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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 000-28372
CARDIAC PATHWAYS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0278793
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
995 BENECIA AVENUE, SUNNYVALE, CALIFORNIA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 737-0505
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and, (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on September
24, 1999 as reported on the Nasdaq National Market, was approximately
$3,631,473. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of September 24, 1999, the registrant had outstanding 2,007,904 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form 10-K
portions of its Proxy Statement for the Annual Meeting of Stockholders to be
held November 18, 1999.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following: the Company's history of losses and uncertainty of profitability; the
uncertainty that those products which have not previously received regulatory
clearance or approval will receive such clearance or approval for commercial
sale from United States and international regulatory authorities in a timely
manner, if at all; the uncertainty of market acceptance of the Company's
products and systems; the Company's dependence on development and introduction
of new products; the Company's lack of sales, marketing and distribution
experience; the risks associated with manufacturing of the Company's products;
the Company's highly competitive industry and rapid technological change within
the Company's industry; the uncertainty of patent and proprietary technology
protection and reliance on technology licensed from third parties; changes in,
or failure to comply with, government regulation; the uncertainty of third party
reimbursement for procedures performed using the Company's products; the
potential fluctuations in the Company's annual and/or quarterly results; the
Company's dependence on retention and attraction of key employees; general
economic and business conditions; and other factors referenced herein.
ITEM 1. BUSINESS
OVERVIEW
Cardiac Pathways Corporation (the "Company") was organized in 1991 as a
California corporation and completed a reincorporation in Delaware prior to its
initial public offering in June 1996. The Company develops, manufactures and
markets minimally invasive systems to diagnose and treat cardiac
tachyarrhythmias (abnormally rapid heart rhythms) which, if untreated, can cause
palpitations, fainting and sudden cardiac arrest (a fatal heart rhythm). The
Company is developing products designed to provide integrated system solutions
for the successful diagnosis and treatment of cardiac tachyarrhythmias. The
Company's products consist of systems for diagnostic mapping, or locating the
source of the tachyarrhythmia within the heart, and for performing ablation
treatment, a nonsurgical, minimally invasive technique for neutralizing heart
tissue responsible for starting or maintaining a dangerous heart rhythm. Current
mapping and ablation procedures often take many hours to complete. The Company
believes its systems may shorten mapping and ablation procedure time and provide
safe and more effective treatments of cardiac tachyarrhythmias than other
current forms of therapy. The Company's strategy is to establish its Cooled
Ablation System, Arrhythmia Mapping System, and suite of Tracking System
products as the preferred means for the diagnosis and treatment of cardiac
tachyarrhythmias.
The Company has generated only limited revenues from sales of Chilli(R)
cooled ablation catheters, Radii(R) supraventricular tachycardia mapping and
ablation catheters, Trio/Ensemble(R) diagnostic catheters, Mercator(R)
diagnostic mapping baskets and related equipment in certain markets. In February
1999, the U.S. Food and Drug Administration ("FDA") granted approval of the
Company's premarket approval ("PMA") application to commercially release in the
United States its Cooled Ablation System which consists of the Chilli 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 and Cosmetics Act of 1938, as amended (the "510(k)
application") to commercially release its Mercator atrial high density array
catheter, which is intended to be used in the right atrium for diagnostic
mapping procedures. In August 1997, the FDA granted clearance of the Company's
510(k) application for the Model 8100/8300 Arrhythmia Mapping System for basic
diagnostic electrophysiology studies. In August 1999, the Company submitted a
510(k) application to the FDA for a suite of products based on its Tracking
System technology (the "Tracking System").
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The Company does not have any experience in manufacturing, marketing or
selling in commercial quantities its products for diagnosis and treatment of
cardiac arrhythmias. With respect to the Company's products for which the
Company has 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. The
commercialization of the Company's products will continue to require substantial
development, manufacturing, sales and marketing and other expenditures. The
Company expects its operating losses to continue through at least the end of
calendar 2001 as it continues to expend substantial funds for research and
development activities, establishment of commercial-scale manufacturing
capabilities and expansion of sales and marketing activities. In addition, there
can be no assurance that the Company will achieve or sustain profitability in
the future. The Company's Tracking System products are in various stages of
clinical and scientific testing and will require further development before the
Company commercially markets such products. There can be no assurance that the
Company's Tracking System development efforts will result in commercially
available products, that required regulatory approvals will be obtained in a
timely manner, or at all, or that the Company will be successful at introducing
its Tracking System products.
BACKGROUND
The heart consists of four chambers: the ventricles, the lower two
chambers, and the atria, the upper two chambers. A healthy heart at rest beats
between 60 to 100 times per minute and pumps over 1,800 gallons of blood per
day. A normal heartbeat is the coordinated contraction of each of the heart's
chambers resulting from the conduction of organized electrical signals generated
by the heart's natural pacemaker, the sinoatrial node ("SA node"). The SA node,
located in the right atrium, initiates the heartbeat by generating an electrical
signal that causes the atria to contract and helps to fill the ventricles, the
heart's primary pumping chambers. Once spread throughout the atria, the
electrical activity of the SA node conducts an electrical signal to the
atrioventricular node ("AV node"). The AV node serves as a delay timer and
electrical signal conductor, allowing the atria to complete their contraction
thus filling the ventricles with blood, then facilitating the organized spread
of the electrical signal to the ventricles, causing them to contract and
distribute deoxygenated blood to the lungs from the right ventricle and freshly
oxygenated blood to the rest of the body from the left ventricle.
When defects compromise the normal conduction of this electrical activity,
the pumping rhythm of the heart can be affected, resulting in cardiac
arrhythmias (abnormal heart rhythms). Cardiac arrhythmias have numerous causes,
including congenital defects, tissue damage due to heart attacks or
arteriosclerosis (the deposition of fatty substances in the inner layer of the
arteries) and other diseases, that accelerate, delay or redirect the
transmission of electrical activity, thereby disrupting the normal coordinated
contractions of the chambers. During a cardiac arrhythmia, the heart beats
either too slowly or too rapidly. Cardiac arrhythmias characterized by an
abnormally slow heart rate, usually defined as a resting rate lower than 60
beats per minute, are generally treated by implantation of a pacemaker that
delivers electrical impulses to increase the heart rate. Cardiac arrhythmias
characterized by an abnormally high resting rate of more than 100 beats per
minute are known as cardiac tachyarrhythmias.
Ventricular Tachycardia. Ventricular tachycardia is a life-threatening
condition characterized by the ventricles beating at an abnormally rapid rate,
significantly interfering with the pumping of oxygenated blood throughout the
body. When the ventricles beat at an abnormally rapid rate, they lack sufficient
time to fill with blood prior to each contraction. As a result, less blood is
pumped out of the heart and less oxygen is carried to the tissues and organs of
the body. This lack of oxygen can cause dizziness, loss of consciousness and
sudden cardiac arrest. Individuals with ventricular tachycardia are at risk of
imminent death due to the unpredictable nature of ventricular tachycardia. Most
ventricular tachycardias result from myocardial infarctions (heart attacks)
caused by coronary artery disease. When a myocardial infarction occurs due to a
blockage in one or more coronary arteries, a portion of the heart muscle (most
often in the left ventricle) dies. After the portion of the left ventricle heart
muscle that was served by the blocked artery dies, an irregular border
consisting of intermixed healthy and scar tissue forms. Ventricular tachycardias
typically originate at the border of healthy and scar tissue.
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Supraventricular Tachycardia. Supraventricular tachycardias affect
ventricular rate from an origin above the ventricles. During in-utero
development, incomplete separation of the top and bottom chambers of the heart
leaves small muscle bundles that can rapidly conduct electrical signals between
chambers, resulting in a rapid heart rhythm. The most common types of
supraventricular tachycardias are Wolff-Parkinson-White ("WPW") syndrome and
Atrioventricular Nodal Reentrant Tachycardia ("AVNRT"). WPW syndrome involves a
congenital remnant of muscle tissue, an accessory pathway, between the atria and
ventricles that can very rapidly conduct electrical signals between the top and
bottom chambers of the heart. AVNRT, primarily a congenital condition, is
characterized by a circuit of conductive tissue between a part of the AV node
and either the atria or the ventricles. This circuit, like that of WPW syndrome,
can conduct the electrical signals from the AV node rapidly, leading to a
symptomatic tachycardia.
THE CARDIAC PATHWAYS SOLUTION
The Company is developing products to provide a comprehensive solution for
the successful diagnosis and treatment of ventricular tachycardia and other
cardiac tachyarrhythmias. The Company's systems are designed to allow the
electrophysiologist to perform high resolution mapping, enabling the physician
to locate cardiac tachyarrhythmias and assess the effectiveness of the minimally
invasive ablation treatment. In addition, the Company's systems assist
physicians to manipulate, in real-time, multiple catheters within the heart
during a diagnostic procedure minimizing the use of fluoroscopy and to carefully
document intracardiac sites involved in the cardiac arrhythmia. Current mapping
and ablation procedures often take many hours to complete. The Company believes
its systems will substantially shorten mapping and ablation procedure time and
provide safe and more effective treatments than other forms of therapy. The
Company has also developed and is currently marketing products for the diagnosis
and treatment of supraventricular tachycardia. The following are features and
benefits of the core technologies used in the Company's products.
Cooled Ablation for Ventricular Tachycardia. The Company's Cooled Ablation
System utilizes a patented electrode-cooling catheter that allows the
electrophysiologist to deliver greater energy levels than existing technologies
to the site that is causing the ventricular tachycardia without a significant
risk of producing charred blood particles that could lead to stroke. The Company
believes that the ability to make deeper and wider lesions enables more
effective treatment.
High Resolution Mapping for Complex Arrhythmias. The Company's Arrhythmia
Mapping System utilizes a patented, basket-shaped, multi-site, high resolution
device which is placed in the heart chamber with a minimally invasive procedure,
similar to conventional heart catheterization. This device and its integrated
mapping computer system is designed to allow the electrophysiologist to quickly
locate high rate arrhythmias at multiple sites, thus providing a significant
improvement over currently used single point mapping techniques. The Company
believes that this ability to locate the source of the arrhythmia will enable a
large population of patients to receive successful treatment using the Company's
Cooled Ablation System.
Tracking System Technology for Complex Arrhythmias. The Company's suite of
Tracking System products consists of a line of diagnostic catheter products and
a computer-based system for recording cardiac electrograms. The catheters
contain ultrasound transducers that are used to precisely triangulate, in
real-time, the position of catheter electrodes within the heart during the
diagnostic procedure. The supporting computer system combines real-time 3D
graphics, displaying catheter images while recording associated intracardiac
electrical signals. The Company believes that the Tracking System technology
will assist physicians to precisely manipulate catheters within the heart during
a diagnostic procedure minimizing the use of fluoroscopy and to carefully
document intracardiac sites involved in tachyarrhythmias that will enable rapid
assessment, mapping and ablation of complex arrhythmias.
STRATEGY
The Company's strategy is to become a commercially viable, profitable
enterprise by successfully positioning two proprietary technology platforms; the
Chilli Cooled Ablation System and the Tracking
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System, as standards of care for rapid assessment, mapping, diagnosis,
navigation and treatment of cardiac tachyarrhythmias. The following are key
elements of the Company's strategy:
Achieve market penetration and acceptance of the Chilli Cooled Ablation
System. The Company intends to increase the size and scope of the user base for
the Chilli Cooled Ablation System. The Company believes that the clinical
utility of the Chilli catheter will lead to its rapid adoption by key
electrophysiology centers in the United States and in certain international
markets. The Company is committed to providing superior clinical support,
marketing and sales activities to position its proprietary technology as a
standard of care for cardiac ablation procedures.
Complete the development and market launch of the Tracking System. The
Company intends to commercially launch and grow the Tracking System installed
base in the United States and in certain international markets by positioning
this proprietary suite of products as the standard of care for intracardiac
navigation enabling the rapid assessment, mapping and ablation of cardiac
tachyarrhythmias.
Accelerate global revenue growth. The Company believes it is poised to
generate increasing revenues from its products in the United States, Europe and
Japan from existing and new products. The Company intends to continue investing
substantial resources in the areas of sales, marketing and clinical support. The
Company intends to further develop its manufacturing, sales and marketing
functions to meet improved product demand.
Continue to build upon relationships with electrophysiologists. The Company
has developed strong relationships with prominent electrophysiologists worldwide
who have been involved and whom the Company expects to continue to be involved
in the Company's clinical and product development. The Company intends to
continue to build these relationships through active field clinical support,
clinical investigator meetings and participation in scientific symposia and
meetings to discuss clinical issues and treatments. The Company's strategy is to
leverage these relationships with leading electrophysiologists to gain market
acceptance of its products in the United States and internationally. The Company
believes there are approximately 600 board certified electrophysiologists
practicing in the United States.
Provide integrated system solutions for diagnosing and treating cardiac
tachyarrhythmias. The Company's mapping baskets and integrated mapping computer
system are designed to quickly identify the source of an arrhythmia. The
Company's cooled ablation catheters and its radiofrequency generator, are
designed to provide safe, effective ablation of the heart tissue. The Company
believes that its integrated systems approach provides solutions for diagnosing
and treating a significant portion of the patients who suffer from a broad range
of cardiac arrhythmias including ventricular tachycardia. The Company also
believes its integrated systems solution offers advantages over other products.
All of the Company's products are designed to work together and thereby
eliminate incompatibility problems that may arise from using products from
several vendors. The Company believes this integrated approach makes the
products easier to use, shortens procedure times and increases the efficiency of
the treatment. In addition, the Company plans to be a single source provider of
complete mapping and ablation systems, thereby making its products more
cost-effective.
Maintain technological leadership and achieve market leadership. The
Company intends to become a market leader of commercialized integrated systems
to diagnose and treat cardiac arrhythmias. The Company believes that its
technological innovations have overcome the principle obstacles to the
development of such systems. In addition, the Company intends to continue to
invest significant resources to enhance its technological position and to
increase market acceptance of its products.
Protect and enhance proprietary position. The Company currently holds
issued and allowed patents and has pending patents covering a number of
fundamental aspects of the Company's Cooled Ablation System, Arrhythmia Mapping
Systems, and other products. The Company owns 55 assigned United States issued
patents and 8 foreign issued patents. The Company owns an exclusive field-of-use
license on 25 United States issued patents. In addition, the Company has 19
United States pending patent applications, of which two are licensed. The
Company has also filed 14 corresponding foreign patent applications that are
currently pending in Europe, Japan, Australia and Canada, of which 12 have been
published and are pending issuance. Eleven of the pending foreign patent
applications are PCT applications, with Europe, Japan, Australia and Canada as
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designated countries for filing at the national phase. Eight of the PCT
applications are licensed. The Company's 55 United States patents expire at
various dates ranging from 2012 to 2019 and the 8 foreign issued patents expire
at various dates ranging from 2012 to 2014. The exclusive field of use license
of 25 United States issued patents expire at various dates ranging from 2013 to
2019.
PRODUCTS AND SYSTEMS
The Company's product line is designed to provide an integrated systems
solution to the mapping and ablation of cardiac arrhythmias. The following table
summarizes products that have been released and those that are currently under
development:
<TABLE>
<CAPTION>
PRODUCTS DESCRIPTION STATUS(1)
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<S> <C> <C>
Chilli Cooled Ablation An ablation catheter that PMA approval in February
Catheter includes lumens to cool the 1999. Commercially released
catheter tip during radio- in the United States and
frequency energy delivery. available in certain
international markets. PMA
supplement submitted in
September 1999 for
integration with Tracking
System.
Radiofrequency Generator and An integrated radiofrequency PMA approval with Chilli
Integrated Fluid Pump generator energy source and Cooled Ablation Catheter in
fluid pump for cooled February 1999.
ablation applications.
Tracking System Products A line of diagnostic catheter Submitted 510(k) in August
products and a computer-based 1999 for diagnostic
system for recording cardiac applications. PMA supplement
electrograms. The Tracking filed in September 1999 for
System uses ultrasound integration of Chilli Cooled
technology to determine Ablation Catheter.
catheter positions.
Mercator Atrial Mapping A high density array catheter 510(k) clearance received in
Basket used to assess atrial January 1999. Commercially
arrhythmias. released in the United States
and available in certain
international markets.
Arrhythmia Mapping System for An integrated mapping 510(k) cleared in August
basic diagnostic computer system that analyzes 1997. Available in the United
electrophysiology studies and displays data from single States and certain
point catheters to map international markets.
electrical activity within
the heart for basic
diagnostic electrophysiology
lab procedures.
Radii Mapping and Ablation A family of deflectable Available in international
Catheters catheters for mapping and markets. Received U.S. 510(k)
ablation of supraventricular clearance in January 1999 for
tachycardia. diagnostic applications.
Trio/Ensemble Diagnostic A set of three, uniquely 510(k) submitted by Arrow
Catheters small multi-electrode International, Inc. and
catheters and a triple-lumen cleared in December 1995.
guide catheter for use in Available in the United
diagnostic electrophysiology States and international
procedures. markets.
</TABLE>
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(1) "Approved" or "cleared" means that the Company has received Food and Drug
Administration ("FDA") approval of an application by the Company to sell the
product in the United States pursuant to an application under section 510(k)
of the Food, Drug and Cosmetics Act of 1938, as amended (a "510(k)"
application) or a premarket approval (a "PMA") application.
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The following are detailed descriptions of the Company's products:
Chilli Cooled Ablation Catheter. The Chilli Cooled Ablation Catheter is
designed to perform an ablation treatment that can reach wide and deep within
the heart tissue to successfully treat the patient's cardiac arrhythmia. The
Chilli catheter received PMA approval in February 1999 for use with ventricular
tachycardia and has been commercially released in the United States and in
certain international markets. The Chilli Cooled Ablation Catheter is a
minimally invasive device designed to treat ventricular tachycardia using
radiofrequency energy ablation to create lesions in the ventricle. Although
leading electrophysiologists have recently begun to use radiofrequency ablation
to treat ventricular tachycardia, excessive heating of the tissue and the
ablation electrode often limits the level of energy delivered and therefore the
success of the treatment. Incorporating a closed system of fluid circulation,
the Chilli Cooled Ablation Catheter allows circulating fluid to cool the
catheter ablation electrode during delivery of radiofrequency energy. A
programmable pump injects fluid into a catheter lumen that circulates the fluid
to the tip electrode and back to the fluid pump. The circulation of fluid draws
heat away from the metal electrode and from the electrode-to-tissue interface,
which the Company believes will allow the delivery of higher radiofrequency
energy power levels without excessive heating. Higher power levels allow for
creation of wider and deeper lesions than those created with lower power levels,
increasing the likelihood of a successful ablation. The Chilli Cooled Ablation
Catheter is labeled for single use due to its closed system of fluid circulation
through catheter lumens.
Radiofrequency Generator with Integrated Fluid Pump. Radiofrequency energy
is the most common energy source used in catheter ablation procedures. When
radiofrequency energy is passed through heart tissue, the tissue resists the
flow of energy, generating heat in a process known as resistive heating.
Resistive heating destroys the cardiac tissue in contact with the catheter. The
treatment of many arrhythmias requires that ablation produce large, deep
lesions. However, when the tissue becomes too hot from resistive heating, heat
conducts back from within the tissue to the catheter electrode tip causing the
formation of charred blood particles. This inhibits the flow of electricity to
the heart tissue and the depth of the lesion that can be produced. In addition,
this overheating poses a risk as the removal of the catheter from the heart can
dislodge charred blood particles that can travel through the arteries exiting
the heart into the brain, causing a stroke.
Cooled ablation addresses these shortcomings of radiofrequency energy
ablation. By cooling the catheter tip, the Company believes heat is removed from
the electrode-to-tissue interface, allowing more energy to be delivered to the
heart without blood coagulating on the catheter tip, resulting in what the
Company believes are larger and deeper lesions created in a safer manner. The
Radiofrequency Generator and Integrated Fluid Pump incorporates the widely
accepted radiofrequency energy method for creating endocardial lesions with a
fluid pump for fluid delivery during ablation. The Company believes this is the
only radiofrequency generator featuring an integrated fluid pump for catheter
electrode cooling. Currently, software design limits the radiofrequency energy
output to a maximum of 50 watts, a level of energy delivery believed to be both
safe and sufficiently strong to produce an effective lesion.
Tracking System Products. The Tracking System Products include catheters
and computer systems that allow the recording, viewing, and annotation of
diagnostic electrophysiology ("EP") catheter positions and electrode positions.
The specialized diagnostic catheters contain ultrasound transducers that are
used to determine the 3D position of catheters during a procedure. All catheters
contain ultrasound transducers that are used as transmitters, receivers, or
transceivers in the system. An ultrasound transducer acting as a transmitter is
energized by the electronics. All transducers acting as receivers detect the
arrival of the transmitted pulse and latch the time of arrival. There is a
linear relationship between the transmit time, through blood and tissue, and the
distance between the transmit and receive transducers. Using this relationship
the distance between all transducers is determined and is then used to
reconstruct the location/position of each transducer in 3D space. From these
positions the catheter locations are projected in real-time by software into a
3D representation on the system display. All catheters also contain electrodes
for mapping and pacing during EP procedures. Tracking catheters may also contain
ablation electrodes for creating lesions in the myocardium. The position of
these electrodes and ablative lesions can be recorded on the system to analyze
activation through the tissue, known as mapping, and to document the location of
lesion placement. The system can be used to navigate catheters without the use
of fluoroscopy.
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Mercator Atrial Mapping Basket. The Mercator Atrial Mapping Basket is a
high density, 64-electrode basket that the Company believes will be useful in
atrial electrophysiology studies. The use of the Company's proprietary
technology for constructing high density electrode arms was leveraged in this
design, and the arm shapes were designed specifically with consideration for the
anatomy of human atria. A range of basket sizes has been developed to account
for variations in size and shape of human atria. The Company believes that a
mapping system for the atria will be important to reduce the procedure time and
assess the effectiveness of ablation procedures for treating the patient's
tacharrythmias. The Mercator Atrial Mapping Basket is intended for single use
due to the inability of the catheter's biocompatible, anticoagulation coating to
withstand resterilization.
The Mercator Atrial Mapping Basket is combined with the Company's
Arrhythmia Mapping System to form the Company's Arrhythmia Mapping System for
diagnostic mapping of complex atrial tachyarrhythmias. This system captures the
conduction activity in the atrium and displays the information allowing the
physician to evaluate and manipulate the data to determine the source of the
arrhythmia. The Company believes that the mapping catheter will also be
compatible with existing computerized electrophysiology signal display systems
using appropriate interface connections.
Arrhythmia Mapping System. Electrophysiologists use dedicated signal
amplifier systems to diagnose information gathered during an electrophysiology
study. Typical systems amplify the signals recorded from the heart, convert
these signals into digital information and permanently store the digital
information. A printer provides paper display of signals for analysis by the
electrophysiologist and medical records storage. Currently, some
electrophysiologists still rely on older analog amplifier systems that merely
display signals on a monitor and print them on a paper strip chart recorder for
medical records storage. These systems force the electrophysiologist to perform
a tedious process of manual measurement of the signals printed on paper. More
modern systems, while utilizing computerized technology, are limited in their
ability to support high resolution mapping devices such as the Company's
Mercator Mapping Basket.
The Arrhythmia Mapping System records, amplifies and displays the unique
electrical activity recorded from catheter electrodes that have been passed into
the heart. The Arrhythmia Mapping System was also designed to function as a
signal amplifier system to be used in basic diagnostic electrophysiology studies
with single point catheters. The system also supports complex mapping catheters
by offering software that intuitively displays information abstracted from the
timing information in the electrical signals using a type of color display known
as an isochronal map. The isochronal maps represent those parts of the heart's
chamber that contract at the same time by using the same color. With this
technique, color indicates when parts of the heart contract relative to each
other. Colors provide rapid visual indication of a segment of the heart that
could be a source of the tachycardia.
The Tracking System has been fully integrated with the Arrhythmia Mapping
System. The same computer and software base have been leveraged to provide both
the signal recording and position recording on a single platform.
Radii Mapping and Ablation Catheters. The Company's Radii family of
supraventricular tachycardia mapping and ablation catheters is similar to
catheters widely used in conjunction with ablation procedures. Each catheter has
a deflectable, steerable shaft that can be used with single-point mapping
techniques to locate potential arrhythmia sites prior to application of
radiofrequency energy to ablate the tissue. Unlike ventricular tachycardia,
single-point mapping techniques are appropriate for supraventricular tachycardia
because the arrhythmia can be induced and maintained in the patient for a
sufficient length of time to identify the origins of the supraventricular
tachycardia without threatening the patient's life. Some Radii models contain a
temperature sensor embedded into the ablation electrode to provide additional
information about the performance of the radiofrequency energy delivery. The
Company believes that the Radii is compatible with other manufacturer's
radiofrequency generators for use in supraventricular tachycardia ablation
procedures. The Radii supraventricular tachycardia mapping and ablation
catheters are distributed internationally by distributors. The Company was
granted U.S. 510(k) clearance for the Radii catheter for diagnostic mapping in
January 1999. The Radii supraventricular tachycardia mapping and ablation
catheters have list prices ranging from $600 to $800, depending upon model and
distribution territory.
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Trio/Ensemble Diagnostic Catheters. Many diagnostic electrophysiological
studies are performed with placement of multi-electrode catheters in three or
four locations of the right heart chambers. The placement of these diagnostic
catheters provides the electrophysiologist with an overall tool to assess
electrical conduction between the atria and the ventricle. The Ensemble is
available with five curve shapes to assist placement of the catheters in
different locations within the heart. The Trio/Ensemble diagnostic catheters
allow the placement of three diagnostic catheters through a single patient
introduction site rather than separate introduction sites for each catheter,
reducing patient preparation time, lessening patient trauma and potentially
enabling the electrophysiology study to be performed on an outpatient basis. The
FDA granted 510(k) clearance for the Trio/Ensemble diagnostic catheter to Arrow
International, Inc. ("Arrow") in December 1995. Arrow distributes the product in
the United States and Arrow and a limited number of other distributors market
the Trio/Ensemble on the Company's behalf in certain international markets. The
Trio/ Ensemble diagnostic catheters currently have list prices ranging from $150
to $250, depending upon configurations and distribution territory.
The Company's Tracking System products will require additional development
and regulatory approvals before they can be marketed in the United States and
internationally. There can be no assurance that the Company's development
efforts will be successful or that the Tracking System products or any other
products developed by the Company will be safe or effective, approved by
appropriate regulatory and reimbursement authorities, capable of being
manufactured in commercial quantities at acceptable costs or successfully
marketed. Furthermore, because the Cooled Ablation System and the Tracking
System products represent the Company's primary near-term product focus, the
Company could be required to cease operations if these systems and products are
not successfully commercialized.
There can be no assurance that the Company's Cooled Ablation System,
Arrhythmia Mapping System and Tracking System products or the component
catheters and equipment will gain any significant degree of market acceptance
among physicians, patients and health care payors. The Company believes that
physicians' acceptance of procedures performed using the Company's systems will
be essential for market acceptance of its systems. Physicians will not recommend
that procedures be performed using the Company's systems until such time, if at
all, as clinical data or other factors demonstrate the efficacy of such
procedures as compared to conventional drug, surgical and other treatments. Even
if the clinical efficacy of procedures using the Company's systems is
established, electrophysiologists, cardiologists and other physicians may elect
not to recommend the procedures for any number of other reasons. The Company
believes that, as with any novel medical procedure, there will be a significant
learning process involved for physicians to become proficient. Broad use of the
Company's systems will require training of physicians, and the time required to
complete such training could adversely affect market acceptance. Failure of the
Company's products to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
CLINICAL TRIALS
On February 2, 1999, the Company obtained PMA approval for the Chilli
Cooled Ablation Catheter and the Radiofrequency Generator and Integrated Fluid
Pump, the products that together form the Company's Cooled Ablation System. On
March 11, 1999, the Company suspended and later terminated a clinical trial for
the Local Sector Mapping Basket, a variation of the Mercator Mapping Basket. On
January 27, 1999, the Company received 510(k) clearance for the Mercator Atrial
Mapping Basket sizes 70cc and 100cc and the Arrhythmia Mapping System, the
products that together form the Company's Arrhythmia Mapping System for
diagnostic mapping of the right atrium. The Company is continuing to enroll
patients in the study for the 130cc size basket to support a special 510(k)
submission. The Company discontinued a clinical trial for a second version of
the Nexus Linear Lesion Catheter for the treatment of atrial flutter in February
1999, and for atrial fibrillation in July 1999.
Cooled Ablation System for Ventricular Tachycardia. The Company obtained
PMA approval for the Chilli Cooled Ablation Catheter and Radiofrequency
Generator and Fluid Pump on February 2, 1999. The PMA approval requires the
Company to perform a post market study. On September 17, 1999, the
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Company submitted a PMA supplement requesting the addition of tracking
technology, new curve sizes and bi-directional deflection to the Chilli
catheter.
Mercator High Density Array Catheter for the Right Atrium. In June 1997,
the Company received an Investigation Device Exemption ("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.
The Company submitted a 510(k) application for clearance of the Mercator Atrial
Mapping Basket in July 1998 and received clearance in January 1999 of two of the
three basket sizes (70 and 100cc). The Company has performed five of the 12
cases needed for a 510(k) submission regarding the 130cc size basket.
Tracking System. In August 1999, the Company submitted a 510(k) application
requesting clearance of the Tracking System. This system is comprised of the
Arrhythmia Mapping Computer, the Signal Acquisition Module, the Position
Acquisition Module the Radii diagnostic electrophysiology catheter, and two
reference diagnostic catheters. The use of this system is designed to enable the
real-time tracking of catheter position information minimizing the use of
fluoroscopy. The Company believes this new technology will enhance the
performance of diagnostic electrophysiology studies. Furthermore, the Company
believes the combination of the Chilli catheter with the Tracking System will
enhance the performance of radiofrequency ablation procedures.
There can be no assurance that the Company's current or future products
will prove to be safe and effective in clinical trials under applicable United
States or international regulatory guidelines or that additional modifications
to the Company's products will not be necessary. Furthermore, there can be no
assurance that the Company will be successful in completing development of the
Tracking System products. With respect to the Chilli Cooled Ablation System,
because ablation treatment of cardiac arrhythmias is a relatively new and to
date untested treatment, the long-term effects of radiofrequency ablation on
patients are unknown. As a result, the long-term success of ablation therapy in
treating ventricular tachycardia and other tachyarrhythmias will not be known
for several years.
MARKETING AND DISTRIBUTION
The Company markets its Chilli Cooled Ablation System, Mercator Mapping
Baskets and Arrhythmia Mapping System in United States through a direct sales
force and through distributors internationally. The Radii supraventricular
tachycardia mapping and ablation catheters, Trio/Ensemble diagnostic catheters
and certain mapping baskets are marketed internationally through established
distributors of specialty cardiovascular products. The Company's agreement with
Arrow provides distribution rights for the Trio/Ensemble diagnostic catheters
throughout the world except for the territories of Japan and southern Europe.
For distribution of the Company's commercialized products, the Company has
agreements with distributors in Europe and Japan.
The agreements in Europe are with three distributors: Izasa, S.A., Curative
E.P. and Ela Medical, S.A. and were signed in June 1998, July 1998 and August
1999, respectively. These agreements cover the major European medical device
markets: Germany (Curative EP), France and Italy (Ela Medical) and Spain
(Izasa).
Sales to Japan Lifeline Company, Ltd. ("Japan Lifeline"), the Company's
distributor in Japan, accounted for 52%, 80% and 66% of the Company's net sales
in fiscal 1999, 1998 and 1997, respectively. International sales accounted for
78%, 87% and 82% of the Company's net sales in fiscal 1999, 1998 and 1997,
respectively.
The Company generally operates under written distribution agreements that
grant exclusive rights to sell the Company's products within a defined
territory. These agreements generally grant the Company the right to terminate
the distributor for cause (which includes failure to satisfy specified minimum
performance obligations) or the failure of the distributor to obtain required
governmental approvals to distribute the Company's products in the territory.
These distributors also market medical products of other companies, although the
Company has obtained covenants from its distributors granting the Company rights
to terminate
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given distribution agreements with distributors that market medical devices that
compete directly with those of the Company. Distributors typically purchase the
Company's products at a discount to list price and resell the products to
hospitals and physicians.
The Company currently has only a limited sales and marketing organization.
The Company's Vice President of Sales and Marketing manages distributor
relationships outside North America. In addition, the Company intends to
leverage its existing field clinical specialists' technical expertise to support
the revenue producing installations. There can be no assurance that
electrophysiologists will accept the Company's products or systems on a
commercial basis. Failure of such products or systems to gain market acceptance
would have a material adverse effect upon the Company's business, financial
condition and results of operations. For products that have received FDA
clearances or approvals, the Company markets primarily through a direct sales
force in the United States. The Company believes that the concentrated nature of
the market of practicing electrophysiologists in the United States will allow it
to address this market with a small, targeted sales force. The Company believes
that fewer than 200 of the practicing electrophysiology centers account for
approximately two-thirds of the electrophysiological procedures performed for
ventricular tachycardia.
The Company expects to expand its sales and marketing efforts to include
marketing managers and clinical specialists to assist in the sales and marketing
efforts. The Company's marketing and sales strategy in the United States will
involve the use of a combination of sales representatives directly employed by
the Company and field clinical specialists to provide technical expertise. The
role of the sales representative will be to demonstrate the use of the Company's
products while educating physicians as to the clinical benefits of catheter
ablation, using marketing techniques similar to those commonly employed in the
cardiovascular device industry. The role of the field clinical specialists will
be to provide installations of the Company's systems and provide training to
physicians and their staff on appropriate operation of the Company's equipment.
The Company also intends to establish a resource to provide physicians with
relevant clinical information regarding the Company's products. The Company
believes that this combination of sales representatives and field clinical
engineers will provide an appropriate balance of professional selling skills
while maintaining an appropriate level of technical expertise in the field.
A key element of the Company's marketing strategy has been to develop
relationships with prominent academic physicians who have a history of research
and publications in peer reviewed literature on ablation for cardiac
arrhythmias. The Company's strategy is to leverage these relationships with
leading electrophysiologists to gain market acceptance of its products in the
United States and internationally. The Company believes there are approximately
600 board certified electrophysiologists practicing in the United States. These
physicians have been involved and will continue to be involved in the Company's
clinical and product development efforts. The Company intends to continue to
build these relationships through active field support, participation in
scientific symposia and meetings to discuss clinical issues and treatments.
Because of the sub-specialty nature of electrophysiology, electrophysiologists
with high patient volume are found in referral centers usually associated with
major academic medical centers in large urban population centers.
Establishing a marketing and sales capability sufficient to support sales
of the Company's products in commercial quantities will require substantial
efforts and require significant management and financial resources. There can be
no assurance that the Company will be able to expand its marketing staff or
sales force, that the establishment of such a marketing staff or sales force
will be cost-effective or that the Company's sales and marketing efforts will be
successful. There can be no assurance that the Company will be able to maintain
or enter into agreements with existing or new distributors, or that such
distributors will devote adequate resources to selling the Company's products.
Failure to establish appropriate distribution relationships could have a
material adverse effect upon the Company's business, financial condition and
results of operations. The Company currently sells its products through
distributors in certain international markets. All sales of the Company's
products to date have been denominated in U.S. dollars. The end-user price is
determined by the distributor and varies from country to country. Changes in
overseas economic conditions, currency exchange rates, foreign tax laws, or
tariffs or other trade regulations could have a material adverse effect on the
Company's ability to market its products internationally and therefore on its
business, financial condition and results of operations.
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STRATEGIC RELATIONSHIPS
The Company intends to pursue strategic relationships with corporations and
research institutions with respect to the research, development, international
regulatory approval, manufacturing and marketing of certain of its products. In
March 1995, the Company formed a strategic relationship with Arrow, a
manufacturer of medical products for critical care medicine, interventional
cardiology and radiology. The relationship included Arrow's equity investment of
$9.1 million in the Company. The Company and Arrow entered into agreements
pursuant to which the Company granted to Arrow certain manufacturing and
distribution rights to the Trio/Ensemble diagnostic catheters and Radii
supraventricular tachycardia mapping and ablation catheters. Subsequently, the
Company and Arrow have terminated the manufacturing and distribution agreement
related to the Radii product. Although the Company intends to pursue additional
strategic relationships in the future, there can be no assurance that the
Company will be successful in establishing or maintaining any such relationships
or that any such relationship will be successful. See "-- Marketing and
Distribution."
The Company has manufacturing and distribution agreements with Arrow
International, Inc.. Under the manufacturing agreement, Arrow has the exclusive
right to manufacture and sell the Trio/Ensemble diagnostic catheters (the
"Products") throughout the world except for the countries of Japan, Italy,
France, Portugal and Spain (the "Territory") for use in the field of
electrophysiology testing; provided, however, that, after the expiration of the
initial five years of the term, the Company has the option to convert the
distribution right to be nonexclusive. The term of the distribution agreement is
ten years and Products purchased by Arrow for distribution under the
distribution agreement are to be paid net thirty (30) days after the date of
invoice. Under the manufacturing agreement, Arrow has a nonexclusive right to
manufacture the Products for distribution and sale in the Territory, and the
Company has a right to distribute and sell the products outside of the
Territory. The royalty payments for Arrow's manufacturing rights include a
nonrefundable, prepaid royalty of $3.0 million and an ongoing royalty of 5% on
net sales of the Products; provided, however, that, if the Company elects to
convert the distribution agreement to be nonexclusive, the royalty rate will be
reduced to 3% of net sales. Also, the manufacturing agreement requires that, at
the Company's option, Arrow is required to manufacture and supply to the Company
such quantities of the Products as the parties agree upon from time to time. The
manufacturing agreement terminates upon termination of the distribution
agreement; provided, however, that the Company may extend the term of the
manufacturing agreement with respect to Products supplied by Arrow to the
Company for a period of three months.
RESEARCH AND DEVELOPMENT
Substantially all of the Company's research and development activities are
performed internally by the Company's team of research scientists, engineers and
technicians. The Company's primary research and development programs involve
completing development of the Tracking System products and developing
improvements to the Chilli Cooled Ablation System and Arrhythmia Mapping System,
including new mapping and ablation catheter configurations and new versions of
the mapping and ablation equipment and related software in order to increase the
efficacy of the procedures, increase manufacturing reliability and reduce
component and manufacturing costs.
Research and development expenses which also includes clinical and certain
regulatory expenses for fiscal 1999, 1998 and 1997 were $12.1 million, $14.4
million and $11.8 million, respectively. The Company intends to continue to make
significant investments in research and development.
MANUFACTURING
The Company has a 14,000 square feet manufacturing facility consisting of
approximately 9,000 square feet for catheter manufacturing, systems assembly and
testing, and approximately 5,000 square feet of manufacturing support area at
its facilities in Sunnyvale, California. The manufacture of catheters is a
complex operation involving a number of separate processes and components. Each
catheter is assembled and individually tested by the Company prior to
sterilization in accordance with FDA requirements. The
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manufacturing process for the mapping, tracking and ablation equipment consists
primarily of assembly of purchased components and testing operations.
Components and raw materials are purchased from various qualified suppliers
and subjected to stringent quality specifications. The Company conducts quality
audits of suppliers and is establishing a vendor certification program. A number
of the components 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 certain products and
therefore on its business, financial condition and ability to market its
products as currently contemplated.
The Company has no experience manufacturing its products in the volumes
that will be necessary for the Company to achieve significant commercial sales,
and there can be no assurance that reliable, high-volume manufacturing capacity
can be established or maintained at commercially reasonable costs. If the
Company receives FDA clearance or approval for its products, it will need to
expend significant capital resources and develop manufacturing expertise to
establish large-scale manufacturing capabilities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply
shortages, shortages of qualified personnel, compliance with FDA regulations,
and the need for further FDA approval of new manufacturing processes. In
addition, the Company believes that substantial cost reductions in its
manufacturing operations will be required for it to commercialize its catheters
and systems on a profitable basis. Any inability of the Company to establish and
maintain large-scale manufacturing capabilities would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's manufacturing facilities are subject to periodic inspection
by regulatory authorities, and its operations must undergo Quality System
Regulations ("QSR," the successor regulations to Good Manufacturing Practices
Regulations) compliance inspections conducted by the FDA. The Company is
required to comply with QSR requirements in order to manufacture and sell
products in the United States and with ISO9001/EN46001 standards to manufacture
and sell products in Europe. The Company's manufacturing facilities are subject
to periodic inspection by regulatory authorities, and failure of the Company to
comply with quality system requirements may result in the Company being required
to take corrective actions, such as modification of its policies and procedures.
In August 1998, the Company's facilities and manufacturing process were
inspected by the FDA in an inspection related to a pre-market approval
application. This inspection resulted in a recommendation for approval by the
FDA district office. The Company has received ISO9001/EN46001 certification for
the Medical Device Directive QSR from its European Notified Body. The Company
has also received a medical device manufacturing license issued by the State of
California Department of Health Services ("CDHS"), and is registered with the
FDA as a medical device manufacturer. If the Company is unable to maintain such
licenses and certifications, the Company would be unable to manufacture and
distribute its products and such inability would have a material adverse effect
on the Company's 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 products and systems. The Company owns 55
assigned United States issued patents and 8 foreign issued patents. The Company
owns an exclusive field-of-use license on 25 United States issued patents. In
addition, the Company has 19 United States pending patent applications, of which
two are licensed by the Company. The Company has also filed 14 corresponding
foreign patent applications that are currently pending in Europe, Japan,
Australia and Canada, of which 12 have been published and are
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pending issuance. Eleven of the pending foreign patent applications are Patent
Cooperation Treaty ("PCT") applications, with Europe, Japan and Canada as
designated countries for filing at the national phase. Eight of the PCT
applications are licensed. The Company's 55 United States patents expire at
various dates ranging from 2012 to 2019 and the 8 foreign issued patents expire
at various dates ranging from 2012 to 2014. The exclusive field of use license
of 25 United States issued patents expire at various dates ranging from 2013 to
2019.
The Company's patents and patent applications relate to a number of aspects
of the Company's technology, including the technology related to the Company's
basket approach to diagnostic mapping, ultrasound tracking, the integration of
mapping and ablation in a single device, the cooled ablation catheters, bend
location and radius adjustment in the ablation catheters and the multiport
introducer. The Company intends to file additional patent applications to seek
protection for other proprietary aspects of its technology in the future. The
patent positions of medical device companies, including those of the Company,
are uncertain and involve complex and evolving legal and factual questions. The
coverage sought in a patent application either can be denied or significantly
reduced before or after the patent is issued. Consequently, there can be no
assurance that any patents from pending patent applications or from any future
patent application will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. Since patent applications are
confidential until patents are issued in the United States or corresponding
applications are published in international countries, and since publication of
discoveries in the scientific or patent literature often lags behind actual
discoveries, the Company cannot be certain that it was the first to make the
inventions covered by each of its pending patent applications or that it was the
first to file patent applications for such inventions. In addition, there can be
no assurance that competitors, many of which have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets. Further, the laws of certain foreign countries do not
protect the Company's intellectual property rights to the same extent as do the
laws of the United States. Litigation or regulatory proceedings, which could
result in substantial cost and uncertainty to the Company may also be necessary
to enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. There can
be no assurance that the Company will have the financial resources to defend its
patents from infringement or claims of invalidity.
The Company also relies on licensed technology from others for certain
components of its mapping and ablation systems. The license will convert into a
fully paid nonexclusive license on the later of ten years from the first
commercial sale of products based on the patents or the expiration date of the
last to expire licensed patent. The Company obtained the rights to its
biocompatible coating material through a nonexclusive royalty bearing license
that will terminate upon the later of ten years from the first commercial sale
of catheters treated with the coating material or the expiration of the last to
expire licensed patent.
In addition to patents, the Company relies on trade secrets and proprietary
know-how to compete, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. These agreements
generally provide that all confidential information developed or made known to
individuals by the Company during the course of the relationship with the
Company is to be kept confidential and not disclosed to third parties, except in
specific circumstances. The agreements also generally provide that all
inventions conceived by the individual in the course of rendering service to the
Company shall be the exclusive property of the Company. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to or independently developed by competitors.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the
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USPTO to determine the priority of inventions or an opposition to a patent grant
in a foreign jurisdiction. The defense and prosecution of intellectual property
suits, USPTO interference or opposition proceedings and related legal and
administrative proceedings are both costly and time-consuming. Any litigation,
opposition or interference proceedings will result in substantial expense to the
Company and significant diversion of effort by the Company's technical and
management personnel. An adverse determination in litigation or interference
proceedings to which the Company may become a party could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require the Company to cease using such technology.
Although patent and intellectual property disputes in the medical device area
have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, there can be no assurance that necessary licenses from
others would be available to the Company on satisfactory terms, if at all.
Adverse determinations in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing and
selling its products, which would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is aware of certain patents owned or licensed by others and relating to cardiac
catheters and cardiac monitoring. Certain enhancements of the Company's products
are still in the design and pre-clinical testing phase. Depending on the
ultimate design specifications and results of pre-clinical testing of these
enhancements, there can be no assurance that the Company would be able to obtain
a license to such patents or that a court would find that such patents are
either not infringed by such enhancements or are invalid. Further, there can be
no assurance that owners or licensees of these patents will not attempt to
enforce their patent rights against the Company in a patent infringement suit or
other legal proceeding, regardless of the likely outcome of such suit or
proceeding.
COMPETITION
At present, the Company considers its primary competition to be companies
involved in current, more established therapies for the treatment of cardiac
arrhythmias, 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
cardiac arrhythmias, including ablation systems using ultrasound, microwave,
laser and cryoablation technologies and mapping systems using contact mapping,
single-point spatial mapping and non-contact, multisite electrical mapping
technologies. Many of the Company's competitors have an established presence in
the field of interventional cardiology and electrophysiology, including Boston
Scientific Corporation, C.R. Bard, Inc., Johnson & Johnson through its Cordis
Division, St. Jude Medical and Medtronic, Inc. Many of these competitors have
substantially greater financial and other resources than the Company, including
larger research and development staffs and more experience and capabilities in
conducting research and development activities, testing products in clinical
trials, obtaining regulatory approvals, and manufacturing, marketing and
distributing products. There can be no assurance that the Company will succeed
in developing and marketing technologies and products that are more clinically
efficacious and cost-effective than the more established treatments or the new
approaches and products developed and marketed by its competitors. Furthermore,
there can be no assurance that the Company will succeed in developing new
technologies and products that are available prior to its competitors' products.
The failure of the Company to demonstrate the efficacy and cost-effective
advantages of its products over those of its competitors or the failure to
develop new technologies and products before its competitors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company believes that the primary competitive factors in the market for
cardiac ablation and mapping devices are safety, efficacy, ease of use and
price. In addition, the length of time required for products to be developed and
to receive regulatory and, in some cases, reimbursement approval is an important
competitive factor. The medical device industry is characterized by rapid and
significant technological change. Accordingly, the Company's success will depend
in part on its ability to respond quickly to medical and technological changes
through the development and introduction of new products. Product development
involves a high degree of risk and there can be no assurance that the Company's
new product development efforts will result in any commercially successful
products. The Company believes it competes favorably with respect to these
factors, although there is no assurance that it will be able to continue to do
so.
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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 authorizations, a recommendation
by the FDA that the Company not be permitted to enter into government contracts
and criminal prosecution. The FDA also has the authority to request repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
In the United States, medical devices are classified into one of three
classes, Class I, II or III, on the basis of the controls deemed by the FDA to
be necessary to reasonably ensure their safety and effectiveness. Class I
devices are subject to general controls (e.g., labeling, premarket notification
and adherence to current QSR). Class II devices are subject to general controls
and to special controls (e.g., performance standards, postmarket surveillance,
patient registries and FDA guidelines). Generally, Class III devices (e.g.,
life-sustaining, life-supporting and implantable devices or new devices which
have not been found substantially equivalent to legally marketed devices), are
those that require clinical testing to assure safety and effectiveness and FDA
approval prior to marketing and distribution.
Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through a premarket notification under
Section 510(k) of the FDC Act or an approval of a PMA application under Section
515 of the FDC Act. A 510(k) clearance typically will be granted if the
submitted information establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or II medical device or to a Class III
medical device for which the FDA has not called for a PMA (i.e., a predicate
device). A 510(k) notification must contain information to support a claim of
substantial equivalence, which may include laboratory test results or the
results of clinical studies of the device in humans. Commercial distribution of
a device for which a 510(k) clearance is required can only begin after the FDA
issues an order finding the device to be "substantially equivalent" to a
predicate device. The FDA recently has been requiring a more rigorous
demonstration of substantial equivalence than in the past and is more likely to
require the submission of human clinical trial data. Based upon industry and FDA
publications, the Company believes that it generally takes from four to twelve
months from the date of submission to obtain a clearance of a 510(k) submission,
but it may take longer. The FDA may determine that a proposed device is not
substantially equivalent to a legally marketed device or that additional
information is needed before a substantial equivalence determination can be
made. A "not substantially equivalent" determination, or a request for
additional information, could delay the market introduction of new products that
fall into this category.
A PMA application must be supported by valid scientific evidence that
typically includes extensive data including pre-clinical and clinical trial data
to demonstrate the safety and efficacy of the device. If human clinical trials
of a device are required and the device presents a "significant risk," the
sponsor of the trial (usually the manufacturer or the distributor of the device)
is required to file an IDE application with the FDA prior to commencing human
clinical trials. The IDE application must be supported by data, typically
including the results of animal and laboratory testing. If the IDE application
is approved by the FDA and one or more appropriate institutional review boards
("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients as approved by the FDA.
If the device presents a "nonsignificant risk" to the patient, a sponsor may
begin the clinical trial after obtaining approval for the study by one or more
appropriate IRBs without the need for FDA approval. Sponsors of clinical trials
are permitted to sell investigational devices distributed in the course of the
study provided such compensation does not exceed recovery of the costs of
manufacture, research, development and handling. An IDE supplement must be
submitted to and approved by the FDA before a sponsor or an investigator may
make a change to the investigational device or plan that may affect its
scientific soundness or the rights, safety or welfare of human subjects.
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Modifications to a device that is the subject of an approved PMA, its
labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
Any device manufactured or distributed by the Company pursuant to FDA
clearance or approvals is subject to pervasive and continuing regulation by FDA
and certain state agencies, including record keeping requirements and reporting
of adverse experiences with the use of the device. Labeling and promotional
activities are subject to scrutiny by FDA and, in certain circumstances, by the
Federal Trade Commission ("FTC").
Current FDA enforcement policy prohibits the marketing of approved medical
devices for unapproved uses. Labeling and promotional activities are subject to
scrutiny by the FDA and, in certain circumstances, by the FTC. FDA enforcement
policy strictly prohibits the marketing of FDA cleared or approved medical
devices for unapproved or "off-label" uses. The Company also is subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances. There can
be no assurance that the Company will not be required to incur significant costs
to comply with such laws and regulations in the future or that such laws or
regulations will not have a material adverse effect upon the Company's ability
to do business.
Manufacturers of medical devices intended for distribution in the United
States are required to adhere to applicable regulations setting forth detailed
QSR requirements, which include testing, control and documentation requirements
to register their establishments with the FDA; and to submit device listing
information regarding the devices marketed in the United States. Manufacturers
must also comply with Medical Device Reporting ("MDR") requirements that a firm
report to FDA any incident in which its product may have caused or contributed
to a death or serious injury, or in which its product malfunctioned and, if the
malfunction were to recur, it would be likely to cause or contribute to a death
or serious injury.
In February 1998, the Company received a device manufacturing license from
the CDHS. The Company is subject to routine inspection by FDA and the CDHS for
compliance with QSR requirements, MDR requirements and other applicable
regulations. FDA has implemented the QSR, including design control requirements,
which will likely increase the cost of compliance. Changes in existing
requirements or adoption of new requirements could have a material adverse
effect on the Company's business, financial condition, and results of operation.
There can be no assurance that the Company will not incur significant costs to
comply with laws and regulations in the future or that laws and regulations will
not have a material adverse effect upon the Company's business, financial
condition or results of operation.
International
In order for the Company to market its products in Europe and certain other
foreign jurisdictions, the Company must obtain required regulatory approvals and
clearances and otherwise comply with extensive regulations regarding safety and
manufacturing processes and quality. These regulations, including the
requirements for approvals or clearance to market and the time required for
regulatory review vary from country to country. There can be no assurance that
the Company will obtain regulatory approvals in such countries or that it will
not be required to incur significant costs in obtaining or maintaining its
foreign regulatory approvals. Delays in receipt of approvals to market the
Company's products, failure to receive these approvals or future loss of
previously received approvals could have a material adverse effect on the
Company's business, financial condition and results of operations.
The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA approval, and the requirements may
differ. 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 and 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
17
<PAGE> 18
in that Act. If the device has no marketing authorization in a Tier I country,
and is intended for marketing, it may be necessary to obtain approval from the
FDA to export the device. In order to obtain export approval, the Company may be
required to provide the FDA with documentation from the medical device
regulatory authority of the country in which the study is to be conducted or the
purchaser is located, stating that the device has the approval of the country.
In addition, the FDA must find that the exportation of the device is not
contrary to the public health and safety of the country in order for the Company
to obtain the permit. The Company is in the process of obtaining the necessary
approvals in the European Union and Japan.
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 Systems certification is
one of the CE mark requirements. In December 1997, the Company received
ISO9001/EN46001 certification from its European Notified Body. 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 on
additional products, there can be no assurance that the Company will be
successful in meeting the European certification requirements for additional
products and failure to receive the right to affix the CE mark will prohibit the
Company from selling those products in member countries of the European Union.
See "-- Manufacturing."
THIRD-PARTY REIMBURSEMENT AND UNCERTAINTY RELATED TO HEALTH CARE REFORM
In the United States, health care providers, including hospitals and
physicians, that purchase medical products for treatment of their patients,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or a part of the
costs and fees associated with the procedures performed using these products.
The Company's success will be dependent upon, among other things, the ability of
health care providers to obtain satisfactory reimbursement from third-party
payors for medical procedures in which the Company's products are used.
Third-party payors may deny reimbursement if they determine that a prescribed
device has not received appropriate regulatory clearances or approvals, is not
used in accordance with cost-effective treatment methods as determined by the
payor, or is experimental, unnecessary or inappropriate. If FDA clearance or
approval is received, third-party reimbursement would also depend upon decisions
by the United States Healthcare Financing Administration (the "HCFA") for
Medicare, as well as by individual health maintenance organizations, private
insurers and other payors. Government agencies, private insurers and other
payors determine whether to provide coverage for a particular procedure and
reimburse health care providers for medical treatment at a fixed rate based on
the diagnosis-related group ("DRG") established by the HCFA. The fixed rate of
reimbursement is based on the procedure performed, and is unrelated to the
specific type of number of devices used in a procedure. If a procedure is not
covered by a DRG, payors may deny reimbursement. The Company intends to obtain
an appropriate Medicare DRG assignment by HCFA for procedures performed using
its devices. As part of this process, during clinical trials the Company will
collect economic data regarding resources expended in performing procedures with
the devices. The Company will use these data to document differences in resource
use between procedures performed with the Company's devices and procedures
currently categorized under existing DRGS. The Company intends to meet with HCFA
policy staff to request and support development of appropriate hospital payment
policies for the procedures performed using the Company's devices. In addition,
the Company may also collect resource use data regarding physician services to
support establishment of appropriate fee schedules by third-party payors. The
Company believes these efforts will also support reimbursement among private
payors.
Capital costs for medical equipment purchased by hospitals are currently
reimbursed separately from DRG payments. Federal legislation has reduced capital
cost reimbursements under the Medicare capital cost pass-through system. Such
reductions have had an adverse impact on reimbursements to hospitals for the
capital cost of equipment such as the system components of the Company's
products. There can be no
18
<PAGE> 19
assurance that similar legislation will not be enacted in the future and, if
enacted, that such legislation would not have a material adverse effect on the
Company's business, financial condition and results of operations.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country by country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in international
markets targeted by the Company. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
time, for a particular amount, or at all.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. In addition, the Company believes that a patient's
underlying arrhythmia will typically not recur after treatment with the
Company's procedures. The Company anticipates that hospital administrators and
physicians would justify the use of the Company's products by the attendant cost
savings and clinical benefits that the Company believes would be derived from
the use of its products. However, there can be no assurance that this will be
the case. There can be no assurance that reimbursement for the Company's
products will be available in the United States or in international markets
under either government or private reimbursement systems, or that physicians
will support and advocate reimbursement for procedures using the Company's
products. Failure by hospitals and other users of the Company's products to
obtain reimbursement from third-party payors, or changes in government and
private third-party payors' policies toward reimbursement for procedures
employing the Company's products, would have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover, the
Company is unable to predict what additional legislation or regulation, if any,
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future, or what effect such legislation or regulation
would have on the Company.
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. The Company
anticipates that Congress, state legislatures and the private sector will
continue to review and assess alternative health care delivery and payment
systems. Potential approaches that have been considered include mandated basic
health care benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups, price controls and
other fundamental changes to the health care delivery system. Legislative debate
is expected to continue in the future, and market forces are expected to demand
reduced costs. The Company cannot predict what impact the adoption of any
federal or state health care reform measures, future private sector reform or
market forces may have on its business.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical products entail
significant risk of product liability claims and product failure claims. The
Company has only limited commercial sales to date and does not yet have, and
will not have for a number of years, sufficient data to allow the Company to
measure the risk of such claims with respect to its products. The Company faces
an inherent business risk of financial exposure to product liability claims in
the event that the use of its products results in personal injury or death. The
Company also faces the possibility that defects in the design or manufacture of
the Company's products might necessitate a product recall. There can be no
assurance that the Company will not experience losses due to product liability
claims or recalls in the future. The Company currently maintains product
liability insurance with coverage limits of $6.0 million per occurrence and
$12.0 million annually in the aggregate and there can be no assurance that the
coverage limits of the Company's insurance policies will be adequate. In
addition, the Company will require increased product liability coverage if any
of its 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.
19
<PAGE> 20
EMPLOYEES
As of June 30, 1999, the Company had 107 employees, 32 of whom were engaged
directly in research, development, regulatory and clinical activities, 56 in
manufacturing and quality assurance and 19 in marketing, sales and
administrative positions. No employee of the Company is covered by collective
bargaining agreements, and the Company believes that its relationship with its
employees is good.
The Company's ability to operate successfully depends in significant part
upon the continued service of certain key scientific, technical, clinical,
regulatory and managerial personnel, and its continuing ability to attract and
retain additional highly qualified scientific, technical, clinical, regulatory
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that the Company can retain such personnel or that it can
attract or retain other highly qualified scientific, technical, clinical,
regulatory and managerial personnel in the future, including key sales and
marketing personnel. The loss of key personnel or the inability to hire and
retain qualified personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations.
In addition, in order to manufacture and market its products in commercial
quantities, the Company believes that it will be required to expand its
operations, particularly in the areas of manufacturing and sales and marketing.
As the Company expands its operations in these areas, such expansion will likely
result in new and increased responsibilities for management personnel and place
significant strain upon the Company's management, operating and financial
systems and resources. To accommodate any such growth and compete effectively,
the Company will be required to implement and improve information systems,
procedures, and controls, and to expand, train, motivate and manage its work
force. The Company's future success will depend to a significant extent on the
ability of its current and future management personnel to operate effectively,
both independently and as a group. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's future operations.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Thomas M. Prescott............. 44 President and Chief Executive Officer
Debra S. Echt, M.D............. 48 Vice President and Chief Medical Officer
Brian Grigsby.................. 46 Vice President, Operations
Jon P. Hunt, Ph.D.............. 44 Vice President, Sales and Marketing
G. Michael Latta............... 37 Vice President, Finance and Chief Financial Officer
Richard E. Riley............... 44 Executive Vice President, Research and Development
</TABLE>
Thomas M. Prescott has been President and Chief Executive Officer of the
Company since May 1999. Mr. Prescott was Vice President and General Manager of a
respiratory business unit of Mallinckrodt, Inc. from August 1996 to May 1999.
Mr. Prescott served in other senior leadership roles at Nellcor, Inc. from April
1994 until Nellcor's acquisition by Mallinckrodt in August 1997. Prior to that
time, Mr. Prescott served in various roles at General Electric Medical Systems
and Siemens A.G.
Debra S. Echt, M.D. has been Vice President and Chief Medical Officer of
the Company since September 1996. From July 1990 to August 1996, Dr. Echt was
Associate Professor of Medicine/Cardiology and Director of the Cardiac
Arrhythmia Section at Vanderbilt University. She held a concurrent position as a
member and consultant on the United States Food and Drug Administration's
Circulatory System Devices Advisory Panel from June 1991 to July 1996.
Brian Grigsby has been Vice President, Operations since February 1999. From
August 1998 to January 1999, Mr. Grigsby was Senior Director of Quality
Assurance of the Company. From September 1996 to July 1998, Mr. Grigsby was
Director of Quality Assurance of the Company. From September 1988 to August
1996, Mr. Grigsby held various positions within the medical device industry
including Director, Manufacturing,
20
<PAGE> 21
Quality and Regulatory Affairs with Catheter Research, Inc. and Manager, Quality
and Manufacturing Engineering with Medtronic, Inc., a medical device company.
Jon P. Hunt, Ph.D. has been Vice President, Sales and Marketing of the
Company since June 1999. He previously served as Vice President, International
Sales of the Company from March 1998 through May 1999. From April 1996 to March
1998, Dr. Hunt was Business Unit Director of the Cardiac Rhythm Management
Division of St. Jude Medical Europe, a medical device company. From November
1993 to March 1996, Dr. Hunt was Director of Clinical Research of Pacesetter
Systems, Inc., a medical device company. From January 1992 to November 1993, Dr.
Hunt was Director of Clinical Programs at Cardiac Pacemakers, Inc.
G. Michael Latta has been Vice President, Finance and Chief Financial
Officer of the Company since December 1998. From September 1994 to November
1998, Mr. Latta held various financial management positions with the Company.
From September 1989 to September 1994, Mr. Latta was with Ernst & Young LLP,
most recently as an Audit Manager. Mr. Latta is a Certified Public Accountant.
Richard E. Riley has been the Executive Vice President, Research and
Development of the Company since July 1998. Mr. Riley was Vice President,
Product Development of the Company from July 1994 to July 1998. From July 1992
to July 1994, Mr. Riley was Vice President, Software Development of the Company.
From 1982 to June 1992, Mr. Riley held various engineering positions, including
Project Director with Medtronic, Inc.
ITEM 2. PROPERTIES
The Company leases approximately 36,000 square feet in Sunnyvale,
California, for production, research and development, clinical research and
selling and administrative activities. This facility is leased through October
2003. In addition, the Company leases approximately 8,000 square feet in
Sunnyvale, California at a separate facility for warehouse and field service
activities. This facility is leased through October 2000. The Company believes
that these facilities will be adequate to meet its needs through fiscal 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 20, 1999, at a special meeting of stockholders of Cardiac Pathways
the stockholders of Cardiac Pathways took the following actions:
1. Approval of one-for-five reverse split of the common stock of Cardiac
Pathways:
<TABLE>
<S> <C> <C>
For: 5,465,167
Against: 180,818
Abstain: 5,245
Broker Non-Votes 0
</TABLE>
2. Approval of increase in number of authorized shares of common stock to
75,000,000:
<TABLE>
<S> <C> <C>
For: 5,275,179
Against: 364,156
Abstain: 11,895
Broker Non-Votes 0
</TABLE>
3. Approval of the sale of up to 40,000 shares of series B convertible
preferred stock:
<TABLE>
<S> <C> <C>
For: 4,777,433
Against: 175,547
Abstain: 10,045
Broker Non-Votes 688,205
</TABLE>
21
<PAGE> 22
4. Approval of amendment of 1991 Stock Plan to (i) increase the number of
shares reserved for issuance thereunder by 4,000,000 shares (pre-reserve
split) and (ii) increase the share limitations for purposes of Section
162(m) of the Internal Revenue Code:
<TABLE>
<S> <C> <C>
For: 4,374,727
Against: 550,253
Abstain: 38,045
Broker Non-Votes 688,205
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Stock and Dividend Policy
The Common Stock of the Company has been traded on the Nasdaq National
Market under the symbol CPWY since the Company's initial public offering on June
12, 1996. Prior to that time there was no public market for the Company's Common
Stock. The following table sets forth for the period indicated the high and low
sale prices of the Common Stock as adjusted for the 1 for 5 reverse stock split
effected by the Company in July 1999.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1998
First Quarter............................................... $47 1/2 $38 3/4
Second Quarter.............................................. $60 $28 3/4
Third Quarter............................................... $48 1/8 $30
Fourth Quarter.............................................. $52 1/2 $34 3/8
FISCAL YEAR ENDED JUNE 30, 1999
First Quarter............................................... $51 7/8 $19 3/8
Second Quarter.............................................. $30 $17 1/2
Third Quarter............................................... $25 5/8 $ 4 11/16
Fourth Quarter.............................................. $ 7 13/16 $ 2 1/2
</TABLE>
As of September 24, 1999, there were approximately 170 holders of record of
the Common Stock.
The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain its future earnings for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future. In addition, the holders of the Company's
Series B Convertible Preferred Stock are entitled to receive cumulative
dividends at the rate per share equal to 11% per annum of the initial purchase
price of the Series B Convertible Preferred Stock before any dividend or other
distribution will be paid or declared and set apart for payment on any shares of
any common stock or other class of stock junior to the Series B Convertible
Preferred Stock. In the event that the Company has not redeemed the Series B
Convertible Preferred Stock prior to May 2004 after a request by the holders to
do so, the cumulative dividend will increase by six percentage points each full
year after May 2004 in which a redemption does not occur. In addition, the
affirmative vote of holders of a majority of the Series B Convertible Preferred
Stock, voting as a separate class, will be required to declare or pay any
dividends on the common stock.
Recent Sales of Unregistered Securities
On July 23, 1999, the Company completed a $32.0 million Series B
Convertible Preferred Stock financing. The 32,000 shares of Series B Convertible
Preferred Stock are convertible at the option of the holders into 6.4 million
shares of the Company's Common Stock. On May 21, 1999 the Company signed a
definitive agreement with BankAmerica Ventures, Morgan Stanley Dean Witter
Venture Partners and certain other accredited investors for the sale of
$32,000,000 of Series B Convertible Preferred Stock. On July 20,
22
<PAGE> 23
1999, the Company's stockholders approved the financing at a special meeting of
stockholders. The financing closed on July 23, 1999 and the Company issued
32,000 shares of Series B Convertible Preferred Stock at a purchase price of
$1,000 per share and raised $31,500,000, net of issuance costs.
The financing was severely dilutive to the Company's then existing
stockholders. The following table summarizes the dilutive effect, for percentage
ownership purposes, of the financing on the Cardiac Pathways stockholders based
on outstanding share information as of June 4, 1999:
<TABLE>
<CAPTION>
SHARES PERCENTAGE
--------- ----------
<S> <C> <C>
Outstanding common stock as of June 4, 1999................. 2,007,716 23.9%
New common stock issuable upon conversion of the series B
convertible preferred stock............................... 6,400,000 76.1
--------- -----
Total............................................. 8,407,716 100.0%
========= =====
</TABLE>
This table does not give effect to the issuance of warrants to purchase 300
shares of Series B Convertible Preferred Stock (convertible into 60,000 shares
of common stock) in connection with the interim funding described below.
The members of the Company's board of directors other than Thomas M.
Prescott resigned effective upon the closing of the financing. The remaining
director, Mr. Prescott, appointed Mark J. Brooks, Anchie Y. Kuo, M.D., and Fazle
Husain, nominees of the Series B Convertible Preferred Stockholders, and former
director, chief executive officer and president, William N. Starling, to fill
the vacancies. Mr. Starling was also appointed chairman of the board of
directors. The consent of the directors nominated by the Series B Convertible
Preferred Stock will be required to increase the number of directors above the
number currently in office.
The holders of Series B Convertible Preferred Stock are entitled to
significant rights, preferences and privileges as a result of their investment.
Each share of Series B Convertible Preferred Stock is convertible into 200
shares of common stock. The conversion ratio of the Series B Convertible Stock
are subject to adjustment for price based antidilution.
The Series B Convertible Preferred Stock is entitled to an 11% cumulative
dividend per year. The series B convertible preferred stock has a liquidation
preference equal to the initial purchase price plus accrued dividends upon the
occurrence of a liquidation, a merger or the sale of all or substantially all of
the Company's stock or assets. As a result of the liquidation preference, in the
event of a liquidation, merger or the sale of substantially all of the Company's
stock or assets, the holders of Series B Convertible Preferred Stock will
receive their original purchase price plus any accrued dividends prior to any
distribution to the holders of common stock.
The Series B Convertible Preferred Stock is redeemable after May 31, 2004
at the request of a majority of the holders, subject to the approval of the
Company. If a redemption request is received but not approved by the Company,
the cumulative dividend rate payable on the Series B Convertible Preferred Stock
will increase by six percentage points for each year a redemption does not
occur.
The holders of the Series B Convertible Preferred Stock vote on all matters
presented to stockholders on an as-converted to common stock basis. In addition,
the affirmative vote of holders of a majority of the Series B Convertible
Preferred Stock, voting as a separate class, will be required to:
1. Amend or repeal any provision, or add any provision to the
Company's certificate of incorporation or bylaws which changes the rights
of the Series B Convertible Preferred Stock;
2. Increase or decrease (other than by redemption or conversion) the
total number of authorized shares of preferred stock or common stock;
3. Authorize or issue, or obligate itself to issue, any other security
convertible into or exercisable for any security having a preference over,
or being on a parity with, the Series B Convertible Preferred Stock with
respect to voting, dividends, redemption or upon liquidation;
23
<PAGE> 24
4. Issue any shares of common stock, other than
(a) shares of common stock issuable or issued to employees,
consultants or directors of the Company directly or pursuant to a stock
option plan or restricted stock plan approved by the board of directors,
including the representatives of the Series B Convertible Preferred
Stock;
(b) shares of common stock issuable or issued upon conversion of
the Series A Participating Preferred Stock or Series B Convertible
Preferred Stock or as dividends or distributions on the Series A
Participating Preferred Stock or Series B Convertible Preferred Stock;
(c) shares of common stock issuable or issued upon exercise of
warrants issued to banks, equipment lessors or other vendors, where such
common stock or warrants were approved by the board of directors,
including the representatives of the Series B Convertible Preferred
Stock; or
(d) shares of common stock issuable or issued as consideration for
business combinations or corporate partnering agreements approved by the
board of directors, including the representatives of the Series B
Convertible Preferred Stock.
5. Declare or pay any dividends on its common stock or redeem,
purchase or otherwise acquire (or pay into or set aside for a sinking fund
for such purpose) any share or shares of common stock; provided, however,
that this restriction shall not apply to the repurchase of shares of common
stock from employees, officers, directors, consultants or other persons
performing services for the Company or any subsidiary pursuant to
agreements under which the Company has the option to repurchase such shares
at cost or at cost upon the occurrence of certain events, such as the
termination of employment;
6. Sell, convey or otherwise dispose of all or substantially all of
its property or business or merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary corporation) or effect
any transaction or series of related transactions in which more than fifty
percent (50%) of the voting power of this corporation is disposed of;
7. Repurchase any series of preferred stock; or
8. Increase or decrease the size of the board of directors.
The holders of the Series B Convertible Preferred Stock have a right of
first offer with respect to future financings by the Company.
The holders of 45% of the then outstanding Series B Convertible Preferred
Stock will have the right to request that the Company register the shares of
common stock into which the Series B Convertible Preferred Stock are convertible
after May 21, 2000. In addition, if the Company otherwise registers shares of
Company common stock, the holders of the Series B Convertible Preferred Stock
will be entitled to participate in the registration.
The foregoing transaction did not involve any underwriters, underwriting
discounts or commissions or any public offering, and we believe that each
transaction was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof or Regulation D promulgated thereunder. The
recipients in such transactions represented their intention to acquire the
securities for investment only and not with a view to or for resale in
connection with any distribution thereof, and appropriate legends were affixed
to the share certificates and instruments issued in such transactions. All
recipients had adequate access, through their relationships with us, to
information about us.
24
<PAGE> 25
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below should be read in conjunction with the
consolidated financial statements and related notes attached to this Annual
Report on Form 10-K as pages F-1 through F-23. In July 1999, the Company's
stockholders approved a 1 for 5 reverse stock split which was effected on July
27, 1999. All share and per share amounts have been retroactively adjusted to
reflect the reverse stock split.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Net sales............................. $ 4,406 $ 2,420 $ 2,409 $ 1,684 $ 115
Operating expenses:
Manufacturing start-up and cost of
goods sold....................... 4,249 2,828 2,508 2,408 2,520
Research and development............ 12,115 14,353 11,756 6,819 5,666
Selling, general and
administrative................... 6,685 4,092 3,147 1,981 1,745
-------- -------- -------- ------- -------
Total operating expenses.... 23,049 21,273 17,411 11,208 9,931
-------- -------- -------- ------- -------
Loss from operations.................. (18,643) (18,853) (15,002) (9,524) (9,816)
Other income, net..................... 77 1,354 2,136 155 156
-------- -------- -------- ------- -------
Net loss.............................. $(18,566) $(17,499) $(12,866) $(9,369) $(9,660)
======== ======== ======== ======= =======
Net loss per share -- basic and
diluted............................. $ (9.34) $ (9.07) $ (6.86)
======== ======== ========
Shares used in computing net loss per
share -- basic and diluted.......... 1,987 1,930 1,876
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------
1999 1998 1997 1996(1) 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments............ $ 2,340 $ 24,517 $ 41,567 $ 52,873 $ 11,652
Working capital..................... (1,343) 22,351 39,511 52,028 10,632
Total assets........................ 8,906 30,935 46,655 57,188 15,139
Long-term liabilities, net of
current portion................... 2,974 9,248 9,077 8,877 5,978
Accumulated deficit................. (79,983) (61,418) (43,919) (31,053) (21,684)
Stockholders' equity (deficit)...... (395) 17,485 33,992 46,051 7,440
</TABLE>
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(1) The selected consolidated balance sheet data as of June 30, 1996 reflect the
Company's initial public offering completed in June 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors that include, but are not limited to, the risks discussed in "Factors
That May Impact Future Operations" as well as those discussed in the following
"Overview" section. These forward-looking statements include the statement in
the first paragraph of "Overview" relating to expectations of operating losses,
the statement in the second paragraph of "Overview" relating to the
commercialization of products that have received FDA manufacturing approval, the
statements in the third paragraph of "Overview" related to the manufacturing,
marketing and distribution of the Company's products, the statements in the last
sentence of "Cost of Goods Sold," the statements in the last sentence of each of
the "Research and Development" and "Selling, General and
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<PAGE> 26
Administrative" paragraphs, and the statements regarding future capital
expenditures in the eighth paragraph of "Liquidity and Capital Resources."
OVERVIEW
The Company was founded in April 1991, operates in a single industry
segment, and has engaged primarily in developing, testing and obtaining
regulatory clearances for its products. The Company has experienced significant
operating losses since inception and as of June 30, 1999 had an accumulated
deficit of approximately $80.0 million. The Company has generated only limited
revenues from sales of Chilli cooled ablation catheters, Radii supraventricular
tachycardia mapping and ablation catheters, Trio/Ensemble diagnostic catheters,
Mercator diagnostic mapping baskets and related equipment in certain markets.
The Company expects its operating losses to continue through at least the end of
calendar 2001 as it continues to expend substantial funds to conduct research
and development activities, obtain regulatory approvals for its products,
establish commercial-scale manufacturing capabilities and expand its sales and
marketing activities.
The Company currently believes that its Chilli Cooled Ablation System,
Arrhythmia Mapping System and Tracking System products and their component
catheters and equipment are the only significant potential products while other
products such as Radii and Trio/Ensemble represent important current revenue
streams from international customers. The Company believes the majority of its
revenue growth will be from the Chilli and Tracking System product platforms. In
February 1999, the FDA granted approval of the Company's PMA application to
commercially release its Chilli Cooled Ablation System which consists of the
Chilli Cooled Ablation Catheter and the Radiofrequency Generator. In January
1999, the FDA granted clearance of the Company's application pursuant to section
510(k) of the Food, Drug and Cosmetics Act of 1938, as amended (the 510(k)
application) to commercially release its Mercator Atrial High Density Array
Catheter which is intended to be used in the right atrium for diagnostic mapping
procedures. In August 1997, the FDA granted clearance of the Company's 510(k)
application for the Model 8100/8300 Arrhythmia Mapping System for basic
diagnostic electrophysiology studies.
For the Company's products which have recently obtained FDA clearance or
approval, there can be no assurance that any such products will be successfully
commercialized or that the Company will achieve significant revenues from either
domestic or international sales. Although the FDA granted PMA approval for the
Chilli Cooled Ablation System, 510(k) clearance for the Mercator atrial
catheter, and 510(k) clearance for the Arrhythmia Mapping System for basic
diagnostic studies, the Company does not have any experience in manufacturing,
marketing or selling these products in commercial quantities. In order to
successfully implement its business plan, the Company must manufacture and sell
the Chilli Cooled Ablation System and other products in commercial quantities.
Furthermore, the Company will need to expend significant capital resources and
develop manufacturing expertise to establish large-scale manufacturing
capabilities. Manufacturers often encounter difficulties in scaling up
production of new products, including problems involving production yields,
quality control and assurance, component supply shortages, shortages of
qualified personnel, compliance with FDA regulations, and the need for further
FDA approval of new manufacturing processes. The Company intends to market its
products primarily through a direct sales force in the United States and
indirect sales channels internationally. Establishing a marketing and sales
capability sufficient to support sales in commercial quantities will require
significant management and financial resources. See "-- Factors That May Impact
Future Operations."
The Company's Common Stock is currently listed for trading on the Nasdaq
Stock Market's National Market. In April 1999, Nasdaq requested that the Company
provide certain information with respect to the Company's ability to meet
Nasdaq's quantitative maintenance requirements. In May 1999, Nasdaq notified the
Company that, based on 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). The Company believes that
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<PAGE> 27
as of the closing of its Series B Preferred Stock financing on July 23, 1999, it
is in compliance with Maintenance Standard 1.
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.
RESULTS OF OPERATIONS
Years Ended June 30, 1999 and 1998
Net Sales. The Company's net sales to date have resulted primarily from
limited sales of Chilli cooled ablation catheters, Radii supraventricular
tachycardia mapping and ablation catheters, Trio/Ensemble diagnostic catheters,
Mercator mapping baskets, Radiofrequency Generator Systems and Arrhythmia
Mapping Systems. The Company's net sales increased to $4.4 million in fiscal
1999 compared to $2.4 million for fiscal 1998. The net increase in sales for
fiscal 1999 primarily resulted from sales of Chilli cooled ablation catheters in
the U.S. market following commercial release in the third quarter of fiscal
1999. In addition, the Company had increased sales of Chilli and Radii catheters
in Europe reflecting the establishment of certain distributor arrangements in
fiscal 1999, particularly in Germany, France and Spain. The Company also
recorded higher overall sales of Radii and Trio/Ensemble catheters in Japan
during the year.
In December 1995, the Company received $3.0 million pursuant to a royalty
agreement with Arrow. This amount was recorded as deferred royalty income and
will be amortized to income for those Trio/Ensemble catheters that Arrow
manufactures and sells. The royalty rate is 5% of the Trio/Ensemble catheter's
sales price. In fiscal 1999, the Company began to amortize deferred royalty
income on a straight-line basis over the estimated lives of the related
technology patents. A total of $369,138 of royalty income related to the
agreement has been recorded through June 30, 1999, of which $300,000 was
recognized in fiscal 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 $4.2 million for fiscal 1999 and resulted in a gross margin of
$157,000. For fiscal 1998, cost of goods sold was $2.8 million and resulted in a
gross margin deficit of $408,000. The increase in the gross margin for fiscal
1999 compared to fiscal 1998 was primarily due to increased sales volumes,
changes in sales mix and improved manufacturing yields. These improvements were
offset in part by increased overhead and training costs for manufacturing
personnel, higher costs associated with quality control and manufacturing
engineering activities to support higher production volumes. The Company expects
its gross margins to fluctuate in the future as its products are commercialized.
Research and Development. Research and development expenses include costs
associated with product research, clinical trials, prototype development, design
and testing, and costs associated with obtaining regulatory approvals. Research
and development expenses decreased to $12.1 million in fiscal 1999 compared to
$14.4 million in fiscal 1998. The decrease in research and development expenses
was primarily attributable to decreased costs related to clinical trials of the
Chilli catheter for which patient enrollment was completed in December 1997, and
decreased costs reflecting an overall smaller research and development
organization. The decreases were offset in part by increased costs associated
with consulting services, facilities and certain equipment costs during fiscal
1999 associated with various clinical programs. 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 $6.7
million in fiscal 1999 compared to $4.1 million in fiscal 1998. The increase was
primarily attributable to higher expenditures for sales and marketing personnel
and services to support expanding international and domestic sales, marketing
and customer service activities and increased costs associated with
demonstration units and product marketing materials. The Company anticipates
that selling, general and administrative expenses will increase in future
periods as additional personnel are added to support growing business operations
in all functional areas.
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<PAGE> 28
Other Income (Expense), Net. Other income (expense), net decreased to net
other income of $77,000 in fiscal 1999 from net other income of $1.4 million in
fiscal 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 increased to $18.6 million in fiscal 1999
compared to $17.5 million in fiscal 1998. The increase in the Company's net loss
primarily resulted from increased selling, general and administrative expenses
and lower interest income, which were offset in part by increased overall sales
volumes and gross margins and decreased clinical research and product
development costs.
Net Operating Loss and Research Tax Credit Carryforwards. As of June 30,
1999, the Company's reported net operating loss carryforwards were approximately
$73.3 million and $15.1 million for federal and state income tax purposes,
respectively. The Company's research tax credit carryforwards were approximately
$3.8 million. The net operating loss and credit carryforwards will expire at
various dates beginning in 1999, if not utilized. In addition, the net operating
loss and tax credit carryforwards may be subject to annual limitations under the
ownership provisions of Internal Revenue Code Section 382 and 383.
Impact of Adoption of New Accounting Standards. In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 130 (FAS 130), "Reporting Comprehensive Income" which requires the reporting
and presentation of comprehensive income and its components in the financial
statements. Comprehensive income reflects certain items not currently reported
in measuring net income, such as changes in value of available-for-sale
securities and foreign currency translation adjustments. The Company adopted FAS
130 in 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 loss or stockholder's equity.
In June 1997, the Financial Accounting Standards Board 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 adopted FAS 131 for the year
ending June 30, 1999. As the Company operates in a single industry segment,
there were no significant modifications or additional disclosures required in
the financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted in years beginning after June 15,
2000. The Company has not used derivative instruments in the past nor does it
anticipate using derivatives in the future, 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.
Years Ended June 30, 1998 and 1997
Net Sales. The Company's net sales remained level at $2.4 million for each
of the years ended June 30, 1998 and 1997. During fiscal 1998, the Company had
increased sales of its Radii catheters in Japan following the initial launch of
the Radii product line in the Japanese market during the first quarter. In
addition, the Company had increased sales of Arrhythmia Mapping Systems during
fiscal 1998. These increases were offset by lower overall demand for
Trio/Ensemble catheters following the transfer, during fiscal 1997, of
manufacturing and distribution for the U.S. market and certain international
markets to Arrow International, Inc. ("Arrow"). These increases were also offset
in part by decreased international sales of Radiofrequency Generator Systems.
The Company experienced a delay in the international launch of Radii
catheters in Japan, a delay in the release of a software revision for the
Company's Arrhythmia Mapping System and delays in receiving
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<PAGE> 29
CE mark approval for certain catheters in Europe. Each of the foregoing factors
resulted in lower than expected revenue in fiscal 1998.
In December 1995, the Company received $3.0 million pursuant to a royalty
agreement with Arrow. This amount was recorded as deferred royalty income and
will be amortized to income for those Trio/Ensemble catheters that Arrow
manufactures and sells. The royalty rate is 5% of the Trio/Ensemble catheter's
sales price, and a total of $69,000 of royalty income related to the agreement
has been recorded through June 30, 1998, of which $20,000 was recognized in
fiscal 1998.
Cost of Goods Sold. Cost of goods sold was $2.8 million for fiscal 1998 and
resulted in a gross margin deficit of $408,000. For fiscal 1997, cost of goods
sold was $2.5 million and resulted in a gross margin deficit of $99,000. The
decrease in the gross margin for fiscal 1998 compared to fiscal 1997 was
primarily attributable to changes in sales mix, increased fixed overhead costs
resulting from the expansion of catheter and equipment production capacity,
lower manufacturing yields and increased compensation and associated labor costs
for assembly, quality control and engineering support personnel. In addition,
cost of goods sold increased in fiscal 1998 due to the additional expenses
related to a change in specifications for certain Radii catheters.
Research and Development. Research and development expenses increased to
$14.4 million in fiscal 1998 compared to $11.8 million in fiscal 1997. The
increase in research and development expenses was primarily attributable to
increased costs associated with the hiring of additional engineering personnel,
costs in connection with procurement of certain materials, increased costs for
regulatory and other consulting services and the placement of Arrhythmia Mapping
Systems, Radiofrequency Generator Systems and catheter products at clinical
sites in the United States and Europe.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $4.1 million in fiscal 1998 compared to $3.1 million in
fiscal 1997. The increase was primarily attributable to higher expenditures for
sales and marketing personnel and services to support expanding international
sales and marketing activities, increased costs associated with demonstration
units, product marketing materials and insurance.
Other Income (Expense), Net. Other income (expense), net decreased to net
other income of $1.4 million in fiscal 1998 from net other income of $2.1
million in fiscal 1997. The reduction in net other income was the result of
declining interest income on lower cash, cash equivalent and short-term
investment balances.
Net Loss. The Company's net loss increased to $17.5 million in fiscal 1998
compared to $12.9 million in fiscal 1997. The increase in the Company's net loss
primarily resulted from the larger gross margin deficit, increased operating
expenses, including product development, clinical research and selling, general
and administrative expenses and lower interest income.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through a
combination of private placements of equity securities yielding $33.5 million, a
private placement of debt securities yielding approximately $4.5 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 June 30, 1999, the Company had $2.3 million
in cash and cash equivalents.
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. Borrowings
under the credit facility bore interest at the bank's prime rate plus 1.25%
(9.75% at June 30, 1998). Interest payments were due monthly following
commencement of each advance and the outstanding balance of all borrowings under
the credit facility were to be fully amortized over the 36-month period
following the end of the drawdown period with principal and interest payments
due monthly. Under the terms of loan agreement, all borrowings were
collateralized by
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<PAGE> 30
substantially all of the Company's assets and the Company was required to
maintain certain financial ratios and other covenants.
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.
In March 1999, the Company was out of compliance with the financial ratios
and other covenants required by the term loan credit facility. Under the terms
of the loan agreement, the Company was required to fully collateralize the $6.0
million loan through a restricted cash pledge. In May 1999, the commercial bank
foreclosed and took possession of the collateral in satisfaction of the full
amount due under the loan.
In May 1999, the Company's Board of Directors authorized and the Company
entered into definitive agreements in connection with a preferred stock
financing. The terms of the financing included the sale of a maximum of 40,000
shares of Series B Preferred Stock at $1,000 per share to a group of accredited
investors. The Series B Preferred Stock is initially convertible into 200 shares
of the Company's Common Stock. The Series B Preferred Stock is entitled to a
cumulative dividend of 11% of the purchase price per share per year, and will
have a liquidation preference in certain circumstances equal to the initial
purchase price plus accrued but unpaid dividends. In addition, at any time after
May 31, 2004, the holders of a majority of Series B Preferred Stock may request
that the Company redeem the outstanding shares of Series B Preferred Stock. The
Company, at its sole discretion, may redeem the outstanding shares of Series B
Preferred Stock for an amount equal to the original Series B issue price plus
accrued but unpaid dividends. If the Company has not redeemed the Series B
Preferred Stock prior to May 31, 2004, the dividend rate will increase by 6% for
each year a redemption has not occurred subsequent to May 31, 2004. The Series B
Preferred Stock financing was approved by the stockholders in July 1999.
Furthermore, in July 1999, the Company closed the Series B Preferred Stock
financing and issued a total of 32,000 shares of Series B Preferred Stock at a
price of $1,000 per share, raising approximately $31.5 million, net of issuance
costs.
In May 1999, in connection with the Series B Preferred Stock Financing
above, the Company obtained a convertible bridge loan of $3.0 million from
certain participating investors. The bridge loan bore interest at the prime rate
plus 2.00% (9.75% at June 30, 1999). The promissory notes issued in connection
with the bridge loan were convertible into shares of Series B convertible
preferred stock at the same price as the shares issued in the financing. In July
1999, the bridge loan and related accrued interest was converted into 3,052
shares of Series B preferred stock concurrent with the closing of the preferred
stock financing.
Net cash used in operating activities was $18.4 million, $16.8 million and
$10.2 million in fiscal 1999, 1998 and 1997, respectively. For such periods, net
cash used in operating activities resulted primarily from net losses. Net cash
provided by investing activities was $16.7 million and $17.7 million in fiscal
1999 and 1998, respectively, and net cash used in investing activities was $13.6
million in fiscal 1997. 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. The net cash used in
investing activities was primarily attributable to the purchase of short-term
investments. Net cash used in financing activities was $3.2 million in fiscal
1999, and net cash provided by financing activities was $1.3 million in fiscal
1998. The net cash used in financing activities in fiscal 1999 primarily
resulted from the repayment of $6.0 million on the Company's line of credit with
a commercial bank offset in part, by the proceeds from the bridge loan financing
in connection with the Series B preferred stock transaction. Net cash used in
financing activities was $311,000 in fiscal 1997.
As of June 30, 1999, the Company had capital equipment of $8.8 million,
less accumulated depreciation and amortization of $5.0 million, to support its
clinical, development, manufacturing and administrative activities. The Company
has financed $4.0 million from capital lease obligations through June 30, 1999.
The Company expects capital expenditures to increase over the next several years
as it expands facilities and acquires equipment to support the planned expansion
of manufacturing capabilities.
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<PAGE> 31
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the progress of the Company's product development
efforts, actions relating to regulatory matters, the costs and timing of
expansion of product development, manufacturing, marketing and sales activities
and the extent to which the Company's products gain market acceptance, and
competitive developments. In order to successfully manufacture in commercial
quantities and market and sell its FDA-cleared products and to apply for FDA
marketing clearance for its remaining products, the Company may be required to
raise additional funds.
FACTORS THAT MAY IMPACT FUTURE OPERATIONS
Limited Operating History; History of Losses and Expectation of Future Losses
The Company was founded in 1991 and to date has engaged primarily in
researching, developing, testing and obtaining regulatory clearances for its
products. The Company has experienced significant operating losses since
inception. As of June 30, 1999, the Company had an accumulated deficit of $80.0
million. To date, the Company has generated only limited revenues from sales of
its products and expects its operating losses to continue through at least the
end of calendar 2001 as it continues to expend substantial funds for clinical
trials in support of regulatory approvals, expansion of research and development
activities, establishment of commercial scale manufacturing capabilities and
expansion of sales and marketing activities. There can be no assurance that any
of the Company's potential products for diagnosis and treatment of ventricular
tachycardia, atrial fibrillation and atrial flutter will receive regulatory
approvals for marketing, will be successfully commercialized or that the Company
will achieve significant revenues from either international or domestic sales.
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.
Clinical Trials
There can be no assurance that the Company's current or future products
will prove to be safe and effective in clinical trials under applicable United
States or international regulatory guidelines or that additional modifications
to the Company's products will not be necessary. Furthermore, there can be no
assurance that the Company will be successful in completing development of the
Tracking System products. With respect to the Chilli Cooled Ablation System,
because ablation treatment of cardiac arrhythmias is a relatively new and to
date untested treatment, the long-term effects of radiofrequency ablation on
patients are unknown. As a result, the long-term success of ablation therapy in
treating ventricular tachycardia and other tachyarrhythmias will not be known
for several years.
On February 2, 1999, the Company obtained PMA approval for the Chilli
Cooled Ablation Catheter and the Radiofrequency Generator and Integrated Fluid
Pump, the products that together form the Company's Cooled Ablation System. On
March 11, 1999, the Company suspended and later terminated a clinical trial for
the Local Sector Mapping Basket, a variation of the Mercator Mapping Basket. On
January 27, 1999, the Company received 510(k) clearance for the Mercator Atrial
Mapping Basket sizes 70cc and 100cc and the Model 8100/8300 Arrhythmia Mapping
System, the products that together form the Company's Arrhythmia Mapping System
for diagnostic mapping of the right atrium. The Company is continuing to enroll
patients in the study for the 130cc size basket to support a special 510(k)
submission. The Company discontinued a clinical trial for a second version of
the Nexus Linear Lesion Catheter for the treatment of atrial flutter in February
1999 and atrial fibrillation in July 1999.
Cooled Ablation System for Ventricular Tachycardia. The Company obtained
PMA approval for the Chilli Cooled Ablation Catheter and Radiofrequency
Generator and Fluid Pump on February 2, 1999. The PMA approval requires the
Company to perform a post market study. On September 17, 1999, the Company
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<PAGE> 32
submitted a PMA supplement requesting the addition of tracking technology, new
curve sizes and bi-directional deflection to the Chilli catheter.
Mercator High Density Array Catheter for the Right Atrium. In June 1997,
the Company received IDE approval by the FDA to conduct a clinical trial of the
Mercator Atrial Mapping Basket for the right atrium and Arrhythmia Mapping
System for complex atrial tachyarrhythmias. The Company submitted a 510(k)
application for clearance of the Mercator Atrial Mapping Basket in July 1998 and
received clearance in January 1999 for two of the three basket sizes (70 and
100cc). The Company has performed five of the twelve cases needed for a 510(k)
submission regarding the 130cc basket.
Tracking System. In August 1999, the Company submitted a 510(k) application
requesting clearance of the Tracking System. This system is comprised of the
Arrhythmia Mapping Computer, the Signal Acquisition Module, the Position
Acquisition Module, the Radii diagnostic electrophysiology catheter and two
reference diagnostic catheters. The use of this system is designed to enable the
real-time tracking of catheter position information minimizing the use of
fluoroscopy. The Company believes this new technology will enhance the
performance of diagnostic electrophysiology studies. Furthermore, the Company
believes the combination of the Chilli catheter with the Tracking System will
enhance the performance of radiofrequency ablation procedures.
No Existing Market
On February 2, 1999, the Company received approval from the FDA of its PMA
application to commercially release its Chilli Cooled Ablation System. In
January 1999, the FDA granted 510(k) clearance of the Company's Mercator Atrial
High Density Array Catheter. The Company's Model 8100/8300 Arrhythmia Mapping
System (the "Model 8100/8300") received 510(k) Clearance from the FDA in August
1997 for basic diagnostic electrophysiology studies. In September 1997, the
Company began marketing such system commercially in the United States. However,
there can be no assurance that such system will gain any significant degree of
market acceptance among physicians, patients, and health care payors. The
Company believes that physician's acceptance of procedures using the Company's
Model 8100/8300 will be essential for market acceptance of such system. Even
though the clinical efficacy of such system has been established,
electrophysiologists, cardiologists and other physicians may elect not to
recommend the use of the Model 8100/8300 for any number of reasons. Although the
FDA granted 510(k) Clearance for basic electrophysiology studies for the
Company's Model 8100/8300 Arrhythmia Mapping System in August 1997, such product
cannot be marketed for use with the Company's diagnostic mapping catheters
unless and until such catheters receive marketing clearance from the FDA. Until
such regulatory approval is obtained, the Arrhythmia Mapping System may only be
used with other manufacturer's catheters. There can be no assurance that this
system will be successfully commercialized in the United States or in
international markets where it has not yet received approval. The Company
believes that, as with any novel medical technology, there will be a significant
learning process involved for physicians to become proficient. Broad use of such
system will require training of electrophysiologists, and the time required to
complete such training could adversely affect market acceptance. Failure of such
product to achieve significant market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations.
Even if the Model 8100/8300 achieves market acceptance, if the Company is unable
to manufacture sufficient quantities of such product to satisfy customer demand,
the Company's business, financial condition and results of operations would be
materially adversely affected.
Marketing and Distribution
The Company currently has only a limited sales and marketing organization.
For products that have received FDA clearances or approvals, the Company markets
primarily through a direct sales force in the United States. The Company's Vice
President of Sales and Marketing manages distributor relationships outside North
America. In addition, the Company intends to leverage its existing field
clinical specialists' technical expertise to support the revenue producing
installations. There can be no assurance that electrophysiologists will accept
the Company's products or systems on a commercial basis. Failure of such
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products or systems to gain market acceptance would have a material adverse
effect upon the Company's business, financial condition and results of
operations.
Establishing a marketing and sales capability sufficient to support sales
of the Company's products in commercial quantities will require substantial
efforts and require significant management and financial resources. There can be
no assurance that the Company will be able to build such a marketing staff or
sales force, that the establishment of such a marketing staff or sales force
will be cost effective or that the Company's sales and marketing efforts will be
successful. If the Company is successful in obtaining the necessary regulatory
approvals for its ventricular tachycardia and atrial fibrillation products in
international markets, it expects to establish a sales and marketing capability
in those markets primarily through distributors. There can be no assurance that
the Company will be able to enter into agreements with desired distributors on a
timely basis or at all, or that such distributors will devote adequate resources
to selling the Company's products. Failure to establish appropriate distribution
relationships could have a material adverse effect upon the Company's business,
financial condition and results of operations. The Company currently sells its
products through distributors in certain international markets. All sales of the
Company's products to date have been denominated in U.S. dollars. The end-user
price is determined by the distributor and varies from country to country.
Changes in overseas economic conditions, currency exchange rates, foreign tax
laws, or tariffs or other trade regulations could have a material adverse effect
on the Company's ability to market its products internationally and therefore on
its business, financial condition and results of operations.
Major Distributor; Dependence on Japan Lifeline
The Company currently relies upon international distributors of speciality
cardiovascular products to market and sell its products. A large percentage of
the Company's revenues are derived from sales to its Japanese distributor, Japan
Lifeline. During fiscal 1999, 1998 and 1997 Japan Lifeline accounted for 52%,
80% and 66%, respectively, of the Company's net sales. In fiscal 2000, the
Company anticipates that Japan Lifeline will account for a smaller percentage of
the Company's net sales. The Company also relies on its European distributors
for a significant portion of its revenues. If the Company's sales to any of its
international distributors decline, the Company would experience a material
decline in revenues. Even if the Company is successful in selling its products
through new international distributors, the rate of growth of the Company's net
sales could be materially and adversely effected if its current international
distributors do not continue to sell a substantial number of the Company's
products. If the Company's sales to its current international distributors
decline, the Company cannot be certain that it will be able to attract
additional distributors that can market its products effectively or can provide
timely and cost-effective customer support and service. None of the Company's
international distributors are obligated to sell the Company's products after
its agreement with the Company has expired. Further, the Company cannot be
certain that its current international distributors will continue to represent
its products or that they will continue to devote a sufficient amount of effort
and resources to selling the Company's products.
Strategic Relationships
The Company intends to pursue strategic relationships with corporations and
research institutions with respect to the research, development, international
regulatory approval, manufacturing and marketing of certain of its products.
There can be no assurance that the Company will be successful in establishing or
maintaining any such relationships or that any such relationship will be
successful.
Manufacturing
Components and raw materials are purchased from various qualified suppliers
and subjected to stringent quality specifications. The Company conducts quality
audits of suppliers and is establishing a vendor certification program. A number
of components for the Company's products are provided by sole source suppliers.
For certain of these components, there are relatively few alternative sources of
supply, and establishing additional or replacement vendors for such components
could not be accomplished quickly. The Company plans to qualify additional
suppliers if and as future production volumes increase. Because of the long lead
time for some components that are currently available from a single source, a
vendor's inability to
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supply such components in a timely manner could have a material adverse effect
on the Company's ability to manufacture the mapping basket, mapping equipment
and ablation equipment and therefore on its business, financial condition and
ability to market its products as currently contemplated.
The Company has no experience manufacturing its products in the volumes
that will be necessary for the Company to achieve significant commercial sales,
and there can be no assurance that reliable, high volume manufacturing capacity
can be established or maintained at commercially reasonable costs. If the
Company receives FDA clearance or approval for its products, it will need to
expend significant capital resources and develop manufacturing expertise to
establish large scale manufacturing capabilities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply
shortages, shortages of qualified personnel, compliance with FDA regulations,
and the need for further FDA approval of new manufacturing processes. For
example, the Company encountered low yields, and other production inefficiencies
in the manufacture of its Sector mapping basket catheters. In addition, the
Company believes that substantial cost reductions in its manufacturing
operations will be required for it to commercialize its catheters and systems on
a profitable basis. Any inability of the Company to establish and maintain large
scale manufacturing capabilities would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's manufacturing facilities are subject to periodic inspection
by regulatory authorities, and its operations must undergo QSR compliance
inspections conducted by the FDA. The Company is required to comply with QSR in
order to produce products for sale in the United States and with 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 which was granted in February 1998. If the Company
is unable to maintain such a license, it would be unable to manufacture or ship
any product, and such inability would have a material adverse effect on the
Company's business, financial condition and results of operations.
Patents and Proprietary Rights
The Company's success will depend in part on its ability to obtain patent
and copyright protection for its products and processes, to preserve its trade
secrets and to operate without infringing or violating the proprietary rights of
third parties. The Company's strategy is to actively pursue patent protection in
the United States and foreign jurisdictions for technology that it believes to
be proprietary and that offers a potential competitive advantage for its
products. The Company holds issued and allowed patents covering a number of
fundamental aspects of the Company's Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System. The patent
positions of medical device companies, including those of the Company, are
uncertain and involve complex and evolving legal and factual questions. The
coverage sought in a patent application either can be denied or significantly
reduced before or after the patent is issued. Consequently, there can be no
assurance that any patents from pending patent applications or from any future
patent application will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. In addition, there can be no assurance
that competitors, many of which have substantial resources and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, 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.
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In addition to patents, the Company relies on trade secrets and proprietary
know how to compete, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. These agreements
generally provide that all confidential information developed or made known to
individuals by the Company during the course of the relationship with the
Company is to be kept confidential and not disclosed to third parties, except in
specific circumstances. The agreements also generally provide that all
inventions conceived by the individual in the course of rendering service to the
Company shall be the exclusive property of the Company. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to or independently developed by competitors.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the USPTO to determine the priority of
inventions or an opposition to a patent grant in a foreign jurisdiction. The
defense and prosecution of intellectual property suits, USPTO interference or
opposition proceedings and related legal and administrative proceedings and
related legal and administrative proceedings are both costly and time-consuming.
Any litigation, opposition or interference proceedings will result in
substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology. Although patent and intellectual property disputes
in the medical device area have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses from others would be available to the Company on satisfactory
terms, if at all. Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is aware of certain patents owned or licensed by others and relating
to cardiac catheters and cardiac monitoring. Certain enhancements of the
Company's products are still in the design and pre-clinical testing phase.
Depending on the ultimate design specifications and results of pre-clinical
testing of these enhancements, there can be no assurance that the Company would
be able to obtain a license to such parties' patents or that a court would find
that such patents are either not infringed by the Company's enhancements or that
the Company's patents are invalid. Further, there can be no assurance that
owners or licensees of these patents will not attempt to enforce their patent
rights against the Company in a patent infringement suit or other legal
proceeding, regardless of the likely outcome of such suit or proceeding.
Competition
At present, the Company considers its primary competition to be companies
involved in current, more established therapies for the treatment of ventricular
tachycardia and atrial fibrillation, including drugs, external electrical
cardioversion and defibrillation, implantable defibrillators, ablation
accompanied by pacemaker implantation and open-heart surgery. In addition,
several competitors are also developing new approaches and new products for the
treatment and mapping of ventricular tachycardia and atrial fibrillation,
including ablation systems using ultrasound, microwave, laser and cryoablation
technologies and mapping systems using contact mapping, single-point spatial
mapping and non-contact, multisite electrical mapping technologies. Many of the
Company's competitors have an established presence in the field of
interventional cardiology and electrophysiology, including Boston Scientific
Corporation, C.R. Bard, Inc., Johnson and Johnson through its Cordis Division,
St. Jude Medical and Medtronic, Inc. Many competitors have substantially greater
financial and other resources than the Company, including larger research and
development staffs and more experience and capabilities in conducting research
and development activities, testing products in clinical trials, obtaining
regulatory approvals and manufacturing, marketing and distributing products.
There can be no assurance that the Company will succeed in developing and
marketing technologies
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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.
The Company will be required to make a new 510(k) submission for any device
that is cleared through the 510(k) process if the Company modifies or enhances
the device in a manner that could significantly affect safety or effectiveness,
or if those changes constitute a major modification in the intended use of the
device. If the Company cannot establish that a proposed device is substantially
equivalent to a legally marketed predicate device, the Company must seek
premarket approval of the proposed device from the FDA through the submission of
a PMA application. There can be no assurance that the FDA will act favorably or
quickly on any of the Company's PMA applications. Significant difficulties and
costs may be encountered by the Company in its efforts to obtain FDA clearance
that could delay or preclude the Company from selling its products in the United
States. Furthermore, there can be no assurance that the FDA will not request
additional data or require that the Company conduct further clinical studies,
causing the Company to incur substantial cost and delay. In addition, there can
be no assurance that the FDA will not impose strict labeling requirements,
onerous operator training requirements or other requirements as a condition of
its PMA approval, any of which could limit the Company's ability to market its
systems. Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission ("FTC"). FDA
enforcement 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,
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including changes in indications or other modifications that could affect safety
or efficacy, additional clearances or approvals will be required from the FDA.
Failure to receive or delays in receipt of FDA clearances or approvals,
including the need for additional clinical trials or data as a prerequisite to
clearance or approval, or any FDA conditions that limit the ability of the
Company to market its systems, could have a material adverse effect on the
Company's business, financial condition and results of operations.
International
The European Union has promulgated rules which require that medical
products distributed after June 14, 1998 bear the CE mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. Quality system certification is
one of the CE mark requirements. The Company has received ISO9001/EN46001
certification by its European Notified Body, one of the CE mark certification
prerequisites, for its manufacturing facility in Sunnyvale, California.
Furthermore, in January 1998, the Company received the right to affix the CE
mark to its Arrhythmia Mapping System and Chilli Cooled Ablation System. In
April 1998, the Company received the right to affix the CE mark to its Radii
catheters. In July 1998, the Company received the right to affix the CE mark to
its Trio/Ensemble catheters. While the Company intends to satisfy the requisite
policies and procedures that will permit it to receive the CE Mark Certification
for other products, there can be no assurance that the Company will be
successful in meeting the European certification requirements and failure to
receive the right to affix the CE mark will prohibit the Company from selling
these and other products in member countries of the European Union.
The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA approval, and the requirements may
differ. Export sales of medical devices that have not received FDA marketing
authorization are subject to FDA export requirements. In accordance with the FDA
Export Reform & Enforcement Act of 1996, such devices may be exported to any
country provided that the device meets a number of criteria including marketing
authorization in one of the "Tier I" countries identified in that Act. If the
device has no marketing authorization in a Tier I country, and is intended for
marketing, it may be necessary to obtain approval from the FDA to export the
device. In order to obtain export approval, the Company may be required to
provide the FDA with documentation from the medical device regulatory authority
of the country in which the study is to be conducted or the purchaser is
located, stating that the device has the approval of the country. In addition,
the FDA must find that the exportation of the device is not contrary to the
public health and safety of the country in order for the Company to obtain the
permit. The Company currently has marketing authorization in one or more Tier I
countries for all its clinically used products. The Company is in the process of
obtaining the necessary marketing approvals or conducting clinical trials in the
United Kingdom, Germany, France, Canada, Japan and several other countries in
Europe and Asia.
Third-Party Reimbursement and Uncertainty Related to Health Care Reform
In the United States, health care providers, including hospitals and
physicians, that purchase medical products for treatment of their patients,
generally rely on third party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or a part of the
costs and fees associated with the procedures performed using these products.
The Company's success will be dependent upon, among other things, the ability of
health care providers to obtain satisfactory reimbursement from third party
payors for medical procedures in which the Company's products are used. Third
party payors may deny reimbursement if they determine that a prescribed device
has not received appropriate regulatory clearances or approvals, is not used in
accordance with cost-effective treatment methods as determined by the payor, or
is experimental, unnecessary or inappropriate. Third party reimbursement is
generally provided on the basis of the procedure's DRG code is established by
the HCFA. The failure of the procedures in which the Company's products are used
or an insufficient level of reimbursements for such procedures would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, medical equipment reimbursements have been
mandated by statute to be reduced in the past, and there can be no assurance
that any such reimbursements with respect to the Company's products will be
adequate or provided at all. Failure by
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hospitals and other users of the Company's products to obtain reimbursement from
third party payors, or changes in government and private third party payors'
policies toward reimbursement for procedures employing the Company's products,
would have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, the Company is unable to predict
what additional legislation or regulation, if any, relating to the health care
industry or third party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation would have on the Company.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country by country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in international
markets targeted by the Company. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
amount, or at all.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. In addition, the Company believes that treatment with the
Company's products will be more efficacious than currently available therapies.
The Company anticipates that hospital administrators and physicians would
justify the use of the Company's products by the attendant cost savings and
clinical benefits that the Company believes would be derived from the use of its
products. However, there can be no assurance that this will be the case. There
can be no assurance that reimbursement for the Company's products will be
available in the United States or in international markets under either
government or private reimbursement systems, or that physicians will support and
advocate reimbursement procedures using the Company's products.
Product Liability and Insurance
The development, manufacture and sale of medical products entail
significant risk of product liability claims and product failure claims. The
Company has only limited commercial sales to date and does not yet have, and
will not have for a number of years, sufficient clinical data to allow the
Company to measure the risk of such claims with respect to its products. The
Company faces an inherent business risk of financial exposure to product
liability claims in the event that the use of its products results in personal
injury or death. The Company also faces the possibility that defects in the
design or manufacture of the Company's products might necessitate a product
recall. There can be no assurance that the Company will not experience losses
due to product liability claims or recalls in the future. In addition, the
Company will require increased product liability coverage if any of its
potential products are successfully commercialized. Such insurance is expensive,
difficult to obtain and may not be available in the future on acceptable terms,
or at all. Any claims against the Company regardless of their merit or eventual
outcome could have a material adverse effect upon the Company's business,
financial condition and results of operations.
Employees
The Company's ability to operate successfully depends in significant part
upon the continued service of certain key scientific, technical, clinical,
regulatory and managerial personnel, and its continuing ability to attract and
retain additional highly qualified scientific, technical, regulatory and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company can retain such personnel or that it can
attract or retain other highly qualified scientific, technical, clinical,
regulatory and managerial personnel in the future, including key sales and
marketing personnel. The loss of key personnel or the inability to hire and
retain qualified personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations.
In addition, in order to manufacture and market its products in commercial
quantities, the Company believes that it will be required to expand its
operations, particularly in the areas of research and development,
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manufacturing and sales and marketing. The Company hired a new Chief Executive
Officer in May 1999 and a new Chief Financial Officer in December 1998. There
can be no assurance that the Company's officers and Sales and Marketing
personnel will be able to build a successful sales force or that they will be
able to operate effectively with the existing management team. As the Company
expands its operations in these areas, such expansion will likely result in new
and increased responsibilities for management personnel and place significant
strain upon the Company's management, operating and financial systems and
resources. To accommodate any such growth and compete effectively, the Company
will be required to implement and improve information systems, procedures, and
controls, and to expand, train, motivate and manage its work force. Any failure
to implement and improve the Company's operational, financial and management
systems or, to expand, train, motivate or manage employees as required by future
growth, if any, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Year 2000 Compliance
The Company's proprietary software products that operate its Arrhythmia
Mapping System and Radiofrequency Generator System are designed for use with
certain hardware developed by other vendors. Furthermore, these systems will be
used in various operating environments once installed at customer sites. It is
likely that, commencing in the year 2000, the functionality of certain operating
environments will be adversely affected when one or more component products of
the environment would not be in "Year 2000 compliance." The Company believes its
products are in Year 2000 compliance, but has not conducted any formal audit of
its products with respect to Year 2000 compliance. There can be no assurance
that the Company's fully compliant products will be able to function properly
when integrated with other vendor's noncompliant component products.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the data code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance. The Company has recently reviewed the
Year 2000 compliance status of the software and systems used in its internal
business processes, and obtained appropriate assurances of compliance from the
manufacturers of these products and agreements to modify or replace all
non-compliant products. The Company contacted its critical suppliers and major
customers to determine whether the products obtained by the Company from such
vendors or sold by the customer to third parties are Year 2000 compliant. In
addition, the Company considered converting certain of its software and systems
to commercial products that are known to be Year 2000 compliant. Implementation
of software products of third parties, however, will require the dedication of
substantial administrative and management information resources, the assistance
of consulting personnel from third party software vendors and the training of
the Company's personnel using such systems. Nevertheless, particularly to the
extent the Company is relying on the products of other vendors to resolve Year
2000 issues, there can be no assurances that the Company will not experience
delays in implementing such products. If key systems, or a significant number of
systems were to fail as a result of Year 2000 problems, or the Company were to
experience delays implementing Year 2000 compliant software products, the
Company could incur substantial costs and disruption of its business, which
would potentially have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company in its ordinary course of business tests and evaluates its own
software products. The Company believes that its software products are generally
Year 2000 compliant, meaning that the use or occurrence of dates on or after
January 1, 2000 will not materially affect the performance of the Company's
software products with respect to four digit date dependent data or the ability
of such products to correctly create, store, process and output information
related to such data. To the extent the Company's software products are not
fully Year 2000 compliant, there can be no assurance that the Company's software
products contain all necessary software routines and codes necessary for the
accurate calculation, display, storage and manipulation of data involving dates.
To the extent that the Company's products are integrated with products sold by
third parties, there can be no assurances that users of the Company's products
will not experience Year
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2000 problems as a result of the integration of the Company's software with
non-compliant Year 2000 products of such third party suppliers. In addition, in
certain circumstances, the Company has warranted that the use or occurrence of
dates on or after January 1, 2000 will not adversely affect the performance of
the Company's products with respect to four digit date dependent data or the
ability to create, store, process and output information related to such data.
If any of the Company's licensees experience Year 2000 problems, such licensees
could assert claims for damages against the Company. There can be no assurance
that the Company's resources spent on investigating and remedying Year 2000
compliance issues will not have a material adverse effect on the Company's
business, financial condition and results of operations.
Issuance of Preferred Stock Could Delay or Prevent Corporate Takeover
The Board of Directors has the authority to issue up to 5,000,000 shares of
undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
the stockholders. To date, the Board of Directors has designated 30,000 shares
as Series A Participating Preferred Stock in connection with the Company's
Stockholder Rights Plan. The issuance of Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company or otherwise adversely affecting the rights of the
holders of Common Stock or Series B Preferred Stock.
On April 22, 1997, pursuant to a Preferred Shares Rights Agreements (the
"Rights Agreement") between the Company and Norwest Bank Minnesota, N.A. (the
"Rights Agent"), the Company's Board of Directors declared a dividend of one
right to purchase 1/1000 a share of the Company's Series A Participating
Preferred Stock ("Series A Preferred") for each outstanding share of Common
Stock and Series B Preferred Stock (on an as converted basis) of the Company (a
"Right"). Each Right entitles the registered holder to purchase from the Company
1/1000 a share of Series A Preferred at an exercise price of $125 (the "Purchase
Price"), subject to adjustment. The Rights approved by the Board are designed to
protect and maximize the value of the outstanding equity interests in the
Company in the event of an unsolicited attempt by an acquirer to take over the
Company, in a manner or on terms not approved by the Board of Directors. The
Rights have been declared by the Board in order to deter coercive tactics,
including a gradual accumulation of shares in the open market of a 15% or
greater position to be followed by a merger or a partial or two tier tender
offer that does not treat all stockholders equally. The Rights should not
interfere with any merger or business combination approved by the Board of
Directors. However, the Rights may have the effect of rendering more difficult
or discouraging an acquisition of the Company deemed undesirable by the Board of
Directors. The Rights may cause substantial dilution to a person or group that
attempts to acquire the Company on terms or in a manner not approved by the
Company's Board of Directors, except pursuant to an offer conditioned upon the
negation, purchase or redemption of the Rights.
Potential Volatility of Stock Price
The market price of shares of Common Stock, like that of the common stock
of many medical products and high technology companies, has in the past been,
and is likely in the future to continue to be highly volatile. Factors such as
fluctuations in the Company's operating results, announcements of technological
innovations or new commercial products by the Company or competitors, government
regulation, changes in the current structure of the health care financing and
payment systems, developments in or disputes regarding
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patent or other proprietary rights, release of reports by securities analysts,
change in securities analysts recommendations, economic and other external
factors and general market conditions may have a significant effect on the
market price of the Common Stock. Also, at some future time, the Company's
revenues and results of operations may be below the expectations of securities
analysts or investors, resulting in significant fluctuations in the market price
of the Company's Common Stock. Moreover, the stock market has from time to time
experienced extreme price and volume fluctuations which have particularly
affected the market prices for medical products and high technology companies
and which have often been unrelated to the operating performance of such
companies. These broad market fluctuations, as well as general economic,
political and market conditions, may adversely affect the market price of the
Company's Common Stock. In the past, following periods of volatility in the
market price of a company's stock, securities class action litigation has
occurred against the issuing company. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, operating results and financial condition. Any adverse
determination in such litigation could also subject the Company to significant
liabilities.
Absence of Dividends
The Company has not paid any cash dividends since inception and does not
anticipate paying cash dividends in the foreseeable future.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to financial market risks, including changes in
interest rates. The fair value of the Company's available-for-sale investments
can be adversely affected by changes in market interest rates. The primary
objective of the Company's investment activities is to preserve principal while
at the same time maximizing yields without incurring significant risk. To
achieve this objective, the Company primarily invests in U.S. Government or
high-grade corporate debt securities. At June 30, 1999, the Company had no
available-for-sale investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and the report of independent auditors
appear on pages F-1 through F-23 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's directors is
incorporated by reference from the section captioned "Election of Directors"
contained in the Company's Proxy Statement related to the Annual Meeting of
Stockholders to be held November 18, 1999, to be filed by the Company with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy
Statement"). The information required by this item concerning executive officers
is set forth in Part I of this Report. The information required by this item
concerning compliance with Section 16(a) of the Exchange Act is incorporated by
reference from the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" contained in the Proxy Statement in the table labeled
"Principal Stockholders."
41
<PAGE> 42
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section captioned "Executive Compensation" and "Compensation of Directors"
contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement in the table labeled "Principal
Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
sections captioned "Employment Contracts and Change-of-Control Arrangements,"
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions With Management" contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements are filed as part of this Report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
(a)(2) Financial Statement Schedules
<TABLE>
<S> <C>
II -- Valuation and Qualifying Accounts..................... S-1
</TABLE>
All other Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
(a)(3) Exhibits
<TABLE>
<S> <C>
3.1(1) Restated Certificate of Incorporation of the Registrant.
3.2(1) Bylaws of Registrant.
3.3(7) Certificate of Designation of Series B Preferred Stock.
4.1(2) Preferred Share Rights Agreement, dated April 22, 1997
between the Registrant and Norwest Bank Minnesota, N.A.
4.1.1 Amendment No. 1 to Preferred Share Rights Agreement.
10.1(1) Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2(6) 1991 Stock Plan and form of Stock Option Agreement
thereunder.
10.3(5) 1996 Director Option Plan and form of Director Stock Option
Agreement thereunder.
10.5+(1) OEM Agreement between Registrant and Liebel-Flarsheim
Company dated June 22, 1994.
10.6+(1) License Agreement between Registrant and BSI Corporation
dated October 21, 1994.
</TABLE>
42
<PAGE> 43
<TABLE>
<S> <C>
10.7(1) Loan Agreement between the Registrant and Dideco S.p.A.
dated June 23, 1994, as amended by Amendment to Loan
Agreement dated June 22, 1995 and Amendment No. 2 to Loan
Agreement dated April 10, 1996.
10.7.1(3) Distributor Termination Agreement between the Registrant and
Dideco S.p.A. dated May 26, 1998.
10.8+(1) Exclusive License Agreement dated May 24, 1995.
10.9(1) Manufacturing and Supply Agreement between the Registrant
and Arrow International Inc. dated March 8, 1995.
10.10(1) Exclusive International Distributor Agreement between the
Registrant and Arrow International dated March 8, 1995.
10.11(1) Lease dated June 25, 1993 between the Registrant and Brock
Properties.
10.11.1(4) Lease Modification Agreement effective as of February 24,
1998 between the Registrant And Brock Properties.
10.12(1) Master Lease Agreement dated December 1, 1993 between the
Registrant and Linc Capital Management Services, Ltd., as
amended.
10.12.1(8) Amendment No. 5 to Master Lease Agreement dated December 1,
1993 between the Registrant and Linc Capital Management
Services, Ltd.
10.15(5) 1998 Employee Stock Purchase Plan.
10.16(3) Loan and Security Agreement dated May 15, 1998 between the
Registrant and Silicon Valley Bank.
10.17(3) Lease Agreement dated April 27, 1998 between the Registrant
and Lincoln Property Company Management Services, Inc. for
the premises located at 824 W. California Ave., Sunnyvale,
California 94086.
10.18(3) Agreement dated April 18, 1996 between the Registrant and
Earle Canty.
10.18.1(3) Amendment No. 1 to Agreement dated April 18, 1996 between
the Registrant and Earle Canty.
10.19(3) Loan Agreement dated April 18, 1996 between the Registrant
and Earle Canty.
10.19.1(3) Amendment No. 1 dated August 31, 1998 to Loan Agreement
dated April 18, 1996 between the Registrant and Earle Canty.
10.20(3) Loan Agreement dated December 23, 1996 between the
Registrant and Earle Canty.
10.20.1(3) Amendment No. 1 dated August 31, 1998 to Loan Agreement
dated December 23, 1996 between the Registrant and Earle
Canty.
10.21(3) Consulting Agreement dated September 1, 1998 between
Registrant and Earle Canty.
10.22(6) Cardiac Pathways Corporation 1998 Nonstatutory Option Plan.
10.23(7) Series B Convertible Preferred Stock Purchase Agreement.
10.24(7) Registration Rights Agreement dated May 20, 1999.
10.25 Employment Agreement with Thomas M. Prescott dated May 18,
1999.
10.26 Employment Agreement with G. Michael Latta dated November
30, 1998.
10.27 Employment Agreement with William N. Starling dated January
6, 1992.
10.28* Exclusive Licensing Agreement between the Registrant and
Sonometrics Corporation dated July 21, 1999.
10.29 Employment Agreement with Debra S. Echt dated August 7,
1996.
10.30 Employment Agreement with Richard E. Riley dated June 1,
1992.
10.31 Employment Agreement with Jon P. Hunt dated March 6, 1998.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 45).
27.1 Financial Data Schedule
</TABLE>
- ---------------
+ Confidential treatment has been granted for portions of these agreements.
Omitted portions have been filed separately with the Commission.
* A request for confidential treatment for portions of this agreement has been
submitted to the Commission. Omitted portions have been filed separately
with the Commission.
43
<PAGE> 44
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (Reg. No. 333-3616) as declared effective by the
Commission on June 12, 1996.
(2) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form 8-A (Reg. No. 000-28372) as declared
effective by the Commission on May 22, 1997.
(3) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended June 30, 1998.
(4) Incorporated by reference to exhibits filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998.
(5) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (Reg. No. 333-84777) as declared effective by the
Commission on December 17, 1998.
(6) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (Reg. No. 333-69095) as declared effective by the
Commission on August 9, 1999.
(7) Incorporated by reference to exhibits filed with Registrant's Form 8-K on
August 3, 1999.
(8) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
(b)Reports on Form 8-K. The Company filed a report on Form 8-K on August 3,
1999.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CARDIAC PATHWAYS CORPORATION
By: /s/ THOMAS M. PRESCOTT
------------------------------------
Thomas M. Prescott
President and Chief Executive
Officer
Date: September 28, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Thomas M. Prescott and Richard E. Riley,
and each of them, his true and lawful attorneys-in-fact and agents, each with
full power of substitution and resubstitution, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or their substitute or substitutes, or any of them, shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ THOMAS M. PRESCOTT President and Chief September 28, 1999
- ----------------------------------------------------- Executive Officer (Principal
(Thomas M. Prescott) Executive Officer)
/s/ G. MICHAEL LATTA Vice President of Finance September 28, 1999
- ----------------------------------------------------- and Chief Financial Officer
(G. Michael Latta) (Principal Financial and
Accounting Officer)
/s/ WILLIAM N. STARLING Director September 28, 1999
- -----------------------------------------------------
(William N. Starling)
Director September , 1999
- -----------------------------------------------------
(Mark J. Brooks)
/s/ M. FAZLE HUSAIN Director September 28, 1999
- -----------------------------------------------------
(M. Fazle Husain)
Director September , 1999
- -----------------------------------------------------
(Anchie Y. Kuo, M.D.)
</TABLE>
45
<PAGE> 46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of June 30, 1999 and 1998.... F-3
Consolidated Statements of Operations for the years ended
June 30, 1999, 1998 and 1997.............................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended June 30, 1999, 1998 and 1997.......... F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1999, 1998, and 1997............................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 47
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cardiac Pathways Corporation
We have audited the accompanying consolidated balance sheets of Cardiac
Pathways Corporation as of June 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended June 30, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cardiac
Pathways Corporation at June 30, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material aspects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
September 2, 1999
F-2
<PAGE> 48
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,339,660 $ 7,268,877
Short-term investments.................................... -- 17,248,500
Accounts receivable, net of allowance for doubtful
accounts of $105,000 at June 30, 1999 and $16,500 at
June 30, 1998.......................................... 898,296 523,455
Inventories............................................... 1,330,255 668,042
Prepaid expenses.......................................... 338,479 317,549
Other current assets...................................... 76,719 526,193
------------ ------------
Total current assets.............................. 4,983,409 26,552,616
Property and equipment, net................................. 3,790,443 3,632,488
Notes receivable from related parties....................... 29,584 260,477
Deposits and other assets................................... 102,406 488,996
------------ ------------
$ 8,905,842 $ 30,934,577
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 488,128 $ 1,079,772
Accrued compensation and related benefits................. 835,277 601,307
Accrued clinical expenses................................. 939,183 1,144,556
Other accrued expenses.................................... 738,831 654,670
Current obligations under capital leases.................. 325,334 554,806
Bridge loan............................................... 3,000,000 --
Current portion of long-term debt......................... -- 166,667
------------ ------------
Total current liabilities......................... 6,326,753 4,201,778
Long-term obligations under capital leases.................. 342,772 483,586
Deferred royalty income..................................... 2,630,862 2,930,862
Long-term debt, less current portion........................ -- 5,833,333
Commitments
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 5,000,000 shares
authorized and none issued and outstanding at June 30,
1999 and 1998.......................................... -- --
Common stock, $.001 par value; 30,000,000 shares
authorized; 2,007,904 shares issued and outstanding at
June 30, 1999 and 1,959,194 at June 30, 1998........... 2,008 1,959
Additional paid-in capital................................ 80,152,542 79,791,616
Receivable from stockholder............................... (385,000) (385,000)
Accumulated deficit....................................... (79,983,404) (61,417,629)
Deferred compensation..................................... (180,691) (505,928)
------------ ------------
Total stockholders' equity (deficit).............. (394,545) 17,485,018
------------ ------------
$ 8,905,842 $ 30,934,577
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 49
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales........................................ $ 4,406,370 $ 2,419,816 $ 2,408,773
Cost of goods sold............................... 4,249,308 2,827,789 2,507,375
------------ ------------ ------------
Gross margin (deficit)......................... 157,062 (407,973) (98,602)
Operating expenses:
Research and development....................... 12,115,535 14,353,393 11,756,260
Selling, general and administrative............ 6,684,669 4,091,637 3,147,311
------------ ------------ ------------
Total operating expenses............... 18,800,204 18,445,030 14,903,571
------------ ------------ ------------
Loss from operations............................. (18,643,142) (18,853,003) (15,002,173)
Other income (expense):
Interest income................................ 699,589 1,857,981 2,624,055
Interest expense............................... (664,527) (578,931) (523,038)
Other, net..................................... 42,305 75,156 35,562
------------ ------------ ------------
Total other income (expense), net...... 77,367 1,354,206 2,136,579
------------ ------------ ------------
Net loss......................................... $(18,565,775) $(17,498,797) $(12,865,594)
============ ============ ============
Net loss per share -- basic and diluted.......... $ (9.34) $ (9.07) $ (6.86)
============ ============ ============
Shares used in computing net loss per
share -- basic and diluted..................... 1,987,000 1,930,000 1,876,000
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 50
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RECEIVABLES TOTAL
------------------ PAID-IN FROM ACCUMULATED DEFERRED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT COMPENSATION EQUITY (DEFICIT)
--------- ------ ----------- ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996....... 1,853,866 $1,854 $77,664,050 $(406,000) $(31,053,238) $(155,771) $ 46,050,895
Issuance of nonqualified stock
options for services......... -- 17,750 -- -- -- 17,750
Exercise of options to purchase
Common Stock................. 43,328 43 305,910 (14,000) -- -- 291,953
Issuance of Common Stock under
employee stock purchase
plan......................... 7,513 8 253,602 -- -- -- 253,610
Deferred compensation.......... -- -- 855,500 -- -- (855,500) --
Amortization of deferred
compensation................. -- -- -- -- -- 243,595 243,595
Net loss....................... -- -- -- (12,865,594) -- (12,865,594)
--------- ------ ----------- --------- ------------ --------- ------------
Balance at June 30, 1997....... 1,904,707 1,905 79,096,812 (420,000) (43,918,832) (767,676) 33,992,209
Issuance of Common Stock
warrants..................... -- -- 60,351 -- -- -- 60,351
Issuance of nonqualified stock
options for services......... -- -- 65,121 -- -- -- 65,121
Exercise of options to purchase
Common Stock................. 41,776 42 225,502 35,000 -- -- 260,544
Issuance of Common Stock under
employee stock purchase
plan......................... 12,711 13 343,829 -- -- -- 343,842
Amortization of deferred
compensation................. -- -- -- -- -- 261,748 261,748
Net loss....................... -- -- -- -- (17,498,797) -- (17,498,797)
--------- ------ ----------- --------- ------------ --------- ------------
Balance at June 30, 1998....... 1,959,194 1,960 79,791,615 (385,000) (61,417,629) (505,928) 17,485,018
Issuance of Preferred Stock
warrants..................... -- -- 45,000 -- -- -- 45,000
Issuance of nonqualified stock
options for services......... -- -- 3,811 -- -- -- 3,811
Exercise of options to purchase
Common Stock................. 32,436 32 314,099 -- -- -- 314,131
Issuance of Common Stock under
employee stock purchase
plan......................... 16,274 16 132,423 -- -- -- 132,439
Deferred compensation.......... -- -- (134,406) -- -- 134,406 --
Amortization of deferred
compensation................. -- -- -- -- -- 190,831 190,831
Net loss....................... -- -- -- -- (18,565,775) -- (18,565,775)
--------- ------ ----------- --------- ------------ --------- ------------
Balance at June 30, 1999....... 2,007,904 $2,008 $80,152,542 $(385,000) $(79,983,404) $(180,691) $ (394,545)
========= ====== =========== ========= ============ ========= ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 51
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................... $(18,565,775) $(17,498,797) $(12,865,594)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 1,271,058 1,274,226 1,260,546
Amortization of deferred royalty income........ (300,000) (19,611) (49,527)
Amortization of deferred compensation.......... 190,831 261,748 243,595
(Gain) on disposal of property and equipment... -- (33,678) --
Issuance of common stock warrants.............. -- 60,351 --
Issuance of preferred stock warrants........... 45,000 -- --
Issuance of nonqualified stock options for
services.................................... 3,811 65,121 17,750
Changes in operating assets and liabilities:
Accounts receivable............................ (374,841) (354,627) 230,169
Receivable from related party.................. -- 1,552 20,173
Inventories.................................... (662,213) (248,037) (257,489)
Prepaid expenses............................... (20,930) 94,209 (177,419)
Other current assets........................... 449,474 52,335 (188,237)
Accounts payable............................... (591,644) 291,388 276,998
Accrued compensation and related benefits...... 233,970 138,493 269,303
Accrued clinical expenses...................... (205,373) 448,450 546,102
Other accrued expenses......................... 84,161 (215,572) 136,677
Interest payable on note....................... -- (1,153,625) 379,204
------------ ------------ ------------
Net cash used in operating activities............ (18,442,471) (16,836,074) (10,157,749)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments.............. (5,612,448) (25,167,799) (54,509,722)
Maturities and sales of short-term investments... 22,860,948 44,394,833 41,795,000
Purchase of property and equipment, net.......... (1,202,612) (1,170,621) (742,155)
Proceeds from disposal of equipment.............. -- 23,519 --
(Increase) decrease in notes receivable.......... 230,893 59,014 (57,075)
(Increase) decrease in deposits and other
assets......................................... 386,590 (391,713) (38,095)
------------ ------------ ------------
Net cash provided by (used in) investing
activities..................................... 16,663,371 17,747,233 (13,552,047)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease
obligations.................................... (596,687) (838,094) (856,596)
Proceeds from bridge loan financing.............. 3,000,000 -- --
Repayment of borrowings on line of credit........ (6,000,000) -- --
Repayment of note payable........................ -- (4,500,000) --
Proceeds from borrowings on line of credit....... -- 6,000,000 --
Proceeds from issuance of common stock........... 446,570 569,386 559,563
Notes receivable from stockholders............... -- 35,000 (14,000)
------------ ------------ ------------
Net cash provided by (used in) financing
activities..................................... (3,150,117) 1,266,292 (311,033)
------------ ------------ ------------
Net change in cash and cash equivalents.......... (4,929,217) 2,177,451 (24,020,829)
Cash and cash equivalents at beginning of year... 7,268,877 5,091,426 29,112,255
------------ ------------ ------------
Cash and cash equivalents at end of year......... $ 2,339,660 $ 7,268,877 $ 5,091,426
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 52
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Cardiac Pathways Corporation, a Delaware corporation (the "Company"),
operates in a single industry segment and develops, manufactures and markets
minimally invasive systems to diagnose and treat cardiac tachyarrhythmias.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Cardiac Pathways B.V. and Cardiac
Pathways G.m.b.H. All significant intercompany accounts and transactions have
been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Preferred Stock Financing and Reverse Stock Split
In May 1999, the Company's Board of Directors authorized and the Company
entered into definitive agreements in connection with a preferred stock
financing. The terms of the financing included the sale of a maximum of 40,000
shares of Series B Preferred Stock at $1,000 per share to a group of accredited
investors. The Series B Preferred Stock is initially convertible into 200 shares
of the Company's Common Stock. The Series B Preferred Stock is entitled to a
cumulative dividend of 11% of the purchase price per share per year, and will
have a liquidation preference in certain circumstances equal to the initial
purchase price plus accrued but unpaid dividends. In addition to the preferred
stock financing, in May 1999, the Company's Board of Directors authorized a
1-for-5 reverse stock split.
The Series B Preferred Stock financing and the 1-for-5 reverse stock split
were approved by the stockholders in July 1999. Furthermore, in July 1999, the
Company closed the Series B Preferred Stock financing and issued a total of
32,000 shares of Series B Preferred Stock at a price of $1,000 per share,
raising approximately $31,500,000, net of issuance costs (see notes 4 and 13.)
In addition, the Company effected the 1-for-5 reverse stock split in July 1999.
All share and per share amounts have been retroactively adjusted to reflect the
reverse stock split.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents and short-term investments approximate fair value. The fair value of
short-term investments was based on quoted market prices.
The carrying amount for the Company's long-term and short-term debt
approximated fair value. The fair value of the Company's debt was estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
Concentrations of Credit Risk
The Company is potentially subject to concentrations of credit risk with
respect to its cash investments and trade accounts receivable. The Company
invests its excess cash in a diversified portfolio of investment grade interest
bearing instruments. The Company is exposed to credit risk in the event of
default by the
F-7
<PAGE> 53
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
financial institutions or issuers of investments only to the extent recorded on
the balance sheet. To date, the Company has not experienced any significant
losses on its investments.
The Company sells its products to distributors in Japan and Europe and to
hospitals in the United States (see Note 10). The Company does not require
collateral and maintains reserves for estimated credit losses. To date, such
losses have been within management's expectations and have not been significant.
Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
other liquid investments are classified as short-term investments. Through
fiscal 1999, management classified the Company's investment portfolio as
held-to-maturity and available-for-sale. Available-for-sale securities were
carried at fair value with unrealized gains and losses reported as a separate
component of stockholders' equity. To date, the Company has not experienced any
significant unrealized gains or losses on available-for-sale securities and,
accordingly, no adjustments have been made to stockholders' equity.
The cost of held-to-maturity securities was adjusted for the amortization
of premiums and the accretion of discounts to maturity. Such amortization of
premiums and accretion of discounts was included in interest income. At June 30,
1999 the Company had $2,339,660 in cash and cash equivalents which were held
primarily in a money market account and had no short-term investments. At June
30, 1998 short-term investments were valued at amortized cost, which
approximated fair value.
The following is a summary of held-to-maturity and available-for-sale
securities at June 30, 1998:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DESCRIPTION COST GAINS LOSSES FAIR VALUE
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. government agency................... $ 2,996,886 $ -- $ (1,171) $ 2,995,715
U.S. corporate obligations............... 10,751,614 2,221 (8,968) 10,744,867
Available-for-sale:
Auction rate preferred stock............. 3,500,000 -- -- 3,500,000
----------- ------ -------- -----------
17,248,500 2,221 (10,139) 17,240,582
Amounts classified as cash equivalents..... -- -- -- --
----------- ------ -------- -----------
Amounts included in short-term
investments.............................. $17,248,500 $2,221 $(10,139) $17,240,582
=========== ====== ======== ===========
</TABLE>
There were no significant realized gains or losses as a result of the
maturity or sale of securities for the years ended June 30, 1999 and 1998. In
the three months ended March 31, 1999, the Company sold certain of its
held-to-maturity securities to meet its liquidity needs. The cost of securities
sold was based on the specific identification method. Commencing in fiscal 2000,
management will classify the Company's investment portfolio as
available-for-sale.
F-8
<PAGE> 54
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
Inventory
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market and consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1999 1998
---------- --------
<S> <C> <C>
Raw materials........................................ $ 611,667 $432,867
Work-in-process...................................... 174,016 123,052
Finished goods....................................... 544,572 112,123
---------- --------
$1,330,255 $668,042
========== ========
</TABLE>
Property and Equipment
Property and equipment, including equipment under capital leases, are
carried at cost less accumulated depreciation and amortization. Property and
equipment are depreciated using the straight-line method over estimated useful
lives of three to five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful life of the asset
or the remaining term of the lease. Depreciation expense includes amortization
of capital leases and leasehold improvements.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Property and equipment:
Equipment......................................... $6,836,138 $5,626,967
Leasehold improvements............................ 422,061 348,610
Equipment-in-process.............................. 1,521,008 1,523,411
---------- ----------
8,779,207 7,498,988
Less accumulated depreciation and amortization...... 4,988,764 3,866,500
---------- ----------
$3,790,443 $3,632,488
========== ==========
</TABLE>
Revenue Recognition
Revenue from disposable products is recognized at the time of shipment.
Revenue from equipment is recognized upon shipment and the completion of certain
installation and acceptance criteria.
Product Warranties
The Company warrants its equipment for a period of one year. The Company
provides for estimated warranty costs concurrent with the recognition of
revenue.
Capitalized Software
The Company capitalizes internally generated software development costs in
accordance with Statement of Financial Accounting Standards No. 86 (FAS 86),
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." Capitalization of software development costs begins upon the
establishment of technological feasibility for the product. The Company
amortizes capitalized amounts upon commercial release of the product on a
straight-line basis over the estimated economic lives. Capitalized software
development costs were $0 and $233,000 as of June 30, 1999 and 1998,
respectively.
F-9
<PAGE> 55
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
Royalty Income
At June 30, 1999 and 1998, the Company had $2,630,862 and $2,930,862 of
deferred royalty income, respectively, related to one of its diagnostic catheter
systems (see Note 9). Income earned from this royalty agreement is recorded as a
component of net sales.
Research and Development Costs
Research and development costs, which include clinical and certain
regulatory costs, are charged to expense as incurred.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar. Monetary assets and liabilities denominated in foreign currencies are
remeasured at the fiscal year-end exchange rate. Inventory, property and other
nonmonetary assets and liabilities including related revenues, expenses, gains
and losses are remeasured using historical exchange rates during the month in
which the transactions occurred. Adjustments resulting from these remeasurements
are included in the results of operations and have been immaterial to date.
Net Loss Per Share
Basic and diluted net loss per share are computed using the weighted
average number of common shares outstanding during the period. The Company has
other securities outstanding that could dilute basic earnings per share in the
future that were not included in the computation of diluted net loss per share
in the periods presented as their effect is antidilutive.
The following table sets forth the computation of net loss per share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Numerator for basic and diluted net loss per
share:
Net loss........................................ $(18,565,775) $(17,498,797) $(12,865,594)
Denominator:
Average shares outstanding for basic and diluted
net loss per share........................... 1,987,000 1,930,000 1,876,000
Basic and diluted net loss per share.............. $ (9.34) $ (9.07) $ (6.86)
============ ============ ============
</TABLE>
For the year ended June 30, 1999, outstanding stock options and warrants to
purchase 315,000 shares of common stock were excluded from the calculation of
net loss per share as their effect is antidilutive.
Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements using
the intrinsic-value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and accordingly, has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123 (FAS 123), "Accounting for Stock-Based Compensation." These provisions
require the Company to disclose pro forma net loss and net loss per share
amounts as if compensation expense related to certain stock awards was
recognized based on the fair value accounting rules under FAS 123 (see Note 4).
F-10
<PAGE> 56
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board 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
the value of available-for-sale securities and foreign currency translation
adjustments. The Company adopted FAS 130 in 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 loss
or stockholders' equity.
In June 1997, the Financial Accounting Standards Board 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 adopted FAS 131 for the year
ending June 30, 1999. As the Company operates in a single industry segment,
there were no significant modifications or additional disclosures required in
the financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in years beginning after June 15,
2000. The Company has not used derivative instruments in the past and does not
anticipate using derivative instruments in the future, 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.
2. DEBT
In May 1998, the Company obtained a term loan credit facility of $8,000,000
from a commercial bank. The loan agreement provided for an initial advance of
$6,000,000 available for the repayment of a note payable and related accrued
interest due to Sorin Biomedical with the remaining $2,000,000 available for
general corporate purposes. Borrowings under the credit facility bore interest
at the bank's prime rate plus 1.25% (9.75% at June 30, 1998). Interest payments
were due monthly following commencement of each advance and the outstanding
balance of all borrowings under the credit facility were to be fully amortized
over the 36-month period following the end of the drawdown period with principal
and interest payments due monthly. Under the terms of the loan agreement, all
borrowings were collateralized by substantially all of the Company's assets and
the Company was required to maintain certain financial ratios and other
covenants.
In May 1998, the Company utilized $6,000,000 of the term loan credit
facility in order to repay a $4,500,000 note payable and related accrued
interest of approximately $1,500,000 due to Sorin Biomedical. The $4,500,000
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.
In March 1999, the Company was out of compliance with the financial ratios
and other covenants required by the term loan credit facility. Under the terms
of the loan agreement, the Company was required to fully collateralize the
$6,000,000 loan through a restricted cash pledge. In May 1999, the commercial
bank foreclosed and took possession of the collateral in satisfaction of the
full amount due under the loan.
In May 1999, in connection with the Series B Preferred Stock Financing, the
Company obtained a convertible bridge loan of $3,000,000 from certain
participating investors. The bridge loan bore interest at the
F-11
<PAGE> 57
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
prime rate plus 2.00% (9.75% at June 30, 1999). The promissory notes issued in
connection with the bridge loan were convertible into shares of Series B
convertible preferred stock at the same price as the shares issued in the
financing. In July 1999, the bridge loan and related accrued interest was
converted into 3,052 shares of Series B preferred stock concurrent with the
closing of the financing (see notes 4 and 13).
3. COMMITMENTS
The Company leases facilities and equipment under noncancelable lease
agreements. Future minimum lease payments were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
2000........................................................ $374,676 $ 925,067
2001........................................................ 279,925 763,808
2002........................................................ 94,563 741,408
2003........................................................ -- 741,408
2004........................................................ -- 247,136
Thereafter.................................................. -- --
-------- ----------
Total minimum lease payments...................... 749,164 $3,418,827
==========
Less amount representing interest........................... 81,058
==========
--------
Present value of minimum lease payments..................... 668,106
Less current portion........................................ 325,334
--------
Long-term portion........................................... $342,772
========
</TABLE>
The Company leases its facilities under operating lease agreements that
extend through October 2003. Rent expense was approximately, $730,323, $364,000,
and $322,000 for the years ended June 30, 1999, 1998 and 1997, respectively. The
Company leases certain equipment under long-term leases, the terms of which
qualify as capital leases. Capital lease obligations are collateralized with
leased equipment.
The Company's equipment acquired under capital lease arrangements and
related accumulated amortization are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Equipment at cost........................................... $4,018,000 $3,792,000
Less accumulated amortization............................... 3,334,000 2,747,000
---------- ----------
$ 684,000 $1,045,000
========== ==========
</TABLE>
At June 30, 1999, the Company had approximately $308,000 in noncancelable
commitments with suppliers to provide components in the normal course of
business.
4. STOCKHOLDERS' EQUITY
Common Stock
The Company is authorized to issue 30,000,000 shares of common stock, $.001
par value per share, of which a total of 2,007,904 and 1,959,194 shares were
outstanding at June 30, 1999 and 1998, respectively.
F-12
<PAGE> 58
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
Preferred Stock
The Company is authorized to issue 5,000,000 shares of undesignated
preferred stock, $.001 par value per share. Preferred stock may be issued from
time to time in one or more series. The Board of Directors is authorized to
determine the rights, preferences, privileges, and restrictions granted to and
imposed upon any wholly unissued series of preferred stock and to fix the number
of shares of any series of preferred stock and the designation of any such
series without any vote or action by the Company's stockholders. At June 30,
1999 and 1998, the Company had no shares of preferred stock outstanding.
In May 1999, the Company's Board of Directors authorized and the Company
entered into definitive agreements in connection with a preferred stock
financing. The terms of the financing included the sale of a maximum of 40,000
shares of Series B Preferred Stock at $1,000 per share to a group of accredited
investors. The Series B Preferred Stock is initially convertible into 200 shares
of the Company's Common Stock. The Series B Preferred Stock is entitled to a
cumulative dividend of 11% of the purchase price per share per year, and will
have a liquidation preference in certain circumstances equal to the initial
purchase price plus accrued but unpaid dividends. In addition, at any time after
May 31, 2004, the holders of a majority of Series B Preferred Stock may request
that the Company redeem the outstanding shares of Series B Preferred Stock. The
Company, at its sole discretion, may redeem the outstanding shares of Series B
Preferred Stock for an amount equal to the original Series B issue price plus
accrued but unpaid dividends. If the Company has not redeemed the Series B
Preferred Stock prior to May 31, 2004, the dividend rate will increase by 6% for
each year a redemption has not occurred subsequent to May 31, 2004. The Series B
Preferred Stock financing was approved by the stockholders in July 1999.
Furthermore, in July 1999, the Company closed the Series B Preferred Stock
financing and issued a total of 32,000 shares of Series B Preferred Stock at a
price of $1,000 per share, raising approximately $31,500,000, net of issuance
costs.
Stock Warrants
The Company has issued warrants to purchase common stock in connection with
various financing and lease agreements. The fair value of warrants issued in
connection with lease transactions was expensed. The following warrants to
purchase common stock were outstanding at June 30, 1999:
<TABLE>
<CAPTION>
RESERVED FOR PRICE PER AGGREGATE EXPIRATION
SHARES ISSUANCE SHARE PRICE DATE
------ ------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
7,034..................... 7,034 $42.65 $ 300,000 July 2009
4,000..................... 4,000 43.50 174,000 June 2001
15,394..................... 15,394 65.625 1,010,231 June 2001
2,200..................... 2,200 75.00 165,000 June 2001
</TABLE>
In May 1999, the Company issued warrants to purchase 300 shares of Series B
Preferred Stock in connection with the convertible bridge loan noted above (see
note 2). The warrants are exercisable at $1,000 per share and expire in May
2004. As of June 30, 1999 none of the preferred stock warrants had been
exercised.
Stock Option Plans
In July 1991, the Board of Directors of the Company approved the Company's
1991 Stock Option Plan (the "Plan"). The Plan provides for the issuance of
incentive and nonstatutory options to employees, officers, and consultants of
the Company to acquire common stock of the Company. The Plan, as amended,
provides for the granting of options for up to 1,313,406 shares of common stock
of the Company which includes 800,000 shares which were approved by the
stockholders in July 1999. The exercise price of incentive stock options granted
under the Plan may not be less than 100% (110% in the case of any options
granted to a person
F-13
<PAGE> 59
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
who owns more than 10% of the total combined voting power of all classes of
stock of the Company) of the fair market value of the common stock subject to
the option on the date of grant. Options granted under the Plan generally become
exercisable over a four-year period and generally expire ten years from the date
of grant. Expired options become available under the Plan. At June 30, 1999, a
total of 288,300 shares of common stock were reserved for issuance under the
Plan (see Note 13).
In September 1996 and April 1997, the Board of Directors authorized the
exchange of certain stock option grants at the then fair market values of the
Company's common stock. These exchanges were voluntary and open to all employees
holding options subsequent to certain dates. In September 1996, options to
purchase 5,730 shares of common stock at prices ranging from $63.75 to $75.00
per share were exchanged for options to purchase a like number of shares at
$60.00 per share. Under the September 1996 exchange, all previous vesting of the
related options was forfeited. In April 1997, options to purchase 30,925 shares
of common stock at prices ranging from $42.50 to $85.00 per share were exchanged
for options to purchase a like number of shares at $33.15 per share. Vesting
terms were not modified under the April 1997 exchange, however, no vested
options related to the exchange were exercisable for a period of 180 days
following the exchange.
During the years ended June 30, 1997 and 1996, the Company recorded
deferred compensation of approximately $856,000 and $192,000, respectively,
representing the difference between the grant price and the fair value of the
Company's common stock for certain options granted during those years. The
deferred compensation is amortized over the period for which the related stock
options become exercisable, which is generally four years. During the year ended
June 30, 1999, the company decreased unamortized deferred compensation by
approximately $134,000 to reflect the cancellation of certain unvested stock
options for which deferred compensation was previously recorded. Amortization of
deferred compensation was approximately $191,000, $262,000 and $244,000 for the
years ended June 30, 1999, 1998 and 1997, respectively.
In April 1996, the Company adopted the 1996 Director Option Plan (the
"Director Plan"). The Director Plan provides for the granting of options for up
to 12,000 shares of common stock of the Company. The option grants under the
Director Plan are automatic and non-discretionary, and the exercise price of the
options is 100% of the fair market value of the common stock on the grant date.
The Director Plan provides for an initial grant of options to purchase 2,600
shares of common stock to each new non-employee director. In addition, each
non-employee director will automatically be granted an option to purchase 140
shares of common stock annually. Options granted under the Director Plan become
exercisable over a four-year period and expire ten years from the date of grant.
At June 30, 1999, a total of 12,000 shares of common stock were reserved for
issuance under the Director Plan.
In August 1998, the Board of Directors of the Company approved the
Company's 1998 Nonstatutory Stock Option Plan (the "Supplemental Plan"). The
Supplemental Plan provides for the issuance of nonstatutory options to
non-officer employees and consultants of the Company to acquire common stock of
the Company. The Supplemental Plan, as amended, provides for the granting of
options for up to 480,000 shares of common stock of the Company, that includes
400,000 shares which were approved by the Company's Board of Directors in July
1999. Options granted under the Supplemental Plan generally become exercisable
over a four-year period and generally expire ten years from the date of grant.
Expired options become available under the Supplemental Plan. At June 30, 1999,
a total of 80,000 shares of common stock were reserved for issuance under the
Supplemental Plan (see Note 13).
F-14
<PAGE> 60
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
The fair value of option grants related to the above plans is estimated on
the date of grant using the Black-Scholes pricing model with the following
assumptions for the years ended June 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate......................... 6.02% 5.75% 6.02%
Expected life................................... 3.81 years 3.73 years 3.49 years
Expected volatility............................. 78.8% 76.20% 72.62%
Dividend yield.................................. -- -- --
</TABLE>
The following is a summary of activity under the stock option plans:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
STOCK OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------- ------- ---------------- ------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at July 1... 242,538 $27.30 205,552 $17.60 209,034 $ 9.55
Granted............... 161,919 $14.01 93,337 $38.75 123,183 $40.80
Exercised............. (32,436) $ 9.68 (41,776) $ 5.40 (43,328) $ 7.05
Canceled.............. (85,354) $32.06 (14,575) $34.65 (83,337) $37.15
------- ------- -------
Outstanding at June
30.................... 286,667 $20.37 242,538 $27.30 205,552 $17.60
======= ======= =======
Exercisable at June
30.................... 113,075 $22.08 106,409 $15.65 90,878 $ 5.60
Weighted average fair
value of options
granted............... $10.02 $22.10 $23.50
Shares available for
grant................. 93,633 26,195 24,958
</TABLE>
The following table summarizes information for outstanding and exercisable
options at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.15 - $ 5.00 90,073 9.08 $ 4.63 10,570 $ 1.95
$ 6.60 - $31.25 121,760 7.68 $19.11 66,639 $15.44
$33.13 - $42.50 64,677 8.25 $38.38 30,581 $37.20
$43.15 - $75.00 10,157 7.86 $53.47 5,285 $57.27
- --------------- ------- ---- ------ ------- ------
$ 1.15 - $75.00 286,667 8.25 $20.37 113,075 $22.08
</TABLE>
Employee Stock Purchase Plans
In April 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the "1996 ESPP"). The 1996 ESPP, as amended, provided for the purchase by
employees of up to 24,600 shares of the Company's common stock. In August 1998,
the Board of Directors of the Company approved the termination of the 1996 ESPP
and the adoption of the Cardiac Pathways Corporation 1998 Employee Stock
Purchase Plan (the "1998 ESPP") including the initial reservation of 20,000
shares of Common Stock under the 1998 ESPP. The 1998 ESPP provides for
consecutive, overlapping 24-month offering periods. Each offering period
consists of four semi-annual purchase periods and is designed to allow eligible
employees to purchase common stock through payroll deductions at a price equal
to 85% of the lesser of the fair market value of the Company's common stock on
the first day of the applicable offering period or the last day of the
respective purchase period. The 1998 ESPP provides for an annual increase in the
number of Common Stock shares reserved
F-15
<PAGE> 61
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
equal to the lesser of 40,000 shares or 1.5% of the Company's outstanding Common
Stock. The maximum number of Common Stock shares reserved for issuance under the
1998 ESPP cannot exceed 196,000. The adoption of the 1998 ESPP was approved by
the stockholders in November 1998.
During the years ended June 30, 1999, 1998 and 1997, a total of 16,274,
12,711 and 7,513 shares were purchased, respectively, under the Employee Stock
Purchase Plans at prices ranging from $4.40 to $46.75 per share. At June 30,
1999, there were 184,101 shares reserved for future issuance under the 1998
ESPP.
The estimated fair value of purchase rights under the Company's Employee
Stock Purchase Plan is determined using the Black-Scholes pricing model with the
following assumptions for the years ended June 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate........................... 5.16% 5.54% 5.41%
Expected life..................................... 6 months 6 months 6 months
Expected volatility............................... 78.75% 76.20% 72.62%
Dividend yield.................................... -- -- --
</TABLE>
For the years ended June 30, 1999, 1998 and 1997, the weighted average fair
value of purchase rights under the plan was $3.46, $13.90 and $19.35,
respectively.
Pro Forma Compensation Expense
The Company has adopted the disclosure-only provisions of FAS 123, and
accordingly, no compensation expense has been recorded for stock awards based on
the fair value method for the years ended June 30, 1999, 1998 and 1997. Had
compensation expense for the Company's stock plans been determined based on the
fair value methodology, the Company's net loss and net loss per share would have
been reported as the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss -- as reported.................. $(18,565,775) $(17,498,797) $(12,865,594)
Net loss -- pro forma.................... $(19,690,069) $(19,094,636) $(14,094,538)
Net loss per share -- as reported........ $ (9.34) $ (9.07) $ (6.86)
Net loss per share -- pro forma.......... $ (9.91) $ (9.89) $ (7.51)
</TABLE>
The above pro forma effects on the results of operations may not be
representative of the effects for future years as option grants typically vest
over several years and additional options are generally granted each year.
Stockholder Rights Plan
In April 1997, the Board of Directors approved a stockholder rights plan
and declared a dividend of one preferred share purchase right (a "Right") for
each outstanding share of common stock of the Company to holders of record as of
April 30, 1997. Each Right will entitle stockholders to purchase 1/1000 of a
share of Series A participating preferred stock of the Company (a newly
designated series of preferred stock for which each 1/1000 of a share has
economic attributes and voting rights equivalent to those of one share of the
Company's common stock) at an exercise price of $125. The Rights only become
exercisable in certain limited circumstances involving acquisitions of or tender
offers for 15% or more of the Company's capital stock by another person or group
of persons. For a limited period of time after the announcement of any such
acquisition or offer, the Rights are redeemable at a price of $.01 per Right.
After becoming exercisable, each Right entitles its holder to purchase for $125
an amount of common stock of the Company, or in certain
F-16
<PAGE> 62
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
circumstances, securities of the acquirer, having a then current market value
equal to two times the exercise price of the Right. The Rights expire on April
21, 2007.
5. INCOME TAXES
Due to operating losses and the inability to recognize an income tax
benefit therefrom, there was no provision for income taxes for the years ended
June 30, 1999, 1998 and 1997.
As of June 30, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $73,300,000 and
$15,100,000, respectively. In addition, the Company had research credit
carryforwards of approximately $3,800,000. The net operating loss and credit
carryforwards described above will expire at various dates beginning in 1999, if
not utilized. Utilization of the net operating losses and credits may be subject
to a substantial annual limitation due to the ownership change provisions of the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization. The deferred
tax asset for capitalized research costs relates to certain research and
development project costs that were capitalized for California state tax
purposes. These costs were not capitalized on the balance sheet.
Deferred income taxes reflect the net effects of tax carryforwards and
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets were as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net operating loss carryforwards........................ $ 25,800,000 $ 19,300,000
Capitalized research costs.............................. 2,600,000 2,100,000
Research credit carryforwards........................... 3,300,000 2,900,000
Deferred revenue........................................ 1,000,000 1,200,000
Other................................................... 1,500,000 1,100,000
------------ ------------
Subtotal.............................................. 34,200,000 26,600,000
Valuation allowance..................................... (34,200,000) (26,600,000)
------------ ------------
Total deferred tax asset...................... $ -- $ --
============ ============
</TABLE>
The increase in the valuation allowance was approximately $7,600,000 and
$7,900,000 for years ended June 30, 1999 and 1998, respectively.
6. RISKS DUE TO CONCENTRATIONS
Dependence on Systems
The Company has been engaged primarily in developing, testing and obtaining
regulatory clearances for the catheters and equipment that are components of the
Cooled Ablation System, Arrhythmia Mapping and Tracking Systems. The Company
believes that these systems are currently the Company's only significant
potential products and these systems will require additional development and
regulatory approvals before they can be marketed in the United States and
internationally.
There can be no assurance that the Company's development efforts will be
successful or that the systems or any other product developed by the Company
will be safe or effective, approved by appropriate regulatory and reimbursement
authorities, capable of being manufactured in commercial quantities at
acceptable costs or successfully marketed.
F-17
<PAGE> 63
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
Dependence on Key Suppliers
The Company purchases certain key components of its products, including
computer workstations, a fluid pump, certain integrated circuit components, flex
circuits and biocompatible coatings from sole, single or limited source
suppliers. Any significant component supply delay or interruption could require
the Company to qualify new sources of supply, if available, and could have a
material adverse effect on the Company's ability to manufacture its products.
7. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
-------- ---------- --------
<S> <C> <C> <C>
Capital lease obligations incurred to acquire
equipment........................................... $226,402 $ 635,085 $823,885
Cash paid for interest................................ $613,026 $1,672,205 $143,887
</TABLE>
8. NOTES RECEIVABLE
In March 1996, the Company entered into an employment agreement with an
officer of the Company pursuant to which it loaned $385,000 to the officer at an
annual interest rate of 5.88%. The proceeds of the loan were used to exercise a
stock option granted to this officer in January 1996. The loan is due upon the
sale of the shares, or any portion thereof, underlying the option up to an
amount equal to fifty percent (50%) of the proceeds from such sale. The
outstanding balance of the note and accrued interest is due and payable on the
earlier of the termination of the officer's employment, or January 2001. In
December 1996, the Company loaned $197,450 to the officer at an annual interest
rate of 6.40% pursuant to the same employment agreement. The proceeds of the
loan were used to pay certain federal and state income taxes related to the
above stock option exercise. The loan is due upon the sale of the shares, or any
portion thereof, underlying the option up to an amount equal to fifty percent
(50%) of the proceeds from such sale. The outstanding balance of the note and
accrued interest is due and payable on the earlier of the termination of the
officer's employment, or December 2001. In January 1998, the officer repaid to
the Company a portion of the $197,450 note, the outstanding balance of which was
$164,950 at June 30, 1999. In August 1998, the officer resigned from the Company
and became a consultant to the Company pursuant to a consulting agreement. The
terms of the consulting agreement provide for an extension of time related to
the repayment provisions of both notes.
The Company has made loans to employees and an officer in connection with
their relocation to the Company's geographic area. The aggregate outstanding
balance of these loans was $82,000 at June 30, 1999. These full recourse notes,
which are unsecured, may be forgiven at the end of four years and are charged to
expense in some circumstances.
9. RELATIONSHIP WITH ARROW INTERNATIONAL, INC.
The Company entered into an agreement with Arrow International, Inc.
("Arrow") whereby the Company sold an aggregate of 121,333 shares of Series F
preferred stock (which automatically converted to common stock upon the closing
of the Company's initial public offering in June 1996) at $75.00 per share in
June 1995 and December 1995 for an aggregate purchase price of approximately
$9,100,000. In addition, Arrow acquired distribution and manufacturing rights
related to certain of the Company's diagnostic catheter products and the Company
received a $3,000,000 prepaid royalty from Arrow in December 1995. This amount
was recorded as deferred royalty income. During the year ended June 30, 1999,
the Company began amortizing deferred royalty income on a straight-line basis
over the estimated remaining life of the related catheter patents. For the years
ended June 30, 1999, 1998 and 1997, the Company recorded royalty income of
approximately $300,000, $20,000 and $50,000, respectively.
F-18
<PAGE> 64
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
10. INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment with principal
manufacturing and distribution operations located in the United States. The
Company also operates limited sales and distribution activities through its
European subsidiaries, Cardiac Pathways B.V. in The Netherlands and Cardiac
Pathways G.m.b.H. in Germany.
Net sales primarily consist of product sales to distributors in Japan and
Europe, and direct sales to hospitals in the United States. One distributor
accounted for 52%, 80% and 66% of net sales for the years ended June 30, 1999,
1998 and 1997, respectively. No other distributors represented greater than 10%
of net sales for the year ended June 30, 1999.
All export and other foreign sales are denominated in U.S. dollars. The
following table summarizes net sales including export and other foreign sales by
geographic region:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
United States.................................. $ 963,905 $ 321,491 $ 407,377
Japan.......................................... 2,280,433 1,924,538 1,593,521
Europe......................................... 1,162,032 173,787 407,875
---------- ---------- ----------
$4,406,370 $2,419,816 $2,408,773
========== ========== ==========
</TABLE>
F-19
<PAGE> 65
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
The following table presents information about the Company's operations
located in certain geographical areas:
<TABLE>
<CAPTION>
U.S. EUROPE ELIMINATIONS CONSOLIDATED
YEAR ENDED JUNE 30, ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
1999
Sales to unaffiliated customers....... $ 3,763,947 $ 642,423 $ -- $ 4,406,370
Transfers between geographic areas.... 270,281 -- (270,281) --
------------ ---------- --------- ------------
Total revenue......................... $ 4,034,228 $ 642,423 $(270,281) $ 4,406,370
============ ========== ========= ============
Operating income (loss)............... $(18,568,772) $ (53,456) $ (20,914) $(18,643,142)
Other income.......................... 77,367
------------
Net loss.............................. $(18,565,775)
============
Identifiable assets................... $ 7,871,898 $1,106,090 $ (72,146) $ 8,905,842
============ ========== ========= ============
1998
Sales to unaffiliated customers....... $ 2,057,193 $ 362,623 $ -- $ 2,419,816
Transfers between geographic areas.... 220,576 -- (220,576) --
------------ ---------- --------- ------------
Total revenue......................... $ 2,277,769 $ 362,623 $(220,576) $ 2,419,816
============ ========== ========= ============
Operating income (loss)............... $(18,845,430) $ 18,391 $ (25,964) $(18,853,003)
Other income.......................... 1,354,206
------------
Net loss.............................. $(17,498,797)
============
Identifiable assets................... $ 30,919,990 $ 107,081 $ (92,494) $ 30,934,577
============ ========== ========= ============
1997
Sales to unaffiliated customers....... $ 2,023,798 $ 384,975 $ -- $ 2,408,773
Transfers between geographic areas.... 450,669 -- (450,669) --
------------ ---------- --------- ------------
Total revenue......................... $ 2,474,467 $ 384,975 $(450,669) $ 2,408,773
============ ========== ========= ============
Operating income (loss)............... $(14,928,670) $ 5,227 $ (78,730) $(15,002,173)
Other income.......................... 2,136,579
------------
Net loss.............................. $(12,865,594)
============
Identifiable assets................... $ 46,620,699 $ 179,815 $(145,260) $ 46,655,254
============ ========== ========= ============
</TABLE>
11. RELATED PARTY TRANSACTIONS
During the year ended June 30, 1999, the Company sold approximately $68,000
of catheter products and equipment to a hospital for which a former director of
the Company is a practicing electrophysiologist.
During the year ended June 30, 1998, the Company sold approximately $50,000
of research equipment to Conway-Stuart Medical, Inc. ("Conway-Stuart"), a
medical device company. Proceeds from the sale of equipment were recorded to
other income. There is one former director and one former officer who is also a
director of the Company who has a direct financial interest in Conway-Stuart.
During the years ended June 30, 1998 and 1997, the Company entered into
certain transactions (described below) with Somnus Medical Technologies, Inc.
("Somnus"). There is one former officer who is also a director of the Company
who has a direct financial interest in Somnus. The Company had a sublease
agreement with Somnus for approximately 6,900 square feet. In addition, the
Company had a shared services and equipment rental agreement whereby the Company
would provide, at the request of Somnus, certain facilities and administrative
support services, and would rent certain office furniture and equipment to
Somnus
F-20
<PAGE> 66
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
on a month-to-month basis. Both agreements terminated on March 31, 1997. For the
years ended June 30, 1997 and 1996, the Company recorded rental and related
income under the agreements of $96,000 and $22,000, respectively.
12. EMPLOYEE BENEFIT PLAN
The Company has an employee 401(k) salary deferral plan that allows
voluntary contributions by all full-time employees. Eligible employees may
contribute from 1% to 15% of their respective compensation, subject to statutory
limitations, and the Company may match a percentage of employee contributions at
the discretion of the Board of Directors. The Company made matching
contributions to certain eligible employees in the plan of approximately
$53,000, $38,000 and $27,000 for the years ended June 30, 1999, 1998 and 1997,
respectively.
13. SUBSEQUENT EVENTS (UNAUDITED)
Stock Plans
In July 1999, the Board of Directors approved an increase of 400,000 shares
reserved for issuance under the 1998 Nonstatutory Stock Option Plan.
Furthermore, in July 1999, the stockholders approved an increase of 800,000
shares reserved for issuance under the 1991 Stock Plan.
License Agreement
In July 1999, the Company entered into an agreement with a Canadian company
to obtain an exclusive worldwide license to certain patents involving the use of
ultrasound technology. The terms of the agreement include payments by the
Company to the licensor of $1,000,000 each in August 1999 and January 2000.
New CEO, Preferred Stock Financing, Convertible Bridge Loan and Pro-forma
Balance Sheet
In May 1999, Thomas M. Prescott was appointed as the Company's President
and Chief Executive Officer. In connection with the Series B Preferred Stock
financing, the Company and the investors agreed to appoint Mr. Prescott as a
director of the Company effective upon the closing of the financing. In
addition, Mr. Prescott entered into an employment agreement with the Company
that provides among other things that Mr. Prescott is entitled to an annual base
salary of $225,000 and options to purchase 247,306 shares of the Company's
common stock at an exercise price of $5.00 per share. Mr. Prescott received
options to purchase 60,000 shares of the Company's Common Stock in June 1999.
Additionally, Mr. Prescott is entitled to a $250,000 loan from the Company at a
7% interest rate to purchase shares of the Company's Series B Convertible
Preferred Stock.
In May 1999, the Company's Board of Directors authorized and the Company
entered into definitive agreements in connection with a preferred stock
financing. The terms of the financing included the sale of a maximum of 40,000
shares of Series B Preferred Stock at $1,000 per share to a group of accredited
investors. The Series B Preferred Stock is initially convertible into 200 shares
of the Company's Common Stock. The Series B Preferred Stock is entitled to a
cumulative dividend of 11% of the purchase price per share per year, and will
have a liquidation preference in certain circumstances equal to the initial
purchase price plus accrued but unpaid dividends. In addition, at any time after
May 31, 2004, the holders of a majority of Series B Preferred Stock may request
that the Company redeem the outstanding shares of Series B Preferred Stock. The
Company, at its sole discretion, may redeem the outstanding shares of Series B
Preferred Stock for an amount equal to the original Series B issue price plus
accrued but unpaid dividends. If the Company has not
F-21
<PAGE> 67
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
redeemed the Series B Preferred Stock prior to May 31, 2004, the dividend rate
will increase by 6% for each year a redemption has not occurred subsequent to
May 31, 2004. Furthermore, in May 1999, in connection with the Series B
Preferred Stock Financing, the Company obtained a convertible bridge loan of
$3,000,000 from certain participating investors. The bridge loan bore interest
at the prime rate plus 2.00% (9.75% at June 30, 1999). Upon the closing of the
financing, the promissory notes issued in connection with the bridge loan were
converted into 3,052 shares of Series B convertible preferred stock at the same
price at the shares issued in the financing.
The Series B Preferred Stock financing was approved by the stockholders in
July 1999. Furthermore, in July 1999, the Company closed the Series B Preferred
Stock financing and issued a total of 32,000 shares of Series B Preferred Stock
at a price of $1,000 per share, raising approximately $31,500,000, net of
issuance costs. The closing of the financing included the conversion of the
bridge loan and related accrued interest.
F-22
<PAGE> 68
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
The following represents a pro-forma balance sheet at June 30, 1999 giving
effect to the completion of the Series B Preferred Stock Financing and
conversion of the bridge loan in July 1999.
The pro forma balance sheet also reflects the discount or beneficial
conversion feature present in the convertible securities. The discount is being
recognized as a return to the preferred stockholders (similar to a dividend)
over the minimum period in which the preferred stockholders can realize the
return, immediately for the Series B Preferred stockholders. The discount has
been accreted to additional paid in capital (accumulated deficit) in the
pro-forma balance sheet.
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1999
---------------------------
ACTUAL PRO-FORMA
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,339,660 $ 31,288,014
Short-term investments.................................... -- --
Accounts receivable, net of allowance for doubtful
accounts of $105,000 at June 30, 1999 and pro-forma.... 898,296 898,296
Inventories............................................... 1,330,255 1,330,255
Prepaid expenses.......................................... 338,479 338,479
Other current assets...................................... 76,719 76,719
------------ ------------
Total current assets.............................. 4,983,409 33,931,763
Property and equipment, net................................. 3,790,443 3,790,443
Notes receivable from related parties....................... 29,584 29,584
Deposits and other assets................................... 102,406 102,406
------------ ------------
$ 8,905,842 $ 37,854,196
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 488,128 $ 488,128
Accrued compensation and related benefits................. 835,277 835,277
Accrued clinical expenses................................. 939,183 939,183
Other accrued expenses.................................... 738,831 1,206,331
Current obligations under capital leases.................. 325,334 325,334
Bridge loan............................................... 3,000,000 --
------------ ------------
Total current liabilities......................... 6,326,753 3,794,253
Long-term obligations under capital leases.................. 342,772 342,772
Deferred royalty income..................................... 2,630,862 2,630,862
Commitments
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 5,000,000 shares
authorized and none issued and outstanding at June 30,
1999 and 32,000 pro-forma.............................. -- 32
Common stock, $.001 par value; 30,000,000 shares
authorized;
2,007,904 shares issued and outstanding at June 30,
1999 and pro-forma..................................... 2,008 2,008
Additional paid-in capital................................ 80,152,542 112,612,510
Receivable from stockholders.............................. (385,000) (385,000)
Accumulated deficit....................................... (79,983,404) (80,962,550)
Deferred compensation..................................... (180,691) (180,691)
------------ ------------
Total stockholders' equity (deficit).............. (394,545) 31,086,309
------------ ------------
$ 8,905,842 $ 37,854,196
============ ============
</TABLE>
F-23
<PAGE> 69
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTIONS PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
June 30, 1997............................... $ 9,500 $ -- $-- $ 9,500
June 30, 1998............................... 9,500 7,000 -- 16,500
June 30, 1999............................... 16,500 88,500 -- 105,000
</TABLE>
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
4.1.1 Amendment No. 1 to Preferred Share Rights Agreement.
10.25 Employment Agreement with Thomas M. Prescott dated May 18,
1999.
10.26 Employment Agreement with G. Michael Latta dated November
30, 1998.
10.27 Employment Agreement with William N. Starling dated January
6, 1992.
10.28 Exclusive Licensing Agreement between the Registrant and
Sonometrics Corporation dated July 21, 1999.
10.29 Employment Agreement with Debra S. Echt dated August 7,
1996.
10.30 Employment Agreement with Richard E. Riley dated June 1,
1992.
10.31 Employment Agreement with Jon P. Hunt dated March 6, 1998.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 4.1.1
AMENDMENT
TO THE CARDIAC PATHWAYS CORPORATION
PREFERRED SHARES RIGHTS AGREEMENT
JULY 23, 1999
WHEREAS, Cardiac Pathways Corporation (the "Company") and Norwest Bank
Minnesota, N.A. (the "Rights Agent") are parties to the Preferred Shares Rights
Agreement, dated as of April 22, 1997 (the "Rights Agreement");
WHEREAS, the Company's Board of Directors has authorized the designation
and sale of the Company's Series B Convertible Preferred Stock;
WHEREAS, the Company has determined that pursuant to Section 27 of the
Rights Agreement, the Rights Agreement may be amended as set forth herein
without the approval of the holders of the Rights (as defined in the Rights
Agreement);
NOW THEREFORE, in consideration of the promises and mutual agreements
set forth in the Rights Agreement, the parties hereby amend the Rights Agreement
as follows:
1. The definition of "Acquiring Person" set forth in Section 1(a) is hereby
amended, in its entirety, to provide as follows:
"ACQUIRING PERSON" shall mean any Person who or which, together with all
Affiliates and Associates of such Person, shall be the Beneficial Owner of 15%
or more of the Common Shares then outstanding, but shall not include the
Company, any Subsidiary of the Company or any employee benefit plan of the
Company or of any Subsidiary of the Company, or any entity holding Common Shares
for or pursuant to the terms of any such plan; provided, however that no Series
B Party (as defined below) shall be deemed an "Acquiring Person" as a result of
its being the Beneficial Owner of any securities (any such securities, "Series B
Securities") issued or issuable pursuant to the Series B Convertible Preferred
Stock Purchase Agreement and Securities Purchase Agreement (including the
exhibits that are a part thereof, and in particular including any Common Shares
which have been or may be issued upon conversion of shares of preferred stock
issued thereunder, issued upon exercise of the warrants granted thereby or
otherwise issued in accordance with the terms of such agreements or related
documents) each dated as of May 20, 1999 between the Company and the Purchasers
named therein. Notwithstanding the foregoing, no Person shall be deemed to be an
Acquiring Person as the result of an acquisition of Common Shares by the Company
which, by reducing the number of shares outstanding, increases the proportionate
number of shares beneficially owned by such Person to 15% or more of the Common
Shares of the Company then outstanding; provided, however, that if a Person
shall become the Beneficial Owner of 15% or more of the Common Shares of the
Company then outstanding by reason of share purchases by the Company and shall,
after such share purchases by the Company, become the Beneficial Owner of
<PAGE> 2
any additional Common Shares of the Company (other than pursuant to a dividend
or distribution paid or made by the Company on the outstanding Common Shares in
Common Shares or pursuant to a split or subdivision of the outstanding Common
Shares), then such Person shall be deemed to be an Acquiring Person unless upon
becoming the Beneficial Owner of such additional Common Shares of the Company
such Person does not beneficially own 15% or more of the Common Shares of the
Company then outstanding. Notwithstanding the foregoing, (i) if the Company's
Board of Directors determines in good faith that a Person who would otherwise be
an "Acquiring Person," as defined pursuant to the foregoing provisions of this
paragraph (a), has become such inadvertently (including, without limitation,
because (A) such Person was unaware that it beneficially owned a percentage of
the Common Shares that would otherwise cause such Person to be an "Acquiring
Person," as defined pursuant to the foregoing provisions of this paragraph (a),
or (B) such Person was aware of the extent of the Common Shares it beneficially
owned but had no actual knowledge of the consequences of such beneficial
ownership under this Agreement) and without any intention of changing or
influencing control of the Company, and if such Person divested or divests as
promptly as practicable a sufficient number of Common Shares so that such Person
would no longer be an "Acquiring Person," as defined pursuant to the foregoing
provisions of this paragraph (a), then such Person shall not be deemed to be or
to have become an "Acquiring Person" for any purposes of this Agreement; and
(ii) if, as of the date hereof, any Person is the Beneficial Owner of 15% or
more of the Common Shares outstanding, such Person shall not be or become an
"Acquiring Person," as defined pursuant to the foregoing provisions of this
paragraph (a), unless and until such time as such Person shall become the
Beneficial Owner of additional Common Shares (other than pursuant to a dividend
or distribution paid or made by the Company on the outstanding Common Shares in
Common Shares or pursuant to a split or subdivision of the outstanding Common
Shares), unless, upon becoming the Beneficial Owner of such additional Common
Shares, such Person is not then the Beneficial Owner of 15% or more of the
Common Shares then outstanding. A "Series B Party" shall include each of (i)
Bank America Ventures, Morgan Stanley Venture Partners III, L.P., Morgan Stanley
Venture Investors III, L.P., Morgan Stanley Venture Partners Entrepreneur Fund,
L.P., Van Wagoner Capital Management, State of Wisconsin Investment Board,
Thomas J. Fogarty and Trellis Health Ventures L.P. (the "Purchasers") (ii) any
Affiliate of a Purchaser, (iii) any creditor of a Purchaser who acquires Series
B Securities upon the exercise of creditor rights in connection with a bona fide
credit arrangement, and (iv) any other person who acquires Series B Securities
provided that such person has stated or intends to state in a timely fashion in
a filing pursuant to Regulation 13D-G under the Securities Exchange Act of 1934,
as amended, or any successor provision thereto, that such person has acquired
such securities in the ordinary course of business and not with the purpose or
effect of changing or influencing control of the Company, nor in connection with
or as a participant in any transaction having such purpose or effect, including
any transaction subject to Rule 13d-3(b).
2. The definition of "Common Shares" set forth in Section 1(g) is hereby
amended, in its entirety, to provide as follows:
"COMMON SHARES" when used with reference to the Company shall mean the
shares of Common Stock of the Company, $.001 par value, and the shares of Series
B Convertible Preferred Stock, $.001 par value. Common Shares when used with
reference to any Person other than the Company shall mean the capital stock (or
equity interest) with the greatest voting power of such
-2-
<PAGE> 3
other Person or, if such other Person is a Subsidiary of another Person, the
Person or Persons which ultimately control such first-mentioned Person.
3. This Amendment may be executed in counterparts each of which shall be deemed
an original and all of which shall constitute one instrument.
4. Except as expressly amended by this Amendment, all provisions of the Rights
Agreement shall remain in full force and effect.
[Remainder of Page Intentionally Left Blank]
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
CARDIAC PATHWAYS CORPORATION
By: /s/ G. MICHAEL LATTA
-----------------------------------------
G. Michael Latta, Chief Financial Officer
NORWEST BANK MINNESOTA, N.A.
By: /s/ KARRI L. VANDELL
-----------------------------------------
Name: Karri L. VanDell
Title: AVP
CERTIFICATE
The undersigned officer of Cardiac Pathways Corporation certifies that
this Amendment is in compliance with the terms of Section 27 of the Rights
Agreement.
/s/ G. MICHAEL LATTA
- -----------------------------------------
G. Michael Latta, Chief Financial Officer
[Signature Page]
[Amendment to the Cardiac Pathways Corporation Preferred Shares Rights
Agreement]
-4-
<PAGE> 1
EXHIBIT 10.25
[CARDIAC PATHWAYS CORPORATION LETTERHEAD]
May 18,1999
Thomas M. Prescott
1024 Greystone Manor Parkway
Chesterfield, MO 63005
Dear Tom:
This letter when signed by you will constitute an agreement between Cardiac
Pathways Corporation (the "Company") and you concerning your employment.
1. The Company hereby hires you and you hereby accept employment as
President and Chief Executive Officer ("CEO") of the Company.
2. It is expected that your first day of employment with the Company
will be May 24, 1999.
3. The Company agrees to pay you an annual base salary of $225,000
payable in accordance with the Company's standard payroll policy.
Your base salary will be reevaluated at least annually in
accordance with the Company's standard practices.
4. Upon approval of the Compensation Committee of the Board of
Directors, the Company shall grant you options to acquire a total
of 1,236,532 shares of the Company's Common Stock, at a per share
exercise price equal to the lower of (i) $ 1.00 or (ii) the
average trading price of the Company's common stock on the five
(5) trading days immediately prior to the date of the public
announcement of the Company's Series B Convertible Preferred
Stock Purchase Agreement. 300,000 options will be granted to you
under stock option plans currently approved by the Company's
shareholders (this grant will take place at a special meeting of
the board of directors held as soon as practicable after the date
of your hiring). The remaining stock options (936,532) will be
granted to you under a newly authorized option plan approved by
the Company's shareholders at the Closing of the Company's Series
B Convertible Preferred Stock Purchase Agreement (this grant will
take place at the first board meeting following the
aforementioned Closing of the Series B Convertible Preferred
Stock Purchase Agreement). The options will vest over a four-year
period with 25% of the total shares vesting on July 1, 2000 and
an additional 25% vesting on July 1 of 2001, 2002 and 2003,
assuming you remain a Company employee on each such date. The
option will be governed by the Company's Incentive Stock Option
Plan and your written option agreement which will follow the
Company's standard form of option agreement.
<PAGE> 2
Thomas Prescott
May 18,1999
Page 2
5. Less than one month after the Closing of the Company's Series B
Convertible Preferred Stock Purchase Agreement, you will purchase
$250,000 worth of the Company's Series B Convertible Preferred
Stock according to the same terms and conditions that BankAmerica
Ventures has purchased Series B Convertible Preferred Stock. If
necessary, the Company will loan you money to help you make this
purchase. Such loan will be repayable in twelve equal quarterly
installments commencing with the third anniversary of the loan.
This loan will bear interest at 7%. Interest will be payable in
cash or can be accrued by you at your option.
6. a. The term of this Agreement shall commence on your first day
of employment and shall continue until terminated by either
party in accordance with the provisions of this Section 5.
b. This Agreement may be terminated by the Company at any time
for Justifiable Cause (as hereinafter defined) provided that
the Company shall pay you an amount equal to one month of
your then current base salary as a severance payment. For the
purpose of this Agreement, the term "Justifiable Cause" shall
include the occurrence of any of the following events: (i)
your conviction for, or plea of nolo contendere, a felony or
a crime involving moral turpitude, (ii) your commission of an
act of personal dishonesty or breach of fiduciary duty
involving personal profit in connection with the Company,
(iii) your commission of an act, or failure to act, which the
Board shall reasonably have found to have involved misconduct
or gross negligence on the part of you, in the conduct of
your duties hereunder, (iv) habitual absenteeism, alcoholism
or drug dependency that interferes with the performance of
your duties hereunder, (v) your willful and material breach
or refusal to perform your services as provided herein, (vi)
any other material breach of this Agreement or (vii) the
willful and material failure or refusal to carry out a direct
request of the Board of Directors. The payment to you of the
severance payment described in this Section 6(b) will
discharge all of the Company's obligations to you, other than
vested stock options, if any, which shall be governed by the
written stock option agreement.
c. This Agreement may be terminated by the Company at any time
without Justifiable Cause provided that the Company shall
continue to pay your then current monthly base pay as a
severance payment for a period of twelve (12) months
following the date of termination (the "Severance Period").
Any payments made pursuant to this Section 6(c) shall be
reduced to the extent you receive any other earnings from
employment or consulting, or unemployment or disability
compensation, during the Severance Period. The payment to you
of the severance payment described in this Section 6(c) will
discharge all of the Company's obligations (subject to the
provisions noted in Section 7) to you, other than vested
stock options, if any, which shall be governed by the written
stock option agreement. If such termination without
Justifiable Cause takes place in the first year of your
employment with the Company, the incentive stock option will
vest at 1/48th per full month of employment.
<PAGE> 3
Thomas Prescott
May 18,1999
Page 3
d. You may terminate this Agreement at any time in which case the
Company shall have no severance or other obligations to you.
7. Notwithstanding anything set forth in this Section 7, upon your
involuntary termination of employment from the Company (for any
reason other than for Justifiable Cause) on or after an
Acquisition (as defined below), the 1,236,532 shares of Common
Stock described in Section 4 above shall be fully and immediately
exercisable. For purposes of this Section 7, an Acquisition shall
be defined as a merger, reorganization, or sale of all or
substantially all of the assets of the Company in which
shareholders of the Company immediately prior to the transaction
possess less than fifty percent (50%) of the voting stock of the
surviving entity (or its parent) immediately after the
transaction. Your Constructive Termination (as defined below)
shall be treated as an involuntary termination of employment
under this Section 7. For purposes of this Section 7, a
Constructive Termination shall mean a material reduction in
salary or benefits, a material diminution of responsibilities, a
requirement to relocate to office relocations that would increase
your one-way commute distance by more than thirty-five (35)
miles.
8. You will be eligible to participate in any insurance or other
benefit plan as may be sponsored or maintained by the Company
from time to time for its employees or executives. The Company
will provide you with life insurance coverage equal to six (6)
times your annual base salary.
9. To help you search for a home in the San Francisco Bay area, the
Company will pay the cost of reasonable travel, lodging, and
meals from St. Louis to San Francisco and return for you and your
family in an amount not to exceed $7,000.
10. The Company will pay the following expenses, to help move you to
the Bay area:
a. All expenses incurred in packing, loading, transporting
and temporary storage (if required) for your personal
belongings from the St. Louis area to the San Francisco
Bay area in an amount not to exceed $40,000.
b. Real estate commissions paid by you to your real estate
broker in connection with the sale of your home in the St.
Louis area along with other closing costs not to exceed
$50,000. Based upon your effective State and Federal tax
rate at the time of the house sale, the Company will gross
up this payment to cover State and Federal taxes.
c. Closing costs up to $16,000 on the purchase of a
residential dwelling in the San Francisco Bay area during
your tenure at the Company. This amount will be taxable to
you.
d. A $75,000 bonus to help compensate you for the increased
cost of housing in the Bay area to be payable by June 25,
1999.
<PAGE> 4
Thomas Prescott
May 18, 1999
Page 4
e. Under the above Sections (a) through (c), the offer of
payment for stated expenses will expire twelve (12) months
from your hire date.
11. For each fiscal year of the Company during which you remain CEO,
you will be eligible for a bonus of up to 25% of your base salary
for the year, based upon the attainment of goals established by
the Board of Directors.
12. This offer is contingent upon you signing and returning to the
Company a copy of its standard Proprietary Information agreement.
13. In accordance with Federal immigration law, on your first day of
employment, we will need to see documents proving your identity
and eligibility to work in the United States. Documents that can
satisfy these requirements are a valid driver's license and a
social security card or a United States passport.
14. Your employment is at will, as defined under applicable law. If
your employment terminates for any reason, you shall not be
entitled to any payments, benefits, damages, awards or
compensation other than as provided above, or as otherwise may be
available in accordance with the Company's established employee
plans and policies at the time of termination.
15. Prior to your first day of employment with the Company, you will
be expected to travel to the Company's offices or a place where
the Company conducts business, to familiarize yourself with the
Company. The Company will reimburse you for all reasonable travel
expenses associated with your visits, in accordance with standard
Company policies.
16. This offer of employment will expire on May 20,1999, at 5:00 p.m.
17. This letter sets forth the entire agreement regarding the subject
matter hereof. It supersedes any prior representations or
agreements, oral or written, and it can only be modified by a
written agreement signed by a duly authorized officer of the
Company.
<PAGE> 5
Thomas Prescott
May 18,1999
Page 5
If the terms of this letter are agreeable, please sign and return one copy of
this letter and the agreement to our Human Resources Department. We look forward
to working with you at Cardiac Pathways.
Best personal regards,
/s/ WILLIAM N. STARLING
William N. Starling
President and Chief
Executive Officer
Agreed and Accepted.
/s/ THOMAS M. PRESCOTT 5/20/99
- ---------------------------------------
THOMAS M. PRESCOTT
<PAGE> 1
EXHIBIT 10.26
[CARDIAC PATHWAYS CORPORATION LETTERHEAD]
November 30, 1998
G. Michael Latta
4421 E. Williams Dr.
Phoenix, AZ 85050
Dear Mike:
This letter, when signed by you, will constitute an agreement between Cardiac
Pathways Corporation (the "Company") and you (the "Executive") concerning your
employment.
1. The Company hereby offers the Executive and the Executive hereby accepts
employment as Vice President - Finance and Chief Financial Officer of
the Company.
2. The Company agrees to pay the Executive a monthly base salary of
$10,833.34 payable in accordance with the Company's standard payroll
policy.
3. The Executive's employment with the Company will be at-will and may be
terminated by the Executive or the Company at any time.
4. The Company will issue to the Executive an option exercisable for 72,500
shares of Common Stock at its fair market value on the date of the
grant. The current fair market value of Common Stock is $4.63. The grant
of this option is subject to the Board of Directors' approval. The stock
option will vest over a four year period with 1/48 of the shares vesting
at the end of each full month following the date of grant. The stock
option shall be represented by the Company's standard form of stock
option agreement. This vesting schedule could be modified by the terms
outlined in Sections 5 and 6.
5. a. The term of this Agreement shall commence as of the effective date
hereof and shall continue until terminated by either party in accordance
with the provisions of this Section 5.
<PAGE> 2
G. Michael Latta
November 30,1998
b. This Agreement may be terminated by the Company at any time for
Justifiable Cause (as hereinafter defined) provided that the Company
shall pay the Executive an amount equal to the sum of his then current
monthly base salary as a severance payment for one month following the
date of termination. For the purpose of this Agreement, the term
"Justifiable Cause" shall include the occurrence of any of the
following events: (i) the Executive's conviction for, or plea of nolo
contendere, a felony or a crime involving moral turpitude, (ii) the
Executive's commission of an act of personal dishonesty or breach of
fiduciary duty involving personal profit in connection with the
Company, (iii) the Executive's commission of an act, or failure to act,
which the Executive's supervisor at the Company shall reasonably have
found to have involved misconduct or gross negligence on the part of
the Executive, in the conduct of his duties hereunder, (iv) habitual
absenteeism, alcoholism or drug dependency on the part of the Executive
which interfere with the performance of his duties hereunder, (v) the
Executive's willful and material breach or refusal to perform his
services as provided herein, (vi) any other material breach of this
Agreement or (vii) the willful and material failure or refusal to carry
out a direct request of the Executive's supervisor. The payment to the
Executive of the severance payment described in this Section 5(b) will
discharge all of the Company's obligations to the Executive.
c. This Agreement may be terminated by the Company at any time without
Justifiable Cause provided that the Company shall pay the Executive an
amount equal to the sum of his then current monthly base pay as a
severance payment for a period of six months following the date of
termination, or until the Executive finds other employment, whichever
is shorter. Any payments made pursuant to this Section 5(c) shall be
reduced to the extent the Executive receives any other earnings related
to employment or consulting services or other unemployment or
disability compensation during the six month period. The payment to the
Executive of the severance payment described in this Section 5(c) will
discharge all of the Company's obligations (subject to the provisions
noted in Section 6) to the Executive.
d. This Agreement may be terminated by the Executive at any time upon
30 days written notice, in which case the Company shall have no
severance or other obligations to the Executive.
<PAGE> 3
G. Michael Latta
November 30, 1998
6. Notwithstanding anything set forth in this Section 6, upon the
Executive's involuntary termination of employment from the Company (for
any reason other than for Justifiable Cause) on or after an Acquisition
(as defined below), all then currently outstanding shares of Common
Stock under stock options described in Section 4 above shall be fully
and immediately exercisable. For purposes of this Section 6, an
Acquisition shall be defined as a merger, reorganization, or sale of all
or substantially all of the assets of the Company in which the
shareholders of the Company immediately prior to the transaction possess
less than fifty percent (50%) of the voting power of the surviving
entity (or its parent) immediately after the transaction. The
resignation of the Executive after a Constructive Termination (as
defined below) shall be treated as an involuntary termination of
employment under this Section 6. For purposes of this Section 6, a
Constructive Termination shall mean a material reduction in salary or
benefits, a material change in responsibilities, or a requirement to
relocate, except for office relocations that would not increase the
Executive's one-way commute distance by more than thirty-five (35)
miles.
7. As a condition of the Executive's employment, it is hereby acknowledged
that the Executive has executed the Company's standard Proprietary
Information Agreement.
If the you are in agreement with this proposal, please execute a copy of this
letter and return it to me as soon as possible.
Best personal regards,
CARDIAC PATHWAYS CORPORATION
/s/ WILLIAM N. STARLING
William N. Starling
President and
Chief Executive Officer
Acknowledged and accepted as of November 30, 1998.
/s/ G. MICHAEL LATTA
- ------------------------------------
G. Michael Latta
<PAGE> 1
EXHIBIT 10.27
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made effective as of this Sixth day of January, 1992 by and
between Cardiac Pathways Corporation, a California corporation (the "Company")
and William N. Starling (the "Executive").
1. Position and Duties. The Company hereby hires the Executive and the
Executive hereby accepts employment as President and Chief Operating Officer of
the Company. The Executive will, to the best of his ability during his
employment, devote his full time and best efforts to the performance of the
duties and functions of the position of President of the Company, and in the
performance of those duties, will comply with the policies of the Company and
the direction of the board of directors. To the extent requested, the Executive
agrees to serve as a director of the Company without any additional
compensation.
2. Compensation.
(a) The Company agrees to pay the Executive and the Executive
agrees to accept as the compensation for his services, a monthly base salary of
$11,000 payable in accordance with the Company's standard payroll policy. The
first and last payment by the Company to the Executive shall be prorated, if
necessary, to reflect a commencement or termination date other than the first or
last working day of a pay period. Additionally, at least annually, the board of
directors will consider increases in the annual rate of salary in light of the
Executive's individual performance and other relevant factors.
(b) The Executive will be entitled to vacation, fringe
benefits and reimbursement for reasonable out-of-pocket expenses in accordance
with the Company's practices covering executive personnel, as such may be in
effect from time to time.
(c) After the Executive commences his employment with the
Company the board of directors shall grant the Executive an incentive stock
option exercisable for 160,000 shares of Common Stock at an exercise price of
$.15 per share. This incentive stock option (ISO) will vest during the
Executives employment over a 48 month period, with 12/48 of the shares vesting
at the end of one year following the commencement of the Executive's employment
with the Company and an additional 1/48 of the shares vested on the same day in
each calendar month thereafter. The stock option shall be represented by the
Company's standard form of stock option agreement. This vesting schedule could
be modified by the terms outlined in Section 5(c).
3. Unrelated Business Activities.
(a) The Executive agrees to devote his full working time,
attention and energies to the performance of the duties of the Company and the
Executive shall not, directly or indirectly, alone or as a member of any
partnership, or as an
<PAGE> 2
officer, consultant or employee of any other company, partnership or
organization, be actively engaged in or concerned with any other duties or
pursuits which interfere with the performance of his duties hereunder. The
Company acknowledges that the Executive is currently a member of the board of
directors of Applied Medical Resources Corporation and of Cardiometrics, Inc.
and that he may continue as a member of those board of directors if he so
chooses, so long as these activities do not interfere with the performance of
his duties hereunder.
(b) The Executive has previously entered into a consulting
agreement with the Company. The consulting agreement between the Executive and
the Company was terminated effective on the date of this Agreement. The stock
purchase agreement between the Company and the Executive entered into on or
about June 15, 1991 shall continue unaffected by this agreement.
4. Proprietary Information Agreement. The Executive has entered into
the Company's standard Proprietary Information Agreement and agrees to be
subject to the terms of such agreement.
5. Terms and Termination.
(a) The term of this Agreement shall commence on January 6,
1992 and shall continue until terminated by either party in accordance with the
provisions of this Section 5.
(b) This Agreement may be terminated by the Company at any
time before justifiable Cause (as hereinafter defined) provided that the Company
shall pay the Executive an amount equal to the sum of his then current monthly
base salary as a severance payment for one month following the date of
termination. For the purpose of this Agreement, the term "Justifiable Cause"
shall include the occurrence of any of the following events: (i) the Executive's
conviction for, or plea of nolo contendere, a felony or a crime involving moral
turpitude, (ii) the Executive's commission of an act of personal dishonesty or
breach of fiduciary duty involving personal profit in connection with the
Company, (iii) the Executive's commission of an act, or failure to act, which
the board of directors of the Company shall reasonably have found to have
involved misconduct or gross negligence on the part of the Executive, in the
conduct of his duties hereunder, (iv) habitual absenteeism, alcoholism or drug
dependency on the part of the Executive which interfere with the performance of
his duties hereunder, (v) the Executive's willful and material breach or refusal
to perform his services as provided herein, (vi) any other material breach of
this Agreement or (vii) the willful and material failure or refusal to carry out
a direct request of the board of directors. The payment to the Executive of the
severance payment described in this Section 5(b) will discharge all of the
Company's obligations to the Executive.
<PAGE> 3
(c) This Agreement may be terminated by the Company at any
time without justifiable Cause provided that the company shall pay the Executive
an amount equal to the sum of his then current monthly base pay as a severance
payment for a period of six months following the date of termination, or until
the Executive finds other employment, whichever is shorter. Any payments made
pursuant to this Section 5(c) shall be reduced to the extent the Executive
receives any other earnings related to employment or consulting services or
other unemployment or disability compensation during the six month period. The
payment to the Executive of the severance payment described in this Section 5(c)
will discharge all of the Company's obligations to the Executive. If such
termination takes place in the first year of the Executive's employment with the
company, the ISO will vest at 1/48 per month, and the one year waiting period
pursuant to Section 2(c) shall be waived.
(d) This Agreement may be terminated by the Executive at any
time upon 30 days written notice, in which case the Company shall have no
severance or other obligations to the Executive.
6. Conflicting Agreements. The Executive represents and warrants that
he is free to enter into this Agreement and that there are no employment
contracts or restrictive covenants preventing full performance of his duties
hereunder.
7. Miscellaneous.
(a) This Agreement shall be binding upon the legal
representatives, distributees, successors and assigns of the parties hereto.
(b) This Agreement contains the entire agreement of the
parties, and may not be changed orally, but only by a writing signed by the
party against whom enforcement of such change is sought.
(c) This Agreement supersedes any prior agreements between the
parties related to the subject matter hereof. It is agreed that a waiver by
either party of a breach of any provision to this Agreement shall not operate or
be construed as a waiver of any subsequent breach by the same party.
(d) In case one or more of the provisions contained in this
Agreement shall for any reason be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provisions of this Agreement but such provisions shall be deemed
deleted and such deletion shall not affect the validity of any other provision
of this Agreement.
(e) This Agreement shall be governed by and construed
according to the internal laws of the State of California. The federal and state
courts of the state of California shall have exclusive jurisdiction to
adjudicate any dispute rising out of this Agreement.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the day and year first above written.
CARDIAC PATHWAYS CORPORATION
/s/ MIR A. IMRAN
- --------------------------------
Mir A. Imran
Chief Executive Officer
/s/ WILLIAM N. STARLING 1/6/92
- --------------------------------
William N. Starling
<PAGE> 1
Exhibit 10.28
LICENSE AGREEMENT
THIS LICENSE AGREEMENT ("Agreement") is made as of July 21, 1999 (the
"Effective Date") by and between Sonometrics Corporation, a corporation
organized and existing under the laws of Ontario, Canada, having a principal
place of business located at 135-4056 Meadowbrook Dr., London, Ontario, Canada
N6L 1E4 ("Licensor") and Cardiac Pathways Corporation, a corporation organized
and existing under the laws of Delaware, having a principal place of business at
995 Benecia Avenue, Sunnyvale, California 94086 ("Licensee").
BACKGROUND
WHEREAS, Licensor owns certain Licensed Patents (as defined below); and
WHEREAS, Licensee wishes to obtain an exclusive license from Licensor to
the Licensed Patents on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
indicated:
1.1 "Affiliate" shall mean any corporation or other business entity
which during the term of this Agreement controls, is controlled by, or is under
common control with Licensee, but only for so long as such entity controls, is
controlled by, or is under common control with Licensee. For this purpose,
control shall mean the possession of the power to direct or cause the direction
of the management and the policies of an entity whether through ownership
directly or indirectly of fifty percent (50%) or more of the stock entitled to
vote, and for non-stock organizations, the right to receive fifty percent (50%)
or more of the profits by contract or otherwise, or in countries where control
of fifty percent (50%) or more of such rights is not permitted in the country
where such entity exists, the maximum permitted in such country.
1.2 "Field" shall mean use of [***Redacted] and [***Redacted] in and on
the [***Redacted] that utilize essentially [***Redacted], excluding
[***Redacted] solely and directly related to [***Redacted].
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the commissioner.
<PAGE> 2
1.3 "Financing Event" means the closing of a transaction, as described
in the Preferred Stock Financing Agreements, dated May 21, 1999, entered into by
Licensee and a group of investors, relating to the sale of Licensee's
convertible preferred shares pursuant to which Licensee receives at least
twenty-five million dollars ($25,000,000) for the sale of such shares.
1.4 "Licensee" shall mean Cardiac Pathways Corporation and its
Affiliates.
1.5 "Licensed Patents" shall mean (i) all patents and patent
applications claiming or disclosing subject matter claimed or disclosed in those
certain patents and patent applications, including continuations and provisional
applications, that are owned or controlled by Licensor as of the Effective Date,
a complete listing of which is attached hereto as Exhibit A, and (ii) all
divisionals, continuations, continuations in-part, patents of addition, and
substitutions of, and all Patents issuing on any of the foregoing, together with
all registrations, reissues, re-examinations, or extensions of any kind with
respect to any of such patents.
1.6 "Licensed Product" shall mean a product:
1.6.1 within the scope of one or more Valid Claims of the Licensed
Patents in the country of manufacture or sale;
1.6.2 produced, processed or otherwise manufactured by a process or
method within the scope of one or more Valid Claims of the Licensed Patents in
the country of such manufacture; or
1.6.3 used in a process and/or method within the scope of one or
more Valid Claims of the Licensed Patents in the country where such product is
made or sold.
1.7 "Listed Countries" shall mean France, Germany, Italy, Japan, and the
United States. Licensee may, from time to time, modify this list by notifying
Licensor in advance in writing.
1.8 "Net Royalties" shall mean royalties and fees received by Licensee
from a Sublicensee with respect to the Licensed Patents, including any initial
payments, less all costs incurred by Licensee in collecting such royalties
including, without limitation, attorney's fees, audit and/or accountant's fees,
and collection costs.
1.9 "Sublicensee" shall mean a third party to whom Licensee has granted
a license or sublicense to make, have made, import, use, sell, offer for sale,
or otherwise exploit a Licensed Patent in the Field.
1.10 "Valid Claim" shall mean a claim of an issued and unexpired patent
or a claim of a pending patent application which has not been held unpatentable,
invalid or unenforceable by a court or other government agency of competent
jurisdiction and has not been admitted to be invalid or unenforceable through
reissue, re-examination, disclaimer or otherwise; provided, however, that if any
holding of invalidity, unenforceability or unpatentability is later reversed by
a court or agency with overriding authority, the relevant claim shall be
reinstated as a Valid Claim hereunder with
-2-
<PAGE> 3
respect to sales made after the date of such reversal. Notwithstanding the
foregoing provisions of this Section 1.10, if a claim of a pending patent
application has not issued as a claim of an issued patent, within five (5) years
after the date from which such claim takes priority, such pending claim shall
not be a Valid Claim for purposes of this Agreement unless and until the patent
is issued including such claim.
ARTICLE II
LICENSE
2.1 Grant. Licensor hereby grants to Licensee an exclusive, worldwide,
royalty-bearing license, with the right to grant and authorize sublicenses, to
Licensor's entire interest in and to the Licensed Patents within the Field to:
(i) make, have made, use, import, have imported, sell, offer for sale and
otherwise exploit and distribute Licensed Products within the Field, and (ii)
practice any method, process or procedure included within the Licensed Patents
in the Field.
2.2 Acknowledgement. Licensor expressly reserves the right to continue
practicing the Licensed Patents outside the Field.
ARTICLE III
PAYMENTS AND REPORTS
3.1 License Royalty. As consideration for the rights and licenses
granted by Licensor to Licensee hereunder, Licensee agrees to pay Licensor one
million United States dollars ($1,000,000 U.S.) within fifteen business days
after the closing of a Financing Event, and one million United States dollars
($1,000,000 U.S.) within two (2) business days of January 4, 2000.
3.2 Sublicense Royalties.
3.2.1 Payments on Net Royalties. In addition to the payments
above in Section 3.1, Licensee shall pay to Licensor a sublicensing royalty
equal to [***Redacted] percent ([***Redacted]%) of the Net Royalties it receives
from a Sublicensee within [***Redacted] ([***Redacted]) days of receipt by the
Licensee. It is understood and agreed that the "sublicense royalty" received by
Licensee from Sublicensees shall not include, (i) amounts received
[***Redacted], (ii) [***Redacted] of amounts [***Redacted], (iii) amounts
[***Redacted] under [***Redacted] with the [***Redacted], or (iv) amounts
[***Redacted] or [***Redacted].
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the commissioner.
-3-
<PAGE> 4
3.2.2 Outside Scope of Valid Claim. The sublicensing royalty rate
set forth in Section 3.2.1 above shall be [***Redacted] by [***Redacted] percent
([***Redacted]%) if the applicable Licensed Products are not within the scope of
an issued Valid Claim of a patent within the Licensed Patents in the country
such Licensed Products are made or sold.
3.2.3 Royalty Term. The obligation of Licensee to pay royalties
under this Article III shall continue on a Licensed Product by Licensed Product
and country-by-country basis, for so long as there exists a Valid Claim covering
such Licensed Product in the country of such manufacture or sale.
3.3 Payment Method. Unless otherwise requested in writing by Licensor,
all amounts payable under this Agreement shall be made by check drawn on a
United States bank account and delivered to Licensor at the address set forth in
Section 10.4 or such other business address as Licensor may designate in
writing. All payments hereunder shall be made in U.S. dollars. Any payments that
are not paid on the date such payments are due under this Agreement shall bear
interest, to the extent permitted by applicable law, at the prime rate as
reported by the Chase Manhattan Bank, New York, New York, on the date such
payment is due calculated on the number of days such payment is delinquent.
3.4 Currency Conversion. If any currency conversion shall be required in
connection with the calculation of royalties hereunder, such conversion shall be
made using the selling exchange rate for conversion of the foreign currency into
U.S. dollars, quoted for current transactions reported in The Wall Street
Journal for the last business day of the calendar quarter to which such payment
pertains.
3.5 Review of Accounting Records. Licensee shall maintain accurate books
and records which enable the calculation of sublicensing royalties payable
hereunder to be verified. Upon thirty (30) days prior notice to Licensee,
independent accountants selected by Licensor, reasonably acceptable to Licensee,
after entering into a confidentiality agreement with Licensee, may have access
to the books and records of Licensee to conduct a review or audit once per
calendar year, for the sole purpose of verifying the accuracy of Licensee's
payments and compliance with this Agreement. The accounting firm shall report to
Licensor only whether there has been a sublicensing royalty underpayment and, if
so, the amount thereof. Such access shall be permitted during Licensee's normal
business hours during the term of this Agreement and for three (3) years after
the expiration or termination of this Agreement. Any such inspection or audit
shall be at Licensor's expense, unless that it is demonstrated that Licensee has
underpaid Licensor by at least ten (10) percent of the amounts due Licensor
under Section 3.2.
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the commissioner.
-4-
<PAGE> 5
ARTICLE IV
TERM AND TERMINATION
4.1 Term. The term of this Agreement shall commence on the Effective
Date, and unless earlier terminated as provided herein, shall continue in full
force and effect on a country-by-country and Licensed Product-by-Licensed
Product basis until there are no remaining royalty payment obligations in a
country, at which time the Agreement shall expire in its entirety in such
country.
4.2 Termination for Cause. If either party materially breaches this
Agreement, the nonbreaching party may elect to give the breaching party written
notice describing the alleged breach. If the breaching party has not cured such
breach within sixty (60) days after receipt of such notice, the notifying party
will be entitled, in addition to any other rights it may have under this
Agreement, to terminate this Agreement effective immediately; provided, however,
if either party receives notification from the other of a material breach and if
the party alleged to be in breach notifies the nonbreaching party in writing
within thirty (30) days of receipt of default notice that it disputes the
asserted default, the parties shall discuss in good faith and attempt to resolve
such dispute. If the parties are unable to resolve such dispute within thirty
(30) days after notice of the dispute is received by the nonbreaching party, the
matter will be submitted to arbitration and no termination shall become
effective prior to the completion of such arbitration, and unless approved by
the arbitrators.
4.3 Termination for Failure of Financing Event. If there has not been a
closing of a Financing Event on or before August 19, 1999, the Licensor may, at
its option, terminate this Agreement upon notice to the Licensee, unless the
Licensee chooses to extend the agreement for a period (the "Extension Period").
The Extension Period is defined as a period during which the Licensee pays the
Licensor an extension fee amounting to one thousand dollars ($1,000) per day up
to and including September 30, 1999. During this Extension Period, the Licensor
may not terminate this Agreement for failure to close a Financing Event.
4.4 Permissive Termination. Licensee may terminate this Agreement with
respect to any country and/or any patent application or patent of the Licensed
Patents upon thirty (30) days written notice to Licensor.
4.5 Effect of Termination.
4.5.1 Accrued Rights and Obligations. Termination of this
Agreement for any reason shall not release any party hereto from any liability
which, at the time of such termination, has already accrued to the other party
or which is attributable to a period prior to such termination, nor preclude
either party from pursuing any rights and remedies it may have hereunder or at
law or in equity which accrued or are based upon any event occurring prior to
such termination.
4.5.2 Stock on Hand. In the event this Agreement is terminated
for any reason, Licensee and its Sublicensees shall have the right to sell or
otherwise dispose of the stock of any Licensed Product subject to this Agreement
then on hand.
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4.5.3 Sublicensees. In the event of any termination of this
Agreement any sublicenses granted by Licensee shall remain in force and effect
and shall be assigned by Licensee to Licensor, provided, that such Sublicensee
is currently in good standing with regard to its obligations under the
sublicense or has cured any default or breach within the period provided in such
sublicense, and further provided, that the financial obligations of each such
Sublicensee shall be limited to those due Licensee hereunder for the practice of
such a sublicense.
4.6 Survival. Articles V, VII, IX and X, and Sections 4.5-4.6 shall
survive expiration or termination of this Agreement for any reason.
ARTICLE V
CONFIDENTIALITY
5.1 Confidential Information. Except as expressly provided in this
Agreement, neither party shall use for its own benefit or the benefit of any
third party, or disclose to any third party, any confidential, proprietary or
trade secret information (the "Confidential Information") received from the
other party hereto, during the term of this Agreement and for five (5) years
thereafter. All Confidential Information must be designated as such by the
disclosing party in writing at or before the disclosure is made in writing, or
within thirty (30) days of such disclosure.
5.2 Permitted Disclosures. Notwithstanding Section 5.1 above,
Confidential Information shall not include any of the following information
which the receiving party can demonstrate by competent evidence:
5.2.1 was already known to the receiving party, other than under
an obligation of confidentiality, at the time of disclosure;
5.2.2 was generally available to the public or otherwise part of
the public domain at the time of disclosure to the receiving party;
5.2.3 became generally available to the public or otherwise part
of the public domain after its disclosure and other than through any act or
omission of the receiving party in breach of this Agreement;
5.2.4 was independently developed by the receiving party without
reference to any information or materials disclosed by the disclosing party; or
5.2.5 was subsequently disclosed to the receiving party by a
person other than a party without breach of any legal obligation to the
disclosing party.
5.3 Additional Permitted Disclosures. In addition, either party may
disclose Confidential Information of the other (i) to their legal
representatives, employees and Affiliates, and legal representatives and
employees of Affiliates, consultants and Sublicensees, to the extent such
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disclosure is reasonably necessary to achieve the purposes of this Agreement,
and provided such representatives, employees, consultants and Sublicensees have
agreed in writing to obligations of confidentiality with respect to such
information no less stringent than those set forth herein; (ii) in connection
with the filing and support of patent applications; (iii) to a potential
Sublicensee or as reasonably required in the course of a contemplated public
offering or private financing; (iv) to a corporate partner; or (v) if disclosure
is compelled to be disclosed by a court order or applicable law or regulation,
provided that the party compelled to make such disclosure (x) requests
confidential treatment of such information, (y) provides the other party with
sufficient advance notice of the compelled disclosure to provide adequate time
to seek a protective order and (z) discloses only the minimum necessary to
comply with the requirement to disclose.
5.4 Non-Disclosure. The terms of this Agreement shall not be disclosed
by Licensee or Licensor to any third party or be published unless both parties
expressly agree otherwise in writing. Licensee shall allow at least three (3)
business days notice of any proposed public disclosure for Licensor's review and
comment or to provide written consent. The text of any press release to be
issued by Licensee and/or Licensor concerning this Agreement as well as the
precise date and timing of the press release shall be agreed between the parties
in writing in advance, such agreement not to be unreasonably withheld or
delayed. However, this restriction shall not apply to announcements required by
law or regulation, except that in such event the parties shall coordinate to the
extent possible with respect to the details of any such announcement. This
restriction shall not apply to disclosure of this Agreement to certain private
third parties such as the shareholders, investment bankers, attorneys and other
professional consultants of, and prospective investors in Licensee or the
Licensor. Once a particular disclosure has been approved, further disclosures
that do not differ materially therefrom may be made without obtaining any
further consent of the other party.
ARTICLE VI
PATENT PROSECUTION, ENFORCEMENT AND DEFENSE
6.1 Licensor's Responsibilities. Licensor shall, using patent counsel
mutually acceptable to Licensee and Licensor, have the initial right to control,
on a best efforts basis, the preparation, filing, prosecution and maintenance of
the Licensed Patents, and any interferences, re-examinations, reissues and
opposition proceeding relating thereto. Licensee shall bear the reasonable costs
of prosecuting and maintaining the Licensed Patents in the Listed Countries
only, provided that (i) the costs are incurred after the Effective Date, (ii)
Licensee shall bear the costs of any interferences, re-examinations, reissues
and opposition on a case-by-case basis and only if Licensee agrees in writing to
bear such costs, and (iii) Licensee may choose to terminate its obligations
hereunder to bear the cost of preparation, filing, prosecution and/or
maintenance with respect to any Licensed Patent upon thirty (30) days written
notice to Licensor in advance of the procedural step which requires funding.
Licensee shall pay such reasonable costs within forty-five (45) days of
receiving an invoice for such costs. Licensor shall consult with Licensee
regarding the conduct of all such activities, by providing Licensee a reasonable
opportunity to review and comment on all proposed submissions to any patent
office before submission. For the purpose of this Agreement, "reasonable
opportunity" shall mean
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<PAGE> 8
that Licensee shall receive from Licensor or its patent counsel true copies of
all documents relating to filing, registration, prosecution, and maintenance of
patent applications and patents within the Licensed Patents within ten (10) days
after Licensor has received such documents and materials or at least fifty-five
(55) days before any date imposed upon Licensor for action or response with
respect to such patent applications or patents. Licensee will use commercially
reasonable efforts to provide its comments to Licensor at least ten (10) days
before any date imposed upon Licensor for action or response with respect to the
patent applications or patents. Licensor agrees to consider Licensee's comments
concerning such documents and materials, and shall use its best efforts to
incorporate into the final version of such documents and materials any
modification(s) and/or claim(s) requested by Licensee. Licensor shall not
abandon any of the Licensed Patents without Licensee's prior written consent.
6.2 Licensor's Failure to Prosecute. In the event Licensor declines to
file or having filed fails to further prosecute or maintain any patent
applications or patents, or conduct any interferences, re-examinations,
reissues, or oppositions, within a reasonable time therefor, then Licensee shall
have the right, upon thirty (30) days prior notice to Licensor, to prepare,
file, prosecute and maintain such patent applications and patents in such
countries as it deems appropriate, and conduct any interferences,
re-examinations, reissues or oppositions, at its sole expense, using patent
counsel of its choice.
6.3 Copies. Upon request by Licensee, Licensor shall promptly provide to
Licensee a copy of any patent applications within the Licensed Patents filed by
Licensor during the term of this Agreement and all material documents received
from or sent to any patent office relating thereto which relate to the scope,
term, maintenance, validity, or enforceability of any of the Licensed Patents,
or any challenge to or change to any of the preceding.
6.4 Patent Term Extensions. With respect to any patent within the
Licensed Patents, Licensor will designate Licensee or its designee as its agent
for obtaining an extension of such patent or governmental equivalent which
extends the exclusivity of any of the patent subject matter where available in
any country in the world or if not feasible, at Licensee's option, permit
Licensee to file in Licensor's name or diligently obtain such extension for
Licensee or its Sublicensee(s), at Licensee's expense. Furthermore, Licensor
shall provide reasonable assistance to facilitate Licensee's or its
Sublicensees' efforts to obtain any such extension.
6.5 Enforcement. If either party hereto becomes aware that any Licensed
Patents are being or have been infringed by any third party or are subject to a
declaratory judgment action, such party shall promptly notify the other party
hereto in writing describing the facts relating thereto in reasonable detail.
6.5.1 Licensee. Licensee shall have the initial right, but not
obligation, to institute, prosecute and control any such action, suit or
proceeding (an "Action") at its expense, using legal counsel acceptable to
Licensor, and Licensor shall cooperate with Licensee in connection with any such
Action, at Licensee's expense; provided, Licensee may not enter into any
settlement which admits that any of the Licensed Patents are invalid or
unenforceable. Licensor may, at its option and
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<PAGE> 9
cost, be represented by legal counsel of its choice in such proceedings to
observe the proceedings. Any amounts recovered from third parties in any such
Action shall be used first to reimburse Licensee for its costs and expenses
associated with such Action (including, without limitation, attorney and expert
fees), and the remainder shall be treated as follows: the portion of any
recovery which is attributable to damages for reasonable royalties or lost
profits shall be determined, and Licensor shall receive a portion of such amount
equal to the applicable royalty it would have received pursuant to Article III
if Licensee had made the sales actually made by the infringer.
6.5.2 Licensor. In the event Licensee fails to initiate or defend
any Action involving the Licensed Patents within nine (9) months of receiving
notice of any alleged infringement, Licensor shall have the right, but not the
obligation, to initiate such an Action, at its expense, using legal counsel of
its choice, and Licensee shall cooperate with Licensor in connection with any
such Action at Licensor's expense; provided, Licensor may not enter into any
settlement which admits that any of the Licensed Patents are invalid or
unenforceable. Licensee shall provide notice to Licensor of having received such
notice of alleged infringement within [***Redacted] ([***Redacted]) days of
receipt of such notice. Any amounts recovered from third parties in any such
Action shall be used first to reimburse Licensor for its costs and expenses
associated with such Action (including, without limitation, attorney and expert
fees), and the remainder shall be divided between the parties, with Licensor
receiving [***Redacted] percent ([***Redacted]%) of such remainder and Licensee
receiving [***Redacted] percent ([***Redacted]%).
6.6 Defense. If Licensee, its Sublicensee, distributor or other customer
is sued by a third party charging infringement of patent rights that dominate a
claim of the Licensed Patents or that cover the development, manufacture, use,
distribution or sale of a Licensed Product, Licensee will be entitled to control
the defense in any such action(s), and withhold [***Redacted] of the royalties
related to such Licensed Product in the country of suit otherwise payable to
Licensor and use such withheld royalties to reimburse the legal defense costs,
attorney fees and liability incurred in such infringement suit(s).
Notwithstanding the foregoing, Licensee agrees to withhold only that portion of
such royalties as may reasonably be necessary to reimburse amounts in accordance
with this Section 6.6. If Licensee is required to pay a royalty or other amount
to a third party to make and/or sell a Licensed Product as a result of a final
judgment or settlement, [***Redacted] of such amounts may be deducted from the
royalties payable to Licensor hereunder in relation to such Licensed Product;
provided that such royalties shall not be so reduced by more than [***Redacted]
percent ([***Redacted]%). Licensor may, at its option and cost, be represented
by legal counsel of its choice in such proceedings to observe the proceedings.
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the commissioner.
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6.7 Cooperation. In any suit, action or other proceeding in
connection with enforcement and/or defense of the Licensed Patents, Licensor
shall at the expense of Licensee cooperate fully, including without limitation
by joining as a party plaintiff and executing such documents as Licensee may
reasonably request. Furthermore, upon the request of and, at the expense of
Licensee, Licensor shall make available at reasonable times and under
appropriate conditions all relevant records, papers, information, samples and
other similar materials in Licensor's possession.
ARTICLE VII
INDEMNIFICATION; INSURANCE
7.1 Licensee. Licensee shall defend and hold Licensor and it trustees,
officers, agents, faculty, employees and students harmless as against any
judgments, fees, expenses, or other costs arising from or incidental to any
product liability or other lawsuit, claim, demand or other action (a
"Liability") brought by a third party as a consequence of the practice of the
Licensed Patents by Licensee or any Sublicensee, whether or not Licensor is
named as a party defendant in any lawsuit, except to the extent such Liability
is caused by the negligence or willful misconduct of Licensor.
7.2 Licensor. Licensor shall defend and hold Licensee and its directors,
officers, employees and agents harmless as against any judgments, fees,
expenses, liabilities, or other costs arising from or incidental to any product
liability or other lawsuit, claim, demand or other action (also a "Liability")
resulting from any claim, suit or proceeding brought by a third party against
any of the foregoing entities, arising out of or in connection with any
misrepresentation with regard to, or breach of any of, the representations and
warranties of Licensor set forth in Article VIII, or to the extent due to the
negligence or willful misconduct of Licensor.
7.3 Procedure. In the event that any indemnitee intends to claim
indemnification under this Article VII it shall promptly notify the other party
in writing of such potential Liability. The indemnifying party shall have the
right to control the defense thereof. The affected indemnitees shall cooperate
fully with the indemnifying party and its legal representatives in the
investigation and conduct of any Liability covered by this Article VII.
Notwithstanding the foregoing, neither party shall have indemnity obligations
for any claim if the indemnitee seeking indemnification makes any admission,
settlement or other communication regarding such claim without the prior written
consent of the indemnifying party.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES
8.1 Licensor. Licensor represents and warrants that: (i) it is a
corporation duly organized validly existing and in good standing under the laws
of Ontario, Canada; (ii) the execution, delivery and performance of this
Agreement have been duly authorized by all necessary corporate action on
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<PAGE> 11
the part of Licensor; (iii) to the Licensor's best knowledge, Licensor is the
sole and exclusive owner of all right, title and interest in and to the Licensed
Patents; (iv) Licensor has the right to grant the rights and licenses granted
herein; (v) the Licensed Patents are free and clear of any lien, encumbrance,
security interest or restriction on license; (vi) to Licensor's best knowledge,
the practice of the Licensed Patents will not infringe intellectual property of
third parties; (vii) it has not previously granted, and will not grant during
the term of this Agreement, any right, license or interest in or to the Licensed
Patents, or any portion thereof, inconsistent with the license granted to
Licensee herein; (viii) there are no threatened or pending actions, suits,
investigations, claims or proceedings in any way relating to the Licensed
Patents; and (ix) the list in Exhibit A of Licensed Patents represents the
entire patent portfolio of Licensor as of the Effective Date.
8.2 Licensee. Licensee represents and warrants that: (i) it is a
corporation duly organized validly existing and in good standing under the laws
of the State of Delaware, (ii) the execution, delivery and performance of this
Agreement have been duly authorized by all necessary corporate action on the
part of Licensee, and (iii) Licensee has made no previous obligation materially
inconsistent with its obligations under this Agreement.
ARTICLE IX
ARBITRATION
9.1 Arbitration. Licensor and Licensee agree that any dispute or
controversy arising out of or relating to Section 4.2 or Article III of this
Agreement shall be settled by binding arbitration in San Francisco, California,
United States of America, under the then-current Commercial Agreement
Arbitration Rules of the American Arbitration Association by one (1) arbitrator
appointed in accordance with such Rules. The arbitrator shall determine what
discovery will be permitted, based on the principle of limiting the cost and
time that the parties must expend on discovery; provided, the arbitrator shall
permit such discovery it deems necessary to achieve an equitable resolution of
the dispute. The decision and/or award rendered by the arbitrator shall be
written, final and non-appealable and may be entered in any court of competent
jurisdiction. The parties agree that, any provision of applicable law
notwithstanding, they will not request, and the arbitrator shall have no
authority to award punitive or exemplary damages against any party. The costs of
any arbitration, including administrative fees and fees of the arbitrator, shall
be shared equally by the parties. Each party shall bear the cost of its own
attorney and expert fees.
ARTICLE X
GENERAL
10.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without reference to
principles of conflicts of laws.
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10.2 Independent Contractors. The relationship of the parties hereto is
that of independent contractors. The parties hereto are not deemed to be agents,
partners or joint ventures of the other for any purpose as a result of this
Agreement or the transactions contemplated thereby.
10.3 Assignment. This Agreement shall be not be assignable by Licensor
or by Licensee without the other party's prior written consent, which shall not
be unreasonably withheld; provided, however, that either party may assign this
Agreement without such consent (i) to an Affiliate, or (ii) in connection with a
transfer of all or substantially all of its assets to which this Agreement
relates whether by sale, merger, operation of law or otherwise. This Agreement
shall be binding upon and inure to the benefit of the parties and their
successors and assigns.
10.4 Notices. Any required notices hereunder shall be given in writing
by certified mail or overnight express delivery service at the address of each
party set forth below, or to such other address as either party may indicate on
its behalf by written notice.
If to Licensee:
Cardiac Pathways Corporation
995 Benecia Avenue
Sunnyvale, CA 94086
Attention: G. Michael Latta
If to Licensor:
Sonometrics Corporation
135-4056 Meadowbrook Dr.
London, Ontario, Canada N6L 1E4
Attn: Blair Poetschke
Notice shall be deemed served when delivered or, if delivery is not
accomplished by reason or some fault of the addressee, when tendered.
10.5 Force Majeure. Neither party shall lose any rights hereunder or be
liable to the other party for damages or losses (except for payment obligations)
on account of failure of performance by the defaulting party if the failure is
occasioned by war, strike, fire, Act of God, earthquake, flood, lockout,
embargo, governmental acts or orders or restrictions, failure of suppliers, or
any other reason where failure to perform is beyond the reasonable control and
not caused by the negligence, intentional conduct or misconduct of the
nonperforming party and the nonperforming party has exerted all reasonable
efforts to avoid or remedy such force majeure; provided, however, that in no
event shall a party be required to settle any labor dispute or disturbance.
10.6 Compliance with Laws. Each party shall furnish to the other party
any information related to the subject matter of this Agreement requested or
required by that party during the term of this Agreement or any extensions
hereof to enable that party to comply with the requirements of any U.S. or
foreign federal, state and/or government agency. Each party agrees to make
reasonable efforts to comply with applicable laws.
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<PAGE> 13
10.7 Export Controls. Licensee acknowledges that it is subject to United
States laws and regulations controlling the export of products or technical
information. Licensee agrees that it will not export, directly or indirectly,
any technical information acquired from Licensor under this Agreement or any
products using such technical information to any country for which the United
States government or agency thereof at the time of export requires an export
license or other governmental approval, without first obtaining the written
consent to do so from the Department of Commerce or other agency of the United
States government when required by an applicable statute or regulation.
10.8 LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER
FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGES ARISING OUT OF
THE PERFORMANCE OF THIS AGREEMENT, HOWEVER CAUSED, UNDER ANY THEORY OF
LIABILITY.
10.9 Further Assurances. At any time or from time to time on and after
the date of this Agreement, Licensor shall at the written request of Licensee
(i) deliver to Licensee such records, data or other documents consistent with
the provisions of this Agreement, (ii) execute, and deliver or cause to be
delivered, all such consents, documents or further instruments of transfer or
license, and (iii) take or cause to be taken all such actions, as Licensee may
reasonably deem necessary or desirable in order for Licensee to obtain the full
benefits of this Agreement and the transactions contemplated hereby.
10.10 Severability. In the event that any provisions of this Agreement
are determined to be invalid or unenforceable by a court of competent
jurisdiction, the remainder of the Agreement shall remain in full force and
effect without said provision. The parties shall in good faith negotiate a
substitute clause for any provision declared invalid or unenforceable, which
shall most nearly approximate the intent of the parties in entering this
Agreement.
10.11 Waiver. The failure of a party to enforce any provision of the
Agreement shall not be construed to be a waiver of the right of such party to
thereafter enforce that provision or any other provision or right.
10.12 Entire Agreement; Amendment. This Agreement sets forth the entire
agreement and understanding of the parties with respect to the subject matter
hereof, and supersedes all prior discussions, agreements and writings in
relating thereto. This Agreement may not be altered, amended or modified in any
way except by a writing signed by both parties.
10.13 Counterparts. This Agreement may be executed in two counterparts,
each of which shall be deemed an original and which together shall constitute
one instrument.
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IN WITNESS WHEREOF, Licensor and Licensee have executed this Agreement by their
respective duly authorized representatives.
Sonometrics Corporation Cardiac Pathways Corporation
By: /s/ Blair Poetschke By: /s/ Thomas M. Prescott
------------------------ ---------------------------
Name: Blair Poetschke Name: Thomas M. Prescott
Title: President Title: Chief Executive Officer
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EXHIBIT A
APPLN SERIAL #/ ISSUE DATE/
ISSUED PATENT # FILING DATE TITLE
- ---------------------- --------------------- ------------------
[***Redacted]
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the commissioner.
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<PAGE> 1
EXHIBIT 10.29
August 7, 1996
REVISED OFFER LETTER
VIA FEDERAL EXPRESS
DEBRA SHERYL ECHT, M.D.
1477 Georgetown Court
Nashville, TN 37215
Dear Debra:
This letter, when signed by you, will constitute an agreement between Cardiac
Pathways Corporation (the "Company") and you (the "Executive") concerning your
employment.
1. The Company hereby hires the Executive and the Executive hereby accepts
employment as Vice President Chief Medical Officer.
a. The Executive will work full time at Cardiac Pathways Corporation
beginning September 3, 1996.
b. Primary responsibility for this position will include management
of the Company's clinical trials and preclinical trials,
assistance in the areas of advanced research, product planning,
strategic planning and business development. Other
responsibilities for this position will also include interactions
with the Company's institutional investors, analysts and
investment bankers concerning clinical matters.
2. The Company agrees to pay the Executive an annual base salary of
$200,000.00 payable in accordance with the Company's standard payroll
policy. In addition, the Company agrees to pay the Executive a bonus as
follows:
a. $50,000 upon PMA approval by the U.S. FDA of the Company's Cooled
Ablation Catheter and Mapping System for Ventricular Tachycardia.
b. $50,000 upon PMA approval by the U.S. FDA of the Company's Linear
Lesion Catheter for Atrial Fibrillation.
3. The Company will also pay the following expenses, to help move the
Executive to the Bay Area:
a. All expenses incurred in moving the Executive's personal
belongings from the Nashville, Tennessee area to the San
Francisco Bay Area.
<PAGE> 2
DEBRA SHERYL ECHT, M.D.
August 7,1996
Page Two
b. Real estate commissions paid by the Executive to the Executive's
real estate broker in connection with the sale of the Executive's
home in Nashville, Tennessee.
c. Closing costs on the purchase of a residential dwelling in the
San Francisco Bay Area during the Employee's tenure at the
Company.
4. After the Executive has purchased a home in the San Francisco Bay Area,
the Company will provide the Executive an optional loan program of
$1,000 per month for a maximum period of sixty (60) months. This loan
will be due on the earlier of (i) seven (7) years from the date of the
first monthly loan, or (ii) three (3) months after the termination of
the Executive's employment with the Company. The loan will bear interest
at the applicable Federal rate as defined in the Internal Revenue Code
of 1986 and the regulations thereunder, and be secured by a trust deed
on the Employee's new residence.
5. The Executive's employment with the Company will be at-will and may be
terminated by the Executive or the Company at any time.
6. The Executive will be eligible to participate in any insurance or other
benefit plan as may be sponsored or maintained by the Company from time
to time for its employees. Cardiac Pathways currently offers medical,
dental, vision, life and long-term disability insurance, a 401k,
flexible benefits and an Employee stock purchase plan.
7. The Company will issue to the Executive an option exercisable for
100,000 shares of Common Stock at $6.25 per share. The grant of this
option is subject to the Board of Director's approval. The stock option
will vest over a four year period with 12/48ths of the shares vesting on
the Executive's one year anniversary date with the Company and an
additional 1/48th of the total number of shares vesting at the end of
each full month thereafter.
The stock option shall be represented by the Company's standard form of
stock option agreement. The vesting schedule for the stock option will
be further modified by the terms outlined in Sections 8 and 9.
8. a. The term of this Agreement shall commence on your first day of
employment and shall continue until terminated by either party in
accordance with the provisions of this Section 8.
<PAGE> 3
DEBRA SHERYL ECHT, M.D.
August 7, 1996
Page Three
b. This Agreement may be terminated by the Company at any time for
Justifiable Cause (as hereinunder defined) provided that the
Company shall pay the Executive an amount equal to the sum of his
then current base salary as a severance payment for one month
following the date of termination. For the purpose of this
Agreement., the term "Justifiable Cause" shall include the
occurrence of any of the following events: (i) the Executive's
conviction for, or plea of nolo contendere, a felony or a crime
involving moral turpitude, (ii) the Executive's commission of an
act of personal dishonesty or breach of fiduciary duty involving
personal profit in connection with the Company, (iii) the
Executive's commission of an act, or failure to act, which the
Executive's supervisor at the Company shall reasonably have found
to have involved misconduct or gross negligence on the part of
the Executive, in the conduct of his duties hereunder, (iv)
habitual absenteeism, alcoholism or drug dependency on the part
of the Executive which interfere with the performance of his
duties hereunder, (v) the Executive's willful and material breach
or refusal to perform his services as provided herein, (vi) any
other material breach of this Agreement or (vii) the willful and
material failure or refusal to carry out a direct request of the
Executive's supervisor. The payment to the Executive of the
severance payment described in this Section 8(b) will discharge
all of the Company's obligations to the Executive.
c. This Agreement may be terminated by the Company at any time
without Justifiable Cause provided that the Company shall pay the
Executive an amount equal to the sum of his then current monthly
base pay as a severance payment for a period of six months
following the date of termination, or until the Executive finds
other employment, whichever is shorter. Any payments made
pursuant to this Section 8(c) shall be reduced to the extent the
Executive received any other earnings related to employment or
consulting services or other unemployment or disability
compensation during the six month period. The payment of the
Executive of the severance payment described in this Section 8(c)
will discharge all of the Company's obligations (subject to the
provisions noted in Section 9) to the Executive.
d. This Agreement maybe terminated by the Executive at any time upon
30 days written notice, in which case the Company shall have no
severance or other obligations to the Executive.
<PAGE> 4
DEBRA SHERYL ECHT, M.D.
August 7,1996
Page Four
9. Notwithstanding anything set forth in this Section 9, upon the
Executive's involuntary termination of employment from the Company (for
any reason other than for Justifiable Cause) on or after an Acquisition
(as defined below), the 100,000 shares of Common Stock described in
Section 7 above shall be fully and immediately exercisable. For purposes
of this Section 9, an Acquisition shall be defined as a merger,
reorganization, or sale of all or substantially all of the assets of the
Company in which shareholders of the Company immediately prior to the
transaction possess less than fifty percent (50%) of the voting power of
the surviving entity (or its parent) immediately after the transaction.
The resignation of the Executive after a Constructive Termination (as
defined below) shall be treated as an involuntary termination of
employment under this Section 6. For purposes of this Section 9, a
Constructive termination shall mean a material reduction in salary or
benefits, a material change in responsibilities, or a requirement to
relocate, except for office relocations that would not increase the
Executive's one-way commute distance by more than thirty-five (35)
miles.
10. As a condition of the Executive's employment, the Executive will also be
required to execute the Company's standard Proprietary Information
Agreement, a copy of which is enclosed with this letter.
If you are in agreement with this proposal, please execute a copy of this letter
and the Proprietary Information Agreement and return them to me as soon as
possible.
Best personal regards,
CARDIAC PATHWAYS CORPORATION Acknowledged and Accepted
By: /s/ AURORA C. SALGADO /s/ DEBRA SHERYL ECHT, M.D.
-------------------------------- -----------------------------------
FOR: William. N. Starling Debra Sheryl Echt, M.D.
President and CEO
Enclosure as stated above.
<PAGE> 1
EXHIBIT 10.30
June 1, 1992
Richard Riley
469 Valley Wood Circle
Golden Valley, Minnesota 55422
Dear Rick:
This letter, when signed by the you, will constitute an agreement between
Cardiac Pathways Corporation (the "Company") and the you (the "Executive")
concerning your employment and will supercede all previous agreements and
discussions.
1. The Company hereby hires the Executive and the Executive hereby accepts
employment as Vice President Software Engineering of the Company.
2. The Company agrees to pay the Executive a monthly base salary of
$9,166.67 payable in accordance with the Company's standard payroll
policy.
3. The Executive's employment with the Company will be at-will and may be
terminated by the Executive or the Company at any time.
4. The Company will issue to the Executive an option exercisable for 75,000
shares of Common Stock at its fair market value on the date of the
grant. The current fair market value of Common Stock is $0.15. The grant
of this option is subject to the Board of Directors' approval. The stock
option will vest over a four year period with 12/48 of the shares
vesting on the Executive's one year anniversary date with the Company
and an additional 1/48 of the total number of shares vesting at the end
of each full month thereafter. The stock option shall be represented by
the Company's standard form of stock option agreement. This vesting
schedule could be modified by the terms outlined in Sections 5 and 6.
5. a. The term of this Agreement shall commence on July 1, 1992 and
shall continue until terminated by either party in accordance
with the provisions of this Section 8.
b. This Agreement may be terminated by the Company at any time for
Justifiable Cause (as hereinafter defined) provided that the
Company shall pay the Executive an amount equal to the sum of his
then current monthly base salary as a severance payment for one
month following
<PAGE> 2
Rick Riley
June 1, 1992
Page Two
the date of termination. For the purpose of this Agreement, the
term "Justifiable Cause" shall include the occurrence of any of
the following events: (i) the Executive's conviction for, or plea
of nolo contendere, a felony or a crime involving moral
turpitude, (ii) the Executive's commission of an act of personal
dishonesty or breach of fiduciary duty involving personal profit
in connection with the Company, (iii) the Executive's commission
of an act, or failure to act, which the Executive's supervisor at
the Company shall reasonably have found to have involved
misconduct or gross negligence on the part of the Executive, in
the conduct of his duties hereunder, (iv) habitual absenteeism,
alcoholism or drug dependency on the part of the Executive which
interfere with the performance of his duties hereunder, (v) the
Executive's willful and material breach or refusal to perform his
services as provided herein, (vi) any other material breach of
this Agreement or (vii) the willful and material failure or
refusal to carry out a direct request of the Executive's
supervisor. The payment to the Executive of the severance payment
described in this Section 5(b) will discharge all of the
Company's obligations to the Executive.
c. This Agreement may be terminated by the Company at any time
without justifiable Cause provided that the company shall pay the
Executive an amount equal to the sum of his then current monthly
base pay as a severance payment for a period of six months
following the date of termination, or until the Executive finds
other employment whichever is shorter. Any payments made pursuant
to this Section 5(c) shall be reduced to the extent the Executive
receives any other earnings related to employment or consulting
services or other unemployment or disability compensation during
the six month period. The payment to the Executive of the
severance payment described in this Section 5(c) will discharge
all of the Company's obligations (subject to the provisions noted
in Section 6) to the Executive. If such termination takes place
in the first year of the Executive's employment with the company,
the incentive stock option will vest at 1/48 per month, and the
one year waiting period pursuant to Section 4 shall be waived.
d. This Agreement may be terminated by the Executive at any time
upon 30 days written notice, in which case the Company shall have
no severance or other obligations to the Executive.
<PAGE> 3
Rick Riley
June 1, 1992
Page Three
6. Notwithstanding anything set forth in this Section 6, upon the
Executive's involuntary termination of employment from the Company (for
any reason other than for Justifiable Cause) on or after an Acquisition
(as defined below), the 75,000 shares of Common Stock described in
Section 4 above shall be fully and immediately exercisable. For purposes
of this Section 6, an Acquisition shall be defined as a merger,
reorganization, or sale of all or substantially all of the assets of the
Company in which the shareholders of the Company immediately prior to
the transaction possess less than fifty percent (50%) of the voting
power of the surviving entity (or its parent) immediately after the
transaction. The resignation of the Executive after a Constructive
Termination (as defined below) shall be treated as an involuntary
termination of employment under this Section 6. For purposes of this
Section 6, a Constructive Termination shall mean a material reduction in
salary or benefits, a material change in responsibilities, or a
requirement to relocate, except for office relocations that would not
increase the Executive's one-way commute distance by more than
thirty-five (35) miles.
7. As a condition of the Executive's employment, the Executive will also be
required to execute the Company's standard Proprietary Information
Agreement, a copy of which is enclosed with this letter.
8. As additional compensation, the Company will pay up to $2,000 per month,
less applicable withholding to the Executive for the Executive's
temporary living expenses including food, laundry and rent for an
apartment or home in the San Francisco Bay area. The temporary living
expense allowance will terminate when both of the Executive's
Minneapolis homes have sold, up to a maximum of twelve months. The
Company will also pay the cost of several round-trip airplane tickets to
Minneapolis to expedite the transition to the Bay area.
9. The Company will also pay the following expenses, to help move the
Executive to the Bay area:
a. All expenses incurred in moving the Executive's personal
belongings, from the Minneapolis area to the San Francisco Bay
area;
<PAGE> 4
Rick Riley
June 1, 1992
Page Four
b. Real estate commissions paid by the Executive to the Executive's
real estate broker in connection with the sale of the Executive's
most recently purchased home in Minneapolis;
c. Closing costs up to $10,000 on the purchase of a residential
dwelling in the San Francisco Bay area during the Executive's
tenure at the Company.
d. The Executive agrees to relocate to the Bay area and start work
on or before August 3, 1992.
10. After the Executive has purchased a home in the San Francisco Bay area,
the Company will lend the Executive each month for a maximum period of
sixty (60) months an amount equal to the difference between the
Executive's monthly mortgage for the Executive's current residence and
the monthly mortgage payment for the Executive's home in the San
Francisco Bay area, up to a maximum of $1,000 per month. This loan will
be due on the earlier of (i) five years from the date of the first
monthly loan, or (ii) six months after the termination of the
Executive's employment with the Company. At the Executive's option, the
loan may be structured in one of two ways. First, it can be a loan
bearing interest at the applicable federal rate as defined in the
Internal Revenue Code of 1986 and the regulations thereunder, or second,
it can be an interest free loan secured by a trust deed on the
Executive's new residence.
If you are in agreement with this proposal, please execute a copy of this letter
and the Proprietary Information Agreement and return them to me as soon as
possible.
Best personal regards,
Cardiac Pathways Corporation Acknowledged and Accepted
By: /s/ WILLIAM N. STARLING /s/ RICHARD RILEY
-------------------------------- -----------------------------------
William N. Starling Richard Riley
President
<PAGE> 1
EXHIBIT 10.31
[CARDIAC PATHWAYS CORPORATION LETTERHEAD]
March 6, 1998
VIA FACSIMILE
REVISED OFFER LETTER
THIS SUPERSEDES THE FEBRUARY 24,
1998 OFFER LETTER.
JON HUNT, Ph.D.
25526 Via Desca
Valencia, CA 91355
Dear Jon:
This letter when signed by you, will constitute an agreement between Cardiac
Pathways Corporation (the "Company") and you (the "Executive") concerning your
employment.
1. The Company hereby hires the Executive and the Executive hereby accepts
employment as Vice President -- International.
2. The Company agrees to pay the Executive an annual base salary of
$150,000.00 payable in accordance with the Company's standard payroll
policy.
3. Upon approval of the Board of Directors, and subject to all applicable
Federal and State securities laws, the Company shall grant you an option
to acquire 90,000 shares of the Company's Common Stock, at a purchase
price equal to the fair market value of such common stock on the date of
action by the Board. The vesting shall be over a four-year period with
12/48ths of the total shares vesting after one year of employment and
thereafter vesting 1/48th of the total remaining shares each month of
your continuing employment. Please refer to the Company's Stock Option
Plan for further details and terms.
4. It is expected that your first day of employment with Cardiac Pathways
will be April 6, 1998.
5. a. The term of this Agreement shall commence on your first day of
employment and shall continue until terminated by either party in
accordance with the provisions of this Section 5.
b. This Agreement may be terminated by the Company at any time for
Justifiable Cause (as hereinafter defined) provided that the
Company shall pay the Executive an amount equal to the sum of his
then current base salary as a severance payment for one month
following the date of termination. For the purpose of this
Agreement, the term "Justifiable Cause" shall include the
occurrence of any of the following events: (i) the Executive's
conviction for, or plea of nolo contendere, a felony or a crime
involving moral turpitude, (ii) the Executive's commission of an
act of personal dishonesty or breach of
<PAGE> 2
JON HUNT, Ph.D.
Offer Letter
Page Two of 5
fiduciary duty involving personal profit in connection with the
Company, (iii) the Executive's commission of an act, or failure
to act, which the Executive's supervisor at the Company shall
reasonably have found to have involved misconduct or gross
negligence on the part of the Executive, in the conduct of his
duties hereunder, (iv) habitual absenteeism, alcoholism or drug
dependency on the part of the Executive which interfere with the
performance of his duties hereunder, (v) the Executive's willful
and material breach or refusal to perform his services as
provided herein, (vi) any other material breach of this Agreement
or (vii) the willful and material failure or refusal to carry out
a direct request of the Executive's supervisor. The payment to
the Executive of the severance payment described in this Section
5(b) will discharge all of the Company's obligations to the
Executive.
c. This Agreement may be terminated by the Company at any time
without Justifiable Cause provided that the Company shall pay the
Executive an amount equal to the sum of his then current monthly
base pay as a severance payment for a period of six months
following the date of termination, or until the Executive finds
other employment, whichever is shorter. Any payments made
pursuant to this Section 5(c) shall be reduced to the extent the
Executive received any other earnings related to employment or
consulting services or other unemployment or disability
compensation during the six month period. The payment of the
Executive of the severance payment described in this Section 5(c)
will discharge all of the Company's obligations (subject to the
provisions noted in Section 6) to the Executive. If such
termination takes place in the first year of the Executive's
employment with the company, the incentive stock option will vest
at 1/48th per month, and the one year waiting period pursuant to
Section 3 shall be waived.
d. This Agreement may be terminated by the Executive at any time
upon 30 days written notice, in which case the Company shall have
no severance or other obligations to the Executive.
6. Notwithstanding anything set forth in this Section 6, upon the
Executive's involuntary termination of employment from the Company (for
any reason other than for Justifiable Cause) on or after an Acquisition
(as defined below), the 90,000 shares of Common Stock described in
Section 3 above shall be fully and immediately exercisable. For purposes
of this Section 6, an Acquisition shall be defined as a merger,
reorganization, or sale of all or substantially all of the assets
<PAGE> 3
JON HUNT, Ph.D.
Offer Letter
Page Three of 5
of the Company in which shareholders of the Company immediately prior
to the transaction possess less than fifty percent (50%) of the voting
power of the surviving entity (or its parent) immediately after the
transaction. The resignation of the Executive after a Constructive
Termination (as defined below) shall be treated as an involuntary
termination of employment under this Section 6. For purposes of this
Section 6, a Constructive termination shall mean a material reduction
in salary or benefits, a material change in responsibilities, a
requirement to relocate, except for office relocations that would not
increase the Executive's one-way commute distance by more than
thirty-five (35) miles.
7. The Executive will be eligible to participate in any insurance or other
benefit plan as may be sponsored or maintained by the Company from time
to time for its employees. Cardiac Pathways currently offers medical,
dental, vision, life and long-term disability insurance, a 401k,
flexible benefits and an Employee stock purchase plan.
8. As additional compensation, Cardiac Pathways Corporation, referred to as
the Company will pay up to S2,000 per month to the Executive for the
Executive's temporary living expenses (i.e. rent for an apartment or
home in the San Francisco Bay area). Based upon the effective State and
Federal tax rate of the Executive for the 1998/1999 tax years, the
Company will gross up the $2,000 per month payment to cover the State
and Federal taxes. The temporary living expense allowance will terminate
after twelve months. In addition, if the Executive utilizes the loan
program outlined in Section 11, the temporary living expense allowance
will terminate. The Company will also pay the cost of round-trip
airplane tickets to Burbank, California to expedite the transition to
the Bay area in an amount not to exceed $ 1,000.
9. The Company will also pay the following expenses, to help move the
Executive to the Bay area:
a. All expenses incurred in moving the Executive's personal
belongings, from the Valencia area to the San Francisco Bay area
in an amount not to exceed $16,000.
b. Real estate commissions paid by the Executive to the Executive's
real estate broker in connection with the sale of the Executive's
home in Valencia, California in an amount not to exceed $20,000.
Based upon the effective
<PAGE> 4
JON HUNT, Ph.D.
Offer Letter
Page Four of 5
State and Federal tax rate of the Executive at the time of the
house sale, the Company will gross up this payment to cover
State and Federal taxes.
c. Closing costs up to $5,000 on the purchase of a residential
dwelling in the San Francisco Bay area during the Executive's
tenure at the Company. This amount will be taxable to the
Executive.
d. Under the above Sections (a) through (c), the offer of payment
for stated expenses will expire within twenty-four (24) months of
the Executive's hire date.
10. The total amount allowed under sections 8 and 9 will not exceed $66,000.
11. After the Executive has purchased a home in the San Francisco Bay area,
the Company will lend the Executive each month for a maximum period of
sixty (60) months an amount equal to the difference between the
Executive's monthly mortgage for the Executive's current residence and
the monthly mortgage payment for the Executive's home in the San
Francisco Bay area, up to a maximum of $1,000 per month. This loan will
be due on the earlier of (i) seven (7) years from the date of the first
monthly loan, or (ii) six months after the termination of the
Executive's employment with the Company. The loan will bear interest at
the applicable federal rate as defined in the Internal Revenue Code of
1986 and the regulation thereunder, and be secured by a trust deed on
the Executive's new residence. Under section 9, the offer of this loan
will expire within twenty-four (24) months of the Executive's hire date.
In the event the Company institutes a bankruptcy proceeding of itself or
all of its property under the laws of any jurisdiction prior to the loan
maturity date, the Company agrees to waive repayment of the loan.
12. Beginning in the Company's 1999 fiscal year, a bonus plan for the
Executive will be presented to the Board of Directors. The bonus plan
will allow for a maximum payout of $50,000 based upon the attainment of
goals for the Company's international business.
13. This offer is contingent upon Cardiac Pathways receiving the enclosed
Proprietary Information agreement which must be executed by you.
14. In accordance with Federal immigration law, on your first day of
employment, we
<PAGE> 5
JON HUNT, Ph.D.
Offer Letter
Page Five of 5
will need to see documents proving your identity and eligibility to work
in the United States. Documents which can satisfy these requirements are
a valid driver's license and a social security card or a United States
passport.
15. Your employment is at will, as defined under applicable law. If your
employment terminates for any reason, you shall not be entitled to any
payments, benefits, damages, awards or compensation other than as
provided above, or as otherwise be available in accordance with the
Company's established employee plans and policies at the time of
termination.
16. This offer of employment will expire on Monday, March 9, 1998 at 5: 00
p.m.
If the terms of this letter and the enclosed Proprietary Information agreement
are agreeable, please sign and return one copy of this letter and the agreement
to our Human Resources Department. We look forward to working with you at
Cardiac Pathways.
Best personal regards,
/s/ DAVID W. GRYSKA, CFO
- --------------------------------
FOR: William N. Starling
President and Chief Executive Officer
Enclosures
Accepted effective as of 9th March, 1998.
---------
Start date effective no later than April 6, 1998.
/s/ JON HUNT
- ------------------------------
JON HUNT
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-0762, 333-38049, 333-84777 and 333-69095) pertaining to the
1996 Employee Stock Purchase Plan, 1996 Director Option Plan, 1991 Stock Plan,
1998 Employee Stock Purchase Plan and 1998 Nonstatutory Stock Option Plan of
Cardiac Pathways Corporation of our report dated September 2, 1999, with
respect to the consolidated financial statements and schedule of Cardiac
Pathways Corporation included in its Annual Report (Form 10-K) for the year
ended June 30, 1999.
/s/ ERNST & YOUNG LLP
San Jose, California
September 27, 1999
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