<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, 1998.
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 November 6, 1998 there were 9,869,983 shares of the Registrant's Common
Stock outstanding.
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CARDIAC PATHWAYS CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements and Notes (Unaudited)
Consolidated Balance Sheets as of September 30, 1998 and
June 30, 1998............................................... 3
Consolidated Statements of Operations for the three
months ended September 30, 1998 and 1997.................... 4
Consolidated Statements of Cash Flows for the three
months ended September 30, 1998 and 1997.................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk................................................. 27
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................... 28
Item 6. Exhibits and Reports on Form 8-K............................ 28
SIGNATURES................................................................... 29
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998 (1)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,196,530 $ 7,268,877
Short-term investments 14,894,614 17,248,500
Accounts receivable, net of allowance for doubtful accounts
of $16,500 at September 30, 1998 and June 30, 1998 874,827 523,455
Inventories 800,613 668,042
Prepaid expenses 401,519 317,549
Other current assets 351,085 526,193
------------ ------------
Total current assets 21,519,188 26,552,616
Property and equipment, net 4,130,997 3,632,488
Notes receivable from related parties 256,239 260,477
Deposits and other assets 424,809 488,996
------------ ------------
$ 26,331,233 $ 30,934,577
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 996,276 $ 1,079,772
Accrued compensation and related benefits 655,434 601,307
Accrued clinical expenses 1,058,342 1,144,556
Other accrued expenses 607,117 654,670
Current obligations under capital leases 543,145 554,806
Current portion of long-term debt 666,667 166,667
------------ ------------
Total current liabilities 4,526,981 4,201,778
Long-term obligations under capital leases 466,428 483,586
Deferred royalty income 2,855,862 2,930,862
Long-term debt, less current portion 5,333,333 5,833,333
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized and none
issued and outstanding at September 30, 1998 and June 30, 1998 -- --
Common stock, $.001 par value; 30,000,000 shares authorized; 9,869,983
shares issued and outstanding at September 30, 1998 and 9,795,974
at June 30, 1998 9,870 9,796
Additional paid-in capital 79,882,699 79,783,779
Receivables from stockholders (385,000) (385,000)
Accumulated deficit (66,040,550) (61,417,629)
Deferred compensation (318,390) (505,928)
------------ ------------
Total stockholders' equity 13,148,629 17,485,018
------------ ------------
$ 26,331,233 $ 30,934,577
============ ============
</TABLE>
(1) Derived from the Company's audited consolidated balance sheet as of June 30,
1998.
See notes to consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 1,137,406 $ 561,787
Cost of goods sold 1,069,440 649,926
----------- -----------
Gross margin (deficit) 67,966 (88,139)
Operating expenses:
Research and development 3,419,727 3,496,614
Selling, general and administrative 1,402,337 863,995
----------- -----------
Total operating expenses 4,822,064 4,360,609
----------- -----------
Loss from operations (4,754,098) (4,448,748)
Other income (expense):
Interest income 293,492 557,441
Interest expense (174,430) (187,338)
Other, net 12,115 11,894
----------- -----------
Total other income (expense) 131,177 381,997
----------- -----------
Net loss ($4,622,921) ($4,066,751)
=========== ===========
Net loss per share - basic and diluted $ (0.47) $ (0.43)
=========== ===========
Shares used in computing
net loss per share - basic and diluted 9,845,000 9,528,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,622,921) $ (4,066,751)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 320,220 315,237
Amortization of deferred royalty income (75,000) (7,167)
Amortization of deferred compensation 53,132 66,888
Issuance of common stock warrants -- 60,351
Issuance of nonqualified stock options for services -- 46,963
Changes in operating assets and liabilities:
Accounts receivable (351,372) (117,559)
Inventories (132,571) 6,846
Prepaid expenses (83,970) 58,482
Other current assets 175,108 87,155
Accounts payable (83,496) (368,702)
Accrued compensation and related benefits 54,127 147,662
Accrued clinical expenses (86,214) 67,449
Other accrued expenses (47,553) (150,734)
Interest payable -- 97,750
------------ ------------
Net cash used in operating activities (4,880,510) (3,756,130)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (4,596,114) (8,160,108)
Maturities and sales of short-term investments 6,950,000 15,355,200
Purchases of property and equipment, net (695,856) (253,726)
Decrease in notes receivable 4,238 76,786
(Increase) decrease in deposits and other assets 64,187 (10,176)
------------ ------------
Net cash provided by (used in) investing activities 1,726,455 7,007,976
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations (151,692) (241,972)
Proceeds from issuance of common stock 233,400 9,872
------------ ------------
Net cash provided by (used in) financing activities 81,708 (232,100)
------------ ------------
Net increase (decrease) in cash and cash equivalents (3,072,347) 3,019,746
Cash and cash equivalents at beginning of period 7,268,877 5,091,426
------------ ------------
Cash and cash equivalents at end of period $ 4,196,530 $ 8,111,172
============ ============
</TABLE>
See notes to consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(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,
1998 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 1999. 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, 1998.
2. SHORT-TERM INVESTMENTS
At September 30, 1998 and June 30, 1998, 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, 1998
and June 30, 1998, 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.
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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 1998 1998
----------- -----------
<S> <C> <C>
Held-to-maturity:
U.S. government agency $ 1,998,802 $ 2,996,886
U.S. corporate obligations 11,295,576 10,751,614
Available-for-sale:
Auction rate preferred stock 3,100,000 3,500,000
----------- -----------
16,394,378 17,248,500
Amounts classified as cash equivalents 1,499,764 --
----------- -----------
Amounts included in short-term investments $14,894,614 $17,248,500
=========== ===========
</TABLE>
There were no realized gains or losses for the three-month periods
ending September 30, 1998 and 1997. The cost of securities sold is based on the
specific identification method. Held-to-maturity securities at September 30,
1998 mature at various dates through October 1999.
3. CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
-------- --------
<S> <C> <C>
Inventories:
Raw materials $511,018 $432,867
Work-in-process 159,206 123,052
Finished goods 130,389 112,123
-------- --------
$800,613 $668,042
======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
---------- ----------
<S> <C> <C>
Property and equipment:
Equipment $6,028,501 $5,626,967
Leasehold improvements 387,361 348,610
Equipment-in-process 1,898,186 1,523,411
---------- ----------
8,314,048 7,498,988
Less accumulated depreciation and
amortization 4,183,051 3,866,500
---------- ----------
$4,130,997 $3,632,488
========== ==========
</TABLE>
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4. STOCK PLANS
In August 1998, the Board of Directors of the Company approved the
termination of the open offering periods for the 1996 Employee Stock Purchase
Plan effective as of October 31, 1998 and the termination of any future offering
periods under the 1996 Employee Stock Purchase Plan. In August 1998, the
Company's Board of Directors approved the adoption of the Cardiac Pathways
Corporation 1998 Employee Stock Purchase Plan and the initial reservation of
100,000 shares of Common Stock under the Plan. The 1998 Employee Stock Purchase
Plan provides for an annual increase, commencing as of July 1, 1999, in the
number of Common Stock shares reserved for issuance equal to the lesser of
200,000 shares or 1.5% of the Company's outstanding Common Stock. The adoption
of the 1998 Employee Stock Purchase Plan is subject to stockholder approval.
In August 1998, the Board of Directors of the Company approved the
adoption of the Cardiac Pathways Corporation 1998 Nonstatutory Stock Option Plan
under which 400,000 shares of Common Stock were reserved for issuance.
In October 1998, the Board of Directors of the Company approved the
amendment of the 1991 Stock Plan and 1996 Director Option Plan to increase the
number of shares reserved for issuance by 300,000 and 20,000 shares,
respectively.
5. RECENT PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 (FAS 130), "Reporting Comprehensive Income" which requires the
reporting and presentation of comprehensive income and its components in the
financial statements. Comprehensive income reflects certain items not currently
reported in measuring net income such as changes in value of available-for-sale
securities and foreign currency translation adjustments. The Company does not
expect the adoption of FAS 130 to have a material effect on its financial
statements. FAS 130 will become effective for the Company's year ending June 30,
1999.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 (FAS 131), "Disclosures about Segments of an Enterprise and
Related Information" which supersedes the current segment reporting requirements
of Statement of Financial Accounting Standards No. 14 (FAS 14), "Financial
Reporting for Segments of a Business Enterprise," as amended. FAS 131 requires
the reporting of certain financial and other disclosures related to the
Company's operating segments which are identified using a "management approach."
Operating segments are revenue-producing components of the business for which
separate financial information is produced internally and are subject to
evaluation by the chief operating decision maker in the resource allocation
process. FAS 131 will become effective for the Company's year ending June 30,
1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted in years beginning after June 15,
1999. The Company has not in the past and does not anticipate in the future
using derivative instruments, and the Company does not expect that the adoption
of FAS 133 will have a significant impact on its financial condition or results
of operations.
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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 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 (i) the Statements
in the "Overview" section including the statement in the first paragraph
relating to expectations of operating losses, the statement in the second
paragraph relating to anticipated filing and approval time periods for premarket
approval applications and the commercialization of products that have received
Food and Drug Administration ("FDA") manufacturing approval, the statements in
the third paragraph related to the manufacturing, marketing, and distribution of
the Company's products; (ii) the statements in "Results of Operations" including
statements in the last sentence of "Cost of Goods Sold," the statements in the
last sentence of each of the "Research and Development" and "Selling, General
and Administrative" paragraphs; and (iii) the statements in the "Liquidity and
Capital Resources" section including the statements regarding future capital
expenditures in the third paragraph, the Company's forecast of the period of
time through which its financial resources will be adequate to support its
operations in the sixth paragraph and the statements in the seventh paragraph
regarding potential sources of additional capital resources.
OVERVIEW
The Company was founded in April 1991, operates in a single industry
segment, and 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, 1998 had an
accumulated deficit of approximately $66.0 million. The Company has generated
only limited revenues from sales of Radii supraventricular tachycardia mapping
and ablation catheters, Trio/Ensemble diagnostic catheters, Chilli cooled
ablation catheters, certain mapping baskets, Radiofrequency Generator Systems
and Arrhythmia Mapping Systems. The Company expects its operating losses to
continue through at least the end of calendar 2000 as it continues to expend
substantial funds for clinical trials to support its efforts to obtain
regulatory approvals for its products, expand its research and development
activities, establish commercial-scale manufacturing capabilities and expand its
sales and marketing activities.
The Company believes that its Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System and their
component catheters and equipment are currently the Company's only significant
potential products. The Atrial Fibrillation Ablation System is also being
developed for use in treating atrial flutter. The FDA granted clearance pursuant
to Section 510(k) ("510(k) clearance") of the Food, Drug and Cosmetics Act of
1938, as amended (the "FDC Act") to the Company in August 1997 for the Model
8100/8300 Arrhythmia Mapping System for basic diagnostic electrophysiology
studies. The Company filed a premarket approval ("PMA") application for the
Ventricular Tachycardia Ablation System in January 1998, and the FDA Circulatory
Systems Devices Advisory Panel recommended approval of the PMA application in
July 1998 with certain labeling changes and follow-up study requirements. To
date, the FDA has not acted on the panel's recommendation. The Arrhythmia
Mapping System for diagnostic mapping of ventricular tachycardia is in various
stages of clinical testing, and clinical data obtained to date are insufficient
to demonstrate the safety and efficacy of this product under applicable FDA
regulatory guidelines. In addition, the ablation catheter and ablation equipment
that together form the Atrial Fibrillation Ablation System and the
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mapping catheter and mapping equipment that together form the Arrhythmia Mapping
System for atrial fibrillation and atrial flutter 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. With the exception of the Chilli Cooled Ablation Catheter, at the
earliest, the Company does not anticipate filing a PMA application for any
additional system for at least six months, and does not anticipate receiving a
PMA for any such system until at least one year 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 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, atrial fibrillation and
atrial flutter 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. On July 21, 1998,
the FDA Circulatory System Devices Advisory Panel recommended that the Company's
PMA for the Ventricular Tachycardia Ablation System be granted subject to
certain conditions, but there can be no assurance that the FDA will issue such
PMA clearance in a timely manner, if at all. The Company will not be permitted
to commercialize the Ventricular Tachycardia Ablation System until such time as
approval is received. 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 Company does not have any experience in manufacturing, marketing or
selling its products for diagnosis and treatment of ventricular tachycardia,
atrial fibrillation or atrial flutter 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. Establishing a marketing and sales
capability sufficient to support sales in commercial quantities will require
substantial efforts and require significant management and financial resources.
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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, Chilli cooled ablation catheters,
Mercator mapping baskets, Radiofrequency Generator Systems and Arrhythmia
Mapping Systems. The Company's net sales increased to $1.1 million for the three
months ended September 30, 1998 compared to $562,000 for the three months ended
September 30, 1997. The increase in net sales was primarily attributable to
increased sales of Trio/Ensemble catheters in Japan and increased sales of Radii
catheters in Europe. Furthermore, in late fiscal 1998, the Company commenced
sales of its Chilli cooled ablation catheters in Europe. The increased European
sales reflect the introduction of the Company's products by new distributors in
Germany and Spain during the three months ended September 30, 1998.
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. A total of $144,000 of royalty income related to the
agreement has been recorded through September 30, 1998, of which $75,000 was
recognized in the three months ended September 30, 1998.
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 $1.0 million for the three months ended September 30, 1998, and
resulted in a gross margin of $68,000. For the three months ended September 30,
1997, cost of goods sold was $650,000 and resulted in a gross margin deficit of
$88,000. The increase in the gross margin for the three months ended September
30, 1998 compared to the same period in the prior year was primarily due to
increased sales volumes, changes in sales mix and slightly improved
manufacturing yields. These improvements were offset in part by increased
overhead and training costs for manufacturing personnel in connection with the
expansion of catheter production capacity. In addition, the Company incurred
higher costs associated with quality control and manufacturing engineering
activities to support higher production volumes in the three months ended
September 30, 1998. The Company expects its gross margins to fluctuate in the
future as other products are commercialized.
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
decreased slightly to $3.4 million for the three months ended September 30, 1998
from $3.5 million for the three months ended September 30, 1997. The decrease in
research and development expenses was primarily attributable to decreased costs
related to clinical trials of the Chilli cooled ablation system, for which
patient enrollment was completed in December 1997, and decreased costs in the
procurement of prototype materials. These decreases were substantially offset by
increased costs associated with consulting services, facilities and the
placement at clinical sites of Arrhythmia Mapping Systems and Radiofrequency
Generator Systems and catheter products to support the Company's high resolution
mapping and linear ablation studies. 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 and/or flutter products, expands clinical research
activities and increases its research and development efforts related to new
products and technologies.
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<PAGE> 12
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 $1.4
million for the three months ended September 30, 1998 from $864,000 for the
three months ended September 30, 1997. The increase was primarily attributable
to higher expenditures for sales and marketing personnel and services to support
expanding international sales, marketing and customer service activities and
increased costs associated with demonstration units and product marketing
materials. 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 $131,000 for the three months ended September 30, 1998 from
$382,000 for the three months ended September 30, 1997. The reduction in net
other income was the result of declining interest income on lower cash, cash
equivalent and short-term investment balances.
Net Loss. The Company's net loss increased to $4.6 million for the three
months ended September 30, 1998 from $4.1 million for the three months ended
September 30, 1997. The increase in the Company's net loss primarily resulted
from increased costs associated with expanded manufacturing capacity, increased
selling, general and administrative expenses and lower interest income.
Impact of Adoption of New Accounting Standards. In June 1997, the FASB
issued Statement of Financial Accounting Standards No. 130 (FAS 130), "Reporting
Comprehensive Income" which requires the reporting and presentation of
comprehensive income and its components in the financial statements.
Comprehensive income reflects certain items not currently reported in measuring
net income such as changes in value of available-for-sale securities and foreign
currency translation adjustments. The Company does not expect the adoption of
FAS 130 to have a material effect on its financial statements. FAS 130 will
become effective for the Company's year ending June 30, 1999.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 (FAS 131), "Disclosures about Segments of an Enterprise and Related
Information" which supersedes the current segment reporting requirements of
Statement of Financial Accounting Standards No. 14 (FAS 14), "Financial
Reporting for Segments of a Business Enterprise," as amended. FAS 131 requires
the reporting of certain financial and other disclosures related to the
Company's operating segments which are identified using a "management approach."
Operating segments are revenue-producing components of the business for which
separate financial information is produced internally and are subject to
evaluation by the chief operating decision maker in the resource allocation
process. The Company does not expect the adoption of FAS 130 to have a material
effect on its financial statements. FAS 131 will become effective for the
Company's year ending June 30, 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted in years beginning after June 15,
1999. The Company has not in the past and does not anticipate in the future
using derivative instruments, and the Company does not expect that the adoption
of FAS 133 will have a significant impact on its financial condition or results
of operations.
12
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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
bank line of credit of $6.0 million, equipment lease financing arrangements
yielding $3.9 million and a prepaid royalty arrangement yielding $3.0 million.
In addition, the Company closed its initial public offering in June 1996 and
raised net proceeds of $43.1 million. As of September 30, 1998, the Company had
$19.1 million in cash, cash equivalents and short-term investments.
Net cash used in operating activities was $4.9 million and $3.8 million for
the three months ended September 30, 1998 and 1997, respectively. For each of
these periods, the net cash used in operating activities resulted primarily from
net losses. Net cash provided from investing activities was $1.7 million and
$7.0 million for the three months ended September 30, 1998 and 1997,
respectively. 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 and equipment. Net cash provided by financing activities
was $82,000 for the three months ended September 30, 1998 and net cash used in
financing activities was $232,000 for the three months ended September 30, 1997.
As of September 30, 1998, the Company had capital equipment of $8.3 million,
less accumulated depreciation and amortization of $4.2 million, to support its
clinical, development, manufacturing and administrative activities. The Company
has financed $3.9 million from capital lease obligations through September 30,
1998. 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. As of September 30, 1998, the Company
had available an unused equipment lease financing facility (the "lease line") of
approximately $1.2 million. The Company expects to utilize the lease line and a
portion of the Company's existing cash resources to purchase additional
equipment over the next 12 months.
In May 1998, the Company obtained a term loan credit facility of $8.0
million from a commercial bank. The loan agreement provides for an initial
advance of $6.0 million available for the repayment of a note payable and
related accrued interest due to Sorin Biomedical (described below) with the
remaining $2.0 million available for general corporate purposes. Advances can be
made to the Company during a 12-month non-revolving drawdown period that expires
in May 1999. Borrowings under the credit facility bear floating interest at the
bank's prime rate plus 1.25% (9.75% at September 30, 1998) and the Company can
elect a fixed interest rate option at the end of the 12-month drawdown period.
Interest payments are due monthly following commencement of each advance and the
outstanding balance of all borrowings under the credit facility will be fully
amortized over the 36-month period following the end of the drawdown period with
principal and interest payments due monthly. Under the terms of loan agreement,
all borrowings are collateralized by substantially all of the Company's assets
and the Company must maintain certain financial ratios and other covenants. At
September 30, 1998, the Company had an unused amount of $2.0 million under the
credit facility that is available for drawdowns through May 1999. The Company
was in compliance with all covenants as of September 30, 1998.
In May 1998, the Company utilized $6.0 million of the term loan credit
facility in order to repay a $4.5 million note payable and related accrued
interest of approximately $1.5 million due to Sorin Biomedical. The $4.5 million
note payable bore interest at the prime rate as quoted in the Wall Street
Journal and all principal and accrued interest was due on June 27, 1999. The
early repayment of the note payable was made in connection with the termination
of a product distribution agreement with Sorin Biomedical.
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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 and the extent to which the
Company's products gain market acceptance, and competitive developments. The
Company has received marketing approval for its Model 8100/8300 Arrhythmia
Mapping System for basic electrophysiology studies, and the FDA Circulatory
System Devices Advisory Panel has recommended that the Company's PMA application
for its Ventricular Tachycardia Ablation System be granted clearance by the FDA.
However, the FDA has not acted on such recommendation to date. In order to
successfully manufacture in commercial quantities and market and sell its
FDA-cleared products and to apply for FDA marketing clearance for its remaining
products, the Company anticipates that it will be required to raise additional
funds through equity or debt financing in fiscal 1999 or 2000. Absent successful
fund raising, the Company believes it will not have sufficient resources to
successfully commercialize its products and that such inability will have a
material adverse effect on the Company's business, financial condition and
results of operations.
The factors described in the previous paragraph, "Factors That May Impact
Future Operations" and elsewhere in this Report will impact the Company's future
capital requirements and the adequacy of its available funds. The Company
anticipates that it will be required to raise additional funds through public or
private financing, collaborative relationships or other arrangements in fiscal
1999 or fiscal 2000. There can be no assurance that such additional funding,
when needed, will be available on terms acceptable to the Company, if at all.
Furthermore, any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve additional restrictive covenants.
Collaborative arrangements with a capital raising component 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, 1998, the Company had an accumulated deficit of
$66.0 million. To date, 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 2000 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, atrial fibrillation and atrial flutter
will receive regulatory approvals for marketing, will be successfully
commercialized or that the Company will achieve significant revenues from either
international or domestic sales. The Company anticipates that it will need to
raise additional funds in fiscal 1999 or 2000 in order to successfully
manufacture in commercial quantities and sell its FDA-cleared products and to
apply for FDA clearance for additional products. In addition, there can be no
assurance that the Company will achieve or sustain profitability in the future
or meet the expectations of securities industry analysts. 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
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Company's products gain market acceptance, the scale-up of manufacturing
abilities, the expansion of sales and marketing activities and competition.
Clinical Trials
The Ventricular Tachycardia Ablation System, Arrhythmia Mapping System and
Atrial Fibrillation Ablation System are in various stages of clinical testing.
Other than with respect to the Ventricular Tachycardia Ablation System for which
FDA clearance is still pending, the clinical data obtained to date are
insufficient to demonstrate the safety and efficacy of these products under
applicable FDA regulations and 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 regulations and 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 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 clearance or approval is obtained, the Arrhythmia Mapping
System may only be used with other manufacturers' 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 if at all. If the 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, atrial fibrillation and atrial flutter will not be known for
several years.
In December 1997, the Company completed enrollment in 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. The Company is currently conducting a clinical trial
for the Local Sector Mapping Basket, a variation of the Mercator Left
Ventricular Mapping Basket. The Company completed a clinical trial of the
Mercator Atrial Mapping Basket and the Model 8100/8300 Arrhythmia Mapping System
in March 1998, the products that together form the Company's Arrhythmia Mapping
System for diagnostic mapping of the right atrium. In February 1998, the Company
filed an IDE for a clinical trial of the Local Sector Mapping Basket in 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. The Company is currently conducting a clinical
trial for a second version of the Nexus Linear Lesion Catheter for the treatment
of atrial flutter.
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Ventricular Tachycardia Ablation System. The Company initiated a clinical
trial for the Ventricular Tachycardia Ablation System in the United States and
Europe in September 1995 under an IDE approved by the FDA. The clinical trial
was conducted at a maximum of 15 clinical sites. 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 was 30 days for safety and the Company is
required to follow up with some patients for up to 24 months after the PMA
application filing. Enrollment for the clinical trial was completed on December
19, 1997. A PMA application was submitted on January 29, 1998 for approval to
market the Ventricular Tachycardia Ablation System and its component catheters
and equipment in the United States, and the FDA Circulatory Systems Device
Advisory Panel recommended approval of the PMA application with certain
conditions on July 21, 1998. To date, the FDA has not acted on the Panel's
recommendation or approved or denied the Company's PMA. There can be no
assurance that the FDA will accept the Panel's recommendation or grant marketing
clearance of the Company's PMA.
The FDA granted the Company's request to permit continuation of the study
and expansion to a maximum of 20 clinical sites and 300 patients while the PMA
application is under review. As of October 26, 1998, 213 patients had been
enrolled in the trial: 75 patients randomized to ablation, 106 patients
non-randomized to ablation and 32 patients randomized to drug therapy of which
17 patients have subsequently received ablation therapy due to ventricular
tachycardia recurrence. In addition, 18 patients have received ablation therapy
under a compassionate use protocol. Analysis of 150 of such patients was
included in the PMA application. The Company believes that such analysis shows
that clinical recurrence of Ventricular Tachycardia was significantly less in
the patients randomized to ablation compared to patients randomized to control.
Acute success of ablation therapy, defined as eradication of all mappable
ventricular tachycardia at the end of the ablation procedure, was attained in
75% of patients. The incidence of major adverse events associated with the
procedure was 8.0%.
Arrhythmia Mapping System for Ventricular Tachycardia. In January 1997, 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 14 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, as of October 26, 1998,
26 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 40
studies. Of the 40 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 of
baskets: the Mercator Left Ventricular Mapping Basket, a full chamber global
basket evaluated in the feasibility study and 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. Three patients
have been enrolled in this study as of October 26, 1998. The FDA requested a
separate IDE for a study of the Sector Mapping Basket. A new IDE was submitted
and received conditional approval in November 1997 to initiate enrollment of 30
patients at five sites in the Sector study. This study was initiated April 8,
1998, and six patients have been enrolled in this trial as of October 26, 1998.
These studies allow the use of the ventricular mapping baskets with the
Ventricular Tachycardia Ablation System simultaneously. The Company believes
that ventricular mapping will be an enabling technology for the treatment of
high rate ventricular tachycardia, which is more common than slow rate
ventricular tachycardia. Slow rate ventricular tachycardia is currently the only
type of ventricular tachycardia amenable to ablation therapy using current
techniques.
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Arrhythmia Mapping System for Atrial Fibrillation. In June 1997, 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 seven clinical sites in the United States and one in
Europe. The purpose of this clinical trial was to demonstrate the equivalency of
the Mercator Atrial Mapping Basket and the Arrhythmia Mapping System to
commercially available mapping catheters. Enrollment in the clinical trial was
completed on March 10, 1998 and the trial includes 74 patients. There was no
thrombus formation on any mapping basket used in the 74 studies. The Company has
also tested the Mercator Atrial Mapping Basket in nine patients in Europe
outside of the IDE. The Company submitted a 510(k) application for clearance of
the Mercator Atrial Mapping Basket on July 17, 1998. An IDE was submitted for a
clinical study of the Local Sector Mapping Basket for the right atrium on
February 20, 1998. The Company was granted conditional approval to test 20
subjects at five clinical sites, and four patients have been enrolled as of
October 26, 1998.
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 1997. The purpose of the IDE feasibility study for the Atrial
Fibrillation Ablation System was to assess the safety and performance in
creating continuous linear lesions. The feasibility testing 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.
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. An IDE supplement was 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 received
conditional approval in December 1997 to involve 30 patients at five sites and
was further amended in October 1998 to allow delivery of 70 watts of power and
use a superior approach to accessing the right atrium. The study was initiated
in February 1998 and eight patients have been enrolled as of October 26, 1998.
The Company has also tested the Nexus Linear Lesion Catheter for atrial flutter
and fibrillation in 11 patients in Europe as of October 26, 1998.
A feasibility IDE for use of the modified Nexus Linear Lesion Catheter in
the right and left atrium to treat atrial fibrillation is expected to be
submitted in calendar 1998.
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. In September 1997, the Company began
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 acceptance of procedures 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,
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electrophysiologists, cardiologists and other physicians may elect not to
recommend the use of the Model 8100/8300 for any number of reasons. 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. 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 be
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 only
begun to establish 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. 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 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
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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. For example,
the Company encountered low yields, and other production inefficiencies in the
manufacture of its Sector mapping basket catheters. In addition, the Company
believes that substantial per unit 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
Regulation ("QSR;" the successor regulations to current Good Manufacturing
Practices) compliance inspections conducted by the FDA. The Company is required
to comply with QSR 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. In December 1997, the Company received ISO 9001/EN46001 certification
from its European Notified Body. Any failure of the Company to comply with QSR
or ISO 9001/EN46001 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 and granted the Company such a license in February
1998. If the Company is unable to maintain such a license, it would be unable to
manufacture or ship any product, and such 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
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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. The Company seeks to protect its trade secrets and
proprietary know how, 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 (the "USPTO") to determine the priority of inventions or an opposition to
a patent grant in a foreign jurisdiction. The defense and prosecution of
intellectual property suits, USPTO interference or opposition proceedings and
related legal and administrative proceedings 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 parties' patents or that a court would find that such patents
are either not infringed by the Company's enhancements or that the Company's
patents 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.
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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 spatial
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 products to be developed and
to receive regulatory and, in some cases, third party payor reimbursement
approval are important competitive factors. 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
The design, pre-clinical and clinical testing, manufacture, labeling, sale,
distribution and promotion of the Company's products are subject to regulation
by numerous governmental authorities, principally the FDA and corresponding
state and foreign regulatory agencies. 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 authorization, a recommendation by
the FDA that the Company not be permitted to enter into government contracts
and/or 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.
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Before a new device can be introduced into the market, a manufacturer must
generally obtain marketing clearance through a premarket notification under
Section 510(k) of the FDC Act 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 any additional PMA applications for any system for at least
the next nine 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. 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. FDA
enforcement policy strictly prohibits the marketing of FDA cleared or approved
medical devices for unapproved uses. Further, if a company wishes to modify a
product after FDA approval of a PMA, including changes in indications or other
modifications that could affect safety or efficacy, additional clearances or
approvals will be required from the FDA. Failure to receive or delays in receipt
of FDA clearances or approvals, including the need for additional clinical
trials or data as a prerequisite to clearance or approval, or any FDA conditions
that limit the ability of the Company to market its systems, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
International
The European Union has promulgated rules which require that medical products
distributed after June 14, 1998 bear the CE mark, an international symbol of
adherence to quality assurance standards and compliance with applicable European
medical device directives. Quality system certification is one of the CE mark
requirements. The Company has received ISO9001/EN46001 certification by its
European Notified Body, one of the CE mark certification prerequisites for its
manufacturing facility in Sunnyvale, California. Furthermore, in January 1998,
the Company received the right to affix the CE mark to its Arrhythmia Mapping
System and Chilli Cooled Ablation System. In April 1998, the Company received
the right to affix the CE mark to its Radii catheters. In July 1998, the Company
received the right to affix the CE mark to its Trio/Ensemble catheters. While
the Company intends to satisfy the requisite policies and procedures that will
permit it to receive the CE Mark Certification for other products, 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 these and other 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 medical devices that have not received FDA marketing
authorization 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
22
<PAGE> 23
provided that the device meets a number of criteria including marketing
authorization in one of the "Tier I" countries identified in that act. If the
device has no marketing authorization in a Tier I country, and is intended for
marketing, it may be necessary to obtain approval from the FDA to export the
device. 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 currently has marketing authorization in one or more Tier I
countries for all its clinically used products. The Company is in the process of
obtaining the necessary marketing approvals or conducting clinical trials in the
United Kingdom, Germany, France, Canada, Japan and several other countries in
Europe 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. Third party reimbursement is
generally provided on the basis of the procedure's diagnosis-related group
("DRG") code and such code is established by the United States Health Care
Finance Administration. The failure of the procedures in which the Company's
products are used or an insufficient level of reimbursements for such procedures
would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, medical equipment
reimbursements have been mandated by statute to be reduced in the past, and
there can be no assurance that any such reimbursements with respect to the
Company's products will be adequate or provided at all. 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.
Reimbursement systems in international markets vary significantly by country
and by region within some countries, and reimbursement approvals must be
obtained on a country by country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in international
markets targeted by the Company. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
time, for a particular amount, or at all.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and
23
<PAGE> 24
other treatments. In addition, the Company believes that treatment with the
Company's products will be more efficacious than currently available therapies.
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 procedures using the Company's products.
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 to date 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, regulatory and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company can retain such personnel or that it can
attract or retain other highly qualified scientific, technical, clinical,
regulatory and managerial personnel in the future, including key sales and
marketing personnel. The loss of key personnel or the inability to hire and
retain qualified personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations.
In addition, in order to complete clinical trials in progress, prepare
additional products for clinical trials, and develop future products, the
Company believes that it will be required to expand its operations, particularly
in the areas of research and development, manufacturing and sales and marketing.
The Company hired a new Vice President of North American Sales in January 1998
and a new Vice President of International Sales in March 1998. However, there
can be no assurance that they will be able to build a successful sales force or
that they will be able to operate effectively with the existing management team.
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.
24
<PAGE> 25
Year 2000 Impact on Information Technology and Budgets and Year 2000
Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance. The
Company has commenced a program in fiscal 1998, to be substantially completed by
early calendar 1999, to review the Year 2000 compliance status of the software
and systems used in its internal business processes, to obtain appropriate
assurances of compliance from the manufacturers of these products and agreements
to modify or replace all non-compliant products. The Company has contacted its
major suppliers to determine whether the products obtained by the Company from
such vendors are Year 2000 compliant. To date, the Company has not received
responses from a majority of such suppliers. The Company's suppliers are under
no contractual obligation to provide such information to the Company. In
addition, the Company is considering converting certain of its software and
systems to commercial products that are known to be Year 2000 compliant.
Implementation of software products of third parties, however, will require the
dedication of substantial administrative and management information resources,
the assistance of consulting personnel from third party software vendors and the
training of the Company's personnel using such systems. Based on the information
available to date, the Company believes it will be able to complete its Year
2000 compliance review and make necessary modifications prior to early calendar
1999. Software or systems that are deemed critical to the Company's business are
scheduled to be Year 2000 compliant by early calendar 1999. Nevertheless,
particularly to the extent the Company is relying on the products of other
vendors to resolve Year 2000 issues, there can be no assurances that the Company
will not experience delays in implementing such products. If key systems, or a
significant number of systems were to fail as a result of Year 2000 problems, or
the Company were to experience delays implementing Year 2000 compliant software
products, the Company could incur substantial costs and disruption of its
business, which would potentially have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company in its ordinary course of business tests and evaluates its own
software products. The Company's proprietary software products that operate its
Arrhythmia Mapping System and Radiofrequency Generator System are designed for
use with certain hardware developed by other vendors. The Company believes that
its software products are generally Year 2000 compliant, meaning that the use or
occurrence of dates on or after January 1, 2000 will not materially affect the
performance of the Company's software products with respect to four digit date
dependent data or the ability of such products to correctly create, store,
process and output information related to such data. To the extent the Company's
software products are not fully Year 2000 compliant, there can be no assurance
that the Company's software products contain all necessary software routines and
codes necessary for the accurate calculation, display, storage and manipulation
of data involving dates. Furthermore, these systems will be used in various
operating environments once installed at customer sites. The Company believes
its products are in Year 2000 compliance. In certain circumstances, the Company
has warranted that the use or occurrence of dates on or after January 1, 2000
will not adversely affect the performance of the Company's products with respect
to four digit date dependent data or the ability to create, store, process and
output information related to such data. If any of the Company's licensees
experience Year 2000 problems, such licensees could assert claims for damages
against the Company.
To date the Company has not identified a complete and separate budget for
investigating and remedying issues related to Year 2000 compliance whether
involving the Company's own software
25
<PAGE> 26
products or the software or systems used in its internal operations. The Company
has incurred costs and expects to incur approximately $20,000 in connection with
the procurement of software upgrades, if required, and the implementation of new
Year 2000 compliant information systems. There can be no assurance that the
Company's resources spent on investigating and remedying Year 2000 compliance
issues will not have a material adverse effect on the Company's business,
financial condition and results of operations.
Impact of Introduction of Single European Currency
The introduction of the Single European Currency (Euro) is scheduled for
initial implementation as of January 1, 1999 with a transition period through to
January 1, 2002. The Company expects that the introduction and use of the Euro
will not have a material adverse impact on the Company's internal systems or
will result in increased costs related to its European business activities.
Furthermore, the Company does not believe that the introduction of the Euro will
have a material adverse effect on its 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 to purchase 1/1000th a share of the Company's Series A Participating
Preferred Stock ("Series A Preferred") for each outstanding share of Common
Stock of the Company (a "Right"). Each Right entitles the registered holder to
purchase from the Company 1/1000th 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.
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 or competitors, government
26
<PAGE> 27
regulation, changes in the current structure of the health care financing and
payment systems, developments in or disputes regarding patent or other
proprietary rights, release of reports by securities analysts, changes in
securities analysts recommendations, economic and other external factors and
general market conditions may have a significant effect on the market price of
the Common Stock. Also, at some future time, the Company's revenues and results
of operations may be below the expectations of securities analysts or investors,
resulting in significant fluctuations in the market price of the Company's
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, financial condition and
results of operations. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's disclosures about
market risk from those set forth in the Company's Annual Report on Form 10-K for
the year ended June 30, 1998.
27
<PAGE> 28
CARDIAC PATHWAYS CORPORATION
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 quarterly
report on Form 10-Q for the period ended March 31, 1998: purchase and
installation of machinery and equipment - $727,177; repayment of indebtedness -
$273,159; and working capital - $8,751,662.
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, 1998.
28
<PAGE> 29
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: NOVEMBER 6, 1998 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
29
<PAGE> 30
CARDIAC PATHWAYS CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION PAGE NO.
----------- ------------------- --------
<S> <C> <C>
27.1 Financial Data Schedule
</TABLE>
30
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,197
<SECURITIES> 14,895
<RECEIVABLES> 891
<ALLOWANCES> 16
<INVENTORY> 801
<CURRENT-ASSETS> 21,519
<PP&E> 8,314
<DEPRECIATION> 4,183
<TOTAL-ASSETS> 26,331
<CURRENT-LIABILITIES> 4,527
<BONDS> 7,010
0
0
<COMMON> 10
<OTHER-SE> 13,139
<TOTAL-LIABILITY-AND-EQUITY> 26,331
<SALES> 1,137
<TOTAL-REVENUES> 1,137
<CGS> 1,069
<TOTAL-COSTS> 1,069
<OTHER-EXPENSES> 3,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 174
<INCOME-PRETAX> (4,623)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,623)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,623)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
