<PAGE> 1
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
Commission file number 0-28288
--------------------
ECLIPSE SURGICAL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
----------------------
CALIFORNIA 77-0223740
(State of incorporation) (I.R.S. Employer
Identification Number)
1049 KIEL COURT
SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices)
(408) 548-2100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock outstanding as of the latest practicable date.
28,236,266 shares
As of April 30, 1999
================================================================================
<PAGE> 2
ECLIPSE SURGICAL TECHNOLOGIES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements:
a. Consolidated Balance Sheets
as of March 31, 1999 and December 31, 1998 ................... 1
b. Consolidated Statements of Operations & Comprehensive
Loss for the three months ended March 31, 1999 and 1998......... 2
c. Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 1998 ............. 3
d. Notes to Consolidated Financial Statements.................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 23
PART II
OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 24
Item 2(d). Changes in Securities and Use of Proceeds ......................... 24
Item 4. Submission of Matters to a Vote of Security Holders ............... 25
Item 5. Other Information ................................................. 25
Item 6. Exhibits and Reports on Form 8-K .................................. 25
Signatures......................................................... 26
</TABLE>
<PAGE> 3
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................... $ 6,829 $ 3,273
Marketable securities ................................................... 7,514 14,167
Accounts receivable, (net of allowance for doubtful accounts of $1,854 at
March 31, 1999 and $1,698 at December 31, 1998, respectively) ........ 7,892 9,140
Inventories ............................................................. 10,170 9,075
Prepaids and other current assets ....................................... 1,273 2,176
--------- ---------
Total current assets ................................................. 33,678 37,831
Property and equipment, net ................................................. 1,737 2,353
Accounts receivable over one year, (net of allowance for doubtful accounts
of $1,877 at March 31, 1999 and $970 at December 31, 1998,
respectively) ............................................................... 1,177 2,083
Long term marketable securities ............................................. 6,734 10,287
Other assets ................................................................ 2,662 424
--------- ---------
Total assets ......................................................... $ 45,988 $ 52,978
========= =========
LIABILITIES
Current liabilities:
Accounts payable ......................................................... $ 2,770 $ 1,589
Accrued liabilities ...................................................... 13,319 11,464
Customer deposits ........................................................ 162 256
Deferred revenue ......................................................... 1,183 2,145
Note payable ............................................................. 85 111
Current portion of long-term debt ........................................ 1,523 23
--------- ---------
Total current liabilities ............................................. 19,042 15,588
Long-term debt, less current portion ........................................ 1,879 114
--------- ---------
Total liabilities ..................................................... 20,921 15,702
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 27,576 shares at March 31, 1999 and 27,000
shares at December 31, 1998 .......................................... 152,204 148,947
Deferred compensation ....................................................... (1,057) (829)
Accumulated other comprehensive income (loss) ............................... (23) 49
Accumulated deficit ......................................................... (126,057) (110,891)
--------- ---------
Total shareholders' equity ........................................... 25,067 37,276
--------- ---------
Total liabilities and shareholders' equity ........................... $ 45,988 $ 52,978
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
1
<PAGE> 4
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPEHENSIVE LOSS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Net revenues ........................................................... $ 4,474 $ 2,424
Cost of revenues ....................................................... 1,905 1,426
-------- --------
Gross profit ....................................................... 2,569 998
-------- --------
Operating expenses:
Research and development ........................................... 3,970 6,938
Sales and marketing ................................................ 4,123 3,785
General and administrative ......................................... 3,057 2,449
Merger related costs ............................................... 6,893 0
-------- --------
Total operating expenses ........................................ 18,043 13,172
-------- --------
Operating loss ................................................ (15,474) (12,174)
Interest expense ....................................................... (2) (34)
Interest and other income .............................................. 310 994
-------- --------
Net loss ...................................................... (15,166) (11,214)
-------- --------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ... (67) (32)
Less: reclassification adjustment for gains included in net
income .................................................... (5) 6
-------- --------
Other comprehensive loss .............................. (72) (26)
-------- --------
Comprehensive loss ............................. $(15,238) $(11,240)
======== ========
Net loss per share:
Basic and diluted ............................................. $ (0.55) $ (0.42)
======== ========
Weighted average shares outstanding ........................... 27,576 26,587
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
2
<PAGE> 5
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................... $(15,166) $(11,214)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................. 393 488
Loss on property & equipment write off .................................... 317 --
Provision for doubtful accounts ........................................... 1,063 250
Inventory reserves ........................................................ 866 --
Changes in operating assets and liabilities:
Accounts receivable .................................................... 1,091 2,164
Inventories ............................................................ (1,961) (576)
Prepaids and other current assets....................................... 903 88
Other assets ........................................................... (2,238) (88)
Accounts payable ....................................................... 1,181 919
Accrued liabilities .................................................... 1,855 (9)
Customer deposits ...................................................... (94) 35
Deferred revenue ....................................................... (962) (150)
-------- --------
Net cash used in operating activities ............................... (12,752) (8,093)
-------- --------
Cash flows from investing activities:
Purchase of marketable securities ........................................... (12,324) (19,224)
Sale of marketable securities ............................................... 22,458 22,106
Acquisition of property and equipment ....................................... (94) (449)
-------- --------
Net cash provided by investing activities ........................... 10,040 2,433
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants ..................... 3,029 302
Proceeds from long-term debt ................................................ 3,265 (2)
Repayment of note payable ................................................... (26) --
-------- --------
Net cash provided by financing activities ........................... 6,268 300
-------- --------
Net increase (decrease) in cash and cash equivalents ............. 3,556 (5,360)
Cash and cash equivalents at beginning of period ............................... 3,273 23,044
-------- --------
Cash and cash equivalents at end of period ..................................... $ 6,829 $ 17,684
-------- --------
Supplemental schedule of cash flow information:
Interest paid ............................................................... $ -- $ 34
======== ========
Taxes paid .................................................................. $ -- $ --
======== ========
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on marketable securities ............................. $ (72) $ (26)
======== ========
Deferred compensation ....................................................... $ 228 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
3
<PAGE> 6
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Interim Financial Information (unaudited):
The interim financial statements in this report reflect all adjustments,
consisting of normal recurring adjustments, that are, in the opinion of
management, necessary for a fair presentation of the results of operations and
cash flows for the interim periods covered and of the financial condition of the
Company at the interim balance sheet dates. Results for interim periods are not
necessarily indicative of results to be expected for the full fiscal year. The
year-end balance sheet information was derived from audited financial statements
but does not include all disclosures required by generally accepted accounting
principles. These financial statements should be read in conjunction with
Eclipse's audited financial statements and notes thereto for the year ended
December 31, 1998, contained in the Company's Annual Report on Form 10-K as
filed with the U.S. Securities and Exchange Commission (SEC).
Net Loss Per Share:
Earnings per share are calculated in accordance with the provisions of
Statement of Accounting Standards No. 128, "Earnings per Share," (SFAS 128).
SFAS 128 requires the Company to report both basic earnings per share, which is
the weighted-average number of common shares outstanding, and diluted earnings
per share, which includes the weighted-average common shares outstanding and all
dilutive potential common shares outstanding. For the three months ended March
31, 1999 and March 31, 1998 dilutive potential common shares outstanding
reflects shares issuable under the Company's stock option plans.
Basic EPS is computed by dividing loss available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS is computed giving effect to all dilutive potential common shares that were
outstanding during the period.
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Numerator - Basic and Diluted EPS
Net Loss .......................... $ (15,166) $ (11,214)
Denominator - Basic and Diluted EPS
Weighted average shares outstanding 27,576 26,587
Basic EPS ............................ $ (0.55) $ (0.42)
========== ==========
Diluted EPS .......................... $ (0.55) $ (0.42)
========== ==========
</TABLE>
Options to purchase 4,028,112 and 4,583,352 shares of common stock were
outstanding at March 31, 1999 and 1998 respectively, but were not included in
the calculation of diluted EPS because their inclusion would have been
antidilutive.
4
<PAGE> 7
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies -- (Continued):
Recent Pronouncements:
In June 1998, FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") which is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Eclipse does not use derivative
instruments and is not involved in hedging activities and has no plans to do so
given Eclipse's current business operations.
2. Business Combination
On March 17, 1999, Eclipse and CardioGenesis Corporation
("CardioGenesis") announced the completion of their business combination. Under
the terms of the combination, each share of CardioGenesis Common Stock has been
converted into 0.8 of a share of Eclipse Common Stock, and Eclipse has assumed
all outstanding CardioGenesis stock options. CardioGenesis has become a
wholly-owned subsidiary of Eclipse and its shares are no longer publicly traded.
As a result of the transaction, Eclipse has increased its outstanding shares by
approximately 9.9 million shares which are issuable to the former CardioGenesis
stockholders upon proper surrender of their stock certificates. The transaction
has been structured to qualify as a tax-free reorganization and has been
accounted for as a pooling of interests, consequently, all prior period figures
have been restated as if the combined entity existed for all periods presented.
There were no inter-company transactions between the companies prior to the date
of the business combination. The fiscal year remained the same and thus, there
were no changes in retained earnings due to the business combination. Further,
there were no required adjustments needed to conform to the accounting policies
between the two companies.
CardioGenesis was a medical device company like Eclipse which developed,
manufactured, and marketed cardiac revascularization products for the treatment
of advanced cardiovascular disease and severe angina pain through TMR and PTMR.
CardioGenesis also manufactured and marketed disposable products to perform
intraoperative transmyocardial revascularization ("ITMR"), catheter-based
percutaneous myocardial revascularization ("PMR"), and thorascopic
transmyocardial revascularization ("ITMR") to treat patients afflicted with
debilitating angina. During the quarter ended March 31,1999, Eclipse recognized
merger-related costs of $6,893,000 for financial advisory and legal fees,
personnel severance, terminated relationships and other costs including
write-offs of fixed assets and inventory. A majority of the terminated employees
were located in California and worked in operations, sales, marketing, quality,
research and development and administrative functions. A total of 40 employees
were terminated. Eclipse expects the last severance payment which would be the
last merger cost to be made in November.
The following table summarizes the merger-related costs (in thousands):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------
<S> <C>
Financial advisory and legal fees ........................ $2,515
Personnel severance ...................................... 967
Terminated relationships/contracts ....................... 1,528
Other costs including fixed asset and inventory write-offs 1,883
------
Total ................................................. $6,893
======
</TABLE>
5
<PAGE> 8
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business Combination -- (Continued):
The following table summarizes the Company's merger related reserve
balances (in thousands):
<TABLE>
<S> <C>
MERGER RELATED COST $6,893
Less:
Non-cash charges .................. 1,183
Cash payments ..................... 548
------
Merger Reserve balance at March 31, 1999 $5,162
======
</TABLE>
The following information is the detail of the results of operations for
the separate companies for the three months ended March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
ECLIPSE CARDIOGENESIS
------- -------------
<S> <C> <C>
Net revenues ................................. $ 3,799 $ 675
Net loss ..................................... $(6,849) $(8,317)
Other changes in shareholders' equity ........ $ (343) $ --
</TABLE>
3. Inventories:
Inventories are stated at lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
<S> <C> <C>
Raw materials ........ $ 4,102 $ 3,679
Work in process ...... 1,046 839
Finished goods ....... 5,022 4,557
------- -------
$10,170 $ 9,075
======= =======
</TABLE>
4. Commitments:
On January 5, 1999, prior to the merger with Eclipse, CardioGenesis
entered into a Settlement and License Agreement with PLC Medical Systems, Inc.
(PLC) which grants CardioGenesis a non-exclusive worldwide license to certain
PLC patents. In return, CardioGenesis agreed to pay PLC a license fee and
minimum royalties totaling $2.5 million over an approximately forty-month
period. The present value of these payments of $2.3 million has been recorded as
a prepaid license fee in other assets, and will be amortized over the life of
the underlying patents. The corresponding liability for outstanding payments due
to PLC is reflected in the current and long term portions of long-term debt.
During the first quarter of 1999, prior to the merger, CardioGenesis
entered into an agreement to terminate a relationship with a distributor. As
part of this agreement, CardioGenesis agreed to repurchase certain inventory
and field units.
5. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains descriptions of Eclipse's expectations regarding
future trends affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Please read the section below titled "Factors That May Affect Future
Results" to review conditions which Eclipse believes could cause actual results
to
6
<PAGE> 9
differ materially from those contemplated by the forward-looking statements.
Forward-looking statements include, but are not limited to, those items
identified with a footnote 1 symbol. Eclipse undertakes no obligation to update
the information contained herein.
The following discussion should be read in conjunction with financial
statements and notes thereto included in this Quarterly Report on Form 10-Q.
OVERVIEW
Eclipse was founded in 1989. From 1989 through September 1995, Eclipse
engaged in the research, development and sale of surgical laser products
principally for procedures such as atherectomy and arthroscopy. In 1995, Eclipse
determined that there was a significant opportunity in the Transmyocardial
Revascularization ("TMR") market, and that Eclipse was well-positioned to enter
this market because of Eclipse's expertise with laser-based surgical techniques
and the treatment of cardiovascular disease. Accordingly, in late 1995, Eclipse
changed its strategic direction to enter the TMR market.
Prior to 1996, Eclipse focused almost exclusively on research and
development activities relating to surgical laser products. Since 1996, Eclipse
has focused on TMR and Percutaneous Transmyocardial Revascularization ("PTMR")
activities, particularly research and development activities and clinical
trials. At March 31, 1999, Eclipse had an accumulated deficit of $126,057,000.
On October 22, 1998, Eclipse announced the signing of a definitive
agreement that provided for a business combination with CardioGenesis. On March
17, 1999, Eclipse and CardioGenesis announced the completion of their business
combination. Under the terms of the combination, each share of CardioGenesis
Common Stock has been converted into 0.8 of a share of Eclipse Common Stock, and
Eclipse has assumed all outstanding CardioGenesis stock options. CardioGenesis
has become a wholly-owned subsidiary of Eclipse and its shares are no longer
publicly traded. As a result of the transaction, Eclipse has increased its
outstanding shares by approximately 9.9 million shares which 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 has been accounted for as a pooling of
interests. Accordingly, the accompanying financial statements have been restated
as if the combined entity existed for all periods presented.
On February 11, 1999, Eclipse received final approval from the FDA for
its TMR products for certain indications and is now able to sell those products
in the U.S. on a commercial basis. Eclipse has also received the European
Conforming Mark ("CE Mark") allowing the commercial sale of its TMR laser
systems and its PTMR catheter system to customers in the European Community. On
April 7, 1999, Eclipse received confirmation from the Health Care Financial
Administration ("HCFA") that effective July 1, 1999, HCFA will provide Medicare
coverage for TMR. With this confirmation, 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.
RESULTS OF OPERATIONS
Net Revenues
Net revenues increased 85% to $4,474,000 for the three months ended
March 31, 1999 from $2,424,000 for the three months ended March 31, 1998. The
increase in revenues was a result of higher laser system and disposable
- -----------------------------------
(1) Forward looking statement.
7
<PAGE> 10
products sales. Export sales accounted for approximately 11% for the three
months ended March 31, 1999 and 42% for the three months ended March 31, 1998.
Future revenues may continue to be affected by restrictions on third
party reimbursement. Eclipse intends to continue selling its laser system to
hospitals outright or placing the systems with hospitals under lease or fee per
use agreements. On April 7, 1999, Eclipse received confirmation from the Health
Care Financial Administration ("HCFA") that effective July 1, 1999, HCFA will
provide Medicare coverage for TMR. With this confirmation, hospitals will again
receive Medicare reimbursement for TMR equipment and procedures. Eclipse has
limited experience to date with the acceptability of its TMR procedures for
reimbursement by private insurance and private health plans. There can be no
assurance that private insurance and private health plans will reimburse the TMR
procedure.
Gross Profit
Gross profit increased to $2,569,000 or 57% of net revenues for the
three months ended March 31, 1999, compared to $998,000 or 41% of net revenues
for the three months ended March 31, 1998. The increase resulted from greater
sales volume and a higher average sales price per laser. The improvement in
gross profit percentage is due to improved efficiency from higher production
volumes.
Research and Development Expenses
Research and development expenditures decreased to $3,970,000 or 89% net
revenues for the three months ended March 31, 1999, compared to $6,938,000 or
286% of net revenues for the three months ended March 31, 1998, respectively.
The decrease in these expenses reflected the lower costs related to the cost of
supporting additional clinical trials and decreases in employee and patent
expenses.
Some of Eclipse's products are currently in clinical trials and
therefore subject to limitations by the FDA. Eclipse believes that continued
investments 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 for July 1, 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 expenses increased to $4,123,000 or 92% of net
revenues for the three months ended March 31, 1999, from $3,785,000 or 156% of
net revenues for the three months ended March 31, 1998, respectively. The
increase is due 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)
General and Administrative
General and administrative expenses increased to $3,057,000 or 68% of
net revenues for the three months ended March 31, 1999, compared to $2,449,000
or 101% of net revenues for the three months ended March 31, 1998, respectively.
The increase is due mainly to an increase in the provision for doubtful accounts
which is offset by a decrease in CardioGenesis' legal expenses related to a
lawsuit that was settled in January 1999.
Merger Related Costs
Merger related costs were $6,893,000 or 154% of net revenues for the
three months ended March 31, 1999. These were non-recurring costs associated
with the merger.
- -----------------------------------
(1) Forward looking statement.
8
<PAGE> 11
The following table summarizes the merger-related costs (in thousands).
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------
<S> <C>
Financial advisory and legal fees ........................ $2,515
Personnel severance ...................................... 967
Terminated relationships/contracts ....................... 1,528
Other costs including fixed asset and inventory write-offs 1,883
------
Total ................................................. $6,893
======
</TABLE>
Interest Income and Expense, Net
Interest income decreased 69% to $310,000 for the three months ended
March 31, 1999, compared to $994,000 for the three months ended March 31, 1998.
The decrease was due to lower investments in marketable securities. Interest
expense of $2,000 decreased $32,000 or 94% for the three months ended March 31,
1999 when compared to $34,000 for the three months ended March 31, 1998. This
decrease reflected the repayment of debt.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short and long-term marketable securities
were $21,077,000 at March 31, 1999 compared to $27,727,000 at December 31, 1998,
a decrease of 24%. Marketable securities are classified as "available-for-sale"
and are readily marketable at their fair market value. Eclipse used $12,752,000
of cash for operating activities, including funding its operating loss and
increases in inventory, accounts payable, accrued liabilities and other assets.
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 March 31, 1999, Eclipse had an
accumulated deficit of $126,057,000.
Eclipse anticipates that its current cash, cash equivalents and
marketable securities will be sufficient to meet Eclipse's funding requirements
through December 31, 1999(1). There can be no assurance, however, that Eclipse
will not require additional sources of cash at an earlier date, depending upon
the progress of expansion of Eclipse's clinical trials, any need for additional
clinical trials or other testing of Eclipse's products and the timing of other
required expenditures as indicated above. If Eclipse is required to obtain
additional financing in the future, there can be no assurance that capital will
be available on terms acceptable to Eclipse, if at all.
RECENTLY ISSUED ACCOUNTING STANDARDS
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:
- -----------------------------------
(1) Forward looking statement.
9
<PAGE> 12
Security systems Network equipment
Facility systems Printers, copiers and fax machines
Telephony Server tape backups
Servers Testing equipment
Personal computers Miscellaneous software
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 has prepared a preliminary estimate
of total Year 2000 remediation efforts of approximately $60,000, of which
$30,000 has been spent as of March 31, 1999.
Eclipse's products have no internal date clocks, do not use software
that is dependent on date data processing and do not have electrical ports for
connection of other devices that require date data processing. This means that
Eclipse products, when used as intended by Eclipse in accordance with Eclipse
procedures and user/service manuals, will not be affected by the change from
1999 to 2000.
Eclipse is also working with its suppliers of products, services and
systems to assure that the products, services and systems supplied to Eclipse,
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 third quarter of fiscal 1999 and will not have a material adverse
effect on Eclipse's financial condition or overall trends in the results of
operations(1). However, there can be no assurance that unexpected delays or
problems, including the failure to ensure the Year 2000 compliance of systems,
services or products supplied to Eclipse by a third party, will not have an
adverse effect on Eclipse, its financial performance, or the competitiveness or
customer acceptance of its products. Further, Eclipse's current understanding of
expected costs is subject to change as the project progresses and does not
include the potential cost of internal software and hardware replaced in the
normal course of business.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Eclipse has identified certain forward-looking statements in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this Annual Report on Form 10-Q with a footnote(1)
symbol. Eclipse may also make oral forward-looking statements from time to time.
Actual results may differ materially from those projected in any such
forward-looking statements due to a number of factors, including those set forth
below and elsewhere in this Form 10-Q.
Eclipse operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The following section lists some, but
not all, of those risks and uncertainties which may have a material adverse
effect on Eclipse's business, financial condition or results of operations. This
section should be read in conjunction with the unaudited Consolidated Financial
Statements and Notes thereto included in Part I-Item I of this Quarterly Report
on Form 10-Q and the audited Consolidated Financial Statements and Notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 1998, contained in Eclipse's 1998
Form 10-K. Eclipse has identified certain forward-looking
- -----------------------------------
(1) Forward looking statement.
10
<PAGE> 13
statements in the Management's Discussion and Analysis of Financial Condition
and Results of Operations with a footnote symbol. Eclipse may also make oral
forward-looking statements from time to time. Actual results may differ
materially from those projected in any such forward looking statements due to a
number of factors, including those set forth below and elsewhere in this Form
10-Q.
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 Pre 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
Investigational Device Exemptions ("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.
In January 1996, prior to the merger with Eclipse, CardioGenesis
reported to the FDA the existence of an error in the software incorporated into
the Ho:YAG laser included in its TMR laser systems. CardioGenesis' laser
manufacturer, New Star Lasers, determined that, under certain circumstances, the
laser could be fired even though its control panel indicated it was in the
"stand-by" mode. CardioGenesis initiated a voluntary field correction of the
lasers, categorized as a Class II recall by the FDA, and the software error has
been corrected. FDA defines a Class II recall as one in which use of, or
exposure to, the product may cause temporary or permanent adverse health
consequences. The FDA has acknowledged the correction of the software error and
the completion of the related field activities.
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
11
<PAGE> 14
- - 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 Pre Market Approval ("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
- - 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.
12
<PAGE> 15
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.
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
13
<PAGE> 16
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.
In 1996, prior to the merger with Eclipse, CardioGenesis initiated a
suit in the United States against PLC seeking a judgement that the PLC patent is
invalid and unenforceable. In 1997, PLC counterclaimed in that suit alleging
infringement by CardioGenesis of the PLC patent. Also in 1997, PLC initiated
suit in Germany against CardioGenesis and CardioGenesis' former German sales
agent alleging infringement of a European counterpart to the PLC patent. In
1997, CardioGenesis filed an Opposition in the European Patent Office to a
European counterpart to the PLC patent, seeking to have the European patent
declared invalid.
On January 5, 1999, before trial on the U.S. suit commenced
CardioGenesis and PLC settled all litigation between them, both in the U.S. and
in Germany, with respect to the PLC patent and the European patents. Under the
Settlement and License Agreement signed by the parties CardioGenesis stipulated
to the validity of the PLC patents and PLC granted CardioGenesis a non-exclusive
worldwide license to the PLC patents. CardioGenesis agreed to pay PLC a license
fee, and minimum royalties, totaling $2.5 million over an approximately
forty-month period, with a running royalty credited against the minimums.
The Settlement and License Agreement does not apply to any products or
technology that do not use the PLC patents, nor does the agreement provide PLC
any rights to any CardioGenesis intellectual property. The Eclipse TMR products
do not use the technology associated with the PLC patents.
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.
14
<PAGE> 17
Any litigation or interference proceedings will result in:
- - substantial expense; and
- - a significant diversion of effort by technical and management personnel.
If the results of such litigation or interference proceedings are
adverse to Eclipse, then the results may:
- - subject Eclipse to significant liabilities to third parties;
- - require Eclipse to seek licenses from third parties;
- - prevent Eclipse from selling its products in certain markets, or at all; or
- - require Eclipse to modify its products.
Although patent and intellectual property disputes regarding medical
devices are often settled through licensing and similar arrangements, costs
associated with such arrangements may be substantial and could include 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:
15
<PAGE> 18
- - its employees, consultants and advisors may breach their confidentiality and
invention assignment agreements and there may not be an adequate remedy for
such breach;
- - its competitors may independently develop substantially equivalent
proprietary information and techniques; or
- - competitors may otherwise gain access to 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;
- - foreign tax laws;
- - shipping delays;
16
<PAGE> 19
- - 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.
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.
17
<PAGE> 20
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 Good
Manufacturing Practices ("GMP") regulations, international quality standards
and other regulatory requirements); and
- - shortages of qualified personnel.
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:
18
<PAGE> 21
- - 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 through
December 31, 1999. 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.
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.
19
<PAGE> 22
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.
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., remains as
Chairman of the Board of the combined company. Allen W. Hill, President and
Chief Executive Officer of CardioGenesis, has become President and Chief
Executive Officer of the combined company. Richard L. Mueller, Jr., is no longer
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 intends to maintain similar insurance in the future for
its key personnel.
Eclipse's future business and results of operations also depend in
significant part upon its ability to attract and retain additional qualified
management, manufacturing, technical, marketing and sales and support personnel
for its operations. 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.
20
<PAGE> 23
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.
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 third quarter of fiscal 1999 and will not have a material adverse
effect on Eclipse's financial condition or overall trends in the results of
operations(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;
- -----------------------------------
(1) Forward looking statement.
21
<PAGE> 24
- - personnel changes;
- - changes in strategy; and
- - the level of international sales.
Eclipse believes that quarter to quarter comparisons of its operating
results may not be a good indication of its future performance. It is likely
that the operating results of Eclipse for a future quarter will fall below the
expectations of public market analysts and investors. If this occurs, the price
of Eclipse's Common Stock may fall, perhaps substantially.
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.
On April 7, 1999, Eclipse received confirmation from HCFA that effective
July 1, 1999, HCFA will provide Medicare coverage for TMR systems for any
manufacturer's TMR procedures. Eclipse has limited experience to date with the
acceptability of its TMR procedures for reimbursement 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
22
<PAGE> 25
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;
- - 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Eclipse has an investment portfolio of fixed income securities that are
classified as "available-for-sale securities". These securities are subject to
interest rate risk and will fall in value if market interest rates increase.
Eclipse attempts to limit this exposure by investing in securities that will
mature within 24 months.
23
<PAGE> 26
ECLIPSE SURGICAL TECHNOLOGIES, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1996, prior to the merger with Eclipse, CardioGenesis initiated a
suit in the United States against PLC seeking a judgement that the PLC
patent is invalid and unenforceable. In 1997, PLC counterclaimed in that
suit alleging infringement by CardioGenesis of the PLC patent. Also in
1997, PLC initiated suit in Germany against CardioGenesis and
CardioGenesis' former German sales agent alleging infringement of a
European counterpart to the PLC patent. In 1997, CardioGenesis filed an
Opposition in the European Patent Office to a European counterpart to
the PLC patent, seeking to have the European patent declared invalid.
On January 5, 1999, before trial on the U.S. suit commenced
CardioGenesis and PLC settled all litigation between them, both in the
U.S. and in Germany, with respect to the PLC patent and the European
patents. Under the Settlement and License Agreement signed by the
parties CardioGenesis stipulated to the validity of the PLC patents and
PLC granted CardioGenesis a non-exclusive worldwide license to the PLC
patents. CardioGenesis agreed to pay PLC a license fee, and minimum
royalties, totaling $2.5 million over an approximately forty-month
period, with a running royalty credited against the minimums.
The Settlement and License Agreement does not apply to any products or
technology that do not use the PLC patents, nor does the agreement
provide PLC any rights to any CardioGenesis intellectual property. The
Eclipse TMR products do not use the technology associated with the PLC
patents.
ITEM 2(d) CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with its initial public offering in 1996 Eclipse filed a
Registration Statement on Form S-1, SEC File No. 333-03770 (the
"Registration Statement"), which was declared effective by the
Commission on May 31, 1996. Eclipse registered 7,000,000 shares of its
Common Stock, no par value per share. The offering commenced on May 31,
1996 and 6,400,000 shares were sold. The aggregate offering price of the
registered shares was $124,000,000. The managing underwriters of the
offering were PaineWebber Incorporated, Deutsche Morgan Grenfell,
Jefferies & Company Inc., Bear, Stearns & Company Inc., Montgomery
Securities and Piper Jaffray Inc. Eclipse incurred the following
expenses in connection with the offering:
<TABLE>
<S> <C>
Underwriting discounts and commissions: $10,013,000
Other expenses: $ 1,565,000
-----------
Total expenses: $11,578,000
===========
</TABLE>
All of such expenses were payments to others.
The net offering proceeds to Eclipse after deducting the total expenses
above were approximately $112,422,000. From May 31, 1996 to March 31,
1999, Eclipse used such net offering proceeds, in direct or indirect
payments to others, as follows:
<TABLE>
<S> <C>
Purchase and installment of machinery and equipment: $ 2,485,000
Working capital: $ 75,536,000
Investment in short-term, interest- bearing obligations: $ 30,238,000
Repayment of indebtedness: $ 1,777,000
------------
Total $110,036,000
============
</TABLE>
Each of such amounts is a reasonable estimate of the application of the
net offering proceeds. This use of proceeds does not represent a
material change in the use of proceeds described in the prospectus of
the Registration Statement.
24
<PAGE> 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Eclipse's Special Meeting of Shareholders on March 17, 1999, the
following proposal was approved:
1. Approval of a reorganization agreement, pursuant to which a
subsidiary of Eclipse would be merged with and into
CardioGenesis Corporation. CardioGenesis would survive the
transaction as a wholly-owned subsidiary of Eclipse. In the
merger, Eclipse will issue CardioGenesis stockholders 0.80 of a
share of Eclipse common stock for each share of CardioGenesis
common stock. In order to effect this transaction, Eclipse
shareholder will have to approve the principal terms of the
reorganization including the issuance of shares of Eclipse
common stock to the stockholders of CardioGenesis.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- ------- -------
<S> <C> <C> <C>
Eclipse Surgical Technologies, Inc. .. 10,091,569 23,692 91,986
CardioGenesis Corporation ............ 10,808,539 11,009 7,535
</TABLE>
ITEM 5. OTHER INFORMATION
Eclipse's 1999 Annual Meeting of Stockholders will be held on June 30,
1999 at 9a.m. at the Corporation's headquarters in Sunnyvale,
California. Eclipse intends to mail the proxy statement for such meeting
on or about May 27, 1999.
Stockholder proposals related to Eclipse's 1999 Annual Meeting of
Stockholders, but submitted outside the processes of Rule 14a-8 under
the Securities Exchange Act of 1934, must be received by Eclipse prior
to April 12, 1999 in order to withhold authority of management proxies
to use their discretionary voting authority with respect to any such
proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 27
b) Reports on Form 8-K
No reports on Form 8-K were filed by Eclipse during the three
month period ended March 31, 1999.
25
<PAGE> 28
ECLIPSE SURGICAL TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ECLIPSE SURGICAL TECHNOLOGIES, INC.
Registrant
Date: May 14, 1999 /s/ Allen W. Hill
----------------------------------
Allen W. Hill
Chief Executive Officer
and President
Date: May 14, 1999 /s/ Richard P. Powers
----------------------------------
Richard P. Powers
Chief Financial Officer
(Duly Authorized Officer,
Principal Financial and
Accounting Officer)
26
<PAGE> 29
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ECLIPSE
SURGICAL TECHNOLOGIES, INC AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,829
<SECURITIES> 7,514
<RECEIVABLES> 9,746
<ALLOWANCES> (1,854)
<INVENTORY> 10,170
<CURRENT-ASSETS> 33,678
<PP&E> 4,248
<DEPRECIATION> (2,511)
<TOTAL-ASSETS> 45,988
<CURRENT-LIABILITIES> 19,042
<BONDS> 0
0
0
<COMMON> 152,204
<OTHER-SE> (1,080)
<TOTAL-LIABILITY-AND-EQUITY> 45,988
<SALES> 4,474
<TOTAL-REVENUES> 4,474
<CGS> 1,905
<TOTAL-COSTS> 1,905
<OTHER-EXPENSES> 18,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2)
<INCOME-PRETAX> (15,166)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,166)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,166)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
