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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, 1999.
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 12, 1999 there were 2,007,904 shares of the Registrant's Common
Stock outstanding.
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CARDIAC PATHWAYS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Notes (Unaudited)
Consolidated Balance Sheets as of September 30, 1999 and
June 30, 1998 ..................................................... 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 1999 and 1998 ................................. 4
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1999 and 1998 ................................. 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 ........ 23
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ......................... 24
Item 6. Exhibits and Reports on Form 8-K .................................. 24
SIGNATURES ...................................................................... 25
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999(1)
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,985,278 $ 2,339,660
Short-term investments 8,960,403 -
Accounts receivable, net of allowance for doubtful accounts
of $105,000 at September 30, 1999 and at June 30, 1999 1,192,852 898,296
Inventories 1,346,144 1,330,255
Prepaid expenses 288,252 338,479
Other current assets 241,824 76,719
------------- -------------
Total current assets 29,014,753 4,983,409
Property and equipment, net 3,578,738 3,790,443
Notes receivable from related parties 36,199 29,584
Intangible assets, net of accumulated amortization of
$66,667 at September 30, 1999 1,933,333 -
Deposits and other assets 112,160 102,406
------------- -------------
$ 34,675,183 $ 8,905,842
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 590,660 $ 488,128
Accrued compensation and related benefits 633,583 835,277
Accrued clinical expenses 939,183 939,183
Other accrued expenses 2,222,232 738,831
Current obligations under capital leases 269,569 325,334
Short-term debt obligations - 3,000,000
------------- -------------
Total current liabilities 4,655,227 6,326,753
Long-term obligations under capital leases 278,227 342,772
Deferred royalty income 2,555,862 2,630,862
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized and 32,000
issued and outstanding at September 30, 1999 and none issued and
outstanding at June 30, 1999; liquidation preference of $32,660,000 at
September 30, 1999 32 -
Common stock, $.001 par value; 30,000,000 shares authorized; 2,007,904
shares issued and outstanding at September 30, 1999 and June 30, 1999 2,008 2,008
Additional paid-in capital 110,992,510 80,152,542
Receivable from stockholder (385,000) (385,000)
Accumulated deficit (83,287,780) (79,983,404)
Deferred compensation (135,903) (180,691)
------------- -------------
Total stockholders' equity 27,185,867 (394,545)
------------- -------------
$ 34,675,183 $ 8,905,842
============= =============
</TABLE>
(1) Derived from the Company's audited consolidated balance sheet as of June 30,
1999.
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,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 1,380,642 $ 1,137,406
Cost of goods sold 1,391,727 1,069,440
----------- -----------
Gross margin (deficit) (11,085) 67,966
Operating expenses:
Research and development 1,928,042 3,419,727
Selling, general and administrative 1,627,401 1,402,337
----------- -----------
Total operating expenses 3,555,443 4,822,064
----------- -----------
Loss from operations (3,566,528) (4,754,098)
Other income (expense):
Interest income 176,977 293,492
Interest expense (34,752) (174,430)
Other, net 119,927 12,115
----------- -----------
Total other income (expense), net 262,152 131,177
----------- -----------
Net loss (3,304,376) (4,622,921)
Preferred stock dividend 660,000 -
Beneficial conversion feature related to the
issuance of the Series B preferred stock 960,000 -
----------- -----------
Net loss applicable to common stockholders $(4,924,376) $(4,622,921)
=========== ===========
Net loss per common share -
basic and diluted $ (2.45) $ (2.35)
=========== ===========
Shares used in computing net loss
per common share - basic and diluted 2,008,000 1,969,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,304,376) $ (4,622,921)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 403,676 320,220
Amortization of deferred royalty income (75,000) (75,000)
Amortization of deferred compensation 44,788 53,132
Changes in operating assets and liabilities:
Accounts receivable (294,555) (351,372)
Inventories (15,889) (132,571)
Prepaid expenses 50,227 (83,970)
Other current assets (165,105) 175,108
Accounts payable 102,532 (83,496)
Accrued compensation and related benefits (201,694) 54,127
Accrued clinical expenses - (86,214)
Other accrued expenses 823,401 (47,553)
------------ ------------
Net cash used in operating activities (2,631,995) (4,880,510)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (8,960,403) (4,596,114)
Maturities and sales of short-term investments - 6,950,000
Purchases of property and equipment, net (125,305) (695,856)
(Increase) decrease in notes receivable (6,615) 4,238
(Increase) in intangible assets (2,000,000) -
(Increase) decrease in deposits and other assets (9,754) 64,187
------------ ------------
Net cash (used) provided by investing activities (11,102,077) 1,726,455
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations (120,310) (151,692)
Payment of short-term debt obligations (3,000,000) -
Proceeds from sale of preferred stock 31,500,000 -
Proceeds from sale of common stock - 233,400
------------ ------------
Net cash used in financing activities 28,379,690 81,708
------------ ------------
Net decrease in cash and cash equivalents 14,645,618 (3,072,347)
Cash and cash equivalents at beginning of period 2,339,660 7,268,877
------------ ------------
Cash and cash equivalents at end of period $ 16,985,278 $ 4,196,530
============ ============
</TABLE>
See notes to consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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 months ended September 30, 1999 are
not necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 2000. The accompanying consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Cardiac Pathways Corporation's (the "Company")
Annual Report on Form 10-K for the fiscal year ended June 30, 1999.
2. PREFERRED STOCK FINANCING AND REVERSE STOCK SPLIT
In May 1999, the Company's Board of Directors authorized and the Company
entered into definitive agreements in connection with a preferred stock
financing. The terms of the financing included the sale of a maximum of 40,000
shares of Series B Preferred Stock at $1,000 per share to a group of accredited
investors. Each share of Series B Preferred Stock is initially convertible into
200 shares of the Company's Common Stock. The Series B Preferred Stock is
entitled to a cumulative dividend of 11% of the purchase price per share per
year, and will have a liquidation preference in certain circumstances equal to
the initial purchase price plus accrued but unpaid dividends. In addition to the
preferred stock financing, in May 1999, the Company's Board of Directors
authorized a 1-for-5 reverse stock split.
The September 30, 1999 balance sheet also reflects the discount or
beneficial conversion feature present in the convertible securities. The
discount is being recognized as a return to the preferred stockholders (similar
to a dividend) over the minimum period in which the preferred stockholders can
realize return, immediately for the Series B Preferred stockholders. The
discount has been accreted to additional paid in capital (accumulated deficit)
in the September 30, 1999 balance sheet.
The Series B Preferred Stock financing and the 1-for-5 reverse stock
split were approved by the stockholders in July 1999. Furthermore, in July 1999,
the Company closed the Series B Preferred Stock financing and issued a total of
32,000 shares of Series B Preferred Stock at a price of $1,000 per share,
raising approximately $31,500,000, net of issuance costs. In addition, the
Company effected the 1-for-5
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reverse stock split in July 1999. All share and per share amounts have been
retroactively adjusted to reflect the reverse stock split.
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
other liquid investments are classified as short-term investments. At September
30, 1999, all short-term investments were classified as
available-for-sale. 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.
The following is a summary of available-for-sale securities at cost, which
approximates fair value:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
DESCRIPTION 1999 1999
------------- -----------
<S> <C> <C>
Available for sale:
U.S. government agency $ 2,000,000 $ --
U.S. corporate obligations 23,567,159 --
----------- -----------
25,567,159 --
Amounts classified as cash equivalents 16,606,756 --
----------- -----------
Amounts included in short-term investments $ 8,960,403 $ --
=========== ===========
</TABLE>
There were no material realized gains or losses for the three month
period ending September 30, 1999. The cost of securities sold is based on the
specific identification method.
4. CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------- ----------
<S> <C> <C>
Inventories:
Raw materials $ 651,716 $ 611,667
Work-in-process 168,744 174,016
Finished goods 525,684 544,572
---------- ----------
$1,346,144 $1,330,255
========== ==========
</TABLE>
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<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------ -----------
<S> <C> <C>
Property and equipment:
Equipment $ 7,072,607 $ 6,836,138
Leasehold improvements 422,061 422,061
Equipment-in-process 1,409,843 1,521,008
----------- -----------
8,904,511 8,779,207
Less accumulated depreciation
and amortization 5,325,773 4,988,764
----------- -----------
$ 3,578,738 $ 3,790,443
=========== ===========
</TABLE>
5. LICENSE AGREEMENT
In July 1999, the Company entered into an agreement with a Canadian
company to obtain an exclusive worldwide license to certain patents involving
the use of ultrasound technology. The terms of the agreement include payments by
the Company to the licensor of $1,000,000 each in August 1999 and January 2000.
6. STOCK PLANS
In July 1999, 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 800,000 shares. This increase was
approved by the stockholders at the Special Meeting of Stockholders on July 20,
1999.
7. RECENT PRONOUNCEMENTS
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,
2000. 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 the statement in the first paragraph of "Overview" relating to
expectations of operating losses, the statement in the second paragraph of
"Overview" relating to the commercialization of products that have received FDA
manufacturing approval, the statements in the third paragraph of "Overview"
related to the manufacturing, marketing and distribution of the Company's
products, the statements in the last 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, the statements in the last
sentence of the "Results of Operations" section regarding FAS 133, and the
statements regarding future capital expenditures in the third paragraph of
"Liquidity and Capital Resources."
OVERVIEW
The Company was founded in April 1991, operates in a single industry
segment, and has engaged primarily in developing, testing and obtaining
regulatory clearances for its products. The Company has experienced significant
operating losses since inception and as of September 30, 1999 had an accumulated
deficit of approximately $83.3 million. The Company has generated only limited
revenues from sales of Chilli cooled ablation catheters, Radii supraventricular
tachycardia mapping and ablation catheters, Trio/Ensemble diagnostic catheters,
Mercator diagnostic mapping baskets and related equipment in certain markets.
The Company expects its operating losses to continue through at least the end of
calendar 2000 as it continues to expend substantial funds to conduct research
and development activities, obtain regulatory approvals for its products,
establish commercial-scale manufacturing capabilities and expand its sales and
marketing activities.
The Company currently believes that its Chilli Cooled Ablation System,
Arrhythmia Mapping System and Tracking System products and their component
catheters and equipment are the only significant potential products while other
products such as Radii and Trio/Ensemble represent important current revenue
streams from international customers. The Company believes the majority of its
revenue growth will be from the Chilli and Tracking System product platforms. In
February 1999, the FDA granted approval of the Company's pre-market approval
("PMA") application to commercially release its Chilli Cooled Ablation System
which consists of the Chilli Cooled Ablation Catheter and the Radiofrequency
Generator. In January 1999, the FDA granted clearance of the Company's
application pursuant to section 510(k) of the Food, Drug and Cosmetics Act of
1938, as amended (the "510(k) application") to commercially release its Mercator
Atrial High Density Array Catheter which is intended to be used in the right
atrium for diagnostic mapping procedures. In August 1997, the FDA granted
clearance of the Company's 510(k) application for the Model 8100/8300 Arrhythmia
Mapping System for basic diagnostic electrophysiology studies.
For the Company's products which have recently obtained FDA clearance or
approval, there can be no assurance that any such products will be successfully
commercialized or that the Company will achieve significant revenues from either
domestic or international sales. Although the FDA granted PMA approval for the
Chilli Cooled Ablation System, 510(k) clearance for the Mercator atrial
catheter,
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and 510(k) clearance for the Arrhythmia Mapping System for basic diagnostic
studies, the Company does not have any experience in manufacturing, marketing or
selling these products in commercial quantities. In order to successfully
implement its business plan, the Company must manufacture and sell the Chilli
Cooled Ablation System and other products in commercial quantities. Furthermore,
the Company 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. 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 significant management and
financial resources. See "-- Factors That May Impact Future Operations." The
Company's Common Stock is currently listed for trading on the Nasdaq Stock
Market's National Market.
RESULTS OF OPERATIONS
Net Sales. The Company's net sales to date have resulted primarily from
sales of Chilli cooled ablation catheters, Radii supraventricular tachycardia
mapping and ablation catheters and Trio/Ensemble diagnostic catheters. The
Company's net sales increased to approximately $1.4 million for the three months
ended September 30, 1999 compared to approximately $1.1 million for the three
months ended September 30, 1998. The increase in net sales for the three months
ended September 30, 1999 compared to the quarter ended September 30, 1998
resulted primarily from sales of the Company's Chilli cooled ablation catheter
in the U.S. market following FDA approval in February 1999.
In December 1995, the Company received $3.0 million pursuant to a
royalty agreement with Arrow International Inc. ("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 or ratably over the
period for which the related technology patents expire. A total of $75,000 was
recognized in the three months ended September 30, 1999.
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 approximately $1,392,000 for the three months ended September 30,
1999 and resulted in a gross margin deficit of approximately $11,000 compared to
a gross margin of approximately $68,000 for the three months ended September 30,
1998. The decrease in the gross margins for the three months ended September 30,
1999 compared to the same period in the prior year was due primarily to changes
in sales mix, increased overhead and training costs for manufacturing personnel,
and higher costs associated with quality control and manufacturing engineering
activities to support higher production volumes. The Company expects its gross
margins to fluctuate in the future as its products are commercialized.
Research and Development. Research and development expenses include
costs associated with product research, clinical trials, prototype development,
design and testing, and costs associated with obtaining regulatory approvals.
Research and development expenses decreased to approximately $1.9 million for
the three months ended September 30, 1999 compared to approximately $3.4 million
for the three months ended September 30, 1998. The decrease in research and
development expenses was primarily attributable to decreased costs relating to
product development and clinical research and reflects an overall smaller
research and development organization. The Company expects to expend substantial
funds in the future to continue its product development programs.
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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
approximately $1.6 million for the three months ended September 30, 1999 as
compared to approximately $1.4 million for the three months ended September 30,
1998. The increase was primarily attributable to higher expenditures for sales
and marketing personnel and services to support expanding international and
domestic 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 increased to
net other income of approximately $262,000 for the three months ended September
30, 1999 as compared to net other income of approximately $131,000 for the three
months ended September 30, 1998. The increase in net other income was the result
of decreased interest expense and increased investment income on significantly
larger cash, cash equivalent and short-term investment balances.
Net Loss. The Company's net loss decreased to approximately $3.3 million
for the three months ended September 30, 1999 as compared to approximately $4.6
million for the three months September 30, 1998. The net loss decline was
primarily the result of the reduction in operating expenses from period to
period.
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,
2000. 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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through a
combination of private placements of equity securities yielding $65 million,
equipment lease financing arrangements yielding $4.0 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
and in July 1999 it raised $31.5 million in its Series B Convertible Preferred
Stock financing. As of September 30, 1999, the Company had $26 million in cash,
cash equivalents and short-term investments. The Company believes that current
cash and investment balances are sufficient to fund operations for the next
twelve months.
Net cash used in operating activities was approximately $2.6 million and
approximately $4.9 million for the three months ended September 30, 1999 and
1998, respectively. For each of these periods, the net cash used in operating
activities resulted primarily from net losses. Net cash of approximately $11.1
million was used in investing activities for the three months ended September
30, 1999 compared to approximately $1.7 million provided from investing
activities for the three months ended September 30, 1998. Net cash used and
provided by investing activities resulted primarily from purchases, maturities
and sales of short-term investments, offset in part by purchases of equipment
and licenses.
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As of September 30, 1999, the Company had capital equipment of
approximately $8.9 million, less accumulated depreciation and amortization of
approximately $5.3 million, to support its clinical, development, manufacturing
and administrative activities. The Company had financed approximately $4.0
million from capital lease obligations through September 30, 1999. The Company
expects capital expenditures to increase over the next several years as it
acquires equipment to support manufacturing operations.
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. In
order to successfully manufacture in commercial quantities, market and sell its
FDA-cleared products and apply for FDA marketing clearance for its remaining
products, the Company may be required to raise additional funds.
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, 1999, the Company had an accumulated deficit of
$83.3 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 to
conduct its research and development activities, obtain regulatory approvals for
its products, establish commercial-scale manufacturing capabilities and expand
its sales and marketing activities. There can be no assurance that any of the
Company's potential products for diagnosis and treatment of ventricular
tachycardia and atrial fibrillation will either receive regulatory approvals for
marketing or be successfully commercialized or that the Company will achieve
significant revenues from either international or domestic sales. In addition,
there can be no assurance that the Company will achieve or sustain profitability
in the future 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 Company's products gain market acceptance, the scale-up of manufacturing
abilities and the expansion of sales and marketing activities and competition.
Clinical Trials
There can be no assurance that the Company's current or future products
will prove to be safe and effective in clinical trials under applicable United
States or international regulatory guidelines or that additional modifications
to the Company's products will not be necessary. Furthermore, there can be no
assurance that the Company will be successful in completing development of the
Tracking System products. With respect to the Chilli Cooled Ablation System,
because ablation treatment of cardiac arrhythmias is a relatively new and to
date untested treatment, the long-term effects of radiofrequency ablation on
patients are unknown. As a result, the long-term success of ablation therapy in
treating ventricular tachycardia and other tachyarrhythmias will not be known
for several years.
On February 2, 1999, the Company obtained PMA approval for the Chilli
Cooled Ablation Catheter and the Radiofrequency Generator and Integrated Fluid
Pump, the products that together form the
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Company's Cooled Ablation System. On March 11, 1999, the Company suspended and
later terminated a clinical trial for the Local Sector Mapping Basket, a
variation of the Mercator Mapping Basket. On January 27, 1999, the Company
received 510(k) clearance for the Mercator Atrial Mapping Basket sizes 70cc and
100cc and the Model 8100/8300 Arrhythmia Mapping System, the products that
together form the Company's Arrhythmia Mapping System for diagnostic mapping of
the right atrium. The Company is continuing to enroll patients in the study for
the 130cc size basket to support a special 510(k) submission. The Company
discontinued a clinical trial for a second version of the Nexus Linear Lesion
Catheter for the treatment of atrial flutter in February 1999 and atrial
fibrillation in July 1999.
Cooled Ablation System for Ventricular Tachycardia. The Company obtained
PMA approval for the Chilli Cooled Ablation Catheter and Radiofrequency
Generator and Fluid Pump on February 2, 1999. The PMA application requires the
Company to perform a post market study. On September 17, 1999, the Company
submitted a PMA supplement requesting the addition of tracking technology, new
curve sizes and bi-directional deflection to the Chilli catheter.
Mercator High Density Array Catheter for the Right Atrium. 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 the Arrhythmia Mapping
System for complex atrial tachyarrhythmias. The Company submitted a 510(k)
application for clearance of the Mercator Atrial Mapping Basket in July 1998 and
received clearance in January 1999 for two of the three basket sizes (70
and100cc). The Company has performed five of the twelve cases needed for a
510(k) submission regarding the 130cc basket.
Tracking System. In August 1999, the Company submitted a 510(k)
application requesting clearance of the Tracking System. This system is
comprised of the Arrhythmia Mapping Computer, the Signal Acquisition Module, the
Position Acquisition Module, the Radii diagnostic electrophysiology catheter and
two reference diagnostic catheters. The use of this system is designed to enable
the real-time tracking of catheter position information minimizing the use of
fluoroscopy. The Company believes this new technology will enhance the
performance of diagnostic electrophysiology studies. Furthermore, the Company
believes the combination of the Chilli catheter with the Tracking System will
enhance the performance of radiofrequency ablation procedures.
No Existing Market
On February 2, 1999, the Company received approval from the FDA of its
PMA application to commercially release its Chilli Cooled Ablation System. In
January 1999, the FDA granted 510(k) clearance of the Company's Mercator Atrial
High Density Array Catheter. 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 physicians' 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,
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
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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. For products that have received FDA clearances or approvals, the
Company markets primarily through a direct sales force in the United States. The
Company's Vice President of Sales and Marketing manages distributor
relationships outside North America. In addition, the Company intends to
leverage its existing field clinical specialists' technical expertise to support
the revenue producing installations. There can be no assurance that
electrophysiologists will accept the Company's products or systems on a
commercial basis. Failure of such products or systems to gain market acceptance
would have a material adverse effect upon the Company's business, financial
condition and results of operations.
Establishing a marketing and sales capability sufficient to support
sales of the Company's products 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 the establishment of 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. The Company currently sells its products through distributors in
certain international markets. All sales of the Company's products to date have
been denominated in U.S. dollars. The end-user price is determined by the
distributor and varies from country to country. Changes in overseas economic
conditions, currency exchange rates, foreign tax laws, or tariffs or other trade
regulations could have a material adverse effect on the Company's ability to
market its products internationally and therefore on its business, financial
condition and results of operations.
Major Distributor; Dependence on Japan Lifeline
The Company currently relies upon international distributors of
specialty cardiovascular products to market and sell its products. A large
percentage of the Company's revenues are derived from sales to its Japanese
distributor, Japan Lifeline. During fiscal 1999, 1998 and 1997 Japan Lifeline
accounted for 52%, 80% and 66%, respectively, of the Company's net sales. In
fiscal 2000, the Company anticipates that Japan Lifeline will account for a
smaller percentage of the Company's net sales. The Company also relies on its
European distributors for a significant portion of its revenues. If the
Company's sales to any of its international distributors decline, the Company
would experience a material decline in revenues. Even if the Company is
successful in selling its products through new international distributors, the
rate
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of growth of the Company's net sales could be materially and adversely effected
if its current international distributors do not continue to sell a substantial
number of the Company's products. If the Company's sales to its current
international distributors decline, the Company cannot be certain that it will
be able to attract additional distributors that can market its products
effectively or can provide timely and cost-effective customer support and
service. None of the Company's international distributors are obligated to sell
the Company's products after its agreement with the Company has expired.
Further, the Company cannot be certain that its current international
distributors will continue to represent its products or that they will continue
to devote a sufficient amount of effort and resources to selling the Company's
products.
Strategic Relationships
The Company intends to pursue strategic relationships with corporations
and research institutions with respect to the research, development,
international regulatory approval, manufacturing and marketing of certain of its
products. There can be no assurance that the Company will be successful in
establishing or maintaining any such relationships or that any such relationship
will be successful.
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 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 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 QSR
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
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ISO9001/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
ISO9001/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 which was granted 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, modify, use or sell its products either in the United States or
in international markets. Litigation or regulatory proceedings, which could
result in substantial cost and uncertainty to the Company, may also be necessary
to enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. There can
be no assurance that the Company will have the financial resources to defend its
patents from infringement or claims of invalidity.
In addition to patents, the Company relies on trade secrets and
proprietary know how to compete, which it seeks to protect, in part, through
appropriate confidentiality and proprietary information agreements. These
agreements generally provide that all confidential information developed or made
known to individuals by the Company during the course of the relationship with
the Company is to be kept confidential and not disclosed to third parties,
except in specific circumstances. The agreements also generally provide that all
inventions conceived by the individual in the course of rendering service to the
Company shall be the exclusive property of the Company. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to or independently developed by competitors.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and
companies in the medical device industry have employed intellectual property
litigation to gain a competitive advantage. There can be no assurance that the
Company will not become subject to patent infringement claims or litigation in a
court of law, or interference proceedings
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declared by 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 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.
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, including Boston
Scientific Corporation, C.R. Bard, Inc., Johnson and Johnson through its Cordis
Division, St. Jude Medical and Medtronic, Inc. 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.
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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.
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 Company will be required to make a new 510(k) submission for any
device that is cleared through the 510(k) process if the Company modifies or
enhances the device in a manner that could significantly affect safety or
effectiveness, or if those changes constitute a major modification in the
intended use of the 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. There can be no assurance that the FDA will
act favorably or quickly on any of the Company's PMA applications. Significant
difficulties and costs may be encountered by the Company in its efforts to
obtain FDA clearance that could delay or preclude the Company from selling its
products in the United States. Furthermore, there can be no assurance that the
FDA will not request additional data or require that the Company conduct further
clinical studies, causing the Company to incur substantial cost and delay. In
addition, there can be no assurance that the FDA will not impose strict labeling
requirements, onerous operator training requirements or other requirements as a
condition of its PMA approval, any of which could limit the Company's ability to
market its systems. Labeling and promotional activities are subject to scrutiny
by the FDA and, in certain circumstances, by the Federal Trade Commission
("FTC"). FDA enforcement
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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 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
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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 DRG code is established by
the HCFA. 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
amount, or at all.
Regardless of the type of reimbursement system, the Company believes
that physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. In addition, the Company believes that 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 only limited commercial sales 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 of its
potential products are successfully commercialized. Such insurance is expensive,
difficult to obtain and may not be
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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 manufacture and market its products in
commercial quantities, 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 Chief Executive
Officer in May 1999 and an Interim Chief Financial Officer in October 1999.
There can be no assurance that the Company's officers and Sales and Marketing
personnel 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. Any failure
to implement and improve the Company's operational, financial and management
systems or, to expand, train, motivate or manage employees as required by future
growth, if any, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Year 2000 Compliance
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. Furthermore, these systems will be
used in various operating environments once installed at customer sites. It is
likely that, commencing in the year 2000, the functionality of certain operating
environments will be adversely affected when one or more component products of
the environment would not be in "Year 2000 compliance." The Company believes its
products are in Year 2000 compliance, but has not conducted any formal audit of
its products with respect to Year 2000 compliance. There can be no assurance
that the Company's fully compliant products will be able to function properly
when integrated with other vendor's noncompliant component products.
Many currently installed computer systems and software products are
coded to accept only two digit entries in the data 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, 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 recently
reviewed the Year 2000 compliance status of the software and systems used in its
internal business processes, and obtained appropriate assurances of compliance
from
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the manufacturers of these products and agreements to modify or replace all
non-compliant products. The Company contacted its critical suppliers and major
customers to determine whether the products obtained by the Company from such
vendors or sold by the customer to third parties are Year 2000 compliant. In
addition, the Company considered 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. 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 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. To the extent that the Company's products are integrated with
products sold by third parties, there can be no assurances that users of the
Company's products will not experience Year 2000 problems as a result of the
integration of the Company's software with non-compliant Year 2000 products of
such third party suppliers. In addition, 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. 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.
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 or Series B Preferred Stock.
On April 22, 1997, pursuant to a Preferred Shares Rights Agreements (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 1/1000 a share of the Company's Series A Participating
Preferred Stock ("Series A Preferred") for each outstanding share of Common
Stock and Series B Preferred Stock (on an as converted basis) of the Company (a
"Right"). Each Right entitles the
22
<PAGE> 23
registered holder to purchase from the Company 1/1000 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 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,
change 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, operating results and financial condition. Any adverse
determination in such litigation could also subject the Company to significant
liabilities.
Absence of Dividends
The Company has not paid any cash dividends since inception and does not
anticipate paying cash dividends in the foreseeable future.
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, 1999.
23
<PAGE> 24
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 annual
report on Form 10-K for the year ended June 30, 1999: purchase and installation
of machinery and equipment - $125,305; repayment of indebtedness - $3,120,310.
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) The Registrant filed a Form 8-K on August 3, 1999 related to the
completion of its Series B Preferred Stock financing.
24
<PAGE> 25
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 12, 1999 CARDIAC PATHWAYS CORPORATION
/S/ THOMAS M. PRESCOTT
-------------------------------
THOMAS M. PRESCOTT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/S/ DOUGLAS E. GANS
-------------------------------
DOUGLAS E. GANS
INTERIM CHIEF FINANCIAL OFFICER
25
<PAGE> 26
CARDIAC PATHWAYS CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION PAGE NO.
- ----------- ------------------- --------
<S> <C> <C>
27.1 Financial Data Schedule 27
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,985
<SECURITIES> 8,960
<RECEIVABLES> 1,193
<ALLOWANCES> 105
<INVENTORY> 1,346
<CURRENT-ASSETS> 29,015
<PP&E> 8,905
<DEPRECIATION> 5,326
<TOTAL-ASSETS> 34,675
<CURRENT-LIABILITIES> 4,655
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 27,184
<TOTAL-LIABILITY-AND-EQUITY> 34,675
<SALES> 1,381
<TOTAL-REVENUES> 1,381
<CGS> 1,392
<TOTAL-COSTS> 1,392
<OTHER-EXPENSES> 1,928
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> (3,304)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,304)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,304)
<EPS-BASIC> (2.45)
<EPS-DILUTED> (2.45)
</TABLE>
