<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998.
[ ] 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: 0-28424
CARDIOGENESIS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0352469
- - ----------------------------- ---------------------------------
(State or other (I.R.S. employer
jurisdiction of identification No.)
incorporation or
organization)
540 OAKMEAD PARKWAY
SUNNYVALE, CALIFORNIA 94086
(Address of principal executive
offices, including zip code)
(408) 328-8500
(Registrant's telephone number,
including area code)
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 [ ]
The number of shares of Common Stock outstanding as of October 31, 1998 was
12,281,845.
<PAGE> 2
CARDIOGENESIS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 1998 3
and December 31, 1997 (unaudited)
Condensed Consolidated Statements of Operations for the three 4
months and nine months ended September 30, 1998 and 1997 (unaudited)
Condensed Consolidated Statements of Cash Flows for the nine 5
months ended September 30, 1998 and 1997 (unaudited)
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 7
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURE 14
INDEX TO EXHIBITS 15
</TABLE>
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<PAGE> 3
CARDIOGENESIS CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1998 1997
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,901 $ 6,047
Available-for-sale securities 2,783 24,469
Accounts receivable, net 1,633 3,293
Inventories 1,829 1,109
Other current assets 1,614 1,751
------- -------
Total current assets 14,760 36,669
Property and equipment, net 1,581 1,529
Available-for-sale securities, non-current 15,676 10,019
Other assets 24 23
------- -------
Total assets $32,041 $48,240
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,410 $ 3,944
Deferred revenue 295 150
------- -------
Total liabilities 6,705 4,094
Contingencies (Note 3)
Stockholders' equity 25,336 44,146
------- -------
Total liabilities and stockholders' equity $32,041 $48,240
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-3
<PAGE> 4
CARDIOGENESIS CORPORATION
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 1,053 $ 1,225 $ 2,979 $ 5,509
Cost of sales 1,028 856 2,657 3,448
-------- -------- -------- --------
Gross profit 25 369 322 2,061
-------- -------- -------- --------
Operating expenses:
Research and development 4,080 3,699 12,257 10,203
General and administrative 1,312 1,071 4,221 2,762
Sales and marketing 1,979 1,395 4,816 3,693
-------- -------- -------- --------
Total operating expenses 7,371 6,165 21,294 16,658
-------- -------- -------- --------
Operating loss (7,346) (5,796) (20,972) (14,597)
Interest income and other, net 405 697 1,463 2,188
-------- -------- -------- --------
Net loss $ (6,941) $ (5,099) $(19,509) $(12,409)
======== ======== ======== ========
Net loss per common share
and per common share
- assuming dilution $ (0.57) $ (0.42) $ (1.60) $ (1.03)
======== ======== ======== ========
Shares used in computing
net loss per common share
and per common share
- assuming dilution 12,234 12,039 12,189 12,008
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-4-
<PAGE> 5
CARDIOGENESIS CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities :
Net loss $(19,509) $(12,409)
Adjustments to reconcile net loss to
net cash used in operating activities :
Depreciation and amortization 576 335
Amortization of deferred compensation 343 359
Changes in assets and liabilities :
Accounts receivable 1,660 380
Inventories (720) (32)
Other current assets 137 (639)
Accounts payable and accrued expenses 2,466 580
Deferred revenue 145 (370)
-------- --------
Net cash used in operating activities (14,902) (11,796)
-------- --------
Cash flows from investing activities :
Purchase of available-for-sale securities (15,362) (29,268)
Maturities of available-for-sale securities 31,458 43,840
Acquisition of property and equipment (628) (360)
Other assets (1) --
-------- --------
Net cash provided by investing activities 15,467 14,212
-------- --------
Cash flows from financing activities :
Proceeds from issuance of Common Stock 289 237
-------- --------
Net cash provided by financing activities 289 237
-------- --------
Effect of foreign currency translation adjustment -- (31)
-------- --------
Net increase in cash and cash equivalents 854 2,622
Cash and cash equivalents, beginning of period 6,047 2,080
-------- --------
Cash and cash equivalents, end of period $ 6,901 $ 4,702
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-5-
<PAGE> 6
CARDIOGENESIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
These interim consolidated financial statements are unaudited, but have
been prepared in accordance with generally accepted accounting principles for
interim information and with the instructions to Form 10-Q. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of financial position, results of operations
and cash flows at the dates and for the periods presented have been included.
The interim financial information herein is not necessarily indicative of
results for any future period. The interim consolidated financial statements
should be read in conjunction with the audited financial statements and the
notes thereto for the fiscal year ended December 31, 1997 included in the
Company's Form 10-K filed with the Securities and Exchange Commission.
NOTE 2 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
------------ -----------
(in thousands)
(unaudited)
<S> <C> <C>
Raw materials $1,512 $736
Finished goods 317 373
------ ------
$1,829 $1,109
====== ======
</TABLE>
NOTE 3 - CONTINGENCIES
In September 1996, the Company filed an action for declaratory relief against
PLC Systems, Inc. of Canada and its wholly-owned U.S. subsidiary, PLC Medical
Systems, Inc., (collectively, "PLC"), seeking a judgment that PLC's United
States patent No. 5,125,926 (the "PLC Patent") to a certain heart-synchronized
pulsed laser system is not infringed, is invalid and is unenforceable. In the
suit, filed in the United States District Court for the Northern District of
California, the Company initially requested the Court to enter judgment that the
Company's Transmyocardial Revascularization (TMR) systems do not infringe the
PLC Patent. In October 1996, PLC responded to the complaint. In its response,
PLC took the position that the PLC Patent has been infringed by the Company, but
made no further claims. In September 1997, the Company filed an amended
complaint asking the Federal District Court to consider evidence of inequitable
conduct in the U.S. Patent Office while the PLC Patent was being obtained by
PLC. The amended complaint asserts that the PLC Patent is invalid and
unenforceable because material prior work of another party was withheld from the
Patent Office. Trial is set to begin on January 11, 1999.
On February 9, 1998, PLC submitted the PLC Patent to the U.S. Patent Office
seeking reissue on the basis that the PLC Patent as granted is "wholly or partly
inoperative or invalid."
-6-
<PAGE> 7
In January 1997, the Company filed an Opposition to a European Patent owned
by PLC (the "European Patent") that is a counterpart to the PLC Patent. The
Opposition seeks to have the European Patent declared invalid. The Company
believes it has meritorious positions with respect to the invalidity of the
European Patent and intends to pursue the Opposition proceeding vigorously.
There is also a second opposition to the European Patent being pursued by a
third party.
In September 1997, the Company was served with a complaint filed by PLC in
Munich, Germany alleging that the Company and its former German sales agent have
infringed EP 0 553 576, a European counterpart of the PLC Patent. The Company
has referred the complaint to patent counsel and is proceeding in its defense.
NOTE 4 - COMPUTATION OF NET LOSS PER COMMON SHARE AND PER COMMON SHARE --
ASSUMING DILUTION
The Company adopted Financial Accounting Standards Board Statement No. 128
"Earnings Per Share" and the provisions of the Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 98, and accordingly all prior
periods have been restated. Net loss per common share and per common share --
assuming dilution are computed using the weighted average number of shares of
common stock outstanding. Common equivalent shares from stock options are
excluded from the computation of diluted net loss per common share as their
effect is antidilutive.
Stock options to purchase 2,467,369 shares of common stock at prices ranging
from $.1220 per share to $12.875 per share were outstanding at September 30,
1998, but were not included in the computation of diluted net loss per common
share because they were antidilutive. The aforementioned stock options could
potentially dilute earnings per share in the future.
NOTE 5 - LINE OF CREDIT
In June 1998, the Company entered into a loan and security agreement with a
bank which provides an $8 million line of credit. Amounts borrowed under the
agreement bear interest at a rate equal to the bank's prime rate and are
collateralized by the Company's assets. The agreement contains certain financial
covenants and is available until May 15, 1999. There was no outstanding balance
as of September 30, 1998.
NOTE 6 - PROPOSED MERGER
On October 22, 1998, the Company entered into an agreement to merge with
Eclipse Surgical Technologies, Inc. ("Eclipse"). In the merger 0.80 of a share
of Eclipse common stock will be issued in exchange for 0.8 shares of Eclipse's
common stock for each share of the Company's common stock. The two companies
expect that the transaction will, due to its structure, qualify as a tax-free
re-organization to be accounted for as a pooling of interests. The Board of the
Directors of the Company and Eclipse have approved the agreement; however, the
merger is subject to approval by the stockholders of the Company and Eclipse.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements involve a number of risks and uncertainties, including the factors
described throughout this Report, and in the Company's Form 10-K filed with the
Securities and Exchange Commission, particularly the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors." The actual results the Company achieves may differ
materially from any forward-looking statements due to such risks and
uncertainties. The Company has identified by an asterisk (*) various sentences
within this Report which contain such forward-looking statements, and words such
as "believes", "anticipates", "expects", "intends" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. The Company undertakes no obligation to revise
any forward-looking statements to reflect events or circumstances that may arise
after the date of this Report. Readers are urged to carefully review and
consider the various disclosures made by the Company in this Report and in the
Company's 1997 Form 10-K for the year ended December 31, 1997 filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.
-7-
<PAGE> 8
OVERVIEW
Since its inception, CardioGenesis has been primarily engaged in the design,
development, and marketing of its transmyocardial revascularization ("TMR")
systems. The Company has only a limited operating history and has experienced
significant operating losses since its inception. The Company incurred a net
loss of $6.9 million in the three months ended September 30, 1998. The
development and potential commercialization of the Company's products will
continue to require significant research and development, regulatory, sales and
marketing, manufacturing and other expenditures. *Operating losses are expected
to continue at least through 1999 as the Company continues to perform research
and development, to fund clinical trials in support of regulatory and
reimbursement approvals, and to expand its marketing and sales activities in the
U.S. and internationally by supporting Boston Scientific Corporation ("BSC"),
the Company's exclusive distributor in international markets. There can be no
assurance that the Company's TMR systems will ever generate significant revenues
or that the Company will achieve or sustain profitability.
The research, manufacture, sale and distribution of medical devices such as the
Company's TMR systems are subject to numerous regulations imposed by
governmental authorities, principally the Food and Drug Administration ("FDA")
and corresponding state and foreign agencies. The regulatory process is lengthy,
expensive and uncertain. FDA approval of a Pre-market Approval ("PMA")
application is required before any of the Company's TMR systems can be marketed
in the United States. Securing FDA approvals and clearances will require
submission to the FDA of extensive clinical data and technical information.
Also, many foreign governments and the European Union also have review processes
for medical devices. The Company has received CE Mark approval to market its
intraoperative CardioSync (TM) TMR (ITMR) System and percutaneous Axcis(TM) PMR
System in the European Union. The CE Mark is granted to companies whose products
meet the essential requirements of the European Medical Device Directive ("MDD")
and provides the regulatory approval necessary for commercialization in Europe.
The Company will be subject to continued supervision by regulators and will be
required to report any serious adverse incidents to the appropriate authorities.
The Company also will be required to comply with additional national
requirements that are outside the scope of the MDD. *The Company plans to
continue to seek regulatory approvals to allow for marketing and distribution of
its products in international markets.
The Company commenced clinical trials of its CardioSync ITMR System in October
1995 and began clinical trials of its Axcis PMR System in November 1996.
Clinical trials of the Company's thoracoscopic TMR (TTMR) System have not
commenced.
In July 1996, the Company began a Phase II clinical trial under an
investigational device exemption ("IDE") that allowed a prospective, randomized,
multi-center clinical trial of its CardioSync ITMR System in "no-option"
patients with severe coronary artery disease ("CAD"). Enrollment in the Phase
II, randomized, no-option trial is now complete. The Company is nearing
completion of its submission of data and information on the CardioGenesis
CardioSync ITMR System in a modular format to the FDA. The FDA has requested
that the Company delay submission of the final clinical package until the agency
catches up with their September 30, 1998 fiscal year end backlog. The Company is
not aware of any FDA issues with its modular submission to date. *CardioGenesis
believes that its relationship with the FDA remains strong, and does not
believe that this request will slow down CardioGenesis' progress towards a
Pre-market Approval (PMA) panel date or ultimate FDA approval.
In August 1996, the Company received an IDE from the FDA and has begun a major
clinical study of its CardioSync ITMR System used as an adjunctive therapy to
coronary artery bypass graft ("CABG") surgery in patients with severe angina who
are only partially treatable by CABG. The adjunct to CABG clinical trials are
ongoing.
Clinical trials for the Company's Axcis PMR System commenced in Europe in
November 1996. In January 1998, the Company received the CE Mark approval for
use of its Axcis PMR System in the European Community. In July 1997, the Company
received an IDE from the FDA which allows a multi-center clinical trial of the
Axcis PMR System to treat angina in no-option patients. Enrollment and treatment
for the prospective randomized Phase II trial of the Company's Axcis PMR System
has been completed and the trials are ongoing with three, six and twelve month
patient follow ups.
-8-
<PAGE> 9
The trial, which includes over 290 patients, is being conducted at 12 major
cardiovascular treatment centers in both the U.S. and Europe. * The Company
plans to pursue a modular submission for regulatory approval and intends to
submit information and updates for the formal follow up period of the study.
*This proactive and collaborative approach to submissions provides the Company
with a means for frequent reviews by the FDA of information required for PMA of
the Axcis PMR System.
In September 1998, the Company received a preliminary IDE from the FDA and has
begun a prospective, randomized clinical study of its Axcis PMR System used as
an adjunctive therapy to percutaneous transluminal coronary angioplasty ("PTCA")
surgery. The trial, which has been approved for 40 patients, is being conducted
at 5 major cardiovascular treatment centers in the U.S. The Company anticipates
expanding the trial in the future.
The Company recorded sales of $3.0 million for the first nine months of
1998 from sales of its CardioSync ITMR Systems, Axcis PMR Systems and
disposable probes and catheters to clinical trial sites in the U.S. and to its
international distributor, BSC. The Company recognizes product revenues upon
shipment of its products to customers and fulfillment of acceptance terms, if
any, and when no significant contractual obligations remain outstanding.
Deferred revenue consists of shipments that have been made which are subject to
limited rights of return or other contingencies. *The Company anticipates that
it will continue to derive revenues from product sales over the next several
years from international sales to BSC. Any such international sales will be
subject to a number of risks, including foreign currency fluctuations, economic
or political instability, foreign tax laws, shipping delays, various tariffs
and trade regulations and restrictions and foreign medical regulations, any of
which could have a material adverse impact on the Company's revenues.
*Results of the Company's operations have varied and are expected to fluctuate
significantly from quarter to quarter depending on numerous factors, including:
(i) reliance on BSC; (ii) demand for the Company's products, new product
introductions by the Company or its competitors or transitions to new products;
(iii) the timing of orders and shipments; (iv) the degree of acceptance of TMR
therapy by the medical community; (v) competition, including pricing pressures;
(vi) potential third-party patent infringement claims; (vii) the timing of
regulatory and third-party reimbursement approvals; (viii) expansion of the
Company's manufacturing capacity and the Company's ability to manufacture its
products efficiently; (ix) the timing of research and development expenses,
including clinical trial-related expenditures; and (x) seasonal factors
affecting the number of procedures performed. *Due to such fluctuations in
operating results, period-to-period comparisons of the Company's operating
results are not necessarily meaningful and should not be relied upon as
indicators of likely future performance.
On October 22, 1998, the Company entered into an agreement to merge with Eclipse
Surgical Technologies, Inc. ("Eclipse"). In the merger 0.80 of a share of
Eclipse common stock will be issued in exchange for 0.8 shares of Eclipse's
common stock for each share of the Company's common stock. The two companies
expect that the transaction will, due to its structure, qualify as a tax-free
re-organization to be accounted for as a pooling of interests. The Board of
Directors of the Company and Eclipse have approved the agreement; however, the
merger is subject to approval by the stockholders of the Company and Eclipse.
RESULTS OF OPERATIONS
Sales. Sales of the Company's CardioSync ITMR Systems, Axcis PMR Systems and
disposable products for commercial use in Europe and for use at clinical trial
sites in both the U.S. and Europe decreased approximately $172,000 to $1.1
million for the three months ended September 30, 1998 from $1.2 million for the
same period in 1997. Sales decreased approximately $2.5 million to $3.0 million
for the nine months ended September 30, 1998 from $5.5 million for the same
period in 1997. This reduction in sales is due primarily to constraints on
capital equipment purchases resulting from hospital budgets and government
overview outside the U.S., and by the limited current availability of
reimbursement for TMR procedures in Europe.
Cost of Sales. Cost of sales consists of direct and indirect costs of providing
CardioSync ITMR Systems, Axcis PMR Systems and disposable products to customers.
Cost of sales was approximately $1 million, or 98% of sales, for the three
months ended September 30, 1998 and $856,000, or 70% of sales, for the same
period in 1997. Cost of sales was approximately $2.7 million, or 89% of sales,
for the nine months ended September 30, 1998 and $3.4 million, or 63% of sales,
for the same period in 1997. The increase in cost of sales as a percent of sales
from 1997 to 1998 was primarily due to the allocation of fixed overhead costs
over fewer units.
Research and Development Expenses. Research and development expenses increased
approximately $381,000 to $4.1 million for the three months ended September 30,
1998 from $3.7 million for the same period in 1997.
-9-
<PAGE> 10
Research and development expenses increased approximately $2.1 million to $12.3
million for the nine months ended September 30, 1998 from $10.2 million for the
same period in 1997. The increase in 1998 was primarily due to higher clinical
expenses for increased activity in the clinical trials and continued investment
in research in the field of TMR. *The Company expects research and development
expenses to continue to increase at least through 1998 as the Company continues
patient follow ups in its ongoing clinical trials, initiates additional clinical
trials, and continues to invest in TMR mechanism research.
General and Administrative Expenses. General and administrative expenses
increased approximately $241,000 to $1.3 million for the three months ended
September 30, 1998 from $1.1 million for the same period in 1997. General and
administrative expenses increased approximately $1.5 million to $4.2 million for
the nine months ended September 30, 1998 from $2.8 million for the same period
in 1997. The increase in 1998 was primarily due to legal fees related to the
lawsuit by the Company against PLC seeking a judgment that the PLC patent is not
infringed by the Company and is invalid and unenforceable. *The Company expects
that general and administrative expenses will continue to increase at least
through 1998.
Sales and Marketing Expenses. Sales and marketing expenses increased
approximately $584,000 to $2.0 million for the three months ended September 30,
1998 from $1.4 million for the same period in 1997. Sales and marketing expenses
increased approximately $1.1 million to $4.8 million for the nine months ended
September 30, 1998 from $3.7 million for the same period in 1997. The increase
in 1998 was primarily due to increased sales and marketing costs associated with
the distribution of the CardioSync ITMR and Axcis PMR Systems in Europe. *The
Company expects that sales and marketing expenses will continue to increase in
1998 and 1999 as the Company conducts physician training and expands sales and
marketing activities in the U.S. and in Europe.
Interest Income and Other, Net. Interest income and other, net decreased
approximately $292,000 to $405,000 for the three months ended September 30, 1998
from $697,000 for the same period in 1997. Interest income and other, net
decreased $725,000 to $1.5 million for the nine months ended September 30, 1998
from $2.2 million for the same period in 1997. The decrease is primarily due to
decreases in the Company's cash and cash equivalents and short-term investments
balances.
Deferred Compensation Expense. The Company recorded deferred compensation
expense of approximately $1.4 million and $874,000 with respect to options to
purchase Common Stock granted and Preferred Stock issued during 1996 and 1995,
respectively. Deferred compensation expense is being amortized over the vesting
period of the options, which is generally four years. Compensation expense of
$114,000 and $114,000 was recognized for the three months ended September 30,
1998 and 1997, respectively. Compensation expense of $343,000 and $359,000 was
recognized for the nine months ended September 30, 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations since inception primarily through the
private sale of capital stock and interest income on proceeds from private
financings as well as proceeds and interest thereon from its initial public
offering in May 1996. Through September 30, 1998, the Company had raised
approximately $77.7 million from the sale of stock, net of issuance costs.
In June 1998, the Company entered into a loan and security agreement with a bank
which provides an $8.0 million line of credit. Amounts borrowed under the
agreement bear interest at a rate equal to the bank's prime rate and are
collateralized by the Company's assets. The agreement contains certain financial
covenants and is available until May 15, 1999. There was no outstanding balance
as of September 30, 1998.
Net cash used in the Company's operations was $14.9 million and $11.8 million
for the nine months ended September 30, 1998 and 1997, respectively. The
Company's acquisition of property and equipment was $628,000 and $360,000 for
the nine months ended September 30, 1998 and 1997, respectively. The increase
from 1997 to 1998 is attributed to the purchase of lasers for research &
development purposes.
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<PAGE> 11
At September 30, 1998, the Company had cash, cash equivalents and
available-for-sale securities, totaling $25.4 million. *The Company plans to
finance its operations and capital needs principally from cash, cash
equivalents, and available-for-sale securities, and, to the extent available,
from bank and lease financing, and believes these sources of cash will be
sufficient to fund its operations through the next twelve months. However, the
Company's future liquidity and capital requirements will depend upon numerous
factors, including the level of sales of the Company's products generated by BSC
in major and emerging international markets; market acceptance of, and demand
for the Company's products; the Company's clinical research and product
development programs; the receipt of, and the time required to obtain regulatory
clearances and approvals; the resources the Company devotes to the development,
manufacture and marketing of its products; the resources required to hire and
develop a direct sales force in the United States, and to expand manufacturing
capacity; facilities requirements; and other factors. *Although the Company
believes its current levels of cash, cash equivalents, and available-for-sale
securities, together with cash generated from operations, will provide adequate
funding for its operations and capital requirements through the next twelve
months, the Company may be required to raise additional funds through public or
private debt or equity financings, collaborative relationships, bank facilities
or other arrangements. There can be no assurance the Company will not require
additional funding sooner or that such additional funding, if needed, will be
available on terms attractive to the Company, or at all. *Any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve restrictive covenants.
IMPACT OF THE YEAR 2000 ON INFORMATION SYSTEMS
The Company has completed its preliminary assessment of both its IT (information
technology) and non-IT systems. For the Company's IT system, non-compliant
software and hardware have been identified, and upgrades are in progress. The
Company generally does not customize or use internally developed software for
the IT function, and therefore, the IT upgrades in progress consist of replacing
existing software with Year 2000-compliant revisions supplied by the
manufacturers of the software.* The Company's IT system is expected to be Year
2000-compliant by March 31, 1999.
Several non-IT systems have been identified which are not Year 2000-compliant.
The Company is developing remediation plans for these systems which may include
the purchase of vendor-supported upgrades or the purchase of new systems known
to be Year 2000-compliant.* The Company's non-IT systems are expected to be Year
2000-compliant by June 30, 1999.
The Company is obtaining written assurance from its suppliers that date
sensitive components incorporated into the Company's products are Year
2000-compliant.* The Company expects to receive such assurances by March 31,
1999.
The Company is preparing to contact key vendors and other third parties
with which the Company has a significant relationship to determine their
readiness with respect to Year 2000 issues. *The Company is setting a
preliminary target to receive this information by June 30, 1999, but there is a
possibility, based on the timeliness of the responses, that this process could
take longer.
*The Company has prepared a preliminary estimate of total Year 2000 remediation
efforts of $50,000, none of which has been spent as of September 30, 1998. This
anticipated expense is primarily for upgrades of non-compliant non-IT systems
and for diagnostic software for the IT system.
The Company has not yet evaluated the consequences of its most reasonably
likely worst case Year 2000 scenario. The Company is in the process of
preparing Year 2000 contingency plans to address the question of "what the
company will do if it is not ready?". *The contingency plans are expected to be
complete by June 30, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information." SFAS
No. 131 requires publicly-held companies to report financial and other
information about key revenue-producing segments of the entity for which such
information is available and is utilized by the chief operating decision maker.
Specific information to be reported for individual segments includes profit or
loss, certain revenue and expense items and total assets. A reconciliation of
segment financial information to amounts reported in the financial statements
would be provided. SFAS No. 131 is effective for the Company for the year ending
December 31, 1998. The Company operates in one business segment; namely, the
research, development, manufacture and sale of cardiovascular surgical devices.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-11-
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 21, 1996, the Company commenced an offering of Common Stock and issued
3.0 million shares. The aggregate offering price of the shares sold was $60.0
million. Expenses and underwriting discounts and commissions incurred in
connection with the issuance totaled $5,533,000. Net offering proceeds to the
Company were $54,467,000. The table below shows all amounts from the effective
date of the registration statement to September 30, 1998.
All amounts are rounded to the nearest $1,000.
<TABLE>
<CAPTION>
Direct or indirect Direct or indirect
payments to directors, payments to others
officers, general partners
of the issuer or their
associates; to persons
owning ten percent or more
of any class of equity
securities of the issuer;
and to affiliates of the
issuer
---------------------------- ----------------------------
(A) (B)
---------------------------- ----------------------------
<S> <C> <C>
Construction of plant, -- --
building and facilities
Purchase and installation of -- --
machinery and equipment
Purchase of real estate -- --
Acquisition of other -- --
business(es)
Repayment of indebtedness -- --
Working capital -- 29,107,000
Temporary investment -- 25,360,000
============================ ============================
Net offering proceeds $0 $54,467,000
============================ ============================
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report on Form 10-Q
:
<TABLE>
Number Description
------ -----------
<S> <C>
27.01 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
Reference is made to the current report on Form 8-K filed by the
Company on November 3, 1998 relating to the signing of a
definitive agreement and plan of reorganization among the
Company, Eclipse Surgical Technologies, Inc. ("Eclipse") and RW
Acquisition Corporation, a wholly-owned subsidiary of Eclipse.
-12-
<PAGE> 13
SIGNATURE
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.
CARDIOGENESIS CORPORATION
(Registrant)
Date: November 16, 1998 By: /s/ Richard P. Powers
----------------------------------
Richard P. Powers
Executive Vice President, Chief
Financial Officer and Secretary
(Duly Authorized Officer, Principal
Financial Officer, and Principal
Accounting Officer)
-13-
<PAGE> 14
INDEX TO EXHIBITS
EXHIBIT
- - -------
27.01 Financial Data Schedule
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,901
<SECURITIES> 2,783
<RECEIVABLES> 1,633
<ALLOWANCES> 0
<INVENTORY> 1,829
<CURRENT-ASSETS> 1,614
<PP&E> 1,581
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,041
<CURRENT-LIABILITIES> 6,705
<BONDS> 0
0
0
<COMMON> 25,336
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 32,041
<SALES> 2,979
<TOTAL-REVENUES> 2,979
<CGS> 2,657
<TOTAL-COSTS> 2,657
<OTHER-EXPENSES> 21,294
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (19,509)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,509)
<EPS-PRIMARY> (1.60)
<EPS-DILUTED> (1.60)
</TABLE>
