<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
Commission file number 0-28288
--------------------
ECLIPSE SURGICAL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------------
CALIFORNIA 77-0223740
------------------------ ----------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
559 WEDDELL DRIVE
SUNNYVALE, CALIFORNIA 94089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(408) 747-0120
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock outstanding as of the latest practicable date.
16,942,799 shares
As of April 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART 1
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements:
a. Consolidated Balance Sheets
as of March 31, 1998 and December 31, 1997................... 3
b. Consolidated Statements of Operations
for the three months ended March 31, 1998 and 1997........... 4
c. Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1997........... 5
d. Notes to Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 18
PART II
OTHER INFORMATIO
Item 1. Legal Proceedings............................................ 19
Item 2(d) Changes in Securities and Use of Proceeds.................... 19
Item 6. Exhibits and Reports on Form 8-K............................. 19
Signatures................................................... 20
</TABLE>
2
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
March 31, 1998 December 31,
-------------- ------------
(unaudited) 1997
-------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . $13,605 $16,997
Marketable securities. . . . . . . . . . . . . . . . . . . . . . . 16,201 18,197
Accounts receivable, net of allowance for
doubtful accounts of $770 at March 31, 1998
and $757 at December 31, 1997, respectively . . . . . . . . . . 2,118 2,054
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,169 3,866
Prepaids and other current assets. . . . . . . . . . . . . . . . . 263 556
-------------- ------------
Total current assets . . . . . . . . . . . . . . . . . . . . 36,356 41,670
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . 1,217 1,420
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471 384
-------------- ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $38,044 $43,474
-------------- ------------
-------------- ------------
LIABILITIES
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . $3,259 $3,190
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . 956 965
Customer deposits. . . . . . . . . . . . . . . . . . . . . . . . . 106 71
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 1,000
Current portion of long-term debt. . . . . . . . . . . . . . . . . 10 10
-------------- ------------
Total current liabilities. . . . . . . . . . . . . . . . . . 5,331 5,236
Long-term debt, less current portion . . . . . . . . . . . . . . . 8 10
-------------- ------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 5,339 5,246
-------------- ------------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 16,907
shares at March 31, 1998 and 16,858
shares at December 31, 1997. . . . . . . . . . . . . . . . . . . . 66,725 66,596
Unrealized gain on marketable securities . . . . . . . . . . . . . . . 24 50
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (34,044) (28,418)
-------------- ------------
Total shareholders' equity . . . . . . . . . . . . . . . . . 32,705 38,228
-------------- ------------
Total liabilities and shareholders' equity . . . . . . . . . $38,044 $43,474
-------------- ------------
-------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
-------- --------
<S> <C> <C>
Net revenues . . . . . . . . . . . . . . . . . . . . . . $1,574 $1,208
Cost of revenues . . . . . . . . . . . . . . . . . . 834 630
-------- --------
Gross profit . . . . . . . . . . . . . . . . . . . 740 578
-------- --------
Operating expenses:
Research and development . . . . . . . . . . . . . 3,127 2,727
Sales and marketing. . . . . . . . . . . . . . . . 2,757 1,411
General and administrative . . . . . . . . . . . . 887 795
-------- --------
Total operating expenses . . . . . . . . . . . . 6,771 4,933
-------- --------
Operating loss . . . . . . . . . . . . . . . . (6,031) (4,355)
Interest expense . . . . . . . . . . . . . . . . . . . . (34) (6)
Interest and other income. . . . . . . . . . . . . . . . 439 504
Net loss . . . . . . . . . . . . . . . . . . . $(5,626) $(3,857)
-------- --------
-------- --------
Unrealized gain on marketable securities . . . $24 $222
Comprehensive loss . . . . . . . . . . . . . . $(5,602) $(3,635)
-------- --------
-------- --------
Net loss per share: Basic and Diluted . . . . . . . . . $(0.33) $(0.24)
-------- --------
-------- --------
Weighted average shares outstanding. . . . . . . . . 16,880 16,181
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $(5,626) $(3,857)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 262 105
Provision for doubtful accounts . . . . . . . . . . . . . 224 452
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable . . . . . . . (288) 476
Increase in inventories. . . . . . . . . . . . . . . . . (303) (629)
Decrease in prepaids and other current assets. . . . . . 293 260
Increase(decrease) in accounts payable . . . . . . . . . 69 (670)
Increase in customer deposits. . . . . . . . . . . . . . 35 -
Increase (decrease) in accrued liabilities . . . . . . . (9) 491
-------- --------
Net cash used in operating activities. . . . . . . . . (5,343) (3,372)
-------- --------
Cash flows from investing activities:
Purchase of marketable securities. . . . . . . . . . . . . - (11,054)
Sale of marketable securites . . . . . . . . . . . . . . . 1,970 12,044
Acquisition of property and equipment. . . . . . . . . . . (59) (657)
Increase (decrease) in other assets. . . . . . . . . . . . (87) 129
-------- --------
Net cash provided by investing activities . . . . . . 1,824 462
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock
and warrants . . . . . . . . . . . . . . . . . . . . . . 129 110
Payments on long-term debt . . . . . . . . . . . . . . . . (2) (36)
-------- --------
Net cash provided by financing activities. . . . . . . 127 74
-------- --------
Net decrease in cash and cash equivalents. . . . . . (3,392) (2,836)
Cash and cash equivalents at beginning of period. . . . . . . 16,997 24,106
Cash and cash equivalents at end of period. . . . . . . . . . $13,605 $21,270
-------- ---------
-------- ---------
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain on marketable securities. . . . . . . . . . $24 $222
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
INTERIM FINANCIAL INFORMATION (UNAUDITED):
The interim financial statements in this report reflect all adjustments,
consisting of normal recurring accruals, that are, in the opinion of management,
necessary for a fair statement of financial position, results of operations and
cash flows for the interim periods covered and of the financial condition of the
Company at the interim balance sheet dates. Results for interim periods are not
necessarily indicative of results to be expected for the full fiscal year. The
year-end balance sheet information was derived from audited financial statements
but does not include all disclosures required by generally accepted accounting
principles. These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1997, contained in the Company's Annual Report on Form 10-K as
filed with the U.S. Securities and Exchange Commission (SEC).
NET LOSS PER SHARE:
Earnings per share are calculated in accordance with the provisions of
Statement of Accounting Standards No. 128, "Earnings per Share," (SFAS 128).
SFAS 128 requires the Company to report both basic earnings per share, which
is the weighted-average number of common shares outstanding, and diluted
earnings per share, which includes the weighted-average common shares
outstanding and all dilutive potential common shares outstanding. All periods
presented herein have been restated to reflect the adoption of SFAS 128. For
the quarters ended March 31, 1998 and 1997 dilutive potential common shares
outstanding reflects shares issuable under the Company's stock option plans.
Basic EPS is computed by dividing loss available to common shareholders by
the weighted average number of common shares outstanding for the period.
Diluted EPS is computed giving effect to all dilutive potential common shares
that were outstanding during the period. Dilutive potential common shares
consist of incremental shares issuable upon the conversion of convertible
preferred stock (using the "if converted" method) and exercise of stock options
and warrants.
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
--------- ----------
<S> <C> <C>
Numerator - Basic and Diluted EPS
Loss available to common stockholders. . . . . . $(5,626) $(3,857)
Denominator - Basic and Diluted EPS
Weighted average shares outstanding. . . . . . . . 16,880 16,181
--------- ----------
Basic and diluted earnings per share . . . . . . . $(0.33) $(0.24)
--------- ----------
--------- ----------
</TABLE>
Options to purchase 3,065,000 and 3,068,000 shares of common stock were
outstanding at March 31, 1998 and 1997, respectively, but were not included in
the calculation of diluted EPS because their inclusion would have been
antidilutive.
6
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies -- (CONTINUED):
COMPREHENSIVE INCOME:
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," effective January 1, 1998.
This statement requires the disclosure of comprehensive income and its
components in a full set of general purpose financial statements. Comprehensive
income is defined as net income plus revenues, expenses, gains and losses that,
under generally accepted accounting principles, are excluded from net income.
RECENT PRONOUNCEMENTS:
In June 1997, FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), which supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 changes current practice under
SFAS 14 by establishing a new framework on which to base segment reporting
and also requires interim reporting of segment information. SFAS 131 is
effective for the Company's fiscal year ended December 31, 1998 with interim
reporting disclosures required the first quarter of 1999.
2. Inventories:
Inventories are stated at lower of cost (first-in, first-out) or market and
consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Raw materials. . . . . . . . . . . $1,396 $1,446
Work in process. . . . . . . . . . 120 -
Finished goods . . . . . . . . . . 2,653 2,420
----------- ------------
$4,169 $3,866
----------- ------------
----------- ------------
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS DESCRIPTIONS OF THE COMPANY'S EXPECTATIONS
REGARDING FUTURE TRENDS AFFECTING ITS BUSINESS. THESE FORWARD-LOOKING STATEMENTS
AND OTHER FORWARD-LOOKING STATEMENTS MADE ELSEWHERE IN THIS DOCUMENT ARE MADE IN
RELIANCE UPON THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. PLEASE READ THE SECTION BELOW TITLED "FACTORS THAT MAY
AFFECT FUTURE RESULTS" TO REVIEW CONDITIONS WHICH THE COMPANY BELIEVES COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT
LIMITED TO, THOSE ITEMS IDENTIFIED WITH A FOOTNOTE (1) SYMBOL. THE COMPANY
UNDERTAKES NO OBLIGATION TO UPDATE THE INFORMATION CONTAINED HEREIN.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINED IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC).
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 1995, the Company determined that there was a
significant opportunity in the Transmyocardial Revascularization ("TMR")
market, and that the Company was 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 to enter the TMR market.
Prior to 1996, the Company had focused almost exclusively on research and
development activities relating to surgical laser products, substantially
contributing to annual operating losses since inception. Since 1996, the Company
has focused on TMR and Percutaneous Transmyocardial Revascularization ("PTMR")
activities, particularly research and development activities and clinical
trials. At March 31, 1998, the Company had an accumulated deficit of
$34,044,000. There are currently eight clinical trials in progress in either
TMR or PTMR. The Company has submitted an application to the U.S. Food and Drug
Administration ("FDA") for marketing clearance ("PMA" or Pre-Market Approval) of
its TMR products in the United States. The Company received notification from
the FDA, dated March 16, 1998, that its PMA application has been accepted for
filing, which will lead to a circulatory devices panel review. There is no way
to predict when the panel review will be held nor is there any assurance that
the panel will recommend approval of the Company's products. The Company has
received the European Conforming Mark ("CE Mark") allowing the commercial sale
of its TMR laser system to the European Community.
The Company expects to continue to incur operating losses related to the
expansion of sales and marketing resources, research and development
activities, including clinical studies, 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.
- --------------------------
1 Forward-Looking Statement
8
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
NET REVENUES
Net revenues of $1,574,000 for the three months ended March 31, 1998
increased $366,000, or 30% as compared to net revenues of $1,208,000 for the
three months ended March 31, 1997. This increase resulted primarily from higher
international sales.
The Company's revenues have continued to be affected by a Health Care
Financing Administration ("HCFA") policy effective May 19, 1997 which restricts
Medicare reimbursement for TMR equipment and procedures. The Company's products
had received third party reimbursement under the preceding HCFA policy.
Reimbursement is a significant factor considered by hospitals in determining
whether to acquire new equipment.
Future revenues could continue to be affected by restrictions on third
party reimbursement and the timing and manner of sale of TMR and PTMR laser
systems. The Company intends to continue selling the systems to the hospital
outright (list price is $295,000) or placing the system with the hospital for a
placement fee (currently $25,000) plus an additional fee for each procedure
performed. The Company has also made contingency placements which are not
taken as revenue because the sale is dependent upon FDA approval or HCFA
reimbursement. As a result of the HCFA policy restricting Medicare reimbursement
for TMR equipment and procedures, the Company anticipates that these sales will
continue to be more difficult to obtain in the future than prior to the
effective date of the policy.
GROSS PROFIT
Gross profit increased in absolute dollars to $740,000 or 47% of net
revenues for the three months ended March 31, 1998 as compared to $578,000 or
48% of net revenues for the three months ended March 31, 1997.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures of $3,127,000 increased $400,000 or
15% for the three months ended March 31, 1998 as compared to $2,727,000 for the
three months ended March 31, 1997. The increase in these expenses reflected the
higher costs of supporting clinical trials and an increase in research and
development activities.
The Company's products are currently in clinical trials and therefore
subject to limitations by the FDA. 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. As a result of the HCFA policy restricting Medicare reimbursement for
TMR and PTMR equipment and procedures, the Company reimbursed clinical sites for
expenses incurred in conjunction with performing clinical trials. The Company
anticipates a continued increase in expenditures relating to hospital support of
the Company's clinical trials as the number of clinical trials increases.
Accordingly, the Company believes that research and development expenses may
continue to increase over the short term and possibly thereafter. There can be
no assurance that the Company's future revenues, if any, will be sufficient to
offset the research and development expenses required in connection with ongoing
efforts including current and future clinical trials.
- --------------------------
1 Forward-Looking Statement
9
<PAGE>
SALES AND MARKETING
Sales and Marketing expenditures of $2,757,000 increased $1,346,000 or 95%
for the three months ended March 31, 1998 when compared to $1,411,000 for the
three months ended March 31, 1997. The increase reflected the Company's
application of additional resources to both TMR and PTMR markets, including the
expansion of the international sales staff and related travel expenses.
Additionally, the Company incurred the depreciation expense associated with
lasers placed as demonstration units. The Company expects that sales and
marketing expenses will continue to increase as the Company continues to focus
resources on the development of the TMR and PTMR market.
GENERAL AND ADMINISTRATIVE
General and administrative expenses of $887,000 increased by $92,000 or
12% for the three months ended March 31, 1998 as compared to $795,000 for the
three months ended March 31, 1997. The increase in 1998 as compared to 1997
resulted primarily from increased staffing.
INTEREST INCOME AND EXPENSE, NET
Interest income of $439,000 decreased $65,000 or 13% for the three months
ended March 31, 1998 as compared to $504,000 for the three months ended March
31, 1997. This decrease was due to lower cash balances in 1998.
Interest expense of $34,000 increased $28,000 as a result of a note payable
related to the Company's subsidiary, MicroHeart.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has satisfied its capital requirements
primarily through 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. At March 31, 1998, the Company had
aggregate cash and marketable securities of $29,806,000 as compared to
$35,194,000 at December 31, 1997. The Company used $5,343,000 and $3,372,000
for operating activities for the three months ended March 31, 1998 and March 31,
1997, respectively. At March 31, 1998, the Company had an accumulated deficit of
$34,044,000.
The Company anticipates that its current cash and marketable securities,
together with sales of products for investigational use, will be sufficient to
meet the Company's capital requirements through the next 12 months. 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), which supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 changes current practice under
SFAS 14 by establishing a new framework on which to base segment reporting
and also requires interim reporting of segment information. SFAS 131 is
effective for the Company's fiscal year ended December 31, 1998 with interim
reporting disclosures required the first quarter of 1999.
10
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE COMPANY HAS IDENTIFIED CERTAIN FORWARD-LOOKING STATEMENTS IN THE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS WITH A FOOTNOTE (1) SYMBOL. THE COMPANY MAY ALSO MAKE ORAL FORWARD
LOOKING STATEMENTS FROM TIME TO TIME. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE PROJECTED IN ANY SUCH FORWARD LOOKING STATEMENTS DUE TO A NUMBER OF
FACTORS, INCLUDING THOSE SET FORTH BELOW AND ELSEWHERE IN THIS FORM 10-Q.
THE COMPANY OPERATES IN A DYNAMIC AND RAPIDLY CHANGING ENVIRONMENT THAT
INVOLVES NUMEROUS RISKS AND UNCERTAINTIES. THE FOLLOWING SECTION LISTS SOME, BUT
NOT ALL, OF THOSE RISKS AND UNCERTAINTIES WHICH MAY HAVE A MATERIAL ADVERSE
EFFECT ON THE COMPANY'S BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
THIS SECTION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN PART I --ITEM 1 OF THIS
QUARTERLY REPORT ON FORM 10-Q AND THE AUDITED FINANCIAL STATEMENTS THERETO AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997, CONTAINED IN THE COMPANY'S 1997
ANNUAL REPORT TO STOCKHOLDERS ON FORM 10-K.
EARLY STAGE OF CLINICAL TRIALS
The Company must obtain marketing clearance ("PMA") from the FDA before the
Company will be able to offer its products for TMR or PTMR 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.
On July 2, 1997, the Company initially submitted a PMA application to the
FDA for use of the Eclipse laser system to treat patients with Class IV angina
(chest pain) caused by coronary artery disease using the TMR procedure. On March
15, 1998, the Company amended this application and thereafter, the FDA accepted
the amended application for filing. The FDA review process can be lengthy and
its results are uncertain. There can be no assurance as to whether or when the
FDA will approve this application, which would have a material adverse impact on
the Company's business, financial condition and operating results.
Completion of the Company's clinical studies on a timely basis will depend,
among other things, on the Company's ability to successfully establish TMR and
PTMR sites and continue to identify and enroll participating patients in a
timely fashion. 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 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 or PTMR products could delay or prevent
regulatory approval and would materially and adversely affect the Company's
business, financial condition and operating results.
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 ("FD&C 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
regulation prohibits commercial marketing in the U.S. 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.
11
<PAGE>
On July 2, 1997, the Company submitted a PMA application to the FDA for use
of the Eclipse laser system to treat patients with Class IV angina (chest pain)
caused by coronary artery disease using the TMR procedure. On March 15, 1998 the
Company amended this application and thereafter, the FDA accepted the amended
application for filing. There can be no assurance that the FDA will approve this
application in the foreseeable future, if at all. 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 operating
results.
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") 9001 standards. Although
the Company became 9001 certified in May 1997, failure to meet or to continue to
satisfy these requirements in the future 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 operating
results.
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. 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 European Conforming Mark (the "CE
Mark") is required to sell products in European Union countries. The Company
received CE Marking for its TMR laser in December 1996. However, product
approvals can be withdrawn due to various factors, including failure to comply
with regulatory standards or unforeseen problems following initial marketing.
RISKS ASSOCIATED WITH NEW SURGICAL PROCEDURES; NO ASSURANCE OF MARKET ACCEPTANCE
The Company's ability to successfully commercialize its TMR and PTMR
products will depend upon its ability to achieve acceptance of its products and
procedures among cardiologists, cardiac surgeons and other members of the
medical community as well as prospective patients. The Company believes that it
will not achieve such acceptance until such time, if any, as the Company's TMR
or PTMR 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 or PTMR for any number of other
reasons. Broad use of the Company's products will require training of numerous
physicians, and the time required to complete such training could adversely
affect market acceptance. Moreover, even if TMR and PTMR become generally
accepted by the medical community, physicians trained in competitive 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 operating results.
DEPENDENCE ON SINGLE PRODUCT LINE
The Company has elected to focus its resources on the continued development
and refinement of its TMR and PTMR products. If the Company is unable to obtain
requisite regulatory approvals or to achieve commercial acceptance of these
products, the Company's business, financial condition and operating results
would be materially and adversely affected, which could result in cessation of
the Company's 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
12
<PAGE>
technology, inventions and improvements that are important to the development
of its business. Although the Company has a number of patents and patent
applications pending relating to various aspects of TMR, PTMR and other
cardiovascular therapies, 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 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 electrical signals from 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.
13
<PAGE>
EXPECTATION OF INTENSE MARKET COMPETITION
The Company expects that the markets for TMR and PTMR, which are currently
in the early stages of development, will be intensely competitive. Competitors
are likely to include at least four companies: PLC Systems, Inc. ("PLC"),
CardioGenesis Corporation ("CardioGenesis"), U.S. Surgical Corporation ("U.S.
Surgical"), and Johnson & Johnson ("J & J") all four of which are currently
selling TMR and/or PTMR products for investigational use in the U.S. and abroad.
Other competitors may include additional companies that elect to enter the
market, including large companies in the laser, cardiac devices and cardiac
surgery markets. The Company believes that a number of significant companies
including Boston Scientific Corp., Baxter International, Inc., and C.R. Bard,
Inc. have distribution rights to current or future products in TMR or PTMR. 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 and PTMR also compete with other more conventional or established
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 and PTMR 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 or PTMR when used
in conjunction with other treatments, there can be no assurance that the
Company's products will be accepted in these markets, nor can there be any
assurance that physicians will use the Company's procedures to replace or
supplement established treatments, or that the Company's procedures will be
competitive with current or future technologies. In such event, the Company's
busines, financial condition and operating results could be materially and
adversely affected.
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 operating
results.
HISTORY OF OPERATING LOSSES
From inception to March 31, 1998, the Company incurred cumulative net
losses of approximately $34 million. 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 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 as well as continued clinical research
support required due to the absence of HCFA reimbursement in all categories.
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.
RISKS OF TECHNOLOGICAL CHANGE
Significant resources are continually being expended to develop new and
improved treatment methodologies for coronary disease. Accordingly, the market
acceptance and commercial success of the Company's TMR and PTMR products and
procedures will depend not only on the safety and effectiveness of the Company's
TMR and PTMR products and procedures, but also the relative safety and
effectiveness of alternative treatment measures. Any such alternatives could
potentially include new treatments or improvements to treatments which would
materially and adversely affect the Company's business, financial condition and
results of operations.
14
<PAGE>
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 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.
The approach of Year 2000 presents significant issues for many computer
systems, since much of the software in use today may not accurately process data
beyond 1999. The Company is in the process of implementing new information
systems and accordingly does not anticipate any Year 2000 issues from its own
information systems, databases or programs. However, the Company could be
adversely impacted by Year 2000 issues faced by major distributors, suppliers,
customers, vendors and financial service organizations with which the Company
interacts. The Company is currently taking steps to address the impact, if any,
of the Year 2000 issue on the operations of the Company. There can be no
assurances that the Company will be able to detect all potential failures of the
Company's and/or third parties' computer systems. A significant failure of the
Company's or a third party's computer system could have a material adverse
effect on the Company's business, financial condition and result of operations.
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 such product carries a high price per unit.
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.
- --------------------------
1 Forward-Looking Statement
15
<PAGE>
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 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
for its TMR procedure from the HCFA. Accordingly, the Company's procedures had
received third party reimbursement in many cases under HCFA's policy. As of May
19, 1997, although the Company's Category B status was retained, under a HCFA
ruling, there will not be coverage for any manufacturer's TMR procedures at this
time. There can be no assurance that this coverage will be given in the future
or that Medicare will adequately reimburse the costs of the Company's TMR and
PTMR procedures when and if a PMA is granted. While the Company is unable to
determine the ultimate effect of this policy change on the business and
operating results, the Company anticipates that research and development
expenses will increase significantly due to increased expenses in support of
clinical trials, and revenues from sale of investigational products are likely
to decrease, at least over the short term and possibly thereafter.
There can be no assurance as to whether third party payors will cover TMR
or PTMR procedures 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.
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 and PTMR products, if approved, through a direct sales force and
through relationships with distributors or agents. Establishment of a sales
force capable of effectively commercializing the Company's TMR and PTMR 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 distributors will devote sufficient
resources to development of the markets for the Company's products or that they
will be successful in such commercialization efforts.
POTENTIAL NEED FOR ADDITIONAL CAPITAL
Although the Company anticipates that its current cash balances, together
with sales of products for investigational use, will be sufficient to meet the
Company's capital requirements for the next twelve months, 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.
16
<PAGE>
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 $3
million per occurrence and $3 million in the aggregate. 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.
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 9001
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 and PTMR 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.
DEPENDENCE ON KEY PERSONNEL
The Company's future business and operating results depend in significant
part aggregate or for each upon the continued contributions of its key technical
and senior management personnel, including Douglas Murphy-Chutorian, M.D., the
Company's Chief Executive Officer, and Richard L. Mueller, Jr., the Company's
President and Chief Operating Officer. The Company maintains key person life
insurance policies on both of these individuals 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
17
<PAGE>
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.
TRADING MARKET FOR COMMON STOCK; VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been, and is likely to continue
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 Company, 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.
CONCENTRATION OF SHARE OWNERSHIP
The present directors and executive officers of the Company and their
affiliates beneficially own approximately 36% 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has an investment portfolio of fixed income securities that are
classified as "available for sale securities". These securities are subject to
interest rate risk and will fall in value if market interest rates increase.
The Company attempts to limit this exposure by investing in short-term
securities.
18
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any material litigation outside of the
ordinary course of business.
ITEM 2(d) CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with its initial public offering in 1996 the Company filed
a Registration Statement on Form S-1, SEC File No. 333-03770 (the
"Registration Statement"), which was declared effective by the
Commission on May 31, 1996. The Company registered 4,600,000 shares of
its Common Stock, no par value per share. The offering commenced on May
31, 1996 and 4,000,000 shares were sold. The aggregate offering price of
the registered shares was $64,000,000. The managing underwriters of the
offering were PaineWebber Incorporated, Deutsche Morgan Grenfell, and
Jefferies & Company, Inc. The Company incurred the following expenses
expenses in connection with the offering:
<TABLE>
<S> <C>
Underwriting discounts and commissions: $ 4,480,000
Other expenses: $ 1,565,000
------------
Total expenses: $ 6,045,000
------------
------------
</TABLE>
All of such expenses were or indirect payments to others.
The net offering proceeds to the Company after deducting the total expenses
above were approximately $57,955,000. From May 31, 1996 to March 31, 1998,
the Company used such net offering proceeds, in direct or indirect payments to
others, as follows:
<TABLE>
<S> <C>
Purchase and installment of machinery and equipment: $ 2,405,000
Acquisition of other businesses: $ --
Working capital: $23,967,000
Investment in short-term, interest- bearing obligations: $16,201,000
Repayment of indebtedness: $ 1,777,000
-----------
Total $44,350,000
-----------
-----------
</TABLE>
Each of such amounts is a reasonable estimate of the application of the
net offering proceeds. This use of proceeds does not represent a
material change in the use of proceeds described in the prospectus of
the Registration Statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 27
b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the three
month period ended March 31, 1998.
19
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECLIPSE SURGICAL TECHNOLOGIES, INC.
Registrant
Date: May 14, 1998 /s/ Douglas Murphy-Chutorian, M.D.
--------------------------------------------
Douglas Murphy-Chutorian, M.D.
Chief Executive Officer
Date: May 14, 1998 /s/ Kenneth E. Bennert
--------------------------------------------
Kenneth E. Bennert
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM ECLIPSE SURGICAL
TECHNOLOGIES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 13,605
<SECURITIES> 16,201
<RECEIVABLES> 2,888
<ALLOWANCES> (770)
<INVENTORY> 4,169
<CURRENT-ASSETS> 36,356
<PP&E> 2,611
<DEPRECIATION> (1,394)
<TOTAL-ASSETS> 38,044
<CURRENT-LIABILITIES> 5,331
<BONDS> 0
0
0
<COMMON> 32,705
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 38,044
<SALES> 1,574
<TOTAL-REVENUES> 1,574
<CGS> 834
<TOTAL-COSTS> 834
<OTHER-EXPENSES> 6,771
<LOSS-PROVISION> 770
<INTEREST-EXPENSE> (34)
<INCOME-PRETAX> (5,602)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,602)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,602)
<EPS-PRIMARY> $(0.33)
<EPS-DILUTED> 0
</TABLE>
