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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-28288
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
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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)
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TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, NO PAR VALUE NASDAQ NATIONAL MARKET
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $129,286,586 as of February 26, 1999, based upon
the closing sale price reported for that date on the Nasdaq National Market.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded because such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily conclusive for other purposes.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock outstanding as of the last practicable date.
17,630,675 shares
As of February 26, 1999
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INDEX TO FORM 10-K
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PART I
Item 1. Business....................................................................................... 3
Item 2. Description of Property........................................................................ 15
Item 3. Legal Proceedings.............................................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............................................ 15
PART II
Item 5. Market for Registrant's Shares and Related Shareholder Matters................................. 16
Item 6. Selected Consolidated Financial Data........................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 35
Item 8. Consolidated Financial Statements and Supplementary Schedules.................................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 35
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 36
Item 11. Executive Compensation......................................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 42
Item 13. Certain Relationships and Related Transactions................................................. 43
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K................................. 44
Signatures................................................................................................. 63
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PART I
ITEM 1. BUSINESS.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED HEREIN THAT ARE NOT
PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, INCLUDING WITHOUT
LIMITATION STATEMENTS REGARDING ECLIPSE'S EXPECTATIONS, BELIEFS, INTENTIONS OR
STRATEGIES REGARDING THE FUTURE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
DOCUMENT OR INCORPORATED BY REFERENCE HEREIN ARE BASED ON INFORMATION AVAILABLE
TO ECLIPSE ON THE DATE HEREOF, AND ECLIPSE ASSUMES NO OBLIGATION TO UPDATE ANY
SUCH FORWARD-LOOKING STATEMENTS. ECLIPSE'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN ITEM 7 AND ELSEWHERE.
GENERAL
Eclipse Surgical Technologies, Inc ("Eclipse"), incorporated in California
in 1989, designs, develops, manufactures and distributes laser-based surgical
products and disposable fiber-optic accessories for the treatment of advanced
cardiovascular disease through transmyocardial revascularization ("TMR") and
percutaneous transluminal myocardial revascularization ("PTMR"). TMR and PTMR
are new laser-based heart treatments in which one millimeter channels are made
in the heart muscle. It is believed these procedures encourage new vessel
formation, or angiogenesis, and result in reduced angina pain. TMR is performed
by a cardiac surgeon through a small incision in the chest. PTMR is performed by
a cardiologist in a catheter based procedure under local anesthesia. Both
procedures can be performed as stand alone treatments or adjunctively with
coronary artery bypass graft ("CABG") or balloon angioplasty, respectively.
Eclipse has ongoing clinical trials for certain indications in each of these
areas. In the U.S., Eclipse offered its laser systems for sale in limited
numbers for investigational use only pursuant to Investigational Device
Exemptions ("IDEs") from the U.S. Food and Drug Administration (the "FDA"). On
February 11, 1999, Eclipse received final approval from the FDA for its TMR
products for treatment of stable patients with angina (Canadian Cardiovascular
Society Class 4) refractory to other medical treatments and secondary to
objectively demonstrated coronary artery atherosclerosis and with a region of
the myocardium with reversible ischemia not amenable to direct coronary
revascularization. Eclipse continues to offer its PTMR products in limited
numbers for investigational use only pursuant to Investigational Device
Exemptions ("IDEs") from the U.S. Food and Drug Administration (the "FDA").
On October 22, 1998, Eclipse announced the signing of a definitive agreement
that provided for a business combination with CardioGenesis Corporation
("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 will no longer be publicly traded. As a result of the transaction,
Eclipse has increased its outstanding shares by approximately 9.9 million shares
which are issuable 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 will be accounted for as
a pooling of interests.
BACKGROUND
Cardiovascular disease is the leading cause of death and disability in the
U.S., according to the American Heart Association (the "AHA"). Coronary artery
disease is the principal form of cardiovascular disease and is characterized by
a progressive narrowing of the coronary arteries, which supply blood to the
heart. This narrowing process is usually due to atherosclerosis, the buildup of
fatty deposits, or plaque, on the inner lining of the arteries. Coronary artery
disease reduces the available supply of oxygenated blood to
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the heart muscle, potentially resulting in severe chest pain known as angina, as
well as damage to the heart. Typically, the condition worsens over time and
often leads to heart attack or death.
Based on standards promulgated by the Canadian Heart Association, angina is
typically classified into four classes, ranging from Class 1, in which anginal
pain results only from strenuous exertion, to the most severe class, Class 4, in
which the patient is unable to conduct any physical activity without angina and
angina may be present even at rest. The AHA estimates that more than six million
Americans experience anginal symptoms.
The primary therapeutic options for treatment of coronary artery disease are
drug therapy, balloon angioplasty also known as percutaneous transluminal
coronary angioplasty or ("PTCA"), other interventional techniques which augment
or replace PTCA such as stent placement and atherectomy, and CABG. The objective
of each of these approaches is to increase blood flow through the coronary
arteries to the heart.
Drug therapy may be effective for mild cases of coronary artery disease and
angina either through medical effects on the arteries that improve blood flow
without reducing the plaque or by decreasing the rate of formation of additional
plaque (E.G., by reducing blood levels of cholesterol). Because of the
progressive nature of the disease, however, many patients with angina ultimately
undergo either PTCA or open heart bypass surgery.
PTCA is a less-invasive alternative to CABG introduced in the early 1980s in
which a balloon-tipped catheter is inserted into an artery, typically near the
groin, and guided to the areas of blockage in the coronary arteries. The balloon
is then inflated and deflated at each blockage site, thereby rupturing the
blockage and stretching the vessel. Although the procedure is usually successful
in widening the blocked channel, the artery often re-narrows within six months
of the procedure, a process called "restenosis," often necessitating a repeat
procedure. A variety of techniques for use in conjunction with PTCA have been
developed in an attempt to reduce the frequency of restenosis, including stent
placement and atherectomy. Stents are small metal frames delivered to the area
of blockage using a balloon catheter and deployed or expanded within the
coronary artery. The stent is a permanent implant intended to keep the channel
open. Atherectomy is a means of using mechanical, laser or other techniques at
the tip of a catheter to cut or grind away plaque.
CABG is an open chest procedure developed in the 1960s in which conduit
vessels are taken from elsewhere in the body and grafted to the blocked coronary
arteries so that blood can bypass the blockage. CABG typically requires the use
of a heart-lung bypass machine to render the heart inactive (to allow the
surgeon to operate on a still, relatively bloodless heart) and involves
prolonged hospitalization and patient recovery periods. Accordingly, it is
generally reserved for patients with severe cases of coronary artery disease or
those who have previously failed to receive adequate relief of their symptoms
from PTCA or related techniques. Unfortunately, most bypass grafts fail within
one to fifteen years following the procedure. Repeating the surgery ("re-do
bypass surgery") is possible, but is made more difficult because of scar tissue
and adhesions that typically form as a result of the first operation. Moreover,
for many patients CABG is inadvisable for various reasons, such as the severity
of the patient's overall condition, the extent of coronary artery disease or the
small size of the blocked arteries.
When these treatment options are exhausted, the patient is left with no
viable surgical alternative other than, in limited cases, heart transplantation.
Without a viable surgical alternative, the patient is generally managed with
drug therapy, often with significant lifestyle limitations. TMR and PTMR,
currently under clinical investigation by Eclipse and certain other companies,
offer potential relief to a large class of patients with severe cardiovascular
disease.
THE TMR AND PTMR PROCEDURE
TMR, or transmyocardial revascularization, is a surgical procedure performed
on the beating or non-beating heart, in which a laser device is used to create
pathways through the myocardium directly into
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the heart chamber. The pathways are intended to enable improved perfusion, or
supply, of blood to the myocardium and reduce angina in the patient. TMR
potentially can be performed using any of several different surgical approaches,
including open chest surgery, minimally invasive surgery through a four inch
incision between the ribs, or videoscopically through small openings or ports in
the chest. TMR offers end-stage cardiac patients who are not candidates for PTCA
or CABG as a means to alleviate their symptoms and improve their quality of
life. TMR may also be effective when used in conjunction with CABG to treat
areas of the heart not treated after bypass surgery. Eclipse has received FDA
approval for commercial distribution in the U.S. of the Eclipse TMR 2000 Holmium
laser system for certain indications.
PTMR, or percutaneous transluminal myocardial revascularization, is an
interventional procedure performed by a cardiologist. PTMR is based upon the
same principles as TMR, but the procedure is much less invasive. The patient is
under local anesthesia, and is treated through a catheter inserted in the
femoral artery at the top of the leg. A laser transmitting catheter is threaded
up into the heart chamber, where channels are created in the inner portion of
the myocardium (i.e. heart muscle). PTMR potentially offers angina sufferers
another treatment option before being referred to a surgeon for a more invasive
course of treatment. PTMR may also be effective when used in conjunction with
PTCA to treat areas of the heart not revascularized by a balloon or stent.
Eclipse has received FDA approval to conduct clinical trials studying PTMR, as
well as PTMR in conjunction with PTCA.
The physiologic principles underlying TMR and PTMR as potential treatments
for cardiovascular disease were first identified in the 1930s. It was observed
then that, although the human myocardium depends on external coronary arteries
for its blood supply, it displays elements of certain direct blood pathways
found in reptilian hearts. In reptiles, blood is supplied directly to the
myocardium through these pathways from the chambers of the heart. These
observations led to a belief that impaired vascularization in the human
myocardium could be treated by creating direct pathways through the myocardium
into the heart chamber. Following numerous advancements in the use of laser
technology in medical applications, human trials of laser-based TMR commenced in
the 1980s and of PTMR in the 1990s. TMR with the Eclipse TMR 2000 Holmium laser
system is approved by the FDA in the U.S. for treatment of stable patients with
angina (Canadian Cardiovascular Society Class 4) refractory to medical treatment
and secondary to objectively demonstrated coronary artery atherosclerosis and
with a region of the myocardium with reversible ischemia not amenable to direct
coronary revascularization. TMR with CABG and PTMR are now being offered as
investigational procedures as part of clinical studies to determine the safety
and effectiveness of such procedures.
BUSINESS STRATEGY
Eclipse's objective is to become the leading supplier in the TMR and PTMR
markets. Eclipse's strategies to achieve this goal are as follow:
DEMONSTRATE CLINICAL UTILITY OF TMR AND PTMR. TMR with the Eclipse TMR 2000
laser system is approved by the FDA in the U.S. for treatment of stable patients
with angina (Canadian Cardiovascular Society Class 4) refractory to medical
treatment and secondary to objectively demonstrated coronary artery
atherosclerosis and with a region of the myocardium with reversible ischemia not
amenable to direct coronary revascularization. Eclipse is seeking to demonstrate
the clinical safety and effectiveness of TMR with CABG as well as and PTMR and
achieve FDA approval of its products through clinical trials. Eclipse has
commenced additional trials, including "TMR as an Adjunct to Bypass Surgery,"
"PTMR Compared to Drug Therapy," and "PTMR as an Adjunct to PTCA".
DEVELOP COMPREHENSIVE PRODUCT LINES FOR TMR AND PTMR. Eclipse is seeking to
develop multiple surgical platforms and provide a comprehensive suite of high
quality products for TMR. Eclipse believes that its compact, flexible,
fiber-optic based system will enable it to offer effective TMR solutions across
the three principal TMR surgical approaches for TMR, open chest surgery,
minimally invasive surgery and percutaneous TMR. Eclipse is also developing a
broad range of disposable fiber-optic based surgical tools designed to operate
with its laser base unit and intended to provide physicians with a broad range
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options for their individual tactile preferences and solutions for the different
geometry of each patient's heart cavity.
LEVERAGE PROPRIETARY TECHNOLOGY. Eclipse believes that its significant
expertise in laser and catheter-based systems for cardiovascular disease and the
proprietary technologies it has developed are important factors in its efforts
to demonstrate the safety and effectiveness of its TMR and PTMR procedures.
Eclipse is seeking to develop additional proprietary technologies for TMR, PTMR
and related procedures. Eclipse has 40 patents or allowed patent applications
and 63 patent applications pending relating to various aspects of TMR, PTMR and
other cardiovascular therapies.
EXPAND MARKET FOR THE COMPANY'S PRODUCTS. Eclipse is seeking to expand
market awareness of its products among opinion leaders in the cardiovascular
field, subject to appropriate regulatory guidelines. In connection with the
current clinical trials, Eclipse has focused its initial efforts in the U.S. on
the 200 hospitals that perform the greatest number of cardiovascular procedures.
Eclipse also sells its products through its direct international sales
organization and a network of distributors and agents. In addition, Eclipse has
assembled a board of scientific advisors consisting of a number of influential
cardiac surgeons and cardiologists. Eclipse has also developed a comprehensive
training program to assist physicians in acquiring the expertise necessary to
utilize its TMR or PTMR products and procedures. Eclipse is seeking to expand
the approved indications for TMR or PTMR through additional clinical studies.
PRODUCTS AND TECHNOLOGY
ECLIPSE TMR 2000 SYSTEM
The Eclipse TMR 2000 system consists of the Eclipse TMR 2000 laser base unit
and a line of fiber-optic, laser-based surgical tools. Each surgical tool
utilizes optical fiber to deliver laser energy from the source laser base unit
to the distal tip of the surgical handpiece or PTMR catheter. The compact base
unit occupies a small amount of operating room floor space, operates on a
standard 208 or 220-volt power supply, features a self-contained cooling system
which eliminates the need for electrical or plumbing modifications to the
hospital operating room or catheterization laboratory where it is typically used
on patients, and is light enough to move within the operating room or among
operating rooms in order to use operating room space efficiently. Moreover, the
flexible, lightweight and slender optical fiber used to deliver the laser energy
to the patient enables ready access to the patient and to various sites within
the heart.
The Eclipse TMR 2000 system and related surgical procedures are designed to
be used without the requirement of the external systems utilized with certain
competitive TMR systems. For example, the Eclipse TMR 2000 system does not
require electrocardiogram synchronization, which monitors the electrical output
of the heart and times the use of the laser to minimize electrical disruption of
the heart, or transesophageal echocardiography, which tests each application of
the laser to the myocardium during the TMR procedure to determine if the pathway
has penetrated through the myocardium into the heart chamber.
ECLIPSE HOLMIUM LASER. The Eclipse TMR 2000 laser base unit generates laser
light of a 2-micron wavelength by photoelectric excitation of a solid state
holmium crystal. The holmium laser, because it uses a solid state crystal as its
source, is compact, reliable and requires low maintenance. Eclipse has been
using holmium lasers since its inception.
DISPOSABLE SURGICAL TOOLS. Eclipse offers to physicians a broad range of
surgical tool options for their individual tactile preferences and solutions for
the different geometry of each patient's heart cavity. These products are
designed to give the surgeon control of the procedure, access to difficult to
reach areas of the heart and clear visualization of the surgical field. Each
such tool is designed for disposal after use in a single surgical procedure. The
products include the following devices:
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SOLO-GRIP II. The Solo-Grip II handpiece system contains multiple, fine
fiber-optic strands in a one millimeter diameter bundle. The flexible fiber
optic delivery system combined with the ergonomic handpiece provides access
for treating all regions of the left ventricle.
PTMR CATHETER AND SLIMFLEX. The PTMR catheter is an over-the-wire,
steerable, disposable catheter system that features torque control,
deflection capability, infusion port and radioopaque markers for enhanced
visualization and depth control. After insertion into an artery of the leg,
the PTMR catheter is advanced over the aortic arch, across the aortic valve
and into the heart chamber. Visualization is achieved using standard
fluoroscopic or x-ray techniques common to all hospitals doing cardiac
catheterization.
The Solo-Grip II and SlimFlex fiber-optic delivery systems each have an easy
to install connector which screws into the laser base unit, and each device is
pre-calibrated in the factory so it requires no special preparation.
REGULATORY STATUS
Eclipse received final approval from the FDA for use of its TMR products for
treatment of stable patients with angina (Canadian Cardiovascular Society Class
4) refractory to other medical treatments and secondary to objectively
demonstrated coronary artery atherosclerosis and with a region of the myocardium
with reversible ischemia not amenable to direct coronary revascularization on
February 11, 1999.
In February 1996, Eclipse obtained FDA clearance to undertake Phase I of
another clinical study of TMR intended to assess the safety and effectiveness of
"TMR Used in Conjunction with CABG" as compared with CABG alone. In September
1996, the FDA provided Eclipse with clearance to begin Phase II of this study
and final data collection is currently in process. During 1998 Eclipse was
granted FDA clearance to begin two additional surgical clinical trials. One of
these trials has completed enrollment and the other trial is in process.
In June 1997, Eclipse received an IDE from the FDA to begin its first PTMR
clinical trial, comparing patients treated with PTMR to patients receiving only
drug therapy. In November 1997, the FDA gave Eclipse authorization to begin
Phase II of this trial. This study has completed enrollment and final data
collection is currently in process.
In April 1998, Eclipse received approval to begin Phase I of another PTMR
clinical trial. This trial is studying PTMR in conjunction with PTCA or various
other interventional procedures, compared to people receiving only PTCA. Phase
II is currently in process.
SALES AND MARKETING
Eclipse has received Pre Market Approval ("PMA") from the FDA for its
surgical TMR laser system. Health Care Finance Administration ("HCFA") has also
announced its coverage policy for the TMR with FDA approved systems. Eclipse
expects revenues from sales of surgical TMR systems to increase and expenses in
support of clinical trials to decrease over the short-term and possibly
thereafter. Eclipse is promoting market awareness of Eclipse's approved surgical
products among opinion leaders in the cardiovascular field and is recruiting
physicians and hospitals. To support the surgical launch, Eclipse has expanded
the domestic sales force to sixteen sales people in three sales regions.
Eclipse currently offers a laser base unit, at a current end user list price
of $320,000 per unit, and disposable surgical tools (at least one of which must
be used with each procedure) at an end user unit list price of $2,495 for a TMR
handpiece or $2,295 for a PTMR catheter. In order to assist hospitals in making
a substantial investment in Eclipse's laser system, Eclipse intends to continue
selling the systems to the hospital outright or placing the system with the
hospital under leasing or fee per use contracts.
Eclipse intends to continue to broaden its line of disposable products as
part of its strategy to develop multiple platforms for TMR. The open chest,
minimally invasive TMR procedures and percutaneous TMR
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procedures are made possible by the use of the Company's flexible, lightweight
and slender fiber-optic based surgical tools. Open chest TMR procedures and
minimally invasive TMR surgical procedures are performed by cardiac surgeons. In
contrast, PTMR is performed by interventional cardiologists using catheter-based
products.
Internationally, Eclipse sells its products through a direct sales and
support organization of six people and a network of distributors and agents.
From September 1995 through December 31, 1998, Eclipse shipped 200 systems
worldwide.
Eclipse has developed, in conjunction with several major hospitals using
Eclipse's TMR or PTMR products, a training program to assist physicians in
acquiring the expertise necessary to utilize Eclipse's products and procedures.
This program includes a comprehensive one-day course including observation of
live procedures, didactic training and hands-on performance of TMR or PTMR in
vivo.
Eclipse exhibits its products at major cardiovascular meetings and recruits
new investigators to buy its products for investigational use in their
hospitals. Investigators of Eclipse's products have made presentations at
meetings around the world, describing their results. Abstracts have been
published and articles will be submitted to peer-reviewed publications and
industry journals to present the results of the ongoing clinical trials.
SCIENTIFIC ADVISORY BOARD
Eclipse's Scientific Advisory Board meets with Eclipse on an individual and
group basis to discuss Eclipse's TMR and PTMR products and procedures, relevant
developments in cardiology and the treatment of heart disease, and strategic
directions. In addition, Eclipse has worked with the medical staffs of several
major universities in developing the protocols for Eclipse's TMR and PTMR
procedures and in clinical data monitoring and statistical analysis.
The Scientific Advisory Board consists of a number of prominent members of
the medical and scientific communities, including the following persons:
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Eric Powers, M.D................................ Professor of Medicine and Director
Cardiac Cath Laboratory
University of Virginia
Vaughn Starnes, M.D............................. Professor of Surgery and Chief
Cardiothoracic Surgery
University of Southern California School of Medicine
Eric Topol, M.D................................. Chairman
Department of Cardiology
Cleveland Clinic Foundation
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In addition, Eclipse meets several times each year, during professional
conferences and exhibitions, with the group of physicians who serve as
investigators in connection with Eclipse's clinical trials in order to discuss
clinical procedures and results.
RESEARCH AND DEVELOPMENT
Eclipse's ongoing research and product development efforts are focused on
the development of new and enhanced lasers, fiber-optic handpieces and TMR and
PTMR applications. In addition, Eclipse continues to develop new laser
handpieces in order to enhance the utility and quality of Eclipse's line of
disposable surgical tools and to expand the indications for use and variety of
procedures that can be performed with Eclipse's surgical tools. Specifically,
Eclipse is seeking to achieve continual improvements in its TMR and PTMR
procedures, including greater surgical access and visualization of the surgical
field;
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greater precision in the placement of pathways; reduced epicardial bleeding and
bruising of heart muscle; greater margins of safety with respect to underlying
heart structures; and reduced likelihood of induction of arrhythmia.
In furtherance of Eclipse's strategy to develop the three principal surgical
platforms for performance of TMR, current research efforts include enhancements
to open chest surgical TMR as well as complementary techniques for minimally
invasive surgical TMR and PTMR. In all these cases, Eclipse anticipates new
disposable products will be required to satisfy market requirements.
Eclipse's research and development spending, including expenditures related
to clinical trials, was $14,175,000 in 1998, $12,007,000 in 1997 and $6,183,000
in 1996. Due to a May 1997 change in the HCFA policy regarding Medicare
reimbursement for TMR procedures in clinical trials, Eclipse's expenses in
support of clinical trials increased. Eclipse believes the FDA approval of its
surgical TMR system and indication of coverage by HCFA during 1999 will decrease
the level of research and development expenditures in connection with clinical
trials.
MANUFACTURING AND QUALITY ASSURANCE
Eclipse manufactures and assembles its products from purchased components
and subassemblies, primarily at its facility in Sunnyvale, California.
Each laser is mobile and shock resistant, complies with Underwriters
Laboratory ("UL") standards and is equipped with safety interlocks and user
friendly controls and meters. Eclipse production personnel assemble and test
each laser system in a process designed to test the integrity of the laser
system and to provide for accurate calibration of system components. Upon
completion of these tests, the laser is packaged for shipment. Eclipse personnel
uncrate and install the laser at the hospital, and verify that the system meets
acceptance criteria, including all laser power output specifications.
Laser handpieces are fabricated from tubing, connectors and optical fibers,
each of which is purchased from outside vendors. The individual optical fibers
are cut to the appropriate length, bundled and placed in the extruded tubing and
metal connectors, and the tip of the device is molded and polished. Prior to
packaging, each handpiece is tested on a laser system to verify acceptable power
output.
Eclipse's assembly and manufacturing activities to date have consisted
primarily of producing limited quantities of its laser units and fiber-optic
accessories for sale to clinical investigators. Eclipse's future profitability
will depend, in part, on its ability to achieve manufacturing efficiencies as
production volumes increase.
The core components of Eclipse's laser units and fiber-optic handpieces are
generally acquired from multiple sources. Eclipse currently purchases certain
laser and fiber-optic components and subassemblies from single sources. Although
Eclipse has identified alternative vendors, the qualification of additional or
replacement vendors for certain components or services is a lengthy process. Any
significant supply interruption would have a material adverse effect on
Eclipse's ability to manufacture its products and, therefore, would materially
and adversely affect Eclipse's business, financial condition and results of
operations. Eclipse intends to continue to qualify multiple sources for
components that are presently single sourced and also to build an inventory of
these items for use in the event of supply interruptions.
In May 1997, Eclipse received ISO 9001 Certification for its quality
assurance process. Eclipse is committed to continuous quality improvement in its
manufacturing and assembly operations. Each subassembly and product is
thoroughly tested at multiple stages of production to ensure proper operation
and compliance with applicable regulatory standards. Manufacturing quality is
documented and monitored continually under ISO guidelines.
Eclipse is required to register as a manufacturer of medical devices with
the FDA and state agencies such as the California Department of Health Services.
As a condition to receipt of a PMA, Eclipse's
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facilities, procedures and practices will be subject to pre-approval Good
Manufacturing Practices ("GMP") inspections and thereafter to ongoing, periodic
inspections by the FDA and such other regulatory agencies.
Eclipse is also subject to certain federal, state and local regulations
regarding environmental protection and hazardous substance controls, among
others. Although Eclipse believes it currently complies in all material respects
with such regulations, failure to comply could subject Eclipse to fines or other
enforcement actions.
Eclipse provides to its customers in the U.S. and to its foreign
distributors a free one-year parts and service warranty for each laser unit.
Eclipse offers extended warranty coverage for one-year periods to customers in
the U.S. Eclipse also performs service on a fee basis on laser units that are no
longer covered by warranty. Annual service contracts are generally priced at 10%
of the purchase price of the laser unit. Handpieces are sold without warranty.
COMPETITION
Eclipse expects that the market for TMR and PTMR, which is currently in the
early stages of development, will be intensely competitive. Competitors include
PLC Systems, Inc. ("PLC"), Johnson and Johnson ("J&J"), and U.S. Surgical
Corporation ("U.S. Surgical") which are currently selling TMR or PTMR products
for investigational use in the U.S. and abroad. Other competitors may also enter
the market, including large companies in the laser and cardiac surgery markets.
Many of these companies have or may have significantly greater financial,
research and development, marketing and other resources than Eclipse.
PLC is a publicly traded corporation which uses a CO(2) laser and an
articulated mechanical arm in its TMR products. PLC obtained a PMA for TMR in
1998. PLC has received the CE Marking which allows sales of its products
commercially in all European Union countries. PLC has been issued patents for
its apparatus and methods for TMR.
J&J is a publicly traded company which uses a holmium laser and fiber-optics
in its PTMR products. J&J has acquired a ventricular mapping company to further
its PTMR product line and has begun U.S. trials under an IDE.
U.S. Surgical is a publicly traded company which uses an excimer laser and
fiber-optics in its TMR products. U.S. Surgical is actively promoting its
products in Europe and has begun clinical trials in the U.S. under an IDE. U.S.
Surgical has acquired one laser company and rights to products from another
laser supplier.
Eclipse believes that the factors which will be critical to market success
include the timing of receipt of requisite regulatory approvals, effectiveness
and ease of use of the TMR products and procedures on both a stand alone basis
and in conjunction with other procedures such as CABG and PTCA, breadth of
product line, system reliability, brand name recognition and effectiveness of
distribution channels and cost of capital equipment and disposable devices.
TMR and PTMR also competes with other methods for the treatment of
cardiovascular disease, including drug therapy, PTCA and CABG. Even with recent
FDA approval of the Eclipse TMR system in patients for whom other cardiovascular
treatments are not likely to provide relief, and when used in conjunction with
other treatments, there can be no assurance that Eclipse's TMR or PTMR products
will be accepted. Moreover, technological advances in other therapies for
cardiovascular disease such as pharmaceuticals or future innovations in cardiac
surgery techniques could make such other therapies more effective or lower in
cost than the Company's TMR procedure and could render Eclipse's technology
obsolete. There can be no assurance that physicians will use Eclipse's TMR
procedure to replace or supplement established treatments, or that Eclipse's TMR
procedure will be competitive with current or future technologies. Such
competition could materially and adversely affect Eclipse's business, financial
condition and results of operations.
10
<PAGE>
The TMR laser system and any other product developed by Eclipse 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
Eclipse can develop products, complete clinical testing and regulatory approval
processes, gain reimbursement acceptance and supply commercial quantities of the
product to the market are expected to be important competitive factors. In the
event a competitor is able to obtain a PMA for its products prior to Eclipse,
Eclipse's ability to compete successfully could be materially and adversely
affected. There can be no assurance that Eclipse will be able to compete
successfully against current and future competitors even if Eclipse obtains a
PMA prior to its competitors.
GOVERNMENT REGULATION
Laser-based surgical products and disposable fiber-optic accessories for the
treatment of advanced cardiovascular disease through TMR are considered medical
devices, and as such are subject to regulation in the U.S. by the FDA. Eclipse
has FDA clearance for the sale of the Eclipse laser system for thoracic surgery.
Eclipse has recently obtained FDA approval through the more rigorous PMA process
for the performance of TMR with the Eclipse TMR 2000 laser system for treatment
of stable patients with angina (Canadian Cardiovascular Society Class 4)
refractory to medical treatment and secondary to objectively demonstrated
coronary artery atherosclerosis and with a region of the myocardium with
reversible ischemia not amenable to direct coronary revascularization.
To obtain a PMA for a medical device, Eclipse must file a PMA application
that includes clinical data and the results of pre-clinical and other testing
sufficient to show that there is a reasonable assurance of safety and
effectiveness of the product for its intended use. To begin a clinical study, an
IDE must be obtained and the study must be conducted in accordance with FDA
regulations. An IDE application must contain preclinical test data demonstrating
the safety of the product for human investigational use, information on
manufacturing processes and procedures, and proposed clinical protocols. If the
IDE application is cleared by the FDA, human clinical trials may begin. The
results obtained from these trials, if satisfactory, are accumulated and
submitted to the FDA in support of a PMA application. Premarket approval from
the FDA is required before commercial distribution of devices similar to those
under development by the Company is permitted in the U.S. In addition to the
results of clinical trials, the PMA application must include other information
relevant to the safety and effectiveness of the device, a description of the
facilities and controls used in the manufacturing of the device, and proposed
labeling. By law, the FDA has 180 days to review a PMA application. While the
FDA has responded to PMA applications within the allotted time frame, reviews
more often occur over a significantly longer period and may include requests for
additional information or extensive additional trials. There can be no assurance
that Eclipse will not be required to conduct additional trials which may result
in substantial costs and delays, nor can there be any assurance that a PMA will
be obtained for each product in a timely manner, if at all. In addition, changes
in existing regulations or the adoption of new regulations or policies could
prevent or delay regulatory approval of Eclipse's products. Furthermore, even if
a PMA is granted, subsequent modifications of the approved device or the
manufacturing process may require a supplemental PMA or the submission of a new
PMA which could require substantial additional clinical efficacy data and FDA
review. After the FDA accepts a PMA application for filing, and after FDA review
of the application, a public meeting is frequently held before an FDA advisory
panel in which the PMA is reviewed and discussed. The panel then issues a
favorable or unfavorable recommendation to the FDA or recommends approval with
conditions. Although the FDA is not bound by the panel's recommendations, it
tends to give such recommendations significant weight. In February 1999, Eclipse
received a PMA for its TMR laser system for use in certain indications.
Products manufactured or distributed by Eclipse pursuant to a PMA will be
subject to pervasive and continuing regulation by the FDA, including, among
other things, postmarket surveillance and adverse event reporting requirements.
Failure to comply with applicable regulatory requirements can result in, among
other things, warning letters, fines, suspensions or delays of approvals,
seizures or recalls of
11
<PAGE>
products, operating restrictions or criminal prosecutions. The Federal Food,
Drug and Cosmetic Act ("FD&C Act") requires Eclipse to manufacture its products
in registered establishments and in accordance with GMP regulations and to list
its devices with the FDA. Furthermore, as a condition to receipt of a PMA,
Eclipse's facilities, procedures and practices will be subject to additional
pre-approval GMP inspections and thereafter to ongoing, periodic GMP inspections
by the FDA. These GMP regulations impose certain procedural and documentation
requirements upon Eclipse with respect to manufacturing and quality assurance
activities. Labeling and promotional activities are subject to scrutiny by the
FDA. Current FDA enforcement policy prohibits the marketing of approved medical
devices for unapproved uses. Changes in existing regulatory requirements or
adoption of new requirements could materially and adversely affect Eclipse's
business, financial condition and results of operations. There can be no
assurance that Eclipse will not be required to incur significant costs to comply
with laws and regulations in the future or that current or future laws and
regulations will not materially and adversely affect Eclipse's business,
financial condition and result of operations.
Eclipse is also regulated by the FDA under the Radiation Control for Health
and Safety Act, which requires laser products to comply with performance
standards, including design and operation requirements, and manufacturers to
certify in product labeling and in reports to the FDA that their products comply
with all such standards. The law also requires laser manufacturers to file new
product and annual reports, maintain manufacturing, testing and sales records,
and report product defects. Various warning labels must be affixed and certain
protective devices installed, depending on the class of the product. In
addition, Eclipse is subject to California regulations governing the manufacture
of medical devices, including an annual licensing requirement. Eclipse's
facilities are subject to ongoing, periodic inspections by the FDA and
California regulatory authorities.
Sales, manufacturing and further development of Eclipse's TMR and PTMR
systems also may be subject to additional federal regulations pertaining to
export controls and environmental and worker protection, as well as to state and
local health, safety and other regulations that vary by locality, which may
require obtaining additional permits. The impact of such regulations on
Eclipse's business, financial condition and results of operations cannot be
predicted.
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 to certain countries. To market in Europe, a
manufacturer must obtain the certifications necessary to affix to its products
the CE Marking. The CE Marking is an international symbol of adherence to
quality assurance standards and compliance with applicable European medical
device directives. In order to obtain a CE Marking, a manufacturer must be in
compliance with appropriate ISO 9001 standards and obtain certification of its
quality assurance systems by a recognized European Union notified body. However,
certain individual countries within Europe require further approval by their
national regulatory agencies. Failure to receive the right to affix the CE
Marking or other requisite approvals will prohibit Eclipse from selling its TMR
products in member countries of the European Union or elsewhere, and there can
be no assurance that Eclipse will be successful in meeting the European
certification requirements. In December 1996, Eclipse obtained a CE Marking for
its TMR laser system. In July 1998, Eclipse obtained CE Marking for its PTMR
catheter system.
INTELLECTUAL PROPERTY MATTERS
Eclipse'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. Eclipse's policy is to seek to
protect its proprietary position by, among other methods, filing U.S. and
foreign patent applications related to its technology, inventions and
improvements that are important to the development of its business. Eclipse has
40 patents or allowed patent applications and 63 patent applications pending
relating to various aspects of TMR, PTMR and other cardiovascular therapies.
There can be no assurance that any of Eclipse's patents or patent applications
will not be challenged, invalidated or circumvented in
12
<PAGE>
the future or that the rights granted thereunder will provide a competitive
advantage. Eclipse 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 Eclipse may be necessary to enforce patents issued to
Eclipse, to protect trade secrets or know-how owned by Eclipse, or to determine
the enforceability, scope and validity of the proprietary rights of others.
Eclipse also relies upon trade secrets, technical know-how and continuing
technological innovation to develop and maintain its competitive position.
Eclipse 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 Eclipse. There can be no
assurance, however, that these agreements will not be breached or that Eclipse
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 Eclipse's
proprietary technology, or that Eclipse 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
Eclipse have been issued a number of patents related to TMR and PTMR. In
September 1995 Eclipse 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, Eclipse received from CardioGenesis a notice of potential
infringement of the competitor's patents regarding methods to perform TMR/PTMR
using fiber-optics. Eclipse had concluded in each case, following discussion
with its patent counsel, that it did not utilize the process and/or apparatus
which is the subject of the patent at issue, and had responded to the respective
competitor to such effect and 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 Eclipse's technical and management personnel. Eclipse may be
involved in litigation to defend against claims of infringement by Eclipse, to
enforce patents issued to Eclipse, or to protect trade secrets of Eclipse. If
any relevant claims of third party patents are upheld as valid and enforceable
in any litigation or administrative proceeding, Eclipse 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 Eclipse's ability to make, use or sell its
products either in the U.S. or internationally. In the event Eclipse 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 Eclipse, nor can there be any assurance that Eclipse would
be successful in any attempt to redesign its products or processes to avoid
infringement or that any such redesign could be accomplished in a cost-effective
manner. Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent Eclipse from
manufacturing and selling its products, which would materially and adversely
affect Eclipse's business, financial condition and results of operations.
Unrelated to the products used in its TMR procedure, Eclipse has received
notices from three holders of patents requesting that Eclipse become a licensee.
Although Eclipse believes that either these patents are subject to challenge as
being invalid or are not infringed by Eclipse's products, there can be no
13
<PAGE>
assurance that Eclipse would prevail in any such action. In one case, Eclipse
has taken a non-exclusive license to a patent involving arthroscopy use. In a
second case, Eclipse buys components only from licensees of the patent holder,
which Eclipse believes obviates the need for a separate license. In addition,
Eclipse has received notice of interference of one of its patents involving
products that Eclipse is not actively pursuing. Eclipse has received a
non-exclusive license to the technology. Should Eclipse determine that it is
necessary for it to obtain a license to any patents or intellectual property,
there can be no assurance that any such license would be available on acceptable
terms or at all, or that Eclipse would be able to develop or otherwise obtain
alternative technology. Failure of Eclipse to obtain necessary licenses could
prevent Eclipse from manufacturing and selling its products, which would
materially and adversely affect Eclipse's business, financial condition and
results of operations.
THIRD PARTY REIMBURSEMENT
Eclipse expects that sales volumes and prices of Eclipse's products will
depend significantly on the availability of reimbursement for surgical
procedures using Eclipse's products from third party payors such as governmental
programs, private insurance and private health plans. Reimbursement is a
significant factor considered by hospitals in determining whether to acquire new
equipment. Reimbursement rates from third party payors vary depending on the
third party payor, the procedure performed and other factors. Moreover, third
party payors, including government programs, private insurance and private
health plans, have in recent years been instituting increasing cost containment
measures designed to limit payments made to healthcare providers by, among other
measures, reducing reimbursement rates, limiting services covered, negotiating
prospective or discounted contract pricing and carefully reviewing and
increasingly challenging the prices charged for medical products and services.
Medicare reimburses hospitals on a prospectively determined fixed amount for
the costs associated with an in-patient hospitalization based on the patient's
discharge diagnosis, and reimburses physicians on a prospectively determined
fixed amount based on the procedure performed, regardless of the actual costs
incurred by the hospital or physician in furnishing the care and unrelated to
the specific devices used in that procedure. Medicare and other third party
payors are increasingly scrutinizing whether to cover new products and the level
of reimbursement for covered products. In addition, Medicare traditionally has
considered items or services involving devices that have not been approved or
cleared for marketing by the FDA to be precluded from Medicare coverage. Under a
HCFA policy effective November 1, 1995, Medicare coverage was not precluded for
items and related services involving devices that had 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 could have been denied if other coverage requirements are not met, for
example if the treatment is not medically needed for the specific patient. In
November 1995, Eclipse received Category B designation for its TMR procedure
from the HCFA. Accordingly, Eclipse's procedures had received third party
reimbursement in many cases under HCFA's policy. In May 1997, HCFA decided to
retain Eclipse's Category B status but ruled to rescind coverage. In January
1999, HCFA announced coverage policy for FDA approved TMR systems for any
manufacturer's TMR procedures. While Eclipse is unable to determine the ultimate
effect of this policy change on the business and operating results, Eclipse
anticipates that research and development expenses will decrease due to
decreased expenses in support of clinical trials, and revenues from the sale of
FDA approved surgical TMR products are likely to increase, at least over the
short-term and possibly thereafter.
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 private insurance and private health plans will
approve reimbursement for TMR or PTMR.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as
14
<PAGE>
in the U.S., health maintenance organizations are emerging in certain European
countries. Eclipse may need to seek international reimbursement approvals, and
there can be no assurance that any such approvals will be obtained in a timely
manner, if at all. Failure to receive foreign reimbursement approvals could have
an adverse effect on the market acceptance of Eclipse's products in the foreign
markets in which such approvals are sought.
Eclipse believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the U.S. and in
foreign markets. Eclipse believes that the escalating cost of medical products
and services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by Eclipse. There can be no assurance
that third party reimbursement and coverage will be available or adequate in
U.S. or foreign markets, that current levels of reimbursement will not be
decreased in the future, or that future legislation, regulation, or
reimbursement policies of third party payors will not otherwise adversely affect
the demand for Eclipse'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 Eclipse cannot predict the timing or effect of any such
proposal. If third party payor coverage or reimbursement is unavailable or
inadequate, Eclipse's business, financial condition and results of operations
could be materially and adversely affected.
PRODUCT LIABILITY AND INSURANCE
Eclipse maintains insurance against product liability claims in the amount
of $10 million per occurrence and $10 million in the aggregate, and may seek to
increase such coverage now that Eclipse has received a PMA. However, there can
be no assurance that such coverage will continue to be available in the amount
desired or on terms acceptable to Eclipse, or that such coverage will be
adequate for liabilities actually incurred. Any uninsured or underinsured claim
brought against Eclipse, or any claim or product recall that results in
significant cost to or adverse publicity against Eclipse, could materially and
adversely affect Eclipse's business, financial condition and results of
operations.
EMPLOYEES
As of December 31, 1998 Eclipse had 123 employees, including 22 in research
and development, 45 in manufacturing, 32 in sales and marketing and 24 in
administration. All employees have entered into confidentiality agreements with
Eclipse but Eclipse does not otherwise have employment agreements with any of
its employees. None of Eclipse's employees is covered by a collective bargaining
agreement and Eclipse has experienced no work stoppages to date.
ITEM 2. DESCRIPTION OF PROPERTY.
Eclipse's facilities are comprised of 50,335 square feet under five separate
leases. The facility contains a Class 10,000 clean room for laser handpiece and
catheter fabrication. The leases expire from December 1999 through December
2002. Eclipse's headquarters are located in Sunnyvale, California. Eclipse
believes its facilities are adequate to meet its foreseeable requirements
through at least 1999. There can be no assurance that additional facilities will
be available to Eclipse, if and when needed, thereafter.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending legal proceedings against Eclipse other than ordinary
litigation incidental to Eclipse's business, the outcome of which, individually
or in the aggregate, is not expected to have a material adverse effect on
Eclipse's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANTS SHARES AND RELATED SHAREHOLDER MATTERS.
(a) Eclipse's Common Stock is traded on the Nasdaq National Market under the
symbol, ESTI, commencing May 31, 1996. For the periods indicated, the following
table presents the range of high and low sale prices for the Common Stock as
reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
1998 HIGH LOW
- ---------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter............................................................... $ 13.50 $ 5.88
Second Quarter.............................................................. $ 13.00 $ 9.38
Third Quarter............................................................... $ 10.13 $ 5.63
Fourth Quarter.............................................................. $ 9.56 $ 6.31
</TABLE>
<TABLE>
<CAPTION>
1997 HIGH LOW
- ---------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter............................................................... $ 9.75 $ 4.88
Second Quarter.............................................................. $ 8.50 $ 4.88
Third Quarter............................................................... $ 10.00 $ 6.75
Fourth Quarter.............................................................. $ 9.50 $ 5.50
</TABLE>
As of December 31, 1998, shares of Eclipse's Common Stock were held by 177
registered shareholders.
Eclipse has never paid a cash dividend on its capital stock and does not
anticipate paying any cash dividends on the Common Stock in the foreseeable
future, as it intends to retain its earnings, if any, to generate increased
growth and for general corporate purposes.
(b) 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 Securities and Exchange
Commission on May 31, 1996. Eclipse 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. Eclipse incurred the following expenses in connection with the offering:
<TABLE>
<CAPTION>
<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 direct or indirect payments to others.
The net offering proceeds to Eclipse after deducting the total expenses
above were approximately $57,955,000. From May 31, 1996 to December 31, 1998,
Eclipse used such net offering proceeds, in direct or indirect payments to
others, as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase and installment of machinery and equipment........................ $ 2,847,000
Working capital............................................................ 44,992,000
Investment in short-term, interest-bearing obligations..................... 7,526,000
Repayment of indebtedness.................................................. 1,777,000
-------------
Total...................................................................... $ 57,142,000
-------------
-------------
</TABLE>
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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. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data with respect to Eclipse
for the five years ended December 31, 1998, are derived from the consolidated
financial statements of Eclipse which have been audited by
PricewaterhouseCoopers LLP for the five fiscal years ended December 31, 1998.
The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................................. $ 12,002 $ 5,499 $ 9,759 $ 2,707 $ 2,020
Cost of revenues......................................... 4,735 2,779 3,558 1,642 1,173
---------- ---------- ---------- --------- ---------
Gross profit......................................... 7,267 2,720 6,201 1,065 847
---------- ---------- ---------- --------- ---------
Operating expenses:
Research and development............................... 14,175 12,007 6,183 1,010 971
Sales and marketing.................................... 11,417 7,345 3,327 879 392
General and administrative............................. 3,619 4,036 2,403 681 1,031
---------- ---------- ---------- --------- ---------
Total operating expenses................................. 29,211 23,388 11,913 2,570 2,394
---------- ---------- ---------- --------- ---------
Operating loss....................................... (21,944) (20,668) (5,712) (1,505) (1,547)
Interest and other income (expense), net................. 1,590 2,421 1,556 (921) (435)
---------- ---------- ---------- --------- ---------
Net loss............................................. $ (20,354) $ (18,247) $ (4,156) $ (2,426) $ (1,982)
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Net loss per share--basic and diluted................ $ (1.18) $ (1.11) $ (0.30) $ (0.23) $ (0.19)
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Shares used in per share calculation................. 17,227 16,404 14,078 10,470 10,231
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities......... $ 8,339 $ 35,194 $ 52,063 $ 123 $ 132
Working capital (deficit)................................ 8,501 36,434 47,861 (1,549) 657
Total assets............................................. 26,243 43,474 58,706 2,459 2,922
Long-term debt, less current portion..................... 114 10 20 -- 1,009
Accumulated deficit...................................... (48,772) (28,418) (10,171) (6,015) (3,589)
Total shareholders' equity (deficit)..................... 19,727 38,228 55,666 (1,429) (139)
</TABLE>
ITEM 7. 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
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<PAGE>
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 ANNUAL REPORT ON FORM 10-K.
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. At December 31, 1998, Eclipse had an accumulated deficit of $48,772,000.
On May 19, 1997, HCFA adopted a policy to restrict Medicare reimbursement
for TMR equipment and procedures. Eclipse's products had received third party
reimbursement under the preceding HCFA policy. Reimbursement was a significant
factor considered by hospitals in determining whether to acquire new equipment.
On October 22, 1998, Eclipse announced the signing of a definitive agreement
that provided for a business combination with CardioGenesis Corporation
("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 will no longer be publicly traded. As a result of the transaction,
Eclipse has increased its outstanding shares by approximately 9.9 million shares
which are issuable 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 will be accounted for as
a pooling of interests.
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. In
February 1999, HCFA issued an indication of coverage for TMR procedures that are
FDA approved. When HCFA issues final guidelines, hospitals will again receive
Medicare reimbursement for TMR equipment and procedures which is expected to
result in a reduction in Eclipse's costs of clinical trials(1).
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 progress of Eclipse's clinical trials,
the status and timing of regulatory approvals, the timing of market acceptance,
if any, of Eclipse's products, and the efforts required to develop Eclipse's
sales and marketing organization.
- ------------------------
(1) Forward looking statement.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES
Net revenues of $12,002,000 for the year ended December 31, 1998 increased
$6,503,000 or 118% when compared to net revenues of $5,499,000 for the year
ended December 31, 1997. The increase in revenues was a result of higher laser
system and disposable product sales.
Future revenues could continue to be affected by restrictions on third party
reimbursement. Eclipse intends to continue selling its laser systems to
hospitals outright or placing the systems with hospitals under lease or fee per
use agreements.
GROSS PROFIT
Gross profit increased to $7,267,000 or 61% of net revenues for the year
ended December 31, 1998 as compared to $2,720,000 or 49% of net revenues for the
year ended December 31, 1997. The increase resulted from greater sales volume
and a higher average sales price per laser in 1998 compared to 1997. The
increase in sales volumes in 1998 resulted in increased production volumes which
resulted in lower per unit manufacturing costs as a result of production
efficiencies.
RESEARCH AND DEVELOPMENT
Research and development expenditures of $14,175,000 increased $2,168,000 or
18% for the year ended December 31, 1998 when compared to $12,007,000 for the
year ended December 31, 1997. The increase in these expenses reflected a higher
level of costs related to the development of new products, and increases in the
number of clinical trials and the cost of supporting these trials.
On February 11, 1999, Eclipse received FDA approval for the TMR 2000 laser
system. TMR with the Eclipse TMR 2000 laser system is approved for treatment of
stable patients with angina (Canadian Cardiovascular Society Class 4) refractory
to medical treatment and secondary to objectively demonstrated coronary artery
atherosclerosis and with a region of the myocardium with reversible ischemia not
amenable to direct coronary revascularization.
Eclipse's products for other indications are currently in clinical trials
and therefore subject to limitations by the FDA. Eclipse believes that continued
investment in the development of new and improved products and procedures and
continued investment 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 during 1999, it is anticipated that the level of
research and development expenditures incurred in connection with clinical
trials will decrease(1). 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 expenditures of $11,417,000 increased $4,072,000 or 55%
for the year ended December 31, 1998 when compared to $7,345,000 for the year
ended December 31, 1997. The increase is due primarily to increases in
headcount, sales commissions and physician training. Eclipse expects that sales
and marketing expenses will continue to increase as Eclipse continues to focus
resources on the development of the TMR and PTMR market(1).
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(1) Forward looking statement.
19
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GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased by $417,000 or 10% to
$3,619,000 in 1998 from $4,036,000 in 1997. The decrease in 1998 as compared to
1997 reflected a decrease in investor relations costs.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income of $1,673,000 decreased $773,000 or 32% for the
year ended December 31, 1998 when compared to $2,446,000 for the year ended
December 31, 1997. This decrease was due primarily to lower cash balances and
lower investments in marketable securities in 1998.
In November 1998, the Company contributed certain licenses, patents, and
other intellectual property and the MicroHeart name to MicroHeart Holdings, Inc.
("MHH") in exchange for MHH common stock, representing less than 1% of MHH's
outstanding common stock and two warrants to acquire MHH common stock for an
aggregate exercise price of approximately $290,000. In addition, the Company has
agreed to perform research and development related to the contributed technology
over the next 6 months, for which the Company will be paid $1,120,000 by MHH.
Eclipse has recorded a $400,000 investment and related gain on the contributed
technology and revenue of $290,000 related to research and development performed
on the contributed technology in the year ended December 31, 1998.
Interest expense of $83,000 increased $58,000 or 232% for the year ended
December 31, 1998 when compared to $25,000 for the year ended December 31, 1997.
This increase was a result of a note payable held by Eclipse's subsidiary,
MicroHeart, Inc. from October 1997 to October 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET REVENUES
Net revenues of $5,499,000 for the year ended December 31, 1997 decreased
$4,260,000 or 44% when compared to net revenues of $9,759,000 for the year ended
December 31, 1996. The decrease resulted primarily from a change in the mix of
lasers sold versus placed. This change was primarily due to a HCFA policy
effective May 19, 1997 which restricted Medicare reimbursement for TMR equipment
and procedures. Eclipse's products had received third party reimbursement under
the preceding HCFA policy. Reimbursement was a significant factor considered by
hospitals in determining whether to acquire new equipment.
GROSS PROFIT
Gross profit decreased to $2,720,000 or 49% of net revenues for the year
ended December 31, 1997 as compared to $6,201,000 or 64% of net revenues for the
year ended December 31, 1996. The decrease resulted from a higher level of
manufacturing overhead associated with facility and infrastructure expansion
including increased headcount, as well as a lower average sales price per laser
in 1997 due to the higher mix of lasers placed versus sold in 1997 as compared
to 1996.
RESEARCH AND DEVELOPMENT
Research and development expenditures of $12,007,000 increased $5,824,000 or
94% for the year ended December 31, 1997 when compared to $6,183,000 for the
year ended December 31, 1996. The increase in these expenses reflected a higher
level of costs related to the development of new products, increases in the
number of clinical trials and the cost of supporting these trials, and an
increase in headcount to 39 at December 31, 1997 from 25 research and
development employees at December 31, 1996.
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SALES AND MARKETING
Sales and marketing expenditures of $7,345,000 increased $4,018,000 or 121%
for the year ended December 31, 1997 when compared to $3,327,000 for the year
ended December 31, 1996. The increase was due primarily to a headcount increase
to 27 in 1997 from nine in 1996, which resulted in significant increases in
salary, commission and travel expenses. The additional headcount has been
utilized in the areas of international sales, service, training and clinical
support to the increasing number of clinical sites.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $4,036,000 in 1997 from
$2,403,000 in 1996. The increase for the year ended December 31, 1997 as
compared to for the year ended December 31, 1996 reflected an increase in patent
and patent related expenses. At December 31, 1997, Eclipse had 30 patents or
allowed patent applications and 32 patent applications pending relating to
various aspects of TMR, PTMR and other cardiovascular therapies as compared to
five and 29, respectively, at December 31, 1996. The increase also reflected
expenses related to being a publicly traded company, including investor
relations fees, legal, accounting and stock administration expenses, which were
incurred throughout the year in 1997 as compared to seven months in 1996.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest income of $2,446,000 increased $694,000 or 40% for the year ended
December 31, 1997 as compared to $1,752,000 for the year ended December 31,
1996. This increase was due primarily to the funds received in connection with
an initial public offering in May 1996 being invested for twelve months in 1997
as compared to seven months in 1996.
Interest expense of $25,000 decreased $171,000 or 87% for the year ended
December 31, 1997 as compared to $196,000 for the year ended December 31, 1996.
This decrease reflected the use of funds from the initial public offering to
repay debt, resulting in a lower debt level in 1997 as compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short and long-term marketable securities were
$8,339,000 at December 31, 1998 compared to $35,194,000 at December 31, 1997, a
decrease of 76%. Marketable securities are classified as "available-for-sale"
and are readily marketable at their fair market value. Eclipse used $27,324,000
of cash for operating activities, including funding its operating loss and
increases in accounts receivable and inventory in 1998.
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 December 31, 1998, Eclipse had an
accumulated deficit of $48,772,000.
Eclipse anticipates that its current cash, cash equivalents and marketable
securities will be sufficient to meet Eclipse's funding requirements through at
least December 31, 1999(1). There can be no assurance, however, that Eclipse
will not require additional sources of cash at an earlier date in the future,
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.
- ------------------------
(1) Forward looking statement.
21
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RECENTLY ISSUED ACCOUNTING STANDARDS
Management does not believe that there are any recently issued accounting
standards not yet adopted by Eclipse, the future adoption of which will have a
material impact on Eclipse's financial position or results of operations.
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 identified the following systems which are in
the process of being evaluated:
<TABLE>
<CAPTION>
<S> <C>
Security systems Network equipment
Facility systems Printers, copiers and fax machines
Telephony Server tape backups
Servers Testing equipment
Personal computers Miscellaneous software
</TABLE>
The vast majority of Eclipse's information systems hardware and software is
already Year 2000 compliant. These same hardware and software systems are used
for process controls in Eclipse's manufacturing operations which do not depend
otherwise upon date data oriented equipment. Eclipse does not anticipate any
material disruption in its operations as a result of any failure by Eclipse to
be in Year 2000 compliance(1). Eclipse will estimate the cost to modify its
systems to be Year 2000 compliant as part of its assessment phase, however, at
present, Eclipse does not anticipate that the cost will be material to its
financial condition or results of operations(1). To date as well, Eclipse
believes that the cost is not material to its financial condition or results of
operations.
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 date 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, and the
products Eclipse supplies to its customers, 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 expects that its Year 2000 compliance project will be completed
prior to the second 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(1). However, there can be no assurance that unexpected delays or
problems,
- ------------------------
(1) Forward looking statement.
22
<PAGE>
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 AFFECTING 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 ANNUAL REPORT ON FORM 10-K 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-K.
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 AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO INCLUDED IN PART IV--ITEM 14 OF THIS ANNUAL REPORT ON FORM
10-K.
ECLIPSE MAY FAIL TO OBTAIN REQUIRED REGULATORY APPROVALS TO MARKET ITS
PRODUCTS IN THE UNITED STATES. Eclipse may not be able to obtain the regulatory
approval required for commercial sale of its laser systems in a timely manner.
On February 11, 1999, Eclipse received final approval from the FDA for its TMR
products for certain indications but, to date, none of its PTMR laser systems
has been approved for sale in the U.S.
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 a PMA, before it can sell its laser systems as medical
devices. Before submitting a PMA application, Eclipse must complete clinical
testing to demonstrate the safety and effectiveness of their 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. Eclipse also has applied for and received
IDEs to engage in various clinical trials of its PTMR products and procedures.
Eclipse must successfully complete clinical trials of its PTMR products and
procedures before filing a PMA application for those products and procedures.
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 laser systems. Any such occurrence could
cause a delay in future regulatory approvals or adversely affect the acceptance
of its products and could have a material adverse effect on Eclipse's business,
financial condition and results of operations.
23
<PAGE>
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 Eclipse's business, financial condition and
results of operations:
- 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 are subject to other regulatory requirements in the
European Union and other countries. Any enforcement action by regulatory
authorities with respect to past or future regulatory noncompliance could have a
material adverse effect on Eclipse's business, financial condition and results
of operations.
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
- the device is 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.
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; or
- 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 the 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
24
<PAGE>
- be required to incur significant costs in obtaining or maintaining such
foreign regulatory approvals.
ECLIPSE PRODUCTS ARE EXPERIMENTAL AND HAVE NOT BEEN BROADLY ADOPTED BY THE
MEDICAL COMMUNITY AND UNLESS THEY ARE BROADLY ADOPTED ECLIPSE'S BUSINESS WILL BE
ADVERSELY AFFECTED. TMR and PTMR products using lasers are experimental and
have not yet achieved broad clinical adoption. Eclipse cannot predict whether or
at what rate and how broadly its 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 adoptions; or
- its TMR or PTMR laser systems fail to achieve significant market
acceptance.
Positive endorsements by physicians are essential for clinical adoption of
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 or 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 treatments, 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; and
- disseminates such understanding within the medical community.
Clinical adoption of these products will also depend upon:
- 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.
ECLIPSE PRODUCTS DEPEND ON TMR TECHNOLOGY WHICH IS RAPIDLY CHANGING, WHICH
COULD REQUIRE ECLIPSE 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 its TMR and PTMR laser systems, then its 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.
25
<PAGE>
THIRD PARTIES MAY LIMIT THE DEVELOPMENT AND PROTECTION OF ECLIPSE'S
INTELLECTUAL PROPERTY WHICH COULD ADVERSELY AFFECT ITS COMPETITIVE
POSITION. 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 U.S. 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 U.S. 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.
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
- a significant diversion of effort by technical and management personnel.
26
<PAGE>
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 ongoing royalties.
Furthermore, there can be no assurance that 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 patents 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 U.S. are maintained in secrecy until
patents issue, Eclipse cannot be certain:
- others did not first file applications for inventions covered by their
pending patent applications; nor
- that they 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
healthcare 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 its
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;
27
<PAGE>
- its competitors may independently develop substantially equivalent
proprietary information and techniques; or
- competitors may otherwise gain access to Eclipse's proprietary technology.
The inability of Eclipse to protect its unpatented intellectual property
could materially adversely affect its business.
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.;
- U.S. Surgical Corporation; and
- Johnson & Johnson.
Each of these competitors are currently selling TMR and/or PTMR products for
investigational use in the U.S. and abroad. Certain companies, including PLC,
have:
- completed enrollment in randomized clinical trials of products and
procedures involving TMR; and
- received regulatory approvals in U.S. and Europe to begin commercially
marketing their various TMR products.
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 it's TMR laser system in 1998 and thus, would be able to capture a greater
market share.
Even with the FDA approval for it's TMR laser, 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 the introduction of
competitive products into the market, which 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.
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;
28
<PAGE>
- 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 a material adverse effect on the business,
financial condition and results of operations of Eclipse.
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 percutanous transluminal coronary angioplasty (known as
PTCA) and coronary artery bypass grafts.
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 HAS A HISTORY OF LOSSES AND MAY NOT BE PROFITABLE IN THE
FUTURE. Eclipse has incurred significant losses since inception and may not
achieve or sustain profitability in the future. Eclipse's revenues and operating
income will be constrained:
- until such time, as Eclipse obtains FDA and other regulatory approvals for
its PTMR products;
- for an uncertain period of time after such approvals are obtained; and
- until the medical community embraces laser systems as an effective
treatment for coronary artery disease.
29
<PAGE>
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:
- complete the clinical trials that are currently in progress;
- prepare additional products for clinical trials;
- develop future products; and
- generally compete successfully.
Such expansion could place a significant strain on Eclipse's 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.
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 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 the needs of Eclipse 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 GMP
regulations, international quality standards and other regulatory
requirements); and
- shortages of qualified personnel.
30
<PAGE>
There can be no assurance that Eclipse:
- will be able to successfully increase manufacturing capacity; or
- will be able to avoid manufacturing difficulties or product recalls.
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 U.S. or manufactures finished devices
in the U.S. The FDA inspects manufacturing facilities on a regular basis to
determine compliance. If they fail to comply with applicable FDA or other
regulatory requirements, Eclipse can be subject to:
- fines, injunctions, and civil penalties;
- recalls or seizures of products;
- total or partial suspensions of production; and
- criminal prosecutions.
TO EXPAND ITS BUSINESS, ECLIPSE WILL BE REQUIRED TO ESTABLISH EFFECTIVE
SALES, MARKETING AND DISTRIBUTION PROCESSES AND IT HAS LIMITED EXPERIENCE TO
DATE ESTABLISHING THESE OPERATIONS. To expand its business, Eclipse must
establish effective processes 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. For this reason, Eclipse
has maintained only a limited sales and marketing organization.
With the recent FDA approval of it's TMR laser, Eclipse expects to market
its TMR products through a direct sales force and through relationships with
distributors or agents. This will require substantial management efforts and
financial resources. If Eclipse is not able to establish relationships with
distributors, or if such distributors are not effective, its business and
results of operations could be materially adversely affected.
ECLIPSE MAY NEED ADDITIONAL CAPITAL OR IT WILL BE UNABLE TO CONTINUE
EXPANDING ITS CLINICAL TRIALS AND TESTING ITS PRODUCTS. Eclipse currently
anticipates that its cash balances, together with sales of products for
investigational and approved use, will be sufficient to meet its capital
requirements for the next twelve months. If Eclipse cannot raise enough
additional funds, it may not be able to continue expanding its clinical trials
and testing its products. If this were to occur, Eclipse's business, results of
operations, financial condition and prospects would be materially adversely
affected.
Eclipse may require additional sources of cash at an earlier date. The need
for additional cash will depend upon the progress or expansion of clinical
trials and any need for additional trials or other testing of products and the
timing of these expenditures. Additional financing may not be available when
needed or on satisfactory terms, if at all.
ECLIPSE WILL BE UNABLE TO OBTAIN ADDITIONAL FDA APPROVAL IF ITS PRODUCTS ARE
NOT 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.
Conducting clinical trials will:
- require substantial financial and management resources; and
- take several years.
Eclipse cannot determine if its TMR and PTMR laser systems will prove to be
safe or effective. The business, financial condition, and results of operations
of Eclipse will be materially and aversely affected if its TMR and PTMR laser
systems do not prove to be safe and effective in clinical trials.
31
<PAGE>
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. Eclipse's products are designed to be used in
life-threatening situations where there is a high risk of serious injury or
death and Eclipse 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 the ability of Eclipse to
defend against product liability lawsuits. Although Eclipse has never
experienced any product liability claims to date, any such claims could have a
material adverse effect on Eclipse's business, financial condition and results
of operations.
ECLIPSE'S INSURANCE MAY BE INSUFFICIENT TO COVER PRODUCT LIABILITY
CLAIMS. There can be no assurance that the product liability insurance
maintained by Eclipse will:
- be adequate for any future product liability problems; or
- continue to be available on commercially reasonable terms, or at all.
If Eclipse was 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 Eclipse's 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
may 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 TMR
and PTMR laser systems.
Eclipse may require increased product liability coverage if any products are
commercialized. Product liability insurance is expensive and in the future may
not be available on acceptable terms, if at all.
ECLIPSE MAY EXPERIENCE ADVERSE EFFECTS RELATED TO YEAR 2000 ISSUES AFFECTING
ITS SUPPLIERS. Many currently installed computer systems and software products
experience functional difficulty distinguishing between the year 2000 from the
year 1900. 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.
Eclipse does not anticipate any material disruption in its operations as a
result of any internal or external Year 2000 compliance problems. However,
Eclipse will 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 its preparations will be successful or that it will not
experience unexpected delays or problems as a result of Year 2000 problems.
32
<PAGE>
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 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 expects that its Year 2000 compliance project will be completed
prior to the second 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(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.
THE OPERATING RESULTS OF ECLIPSE ARE EXPECTED TO FLUCTUATE AND QUARTER TO
QUARTER COMPARISONS OF ITS RESULTS MAY NOT INDICATE FUTURE
PERFORMANCE. Eclipse's operating results have fluctuated significantly from
quarter to quarter and are expected to fluctuate significantly from quarter to
quarter in the future 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 healthcare 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 and 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
- ------------------------
(1) Forward looking statement.
33
<PAGE>
fall below the expectations of public market analysts and investors. If this
occurs, the price of Eclipse's Common Stock may fall, perhaps substantially.
ECLIPSE MAY NOT BE ABLE TO SUCCESSFULLY MARKET ITS PRODUCTS IF IT FAILS TO
OBTAIN ACCEPTANCE OF 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 from 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.
In January 1999, HCFA announced coverage policy for FDA approved TMR systems
for any manufacturer's TMR 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 private
insurance and private health plans will approve reimbursement for TMR or PTMR.
Although Eclipse does not anticipate receiving reimbursements for their
laser systems from Medicare during their 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 MAY NOT ACHIEVE WIDE ACCEPTANCE OF ITS PRODUCTS IN FOREIGN MARKETS
IF IT FAILS TO OBTAIN THIRD PARTY REIMBURSEMENTS FOR THE PROCEDURES PERFORMED
WITH ITS PRODUCTS. If Eclipse obtains the necessary foreign regulatory
registrations or approvals, market acceptance of its products in international
markets would be dependent, in part, upon the availability of reimbursement
within prevailing healthcare payment systems. Reimbursement and healthcare
payment systems in international markets vary significantly by country. They
include both government sponsored healthcare and private insurance. Although
Eclipse expects to seek international reimbursement approvals, there can be no
assurance that any such approvals will be obtained in a timely manner, if at
all. Failure to receive international reimbursement approvals could have a
material adverse effect on the market acceptance of TMR and PTMR products in the
international markets in which such approvals are sought.
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
healthcare industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by it. There can be no assurance in
either U.S. or international markets that:
- third party reimbursement and coverage will be available or adequate;
34
<PAGE>
- current reimbursement amounts will not be decreased in the future; or
- 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 U.S. 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.
COMPLETION OF BUSINESS COMBINATION WITH CARDIOGENESIS. On March 17, 1999,
Eclipse announced the completion of the business combination between
CardioGenesis and itself. 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, other than the transaction with CardioGenesis, Eclipse's management
frequently evaluates the strategic opportunities available related to
complimentary 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. The
business combination with CardioGenesis or 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.
DEPENDENCE ON 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. Douglas Murphy-Chutorian, M.D.,
will remain as Chairman of the Board of the combined company. Allen W. Hill,
President and Chief Executive Officer of CardioGenesis, has also become
President and Chief Executive Officer of the combined company. Richard L.
Mueller, Jr., will no longer continue to be President and Chief Operating
Officer. Eclipse maintained key person life insurance policies on both Dr.
Murphy-Chutorian and Mr. Mueller in the amount of $2 million in total and intend
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. Competition for such personnel is intense, and Eclipse may
not be successful in attracting or retaining such personnel. 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.
ITEM 7A. 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.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 below and the Index therein for a listing of the consolidated
financial statements and supplementary data filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The names of the directors and executive officers are set forth:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ---------------------------------------------------------
<S> <C> <C>
Douglas Murphy-Chutorian, M.D................... 44 Chairman of the Board and Chief Executive Officer
Richard L. Mueller, Jr.......................... 43 President, Chief Operating Officer and Director
Robert L. Mortensen............................. 64 Director
Iain M. Watson.................................. 43 Director
Alan L. Kaganov, Sc.D........................... 60 Director
</TABLE>
DOUGLAS MURPHY-CHUTORIAN, M.D. has been Chairman of the Board and Chief
Executive Officer of Eclipse since June 1989. Dr. Murphy-Chutorian was also
Chairman of the Board of Atlantis Catheter Company, Inc. ("Atlantis") from
November 1993 to March 1996 when Atlantis was acquired by Biocompatibles
International plc. Since 1997, Dr. Murphy-Chutorian has been the Chairman of the
Board of MicroHeart Holdings, Inc. ("MHH"). Dr. Murphy-Chutorian is an
interventional cardiologist and served as a Clinical Assistant Professor in the
Department of Cardiology and Cardiovascular Medicine at Albert Einstein College
of Medicine (Montefiore Division) and Stanford University Medical Center from
1986 through July 1990. He is currently a member of the voluntary clinical staff
of Stanford University Medical Center and of Montefiore Medical Center. Dr.
Murphy-Chutorian received his M.D. degree from the College of Physicians and
Surgeons, Columbia University, completed his residency at New York
University/Bellevue Hospital and completed his cardiology training at Stanford
University Medical Center.
RICHARD L. MUELLER, JR. has been President and Chief Operating Officer of
Eclipse since December 1995. From May 1994 until December 1995, Mr. Mueller was
Vice President of Research and Development at Heartport, Inc., a
minimally-invasive cardiac surgery company. From November 1990 until May 1994,
Mr. Mueller was Director of Research and Development at Origin Medsystems, Inc.,
an endosurgical device manufacturer. From March 1987 until November 1990, Mr.
Mueller was Director of New Product Development at Devices for Vascular
Intervention, Inc., a coronary atherectomy manufacturer. Since September 1998,
Mr. Mueller has been the President and Chief Executive Officer of MHH. Mr.
Mueller holds a B.S.E.E. degree from Northwestern Polytechnic University and a
B.S. degree in business management from Westminster College.
ROBERT L. MORTENSEN has been a director of Eclipse since April 1992. Since
1984, Mr. Mortensen has been either President or Chairman of the Board and a
director of Lightwave Electronics Corporation, a solid-state laser company that
he founded. He holds an M.B.A from Harvard University.
IAIN M. WATSON has been a director of Eclipse since April 1992. Since
September 1993, Mr. Watson has been President of HAL Investments, Inc., an
investment company. From 1980 to September 1993, Mr. Watson held various
positions with the Boston Consulting group, a management consulting firm. Mr.
Watson holds an M.B.A. from Harvard University.
ALAN L. KAGANOV, SC.D has been a director of Eclipse since January 1997.
Since July 1996, Dr. Kaganov has been a Venture Partner at U.S. Venture
Partners. From May 1993 to June 1996 Dr. Kaganov was Vice President of Business
Development and Strategic Planning at Boston Scientific Corporation. From June
1991 until December 1992 he was President and CEO of EP Technologies, a
catheter-based electrophysiology company. Dr. Kaganov has a Masters and
Doctorate of Science in biomedical engineering from Columbia University and an
M.B.A. from New York University.
36
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act and regulations of the Securities and
Exchange Commission (the "SEC") thereunder require the Company's executive
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of initial ownership and
changes in ownership with the SEC. Based solely on its review of copies of such
forms received by the Company, or on written representations from certain
reporting persons that no other reports were required for such persons, the
Company believes that, during or with respect to the period from January 1, 1998
to December 31, 1998, all of the Section 16(a) filing requirements applicable to
its executive officers, directors and 10% stockholders were complied with,
except for the following: Stuart Harman, Vice President of Product Development
of the Company, filed a Form 5 approximately one month late to report the
private purchases of 190 shares on each of May 15, 1997 and November 14, 1997
and Alan Kaganov, a director of the Company filed a Form 5 approximately one
month late to report the grant of options to purchase 52,500 shares of Common
Stock of the Company on December 12, 1997.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER MATTERS.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth information regarding
the compensation of the Chief Executive Officer and each of the four other most
highly compensated officers of Eclipse (each, a "Named Executive Officer") for
services rendered in all capacities to Eclipse for the fiscal years ended
December 31, 1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
FISCAL ---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS/SARS COMPENSATION(1)
- ------------------------------------------------ ----------- ---------- ---------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Douglas Murphy-Chutorian, M.D................... 1998 $ 295,190 $ 100,000 50,000 $ 7,236
Chairman of the Board and Chief 1997 267,099 22,119 -- 5,905
Executive Officer 1996 228,552 33,746 -- 830
Richard L. Mueller, Jr.......................... 1998 232,275 50,000 50,000 1,831
President and Chief Operating Officer 1997 193,327 15,166 -- 1,257
1996 163,423 22,263 -- 648
Linda Fenney, M.D............................... 1998 190,552 39,892 9,999 151
Vice President, Medical Affairs 1997 176,554 13,964 20,000 32
1996 133,340 18,063 -- 767
Vurnetha R. Bitoy............................... 1998 188,282 16,945 25,000 --
Vice President, Sales and Marketing 1997 75,000 4,800 50,000 --
1996 -- -- -- --
William E. Picht................................ 1998 181,500 16,335 15,000 745
Vice President, Operations 1997 170,373 21,120 -- 248
1996 56,814 7,599 75,000 --
</TABLE>
- ------------------------
(1) Life insurance premiums
37
<PAGE>
OPTIONS GRANTED IN FISCAL 1998
The following tables set forth information regarding stock options granted
to and exercised by the Named Executive Officers during Eclipse's fiscal year
ended December 31, 1998, the last day of Eclipse's 1998 fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES PRICE OPTION TERM(2)
OPTIONS IN FISCAL PER EXPIRATION --------------------
NAME GRANTED YEAR SHARE DATE 5% 10%
- ---------------------------------------------- ----------- ------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Douglas Murphy-Chutorian, M.D................. 50,000 8.5% $ 6.88 02/10/98 $ 8,633 $ 17,266
Richard L. Mueller, Jr........................ 50,000 8.5% $ 6.88 02/10/98 8,634 17,268
Linda Fenney, M.D............................. 9,999 1.7% $ 6.94 03/03/98 -- --
Vurnetha R. Bitoy............................. 25,000 4.2% $ 6.88 02/10/98 3,048 6,096
William E. Picht.............................. 15,000 2.5% $ 5.88 01/02/98 2,590 5,180
</TABLE>
- ------------------------
(1) Each of these options was granted pursuant to Eclipse's Option Plan.
(2) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), shown are the hypothetical gains or "option spreads" that
would exist for the respective options. These gains are based on assumed
rates of annual compounded stock price appreciation of 5% and 10% from the
date the option was granted over the full option term. The 5% and 10%
assumed rates of appreciation are mandated by the rules of the Commission
and do not represent Eclipse's estimate or projection of future increases in
the price of its Common Stock.
OPTIONS OUTSTANDING IN FISCAL YEAR 1998
The following table sets forth certain information for the year ended
December 31, 1998 concerning exercised, exercisable and unexercisable stock
options held by each of the Named Executive Officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTIONS
-------------------------------------------------------
NUMBER OF VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT FISCAL YEAR-END: AT FISCAL YEAR-END(1)
ON VALUE -------------------------- ---------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------- --------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Douglas Murphy-Chutorian, M.D............. -- -- 20,835 29,165 $ 9,126 $ 12,774
Richard L. Mueller, Jr.................... -- -- 770,837 29,163 4,241,377 12,773
Linda Fenney, M.D......................... -- -- -- 9,999 363,974 3,755
Vurnetha R. Bitoy......................... -- -- -- 25,000 -- 10,950
William E. Picht.......................... -- -- 6,251 8,749 8,989 12,581
</TABLE>
- ------------------------
(1) The value for an "in the money" option represents the difference between the
exercise price of such option as determined by Eclipse's Board of Directors
and the fair market value of Eclipse's Common Stock at December 31, 1998,
multiplied by the total number of shares subject to the option.
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<PAGE>
DIRECTORS COMPENSATION
Directors who are not compensated as employees or consultants to Eclipse
receive a retainer of $10,000 per year for serving on the Board of Directors,
plus fees of $1,500 per board meeting and $1,500 per committee meeting, provided
such committee meeting does not occur on the same day as a board meeting.
Eclipse also has a Director Stock Option Plan for non-employee directors.
Directors Alan L. Kaganov, Iain M. Watson and Robert L. Mortensen were each
granted an option to purchase an aggregate of 7,500 shares of Common Stock
pursuant to such plan in fiscal 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors for the year ended
December 31, 1998 consisted of Messrs. Mortensen and Watson. No member of the
Compensation Committee has a relationship that would constitute an interlocking
relationship with executive officers or directors of another entity.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee (the "Committee") of the Board reviews and
approves Eclipse's executive compensation policies. The Committee administers
Eclipse's various incentive plans, including the Stock Option Plan and the
Employee Stock Purchase Plan, sets compensation policies applicable to Eclipse's
executive officers and evaluates the performance of Eclipse's executive
officers. The compensation levels of Eclipse's executive officers for the fiscal
year ended December 31, 1998, including base salary levels, potential bonuses
and stock option grants were determined by the Committee at the beginning of the
fiscal year. The following is a report of the Committee describing compensation
policies and rationale applicable with respect to the compensation paid to
Eclipse's executive officers for the fiscal year ended December 31, 1998.
The members of the Compensation Committee of the Board of Directors are
Messrs. Mortensen and Watson, neither of whom is an employee of Eclipse.
COMPENSATION PHILOSOPHY
Eclipse's executive compensation programs are designed to attract, motivate
and retain executives who will contribute significantly to the long-term success
of Eclipse and the enhancement of stockholder value. In addition to base salary,
certain elements of total compensation are payable in the form of variable
incentive plans tied to the performance of Eclipse and the individual, and in
the equity-based plans designed to closely align executive and stockholder
interests.
BASE SALARY
Base salary for executives, including that of the chief executive officer,
is set according to the responsibilities of the position, the specific skills
and experience of the individual and the competitive market for executive
talent. In order to evaluate the competitive position of Eclipse's salary
structure, the Committee makes reference to compensation surveys of comparable
companies in the high-technology sector, Eclipse's industry and its geographic
location. Executive salary levels are set to approximate average rates, with the
intent that superior performance under incentive bonus plans will enable the
executive to elevate his total cash compensation levels that are above average
of comparable companies. The Committee reviews salaries annually and adjusts
them as appropriate to reflect changes in market conditions and individual
performance and responsibilities.
39
<PAGE>
STOCK OPTION PLAN
The Committee believes that Eclipse's Stock Option Plan (The "Option Plan")
is an essential tool to link the long-term interests of stockholders and
employees, especially executive management, and serves to motivate executives to
make decisions that will, in the long run, give the best returns to
stockholders. Stock options are generally granted when an executive joins
Eclipse, with subsequent grants also taking into account the individual's
performance and the vesting status of previously granted options. These options
typically vest over a three year period and are granted at an exercise price
equal to the fair market value of Eclipse's Common Stock at the date of grant.
The size of initial option grants is based upon the position, responsibilities
and expected contribution of the individual. This approach is designed to
maximize stockholder value over a long term, as no benefit is realized from the
option grant unless the price of Eclipse's Common Stock has increased over a
number of years.
In addition to the Option Plan, executive officers are eligible to
participate in Eclipse's Employee Stock Purchase Plan. This plan allows
employees to purchase Eclipse's Common Stock at a price equal to 85% of the
lower of the fair market value at the beginning of the offering period or the
fair market value at the end of the purchase period.
Other elements of executive compensation include life and long-term
disability insurance, medical benefits and a 401(k) deferred compensation plan
with no Eclipse matching contribution for the fiscal year ended December 31,
1998. All such benefits are available to all regular, full-time employees of
Eclipse.
The foregoing report has been furnished by the Compensation Committee of the
Board of Directors of Eclipse. The Compensation Committee consisted of Robert L.
Mortenson and Iain M. Watson.
40
<PAGE>
PERFORMANCE GRAPH
The following graph sets forth Eclipse's total cumulative stockholder return
as compared to the Nasdaq Index and the Nasdaq Medical Devices, Instruments, and
Supplies, Manufacturers and Distributors Total Return Index (SIC codes 384).
Total stockholder return assumes $100 invested at the beginning of the period in
the Common Stock of Eclipse, the stocks represented in the Nasdaq Index and the
stocks represented in the Nasdaq Medical Devices, Instruments, and Supplies,
Manufacturers and Distributors Total Return Index respectively. Total return
also assumes reinvestment of dividends; Eclipse has paid no dividends on its
Common Stock.
COMPARISON OF CUMULATIVE TOTAL RETURNS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ECLIPSE SURGICAL TECHNOLOGIES,
INC. NASDAQ INDEX NASDAQ MEDICAL DEVICES INDEX
<S> <C> <C> <C>
5/31/96 $100 $100 $100
6/30/96 $83 $95 $81
9/30/96 $73 $99 $88
12/31/96 $53 $104 $76
3/31/97 $36 $98 $72
6/30/97 $48 $116 $76
9/30/97 $54 $136 $71
12/31/97 $36 $127 $59
3/31/98 $77 $149 $109
6/30/98 $61 $153 $104
9/30/98 $55 $139 $92
12/31/98 $44 $179 $112
</TABLE>
Historical stock price performance should not be relied upon as indicative
of future stock price performance.
<TABLE>
<CAPTION>
NASDAQ MEDICAL DEVICES,
INSTRUMENTS, AND SUPPLIES,
ECLIPSE SURGICAL MANUFACTURERS AND DISTRIBUTORS
TECHNOLOGIES, INC. NASDAQ INDEX TOTAL RETURN INDEX
------------------- --------------- -------------------------------
<S> <C> <C> <C>
05/31/96...................... $ 100 $ 100 $ 100
06/30/96...................... 83 95 81
09/30/96...................... 73 99 88
12/31/96...................... 53 104 76
03/31/97...................... 36 98 72
06/30/97...................... 48 116 76
09/30/97...................... 54 136 71
12/31/97...................... 36 127 59
03/31/98...................... 77 149 109
06/30/98...................... 61 153 104
09/30/98...................... 55 139 92
12/31/98...................... 44 179 112
</TABLE>
41
<PAGE>
All information contained herein is obtained from sources believed to be
accurate and reliable, but, because of the possibility of human and mechanical
error as well as other factors, all information is provided "as is" without
warranty of any kind, and The Nasdaq Stock Market, Inc. expressly disclaims all
express and implied warranties of any kind and makes no representations or
warranties, expressed or implied, to any person or entity, as to the accuracy,
timeliness, completeness, merchantability or fitness for any particular purpose.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of March 1, 1999 (except as noted in the
footnotes) certain information with respect to the beneficial ownership of the
Company's Common Stock by (i) each director of the Company, (ii) each of the
Named Executive Officers and (iii) all directors and executive officers as a
group. There are no persons known by the Company to own beneficially more than
5% of the outstanding shares of Common Stock. Except as indicated in the
footnotes to this table, the persons and entities named in the table have sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where applicable.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED(1)
-----------------------
PERCENTAGE
NAME OF BENEFICIAL OWNER(2) NUMBER OWNERSHIP
- ----------------------------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
Douglas Murphy-Chutorian, M.D.(3)........................................................ 4,937,309 28.0%
c/o Eclipse Surgical Technologies, Inc.
1049 Kiel Court, Sunnyvale, CA 94089
Tawfeek Shaheen.......................................................................... 1,090,689 6.2%
Box 316, Sonoma, CA 95476
Richard L. Mueller(4).................................................................... 778,614 4.2%
Iain M. Watson(5)........................................................................ 204,132 1.2%
Stuart D. Harman(6)...................................................................... 105,814 *
Robert L. Mortensen(7)................................................................... 80,196 *
Linda Fenney(8).......................................................................... 79,324 *
Alan L. Kaganov, Sc.D(9)................................................................. 53,199 *
William E. Picht(10)..................................................................... 68,391 *
Janet K. Castaneda(11)................................................................... 37,993 *
Vurnetha R. Bitoy(12).................................................................... 35,851 *
Jeffrey Green............................................................................ 116 *
Kenneth Bennert.......................................................................... -- *
All directors and officers as a group
(12 persons)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)...................................... 6,380,939 33.7%
</TABLE>
- ------------------------
* Less than 1%.
(1) Percentage ownership is based on 17,630,675 shares of Common Stock
outstanding as of March 1, 1999.
(2) Except as otherwise indicated in the footnotes to this table and pursuant
to applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
42
<PAGE>
(3) Includes an aggregate of 3,581,724 shares of Common Stock held by Leslie
Murphy-Chutorian, the wife of Dr. Murphy-Chutorian, and by Mrs.
Murphy-Chutorian as Trustee of the Murphy-Chutorian Family Trust UDT dated
1-13-97. Also includes 23,612 shares subject to stock options held by Dr.
Murphy-Chutorian that are exercisable within 60 days of March 1, 1999.
(4) Includes 773,614 shares subject to stock options held by Mr. Mueller that
are exercisable within 60 days of March 1, 1999.
(5) Includes 80,196 shares subject to stock options held by Mr. Watson that are
exercisable within 60 days of March 1, 1999.
(6) Includes 105,000 shares subject to stock options held by Mr. Harman that
are exercisable within 60 days of March 1, 1999.
(7) Includes 80,196 shares subject to stock options held by Mr. Mortensen that
are exercisable within 60 days of March 1, 1999.
(8) Includes 78,387 shares subject to stock options held by Ms. Fenney that are
exercisable within 60 days of March 1, 1999.
(9) Includes 53,199 shares subject to stock options held by Mr. Kaganov that
are exercisable within 60 days of March 1, 1999.
(10) Includes 67,499 shares subject to stock options held by Ms. Picht that are
exercisable within 60 days of March 1, 1999.
(11) Includes 36,667 shares subject to stock options held by Ms. Castaneda that
are exercisable within 60 days of March 1, 1999.
(12) Includes 34,724 shares subject to stock options held by Ms. Bitoy that are
exercisable within 60 days of March 1, 1999.
(13) Includes options to purchase an aggregate of 1,333,094 shares of Common
Stock exercisable within 60 days of March 1, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There are no family or other reportable relationships or related
transactions between the directors or officers of Eclipse.
43
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) (1) FINANCIAL STATEMENTS. The financial statements required to be filed by
Item 8 herewith are as follows:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... 46
Consolidated Balance Sheets as of December 31, 1998 and 1997............................................... 47
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 1998, 1997
and 1996................................................................................................. 48
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1998, 1997 and
1996..................................................................................................... 49
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................. 50
Notes to Consolidated Financial Statements................................................................. 51
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULE. The following financial statement schedule
is filed herewith.
<TABLE>
<S> <C>
Schedule II--Valuation and Qualifying Accounts........................................ 64
Report of Independent Accountants on Financial Statement Schedule..................... 65
</TABLE>
(3) EXHIBITS.
The exhibits listed under Item 14(c) are filed or incorporated by reference
herein.
(b) REPORTS ON FORM 8-K. The following reports on form 8-K are filed herewith.
During the period covered by this report, the Company filed the following
Current Reports on Form 8-K:
(1) Form 8-K dated October 21, 1998 and filed with the Commission on October
21, 1998 reporting information under item 5, with respect to the
execution of the Agreement and Plan of Reorganization dated as of October
21, 1998 among the Company, RW Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of the Company, and CardioGenesis
Corporation, a Delaware corporation.
(2) Form 8-K dated December 12, 1998 and filed with the Commission on
December 12, 1998 reporting information under item 5, with respect to the
Company's entering agreements pursuant to which it contributed certain
licenses, patents, and other intellectual property and the MicroHeart
name to MicroHeart Holdings, Inc., a Delaware company previously formed
by U.S. Ventures and Venrock Associates.
44
<PAGE>
(c) EXHIBITS.
The exhibits below are filed or incorporated herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
2.1(2) Agreement and Plan of Reorganization among the Company, CardioGenesis Corporation and RW Acquisition
Corporation dated October 21, 1998.
3.1(2) Certificate of Amendment and Restated Articles of Incorporation of Registrant.
3.2(2) Amended and Restated Bylaws of Registrant.
4.1(2) Form of Warrant issued in July 1993.
4.3(2) Form of Warrant issued in February 1994.
4.6(2) Form of Warrant issued in March 1996.
10.1(2) Form of Director and Officer Indemnification Agreement.
10.2(2) Stock Option Plan.
10.3(2) Director Stock Option Plan.
10.4(2) 1996 Employee Stock Purchase Plan.
10.5(2) Facilities Lease for 1049 Kiel Court, Sunnyvale, California.
10.6(2) Facilities Lease for 1139 Karlstad Drive, Sunnyvale, California.
10.7(2) 401(k) Plan.
23(1) Consent of PricewaterhouseCoopers LLP.
</TABLE>
- ------------------------
(1) Incorporated herein by reference to Appendix 1 to the Company's
Registration Statement on S-4 filed with the Securities and Exchange
Commission on February 9, 1999 (File No. 333-72063).
(2) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (File No. 333-03770), as amended, filed on April 18, 1996).
45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Eclipse Surgical Technologies, Inc.;
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive loss, of shareholders'
equity (deficit) and of cash flows present fairly in all material respects, the
financial position of Eclipse Surgical Technologies, Inc. and its subsidiaries
(the "Company") at December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 29, 1999, except Note 14 which is dated March 17, 1999.
46
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 683 $ 16,997
Marketable securities................................................................... 130 18,197
Accounts receivable, net of allowance for doubtful accounts of $1,323 and $757 at
December 31, 1998 and 1997, respectively.............................................. 7,077 2,054
Inventories............................................................................. 6,362 3,866
Prepaids and other current assets....................................................... 651 556
---------- ----------
Total current assets.................................................................. 14,903 41,670
Property and equipment, net............................................................... 1,331 1,420
Long-term marketable securities........................................................... 7,526 --
Accounts receivable over one year, net of allowance for doubtful accounts of $970 and
$708, at December 31, 1998 and 1997, respectively....................................... 2,083 384
Other assets.............................................................................. 400 --
---------- ----------
Total assets.......................................................................... $ 26,243 $ 43,474
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 998 $ 740
Accrued liabilities..................................................................... 4,295 3,415
Customer deposits....................................................................... 256 71
Deferred revenue........................................................................ 830 --
Note payable............................................................................ -- 1,000
Current portion of long-term debt....................................................... 23 10
---------- ----------
Total current liabilities............................................................. 6,402 5,236
Long-term debt, less current portion...................................................... 114 10
---------- ----------
Total liabilities..................................................................... 6,516 5,246
---------- ----------
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred stock: no par value; 5,000 shares authorized; none issued and outstanding;.... -- --
Common stock: no par value; 50,000 shares authorized; 17,615 and 16,858 shares issued
and outstanding at December 31, 1998 and 1997, respectively........................... 68,943 66,596
Deferred compensation................................................................... (438) --
Accumulated other comprehensive income (loss)........................................... (6) 50
Accumulated deficit..................................................................... (48,772) (28,418)
---------- ----------
Total shareholders' equity............................................................ 19,727 38,228
---------- ----------
Total liabilities and shareholders' equity............................................ $ 26,243 $ 43,474
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
47
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Net revenues................................................................... $ 12,002 $ 5,499 $ 9,759
Cost of revenues............................................................... 4,735 2,779 3,558
---------- ---------- ---------
Gross profit................................................................. 7,267 2,720 6,201
---------- ---------- ---------
Operating expenses:
Research and development..................................................... 14,175 12,007 6,183
Sales and marketing.......................................................... 11,417 7,345 3,327
General and administrative................................................... 3,619 4,036 2,403
---------- ---------- ---------
Total operating expenses................................................... 29,211 23,388 11,913
---------- ---------- ---------
Operating loss........................................................... (21,944) (20,668) (5,712)
Interest expense............................................................... (83) (25) (196)
Interest and other income...................................................... 1,673 2,446 1,752
---------- ---------- ---------
Net loss................................................................. (20,354) (18,247) (4,156)
---------- ---------- ---------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period................ (6) 48 498
Less: reclassification adjustment for gains included in net income..... (50) (496) --
---------- ---------- ---------
Other comprehensive income (loss).................................... (56) (448) 498
---------- ---------- ---------
Comprehensive loss................................................. $ (20,410) $ (18,695) $ (3,658)
---------- ---------- ---------
---------- ---------- ---------
Net loss per share:
Basic........................................................................ $ (1.18) $ (1.11) $ (0.30)
---------- ---------- ---------
---------- ---------- ---------
Diluted...................................................................... $ (1.18) $ (1.11) $ (0.30)
---------- ---------- ---------
---------- ---------- ---------
Weighted average shares outstanding.......................................... 17,227 16,404 14,078
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
48
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE ACCUMULATED OTHER
------------------------ FOR COMMON DEFERRED COMPREHENSIVE ACCUMULATED
SHARES AMOUNT STOCK COMPENSATION INCOME (LOSS) DEFICIT
----------- ----------- ----------- --------------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996........ 11,210 $ 4,690 $ (104) $ -- $ -- $ (6,015)
Issuance of common stock in
connection with initial
public offering.............. 4,000 57,956 -- -- -- --
Issuance of common stock....... 962 2,691 -- -- -- --
Payments on notes
receivable................... 104 -- -- --
Issuance of warrants........... -- 2 -- -- -- --
Unrealized gain on marketable
securities................... -- -- -- -- 498 --
Net loss....................... -- -- -- -- -- (4,156)
----------- ----------- ----------- ----- ----- ------------
Balances, December 31, 1996...... 16,172 65,339 -- -- 498 (10,171)
Issuance of common stock....... 552 956 -- -- -- --
Issuance of common stock
pursuant to exercise of
warrants..................... 134 301 -- -- -- --
Net realized gain on marketable
securities................... -- -- -- -- (448) --
Net loss....................... -- -- -- -- -- (18,247)
----------- ----------- ----------- ----- ----- ------------
Balances, December 31, 1997...... 16,858 66,596 -- -- 50 (28,418)
Issuance of common stock....... 452 1,184 -- -- -- --
Issuance of common stock
pursuant to exercise of
warrants..................... 305 725 -- -- -- --
Deferred stock compensation.... -- 438 -- (438) -- --
Net realized gain on marketable
securities................... -- -- -- -- (56)
Net loss....................... -- -- -- -- -- (20,354)
----------- ----------- ----------- ----- ----- ------------
Balances, December 31, 1998...... 17,615 $ 68,943 $ -- $ (438) $ (6) $ (48,772)
----------- ----------- ----------- ----- ----- ------------
----------- ----------- ----------- ----- ----- ------------
<CAPTION>
TOTAL
---------
<S> <C>
Balances, January 1, 1996........ $ (1,429)
Issuance of common stock in
connection with initial
public offering.............. 57,956
Issuance of common stock....... 2,691
Payments on notes
receivable................... 104
Issuance of warrants........... 2
Unrealized gain on marketable
securities................... 498
Net loss....................... (4,156)
---------
Balances, December 31, 1996...... 55,666
Issuance of common stock....... 956
Issuance of common stock
pursuant to exercise of
warrants..................... 301
Net realized gain on marketable
securities................... (448)
Net loss....................... (18,247)
---------
Balances, December 31, 1997...... 38,228
Issuance of common stock....... 1,184
Issuance of common stock
pursuant to exercise of
warrants..................... 725
Deferred stock compensation.... --
Net realized gain on marketable
securities................... (56)
Net loss....................... (20,354)
---------
Balances, December 31, 1998...... $ 19,727
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements
49
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................................ $ (20,354) $ (18,247) $ (4,156)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 590 724 200
Gain from investment in MicroHeart Holdings, Inc.............................. (400) -- --
Provision for doubtful accounts............................................... 828 477 378
Changes in operating assets and liabilities:
Accounts receivable......................................................... (5,589) (48) (2,329)
Inventories................................................................. (2,496) (1,402) (794)
Prepaids and other current assets........................................... (95) (125) (417)
Other assets................................................................ (1,961) (25) (337)
Accounts payable............................................................ 258 59 (297)
Accrued liabilities......................................................... 880 1,145 1,484
Customer deposits........................................................... 185 43 (242)
Deferred revenue............................................................ 830 -- --
--------- --------- ---------
Net cash used in operating activities..................................... (27,324) (17,399) (6,510)
--------- --------- ---------
Cash flows from investing activities:
Purchase of marketable securities............................................... (18,590) -- (27,459)
Sale of marketable securities................................................... 29,075 9,312 --
Acquisition of property and equipment........................................... (362) (1,238) (974)
--------- --------- ---------
Net cash provided by (used in) investing activities....................... 10,123 8,074 (28,433)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants......................... 1,909 1,257 60,649
Payments on notes receivable.................................................... -- -- 104
Proceeds from note payable...................................................... -- 1,000 --
Repayment of note payable....................................................... (1,000) -- --
Repayments of short-term borrowings............................................. -- -- (45)
Repayments of long-term debt.................................................... (22) (41) (1,782)
--------- --------- ---------
Net cash provided by financing activities................................. 887 2,216 58,926
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................... (16,314) (7,109) 23,983
Cash and cash equivalents at beginning of period.................................... 16,997 24,106 123
--------- --------- ---------
Cash and cash equivalents at end of period.......................................... $ 683 $ 16,997 $ 24,106
--------- --------- ---------
--------- --------- ---------
Supplemental schedule of cash flow information:
Interest paid................................................................... $ 83 $ 25 $ 281
--------- --------- ---------
--------- --------- ---------
Taxes paid...................................................................... $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on marketable securities................................. $ (56) $ 50 $ 498
--------- --------- ---------
--------- --------- ---------
Investment in MicoHeart Holdings, Inc........................................... $ 400 $ -- $ --
--------- --------- ---------
--------- --------- ---------
Deferred compensation........................................................... $ 438 $ -- $ --
--------- --------- ---------
--------- --------- ---------
Acquisition of equipment under capital leases................................... $ 139 $ -- $ 34
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
50
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Eclipse Surgical Technologies, Inc. ("Eclipse" or the "Company") was founded
in 1989 to develop, manufacture and market surgical lasers and accessories for
the treatment of disease. Currently, Eclipse's emphasis is on the development
and manufacture of products used for transmyocardial revascularization ("TMR")
and percutaneous transluminal myocardial revascularization ("PTMR"), which are
cardiovascular procedures. Eclipse markets its products for sale primarily in
the U.S., Europe and Asia. Eclipse operates in a single segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of
Eclipse and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
All highly liquid instruments purchased with an original maturity of three
months or less are considered cash equivalents and are held primarily at one
commercial bank and one investment bank.
MARKETABLE SECURITIES:
Marketable securities are classified as available-for-sale and are carried
at fair value. Marketable securities classified as current assets have scheduled
maturities of less than one year, while marketable securities classified as
noncurrent assets have scheduled maturities of more than one year. Unrealized
holding gains or losses on such securities are reported as a separate component
of shareholders' equity. Realized gains and losses on sales of all such
securities are reported in earnings and computed using the specific
identification cost method. Marketable securities are managed by one investment
bank.
INVENTORIES:
Inventories are stated at the lower of cost (principally standard cost,
which approximates actual cost on a first-in, first-out basis) or market value.
PATENT EXPENSES:
Patent and patent related expenditures are expensed as general and
administrative expenses as incurred.
51
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and depreciated on a straight-line
basis over their estimated useful lives of three to five years. Assets acquired
under capital leases are amortized over the shorter of their estimated useful
lives or the term of the related lease (generally three to five years).
Amortization of leasehold improvements is based on the straight-line method over
the shorter of the estimated useful life or the lease term.
LONG-LIVED ASSETS:
Eclipse evaluates the recoverability of its long-lived assets in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). SFAS 121 requires recognition of the impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of certain of Eclipse's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities and customer deposits approximate fair value due to their short
maturities. Based on borrowing rates currently available to Eclipse for loans
with similar terms, the carrying value of the long-term debt obligations also
approximates fair value.
CERTAIN RISKS AND CONCENTRATIONS:
Eclipse sells its products primarily to hospitals and other healthcare
providers in North America, Europe and Asia. Eclipse performs ongoing credit
evaluations of its customers and generally does not require collateral. Although
Eclipse maintains allowances for potential credit losses that it believes to be
adequate, a payment default on a significant sale could materially and adversely
affect its operating results and financial condition. At December 31, 1998, one
customer, MicroHeart Holdings, Inc., accounted for 12% of accounts receivable.
At December 31, 1997, no customer individually accounted for 10% or more of
accounts receivable. No customer individually accounted for 10% or more of net
revenues for 1998. For the year ended December 31, 1997 two customers accounted
for a total of 35% of net revenues: Sorin accounted for 25% and St. Francis,
Roslyn accounted for 10% of the total. For the year ended December 31, 1996 one
customer, Ball Medical & Associates accounted for 11% of net revenues.
Export sales accounted for approximately 21%, 32% and 13% of net sales for
the years ended December 31, 1998, 1997 and 1996, respectively. At December 31,
1998, three customers accounted for a total of 57% of export sales: Izasa
accounted for 23%, Cardiologic GMBH accounted for 22% and Asia Scientific
accounted for 12% of the total. For the year ended December 31, 1997, two
customers accounted for 88% of export sales: Sorin accounted for 77% and Izasa
accounted for 11% of the total. For the year ended December 31, 1996, one
customer, Sorin accounted for 88% of export sales.
Eclipse purchases certain laser and fiber-optic components and subassemblies
from single sources. Although Eclipse has identified alternative vendors, the
qualification of additional or replacement vendors for certain components or
services is a lengthy process. Any significant supply interruption could affect
Eclipse's ability to manufacture its products and would, therefore, adversely
affect operating results.
52
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION:
Eclipse typically recognizes revenue on product sales upon receipt of a
purchase order and subsequent shipment of the product. Where purchase orders
allow customers an acceptance period, revenue is recognized upon acceptance.
Revenues from service contracts, rentals, and per procedure fees are
recognized upon performance or over the terms of the contract as appropriate.
RESEARCH AND DEVELOPMENT:
Research and development expenses are charged to operations as incurred.
WARRANTIES:
Eclipse's laser products are generally warranted for one year. Eclipse
provides for estimated future costs of repair, replacement, or customer
accommodations which are reflected in the accompanying financial statements.
ADVERTISING:
Eclipse expenses all advertising as incurred. Eclipse's advertising expenses
were $73,000, $198,000 and $33,000 for 1998, 1997 and 1996, respectively.
INCOME TAXES:
Eclipse accounts for income taxes using the liability method under which
deferred tax assets or liabilities are calculated at the balance sheet date
using current tax laws and rates in effect for the year in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amounts expected to be
realized.
STOCK-BASED COMPENSATION:
Eclipse accounts for its stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Eclipse has elected to adopt the disclosure only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), which requires pro forma disclosures
in the financial statements as if the measurement provisions of SFAS 123 had
been adopted.
NET LOSS PER SHARE:
Eclipse has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," ("SFAS 128") effective December 31,
1997. SFAS 128 requires the presentation of basic and diluted earnings per share
("EPS"). Basic EPS is computed by dividing the net 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 the exercise of stock
53
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
options and warrants (using the "treasury stock" method). All prior EPS amounts
have been restated to comply with SFAS 128.
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>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Numerator--Basic and Diluted EPS
Net Loss................................................. $ (20,354) $ (18,247) $ (4,156)
---------- ---------- ---------
---------- ---------- ---------
Denominator--Basic and Diluted EPS
Weighted average shares outstanding...................... 17,227 16,404 14,078
---------- ---------- ---------
---------- ---------- ---------
Basic EPS.................................................. $ (1.18) $ (1.11) $ (0.30)
---------- ---------- ---------
---------- ---------- ---------
Diluted EPS................................................ $ (1.18) $ (1.11) $ (0.30)
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
Options to purchase 2,652,000, 2,885,000 and 2,785,000 shares of common
stock were outstanding at December 31, 1998, 1997 and 1996, respectively.
Warrants to purchase 466,123, 770,838 and 904,581 shares of common stock were
outstanding at December 31, 1998, 1997 and 1996, respectively. Both the options
and warrants were not included in the calculation of diluted EPS because their
inclusion would have been anti-dilutive.
COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." This statement established standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. Eclipse adopted the provisions of this statement in 1998.
The accumulated other comprehensive income (loss) for the years ended December
31, 1998, 1997 and 1996 relates to unrealized holding gains (losses) on
marketable securities.
SEGMENT DISCLOSURES:
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS 131"), which
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise" ("SFAS 14"). SFAS 131 changes
current practice under SFAS 14 by establishing a new framework on which to base
segment reporting and also by requiring interim reporting of segment
information. The annual reporting requirements of SFAS 131 were adopted by
Eclipse in 1998. The interim reporting requirements of SFAS 131 will not be
adopted until the first quarter of 1999.
RECLASSIFICATIONS:
Certain prior year balances have been reclassified to conform with the
current year financial statement presentation. These reclassifications had no
effect on previously reported net losses or shareholder's equity.
54
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. MARKETABLE SECURITIES:
At December 31, 1998, marketable securities consisted of U.S. government and
high grade domestic corporate securities held by an investment bank. These
marketable securities had a cost basis of approximately $7,662,000 and a fair
value of $7,656,000 and mature at various dates through 2000. These securities
are classified as available-for-sale and are readily marketable at their fair
market value.
4. INVENTORIES:
Inventories consist of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Raw materials.......................................................... $ 2,277 $ 1,446
Work in process........................................................ 805 --
Finished goods......................................................... 3,280 2,420
--------- ---------
$ 6,362 $ 3,866
--------- ---------
--------- ---------
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Computers and equipment.............................................. $ 1,225 $ 1,638
Manufacturing and demonstration equipment............................ 1,612 850
Assets in progress................................................... 75 --
Leasehold improvements............................................... 201 124
--------- ---------
3,113 2,612
--------- ---------
Less accumulated depreciation and amortization....................... (1,782) (1,192)
--------- ---------
$ 1,331 $ 1,420
--------- ---------
--------- ---------
</TABLE>
Eclipse leases certain equipment under a capital lease which expires in
December 2003. Accordingly, capitalized costs of $138,000, net of accumulated
amortization of $1,000, are included in property and equipment at December 31,
1998.
55
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ACCRUED LIABILITIES:
Accrued liabilities consists of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Accrued research support............................................... $ 1,900 $ 500
Accrued accounts payable and related expenses.......................... 574 960
Accrued witholdings on exercisable options............................. 519 490
Accrued salaries and related expenses.................................. 395 483
Accrued commissions.................................................... 355 127
Accrued consulting fees and related expenses........................... 305 500
Accrued warranty....................................................... 177 78
Accrued other.......................................................... 70 277
--------- ---------
$ 4,295 $ 3,415
--------- ---------
--------- ---------
</TABLE>
7. SHORT-TERM BORROWINGS:
In October 1997, MicroHeart, Inc., a wholly-owned subsidiary of Eclipse,
entered into a note payable with an investor at 8% interest per annum. The
principal and interest, which was due on October 31, 1998 and was repaid in
1998. Warrants to purchase 400,000 shares of MicroHeart, Inc.'s common stock at
$0.50 per share were granted to the investor in conjunction with the note
payable. The warrants are immediately exercisable and expire on October 31,
2000.
8. LONG-TERM DEBT:
Long-term debt at December 31, 1998 consists of a capital lease which bears
interest at 6.8% and expires in December 2003. Future minimum lease payments
under this capital lease are as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
<S> <C>
YEAR ENDING DECEMBER 31,
1999.............................................................................. $ 38
2000.............................................................................. 32
2001.............................................................................. 32
2002.............................................................................. 30
2003.............................................................................. 30
---------
Total minimum lease payments...................................................... 162
Less: Amount representing interest................................................ 25
---------
Present value of capital lease obligations........................................ 137
Less: Current portion............................................................. 23
---------
Long-term portion of capital lease obligations.................................... $ 114
---------
---------
</TABLE>
56
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES:
Eclipse has entered into five operating leases for office facilities with
terms extending through September 2002. The minimum future rental payments are
as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
<S> <C>
YEAR ENDING DECEMBER 31,
1999............................................................................. $ 1,045
2000............................................................................. 947
2001............................................................................. 957
2002............................................................................. 695
---------
$ 3,644
---------
---------
</TABLE>
Rent expense was approximately $622,000, $475,000 and $172,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Eclipse is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions at this time, management
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's financial position or results of operations.
10. SHAREHOLDERS' EQUITY:
WARRANTS:
At December 31, 1998, warrants were outstanding to purchase a total of
466,123 shares of common stock at exercise prices ranging from $1.67 to $2.15
per share. The warrants, which were issued prior to 1997 in connection with
various debt and equity financings, are exercisable and terminate upon the
earlier of sixteen months to five years from the effective grant date, a merger
or sale of all or substantially all of Eclipse's assets to a noncontrolling
entity, or certain other conditions. At December 31, 1998, Eclipse had reserved
466,123 shares of common stock for issuance upon exercise of these warrants.
During the years ended December 31, 1998, 1997 and 1996, 304,715, 133,743 and
267,057 warrants were exercised generating proceeds of approximately $725,000,
$301,000 and $524,000 respectively.
OPTIONS GRANTED TO CONSULTANTS: WAITING FOR ERIC
At December 31, 1998, options for consultants to purchase a total of 159,000
shares of common stock at exercise prices ranging from $1.67 to $10.75 per share
were outstanding. The exercisability and termination of this plan is the same as
Eclipse's Stock Option Plan which is described below. At December 31, 1998,
Eclipse had reserved 159,000 shares of common stock for issuance upon exercise
of these options. Eclipse recorded deferred stock compensation of $438,000 in
1998 related to these options. These options are included in the Stock Option
Plan disclosures below.
STOCK OPTION PLAN:
Eclipse maintains a Stock Option Plan, which includes the Employee Program
under which incentive and nonstatutory options may be granted to employees and
the Consultants Program, under which nonstatutory options may be granted to
consultants of the Company. As of December 31, 1998, Eclipse had reserved a
total of 4,000,000 shares of common stock for issuance under this plan. Under
the plan,
57
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY: (CONTINUED)
options may be granted at not less than fair market value (110% of fair market
value for options granted to 10% shareholders), as determined by the Board of
Directors. Options generally vest over a period of three years and expire ten
years from date of grant (five years for options granted to 10% shareholders).
No shares of common stock issued under the plan are subject to repurchase.
DIRECTORS' STOCK OPTION PLAN:
Eclipse maintains a Directors' Stock Option Plan which provides for the
grant of nonstatutory options to directors who are not officers or employees of
the Company. As of December 31, 1998, Eclipse had reserved 200,000 shares of
common stock for issuance under this plan. Under this plan, options are granted
at the trading price of the common stock at the date of grant. Options generally
vest over twelve to thirty-six months and expire ten years from date of grant.
No shares of common stock issued under the plan are subject to repurchase.
EMPLOYEE STOCK PURCHASE PLAN:
Eclipse maintains an Employee Stock Purchase Plan, under which 250,000
shares of common stock have been reserved for issuance. Eclipse adopted the the
Employee Stock Purchase Plan in April 1996. Eligible employees are permitted to
purchase common stock at 85% of the fair market value through payroll deductions
of up to 15% of an employee's compensation, subject to certain limitations. At
December 31, 1998, 123,062 shares had been issued under this plan.
STOCK-BASED COMPENSATION:
The Company has adopted the disclosure only provision of SFAS 123. Eclipse,
however, continues to apply APB 25 and related interpretations in accounting for
its plans. Had compensation cost for the Stock Option Plan, the Director's Stock
Option Plan and the Employee Stock Purchase Plan been determined based on the
fair value of the options at the grant date for awards in 1998, 1997 and 1996
consistent with the provisions of SFAS 123, Eclipse's net loss and net loss per
share would have increased to the pro forma amounts indicated below (IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Net loss as reported........................................ $ (20,354) $ (18,247) $ (4,156)
Pro forma net loss.......................................... $ (22,731) $ (20,951) $ (5,794)
Basic and diluted net loss per share as reported............ $ (1.18) $ (1.11) $ (0.30)
Pro forma basic and diluted net loss per share.............. $ (1.32) $ (1.28) $ (0.41)
</TABLE>
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of the pro forma effects of
option grants on reported results for future years.
58
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY: (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1998, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Exercise price............................................. $4.36 $4.04 $2.79
Expected life of option.................................... 7 years 8 years 9 years
Risk-free interest rate.................................... 4.86% 5.85% 6.36%
Expected volatility........................................ 97% 36% 45%
</TABLE>
Option activity under the Stock Option Plan and the Directors Stock Option
Plan is as follows (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES ------------------------------
AVAILABLE NUMBER OF WEIGHTED AVERAGE
FOR GRANT SHARES PRICE PER SHARE
----------- ----------- -----------------
<S> <C> <C> <C>
Balance, January 1, 1996................................................... 902 2,540 $ 1.38
Additional shares reserved............................................... 750 -- --
Options granted.......................................................... (515) 515 $ 8.96
Options canceled......................................................... 56 (56) $ 3.74
Options exercised........................................................ -- (214) $ 0.91
----- ----- -----
Balance, December 31, 1996................................................. 1,193 2,785 $ 2.77
Options granted.......................................................... (775) 775 $ 7.52
Options canceled......................................................... 174 (174) $ 6.70
Options exercised........................................................ -- (501) $ 1.21
----- ----- -----
Balance, December 31, 1997................................................. 592 2,885 $ 4.04
Options granted (Price = Fair Value)..................................... (467) 467 $ 7.44
Options granted (Price > Fair Value)..................................... (110) 110 $ 8.50
Options granted (Price < Fair Value)..................................... (23) 23 $ 5.12
Options canceled......................................................... 445 (445) $ 8.68
Options exercised........................................................ -- (388) $ 1.93
----- ----- -----
Balance, December 31, 1998................................................. 437 2,652 $ 4.36
----- ----- -----
----- ----- -----
</TABLE>
At December 31, 1998, 1997 and 1996, options to purchase 2,066,514,
1,720,531 and 1,517,045 shares of common stock, respectively were exercisable at
weighted average fair values of $3.52, $2.74, and $1.38, respectively.
59
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY: (CONTINUED)
The following table summarizes information about the Company's stock options
outstanding and exercisable under the Stock Option Plan and the Director's Stock
Option Plan at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------
WEIGHTED AVERAGE
NUMBER OF REMAINING WEIGHTED
SHARES CONTRACTUAL LIFE AVERAGE
EXERCISE PRICE OUTSTANDING (IN YEARS) EXERCISE PRICE
- ---------------------------------- -------------- ---------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
$0.03 - $1.44..................... 295 3.57 $ 0.77
$1.67 - $1.67..................... 1,120 6.90 $ 1.67
$4.17 - $6.50..................... 266 8.43 $ 5.69
$6.63 - $6.94..................... 329 8.61 $ 6.85
$7.00 - $8.50..................... 374 8.32 $ 7.90
$8.63 - $16.00.................... 268 7.56 $10.23
-----
2,652
-----
-----
<CAPTION>
OPTIONS EXERCISABLE
-------------------------------
WEIGHTED
NUMBER AVERAGE
EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------------------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C>
$0.03 - $1.44..................... 295 $ 0.77
$1.67 - $1.67..................... 1,120 $ 1.67
$4.17 - $6.50..................... 127 $ 5.42
$6.63 - $6.94..................... 98 $ 6.80
$7.00 - $8.50..................... 263 $ 8.01
$8.63 - $16.00.................... 164 $10.48
-----
2,067
-----
-----
</TABLE>
11. EMPLOYEE RETIREMENT PLAN:
Eclipse maintains a 401(k) plan for its employees. The plan allows eligible
employees to defer up to 15% of their earnings, not to exceed the statutory
amount per year on a pretax basis through contributions to the plan. The plan
provides for employer contributions at the discretion of the Board of Directors,
however, no such contributions were made in 1998, 1997 or 1996.
12. INTEREST AND OTHER INCOME:
Interest and other income consists of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest and other income........................................ $ 1,223 $ 1,950 $ 1,752
Gain on investment in MicroHeart Holdings, Inc................... 400 -- --
Gain on sale of marketable securities............................ 50 496 --
--------- --------- ---------
$ 1,673 $ 2,446 $ 1,752
--------- --------- ---------
--------- --------- ---------
</TABLE>
In November 1998, the Company contributed certain licenses, patents, and
other intellectual property and the MicroHeart name to MicroHeart Holdings, Inc.
("MHH") in exchange for MHH common stock, representing less than 1% of MHH's
outstanding common stock, and two warrants to acquire MHH common stock for an
aggregate exercise price of approximately $290,000. In addition, the Company has
agreed to perform research and development related to the contributed technology
over the next 6 months, for which the Company will be paid $1,120,000 by MHH.
Eclipse has recorded a $400,000 investment and related gain on the contributed
technology and revenue of $290,000 related to research and development performed
on the contributed technology in the year ended December 31, 1998.
60
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES:
The components of the net deferred tax asset are as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net operating losses.................................................. $ 16,285 $ 10,212
Research and development and other credits............................ 2,400 1,308
Reserves.............................................................. 946 959
Accrued liabilities................................................... 104 293
Other................................................................. 1,566 829
---------- ----------
Net deferred tax asset............................................ 21,301 13,601
Less valuation allowance.............................................. (21,301) (13,601)
---------- ----------
$ -- $ --
---------- ----------
---------- ----------
</TABLE>
Eclipse has established a valuation allowance to the extent of its deferred
tax asset as management believes that it is not certain that a benefit can be
realized in the future due to Eclipse's history of recurring operating losses.
The change in the valuation allowance was $7,700,000, $9,536,000 and
$1,998,000 in 1998, 1997, and 1996, respectively.
The noncurrent portion of the deferred tax assets, which totaled $19,783,000
and $12,521,000 at December 31, 1998 and 1997, respectively, is included above.
At December 31, 1998, Eclipse had federal and state net operating loss
carryforwards of approximately $45,520,000 and $13,854,000, respectively,
available to offset future regular and alternative minimum taxable income. In
addition, Eclipse had federal and state credit carryforwards of approximately
$1,375,000 and $1,025,000 available to offset future tax liabilities. Eclipse's
net operating loss carryforwards, as well as credit carryforwards, expire in
1999 through 2018, if not utilized.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. Eclipse believes that the sale of common stock in its
initial public offering resulted in an ownership change which could restrict the
utilization of the carryforwards.
14. SUBSEQUENT EVENT:
On March 17, 1999, Eclipse's shareholders approved a business combination
with CardioGenesis Corporation ("CardioGenesis"). Under the terms of the merger
agreement, each share of CardioGenesis common stock has been converted into 0.8
of a share of Eclipse common stock, and Eclipse assumed all outstanding
CardioGenesis stock options. The transaction will be accounted for as a pooling
of interests. The Boards of Directors of Eclipse and CardioGenesis have approved
the definitive agreement, but the combination is subject to approval by
shareholders of each company and to certain other customary conditions to
closing. The parties anticipate the transaction will close in March 1999.
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
61
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENT: (CONTINUED)
products to perform intraoperative transmyocardial revascularization ("ITMR"),
catheter-based percutaneous myocardial revascularization ("PMR"), and
thorascopic transmyocardial revascularization ("ITMR") to treat patients
afflicted with debilitating angina.
Eclipse and CardioGenesis estimate that in total they will incur transaction
and integration costs of approximately $5.0 million associated with the merger,
which will be charged to their operations when incurred, principally in the
first half of 1999. These transaction costs primarily include financial advisory
and legal fees and costs associated with combining the operations of the two
companies.
The following unaudited pro forma condensed data summarizes the combined
operating results of the Company and CardioGenesis as if the merger had occurred
at the beginning of the periods presented:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues.............................................. $ 15,080 $ 13,058 $ 13,718
Net loss.................................................. $ (47,767) $ (36,218) $ (12,956)
Loss per common share..................................... $ (1.77) $ (1.39) $ (0.65)
</TABLE>
The unaudited pro forma earnings per common share are based on the sum of
historical average common shares outstanding, as reported by Eclipse, and the
historical average common shares outstanding for CardioGenesis (adjusted for the
exchange ratio).
62
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
<TABLE>
<S> <C> <C>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
Registrant
Date: March 17, 1999 By: /s/ DOUGLAS MURPHY-CHUTORIAN, M.D.
-----------------------------------------
Douglas Murphy-Chutorian, M.D.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ DOUGLAS MURPHY-CHUTORIAN, Chairman and Chief
M.D. Executive Officer
- ------------------------------ (Principal Executive March 17, 1999
Douglas Murphy-Chutorian, M.D. Officer)
/s/ RICHARD L. MUELLER, JR.
- ------------------------------ President, Chief Operating March 17, 1999
Richard L. Mueller, Jr. Officer and Director
/s/ KENNETH E. BENNERT Chief Financial Officer
- ------------------------------ (Principal Accounting March 17, 1999
Kenneth E. Bennert and Financial Officer)
/s/ IAIN M. WATSON
- ------------------------------ Director March 17, 1999
Iain M. Watson
/s/ ROBERT L. MORTENSEN
- ------------------------------ Director March 17, 1999
Robert L. Mortensen
/s/ ALAN L. KAGANOV, SC. D.
- ------------------------------ Director March 17, 1999
Alan L. Kaganov, Sc. D.
</TABLE>
63
<PAGE>
SCHEDULE II
ECLIPSE SURGICAL TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
OF PERIOD ADDITIONS(1) DEDUCTIONS(2) PERIOD
----------- ------------- ----------------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts............................. $ 29 $ 378 $ 7 $ 400
Year ended December 31, 1997
Allowance for doubtful accounts............................. $ 400 $ 1,065 $ -- $ 1,465
Year ended December 31, 1998
Allowance for doubtful accounts............................. $ 1,465 $ 828 $ -- $ 2,293
</TABLE>
- ------------------------
(1) Charged to costs and expenses.
(2) Accounts written off against the reserve.
64
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the consolidated financial statements of
Eclipse Surgical Technologies, Inc. as of December 31, 1998 and 1997, and for
each of the three years in the period ended December 31, 1998, which financial
statements are included in this Form 10-K, we have also audited the financial
statement schedule listed in Item 14(a)(2) herein. In our opinion, this
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 29, 1999, except Note 14 which is dated March 17, 1999.
65
<PAGE>
SUBLEASE
THIS SUBLEASE (this "Sublease") is dated for reference purposes as of
November 5 1998, and is made by and between GENUS, INC., a California
corporation ("Sublessor"), and ECLIPSE SURGICAL TECHNOLOGIES, INC., a California
corporation ("Sublessee"). Sublessor and Sublessee hereby agree as follows:
1. RECITALS: This Sublease is made with reference to the fact that The
John A. & Susan R. Sobrato 1979 Revocable Trust, as landlord ("Master Lessor"),
and Sublessor, as tenant, entered into that certain Lease Agreement dated as of
April 7, 1991, with respect to those certain premises consisting of
approximately 100,517 rentable square feet of space (the "Premises") in that
certain building (the "Building") located at 1139 Karlstad Drive, Sunnyvale,
California. A copy of the Master Lease is attached hereto as EXHIBIT A.
Capitalized terms used and not defined herein shall have the meaning ascribed to
them in the Master Lease.
2. SUBLEASED PREMISES: Subject to the terms and conditions of this
Sublease, Sublessor hereby subleases to Sublessee, and Sublessee hereby
subleases from Sublessor, a portion of the Premises deemed to be approximately
27,400 rentable square feet of space as more particularly described on EXHIBIT B
attached hereto and incorporated herein by reference (hereinafter, the
"Subleased Premises"). The Subleased Premises shall also include access to (via
the common corridor and through a secured door), and non-exclusive use of the
front lobby entrance, common restroom facilities and common cafeteria
facilities.
3. TERM:
A. TERM: The term (the "Term") of this Sublease shall commence on
the later of November 1, 1998 or the date by which all of the following have
occurred: (i) Sublessor substantially completes Sublessor Improvements in
accordance with Paragraph 25 of this Sublease, (ii) Sublessor obtains Master
Lessor's consent to this Sublease and (iii) Sublessor delivers the Subleased
Premises to Sublessee (the "Commencement Date"), and shall expire on September
30, 2002 (the "Expiration Date") unless this Sublease is sooner terminated
pursuant to its terms or the Master Lease is sooner terminated pursuant to its
terms.
B. OPTION TO EXTEND: Sublessee shall have no option to extend the
Term or expand the Premises, whatsoever.
4. RENT:
A. FIXED RENT: Commencing on the Commencement Date and continuing
each month throughout the term of this Sublease (as the same may be extended),
Sublessee shall pay to Sublessor as fixed rent for the Subleased Premises equal
monthly installments of Fifty-Two Thousand Sixty Dollars ($52,060) ("Fixed
Rent"). Fixed Rent and Additional Rent, as defined in Paragraph 4.B below,
(collectively, hereinafter "Rent") shall be paid in advance on or before the
first (1st) day of each month. Rent for any period during the Term hereof which
is for less than one (1) month of the Term shall be a pro rata portion of the
monthly installment based on a thirty (30) day month. Rent shall be payable
without notice or demand and without any deduction, offset, or abatement, in
lawful money of the United States of America. Rent shall be paid directly to
Sublessor at the Premises, Attention: Chief Financial Officer, or such other
address as may be designated in writing by Sublessor.
B. ADDITIONAL RENT: Additional rent shall consist of all monies
other than Fixed Rent required to be paid by Sublessee under this Sublease;
provided, however, Fixed Rent already includes and Sublessee shall have no
further obligation to pay for "Landlord's Insurance" (as defined in Section 12.B
of the Master Lease), utilities (except excess use as set forth in Paragraph 8
of this Sublease), "Capital Improvements" (as defined in Section 11.C of the
Master Lease), taxes (except as specifically set forth in this Sublease) or
"Tenant Maintenance" (as defined in Section 11.A of the Master Lease).
Sublessee, shall, however, be liable for, and Additional Rent shall include, all
taxes levied against Sublessee's personal property and trade or business
fixtures.
C. PREPAYMENT OF RENT: Upon execution hereof by Sublessee,
Sublessee shall pay to Sublessor the sum of Fifty-Two Thousand Sixty Dollars
($52,060), which shall constitute Fixed Rent for the first (1st) month of the
Term.
<PAGE>
5. SECURITY DEPOSIT: Upon execution hereof, Sublessee shall deposit with
Sublessor the sum of Fifty-Two Thousand Sixty Dollars ($52,060)(the "Security
Deposit"), in cash, as security for the performance by Sublessee of the terms
and conditions of this Sublease. If Sublessee fails to pay Rent or other
charges due under this Sublease or otherwise defaults with respect to any
provision of this Sublease, then Sublessor may draw upon, use, apply or retain
all or any portion of the Security Deposit for the payment of any Rent or other
charge in default, for the payment of any other sum which Sublessor has become
obligated to pay by reason of Sublessee's default, or to compensate Sublessor
for any loss or damage which Sublessor has suffered thereby. If Sublessor so
uses or applies all or any portion of the Security Deposit, then Sublessee,
within ten (10) days after demand by Sublessor therefor, shall deposit cash with
Sublessor in the amount required to restore the Security Deposit to the full
amount stated above. Sublessor may commingle the Security Deposit with its own
funds and Sublessee shall not be entitled to interest on the Security Deposit.
Upon the expiration of this Sublease and Sublessee's vacation of the Subleased
Premises, provided Sublessee is not in default under the terms of this Sublease,
Sublessor shall return to Sublessee so much of the Security Deposit as has not
been applied by Sublessor pursuant to this Paragraph, or which is not otherwise
required to cure Sublessee's defaults.
6. ADDITIONAL SERVICES: At no extra charge to Sublessee, Sublessor shall
make available for Sublessee's use during the Term the cubicles (the "Cubicles")
and the phone wiring / data cabling (the "Wiring") currently existing in the
Subleased Premises. The cost to use the foregoing during the Term is already
included in Fixed Rent. Sublessor makes no representations, express or implied,
whatsoever, with respect to the Cubicles and the Wiring including, without
limitation, their suitability for Sublessee's intended use. Sublessee accepts
the same in their "AS IS" condition and may use the same at Sublessee's sole
risk, and Sublessor shall not be liable for any costs claims, liabilities,
damages or injury arising in connection with Sublessee's use of the same.
Sublessee shall be responsible for the cost of additional telephone lines or
additional data cabling required by Sublessee.
7. HOLDOVER: Sublessee shall indemnify, defend and hold harmless
Sublessor from and against all losses, costs, claims, liabilities and damages
resulting from Sublessee's failure to surrender the Subleased Premises on the
Expiration Date in the condition required under the terms of this Sublease
(including, without limitation, any liability or damages sustained by Sublessor
as a result of a holdover of the Premises by Sublessor occasioned by the
holdover of the Subleased Premises by Sublessee). In addition, Sublessee shall
pay Sublessor holdover rent equal to on hundred fifty percent (150%) of Fixed
Rent plus any Additional Rent payable hereunder for any period from the
Expiration Date through the date Sublessee surrenders the Premises in the
condition required hereunder.
8. EXCESS UTILITIES: Should Tenant require air conditioning in excess of
the normal capacity (as opposed to maximum capacity) of the current air
conditioning system in the Premises, Sublessor reserves the right to reasonably
charge Sublessee for such excess use as additional rent. In addition, Sublessee
shall pay to Sublessor the cost of electricity consumed by Sublessee in excess
of electric power consistent with normal office use for lighting and small
office machines such as desktop computers, copiers and fax machines as
determined by meter, or if not metered, as otherwise reasonably estimated by
Sublessor, plus any actual reasonable accounting expenses incurred by Sublessor
in connection with said determination. Sublessor may cause the Subleased
Premises to be separately metered. Such separate metering shall be done at
Sublessee's expense, including, without limitation, the cost of installing,
maintaining repairing and replacing such meters, if Sublessor reasonably
determines that Sublessee is consuming electricity in excess of electric power
consistent with such normal office use.
9. REPAIRS AND MAINTENANCE: The parties acknowledge and agree that
Sublessee is subleasing the Subleased Premises on an "AS IS" basis, and that
Sublessor has made no representations or warranties, express or implied,
whatsoever, with respect to the Subleased Premises, including, without
limitation, any representation or warranty as to the suitability of the
Subleased Premises for Sublessee's intended use. Sublessor shall have no
obligation whatsoever to make or pay the cost of any alterations or improvements
to the Subleased Premises (except as specifically set forth in Paragraph 25 of
this Sublease), including, without limitation, any improvement required to
comply with any law, regulation, building code or ordinance (including the
Americans with Disabilities Act of 1990, as may be amended). Sublessee shall,
at its sole cost and expense, keep and maintain in good condition, repair and
replace, the Subleased Premises and every part thereof (including, without
limitation, the Cubicles, the Wiring and improvements constructed by or for the
benefit of Sublessee) provided, however, that Sublessee shall not be required to
perform or to pay for any repair, maintenance or improvements, except to the
extent of the negligence or willful misconduct of Sublessee or its
<PAGE>
agents, contractors or invitees, (a) to the structural portions of the
Subleased Premises, (b) to the heating, ventilating, air conditioning,
electrical, water, sewer, and plumbing systems serving the Subleased Premises
and the Building, and (c) to any portion of the Building outside of the
Subleased Premises. Sublessor shall have no obligation to perform any
repairs or any other obligation of Master Lessor required to be performed by
Master Lessor under the terms of the Master Lease (including, without
limitation, Master Lessor's obligations under Articles 11, 17, 18, 27 and 29
of the Master Lease and Master Lessor's obligation to comply with laws) and
Sublessee shall look solely to Master Lessor for performance of said
obligations. Sublessor shall, however, request performance of the same in
writing from Master Lessor promptly after being requested to do so by
Sublessee, and shall use Sublessor's reasonable efforts (not including the
payment of money, the incurring of any liabilities, or the institution of
legal proceedings) to obtain Master Lessor's performance. Sublessee expressly
waives the provisions of Section 1932, subsection 1, and Sections 1941 and
1942 of the Civil Code of California and all rights to make repairs at the
expense of Sublessor as provided in Section 1942 of said Civil Code.
10. INDEMNITY: Except to the extent caused by the negligence or willful
misconduct of Sublessor, its agents, employees or contractors, Sublessee shall
indemnify, defend with counsel reasonably acceptable to Sublessor, protect and
hold Sublessor harmless from and against any and all claims, liabilities,
judgments, causes of action, damages, costs and expenses (including, without
limitation, reasonable attorneys' and experts' fees), caused by or arising in
connection with: (i) the use or occupancy by Sublessee or condition of the
Subleased Premises; (ii) the negligence or willful misconduct of Sublessee or
its agents, employees, contractors or invitees; or (iii) a breach of Sublessee's
obligations under this Sublease or the provisions of the Master Lease assumed by
Sublessee hereunder. Sublessee's indemnification of Sublessor shall survive
termination of this Sublease.
11. RIGHT TO CURE DEFAULTS: If Sublessee fails to pay any sum of money to
Sublessor, or fails to perform any other act on its part to be performed
hereunder, then Sublessor may, but shall not be obligated to, after passage of
any applicable notice and cure periods, make such payment or perform such act.
All such sums paid, and all reasonable costs and expenses of performing any such
act, shall be deemed Additional Rent payable by Sublessee to Sublessor upon
demand, together with interest thereon at the interest rate set forth in Section
41.D of the Master Lease (the "Interest Rate") from the date of the expenditure
until repaid.
12. ASSIGNMENT AND SUBLETTING: Sublessee may not assign this Sublease,
sublet the Subleased Premises, transfer any interest of Sublessee therein or
permit any use of the Subleased Premises by another party (collectively,
"Transfer"), without the prior written consent of Sublessor (Sublessor's consent
not to be unreasonably withheld) and Master Lessor. A consent to one Transfer
shall not be deemed to be a consent to any subsequent Transfer. Any Transfer
without such consent shall be void and, at the option of Sublessor, shall
terminate this Sublease. Sublessor's waiver or consent to any assignment or
subletting shall be ineffective unless set forth in writing, and Sublessee shall
not be relieved from any of its obligations under this Sublease unless the
consent expressly so provides. In addition to the Fixed Rent and Additional
Rent hereunder, Sublessee hereby covenants and agrees to pay to Sublessor all
rent and other consideration which it receives which is in excess of the Fixed
Rent payable hereunder within ten (10) days following receipt thereof by
sublessee. Notwithstanding the foregoing, Sublessee may, without the prior
written consent of Sublessor, but subject to the consent of Master Lessor and
subject to Section 28 of the Master Lease, to "Permitted Transferees" as defined
in Section 28.A of the Master Lease.
13. USE:
A. Subject to any restrictions and limitations on use set forth in
the Master Lease, Sublessee shall use the Subleased Premises for general office,
sales, service, manufacturing, research and development, and shipping and
receiving only, and for no other purpose whatsoever.
B. Sublessee shall not use, store, keep, handle, manufacture,
transport, release, discharge, emit or dispose of any hazardous material in, on,
under, about, to or from the Subleased Premises. Without limiting the
generality of the foregoing, Sublessee, at its sole cost, shall comply with all
laws relating to hazardous materials. Sublessee shall indemnify, defend with
counsel reasonably acceptable to Sublessor and hold Sublessor harmless from and
against all claims, actions, suits, proceedings, judgements, losses, costs,
personal injuries, damages, liabilities, deficiencies, fines, penalties,
damages, attorneys' fees, consultants' fees, investigations, detoxification,
remediations,
<PAGE>
removals, and expenses of every type and nature, to the extent caused by the
use, storage, handling, manufacture, transportation, release, discharge,
emission or disposal of hazardous materials on or about the Subleased
Premises or the Building during by Sublessee or its agents, employees,
contractors or invitees. For purposes of this Sublease, "hazardous
materials" shall mean any material or substance that is now or hereafter
prohibited or regulated by any statute, law, rule, regulation or ordinance or
that is now or hereafter designated by any governmental authority to be
radioactive, toxic, hazardous or otherwise a danger to health, reproduction
or the environment. Sublessor shall indemnify, defend with counsel reasonably
acceptable to Sublessee and hold Sublessee harmless from and against all
claims, actions, suits, proceedings, judgements, losses, costs, personal
injuries, damages, liabilities, deficiencies, fines, penalties, damages,
attorneys' fees, consultants' fees, investigations, detoxification,
remediations, removals, and expenses of every type and nature, to the extent
caused by the use, storage, handling, manufacture, transportation, release,
discharge, emission or disposal of hazardous materials on or about the
Subleased Premises or Building by Sublessor or its agents, employees,
contractors or invitees.
C. Sublessee shall not do or permit anything to be done in or about
the Subleased Premises which would (i) injure the Subleased Premises; or (ii)
vibrate, shake, overload, or impair the efficient operation of the Subleased
Premises or the sprinkler systems, heating, ventilating or air conditioning
equipment, or utilities systems located therein. Sublessee shall not store any
materials, supplies, finished or unfinished products or articles of any nature
outside of the Subleased Premises. Sublessee shall comply with all reasonable
rules and regulations promulgated from time to time by Sublessor and Master
Lessor.
14. EFFECT OF CONVEYANCE: As used in this Sublease, the term
"Sublessor" means the holder of the Tenant's interest under the Master Lease.
In the event of any assignment, transfer or termination of the Tenant's
interest under the Master Lease, which assignment, transfer or termination
may occur at any time during the Term hereof in Sublessor's sole discretion,
Sublessor shall be and hereby is entirely relieved of all covenants and
obligations of Sublessor hereunder, and it shall be deemed and construed,
without further agreement between the parties hereto, that any transferee has
assumed and shall carry out all covenants and obligations thereafter to be
performed by Sublessor hereunder. Sublessor may transfer and deliver any
security of Sublessee to the transferee of the Tenant's interest under the
Master Lease, and thereupon Sublessor shall be discharged from any further
liability with respect thereto.
15. DELIVERY AND ACCEPTANCE: If Sublessor is unable to deliver possession
of the Subleased Premises to Sublessee on or before the November 1, 1998, for
any reason whatsoever, then this Sublease shall not be void or voidable, nor
shall Sublessor be liable to Sublessee for any loss or damage, nor shall the
Expiration Date be extended; provided, however, that in such event, Rent shall
abate until Sublessor delivers possession of the Subleased Premises to
Sublessee. Sublessee may have access to the Subleased Premises prior to the
Commencement Date (but not before Sublessor obtains Master Lessor's consent to
this Sublease) for the purpose of installing cabling and other
telecommunications facilities and otherwise preparing the Subleased Premises for
occupancy ("Early Access"). Such Early Access shall be subject to all of the
terms and conditions of this Sublease except for the provisions for the payment
of Fixed Rent. Sublessee has fully inspected the Subleased Premises and is
satisfied with the condition thereof. By taking possession of the Subleased
Premises, Sublessee conclusively shall be deemed to have accepted the Subleased
Premises in its then-existing, "as-is" condition, with all faults, without any
representation or warranty whatsoever from Sublessor with respect thereto.
16. IMPROVEMENTS: Sublessee shall not make any alterations or
improvements to the Subleased Premises, except in accordance with the Master
Lease, and with the prior written consent of both Master Lessor and Sublessor.
17. RELEASE AND WAIVER OF SUBROGATION: Notwithstanding anything to the
contrary in this Sublease: Sublessor and Sublessee hereby release each other
from any damage to property or loss of any kind which is caused by or results
from any risk insured against under any property insurance policy carried by
either party which contains a waiver of subrogation by the insurer. This
release shall be in effect only so long as the applicable insurance policy
contains a clause to the effect that this release shall not affect the right of
the insured to recover under the policy. Each party shall use its best efforts
to cause each insurance policy obtained by it to provide that the insurer waives
all right of recovery against the other party and its agents and employees in
connection with any damage or injury covered by the policy, and each party shall
notify the other party if it is unable to obtain a waiver of subrogation.
Sublessor shall not be liable to
<PAGE>
Sublessee, nor shall Sublessee be entitled to terminate this Sublease or to
abate Rent for any reason, including, without limitation: (i) failure or
interruption of any utility system or service; or (ii) failure of Master
Lessor to maintain the Subleased Premises as may be required under the Master
Lease. The obligations of Sublessor shall not constitute the personal
obligations of the officers, directors, trustees, partners, joint venturers,
members, owners, stockholders or other principals or representatives of the
business entity.
18. INSURANCE: Sublessee shall obtain and keep in full force and effect,
at Sublessee's sole cost and expense, during the Term the insurance required to
be carried by the "Tenant" under the Master Lease. Sublessee shall include
Sublessor and Master Lessor as an additional insured in any policy of insurance
carried by Sublessee in connection with this Sublease.
19. DEFAULT: Sublessee shall be in material default of its obligations
under this Sublease if any of the following events occur:
A. Sublessee fails to pay any Rent when due, when such failure
continues for three (3) days after written notice from Sublessor to Sublessee
that any such sum is due; or
B. Sublessee fails to perform any term, covenant or condition of
this Sublease (except those requiring payment of Rent) and fails to cure such
breach within fifteen (15) days after delivery of a written notice specifying
the nature of the breach; provided, however, that if more than fifteen (15) days
are reasonably required to remedy the failure, then Sublessee shall not be in
default if Sublessee commences the cure within the fifteen (15) day period and
thereafter diligently completes the cure within thirty (30) days after delivery
of such written notice; or
C. Sublessee makes a general assignment of its assets for the
benefit of its creditors, including attachment of, execution on, or the
appointment of a custodian or receiver with respect to a substantial part of
Sublessee's property or any property essential to the conduct of its business;
or
D. Sublessee abandons the Subleased Premises; or
E. Sublessee commits any other act or omission which constitutes a
default under the Master Lease, which has not been cured after delivery of
written notice and passage of the applicable grace period (if any) provided in
the Master Lease as modified, if at all, by the provisions of this Sublease.
20. REMEDIES: In the event of any default by Sublessee, Sublessor shall
have all remedies provided to the "Landlord" in the Master Lease as if an event
of default had occurred thereunder and all other rights and remedies otherwise
available at law and in equity. Without limiting the generality of the
foregoing, Landlord shall have the remedy described in California Civil Code
Section 1951.4 (Sublessor may continue the Sublease in effect after Sublessee's
breach and abandonment and recover rent as it becomes due, if Sublessee has
right to sublet or assign, subject only to reasonable limitations). Sublessor
may resort to its remedies cumulatively or in the alternative.
21. SURRENDER: On or before the Expiration Date, as the same may be
extended, or any sooner termination of this Sublease, Sublessee shall remove all
of its trade fixtures, personal property and all alterations constructed by
Sublessee in the Subleased Premises which are required to be removed under the
terms of this Sublease or the Master Lease and shall surrender the Subleased
Premises (including the Cubicles and the Wiring) to Sublessor (a) in the
condition received by Sublessee and (b) free of hazardous materials used,
stored, handled, manufactured, transported, released, discharged, emitted or
disposed of by Sublessee or it agents, employees, contractors or invitees in, on
under or about the Building. Sublessee shall repair any damage to the Subleased
Premises caused by Sublessee's removal of its personal property, furnishings
and/or equipment. If the Subleased Premises are not so surrendered, then
Sublessee shall be liable to Sublessor for all costs incurred by Sublessor in
returning the Subleased Premises to the required condition, plus interest
thereon at the Interest Rate.
<PAGE>
22. SIGNAGE: Subject to the provisions of the Master Lease, Sublessee
may, at its sole cost and expense, place a sign, reasonably approved by
Sublessor, in or about the lobby entrance in a location designated by Sublessor,
and on the grass berm facing Karlstad Drive.
23. BROKER: Sublessor and Sublessee each represent to the other that they
have dealt with no real estate brokers, finders, agents or salesmen other than
BT Commercial, representing Sublessor, and Catalyst Real Estate Group,
representing Sublessee, in connection with this transaction. Each party agrees
to hold the other party harmless from and against all claims for brokerage
commissions, finder's fees or other compensation made by any other agent,
broker, salesman or finder as a consequence of said party's actions or dealings
with such agent, broker, salesman, or finder. Sublessor shall pay the brokers'
fees in connection with this transaction to BT Commercial pursuant to a separate
agreement, subject, however, to Sublessee's obligations set forth in this
paragraph.
24. NOTICES: Unless at least five (5) days' prior written notice is given
in the manner set forth in this paragraph, the address of each party for all
purposes connected with this Sublease shall be that address set forth below
their signatures at the end of this Sublease. All notices, demands or
communications in connection with this Sublease shall be properly addressed and
delivered as follows: (a) personally delivered; or (b) submitted to an
overnight courier service, charges prepaid; or (c) deposited in the mail
(certified, return-receipt requested, and postage prepaid). Notices shall be
deemed delivered upon receipt, if personally delivered, one (1) business day
after being submitted to an overnight courier service and two (2) business days
after deposit in the United States mail, if mailed as set forth above. All
notices given to Master Lessor under the Master Lease shall be considered
received only when delivered in accordance with the Master Lease.
25. SUBLESSOR IMPROVEMENTS: Sublessor shall construct a demising wall
(including a secured entrance to the Subleased Premises and one emergency exit)
and a chain link fence on the mezzanine in the warehouse area of the Subleased
Premises to separate the Subleased Premises from the rest of the Premises as
shown on Exhibit B attached hereto.
26. UNRESTRICTED ACCESS: The Facilities Maintenance Supervisor (currently
Brian Reeves) and the Director of Facilities (currently Mike Mitchell) of
Sublessor shall have unrestricted access to the Subleased Premises for the
purpose of maintaining the Premises subject, however, to Sublessee's reasonable
security measures to meet FDA mandates.
27. OTHER SUBLEASE TERMS:
A. INCORPORATION BY REFERENCE. Except as set forth below or
otherwise set forth in this Sublease, the terms and conditions of this Sublease
shall include all of the terms of the Master Lease and such terms are
incorporated into this Sublease as if fully set forth herein, except that:
(i) each reference in such incorporated sections to "Lease" shall be deemed a
reference to this "Sublease"; (ii) each reference to the "Premises" shall be
deemed a reference to the "Subleased Premises" (as defined herein); (iii) each
reference to "Landlord" and "Tenant" shall be deemed a reference to "Sublessor"
and "Sublessee", respectively, except as otherwise expressly set forth herein;
(iv) with respect to work, services, utilities, electricity, repairs (or damage
caused by Master Lessor), restoration, insurance, indemnities, reimbursements,
representations, warranties or the performance of any other obligation of Master
Lessor under the Master Lease, whether or not incorporated herein, the sole
obligation of Sublessor shall be to request the same in writing from Master
Lessor promptly after being requested to do so by Sublessee, and to use
Sublessor's reasonable efforts (not including the payment of money, the
incurring of any liabilities, or the institution of legal proceedings) to
obtain Master Lessor's performance; (v) with respect to any obligation of
Sublessee to be performed under this Sublease, wherever the Master Lease grants
to "Tenant" a specified number of days to perform its obligations under the
Master Lease, except as otherwise provided herein, Sublessee shall have three
(3) fewer days to perform the obligation, including, without limitation, curing
any defaults; (vi) with respect to any approval required to be obtained from the
"Landlord" under the Master Lease, such consent must be obtained from both
Master Lessor and Sublessor, and the approval of Sublessor may be withheld if
Master Lessor's consent is not obtained; (vii) in any case where the "Landlord"
reserves or is granted the right to manage, supervise, control, repair, alter,
regulate the use of, enter or use the Premises or any areas beneath, above or
adjacent thereto, such reservation or grant of right of entry shall be deemed to
be for the benefit of both Master Lessor
<PAGE>
and Sublessor; (viii) in any case where "Tenant" is to indemnify, release or
waive claims against "Landlord", such indemnity, release or waiver shall be
deemed to run from Sublessee to both Master Lessor and Sublessor; and (ix) in
any case where "Tenant" is to execute and deliver certain documents or
notices to "Landlord", such obligation shall be deemed to run from Sublessee
to both Master Lessor and Sublessor.
Notwithstanding the foregoing, the following provisions of the Master Lease
are not incorporated herein: Sections 1, 2, 3, 4, 5, 7, 8 (except subsection
C), 10, 11, 12 (Except subsections A and C), 13, 14, 17 (except first two
sentences), 18 (except subsection D), 19, 20, 25, 31, 36, 37, 38, 39, 40 and 41P
and Exhibits A and B.
B. ASSUMPTION OF OBLIGATIONS. This Sublease is and at all times
shall be subject and subordinate to the Master Lease and the rights of Master
Lessor thereunder. Sublessee hereby expressly assumes and agrees: (i) to comply
with all provisions of the Master Lease which are assumed by Sublessee
hereunder; and (ii) to perform all the obligations on the part of the "Tenant"
to be performed under the terms of the Master Lease during the term of this
Sublease which are assumed by Sublessee hereunder. In the event the Master
Lease is terminated for any reason, this Sublease shall terminate simultaneously
with such termination without any liability of Sublessor to Sublessee. In the
event of a conflict between the provisions of this Sublease and the Master
Lease, as between Sublessor and Sublessee, the provisions of this Sublease shall
control.
28. RIGHT TO CONTEST: If Sublessor does not have the right to contest any
matter in the Master Lease due to expiration of any time limit that may be set
forth therein or for any other reason, then notwithstanding any incorporation of
any such provision from the Master Lease in this Sublease, Sublessee shall also
not have the right to contest any such matter.
29. COVENANT OF QUIET ENJOYMENT: Sublessee peacefully shall have, hold
and enjoy the Subleased Premises, subject to the terms and conditions of this
Sublease, provided that Sublessee pays all Rent imposed hereunder and otherwise
performs all of Sublessee's covenants and agreements contained herein.
30. CONDITIONS PRECEDENT: Notwithstanding anything to the contrary in
this Sublease: this Sublease and Sublessor's and Sublessee's obligations
hereunder are conditioned upon the written consent of Master Lessor to this
Sublease. If Sublessor does not receive such consent within thirty (30) days
after execution of this Sublease by Sublessor, then Sublessor may terminate this
Sublease by giving Sublessee written notice thereof, and upon such termination,
Sublessor shall return to Sublessee its payment of the first month's Fixed Rent
paid by Sublessee pursuant to Paragraph 4 hereof and the Security Deposit.
31. CHOICE OF LAW; SEVERABILITY: This Sublease shall in all respects be
governed by and construed in accordance with the laws of the State of
California. If any term of this Sublease is held to be invalid or unenforceable
by any court of competent jurisdiction, then the remainder of this Sublease
shall remain in full force and effect to the fullest extent possible under the
law, and shall not be affected or impaired.
32. AMENDMENT: This Sublease may not be amended except by the written
agreement of all parties hereto.
33. AUTHORITY TO EXECUTE: Sublessee and Sublessor each represent and
warrant to the other that each person executing this Sublease on behalf of each
party is duly authorized to execute and deliver this Sublease on behalf of that
party.
34. NO DRAFTING PRESUMPTION: The parties acknowledge that this Sublease
has been agreed to by both the parties, that both Sublessor and Sublessee have
consulted with attorneys with respect to the terms of this Sublease and that no
presumption shall be created against Sublessor because Sublessor drafted this
Sublease. Except as otherwise specifically set forth in this Sublease, with
respect to any consent, determination or estimation of Sublessor required or
allowed in this Sublease or requested of Sublessor, Sublessor's consent,
determination or estimation shall be given or made solely by Sublessor in
Sublessor's good faith opinion, whether or not objectively reasonable. If
Sublessor fails to respond to any request for its consent within the time
period, if any, specified in this Sublease, Sublessor shall be deemed to have
disapproved such request.
<PAGE>
35. COUNTERPARTS: This Sublease may be executed in one (1) or more
counterparts each of which shall be deemed an original but all of which together
shall constitute one (1) and the same instrument. Signature copies may be
detached from the counterparts and attached to a single copy of this Sublease
physically to form one (1) document.
SUBLESSOR: SUBLESSEE:
GENUS, INC., ECLIPSE SURGICAL TECHNOLOGIES, INC.,
a California corporation a California corporation
By: By:
---------------------------- -------------------------------
Print Name: MIKE MITCHELL Print Name: RICHARD L. MUELLER, JR.
Title: DIRECTOR OF OPERATIONS Title: PRESIDENT, CHIEF OPERATING
& FACILITIES OFFICER AND DIRECTOR
Date: 11/5/1998 Date: 11/4/98
By: By:
---------------------------- ------------------------------
Print Name: KENNETH SCHWANDA Print Name: KENNETH E. BENNERT
Title: VICE PRESIDENT, FINANCE Title: CHIEF FINANCIAL OFFICER
Date: 11/10/98 Date: 11/5/98
ADDRESS: ADDRESS:
Genus, Inc. Eclipse Surgical Technologies, Inc.,
1139 Karlstad Drive 1049 Kiel Court
Sunnyvale, CA 94089 Sunnyvale, CA 94089
Attn: Chief Financial Officer Attn: Chief Financial Officer
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 333-05009 and 333-74733) of Eclipse
Surgical Technologies, Inc. of our report dated January 29, 1999, appearing
in this Annual Report on Form 10-K. We also consent to the incorporation by
reference of our report on the Financial Statement Schedules, which appears
in this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 30, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<SECURITIES> 7,656
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