<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
-------------------------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ________________to_______________.
COMMISSION FILE NUMBER: 000-28372
CARDIAC PATHWAYS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0278793
State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
995 BENECIA AVENUE, SUNNYVALE, CA 94086
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 737-0505
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. [X] Yes [ ] No
As of October 21, 1997 there were 9,529,805 shares of the Registrant's Common
Stock outstanding.
<PAGE> 2
CARDIAC PATHWAYS CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Financial Statements and Notes (Unaudited)
Consolidated Balance Sheets as of September 30, 1997 and
June 30, 1997 ..................................................... 3
Consolidated Statements of Operations for the three months
ended September 30, 1997 and 1996 ................................. 4
Consolidated Statements of Cash Flows for the three months
ended September 30, 1997 and 1996.................................. 5
Notes to Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities ............................................. 25
Item 4. Submission of Matters to a Vote of Security Holders................ 25
Item 6. Exhibits and Reports on Form 8-K................................... 26
SIGNATURES ............................................................... 27
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997(1)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,111,172 $ 5,091,426
Short-term investments 29,280,442 36,475,534
Accounts receivable, net of allowance for doubtful accounts
of $16,500 at September 30, 1997 and $9,500 June 30, 1997 286,387 168,828
Receivable from related party 1,552 1,552
Inventories 413,159 420,005
Prepaid expenses 353,276 411,758
Other current assets 441,373 528,528
------------ ------------
Total current assets 38,887,361 43,097,631
Property and equipment, net 3,079,338 3,140,849
Notes receivable from related parties 242,705 319,491
Deposits and other assets 107,459 97,283
------------ ------------
$ 42,316,863 $ 46,655,254
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 419,682 $ 788,384
Accrued compensation and related benefits 610,476 462,814
Accrued clinical expenses 763,555 696,106
Other accrued expenses 719,508 870,242
Current obligations under capital leases 635,394 768,813
------------ ------------
Total current liabilities 3,148,615 3,586,359
Long-term obligations under capital leases 364,035 472,588
Deferred royalty income 2,943,306 2,950,473
Note payable 4,500,000 4,500,000
Interest payable on note 1,251,375 1,153,625
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized and none
issued and outstanding at September 30, 1997 and June 30, 1997 -- --
Common stock, $.001 par value; 30,000,000 shares authorized; 9,529,718
shares issued and outstanding at September 30, 1997 and 9,523,540
at June 30, 1997 9,530 9,524
Additional paid-in capital 79,206,373 79,089,193
Receivables from stockholders (420,000) (420,000)
Accumulated deficit (47,985,583) (43,918,832)
Deferred compensation (700,788) (767,676)
------------ ------------
Total stockholders' equity 30,109,532 33,992,209
------------ ------------
$ 42,316,863 $ 46,655,254
============ ============
</TABLE>
(1) Derived from the Company's audited consolidated balance sheet as of June 30,
1997.
See notes to consolidated financial statements.
3
<PAGE> 4
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 561,787 $ 779,205
Cost of goods sold 649,926 607,813
----------- -----------
Gross margin (deficit) (88,139) 171,392
Operating expenses:
Research and development 3,496,614 2,616,695
Selling, general and administrative 863,995 680,062
----------- -----------
Total operating expenses 4,360,609 3,296,757
----------- -----------
Loss from operations (4,448,748) (3,125,365)
Other income (expense):
Interest income 557,441 696,441
Interest expense (187,338) (125,031)
Other, net 11,894 3,668
----------- -----------
Total other income (expense), net 381,997 575,078
----------- -----------
Net loss ($4,066,751) ($2,550,287)
=========== ===========
Net loss per share $ (0.43) $ (0.27)
=========== ===========
Shares used in computing
net loss per share 9,528,000 9,284,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,066,751) $ (2,550,287)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 315,237 238,418
Amortization of deferred compensation 66,888 42,930
Issuance of common stock warrants 60,351 --
Issuance of nonqualified stock options for services 46,963 --
Changes in operating assets and liabilities:
Accounts receivable (117,559) (138,544)
Receivable from related party -- 21,725
Inventories 6,846 (111,812)
Prepaid expenses 58,482 29,922
Other current assets 87,155 (162,012)
Accounts payable (368,702) (38,931)
Accrued compensation and related benefits 147,662 147,921
Accrued clinical expenses 67,449 --
Other accrued expenses (150,734) (97,912)
Interest payable 97,750 94,875
Deferred royalty income (7,167) --
------------ ------------
Net cash used in operating activities (3,756,130) (2,523,707)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (8,160,108) (21,922,146)
Maturities and sales of short-term investments 15,355,200 4,500,000
Purchases of property and equipment, net (253,726) --
(Increase) decrease in notes receivable 76,786 253,860
(Increase) in deposits and other assets (10,176) (722)
------------ ------------
Net cash provided by (used in) investing activities 7,007,976 (17,169,008)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations (241,972) (177,718)
Capital lease obligations incurred, net -- 140,865
Proceeds from sale of common stock 9,872 47,765
------------ ------------
Net cash provided by (used in) financing activities (232,100) 10,912
------------ ------------
Net increase (decrease) in cash and cash equivalents 3,019,746 (19,681,803)
Cash and cash equivalents at beginning of period 5,091,426 29,112,255
------------ ------------
Cash and cash equivalents at end of period $ 8,111,172 $ 9,430,452
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
financial information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included.
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.
The operating results for the three month period ended September 30,
1997 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 1998. The accompanying consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1997.
2. SHORT-TERM INVESTMENTS
At September 30, 1997 and June 30, 1997, all short-term investments were
classified as held-to-maturity and available-for-sale. The amortized 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 September 30, 1997 and June 30,
1997, these securities were valued at amortized cost, which approximates fair
value. Available-for-sale securities are carried at fair value with unrealized
gains and losses, net of tax, 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.
6
<PAGE> 7
The following is a summary of held-to-maturity and available-for-sale
securities at cost, which approximates fair value:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
DESCRIPTION 1997 1997
- ----------- ----------- -----------
<S> <C> <C>
Held-to-maturity:
U.S. government agency $ 4,990,092 $15,485,479
U.S. corporate obligations 24,981,659 20,329,767
Available-for-sale:
Auction rate preferred stock 1,300,000 2,100,000
U.S corporate obligations -- 1,055,206
----------- -----------
31,271,751 38,970,452
Amounts classified as cash equivalents 1,991,309 2,494,918
----------- -----------
Amounts included in short-term investments $29,280,442 $36,475,534
=========== ===========
</TABLE>
There were no realized gains or losses for the three-month periods
ending September 30, 1997 and 1996. The cost of securities sold is based on the
specific identification method. Held-to-maturity securities at September 30,
1997 mature at various dates through August 1998.
3. CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ----------
<S> <C> <C>
Inventories:
Raw materials $213,019 $252,349
Work-in-process 46,687 26,929
Finished goods 153,453 140,727
-------- --------
$413,159 $420,005
======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ----------
<S> <C> <C>
Property and equipment:
Equipment $5,254,922 $4,799,030
Leasehold improvements 332,833 274,307
Equipment-in-process 815,465 1,076,157
---------- ----------
6,403,220 6,149,494
Less accumulated depreciation
and amortization 3,323,882 3,008,645
---------- ----------
$3,079,338 $3,140,849
========== ==========
</TABLE>
7
<PAGE> 8
4. STOCK PLANS
In August 1997, the Board of Directors approved increases in the number
of shares reserved for issuance under the Company's stock plans as follows:
380,000 shares under the 1991 Stock Plan, 20,000 shares under the 1996 Director
Option Plan and 70,000 shares under the 1996 Employee Stock Purchase Plan. These
increases were approved by the stockholders at the 1997 Annual Meeting of
Stockholders on October 14, 1997.
ITEM 2. 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 based
upon current expectations 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, that include, but are
not limited to, the risks discussed in "Factors That May Impact Future
Operations" as well as those discussed in the following "Overview" section.
These forward-looking statements include the statement in the first paragraph of
"Overview" relating to expectations of operating losses, the statement in the
second paragraph of "Overview" relating to anticipated filing and approval time
periods for premarket approval ("PMA") applications and the commercialization of
products that have received United States Food and Drug Administration ("FDA")
marketing clearance or approval, the statements in the third paragraph of
"Overview" related to the manufacturing, marketing and distribution of the
Company's products, the statements in the last paragraph of "Net Sales," the
statements in the last sentence of the first paragraph and the entire second
paragraph of "Cost of Goods Sold," the statements in the last sentence of each
of the "Research and Development" and "Selling, General, and Administrative"
paragraphs, the statements regarding future capital expenditures in the third
paragraph of "Liquidity and Capital Resources" and the Company's forecast in the
fourth paragraph of "Liquidity and Capital Resources" of the period of time
through which its financial resources will be adequate to support its
operations.
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 September 30, 1997, had an accumulated deficit of $48.0
million. The Company has generated only limited revenues from sales of Radii
supraventricular tachycardia mapping and ablation catheters, Trio/Ensemble
diagnostic catheters, Mercator Mapping Baskets, Radiofrequency Generator Systems
and Arrhythmia Mapping Systems. The Company expects its operating losses to
continue through at least the end of calendar 1999 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.
8
<PAGE> 9
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 FDA granted 510(k) clearance to the Company in August
1997 for the Model 8100/8300 Arrhythmia Mapping System for basic diagnostic
electrophysiology studies. The Ventricular Tachycardia Ablation System and
Arrhythmia Mapping System for diagnostic mapping of ventricular tachycardia are
in various 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 in the early stages of clinical
testing and will require further development. See "Factors That May Impact
Future Operating Results - Clinical Trials" for a discussion of the status of
the clinical trials conducted to date for the Company's products. 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 three months, and does not anticipate receiving a PMA
for any such system until at least one to two 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 its Atrial
Fibrillation Ablation System obtain clearance or 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. Although the FDA granted
510(k) clearance for basic electrophysiology studies for the Company's Model
8100/8300 Arrhythmia Mapping System in August 1997, such product cannot be
marketed for use with the Company's diagnostic mapping catheters unless and
until such catheters receive marketing clearance from the FDA. Until such
regulatory approval is obtained, the Arrhythmia Mapping System may only be used
with other manufacturer's catheters. There can be no assurance that this system
will be successfully commercialized in the United States or in international
markets where it has not yet received approval.
9
<PAGE> 10
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. Nor does the Company have any experience in
manufacturing, marketing or selling its mapping equipment for the Arrhythmia
Mapping System in commercial quantities. 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. Although the Company received
marketing clearance for the Model 8100/8300 Arrhythmia Mapping System in August
1997, the Company has not to date established a direct sales force to market
this product. 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
Net Sales. The Company's net sales to date have resulted primarily from
limited sales of Radii supraventricular tachycardia mapping and ablation
catheters, Trio/Ensemble diagnostic catheters, Mercator Mapping Baskets,
Radiofrequency Generator Systems and Arrhythmia Mapping Systems. The Company's
net sales decreased to $562,000 for the three months ended September 30, 1997
compared to $779,000 for the three months ended September 30, 1996. The decrease
in net sales was primarily attributable to decreased sales of Trio/Ensemble
diagnostic catheters following the transfer of manufacturing and distribution
for the U.S. market to Arrow International, Inc. ("Arrow") and slightly lower
demand for these products in Japan as initial stocking orders were filled in the
prior year. These decreases were offset in part by increased sales of Radii
mapping and ablation catheters and the sale of an Arrhythmia Mapping System in
the three months ended September 30, 1997.
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 and approximately $57,000 of royalty income has been
recorded through September 30, 1997, of which $7,000 was recognized in the first
quarter of fiscal 1998. There was no royalty income recorded for the first
quarter of fiscal 1997.
Cost of Goods Sold. Cost of goods sold primarily includes raw materials
costs, catheter fabrication costs, and system assembly and test costs. Cost of
goods sold was $650,000 for the three months ended September 30, 1997, resulting
in a gross margin deficit of $88,000 or 16% of net sales. For the three months
ended September 30, 1996, cost of goods sold was $608,000, resulting in a gross
margin of $171,000 or 22% of net sales. The decrease in gross margin in the
three months ended September 30, 1997 compared to September 30, 1996 was
primarily attributable to lower net sales, changes in sales mix, higher fixed
overhead costs resulting from the expansion of catheter and equipment production
capacity, higher materials procurement costs, and increased compensation and
associated labor costs for assembly, quality control and engineering support
personnel. The Company expects future gross margins to fluctuate as other
products are commercialized.
10
<PAGE> 11
The Company is currently encountering low yields, vendor shortages and
other significant production inefficiencies in the manufacture of its Mercator
Mapping Basket catheters. Although the Company is taking appropriate steps to
address these yield and other production inefficiencies, there can be no
assurance that such improvements will be achieved. Although the Company
anticipates resolving such production inefficiencies by December 1997, no
assurance can be given that the Company will succeed in such attempts. Failure
to obtain acceptable yields in the manufacture of such products will adversely
affect the ability of the Company to expand its mapping system clinical sites
and commence commercialization of this product in international markets.
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 to $3.5 million for the three months ended September 30, 1997 compared
to $2.6 million for the three months ended September 30, 1996. This increase was
primarily attributable to increased costs associated with the hiring of
additional engineering, regulatory and clinical personnel, costs associated with
designing certain manufacturing processes, certain costs in connection with
materials procurement and vendor qualification, and increased costs related to
the placement of Arrhythmia Mapping Systems and catheter products at clinical
sites in the United States and Europe. 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, various legal and professional fees
including those in connection with obtaining patent protection, and costs of
trade shows. Selling, general and administrative expenses increased to $864,000
for the three months ended September 30, 1997 compared to $680,000 for the three
months ended September 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 demonstration units and product marketing materials, and certain
increased facilities related costs. 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 to
net other income of $382,000 for the three months ended September 30, 1997
compared to net other income of $575,000 for the three months ended September
30, 1996. The reduction in net other income is the result of declining interest
income on lower cash, cash equivalent and short-term investment balances and
increased interest expense associated with equipment lease financing activity.
Net Loss. The Company's net loss increased to $4.1 million for the three
months ended September 30, 1997 compared to $2.6 million for the three months
ended September 30, 1996. The increase in the net loss primarily resulted from
the gross margin deficit in the three months ended September 30, 1997, and
increased product development, clinical research and selling, general and
administrative expenses.
11
<PAGE> 12
Impact of Adoption of New Accounting Standards. In February 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128 (FAS 128), "Earnings per Share," which the Company is required
to adopt on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options will be excluded. The Company has
studied the implications of FAS 128 and does not expect its adoption to have a
material impact on the Company's calculation of earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through a
combination of private placements of equity securities yielding $33.5 million, a
private placement of debt securities yielding $4.5 million, equipment lease
financing arrangements yielding $3.2 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 $43.1 million. As of September 30,
1997, the Company had $37.4 million in cash, cash equivalents and short-term
investments.
Net cash used in operating activities was $3.8 million and $2.5 million
for the three months ended September 30, 1997 and 1996, respectively. For such
periods, net cash used in operating activities resulted primarily from net
losses. Net cash provided by investing activities was $7.0 million for the three
months ended September 30, 1997 and net cash used in investing activities was
$17.2 million for the three months ended September 30, 1996. Net cash provided
by investing activities primarily resulted from maturities and sales of
short-term investments, offset in part by purchases of short-term investments.
The net cash used in investing activities for the three months ended September
30, 1996 was primarily attributable to the purchase of short-term investments
following the Company's initial public offering in June 1996, partially offset
by maturities and sales of short-term investments. Net cash used in financing
activities was $232,000 for the three months ended September 30, 1997 and net
cash provided by financing activities was $11,000 for the three months ended
September 30, 1996.
As of September 30, 1997, the Company had capital equipment of $6.4
million less accumulated depreciation and amortization of $3.3 million to
support its clinical, development, manufacturing and administrative activities.
The Company has financed approximately $3.2 million from capital lease
obligations through September 30, 1997. In September 1997, the Company secured
an additional equipment lease financing facility of $2.0 million, which is
available to the Company in two equal increments of $1.0 million in each of the
next two years. In connection with the origination of the $2.0 million lease
facility in September 1997, the Company issued a warrant to purchase 35,170
shares of its Common Stock to the lessor at an exercise price of $8.53 per
share. The Company expects to fully utilize the first increment of this lease
line and a portion of existing cash resources in connection with the purchase of
additional capital equipment over the next 12 months. 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 its current
12
<PAGE> 13
cash, cash equivalent and short-term investment 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 factors described in the previous paragraph and elsewhere 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.
FACTORS THAT MAY IMPACT FUTURE OPERATIONS
LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES
The Company was founded in 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. As of September 30, 1997, the Company had an accumulated deficit of
$48.0 million. The Company has generated only limited revenues from sales of its
products and expects its operating losses to continue through at least the end
of calendar 1999 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. The Company's results of
operations may fluctuate significantly from quarter to quarter or year to year
and will depend on numerous factors, including actions relating to regulatory
matters, progress of clinical trials, the extent to which the Company's products
gain market acceptance, the timing of scale-up of manufacturing abilities, the
timing of expansion of sales and marketing activities and competition.
CLINICAL TRIALS
The Ventricular Tachycardia Ablation System, Arrhythmia Mapping System
for diagnostic mapping of ventricular tachycardia and Arrhythmia Mapping System
for diagnostic mapping of the right atrium are in various 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 are still under development. There can be no
assurance that the
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Company will be successful in completing development of the atrial fibrillation
product and submitting the appropriate Investigational Device Exemption
supplement ("IDEs") or that the FDA will permit the Company to undertake
clinical trials of the atrial fibrillation product. Although the FDA granted
510(k) clearance for basic electrophysiology studies for the Company's
Arrhythmia Mapping System in August 1997, such product cannot be marketed with
the Company's mapping catheters unless and until such catheters receive FDA
marketing clearance or approval. Until such regulatory approval is obtained, the
Arrhythmia Mapping System may only be used with other manufacturer's catheters.
There can be no assurance that physicians will adopt the Arrhythmia Mapping
System for electrophysiology studies in lieu of a system incorporating mapping
equipment and catheters from a single manufacturer or at all. 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.
The Company is currently conducting a clinical trial of the Chilli
Cooled Ablation Catheter and the Models 8002 and 8004 Radiofrequency Generator
and Integrated Fluid Pump, the products that together form the Company's
Ventricular Tachycardia Ablation System. In May 1997, the Company completed an
IDE feasibility study 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 and has filed an IDE supplemental submission in July 1997 for the
Local Sector Mapping Basket, a variation of the Mercator Left Ventricular
Mapping Basket. The Company is currently conducting a clinical trial of the
Mercator Atrial 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 the right atrium. In April 1997, the Company completed
a feasibility study of the Nexus Linear Lesion Catheter and Model 8002
Radiofrequency Generator and Integrated Fluid Pump, the products that together
form the Company's Atrial Fibrillation Ablation System. In October 1997, an IDE
supplement was submitted for a second version of the Nexus Linear Lesion
Catheter for the treatment of atrial flutter.
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 are being conducted at a maximum of 15 clinical sites and will
involve 155 patients randomized using the Ventricular Tachycardia Ablation
System. Pursuant to the IDE, the FDA will evaluate the safety and efficacy of
the Ventricular Tachycardia Ablation System. The primary endpoint of the
clinical trial is clinical recurrence of ventricular tachycardia in patients
randomized to receive ablation treatment versus patients in the control group
receiving antiarrhythmic drugs. The required post-treatment follow-up prior to
submission of a PMA application will be 30 days for safety. However, the Company
is required to follow up with some patients for up to 24 months after the PMA
application filing. The Company anticipates that enrollment for the clinical
trial will be completed prior to calendar 1998. At the conclusion of the
clinical trial, 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 May 15, 1997, the FDA no longer required randomization, and all
patients enrolled have been able to receive ablation initially. This
modification to the protocol has resulted in more rapid enrollment into the
clinical trial. As of October 21, 1997, 153 patients had been enrolled in the
trial; 75 patients
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randomized to ablation, 46 patients non-randomized to ablation, and 32 patients
randomized to control of which 17 patients have subsequently received ablation
therapy due to VT recurrence. In addition, 18 patients have received ablation
therapy under a compassionate use protocol. An interim data analysis of acute
and long-term success was performed as of May 31, 1997, comparing patients
randomized to ablation to patients randomized to control. Acute success of
ablation therapy, defined as eradication of all mappable VT at the end of the
ablation procedure, was attained in 74% of patients. The incidence of major
adverse events associated with the procedure has been approximately 9%.
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 was conducted at three clinical
sites in the United States and Europe and involved a total of 13 patients. The
purpose of the clinical trial was 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. In addition, 15 patients have been
studied in Europe outside of the IDE in a similar protocol. There was no
thrombus formation on any mapping basket used in the 28 studies. Of the 28
patients evaluated, one patient developed asymptomatic aortic regurgitation, one
patient had a transient ischemic attack, and two patients developed pericardial
effusions associated with the procedure. In July 1997, the Company submitted an
IDE supplement to support commercialization of two types baskets; the Mercator
Left Ventricular Mapping Basket, the full chamber "global" basket evaluated in
the feasibility study, as well as a smaller, partial chamber high density local
sector basket. Conditional approval was granted to initiate enrollment of 30
patients at five sites for the global basket. The FDA requested a separate IDE
number for a study of the Sector basket. A new IDE will be submitted by the end
of October 1997 and it is anticipated that this study will begin in December
1997. This study will enable the use of both ventricular mapping baskets with
the Ventricular Tachycardia Ablation System simultaneously. Furthermore,
ventricular mapping should enable the treatment of high rate ventricular
tachycardia, which is more common than slow rate ventricular tachycardia which
is the only type amenable to ablation therapy using current techniques.
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
complex atrial tachyarrhythmias including atrial fibrillation. The clinical
trial is being conducted at eight clinical sites in the United States and one in
Europe. The purpose of this clinical trial is to demonstrate the equivalency of
the Mercator Atrial Mapping Basket and the Arrhythmia Mapping System to
commercially available mapping catheters. As of October 21, 1997, the Mercator
Atrial Mapping Basket was evaluated in 52 patients. There was no thrombus
formation on any mapping basket used in the 52 studies. The Company anticipates
submission of a 510(k) application for clearance during early 1998.
The Company has also evaluated the Mercator Atrial Mapping Basket outside of
the U.S. IDE at two European sites. As of October 21, 1997, the Mercator Atrial
Mapping Basket was safely deployed and fit properly in the right atrium in six
European patients. In addition, the Mercator Atrial Mapping Basket for the left
atrium was also tested in one of the patients. None of the patients in the U.S.
and Europe had complications as a result of the Mercator Atrial Mapping Basket
and Arrhythmia Mapping System.
Atrial Fibrillation Ablation System. The Company received FDA approval of an
IDE feasibility study to evaluate the safety of the Atrial Fibrillation Ablation
System in August 1996. The purpose of the IDE feasibility study for the Atrial
Fibrillation Ablation System was to assess the safety and performance in
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creating continuous linear lesions. The feasibility study was completed with 10
patients undergoing testing.
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 a majority of the patients undergoing ablation, linear lesions
were created in the right atrium either with the Nexus Linear Lesion Catheter
alone or with commercial ablation catheter supplementation. One patient
developed a pericardial effusion attributed to perforation by a commercial
diagnostic (non-ablation) catheter. No other complications occurred. The Company
also tested the Nexus Linear Lesion Catheter in two patients in Europe. As of
October 21, 1997, the Nexus Linear Lesion Catheter was used in a total of 12
patients.
The Nexus Linear Lesion Catheter was modified to improve the ability to
create linear lesions minimizing the need for commercial ablation catheter
supplementation. The modifications include the addition of active deflection to
facilitate tissue contact. It is anticipated that an IDE supplement will be
submitted in October 1997 to support commercialization of the Nexus Linear
Lesion Catheter in the right atrium to treat atrial flutter. Atrial flutter is
an abnormal heart rhythm now commonly treated using catheter ablation, requiring
the creation of a two to four centimeter linear lesion in the right atrium. The
study is expected to begin in December 1997 involving 102 patients at 12
investigative sites.
The Company anticipates the submission of an IDE for use of the modified
Nexus Linear Lesion Catheter in the left atrium for the treatment of atrial
fibrillation in November 1997.
NO EXISTING MARKET
The Company's Model 8100/8300 Arrhythmia Mapping System (the "Model
8100/8300") received 510(k) clearance from the FDA in August 1997 for basic
diagnostic electrophysiology studies. The Company has begun marketing such
system commercially in the United States. However, there can be no assurance
that such system will gain any significant degree of market acceptance among
physicians, patients, and health care payors. The Company believes that
physician's acceptance of procedures performed using the Company's Model
8100/8300 will be essential for market acceptance of such system. Even though
the clinical efficacy of such system has been established, electrophysiologists,
cardiologists, and other physicians may elect not to recommend the use of the
Model 8100/8300 for any number of reasons. The Company believes that, as with
any novel medical technology, there will be a significant learning process
involved for physicians to become proficient. Broad use of such system will
require training of electrophysiologists, and the time required to complete such
training could adversely affect market acceptance. Failure of such product to
achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations. Even if
the Model 8100/8300 achieves market acceptance, if the Company is unable to
manufacture sufficient quantities of such product to satisfy customer demand,
the Company's business, financial condition and results of operations would
materially adversely affected.
MARKETING AND DISTRIBUTION
The Company currently has only a limited sales and marketing
organization. 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. Although the Company received
marketing clearance for the Arrhythmia Mapping System in August 1997, the
Company has not to date established a direct sales force to market this product.
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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. 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. 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.
MANUFACTURING
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 for the Company's products 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 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 Quality
System 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 Quality System requirements in order
to produce products for sale in the United States and with ISO 9001/EN46001
standards in order to produce products for sale in Europe. The Company has
received ISO/EN46001 certification by its European Notified Body and anticipates
final certification for the Medical Device Directive Quality System requirements
by the end of October 1997. Any failure of the Company to comply with Quality
System or ISO 9001/EN46001
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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.
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 CDHS which is required before a license can be
issued. 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 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. 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. 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.
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
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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 cardiology and electrophysiology. Many 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
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products to be developed and to receive regulatory and, in some cases, third
party payor 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 Federal
Food, Drug, and Cosmetic Act of 1938, as amended (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.
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. Commercial distribution of a device for which
a 510(k) clearance is required can begin only after the FDA issues an order
finding the device to be "substantially equivalent" to a predicate device. 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.
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 three
months, and does not anticipate receiving a PMA for any such system until at
least one to two 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 or 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
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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.
International
The European Union ("EU") has promulgated rules which require that
medical products receive by June 12, 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. Quality Systems
certification is one of the CE mark requirements. The Company has been
recommended for Medical Device Directive Quality System certification by its
European Notified Body, one of the CE mark certification prerequisites for its
manufacturing facility in Sunnyvale, California. Final certification is expected
by the end of October 1997. 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.
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. Export sales of investigational devices that are subject to PMA or
IDE requirements and have not received FDA marketing approval are subject to FDA
export requirements. In accordance with the FDA Export Reform & Enforcement Act
of 1996, such devices may be exported to any country provided that the device
has marketing authorization in one of the countries identified in that Act. If
the device has no such marketing authorization and is intended for marketing
approval must be obtained from the FDA to export to any country. In order to
obtain export approval, the Company may be required to provide the FDA with
documentation from the medical device regulatory authority of the country in
which the study is to be conducted or the purchaser is located, stating that the
device has the approval of the country. In addition, the FDA must find that the
exportation of the device is not contrary to the public health and safety of the
country in order for the Company to obtain the permit. The Company is in the
process of obtaining the necessary approvals or initiating clinical trials in
the United Kingdom, Germany, France, Canada, Australia and Asia.
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.
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
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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 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.
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. 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
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
22
<PAGE> 23
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 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.
ISSUANCE OF PREFERRED STOCK COULD DELAY OR PREVENT CORPORATE TAKEOVER
The Board of Directors has the authority to issue up to 5,000,000 shares
of undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
the stockholders. To date, the Board of Directors has designated 30,000 shares
as Series A Participating Preferred Stock in connection with the Company's
Stockholder Rights Plan. The issuance of Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company or otherwise adversely affecting the rights of the
holders of Common Stock.
On April 22, 1997, pursuant to a Preferred Shares Rights Agreement (the
"Rights Agreement") between the Company and Norwest Bank Minnesota, N.A. (the
"Rights Agent"), the Company's Board of Directors declared a dividend of one
right (a "Right") to purchase 1/1000th of a share of the Company's Series A
Participating Preferred Stock ("Series A Preferred") for each outstanding share
of Common Stock of the Company. The dividend was payable on May 23, 1997 to
stockholders of record as of the close of business on April 30, 1997 (the
"Record Date"). Each Right entitles the registered holder to purchase from the
Company 1/1000th of a share of Series A Preferred at an exercise price of $125
(the "Purchase Price"), subject to adjustment. The Rights approved by the Board
are designed to protect and maximize the value of the outstanding equity
interests in the Company in the event of an unsolicited attempt by an acquirer
to take over the Company, in a manner or on terms not approved by the Board of
Directors. The Rights have been declared by the Board in order to deter coercive
tactics, including a gradual accumulation of shares in the open market of a 15%
or greater position to be followed by a merger or a partial or two-tier tender
offer that does not treat all stockholders equally. The Rights should not
interfere with any merger or business combination approved by the Board of
Directors. However, the Rights may have the effect of rendering more difficult
or discouraging an acquisition of the Company deemed undesirable by the Board of
Directors. The Rights may cause substantial dilution to a person or group that
attempts to acquire the Company on terms or in a manner not approved by the
Company's Board of Directors, except pursuant to an offer conditioned upon the
negation, purchase or redemption of the Rights.
23
<PAGE> 24
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of shares of Common Stock, like that of the common
stock of many medical products and high technology companies, has in the past
been, and is likely in the future to continue to be highly volatile. Factors
such as fluctuations in the Company's operating results, announcements of
technological innovations or new commercial products by the Company's or
competitors, government regulation, changes in the current structure of the
health care financing and payment systems, developments in or disputes regarding
patent or other proprietary rights, economic and other external factors and
general market conditions may have a significant effect on the market price of
the Common Stock. Moreover, the stock market has from time to time experienced
extreme price and volume fluctuations which have particularly affected the
market prices for medical products and high technology companies and which have
often been unrelated to the operating performance of such companies. These broad
market fluctuations, as well as general economic, political and market
conditions, may adversely affect the market price of the Company's Common Stock.
In the past, following periods of volatility in the market price of a company's
stock, securities class action litigation has occurred against the issuing
company. There can be no assurance that such litigation will not occur in the
future with respect to the Company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which could have
a material adverse effect on the Company's business, operating results and
financial condition. Any adverse determination in such litigation could also
subject the Company to significant liabilities.
ABSENCE OF DIVIDENDS
The Company has not paid any cash dividends since inception and does not
anticipate paying cash dividends in the foreseeable future.
24
<PAGE> 25
CARDIAC PATHWAYS CORPORATION
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities. Since June 30, 1997, the
Company has issued and sold (without payment of any selling commission to any
person) the following unregistered securities:
1. On September 26, 1997 the Company issued a warrant to purchase
35,170 shares of the Company's Common Stock to LINC Capital, Inc.
("LINC") in connection with the execution of Amendment No. 5 to the
Master Lease Agreement No. 5811 between the Company and LINC.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on Section 4(2) of the Securities Act, or Regulation D
promulgated thereunder, as transactions by an issuer not involving a public
offering. The recipients of securities in each such transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationship
with the Company or otherwise, to information about the Registrant.
Use of Proceeds. With respect to the requirements of Item 701(f) of
Regulation S-K regarding the reporting of use of proceeds, pursuant to the
information required to be reported by Item 701(f)(4)(viii), the Company used
net proceeds in the amounts noted for the stated purposes since its March 12,
1997 report on Form SR: purchase and installation of machinery and equipment -
$562,062; repayment of indebtedness - $239,088; and working capital -
$3,628,298.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 1997 Annual Meeting of Stockholders on October 14,
1997, the stockholders approved the following actions:
A. Election of Class II Directors.
Dr. Thomas J. Fogerty: For: 7,325,632 Withheld: 469,748
Dr. Joseph P. Ilvento: For: 7,777,183 Withheld: 18,197
B. Amendment of 1996 Employee Stock Option Plan to increase the
number of shares available for issuance thereunder by 70,000
shares.
For: 6,768,817 Against: 1,018,109 Abstain: 8,454
25
<PAGE> 26
C. Amendment of 1996 Director Option Plan to increase the number of
shares available for issuance thereunder by 20,000 shares.
For: 6,977,749 Against: 809,377 Abstain: 8,254
D. Amendment of 1991 Stock Plan to (i) approve the amendment of the
1991 Stock Plan to increase the number of shares available for
issuance thereunder by 380,000 shares and (ii) to approve the
material terms of the Stock Plan, including but not limited to,
share limitations for purposes of Section 162(m) of the Internal
Revenue Code of 1986, as amended.
For: 5,304,061 Against: 2,462,638 Abstain: 28,681
E. Ratification of the appointment of Ernst & Young LLP as
independent auditors for the Company for the fiscal year ending
June 30, 1998.
For: 7,763,460 Against: 24,410 Abstain: 7,510
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying Exhibit Index are
filed as a part hereof.
(b) No reports on Form 8-K were filed by the Registrant during
the three months ended September 30, 1997.
26
<PAGE> 27
CARDIAC PATHWAYS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: OCTOBER 23, 1997 CARDIAC PATHWAYS CORPORATION
/S/ WILLIAM N. STARLING
-------------------------------------
WILLIAM N. STARLING
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/S/ DAVID W. GRYSKA
-------------------------------------
DAVID W. GRYSKA
VICE PRESIDENT OF FINANCE AND CHIEF
FINANCIAL OFFICER
27
<PAGE> 28
CARDIAC PATHWAYS CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION PAGE NO.
- ---------------- ---------------------------------------------------------- ----------
<S> <C> <C> <C>
10.2 1991 Stock Plan, as amended
10.12.1 Amendment No. 5 to Master Lease Agreement No. 5811 between
the Registrant and LINC Capital, Inc. dated September 26,
1997
27.1 Financial Data Schedule
</TABLE>
28
<PAGE> 1
CARDIAC PATHWAYS CORPORATION
1991 STOCK PLAN
(AS AMENDED APRIL 1996)
(AS FURTHER AMENDED OCTOBER 1997)
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are to attract
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or nonstatutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. CERTAIN DEFINITIONS. As used herein, the following definitions shall
apply:
(A) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(B) "BOARD" means the Board of Directors of the Company.
(C) "CODE" means the Internal Revenue Code of 1986, as amended.
(D) "COMMITTEE" means the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan.
(E) "COMMON STOCK" means the Common Stock of the company.
(F) "COMPANY" means Cardiac Pathways Corporation, a California
corporation.
(G) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services. The term Consultant shall not include directors
who are not compensated for their services or are paid only a director's fee by
the Company.
(H) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means that
the employment or consulting relationship with the Company, any Parent, or
Subsidiary, is not interrupted or terminated. Continuous Status as an Employee
or Consultant shall not be considered interrupted in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor. A
leave of absence approved by the Company shall include sick leave, military
leave, or any other
<PAGE> 2
personal leave approved by an authorized representative of the Company. For
purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
(I) "EMPLOYEE" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(J) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(K) "FAIR MARKET VALUE" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(L) "INCENTIVE STOCK OPTION" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
(M) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(N) "OPTION" means a stock option granted pursuant to the Plan.
(O) "OPTIONED STOCK" means the Common Stock subject to an Option.
(P) "OPTIONEE" means an Employee or Consultant who receives an
Option.
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<PAGE> 3
(Q) "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(R) "PLAN" means this 1991 Stock Plan.
(S) "RESTRICTED STOCK" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 11 below.
(T) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(U) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 14 of
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 2,267,030 shares of Common Stock. The shares may be
authorized, but unissued, or re-acquired Common Stock.
If an Option or Stock Purchase Right should expire or become
unexercisable for any reason without having been exercised in full, the
unpurchased Shares which were subject thereto shall, unless the Plan shall have
been terminated, become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(A) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule
16b-3, the Plan may be administered by different bodies with respect to
directors, officers who are not directors, and Employees who are neither
directors nor officers.
(ii) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS
SUBJECT TO SECTION 16(b). With respect to Option or Stock Purchase Right grants
made to Employees who are also officers or directors subject to Section 16 of
the Exchange Act, the Plan shall be administered by (A) the Board, if the Board
may administer the Plan in a manner complying with the rules under Rule 16b-3
relating to the disinterested administration of employee benefit plans under
which Section 16(b) exempt discretionary grants and awards of equity securities
are to be made, or (B) a Committee designated by the Board to administer the
Plan, which Committee shall be constituted to comply with the rules under Rule
16b-3 relating to the disinterested administration of employee benefit plans
under which Section 16(b) exempt discretionary grants and awards of equity
securities are to be made. Once appointed, such Committee shall continue to
serve in its designated capacity until otherwise directed by the Board. From
time to time the Board may increase the size of the Committee and appoint
additional members, remove members (with or without cause) and substitute new
members, fill vacancies (however caused), and remove all members of the
Committee and
-3-
<PAGE> 4
thereafter directly administer the Plan, all to the extent permitted by the
rules under Rule 16b-3 relating to the disinterested administration of employee
benefit plans under which Section 16(b) exempt discretionary grants and awards
of equity securities are to be made.
(iii) ADMINISTRATION WITH RESPECT TO OTHER PERSONS. With
respect to Option or Stock Purchase Right grants made to Employees or
Consultants who are neither directors nor officers of the Company, the Plan
shall be administered by (A) the Board or (B) a Committee designated by the
Board, which committee shall be constituted to satisfy the legal requirements
relating to the administration of incentive stock plans of California corporate
and securities laws and the Code (the "Applicable Laws"). Once appointed, such
Committee shall serve in its designated capacity until otherwise directed by the
Board. The Board may increase the size of the Committee and appoint additional
members, remove members (with or without cause) and substitute new members, fill
vacancies (however caused), and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
Applicable Laws.
(B) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan
and in the case of a Committee, the specific duties delegated by the Board to
such Committee, the Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom
Options and Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and
Stock Purchase Rights or any combination thereof, are granted hereunder;
(iv) to determine the number of shares of Common Stock to
be covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder
(including, but not limited to, the share price and any restriction or
limitation or waiver of forfeiture restrictions regarding any Option or other
award and/or the shares of Common Stock relating thereto, based in each case on
such factors as the Administrator shall determine, in its sole discretion;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under subsection 10(f) instead of Common Stock;
(viii) to determine whether, to what extent and under what
circumstances Common Stock and other amounts payable with respect to an award
under this Plan shall be deferred
-4-
<PAGE> 5
either automatically or at the election of the participant (including providing
for and determining the amount, if any, of any deemed earnings on any deferred
amount during any deferral period);
(ix) to reduce the exercise price of any Option to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted; provided, however, that the Administrator must seek the prior consent
of the Board of Directors and stockholders of the Company to effect such action;
and
(x) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights.
(C) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options.
5. ELIGIBILITY. Nonstatutory Stock Options and Stock Purchase Rights may
be granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee or Consultant who has been granted an Option or
Stock Purchase Right may, if he is otherwise eligible, be granted additional
Options or Stock Purchase Rights.
6. LIMITATIONS.
(a) Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted. If
an Option is granted hereunder that is part Incentive Stock Option and part
Nonstatutory Stock Option due to becoming first exercisable in any calendar year
in excess of $100,000, the Incentive Stock Option portion of such Option shall
become exercisable first in such calendar year, and the Nonstatutory Stock
Option portion shall commence becoming exercisable once the $100,000 limit has
been reached.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
employment or consulting relationship with the Company, nor shall they interfere
in any way with the Optionee's right or the Company's right to terminate such
employment or consulting relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options
and Stock Purchase Rights to Employees:
-5-
<PAGE> 6
(i) No Employee shall be granted, in any fiscal year of
the Company, Options to purchase more than 200,000 Shares.
(ii) In connection with his or her initial employment, an
Employee may be granted Options to purchase up to an additional 100,000 Shares
which shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 14.
(iv) If an Option or Stock Purchase Right is cancelled in
the same fiscal year of the Company in which it was granted (other than in
connection with a transaction described in Section 14), the cancelled Option or
Stock Purchase Right will be counted against the limits set forth in subsections
(i) and (ii) above. For this purpose, if the exercise price of an Option or
Stock Purchase Right is reduced, the transaction will be treated as a
cancellation of the Option or Stock Purchase Right and the grant of a new Option
or Stock Purchase Right.
7. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in Section 20 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 16 of the Plan.
8. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
However, in the case of an Option granted to an Optionee who, at the time the
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the term of the Option shall be five (5) years from the date of grant thereof or
such shorter term as may be provided in the Option Agreement.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(A) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
(i) In the case of an INCENTIVE STOCK OPTION
(A) granted to an Employee who, at the time of the
grant of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
-6-
<PAGE> 7
(B) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(ii) In the case of a NONSTATUTORY STOCK OPTION, the per
Share exercise price shall be determined by the Administrator.
(B) FORM OF CONSIDERATION. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price;
(vi) a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment;
or
(viii) such other consideration and method of payment for
the issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTION.
(A) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan.
An Option may not be exercised for a fraction of a Share.
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<PAGE> 8
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option, and full payment for
the Shares with respect to which the Option is exercised has been received by
the Company. Full payment may, as authorized by the Administrator, consist of
any consideration and method of payment allowable under Section 9(b) of the
Plan. Until the issuance (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 14 of the Plan.
Exercise of an Option in any manner shall result in a
decrease in the number of Shares which thereafter may be available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.
(B) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP. Upon
termination of an Optionee's Continuous Status as an Employee, other than upon
the Optionee's death or Disability, the Optionee may exercise his or her Option
within such period of time as is specified in the option agreement to the extent
that he or she is entitled to exercise it on the date of termination (but in no
event later than the expiration of the term of such Option). In the absence of a
specified time in the option agreement, the Option shall remain exercisable for
three (3) months following the Optionee's termination. In the case of an
Incentive Stock Option, such period of time for exercise shall not exceed three
(3) months from the date of termination. If, on the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified by the Administrator, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
Notwithstanding the above, in the event of an Optionee's change
in status from Consultant to Employee or Employee to Consultant, the Optionee's
Continuous Status as an Employee or Consultant shall not automatically terminate
solely as a result of such change in status. In such event, an Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option
beginning three months and one day following such change of status.
(C) DISABILITY OF OPTIONEE. Upon termination of an Optionee's
Continuous Status as an Employee or Consultant as a result of the Optionee's
total and permanent disability (as defined in Section 22(e)(3) of the Code), the
Optionee may exercise his or her Option at any time within twelve (12) months
from the date of termination, but only to the extent that the Optionee is
entitled to exercise it on the date of termination (and in no event later than
the expiration of the term of the Option). If, on the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan. If,
-8-
<PAGE> 9
after termination, the Optionee does not exercise his or her Option within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(D) DEATH OF OPTIONEE. Upon the death of an Optionee, the Option
may be exercised at any time within twelve (12) months following the date of
death (but in no event later than the expiration of the term of such Option), by
the Optionee's estate or by a person who acquires the right to exercise the
Option by bequest or inheritance, but only to the extent that the Optionee would
have been entitled to exercise the Option on the date of death. If, at the time
of death, the Optionee is not entitled to exercise his or her entire Option, the
Shares covered by the unexercisable portion of the Option shall immediately
revert to the Plan. If the Optionee's estate or the person who acquires the
right to exercise the Option by bequest or inheritance does not exercise the
Option within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(E) RULE 16B-3. Options granted to persons subject to Section 16
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
(F) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. STOCK PURCHASE RIGHTS.
(A) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing of the terms, conditions and restrictions related
to the offer, including the number of Shares that such person shall be entitled
to purchase, the price to be paid (which price shall not be less than 50% of the
Fair Market Value of the Shares as of the date of the offer), and the time
within which such person must accept such offer, which shall in no event exceed
thirty (30) days from the date upon which the Administrator made the
determination to grant the Stock Purchase Right. The offer shall be accepted by
execution of a Restricted Stock purchase agreement in the form determined by the
Administrator. Shares purchased pursuant to the grant of a Stock Purchase Right
shall be referred to herein as "Restricted Stock."
(B) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the Committee
may determine.
-9-
<PAGE> 10
(C) RULE 16B-3. Stock Purchase Rights granted to persons subject
to Section 16 of the Exchange Act, and Shares purchased by such persons in
connection with Stock Purchase Rights, shall be subject to any restrictions
applicable thereto in compliance with Rule 16b-3. Such persons may only purchase
Shares pursuant to the grant of a Stock Purchase Right, and may only sell Shares
purchased pursuant to the grant of a Stock Purchase Right, during such time or
times as are permitted by Rule 16b-3.
(D) OTHER PROVISIONS. The Restricted Stock purchase agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(E) RIGHTS AS A STOCKHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 14
of the Plan.
12. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. An Option
or Stock Purchase Right may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
13. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by electing to
have the Company withhold from the Shares to be issued upon exercise of the
Option, or the Shares to be issued in connection with the Stock Purchase Right,
if any, that number of Shares having a Fair Market Value equal to the amount
required to be withheld. The Fair Market Value of the Shares to be withheld
shall be determined on the date that the amount of tax to be withheld is to be
determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(A) the election must be made on or prior to the applicable
Tax Date;
(B) once made, the election shall be irrevocable as to the
particular Shares of the Option or Right as to which the election is made;
(C) all elections shall be subject to the consent or
disapproval of the Administrator;
-10-
<PAGE> 11
(D) if the Optionee is subject to Section 16 of the Exchange Act,
the election must comply with the applicable provisions of Rule 16b-3 and shall
be subject to such additional conditions or restrictions as may be required
thereunder to qualify for the maximum exemption from Section 16 of the Exchange
Act with respect to Plan transactions.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option or Stock Purchase Right is
exercised, but such Optionee shall be unconditionally obligated to tender back
to the Company the proper number of Shares on the Tax Date.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
(A) CHANGES IN CAPITALIZATION. Subject to any required action by
the stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(B) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
-11-
<PAGE> 12
(C) MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall have the right to exercise the Option
or Stock Purchase Right as to all of the Optioned Stock, including Shares as to
which it would not otherwise be exercisable. If an Option or Stock Purchase
Right is exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee that the
Option or Stock Purchase Right shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the Option or Stock Purchase
Right shall terminate upon the expiration of such period. For the purposes of
this paragraph, the Option or Stock Purchase Right shall be considered assumed
if, following the merger or sale of assets, the option or right confers the
right to purchase or receive, for each Share of Optioned Stock subject to the
Option or Stock Purchase Right immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets was not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
15. TIME OF GRANTING OPTIONS. The date of grant of an Option or Stock
Purchase Right shall, for all purposes, be the date on which the Administrator
makes the determination granting such Option or Stock Purchase Right, or such
other date as is determined by the Board. Notice of the determination shall be
given to each Employee or Consultant to whom an Option or Stock Purchase Right
is so granted within a reasonable time after the date of such grant.
16. AMENDMENT AND TERMINATION OF THE PLAN. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made which would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 under
the Exchange Act or with Section 422 of the Code (or any other applicable law or
regulation, including the requirements of the NASD of an established stock
exchange), the Company shall obtain stockholder approval of any Plan amendment
in such a manner and to such a degree as required.
17. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations
-12-
<PAGE> 13
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
19. AGREEMENTS. Options and Stock Purchase Rights shall be evidenced by
written agreements in such form as the Board shall approve from time to time.
20. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the degree and manner required under applicable state and federal law. In
addition, should the Administrator determine that it is appropriate to reduce
the exercise price of any Option pursuant to Section 4(b)(ix) of the Plan, the
Administrator shall seek the prior consent of the stockholders to effect such
action.
-13-
<PAGE> 1
ADDENDUM NO. 005 TO
MASTER LEASE NO. 5811
DATED AS OF SEPTEMBER 12, 1997
BETWEEN
LINC CAPITAL, INC. (SUCCESSOR IN INTEREST TO)
LINC CAPITAL MANAGEMENT SERVICES, LTD.
AS LESSOR AND
CARDIAC PATHWAYS CORPORATION, AS LESSEE
This Addendum No. 005 (this "Addendum") is attached to and forms part of that
certain Master Lease Agreement No. 5811 ("Lease") dated as of December 1, 1993
between LINC Capital Management Services, Ltd., ("Lessor") and Cardiac Pathways
Corporation ("Lessee"). Terms defined in the Lease shall have the same meanings
herein unless otherwise expressly set forth herein or otherwise required by the
context hereof.
Lessor hereby acknowledges and agrees that Lessor has assigned all of its right,
title and interest in the Lease and related Equipment to LINC CAPITAL, INC.
formerly known as SCIENTIFIC LEASING INC. Lessee hereby acknowledges that Lessor
has assigned all of its right, title and interest in the Lease and related
Equipment to LINC CAPITAL, INC. formerly known as SCIENTIFIC LEASING INC. Unless
otherwise expressly provided herein, all references to the "Lessor" in the Lease
and any Addendum, any Equipment Schedule or any other document or instrument
(other than any Warrants issued to any third-parties in connection with the
Lease) shall be deemed a reference to LINC CAPITAL, INC.
For good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Lessor and the Lessee hereby agree as follows:
A. The following terms and conditions shall be added to the terms of the Lease
and are hereby incorporated therein by reference with respect to all Equipment
Schedules entered into between Lessor and Lessee, beginning with Equipment
Schedule Number 012 and commencing as of August 15, 1997 and ending July 31,
1999 (the "Lease Line Period").
26. LEASING OF EQUIPMENT. Section 26 of the Lease is hereby amended by adding
the following provisions thereto:
a. Lease Line. Subject to the terms and conditions herein set forth and
in the applicable Equipment Schedule, and provided no event of default under the
Lease shall have occurred and be then continuing, Lessor agrees to purchase and
lease to Lessee, from time to time, the "Equipment" (as defined below). Unless
otherwise expressly agreed by Lessor, the aggregate "Cost" (as defined below) of
Equipment purchased by Lessor pursuant to this Section 26.a. after August 15,
1997 and before July 31, 1998 (the "97/98 Period") shall in no event exceed
$1,000,000 and the aggregate "Cost" of Equipment purchased by Lessor pursuant to
this Section 26.a. after July 31, 1998 and before July 31, 1999 (the "98/99
Period") shall in no event exceed $2,000,000 less the Cost of Equipment
purchased by Lessor during the 97/98 Period.
During the 97/98 Period and the 98/99 Period, lessee shall provide
Lessor with its financial statements on a quarterly basis in a format acceptable
to Lessor including Lessee's Consolidated Statements of Cash Flows. Lessor shall
have no obligation to purchase Equipment for lease to Lessee upon an occurrence
of an Event of Default under the Lease of a material adverse change in the
financial performance of Lessee compared to the financial projections provided
by independent analysts on a quarterly basis during the Lease Line Period.
-1-
<PAGE> 2
b. Equipment.
(1) The Equipment purchased by Lessor during the Lease Line
Period shall consist of computer equipment, furniture, fixtures, and general
office equipment. All Equipment shall be located within the United States. The
purchase price payable by Lessor for such Equipment advanced shall be 100% of
Equipment Cost (excluding applicable sales, use and property taxes, freight,
installation, labor, assembly and similar charges).
(2) All Equipment shall be tangible personal property eligible
for MACRS depreciation under the Internal Revenue Code of 1986, as amended. The
depreciation benefits will be for the account of Lessor.
(3) Each item of Equipment, its vendor and all purchase orders,
invoices and related documents will be subject to review and approval by Lessor
prior to funding any Takedown. The minimum Cost for an individual item of
Equipment shall not be less than $1000.00.
(4) Notwithstanding the provisions of subsection (1) above, the
"Cost" of for any Equipment placed in service by Lessee more than ninety (90)
days prior to purchase by LINC ("Used Equipment") shall be equal to the lesser
of either (a) 100% of the Net Book Value of the Equipment or (b) the then fair
market value for each item or commercial unit of the type of Used Equipment
acceptable to LINC (the "SLB Amount") but in either event not to exceed $500,000
for Used Equipment purchased by LINC in connection with Equipment Schedule No.
012. The SLB Amount shall be funded by LINC immediately upon execution of this
addendum and all related documents required by Lessor including Equipment
Schedule No. 012 to the Lease. Title to all Used Equipment described in
Equipment Schedule No. 012 shall pass to Lessor upon payment of the SLB Amount.
(5) The Net Book Value shall mean the depreciated value of the
Equipment (determined in accordance with generally accepted accounting
principles according to the books and records of Lessee) and shall be supported
by the original manufacturer's net invoice amount actually paid by Lessee
(excluding applicable sales or use taxes, freight, installation and other
similar charges) as evidenced by canceled checks, copies of which are to be
delivered to Lessor prior to any purchase of Equipment by LINC.
c. Minimum Lease Term. The Minimum Lease Term for Equipment purchased
during the Lease Line Period shall be for 42 months ("Minimum Lease Term") and
commence on the first day of the calendar quarter following Lessee's acceptance
of all equipment.
d. Monthly Lease Rate. The Monthly Lease Rate under each Equipment
Schedule entered into during the Lease Line Period shall be 2.8083% for the
monthly rent payments only ("Lease Rate"). The Monthly Lease Rate is payable
monthly in advance. In addition, the estimated rental payment for the last
month's rent on the entire Lease Line based upon Monthly Lease Rate shall be due
on the commencement of the Minimum Lease Term of Equipment Schedule No. 012.
e. Rate Adjustments: The Lease Rate and the Monthly Lease Rate Factor
will be indexed to the yield for US Treasury Notes maturing closest to the date
42 months from the commencement date of each Equipment Schedule (the "Index
Instrument") currently 6.29% for the 6.25% Treasury Notes maturing January, 2002
as reported in the Wall Street Journal dated June 26, 1997. The Monthly Lease
Rate Factor shall be adjusted to provide for any increase or decrease in the
yield of the Index Instrument on the commencement date of Equipment Schedule No.
012 and on the Commencement Date of each Equipment Schedule entered into during
the Lease Line Period. Upon commencement of each Equipment Schedule, the Monthly
Lease Rate Factor shall be fixed for the Initial Lease Term of each such
Equipment Schedule.
-2-
<PAGE> 3
f. Takedowns. Commencement of each Equipment Schedule entered into
during the Lease Line Period will occur on the first day of the calendar quarter
following Lessee's acceptance of all Equipment listed on such Equipment
Schedule. Equipment shall be funded on Equipment Schedule of at least $100,000
each. Equipment Schedule No. 012 shall takedown on or before October 5, 1997
with Equipment having an aggregate Cost of not less than $100,000 and all
Equipment Schedules beginning with Equipment Schedule No. 013 shall takedown
prior to July 31, 1999. Equipment Schedule No. 012 shall include all Used
Equipment accepted by LINC as a separate Equipment Schedule for the SLB Amount.
The SLB Amount shall be no more than $500,000.00.
g. End of Term. At the end of the Minimum Lease Term of Equipment
Schedule No. 012, Lessee shall have the option to either: (1) renew the
Equipment Schedule for a period of 12 months with respect to all of the
Equipment on the terms set forth in the applicable Equipment Schedule at the
fair market rental thereof; or (2) purchase all of the Equipment at the fair
market value thereof.
Fair Rental Value shall be determined on the basis of and shall be equal in
amount to the value which would obtain in an arm's-length transaction between an
informed and willing lessee-user (other than a used equipment dealer) and an
informed and willing lessor under no compulsion to sell or lease, on the
assumptions that such Equipment: (a) is free and clear of all liens and
encumbrances; and (b) is in the condition required upon the return of the
Equipment under Sections 3 and 5 of this Lease. In such determination, costs of
removal from the location of current use shall not be a deduction from such
value. Notwithstanding anything contained herein to the contrary, Fair Rental
Value shall not exceed the Monthly Lease Rate applicable to the Minimum Lease
Term of each Equipment Schedule. Fair market value shall be determined by an
independent appraisal firm selected by Lessor and reasonably acceptable to
Lessee. The appraised value of the Equipment shall be on an "in-place, in-use"
basis with reference to an end-user in a business which is comparable to the
business of Lessee. Lessee shall pay the appraisal.
h. Warrant and Registration Rights. In consideration of the willingness
of Lessor to enter into this Addendum and each Equipment Schedule to be entered
into during the Lease Line Period, Lessee shall issue and deliver to Lessor a
warrant to purchase up to $300,000 of shares of duly registered Common Stock of
Lessee at an exercise price equal to the average final closing price per share
at which such Common Stock of Lessee has been trading at during the five trading
day period prior to the date of execution and delivery of this Addendum by
Lessee. The warrants shall be issued and delivered to Lessor upon execution of
the lease documents and shall be exercisable at any time within ten (10) years
from the date of the final acceptance of the Equipment during the lease line
period. The warrants shall be issued and delivered to Lessor upon execution of
the lease documents.
i. Earnest Money Deposit. Lessor acknowledges receipt of $10,000 (the
"Earnest Money Deposit") from Lessee. The Earnest Money Deposit will be applied
first to legal and due diligence expenses, then to on-site documentation
preparation costs, and then to the first lease rental payment. Reimbursement for
legal and due diligence costs shall not exceed $2,000.00 provided Lessor's
standard lease documents and the form of the previous warrant documents issued
by Lessee to Lessor are utilized. If Lessee and Lessor do not execute final
documentation acceptable to Lessor or if Lessee elects not to proceed with
transaction contemplated herein, then the deposit amount will be retained by
Lessor.
B. Except as set forth in this Addendum all other terms and conditions set
forth in the Lease shall apply to all purchases of Equipment made
hereunder.
-3-
<PAGE> 4
IN WITNESS WHEREOF, this Addendum has been executed this 26th day of September,
1997.
CARDIAC PATHWAYS CORPORATION
(Lessee)
By: /s/ David W. Gryska
--------------------------------
Title: Chief Financial Officer
--------------------------------
LINC CAPITAL MANAGEMENT SERVICES,
LTD. (Lessor)
By: /s/ Steve E. Byrnes
--------------------------------
Title: Vice President
--------------------------------
LINC CAPITAL, INC. successor in
interest to LINC CAPITAL MANAGEMENT
SERVICES, LTD. (Lessor)
By: /s/ Steve E. Byrnes
--------------------------------
Title: Vice President
--------------------------------
-4-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,111
<SECURITIES> 29,280
<RECEIVABLES> 303
<ALLOWANCES> 17
<INVENTORY> 413
<CURRENT-ASSETS> 38,887
<PP&E> 6,403
<DEPRECIATION> 3,324
<TOTAL-ASSETS> 42,317
<CURRENT-LIABILITIES> 3,149
<BONDS> 6,115
0
0
<COMMON> 10
<OTHER-SE> 30,100
<TOTAL-LIABILITY-AND-EQUITY> 42,317
<SALES> 562
<TOTAL-REVENUES> 562
<CGS> 650
<TOTAL-COSTS> 650
<OTHER-EXPENSES> 3,497
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> 187
<INCOME-PRETAX> (4,067)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,067)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,067)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
