<PAGE>
4,000,000 SHARES
[LOGO]
ECLIPSE SURGICAL TECHNOLOGIES, INC.
COMMON STOCK
----------------
All of the shares of Common Stock offered hereby are being sold by Eclipse
Surgical Tech-
nologies, Inc. Prior to this offering, there has been no public market for the
Common Stock of the Company. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Common
Stock has been approved for listing on The Nasdaq Stock Market's National Market
under the symbol ESTI.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGE
6.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share...................... $16.00 $1.12 $14.88
Total.......................... $64,000,000 $4,480,000 $59,520,000
Total Assuming Full Exercise of
Over-Allotment Option (3)...... $73,600,000 $5,152,000 $68,448,000
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $1,100,000, which are payable by the
Company.
(3) Assuming exercise in full of the 30-day option granted by the Company to the
Underwriters to purchase up to 600,000 additional shares, on the same terms,
solely to cover over-allotments. See "Underwriting."
-------------------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made in New York City on or about June 5,
1996.
-------------------
PAINEWEBBER INCORPORATED
DEUTSCHE MORGAN GRENFELL
JEFFERIES & COMPANY, INC.
------------
THE DATE OF THIS PROSPECTUS IS MAY 31, 1996
<PAGE>
THE COMPANY MUST OBTAIN PRE-MARKET APPROVAL FROM THE U.S. FOOD AND DRUG
ADMINISTRATION BEFORE THE COMPANY WILL BE ABLE TO OFFER ITS PRODUCTS FOR TMR ON
A COMMERCIAL BASIS IN THE U.S. THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL
OBTAIN SUCH APPROVAL OR WHEN SUCH APPROVAL MAY BE OBTAINED. SEE "RISK FACTORS --
NO ASSURANCE OF FDA OR OTHER REQUIRED GOVERNMENTAL APPROVALS."
<TABLE>
<C> <S>
TMR is an investigational surgical procedure performed on
[PHOTOGRAPH OF the beating heart of patients with debilitating angina in
OPERATING ROOM order to improve the blood supply to the myocardium, or
SCENE] heart muscle.
</TABLE>
<TABLE>
<S> <C>
[Map of U.S. with TMR sites labelled]
Eclipse TMR lasers are installed in major hospital centers
in the U.S. The Company believes it has installed TMR
laser systems in more hospitals in the U.S. than any other
TMR provider.
</TABLE>
The Company intends to furnish to its shareholders annual reports containing
audited financial statements, quarterly reports containing unaudited financial
statements and such other periodic reports as the Company may determine to be
appropriate or as may be required by law.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-------------------
This Prospectus contains certain trademarks of the Company.
2
<PAGE>
PROSPECTUS SUMMARY
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS DISCUSSED IN THIS PROSPECTUS,
INCLUDING THOSE SET FORTH IN "RISK FACTORS." PROSPECTIVE INVESTORS SHOULD
CONSIDER CAREFULLY THE FACTORS DISCUSSED IN "RISK FACTORS." THE FOLLOWING
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL SHARE AND PER
SHARE DATA AND INFORMATION IN THIS PROSPECTUS RELATING TO THE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING (I) GIVE EFFECT TO A THREE-FOR-ONE SPLIT OF THE
COMMON STOCK EFFECTED IN MAY 1996, (II) GIVE EFFECT TO AMENDMENTS TO THE
COMPANY'S STOCK OPTION PLAN AND DIRECTOR STOCK OPTION PLAN AND ADOPTION OF AN
EMPLOYEE STOCK PURCHASE PLAN IN APRIL 1996, AND (III) ASSUME NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION TO PURCHASE UP TO 600,000 ADDITIONAL SHARES
OF COMMON STOCK.
THE COMPANY
Eclipse Surgical Technologies, Inc. (the "Company") designs, develops,
manufactures and distributes laser-based surgical products and disposable
fiber-optic accessories for the treatment of advanced cardiovascular disease
through transmyocardial revascularization ("TMR"). TMR is a surgical procedure
performed on the beating heart in which a laser device is used to create
pathways through the myocardium, or heart muscle, directly into the heart
chamber. The pathways are intended to enable improved blood supply to the
myocardium from the heart chamber. TMR potentially offers end-stage cardiac
patients a means to alleviate their symptoms of angina, or chest pain, and
improve their quality of life. The Company currently offers its Eclipse TMR 2000
laser system for sale in limited numbers for investigational use only, pursuant
to an Investigational Device Exemption ("IDE") granted by the U.S. Food and Drug
Administration ("FDA") in September 1995. From that time through April 30, 1996,
the Company has installed its TMR laser systems in 20 hospitals in the U.S. and
two hospitals in Europe. The Company believes it has installed TMR laser systems
in more hospitals in the U.S. than any other TMR provider.
According to the American Heart Association (the "AHA"), cardiovascular
disease is the leading cause of death and disability in the U.S. Coronary artery
disease, the principal form of cardiovascular disease, is characterized by a
progressive narrowing of the coronary arteries, which supply oxygenated blood to
the heart, potentially resulting in angina and damage to the heart. Typically,
the condition worsens over time and often leads to heart attack or death. More
than six million Americans experience anginal symptoms, and approximately
500,000 deaths in the U.S. annually are attributable to coronary artery disease.
The primary therapeutic options for treatment of coronary artery disease are
drug therapy, percutaneous transluminal coronary angioplasty ("PTCA" or "balloon
angioplasty") including techniques which augment or replace PTCA such as stent
placement and atherectomy, and coronary artery bypass graft surgery ("CABG" or
"open heart bypass surgery"). The total number of such cardiovascular related
surgical procedures performed in the U.S. each year is estimated at 885,000,
consisting of approximately 485,000 open heart bypass surgeries and 400,000 PTCA
procedures. When these primary therapeutic options are exhausted, the patient is
left with no viable surgical alternative other than, in limited cases, heart
transplantation. Without a viable surgical alternative, the patient is generally
managed with drug therapy, but often with significant lifestyle limitations. TMR
offers potential relief to this large class of patients with severe
cardiovascular disease.
The Company's initial clinical study, which commenced in November 1995, is
designed to assess the safety and effectiveness of the Company's TMR procedure
as compared with drug therapy in patients with severe angina. Phase I of this
clinical study was completed in January 1996, and Phase II, the final phase of
the clinical trial, commenced in March 1996. In the second quarter of 1996, the
Company intends to undertake Phase I of a second FDA approved TMR study designed
to assess the safety and effectiveness of TMR used in conjunction with CABG as
compared with CABG alone. Through these and other trials, the Company is seeking
to expand the indications for TMR.
3
<PAGE>
The Company's objective is to become the leading supplier in the TMR market
by developing multiple surgical platforms and providing a comprehensive suite of
high quality TMR products. The Company believes that its compact, flexible
fiber-optic based system will enable it to offer effective solutions across the
three principal surgical approaches potentially available for TMR, open chest
surgery, minimally invasive surgery and percutaneous surgery. The Company is
also developing a broad range of disposable fiber-optic based surgical tools
designed to operate with the Company's laser base unit and intended to provide
physicians with a broad range of options for their individual tactile
preferences and solutions for the different geometry of each patient's heart
cavity. The Company holds five U.S. patents and related foreign patents relating
to surgical treatment with lasers and fiber-optic handpieces, and has applied
for or is in the process of applying for additional patents relating to its
laser technology, TMR applications and fiber-optic handpieces. While the
Company's existing patents are not being utilized with the Company's current TMR
protocol, the Company believes such patents may be applicable to minimally
invasive and percutaneous approaches.
The Company must obtain pre-market approval ("PMA") from the FDA before the
Company will be able to offer its products for TMR on a commercial basis in the
U.S. There can be no assurance that the Company will obtain such approval, or
when such approval may be obtained.
The Company is a California corporation formed in 1989. The Company's
principal executive offices are located at 1049 Kiel Court, Sunnyvale,
California 94089 and its telephone number at that location is (408) 747-0120.
RISK FACTORS
The securities offered hereby involve a high degree of risk. The Company's
success will depend upon successful completion of clinical trials, which are
currently at an early stage; the receipt of FDA and other governmental
approvals, which may take considerable time, and may not be granted at all;
acceptance of TMR, which is a new surgical procedure, among the medical
community; the ability to protect the Company's intellectual property rights;
the risk of claims of infringement of third party intellectual property rights;
the ability of the Company to manage change and growth in its business,
particularly in light of the Company's limited history of TMR operations and
history of operating losses; the ability of the Company to succeed in light of
significant competition; and other risks. See "Risk Factors."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company......... 4,000,000 shares (1)
Common Stock Outstanding after the 15,682,396 shares (2)
Offering....................................
Use of Proceeds............................. For research and development including
clinical trials; expansion of sales and
marketing resources; capital expenditures,
including expansion of manufacturing
facilities; repayment of outstanding
indebtedness and overdue obligations; and
general corporate purposes including working
capital. See "Use of Proceeds."
Nasdaq National Market Symbol............... ESTI
</TABLE>
- - ------------------------------
(1) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to 600,000 additional shares of Common Stock.
(2) Excludes as of May 15, 1996 (i) 2,662,526 shares of Common Stock issuable
upon exercise of outstanding options under the Company's Stock Option Plan,
and 1,332,230 additional shares reserved for future issuance under such
plan, (ii) 33,000 shares of Common Stock issuable upon exercise of
outstanding options under the Company's Director Stock Option Plan and
167,000 additional shares reserved for future issuance under such plan,
(iii) 250,000 shares of Common Stock reserved for future issuance under the
Company's Employee Stock Purchase Plan and (iv) 1,171,638 shares of Common
Stock issuable upon exercise of outstanding warrants. See "Management --
Stock Option Plan," "-- Director Stock Option Plan," "-- Employee Stock
Purchase Plan" and "Description of Capital Stock -- Warrants."
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................................... $ 3,289 $ 2,645 $ 2,105 $ 2,020 $ 2,707 $ 528 $ 1,752
Cost of revenues.................................. 1,389 1,108 1,013 1,173 1,642 382 502
--------- --------- --------- --------- --------- ----------- -----------
Gross profit.................................. 1,900 1,537 1,092 847 1,065 146 1,250
--------- --------- --------- --------- --------- ----------- -----------
Operating Expenses:
Research and development........................ 813 920 906 971 1,010 195 517
Sales and marketing............................. 333 620 794 392 879 191 396
General and administrative...................... 367 546 325 1,031 681 199 211
--------- --------- --------- --------- --------- ----------- -----------
Total operating expenses.......................... 1,513 2,086 2,025 2,394 2,570 585 1,124
--------- --------- --------- --------- --------- ----------- -----------
Operating income (loss)....................... 387 (549) (933) (1,547) (1,505) (439) 126
Interest and other income (expense), net.......... (23) (19) (3) (435) (921) (221) (50)
Provision for income taxes........................ 35 -- -- -- -- -- --
--------- --------- --------- --------- --------- ----------- -----------
Net income (loss)............................. $ 329 $ (568) $ (936) $ (1,982) $ (2,426) $ (660) $ 76
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Net income (loss) per share................... $ 0.03 $ (0.05) $ (0.08) $ (0.16) $ (0.19) $ (0.05) $ 0.01
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Shares used in per share calculation.......... 10,491 10,537 11,676 12,526 12,765 12,765 14,863
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Supplemental net income (loss)(3)............. -- -- -- -- $ (2,298) -- $ 108
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Supplemental net income (loss) per share(3)... -- -- -- -- $ (0.18) -- $ 0.01
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Shares used in supplemental per share
calculation(3)............................... -- -- -- -- 12,884 -- 14,987
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................... $ 1,277 $ 57,738
Working capital......................................................................... 468 59,008
Total assets............................................................................ 4,679 61,020
Long-term obligations, less current portion(2).......................................... 23 23
Accumulated deficit..................................................................... (5,939) (5,939)
Total shareholders' equity.............................................................. 720 59,140
</TABLE>
- - ------------------------------
(1) As adjusted to give effect to the application of the estimated net proceeds
of the Offering. See "Use of Proceeds."
(2) Does not include $1,691 of current portion of long-term obligations which
will be paid in full out of the proceeds of the Offering. See "Use of
Proceeds."
(3) Supplemental net income, supplemental net income per share and shares used
in supplemental per share calculation for 1995 and the three months ended
March 31, 1996 were calculated assuming that the indebtedness to be repaid
with the net proceeds of the Offering had been repaid at the beginning of
each such period using the assumed proceeds from the sale of the minimum
number of shares required to retire such indebtedness. See "Use of
Proceeds."
5
<PAGE>
RISK FACTORS
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED BY SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS DISCUSSED IN THIS PROSPECTUS, INCLUDING THE RISK FACTORS SET FORTH
BELOW. PROSPECTIVE PURCHASERS OF THE COMMON STOCK SHOULD CONSIDER CAREFULLY THE
RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS
PROSPECTUS, PRIOR TO INVESTING IN THE COMMON STOCK OFFERED HEREBY.
EARLY STAGE OF CLINICAL TRIALS
The Company must obtain pre-market approval ("PMA") from the U.S. Food and
Drug Administration (the "FDA") before the Company will be able to offer its
products for transmyocardial revascularization ("TMR") on a commercial basis in
the U.S. A necessary prerequisite for submitting a PMA application is completion
of clinical testing to demonstrate the safety and effectiveness of the Company's
TMR products.
The Company is currently at an early stage of clinical testing. The Company
has completed Phase I of its initial clinical study and has only recently
commenced Phase II, the final phase of such study. Phase II will involve a
minimum of 126 patient trials, of which ten trials were performed from
commencement of the trials on March 18, 1996 through March 31, 1996. The study,
including 12-month patient follow-up reviews, is currently expected to be
completed by the latter half of 1997. However, completion of the clinical
studies on a timely basis will depend on the Company's ability to establish TMR
sites and enroll participating patients. In addition, the clinical studies will
require substantial financial and management resources. There can be no
assurance that the Company will have the resources necessary to complete such
clinical studies. Furthermore, there can be no assurance that the Company's
clinical studies will be completed within the currently anticipated time frame
or otherwise in a timely manner, nor that such clinical studies will demonstrate
the safety and effectiveness of the Company's TMR products to the extent
necessary to obtain FDA and other regulatory approvals and establish a
commercial market for the Company's products. Moreover, results of the initial
clinical testing are not necessarily predictive of results to be achieved in
later clinical studies, if undertaken, or commercially, if a PMA is obtained.
Failure to complete the Company's clinical studies in a timely manner or to
demonstrate the safety and effectiveness of the Company's TMR products could
delay or prevent regulatory approval and would materially and adversely affect
the Company's business, financial condition and results of operations. See "--
No Assurance of FDA Approval or Other Required Governmental Approvals" and
"Business -- Government Regulation."
NO ASSURANCE OF FDA OR OTHER REQUIRED GOVERNMENTAL APPROVALS
The Company's products are regulated in the U.S. as medical devices by the
FDA under the Federal Food, Drug, and Cosmetic Act ("FDC Act") and, as such,
require FDA approval of a PMA application prior to commercial sale in the U.S.
The FDA approves PMA applications for specific indications only and FDA policy
prohibits commercial marketing of devices for indications that have not been
approved by the FDA. The process of obtaining required regulatory approvals from
the FDA and other regulatory authorities is lengthy, expensive and inherently
uncertain, generally takes several years or longer to complete, if approval is
obtained at all, and requires the submission of extensive clinical data and
supporting information to the FDA. There can be no assurance that FDA approval
of products developed by the Company will be obtained on a timely basis, if at
all. Furthermore, there can be no assurance that FDA approval will be obtained
for any or all indications sought by the Company. Failure to obtain FDA approval
on a timely basis or for the indications sought by the Company would materially
and adversely affect the Company's business, financial condition and results of
operations.
Sales of medical devices outside of the U.S. are subject to foreign
regulatory requirements that vary widely by country. In addition, the FDA must
approve the export of devices that require a PMA but are not yet approved
domestically. 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. Although the Company is seeking regulatory approval to
begin marketing of its products outside the U.S., there can be no assurance that
such approval will be received on a timely basis, if at all.
6
<PAGE>
Foreign and domestic regulatory approvals, if granted, may include
significant limitations on the indicated uses for which the product may be
marketed. In addition, to obtain such approvals, medical device manufacturers
must comply with numerous other requirements of the FDA and certain foreign
regulatory authorities. For example, the Company will be required to obtain the
European Conforming Mark (the "CE Mark") by June 1998 for its products in order
to continue to sell its products after such date in European Union countries.
Product approvals can be withdrawn for failure to comply with regulatory
standards or because of unforeseen problems following initial marketing. The
Company will also be required to follow applicable Good Manufacturing Practices
("GMP") regulations of the FDA, which include testing, control and documentation
requirements, as well as similar requirements in other countries, including
International Standards Organization ("ISO") 9000 standards. Failure to meet
these requirements would preclude the Company from marketing its products on a
commercial basis, and therefore would materially and adversely affect the
Company's business, financial condition and results of operations. See "Business
- - -- Government Regulation."
RISKS ASSOCIATED WITH NEW SURGICAL PROCEDURE; NO ASSURANCE OF MARKET ACCEPTANCE
The Company's ability to successfully commercialize its TMR products will
depend upon its ability to achieve acceptance of its TMR systems and procedures
among cardiologists, cardiac surgeons and other members of the medical
community. The Company believes that it will not achieve such acceptance until
such time, if any, as the Company's TMR products can be demonstrated to be safe,
efficacious and cost-effective. Even if the clinical safety and effectiveness of
the Company's TMR products is established, cardiologists, cardiac surgeons and
other members of the medical community may elect not to recommend TMR for any
number of other reasons. Broad use of the Company's TMR products will require
training of numerous physicians, and the time required to complete such training
could adversely affect market acceptance. Moreover, even if TMR becomes
generally accepted by the medical community, physicians trained in competitive
TMR products may elect not to consider the Company's products, or may elect
instead to recommend a competitor's products. Failure of the Company's products
to achieve significant market acceptance would materially and adversely affect
the Company's business, financial condition and results of operations. See
"Business -- Regulatory Status" and " -- Competition."
DEPENDENCE ON SINGLE PRODUCT LINE
The Company has elected to focus its resources on the continued development
and refinement of its TMR products. If the Company is unable to obtain requisite
regulatory approvals or to achieve commercial acceptance of its TMR products,
the Company's business, financial condition and results of operations will be
materially and adversely affected and could result in cessation of the Company's
current business.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF
FUTURE LITIGATION
The Company's success will depend, in part, on its ability to obtain patent
protection for its products, preserve its trade secrets, and operate without
infringing the proprietary rights of others. The Company's policy is to seek to
protect its proprietary position by, among other methods, filing U.S. and
foreign patent applications related to its technology, inventions and
improvements that are important to the development of its business. The Company
holds five U.S. patents and related foreign patents relating to surgical
treatment with lasers and fiber-optic handpieces, and has applied for or is in
the process of applying for additional patents relating to its laser technology,
TMR applications and fiber-optic handpieces. There can be no assurance that any
of the Company's patents or patent applications will not be challenged,
invalidated or circumvented in the future or that the rights granted thereunder
will provide a competitive advantage. The Company intends to vigorously protect
and defend its intellectual property. It is uncertain whether patent protection
will continue to be available for surgical methods in the future. Costly and
time-consuming litigation brought by the Company may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company, or to determine the enforceability, scope and validity of the
proprietary rights of others.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute confidentiality and assignment of inventions agreements in connection
7
<PAGE>
with their employment, consulting or advisory relationships with the Company.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for any breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
have been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. In this regard, competitors of
the Company have been issued a number of patents related to TMR. In September
1995, the Company received from a competitor a notice of potential infringement
of the competitor's patent regarding a method for TMR utilizing synchronization
of laser pulses to the beating of the heart. In January 1996, the Company
received from a second competitor a notice of potential infringement of the
competitor's patent regarding a method to perform TMR using fiber optics. The
Company has concluded in each case, following discussion with its patent
counsel, that it does not utilize the process and/or apparatus which is the
subject of the patent at issue, and has responded to the respective competitor
to such effect. The Company has received no further correspondence on either
matter. There can be no assurance, however, that further claims or proceedings
will not be initiated by either competitor, or that claims by other parties will
not arise in the future. Any such claims in the future, with or without merit,
could be time-consuming and expensive to respond to and could divert the
attention of the Company's technical and management personnel. The Company may
be involved in litigation to defend against claims of infringement by the
Company, to enforce patents issued to the Company, or to protect trade secrets
of the Company. If any relevant claims of third party patents are upheld as
valid and enforceable in any litigation or administrative proceeding, the
Company could be prevented from practicing the subject matter claimed in such
patents, or would be required to obtain licenses from the patent owners of each
such patent or to redesign its products or processes to avoid infringement.
Patent applications in the U.S. are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a period after filing. Publication of discoveries in the scientific or
patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Accordingly, there can be no assurance that current
and potential competitors and other third parties have not filed or in the
future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the U.S. or internationally. In the event the Company were to
require licenses to patents issued to third parties, there can be no assurance
that such licenses would be available or, if available, would be available on
terms acceptable to the Company, or that the Company would be successful in any
attempt to redesign its products or processes to avoid infringement.
Accordingly, an adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would materially and adversely
affect the Company's business, financial condition and results of operations.
See "Business -- Intellectual Property Matters" and "-- Competition."
EXPECTATION OF INTENSE MARKET COMPETITION
The Company expects that the market for TMR, which is currently in the early
stages of development, will be intensely competitive. Competitors are likely to
include two laser competitors, PLC Systems, Inc. ("PLC") and CardioGenesis
Corporation ("CardioGenesis"), both of which are currently selling TMR products
for investigational use in the U.S. and abroad. PLC has already received the CE
Mark which allows the sales of its products commercially in all European Union
countries. Other competitors may include additional companies that elect to
enter the market, including large companies in the laser and cardiac surgery
markets. Many of these companies have significantly greater financial,
development, marketing and other resources than the Company. In the event a
competitor is able to obtain a PMA for its products prior to the Company, the
Company's ability to compete successfully could be materially and adversely
affected.
TMR also competes with other methods for the treatment of cardiovascular
disease, including drug therapy, PTCA and CABG. Although the Company is seeking
to demonstrate the safety and effectiveness of
8
<PAGE>
the Company's TMR procedures in patients for whom other cardiovascular
treatments are not likely to provide relief, and in the future intends to pursue
the safety and effectiveness of TMR when used in conjunction with other
treatments, there can be no assurance that the Company's TMR products will be
accepted in these markets. There can be no assurance that physicians will use
the Company's TMR procedures to replace or supplement established treatments, or
that the Company's TMR procedures will be competitive with current or future
technologies. Such competition could materially and adversely affect the
Company's business, financial condition and results of operations.
Any product developed by the Company that gains regulatory approval will
face competition for market acceptance and market share. An important factor in
such competition may be the timing of market introduction of competitive
products. Accordingly, the relative pace at which the Company is able to develop
products, complete clinical testing and regulatory approval processes, gain
third party reimbursement acceptance and supply commercial quantities of the
product to the market are expected to be important competitive factors. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors. Failure to do so would materially and
adversely affect the Company's business, financial condition and results of
operations. See "Business -- Competition."
LIMITED HISTORY OF TMR OPERATIONS; HISTORY OF OPERATING LOSSES
Although the Company commenced operations in June 1989, the Company's
operations to date have consisted primarily of the manufacture and sale of
non-TMR related laser products and accessories. The Company commenced its
operations and clinical studies with respect to TMR products in September 1995,
and accordingly has limited experience to date with the TMR market and TMR
products.
From inception to December 31, 1995, the Company incurred cumulative net
losses of approximately $5.9 million. As of March 31, 1996, the Company had
overdue obligations and indebtedness of approximately $375,000 and $1.3 million,
respectively, which are expected to be paid out of the proceeds of the Offering.
The Company's revenues and operating income will continue to be constrained
until such time, if ever, as FDA and other regulatory approval is obtained for
the Company's TMR products, and for an indefinite period of time after any such
approval is obtained. Furthermore, the Company expects its expenses in all
categories to increase as its clinical trial and other business activities
expand. Hence, there can be no assurance that the Company will achieve or
sustain profitability in the future. Failure to achieve significant commercial
revenues or profitability would materially and adversely affect the Company's
business, financial condition and results of operations. See "Use of Proceeds."
POTENTIAL DIFFICULTIES IN MANAGING BUSINESS UNDERGOING RAPID CHANGE
The Company's future success will depend to a significant extent on the
ability of its current and future management personnel to operate effectively,
both independently and as a group. In this regard, a number of members of the
Company's senior management team have only recently joined the Company.
Moreover, certain members of such management team have limited or no experience
as a senior executive of a public corporation. There can be no assurance that
the management team will operate together effectively. To compete successfully
against current and future competitors, complete clinical trials in progress,
prepare additional products for clinical trials and develop future products, the
Company believes that it must continue to expand its operations, particularly in
the areas of research and development, sales and marketing, training, and
manufacturing. If the Company were to experience significant growth in the
future, such growth would 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 such
growth and compete effectively, the Company must continue to implement and
improve information systems, procedures and controls, and to expand, train,
motivate and manage its work force. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's future operations. Any failure to implement and improve the Company's
operational, financial and management systems or to expand, train, motivate or
manage employees could materially and adversely affect the Company's business,
financial condition and results of operations. See "-- Dependence on Key
Personnel," "Business -- Employees" and "Management -- Directors and Executive
Officers."
9
<PAGE>
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
Results of operations are expected to fluctuate significantly from quarter
to quarter depending upon numerous factors, including the timing and results of
clinical trials; delays associated with the FDA and other regulatory approval
processes; health care reform and reimbursement policies; demand for the
Company's products; changes in pricing policies by the Company or its
competitors; the number, timing and significance of product enhancements and new
product announcements by the Company and its competitors; the ability of the
Company to develop, introduce and market new and enhanced versions of the
Company's products on a timely basis; customer order deferrals in anticipation
of new or enhanced products offered by the Company or its competitors; product
quality problems; personnel changes; changes in Company strategy; and the level
of international sales. Quarter to quarter operating results could also be
affected by the timing of the receipt of individual customer orders, order
fulfillment and revenue recognition with respect to small numbers of individual
laser base units, since each unit carries a high price per unit. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business -- Regulatory Status," "-- Sales and Marketing," "--
Manufacturing and Quality Assurance" and "-- Government Regulation."
RISKS OF TECHNOLOGICAL CHANGE
Significant resources are continually being expended to develop new and
improved treatment methodologies for coronary artery disease. Accordingly, the
market acceptance and commercial success of the Company's TMR products and
procedures will depend not only on the safety and effectiveness of the Company's
TMR products and procedures but also the relative safety and effectiveness of
alternative treatment measures, which alternatives could potentially include new
treatments or improvements or adjuncts to existing treatments. Accordingly, the
improvement of existing alternative treatment measures or emergence of new
alternative treatments would materially and adversely affect the Company's
business, financial condition and results of operations.
UNCERTAINTY REGARDING THIRD PARTY REIMBURSEMENT
The Company expects that its ability to successfully commercialize its
products will depend significantly on the availability of reimbursement for
surgical procedures using the Company's products from third party payors such as
governmental programs, private insurance and private health plans. Reimbursement
is a significant factor considered by hospitals in determining whether to
acquire new equipment. Notwithstanding FDA approval, if granted, third party
payors may deny reimbursement if the payor determines that a therapeutic medical
device is unnecessary, inappropriate, not cost-effective or experimental or is
used for a non-approved indication.
The Health Care Financing Administration ("HCFA") has recently issued a
policy indicating that Medicare coverage will not be precluded for
investigational procedures furnished in accordance with FDA-approved protocols
governing clinical trials. TMR procedures performed using the Company's
products, in the limited trials to date, have received Medicare reimbursement.
There can be no assurance, however, that HCFA will continue to provide
reimbursement for TMR, or will continue to provide such reimbursement at levels
adequate to permit hospitals to perform the Company's TMR procedures.
There can be no assurance as to whether third party payors will cover TMR or
as to the levels of reimbursement. There also can be no assurance that levels of
reimbursement, if any, will not be decreased in the future, or that future
legislation, regulation, or reimbursement policies of third party payors will
not otherwise adversely affect the demand for the Company's products or its
ability to sell its products on a profitable basis. Fundamental reforms in the
healthcare industry in the U.S. and Europe that could affect the availability of
third party reimbursement continue to be proposed, and the Company cannot
predict the timing or effect of any such proposal. If third party payor coverage
or reimbursement is unavailable or inadequate, the Company's business, financial
condition and results of operations could be materially and adversely affected.
See "Business -- Third Party Reimbursement."
LIMITED SALES, MARKETING AND DISTRIBUTION SYSTEMS
The Company has made limited sales of its TMR products to date, for
investigational use only. Accordingly, the Company has maintained a limited
sales and marketing organization in the U.S. and abroad. The Company plans to
market its TMR products, if approved, through a direct sales force in the U.S.
10
<PAGE>
and through a relationship with a major cardiovascular surgical products company
or companies for international sales. Establishment of a sales force capable of
effectively commercializing the Company's TMR products will require substantial
efforts and require significant management and financial resources. There can be
no assurance that the Company will be able to establish such a sales capability
on a timely basis, if at all. Moreover, there can be no assurance that the
Company's international distributor or distributors will devote sufficient
resources to development of the markets for the Company's products or will be
successful in such commercialization efforts. See "Business -- Sales and
Marketing."
RISK OF PRODUCT LIABILITY
The Company faces an inherent and significant business risk of exposure to
product liability claims in the event that the use of its products results in
personal injury or death, and there can be no assurance that material product
liability claims will not be assessed against the Company in the future. The
Company maintains insurance against product liability claims in the amount of $1
million per occurrence and $1 million in the aggregate, and expects to seek to
increase such coverage if and when a PMA is obtained. However, there can be no
assurance that such coverage will continue to be available in the amount desired
or on terms acceptable to the Company, or that such coverage will be adequate
for liabilities actually incurred. Also, in the event that any of the Company's
products prove to be defective, the Company may be required to recall or
redesign such products. Any uninsured or underinsured claim brought against the
Company or any claim or product recall that results in significant cost to or
adverse publicity against the Company could materially and adversely affect the
Company's business, financial condition and results of operations. See "Business
- - -- Product Liability and Insurance."
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON KEY SUPPLIERS
The Company's success will depend in part on its ability to manufacture its
products in a timely, cost-effective manner and in compliance with GMP, ISO 9000
and other regulatory requirements. The manufacture of the Company's products is
a labor-intensive, complex operation involving a number of separate processes
and components. The Company's manufacturing activities to date have consisted
primarily of manufacturing limited quantities of systems for use in clinical
trials. The Company does not have experience in manufacturing its products in
the commercial quantities that might be required if the Company receives
regulatory approval for its TMR products. Furthermore, as a condition to receipt
of PMA approval, the Company's facilities, procedures and practices will be
subject to pre-approval and ongoing GMP inspections by FDA.
Manufacturers often encounter difficulties in scaling up manufacturing of
new products, including problems involving product yields, quality control and
assurance, component and service availability, adequacy of control policies and
procedures, lack of qualified personnel, compliance with FDA regulations, and
the need for further FDA approval of new manufacturing processes and facilities.
There can be no assurance that manufacturing yields, costs or quality will not
be adversely affected as the Company seeks to increase production, and any such
adverse effect could materially and adversely affect the Company's business,
financial condition and results of operations.
The Company currently purchases certain laser and fiber-optic components
from single sources. Although the Company has identified alternative vendors,
the qualification of additional or replacement vendors for certain components or
services is a lengthy process. There can be no assurance that materials obtained
from outside suppliers will continue to be available in adequate quantities or
at the times required by the Company or that the Company will be able to locate
alternative suppliers on a timely basis. Any significant supply interruption
would have a material adverse effect on the Company's ability to manufacture its
products and, therefore, would materially and adversely affect the Company's
business, financial condition and results of operations. The Company expects to
manufacture its products based on forecasted product orders, and intends to
purchase subassemblies and components prior to receipt of purchase orders from
customers. Lead times for materials and components ordered by the Company vary
significantly, and depend on factors such as the business practices of the
specific supplier, contract terms and general demand for a component at a given
time. As a result, there is a risk of excess or inadequate inventory if orders
do not match forecasts. See "Business -- Manufacturing and Quality Assurance."
11
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's future business and operating results depend in significant
part upon the continued contributions of its key technical and senior management
personnel, including Douglas Murphy-
Chutorian, M.D., the Company's Chief Executive Officer. The Company maintains a
key person life insurance policy on Dr. Murphy-Chutorian in the amount of $2
million. The Company's future business and operating results also depend in
significant part upon its ability to attract and retain qualified additional
management, manufacturing, technical, marketing and sales and support personnel
for its operations. Competition for such personnel is intense, and there can be
no assurance that the Company will be successful in attracting or retaining such
personnel. The loss of any key employee, the failure of any key employee to
perform in his or her current position, or the Company's inability to attract
and retain skilled employees, as needed, could materially and adversely affect
the Company's business, financial condition and results of operations. See
"Management -- Directors and Executive Officers."
NO PRIOR TRADING MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after the Offering. The initial public offering price
has been determined through negotiations among the Company and the
representatives of the Underwriters based on several factors and may not be
indicative of the market price of the Common Stock after the Offering. The
market price of the Common Stock is likely to be highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, announcements of technological innovations, new
products or new contracts by the Company or its competitors, developments with
respect to patents or proprietary rights, conditions and trends in the medical
device and other technology industries, healthcare reform measures, adoption of
new accounting standards affecting the medical device industry, changes in
financial estimates by securities analysts, general market conditions and other
factors. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the common stocks of early stage companies. These broad market
fluctuations may materially and adversely affect the market price of the Common
Stock. In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. Such litigation, if brought against the
Company, could result in substantial costs and a diversion of management's
attention and resources. See "Underwriting."
CONCENTRATION OF SHARE OWNERSHIP
Upon completion of the Offering, the present directors and executive
officers of the Company and their affiliates will beneficially own approximately
33.1% of the outstanding Common Stock. As a result, these shareholders will be
able to exercise significant influence over matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may have the effect of
delaying or preventing a change in control of the Company. See "Principal
Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public market
following the Offering could adversely affect the market price for the Common
Stock. The number of shares of Common Stock available for sale in the public
market is limited by restrictions under the Securities Act of 1933, as amended
(the "Securities Act"), and by lock-up agreements under which the holders of
such shares have agreed not to sell or otherwise dispose of any of their shares
for a period of 180 days after the date of this Prospectus without the prior
written consent of PaineWebber Incorporated. However, PaineWebber Incorporated
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. As a result of these
restrictions, based on shares outstanding as of May 15, 1996, on the date of
this Prospectus, a total of 642,267 shares other than the 4,000,000 shares
offered hereby will be eligible for sale; an additional 228,693 shares will be
eligible for sale 90 days after the date of this Prospectus pursuant to Rule
144; an additional 8,695,188 shares will be eligible for sale 180 days after the
date of this Prospectus under Rule 144, upon expiration of the lock-up
agreements. In addition, the Company intends to register on the effective date
of the Offering a total of 4,444,756 shares of Common Stock subject to
outstanding options or reserved for issuance under the Company's Stock Option
Plan, Director Stock Option Plan and Employee
12
<PAGE>
Stock Purchase Plan. Further, upon expiration of the lock-up agreements referred
to above, holders of approximately 10,253,016 shares of Common Stock will be
entitled to certain registration rights, including 217,917 shares which have the
right to demand registration. Such demands may be made as early as 180 days
following the Offering. If such holders, by exercising their registration
rights, cause a large number of shares to be registered and sold in the public
market, such sales could materially and adversely affect the market price for
the Common Stock. See "Description of Capital Stock -- Registration Rights" and
"Shares Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price for the Common Stock is expected to be
substantially higher than the net tangible book value per share of Common Stock.
Accordingly, investors purchasing shares of Common Stock in the Offering will
incur immediate and substantial dilution of $12.23 per share. To the extent
outstanding options to purchase the Common Stock are exercised, there will be
further dilution. See "Dilution" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
DISCRETION OF MANAGEMENT IN USE OF PROCEEDS
The net proceeds of the Offering are estimated to be approximately $58
million, after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company. While the Company anticipates that it
will utilize approximately $15 million of the net proceeds for research and
development, approximately $15 million for expansion of sales and marketing
resources, approximately $3 million for capital expenditures, including
expansion of manufacturing facilities, and approximately $2 million for
repayment of outstanding indebtedness, and that the balance of the proceeds,
approximately $21 million, will be used for general corporate purposes including
working capital, management of the Company will have complete discretion of the
application of the proceeds. There can be no assurance that business
developments and opportunities will not require the Company to utilize the
proceeds in a manner different than presently anticipated, or that the Board of
Directors and management will not determine for other reasons to utilize the
proceeds in a different manner.
POTENTIAL NEED FOR ADDITIONAL CAPITAL
Although the Company anticipates that the net proceeds of the Offering,
together with sales of products for investigational use, will be sufficient to
meet the Company's capital requirements through at least calendar year 1997,
there can be no assurance that the Company will not require additional sources
of cash at an earlier date. This will depend upon the progress of expansion of
the Company's clinical trials and any need for additional trials or other
testing of the Company's products, and the timing of required expenditures. If
the Company is required to obtain additional financing in the future, there can
be no assurance that capital will be available on terms acceptable to the
Company, if at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby are estimated to be $58 million, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
The Company anticipates that approximately $15 million of the net proceeds
will be utilized for research and development, including funding of clinical
trials in support of regulatory and reimbursement approvals; approximately $15
million will be used for expansion of sales and marketing resources;
approximately $3 million will be used for capital expenditures, including
expansion of manufacturing facilities; and approximately $2 million will be used
for repayment of outstanding indebtedness in the aggregate principal amount of
approximately $1.7 million (including debt in the aggregate principal amount of
$50,000 held by one director of the Company) plus accrued interest thereon in
the aggregate amount of $276,000 at March 31, 1996. The remainder of the
proceeds, estimated at approximately $21 million, will be used for other general
corporate purposes including working capital. Of the indebtedness to be repaid,
$1 million bears interest at the rate of 6% per annum and matures on December
31, 1996, $375,000 bears interest at the rate of 10% per annum and is currently
due, and the remainder bears interest at the rate of 10% per annum and matures
on December 31, 1996. Proceeds not immediately used will be held as cash and
will be invested in short-term marketable securities. Management of the Company
will have complete discretion in the application of the proceeds of the
Offering. See "Risk Factors -- Discretion of Management in Use of Proceeds."
The foregoing represents estimates only, and the actual amounts expended by
the Company for these purposes and the timing of such expenditures will depend
on numerous factors, including the status of the Company's development efforts,
actions relating to regulatory matters, including the extent to which the
Company may be required to extend or expand its clinical trials, the extent to
which the Company's products gain market acceptance, and competitive factors.
DIVIDEND POLICY
The Company has never paid a cash dividend on its capital stock and does not
anticipate paying any cash dividends on the Common Stock in the foreseeable
future, as it intends to retain its earnings, if any, to generate increased
growth and for general corporate purposes.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 and as adjusted to give effect to the sale of the shares of Common
Stock offered hereby and the application of the estimated net proceeds therefrom
as described in "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
AS
ACTUAL ADJUSTED(1)
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Current portion of long-term debt......................................................... $ 1,691 $ 8
--------- -----------
--------- -----------
Long-term debt less current portion....................................................... $ 23 $ 23
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized,
no shares issued and outstanding....................................................... -- --
Common Stock, no par value; 50,000,000 shares authorized;
11,682,396 shares issued and outstanding (actual);
15,682,396 shares issued and outstanding (as adjusted) (2)............................. 6,659 65,079
Accumulated deficit..................................................................... (5,939) (5,939)
--------- -----------
Total shareholders' equity............................................................. 720 59,140
--------- -----------
Total capitalization................................................................... $ 743 $ 59,163
--------- -----------
--------- -----------
</TABLE>
- - ------------------------
(1) As adjusted to give effect to the estimated net proceeds of the Offering.
See "Use of Proceeds."
(2) Excludes as of March 31, 1996 (i) 2,633,751 shares of Common Stock issuable
upon exercise of outstanding options under the Company's Stock Option Plan,
and 1,361,005 additional shares reserved for future issuance under such
plan, (ii) 18,000 shares of Common Stock issuable upon exercise of
outstanding options under the Company's Director Stock Option Plan and
182,000 additional shares reserved for future issuance under such plan,
(iii) 250,000 shares of Common Stock reserved for future issuance under the
Company's Employee Stock Purchase Plan and (iv) 1,171,638 shares of Common
Stock issuable upon exercise of outstanding warrants. See "Management --
Stock Option Plan," "-- Director Stock Option Plan," "-- Employee Stock
Purchase Plan" and "Description of Capital Stock -- Warrants."
15
<PAGE>
DILUTION
The net tangible book value of the Company at March 31, 1996 was
approximately $720,000 or $0.06 per share of Common Stock. "Net tangible book
value" per share is equal to the Company's total tangible assets less its total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale of 4,000,000 shares of Common Stock offered hereby and
the application of the estimated net proceeds therefrom as described in "Use of
Proceeds," the pro forma net tangible book value of the Company at March 31,
1996 would have been approximately $59,140,000 or $3.77 per share. This
represents an immediate increase in net tangible book value of $3.71 per share
to existing shareholders and an immediate dilution in net tangible book value of
$12.23 per share to purchasers of Common Stock in the Offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share (1).......................... $ 16.00
Net tangible book value per share prior to the Offering............ $ 0.06
Increase per share attributable to sales of shares in the
Offering.......................................................... 3.71
---------
Pro forma net tangible book value per share after the Offering....... 3.77
---------
Dilution in net tangible book value per share to purchasers in the
Offering............................................................ $ 12.23
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
shareholders and by the purchasers of shares in the Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............................ 11,682,396 74.5% $ 6,659,000 9.4% $ 0.57
New investors.................................... 4,000,000 25.5 64,000,000 90.6 16.00
------------ ----- ------------- -----
Total.......................................... 15,682,396 100.0% $ 70,659,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- - ------------------------
(1) Before deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The foregoing tables do not give effect to the exercise of any options or
warrants subsequent to March 31, 1996. As of May 15, 1996 (i) 2,662,526 shares
of Common Stock were issuable upon exercise of outstanding options under the
Company's Stock Option Plan, and 1,332,230 additional shares were reserved for
future issuance under such plan, (ii) 33,000 shares of Common Stock were
issuable upon exercise of outstanding options under the Company's Director Stock
Option Plan and 167,000 additional shares were reserved for future issuance
under such plan, (iii) 250,000 shares of Common Stock were reserved for future
issuance under the Company's Employee Stock Purchase Plan and (iv) 1,171,638
shares of Common Stock were issuable upon exercise of outstanding warrants. See
"Management -- Stock Option Plan," "-- Director Stock Option Plan," "-- Employee
Stock Purchase Plan" and "Description of Capital Stock -- Warrants."
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1994 and 1995 and
for the years ended December 31, 1993, 1994 and 1995 are derived from the
Company's audited financial statements included elsewhere in this Prospectus.
The selected financial data as of December 31, 1991, 1992 and 1993 and for the
years ended December 31, 1991 and 1992 are derived from audited financial
statements of the Company not included in this Prospectus. The selected
financial data as of March 31, 1996 and for the three months ended March 31,
1995 and 1996 are derived from the Company's unaudited financial statements
included elsewhere in this Prospectus. In the opinion of management, such
unaudited financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. The results of operations for the three months
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the full year. The following data should be read in conjunction
with the financial statements of the Company, including the notes thereto. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Financial Statements."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net revenues......................... $ 3,289 $ 2,645 $ 2,105 $ 2,020 $ 2,707 $ 528 $ 1,752
Cost of revenues..................... 1,389 1,108 1,013 1,173 1,642 382 502
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................... 1,900 1,537 1,092 847 1,065 146 1,250
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development........... 813 920 906 971 1,010 195 517
Sales and marketing................ 333 620 794 392 879 191 396
General and administrative......... 367 546 325 1,031 681 199 211
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses............. 1,513 2,086 2,025 2,394 2,570 585 1,124
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss).......... 387 (549) (933) (1,547) (1,505) (439) 126
Interest and other income (expense),
net................................. (23) (19) (3) (435) (921) (221) (50)
Provision for income taxes........... 35 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................ $ 329 $ (568) $ (936) $ (1,982) $ (2,426) $ (660) $ 76
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share...... $ 0.03 $ (0.05) $ (0.08) $ (0.16) $ (0.19) $ (0.05) $ 0.01
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in per share
calculations.................... 10,491 10,537 11,676 12,526 12,765 12,765 14,863
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Supplemental net income (loss)
(1)............................. -- -- -- -- $ (2,298) -- $ 108
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Supplemental net income (loss)
per share (1)................... -- -- -- -- $ (0.18) -- $ 0.01
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in supplemental per
share calculation (1)........... -- -- -- -- 12,884 -- 14,987
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 302 $ 103 $ 131 $ 132 $ 123 $ 1,277
Working capital (deficit)............................ 102 (67) 834 657 (1,549) 468
Total assets......................................... 916 1,115 1,953 2,922 2,459 4,679
Long-term obligations less current
portion............................................. 66 34 -- 1,009 -- 23
Accumulated deficit.................................. (104) (672) (1,607) (3,589) (6,015) (5,939)
Total shareholders' equity (deficit)................. 174 71 1,011 (139) (1,429) 720
</TABLE>
- - ------------------------
(1) Supplemental net income, supplemental net income per share and shares used
in supplemental per share calculation for 1995 and the three months ended
March 31, 1996 were calculated assuming that the indebtedness to be repaid
with the net proceeds of the Offering had been repaid at the beginning of
each such period using the assumed proceeds from the sale of the minimum
number of shares required to retire such indebtedness. See "Use of
Proceeds."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS DISCUSSED IN THIS PROSPECTUS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS."
OVERVIEW
The Company was founded in 1989 as an outgrowth of certain research and
development efforts initially undertaken by the Company's founders in the early
1980s related to the use of laser technology to treat cardiovascular disease.
From 1989 through September 1995, the Company engaged in research, development
and sale of surgical laser products principally for procedures such as
atherectomy and arthroscopy. In 1993, the Company created and spun off to its
shareholders a balloon angioplasty company, Atlantis Catheter Company, Inc. In
1995, the Company determined that there is a significant opportunity in the TMR
market, and that the Company is well-positioned to enter this market because of
the Company's expertise with laser-based surgical techniques and the treatment
of cardiovascular disease. Accordingly, in late 1995, the Company changed its
strategic direction and began to apply its laser expertise toward the nascent
TMR market.
Since late 1995, the Company has been engaged in restructuring its
operations and expanding its management team in order to focus on the
development and commercialization of its TMR products. In September 1995, the
Company received an IDE allowing it to begin selling its TMR products for
investigational use only, and commenced clinical trials in the United States and
Europe in November 1995. In 1995 and the first quarter of 1996, the Company
installed a total of six and twelve TMR systems in hospitals, respectively.
To date, the Company has focused almost exclusively on research and
development activities relating to surgical laser products, substantially
contributing to annual operating losses since inception. At March 31, 1996, the
Company had an accumulated deficit of $5.9 million. Research and development
efforts have been funded primarily through private placements of equity in the
aggregate amount of $6.6 million since inception and periodic borrowings from
shareholders. The Company expects to continue to incur operating losses related
to research and development activities, including clinical studies, the
expansion of sales and marketing resources and the continued development of
corporate infrastructure. The timing and amounts of the Company's expenditures
will depend upon a number of factors, including the progress of the Company's
clinical trials, the status and timing of regulatory approval, the timing of
market acceptance, if any, of the Company's products, and the efforts required
to develop the Company's sales and marketing organization.
RESULTS OF OPERATIONS
REVENUES
Revenues increased from $2.1 million in 1993 and $2.0 million in 1994 to
$2.7 million in 1995, and were $1.8 million in the first quarter of 1996 as
compared to $528,000 in the first quarter of 1995 and $1.0 million in the fourth
quarter of 1995. The increases in 1995 as compared to 1994 and in the first
quarter of 1996 as compared to the first and fourth quarters of 1995 were
primarily due to commencement of sales of the Company's TMR products at the end
of 1995. These increases also resulted in an increase in accounts receivable to
$1.4 million at March 31, 1996 from $532,000 at December 31, 1995. Sales were
relatively flat from 1993 to 1994 as increased revenues from one of the
Company's early product lines offset reduced sales of laser systems for another
early product line. Since 1995, the Company has focused on the TMR market. Sales
of non-TMR related surgical products were 100% of revenues in 1993 and 1994, 68%
of revenues in 1995, and 10% of revenues in the first three months of 1996.
Future revenues could be affected by the timing and manner of sale of a
limited number of units of TMR laser systems. In order to assist hospitals in
making the substantial investment in the Company's laser system, which carries a
list price of $295,000, the Company intends either to sell the system to the
hospital outright or to place the system with the hospital for a placement fee
(currently $25,000) plus an additional
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fee for each procedure performed. In light of the relatively high list price of
the Company's laser base units, the timing of individual orders and shipments,
as well as the manner of sale, could significantly impact quarter to quarter
results.
GROSS PROFIT
Gross profit decreased from $1.1 million in 1993 to $847,000 in 1994, and
increased to $1.1 million in 1995 and $597,000 in the fourth quarter of 1995. In
the first quarter of 1996, gross profit increased to $1.3 million from $146,000
in the first quarter of 1995. Gross margin decreased from 52% in 1993 to 42% in
1994 and 39% in 1995, and increased to 71% in the first quarter of 1996 as
compared to 28% in the first quarter of 1995 and 58% in the fourth quarter of
1995. The increase in gross profit from 1994 to 1995 reflected commencement of
sales of TMR products in late 1995, offset in large part by the Company's
decision in 1995 to deemphasize sales of other, non-TMR related surgical
products. The declines in gross margin from 1993 to 1994 and from 1994 to 1995
were each attributable to changes in sales mix in favor of certain of the
Company's non-TMR surgical products which generated lower margins than other
such non-TMR surgical products, as well as underutilization of manufacturing
capacity as a result of sales mix changes. The increases in gross profit and
gross margin in the first quarter of 1996 over the prior year, including the
fourth quarter of 1995, reflected the increased emphasis on sales of higher
margin TMR systems.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased modestly from $906,000 in 1993
to $971,000 in 1994 and $1.0 million in 1995, and were $517,000 in the first
quarter of 1996 as compared to $195,000 in the first quarter of 1995 and
$438,000 in the fourth quarter of 1995. The increase in these expenses in the
first quarter of 1996 reflected a higher level of research and development
expenses relating to TMR, including commencement of clinical trials. The
relative flatness in such expenses from 1994 to 1995 reflected an increase in
the level of such expenses in the latter portion of 1995 as the Company
increased its focus on TMR, offset by reduced expenditures with respect to
non-TMR surgical products. Research and development expenditures were relatively
flat from 1993 to 1994 as a result of the relatively flat revenues year to year.
The Company believes that continued investment in the development of new and
improved products and procedures and continued investment in the Company's
clinical trials is critical to its future success. Accordingly, the Company
believes that research and development expenses will continue to increase in
future periods.
SALES AND MARKETING
Sales and marketing expenses decreased from $794,000 in 1993 to $392,000 in
1994, and increased to $879,000 in 1995. Such expenses increased to $396,000 in
the first quarter of 1996 from $191,000 in the first quarter of 1995 and
$328,000 in the fourth quarter of 1995. The increase in the first quarter of
1996 reflected the Company's application of additional resources to the TMR
market. The increase from 1994 to 1995 reflected expansion of the Company's
sales and marketing staff and increased travel and trade show expenses, as well
as expenses associated with the commencement of clinical trials for the
Company's TMR products in late 1995 and associated recruitment of participating
physicians and hospitals. The decrease from 1993 to 1994 was largely
attributable to reduced sales and marketing activity and reduced sales
commissions as the Company switched its emphasis from distributor sales to
direct sales. The Company expects that sales and marketing expenses will
continue to increase significantly as the Company continues to focus resources
on the development of its TMR products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $325,000 in 1993 to $1.0
million in 1994, and decreased to $681,000 in 1995. Such expenses increased from
$199,000 in the first quarter of 1995 and $135,000 in the fourth quarter of 1995
to $211,000 in the first quarter of 1996. The increase in the first quarter of
1996 as compared to the first quarter of 1995 and the fourth quarter of 1995
reflected increased headcount. The lower general and administrative expenses in
the fourth quarter of 1995 as compared to the first quarter of the year was due
primarily to a write off of expenses in the first quarter related to an
unsuccessful financing, while the higher expenses in 1994 as compared to 1993
and 1995 principally reflected professional fees incurred in connection with
certain financing-related initiatives which were terminated during 1994. The
Company anticipates that general and administrative expenses may increase
substantially
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in absolute terms, although such expenses may vary as a percentage of revenues,
reflecting the commitment of resources to expand the Company's systems and
infrastructure as well as compliance and other costs associated with operating
as a publicly traded corporation.
INTEREST EXPENSE, NET
Interest expense, net of interest income, increased from $3,000 in 1993 to
$435,000 in 1994 and $921,000 in 1995, and was $50,000 in the first quarter of
1996 compared to $221,000 in the first quarter of 1995. These increases
reflected higher levels of indebtedness and, in 1994 and 1995 (including the
first quarter of 1995), amortization of a discount on notes payable and a higher
level of indebtedness of the Company. A portion of this indebtedness was reduced
in late 1995 in connection with a private offering of equity securities by the
Company. The Company expects to repay the balance of this outstanding
indebtedness with the proceeds of the Offering. See "Use of Proceeds."
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has satisfied its capital requirements
primarily through private sales of its equity securities and, to a lesser
extent, loans from shareholders. In addition, the Company's operations have been
funded in part through sales of the Company's products prior to its focus on the
TMR market. The Company used $1.1 million and $621,000 for operating activities
in 1995 and the three months ended March 31, 1996, respectively. At March 31,
1996, the Company had an accumulated deficit of $5.9 million. The net proceeds
from equity sold through March 31, 1996 was $6.7 million, and at that date the
Company had outstanding an aggregate of $1.7 million in indebtedness to
shareholders of which $1 million bears interest at 6% per annum and the
remainder bears interest at 10% per annum.
The Company had aggregate cash balances of $1.3 million at March 31, 1996.
After giving effect to the estimated net proceeds of the Offering of $58
million, and the use of approximately $2 million of such proceeds to repay
existing indebtedness, the Company's adjusted cash balances at such date would
be $58 million. See "Use of Proceeds."
The Company anticipates that the net proceeds of the Offering, together with
sales of products for investigational use, will be sufficient to meet the
Company's capital requirements through at least calendar year 1997. The Company
anticipates that, through the end of 1997, approximately $10-15 million of the
proceeds of the Offering will be used for research and development, including
funding of clinical trials; approximately $10-15 million will be used for
expansion of sales and marketing resources; approximately $3 million will be
used for capital expenditures, including expansion of manufacturing facilities;
and approximately $2 million will be used for repayment of debt as referenced
above. The balance of the proceeds will be used for other general corporate
purposes including working capital. There can be no assurance, however, that the
Company will not require additional sources of cash at an earlier date in the
future, depending upon the progress of expansion of the Company's clinical
trials, any need for additional clinical trials or other testing of the
Company's products, and the timing of other required expenditures as indicated
above. If the Company is required to obtain additional financing in the future,
there can be no assurance that capital will be available on terms acceptable to
the Company, if at all.
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BUSINESS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS DISCUSSED IN THIS PROSPECTUS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS."
The Company designs, develops, manufactures and distributes laser-based
surgical products and disposable fiber-optic accessories for the treatment of
advanced cardiovascular disease through transmyocardial revascularization
("TMR"). TMR is a surgical procedure performed on the beating heart in which a
laser device is used to create pathways through the myocardium directly into the
heart chamber. The pathways are intended to enable improved blood supply to the
myocardium from the heart chamber. TMR potentially offers end-stage cardiac
patients who are not candidates for percutaneous transluminal coronary
angioplasty ("PTCA" or "balloon angioplasty") or coronary artery bypass graft
surgery ("CABG" or "open heart bypass surgery") a means to alleviate their
anginal symptoms and improve their quality of life. The Company currently offers
its Eclipse TMR 2000 laser system for sale in limited numbers for
investigational use only pursuant to an Investigational Device Exemption (an
"IDE") from the U.S. Food and Drug Administration (the "FDA"). From September
1995 through April 30, 1996, the Company had installed its TMR laser systems in
20 hospitals in the U.S. and two hospitals in Europe. The Company believes it
has installed TMR laser systems in more hospitals in the U.S. than any other TMR
provider.
BACKGROUND
Cardiovascular disease is the leading cause of death and disability in the
U.S., according to the American Heart Association (the "AHA"). Coronary artery
disease is the principal form of cardiovascular disease and is characterized by
a progressive narrowing of the coronary arteries, which supply blood to the
heart. This narrowing process is usually due to atherosclerosis, the buildup of
fatty deposits, or plaque, on the inner lining of the arteries. Coronary artery
disease reduces the available supply of oxygenated blood to the heart muscle,
potentially resulting in severe chest pain known as angina and damage to the
heart. Typically, the condition worsens over time and often leads to heart
attack or death.
Based on standards promulgated by the Canadian Heart Association, angina is
typically classified into four classes, ranging from Class I, in which anginal
pain results only from strenuous exertion, to the most severe class, Class IV,
in which the patient is unable to conduct any physical activity without angina
and angina may be present even at rest. The AHA estimates that more than six
million Americans experience anginal symptoms.
The primary therapeutic options for treatment of coronary artery disease are
drug therapy, PTCA (including techniques which augment or replace PTCA such as
stent placement and atherectomy), and CABG. The objective of each of these
approaches is to increase blood flow through the coronary arteries to the heart.
The AHA estimates that the total number of cardiovascular related surgical
procedures performed in the U.S. each year is approximately 885,000, including
approximately 485,000 open heart bypass surgeries and approximately 400,000 PTCA
procedures. According to the American Hospital Association, approximately 1,100
hospitals in the U.S. perform cardiovascular related surgical procedures.
Drug therapy may be effective for mild cases of coronary artery disease and
angina either through medical effects on the arteries that improve blood flow
without reducing the plaque or by decreasing the rate of formation of additional
plaque (E.G., by reducing blood levels of cholesterol). Because of the
progressive nature of the disease, however, many patients with angina ultimately
undergo either PTCA or open heart bypass surgery.
PTCA is a less-invasive alternative to CABG introduced in the early 1980s in
which a balloon-tipped catheter is inserted into an artery, typically near the
groin, and guided to the areas of blockage in the coronary arteries. The balloon
is then inflated and deflated at each blockage site, thereby rupturing the
blockage and stretching the vessel. Although the procedure is usually successful
in widening the blocked channel, the artery often renarrows within six months of
the procedure, a process called "restenosis," often necessitating a repeat
procedure. A variety of techniques for use in conjunction with PTCA have been
developed in an attempt to reduce the frequency of restenosis, including stent
placement and atherectomy. Stents are small metal frames
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delivered to the area of blockage using a balloon catheter and deployed or
expanded within the coronary artery. The stent is a permanent implant intended
to keep the channel open. Atherectomy is a means of using mechanical, laser or
other techniques at the tip of a catheter to cut or grind away plaque.
CABG is an open chest procedure developed in the 1960s in which conduit
vessels are taken from elsewhere in the body and grafted to the blocked coronary
arteries so that blood can bypass the blockage. CABG typically requires use of a
heart-lung bypass machine to render the heart inactive (to allow the surgeon to
operate on a still, relatively bloodless heart) and involves prolonged
hospitalization and patient recovery periods. Accordingly, it is generally
reserved for patients with severe cases of coronary artery disease or those who
have previously failed to receive adequate relief of their symptoms from PTCA or
related techniques. Unfortunately, most bypass grafts fail within one to fifteen
years following the procedure. Repeating the surgery ("re-do bypass surgery") is
possible, but is made more difficult because of scar tissue and adhesions that
typically form as a result of the first operation. The American Heart Journal
estimates that 12% of the total CABG procedures in the U.S. are re-do bypass
surgeries. Moreover, for many patients CABG is inadvisable for various reasons,
such as the severity of the patient's overall condition, the extent of coronary
artery disease or the small size of the blocked arteries.
When these treatment options are exhausted, the patient is left with no
viable surgical alternative other than, in limited cases, heart transplantation.
Without a viable surgical alternative, the patient is generally managed with
drug therapy, often with significant lifestyle limitations. TMR, currently under
clinical investigation by the Company and certain other companies, offers
potential relief to a large class of patients with severe cardiovascular
disease.
THE TMR PROCEDURE
TMR, or transmyocardial revascularization, is a surgical procedure performed
on the beating heart, in which a laser device is used to create pathways through
the myocardium directly into the heart chamber. The pathways are intended to
enable improved perfusion, or supply, of blood to the myocardium from the heart
chamber. Current clinical trials are intended to demonstrate improved perfusion
as evidenced by reduced angina in the patient. TMR potentially can be performed
using any of several different surgical approaches, including open chest
surgery, minimally invasive surgery through small openings in the chest or
percutaneous surgery involving the use of a laser-tipped catheter threaded
through a peripheral artery. TMR potentially offers end-stage cardiac patients
who are not candidates for PTCA or CABG a means to alleviate their symptoms and
improve their quality of life. TMR may also be effective when used in
conjunction with (as opposed to following) other procedures such as PTCA and
CABG. The Company has received IDEs to conduct two clinical studies of TMR using
an open chest approach but has not yet sought IDEs to conduct clinical studies
using either a minimally invasive approach or a percutaneous approach.
The physiologic principles underlying TMR as a potential treatment for
cardiovascular disease were first identified in the 1930s. It was observed then
that although the human myocardium depends on external coronary arteries for its
blood supply, it displays elements of certain direct blood pathways found in
reptilian hearts. In reptiles, blood is supplied directly to the myocardium
through these pathways from the chambers of the heart. These observations led to
a belief that impaired vascularization in the human myocardium could be treated
by creating direct pathways through the myocardium into the heart chamber.
Successes in other treatment techniques such as PTCA and CABG, however, as well
as limitations in the technologies available to perform TMR, limited the focus
on TMR until recently. Following numerous advancements in the use of laser
technology in medical applications, human trials of laser-based TMR commenced in
the 1980s. TMR is now being offered as an investigational procedure as part of
clinical studies to determine the procedure's safety and effectiveness.
BUSINESS STRATEGY
The Company's objective is to become the leading supplier in the TMR market.
The Company's strategies to achieve this goal are as follows:
DEMONSTRATE CLINICAL UTILITY OF TMR. The Company is seeking to demonstrate
the clinical safety and effectiveness of TMR and achieve FDA approval of the
Company's products through clinical trials. The
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Company's initial clinical trial commenced in November 1995 and is designed to
assess the safety and effectiveness of the Company's TMR procedure as compared
with drug therapy. Depending upon the success of this initial trial, the Company
intends to submit a PMA application as early as the latter part of 1997.
DEVELOP COMPREHENSIVE PRODUCT LINES FOR TMR. The Company is seeking to
develop multiple surgical platforms and provide a comprehensive suite of high
quality products for TMR. The Company believes that its compact, flexible,
fiber-optic based system will enable it to offer effective TMR solutions across
the three principal TMR surgical approaches potentially available for TMR, open
chest surgery, minimally invasive surgery and percutaneous surgery. The Company
is also developing a broad range of disposable fiber-optic based surgical tools
designed to operate with the Company's laser base unit and intended to provide
physicians with a broad range of options for their individual tactile
preferences and solutions for the different geometry of each patient's heart
cavity.
LEVERAGE PROPRIETARY TECHNOLOGY. The Company believes that its significant
expertise in laser systems for cardiovascular disease and the proprietary
technologies it has developed are important factors in its efforts to
demonstrate the safety and effectiveness of its TMR procedures. The Company is
seeking to leverage this expertise in developing TMR systems designed for
minimally invasive and percutaneous TMR surgical procedures, in addition to the
open chest TMR procedure currently being investigated in the Company's clinical
trials. The Company is also seeking to develop additional proprietary
technologies for TMR and related procedures. The Company holds five U.S. and
related foreign patents relating to surgical treatment with lasers and
fiber-optic handpieces, and has several patent applications pending relating to
various aspects of TMR. See "-- Intellectual Property Matters."
EXPAND MARKET FOR THE COMPANY'S PRODUCTS. The Company is seeking to expand
market awareness of the Company's products among opinion leaders in the
cardiovascular field, subject to appropriate regulatory guidelines. In
connection with the current clinical trials, the Company has focused its initial
efforts on the 200 hospitals in the U.S. that perform the greatest number of
CABG procedures. The Company also intends to develop foreign markets for its
products through international distribution relationships. In addition, the
Company has assembled a board of scientific advisors consisting of a number of
influential cardiac surgeons and cardiologists. The Company has also developed a
comprehensive training program to assist physicians in acquiring the expertise
necessary to utilize the Company's TMR products and procedures.
EXPAND INDICATIONS FOR TMR. The Company is seeking to expand the approved
indications for TMR through additional clinical studies. For example, the
Company has obtained FDA approval to undertake Phase I of a second TMR study
intended to assess the safety and effectiveness of the Company's TMR procedures
used in conjunction with CABG as compared with CABG used alone.
RISK FACTORS
The Company's success will depend upon successful completion of clinical
trials, which are currently at an early stage; the receipt of FDA and other
governmental approvals, which may take considerable time, and may not be granted
at all; acceptance of TMR, which is a new surgical procedure, among the medical
community; the ability to protect the Company's intellectual property rights;
the risks of claims of infringement of third party intellectual property rights;
the ability of the Company to manage change and growth in its business,
particularly in light of the Company's limited history of TMR operations and
history of operating losses; the ability of the Company to succeed in light of
significant competition; and other risks. See "Risk Factors."
PRODUCTS AND TECHNOLOGY
ECLIPSE TMR 2000 SYSTEM
The Eclipse TMR 2000 system consists of the Eclipse TMR 2000 laser base unit
and a line of fiber-optic, laser based surgical tools. Each surgical tool
utilizes optical fiber to deliver laser energy from the source laser base unit
to the distal tip of the surgical handpiece. The compact base unit occupies a
small amount of operating room floor space, operates on a standard 208 or
220-volt power supply, features a self-contained cooling system which eliminates
the need for electrical or plumbing modifications to the hospital operating
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room or catheterization laboratory where it is typically used on patients, and
is light enough to move within the operating room or among operating rooms in
order to use operating room space efficiently. Moreover, the flexible,
lightweight and slender optical fiber used to deliver the laser energy to the
patient enables ready access to the patient and to various sites within the open
chest.
The Eclipse TMR 2000 system and related surgical procedures are designed to
be used without the requirement of the external systems utilized with certain
competitive TMR systems. For example, the Eclipse TMR 2000 does not require
electrocardiogram synchronization, which monitors the electrical output of the
heart and times the use of the laser to minimize electrical disruption of the
heart, or transesophageal echocardiography, which tests each application of the
laser to the myocardium during the TMR procedure to determine if the pathway has
penetrated through the myocardium into the heart chamber. These additional
systems often require the presence of an additional physician. The Company's
products are also designed to minimize bleeding in the external layer of the
myocardium.
ECLIPSE HOLMIUM LASER. The Eclipse TMR 2000 laser base unit generates laser
light of a 2-micron wavelength by photoelectric excitation of a solid state
holmium crystal. The holmium laser, because it uses a solid state crystal as its
source, is compact, reliable and requires low maintenance. The Company has been
using holmium lasers since the Company's inception.
DISPOSABLE SURGICAL TOOLS. The Company offers to physicians a broad range
of surgical tool options for their individual tactile preferences and solutions
for the different geometry of each patient's heart cavity. These products are
designed to give the surgeon control of the procedure, access to difficult to
reach areas of the heart and clear visualization of the surgical field. Each
such tool is designed for disposal after use in a single surgical procedure. The
products include the following devices:
CRYSTALPOINT. The CrystalPoint fiber-optic handpiece system utilizes a
single, one millimeter diameter optical fiber to deliver the energy from the
Eclipse TMR 2000 laser base unit to the targeted surgical sites within the
body. The single strand design provides maximum tactile feedback to the
surgeon, as he or she monitors the penetration of the laser into the
myocardium. The fiber-optic design provides flexibility and maneuverability
for the surgeon, particularly as compared to the articulated mechanical arms
required in connection with CO(2) laser-based devices.
CRYSTALFLEX AND J-GRIP. The CrystalFlex handpiece system is comprised
of multiple, fine fiber-optic strands in a one millimeter diameter bundle.
The CrystalFlex fiber delivers the same amount of laser energy as the
CrystalPoint, but the fiber bundle makes the CrystalFlex more flexible than
the CrystalPoint with its single solid core. The CrystalFlex is used in
conjunction with the J-Grip handpiece to provide access to hard to reach
sites within the heart cavity. The J-Grip handpiece, which is made of
malleable stainless steel alloy, has a curved end which can be repeatedly
adjusted while in use to reach different areas.
The CrystalPoint and CrystalFlex fiber-optic handpieces each have an easy to
install connector which screws into the laser base unit, and each device is
pre-calibrated in the factory so it requires no special preparation. Some
surgeons elect to use more than one product for a single patient such as
combining the CrystalFlex and J-Grip for hard to reach sites and the
CrystalPoint for easier to access areas.
REGULATORY STATUS
The Company is currently involved in the second and final phase of a
clinical study designed to assess the safety and effectiveness of TMR performed
in an open chest procedure for the treatment of patients with Class IV angina as
compared with drug therapy. The Company originally received FDA clearance to
commence this clinical study in September 1995, and undertook Phase I of the
study shortly thereafter in November 1995. Phase I was intended to provide
indications of safety prior to undertaking expanded clinical trials, and was
completed in January 1996. In February 1996, the FDA reviewed the Phase I
results and authorized commencement of Phase II.
Phase II of the study will involve a minimum of 126 patient trials, which
are currently expected to be completed by the latter half of 1996, depending on
the rate at which the Company is able to establish
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additional TMR sites and enroll patients in the study. Phase II commenced March
18, 1996 and through March 31, 1996 a total of 10 trials had been performed. In
addition, the Company intends to perform patient follow-up reviews for up to
twelve months prior to submission of a PMA application. The limited number of
trials to date do not represent a sufficiently large sample for results to date
to be of statistical significance.
In February 1996, the Company obtained FDA clearance to undertake Phase I of
another clinical study of TMR intended to assess the safety and effectiveness of
TMR used in conjunction with CABG as compared with CABG alone. The Company
intends to begin these trials in the second quarter of 1996.
There can be no assurance that the results of the Company's studies will be
sufficient to obtain the PMA required to commercialize its TMR products.
Additionally, there can be no assurance that the Company will not be required to
conduct additional trials which may result in substantial costs and delays. See
"-- Government Regulation."
SALES AND MARKETING
The Company is currently restricted to selling its TMR products for
investigational use only. To the extent permitted under FDA rules, the Company
is seeking to promote market awareness of the Company's products among opinion
leaders in the cardiovascular field and to recruit physicians and hospitals to
participate in the Company's clinical trials. Although approximately 1,100 U.S.
hospitals perform CABG procedures, the Company has focused its initial
recruitment efforts, in connection with the current clinical trials, on the 200
hospitals in the U.S. that perform the greatest number of CABG procedures. To
address this market area the Company maintains a domestic direct sales force
consisting of five regional sales managers and utilizes a regional distributor
of cardiovascular surgical products to manage sales in the sixth designated U.S.
sales region. In the event the Company receives a PMA for the Company's TMR
products, the Company intends to expand its direct sales and support personnel.
The Company currently offers a laser base unit, at a current end user list
price of $295,000 per unit, and disposable surgical tools (at least one of which
must be used with each TMR procedure) at an end user unit price of $1,895. In
order to assist hospitals in making the substantial investment in the Company's
laser system, the Company intends either to sell the system to the hospital
outright or to place the system with the hospital, for a placement fee
(currently $25,000) plus an additional fee for each procedure performed.
The Company intends to broaden its line of disposable products as part of
its strategy to develop multiple platforms for TMR. In addition to the open
chest TMR procedure currently under investigation, the Company intends to
develop TMR systems designed for minimally invasive TMR surgical procedures and
percutaneous TMR procedures, each of which are made possible by the use of the
Company's flexible, lightweight and slender fiber-optic based surgical tools.
Open chest TMR procedures and minimally invasive TMR surgical procedures would
typically be performed by cardiac surgeons. In contrast, the Company believes
that percutaneous TMR could be a viable procedure for interventional
cardiologists for use in conjunction with other percutaneous procedures such as
PTCA.
In Europe, the Company has sold a TMR system to Sorin Biomedical Inc.
("Sorin"), a leading supplier of cardiovascular surgery products and a
subsidiary of Fiat S.p.A., for use by Sorin in conducting clinical trials in
Europe. The Company is currently in discussions with Sorin and other firms to
establish distribution relationships (subject to appropriate regulatory
approvals). There can be no assurance that any such agreement will be
consummated.
From September 1995 through April 30, 1996, the Company installed systems in
20 hospitals in the U.S. and two hospitals in Europe. The Company believes it
has installed TMR laser systems in more hospitals in
the U.S. than any other TMR provider.
The Company has developed, in conjunction with one of the major hospitals
using the Company's TMR products, a training program to assist physicians in
acquiring the expertise necessary to utilize the Company's TMR products and
procedures. This program includes a comprehensive two-day course including
observation of live TMR procedures, didactic training and hands-on performance
of TMR in vivo.
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The Company exhibits its products at major cardiovascular meetings and
recruits new investigators to buy the Company's products for investigational use
in their hospitals. Investigators of the Company's products have made
presentations at meetings around the world, describing their results. Articles
will be submitted to peer-reviewed publications and industry journals to present
the results of the ongoing clinical trials. The Company is also developing a
comprehensive patient recruitment program for use by hospitals and physicians
conducting the Company's investigational trials to promote awareness of TMR and
to educate prospective clinical trial patients regarding TMR.
SCIENTIFIC ADVISORY BOARD
The Company has recently formed a Scientific Advisory Board to meet with the
Company on an individual and group basis and to discuss the Company's TMR
products and procedures, relevant developments in cardiology and the treatment
of heart disease, and strategic directions. In addition, the Company has worked
with the medical staffs of several major universities in developing the
protocols for the Company's TMR procedures and in clinical data monitoring and
statistical analysis.
The Scientific Advisory Board consists of a number of prominent members of
the medical and scientific communities, including the following persons:
<TABLE>
<CAPTION>
NAME OCCUPATION/TITLE
- - -------------------------------------- ----------------------------------------
<S> <C>
Eric Powers, M.D. Professor of Medicine and Director
Cardiac Cath Laboratory
University of Virginia
Norman Shumway, M.D. Professor Emeritus
Cardiothoracic Surgery
Stanford University Medical Center
Vaughn Starnes, M.D. Professor of Surgery and Chief
Cardiothoracic Surgery
University of Southern California School
of Medicine
Eric Topol, M.D. Chairman
Department of Cardiology
Cleveland Clinic Foundation
</TABLE>
In addition, the Company meets several times each year, during professional
conferences and exhibitions, with the group of physicians who serve as
investigators in connection with the Company's clinical trials, in order to
discuss clinical procedures and results.
RESEARCH AND DEVELOPMENT
The Company's ongoing research and product development efforts are focused
on the development of new and enhanced lasers, fiber-optic handpieces and TMR
applications. The Company intends to continue to acquire and adapt for medical
use the most promising new laser technologies and products. In addition, the
Company continues to develop new laser handpieces in order to enhance the
utility and quality of the Company's line of disposable surgical tools and to
expand the indications for use and variety of procedures that can be performed
with the Company's surgical tools. Specifically, the Company is seeking to
achieve continual improvements in its TMR procedure, including greater surgical
access and visualization of the surgical field; greater precision in the
placement of pathways; reduced epicardial bleeding and bruising of heart muscle;
greater margins of safety with respect to underlying heart structures; and
reduced likelihood of induction of arrhythmia.
In furtherance of the Company's strategy to develop the three principal
surgical platforms for performance of TMR, current research efforts include
enhancements to open chest surgical TMR as well as complementary techniques for
minimally invasive surgical TMR and percutaneous TMR. In all these cases, the
Company anticipates new disposable products will be required to satisfy market
requirements. Minimally invasive surgical TMR and percutaneous TMR will each
require FDA approval to commence clinical trials. See "-- Government
Regulation."
26
<PAGE>
The Company's research and development spending, including expenditures
related to clinical trials, was $906,000, $971,000 and $1 million, respectively,
in 1993, 1994 and 1995, and was $517,000 in the first quarter of 1996. The
Company expects that research and development expenses will increase
substantially in connection with the Company's clinical trials and ongoing
development efforts.
All medical products of the types produced by the Company require a PMA
prior to commercial marketing in the U.S. There can be no assurance that the
Company will obtain a PMA from the FDA for the Company's TMR products.
The Company has also done research and received FDA clearances for laser
surgery products other than its TMR systems. The Company is not actively
distributing such products at this time.
MANUFACTURING AND QUALITY ASSURANCE
The Company manufactures and assembles its products from purchased
components and subassemblies, primarily at the Company's facility in Sunnyvale,
California.
Each laser is mobile and shock resistant, complies with Underwriters
Laboratory ("UL") standards and is equipped with safety interlocks and user
friendly controls and meters. Company production personnel assemble and test
each laser system in a process designed to test the integrity of the laser
system and to provide for accurate calibration of system components. Upon
completion of these tests, the laser is packaged for shipment. Company personnel
uncrate and install the laser at the hospital, and verify that the system meets
acceptance criteria, including all laser power output specifications.
Laser handpieces are fabricated from tubing, connectors and optical fibers,
each of which is purchased from outside vendors. The individual optical fibers
are cut to the appropriate length, bundled and placed in the extruded tubing and
metal connectors, and the tip of the device is molded and polished. Prior to
packaging, each handpiece is tested on a laser system to verify acceptable power
output.
The Company's assembly and manufacturing activities to date have consisted
primarily of producing limited quantities of its laser units and fiber-optic
accessories for sale to clinical investigators. The Company's future
profitability will depend, in part, on its ability to achieve manufacturing
efficiencies as production volumes increase.
The core components of the Company's laser units and fiber-optic handpieces
are generally acquired from multiple sources. The Company currently purchases
certain laser and fiber-optic components and subassemblies from single sources.
Although the Company has identified alternative vendors, the qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption would have a material
adverse effect on the Company's ability to manufacture its products and,
therefore, would materially and adversely affect the Company's business,
financial condition and results of operations. The Company intends to continue
to qualify multiple sources for components that are presently single sourced and
also to build an inventory of these items for use in the event of supply
interruptions.
The Company is committed to continuous quality improvement in its
manufacturing and assembly operations. Each subassembly and product is
thoroughly tested at multiple stages of production to ensure proper operation
and compliance with applicable regulatory standards. Manufacturing quality is
documented and monitored continually, and the Company is currently seeking to
obtain ISO 9000 certification of the quality of its manufacturing processes.
The Company is required to register as a manufacturer of medical devices
with the FDA and state agencies such as the California Department of Health
Services. As a condition to receipt of a PMA, the Company's facilities,
procedures and practices will be subject to pre-approval GMP inspections and
thereafter to ongoing, periodic inspections by the FDA and such other regulatory
agencies.
The Company is also subject to certain Federal, state and local regulations
regarding environmental protection and hazardous substance controls, among
others. Although the Company believes it currently complies in all material
respects with such regulations, failure to comply could subject the Company to
fines or other enforcement actions.
27
<PAGE>
The Company provides to its customers in the U.S. and to its foreign
distributors a free one-year parts and service warranty for each laser unit. The
Company offers extended warranty coverage for one-year periods to customers in
the U.S. The Company also performs service on a fee basis on laser units that
are no longer covered by warranty. Annual service contracts are generally priced
at 10% of the purchase price of the laser unit. Handpieces are sold without
warranty.
COMPETITION
The Company expects that the market for TMR, which is currently in the early
stages of development, will be intensely competitive. Competitors include PLC
Systems, Inc. ("PLC") and CardioGenesis Corporation ("CardioGenesis"), both of
which are currently selling TMR products for investigational use in the U.S. and
abroad. Other competitors may also enter the market, including large companies
in the laser and cardiac surgery markets. Many of these companies have or may
have significantly greater financial, development, marketing and other resources
than the Company.
PLC is a publicly traded corporation which uses a CO(2) laser and an
articulated mechanical arm in its TMR products. PLC obtained an IDE to undertake
clinical trials in January 1990. PLC has conducted extensive trials but has not
yet received a PMA. PLC has received the CE Mark which allows sales of its
products commercially in all European Union countries. PLC has been issued
patents for its apparatus and methods for TMR.
CardioGenesis is a privately held company which uses a holmium laser and
fiber optics in its TMR products. CardioGenesis has been issued patents for its
methods of TMR, is actively promoting its products in Europe, and has obtained
an IDE to begin clinical trials in the U.S.
The Company believes that the factors which will be critical to market
success include the timing of receipt of requisite regulatory approvals,
effectiveness and ease of use of the TMR products and procedures on both a stand
alone basis and in conjunction with other procedures such as CABG and PTCA,
breadth of product line, system reliability, brand name recognition and
effectiveness of distribution channels and cost of capital equipment and
disposable devices.
TMR also competes with other methods for the treatment of cardiovascular
disease, including drug therapy, PTCA and CABG. Although the Company is seeking
to demonstrate the safety and effectiveness of the Company's TMR procedures in
patients for whom other cardiovascular treatments are not likely to provide
relief, and in the future intends to pursue the safety and effectiveness of TMR
when used in conjunction with other treatments, there can be no assurance that
the Company's TMR products will be accepted. Moreover, technological advances in
other therapies for cardiovascular disease such as pharmaceuticals or future
innovations in cardiac surgery techniques could make such other therapies more
effective or lower in cost than the Company's TMR procedure and could render the
Company's technology obsolete. There can be no assurance that physicians will
use the Company's TMR procedure to replace or supplement established treatments,
or that the Company's TMR procedure will be competitive with current or future
technologies. Such competition could materially and adversely affect the
Company's business, financial condition and results of operations.
Any product developed by the Company that gains regulatory approval will
face competition for market acceptance and market share. An important factor in
such competition may be the timing of market introduction of competitive
products. Accordingly, the relative pace at which the Company can develop
products, complete clinical testing and regulatory approval processes, gain
reimbursement acceptance and supply commercial quantities of the product to the
market are expected to be important competitive factors. In the event a
competitor is able to obtain a PMA for its products prior to the Company, the
Company's ability to compete successfully could be materially and adversely
affected. There can be no assurance that the Company will be able to compete
successfully against current and future competitors. Failure to do so would
materially and adversely affect the Company's business, financial condition and
results of operations.
28
<PAGE>
GOVERNMENT REGULATION
Laser-based surgical products and disposable fiber-optic accessories for the
treatment of advanced cardiovascular disease through TMR are considered medical
devices, and as such are subject to regulation in the U.S. by the FDA. The
Company has FDA clearance for the sale of the Eclipse laser system for thoracic
surgery. However, the Company has voluntarily submitted the device to the more
rigorous PMA process with the objective of gaining approval for more specific
labeling for the treatment of advanced cardiovascular disease.
To obtain a PMA for a medical device, the Company must file a PMA
application that includes clinical data and the results of pre-clinical and
other testing sufficient to show that there is a reasonable assurance of safety
and effectiveness of the product for its intended use. To begin a clinical
study, an IDE must be obtained and the study must be conducted in accordance
with FDA regulations. An IDE application must contain preclinical test data
demonstrating the safety of the product for human investigational use,
information on manufacturing processes and procedures, and proposed clinical
protocols. If the IDE application is cleared by the FDA, human clinical trials
may begin. The results obtained from these trials, if satisfactory, are
accumulated and submitted to the FDA in support of a PMA application. Premarket
approval from the FDA is required before commercial distribution of devices
similar to those under development by the Company is permitted in the U.S. In
addition to the results of clinical trials, the PMA application must include
other information relevant to the safety and effectiveness of the device, a
description of the facilities and controls used in the manufacturing of the
device, and proposed labeling. By law, the FDA has 180 days to review a PMA
application. While the FDA has responded to PMA applications within the allotted
time frame, reviews more often occur over a significantly longer period and may
include requests for extensive additional trials. There can be no assurance that
the Company will not be required to conduct additional trials which may result
in substantial costs and delays, nor can there be any assurance that a PMA will
be obtained in a timely manner, if at all. In addition, changes in existing
regulations or adoptions of new regulations or policies could prevent or delay
regulatory approval of the Company's products. Furthermore, even if a PMA is
granted, subsequent modifications of the approved device for the manufacturing
process may require a supplemental PMA or the submission of a new PMA which
could require substantial additional clinicial efficacy data and FDA review.
After the FDA accepts a PMA application for filing, and after FDA review of the
application, a public meeting is frequently held before an FDA advisory panel in
which the PMA is reviewed and discussed. The panel then issues a favorable or
unfavorable recommendation to the FDA or recommends approval with conditions.
Although the FDA is not bound by the panel's recommendations, it tends to give
such recommendations significant weight.
Products manufactured or distributed by the Company pursuant to a PMA will
be subject to pervasive and continuing regulation by the FDA, including, among
other things, postmarket surveillance and adverse event reporting requirements.
Failure to comply with applicable regulatory requirements can result in, among
other things, warning letters, fines, suspensions or delays of approvals,
seizures or recalls of products, operating restrictions or criminal
prosecutions. The FDC Act also requires the Company to manufacture its products
in registered establishments and in accordance with GMP regulations and to list
its devices with the FDA. Furthermore, as a condition to receipt of a PMA, the
Company's facilities, procedures and practices will be subject to additional
pre-approval GMP inspections and thereafter to ongoing, periodic GMP inspections
by the FDA. These GMP regulations impose certain procedural and documentation
requirements upon the Company with respect to manufacturing and quality
assurance activities. The FDA has proposed amendments to the GMP regulations
that will likely increase the cost of compliance with GMP requirements. Labeling
and promotional activities are subject to scrutiny by the FDA. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses. Changes in existing regulatory requirements or adoption of new
requirements could materially and adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will not be required to incur significant costs to comply with laws
and regulations in the future or that laws and regulations will not materially
and adversely affect the Company's business, financial condition and result of
operations.
29
<PAGE>
The Company is also regulated by the FDA under the Radiation Control for
Health and Safety Act, which requires laser products to comply with performance
standards, including design and operation requirements, and manufacturers to
certify in product labeling and in reports to the FDA that their products comply
with all such standards. The law also requires laser manufacturers to file new
product and annual reports, maintain manufacturing, testing and sales records,
and report product defects. Various warning labels must be affixed and certain
protective devices installed, depending on the class of the product. In
addition, the Company is subject to California regulations governing the
manufacture of medical devices, including an annual licensing requirement. The
Company's facilities are subject to ongoing, period inspections by the FDA and
California regulatory authorities.
Sales, manufacture and further development of the Company's TMR system also
may be subject to additional federal regulations pertaining to export controls
and environmental and worker protection, as well as to state and local health,
safety and other regulations that by locality, which may require obtaining
additional permits. The impact of such regulations cannot be predicted.
Sales of medical devices outside of the U.S. are subject to foreign
regulatory requirements that vary widely by country. 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. In addition, there
may be foreign regulatory barriers other than pre-market approval, and the FDA
must approve the export of devices to certain countries. To continue to market
in Europe, the Company must obtain the certifications necessary to enable the
Company to affix to its products the CE Mark by June 1998. The CE Mark is an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. In order to obtain a CE
Mark, the Company must be in compliance with appropriate ISO 9000 standards and
obtain certification of its quality assurance systems by a recognized European
Union notified body. The CE Mark will generally allow the Company to market the
products throughout Europe. However, certain individual countries within Europe
require further approval by their national regulatory agencies. Failure to
receive the right to affix the CE Mark or other requisite approvals will
prohibit the Company from selling its TMR products in member countries of the
European Union or elsewhere, and there can be no assurance that the Company will
be successful in meeting the European certification requirements.
INTELLECTUAL PROPERTY MATTERS
The Company's success will depend, in part, on its ability to obtain patent
protection for its products, preserve its trade secrets, and operate without
infringing the proprietary rights of others. The Company's policy is to seek to
protect its proprietary position by, among other methods, filing U.S. and
foreign patent applications related to its technology, inventions and
improvements that are important to the development of its business. The Company
holds five U.S. patents and related foreign patents relating to surgical
treatment with lasers and fiber-optic handpieces, and has applied for or is in
the process of applying for additional patents relating to its laser technology,
TMR applications and fiber-optic handpieces. While the Company's existing
patents are not being utilized with the Company's current TMR protocol, the
Company believes such patents may be applicable to minimally invasive and
percutaneous approaches. There can be no assurance that any of the Company's
patents or patent applications will not be challenged, invalidated or
circumvented in the future or that the rights granted thereunder will provide a
competitive advantage. The Company intends to vigorously protect and defend its
intellectual property. It is uncertain whether patent protection will continue
to be available for surgical methods in the future. Costly and time-consuming
litigation brought by the Company may be necessary to enforce patents issued to
the Company, to protect trade secrets or know-how owned by the Company, or to
determine the enforceability, scope and validity of the proprietary rights of
others.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute confidentiality and assignment of inventions agreements in connection
with their employment, consulting, or advisory relationships with the Company.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for
30
<PAGE>
any breach. Furthermore, no assurance can be given that competitors will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's proprietary technology, or
that the Company can meaningfully protect its rights in unpatented proprietary
technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
have been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. In this regard, competitors of
the Company have been issued a number of patents related to TMR. In September
1995 the Company received from a competitor a notice of potential infringement
of the competitor's patent regarding a method for TMR utilizing synchronization
of laser pulses to the beating of the heart. In January 1996, the Company
received from a second competitor a notice of potential infringement of the
competitor's patent regarding a method to perform TMR using fiber optics. The
Company has concluded in each case, following discussion with its patent
counsel, that it does not utilize the process and/or apparatus which is the
subject of the patent at issue, and has responded to the respective competitor
to such effect. The Company has received no further correspondence on either
matter. There can be no assurance, however, that further claims or proceedings
will not be initiated by either competitor, or that claims by other parties will
not arise in the future. Any such claims in the future, with or without merit,
could be time-consuming and expensive to respond to and could divert the
attention of the Company's technical and management personnel. The Company may
be involved in litigation to defend against claims of infringement by the
Company, to enforce patents issued to the Company, or to protect trade secrets
of the Company. If any relevant claims of third party patents are upheld as
valid and enforceable in any litigation or administrative proceeding, the
Company could be prevented from practicing the subject matter claimed in such
patents, or would be required to obtain licenses from the patent owners of each
such patent or to redesign its products or processes to avoid infringement.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Accordingly, there can be no assurance that current
and potential competitors and other third parties have not filed or in the
future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or internationally. In the event the
Company were to require licenses to patents issued to third parties, there can
be no assurance that such licenses would be available or, if available, would be
available on terms acceptable to the Company, or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would materially
and adversely affect the Company's business, financial condition and results of
operations.
Unrelated to the products used in its TMR procedure, the Company has
received notices from three holders of patents requesting that the Company
become a licensee. Although the Company believes that either these patents are
subject to challenge as being invalid or are not infringed by the Company's
products, there can be no assurance that the Company would prevail in any such
action. In one case, the Company has taken a non-exclusive license to a patent
involving arthroscopy use. In a second case, the Company buys components only
from licensees of the patent holder, which the Company believes obviates the
need for a separate license. In addition, the Company has received notice of
interference of one of its patents involving products that the Company is not
actively pursuing. The Company has received a non-exclusive license to the
technology. Should the Company determine that it is necessary for it to obtain a
license to any patents or intellectual property, there can be no assurance that
any such license would be available on acceptable terms or at all, or that the
Company would be able to develop or otherwise obtain alternative technology.
Failure of the Company to obtain necessary licenses could prevent the Company
from manufacturing and selling its products, which would materially and
adversely affect the Company's business, financial condition and results of
operations.
31
<PAGE>
THIRD PARTY REIMBURSEMENT
The Company expects that sales volumes and prices of the Company's products
will depend significantly on the availability of reimbursement for surgical
procedures using the Company's products from third party payors such as
governmental programs, private insurance and private health plans. Reimbursement
is a significant factor considered by hospitals in determining whether to
acquire new equipment. Reimbursement rates from third party payors vary
depending on the third party payor, the procedure performed and other factors.
Moreover, third party payors, including government programs, private insurance
and private health plans, have in recent years been instituting increasing cost
containment measures designed to limit payments made to healthcare providers by,
among other measures, reducing reimbursement rates, limiting services covered,
negotiating prospective or discounted contract pricing and carefully reviewing
and increasingly challenging the prices charged for medical products and
services.
Medicare reimburses hospitals on a prospectively determined fixed amount for
the costs associated with an in-patient hospitalization based on the patient's
discharge diagnosis, and reimburses physicians on a prospectively determined
fixed amount based on the procedure performed, regardless of the actual costs
incurred by the hospital or physician in furnishing the care and unrelated to
the specific devices used in that procedure. Medicare and other third party
payors are increasingly scrutinizing whether to cover new products and the level
of reimbursement for covered products. In addition, Medicare traditionally has
considered items or services involving devices that have not been approved or
cleared for marketing by the FDA to be precluded from Medicare coverage. Under a
new Health Care Financing Administration ("HCFA") policy effective November 1,
1995, Medicare coverage will not be precluded for items and related services
involving devices that have been classified by the FDA as
"non-experimental/investigational" ("Category B") devices and that are furnished
in accordance with FDA-approved protocols governing clinical trials. Even with
items or services involving Category B devices, however, Medicare coverage may
be denied if other coverage requirements are not met, for example if the
treatment is not medically needed for the specific patient. In November 1995,
the Company received Category B designation from the HCFA. There can be no
assurance, however, that this coverage will continue or that Medicare will
reimburse adequately the costs of the Company's TMR procedures when and if a PMA
is granted.
The Company believes that reimbursement for the Company's TMR procedures to
date has been sought primarily through Medicare. Accordingly, the Company has
limited experience to date with the acceptability of its TMR procedures for
reimbursement by private insurance and private health plans. There can be no
assurance that private insurance and private health plans will approve
reimbursement for TMR.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the U.S., health maintenance organizations are emerging in certain European
countries. The Company may need to seek international reimbursement approvals,
and there can be no assurance that any such approvals will be obtained in a
timely manner, if at all. Failure to receive foreign reimbursement approvals
could have an adverse effect on market acceptance of the Company's products in
the foreign markets in which such approvals are sought.
The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the U.S. and in
foreign markets. The Company believes that the escalating cost of medical
products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products offered by the Company. There
can be no assurance that third party reimbursement and coverage will be
available or adequate in U.S. or foreign markets, that current levels of
reimbursement will not be decreased in the future, or that future legislation,
regulation, or reimbursement policies of third party payors will not otherwise
adversely affect the demand for the Company's products or its ability to sell
its products on a profitable basis. Fundamental reforms in the healthcare
industry in the U.S. and Europe that could affect the availability of third
party reimbursement continue to be proposed, and the Company cannot predict the
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<PAGE>
timing or effect of any such proposal. If third party payor coverage or
reimbursement is unavailable or inadequate, the Company's business, financial
condition and results of operations could be materially and adversely affected.
PRODUCT LIABILITY AND INSURANCE
The Company maintains insurance against product liability claims in the
amount of $1 million per occurrence and $1 million in the aggregate, and expects
to seek to increase such coverage if and when a PMA is obtained. However, there
can be no assurance that such coverage will continue to be available in the
amount desired or on terms acceptable to the Company, or that such coverage will
be adequate for liabilities actually incurred. Any uninsured or underinsured
claim brought against the Company, or any claim or product recall that results
in significant cost to or adverse publicity against the Company, could
materially and adversely affect the Company's business, financial condition and
results of operations.
LITIGATION
The Company is not a party to any pending legal proceeding that, if
determined adversely to the Company, the Company believes would have a material
adverse effect on the Company. See "-- Intellectual Property Matters."
EMPLOYEES
As of May 15, 1996 the Company had 32 employees, including 8 in research and
development, 11 in manufacturing, 7 in sales and marketing and 6 in
administration. All employees have entered into confidentiality agreements with
the Company but the Company does not otherwise have employment agreements with
any of its employees. None of the Company's employees is covered by a collective
bargaining agreement and the Company has experienced no work stoppages to date.
FACILITIES
The Company leases an approximately 17,700 square foot building in
Sunnyvale, California. The facility contains a Class 10,000 clean room for laser
handpiece and catheter fabrication. The facility is leased through March 1998,
but the lease may be terminated earlier by the Company upon 135 days' prior
written notice and payment of a penalty of $6,000, or extended for two
additional one-year periods. The Company's former affiliate, Atlantis Catheter
Company, Inc., currently subleases approximately 8,850 square feet of the
premises for which it reimburses the Company for a pro-rata share of the rent.
This sublease can be terminated upon 60 days' notice by either party. The
Company believes that this facility is adequate to meet its foreseeable
requirements through at least 1996. There can be no assurance that additional
facilities will be available to the Company if and when needed thereafter.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ------------------------------------ ---- ------------------------------------
<S> <C> <C>
Douglas Murphy-Chutorian, M.D.(1) 41 Chairman of the Board and Chief
Executive Officer
Richard L. Mueller Jr. 40 President, Chief Operating Officer
and Director
Barbara A. Dreblow 39 Chief Financial Officer
Janet Kaiser Castaneda 53 Vice President, Legal
Linda J. Fenney, M.D. 45 Vice President, Medical Affairs
Stuart D. Harman 43 Vice President, Product Development
Margaret S. Yarak 43 Vice President, Marketing
Robert L. Mortensen(1)(2) 62 Director
Iain M. Watson(1)(2) 40 Director
</TABLE>
- - ------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
All directors hold office until the next annual meeting of shareholders or
until their successors have been elected and qualified. Officers serve at the
discretion of the Board and are appointed annually. There are no family
relationships between the directors or officers of the Company.
DOUGLAS MURPHY-CHUTORIAN, M.D. has been Chairman of the Board and Chief
Executive Officer of the Company since June 1989. Dr. Murphy-Chutorian was also
Chairman of the Board of Atlantis Catheter Company, Inc. ("Atlantis") from
November 1993 to March 1996 when Atlantis was acquired by Biocompatibles
International plc. Dr. Murphy-Chutorian is an interventional cardiologist and
served as a Clinical Assistant Professor in the Department of Cardiology and
Cardiovascular Medicine at Albert Einstein College of Medicine (Montefiore
Division) and Stanford University Medical Center from 1986 through July 1990. He
is currently a member of the voluntary clinical staff of Stanford University
Medical Center and of Montefiore Medical Center. Dr. Murphy-Chutorian received
his M.D. degree from the College of Physicians and Surgeons, Columbia
University, completed his residency at New York University/Bellevue Hospital and
completed his cardiology training at Stanford University Medical Center.
RICHARD L. MUELLER, JR. has been President and Chief Operating Officer of
the Company since December 1995. From May 1994 until December 1995, Mr. Mueller
was Vice President of Research and Development at Heartport, Inc., a
minimally-invasive cardiac surgery company. From November 1990 until May 1994,
Mr. Mueller was Director of Research and Development at Origin Medsystems, Inc.,
an endosurgical device manufacturer. From March 1987 until November 1990, Mr.
Mueller was Director of New Product Development at Devices for Vascular
Intervention, Inc., a coronary atherectomy manufacturer. Mr. Mueller holds a
B.S.E.E. degree from Northwestern Polytechnic University and a B.S. degree in
business management from Westminster College.
BARBARA A. DREBLOW has been Chief Financial Officer of the Company since
November 1994. From November 1992 until November 1994, Ms. Dreblow was Corporate
Controller and Director of Finance for First Pacific Networks, Inc., a
telecommunications equipment manufacturer. From November 1989 to November 1992,
Ms. Dreblow was a manager with Coopers & Lybrand, L.L.P., a public accounting
firm. Ms. Dreblow is a certified public accountant.
JANET KAISER CASTANEDA has been Vice President, Legal of the Company since
March 1996. From July 1988 until March 1996, Ms. Castaneda was an attorney at
the Law Offices of James E. Eakin, an intellectual
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<PAGE>
property firm in Belmont, California. Ms. Castaneda holds a B.S. degree in
Medical Technology from Michigan State University, a J.D. degree from University
of Puget Sound and is a Registered Patent Attorney.
LINDA J. FENNEY, M.D. has been Vice President, Medical Affairs of the
Company since February 1996. From November 1994 to December 1995, Dr. Fenney was
Director of Safety and Surveillance for Roche Corporation. From September 1993
to November 1994, Dr. Fenney was Director of Labeling and Post Marketed Safety
for Syntex Pharmaceutical Co. and from 1989 to 1993 she was Associate Medical
Director, Cardiovascular Therapy at the Institute of Clinical Medicine at Syntex
Pharmaceutical Co. From 1989 to 1995, Dr. Fenney was a member of the voluntary
clinical faculty in Cardiology at Stanford University Medical Center. Dr. Fenney
received her medical degree from London University and completed residency
training in England and at Stanford University Medical Center.
STUART D. HARMAN has been Vice President, Product Development of the Company
since January 1996. From April 1994 until December 1995, Mr. Harman was Director
of the Surgical Products Division of the Company. From September 1991 until
March 1994, Mr. Harman was Marketing Manager for Sunrise Technologies, Inc., a
medical laser manufacturer. From 1980 until August 1991, Mr. Harman held various
engineering and marketing management positions at Heraeus LaserSonics, Inc., a
medical laser manufacturer.
MARGARET S. YARAK has been Vice President, Marketing of the Company since
December 1995. From April 1992 to December 1995, Ms. Yarak was a marketing and
public relations consultant to several medical device and pharmaceutical
companies. From 1989 to 1992, Ms. Yarak was Vice President, Corporate
Development of SysteMed, Inc., a pharmacy benefits management firm. From 1984 to
1989 she held a variety of marketing positions at McGaw, Inc., an intravenous
products and medical device company. Ms. Yarak received a Masters degree in
Education from Tufts University.
ROBERT L. MORTENSEN has been a director of the Company since April 1992.
Since 1984, Mr. Mortensen has been either President or Chairman of the Board and
a director of Lightwave Electronics Corporation, a solid-state laser company
that he founded. He holds an MBA from Harvard University.
IAIN M. WATSON has been a director of the Company since April 1992. Since
September 1993, Mr. Watson has been President of HAL Investments, Inc., an
investment company. From 1980 to September 1993, Mr. Watson held various
positions with the Boston Consulting Group, a management consulting firm. Mr.
Watson holds an MBA from Harvard University.
BOARD COMMITTEES
The Board of Directors formed a Compensation Committee and an Audit
Committee in 1994. Prior to such date, there were no committees of the Board of
Directors. The Compensation Committee makes recommendations to the Board
concerning salaries and incentive compensation for the Company's officers and
employees and administers the Company's Stock Option Plan and Employee Stock
Purchase Plan. The Audit Committee reviews the results and scope of the audit
and other services provided by the Company's independent auditors including
review and analysis of the Company's systems and the adequacy of controls.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Dr.
Murphy-Chutorian, Mr. Mortensen and Mr. Watson. No member of the Compensation
Committee or executive officer of the Company has a relationship that
constitutes an interlocking relationship with executive officers or directors of
another entity.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Restated Articles of Incorporation eliminate to the fullest
extent permissible under California law the liability of its directors to the
Company for monetary damages. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission. In
addition, the Company's Amended and Restated Bylaws provide that the Company
must indemnify its officers, directors, employees and other agents, to the
fullest extent permitted by California law. The Company has entered into
35
<PAGE>
indemnification agreements with each officer, director and employee of the
Company to such effect. At present, there is no pending litigation or proceeding
involving any director, officer, employee or agent of the Company where
indemnification will be required or permitted. Insofar as indemnification for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"), may be permitted to officers, directors or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission (the
"Commission") such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. The Company will seek to obtain
officers' and directors' insurance in the near future. The Company will bear the
expenses of such policy.
DIRECTOR COMPENSATION
Directors who are not compensated as employees or consultants to the Company
receive a retainer of $10,000 per year for serving on the Board of Directors,
plus fees of $1,500 per board meeting and $1,500 per committee meeting, provided
such committee meeting does not occur on the same day as a board meeting.
The Company also has a Director Stock Option Plan for non-employee
directors. Directors Iain Watson and Robert Mortensen were each granted an
option to purchase an aggregate of 9,000 shares of Common Stock pursuant to such
Plan in fiscal 1995. See "Management -- Director Stock Option Plan."
EXECUTIVE COMPENSATION
The following table sets forth all compensation received for services
rendered to the Company and the Company's subsidiaries in all capacities during
fiscal 1995 by (i) the Company's Chief Executive Officer and (ii) the Company's
two other executive officers whose total compensation exceeded $100,000 during
fiscal 1995 (together, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
AWARDS
ANNUAL -------------
COMPENSATION SECURITIES
------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY OPTIONS/SARS COMPENSATION(1)
- - ----------------------------------------------------------------- --------- ------------- ------------- -------------------
<S> <C> <C> <C> <C>
Douglas Murphy-Chutorian, M.D. .................................. 1995 $ 207,130 -- $ 320
Chairman of the Board and Chief Executive Officer
Barbara A. Dreblow .............................................. 1995 100,000 -- 66
Chief Financial Officer
Stuart D. Harman ................................................ 1995 100,666 106,029 112
Vice President, Product Development
</TABLE>
- - ------------------------
(1) Payment of life insurance premiums.
36
<PAGE>
The following table sets forth certain information concerning grants of
stock options to each of the Named Executive Officers during the fiscal year
ended December 31, 1995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS(1) VALUE AT ASSUMED
------------------------------------------------------------ ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% 10%
- - -------------------------------- ------------- ----------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Douglas Murphy-Chutorian,
M.D. .......................... -- -- -- -- -- --
Barbara A. Dreblow.............. -- -- -- -- -- --
Stuart D. Harman................ 106,029 8.10% $ 1.67 12/31/05 $ 8,836 $ 17,672
</TABLE>
- - ------------------------
(1) Each of these options was granted pursuant to the Stock Option Plan. These
options were granted at an exercise price equal to the fair market value of
the Company's Common Stock as determined by the Board of Directors of the
Company on the date of grant and, as long as the optionee maintains
continuous employment with the Company, vest over a three year period at the
rate of one-third of the shares on the first anniversary of the date of
grant and 1/36th of the grant per month thereafter. The options granted were
Incentive Stock Options. No options were granted for a term longer than ten
years. No SARs were granted.
(2) In accordance with the rules of the Securities and Exchange Commission,
shown are the hypothetical gains or "option spreads" that would exist for
the respective options. These gains are based on assumed rates of annual
compounded stock price appreciation of 5% and 10% from the date the option
was granted over the full option term. The 5% and 10% assumed rates of
appreciation are mandated by the rules of the Commission and do not
represent the Company's estimate or projection of future increases in the
price of its Common Stock.
The following table sets forth certain information as of December 31, 1995
concerning exercisable and unexercisable stock options held by each of the Named
Executive Officers. None of the Named Executive Officers exercised any options
during fiscal year 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
FISCAL YEAR END AT FISCAL YEAR END(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Douglas Murphy-Chutorian, M.D. ........................... -- -- -- --
Barbara A. Dreblow........................................ 54,168 95,832 $ 12,639 $ 22,361
Stuart D. Harman.......................................... 8,151 111,849 1,902 1,358
</TABLE>
- - ------------------------
(1) The value for an "in the money" option represents the difference between the
exercise price of such option and the fair market value of the Company's
Common Stock at December 31, 1995 as determined by the Company's Board of
Directors, multiplied by the total number of shares subject to the option.
STOCK OPTION PLAN
The Company's Stock Option Plan (the "Stock Plan") provides for the granting
to employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and for
the granting to employees and consultants of nonstatutory stock options and
stock purchase rights ("SPRs"). The amended and restated Stock Plan was approved
by the Board of Directors and by the shareholders in April 1996. Unless
terminated sooner, the Stock Plan will
37
<PAGE>
terminate automatically March 31, 2006. The Board has the authority to amend,
suspend or terminate the Stock Plan, provided that no such action may affect any
share of Common Stock previously issued and sold or any option previously
granted under the Stock Plan.
Four million shares of Common Stock have been reserved for issuance pursuant
to the Stock Plan. As of May 15, 1996, options to purchase an additional
2,662,526 shares of Common Stock were outstanding under the Stock Plan at a
weighted average exercise price of $1.81 per share, and an additional 1,332,230
shares of Common Stock remained available for future grant.
The Stock Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee is required to be constituted to
comply with Section 16(b) of the Exchange Act and applicable laws. The Committee
has the power to determine the terms and conditions of the options or SPRs
granted, including the exercise price, the number of shares subject to each
option or SPR and the exercisability thereof, and the form of consideration
payable upon exercise. Options and SPRs granted under the Stock Plan are not
generally transferable by the optionee other than by will or laws of descent,
and each option and SPR is exercisable during the lifetime of the optionee only
by such optionee. Options granted under the Stock Plan to date typically vest
over three years and have a ten-year term. Options granted under the Stock Plan
must be exercised within three months of the end of optionee's status as an
employee or consultant of the Company, or within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's ten year term. In the case of SPRs, unless the
Committee determines otherwise, the Restricted Stock Purchase Agreement
evidencing the sale of the shares to purchaser shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Committee. The exercise price of all incentive stock options granted under the
Stock Plan must be at least equal to the fair market value of the Common Stock
on the date of grant. The exercise price of nonstatutory stock options and SPRs
granted under the Plan is determined by the Committee. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of the Company's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market value
on the grant date and the term of such incentive stock option must not exceed
five years. The term of all other options granted under the Stock Plan may not
exceed ten years.
The Stock Plan provides that in the event of a merger of the Company with or
into another corporation or a sale of substantially all of the Company's assets
or SPR, each option and SPR shall be assumed or an equivalent option substituted
by the successor corporation. If the outstanding options and SPRs are not
assumed or substituted as described in the preceding sentence, the option or the
SPR will terminate unless the Administrator shall provide for the accelerated
vesting of options outstanding at such time. If the Administrator makes an
option or SPR exercisable in full in the event of a merger or sale of assets,
the Administrator shall notify the optionee that the option or SPR shall be
fully exercisable for a period of fifteen (15) days from the date of such
notice, and the option or SPR will terminate upon the expiration of such period.
Richard L. Mueller Jr., Chief Operating Officer and a director of the
Company, was granted an option to purchase an aggregate of 750,000 shares of
Common Stock of the Company in December 1995 at an exercise price of $1.67 per
share. Linda J. Fenney, Vice President, Medical Affairs of the Company, was
granted an option to purchase an aggregate of 64,500 shares of Common Stock of
the Company in December 1995 at an exercise price of $1.67 per share. Margaret
S. Yarak, Vice President, Marketing of the Company, was granted an option to
purchase an aggregate of 75,000 shares of Common Stock of the Company in
December 1995 at an exercise price of $1.67 per share. None of such officers was
a Named Executive Officer for 1995.
38
<PAGE>
DIRECTOR STOCK OPTION PLAN
Non-employee directors are entitled to participate in the Director Stock
Option Plan (the "Director Plan"). The amended and restated Director Plan was
adopted by the Board of Directors and the shareholders in April 1996. The
Director Plan has a term of ten years and will terminate March 31, 2006, unless
terminated sooner by the Board. A total of 200,000 shares of Common Stock have
been reserved for issuance under the Director Plan. As of May 15, 1996, options
to purchase 33,000 shares of Common Stock were outstanding at a price of $5.91
per share, and options to purchase 167,000 shares of Common Stock remained
available for future grant under the Director Plan.
The Director Plan provides for the automatic grant of 22,500 shares of
Common Stock to each non-employee director first elected or appointed to the
Board after June 1, 1996 on the date on which such person first becomes a
non-employee director (the "First Option"). Subsequently, each non-employee
director shall automatically be granted an option to purchase 7,500 shares (a
"Subsequent Option") each year on the date of such non-employee director's
annual reelection to the Board, if on such date he or she shall have served on
the Board for at least six months. Each First Option and each Subsequent Option
shall have a term of 10 years. The First Option shall vest as to one-third of
the shares subject to the First Option per year following the date of grant.
Each Subsequent Option shall vest in full one year following the date of grant.
The exercise prices of the First Option and each Subsequent Option shall be 100%
of the fair market value per share of the Common Stock, generally determined
with reference to the closing price of the Common Stock as reported on the
Nasdaq National Market, on the date of grant.
In the event of a merger of the Company or the sale of substantially all of
the assets of the Company, each option may be assumed or an equivalent option
substituted by the successor corporation. If an option is assumed or substituted
for, it shall continue to vest as provided in the Director Plan. If the
successor does not agree to assume or substitute the option, each option shall
also become fully vested and exercisable for a period of thirty days from the
date the Board notifies the optionee of the option's full exercisability, after
which period the option shall terminate. Options granted under the Director Plan
must be exercised within sixty days of the end of the optionee's tenure as a
director of the Company, but in no event later than the expiration of the
option's ten year term. In the case of death or disability of the non-employee
director terminating the non-employee director's status as a director or such
death or disability occurring sixty days after termination of director status,
the optionee will have twelve months from such date to exercise his or her
option, but in no event may the option be exercised after the expiration of the
option's ten year term. No option granted under the Director Plan is
transferable by the optionee other than by will or the laws of descent and
distribution, and each option is exercisable, during the lifetime of the
optionee, only by such optionee.
The administration and other terms of the Director Plan have been structured
so that options granted to the non-employee directors who administer the
Company's stock plans shall qualify as transactions exempt from Section 16(b) of
the Exchange Act pursuant to Rule 16b-3 promulgated thereunder.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors and shareholders in April 1996. A total of 250,000
shares of Common Stock has been reserved for issuance under the Purchase Plan.
The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, has two six-month offering periods each year beginning on
the first trading day on or after May 16 and November 16, respectively, except
for the first such offering period which commences on the first trading day on
or after the date the Commission declares the Company's Registration Statement
effective and will end on the last trading day on or before November 15, 1996.
The Purchase Plan is administered by the Board of Directors or by a committee
appointed by the Board. The Purchase Plan will be administered so as to comply
with any applicable requirements of Rule 16b-3 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Employees are eligible to participate if
they are customarily employed by the Company or any participating subsidiary for
at least 20 hours per week and more than five months in any calendar year. The
Purchase Plan permits eligible employees to purchase Common
Stock through payroll deductions of up to 15% of an employee's compensation
except that in the
39
<PAGE>
first offering period payroll deductions of up to 20% are allowed (including
commissions, overtime and other bonuses and incentive compensation), up to a
maximum of $21,250 for all offering periods ending within the same calendar
year. The price of stock purchased under the Purchase Plan will be 85% of the
lower of the fair market value of the Common Stock at the beginning or at the
end of each offering period. Employees may end their participation in the
offering at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically on termination of
employment with the Company.
Rights granted under the Purchase Plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the Purchase Plan. The Purchase Plan provides that, in the event
of a merger of the Company with or into another corporation or a sale of
substantially all of the Company's assets, the Board of Directors will shorten
the offering period (so that employees' rights to purchase stock under the Plan
are exercised prior to the merger or sale of assets). The Purchase Plan will
terminate in April 2006. The Board of Directors has the authority to amend or
terminate the Purchase Plan, except that no such action may adversely affect any
outstanding rights to purchase stock under the Purchase Plan.
40
<PAGE>
CERTAIN TRANSACTIONS
Between January 1994 and July 1994, the Company raised capital through the
issuance of promissory notes in which purchasers of each $50,000 unit were
issued (i) a nonrecourse promissory note in the principal amount of $50,000,
bearing interest at an annual rate of 10%, with principal and interest payable
on the earlier of consummation of the Offering or November 12, 1995 (a
"Nonrecourse Note"); (ii) 33,333 shares of Common Stock; and (iii) a warrant to
purchase up to 33,333 shares of Common Stock at a purchase price of $1.67 per
share. Upon the maturity of the Nonrecourse Notes, each holder thereof was
offered by the Company a further warrant to purchase up to 1,764 shares of
Common Stock at a purchase price of $4.17 per share in exchange for agreeing to
delay redemption of their Nonrecourse Note until December 31, 1996. Iain M.
Watson, a director of the Company, purchased a $50,000 unit in the financing
described above, and was issued a warrant to purchase up to 1,764 shares of
Common Stock at a purchase price of $4.17 per share in exchange for agreeing to
delay redemption of his Nonrecourse Note until December 31, 1996. In addition,
during 1995, the Company borrowed a total of $100,000 from Mr. Watson pursuant
to two notes payable with Mr. Watson bearing interest at 10% per annum. These
notes were repaid in full during 1995.
41
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information before and immediately
after the Offering regarding beneficial ownership of Common Stock of the Company
by (i) each person who is known by the Company to be the beneficial owner of
more than five percent of the outstanding shares of Common Stock; (ii) each
director and each Named Executive Officer; and (iii) all directors and executive
officers as a group, based on shares outstanding as of May 15, 1996.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING OFFERING(1)
----------------------- -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT PERCENT
- - ------------------------------------------------------------------------- ---------- ----------- -------------------
<S> <C> <C> <C>
Douglas Murphy-Chutorian, M.D.(2)........................................ 5,063,427 43.3% 32.3%
c/o Eclipse Surgical Technologies, Inc.
1049 Kiel Court
Sunnyvale, CA 94089
Tawfeek Shaheen(3)....................................................... 1,090,689 9.2% 6.9%
Box 316
Sonoma, CA 95476
Iain M. Watson(4)........................................................ 218,298 1.9% 1.4%
Barbara A. Dreblow(5).................................................... 83,334 * *
Robert L. Mortensen(6)................................................... 61,029 * *
Stuart D. Harman(7)...................................................... 10,866 * *
Richard L. Mueller Jr.................................................... -- -- --
All directors and executive officers as a group (8 persons)(8)........... 5,448,954 45.6% 34.2%
</TABLE>
- - ------------------------
(1) Assumes no exercise of the Underwriter's over-allotment option.
(2) Includes an aggregate of 3,719,454 shares of Common Stock held by Leslie
Murphy-Chutorian, the wife of Dr. Murphy-Chutorian, and by Mrs.
Murphy-Chutorian as custodian for their minor children.
(3) Includes warrants to purchase an aggregate of 126,294 shares of Common Stock
exercisable within 60 days of the date hereof.
(4) Includes options and warrants to purchase an aggregate of 96,126 shares of
Common Stock exercisable within 60 days of the date hereof.
(5) Consists of options to purchase an aggregate of 83,334 shares of Common
Stock exercisable within 60 days of the date hereof.
(6) Consists of options to purchase an aggregate of 61,029 shares of Common
Stock exercisable within 60 days of the date hereof.
(7) Consists of options to purchase an aggregate of 10,866 shares of Common
Stock exercisable within 60 days of the date hereof.
(8) Includes options and warrants to purchase an aggregate of 263,355 shares of
Common Stock exercisable within 60 days of the date hereof. See notes 3, 4,
5, 6 and 7 above.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, no par value, and 5,000,000 shares of Preferred Stock, no par
value. As of May 15, 1996, there were 11,682,396 shares of Common Stock
outstanding, a total of 201 shareholders of record and no shares of Preferred
Stock outstanding. The following descriptions of the Company's securities are
qualified in their entirety by reference to the Company's Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws, and the warrant
agreements described below.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of the shareholders. Upon giving the legally
required notice, shareholders may cumulate their votes in the election of
directors. Subject to preferences that may be applicable to any then-outstanding
shares of Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution, or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and any liquidation preference of any then-outstanding Preferred
Stock. Holders of Common Stock have no right to convert their Common Stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of the Offering
will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without the requirement of further
shareholder approval, to designate one or more series of Preferred Stock and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, conversion rights, voting rights, preemptive rights, terms of
redemption, liquidation preferences and sinking fund terms. The Board of
Directors similarly has the authority to fix the number of shares of each such
series (up to an aggregate for all series of Preferred Stock of 5,000,000
shares); to increase or decrease such number of shares (but not below the number
of shares of any such series then outstanding) and to issue up to 5,000,000
shares.
The issuance of Preferred Stock could adversely affect the voting power of
holders of Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation and could have the effect of
delaying, deferring, or preventing a change in control of the Company.
WARRANTS
As of May 15, 1996, there were warrants outstanding to purchase 1,171,638
shares of Common Stock at exercise prices ranging from $1.67 to $4.17 per share
and expiration dates through 1999. All warrants contain provisions for the
adjustment of the exercise price upon the occurrence of certain events including
stock dividends, stock splits, reorganizations, reclassifications and mergers
and termination upon certain public offerings, mergers or sales of Company
assets. The foregoing warrants were issued in reliance on exemptions from the
registration requirements of the Securities Act. Shares issuable upon exercise
of the warrants will be "restricted" securities for purposes of the Securities
Act.
REGISTRATION RIGHTS
Under the terms of certain registration rights agreements, among the Company
and certain holders of its securities (the "Rights Agreements"), following the
closing of the Offering, the holders of approximately 10,253,016 shares of
Common Stock (the "Registrable Securities"), will be entitled to certain rights
with respect to the registration of such shares under the Securities Act. Under
the Rights Agreements, if the Company proposes to register any of its securities
under the Securities Act, either for its own account or the account of other
shareholders, the holders of Registrable Securities are entitled to notice of
such registration and are entitled to include their Registrable Securities
therein, subject to, among other conditions, the Company's right to limit the
number of such shares included in any such registration based upon the advice
43
<PAGE>
of the underwriters. Further, holders of Registrable Securities may require the
Company to register all or a portion of their Registrable Securities at any time
after 180 days following the effective date of the Registration Statement of
which this Prospectus forms a part, subject to certain conditions and
limitations.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston.
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offering, the Company will have 15,682,396
shares of Common Stock outstanding, based on shares outstanding as of May 15,
1996, of which the 4,000,000 shares offered hereby will be freely tradeable
without restriction or further registration under the Securities Act. The
remaining 11,682,396 shares of Common Stock to be outstanding after the Offering
are deemed to be "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act, because such shares were issued and sold
by the Company in transactions not involving a public offering and in the future
may only be sold pursuant to a registration statement under the Securities Act,
in compliance with the provisions of Rule 144 or pursuant to another exemption
under the Securities Act. Sales of a substantial number of shares of Common
Stock in the public market following the Offering could adversely affect the
market price for the Common Stock. The number of shares of Common Stock
available for sale in the public market is limited by restrictions under the
Securities Act, and by lock-up agreements under which the holders of such shares
have agreed not to sell or otherwise dispose of any of their shares for a period
of 180 days after the date of this Prospectus without the prior written consent
of PaineWebber Incorporated. However, PaineWebber Incorporated may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. As a result of these restrictions,
based on shares outstanding as of May 15, 1996, on the date of this Prospectus,
a total of 642,267 shares other than the 4,000,000 shares offered hereby will be
eligible for sale; an additional 228,693 shares will be eligible for sale 90
days after the date of this Prospectus pursuant to Rule 144; an additional
8,695,188 shares will be eligible for sale 180 days after the date of this
Prospectus under Rule 144. In addition, the Company intends to register on the
effective date of the Offering a total of 4,444,756 shares of Common Stock
subject to outstanding options or reserved for issuance under the Company's
Stock Option Plan, Director Stock Option Plan and Employee Stock Purchase Plan.
Further, upon expiration of the lock-up agreements referred to above, holders of
approximately 10,253,016 shares of Common Stock will be entitled to certain
registration rights, including 217,917 shares which have the right to demand
registration. Such demands may be made as early as 180 days following the
Offering. If such holders, by exercising their registration rights, cause a
large number of shares to be registered and sold in the public market, such
sales could have a material adverse effect on the market price for the Common
Stock. See "Description of Capital Stock -- Registration Rights" and "Shares
Eligible for Future Sale."
The Company's officers and directors and certain other shareholders have
agreed not to sell or otherwise dispose of their shares of Common Stock (an
aggregate of 10,629,999 shares plus 3,867,164 shares issuable upon the exercise
of outstanding warrants or options) for a period of at least 180 days from the
date of this Prospectus, without the prior written consent of PaineWebber
Incorporated.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), who has beneficially owned restricted shares of
Common Stock for at least two years from the later of the date such securities
were acquired from the Company or (if applicable) the date they were acquired
from an affiliate, is entitled to sell, within any three-month period, a number
of shares that does not exceed the greater of (i) 1% of the total number of
outstanding shares of Common Stock or, (ii) the average weekly trading volume in
the Common Stock on the Nasdaq National Market during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied.
In addition, affiliates of the Company must comply with the restrictions and
requirements of Rule 144, other than the two-year holding period requirement, in
order to sell shares of Common Stock that are not restricted securities. Under
Rule 144(k), if a period of at least three years has elapsed between the later
of the date restricted securities were acquired from the Company and the date
they were acquired from an affiliate of the Company, a person who is not an
affiliate at the time of sale and has not been an affiliate at any time during
the three months preceding the sale could be entitled to sell the shares without
compliance with the foregoing requirements under Rule 144.
Prior to the Offering there has been no market for the shares of Common
Stock and no prediction can be made as to the effect, if any, that market sales
of shares of Common Stock or the availability of such securities for sale will
have on the market price prevailing from time to time. Nevertheless, the
possibility that substantial amounts of shares of Common Stock may be sold in
the public market may adversely affect prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities.
45
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom PaineWebber
Incorporated, Deutsche Morgan Grenfell/C. J. Lawrence Inc. and Jefferies &
Company, Inc. are acting as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement among the Company and the Underwriters (the "Underwriting Agreement"),
to purchase from the Company, and the Company has agreed to sell to the
Underwriters, the number of shares of Common Stock set forth opposite the name
of such Underwriter below at the price set forth on the cover page of this
Prospectus under "Proceeds to Company":
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- - ------------------------------------------------------------------ ----------
<S> <C>
PaineWebber Incorporated.......................................... 893,500
Deutsche Morgan Grenfell/C. J. Lawrence Inc....................... 893,250
Jefferies & Company, Inc.......................................... 893,250
H. D. Brous & Co., Inc............................................ 80,000
Alex. Brown & Sons Incorporated................................... 80,000
Cowen & Co........................................................ 80,000
Dillon, Read & Co. Inc............................................ 80,000
Invemed Associates, Inc........................................... 80,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................ 80,000
J.P. Morgan Securities Inc........................................ 80,000
Morgan Stanley & Co. Incorporated................................. 80,000
Oppenheimer & Co., Inc............................................ 80,000
Smith Barney Inc.................................................. 80,000
Fahnestock & Co. Inc.............................................. 40,000
Gordon, Haskett Capital Corporation............................... 40,000
Gruntal & Co., Incorporated....................................... 40,000
Ladenburg, Thalmann & Co., Inc.................................... 40,000
Moness Crespi Hardt, Inc.......................................... 40,000
Pennsylvania Merchant Group, Ltd.................................. 40,000
Piper Jaffray Inc................................................. 40,000
Principal Financial Securities, Inc............................... 40,000
Punk, Ziegel & Knoell............................................. 40,000
Tucker Anthony Incorporated....................................... 40,000
Unterberg Harris.................................................. 40,000
Vector Securities International, Inc.............................. 40,000
Wedbush Morgan Securities Inc..................................... 40,000
----------
Total........................................................... 4,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the shares of Common Stock listed above are subject to certain
conditions. The Underwriting Agreement also provides that the Underwriters are
committed to purchase, and the Company is obligated to sell, all of the shares
offered hereby if any of the shares being sold pursuant to the Underwriting
Agreement are purchased (without consideration of any shares that may be
purchased through the exercise of the Underwriters' over-allotment option).
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public initially at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $0.65 per share. The
Underwriters may allow, and such dealers may reallow, a concession to other
dealers not in excess of $0.10 per share. After the initial public offering of
the Common Stock, the public offering price, the concessions to selected dealers
and the reallowance to other dealers may be changed by the Representatives.
46
<PAGE>
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 600,000
additional shares of Common Stock at the initial public offering price set forth
on the cover page of this Prospectus, less underwriting discounts and
commissions. The Underwriters may exercise such option only to cover
over-allotments, if any, incurred in the sales of shares of Common Stock. To the
extent the Underwriters exercise such option, each of the Underwriters will
become obligated, subject to certain conditions, to purchase such percentage of
such additional shares of Common Stock as is approximately equal to the
percentage of shares of Common Stock that it is obligated to purchase as shown
in the table set forth above.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The Representatives have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
The Company and each of its executive officers and directors, and certain of
its existing shareholders, have agreed not to offer, sell, contract to sell, or
grant any option to purchase or otherwise dispose of, directly or indirectly,
any shares of capital stock of the Company or any securities convertible into or
exercisable or exchangeable for any capital stock of the Company owned by any of
them prior to the expiration of 180 days from the date of this Prospectus,
except (i) for the shares of Common Stock offered hereby, (ii) with the prior
written consent of PaineWebber Incorporated and (iii) in the case of the
Company, for the issuance of shares of Common Stock upon the exercise of
options, or the grant of options to purchase shares of Common Stock or
restricted stock awards under the Company's Stock Option Plan, Director Option
Plan or Employee Stock Purchase Plan.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price was determined pursuant to
negotiations between the Company and the Representatives. Among the factors
considered in determining the initial public offering price, in addition to
prevailing market conditions, were certain financial information of the Company,
the history of, and the prospects for, the Company and the industry in which it
competes, an assessment of the Company's management, its past and present
operations, the prospects for, and timing of, future revenues of the Company,
the present state of the Company's development, and the above factors in
relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. The initial public offering price
set forth on the cover page of this Prospectus should not, however, be
considered an indication of the actual value of the Common Stock. Such price is
subject to change as a result of market conditions and other factors. There can
be no assurance that an active trading market will develop for the Common Stock
or that the Common Stock will trade in the public market subsequent to the
Offering at or above the initial public offering price.
47
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the securities which are being offered
hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, of Palo Alto, California and for the Underwriters by
Skadden, Arps, Slate, Meagher & Flom, San Francisco, California. Owen,
Wickersham & Erickson has acted as special counsel to the Company in connection
with matters related to the Company's patents. Roger Erickson, of counsel to
such firm, is the owner of 17,463 shares of Common Stock.
EXPERTS
The financial statements of the Company as of December 31, 1995 and for each
of the three years in the period ended December 31, 1995, included elsewhere in
this Prospectus and the Registration Statement, have been so included in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in accounting and auditing. The
discussion of certain intellectual property matters in the sections entitled
"Risk Factors -- Uncertainty Regarding Patents and Protection of Proprietary
Technology; Risks of Future Litigation" and "Business -- Intellectual Property
Matters" have been so included in reliance on the advice of Owen, Wickersham &
Erickson, given on the authority of such firm as experts in intellectual
property matters.
ADDITIONAL INFORMATION
The Company is not currently subject to the reporting requirements of the
Exchange Act, but will become subject to the requirements of the Exchange Act as
of the effective date of the Registration Statement of which this Prospectus
forms a part. In accordance with the Exchange Act, the Company will file
reports, proxy statements, quarterly reports and other information with the
Commission. Such reports, proxy statements, quarterly reports and other
information can be inspected and copied at the public reference facilities of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; at its New
York Regional Office, 7 World Trade Center, New York, New York 10048; and at its
Chicago Regional Office, 500 West Madison Street, Chicago, Illinois 60661 and
copies of such material can be obtained from the Commission's Public Reference
Section at prescribed rates.
48
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
----
<S> <C>
Report of Independent Accountants......................................... F-2
Financial Statements:
Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996
(UNAUDITED)............................................................ F-3
Statements of Operations for the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1995 and 1996 (UNAUDITED).... F-4
Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1993, 1994 and 1995 and the three months ended March 31,
1995 and 1996 (UNAUDITED).............................................. F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1995 and 1996 (UNAUDITED).... F-6
Notes to Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Eclipse Surgical Technologies, Inc.:
We have audited the accompanying balance sheets of Eclipse Surgical
Technologies, Inc. as of December 31, 1994 and 1995, and the related statements
of operations, shareholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Eclipse Surgical
Technologies, Inc. as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
March 29, 1996
F-2
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 132 $ 123 $ 1,277
Accounts receivable, net of allowance for doubtful accounts of $60 and $29 at
December 31, 1994 and 1995, respectively, and $63 at March 31, 1996......... 381 532 1,440
Inventories.................................................................. 1,833 1,670 1,612
Other current assets......................................................... 363 14 75
--------- --------- -----------
Total current assets....................................................... 2,709 2,339 4,404
Property and equipment, net.................................................... 108 98 135
Other assets................................................................... 105 22 140
--------- --------- -----------
Total assets............................................................... $ 2,922 $ 2,459 $ 4,679
--------- --------- -----------
--------- --------- -----------
LIABILITIES
Current liabilities:
Accounts payable............................................................. $ 951 $ 1,217 $ 1,233
Accrued liabilities.......................................................... 551 547 686
Customer deposits............................................................ 224 270 326
Short-term borrowings........................................................ -- 45 --
Current portion of long-term debt............................................ 326 1,809 1,691
--------- --------- -----------
Total current liabilities.................................................. 2,052 3,888 3,936
Long-term debt, less current portion........................................... 1,009 -- 23
--------- --------- -----------
Total liabilities.......................................................... 3,061 3,888 3,959
--------- --------- -----------
Commitments and contingencies (Note 9).
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, no par value:
Authorized: 5,000 shares;
Issued and outstanding: none
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 10,469 shares at December 31, 1994, 11,210 shares at
December 31, 1995 and 11,682 shares at March 31, 1996....................... 3,450 4,690 6,659
Notes receivable for sale of common stock...................................... -- (104) --
Accumulated deficit............................................................ (3,589) (6,015) (5,939)
--------- --------- -----------
Total shareholders' equity (deficit)....................................... (139) (1,429) 720
--------- --------- -----------
Total liabilities and shareholders' equity (deficit)....................... $ 2,922 $ 2,459 $ 4,679
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................................... $ 2,105 $ 2,020 $ 2,707 $ 528 $ 1,752
Cost of revenues........................................... 1,013 1,173 1,642 382 502
--------- --------- --------- --------- ---------
Gross profit............................................. 1,092 847 1,065 146 1,250
--------- --------- --------- --------- ---------
Operating expenses:
Research and development................................. 906 971 1,010 195 517
Sales and marketing...................................... 794 392 879 191 396
General and administrative............................... 325 1,031 681 199 211
--------- --------- --------- --------- ---------
Total operating expenses............................... 2,025 2,394 2,570 585 1,124
--------- --------- --------- --------- ---------
Operating income (loss).............................. (933) (1,547) (1,505) (439) 126
Interest expense........................................... (15) (447) (923) (223) (50)
Interest income............................................ 12 12 2 2 --
--------- --------- --------- --------- ---------
Net income (loss).................................... $ (936) $ (1,982) $ (2,426) $ (660) $ 76
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share................................ $ (0.08) $ (0.16) $ (0.19) $ (0.05) $ 0.01
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in per share calculation....................... 11,676 12,526 12,765 12,765 14,863
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE
-------------------- FOR COMMON ACCUMULATED
SHARES AMOUNT STOCK DEFICIT TOTAL
--------- --------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1993.............................. 8,549 $ 743 $ (671) $ 72
Issuance of common stock for cash less issuance costs
of $124............................................. 1,337 1,869 -- 1,869
Issuance of warrants................................. -- 6 -- 6
Issuance of common stock for cash upon exercise of
options............................................. 3 -- -- --
Net loss............................................. -- -- (936) (936)
--------- --------- ------------- ------------ ---------
Balances, December 31, 1993............................ 9,889 2,618 (1,607) 1,011
Issuance of common stock............................. 580 822 -- 822
Issuance of warrants................................. -- 10 -- 10
Net loss............................................. -- -- (1,982) (1,982)
--------- --------- ------------- ------------ ---------
Balances, December 31, 1994............................ 10,469 3,450 (3,589) (139)
Issuance of common stock............................. 741 1,235 $ (104) -- 1,131
Issuance of warrants................................. -- 5 -- 5
Net loss............................................. -- -- (2,426) (2,426)
--------- --------- ------------- ------------ ---------
Balances, December 31, 1995............................ 11,210 4,690 (104) (6,015) (1,429)
Issuance of common stock............................. 472 1,967 -- 1,967
Payment on notes receivable.......................... 104 104
Issuance of warrants................................. -- 2 -- 2
Net income........................................... -- -- 76 76
--------- --------- ------------- ------------ ---------
Balances, March 31, 1996 (unaudited)................... 11,682 $ 6,659 $ -- $ (5,939) $ 720
--------- --------- ------------- ------------ ---------
--------- --------- ------------- ------------ ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ (936) $ (1,982) $ (2,426) $ (660) $ 76
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization.............................. 57 11 72 13 29
Amortization of discount and financing costs............... -- 338 607 166 --
Provision for doubtful accounts............................ 9 55 40 (18) 34
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable............... (29) (247) (191) 78 (942)
(Increase) decrease in inventories....................... (741) (486) 163 (79) 58
(Increase) decrease in other assets...................... 9 (202) 349 211 (76)
Increase (decrease) in accounts payable.................. (1) 418 266 181 16
Increase (decrease) in accrued liabilities............... 28 144 (4) (29) 128
Increase (decrease) in customer deposits................. -- 224 46 (100) 56
--------- --------- --------- --------- ---------
Net cash used in operating activities.................. (1,604) (1,727) (1,078) (237) (621)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of property and equipment........................ (64) (16) (62) (7) (35)
Issuance of note receivable.................................. (50) -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing activities.................. (114) (16) (62) (7) (35)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Payments on capital lease obligations........................ (10) (2) -- -- --
Payments on short-term borrowings............................ (119) -- (782) -- (34)
Net proceeds from issuance of common stock and warrants...... 1,875 22 1,136 -- 1,969
Proceeds from short-term borrowings.......................... -- -- 827 154 --
Payments on long-term debt................................... -- -- (50) -- (125)
Proceeds from issuance of long term debt..................... -- 1,724 -- 50 --
--------- --------- --------- --------- ---------
Net cash provided by financing activities.............. 1,746 1,744 1,131 204 1,810
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... 28 1 (9) (40) 1,154
Cash and cash equivalents at beginning of period............... 103 131 132 132 123
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period..................... $ 131 $ 132 $ 123 $ 92 $ 1,277
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental schedule of cash flow information:
Interest paid................................................ $ 15 $ 9 $ 71 $ 3 $ 35
Taxes paid................................................... $ 3 $ 1 $ 1 $ -- $ 1
Supplemental schedule of noncash financing activities:
Issuance of common stock in connection with notes payable.... $ -- $ 811 $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Issuance of common stock and warrants in exchange for note
receivable.................................................. $ -- $ -- $ 104 $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Acquisition of equipment under capital lease................. $ -- $ -- $ -- $ -- $ 30
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. NATURE OF OPERATIONS:
Eclipse Surgical Technologies, Inc. (the Company) was founded in 1989 to
develop, manufacture and market surgical lasers and accessories for the
treatment of disease. Currently, the Company's emphasis is on development and
manufacture of products used for transmyocardial revascularization (TMR), a
cardiovascular procedure.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
All highly liquid instruments purchased with an original maturity of three
months or less are considered cash equivalents.
INVENTORIES:
Inventories are stated at the lower of cost (principally standard cost,
which approximates actual cost on a first-in, first-out basis) or market value.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities and customer deposits approximate fair value due to their short
maturities. Based on borrowing rates currently available to the Company for
loans with similar terms, the carrying value of the long-term debt obligations
also approximates fair value.
CERTAIN RISKS AND CONCENTRATIONS:
The Company maintains its excess cash balance in a major U.S. bank. The
Company has not experienced any losses on its deposits of cash and cash
equivalents.
The Company sells its products primarily to hospitals and other health care
providers in North America, Europe and Asia. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. Although
the Company maintains allowances for potential credit losses that it believes to
be adequate, a payment default on a significant sale could materially and
adversely affect its operating results and financial condition.
REVENUE RECOGNITION:
The Company typically recognizes product sales upon receipt of purchase
order and subsequent shipment of product. Where purchase orders allow customers
an acceptance period, revenue is recognized upon acceptance.
RESEARCH AND DEVELOPMENT:
Research and development expenses are charged to operations as incurred.
DEPRECIATION AND AMORTIZATION:
Property and equipment are stated at cost and depreciated on a straight-line
basis over their estimated useful lives of three to five years. Assets acquired
under capital leases are amortized over the shorter of their
F-7
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
estimated useful lives or the term of the related lease (generally three to five
years). Amortization of leasehold improvements is based on the straight-line
method over the shorter of the estimated useful life or the lease term.
WARRANTIES:
The Company's laser products are generally warranted for one year. The
Company provides for estimated future costs of repair, replacement, or customer
accommodations which are reflected in the accompanying financial statements.
INCOME TAXES:
The Company accounts for income taxes using the liability method under which
deferred tax assets or liabilities are calculated at the balance sheet date
using current tax laws and rates in effect for the year in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amounts expected to be
realized.
NET INCOME (LOSS) PER SHARE:
Net income (loss) per share is computed using the weighted average number of
shares of common stock outstanding and common stock equivalent shares. Common
stock equivalent shares are included in the per share calculations where the
effect of their inclusion would be dilutive. Dilutive common stock equivalent
shares consist of stock options and warrants (using the treasury stock method in
all periods presented). Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, common and common stock equivalent shares issued by
the Company during the twelve months preceding the initial offering date, using
the treasury stock method and the assumed public offering price per share, have
been included in the calculation of net income (loss) per share for all periods
presented.
RECENT PRONOUNCEMENTS:
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS No. 123) "Accounting for Stock-Based Compensation" which
establishes a fair value based method of accounting for stock-based compensation
plans and requires additional disclosures for those companies who elect not to
adopt the new method of accounting. The Company is currently following the
requirements of APB Opinion No. 25 "Accounting for Stock Issued to Employees"
and plans to adopt SFAS No. 123 during 1996 utilizing the disclosure
alternative.
INTERIM FINANCIAL INFORMATION (UNAUDITED):
The financial statements and related notes as of March 31, 1996 and for the
three months ended March 31, 1995 and 1996 have been prepared on the same basis
as the audited financial statements and, in the opinion of management, include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial position and results of operations in
accordance with generally accepted accounting principles for the interim period.
Results for interim periods are not necessarily indicative of results to be
expected for the full fiscal year.
F-8
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
3. INVENTORIES:
Inventories consist of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................................ $ 221 $ 287 $ 156
Work in process.............................................. 330 351 362
Finished goods............................................... 1,282 1,032 1,094
--------- --------- -----------
$ 1,833 $ 1,670 $ 1,612
--------- --------- -----------
--------- --------- -----------
</TABLE>
4. OTHER CURRENT ASSETS:
Other current assets consists of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
---------------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid expenses................................................. $ -- $ -- $ 59
Receivable from related party.................................... 252 14 16
Other............................................................ 111 -- --
--------- --------- ---
$ 363 $ 14 $ 75
--------- --------- ---
--------- --------- ---
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment........................................ $ 129 $ 142 $ 207
Manufacturing and demonstration equipment...................... 152 196 196
Leasehold improvements......................................... 23 28 28
--------- --------- -----
304 366 431
Less accumulated depreciation and amortization................. (196) (268) (296)
--------- --------- -----
$ 108 $ 98 $ 135
--------- --------- -----
--------- --------- -----
</TABLE>
Property and equipment includes equipment under capital leases as follows
(IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Cost............................................................. $ 42 $ 42 $ 72
Less accumulated amortization.................................... (42) (42) (42)
--------- --------- -----
$ -- $ -- $ 30
--------- --------- -----
--------- --------- -----
</TABLE>
F-9
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
6. ACCRUED LIABILITIES:
Accrued liabilities consists of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued commissions payable...................................... $ 47 $ 120 $ 200
Accrued warranty................................................. 30 60 65
Accrued interest................................................. 104 249 262
Other............................................................ 370 118 159
--------- --------- -----
$ 551 $ 547 $ 686
--------- --------- -----
--------- --------- -----
</TABLE>
7. SHORT-TERM BORROWINGS:
In April 1995, the Company entered into a note payable with a financing
company for $50,000, with interest at 2% per month on the average daily
outstanding balance. Principal and interest payments are due monthly commencing
in May 1995 and terminating in August 1995. In July 1995, the Company amended
the note which resulted in renewing the terms through March 28, 1996. The total
balance outstanding on December 31, 1995 is $39,375.
In March 1995, the Company entered into a factoring agreement that allows
for borrowings up to 80% of eligible accounts receivable, not to exceed
$400,000. The factoring agreement is collateralized by substantially all of the
assets of the Company. Interest at 2% per month on the average outstanding
balance is charged monthly. Payments are made against the line of credit by
applying payments from the accounts receivable that have been collateralized to
the outstanding balance. During the year ended December 31, 1995, the maximum
amount drawn against the line was $201,158. The balance outstanding as of
December 31, 1995 and March 31, 1996 was $5,752 and none, respectively.
In February 1995, the Company entered into a note payable with a distributor
for $50,000 at 8% interest per annum. Principal and interest were paid in full
in December 1995.
8. LONG-TERM DEBT:
Debt consists of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable................................................ $ 1,859 $ 1,809 $ 1,684
Capital lease obligations.................................... -- -- 30
--------- --------- -----------
1,859 1,809 1,714
Less unamortized discount on notes payable................... (524) -- --
--------- --------- -----------
Total debt................................................... 1,335 1,809 1,714
Less current portion......................................... (326) (1,809) (1,691)
--------- --------- -----------
$ 1,009 $ -- $ 23
--------- --------- -----------
--------- --------- -----------
</TABLE>
The Company leases certain office equipment under a capital lease which
expires in January 2001.
F-10
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
8. LONG-TERM DEBT, CONTINUED:
During February through June 1994, the Company entered into promissory notes
for $1,008,974. The notes bear interest at 6% per annum and the maturity has
been extended through December 31, 1996. In connection with these notes, the
Company issued warrants to the debt holders to purchase an aggregate of 177,996
shares of common stock at $2.15 per share. The warrants expire in 1999.
During May through July 1994, the Company entered into promissory notes
totaling $798,738. The promissory notes comprised units, each of which includes
a $50,000 note payable bearing interest at 10% due in November 1995; 33,333
shares of common stock and 33,333 warrants at an exercise price of $1.67 per
share. In addition, a $50,000 loan entered into in January 1994, with a member
of the Company's Board of Directors, was converted into a unit with a $50,000
note payable, 33,333 shares of common stock and 33,333 warrants.
The shares and warrants issued in connection with the promissory notes were
determined to have a fair market value of $811,006, which has been charged to
discount on notes payable. The discount has been amortized as a charge to
interest expense on a straight line basis over a 17-month term. For the years
ended December 31, 1994 and 1995, the Company recorded interest expense of
$286,237 and $524,769, respectively.
Costs associated with promissory notes issued by the Company in the amount
of $135,000 were also amortized to interest expense on a straight line basis
over the 17 month term of the notes. For the years ended December 31, 1994 and
1995, $52,000 and $83,000 of these costs had been charged to interest expense,
respectively.
In March 1996, the Company issued warrants at an exercise price of $4.17 per
share to note holders who agreed to extend the term of the notes through
December 31, 1996. A total of 46,884 warrants were issued. At March 31, 1996,
$375,000 of the notes were in default as the holders did not accept these terms.
9. COMMITMENTS AND CONTINGENCIES:
The Company entered into a lease agreement for office facilities in February
1992. It was amended in November 1994 to include additional space for a total of
approximately 17,700 square feet, and to extend the lease term through March
1998. The minimum future rental payments are (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- - ------------------------------------------------------------------
<S> <C>
1996.............................................................. $ 138
1997.............................................................. 154
1998.............................................................. 40
</TABLE>
Rent expense was approximately $66,000, $92,000 and $139,000 for the years
ended December 31, 1993, 1994 and 1995, respectively, and $36,000 and $35,000
for the three month periods ended March 31, 1995 and 1996, respectively.
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions at this time, management
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's financial position or results of operations.
F-11
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
10. SHAREHOLDERS' EQUITY:
COMMON STOCK:
Under certain circumstances, the Company has right of first refusal to
purchase common stock from selling shareholders.
In April 1996, the Board of Directors authorized a three-for-one stock
split. Management has retroactively applied the effect of the stock split for
all periods presented.
WARRANTS:
At December 31, 1995, warrants were outstanding to purchase a total of
1,124,754 shares of common stock at exercise prices ranging from $1.67 to $2.15.
The warrants, which were issued in connection with various debt and equity
financings, are exercisable and terminate upon the earlier of eleven months to
five years from the effective grant date, a merger or sale of all or
substantially all of the Company's assets to a noncontrolling entity, or certain
other conditions. At December 31, 1995, the Company had reserved for issuance
under these warrants 1,124,754 shares of common stock. During the years ended
December 31, 1994 and 1995 and the three month period ended March 31, 1996, no
warrants were exercised.
STOCK OPTION PLAN:
In January 1991 and as amended in October 1991 and August 1994, the Company
adopted the Dual Stock Option Plan, which includes the Employee Program under
which incentive and nonstatutory options may be granted to employees and the
Consultants Program, under which nonstatutory options may be granted to
consultants of the Company. As of March 31, 1996, the Company had reserved for
issuance under this plan a total of 3,000,000 shares of common stock. Under the
plan, options may be granted at prices not less than 85% of the fair market
value at the date of grant for nonstatutory options and not less than fair
market value for incentive options (110% of fair market value for options
granted to 10% shareholders), as determined by the Board of Directors. Under the
Dual Stock Option Plan, options generally vest over a period of three years and
expire ten years from date of grant (five years for options granted to 10%
shareholders). No shares of common stock issued under the plan are subject to
repurchase.
DIRECTOR STOCK OPTION PLAN:
In August 1994, the Company adopted the Directors Stock Option Plan which
provides for the grant of nonstatutory options to directors who are not officers
or employees of the Company. As of March 31, 1996, the Company had reserved for
issuance under this plan 450,000 shares of common stock. Under this plan,
options are granted at the trading price of the common stock at the date of
grant. Options generally vest over twelve months and expire ten years from date
of grant. No shares of common stock issued under the plan are subject to
repurchase.
F-12
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
10. SHAREHOLDERS' EQUITY, CONTINUED:
Option activity under both plans is as follows (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES -------------------------------------
AVAILABLE NUMBER OF PRICE PER
FOR GRANT SHARES SHARE TOTAL
----------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1993......................... 256 507 $0.02-$2.15 $ 349
Options granted................................ (140) 140 $1.43-$2.15 259
Options exercised.............................. -- (3) $0.02 --
Options canceled............................... 29 (29) $1.43-$2.15 (63)
----------- ----- ---------
Balance, December 31, 1993....................... 145 615 $0.02-$2.15 545
Shares reserved................................ 1,482 -- --
Options granted................................ (670) 670 $1.43 960
Options canceled............................... 49 (49) $1.43-$2.15 (71)
----------- ----- ---------
Balance, December 31, 1994....................... 1,006 1,236 $0.02-$2.15 1,434
Shares reserved................................ 1,200 -- --
Options granted................................ (1,308) 1,308 $1.67 2,180
Options canceled............................... 4 (4) $1.43-$2.15 (6)
----------- ----- ---------
Balance, December 31, 1995....................... 902 2,540 $0.02-$2.15 3,608
Options granted................................ (112) 112 $4.17 466
----------- ----- ---------
Balances, March 31, 1996 (UNAUDITED)............. 790 2,652 $0.02-$4.17 $ 4,074
----------- ----- ---------
----------- ----- ---------
</TABLE>
At December 31, 1995, options to purchase 1,241,646 shares of common stock
were exercisable.
11. INCOME TAXES:
The components of the net deferred tax asset were as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Net operating losses..................................................... $ 1,323 $ 1,639
Research and development credits......................................... 247 291
Reserves................................................................. 31 75
Accrued liabilities...................................................... 30 62
--------- ---------
Net deferred asset................................................. 1,631 2,067
Less valuation allowance................................................. (1,631) (2,067)
--------- ---------
$ -- $ --
--------- ---------
--------- ---------
</TABLE>
The Company has established a valuation allowance to the extent of its
deferred tax asset since it is not certain that a benefit can be realized in the
future due to the Company's recurring operating losses.
The change in the valuation allowance was $523,000, $828,000, and $436,000
in 1993, 1994, and 1995, respectively.
The noncurrent portion of the deferred tax assets, which totaled $1,570,000
and $1,930,000 at December 31, 1994 and 1995, respectively, are included above.
At December 31, 1995, the Company had federal and state net operating loss
carryforwards of approximately $4,300,000 and $2,700,000, respectively,
available to offset future regular and alternative minimum
F-13
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
11. INCOME TAXES, CONTINUED:
taxable income. In addition, the Company had federal and state research and
development credit carryforwards of approximately $205,000 and $86,000 available
to offset future tax liabilities. The Company's net operating loss
carryforwards, as well as credit carryforwards, expire in 2002 through 2010, if
not utilized.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company.The Company believes that the sale of common stock in
this public offering (see Note 14) will result in an ownership change which
could restrict the utilization of the carryforwards.
12. MAJOR CUSTOMERS:
In 1993 sales to one customer amounted to 11.9% of net revenues. In 1994,
there were no sales to one customer which amounted to greater than 10% of net
revenues. Sales to two customers amounted to 10% each of net revenues in 1995.
For the three months ended March 31, 1995 sales to three customers amounted to
13%, 16%, and 23% of net revenues. For the three months ended March 31, 1996,
sales to three different customers amounted to 17% of net revenues each, and
sales to one additional customer amounted to 26% of net revenues.
Export sales accounted for approximately 3.2%, 16.9% and 20% of net sales
for the years ended December 31, 1993, 1994 and 1995, respectively. For the
three months ended March 31, 1995 and 1996, export sales accounted for
approximately 41% and 8% of net sales, respectively.
13. RELATED PARTY TRANSACTIONS:
In 1993, the Company decided not to pursue an opportunity to design,
manufacture and distribute low price balloon angioplasty catheters. The Company
therefore caused the formation of Atlantis Catheter Company, Inc. (Atlantis).
The Company purchased 500,000 shares of Atlantis common stock and warrants to
purchase 4,500,000 additional shares of common stock for a total of $14,500.
These shares and warrants were distributed to the Company's shareholders as a
dividend in 1994, causing the Company's president to become the principal
beneficial shareholder of Atlantis. The president is also an outside director of
Atlantis. At December 31, 1995, 51.1% of Atlantis shares were held by the
Company's shareholders.
During 1994, the Company advanced Atlantis a total of $629,017 for
facilities and other operating expenses. The advanced funds were reimbursed
periodically by Atlantis, with a total $251,962 outstanding at December 31,
1994, and $14,000 outstanding at December 31, 1995. As of December 31, 1995, the
funds advanced by the Company to Atlantis pertain only to rent and other
facilities charges generated by the shared facilities of the two companies.
In February 1996, Atlantis was acquired by Biocompatibles International plc
(Biocompatibles), a publicly traded company, at which time Eclipse shareholders
held less than 5% of Biocompatible's outstanding common stock.
During 1995, the Company borrowed an aggregate of $100,000 from one director
pursuant to notes payable bearing interest at 10% per annum. These notes were
repaid in full during the year.
14. SUBSEQUENT EVENTS (UNAUDITED):
In April 1996, the Board of Directors approved the filing of a registration
statement by the Company with the SEC covering the proposed sale of shares of
its common stock to the public (the Offering).
In April 1996, the Board of Directors approved the following:
1. Amendments to the Company's Amended and Restated Articles of
Incorporation to increase the authorized shares of Common Stock from
45,000,000 to 50,000,000 and effect a three-for-one stock
F-14
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
14. SUBSEQUENT EVENTS (UNAUDITED):, continued:
split of the outstanding Common Stock. All common and common equivalent
shares and per share amounts in these financial statements have been
adjusted retroactively to give effect to the stock split
2. The amendment and restatement of the Company's Stock Option Plan to
increase the aggregate number of shares of Common Stock reserved for
issuance under the Plan to 4,000,000 shares (post-split) and to extend
the term of the Plan through March 2006.
3. The amendment and restatement of the Company's Director Stock Option
Plan to decrease the aggregate number of shares of Common Stock reserved
for issuance under the Plan to 200,000 shares (post-split) and to extend
the term of the Plan through March 2006.
4. The adoption of a 1996 Employee Stock Purchase Plan upon the closing of
the Company's initial public offering and the reservation of a total of
250,000 shares of the Company's Common Stock. Under the purchase plan,
employees may purchase Common Stock at the lower of 85% of the fair
market value of the Common Stock at the beginning or end of each offering
period.
F-15
<PAGE>
<TABLE>
<C> <S>
The Eclipse TMR 2000 system generates laser light of a
[Photograph of 2-micron wavelength by photoelectric excitation of a
Eclipse TMR 2000 solid state holmium crystal. The holmium laser is
system and nurse] compact, reliable and has low maintenance requirements.
</TABLE>
<TABLE>
<S> <C>
[Photograph of slender optical fiber] [Photograph of surgical tools]
Flexible, lightweight and slender The Company offers a broad range of
optical fibers shown above are used to surgical tool options for the individual
deliver the laser energy to the tactile preferences of the surgeon and
patient. Eclipse TMR products are solutions for the different geometry of
designed to give the surgeon access to each patient's heart cavity.
difficult to reach areas and greater
visualization of the surgical field.
</TABLE>
<PAGE>
- - ------------------------------------------------
------------------------------------------------
- - ------------------------------------------------
------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES
IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Dilution.................................................................. 16
Selected Financial Data................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 21
Management................................................................ 34
Certain Transactions...................................................... 41
Principal Shareholders.................................................... 42
Description of Capital Stock.............................................. 43
Shares Eligible for Future Sale........................................... 45
Underwriting.............................................................. 46
Legal Matters............................................................. 48
Experts................................................................... 48
Additional Information.................................................... 48
Index to Financial Statements............................................. F-1
</TABLE>
-------------------
UNTIL JUNE 25, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,000,000 SHARES
[LOGO]
ECLIPSE SURGICAL
TECHNOLOGIES, INC.
COMMON STOCK
-----------------
P R O S P E C T U S
-----------------
PAINEWEBBER INCORPORATED
DEUTSCHE MORGAN GRENFELL
JEFFERIES & COMPANY, INC.
------------
MAY 31, 1996
- - ------------------------------------------------
------------------------------------------------
- - ------------------------------------------------
------------------------------------------------
