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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
---------------------------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended September 30, 2000.
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from _______________to______________.
COMMISSION FILE NUMBER: 000-28372
CARDIAC PATHWAYS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0278793
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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<S> <C>
995 BENECIA AVENUE, SUNNYVALE, CA 94085
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (408) 737-0505
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
As of November 10, 2000 there were 3,143,590 shares of the Registrant's Common
Stock outstanding.
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CARDIAC PATHWAYS CORPORATION
INDEX
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Notes (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2000 and
June 30, 2000 3
Condensed Consolidated Statements of Operations for the Three Months
Ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
CARDIAC PATHWAYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNT)
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<CAPTION>
September 30, June 30,
2000 2000 (1)
(unaudited)
--------- ---------
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ASSETS
Current assets:
Cash and cash equivalents $ 6,021 $ 8,488
Short-term investments 3,138 4,137
Accounts receivable, net of allowance for doubtful accounts
of $112 at September 30, 2000 and $139 at June 30, 2000 1,731 1,271
Inventories 1,552 2,095
Prepaid expenses 243 227
Other current assets 104 222
--------- ---------
Total current assets 12,789 16,440
Property and equipment, net 4,104 3,506
Notes receivable from related parties 100 100
Intangible assets, net of accumulated amortization of
$467 and $367 at September 30, 2000 and at June 30, 2000 1,533 1,633
Deposits and other assets 61 86
--------- ---------
$ 18,587 $ 21,765
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 792 $ 980
Accrued compensation and related benefits 1,280 1,196
Accrued clinical expenses 426 527
Other accrued expenses 952 907
Current obligations under capital leases 233 258
Deferred income-current portion 300 400
--------- ---------
Total current liabilities 3,983 4,268
Long-term obligations under capital leases 45 85
Deferred income 1,956 2,031
Accrued Series B Preferred dividends 3,540 2,784
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized and 27,250
issued and outstanding at September 30, 2000 and at June 30, 2000;
liquidation preference of $30,791 at September 30, 2000 -- --
Common stock, $.001 par value; 6,000,000 shares authorized; 3,100,991
shares issued and outstanding at September 30, 2000 and 3,078,486
issued and outstanding at June 30, 2000 3 3
Additional paid-in capital 108,600 109,267
Receivable from stockholders (322) (322)
Accumulated deficit (99,218) (96,351)
--------- ---------
Total stockholders' equity 9,063 12,597
--------- ---------
$ 18,587 $ 21,765
========= =========
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(1) Derived from the Company's audited consolidated balance sheet as of June 30,
2000.
See notes to condensed consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
Three months ended
September 30,
---------------------
2000 1999
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Net sales $ 3,042 $ 1,381
Cost of goods sold 2,488 1,392
------- -------
Gross margin (deficit) 554 (11)
Operating expenses:
Research and development 1,001 1,928
Selling, general and administrative 2,575 1,627
------- -------
Total operating expenses 3,576 3,555
------- -------
Loss from operations (3,022) (3,566)
Other income (expense):
Interest income 167 177
Interest expense (8) (35)
Other, net (4) 120
------- -------
Total other income, net 155 262
------- -------
Net loss (2,867) (3,304)
Preferred stock dividend 756 660
Beneficial conversion feature related to the
issuance of the Series B preferred stock -- 960
------- -------
Net loss applicable to common stockholders $(3,623) $(4,924)
======= =======
Net loss per common share -
basic and diluted $ (1.17) $ (2.45)
======= =======
Shares used in computing net loss
per common share - basic and diluted 3,095 2,008
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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Three months ended
September 30,
-----------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,867) $ (3,304)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 600 404
Amortization of deferred compensation -- 45
Changes in operating assets and liabilities:
Accounts receivable (460) (295)
Inventories 543 (16)
Prepaid expenses (16) 50
Other current assets 118 (165)
Accounts payable (188) 102
Accrued compensation and related benefits 84 (202)
Accrued clinical expenses (101) --
Other accrued expenses 45 823
Deferred income (175) (75)
-------- --------
Net cash used in operating activities (2,419) (2,633)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments -- (8,960)
Maturities and sales of short-term investments 999 --
Purchases of property and equipment, net (1,097) (125)
Increase in notes receivable -- (7)
Purchase of rights to certain patents -- (2,000)
Decrease (increase) in deposits and other assets 25 (10)
-------- --------
Net cash used in investing activities (73) (11,102)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations (65) (120)
Payment of short-term debt obligations -- (3,000)
Proceeds from issuance of preferred stock, net of issuance cost -- 31,500
Proceeds from issuance of common stock 90 --
-------- --------
Net cash provided by financing activities 25 28,380
-------- --------
Net (decrease) increase in cash and cash equivalents (2,467) 14,645
Cash and cash equivalents at beginning of period 8,488 2,340
-------- --------
Cash and cash equivalents at end of period $ 6,021 $ 16,985
======== ========
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See notes to condensed consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and in accordance with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the financial information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The September 30, 2000 and 1999 balance sheets also reflect 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 a return, immediately for the Series B Convertible Preferred
stockholders. The discount was accreted to additional paid in capital in the
quarter ended September 30, 1999 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 stockholders 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.
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The operating results for the three months ended September 30, 2000 are
not necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 2001. The accompanying condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Cardiac Pathways Corporation (the
"Company") Annual Report on Form 10-K, as amended, for the fiscal year ended
June 30, 2000.
2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
other liquid investments are classified as short-term investments. At September
30, 2000, all short-term investments were classified as available-for-sale.
Available-for-sale securities are carried at fair market value with unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity. To date, the Company has not experienced any significant unrealized
gains or losses on available-for-sale securities and, accordingly, no
adjustments have been made to stockholders' equity.
The following is a summary of available-for-sale securities at cost, which
approximates fair value:
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Dollar amounts in thousands SEPTEMBER 30, JUNE 30,
DESCRIPTION 2000 2000
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Held to maturity:
U.S. government agency $ -- $ 1,000
Other government agency 1,000 1,000
Available for sale:
Auction rate preferred stock 2,000 2,000
U.S. corporate obligations 5,795 8,119
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8,795 12,119
Amounts classified as cash equivalents 5,657
7,982
------- -------
Amounts included in short-term investments $ 3,138 $ 4,137
======= =======
</TABLE>
There were no material realized gains or losses for the three-month
periods ending September 30, 2000 and 1999. The cost of securities sold is based
on the specific identification method.
3. CONDENSED CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
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SEPTEMBER 30, JUNE 30,
Dollar amounts in thousands 2000 2000
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Inventories:
Raw materials $ 753 $1,057
Work-in-process 315 204
Finished goods 484 834
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$1,552 $2,095
====== ======
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Dollar amounts in thousands SEPTEMBER 30, JUNE 30,
2000 2000
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Property and equipment:
Equipment $ 9,421 $ 8,320
Leasehold improvements 422 422
Equipment-in-process 900 904
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10,743 9,646
Less accumulated depreciation
and amortization 6,639 6,140
------- -------
$ 4,104 $ 3,506
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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, 2001. 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 policies comply with SAB 101,
additional guidance was recently issued by the SEC staff and the Company is in
the process of evaluating the affect of adopting SAB 101. The Company does not
expect that the adoption of SAB 101 will have a significant impact on its
financial condition or results of operations.
5. SUBSEQUENT EVENT
The Company has signed definitive agreements in connection with a Common
Stock financing (the "Financing"). The investors in the Financing are selected
institutional and other accredited investors. If the Financing closes, the
Company will issue 5,858,823 shares of Common Stock at a purchase price of $4.25
per share for aggregate net proceeds of $22.5 million. The shares of Common
Stock have not been registered under the Securities Act of 1933, as amended, and
may not be offered or sold in the United States absent registration, or
applicable exemption from registration. The Company has also agreed to file a
registration statement, within 30 days of the close of the Financing, for the
purpose of registering under the Securities Act of 1933 the resale of all of the
common stock sold pursuant to the Financing.
The Company intends to use the net proceeds from this Financing to
expand sales, marketing and manufacturing capacity for its key products, and
for working capital and general corporate operations.
The closing of the Financing is contingent upon the Company satisfying
the stockholder approval requirements of the NASDAQ National Market in
connection with the Financing and obtaining the approval of the holders of a
majority of the shares of Series B Convertible Preferred Stock of the Company.
The closing of the Financing is also subject to other customary closing
conditions, including the absence of a material adverse change in the Company's
financial condition since the date of its most recent Annual Report on Form
10-K, as amended. Subject to the conditions of closing, the Financing is
expected to close during the third week of December.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors that include, but are not limited to, the risks
discussed in "Factors That May Impact Future Operations" as well as those
discussed in the following "Overview" section. These forward-looking statements
include the statement in the first paragraph of "Overview" relating to 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 third
paragraph of "Overview" relating to the manufacturing, marketing and
distribution of the Company's products, the statements in the last sentence of
"Cost of Goods Sold" relating to 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 fourth paragraph of "Liquidity and
Capital Resources" regarding the Company's expected liquidity and capital needs,
the statements in the last sentence of the third 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 continuing its shift 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 September 30, 2000 had an accumulated deficit of
approximately $99.2 million. The Company's Chilli Cooled Ablation Catheter sales
exceeded $1 million during the quarter driven by a growing base of acceptance
and utilization by clinicians in the U.S. and Europe. The Company's increase in
revenues was also driven by sales of the Ensemble/Trio/Radii-T mapping and
ablation catheter in Japan and the initial placements of RPM Tracking Systems in
the U.S. and Europe. The Company is focusing its resources on its two key
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 RPM Tracking System and Chilli Cooled Ablation Catheter with RPM
tracking were introduced to the U.S. and European markets in May and June of
this year. The proprietary technology, developed by the company, can be used in
most diagnostic electrophysiology procedures for real-time visualization of
catheters utilizing ultra-sound 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. The RPM Tracking System
and Chilli Cooled Ablation Catheter with tracking have received FDA clearance in
the U.S. and CE Mark approval in Europe.
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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 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
Net Sales. The Company's net sales increased 120% to $3.0 million for
the three months ended September 30, 2000 compared to $1.4 million for the three
months ended September 30, 1999. The increase in net sales for the three months
ended September 30, 2000 was driven primary by growth in Chilli Cooled Ablation
Catheter sales on a worldwide basis, initial placements of RPM Tracking Systems
in the U.S. and Europe and growth in Japan driven primarily by
Ensemble/Trio/Radii-T catheters.
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. $75
thousand of royalty income related to the Arrow agreement was recognized for the
3 months ended September 30, 2000 and 1999.
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 $2.5 million and $1.4 million for the three months ended
September 30, 2000 & 1999, respectively. For the three months ended September
30, 2000, the Company had a gross margin $554 thousand, or 18% of revenue,
compared to a gross margin deficit of ($11) thousand in the year earlier period.
The improvement in the gross margins for the three months ended September 30,
2000 compared to the same period in the prior year reflects the impact of
increasing product volume, process yield improvements and material cost
reduction programs.
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 48% to $1.0 million for the three
months ended September 30, 2000 from $1.9 million for the three months ended
September 30, 1999. The decrease in research and development expenses was due
primarily to the allocation of a greater share of facility costs to
manufacturing and refocusing R&D resources on RPM and Chilli/7 French catheter
development initiatives.
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
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costs of trade shows. Selling, general and administrative expenses increased to
$2.6 million for the three months ended September 30, 2000 from $1.6 million for
the three months ended September 30 1999. The increase in selling, general and
administrative expenses resulted primarily from increased marketing and sales
infrastructure supporting the North America and European markets.
Other Income (Expense), Net. Net other income was $155 thousand for the
three months ended September 30, 2000, compared to $262 thousand for the three
months ended September 30, 1999. Other income consists primarily of interest
income.
Net Loss. The net loss applicable to common stockholders for the three
months ended September 30, 2000 was $3.6 million or $1.17 per share compared to
a net loss of $4.9 million or $2.45 for the three months ended September 30,
1999.
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.
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 September 30, 2000, the Company
had $9.2 million in cash, cash equivalents and short-term investments.
Net cash used in operating activities was $2.4 million and $2.6 million
for the three months ended September 30, 2000 and 1999, 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 $73 thousand and
$11.1 million for the three months ended September 30, 2000 and 1999,
respectively. Net cash used in investing activities resulted primarily from
purchases of property and equipment, offset in part by maturities and sales of
short-term investments. Net cash provided by financing activities was $25
thousand and $28.4 million for the three months ended September 30, 2000 and
1999. The net cash provided by financing activities for the period ending
September 30, 1999 resulted primarily from the proceeds of the Series B
Convertible Preferred stock transaction, offset in part by repayment of the
bridge loan.
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As of the end of September 30, 2000, the Company had capital equipment
of approximately $10.7 million, less accumulated depreciation and amortization
of approximately $6.6 million, to support its product development, manufacturing
and administrative activities. The Company expects capital expenditures to
increase over the next several years as it acquires equipment to support
manufacturing and development activities.
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.
On November 3, 2000, the Company entered into definitive agreement with
certain investors, some of whom are stockholders of the Company, which provide
for the issue and sale of 5,858,813 shares of common stock to these investors at
a per share purchase price of $4.25. The shares of common stock being sold in
this financing have not been registered under the Securities Act of 1933, as
amended, and may not be offered or sold in the United States absent registration
or an applicable exemption from registration. The Company will realize aggregate
net proceeds of $22.5 million from the financing. The closing for this financing
is contingent upon a number of things, including the Company satisfying the
stockholder approval requirements of the Nasdaq National Market and obtaining
the approval of holders representing a majority of the outstanding Series B
Convertible Preferred Stock as well as other customary closing conditions. There
can be no assurance that this financing will close or that the Company will be
receiving funding from investors on the terms described above.
There can be no assurance that 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 following paragraph,
"Factors That May Impact Future Operations" and elsewhere in this Report will
impact the Company's future capital requirements and the adequacy of its
available funds.
FACTORS THAT MAY IMPACT FUTURE OPERATIONS
Limited Operating History; History of Losses and Expectation of Future
Losses
The Company was founded in 1991 and to date has engaged primarily in
researching, developing, testing and obtaining regulatory clearances for its
products. The Company has experienced significant operating losses since
inception. As of September 30, 2000, the Company had an accumulated deficit of
$99.2 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 radio frequency ablation on patients are unknown. As a result, the
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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
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.
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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 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
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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.
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
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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 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.
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Government Regulation
United States
The design, pre-clinical and clinical testing, manufacture, labeling,
sale, distribution and promotion of the Company's products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign regulatory agencies. Noncompliance with
applicable requirements can result in, among other things, fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant 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
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the CE 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
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reimbursement may be enacted in the future, or what effect such legislation or
regulation would have on the Company.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country by country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in international
markets targeted by the Company. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
amount, or at all.
Regardless of the type of reimbursement system, the Company believes
that physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. In addition, the Company believes that treatment with the
Company's products will be more efficacious than currently available therapies.
The Company anticipates that hospital administrators and physicians would
justify the use of the Company's products by the attendant cost savings and
clinical benefits that the Company believes would be derived from the use of its
products. However, there can be no assurance that this will be the case. There
can be no assurance that reimbursement for the Company's products will be
available in the United States or in international markets under either
government or private reimbursement systems, or that physicians will support and
advocate reimbursement procedures using the Company's products.
Product Liability and Insurance
The development, manufacture and sale of medical products entail
significant risk of product liability claims and product failure claims. The
Company has only limited commercial sales to date and does not yet have, and
will not have for a number of years, sufficient clinical data to allow the
Company to measure the risk of such claims with respect to its products. The
Company faces an inherent business risk of financial exposure to product
liability claims in the event that the use of its products results in personal
injury or death. The Company also faces the possibility that defects in the
design or manufacture of the Company's products might necessitate a product
recall. There can be no assurance that the Company will not experience losses
due to product liability claims or recalls in the future. In addition, the
Company will require increased product liability coverage if any of its
potential products are successfully commercialized. Such insurance is expensive,
difficult to obtain and may not be available in the future on acceptable terms,
or at all. Any claims against the Company regardless of their merit or eventual
outcome could have a material adverse effect upon the Company's business,
financial condition and results of operations.
Employees
The Company's ability to operate successfully depends in significant
part upon the continued service of certain key scientific, technical, clinical,
regulatory and managerial personnel, and its continuing ability to attract and
retain additional highly qualified scientific, technical, regulatory and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company can retain such personnel or that it can
attract or retain other highly qualified scientific, technical, clinical,
regulatory and managerial personnel in the future, including key sales and
marketing personnel. The loss of key personnel or the inability to hire and
retain qualified personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations.
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The Company's management has recently gone through a significant
restructuring. The Company's new President and Chief Executive Officer, Thomas
M. 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 have 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 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 holder, into 5.45
million shares of the Company's common stock. The
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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 has 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".
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
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CARDIAC PATHWAYS CORPORATION
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying Exhibit Index are filed as
a part hereof.
(b) No reports on Form 8-K have been filed for the quarter ended
September 30, 2000.
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CARDIAC PATHWAYS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: NOVEMBER 10, 2000 CARDIAC PATHWAYS CORPORATION
/S/ THOMAS M. PRESCOTT
-----------------------------------
THOMAS M. PRESCOTT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/S/ ELDON M. BULLINGTON
-----------------------------------
ELDON M. BULLINGTON
VICE PRESIDENT OF FINANCE AND CHIEF
FINANCIAL OFFICER
24
<PAGE> 25
CARDIAC PATHWAYS CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION PAGE NO.
----------------- ----------------------- ----------
<S> <C> <C>
27.1 Financial Data Schedule 25
</TABLE>
25
