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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 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 (I.R.S. EMPLOYER
OF 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 22, 2000 as reported on the Nasdaq National Market, was approximately
$7,002,306. 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 22, 2000, the registrant had outstanding 3,100,991 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 December 1, 2000.
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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 the Company's products will prove to be safe and effective; the
uncertainty of market acceptance of the Company's products and systems; the
Company's dependence on a major distributor; the Company's limited sales,
marketing and distribution experience; the risks associated with manufacturing
of the Company's products; the Company's inability to foster strategic
relationships with others in its industry; 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 exposure to product
liability claims; the Company's dependence on retention and attraction of key
employees; general economic and business conditions; the significant control and
rights attaching to certain preferred stock of the Company; and other factors
referenced herein.
ITEM 1. BUSINESS
OVERVIEW
Cardiac Pathways Corporation (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 Real-time Position Management ("RPM") Tracking System is the first and only
FDA-cleared advanced mapping system that allows the clinician to visualize and
navigate multiple catheter positions and placements in real time, in three
dimensions. By enabling clinicians to visualize catheters and their trajectory
in the heart in real time and in three dimensions, the Company believes its
systems may shorten mapping and ablation procedure time and provide safe and
more effective treatments of certain forms of cardiac tachyarrhythmias than
other current forms of therapy. The Company's strategy is to establish its
Chilli Cooled Ablation System and its suite of Real Time Position Management
("RPM") Tracking System products as the preferred means for the diagnosis and
treatment of certain forms of cardiac tachyarrhythmias.
During the year, the Company has seen significant increases in revenues
from sales of the Chilli Cooled Ablation Catheter in the U.S. and Europe, and
sales from the Radii-T mapping and ablation catheter in Japan. Sales of the
Trio/Ensemble diagnostic catheters to international customers remained
relatively constant during fiscal 2000. The Company received the U.S. Food and
Drug Administration ("FDA") 510 (k) clearance in March 2000 to begin marketing
the RPM Tracking System. This technology, developed by the Company, can be used
in many diagnostic electrophysiology procedures for real-time visualization of
catheters utilizing ultrasound technology. The RPM Tracking system is expected
to assist physicians in precisely manipulating catheters within the heart during
procedures, offering the potential for reductions in procedure times and
improved economic benefit to the hospital and physician. Also, in March 2000,
the Company received FDA Premarket approval ("PMA") to market its new Chilli RPM
Cooled Ablation
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Catheters incorporating the Company's RPM navigation technology for dynamic
real-time catheter navigation and visualization. The Chilli PMA includes
approval for the new 7 French platform with a bi-directional steering
capability. New models for the Chilli with and without the navigation
visualization technology were approved within the PMA. In addition, the Company
has received CE mark approval to market the RPM Tracking System and reference
and ablation catheters incorporating RPM tracking technology in Europe. Chilli
and the RPM Tracking System are currently undergoing regulatory approval in
Japan.
For the Company's products that 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 510(k) clearance for
the RPM Tracking System and PMA approval for the Chilli Cooled Ablation
Catheters with RPM Tracking, the Company has limited experience in
manufacturing, marketing and selling these products in commercial quantities. In
order to successfully implement its business plan, the Company must manufacture
and sell the RPM and Chilli Cooled Ablation Catheters 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. The Company expects to continue
operating at a loss at least through the end of fiscal year 2002 as it continues
to expend substantial funds to establish commercial-scale manufacturing
capabilities and to expand sales and marketing activities. In addition, there
can be no assurance the Company will achieve or sustain profitability in the
future.
THE NAMES CARDIAC PATHWAYS, CHILLI, REALTIME POSITION MANAGEMENT, TRIO,
ENSEMBLE, RADII AND RADII-T ARE ALL TRADEMARKS, SERVICE MARKS, REGISTERED
TRADEMARKS AND TRADENAMES OF CARDIAC PATHWAYS CORPORATION. THE PRODUCT NAMES,
TRADEMARKS OR SERVICE MARKS OF ANY OTHER COMPANY APPEARING IN THIS REPORT ARE
THE PROPERTY OF THEIR RESPECTIVE HOLDERS.
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 rate lower than 60 beats per
minute, are generally treated by implantation of a pacemaker that delivers
electrical impulses to increase the heart rate.
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Cardiac arrhythmias characterized by an abnormally high 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 tachycardia 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.
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 has developed 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 3D graphics 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 potentially 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 and
require extensive use of X-ray fluoroscopy to navigate and position catheters
accurately within the heart. Limitations in this approach are caused by the
infrequent point-in-time images available through traditional X-ray technology
that can impede a physician's ability to find key sites in the heart and
accurately return to those sites later in the procedure to deliver radio
frequency ("RF") ablation. As a result, patients and clinicians are subjected to
lengthy procedure times and significant exposure to ionizing radiation, and
because of the lack of precision, the efficacy of these forms of treatment is
sub-optimal. The Company believes its systems may 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. The Company believes
that the ability to make deeper and wider lesions enables more effective
treatment.
RPM Tracking System Technology for Complex Arrhythmias. The Company's suite
of RPM Tracking System products consists of the Chilli RPM Cooled Ablation
Catheter, a line of diagnostic and reference catheter products and a
computer-based system for recording cardiac electrograms. The catheters contain
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ultrasound transducers that are used to precisely triangulate, in real-time, the
position of catheter electrodes within the heart during the diagnostic and
ablation procedures. The supporting computer system combines real-time 3D
graphics, displaying catheter images while recording associated intracardiac
electrical signals. The Company believes RPM Tracking System technology will
assist physicians to precisely manipulate catheters within the heart during
diagnostic and ablation procedures, minimize the use of fluoroscopy and to
carefully document intracardiac sites involved in tachyarrhythmias enabling
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 RPM Tracking System, as standards of care
for rapid assessment, mapping, diagnosis, navigation and treatment of cardiac
tachyarrhythmias. The following are the key elements of the Company's strategy:
Provide integrated system solutions for diagnosing and treating cardiac
tachyarrhythmias. The Company's integrated RPM Tracking System products are
designed to quickly identify and map the source of an arrhythmia. The Company's
Chilli Cooled Ablation Catheters integrating RPM Tracking Technology and its
radiofrequency generator is 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 arryhthmias including ventricular
tachycardia. The Company also believes its integrated RPM Tracking System
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.
Market growth of the Chilli Cooled Ablation Catheter. The Company intends
to promote and support the continued growing base of acceptance and utilization
of the Chilli Cooled Ablation Catheter platform in the U.S. and Europe. The
Company is committed to expanding marketing efforts, customer support and
manufacturing capacity to support Chilli growth.
Achieve market penetration and acceptance of the RPM Tracking System. The
Company intends to increase the size and scope of the RPM Tracking System
installed base in the United States and in certain international markets. The
Company believes that the clinical utility of the RPM Tracking System 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 and marketing and sales activities to position this proprietary
suite of products as the preferred solution 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. The Company has sold RPM Tracking
Systems to Japan Lifeline Company, Ltd. ("Japan Lifeline"), the Company's
distributor in Japan, who is advancing the regulatory approval process for RPM
in that market.
Continue to build upon relationships with electrophysiologists. The Company
has developed strong relationships with prominent electrophysiologists worldwide
who have been involved in, and whom the Company expects to continue to be
involved, in clinical and product development. The Company intends to continue
to build these substantial 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
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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.
Pursue strategic relationships with others. The Company believes that
certain multinational medical device companies may find our technologies
attractive for integrating into their own product strategies, or for
distributing to their own customers. The Company intends to pursue beneficial
opportunities to leverage its extensive intellectual property portfolio and to
extend its technology platforms through licensing agreements and strategic
partnerships with others in the industry.
Maintain technological leadership and achieve market leadership. The
Company intends to become a market leader of commercialized integrated systems
to diagnose and treat cardiac tachyarrhythmias. The Company believes that its
technological innovations have overcome the principal obstacles to the
development of such systems. In addition, the Company intends to continue
investing 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 and applications covering a
number of fundamental aspects of the Company's Chilli Cooled Ablation System,
RPM Tracking System and other products. The Company owns 64 United States issued
patents and 4 foreign issued patents. The Company owns exclusive field-of-use
license on 26 United States issued patents. In addition, the Company has 8
United States pending patent applications, of which two are licensed. The
Company has also filed or licensed 22 corresponding foreign patent applications
that are currently pending in Europe and/or Japan. Four of the pending foreign
patent applications are Patent Cooperation Treaty ("PCT") applications, with
Europe and Japan as designated countries for filing at the national phase. One
of the PCT applications is licensed. The Company's 64 United States patents
expire at various dates ranging from 2012 to 2020 and the 4 foreign issue
patents expire at various dates ranging from 2012 to 2015. The exclusive field
of use license of 26 United States issued patents expires at various dates
ranging from 2013 to 2020.
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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
undergoing regulatory in certain international markets:
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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
approved March 2000 for
integration with the RPM
Tracking System. CE Mark
Certification in April 2000
for marketing in Europe.
Undergoing regulatory
approval process in Japan.
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.
RPM Tracking System Products A line of diagnostic 510(k) clearance in March
catheter products and a 2000. PMA approval for
computer-based system for integration of Chilli Cooled
recording cardiac Ablation Catheter in March
electrograms. The RPM 2000. CE Mark Certification
Tracking System uses to market with Chilli Cooled
ultrasound technology to Ablation Catheters in April
determine catheter 2000. Undergoing regulatory
positions. approval process in Japan.
Radii Mapping and Radii-T A family of deflectable Radii-T is available in
Mapping and Ablation catheters for mapping and certain International
Catheters ablation of supraventricular markets. Received CE Mark
tachycardia. Certification in April 1998.
Radii received U.S. 510(k)
clearance in January 1999
for diagnostic applications.
Trio/Ensemble Diagnostic A set of three uniquely 510(k) submitted by Arrow
Catheters small multi-electrode International, Inc.
catheters and a triple-lumen ("Arrow") and cleared in
guide catheter for use in December 1995. Available in
diagnostic electrophysiology the United States and
Procedures international markets.
</TABLE>
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(1) "Approved" or "cleared" means that the Company has received Food and Drug
Administration ("FDA") permission to sell the product in the United States
pursuant to a PMA application or a application under section 510(k) of the
Food, Drug and Cosmetics Act of 1938, as amended (a "510(k)" application).
The following are detailed descriptions of the Company's core products:
Chilli Cooled Ablation Catheter. The Chilli Cooled Ablation Catheter
incorporates Real-time Position Management navigation technology and 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 Cooled
Ablation Catheter is a minimally invasive device designed to treat ventricular
tacharrhythmia 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
and is the only FDA-approved closed-
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loop cooled ablation system available in the world today. A logically integrated
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 energy 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
programmable 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.
RPM Tracking System Products. RPM Tracking System Products include
catheters and computer systems that allow the recording, viewing and annotation
of diagnostic electrophysiology ("EP") catheter and electrode positions. The
specialized diagnostic catheters contain ultrasound transducers that are used to
determine and graphically display 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 distances 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.
The RPM Tracking System records, amplifies and displays the unique
electrical activity recorded from catheter electrodes that have been passed into
the heart. The RPM Tracking 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.
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The RPM Tracking System is unique in that the same computer and software
base have been leveraged to provide both the signal recording and 3D position
mapping on a single platform.
The Company's RPM Tracking System Products will require additional
development before they can be marketed in certain international markets, other
than Europe. There can be no assurance that the Company's development efforts
will be successful or that the RPM 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 Chilli Cooled Ablation System and the RPM
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 and RPM
Tracking System Products or the component catheters and equipment will gain
significant 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.
Radii-T Mapping and Ablation Catheters. The Company's Radii-T 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. The radius of the
deflectable curve may be adjusted by the clinician. This feature allows small
catheter tip movements and slight curve changes that are necessary to reach
different anatomical sites. Some Radii-T 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-T is compatible with other manufacturer's radiofrequency generators for
use in supraventricular tachycardia ablation procedures. The Radii-T
supraventricular tachycardia mapping and ablation catheters are distributed
internationally by distributors.
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. In
the United States, Arrow distributes the products and Arrow and a limited number
of other distributors market the Trio/Ensemble on the Company's behalf in
certain international markets. In Japan and southern Europe, the Trio/Ensemble
catheters are marketed through separate distributor agreements.
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CLINICAL TRIALS
The Company discontinued a clinical trial for a second version for the
Nexus Linear Lesion Catheter for the treatment of atrial fibrillation in July
1999. The Company has also discontinued the Mercator product line.
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 perfecting the design of the
RPM Tracking System Products. With respect to the Chilli Cooled Ablation System,
because ablation treatment of cardiac arrhythmias is relatively new, 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 and RPM Tracking
System through a direct sales force in the United States and through
distributors internationally. The Radii supraventricular tachycardia mapping
catheter and the Radii-T mapping and ablation catheters, Trio/Ensemble
diagnostic catheters 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. In
Europe and Japan, the Company has agreements with distributors for distribution
of the Company's commercialized products. The agreements in Europe are with
three distributors: Izasa, S.A., Curative EP 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 of Radii-T and Trio/Ensemble to
Japan Lifeline, the Company's distributor in Japan, accounted for 49%, 52% and
80%, of the Company's net sales in fiscal 2000, 1999 and 1998, respectively.
International sales accounted for 67%, 78% and 87% of the Company's net sales in
fiscal 2000, 1999 and 1998, 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 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. 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.
The Company has established a sales and marketing organization that
supports direct sales in the U.S. and manages distributors internationally. The
Company intends to leverage its existing field clinical engineers' and
specialists' technical expertise to support the installed base of RPM Tracking
System Products. 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 has expanded 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 application engineers to provide technical expertise. The
role of the sales representative will be to
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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 specialists will provide an appropriate
balance of professional selling skills while maintaining a high level of
technical expertise in the field.
There can be no assurance that electrophysiologists will accept the RPM
Tracking System Products on a commercial basis. Failure to gain market
acceptance by such systems or products would have a material adverse effect upon
the Company's business, financial condition and results of operations.
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 off 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 and market 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 planned
sales growth will require substantial efforts as well as significant management
and financial resources. There can be no assurance that the Company will be able
to continue 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 Chilli Cooled Ablation Catheters, Radii-T
mapping and ablation catheters, Trio/Ensemble diagnostic catheters and RPM
Tracking Systems through distributors in certain international markets. All
sales of the Company's products to date have been denominated in U.S. dollars.
In addition, the Company plans to market its other products in international
markets, subject to receipt of required regulatory approvals. 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.
STRATEGIC RELATIONSHIPS
The Company intends to pursue strategic relationships with corporations and
research institutions with respect to the research, development, international
regulatory approval, manufacturing, distributing and marketing of certain of its
products. Although the Company intends to pursue 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.
The Company has manufacturing and distribution agreements with Arrow, a
manufacturer and distributor of medical products for critical care medicine,
interventional cardiology and radiology. Under the manufacturing agreement,
Arrow has the exclusive right to manufacture and sell the Trio/Ensemble
diagnostic catheters (the "Products") throughout the entire world, except in 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 year term in March 2000, the Company has the
option to change the distribution right to be nonexclusive. The Company has not
yet exercised this option. The term of
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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 by Arrow and for distribution and sale outside of the Territory by the
Company. The royalty payments for the manufacturing right include a
nonrefundable, prepaid royalty of $3 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 shall 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 product supplied 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
developing improvements to the Chilli Cooled Ablation System and the RPM
Tracking System. This includes developing 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, improve
manufacturing reliability and reduce component and manufacturing costs.
Research and development expenses which also includes clinical and certain
regulatory expenses for fiscal 2000, 1999 and 1998 were $6.9 million, $12.1
million and $14.4 million, respectively.
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 Quality System Regulations. The
manufacturing process for the tracking, mapping 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 limited experience manufacturing its products in the
volumes that will be necessary for the Company to achieve significant increases
in commercial sales, and there can be no assurance that reliable, high-volume
manufacturing capacity can be established or maintained at commercially
reasonable costs. The Company may need to further 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 achieve profitable growth for its catheters and systems. Any
inability of the Company to establish and maintain large-scale manufacturing
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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 1999, the Company's facilities and manufacturing process were
inspected by the FDA in an inspection related to a PMA approval application.
This inspection resulted in a recommendation for approval by the FDA district
office. The Company has received ISO9001/EN46001 certification under the
European Medical Device Directive 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 systems and products. 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, RPM Tracking System
and other products. The Company owns 64 United States issued patents and 4
foreign issued patents. The Company owns an exclusive field-of-use license on 26
United States issued patents. In addition, the Company has 8 United States
pending patent applications, of which two are licensed. The Company has also
filed or licensed 22 corresponding foreign patent applications that are
currently pending in Europe and/or Japan. Four of the pending foreign patent
applications are Patent Cooperation Treaty ("PCT") applications, with Europe and
Japan as designated countries for filing at the national phase. One of the PCT
applications is licensed. The Company's 64 United States patents expire at
various dates ranging from 2012 to 2020 and the 4 foreign issues patents expire
at various dates ranging from 2012 to 2015. The exclusive field of use license
of 26 United States issued patents expires at various dates ranging from 2013 to
2020.
The Company's patents and patent applications relate to a number of aspects
of the Company's technology, including the technology related to 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 multipart 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
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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 tracking and ablation systems. 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 included payments made by the Company to the licensor
of $1,000,000 each in August 1999 and January 2000.
In addition to patents, the Company relies on trade secrets and proprietary
know-how to compete. The Company seeks to protect its trade secrets and
proprietary know-how, in part, through appropriate confidentiality and
proprietary information agreements. These agreements generally provide that all
confidential information developed or made known to individuals by the Company
during the course of the relationship with the Company is to be kept
confidential and not disclosed to third parties, except in specific
circumstances. The agreements also generally provide that all inventions
conceived by the individual in the course of rendering service to the Company
shall be the exclusive property of the Company. There can be no assurance that
proprietary information or confidentiality agreements with employees,
consultants and others will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known to or independently developed by competitors.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the United States Patent and Trademark
Office ("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 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
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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 and Johnson, St. Jude Medical,
Medtronic, Inc. and Endocardial Solutions, 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.
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 clearance or 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
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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. 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 Investigational Device Exception ("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.
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 a new PMA. 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 devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals are 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.
Current FDA enforcement policy prohibits the marketing of cleared or
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.
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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.
Manufactures are also required 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.
The Company has 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
otherwise comply with extensive regulations regarding safety and manufacturing
processes and quality. These regulations, including the requirements for
approvals 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 & 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 European Union has promulgated rules, which require that medical
devices 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 from its ISO Certification
Registrar for its manufacturing facility in Sunnyvale, California. Furthermore,
in January 1998, the Company received the right to affix the CE mark to its
Chilli Cooled Ablation System. In April 1998, the Company received the right to
affix the CE mark to its Radii-T catheters. In July 1998, the Company received
the right to affix the CE mark to its Trio/Ensemble catheters. In April 2000,
the Company received CE mark certification for the RPM Tracking System, and for
its Chilli Cooled Ablation Catheters incorporating Real-time Position Management
navigation technology. 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
17
<PAGE> 18
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. See "-- Manufacturing."
The Company has sold RPM Tracking Systems to Japan Lifeline, the Company's
distributor in Japan, who is advancing the regulatory approval process for RPM
in that market.
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 or 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 DRG's. 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 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
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 arrhythmias will typically not recur after treatment with the
Company's procedures. The Company anticipates that hospital administrators and
18
<PAGE> 19
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.
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 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 $5.0 million per occurrence and $5.0
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 may require increased product liability coverage as
commercialization of its products evolves. 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
As of June 30, 2000, the Company had 141 full-time employees, 22 of whom
were engaged directly in research, development, regulatory and clinical
activities, 73 in manufacturing and quality assurance and 46 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 has undergone significant changes in management during fiscal
2000. Our new Chief Executive Officer, Tom Prescott, rebuilt our entire senior
management team with experienced people for sales and marketing, operations,
finance and human resources, who in turn hired new personnel into their
respective areas of operation. We were able to retain an outstanding Vice
President of Research and Development who has been with the company since 1992.
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
19
<PAGE> 20
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 increasing
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........... 45 President, Chief Executive Officer and Director
Eldon M. Bullington.......... 49 Vice President, Finance and Chief Financial Officer
Michael N. Forrest........... 42 Vice President, Human Resources
Sandy L. Miller.............. 58 Vice President, Operations
Richard E. Riley............. 45 Executive Vice President, Research and Development
Robert K. Weigle............. 41 Vice President, Worldwide Sales and Marketing
</TABLE>
Thomas M. Prescott has been President and Chief Executive Officer of the
Company and a member of the Board of Directors since May 1999. Prior to joining
the Company, Mr. Prescott held senior management positions in the medical device
and medical systems industries. 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.
Eldon M. Bullington has been Vice President and Chief Financial Officer of
the Company since January 2000. Prior to joining the Company, Mr. Bullington
held financial management positions in the computer hardware, telecommunications
and wireless information services industries. Mr. Bullington was Vice President,
Finance and Chief Financial Officer of Saraide, Inc. from September 1998 to
April 1999. Mr. Bullington served as Vice President and Corporate Controller of
VeriFone, Inc. from February 1995 to June 1998. Prior to that time, Mr.
Bullington served in different roles with Radius, IBM, Rolm Systems and Memorex.
Michael N. Forrest has been Vice President, Human Resources of the Company
since July 2000. Mr. Forrest held Human Resource management positions in the
medical device and equipment manufacturing industries. Mr. Forrest held various
management positions in Human Resources at DuPuy Orthotech from 1995 through
1999. Mr. Forrest previously served in Human Resources for Whirlpool and Raco,
Inc.
Sandy L. Miller has been Vice President, Operations of the Company since
January 2000. Prior to joining the Company, Ms. Miller held several management
positions in medical device research and development and manufacturing
companies. Ms. Miller was Vice President, Operations of the Aneurx division of
Medtronic during 1998 and 1999. Ms. Miller consulted for Ventritex/St. Jude
Medical during 1998. Ms. Miller has also served as Vice President, Operations of
Micrus Corporation from 1997 to 1998 and for Ventritex from 1994 to 1997. Prior
to that, Ms. Miller served in various roles at Boston Scientific and
Telectronics Pacing Systems.
20
<PAGE> 21
Richard E. Riley has been Executive Vice President, Research and
Development 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., a medical device company.
Robert K. Weigle has been Vice President, Worldwide Sales & Marketing since
joining the Company in January 2000. Prior to joining the Company, Mr. Weigle
held several senior management positions with leading companies specializing in
cardiovascular and neurosurgical devices. Mr. Weigle had served as Senior Vice
President, Worldwide Sales and Marketing for Cardima Corp. Prior to that, Mr.
Weigle was Vice President of Sales and Marketing at Via Medical Corporation from
November 1996 to August 1999. Prior to that Mr. Weigle was Vice President of
Sales at the NeuroCare Group of Companies from October 1993 to October 1996. Mr.
Weigle has also held several sales and marketing management positions at Baxter
Healthcare.
ITEM 2. PROPERTIES
The Company leases approximately 36,000 square feet in Sunnyvale,
California, for production, research and development, clinical research, sales
and marketing and finance and administration. 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, and the lease is not
expected to be renewed. The Company believes that the main facility will be
adequate to meet its needs through fiscal 2001.
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
Not applicable.
21
<PAGE> 22
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.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
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
FISCAL YEAR ENDED JUNE 30, 2000
First Quarter............................................... $ 5 $ 3/4
Second Quarter.............................................. $ 9 14/16 $ 2
Third Quarter............................................... $11 1/2 $ 3
Fourth Quarter.............................................. $ 5 44/64 $ 3 3/8
</TABLE>
As of September 22, 2000, there were approximately 148 holders of record of
the Common Stock.
The Company has never declared or paid cash dividends on its capital common
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 on common stock in the foreseeable future. As documented in the
Series B Convertible Preferred Stock Purchase Agreement, when, as and if
dividends are declared by the Board of Directors of the Company, the holders of
the Company's Series B Convertible Preferred Stock are entitled to receive
cumulative dividends at a rate per share equal to 11% per annum of the initial
purchase price of shares of 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 common stock or other class of stock junior to the
Series B Convertible Preferred Stock. In the event that (i) the Company has not
redeemed the Series B Convertible Preferred Stock prior to May 2004 and (ii) the
holders of Series B Convertible Preferred Stock have requested such a
redemption, 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
In July 1999, the Company's stockholders authorized and the Company
completed a $32 million offering of Series B Convertible Preferred Stock at
$1,000 per share to a group of accredited investors. In connection with this
Series B Convertible Preferred Stock financing, the Company raised $31.5
million, net of issuance costs. In June 2000, one of the holders of Series B
Convertible Preferred Stock converted 5,000 shares of Series B Convertible
Preferred Stock into 1,000,000 shares of Common Stock. The 1,000,000 shares of
common stock were issued as unregistered common stock to an affiliate of the
Company subject to regulatory restrictions and holding period requirements. The
remaining 27,250 shares of Series B Convertible Preferred Stock are convertible
at the option of the holders into 5.45 million shares of the Company's Common
Stock.
22
<PAGE> 23
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 30, 2000:
<TABLE>
<CAPTION>
SHARES PERCENTAGE
--------- ----------
<S> <C> <C>
Outstanding common stock as of June 30, 2000................ 3,078,486 36.1%
New common stock issuable upon conversion of the Series B
Convertible Preferred Stock............................... 5,450,000 63.9
--------- -----
Total............................................. 8,528,486 100.0%
========= =====
</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 interim funding provided to the Company.
The holders of Series B Convertible Preferred Stock are entitled to
significant rights, preferences and privileges as a result of their investment.
The two largest holders of Series B Convertible Preferred Stock control
three of the five seats (60%) on the board of directors. The members of the
Company's board of directors include Thomas M. Prescott, President and CEO of
the Company, Mark J. Brooks, Anchie Y. Kuo, M.D., M. Fazle Husain, nominees of
the holders of Series B Convertible Preferred Stock and William N. Starling, a
former director, chief executive officer and president of the Company. The
consent of the directors nominated by the holders of the Series B Convertible
Preferred Stock will be required to increase the number of directors above the
number currently in office.
Each share of Series B Convertible Preferred Stock is convertible into 200
shares of common stock. The conversion ratio of the Series B Convertible
Preferred Stock is subject to adjustment for price based antidilution.
As documented in the Series B Convertible Preferred Stock Purchase
Agreement, the holder of Series B Convertible Preferred Stock are entitled to a
cumulative dividend, when, as and if declared by the board of directors of the
Company, at a rate per share equal to 11% annum of the initial purchase price of
the Series B Convertible Preferred Stock. 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, or
any class of stock junior to the Series B Convertible Preferred Stock. After
such a distribution payment, any remaining proceeds will be distributed ratably
among the holders of common stock and Series B Convertible Preferred Stock.
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 by laws 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;
4. Issue any shares of common stock, other than
23
<PAGE> 24
(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 are set forth on pages F-1
through F-20.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales............................ $ 6,821 $ 4,406 $ 2,420 $ 2,409 $ 1,684
Manufacturing and operating cost:
Manufacturing start-up and cost of
goods sold...................... 6,868 4,249 2,828 2,508 2,408
Research and development........... 6,947 12,115 14,353 11,756 6,819
Selling, general and
administrative.................. 10,063 6,685 4,092 3,147 1,981
-------- -------- -------- -------- -------
Total manufacturing and
operating cost........... 23,878 23,049 21,273 17,411 11,208
-------- -------- -------- -------- -------
Loss from operations................. (17,057) (18,643) (18,853) (15,002) (9,524)
Other income, net.................... 690 77 1,354 2,136 155
-------- -------- -------- -------- -------
Net loss............................. (16,367) $(18,566) $(17,499) $(12,866) $(9,369)
======== ======== ======== =======
Preferred stock dividend............. 3,300
Beneficial conversion feature related
to the issuance of the Series B
Preferred Stock.................... 960
--------
Net loss applicable to common
stockholders....................... $(20,627)
========
Net loss per share -- basic and
diluted............................ $ (10.05) $ (9.34) $ (9.07) $ (6.86)
======== ======== ======== ========
Shares used in computing net loss per
share -- basic and diluted......... 2,053 1,987 1,930 1,876
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------
2000 1999 1998 1997 1996(1)
------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................... $12,625 $ 2,340 $24,517 $41,567 $52,873
Working capital (deficit)............... 12,173 (745) 22,351 39,511 52,028
Total assets............................ 21,765 8,906 30,935 46,655 57,188
Long-term liabilities, net of current
portion............................... 4,900 2,974 9,248 9,077 8,877
Accumulated deficit..................... (96,351) (79,983) (61,418) (43,919) (31,053)
Stockholders' equity (deficit).......... 12,597 (395) 17,485 33,992 46,051
</TABLE>
25
<PAGE> 26
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 the expectations of operating
losses, the statements in the second paragraph of "Overview" relating to the
range of clinical utility for the RPM Tracking System and the potential
reduction in procedure times, the statements in the fourth paragraph of
"Overview" relating to the manufacturing, marketing and distribution of the
Company's products, the statements in the last two sentences of "Cost of Goods
Sold" relating to the expectations for gross margins, the statements in the last
sentence of the first paragraph of "Impact of Adoption of New Accounting
Standards" regarding FAS 133, the statements in the last sentence of the second
paragraph of "Impact of Adoption of New Accounting Standards" regarding SAB 101,
the statements in the second paragraph of "Liquidity and Capital Resources"
regarding the Company's expected liquidity and capital needs, the statements in
the last sentence of the fourth paragraph of "Liquidity and Capital Resources"
regarding the Company's expected capital expenditures, the statements in the
section of "Factors That May Impact Future Operations" entitled "Limited
Operating History, History of Losses and Expectations of Future Losses" relating
to expectations of operating losses and the statement in the third paragraph in
the section of "Factors That May Impact Future Operations" entitled "Employees"
relating to the Company's need to expand its operations and hire new personnel.
OVERVIEW
The Company is currently shifting from a broad-based research & development
(R&D) and clinical development oriented company to one focused on expansion of
marketing, sales, distribution, customer support and manufacturing capacity. The
Company has experienced significant operating losses since inception and as of
June 30, 2000 had an accumulated deficit of approximately $96.4 million. During
the year, the Company has seen significant increases in revenues from sales of
the Chilli Cooled Ablation Catheter in the U.S. and Europe, and sales increases
of the Radii-T mapping and ablation catheter in Japan. Sales of the
Trio/Ensemble diagnostic catheters to international customers have remained
relatively constant during fiscal 2000. The Mercator diagnostic mapping baskets
and related equipment have been discontinued in order for the Company to focus
its resources on its two platforms; the Chilli Cooled Ablation Catheter and the
new RPM Tracking System. The Company expects to continue operating at a loss at
least through the end of fiscal year 2002 as it continues to expend substantial
funds to establish commercial-scale manufacturing capabilities and to expand its
sales and marketing activities.
The Company received FDA 510(k) clearance in March 2000 to begin marketing
the RPM Tracking System. This technology, developed by the Company, can be used
in many diagnostic electrophysiology procedures for real-time three dimensional
visualization of catheters utilizing ultrasound technology. The RPM Tracking
system is expected to assist physicians in precisely manipulating catheters
within the heart during procedures, offering the potential for reductions in
procedure times and improved economic benefit to the hospital and physician.
In March 2000, the Company also received FDA PMA approval for the Chilli
Cooled Ablation Catheter, incorporating the Company's Real-time Position
Management navigation technology for dynamic real-time catheter navigation and
visualization. The Chilli PMA includes approval for the new 7 French platform
with a bi-directional steering capability. New models for the Chilli with and
without the RPM navigation visualization technology were approved within the
PMA. In addition, the Company has received CE mark approval to market the RPM
Tracking System, and reference and ablation catheters incorporating RPM tracking
technology in Europe.
For the Company's products that 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 510k clearance for
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the RPM Tracking System and PMA approval for the Chilli Cooled Ablation
Catheters with RPM tracking, the Company has limited 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 RPM and Chilli Cooled Ablation Catheters in commercial quantities
and 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."
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999
Net Sales. The Company's net sales increased 55% to $6.8 million for fiscal
2000 compared to $4.4 million for fiscal 1999. During the year, the Company has
seen significant increases in revenues from sales in the Chilli Cooled Ablation
Catheter in the United States and Europe, and sales increases from the Radii-T
mapping and ablation catheter in Japan. Sales of the Trio/Ensemble diagnostic
catheters to international customers have remained relatively constant during
fiscal 2000.
In December 1995, the Company received $3.0 million pursuant to a royalty
agreement with Arrow International Inc. ("Arrow"). This amount was recorded as
deferred royalty income and will be amortized to income for those Trio/Ensemble
catheters that Arrow manufactures and sells or, at a minimum, ratably over the
period for which the related technology patents expire. $300,000 of royalty
income related to the Arrow agreement was recognized in fiscal 2000.
Cost of Goods Sold. Cost of goods sold primarily includes raw materials
costs, catheter fabrication costs, system assembly costs and test costs. Cost of
goods sold was $6.9 million and $4.2 million for fiscal 2000 and 1999,
respectively. Cost of goods sold for fiscal 2000 included approximately $250,000
of costs associated with discontinuing the Mercator Atrial Mapping Basket
product line, approximately $450,000 of costs associated with introduction of
the RPM product line and production increases for the Chilli product line. Gross
margins were approximately break-even for fiscal 2000 and $200,000 for fiscal
1999. The Company expects that its gross margins will continue to be impacted
negatively by the cost of bringing the RPM products on line during fiscal 2001.
The Company is currently implementing manufacturing process improvements, and
these improvement, together with volume related cost improvements, are designed
to have positive effects on gross margins.
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 43% to $6.9 million for fiscal 2000 from
$12.1 million for fiscal 1999. The decrease in research and development expenses
was primarily attributable to a reduction in the number of engineering projects
underway as the Company concentrated its activities on the development,
refinement and launch of the RPM Tracking System and the new Chilli Cooled
Ablation Catheter.
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 $10.1
million for fiscal 2000 from $6.7 million for fiscal 1999. The increase in
selling, general and administrative expenses resulted primarily from increased
marketing and sales infrastructure supporting the North America and European
markets.
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Other Income (Expense), Net. Net other income was $0.7 million for fiscal
2000 compared to $0.1 million for fiscal 1999. Relative increases in net other
income during fiscal 2000 compared to the prior year was the result of increased
interest income on significantly higher cash, cash equivalent and short-term
investment balances.
Net Loss. The net loss applicable to common stockholders for fiscal 2000
was $20.6 million or $10.05 per share compared to a net loss of $18.6 million or
$9.34 for fiscal 1999.
Net Operating Loss Carryforwards. As of June 30, 2000, the Company's
reported net operating loss carryforwards were approximately $89.6 million and
$14.5 million for federal and state income tax purposes, respectively. If not
utilized, the net operating loss carryforwards will expire at various dates
beginning in the years 2001 through 2020. In addition, the net operating loss
carryforwards are subject to annual limitations as a result of the code's
ownership change provisions.
Impact of Adoption of New Accounting Standards.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted in years beginning after June 15,
2000. The Company has not in the past used, and does not anticipate in the
future using, derivative instruments, and the Company does not expect that the
adoption of FAS 133 will have a significant impact on its financial condition or
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") that must be adopted in the quarter ended June 30, 2000. SAB 101
summarizes certain areas of the Staff's views in applying generally accepted
accounting principles to revenue in financial statements. Although the Company
believes that its current revenue recognition principles comply with SAB 101,
additional guidance is expected to be issued by the SEC staff and the Company
will evaluate the affect of adopting SAB 101 at that point.
YEARS ENDED JUNE 30, 1999 AND 1998
Net Sales. The Company's net sales in fiscal 1999 resulted primarily from
limited sales of Chilli Cooled Ablation Catheters, Radii supra ventricular
tachycardia mapping and ablation catheters, Trio/Ensemble diagnostic catheters,
Mercator mapping baskets, Radio frequency 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.
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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.
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.
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.
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,
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.
In July 1999, the Company raised net proceeds of $31.5 million through a Series
B Convertible Preferred Stock financing. As of June 30, 2000, the Company had
$12.6 million in cash, cash equivalents and short-term investments.
The Company's liquidity and capital requirements are such that in order for
the Company to continue to manufacture, develop and market its core products,
the Company will be required to raise additional funds through public or private
financing, collaborative relationships or other arrangements prior to the end of
fiscal 2001. There can be no assurance that such additional funding will be
available on terms acceptable to the Company, if at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve additional restrictive covenants. Collaborative
arrangements with a capital raising component may require the Company to
relinquish its rights to certain of its technologies, products or marketing
territories. The failure of the Company to raise capital when needed will have a
material adverse effect on the Company's business, financial condition and
results of operations. The factors described in the next section, "Factors That
May Impact Future Operations" and elsewhere in this Report will impact the
Company's future capital requirements and the adequacy of its available funds.
Net cash used in operating activities was $14.1 million, $18.4 million and
$16.8 million in fiscal 2000, 1999 and 1998, respectively. For each of these
periods, the net cash used in operating activities resulted primarily from net
losses. Net cash used in investing activities was $8.2 million for fiscal 2000,
and net cash provided by investing activities was $16.7 million and $17.7
million in fiscal 1999 and 1998, respectively. Net cash used and provided by
investing activities resulted primarily from purchases, maturities and sales of
short-term investments, offset in part by purchases of equipment and licenses.
Net cash provided by financing
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activities was $28.4 million and $1.3 million in fiscal 2000 and fiscal 1998,
respectively, and net cash used in financing activities in fiscal 1999 was $3.2
million. The net cash provided by financing activities in fiscal 2000 resulted
primarily from the proceeds of the Series B Convertible Preferred stock
transaction, offset in part by repayment of the bridge loan.
As of the end of fiscal 2000, the Company had capital equipment of
approximately $9.6 million, less accumulated depreciation and amortization of
approximately $6.1 million, to support its product development, manufacturing
and administrative activities. The Company had financed approximately $4.0
million from capital lease obligations through fiscal 2000. The Company expects
capital expenditures to increase over the next several years as it acquires
equipment to support manufacturing and development activities.
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 the end of fiscal 2000, the Company had an accumulated deficit of
$96.4 million. To date, the Company has generated only limited revenues from
sales of its products and expects its operating losses to continue through at
least the end of fiscal 2002 as it continues to expend funds to conduct its
research and development activities, establish commercial-scale manufacturing
capabilities and expand its sales and marketing activities. There can be no
assurance that any of the Company's products for diagnosis and treatment of
ventricular tachycardia and other arrhythmias, particularly the RPM Tracking
System or Chilli Cooled Ablation Catheter, 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 and the expansion of sales
and marketing activities and competition.
No Assurance that Company's Products will Prove to be Safe and Effective
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 perfecting the design of the
RPM Tracking System. With respect to the Chilli Cooled Ablation System, because
ablation treatment of cardiac arrhythmias is relatively new, 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.
No Existing Market
The Company's future success will depend upon the successful
commercialization of the Chilli Cooled Ablation Catheter and RPM Tracking
System. These products have only recently received FDA approval and clearance to
be commercialized in the United States for the treatment of certain forms of
cardiac tachyarrhythmias. The Company has to date demonstrated only limited
ability to commercialize these new products. There can be no assurance that
these products will gain any significant degree of market acceptance among
physicians, patients, and health care payors. The Company believes that
physicians' acceptance of procedures using the Company's RPM Tracking System
will be essential for market acceptance of such system. Even though the clinical
efficacy of the system has been established, electrophysiologists, cardiologists
and other physicians may elect not to recommend the use of the RPM Tracking
System for any number of reasons. There can be no assurance that this system
will be successfully commercialized for the approved product set in the United
States and Europe. There can be no assurance of the ability to obtain regulatory
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approval in certain other international markets where RPM Tracking System 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 the system will require training of
electrophysiologists, and the time required to complete such training could
adversely affect market acceptance. Failure of the 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
RPM Tracking System achieves market acceptance, the Company will be required to
significantly ramp manufacturing operations to produce sufficient quantities of
the product to satisfy customer demand. Any failure to manufacture the RPM
Tracking System in quantities sufficient to satisfy demand will materially
adversely affect the Company's business, financial condition and results of
operations.
Marketing and Distribution
Establishing a marketing and sales capability sufficient to support planned
sales growth will require substantial efforts and significant management and
financial resources. There can be no assurance that the Company will be able to
continue 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 Chilli Cooled Ablation Catheters, Radii-T
mapping and ablation catheters, Trio/Ensemble diagnostic catheters and RPM
Tracking System Products through distributors in certain international markets.
All sales of the Company's products to date have been denominated in U.S.
dollars. In addition, the Company plans to market its other products in
international markets, subject to receipt of required regulatory approvals.
Changes in overseas economic conditions, currency exchange rates, foreign tax
laws, or tariffs or other trade regulations could have a material adverse effect
on the Company's ability to market its products internationally and therefore on
its business, financial condition and results of operations.
Major Distributor; Dependence on Japan Lifeline
The Company currently relies upon international distributors of specialty
cardiovascular products to market and sell its products. A large percentage of
the Company's revenues are derived from sales to its Japanese distributor, Japan
Lifeline. Sales to Japan Lifeline accounted for 49%, 52% and 80%, of the
Company's net sales in fiscal 2000, 1999 and 1998, respectively. International
sales accounted for 67%, 78% and 87% of the Company's net sales in fiscal 2000,
1999 and 1998, respectively. In fiscal 2001, the Company anticipates that Japan
Lifeline will continue to account for a significant 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
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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
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. For some
components, there is currently a long lead-time between purchases and the
receipt of shipments. For those components from a single source, the vendor's
inability to supply such components in a timely manner could have a material
adverse effect on the Company's ability to manufacture the RPM Tracking System
and other diagnostic and ablation catheters and therefore on its business,
financial condition and marketing efforts.
The Company has limited 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. The
Company needs 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 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 ISO9001/EN46001
standards in order to produce products for sale in Europe. Any failure of the
Company to comply with QSR or ISO9001/EN46001 standards may result in the
Company being required to take corrective actions, such as modification of its
policies and procedures. The Company has been granted by the State of California
the required license to manufacture medical devices. 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 patent positions of medical device companies, including those
of the Company, are uncertain and involve complex and evolving legal and factual
questions. The coverage sought in a patent application either can be denied or
significantly reduced before or after the patent is issued. Consequently, there
can be no assurance that any patents from pending patent applications or from
any future patent application will be issued, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the Company's patents will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held by the Company. In addition, there can be no
assurance that competitors, many of which have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to make, modify, use or sell its products either in the United States or
in international markets. Litigation or regulatory proceedings, which could
result in substantial cost and uncertainty to the Company, may also be necessary
to enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. There can
be no assurance that the Company will have the financial resources to defend its
patents from infringement or claims of invalidity.
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The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the United States Patent and Trademark
Office ("USPTO") to determine the priority of inventions or an opposition to a
patent grant in a foreign jurisdiction. The defense and prosecution of
intellectual property suits, USPTO interference or opposition proceedings and
related legal and administrative proceedings are both costly and time-consuming.
Any litigation, opposition or interference proceedings will result in
substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology. Although patent and intellectual property disputes
in the medical device area have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses from others would be available to the Company on satisfactory
terms, if at all. Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is aware of certain patents owned or licensed by others and relating
to cardiac catheters and cardiac monitoring. Certain enhancements of the
Company's products are still in the design and pre-clinical testing phase.
Depending on the ultimate design specifications and results of pre-clinical
testing of these enhancements, there can be no assurance that the Company would
be able to obtain a license to such parties' patents or that a court would find
that such patents are either not infringed by the Company's enhancements or that
the Company's patents are invalid. Further, there can be no assurance that
owners or licensees of these patents will not attempt to enforce their patent
rights against the Company in a patent infringement suit or other legal
proceeding, regardless of the likely outcome of such suit or proceeding.
Competition
At present, the Company considers its primary competition to be companies
involved in current, more established therapies for the treatment of ventricular
tachycardia and atrial fibrillation, including drugs, external electrical
cardioversion and defibrillation, implantable defibrillators, ablation
accompanied by pacemaker implantation and open-heart surgery. In addition,
several competitors are also developing new approaches and new products for the
treatment and mapping of ventricular tachycardia and other arrythmias, 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, St. Jude Medical, Medtronic,
Inc. and Endocardial Solutions, Inc. Many competitors have substantially greater
financial and other resources than the Company, including larger research and
development staffs, more experience, capabilities in conducting research and
development activities, testing products in clinical trials, obtaining
regulatory approvals and manufacturing, marketing and distributing products.
There can be no assurance that the Company will succeed in developing and
marketing technologies and products that are more clinically efficacious and
cost effective than the more established treatments or the new approaches and
products developed and marketed by its competitors. Furthermore, there can be no
assurance that the Company will succeed in developing new technologies and
products that are available prior to its competitors' products. The failure of
the Company to demonstrate the efficacy and cost effective advantages of its
products over those of its competitors or the failure to develop new
technologies and products before its competitors, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company believes that the primary competitive factors in the market for
cardiac ablation and mapping devices are safety, efficacy, ease of use and
price. In addition, the length of time required for products to be developed and
to receive regulatory and, in some cases, third party payor reimbursement
approval are
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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 PMA clearance or PMA 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, 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
34
<PAGE> 35
mark requirements. The Company has received ISO9001/EN46001 certification by its
ISO Certification Registrar, 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. In April 2000, the Company received CE mark certification for the RPM
tracking system, and for its Chilli Cooled Ablation Catheters incorporating
Real-time Position Management navigation technology. 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 RPM Tracking System products
are currently undergoing the process and clinical trials necessary to obtain
regulatory approvals in Japan.
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 as established by
the HCFA. The failure of the procedures in which the Company's products are used
or an insufficient level of reimbursements for such procedures would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, medical equipment reimbursements have been
mandated by statute to be reduced in the past, and there can be no assurance
that any such reimbursements with respect to the Company's products will be
adequate or provided at all. Failure by hospitals and other users of the
Company's products to obtain reimbursement from third party payors, or changes
in government and private third party payors' policies toward reimbursement for
procedures employing the Company's products, would have a material adverse
effect on the Company's business, financial condition and results of operations.
Moreover, the Company is unable to predict what additional legislation or
regulation, if any, relating to the health care industry or third party coverage
and reimbursement may be enacted in the future, or what effect such legislation
or regulation would have on the Company.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country by country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and
35
<PAGE> 36
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.
The Company's management has recently gone through a significant
restructuring. The Company's new President and Chief Executive Officer, Tom
Prescott, joined the Company in May 1999. In addition, the Company's Chief
Financial Officer, Vice President, Operations and Vice President, Sales each
joined the Company in January 2000. The Company also hired a new Vice President
of Human Resources who joined the Company in July 2000. There can be no
assurance that these newly hired officers of the Company will be able to operate
effectively with that portion of the management team that was retained.
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 and, in
connection therewith, to hire new personnel to work in these areas. There can be
no assurance that the Company's officers and its 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
36
<PAGE> 37
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.
Potential Volatility of Stock Price
The market price of shares of Common Stock, like that of the common stock
of many medical product and 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, proportion of ownership between
common stockholders and Series B Convertible Preferred stockholders,
announcements of technological innovations or new commercial products by the
Company or competitors, government regulation, changes in the current structure
of the health care financing and payment systems, developments in or disputes
regarding patent or other proprietary rights, release of reports by securities
analysts, change in securities analysts recommendations, economic and other
external factors and general market conditions may have a significant effect on
the market price of the Common Stock. 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.
> Significant Rights attaching to Series B Convertible Preferred Stock
The Company has 27,250 shares of Series B Convertible Preferred Stock
outstanding which are convertible, at the option of the holders, into 5.45
million shares of the Company's common stock. The holders of Series B
Convertible Preferred Stock are entitled to significant rights, preferences and
privileges over holders of common stock including the right to elect three of
five directors to the board of directors of the Company, to a preferential
cumulative dividend, to certain redemption rights and to a substantial
liquidation payment preference over the Company's common stock which is also
payable upon any transaction or series of transactions (including, without
limitation, any merger, reorganization or consolidation) involving a transfer of
50% or more of the outstanding voting power of the Company. The holders of
Series B Convertible Preferred Stock are also entitled to certain registration
rights and enjoy certain protective rights in that their consent is required to
effect certain corporate transactions including, but not limited to, amending
the Company's certificate of incorporation or by-laws, issuing common or
preferred stock, declaring dividends or selling all or substantially all of the
Company's stock or assets. It is likely that the preferences and rights enjoyed
by the holders of Series B Convertible Preferred Stock have a negative impact
the market price of the common stock of the Company. Also, if these holders, by
converting their Series B Convertible Preferred Stock into common stock and then
exercising their registration rights, cause a large number of securities to be
registered and sold in the public market, such sales could materially and
adversely affect the market price for the Company's common stock. In addition,
if the Company were to include in a registration statement shares held by these
holders pursuant to the exercise of their registration rights, such sales may
impede the Company's ability to raise needed capital. For a more complete
description of the rights, preferences and privileges attaching to the Series B
Convertible Preferred Stock refer to the section of "Item 5. Market for
Registrant's Common Equity and Related Stockholder Matters" entitled "Recent
Sales of Unregistered Securities".
37
<PAGE> 38
Significant Control by Holders of Series B Convertible Preferred Stock
The holders of Series B Convertible Preferred Stock beneficially own an
aggregate of approximately 63.9% of the outstanding voting stock of the Company
and are entitled to elect three of five directors to the Company's Board of
Directors. These stockholders, if acting together, will be able to significantly
influence all matters requiring approval of either the Board of Directors or the
stockholders of the Company, including the approval of significant corporate
transactions. This concentration of ownership may also delay, deter or prevent a
change in control and may make some transactions more difficult or impossible to
complete without the support of these stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company does not use derivative financial instruments in its investment
portfolio. The Company places it's investments in instruments that meet high
credit quality standards as specified in the Company's investment policy. The
Company also limits the amount of credit exposure to any one issue, issuer or
type of investment. The Company does not expect any material loss with respect
to its investment portfolio.
Market Interest Rate Risk
As of June 30, 2000 the Company had short-term available-for-sale
investments with a value of $10.1 million (See Note 1 to the Consolidated
Financial Statements). These investments are subject to interest rate risk and
will decrease in value if market interest rates increase. A hypothetical 10
percent increase in market interest rates from levels at June 30, 2000, would
cause the fair value of these short-term investments to decline by an immaterial
amount. Because the Company has the ability to hold these investments until
maturity, we would not expect the value of these investments to be affected to
any significant degree by the effect of a sudden change in market interest
rates. Declines in interest rates over time will, however, reduce our interest
income.
As of June 30, 1999, the Company did not have any 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-20 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT 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 December 1, 2000, 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."
38
<PAGE> 39
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>
<C> <S>
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(9) 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.
10.8+(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.
</TABLE>
39
<PAGE> 40
<TABLE>
<C> <S>
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.
10.17(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.
10.22(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(9) Employment Agreement with Thomas M. Prescott dated May 18,
1999.
10.26 Employment Agreement with Eldon M. Bullington dated January
3, 2000.
10.27 Employment Agreement with Sandra L. Miller dated January 3,
2000.
10.28(9)+ Exclusive Licensing Agreement between the Registrant and
Sonometrics corporation Date July 21, 1999
10.29 Employment Agreement with Michael N. Forrest dated July 24,
2000.
10.30(9) Employment Agreement with Richard E. Riley dated June 1,
1992.
10.31 Employment Agreement with Robert K. Weigle dated January 17,
2000
10.32 Consulting Agreement with William N. Starling dated January
1, 2000.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 42).
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.
(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 the Registrant's
Registration 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 the 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 the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997.
(9) Incorporated by reference to exhibits filed with the Registrant's
Registration Annual Report on Form 10-K for the year ended June 30, 1999.
40
<PAGE> 41
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter ended
June 30, 2000.
(c) Exhibits.
See Item 14(a)(3) above.
(d) Financial Statement Schedules.
See Item 14(a)(2) above.
41
<PAGE> 42
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, Chief Executive Officer
Date: September 22, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Thomas M. Prescott and Eldon M.
Bullington, 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
--------- ----- ----
<S> <C> <C>
/s/ THOMAS M. PRESCOTT President, Chief Executive September 22, 2000
--------------------------------------------- Officer (Principal Executive
(Thomas M. Prescott) Officer)
/s/ ELDON M. BULLINGTON Vice President of Finance and September 22, 2000
--------------------------------------------- Chief Financial Officer
(Eldon M. Bullington) (Principal Financial and
Accounting Officer)
/s/ WILLIAM N. STARLING Chairman of the Board of September 22, 2000
--------------------------------------------- Directors
(William N. Starling)
/s/ MARK J. BROOKS Director September 22, 2000
---------------------------------------------
(Mark J. Brooks)
/s/ M. FAZLE HUSAIN Director September 22, 2000
---------------------------------------------
(M. Fazle Husain)
/s/ ANCHIE Y. KUO, M.D. Director September 22, 2000
---------------------------------------------
(Anchie Y. Kuo, M.D.)
</TABLE>
42
<PAGE> 43
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, 2000 and 1999.... F-3
Consolidated Statements of Operations for the years ended
June 30, 2000, 1999 and 1998.............................. F-4
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 2000, 1999 and 1998.................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, 1999, and 1998............................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 44
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, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 2000, in conformity with accounting principles generally accepted
in the United States. 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
July 28, 2000
F-2
<PAGE> 45
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 8,487,634 $ 2,339,660
Short-term investments.................................... 4,136,988
---
Accounts receivable, net of allowance for doubtful
accounts of $139,269 at June 30, 2000 and $105,000 at
June 30, 1999.......................................... 1,271,395 898,296
Inventories............................................... 2,095,178 2,228,879
Prepaid expenses.......................................... 227,070 338,479
Other current assets...................................... 222,102 76,719
------------ ------------
Total current assets.............................. 16,440,367 5,882,033
Property and equipment, net................................. 3,505,428 2,891,819
Notes receivable from related parties....................... 100,000 29,584
Intangible assets, net of accumulated amortization of
$366,666 at June 30, 2000................................. 1,633,333
Deposits and other assets................................... 86,137 102,406
------------ ------------
$ 21,765,265 $ 8,905,842
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 980,374 $ 488,128
Accrued compensation and related benefits................. 1,196,071 835,277
Accrued clinical expenses................................. 527,001 939,183
Other accrued expenses.................................... 906,682 738,831
Current obligations under capital leases.................. 257,714 325,334
Deferred income -- current portion........................ 400,000 300,000
Short-term debt obligation................................ -- 3,000,000
------------ ------------
Total current liabilities......................... 4,267,842 6,626,753
Long-term obligations under capital leases.................. 85,058 342,772
Deferred income............................................. 2,030,862 2,330,862
Accrued series B preferred dividends........................ 2,784,375 --
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized and 27,250 issued and outstanding at June
30, 2000 and none issued and outstanding at June 30,
1999; liquidation preference of $30,034,375 at June 30,
2000................................................... 27 --
Common stock, $.001 par value; 6,000,000 shares
authorized; 3,078,486 shares issued and outstanding at
June 30, 2000 and 2,007,904 at June 30, 1999........... 3,078 2,008
Additional paid-in capital................................ 109,266,557 80,152,542
Receivables from stockholders............................. (321,667) (385,000)
Accumulated deficit....................................... (96,350,867) (79,983,404)
Deferred compensation..................................... -- (180,691)
------------ ------------
Total stockholders' equity (deficit).............. 12,597,128 (394,545)
------------ ------------
$ 21,765,265 $ 8,905,842
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 46
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales........................................ $ 6,820,789 $ 4,406,370 $ 2,419,816
Cost of goods sold............................... 6,868,097 4,249,308 2,827,789
------------ ------------ ------------
Gross margin (deficit)......................... (47,308) 157,062 (407,973)
Operating expenses:
Research and development....................... 6,946,822 12,115,535 14,353,393
Selling, general and administrative............ 10,063,509 6,684,669 4,091,637
------------ ------------ ------------
Total operating expenses............... 17,010,331 18,800,204 18,445,030
------------ ------------ ------------
Loss from operations............................. (17,057,639) (18,643,142) (18,853,003)
Other income (expense):
Interest income................................ 1,033,538 699,589 1,857,981
Interest expense............................... (68,488) (664,527) (578,931)
Other, net..................................... (274,873) 42,305 75,156
------------ ------------ ------------
Total other income (expense)........... 690,176 77,367 1,354,206
------------ ------------ ------------
Net loss......................................... (16,367,463) (18,565,775) (17,498,797)
Preferred stock dividend......................... 3,300,000 -- --
Beneficial conversion feature related to the
issuance of the Series B Preferred Stock....... 960,000 -- --
------------ ------------ ------------
Net loss attributable to common stockholders..... $(20,627,464) $(18,565,775) $(17,498,797)
============ ============ ============
Net loss per share -- basic and diluted.......... $ (10.05) $ (9.34) $ (9.07)
============ ============ ============
Shares used in computing net loss per common
share -- basic and diluted..................... 2,053,000 1,987,000 1,930,000
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 47
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL RECEIVABLES
------------------ --------------- PAID-IN FROM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT
--------- ------ ------ ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997........................ 1,904,707 $1,905 -- -- $ 79,096,812 $(420,000) $(43,918,832)
Issuance of Common Stock warrants............... -- -- -- -- 60,351 -- --
Issuance of nonqualified stock option for
services...................................... -- -- -- -- 65,121 -- --
Exercise of options to purchase Common Stock.... 41,776 42 -- -- 225,502 35,000 --
Issuance of Common Stock under employee stock
purchase plan................................. 12,711 13 -- -- 343,829 -- --
Amortization of deferred compensation........... -- -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- -- (17,498,797)
--------- ------ ------ --- ------------ --------- ------------
Balance at June 30, 1998........................ 1,959,194 1,960 -- -- 79,791,615 (385,000) (61,417,629)
Issuance of Preferred Stock warrants............ -- -- -- -- 45,000 -- --
Issuance of nonqualified stock option for
services...................................... -- -- -- -- 3,811 -- --
Exercise of options to purchase Common Stock.... 32,436 32 -- -- 314,099 -- --
Issuance of Common Stock under employee stock
purchase plan................................. 16,274 16 -- -- 132,423 -- --
Deferred compensation........................... -- -- -- -- (134,406) -- --
Amortization of deferred compensation........... -- -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- -- (18,565,775)
--------- ------ ------ --- ------------ --------- ------------
Balance at June 30, 1999........................ 2,007,904 2,008 -- -- 80,152,542 (385,000) (79,983,404)
Issuance of Series B Preferred Stock, net of
issuance cost of $500,000..................... -- -- 32,250 32 32,709,968 (250,000) --
Preferred Stock Dividends....................... -- -- -- -- (4,260,000) -- --
Exercise of options to purchase Common Stock.... 33,781 33 -- -- 152,497 -- --
Issuance of Common Stock under employee stock
purchase plan................................. 36,801 37 -- -- 68,795 -- --
Write-off of receivable from Shareholder........ -- -- -- -- -- 313,333 --
Deferred compensation........................... -- -- -- -- (71,875) -- --
Amortization of deferred compensation........... -- -- -- -- -- -- --
Conversion of Preferred Series B Stock.......... 1,000,000 1,000 (5,000) (5) 514,630 -- --
Net loss........................................ -- -- -- -- -- -- (16,367,463)
--------- ------ ------ --- ------------ --------- ------------
Balance at June 30, 2000........................ 3,078,486 $3,078 27,250 $27 $109,266,557 $(321,667) $(96,350,867)
========= ====== ====== === ============ ========= ============
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY (DEFICIT)
------------ ----------------
<S> <C> <C>
Balance at June 30, 1997........................ $(767,676) $ 33,992,209
Issuance of Common Stock warrants............... -- 60,351
Issuance of nonqualified stock option for
services...................................... -- 65,121
Exercise of options to purchase Common Stock.... -- 260,544
Issuance of Common Stock under employee stock
purchase plan................................. -- 343,842
Amortization of deferred compensation........... 261,748 261,748
Net loss........................................ -- (17,498,797)
--------- ------------
Balance at June 30, 1998........................ (505,928) 17,485,018
Issuance of Preferred Stock warrants............ -- 45,000
Issuance of nonqualified stock option for
services...................................... -- 3,811
Exercise of options to purchase Common Stock.... -- 314,131
Issuance of Common Stock under employee stock
purchase plan................................. -- 132,439
Deferred compensation........................... 134,406 --
Amortization of deferred compensation........... 190,831 190,831
Net loss........................................ -- (18,565,775)
--------- ------------
Balance at June 30, 1999........................ (180,691) (394,545)
Issuance of Series B Preferred Stock, net of
issuance cost of $500,000..................... -- 32,460,000
Preferred Stock Dividends....................... -- (4,260,000)
Exercise of options to purchase Common Stock.... -- 152,530
Issuance of Common Stock under employee stock
purchase plan................................. -- 68,832
Write-off of receivable from Shareholder........ -- 313,333
Deferred compensation........................... 71,875 --
Amortization of deferred compensation........... 108,816 108,816
Conversion of Preferred Series B Stock.......... -- 515,625
Net loss........................................ -- (16,367,463)
--------- ------------
Balance at June 30, 2000........................ $ -- $ 12,597,128
========= ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 48
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(16,367,463) $(18,565,775) $(17,498,797)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,708,833 1,271,058 1,274,226
Amortization of deferred compensation..................... 108,816 190,831 261,748
(Gain) loss on disposal of property and equipment......... 44,726 -- (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
Receivable from shareholder written off................... 313,333 -- --
Changes in operating assets and liabilities:
Accounts receivable....................................... (373,099) (374,841) (354,627)
Receivable from related party............................. -- -- 1,552
Inventories............................................... 133,701 (662,213) (248,037)
Prepaid expenses.......................................... 111,409 (20,930) 94,209
Other current assets...................................... (145,383) 449,474 52,335
Accounts payable.......................................... 492,246 (591,644) 291,388
Accrued compensation and related benefits................. 360,794 233,970 138,493
Accrued clinical expenses................................. (412,182) (205,373) 448,450
Other accrued expenses.................................... 167,851 84,161 (215,572)
Deferred Income........................................... (200,000) (300,000) (19,611)
Interest payable on note.................................. -- -- (1,153,625)
------------ ------------ ------------
Net cash used in operating activities....................... (14,056,417) (18,442,471) (16,836,074)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments......................... (11,136,988) (5,612,448) (25,167,799)
Maturities of short-term investments........................ 7,000,000 22,860,948 44,394,833
Purchase of property and equipment.......................... (2,000,502) (1,202,612) (1,170,621)
Proceeds from disposal of equipment......................... -- -- 23,519
(Increase) decrease in notes receivable..................... (70,416) 230,893 59,014
Purchase of rights to certain patents....................... (2,000,000) -- --
(Increase) decrease in deposits and other assets............ 16,269 386,590 (391,713)
------------ ------------ ------------
Net cash provided by (used in) investing activities......... (8,191,637) 16,663,371 17,747,233
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations.......... (325,334) (596,687) (838,094)
Proceeds (repayment) from bridge loan financing............. (3,000,000) 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 preferred stock, net of issuance
cost...................................................... 31,500,000 -- --
Proceeds from issuance of common stock...................... 221,362 446,570 569,386
Notes receivable from stockholders.......................... -- -- 35,000
------------ ------------ ------------
Net cash provided by (used in) financing activities......... 28,396,028 (3,150,117) 1,266,292
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents........ 6,147,974 (4,929,217) 2,177,451
Cash and cash equivalents at beginning of year.............. 2,339,660 7,268,877 5,091,426
------------ ------------ ------------
Cash and cash equivalents at end of year.................... $ 8,487,634 $ 2,339,660 $ 7,268,877
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 49
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
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 designs, 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. There were no significant intercompany accounts or
transactions in fiscal 2000.
The Company has reclassified certain prior-year balances to conform with
current-year presentations.
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.
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
approximates 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 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, 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 2000, management classified the Company's investment portfolio as
held-to-maturity and available-for-sale. Available-for-sale securities are
carried at fair value with unrealized gains and losses reported as a separate
component of stockholders' equity, if material. 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. To date, the Company has not
F-7
<PAGE> 50
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
experienced any significant unrealized gains or losses on available-for-sale
securities and, accordingly, no adjustments have been made to stockholders'
equity.
The following is a summary of held-to-maturity and available-for-sale
securities at June 30, 2000:
<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................... $ 1,000,000 $ -- $ -- $ 1,000,000
Other government agency.................. 1,000,000 -- (2,640) 997,360
Available-for-sale:
Auction rate preferred stock............. 2,000,000 -- -- 2,000,000
U.S. corporate obligations............... 8,119,109 -- (1,615) 8,117,494
----------- ------- ------- -----------
12,119,109 -- (4,255) 12,114,854
Amounts classified as cash equivalents..... 7,982,121 -- -- 7,982,121
----------- ------- ------- -----------
Amounts included in short-term
investments.............................. $ 4,136,988 $ $(4,255) $ 4,132,733
=========== ======= ======= ===========
</TABLE>
All short-term investments have maturities due in one year or less, except
for $2,000,000 of available-for-sale securities (which the amortized cost equals
the estimated fair value), which has a maturity date greater than 10 years.
At June 30, 1999 the Company had $2,339,660 in cash and cash equivalents
which were held primarily in the money market account and had no short-term
investments.
There were no material realized gains or losses for the years ended June
30, 2000 and 1999. The cost of securities sold is based on the specific
identification method.
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,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Raw materials....................................... $1,057,454 $1,510,291
Work-in-process..................................... 204,042 174,016
Finished goods...................................... 833,682 544,572
---------- ----------
$2,095,178 $2,228,879
========== ==========
</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.
F-8
<PAGE> 51
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Property and equipment:
Equipment......................................... $8,319,692 $6,836,138
Leasehold improvements............................ 422,061 422,061
Equipment-in-process.............................. 903,220 622,384
---------- ----------
9,644,973 7,880,583
Less accumulated depreciation and amortization...... 6,139,545 4,988,764
---------- ----------
$3,505,428 $2,891,819
========== ==========
</TABLE>
Intangible Asset
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 included payments made by the
Company to the licensor of $1,000,000 each in August 1999 and January 2000. The
intangible asset is amortized over five years.
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. Generally, revenue from sales to
distributors is recognized at the time of shipment.
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.
Deferred Income
Included in deferred income at June 30, 2000 and 1999, the Company had
$2,330,862 and $2,630,862 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. The Company deferred
$100,000 of product revenue at June 30, 2000.
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.
F-9
<PAGE> 52
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
Net Loss Per Share
Basic and diluted net loss per share is computed using the weighted average
number of shares of common shares outstanding during the period. The Company has
other securities outstanding (Series B Convertible Preferred Stock Warrants, and
Stock Options -- See note 4) 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,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net loss attributable to common stockholders..... $(20,627,464) $(18,565,775) $(17,498,797)
============ ============ ============
Basic and diluted:
Weighted-average shares of common stock used in
computing basic and diluted net loss per
share....................................... 2,053,000 1,987,000 1,930,000
============ ============ ============
Basic and diluted net loss per share............. $ (10.05) $ (9.34) $ (9.07)
============ ============ ============
</TABLE>
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 were
recognized based on the fair value accounting rules under FAS 123 (see Note 4).
Recent Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted in years beginning after June 15,
2000. The Company has not in the past and does not anticipate in the future
using derivative instruments, and the Company does not expect that the adoption
of FAS 133 will have a significant impact on its financial condition or results
of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") that must be adopted in the quarter ended June 30, 2000. SAB 101
summarizes certain areas of the Staff's views in applying generally accepted
accounting principles to revenue in financial statements. Although the Company
believes that its current revenue recognition principles comply with SAB 101,
additional guidance is expected to be issued by the SEC staff and the Company
will evaluate the affect of adopting SAB 101 at that point.
2. DEBT
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%. 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 share 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 note 4).
F-10
<PAGE> 53
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
3. COMMITMENTS
The Company leases facilities and equipment under noncancelable lease
agreements. Future minimum lease payments were as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
2001................................................. $279,925 $ 774,224
2002................................................. 88,205 749,424
2003................................................. -- 747,420
2004................................................. -- 247,136
2005................................................. -- --
Thereafter........................................... -- --
-------- ----------
Total minimum lease payments............... 368,130 $2,518,204
Less amount representing interest.................... 25,358
--------
Present value of minimum lease payments.............. 342,772
Less current portion................................. 257,714
--------
Long-term portion.................................... $ 85,058
========
</TABLE>
The Company leases its facilities under operating lease agreements that
extend through October 2003. Rent expense, net of sublease income, was
approximately, $825,649, $730,323, and $364,000 for the years ended June 30,
2000, 1999 and 1998, 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,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Equipment at cost................................... $4,018,000 $4,018,000
Less accumulated amortization....................... 3,676,000 3,334,000
---------- ----------
$ 342,000 $ 684,000
========== ==========
</TABLE>
Amortization expense of assets under capital leases is included in
depreciation expense.
At June 30, 2000, the Company had approximately $213,455 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 6,000,000 shares of common stock, $.001
par value per share, of which a total of 3,078,486 and 2,007,904 shares were
outstanding at June 30, 2000 and 1999, respectively. In May 1999, the Company's
Board of Directors authorized a 1-for-5 reverse common stock split. All share
and per share amounts reflect this reverse common stock split.
F-11
<PAGE> 54
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
Preferred Stock
In July 1999, the Company's stockholders authorized and the Company
completed a $32 million offering of Series B Convertible Preferred Stock at
$1,000 per share to a group of accredited investors. In connection with the
Series B Convertible Preferred Stock financing, the Company raised $31.5
million, net of issuance costs. The Series B Convertible Preferred Stock is
redeemable by the Company. At any time after May 31, 2004, the holders of a
majority of the then outstanding shares of Series B Convertible Preferred Stock,
voting as a single class, may request that the Company redeem the outstanding
shares of Series B Convertible Preferred Stock. The Company is not obligated to
honor a redemption request but must thereafter increase the cumulative dividend
by 6%. 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,
2000, the Company had 27,250 shares of Series B Convertible Preferred Stock
outstanding, and the Company had no shares of Series B Convertible Preferred
Stock outstanding in fiscal 1999.
The June 30, 2000 balance sheet also reflects the discount or beneficial
conversion feature present in the convertible securities. The discount was being
recognized as a return to the preferred stockholders (similar to a dividend)
over the minimum period in which the preferred stockholders can realize return,
immediately for the Series B Convertible Preferred stockholders. The discount
has been accreted to additional paid in capital in the June 30, 2000 balance
sheet. Each share of Series B Convertible Preferred Stock is initially
convertible into 200 shares of the Company's Common Stock, at the option of the
holder. Each share of Series B Convertible Preferred Stock shall automatically
be converted into the Company's common stock upon the election of a majority of
the holders of the Series B Convertible Preferred Stock. Each share of Series B
Convertible Preferred Stock shall entitle the holder thereof to that number of
votes on all matters submitted to a vote of the stock holders of the Company
equal to the number of shares of common stock into which the Series B
Convertible Preferred Stock can be converted.
The Series B Convertible Preferred Stock Purchase Agreement specifies that,
when and as if dividends are declared, the holder of Series B Convertible
Preferred Stock are entitled to a cumulative dividend equal to 11% of the
purchase price paid for each share of Series B Convertible Preferred Stock, per
share, per year. If the Series B Convertible Preferred Stock is not redeemed
prior to May 31, 2004, the cumulative dividend payable shall be increased by 6
percentage points at the beginning of each year after such date. The Series B
Convertible Preferred Stock has a liquidation preference equal to the initial
purchase price plus any accrued and unpaid 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 and unpaid dividends prior to any
distribution to the holders of common stock. After such payment any remaining
proceeds would be distributed ratably among the holders of Series B Convertible
Preferred Stock and holders of common stock. All share and per share amounts
reflect the reverse common stock split.
Because the two largest Series B Convertible Preferred Stock holders
control 3 of the 5 seats (60%) on the board of directors, the June 30, 2000
balance sheet reflects the accrual of the Series B Convertible Preferred Stock
cumulative dividends. The members of the Company's board of directors include
Mark J. Brooks, Anchie Y. Kuo, M.D., and M. Fazle Husain, nominees of the Series
B Convertible Preferred Stockholders, Thomas M. Prescott, CEO and William
Starling, a former director, chief executive officer and
F-12
<PAGE> 55
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
president of the Company. 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.
During fiscal 2000, one of the Series B Convertible Preferred Stock holders
converted their shares of Series B Convertible Preferred Stock (5,000 shares) to
common stock (1,000,000 shares). The accrued but undeclared dividends at that
date have been accounted for as an additional contribution to equity.
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, 2000:
<TABLE>
<CAPTION>
PRICE PER AGGREGATE EXPIRATION
SHARES SHARE PRICE DATE
------ --------- ---------- ----------
<S> <C> <C> <C>
7,034 $42.65 $ 300,000 July 2009
4,000 43.50 174,000 June 2001
15,394 65.63 1,010,231 June 2001
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, 2000 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 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
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, 2000, a
total of 1,357,389 shares of common stock have been 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
F-13
<PAGE> 56
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
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, 2000 and 1999, the company decreased unamortized deferred compensation by
approximately $72,000 and $134,000, respectively, to reflect the cancellation of
certain unvested stock options for which deferred compensation was previously
recorded. Amortization of deferred compensation was approximately $109,000,
$191,000 and $262,000 for the years ended June 30, 2000, 1999 and 1998,
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, 2000, a total of 12,000 shares of common stock has been 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, including
400,000 shares 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, 2000, a total
of 476,880 shares of common stock were reserved for issuance under the
Supplemental Plan (see Note 13).
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, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate......................... 6.05% 6.02% 5.75%
Expected life................................... 3.77 years 3.81 years 3.73 years
Expected volatility............................. 118% 78.8% 76.20%
Dividend yield.................................. -- -- --
</TABLE>
F-14
<PAGE> 57
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
The following is a summary of activity under the stock option plans:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------
2000 1999 1998
--------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
STOCK OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------- --------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at July 1........ 286,667 $20.37 242,538 $27.30 205,552 $17.60
Granted.................... 1,512,706 $ 4.25 161,919 $14.01 93,337 $38.75
Exercised.................. (33,781) $ 4.52 (32,436) $ 9.68 (41,776) $ 5.40
Canceled................... (339,621) $12.19 (85,354) $32.06 (14,575) $34.65
--------- ------- -------
Outstanding at June 30....... 1,425,971 $ 5.59 286,667 $20.37 242,538 $27.30
--------- ------- -------
Exercisable at June 30....... 211,641 $11.80 113,075 $22.08 106,409 $15.65
Weighted average fair value
of options granted......... $ 3.70 $10.02 $20.10
Shares available for grant... 420,548 93,633 26,195
</TABLE>
The following table summarizes information for outstanding and exercisable
options at June 30, 2000:
<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 - $ 3.53 256,634 9.31 $ 3.04 14,744 $ 1.76
$ 3.75 - $ 4.50 793,074 9.26 $ 4.28 95,472 $ 4.50
$ 4.63 - $33.13 341,077 8.98 $ 6.71 72,010 $10.55
$33.15 - $75.00 35,186 7.16 $42.90 29,415 $43.62
--------- -------
$ 1.15 - $75.00 1,425,971 9.15 $ 5.59 211,641 $11.80
========= =======
</TABLE>
Employee Stock Purchase Plan
In April 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan"). The Purchase Plan, as amended, provides 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 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 stockholder in November 1998.
During the years ended June 30, 2000, 1999 and 1998, a total of 36,801,
16,274 and 12,711 shares were purchased, respectively, under the Employee Stock
Purchase Plans at prices ranging from $1.86 to $39.85 per share. At June 30,
2000 there were 147,300 shares reserved for future issuance under the 1998 ESPP.
F-15
<PAGE> 58
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
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 assumption for the years ended June 30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate........................... 5.91% 5.16% 5.54%
Expected life..................................... 6 months 6 months 6 months
Expected volatility............................... 72.62% 78.75% 76.20%
Dividend yield.................................... -- -- --
</TABLE>
For the years ended June 30, 2000, 1999 and 1998 the weighted average fair
value of purchase rights under the plan was $1.94, $3.46 and $13.90,
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 to
employees granted at market price on the date of grant. 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,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net loss -- reported..................... $(20,627,464) $(18,565,775) $(17,498,797)
Net loss -- pro forma.................... $(22,273,698) $(19,690,069) $(19,094,636)
Net loss per share -- as reported........ $ (10.05) $ (9.34) $ (9.07)
Net loss per share -- pro forma.......... $ (10.90) $ (9.91) $ (9.89)
</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 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, 2000, 1999 and 1998.
F-16
<PAGE> 59
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
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,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net operating loss carryforwards........................ $ 31,300,000 $ 25,800,000
Capitalized research costs.............................. 3,000,000 2,600,000
Research credit carryforwards........................... 3,000,000 3,300,000
Deferred revenue........................................ 1,000,000 1,000,000
Other................................................... 1,500,000 1,500,000
------------ ------------
Subtotal.............................................. 39,800,000 34,200,000
Valuation allowance..................................... (39,800,000) (34,200,000)
------------ ------------
Total deferred tax asset...................... $ -- $ --
============ ============
</TABLE>
As of June 30, 2000, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $89,600,000 and
$14,500,000, respectively. The net operating loss and credit carryforwards
described above will expire at various dates beginning in the years 2001 through
2020, 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. These annual limitations may result in the expiration of net
operating losses and credits before utilization.
The increase in the valuation allowance was approximately $ 5,600,00 and
$7,600,000 for years ended June 30, 2000 and 1999, respectively.
6. RISKS DUE TO CONCENTRATIONS
Dependence on Systems
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.
Dependence on Key Suppliers
The Company purchases certain key components of its products, including a
computer workstation, 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.
Dependence on Key Distributors
The Company currently relies upon international distributors of specialty
cardiovascular products to market and sell its products. A large percentage of
the Company's revenues are derived from sales of its Japanese distributor, Japan
Lifeline Company, Ltd. ("Japan Lifeline"). Sales to Japan Lifeline accounts for
49%, 52% and 80% of the Company's net sales in fiscal 2000, 1999 and 1998
respectively.
F-17
<PAGE> 60
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
7. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
2000 1999 1998
---------- -------- ----------
<S> <C> <C> <C>
Capital lease obligations incurred to acquire
Equipment..................................... $ -- $226,402 $ 635,085
Cash paid for interest.......................... 68,488 613,026 1,672,205
Issuance of preferred stock for note
receivable.................................... 250,000 -- --
Conversion of preferred stock to common stock... 515,625 -- --
Beneficial conversion feature related to the
issuance of preferred stock................... 960,000 -- --
Preferred stock dividends....................... 3,300,000 -- --
</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, the
proceeds of which were used to exercise a stock option granted to this officer
in January 1996. The stock exercised is pledged as collateral against the
receivable from the stockholder. In August 1998, the officer resigned from the
Company. In March 2000, a reserve against the receivable was recorded for the
amount of the difference between the $385,000 loaned and the fair value of the
pledged stock at March 31, 2000.
In May 1999, the Company entered into an employment agreement with an
officer of the Company pursuant to which the officer is entitled to a $250,000
loan from the Company at a 7% interest rate to purchase 250 shares of the
Company's Series B Convertible Preferred Stock. In March 2000, the loan was
executed for the purchase of the stock and currently reflected in the Company's
Balance Sheet.
9. RELATIONSHIP WITH ARROW INTERNATIONAL, INC.
In December 1995, the Company entered into a distribution and manufacturing
rights agreement related to certain of the Company's diagnostic catheter
products and the Company received a $3,000,000 prepaid royalty. 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, 2000, 1999, and 1998, the Company recorded royalty income of
approximately $300,000, $300,000 and $20,000, respectively.
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 G.m.b.H. in Germany.
Net sales primarily consist of product sales to distributors located in
Japan and Europe, and direct sales to hospitals in the United States.
See Note 6 for dependence on key distributors.
F-18
<PAGE> 61
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
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,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
United States.......................... $2,543,860 $ 963,905 $ 321,491
Japan.................................. 3,343,318 2,280,433 1,924,538
Europe................................. 933,611 1,162,032 173,787
---------- ---------- ----------
$6,820,789 $4,406,370 $2,419,816
========== ========== ==========
</TABLE>
The following table presents information about the Company's operations
located in certain geographical areas:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, U.S. EUROPE ELIMINATIONS CONSOLIDATED
------------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
2000
Sales to unaffiliated customers....... $ 6,820,789 $ 6,820,789
Total revenue............... $ 6,820,289 $ 6,820,789
============ ============
Operating income (loss)............... $(17,057,639) $(17,057,639)
Other income.......................... 690,176
------------
Net loss.............................. $(16,367,463)
------------
Identifiable assets................... $ 21,765,265 $ 21,765,265
============ ============
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 $ 427,023 $(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
============ ========== ========= ============
</TABLE>
11. RELATED PARTY TRANSACTIONS
The Company sold $0 during the year ended June 30, 2000 and approximately
$68,000 during the year ended June 30, 1999, 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
F-19
<PAGE> 62
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
equipment were recorded to other income. There is a director of the Company who
is also a former officer who has a direct financial interest in Curon Medical,
formerly Conway-Stuart.
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
$38,000, $53,000 and $38,000 for the years ended June 30, 2000, 1999 and 1998,
respectively.
13. CONTINGENT LIABILITIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of the matters is not expected to have a material adverse effect, if
any, on the Company's consolidated financial position or results of operations.
F-20
<PAGE> 63
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, 1998..................................... $ 9,500 $ 7,000 $-- $ 16,500
June 30, 1999..................................... 16,500 88,500 -- 105,000
June 30, 2000..................................... 105,000 34,269 -- 139,269
</TABLE>
S-1
<PAGE> 64
EXHIBIT INDEX
<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(9) 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.
10.8+(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.
10.17(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.
10.22(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(9) Employment Agreement with Thomas M. Prescott dated May 18,
1999.
10.26 Employment Agreement with Eldon M. Bullington dated January
3, 2000.
10.27 Employment Agreement with Sandra L. Miller dated January 3,
2000.
10.28(9)+ Exclusive Licensing Agreement between the Registrant and
Sonometrics corporation Date July 21, 1999
10.29 Employment Agreement with Michael N. Forrest dated July 24,
2000.
10.30(9) Employment Agreement with Richard E. Riley dated June 1,
1992.
10.31 Employment Agreement with Robert K. Weigle dated January 17,
2000
10.32 Consulting Agreement with William N. Starling dated January
1, 2000.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 42).
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.
(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 the Registrant's
Registration Annual Report on Form 10-K for the year ended June 30, 1998.
<PAGE> 65
(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 the 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 the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997.
(9) Incorporated by reference to exhibits filed with the Registrant's
Registration Annual Report on Form 10-K for the year ended June 30, 1999.
