<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 March 31, 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 May 17, 1999 there were 10,038,578 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> <C>
Item 1. Financial Statements and Notes (Unaudited)
Consolidated Balance Sheets as of March 31, 1999 and June 30, 1998 .. 3
Consolidated Statements of Operations for the Three and Nine
Months Ended March 31, 1999 and 1998 ................................ 4
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 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 .......... 29
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ........................... 30
Item 6. Exhibits and Reports on Form 8-K .................................... 30
SIGNATURES ...................................................................... 31
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998 (1)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 955,614 $ 7,268,877
Short-term investments 1,208,044 17,248,500
Accounts receivable, net of allowance for doubtful accounts
of $40,000 at March 31, 1999 and $16,500 at June 30, 1998 1,369,679 523,455
Inventories 1,257,548 668,042
Prepaid expenses 297,297 317,549
Other current assets 320,096 526,193
------------ ------------
Total current assets 5,408,278 26,552,616
Restricted cash equivalents 3,000,000 --
Restricted investments 3,300,000 --
Property and equipment, net 4,399,985 3,632,488
Notes receivable from related parties 234,108 260,477
Deposits and other assets 324,463 488,996
------------ ------------
$ 16,666,834 $ 30,934,577
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 898,467 $ 1,079,772
Accrued compensation and related benefits 599,038 601,307
Accrued clinical expenses 1,044,435 1,144,556
Other accrued expenses 525,642 654,670
Current obligations under capital leases 408,600 554,806
Current portion of long-term debt 1,666,667 166,667
------------ ------------
Total current liabilities 5,142,849 4,201,778
Long-term obligations under capital leases 405,730 483,586
Deferred royalty income 2,705,862 2,930,862
Long-term debt, less current portion 4,333,333 5,833,333
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized and none issued
and outstanding at March 31, 1999 and June 30, 1998 -- --
Common stock, $.001 par value; 30,000,000 shares authorized; 9,979,084 shares
issued and outstanding at March 31, 1999 and 9,795,974
at June 30, 1998 9,979 9,796
Additional paid-in capital 80,046,394 79,783,779
Receivable from stockholder (385,000) (385,000)
Accumulated deficit (75,366,834) (61,417,629)
Deferred compensation (225,479) (505,928)
------------ ------------
Total stockholders' equity 4,079,060 17,485,018
------------ ------------
$ 16,666,834 $ 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 Nine months ended
March 31, March 31,
---------------------------------- ----------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 1,322,960 $ 737,947 $ 3,427,277 $ 1,659,451
Cost of goods sold 991,119 793,057 3,111,677 2,063,366
------------ ------------ ------------ ------------
Gross margin (deficit) 331,841 (55,110) 315,600 (403,915)
Operating expenses:
Research and development 3,069,920 3,581,398 9,783,331 10,687,922
Selling, general and administrative 1,596,064 1,041,843 4,669,302 3,000,259
------------ ------------ ------------ ------------
Total operating expenses 4,665,984 4,623,241 14,452,633 13,688,181
------------ ------------ ------------ ------------
Loss from operations (4,334,143) (4,678,351) (14,137,033) (14,092,096)
Other income (expense):
Interest income 140,785 427,663 652,594 1,483,191
Interest expense (157,014) (130,717) (496,620) (439,089)
Other, net 11,822 37,752 31,854 61,082
------------ ------------ ------------ ------------
Total other income (expense), net (4,407) 334,698 187,828 1,105,184
------------ ------------ ------------ ------------
Net loss ($ 4,338,550) ($ 4,343,653) ($13,949,205) ($12,986,912)
============ ============ ============ ============
Net loss per share - basic and diluted $ (0.43) $ (0.45) $ (1.41) $ (1.35)
============ ============ ============ ============
Shares used in computing
net loss per share - basic and diluted 9,974,000 9,723,000 9,909,000 9,603,000
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
March 31,
------------------------------------
1999 1998
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(13,949,205) $(12,986,912)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 949,959 970,909
Amortization of deferred royalty income (225,000) (18,134)
Amortization of deferred compensation 146,042 196,927
Gain on disposal of property and equipment -- (30,122)
Issuance of common stock warrants -- 60,351
Issuance of nonqualified stock options for services 3,811 65,121
Changes in operating assets and liabilities:
Accounts receivable (846,224) (325,239)
Inventories (589,506) (117,548)
Prepaid expenses 20,252 224,613
Other current assets 206,097 148,454
Accounts payable (181,305) (75,734)
Accrued compensation and related benefits (2,269) 66,381
Accrued clinical expenses (100,121) 292,290
Other accrued expenses (129,028) (49,586)
Interest payable -- 291,125
------------ ------------
Net cash used in operating activities (14,696,497) (11,287,104)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (2,312,448) (22,658,792)
Maturities and sales of short-term investments 18,352,904 35,301,450
Purchases of property and equipment, net (1,491,055) (1,139,300)
Decrease in notes receivable 26,369 141,492
(Increase) decrease in deposits and other assets 164,533 (83,117)
------------ ------------
Net cash provided by investing activities 14,740,303 11,561,733
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations (450,463) (716,627)
Amounts held as restricted cash equivalents (3,000,000) --
Reclassification of restricted short-term investments (3,300,000) --
Proceeds from sale of common stock 393,394 350,838
Decrease in note receivable from stockholder -- 10,000
------------ ------------
Net cash used in financing activities (6,357,069) (355,789)
------------ ------------
Net decrease in cash and cash equivalents (6,313,263) (81,160)
Cash and cash equivalents at beginning of period 7,268,877 5,091,426
------------ ------------
Cash and cash equivalents at end of period $ 955,614 $ 5,010,266
============ ============
</TABLE>
See notes to consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 and nine month periods ended March
31, 1999 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.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments," the Company does not have sufficient
resources to continue operations beyond May 21, 1999. Additionally, the Company
does not have a committed source of financing to meet its cash flow needs over
the very short term. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
2. 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 or restricted investments.
At March 31, 1999 and June 30, 1998, all short-term investments were classified
as available-for-sale and held-to-maturity. 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. Available-for-sale securities are
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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.
At March 31, 1999, the Company had restricted cash equivalents and
investments of $3,000,000 and $3,300,000, respectively, pursuant to a
loan agreement with Silicon Valley Bank. The Company is not in compliance with
its financial covenants required by the Company's loan agreement under which
Silicon Valley Bank may require the Company to collateralize up to 105% of the
outstanding principal balance of the loan as long as the Company remains out of
compliance with its covenants. The outstanding principal balance of the loan was
$6,000,000 as of March 31, 1999. The $6,300,000 pledged amounts are not
available to the Company to support its operations or to meet its cash flow
requirements.
The following is a summary of held-to-maturity and available-for-sale securities
at cost, which approximates fair value:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
DESCRIPTION (UNRESTRICTED) 1999 1998
----------- -----------
<S> <C> <C>
Held-to-maturity:
U.S. government agency $ -- $ 2,996,886
U.S. corporate obligations -- 10,751,614
Available-for-sale:
U.S. corporate obligations 1,208,044 --
Auction rate preferred stock -- 3,500,000
----------- -----------
1,208,044 17,248,500
Amounts classified as cash equivalents -- --
----------- -----------
Amounts included in short-term investments $ 1,208,044 $17,248,500
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
DESCRIPTION (RESTRICTED) 1999 1998
----------- -----------
<S> <C> <C>
Available-for-sale:
Certificate of Deposit $ 3,000,000 $ --
U.S. corporate obligations 3,300,000 --
----------- -----------
6,300,000 --
Amounts classified as cash equivalents 3,000,000 --
----------- -----------
Amounts included in restricted investments $ 3,300,000 $ --
=========== ===========
</TABLE>
There were no material realized gains or losses for the three and nine
month periods ending March 31, 1999 and 1998. The cost of securities sold is
based on the specific identification method. In the three months ended March
31, 1999, the Company sold certain of its held-to-maturity securities to meet
its liquidity needs. All securities held at March 31, 1999 are classified as
available-for-sale.
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3. CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
---------- ----------
<S> <C> <C>
Inventories:
Raw materials $ 598,800 $ 432,867
Work-in-process 476,862 123,052
Finished goods 181,886 112,123
---------- ----------
$1,257,548 $ 668,042
========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
---------- ----------
<S> <C> <C>
Property and equipment:
Equipment $6,591,431 $5,626,967
Leasehold improvements 422,062 348,610
Equipment-in-process 2,054,158 1,523,411
---------- ----------
9,067,651 7,498,988
Less accumulated depreciation and
amortization 4,667,666 3,866,500
---------- ----------
$4,399,985 $3,632,488
========== ==========
</TABLE>
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 or such an
amount as may be determined by the Company's Board of Directors. The 1998
Employee Stock Purchase Plan was approved by the stockholders at the 1998 Annual
Meeting of Stockholders on November 30, 1998.
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. These increases were approved by the stockholders at the 1998
Annual Meeting of Stockholders on November 30, 1998.
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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 reported
in measuring net income such as changes in value of available-for-sale
securities and foreign currency translation adjustments. The Company has adopted
FAS 130 as of the first quarter of fiscal 1999. FAS 130 establishes new rules
for the reporting and display of comprehensive income and its components,
however it has no impact on the Company's net income or total stockholder's
equity.
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.
6. RECENT DEVELOPMENTS
For a discussion of certain recent developments, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Recent Developments."
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 "Recent Developments" and "Overview" sections. These
forward looking-statements include (i) the statements in the "Recent
Developments" section, including the statements in the first paragraph regarding
the time period through which the Company will have sufficient resources to
continue operations, the date on which the Company will cease operations in the
absence of financing, the impact of a liquidation upon the holders of Common
Stock, the statements in the third paragraph regarding the Company's
expectations with regard to formal notice of deficiency from Nasdaq and many of
the statements under "Negotiations Regarding Preferred Stock Financing," (ii)
the statements in the "Overview" section including the statement in the first
paragraph relating to expectations of operating losses, the statement in the
third paragraph relating to anticipated filing and approval time periods for
premarket approval applications, and the statements in the fourth paragraph
relating to the commercialization of products that have received Food and Drug
Administration ("FDA") manufacturing approval and, the statements related to the
manufacturing, marketing, and distribution of the Company's products; (iii) 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", "Selling, General and Administrative" paragraphs;
and (iv) 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.
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RECENT DEVELOPMENTS
Immediate Need for Additional Financing
As of May 14, 1999, the Company's balance of cash, cash equivalents and
short-term investments was only $450,000. The Company does not have a committed
source of financing to meet its cash flow needs over the very short term. In the
absence of an immediate in flow of capital, the Company does not have sufficient
resources to continue operations beyond May 21, 1999. If the Company is not
successful in raising additional capital, it will cease operations on or before
Friday, May 21, 1999. The Company does not believe that any funds would be
available for holders of Common Stock in the event of a liquidation.
Noncompliance With Loan Covenants
The Company's long-term credit facility with Silicon Valley Bank requires
the Company to collateralize 105% of the principal balance of the loan in the
event of noncompliance with the restrictive covenants of the facility. In late
March 1999, as a result of noncompliance with certain financial covenants
required by the facility, the Company fully collateralized its $6.0 million loan
obligation to Silicon Valley Bank by pledging $3.0 million of cash and $3.3
million of short-term investments as collateral for the loan. As a result, these
pledged amounts are not available to the Company to support its operations or to
meet its cash flow requirements.
Negotiations Regarding Preferred Stock Financing
The Company is currently negotiating definitive agreements in connection
with a preferred stock financing (the "Financing") that, if closed, would result
in a significant infusion of capital into the Company. The participants in such
Financing would be certain accredited investors, including certain current
stockholders of the Company. As of the filing of this Form 10-Q there is no
commitment on the part of the investors to provide financing to the Company.
Therefore, there can be no assurance that the Company will be able to
successfully negotiate and enter into definitive agreements regarding such
Financing. Negotiations could break down at any time as significant matters have
not yet been agreed upon.
Even if the Company is able to negotiate and enter into definitive
agreements regarding the Financing, the proposed terms of the Financing include
the issuance of preferred stock having rights, including voting rights,
preferences, including dividend and liquidation preferences, and privileges
substantially superior to those of the Common Stock. In addition, if completed,
the Financing will be severely dilutive to the holders of Common Stock.
Even if the Company is able to negotiate and enter into definitive
agreements in connection with the Financing, there can be no assurance that the
Financing will close. The Financing will be subject to customary conditions to
closing, including the requirement of approval by the Company's stockholders of
certain matters in connection with the Financing. The Financing, if agreed to,
will include provisions for bridge financing designed to allow the Company to
meet its cash flow requirements pending the closing. Although the Financing will
be designed to raise sufficient capital to address the Company's net tangible
asset deficiency under Nasdaq described below, there can be no assurance that
the Financing will be completed or even if completed that Nasdaq will permit the
continued listing of the Company's Common Stock. Nasdaq's decision with respect
to continued listing will be based in part on the Company's ability to
demonstrate to Nasdaq that the Company can sustain compliance with Nasdaq's
listing requirements.
Noncompliance with Requirements for Continued Listing on the Nasdaq National
Market
The Company's Common Stock is currently listed for trading on the Nasdaq
Stock Market's National Market. On March 22, 1999, the Company issued a press
release announcing, as described above, that it had pledged $6.3 million of cash
as collateral for the credit facility with Silicon Valley Bank. On April 7,
1999, based upon information contained in such press release, Nasdaq requested
that the Company provide additional information with respect to the Company's
ability to meet Nasdaq's quantative maintenance requirements. On May 5, 1999,
Nasdaq notified the Company that, based upon its review of the information
provided by the Company, the Company was no longer in compliance with the net
tangible assets requirement of $4.0 million for continued listing on the Nasdaq
National Market under NASD Rule 4450(a) (Maintenance Standard 1). As a result of
the Company's failure to meet the stated standards, Nasdaq is reviewing the
Company's eligibility for continued listing on the Nasdaq National Market. In
order to facilitate Nasdaq's review, the Company must provide by May 17, 1999 a
proposal for achieving compliance. Over the last several months, the Company has
considered various financing options and actively sought additional financing
that would bring it back into compliance with the requirements of Nasdaq.
However, other than with respect to the potential transaction described above
under "Negotiations Regarding Preferred Stock Financing," the Company has not
been able to obtain the required additional financing. Therefore, as of May 17,
1999, the Company does not have a definitive plan that will result in its
meeting all Nasdaq National Market listing requirements. As a result, the
Company expects that it will receive a formal notice of deficiency from Nasdaq
shortly after May 17, 1999, at which time Nasdaq will commence the delisting
process.
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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 March 31, 1999 had an
accumulated deficit of approximately $75.4 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 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.
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. In February 1999, the FDA granted approval of the Company's
premarket approval ("PMA") application to commercially release its Ventricular
Tachycardia Ablation System which consists of the Chilli(R) Cooled Ablation
Catheter and the Model 8004 Radiofrequency Generator. In January 1999, the FDA
granted clearance of the Company's application pursuant to section 510(k) of the
Food, Drug, & Cosmetics Act of 1938, as amended (the 510(k) application) to
commercially release its Mercator(R) 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. 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 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 its products in the United States, the Company must obtain
clearance or approval from the FDA. The Company does not anticipate filing a PMA
application for any additional system for at least twelve months, and does not
anticipate receiving a PMA for any such system for 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 from its
Arrhythmia Mapping System for diagnostic mapping of ventricular tachycardia or
its Atrial Fibrillation Ablation System unless and until such products obtain
clearance or approval from the FDA.
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
Ventricular Tachycardia Ablation System, 510(k) clearance for the Mercator
atrial catheter, 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
11
<PAGE> 12
manufacture in commercial quantities and sell the Ventricular Tachycardia
Ablation System. 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
substantial efforts and require significant management and financial resources.
See "Factors That May Impact Future Operations."
Reduction in Force. During the quarter ended March 31, 1999, the Company
reduced its work force company-wide by approximately 40%. The Company recorded
costs associated with the reduction in force of approximately $225,000 in the
three month period ending March 31, 1999. The Company does not expect to realize
any material reductions in manufacturing or operating expenses from the
reduction in force until the fourth quarter of fiscal 1999 or the first quarter
of fiscal 2000 at the earliest.
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 $1.3 million for the three
months ended March 31, 1999 compared to $738,000 for the three months ended
March 31, 1998. The increase in net sales for the three months ended March 31,
1999 compared to the same period a year ago primarily resulted from initial
sales of the Company's Chilli cooled ablation catheter in the U.S. market
following FDA approval in February 1999. In addition, the Company had increased
sales of both Chilli and Radii catheters in Europe during the quarter reflecting
the establishment of certain distributor arrangements, particularly in Germany
and France. These increases were offset in part by a slight decrease in Radii
sales to Japan. For the nine months ended March 31, 1999, the Company had net
sales of $3.4 million compared to $1.7 million for the nine months ended March
31, 1998. The increase in net sales for the nine months ended March 31, 1999
compared to the same period in the prior year was primarily due to
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higher overall shipments of Radii and Trio/Ensemble catheter products in Japan
and Europe, and to a lesser extent, the initial product shipments in the U.S.
market for the Chilli catheter noted above.
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 or ratably over the period for which the related
technology patents expire. A total of $294,000 of royalty income related to the
agreement has been recorded through March 31, 1999, of which $75,000 was
recognized in the three months ended March 31, 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 $991,000 for the three months ended March 31, 1999 and resulted
in a gross margin of $332,000, or 25% of net sales. For the three months ended
March 31, 1998, cost of goods sold was $793,000 and resulted in a gross margin
deficit of $55,000. For the nine months ended March 31, 1999, the Company had a
gross margin of $316,000, or 9% of net sales, compared to a gross margin deficit
of $404,000 for the nine months ended March 31, 1998. The increase in the gross
margins for the three and nine months ended March 31, 1999 compared to the same
periods in the prior year was primarily due to increased sales volumes, changes
in sales mix, improved manufacturing yields, and certain decreases in
manufacturing spending during the quarter ended March 31, 1999. These
improvements were offset in part by increased overhead and training costs for
manufacturing personnel, and higher costs associated 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 $3.1 million for the three months ended
March 31, 1999 from $3.6 million for the three months ended March 31, 1998.
Research and development expenses were $9.8 million for the nine months ended
March 31, 1999 compared to $10.7 million for the nine months ended March 31,
1998. 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 reflecting an overall smaller research and development
organization. These decreases were 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 expects to expend substantial funds in the future to
continue its product development programs.
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 $1.6
million for the three months ended March 31, 1999 from $1.0 million for the
three months ended March 31, 1998. Selling, general, and administrative expenses
were $4.7 million for the nine months ended March 31, 1999, compared to $3.0
million for the nine months ended March 31, 1998. The increases in both periods
were 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
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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 expense of $4,000 for the three months ended March 31, 1999 from net other
income of $335,000 for the three months ended March 31, 1998. Net other income
was $188,000 for the nine months ended March 31, 1999, compared to $1.1 million
for the nine months ended March 31, 1998. The reduction in net other income was
the result of decreased interest income on significantly lower cash, cash
equivalent and short-term investment balances.
Net Loss. The Company's net loss remained approximately the same at $4.3
million for the three months ended March 31, 1999 and March 31, 1998. The net
loss was $13.9 million for the nine months ended March 31, 1999, compared to
$13.0 million for the nine months ended March 31, 1998.
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. FAS 130 was adopted in the first quarter of
fiscal year 1999 and did not have a material effect on the Company's financial
statements.
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 131 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.
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 $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. As of March 31, 1999, the Company had $2.2
million in unrestricted cash, cash equivalents and short-term investments.
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Net cash used in operating activities was $14.7 million and $11.3 million
for the nine months ended March 31, 1999 and 1998, 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 $14.7 million and
$11.6 million for the nine months ended March 31, 1999 and 1998, 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 used in financing activities was $6.4
million and $356,000 for the nine months ended March 31, 1999 and 1998,
respectively. The net cash used in financing activities during the nine months
ended March 31, 1999 was primarily due to amounts held as restricted cash and
cash equivalents and the reclassification of restricted short-term investments
in the current reporting period.
As of March 31, 1999, the Company had capital equipment of $9.1 million,
less accumulated depreciation and amortization of $4.7 million, to support its
clinical, development, manufacturing and administrative activities. The Company
had financed $4.0 million from capital lease obligations through March 31, 1999.
The Company expects capital expenditures to increase over the next several years
as it acquires equipment to support manufacturing operations. As of March 31,
1999, the Company had available an unused equipment lease financing facility
of approximately $1.1 million.
In May 1998, the Company obtained a term loan credit facility of $8.0
million from a commercial bank. The loan agreement provided 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% (9.00% at March 31, 1999), 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. 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. At March 31, 1999, the Company had an unused amount of $2.0 million
under the credit facility that is available for drawdowns through May 1999.
Under the terms of the 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. As of March 31, 1999, the Company was not
in compliance with its financial covenants pertaining to the loan and was
therefore required to designate to Silicon Valley Bank a restricted cash pledge
of $6.3 million representing 105% of the outstanding principal balance of the
loan. As of March 31, 1999, the Company had restricted cash equivalents and
investments of $3.0 million and $3.3 million, respectively, in connection with
the restricted cash pledge requirements of the loan agreement. The pledged
amounts of $6.3 million are not available to the Company to support its
operations or to meet its cash flow requirements.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including those factors set forth above under recent
developments, 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
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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 and
market and sell its FDA-cleared products and to apply for FDA marketing
clearance for its remaining products, the Company will be required to raise
additional funds.
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 one year, 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 commenced a program in fiscal 1998, to be substantially completed by mid
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 many 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 mid calendar 1999.
Software or systems that are deemed critical to the Company's business are
scheduled to be Year 2000 compliant by mid 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.
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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 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.
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 March 31, 1999, the Company had an accumulated deficit of $75.4
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, the expansion of sales and marketing activities and competition.
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Immediate Additional Financing Required.
See "Recent Developments" above for a discussion of the Company's need to
raise additional financing immediately.
Clinical Trials
The Ventricular Tachycardia Ablation System, Arrhythmia Mapping Systems and
Atrial Fibrillation Ablation System are in various stages of clinical testing.
Other than with respect to the Ventricular Tachycardia Ablation System, the
Mercator Atrial Mapping Basket, and the Arrhythmia Mapping System for basic
electrophysiology studies for which FDA approval or clearance was obtained, the
clinical data to date is 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 pre-clinical or clinical 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. In addition,
because ablation treatment of these cardiac arrhythmias is a relatively new and
to date untested treatment, the long-term effects of radiofrequency ablation on
patients are unknown. As a result, the long-term success of ablation therapy in
treating ventricular tachycardia and atrial fibrillation will not be known for
several years.
On February 2, 1999, the Company obtained PMA approval for the Chilli Cooled
Ablation Catheter and the Model 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
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Arrhythmia Mapping System, the products that together form the Company's
Arrhythmia Mapping System for diagnostic mapping of ventricular tachycardia. On
March 11, 1999, the Company suspended a clinical trial for the Local Sector
Mapping Basket, a variation of the Mercator Left Ventricular Mapping Basket due
to financial constraints. 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. On March 11, 1999, the Company
suspended a clinical trial of the Local Sector Mapping Basket in the right
atrium due to financial constraints. 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 submitted an
IDE for the treatment of Atrial Fibrillation for a second version of the Nexus
Linear Lesion Catheter in December 1998 which was conditionally approved in
January 1999. Furthermore, 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.
Ventricular Tachycardia Ablation System. The Company obtained PMA approval
for the Chilli Cooled Ablation Catheter and Model 8004 Radiofrequency Generator
and Fluid Pump on February 2, 1999. The approval requires a post approval study
be performed.
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. 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 were enrolled in this study as of May 14, 1999.
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 seven patients were enrolled in this trial as of
May 14, 1999. Due to limited financial resources, enrollment into the Mercator
and Local Sector Left Ventricular Mapping Basket studies were suspended on March
11, 1999. 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.
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.
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The clinical trial was 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 included 74 patients. There
was no thrombus formation on any mapping basket used in the 74 studies. The
Company submitted a 510(k) application for clearance of the Mercator Atrial
Mapping Basket on July 17, 1998 and received clearance of two of the three
basket sizes (70 and 100cc). Four cases have been performed of the 12 additional
cases needed for a special 510(k) submission requesting approval of the
130cc-sized basket. An IDE was submitted for a clinical study of the Local
Sector Mapping Basket for the right atrium on February 20, 1998. The Company has
approval to test 95 subjects at ten clinical sites, and 25 patients were
enrolled as of May 14, 1999. Due to limited financial resources, enrollment into
the clinical trial was suspended on March 11, 1999.
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 were enrolled as of February 3, 1999. The
Company has also tested the Nexus Linear Lesion Catheter for atrial flutter and
fibrillation in 15 patients in Europe as of May 14, 1999.
A feasibility IDE for use of the modified Nexus Linear Lesion Catheter in
the right atrium to treat atrial fibrillation was submitted on December 30,
1998, and was conditionally approved on January 29, 1999. The IDE approval is
for four clinical sites to enroll a total of 20 patients. Because the FDA is now
open to an approval study route for the indication of treating atrial
fibrillation with right atrial lesions exclusively, the Company has changed its
regulatory strategy to pursue commercialization of the Nexus 2.0 for treating
atrial fibrillation. On February 3, 1999, the Company discontinued the Nexus
study to treat atrial flutter.
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
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8100/8300 Arrhythmia Mapping System (the "Model 8100/8300") received 510(k)
clearance from the FDA in August 1997 for basic diagnostic electrophysiology
studies. Although the Company has received such approval or clearance, there can
be no assurance that such products will gain any significant degree of market
acceptance among physicians, patients, and health care payors. There can be no
assurance that these products will be successfully commercialized in the United
States or in international markets. 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 any
or all such products achieve 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.
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. 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 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, including those European markets in which the Company does not
currently have a distributor in place, 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 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
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resources and develop manufacturing expertise to establish large scale
manufacturing capabilities. In particular, the Company received FDA clearance
for its Chilli Cooled Ablation Catheter on February 2, 1999 and will be required
to manufacture such catheters in large volumes to successfully commercialize the
product. Manufacturers often encounter difficulties in scaling up production of
new products, including problems involving production yields, quality control
and assurance, component supply shortages, shortages of qualified personnel,
compliance with FDA regulations and the need for further FDA approval of new
manufacturing processes. In addition, the Company believes that substantial 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 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 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.
22
<PAGE> 23
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 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
23
<PAGE> 24
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.
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.
24
<PAGE> 25
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 twelve 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 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
25
<PAGE> 26
order for the Company to obtain the permit. The Company currently has marketing
authorization in one or more Tier I countries for all of 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.
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 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
26
<PAGE> 27
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.
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.
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
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.
27
<PAGE> 28
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
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
28
<PAGE> 29
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.
29
<PAGE> 30
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 December 31, 1998: purchase and
installation of machinery and equipment - $612,127; repayment of indebtedness -
$147,848; and working capital - $5,152,863.
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 March 31, 1999.
30
<PAGE> 31
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: MAY 17, 1999 CARDIAC PATHWAYS CORPORATION
/S/ WILLIAM N. STARLING
-------------------------------------
WILLIAM N. STARLING
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/S/ G. MICHAEL LATTA
-------------------------------------
G. MICHAEL LATTA
VICE PRESIDENT OF FINANCE AND CHIEF
FINANCIAL OFFICER
31
<PAGE> 32
CARDIAC PATHWAYS CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION PAGE NO.
----------- ------------------- --------
<S> <C> <C>
27.1 Financial Data Schedule
</TABLE>
32
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 956
<SECURITIES> 1,208
<RECEIVABLES> 1,410
<ALLOWANCES> 40
<INVENTORY> 1,258
<CURRENT-ASSETS> 5,408
<PP&E> 9,068
<DEPRECIATION> 4,668
<TOTAL-ASSETS> 16,667
<CURRENT-LIABILITIES> 5,143
<BONDS> 4,739
0
0
<COMMON> 10
<OTHER-SE> 4,069
<TOTAL-LIABILITY-AND-EQUITY> 16,667
<SALES> 3,427
<TOTAL-REVENUES> 3,427
<CGS> 3,112
<TOTAL-COSTS> 3,112
<OTHER-EXPENSES> 9,783
<LOSS-PROVISION> 24
<INTEREST-EXPENSE> 497
<INCOME-PRETAX> (13,949)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,949)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,949)
<EPS-PRIMARY> (1.41)
<EPS-DILUTED> (1.41)
</TABLE>
