<PAGE> 1
================================================================================
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 SEPTEMBER 30, 1999
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)
1049 KIEL COURT
SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices)
(408) 548-2100
(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.
29,406,743 shares
As of October 31, 1999
================================================================================
<PAGE> 2
ECLIPSE SURGICAL TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART 1
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Financial Statements (unaudited) :
a. Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998 .................. 1
b. Consolidated Statements of Operations & Comprehensive
Loss for the three months and nine months ended September
30, 1999 and 1998 ............................................... 2
c. Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998 ........... 3
d. Notes to Consolidated Financial Statements ...................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........... 24
PART II
OTHER INFORMATION
Item 1. Legal Proceedings . .............................................. 25
Item 2(d). Changes in Securities and Use of Proceeds ............................ 25
Item 6. Exhibits and Reports on Form 8-K ..................................... 26
Signatures ........................................................... 27
</TABLE>
<PAGE> 3
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 7,419 $ 3,273
Marketable securities ...................................... 3,170 14,381
Accounts receivable, (net of allowance for doubtful
accounts of $1,933 at September 30, 1999 and $1,699 at
December 31, 1998, respectively) .......................... 8,530 9,140
Inventories ................................................. 7,874 9,075
Prepaids and other current assets ........................... 1,260 1,962
--------- ---------
Total current assets ...................................... 28,253 37,831
Property and equipment, net .................................... 1,332 2,353
Accounts receivable over one year, (net of allowance for
doubtful accounts of $1,068 at September 30, 1999 and $970
at December 31, 1998, respectively) ............................ 1,743 2,083
Long-term marketable securities ................................ 6,170 10,287
Other assets ................................................... 2,594 424
--------- ---------
Total assets .............................................. $ 40,092 $ 52,978
========= =========
LIABILITIES
Current liabilities:
Accounts payable ............................................ $ 2,775 $ 1,589
Accrued liabilities ......................................... 9,612 11,464
Customer deposits ........................................... 145 256
Deferred revenue ............................................ 1,864 2,145
Note payable ................................................ 184 111
Current portion of capital lease obligation ................. 23 23
Current portion of long-term liabilities .................... 1,464 --
--------- ---------
Total current liabilities ................................ 16,067 15,588
Capital lease obligation, less current portion ................ 103 114
Long-term liabilities, less current portion ................... 1,340 --
--------- ---------
Total liabilities ........................................ 17,510 15,702
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 29,005 shares at September 30,
1999 and 27,466 shares at December 31, 1998 .............. 158,139 148,947
Deferred compensation .......................................... (333) (829)
Accumulated other comprehensive income (loss) .................. (60) 49
Accumulated deficit ............................................ (135,164) (110,891)
--------- ---------
Total shareholders' equity ............................... 22,582 37,276
--------- ---------
Total liabilities and shareholders' equity ............... $ 40,092 $ 52,978
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
1
<PAGE> 4
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues ......................................... $ 6,085 $ 3,065 $ 17,749 $ 9,635
Cost of revenues ..................................... 2,952 1,910 7,727 5,708
-------- -------- -------- --------
Gross profit ...................................... 3,133 1,155 10,022 3,927
-------- -------- -------- --------
Operating expenses:
Research and development .......................... 2,475 7,789 9,452 23,279
Sales and marketing ............................... 3,914 4,295 11,953 12,133
General and administrative ........................ 1,289 2,224 5,998 7,428
Merger related costs .............................. 437 -- 7,414 --
-------- -------- -------- --------
Total operating expenses ....................... 8,115 14,308 34,817 42,840
-------- -------- -------- --------
Operating loss ............................... (4,982) (13,153) (24,795) (38,913)
Interest expense ..................................... (21) (23) (41) (76)
Interest income ...................................... 97 720 563 2,598
-------- -------- -------- --------
Net loss ..................................... (4,906) (12,456) (24,273) (36,391)
-------- -------- -------- --------
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period .................................. 13 135 (26) 109
Less: reclassification adjustment for gains
included in net income ......................... (1) 11 3 (99)
-------- -------- -------- --------
Other comprehensive income (loss) ...... 12 146 (23) 10
-------- -------- -------- --------
Comprehensive loss ............... $ (4,894) $(12,310) $(24,296) $(36,381)
======== ======== ======== ========
Net loss per share:
Basic and diluted ............................ $ (0.17) $ (0.46) $ (0.87) $ (1.35)
======== ======== ======== ========
Weighted average shares outstanding,
basic and diluted .................... 28,591 27,161 28,052 26,877
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
2
<PAGE> 5
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................................. $(24,273) $(36,391)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................... 1,453 1,189
Loss on write-off of property and equipment ............................ 317 --
Provision for doubtful accounts ........................................ 1,273 305
Inventory reserves ..................................................... 1,782 --
Amortization of deferred compensation .................................. 343 343
Amortization of stock compensation ..................................... 370 --
Changes in operating assets and liabilities:
Accounts receivable ................................................. (323) 138
Inventories ......................................................... (581) (2,204)
Prepaids and other current assets ................................... 702 53
Other assets ........................................................ (844) (959)
Accounts payable .................................................... 1,186 2,916
Accrued liabilities ................................................. (1,852) 271
Customer deposits ................................................... (111) 146
Deferred revenue .................................................... (281) 145
Current portion of long-term liabilities ............................ 1,464 --
Long-term liabilities ............................................... 14 --
-------- --------
Net cash used in operating activities ............................. (19,361) (38,048)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment .................................. (749) (1,090)
Purchase of marketable securities ...................................... (36,271) (29,896)
Sale of marketable securities .......................................... 51,511 49,396
-------- --------
Net cash provided by investing activities ......................... 14,491 18,410
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants ................ 8,975 1,636
Proceeds from short-term borrowing ..................................... 73 --
Payments on short-term borrowing ....................................... -- (2)
Payments on capital lease obligation ................................... (11) --
Payments on long-term debt ............................................. -- (5)
-------- --------
Net cash provided by financing activities ......................... 9,037 1,629
-------- --------
Effect of foreign currency translation adjustment ......................... (21) --
Net increase (decrease) in cash and cash equivalents .............. 4,146 (14,009)
Cash and cash equivalents at beginning of period .......................... 3,273 23,044
-------- --------
Cash and cash equivalents at end of period ................................ $ 7,419 $ 9,035
======== ========
Supplemental schedule of cash flow information:
Interest paid ........................................................ $ 45 $ 34
======== ========
Taxes paid ........................................................... $ 90 $ --
======== ========
Supplemental schedule of noncash investing and financing activities:
Change in unrealized gain (loss) on marketable securities ............ $ (88) $ 109
======== ========
Deferred compensation ................................................ $ 217 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
3
<PAGE> 6
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 adjustments, that are, in the opinion of
management, necessary for a fair presentation of the 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
Eclipse's audited financial statements and notes thereto for the year ended
December 31, 1998, contained in the Company's Annual Report on Form 10-K as
filed with the U.S. Securities and Exchange Commission (SEC).
Reclassification:
Certain amounts in the interim financial statements have been
reclassified to conform with the current year's presentation. These
reclassifications had no impact on previously reported working capital,
operating profit or net income.
Net Loss Per Share:
Basic earnings per share is the weighted-average number of common shares
outstanding during the period, and diluted earnings per share is the
weighted-average common shares outstanding and all dilutive potential common
shares outstanding. For the three and nine months ended September 30, 1999 and
1998 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.
A reconciliation of the numerator and denominator of basic and diluted
EPS is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator - Basic and Diluted EPS
Net Loss ............................... $ (4,906) $(12,456) $(24,273) $(36,391)
Denominator - Basic and Diluted EPS
Weighted average shares outstanding .... 28,591 27,161 28,052 26,877
Basic and diluted EPS ..................... $ (0.17) $ (0.46) $ (0.87) $ (1.35)
======== ======== ======== ========
</TABLE>
Options to purchase 3,641,386 and 4,802,722 shares of common stock were
outstanding at September 30, 1999 and 1998 respectively, but were not included
in the calculation of diluted EPS because their inclusion would have been
antidilutive.
4
<PAGE> 7
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies -- (Continued):
Recent Pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") which is effective for the
Company beginning in 2001. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Eclipse does not
currently use derivative instruments and is not involved in hedging activities
and has no plans to do so given Eclipse's current business operations.
2. Business Combination
On March 17, 1999, Eclipse and CardioGenesis Corporation
("CardioGenesis") announced the completion of their business combination. Under
the terms of the combination, each share of CardioGenesis Common Stock was
converted into 0.8 of a share of Eclipse Common Stock, and Eclipse has assumed
all outstanding CardioGenesis stock options. CardioGenesis has become a
wholly-owned subsidiary of Eclipse and its shares are no longer publicly traded.
As a result of the transaction, Eclipse has increased its outstanding shares by
approximately 9.9 million shares. The transaction has been structured to qualify
as a tax-free reorganization and has been accounted for as a pooling of
interests, consequently, all prior period figures have been restated as if the
combined entity existed for all periods presented. There were no inter-company
transactions between the companies prior to the date of the business
combination. The fiscal year remained the same and thus, there were no changes
in retained earnings due to the business combination. Further, there were no
required adjustments needed to conform to the accounting policies between the
two companies.
CardioGenesis was a medical device company like Eclipse which developed,
manufactured, and marketed cardiac revascularization products for the treatment
of advanced cardiovascular disease and severe angina pain through TMR and PTMR.
CardioGenesis also manufactured and marketed disposable products to perform
intraoperative transmyocardial revascularization ("ITMR"), catheter-based
percutaneous myocardial revascularization ("PMR"), and thorascopic
transmyocardial revascularization ("TTMR") to treat patients afflicted with
debilitating angina. During the quarter ended March 31, 1999, Eclipse recognized
merger-related costs of $6,893,000 for financial advisory and legal fees,
personnel severance, terminated relationships and other costs including
write-offs of fixed assets and inventory. A majority of the terminated employees
were located in California and worked in operations, sales, marketing, quality,
research and development and administrative functions. A total of 40 employees
were terminated.
During the quarter ended June 30, 1999, Eclipse recognized additional
merger-related costs of $84,000. This increase was largely due to costs of
approximately $625,000 associated with an upgrade program to replace customer
owned equipment rendered unusable by the merger. This increase was mostly offset
by lower than anticipated costs from terminated relationships and contracts.
During the quarter ended September 30, 1999, Eclipse recognized
additional merger-related costs of $436,000, bringing the total of merger
related costs to $7,414,000 for the nine months ended September 30, 1999. This
increase was mainly due to an additional $188,000 in estimated severance costs,
along with expenses of approximately $179,000 associated with an upgrade program
to replace customer owned equipment rendered unusable by the merger. Eclipse
expects the last merger-related payment to occur in July of 2000.
5
<PAGE> 8
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the merger-related costs (in thousands).
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------
<S> <C>
Financial advisory and legal fees .................... $2,531
Personnel severance .................................. 1,190
Terminated relationships/contracts ................... 910
Other costs including fixed asset and inventory
write-offs ........................................... 2,783
------
Total ............................................. $7,414
======
</TABLE>
The following table summarizes the Company's merger related reserve balances (in
thousands):
<TABLE>
<S> <C>
MERGER RELATED COST .................................. $ 6,893
(for the three month period ended March 31, 1999)
Less:
Non-cash charges ................................ 1,183
Cash payments ................................... 548
-------
Merger Reserve balance at March 31, 1999 ............. 5,162
Less (plus):
Additional merger-related costs accrued during
the three month period ended June 30, 1999 ..... (625)
Change in estimate .............................. 541
Non-cash charges ................................ 609
Cash payments ................................... 1,394
-------
Merger Reserve balance at June 30, 1999 .............. 3,243
Less (plus):
Additional merger-related costs accrued during
the three month period ended September 30, 1999 . (436)
Non-cash charges ................................ 179
Cash payments ................................... 2,312
-------
Merger Reserve balance at September 30, 1999 ......... $ 1,188
=======
</TABLE>
The merger reserve balance is included in accrued liabilities.
3. Inventories:
Inventories are stated at lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Raw materials .................... $3,627 $3,679
Work in process .................. 620 839
Finished goods ................... 3,627 4,557
------ ------
$7,874 $9,075
====== ======
</TABLE>
6
<PAGE> 9
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Commitments:
On January 5, 1999, prior to the merger with Eclipse, CardioGenesis
entered into a Settlement and License Agreement with PLC Medical Systems, Inc.
(PLC) which grants CardioGenesis a non-exclusive worldwide license to certain
PLC patents. In return, CardioGenesis agreed to pay PLC a license fee and
minimum royalties totaling $2.5 million over an approximately forty-month
period. The present value of these payments of $2.3 million has been recorded as
a prepaid license fee in other assets, and will be amortized over the life of
the underlying patents. The corresponding liability for outstanding payments due
to PLC is reflected in the current and long term portions of long-term
liabilities.
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 Eclipse'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 Eclipse 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. Eclipse 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 this Quarterly Report on Form 10-Q.
OVERVIEW
Eclipse was founded in 1989. From 1989 through September 1995, Eclipse
engaged in the research, development and sale of surgical laser products
principally for procedures such as atherectomy and arthroscopy. In 1995, Eclipse
determined that there was a significant opportunity in the Transmyocardial
Revascularization ("TMR") market, and that Eclipse was well-positioned to enter
this market because of Eclipse's expertise with laser-based surgical techniques
and the treatment of cardiovascular disease. Accordingly, in late 1995, Eclipse
changed its strategic direction to enter the TMR market.
Prior to 1996, Eclipse focused almost exclusively on research and
development activities relating to surgical laser products. Since 1996, Eclipse
has focused on TMR and Percutaneous Transmyocardial Revascularization ("PTMR")
activities, particularly research and development activities and clinical
trials.
On October 22, 1998, Eclipse announced the signing of a definitive
agreement that provided for a business combination with CardioGenesis. On March
17, 1999, Eclipse and CardioGenesis announced the completion of their business
combination. Under the terms of the combination, each share of CardioGenesis
Common Stock has been converted into 0.8 of a share of Eclipse Common Stock, and
Eclipse has assumed all outstanding CardioGenesis stock options. CardioGenesis
has become a wholly-owned subsidiary of Eclipse and its shares are no longer
publicly traded. As a result of the transaction, Eclipse has increased its
outstanding shares by approximately 9.9 million shares which have been issued to
the former CardioGenesis stockholders upon proper surrender of their stock
certificates. These shares represent approximately 36% of Eclipse's
post-combination outstanding shares. The transaction has been structured to
qualify as a tax-free reorganization and has been accounted for as a pooling of
interests. Accordingly, the accompanying financial statements have been restated
as if the combined entity existed for all periods presented.
7
<PAGE> 10
On February 11, 1999, Eclipse received final approval from the FDA for
its TMR products for certain indications and is now able to sell those products
in the U.S. on a commercial basis. Eclipse has also received the European
Conforming Mark ("CE Mark") allowing the commercial sale of its TMR laser
systems and its PTMR catheter system to customers in the European Community. On
April 7, 1999, Eclipse received confirmation from the Health Care Financial
Administration ("HCFA") that effective July 1, 1999, HCFA would provide Medicare
coverage for TMR. Hospitals are now eligible to receive Medicare reimbursement
for TMR equipment and procedures.
At September 30, 1999, Eclipse had an accumulated deficit of
$135,164,000. Eclipse 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 Eclipse's expenditures will
depend upon a number of factors, including the efforts required to develop
Eclipse's sales and marketing organization, the timing of market acceptance, if
any, of Eclipse's products, the progress of Eclipse's clinical trials, and the
status and timing of regulatory approvals.
RESULTS OF OPERATIONS
Net Revenues
Net revenues increased 99% to $6,085,000 for the three months ended
September 30, 1999 from $3,065,000 for the three months ended September 30,
1998. Net revenues increased 84% to $17,749,000 for the nine months ended
September 30, 1999 from $9,635,000 for the nine months ended September 30, 1998.
The increase in revenues was due to higher sales of laser systems and disposable
products resulting from the receipt of FDA approval on the Company's TMR
products. Export sales accounted for approximately 18% of total sales for the
three months ended September 30, 1999 and 12% for the three months ended
September 30, 1998. Export sales accounted for approximately 15% of total sales
for the nine months ended September 30, 1999 and 18% for the nine months ended
September 30, 1998. The Company defines export sales as sales to customers
located outside of the United States.
Future revenues may continue to be affected by restrictions on third
party reimbursement. Eclipse intends to continue selling its laser system to
hospitals outright or placing the systems with hospitals under lease agreements
or loan agreements. On April 7, 1999, Eclipse received confirmation from the
Health Care Financing Administration ("HCFA") that effective July 1, 1999, HCFA
would provide Medicare coverage for TMR. With this confirmation, hospitals are
again receiving Medicare reimbursement for TMR equipment and procedures. Eclipse
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 large numbers of private insurance and private health plans will
reimburse the TMR procedure.
Gross Profit
Gross profit increased to $3,133,000 or 51% of net revenues for the
three months ended September 30, 1999, compared to $1,155,000 or 38% of net
revenues for the three months ended September 30, 1998. Gross profit increased
to $10,022,000 or 56% of net revenues for the nine months ended September 30,
1999, compared to $3,927,000 or 41% of net revenues for the nine months ended
September 30, 1998. The increase resulted from greater sales volume, a higher
average sales price per laser and lower unit costs due to the allocation of
fixed manufacturing expenses over higher production volumes.
Research and Development Expenses
Research and development expenditures decreased to $2,475,000 or 41% of
net revenues for the three months ended September 30, 1999, compared to
$7,789,000 or 254% of net revenues for the three months ended September 30,
1998, respectively. Research and development expenditures decreased to
$9,452,000 or 53% of net revenues for the nine months ended September 30, 1999,
compared to $23,279,000 or 242% of net revenues for the nine months ended
September 30, 1998, respectively. The decrease in these expenses in absolute
dollars reflects the
8
<PAGE> 11
decrease in activity associated with clinical trials, lower employee expenses
and cost savings resulting from the merger.
Some of Eclipse's products are currently in clinical trials and
therefore subject to limitations by the FDA. Eclipse believes that a continued
investment in the development of new and improved products and procedures and in
Eclipse's clinical trials is critical to its future success. As a result of the
FDA approval of the Eclipse surgical TMR system and the coverage notice by HCFA
for July 1, 1999, it is anticipated that the level of research and development
expenditures incurred in connection with clinical trials will continue to
decrease as a percentage of revenues.(1) However, there can be no assurance that
Eclipse's future revenues will be sufficient to cover the research and
development expenses required in connection with ongoing efforts including
current and future clinical trials.
Sales and Marketing
Sales and marketing expenses decreased to $3,914,000 or 64% of net
revenues for the three months ended September 30, 1999, from $4,295,000 or 140%
of net revenues for the three months ended September 30, 1998, respectively.
Sales and marketing expenses decreased to $12,133,000 or 216% of net revenues
for the nine months ended September 30, 1999, from $12,133,000 or 126% of net
revenues for the nine months ended September 30, 1998, respectively. The
decreases in absolute dollars are due to cost efficiencies realized from the
merger. Eclipse expects that absolute dollars spent on sales and marketing will
increase as Eclipse continues to focus resources on the development of the TMR
and PTMR market.(1)
General and Administrative
General and administrative expenses decreased to $1,289,000 or 21% of
net revenues for the three months ended September 30, 1999, compared to
$2,224,000 or 73% of net revenues for the three months ended September 30, 1998,
respectively. General and administrative expenses decreased to $5,998,000 or 34%
of net revenues for the nine months ended September 30, 1999, compared to
$5,998,000 or 34% of net revenues for the nine months ended September 30, 1998,
respectively. The decrease is due to a reduction in legal litigation expenses
and cost savings resulting from the merger.
Merger Related Costs
CardioGenesis was a medical device company like Eclipse which developed,
manufactured, and marketed cardiac revascularization products for the treatment
of advanced cardiovascular disease and severe angina pain through TMR and PTMR.
CardioGenesis also manufactured and marketed disposable products to perform
intraoperative transmyocardial revascularization ("ITMR"), catheter-based
percutaneous myocardial revascularization ("PMR"), and thorascopic
transmyocardial revascularization ("TTMR") to treat patients afflicted with
debilitating angina. During the quarter ended March 31,1999, Eclipse recognized
merger-related costs of $6,893,000 for financial advisory and legal fees,
personnel severance, terminated relationships and other costs including
write-offs of fixed assets and inventory. A majority of the terminated employees
were located in California and worked in operations, sales, marketing, quality,
research and development and administrative functions. A total of 40 employees
were terminated.
During the quarter ended June 30, 1999, Eclipse recognized additional
merger-related costs of $84,000. This increase was largely due to costs of
approximately $625,000 associated with an upgrade program to replace customer
owned equipment rendered unusable by the merger. This increase was mostly offset
by lower than anticipated costs associated with terminated relationships and
contracts.
During the quarter ended September 30, 1999, Eclipse recognized
additional merger-related costs of $436,000. This increase was mainly due to an
additional $188,000 in estimated severance costs, along with expenses of
approximately $179,000 associated with an upgrade program to replace customer
owned equipment rendered unusable by the merger. Eclipse expects the last
merger-related payment to occur in January of 2000. Merger
- --------
(1) Forward looking statement.
9
<PAGE> 12
related costs were $7,414,000 for the nine months ended September 30, 1999.
These were non-recurring costs associated with the merger.
The following table summarizes the merger-related costs (in thousands).
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------
<S> <C>
Financial advisory and legal fees .................... $2,531
Personnel severance .................................. 1,190
Terminated relationships/contracts ................... 910
Other costs including fixed asset and inventory
write-offs............................................ 2,783
------
Total ............................................. $7,414
======
</TABLE>
Interest Income and Expense
Interest income decreased 87% to $97,000 for the three months ended
September 30, 1999, compared to $720,000 for the three months ended September
30, 1998. Interest income decreased 78% to $563,000 for the nine months ended
September 30, 1999, compared to $2,598,000 for the nine months ended September
30, 1998. The decrease was due to lower investments in marketable securities and
cash and cash equivalents.
Interest expense decreased 9% to $21,000 for the three months ended
September 30, 1999, compared to $23,000 for the three months ended September 30,
1998. Interest expense decreased 46% to $41,000 for the nine months ended
September 30, 1999, compared to $76,000 for the nine months ended September 30,
1998. This decrease reflects a lower level of debt outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short and long-term marketable securities
were $16,759,000 at September 30, 1999 compared to $27,941,000 at December 31,
1998. Marketable securities are classified as "available-for-sale" and are
readily marketable. Eclipse used $19,361,000 of cash during the nine month
period ending September 30, 1999 for operating activities, including funding its
operating loss and increases in inventory, other assets and accrued liabilities.
Since its inception, Eclipse has satisfied its capital requirements
primarily through sales of its equity securities and, to a lesser extent, loans
from shareholders. In addition, Eclipse's operations have been funded in part
through sales of Eclipse's products. At September 30, 1999, Eclipse had an
accumulated deficit of $135,164,000.
Eclipse anticipates that its current cash, cash equivalents and
marketable securities will be sufficient to meet Eclipse's funding requirements
through March 31, 2000(1). There can be no assurance, however, that Eclipse will
not require additional sources of cash at an earlier date, depending upon the
progress of expansion of Eclipse's clinical trials, any need for additional
clinical trials or other testing of Eclipse's products and the timing of other
required expenditures as indicated above. If Eclipse is required to obtain
additional financing in the future, there can be no assurance that capital will
be available on terms acceptable to Eclipse, if at all.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") which is effective for the Company beginning in 2001. SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Eclipse does not currently use derivative instruments and is not involved in
hedging activities and has no plans to do so given Eclipse's current business
operations.
- --------
(1) Forward looking statement.
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<PAGE> 13
YEAR 2000 COMPLIANCE
The Year 2000 compliance issue (in which systems do not properly
recognize date sensitive information when the year changes to 2000) creates
risks for Eclipse if internal data management, accounting, manufacturing and/or
operational software and systems do not adequately or accurately process or
manage day or date information beyond the year 1999. To address the issue,
Eclipse has assembled a cross-functional project team to review and assess
internal software, data management and accounting, manufacturing and operational
systems to ensure that they do not malfunction as a result of the Year 2000 date
transition. The project team has evaluated the following systems :
Security systems Network equipment
Facility systems Printers, copiers and fax machines
Telephony Server tape backups
Servers Testing equipment
Personal computers Miscellaneous software
Total Year 2000 remediation efforts are estimated to be $50,000, of
which $41,000 has been spent as of September 30, 1999.
Eclipse's products have no internal date clocks, do not use software
that is dependent on date data processing and do not have electrical ports for
connection of other devices that require date data processing. This means that
Eclipse products, when used as intended by Eclipse in accordance with Eclipse
procedures and user/service manuals, will not be affected by the change from
1999 to 2000.
Eclipse is also working with its suppliers of products, services and
systems to assure that the products, services and systems supplied to Eclipse
are Year 2000 compliant. As a contingency plan, Eclipse intends to maintain
higher inventory levels at year end to mitigate any possible supplier delays.
With respect to compliance of the products Eclipse supplies to its customers,
the efforts are complete as Eclipse's products are not dependent upon date data
processing and the products do not have electrical ports for connection of other
devices.
Eclipse has not found it necessary to delay or cancel any internal
services, programs, or projects as a result of its preparatory activities for
Year 2000 compliance. Eclipse does not anticipate any material disruption in its
operations as a result of any internal or external failures to be in Year 2000
compliance, however, Eclipse is prepared, as a worse-case scenario, for minor
delivery delays in the receipt of materials and services(1).
Eclipse's Year 2000 compliance project is essentially complete as of
September 30, 1999, and the Company expects that the coming of Year 2000 will
not have a material adverse effect on Eclipse's financial condition or overall
trends in the results of operations(1). However, there can be no assurance that
unexpected delays or problems, including the failure to ensure the Year 2000
compliance of systems, services or products supplied to Eclipse by a third
party, will not have an adverse effect on Eclipse, its financial performance, or
the competitiveness or customer acceptance of its products. Further, Eclipse's
current understanding of expected costs is subject to change as the project
progresses and does not include the potential cost of internal software and
hardware replaced in the normal course of business.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Eclipse has identified certain forward-looking statements in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this Quarterly Report on Form 10-Q with a
footnote(1) symbol. Eclipse 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.
- --------
(1) Forward looking statement.
11
<PAGE> 14
Eclipse 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 Eclipse'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 I of this Quarterly Report
on Form 10-Q and the audited Consolidated Financial Statements and Notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 1998, contained in Eclipse's 1998
Form 10-K.
Eclipse may fail to obtain required regulatory approvals to market its products
in the United States. The business, financial condition and results of
operations of Eclipse could be materially and adversely affected by any of the
following events, circumstances or occurrences related to the regulatory
process:
- delays in initiating or completing clinical trials or in the receipt of
regulatory approvals;
- the failure to obtain regulatory approvals for such products;
- significant limitations in the indicated uses for which such products
may be marketed, or
- substantial costs incurred in obtaining such approvals.
Eclipse must submit and the FDA must approve applications for
preliminary market approval, known as PMA, before it can sell its TMR and PTMR
laser systems as medical devices. Before submitting a PMA application, Eclipse
must complete clinical testing to demonstrate the safety and effectiveness of
its products.
In 1997, Eclipse submitted a PMA application to the FDA for certain
applications of its TMR laser system. On October 27, 1998, an advisory panel of
the FDA recommended that the FDA approve Eclipse's PMA application for the TMR
laser system. Along with its approval, the FDA panel requested that Eclipse
conduct postmarket surveillance in a form to be determined through further
discussions with the FDA. On February 11, 1999, Eclipse received final approval
from the FDA for its TMR products. In July 1999, Eclipse submitted a PMA
supplement for the use of its TMR products for a more broad set of indications.
To date, the FDA has not approved this PMA supplement. Eclipse also has applied
for and received Investigational Device Exemptions, known as IDEs, to engage in
various clinical trials of its PTMR products and procedures before filing a PMA
application for those products and procedures.
Eclipse products have not been broadly adopted by the medical community, and
unless they are broadly adopted its business will be adversely affected.
Eclipse's TMR products using lasers have not yet achieved broad commercial
adoption. Eclipse's PTMR products are experimental and have not yet achieved
broad clinical adoption. Eclipse cannot predict whether or at what rate and how
broadly their products will be adopted by the medical community. The business,
financial condition and results of operations of Eclipse may be adversely
affected if:
- its products fail to achieve significant clinical adoption; or
- its TMR or PTMR laser systems fail to achieve significant market
acceptance.
Positive endorsements by physicians are essential for clinical adoption
of Eclipse's TMR and PTMR laser systems. Even if the clinical efficacy of TMR
and PTMR laser systems is established, physicians may elect not to recommend TMR
and PTMR laser systems for any number of reasons. The reasons why TMR or PTMR
laser systems may effectively treat coronary artery disease are not well
understood. Although Eclipse intends to use research, development and clinical
efforts to understand better the physiological effects of TMR and PTMR
treatment, Eclipse may not achieve such understanding on a timely basis, or at
all. TMR and PTMR laser systems may not be clinically adopted unless Eclipse:
- understands thoroughly the physiological effects of the products, or
- disseminates such understanding within the medical community.
Clinical adoption of these products will also depend upon:
12
<PAGE> 15
- the ability of Eclipse to facilitate training of cardiothoracic surgeons
and interventional cardiologists in TMR and PTMR therapy; and
- the willingness of such physicians to adopt and recommend such
procedures to their patients.
Patient acceptance of the procedure will depend on:
- physician recommendations;
- the degree of invasiveness;
- the effectiveness of the procedure; and
- the rate and severity of complications associated with the procedure as
compared to other procedures.
To expand its business, Eclipse will be required to establish effective sales,
marketing and distribution systems, and it has limited experience to date
establishing these operations. To expand its business, Eclipse must establish
effective systems to sell, market and distribute products. To date, Eclipse has
had limited sales which have consisted primarily of sales of its TMR and PTMR
laser systems for investigational use only. Eclipse has only recently begun
commercial sales of its TMR laser systems following final FDA regulatory
approval in February 1999. For this reason, Eclipse has maintained only a
limited sales and marketing organization.
With recent FDA approval of its TMR laser system, Eclipse is marketing
its products primarily through a direct sales force. Eclipse intends to expand
its operations by hiring additional sales and marketing personnel. This will
require substantial management efforts and financial resources. If Eclipse is
not able to establish effective sales and marketing capabilities, its business
and results of operations could be materially adversely affected.
The expansion of Eclipse's business may put added pressure on its management and
operational infrastructure and could create numerous risks and challenges. The
growth in Eclipse's business may place a significant strain on its limited
personnel, management and other resources. The evolving growth of Eclipse's
business involves numerous risks and challenges, including:
- the dependence on the growth of the market for Eclipse's TMR and PTMR
systems;
- domestic and international regulatory developments;
- rapid technological change;
- the highly competitive nature of the medical devices industry; and
- the risk of entering emerging markets in which Eclipse has limited or no
direct experience;
Eclipse's future operating results will be significantly affected by its
ability to:
- successfully and rapidly expand sales to potential customers;
- implement operating, manufacturing and financial procedures and
controls;
- improve coordination among different operating functions; and
- continue to attract, train and motivate additional qualified personnel
in all areas.
- Eclipse cannot assure you that it will be able to manage these
activities and implement these strategies successfully, and any failure
to do so could harm its operating results.
Eclipse may not be able to successfully market its products if it fails to
obtain third party reimbursement for the procedures performed with its products.
Few individuals are able to pay directly for the costs associated with the use
of Eclipse's products. In the U.S., hospitals, physicians and other healthcare
providers that purchase medical devices generally rely on third party payors,
such as Medicare, to reimburse all or part of the cost of the procedure in which
the medical device is being used. A failure by third party payors to provide
adequate reimbursement for the TMR and PTMR procedures that use Eclipse's
products would have a material adverse effect on Eclipse's business, financial
condition, and results of operations.
On April 7, 1999, Eclipse received confirmation from the Health Care
Financing Administration that effective July 1, 1999, HCFA will provide Medicare
coverage for TMR systems for any manufacturer's TMR procedures. Eclipse has
limited experience to date with the acceptability of its TMR procedures for
reimbursement
13
<PAGE> 16
by private insurance and private health plans. There can be no assurance that
private insurance and private health plans will approve reimbursement for TMR or
PTMR.
Although Eclipse does not anticipate receiving Medicare reimbursements
for its laser systems that are in clinical trials, it will seek reimbursement
from other third party payors. There can be no assurance, however, that such
reimbursement will be available.
Third party payors may deny reimbursement if they determine that the
device used in a treatment is:
- unnecessary,
- inappropriate;
- experimental;
- used for a non-approved indication; or
- not cost-effective.
Potential purchasers must determine whether the clinical benefits of Eclipse's
TMR and PTMR laser systems justify:
- the additional cost or the additional effort required to obtain prior
authorization or coverage; and
- the uncertainty of actually obtaining such authorization or coverage.
Eclipse faces intense competition and competitive products could render its
products OBSOLETE. The market for TMR and PTMR laser systems is intensely
competitive and is constantly becoming more competitive. If competitors are more
effective in developing new products and procedures and marketing existing and
future products, the business, financial condition and results of operations of
Eclipse may be materially adversely affected.
The market for TMR and PTMR laser systems is characterized by rapid
technical innovation. Accordingly, competitors may succeed in developing TMR and
PTMR products or procedures that:
- are more effective than products marketed by Eclipse;
- are more effectively marketed than products marketed by Eclipse; or
- may render the products or technology of Eclipse obsolete.
Eclipse competes with:
- PLC Systems, Inc.; and
- Johnson & Johnson.
PLC is currently selling TMR commercially in the U.S. and abroad, while
Johnson & Johnson is currently selling PTMR products for investigational use.
Earlier entrants in the market in a therapeutic area often obtain and
maintain greater market share than later entrants. PLC obtained a PMA approval
of its TMR laser system in 1998 and thus, could be able to capture a greater
market share.
Even with the FDA approval for its TMR laser system, Eclipse will face
competition for market acceptance and market share for that product. Eclipse's
ability to compete may depend in significant part on the timing of introduction
of competitive products into the market, and will be affected by the pace,
relative to competitors, at which it is able to:
- develop products;
- complete clinical testing and regulatory approval processes;
- obtain third party reimbursement acceptance; and
- supply adequate quantities of the product to the market.
14
<PAGE> 17
Eclipse's products also compete with alternative treatment methods and its
products must replace these methods to be commercially successful. Many of the
medical indications that may be treatable with TMR and PTMR laser systems are
currently being treated by drug therapies or surgery and other interventional
therapies, including percutaneous transluminal coronary angioplasty (known as
PTCA) and coronary artery bypass graft.
The business, financial condition and results of operations of Eclipse
would be materially adversely affected if TMR technology fails:
- to replace or augment existing therapies; or
- to be more effective, safer or more cost effective than new therapies.
A number of the existing therapies:
- are widely accepted in the medical community;
- have a long history of use; and
- continue to be enhanced rapidly.
Procedures using TMR and PTMR technology may not be able to replace or
augment such established treatments. Clinical research results may not support
the use of TMR or PTMR procedures to augment or replace existing treatments.
Others are developing new surgical procedures and new drug therapies to
treat coronary artery disease. These new procedures and drug therapies could be
more effective, safer or more cost effective than TMR and PTMR laser systems.
The market acceptance and commercial success of Eclipse's TMR and PTMR
laser systems will depend not only upon their safety and effectiveness, but also
upon the relative safety and effectiveness of alternative treatments.
Eclipse products depend on TMR technology which is rapidly changing, which could
require them to incur substantial product development expenditures to respond to
industry changes. TMR and PTMR laser systems are the only products of Eclipse.
Accordingly, if Eclipse fails to develop and commercialize successfully their
TMR and PTMR laser systems, then their business, financial condition and results
of operations would be materially adversely affected.
The medical device industry is characterized by rapid and significant
technological change. The future success of Eclipse will depend in large part on
its ability to respond to such changes. In addition, Eclipse must expand the
indications and applications for its products by developing and introducing
enhanced and new versions of its TMR and PTMR laser systems. Product research
and development requires substantial expenditures and is inherently risky.
Eclipse may not be able to:
- identify products for which demand exists; or
- develop products that have the characteristics necessary to treat
particular indications.
Even if Eclipse identifies and develops such products, it may not
receive regulatory approval and may not be commercially successful.
Overall increases in medical costs could adversely affect Eclipse's business.
Eclipse believes that the overall escalating cost of medical products and
services has led, 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 them. There can be no assurance in
either United States or international markets that:
- third party reimbursement and coverage will be available or adequate;
- current reimbursement amounts will not be decreased in the future; or
15
<PAGE> 18
- future legislation, regulation or reimbursement policies of third party
payors will not otherwise adversely affect the demand for or the ability
of Eclipse to profitably sell its products.
Fundamental reforms in the healthcare industry in the United States and
Europe continue to be considered. Eclipse cannot predict whether or when any
healthcare reform proposals will be adopted and what effect such proposals might
have on its business.
Eclipse has a history of losses and may not be profitable in the futurE. Eclipse
has incurred significant losses since inception. Its revenues and operating
income will be constrained:
- until such time, if ever, as it obtains broad commercial adoption of its
TMR laser systems by healthcare facilities in the U.S.;
- until such time, if ever, as it obtains FDA and other regulatory
approvals for its PTMR laser systems; and
- for an uncertain period of time after such approvals are obtained.
Eclipse may not achieve or sustain profitability in the future.
If Eclipse experiences increased demand for its products, it may not be able to
expand its business to meet such demand. Eclipse may be required to expand its
business to:
- respond to increasing clinical adoption of the TMR procedure;
- develop future products;
- generally compete successfully;
- complete the clinical trials that are currently in progress; and
- prepare additional products for clinical trials;
Such expansion could place a significant strain on managerial,
operational and financial systems and resources. To accommodate such expansion
and compete effectively, Eclipse must:
- improve information systems, procedures and controls; and
- expand, train, motivate and manage its employees.
Third parties may limit the development and protection of Eclipse intellectual
property which could adversely affect their competitive positions. The success
of Eclipse is dependent in large part on its ability to:
- obtain patent protection for its products and processes;
- preserve its trade secrets and proprietary technology; and
- operate without infringing upon the patents or proprietary rights of
third parties.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. Companies
in the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Certain competitors and potential competitors of
Eclipse have obtained United States patents covering technology that could be
used for certain TMR and PTMR procedures. There can be no assurance such
competitors, potential competitors or others have not filed and do not hold
international patents covering other TMR or PTMR technology. In addition,
international patents may not be interpreted the same as any counterpart United
States patents.
In September 1995, one of Eclipse's competitors sent Eclipse a notice of
potential infringement of their patent regarding a method for TMR utilizing
synchronization of laser pulses to the electrical signals from the heart. After
discussion with patent counsel, Eclipse concluded that it did not utilize the
process and/or apparatus that was the subject of the patent at issue, and
Eclipse provided a response to the competitor to that effect. Eclipse has not
received any additional correspondence from this competitor on these matters.
In 1996, prior to the merger with Eclipse, CardioGenesis initiated a
suit in the U.S. against PLC seeking a judgment that the PLC patent is invalid
and unenforceable. In 1997, PLC counterclaimed in that suit alleging
16
<PAGE> 19
infringement by CardioGenesis of the PLC patent. Also in 1997, PLC initiated
suit in Germany against CardioGenesis and CardioGenesis' former German sales
agent alleging infringement of a European counterpart to the PLC patent. In
1997, CardioGenesis filed an Opposition in the European Patent Office to a
European counterpart to the PLC patent, seeking to have the European patent
declared invalid.
On January 5, 1999, before trial on the U.S. suit commenced,
CardioGenesis and PLC settled all litigation between them, both in the U.S. and
in Germany, with respect to the PLC patent and the European patents. Under the
Settlement and License Agreement signed by the parties, CardioGenesis stipulated
to the validity of the PLC patents and PLC granted CardioGenesis a non-exclusive
worldwide license to the PLC patents. CardioGenesis agreed to pay PLC a license
fee, and minimum royalties, totaling $2.5 million over an approximately
forty-month period, with a running royalty credited against the minimums.
The Settlement and License Agreement applies only to those products or
that technology that uses the PLC patents, and the agreement does not provide
PLC any rights to any CardioGenesis intellectual property. The Eclipse TMR
products do not use the technology associated with the PLC patents.
While Eclipse periodically reviews the scope of its patents and other
relevant patents of which it is aware, the question of patent infringement
involves complex legal and factual issues. Any conclusion regarding infringement
may not be consistent with the resolution of any such issues by a court.
Eclipse may not be able to protect its intellectual property because:
- patents may not be issued;
- patents may be challenged, invalidated or designed around by
competitors; or
- patent protection may not continue to be available for surgical methods
in the future.
Costly litigation may be necessary to protect intellectual property rights.
Eclipse may have to engage in time consuming and costly litigation to protect
its intellectual property rights or to determine the proprietary rights of
others. In addition, Eclipse may become subject to:
- patent infringement claims or litigation; or
- interference proceedings declared by the U.S. Patent Office to determine
the priority of inventions.
Defending and prosecuting intellectual property suits, U.S. Patent
Office interference proceedings and related legal and administrative proceedings
are both costly and time-consuming. Eclipse may be required to litigate further
to:
- enforce its issued patents;
- protect its trade secrets or know-how; or
- determine the enforceability, scope and validity of the proprietary
rights of others.
Any litigation or interference proceedings will result in:
- substantial expense; and
- significant diversion of effort by technical and management personnel.
If the results of such litigation or interference proceedings are
adverse to Eclipse, then the results may:
- subject Eclipse to significant liabilities to third parties;
- require Eclipse to seek licenses from third parties;
- prevent Eclipse from selling its products in certain markets or at all;
or
- require Eclipse to modify its products.
Although patent and intellectual property disputes regarding medical
devices are often settled through licensing and similar arrangements, costs
associated with such arrangements may be substantial and could include
17
<PAGE> 20
ongoing royalties. Furthermore, there can be no assurance the necessary licenses
would be available on satisfactory terms, if at all.
Adverse determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent Eclipse from manufacturing
and selling its products. This would have a material adverse effect on Eclipse's
business, financial condition and results of operations.
Eclipse relies on patent and trade secret laws which are complex and may be
difficult to enforce. The validity and breadth of claims in medical technology
patents involve complex legal and factual questions and, therefore, may be
highly uncertain. Issued patent or patents based on pending patent applications
or any future patent application may not exclude competitors or may not provide
a competitive advantage to Eclipse. In addition, patents issued or licensed to
Eclipse may not be held valid if subsequently challenged and others may claim
rights in or ownership of such patents.
Furthermore, there can be no assurance that competitors:
- have not developed or will not develop similar products;
- will not duplicate products of Eclipse; or
- will not design around any patents issued to or licensed by Eclipse.
Since patent applications in the United States are maintained in secrecy
until patents issue, Eclipse cannot be certain:
- others did not first file applications for inventions covered by its
pending patent applications, nor
- that it will not infringe any patents that may issue to others on such
applications.
The U.S. patent laws were recently amended to exempt physicians, other
health care professionals, and affiliated entities from infringement liability
for medical and surgical procedures performed on patients. Eclipse is not able
to predict if this amendment will materially affect its ability to protect their
proprietary methods and procedures.
Competitors may:
- independently develop proprietary information substantially equivalent
to the proprietary information and techniques of Eclipse, or
- otherwise gain access to its proprietary technology.
In addition to its patents, Eclipse relies upon trade secrets, technical
know-how and continuing technological innovation to develop and maintain its
competitive position. Eclipse may not be able to meaningfully protect its
unpatented technology because:
- its employees, consultants and advisors may breach their confidentiality
and invention assignment agreements and there may not be an adequate
remedy for such breach;
- its competitors may independently develop substantially equivalent
proprietary information and techniques; or
- competitors may otherwise gain access to its proprietary technology.
The inability of Eclipse to protect its unpatented intellectual property
could materially adversely affect its business.
Eclipse depends on single source suppliers for certain key components and
production could be interrupted if a key supplier had to be replaced. Eclipse
currently purchases certain critical laser and fiber-optic components from
single sources. Although Eclipse has identified alternative suppliers, a lengthy
process would be required to qualify them as additional or replacement
suppliers. Any significant interruption in the supply of critical materials or
components could adversely affect the ability of Eclipse to manufacture its
products and could materially adversely
18
<PAGE> 21
affect its manufacturing operations, business and results of operations.
Eclipse anticipates that products will be manufactured based on
forecasted demand and will seek to purchase subassemblies and components in
anticipation of the actual receipt of purchase orders from customers. Lead times
for materials and components vary significantly and depend on factors such as
the business practices of each specific supplier and the terms of particular
contracts, as well as the overall market demand for such materials and
components at any given time. If the forecasts are inaccurate, Eclipse could
experience fluctuations in inventory levels, resulting in excess inventory, or
shortages of critical components, either of which could materially adversely
affect its business and results of operations.
Certain suppliers to Eclipse could have difficulty expanding their
manufacturing capacity to meet Eclipse's needs if demand for Eclipse's TMR and
PTMR laser systems were to increase rapidly or significantly. In addition, any
defect or malfunction in the laser or other products provided by such suppliers
could cause a delay in regulatory approvals or adversely affect product
acceptance. There can be no assurance that:
- materials obtained from outside suppliers will continue to be available
in adequate quantities; or
- alternative suppliers can be located on a timely basis.
Eclipse operates on a purchase order basis with most of its suppliers.
Such vendors could at any time determine to cease the supply and production of
such components.
Eclipse has limited manufacturing experience which could prevent it from
successfully increasing capacity in response to market demand. Eclipse has
limited experience in manufacturing products. Manufacturers often encounter
difficulties in increasing production, including problems involving:
- production yields;
- adequate supplies of components;
- quality control and assurance (including failure to comply with good
manufacturing practices regulations, international quality standards and
other regulatory requirements); and
- shortages of qualified personnel
There can be no assurance that Eclipse:
- will be able successfully to increase manufacturing capacity; or
- will be able to avoid manufacturing difficulties or product recalls.
Eclipse products may contain defects which could delay regulatory approval or
market acceptance of its products. Eclipse may experience future product
defects, malfunctions, manufacturing difficulties or recalls related to the
lasers or other components used in its TMR and PTMR laser systems. Any such
occurrence could cause a delay in regulatory approvals or adversely affect the
commercial acceptance of its products and could have a material adverse effect
on the business, financial condition and results of operations of Eclipse.
Eclipse must comply with FDA manufacturing standards or face fines or other
penalties including suspension of production. Eclipse is required to demonstrate
compliance with the FDA's current good manufacturing practices regulations if it
markets devices in the United States or manufactures finished devices in the
United States. The FDA inspects manufacturing facilities on a regular basis to
determine compliance. If Eclipse fails to comply with applicable FDA or other
regulatory requirements, it can be subject to:
- fines, injunctions, and civil penalties;
- recalls or seizures of products;
- total or partial suspensions of production; and
- criminal prosecutions.
Eclipse will be able to obtain FDA approval only for those products that are
proven safe and effective in clinical sites. The FDA has not approved Eclipse's
PTMR laser systems for any indication in the United States. There can be no
assurance regarding the clinical safety or efficacy of such systems. Completing
clinical trials to the point of
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<PAGE> 22
submission to the FDA could:
- require substantial financial and management resources; and
- take several years.
Eclipse cannot determine if its PTMR laser systems will prove to be safe
or effective, or that its TMR laser systems will prove to be safe and effective
for any indications beyond those for which Eclipse has received FDA approval.
The business, financial condition, and results of operations of Eclipse would be
materially and adversely affected if its PTMR laser systems do not prove to be
safe and effective in clinical trials, or if its TMR laser systems do not prove
to be safe and effective for use with other indications.
Eclipse may suffer losses from product liability claims if its products cause
harm to PATIENTS. Eclipse is exposed to:
- potential product liability claims; and
- product recalls.
These risks are inherent in the design, development, manufacture and
marketing of medical devices. The products of Eclipse are designed to be used in
life-threatening situations where there is a high risk of serious injury or
death and such companies could be subject to product liability claims if the use
of its TMR or PTMR laser systems is alleged to have caused adverse effects on a
patient or such products are believed to be defective.
Any regulatory clearance for commercial sale of these products will not
remove these risks. Any failure to comply with the FDA's GMP or other
regulations could have a material adverse effect on Eclipse's ability to defend
against product liability lawsuits. Although Eclipse has not experienced any
product liability claims to date, any such claims could have a material adverse
effect on its business, financial condition and results of operations.
Eclipse's insurance may be insufficient to cover product liability claims
against it. There can be no assurance that the product liability insurance
maintained by Eclipse will:
- be adequate for any future product liability problems; or
- that such insurance coverage will continue to be available on
commercially reasonable terms, or at all.
If Eclipse were held liable for a product liability claim or series of
claims in excess of its insurance coverage, such liability could have a material
and adverse effect on its business, financial condition and results of
operations.
Eclipse maintains insurance against product liability claims in the
amount of:
- $10 million per occurrence; and
- $10 million in the aggregate.
These coverage limits may not adequately protect Eclipse from
liabilities it might incur in connection with the development, manufacture and
sale of its products since:
- TMR technology is not well understood; and
- there is a lack of data regarding the clinical safety and efficacy of
PTMR laser systems.
Eclipse may require increased product liability coverage as sales of
approved products increase and as additional products are commercialized.
Product liability insurance is expensive and in the future may not be available
on acceptable terms, if at all.
Eclipse depends heavily on certain key personnel. Eclipse's future business and
results of operations depend in significant part upon the continued
contributions of our key technical and senior management personnel. In
particular, Eclipse relies on Douglas Murphy-Chutorian, M.D., its Chairman of
the Board, Allen W. Hill, its President and Chief Executive Officer, and Richard
Powers, its Executive Vice President and Chief Financial
20
<PAGE> 23
Officer. Eclipse maintains key person life insurance policy on Dr.
Murphy-Chutorian in the amount of $2 million in total and intends to maintain
similar insurance in the future for its key personnel.
Eclipse's future business and results of operations also depend in
significant part upon its ability to attract and retain additional qualified
management, manufacturing, technical, marketing and sales and support personnel
for its operations. If Eclipse loses a key employee or if a key employee fails
to perform in his or her current position, or if Eclipse is not able to attract
and retain skilled employees as needed, its business and results of operations
could be materially adversely affected.
Eclipse may engage in future acquisitions that distract its management, cause it
to incur debt, or dilute its shareholders. Eclipse may, from time to time,
acquire or invest in other complementary businesses, products or technologies.
While there are currently no commitments with respect to any particular
acquisition or investment, Eclipse's management frequently evaluates the
strategic opportunities available related to complementary businesses, products
or technologies. The process of integrating an acquired company's business into
Eclipse's operations may result in unforeseen operating difficulties and
expenditures and may absorb significant management attention that would
otherwise be available for the ongoing development of Eclipse's business.
Moreover, there can be no assurance that the anticipated benefits of any
acquisition or investment will be realized. Any future acquisitions or
investments by Eclipse could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities and amortization
expenses related to goodwill and other intangible assets, any of which could
materially adversely affect Eclipse's operating results and financial condition.
Eclipse may fail to comply with international regulatory requirements and could
be subject to regulatory delays, fines or other penalties. Regulatory
requirements in foreign countries for international sales of medical devices
often vary from country to country. The impact of the following factors would
have a material adverse effect on the business, financial condition and results
of operations of Eclipse:
- delays in receipt of, or failure to receive, foreign regulatory
approvals or clearances;
- the loss of previously obtained approvals or clearances; or
- the failure to comply with existing or future regulatory requirements.
Eclipse's products will be subject to other regulatory requirements in
the European Union and other countries. Any enforcement action by international
regulatory authorities with respect to past or future regulatory noncompliance
could have a material adverse effect on the business, financial condition and
results of operations of Eclipse.
The time required to obtain approval for sale in foreign countries may
be longer or shorter than required for FDA approval, and the requirements may
differ. In addition, there may be foreign regulatory barriers other than
regulatory approval. Except as stated in the following sentence, the FDA must
approve exports of devices that require a PMA but are not yet approved
domestically. An unapproved device may be exported without prior FDA approval to
any member country of the European Union and the other "listed" countries,
including Australia, Canada, Israel, Japan, New Zealand, Switzerland and South
Africa:
- if the device is approved for sale by that country; or
- for investigational use in accordance with the laws of that country.
Eclipse received the CE Mark for its TMR laser system in December 1996
and for its PTMR laser system in July 1998. In the European Economic Area,
Eclipse will be:
- subject to continued supervision;
- required to report any serious adverse incidents to the appropriate
authorities; and
- required to comply with additional national requirements that are
outside the scope of the Medical Device Directive.
21
<PAGE> 24
Eclipse became ISO 9001 certified in May 1997. Eclipse may not be able
to:
- achieve or maintain the compliance required for CE marking on all or any
of its products; and
- produce its products profitably and in a timely manner while complying
with the requirements of the Medical Device Directive and other
regulatory requirements.
If Eclipse fails to comply with applicable regulatory requirements it
could face:
- fines, injunctions, civil penalties;
- recalls or seizures of products;
- total or partial suspensions of production;
- refusals by foreign governments to permit product sales; and
- criminal prosecution.
Furthermore, if existing regulations are changed or new regulations or
policies are adopted, Eclipse may:
- not be able to obtain, or affect the timing of, future regulatory
approvals or clearances;
- not be able to obtain necessary regulatory clearances or approvals on a
timely basis or at all; and
- be required to incur significant costs in obtaining or maintaining such
foreign regulatory approvals.
Eclipse sells its products internationally which subjects it to certain
significant risks of transacting business in foreign countries. The
international revenue of Eclipse is subject to the following risks:
- foreign currency fluctuations;
- economic or political instability;
- foreign tax laws;
- shipping delays;
- various tariffs and trade regulations;
- restrictions and foreign medical regulations;
- customs duties, export quotas or other trade restrictions; and
- difficulty in protecting intellectual property rights.
Any of these factors could have an adverse effect on international sales
revenues of Eclipse. In future quarters, international sales could become a
significant portion of the revenue of Eclipse.
Eclipse may not achieve wide acceptance of its products in foreign markets if it
fails to obtain third party reimbursement for the procedures performed with its
products. If Eclipse obtains the necessary foreign regulatory registrations or
approvals, market acceptance of Eclipse's products in international markets
would be dependent, in part, upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country. They include
both government sponsored health care and private insurance. Although Eclipse
expects to seek international reimbursement approvals, there can be no assurance
any such approvals will be obtained in a timely manner, if at all. Failure to
receive international reimbursement approvals could have an adverse effect on
market acceptance of TMR products in the international markets in which such
approvals are sought.
Eclipse may experience adverse effects on its business related to Year 2000
issues affecting its suppliers. Many currently installed computer systems and
software products experience functional difficulty distinguishing between
twenty-first century dates and twentieth century dates. This is commonly known
as the Year 2000 Problem. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to function properly in the
future.
As the products that Eclipse itself supplies to its customers are not
dependent upon date data processing and do not have electrical ports for the
connection of other devices, Eclipse believes that these products are Year 2000
compliant.
22
<PAGE> 25
Eclipse does not anticipate any material disruption in its operations as
a result of any internal or external Year 2000 compliance problems. However,
Eclipse expects to prepare for minor delays in the receipt of materials and
services as a result of third parties' failures to meet Year 2000 requirements.
Eclipse cannot assure you that it will not experience unexpected delays or
problems as a result of Year 2000 problems.
Eclipse is also working with its suppliers to ensure that its suppliers
are Year 2000 compliant. If Eclipse is not able to procure adequate supplies, it
will not be able to manufacture and sell its products, which would have a
significant material adverse effect on its business and results of operations.
Eclipse believes that the foregoing describes its most reasonably likely worst
case Year 2000 scenario.
As a contingency plan, Eclipse intends to maintain higher inventory
levels at 1999 year end to mitigate any possible supplier delays. With respect
to compliance of the products Eclipse supplies to its customers, the efforts are
complete as Eclipse's products are not dependent upon date data processing and
the products do not have electrical ports for connection of other devices.
Eclipse has not found it necessary to delay or cancel any internal
services, programs, or projects as a result of its preparatory activities for
Year 2000 compliance. Eclipse does not anticipate any material disruption in its
operations as a result of any internal or external failures to be in Year 2000
compliance. However, Eclipse is prepared, as a worse-case scenario, for minor
delivery delays in the receipt of materials and services.
Eclipse expects that its Year 2000 compliance project will be completed
during the third quarter of fiscal 1999 and will not have a material adverse
effect on Eclipse's financial condition or overall trends in the results of
operations. However, there can be no assurance that unexpected delays or
problems, including the failure to ensure the Year 2000 compliance of systems,
services, or products supplied to Eclipse by a third party, will not have an
adverse effect on Eclipse, its financial performance, or the competitiveness or
customer acceptance of its products. Furthermore, Eclipse's current
understanding of expected costs is subject to change as the project progresses
and does not include the potential costs of internal software and hardware
replaced in the normal course of business.
The operating results of Eclipse are expected to fluctuate and quarter to
quarter comparisons of its results may not indicate future performance. The
operating results of Eclipse have fluctuated significantly from quarter to
quarter and are expected to fluctuate significantly from quarter to quarter due
to a number of events and factors, including:
- the timing and results of clinical trials;
- delays associated with the FDA and other regulatory approval processes;
- the enactment of health care reform legislation and any changes in third
party reimbursement policies;
- the level of product demand and the timing of customer orders;
- changes in competitive pricing policies;
- the ability to develop, introduce and market new and enhanced versions
of products on a timely basis;
- deferrals in customer orders in anticipation of new or enhanced
products;
- product quality problems;
- personnel changes;
- changes in strategy; and
- the level of international sales.
Eclipse believes that quarter to quarter comparisons of its operating
results may not be a good indication of its future performance. It is likely
that the operating results of Eclipse for a future quarter will fall below the
expectations of public market analysts and investors. If this occurs, the price
of Eclipse's common stock may fall, perhaps substantially.
23
<PAGE> 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Eclipse 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.
Eclipse attempts to limit this exposure by investing in securities that will
mature within 24 months.
24
<PAGE> 27
ECLIPSE SURGICAL TECHNOLOGIES, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1996, prior to the merger with Eclipse, CardioGenesis initiated a
suit in the United States against PLC seeking a judgement that the PLC
patent is invalid and unenforceable. In 1997, PLC counterclaimed in that
suit alleging infringement by CardioGenesis of the PLC patent. Also in
1997, PLC initiated suit in Germany against CardioGenesis and
CardioGenesis' former German sales agent alleging infringement of a
European counterpart to the PLC patent. In 1997, CardioGenesis filed an
Opposition in the European Patent Office to a European counterpart to
the PLC patent, seeking to have the European patent declared invalid.
On January 5, 1999, before trial on the U.S. suit commenced
CardioGenesis and PLC settled all litigation between them, both in the
U.S. and in Germany, with respect to the PLC patent and the European
patents. Under the Settlement and License Agreement signed by the
parties CardioGenesis stipulated to the validity of the PLC patents and
PLC granted CardioGenesis a non-exclusive worldwide license to the PLC
patents. CardioGenesis agreed to pay PLC a license fee, and minimum
royalties, totaling $2.5 million over an approximately forty-month
period, with a running royalty credited against the minimums.
The Settlement and License Agreement does not apply to any products or
technology that do not use the PLC patents, nor does the agreement
provide PLC any rights to any CardioGenesis intellectual property. The
Eclipse TMR products do not use the technology associated with the PLC
patents.
ITEM 2(d) CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with its initial public offering in 1996 Eclipse 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. Eclipse registered 7,000,000 shares of its
Common Stock, no par value per share. The offering commenced on May 31,
1996 and 6,400,000 shares were sold. The aggregate offering price of the
registered shares was $124,000,000. The managing underwriters of the
offering were PaineWebber Incorporated, Deutsche Morgan Grenfell,
Jefferies & Company Inc., Bear, Stearns & Company Inc., Montgomery
Securities and Piper Jaffray Inc. Eclipse incurred the following
expenses in connection with the offering:
<TABLE>
<S> <C>
Underwriting discounts and commissions: $10,013,000
Other expenses: $ 1,565,000
-----------
Total expenses: $11,578,000
===========
</TABLE>
All of such expenses were payments to others.
The net offering proceeds to Eclipse after deducting the total expenses
above were approximately $112,422,000. From May 31, 1996 to September
30, 1999, Eclipse used such net offering proceeds, in direct or indirect
payments to others, as follows:
<TABLE>
<S> <C>
Purchase and installment of machinery and equipment: $ 2,851,000
Working capital: $ 74,987,000
Investment in short-term, interest- bearing obligations: $ 30,238,000
Repayment of indebtedness: $ 2,338,000
------------
Total $110,414,000
============
</TABLE>
25
<PAGE> 28
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 Eclipse during the three
month period ended September 30, 1999.
26
<PAGE> 29
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: November 12, 1999 /s/ Allen W. Hill
----------------------------------------
Allen W. Hill
Chief Executive Officer and President
Date: November 12, 1999 /s/ Richard P. Powers
----------------------------------------
Richard P. Powers
Executive Vice President of Finance and
Administration
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
27
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
IS EQUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,419
<SECURITIES> 3,170
<RECEIVABLES> 8,530
<ALLOWANCES> 0
<INVENTORY> 7,874
<CURRENT-ASSETS> 1,260
<PP&E> 1,332
<DEPRECIATION> 0
<TOTAL-ASSETS> 40,092
<CURRENT-LIABILITIES> 16,067
<BONDS> 0
0
0
<COMMON> 158,139
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 40,092
<SALES> 17,749
<TOTAL-REVENUES> 17,749
<CGS> 7,727
<TOTAL-COSTS> 7,727
<OTHER-EXPENSES> 8,115
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> (4,906)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,906)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,906)
<EPS-BASIC> (0.87)
<EPS-DILUTED> (0.87)
</TABLE>
