilities and equipment under noncancelable lease
agreements. Future minimum lease payments were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
CAPITAL OPERATING
LEASES LEASES
---------- --------
<S> <C> <C>
1997....................................................... $ 767,889 $359,676
1998....................................................... 536,939 351,612
1999....................................................... 101,883 117,204
---------- --------
Total minimum lease payments..................... 1,406,711 $828,492
========
Less amount representing interest.......................... 132,599
----------
Present value of minimum lease payments.................... 1,274,112
Less current portion....................................... 671,538
----------
Long-term portion.......................................... $ 602,574
==========
</TABLE>
The Company leases its facilities under noncancelable operating lease
agreements that extend through October 1998. Rental expense was approximately
$350,000 for the years ended June 30, 1994 and 1995, and approximately $366,000
for the year ended June 30, 1996. In addition, the Company leases certain
equipment under long-term leases, the terms of which qualify as capital leases.
Capital lease obligations are collateralized with leased equipment.
The Company's equipment acquired under capital lease arrangements and
related accumulated amortization are as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1995 1996
---------- ----------
<S> <C> <C>
Equipment at cost......................................... $2,156,000 $2,333,000
Less accumulated amortization............................. 586,000 1,109,000
---------- ----------
$1,570,000 $1,224,000
========== ==========
</TABLE>
At June 30, 1996, the Company had an unused equipment lease line facility
of approximately $823,000, which expires on December 31, 1996. In addition, the
Company had approximately $180,000 in noncancelable purchase commitments to
acquire certain equipment components from two vendors at June 30, 1996.
3. NOTE PAYABLE
At June 30, 1996, the Company had a $4,500,000 note payable due to a
European biomedical company. The note bears interest at the prime rate (8.25% at
June 30, 1996) as quoted in The Wall Street Journal, and all principal and
accrued interest are due on June 27, 1999.
The note is immediately payable in the event the Company completes a
follow-on public offering pursuant to which the Company realizes more than
$5,000,000 or in the event the Company has positive cash flow from operations in
excess of $500,000 for any fiscal quarter. In addition, the note is immediately
payable upon the close of a merger, reorganization, or sale of substantially all
of the assets of the Company.
F-11
<PAGE> 53
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 -- (CONTINUED)
4. STOCKHOLDERS' EQUITY
Common Stock
In June 1996, the Company completed its initial public offering of
2,500,000 shares of common stock. The net proceeds to the Company were
approximately $43,137,000. Upon completion of the offering, all of the preferred
stock outstanding automatically converted into common stock.
Preferred Stock
Upon the completion of the Company's initial public offering noted above,
the Company became authorized to issue 5,000,000 shares of undesignated
preferred stock. Preferred stock may be issued from time to time in one or more
series. The Board of Directors is authorized to determine the rights,
preferences, privileges, and restrictions granted to and imposed upon any wholly
unissued series of preferred stock and to fix the number of shares of any series
of preferred stock and the designation of any such series without any vote or
action by the Company's stockholders.
Stock Warrants
The following warrants to purchase common stock were issued in connection
with various financing and lease agreements:
<TABLE>
<CAPTION>
RESERVED FOR PRICE PER AGGREGATE EXPIRATION
SHARES ISSUANCE SHARE PRICE DATE
- ------ ------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
19,999 19,999 $ 8.70 $ 173,991 June 2001
76,972 76,972 13.125 1,010,258 June 2001
11,000 11,000 15.00 165,000 June 2001
</TABLE>
The fair value of warrants issued in connection with lease transactions
were expensed as incurred. The fair value of the warrants issued has been
immaterial.
Stock Option Plans
In July 1991, the Board of Directors of the Company approved the Company's
1991 Stock Option Plan (the Plan). The Plan provides for the issuance of
incentive and nonstatutory options to employees, officers, and consultants of
the Company to acquire common stock of the Company. The Plan provides for the
granting of options for up to 1,887,030 shares of common stock of the Company.
The exercise price of incentive stock options granted under the Plan may not be
less than 100% (110% in the case of any options granted to a person who owns
more than 10% of the total combined voting power of all classes of stock of the
Company) of the fair market value of the common stock subject to the option on
the date of grant. Options granted under the Plan generally become exercisable
over a four-year period and generally expire ten years from the date of grant.
Expired options become available under the Plan.
F-12
<PAGE> 54
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 -- (CONTINUED)
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
SHARES SHARES UNDER OUTSTANDING OPTIONS
AVAILABLE -------------------------------------------
FOR GRANT SHARES PRICE AGGREGATE
--------- --------- --------------- ----------
<S> <C> <C> <C> <C>
Balance at June 30, 1993......... 144,615 666,027 $ .22 - $ .60 $ 257,641
Authorized..................... 533,333 -- $ -- --
Granted........................ (222,333) 222,333 $ .60 - $ 1.32 182,306
Exercised...................... -- (56,056) $ .22 - $ 1.32 (18,044)
Canceled....................... 12,826 (12,826) $ .22 - $ .87 (6,203)
-------- --------- ----------
Balance at June 30, 1994......... 468,441 819,478 $ .22 - $ .87 415,700
Granted........................ (475,364) 475,364 $1.32 - $ 1.50 662,079
Exercised...................... -- (84,281) $ .22 - $ 1.32 (41,897)
Canceled....................... 116,677 (116,677) $ .22 - $ 1.50 (104,257)
-------- --------- ----------
Balance at June 30, 1995......... 109,754 1,093,884 $ .22 - $ 1.50 931,625
Authorized..................... 530,000 -- $ -- --
Granted........................ (379,408) 379,408 $1.50 - $15.00 2,864,821
Exercised...................... -- (384,446) $ .22 - $ 9.90 (259,849)
Canceled....................... 43,674 (43,674) $ .60 - $12.38 (229,492)
-------- --------- ----------
Balance at June 30, 1996......... 304,020 1,045,172 $ .22 - $15.00 $3,307,105
======== ========= ==========
</TABLE>
At June 30, 1996, options to purchase 400,194 shares of common stock were
exercisable. Also, at June 30, 1996, 1,349,192 shares of common stock have been
reserved for issuance under the Plan.
The Company recorded deferred compensation of approximately $192,000
representing the difference between the grant price and the estimated fair value
of the Company's common stock for certain options granted during the year ended
June 30, 1996. The deferred compensation is amortized over the period for which
the related stock options become exercisable, which is generally four years.
Amortization of the deferred compensation was approximately $36,000 for the year
ended June 30, 1996.
In April 1996, the stockholders of the Company approved the Company's 1996
Director Option Plan (the Director Plan). A total of 20,000 shares of common
stock has been reserved for issuance under the Director Plan. The option grants
under the Director Plan are automatic and non-discretionary, and the exercise
price of the options is 100% of the fair market value of the common stock on the
grant date. The Director Plan provides for an initial grant of options to
purchase 13,000 shares of common stock to each new non-employee director. In
addition, each non-employee director will automatically be granted an option to
purchase 700 shares of common stock annually. Options granted under the Director
Plan become exercisable over a four-year period and expire ten years from the
date of grant. At June 30, 1996, there were no options outstanding under the
Director Plan.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the Purchase Plan), was
approved by the stockholders in April 1996. The Purchase Plan is designed to
allow eligible employees of the Company to purchase shares of common stock, at
semi-annual intervals, through periodic payroll deductions. Under the Purchase
Plan, 53,000 shares of common stock have been reserved for future issuance. No
shares have been purchased under this plan through June 30, 1996.
F-13
<PAGE> 55
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 -- (CONTINUED)
5. INCOME TAXES
Due to operating losses and the inability to recognize an income tax
benefit therefrom, there is no provision for income taxes for the years ended
June 30, 1994, 1995 and 1996.
Deferred income taxes reflect the net effects of tax carryforwards and
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1995 1996
----------- ------------
<S> <C> <C>
Net operating loss carryforwards......................... $ 6,900,000 $ 9,100,000
Capitalized research costs............................... 900,000 900,000
Research credit carryforwards............................ 1,300,000 1,400,000
Deferred revenue......................................... -- 1,200,000
Other.................................................... 200,000 300,000
----------- ------------
Subtotal............................................... 9,300,000 12,900,000
Valuation allowance...................................... (9,300,000) (12,900,000)
----------- ------------
Total deferred tax asset....................... $ -- $ --
=========== ============
</TABLE>
The increase in the valuation allowance was approximately $4,150,000 and
$3,600,000 for years ended June 30, 1995 and 1996, respectively.
As of June 30, 1996, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $26,000,000 and
$5,000,000, respectively. In addition, the Company had research credit
carryforwards of approximately $1,600,000. The net operating loss and credit
carryforwards described above will expire at various dates beginning in the
years 1998 through 2011, if not utilized. Approximately $7,000,000 of the
federal net operating loss disclosed above is subject to an annual limitation on
utilization of approximately $1,000,000 due to the Section 382 ownership change
rules of the Internal Revenue Code.
6. RISKS DUE TO CONCENTRATIONS
Dependence on Systems
The Company has been engaged primarily in researching, developing, testing
and obtaining regulatory clearances for the catheters and equipment that are
components of the Ventricular Tachycardia Ablation System, Arrhythmia Mapping
System and Atrial Fibrillation Ablation System. The Company believes that these
systems are currently the Company's only significant potential products and
these systems will require additional development, clinical trials and
regulatory approvals before they can be marketed in the United States and
internationally.
There can be no assurance that the Company's development efforts will be
successful or that the systems or any other product developed by the Company
will be safe or effective, approved by appropriate regulatory and reimbursement
authorities, capable of being manufactured in commercial quantities at
acceptable costs or successfully marketed.
Dependence on Key Suppliers
The Company purchases certain key components of its products, including a
computer workstation, a fluid pump, certain integrated circuit components, flex
circuits and biocompatible coatings from sole, single or limited source
suppliers. Any significant component supply delay or interruption could require
the Company to
F-14
<PAGE> 56
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 -- (CONTINUED)
qualify new sources of supply, if available, and could have a material adverse
effect on the Company's ability to manufacture its products.
7. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1994 1995 1996
-------- ---------- --------
<S> <C> <C> <C>
Capital lease obligations incurred to acquire
equipment....................................... $836,673 $1,319,064 $176,818
Issuance of note receivable in connection with
stock option exercise........................... $ -- $ -- $385,000
Cash paid for interest............................ $ 41,319 $ 119,936 $149,193
</TABLE>
8. NOTES RECEIVABLE
In March 1996, the Company entered into an employment agreement with an
officer of the Company pursuant to which it loaned $385,000 to the officer at an
annual interest rate of 5.88%. The proceeds of the loan were used to exercise a
stock option granted to this officer in January 1996. The loan is due upon the
sale of the shares, or any portion thereof, underlying the option up to an
amount equal to fifty percent (50%) of the proceeds from such sale. The
outstanding balance of the note and accrued interest is due and payable on the
earlier of the termination of the officer's employment, or January 2001.
In fiscal 1993, the Company received a $200,000 promissory note from a
consultant and former director of the Company. The full recourse note bears
interest at 5.68% per annum, compounded annually, and is secured by
approximately 524,514 shares of the Company's common stock held by the
consultant. The principal and all accrued interest became payable upon the
effectiveness of the Company's initial public offering and were repaid
subsequent to year end. At June 30, 1996, the $200,000 promissory note was
outstanding, and the related accrued interest was approximately $43,700.
The Company has made loans to employees in connection with their relocation
to the Company's geographic area in the aggregate amount of $32,500. At June 30,
1996, the net amount of these loans was $16,000. These full recourse notes,
which are unsecured, may be forgiven at the end of four years and are charged to
expense in some circumstances. In addition, the Company made two full recourse
unsecured loans to officers in the amount of $21,000 at June 30, 1996 in
connection with the purchase of the Company's stock.
9. RELATIONSHIP WITH ARROW INTERNATIONAL, INC.
The Company entered into an agreement with Arrow International, Inc.
(Arrow) whereby the Company sold an aggregate of 606,667 shares of Series F
preferred stock (which automatically converted to common stock upon the closing
of the Company's initial public offering in June 1996) at $15.00 per share in
June 1995 and December 1995 for an aggregate purchase price of approximately
$9.1 million. In addition, Arrow acquired distribution and manufacturing rights
related to certain of the Company's diagnostic catheter products and the Company
received a $3.0 million prepaid royalty from Arrow in December 1995. This amount
was recorded as deferred royalty income and will be amortized to income as the
catheter products are manufactured and sold by Arrow. The royalty rate is 5% of
the sales price of the related products. To date, no royalty income has been
recognized.
F-15
<PAGE> 57
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 -- (CONTINUED)
10. INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment and revenues primarily
consist of product sales to three significant distributors in the United States,
Japan and Europe. The relative percentage of net sales for these distributors is
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1994 1995 1996
--- --- ---
<S> <C> <C> <C>
Distributor A............................................ --% 15% 54%
Distributor B............................................ --% --% 33%
Distributor C............................................ --% 57% 13%
</TABLE>
All export and other foreign sales are denominated in U.S. dollars. Export
sales to Europe and Japan represented 85% and 15%, respectively, of the
Company's net sales for the year ended June 30, 1995. For the year ended June
30, 1996, export sales to Europe and Japan represented 13% and 54% of net sales.
Sales to unaffiliated customers from the U.S. and the Company's European
operations were $0 and $115,000, respectively, for the year ended June 30, 1995,
and $1,283,000 and $401,000 for the year ended June 30, 1996. Identifiable
assets of the Company's two foreign subsidiaries are not significant.
11. RELATED PARTY TRANSACTIONS
During the year ended June 30, 1996, the Company entered into certain
transactions (described below) with IntelliWire, Inc. (IntelliWire), a company
developing products for interventional cardiology, and a related party. There
are two members of the Board of Directors of the Company who are on the Board of
Directors of IntelliWire, and one officer of the Company is also on the Board of
Directors of IntelliWire. In addition, IntelliWire and the Company have certain
common investor groups.
The Company had a sublease agreement with IntelliWire for approximately
6,300 square feet which terminated on September 30, 1995. Thereafter,
IntelliWire opted to continue the sublease arrangement on a month-to-month basis
through May 17, 1996, after which the sublease was terminated. For the years
ended June 30, 1994, 1995 and 1996, the Company recorded rental income of
approximately $65,500, $104,000, and $92,000, respectively, under the sublease.
In addition, the Company has a shared services agreement with IntelliWire
whereby the Company and IntelliWire share the services of certain employees of
each company, and the Company provides IntelliWire certain engineering, and
support services. The shared services agreement is on a month-to-month basis,
and for the years ended June 30, 1994, 1995 and 1996, the Company recorded a net
amount of $7,000, $27,000 and $19,000 respectively, under the shared services
agreement after taking into consideration amounts due IntelliWire. For the years
ended June 30, 1994, 1995 and 1996, the Company sold $11,000, $33,000 and $0 in
raw materials and equipment, respectively, at cost to IntelliWire.
12. EMPLOYEE BENEFIT PLAN
The Company has an employee 401(k) salary deferral plan that allows
voluntary contributions by all full-time employees. Eligible employees may
contribute from 1% to 15% of their respective compensation, subject to statutory
limitations, and the Company may match a percentage of employee contributions at
the discretion of the Board of Directors. The Company made matching
contributions to certain eligible employees in the plan of approximately $1,800
and $4,500 for the years ended June 30, 1995 and 1996.
13. INCENTIVE PLAN
In fiscal 1995, the Company adopted a cash incentive plan for certain key
research and development and clinical personnel. These individuals are not
officers of the Company. The cash award was determined by the increase in the
price of the Company's stock from the last private round of preferred stock
financing to the initial public offering price. At June 30, 1996, the Company
had paid approximately $139,000 related to the plan.
F-16
<PAGE> 58
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTIONS PERIOD EXPENSES DEDUCTIONS PERIOD
- ---------------------------------------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
June 30, 1994................................. $ -- $ -- $ -- $ --
June 30, 1995................................. -- 9,500 -- 9,500
June 30, 1996................................. 9,500 2,000 (2,000) 9,500
</TABLE>
S-1
<PAGE> 59
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ---------------------------------------------------------------------- ----
<S> <C> <C>
3.1 Restated Articles of Incorporation of the Registrant..................
3.2 Bylaws of Registrant..................................................
4.1++ Specimen Common Stock Certificate.....................................
10.1++ Form of Indemnification Agreement between the Registrant and each of
its directors and officers............................................
10.2++ 1991 Stock Plan and form of Stock Option Agreement thereunder.........
10.3++ 1996 Director Option Plan and form of Director Stock Option Agreement
thereunder............................................................
10.4++ 1996 Employee Stock Purchase Plan and forms of agreement thereunder...
10.5+++ OEM Agreement between Registrant and Liebel-Flarsheim Company dated
June 22, 1994.........................................................
10.6+++ License Agreement between Registrant and BSI Corporation dated October
21, 1994..............................................................
10.7++ Loan Agreement between the Registrant and Dideco S.p.A. dated June 23,
1994, as amended by Amendment to Loan Agreement dated June 22, 1995
and Amendment No. 2 to Loan Agreement dated April 10, 1996............
10.8+++ Exclusive License Agreement dated May 24, 1995........................
10.9++ Manufacturing and Supply Agreement between the Registrant and Arrow
International Inc. dated March 8, 1995................................
10.10++ Exclusive International Distributor Agreement between the Registrant
and Arrow International dated March 8, 1995...........................
10.11++ Lease dated June 25, 1993 between the Registrant and Brock
Properties............................................................
10.12++ Master Lease Agreement dated December 1, 1993 between the Registrant
and Linc Capital Management Services, Ltd., as amended................
10.13++ Shareholder Rights Agreement, as amended to date, dated June 13, 1995,
between the Registrant and certain holders of the Company's
securities............................................................
10.14++ Consulting Agreement dated June 1, 1995 between the Registrant and Mir
Imran.................................................................
11.1 Statement Regarding Computation of Net Loss Per Share.................
22.1++ Subsidiaries of Registrant............................................
23.1 Consent of Ernst & Young LLP, Independent Auditors....................
24.1 Power of Attorney (see page 40).......................................
27.1 Financial Data Schedule...............................................
</TABLE>
- ---------------
+ Confidential treatment has been granted for portions of these agreements.
Omitted portions have been filed separately with the Commission.
++ Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (Reg. No. 333-3616) as declared effective by the
Commission on June 12, 1996.
<PAGE> 1
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
CARDIAC PATHWAYS CORPORATION
Cardiac Pathways Corporation, a corporation organized and existing under
laws of the State of Delaware, hereby certifies as follows:
1. The name of the Corporation is Cardiac Pathways Corporation. Cardiac
Pathways Corporation was originally incorporated under the same name, and the
original Certificate of Incorporation of the Corporation was filed with the
Secretary of State of the state of Delaware on March 18, 1996.
2. Pursuant to Sections 228, 242 and 245 of the General Corporation Laws of
the State of Delaware, this Restated Certificate of Incorporation restates and
integrates and further amends the provisions of the Certificate of Incorporation
of this corporation.
3. The text of the Certificate of Incorporation as heretofore amended or
supplemented is hereby amended and restated to read in its entirety as follows:
FIRST: The name of this corporation is Cardiac Pathways Corporation.
SECOND: The address of the corporation's registered office in the
State of Delaware is 1209 Orange Street, Wilmington, County of New Castle,
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The purpose of this corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH: 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
35,000,000 shares. 30,000,000 shares shall be Common Stock, par value $.001
per share, and 5,000,000 shares shall be Preferred Stock, par value $.001
per share.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is authorized to fix the number of shares of
any series of Preferred Stock and to determine the designation of any such
series. The Board of Directors is also authorized to determine and alter
the powers, rights, preferences and privileges and the qualifications,
limitations and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock and within the limitations or restrictions stated
in any resolution or resolutions of the Board of Directors originally
fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares of such series then
outstanding) the number of shares of any series subsequent to the issue of
shares of that series, to determine the designation of any series, and to
fix the number of shares of any series. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
FIFTH: "Qualified Public Offering" as used in this Certificate of
Incorporation shall mean the corporation's initial firm commitment
underwritten public offering pursuant to an effective registration under
the Securities Act of 1933, as amended, covering the offer and sale of
Common Stock for the account of the Corporation to the public. For the
management of the business and for the conduct of the affairs of the
corporation, and in further definition, limitation and regulation of the
powers of the
<PAGE> 2
corporation, of its directors and of its stockholders or any class thereof,
as the case may be, it is further provided that, effective upon the closing
of a Qualified Public Offering:
1. The management of the business and the conduct of the affairs of
the corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be
fixed exclusively by one or more resolutions adopted from time to time
by the Board of Directors.
The Board of Directors shall be divided into three classes
designated as Class I, Class II and Class III, respectively. Directors
shall be assigned to each class in accordance with a resolution or
resolutions adopted by the Board of Directors. At the first annual
meeting of stockholders following the date hereof, the term of office of
the Class I directors shall expire and Class I directors shall be
elected for a full term of three years. At the second annual meeting of
stockholders following the date hereof, the term of office of the Class
II directors shall expire and Class II directors shall be elected for a
full term of three years. At the third annual meeting of stockholders
following the date hereof, the term of office of the Class III directors
shall expire and Class III directors shall be elected for a full term of
three years. At each succeeding annual meeting of stockholders,
directors shall be elected for a full term of three years to succeed the
directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each
director shall serve until his or her successor is duly elected and
qualified or until his or her death, resignation or removal. No decrease
in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
Any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal, or other causes shall be filled
by either (i) the affirmative vote of the holders of a majority of the
voting power of the thenoutstanding shares of voting stock of the
corporation entitled to vote generally in the election of directors (the
"Voting Stock") voting together as a single class; or (ii) by the
affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum of the Board of Directors. Newly
created directorships resulting from any increase in the number of
directors shall, unless the Board of Directors determines by resolution
that any such newly created directorship shall be filled by the
stockholders, be filled only by the affirmative vote of the directors
then in office, even though less than a quorum of the Board of
Directors. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the
class of directors in which the new directorship was created or the
vacancy occurred and until such director's successor shall have been
elected and qualified.
2. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter,
amend, or repeal the Bylaws of the corporation.
3. The directors of the corporation need not be elected by written
ballot unless a stockholder demands election by written ballot at the
meeting and before voting begins, or unless the Bylaws so provide.
4. The affirmative vote of sixty-six and two-thirds percent
(66-2/3%) of the voting power of the then outstanding shares of Voting
Stock, voting together as a single class, shall be required for the
adoption, amendment or repeal of the following sections of the
corporation's Bylaws by the stockholders of this corporation: 2.2
(Annual Meeting) and 2.3 (Special Meeting).
5. No action shall be taken by the stockholders of the corporation
except at an annual or special meeting of the stockholders called in
accordance with the Bylaws.
6. Advance notice of stockholder nomination for the election of
directors and of business to be brought by stockholders before any
meeting of the stockholders of the corporation shall be given in the
manner provided in the Bylaws of the corporation.
2
<PAGE> 3
7. Any director, or the entire Board of Directors, may be removed
from office at any time (i) with cause by the affirmative vote of the
holders of at least a majority of the voting power of all of the
then-outstanding shares of the Voting Stock, voting together as a single
class; or (ii) without cause by the affirmative vote of the holders of
at least sixty-six and two-thirds percent (66 2/3%) of the voting power
of all of the then-outstanding shares of the Voting Stock.
SIXTH: Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any affirmative vote of the holders of
any particular class or series of the Voting Stock required by law, this
Certificate of Incorporation or any Preferred Stock Designation, the
affirmative vote of the holders of at least sixty-six and two-thirds
percent (66 2/3%) of the voting power of all of the then-outstanding shares
of the Voting Stock, voting together as a single class, shall be required
to alter, amend or repeal Article FIFTH or this Article SIXTH.
SEVENTH: The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, except as provided in
Article SIXTH of this Certificate, and all rights conferred upon the
stockholders herein are granted subject to this right.
EIGHTH:
1. To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or as may hereafter be amended, a director of the
corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach fiduciary duty as a director.
2. The corporation may indemnify to the fullest extent permitted by
law any person made or threatened to be made a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that he, his testator or intestate is or was a director,
officer or employee of the corporation or any predecessor of the
corporation or serves or served at any other enterprise as a director,
officer or employee at the request of the corporation or any predecessor to
the corporation.
3. Neither any amendment nor repeal of this Article I, nor the
adoption of any provision of the corporation's Certificate of Incorporation
inconsistent with this Article EIGHTH, shall eliminate or reduce the effect
of this Article EIGHTH, in respect of any matter occurring, or any action
or proceeding accruing or arising or that, but for this Article EIGHTH,
would accrue or arise, prior to such amendment, repeal, or adoption of an
inconsistent provision.
NINTH: Meetings of stockholders may be held within or without the
State of Delaware, as the Bylaws may provide. The books of the corporation
may be kept (subject to any provision contained in the statutes) outside of
the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the Bylaws of the corporation.
TENTH. At all elections of directors of the corporation, each holder
of stock or of any class or series of stock shall be entitled to as many
votes as shall equal the number of votes which such stockholder would be
entitled to cast for the election of directors with respect to his or her
shares of stock multiplied by the number of directors to be elected, and
may cast all of such votes for any director, or for any two or more of them
as such stockholder may see fit.
3
<PAGE> 4
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
signed this 21st day of June, 1996.
CARDIAC PATHWAYS CORPORATION
By: /s/ WILLIAM N. STARLING
------------------------------------
William N. Starling
President and Chief Executive
Officer
ATTEST:
/s/ J. CASEY MCGLYNN
- --------------------------------------
Casey McGlynn, Secretary
4
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
CARDIAC PATHWAYS CORPORATION
(A DELAWARE CORPORATION)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I -- CORPORATE OFFICES........................................................ 1
1.1 REGISTERED OFFICE............................................................ 1
1.2 OTHER OFFICES................................................................ 1
ARTICLE II -- MEETINGS OF STOCKHOLDERS................................................ 1
2.1 PLACE OF MEETINGS............................................................ 1
2.2 ANNUAL MEETING............................................................... 1
2.3 SPECIAL MEETING.............................................................. 3
2.4 NOTICE OF STOCKHOLDERS' MEETINGS............................................. 3
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................................. 4
2.6 QUORUM....................................................................... 4
2.7 ADJOURNED MEETING; NOTICE.................................................... 4
2.8 VOTING....................................................................... 5
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT............................ 5
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING..................... 6
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING
CONSENTS................................................................... 6
2.12 PROXIES..................................................................... 7
2.13 INSPECTORS OF ELECTION...................................................... 7
ARTICLE III -- DIRECTORS.............................................................. 8
3.1 POWERS....................................................................... 8
3.2 NUMBER AND TERM OF OFFICE.................................................... 8
3.3 CLASSES OF DIRECTORS......................................................... 8
3.4 RESIGNATION AND VACANCIES.................................................... 9
3.5 REMOVAL...................................................................... 10
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE..................................... 10
3.7 FIRST MEETINGS............................................................... 10
3.8 REGULAR MEETINGS............................................................. 10
3.9 SPECIAL MEETINGS; NOTICE..................................................... 11
3.10 QUORUM....................................................................... 11
3.11 WAIVER OF NOTICE............................................................. 11
3.12 ADJOURNMENT.................................................................. 11
3.13 NOTICE OF ADJOURNMENT........................................................ 12
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............................ 12
3.15 FEES AND COMPENSATION OF DIRECTORS........................................... 12
3.16 APPROVAL OF LOANS TO OFFICERS................................................ 12
ARTICLE IV -- COMMITTEES.............................................................. 12
4.1 COMMITTEES OF DIRECTORS...................................................... 12
4.2 MEETINGS AND ACTION OF COMMITTEES............................................ 13
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE V -- OFFICERS................................................................. 13
5.1 OFFICERS..................................................................... 13
5.2 ELECTION OF OFFICERS......................................................... 14
5.3 SUBORDINATE OFFICERS......................................................... 14
5.4 REMOVAL AND RESIGNATION OF OFFICERS.......................................... 14
5.5 VACANCIES IN OFFICES......................................................... 14
5.6 CHAIRMAN OF THE BOARD........................................................ 14
5.7 CHIEF EXECUTIVE OFFICER...................................................... 15
5.8 VICE PRESIDENTS.............................................................. 15
5.9 SECRETARY.................................................................... 15
5.10 CHIEF FINANCIAL OFFICER...................................................... 16
ARTICLE VI -- INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS...... 16
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.................................... 16
6.2 INDEMNIFICATION OF OTHERS.................................................... 16
6.3 INSURANCE.................................................................... 17
ARTICLE VII -- RECORDS AND REPORTS.................................................... 17
7.1 MAINTENANCE AND INSPECTION OF RECORDS........................................ 17
7.2 INSPECTION BY DIRECTORS...................................................... 18
7.3 ANNUAL STATEMENT TO STOCKHOLDERS............................................. 18
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS............................... 18
ARTICLE VIII -- GENERAL MATTERS....................................................... 18
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING........................ 18
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS.................................... 19
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED............................ 19
8.4 STOCK CERTIFICATES; PARTLY PAID SHARES....................................... 19
8.5 SPECIAL DESIGNATION ON CERTIFICATES.......................................... 20
8.6 LOST CERTIFICATES............................................................ 20
8.7 CONSTRUCTION; DEFINITIONS.................................................... 20
ARTICLE IX -- AMENDMENTS.............................................................. 20
ARTICLE X -- DISSOLUTION.............................................................. 21
ARTICLE XI -- CUSTODIAN............................................................... 21
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES.................................. 21
11.2 DUTIES OF CUSTODIAN.......................................................... 22
</TABLE>
ii
<PAGE> 4
BYLAWS
OF
CARDIAC PATHWAYS CORPORATION
(A DELAWARE CORPORATION)
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be fixed in the Certificate
of Incorporation of the corporation.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
(a) The annual meeting of stockholders shall be held each year on a date
and at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the 15th day of
November in each year at 10:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected, and
any other proper business may be transacted.
(b) At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before an annual meeting, business must be: (A) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (B) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (C) otherwise properly brought before
the meeting by a stockholder. For business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not less than one hundred twenty
(120) calendar days in advance of the date specified in the corporation's proxy
statement released to stockholders in connection with the previous year's annual
meeting of stockholders; provided, however, that in the event that no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than thirty (30) days from the date contemplated at the time of
the previous year's proxy statement, notice by the stockholder to be timely must
be so received a reasonable time before the solicitation is made. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting: (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and address,
as they appear on the corporation's books, of the stockholder proposing such
business, (iii) the class and number of shares of the corporation which are
beneficially owned by the stockholder, (iv) any material interest of the
stockholder in
<PAGE> 5
such business and (v) any other information that is required to be provided by
the stockholder pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (the "1934 Act"), in his capacity as a proponent to a
stockholder proposal. Notwithstanding the foregoing, in order to include
information with respect to a stockholder proposal in the proxy statement and
form of proxy for a stockholder's meeting, stockholders must provide notice as
required by the regulations promulgated under the 1934 Act. Notwithstanding
anything in these Bylaws to the contrary, no business shall be conducted at any
annual meeting except in accordance with the procedures set forth in this
paragraph (b). The chairman of the annual meeting shall, if the facts warrant,
determine and declare at the meeting that business was not properly brought
before the meeting and in accordance with the provisions of this paragraph (b),
and, if he should so determine, he shall so declare at the meeting that any such
business not properly brought before the meeting shall not be transacted.
(c) Only persons who are nominated in accordance with the procedures set
forth in this paragraph (c) shall be eligible for election as Directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the corporation entitled to vote in the
election of Directors at the meeting who complies with the notice procedures set
forth in this paragraph (c). Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the corporation in accordance with the provisions
of paragraph (b) of this Section 2.2. Such stockholder's notice shall set forth
(i) as to each person, if any, whom the stockholder proposes to nominate for
election or re-election as a Director: (A) the name, age, business address and
residence address of such person, (B) the principal occupation or employment of
such person, (C) the class and number of shares of the corporation which are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder, and (E) any other information relating to such
person that is required to be disclosed in solicitations of proxies for
elections of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the 1934 Act (including without limitation such person's
written consent to being named in the proxy statement, if any, as a nominee and
to serving as a Director if elected); and (ii) as to such stockholder giving
notice, the information required to be provided pursuant to paragraph (b) of
this Section 2.2. At the request of the Board of Directors, any person nominated
by a stockholder for election as a Director shall furnish to the Secretary of
the corporation that information required to be set forth in the stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a Director of the corporation unless nominated in accordance
with the procedures set forth in this paragraph (c). The chairman of the meeting
shall, if the facts warrants, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if he should so determine, he shall so declare at the meeting, and
the defective nomination shall be disregarded.
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
Board of Directors, or by the chairman of the board, or in the absence of the
chairman of the board by the chief executive officer, or by one or more
shareholders holding shares in the aggregate entitled to cast not less than ten
percent (10%) of the votes at that meeting, but such special meetings may not be
called by any other person or persons.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president, chief
executive officer, or the secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
officer receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5, that a meeting will be held at the time requested by the person or
persons who called the meeting, not less than thirty-five (35) nor more than
sixty (60) days after the receipt of the request. If the notice is not given
within twenty (20) days after the receipt of the request, the
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person or persons requesting the meeting may give the notice. Nothing contained
in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or
affecting the time when a meeting of stockholders called by action of the board
of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
Except as set forth in Section 2.3, all notices of meetings of stockholders
shall be sent or otherwise given in accordance with Section 2.5 of these bylaws
not less than ten (10) nor more than sixty (60) days before the date of the
meeting. The notice shall specify the place, date, and hour of the meeting and
(i) in the case of a special meeting, the general nature of the business to be
transacted (no business other than that specified in the notice may be
transacted) or (ii) in the case of the annual meeting, those matters which the
board of directors, at the time of giving the notice, intends to present for
action by the stockholders (but any proper matter may be presented at the
meeting for such action). The notice of any meeting at which directors are to be
elected shall include the name of any nominee or nominees who, at the time of
the notice, the board intends to present for election.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that stockholder by mail or telegraphic or other written communication
to the corporation's principal executive office, or if published at least once
in a newspaper of general circulation in the county where that office is
located. Notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by telegram or other means of
written communication.
If any notice addressed to a stockholder at the address of that stockholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the stockholder at that address, then
all future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available to the stockholder on written
demand of the stockholder at the principal executive office of the corporation
for a period of one (1) year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.6 QUORUM
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of stockholders. The stockholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough stockholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
2.7 ADJOURNED MEETING; NOTICE
Any stockholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy. In the absence
of a quorum, no other business may be transacted at that meeting except as
provided in Section 2.6 of these bylaws.
When any meeting of stockholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at the meeting at which the
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adjournment is taken. However, if a new record date for the adjourned meeting is
fixed or if the adjournment is for more than thirty (30) days from the date set
for the original meeting, then notice of the adjourned meeting shall be given.
Notice of any such adjourned meeting shall be given to each stockholder of
record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the
corporation may transact any business which might have been transacted at the
original meeting.
2.8 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the Certificate of Incorporation,
each outstanding share, regardless of class, shall be entitled to one vote on
each matter submitted to a vote of the stockholders. Any stockholder entitled to
vote on any matter may vote part of the shares in favor of the proposal and
refrain from voting the remaining shares or, except when the matter is the
election of directors, may vote them against the proposal; but, if the
stockholder fails to specify the number of shares which the stockholder is
voting affirmatively, it will be conclusively presumed that the stockholder's
approving vote is with respect to all shares which the stockholder is entitled
to vote.
If a quorum is present, the affirmative vote of the majority of the shares
represented and voting at a duly held meeting (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the stockholders, unless the vote of a greater number or a vote by classes is
required by law or by the Certificate of Incorporation.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of stockholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though they
had been taken at a meeting duly held after regular call and notice, if a quorum
be present either in person or by proxy, and if, either before or after the
meeting, each person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of stockholders. All such waivers, consents,
and approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by law to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the Certificate of Incorporation, any action
which may be taken at any annual or special meeting of stockholders may be taken
without a meeting and without prior notice, if a consent in writing, setting
forth the action so taken, is signed by the holders of outstanding shares having
not less than the minimum number of votes that would be necessary to authorize
or take that action at a meeting at which all shares entitled to vote on that
action were present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the
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certificate filed under such section shall state, in lieu of any statement
required by such section concerning any vote of stockholders, that written
notice and written consent have been given as provided in Section 228 of the
General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of any such meeting nor more than sixty (60) days before any such
action without a meeting, and in such event only stockholders of record on the
date so fixed are entitled to notice and to vote or to give consents, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date.
If the board of directors does not so fix a record date:
(a) the record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business
on the business day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held; and
(b) the record date for determining stockholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first
written consent is given, or (ii) when prior action by the board has been
taken, shall be at the close of business on the day on which the board
adopts the resolution relating to that action.
The record date for any other purpose shall be as provided in Article VIII
of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(c) of the General Corporation Law of Delaware.
2.13 INSPECTORS OF ELECTION
Before any meeting of stockholders, the board of directors may appoint an
inspector or inspectors of election to act at the meeting or its adjournment. If
no inspector of election is so appointed, then the chairman of the meeting may,
and on the request of any stockholder or a stockholder's proxy shall, appoint an
inspector or inspectors of election to act at the meeting. The number of
inspectors shall be either one (1) or three (3). If inspectors are appointed at
a meeting pursuant to the request of one (1) or more stockholders or proxies,
then the holders of a majority of shares or their proxies present at the meeting
shall determine whether one (1) or three (3) inspectors are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
then the chairman of the meeting may, and upon the request of any stockholder or
a stockholder's proxy shall, appoint a person to fill that vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of a
quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
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(c) hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election or
vote with fairness to all stockholders.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and to
any limitations in the Certificate of Incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER AND TERM OF OFFICE
The authorized number of directors shall be not less than four (4) nor more
than seven (7). The exact number of directors shall be seven (7) until changed,
within the limits specified above, by a bylaw amending this Section 3.2, duly
adopted by the board of directors or by the stockholders. The indefinite number
of directors may be changed, or a definite number may be fixed without provision
for an indefinite number, by a duly adopted amendment to the Certificate of
Incorporation or by an amendment to this bylaw adopted by the vote or written
consent of holders of a majority of the outstanding shares entitled to vote or
by resolution of a majority of the board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires. If for any
cause, the directors shall not have been elected at an annual meeting, they may
be elected as soon thereafter as convenient at a special meeting of the
stockholders called for that purpose in the manner provided in these Bylaws.
3.3 CLASSES OF DIRECTORS
Following the closing of the corporation's initial public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended (the "1933 Act"), covering the offer and sale of Common Stock of the
corporation (the "Initial Public Offering"), the Directors shall be divided into
three classes designated as Class I, Class II and Class III, respectively.
Directors shall be assigned to each class in accordance with a resolution or
resolutions adopted by the Board of Directors. At the first annual meeting of
stockholders following the closing of the Initial Public Offering, the term of
office of the Class I Directors shall expire and Class I Directors shall be
elected for a full term of three years. At the second annual meeting of
stockholders following the closing of the Initial Public Offering, the term of
office of the Class II Directors shall expire and Class II Directors shall be
elected for a full term of three years. At the third annual meeting of
stockholders following the closing of the Initial Public Offering, the term of
office of the Class III Directors shall expire and Class III Directors shall be
elected for a full term of three years. At each succeeding annual meeting of
stockholders, Directors shall be elected for a full term of three years to
succeed the Directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each Director
shall serve until his successor is duly elected and qualified or until his
earlier death, resignation or removal. No decrease in the number of Directors
constituting the Board of Directors shall shorten the term of any incumbent
Director.
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3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
Unless otherwise provided in the Certificate of Incorporation or these
bylaws, vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote or
written consent of the stockholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute a majority of the required quorum), or by the unanimous written
consent of all shares entitled to vote thereon. Each director so elected shall
hold office until the next annual meeting of the stockholders and until a
successor has been elected and qualified.
Unless otherwise provided in the Certificate of Incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or
by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the
directors elected by such class or classes or series thereof then in
office, or by a sole remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 REMOVAL
Subject to any limitations imposed by law, and unless otherwise provided in
the Certificate of Incorporation, the Board of Directors, or any individual
Director, may be removed from office at any time by the affirmative vote of the
holders of at least a majority of the then outstanding shares of the capital
stock of the corporation entitled to vote at an election of Directors.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
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Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.7 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.8 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.
3.9 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, or in the absence of the
chairman of the board by the chief executive officer or any three directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least seven (7) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least seventy-two (72) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.10 QUORUM
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
Certificate of Incorporation and applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.11 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
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3.12 ADJOURNMENT
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
3.13 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.8 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board.
3.15 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.15 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.16 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have all the authority of
the board, but no such committee shall have the power or authority to (i) amend
the Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the board of directors as provided in Section 151(a) of the
General Corporation Law of Delaware, fix any of the preferences or rights of
such shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
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for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution, or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the Certificate of
Incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.7 (regular meetings), Section 3.8 (special
meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice),
Section 3.11 (adjournment), Section 3.12 (notice of adjournment), and Section
3.13 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a chairman of the board, a chief
executive officer, a secretary and a chief financial officer. The corporation
may also have, at the discretion of the board of directors, a president, one or
more vice presidents, one or more assistant secretaries, one or more assistant
treasurers, and such other officers as may be appointed in accordance with the
provisions of Section 5.3 of these bylaws. Any number of offices may be held by
the same person.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
10
<PAGE> 14
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall serve as
the corporation's general manager, and shall have general supervision, direction
and control of the corporation's business and its officers, and, if present,
preside at meetings of the stockholders and the board of directors and exercise
and perform such other powers and duties as may from time to time be assigned to
him by the board of directors or as may be prescribed by these bylaws. If there
is no chief executive officer, then the chairman of the board shall also be the
chief executive officer of the corporation and shall have the powers and duties
prescribed in Section 5.7 of these bylaws. The chairman of the board shall
report to the board of directors.
5.7 CHIEF EXECUTIVE OFFICER
Subject to such powers, if any, as may be given by the board of directors
to the chairman of the board, if there be such an officer, the chief executive
officer shall, subject to the control of the chairman of the board, or the board
of directors if there is no chairman of the board, have general supervision,
direction, and control of the business and the officers of the corporation. He
or she shall preside at all meetings of the stockholders and the board of
directors, in the absence or nonexistence of a chairman of the board. He or she
shall have the general powers and duties of management usually vested in the
office of president of a corporation, and shall have such other powers and
duties as may be prescribed by the board of directors or these bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and stockholders. The minutes shall show the time and place of each
meeting, whether regular or special (and, if special, how authorized and the
notice given), the names of those present at directors' meetings or committee
meetings, the number of shares present or represented at stockholders' meetings,
and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
11
<PAGE> 15
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable times
be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He or she shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware, to indemnify each
of its employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or
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<PAGE> 16
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under the provisions of the General
Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders and its other books and records for a purpose
reasonably related to his or her position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The
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<PAGE> 17
authority herein granted may be exercised either by such person directly or by
any other person authorized to do so by proxy or power of attorney duly executed
by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any other lawful
action (other than action by stockholders by written consent without a meeting),
the board of directors may fix, in advance, a record date, which shall not be
more than sixty (60) days before any such action. In that case, only
stockholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided by law.
If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by the chief
financial officer, the secretary or an assistant secretary of such corporation
representing the number of shares registered in certificate form. Any or all of
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate has ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if he or she were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to
14
<PAGE> 18
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its Certificate of Incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder
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<PAGE> 19
entitled to vote thereon of the adoption of the resolution and of a meeting of
stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall have
attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the stockholders
are so divided that they have failed to elect successors to directors whose
terms have expired or would have expired upon qualification of their
successors; or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for
action by the board of directors cannot be obtained and the stockholders
are unable to terminate this division; or
(iii) the corporation has abandoned its business and has failed within
a reasonable time to take steps to dissolve, liquidate or distribute its
assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
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<PAGE> 20
CERTIFICATE OF ADOPTION OF BYLAWS
OF
CARDIAC PATHWAYS CORPORATION
ADOPTION BY INCORPORATOR
The undersigned person appointed in the Certificate of Incorporation to act
as the Incorporator of Cardiac Pathways Corporation hereby adopts the foregoing
bylaws, comprising twenty-three (23) pages, as the Bylaws of the corporation.
Executed this 19th day of March 1996.
/s/ CHRIS F. FENNELL
--------------------------------------
Chris F. Fennell
Incorporator
CERTIFICATE BY SECRETARY OF ADOPTION BY INCORPORATOR
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Cardiac Pathways Corporation and that the foregoing
Bylaws, comprising twenty-three (23) pages, were adopted as the Bylaws of the
corporation on March 19th, 1996, by the person appointed in the Certificate of
Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this 19th day of March 1996.
/s/ J. CASEY MCGLYNN
--------------------------------------
Secretary
17
<PAGE> 21
CERTIFICATE OF AMENDMENT
OF BYLAWS OF
CARDIAC PATHWAYS CORPORATION
The undersigned, being the Secretary of Cardiac Pathways Corporation hereby
certifies that Article III, Section 3.2 was amended, effective July 3, 1996, by
the Board of Directors to provide in its entirety as follows:
"3.2 NUMBER AND TERM OF OFFICE
The authorized number of directors shall be not less than four (4) nor
more than seven (7). The exact number of directors shall be six (6) until
changed, within the limits specified above, by a bylaw amending this
Section 3.2, duly adopted by the board of directors or by the stockholders.
The indefinite number of directors may be changed, or a definite number may
be fixed without provision for an indefinite number, by a duly adopted
amendment to the Certificate of Incorporation or by an amendment to this
bylaw adopted by the vote or written consent of holders of a majority of
the outstanding shares entitled to vote or by resolution of a majority of
the board of directors.
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office
expires. If for any cause, the directors shall not have been elected at an
annual meeting, they may be elected as soon thereafter as convenient at a
special meeting of the stockholders called for that purpose in the manner
provided in these Bylaws."
Dated: July 3, 1996
/s/ J. CASEY MCGLYNN
--------------------------------------
Casey McGlynn, Secretary
18
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
HISTORICAL:
Net loss.................................................. $(7,430) $(9,660) $(9,369)
======= ======= =======
Weighted average common shares outstanding................ 811 854 1,379
Shares related to SAB No. 55, 64, and 83.................. 1,328 1,328 996
------- ------- -------
Total weighted average common shares outstanding.......... 2,139 2,182 2,375
======= ======= =======
Net loss per share........................................ $ (3.47) $ (4.43) $ (3.95)
======= ======= =======
PRO FORMA:
Net loss.................................................. $(9,660) $(9,369)
======= =======
Weighted average common shares outstanding................ 854 1,091
Common equivalent shares:
Convertible preferred stock............................. 5,450 5,450
Other shares related to SAB No. 55, 64, and 83............ 655 491
------- -------
Total weighted average common and common equivalent shares
outstanding............................................. 6,959 7,032
======= =======
Pro forma net loss per share.............................. $ (1.39) $ (1.33)
======= =======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-7629) pertaining to the 1991 Stock Plan, 1996 Employee Stock
Purchase Plan and 1996 Director Option Plan of Cardiac Pathways Corporation of
our report dated July 30, 1996, with respect to the consolidated financial
statements and schedule of Cardiac Pathways Corporation included in the Annual
Report (Form 10-K) for the year ended June 30, 1996.
/s/ ERNST & YOUNG LLP
San Jose, California
August 16, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 29,112
<SECURITIES> 23,761
<RECEIVABLES> 399
<ALLOWANCES> 10
<INVENTORY> 163
<CURRENT-ASSETS> 54,288
<PP&E> 4,583
<DEPRECIATION> 1,748
<TOTAL-ASSETS> 57,188
<CURRENT-LIABILITIES> 2,260
<BONDS> 5,877
0
0
<COMMON> 9
<OTHER-SE> 46,042
<TOTAL-LIABILITY-AND-EQUITY> 57,188
<SALES> 1,684
<TOTAL-REVENUES> 1,684
<CGS> 2,408
<TOTAL-COSTS> 2,408
<OTHER-EXPENSES> 6,820
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 569
<INCOME-PRETAX> (9,369)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,369)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,369)
<EPS-PRIMARY> (1.33)
<EPS-DILUTED> (1.33)
</TABLE>
