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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, 2000
Commission file number 0-28288
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
----------------------
CALIFORNIA 77-0223740
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(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.
30,034,540 shares
As of April 30, 2000
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART 1
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Item 1. Financial Statements (unaudited):
a. Consolidated Balance Sheets
as of March 31, 2000 and December 31, 1999............................ 1
b. Consolidated Statements of Operations & Comprehensive Loss
for the three months ended March 31, 2000 and 1999..................... 2
c. Consolidated Statements of Cash Flows
for the three months ended March 31, 2000 and 1999..................... 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....................... 20
PART II
OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 21
Item 5. Other Information................................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................................. 21
Signatures....................................................................... 22
</TABLE>
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31,
(UNAUDITED) 1999
-------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 5,640 $ 5,566
Marketable securities .............................................. 2,280 3,227
Accounts receivable, net of allowance for doubtful
accounts of $954 and $1,079 at March 31, 2000 and
December 31, 1999, respectively ............................. 6,240 8,119
Inventories ........................................................ 7,092 6,983
Prepaids and other current assets .................................. 452 767
-------------- --------------
Total current assets ............................................. 21,704 24,662
Property and equipment, net .......................................... 1,090 1,220
Long-term marketable securities ...................................... 2,022 4,520
Accounts receivable over one year, net of allowance for
doubtful accounts of $281 and $797 at March 31, 2000
and December 31, 1999, respectively ............................. 822 1,125
Other assets ......................................................... 2,444 2,492
-------------- --------------
Total assets ..................................................... $ 28,082 $ 34,019
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 1,478 $ 1,819
Accrued liabilities ................................................ 7,258 9,557
Customer deposits .................................................. 214 145
Deferred revenue ................................................... 1,943 1,720
Current portion of capital lease obligation ........................ 26 26
Current portion of long-term liabilities ........................... 1,121 1,364
-------------- --------------
Total current liabilities .................................... 12,040 14,631
Capital lease obligation, less current portion ....................... 84 90
Long-term liabilities, less current portion .......................... 546 725
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Total liabilities ................................................ 12,670 15,446
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Shareholders' equity:
Preferred stock:
no par value; 6,600 shares authorized; none issued and
outstanding ....................................................... -- --
Common stock:
no par value; 82,000 shares authorized; 30,010 and 29,437
shares issued and outstanding at March 31, 2000 and
December 31, 1999, respectively ................................... 159,616 158,338
Deferred Compensation ................................................ (463) (466)
Accumulated other comprehensive loss ................................. (78) (75)
Accumulated deficit .................................................. (143,663) (139,224)
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Total shareholders' equity ......................................... 15,412 18,573
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Total liabilities and shareholders' equity ......................... $ 28,082 $ 34,019
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
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<S> <C> <C>
Net revenues .............................................................. $ 5,677 $ 4,474
Cost of revenues .......................................................... 2,332 1,905
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Gross profit .......................................................... 3,345 2,569
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Operating expenses:
Research and development ................................................ 1,786 3,970
Sales and marketing ..................................................... 4,549 4,123
General and administrative .............................................. 1,556 3,057
Merger related costs .................................................... -- 6,893
---------- ----------
Total operating expenses .............................................. 7,891 18,043
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Operating loss .................................................... (4,546) (15,474)
Interest expense .......................................................... (10) (2)
Interest and other income ................................................. 117 310
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Net loss .............................................................. (4,439) (15,166)
Other comprehensive loss, net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during period ................ -- (67)
Less: reclassification adjustment for gains included in net
income ......................................................... (3) (5)
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Other comprehensive loss ................................ (3) (72)
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Comprehensive loss ............................ $ (4,442) $ (15,238)
========== ==========
Net loss per share:
Basic and diluted ........................................... $ (0.15) $ (0.55)
========== ==========
Weighted average shares outstanding ......................... 29,664 27,576
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
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<S> <C> <C>
Cash from operating activities:
Net loss ...................................................................... $ (4,439) $(15,166)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization ............................................. 246 393
Provision for doubtful accounts ........................................... 10 1,063
Inventory reserves ........................................................ 456 866
Amortization of deferred compensation for options to consultants .......... 248 --
Amortization of license fees .............................................. 48 --
Loss on disposal of property and equipment ................................ -- 317
Changes in operating assets and liabilities:
Accounts receivable - short term ......................................... 1,856 1,091
Inventories ............................................................... (565) (1,961)
Prepaids and other current assets ......................................... 315 903
Other assets .............................................................. -- (2,238)
Accounts receivable long - term ........................................... 316 --
Accounts payable .......................................................... (341) 1,181
Accrued liabilities ....................................................... (2,299) 1,855
Current portion of long-term liabilities................................... (243) --
Long-term liabilities ..................................................... (179) --
Customer deposits ......................................................... 69 (94)
Deferred revenue .......................................................... 223 (962)
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Net cash used in operating activities .................................. (4,279) (12,752)
-------- --------
Cash flows from investing activities:
Purchase of marketable securities ............................................. (775) (12,324)
Maturities of marketable securities ........................................... 4,218 22,458
Acquisition of property and equipment ......................................... (116) (94)
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Net cash provided by investing activities .............................. 3,327 10,040
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Cash flows from financing activities:
Net proceeds from issuance of common stock from exercise of
options and warrants ...................................................... 1,033 3,029
Proceeds from long-term debt .................................................. -- 3,265
Repayment of note payable ..................................................... -- (26)
Repayments of capital lease obligations ....................................... (6) --
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Net cash provided by financing activities ................................. 1,027 6,268
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Net increase in cash and cash equivalents ................................. 75 3,556
Effect of exchange rates on cash and cash equivalents ..................... (1) --
Cash and cash equivalents at beginning of period ................................... 5,566 3,273
-------- --------
Cash and cash equivalents at end of period ......................................... $ 5,640 $ 6,829
======== ========
Supplemental schedule of cash flow information:
Interest paid ................................................................. $ 9 $ --
======== ========
Taxes paid .................................................................... $ 11 $ --
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Supplemental schedule of noncash investing and financing activities:
Change in unrealized loss on marketable securities ............................ $ (3) $ (72)
======== ========
Deferred compensation ......................................................... $ 245 $ 228
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
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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, 1999, 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:
Basic earnings per share is the weighted-average number of common shares
outstanding during the period, and diluted earnings per share is the
weighted-average common shares outstanding and all dilutive potential common
shares outstanding. For the three months ended March 31, 2000 and 1999 dilutive
potential common shares outstanding reflects shares issuable under the Company's
stock option plans.
Basic EPS is computed by dividing net loss by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed
giving effect to all dilutive potential common shares that were outstanding
during the period.
A reconciliation of the numerator and denominator of basic and diluted
EPS is as follows (in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------- --------
<S> <C> <C>
Numerator - Basic and Diluted EPS
Net Loss .......................... $ (4,439) $(15,166)
-------- --------
Denominator - Basic and Diluted EPS
Weighted average shares outstanding 29,664 27,576
-------- --------
Basic and diluted EPS ................ $ (0.15) $ (0.55)
======== ========
</TABLE>
Options to purchase 3,535,925 and 4,028,112 shares of common stock were
outstanding at March 31, 2000 and 1999 respectively, but were not included in
the calculation of diluted EPS because their inclusion would have been
antidilutive.
4
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies -- (Continued):
Recent Pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting with Derivative Instruments
and Hedging Activities Deferral of the Effective Date of FASB Statement No.
133" ("SFAS 137"). SFAS 137 deferred the effective date until the first quarter
ending June 30, 2000. The Company will adopt SFAS 133 in its quarter ending
June 30, 2000. The Company has not engaged in hedging activities or invested in
derivative instruments and accordingly does not believe implementation of SFAS
133 will have a material effect on its financial statements.
In December 1999, the Securities Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, which
outlines the basic criteria that must be met to recognize revenue and provides
guidance for presentation of revenue and for disclosure related to revenue
recognition policies in financial statements filed with the SEC. The Company
believes that adopting SAB 101 will not have a material impact on the Company's
financial position and results of operations.
2. Inventories:
Inventories are stated at lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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(UNAUDITED)
<S> <C> <C>
Raw materials ............................... $ 3,826 $ 3,074
Work in process ............................. 983 624
Finished goods .............................. 2,283 3,285
------------ ------------
$ 7,092 $ 6,983
============ ============
</TABLE>
5
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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 our expectations regarding future
trends affecting our 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 Affecting Future Results"
to review conditions which we believe could cause actual results to differ
materially from those contemplated by the forward-looking statements.
Forward-looking statements are identified by words such as "believes,"
"anticipates," "expects," "intends," "plans," "will," "may" and similar
expressions. In addition, any statements that refer to our plans, expectations,
strategies or other characterizations of future events or circumstances are
forward-looking statements. Our business may have changed since the date hereof
and we undertake no obligation to update these forward looking statements.
The following discussion should be read in conjunction with financial
statements and notes thereto included in this Quarterly Report on Form 10-Q.
OVERVIEW
We were founded in 1989. From 1989 through September 1995, we engaged in
the research, development and sale of surgical laser products principally for
procedures such as atherectomy and arthroscopy. In 1995, we determined that
there was a significant opportunity in the TMR market, and that we were
well-positioned to enter this market because of our expertise with laser-based
surgical techniques and the treatment of cardiovascular disease. Accordingly, in
late 1995, we changed our strategic direction to enter the TMR market.
Prior to 1996, we focused almost exclusively on research and development
activities relating to surgical laser products. Since 1996, we have focused on
TMR and PTMR activities, particularly research and development activities and
clinical trials.
On March 17, 1999, we announced the completion of our business
combination with CardioGenesis Corporation. Under the terms of the combination,
each share of CardioGenesis common stock has been converted into 0.8 of a share
of our common stock, and we have assumed all outstanding CardioGenesis stock
options. CardioGenesis has become a wholly-owned subsidiary of ours and its
shares are no longer publicly traded. As a result of the transaction, we
increased our outstanding shares by approximately 9.9 million. As of March 17,
1999 these shares represented approximately 36% of our post-combination
outstanding shares. The transaction was 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.
On February 11, 1999, we received final approval from the FDA for our
TMR products for certain indications and are now able to sell those products in
the U.S. on a commercial basis. We have also received the European Conforming
Mark ("CE Mark") allowing the commercial sale of our TMR laser systems and our
PTMR catheter systems to customers in the European Community. Effective July 1,
1999, Health Care Financial Administration began providing Medicare coverage for
TMR. Hospitals and physicians are now eligible to receive Medicare reimbursement
for TMR equipment and procedures.
As of March 31, 2000, we had an accumulated deficit of $143,663,000. We
expect 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 our expenditures will depend upon a number of factors, including
the efforts required to develop our sales and marketing organization, the timing
of market acceptance, if any, of our products, the progress of our clinical
trials,
6
<PAGE> 9
and the status and timing of regulatory approvals.
RESULTS OF OPERATIONS
Net Revenues
Net revenues of $5,677,000 for the quarter ended March 31, 2000
increased $1,203,000 or 27% when compared to net revenues of $4,474,000 for the
quarter ended March 31, 1999. The increase in revenues was due to higher sales
of laser systems and disposable products resulting from the receipt of FDA
approval on our TMR products. Export sales accounted for approximately 16% and
25% of total sales for the quarter ended March 31, 2000 and 1999, respectively.
This percentage decrease in export sales relative to total sales is mainly due
to higher domestic sales resulting from the receipt of FDA approval on our TMR
products. We define export sales as sales to customers located outside of the
United States. (See "--Factors Affecting Future Results.")
Gross Profit
Gross profit increased to $3,345,000 or 59% of net revenues for the
quarter ended March 31, 2000 as compared to $2,569,000 or 57% of net revenues
for the quarter ended March 31, 1999. The increase in absolute terms and as a
percentage of sales resulted from greater sales volume and lower unit costs due
to lower fixed manufacturing expenses and higher production volumes.
Research and Development
Research and development expenditures of $1,786,000 decreased $2,184,000
or 55% for the quarter ended March 31, 2000 when compared to $3,970,000 for the
quarter ended March 31, 1999. The decrease in these expenses reflects the
decrease in activity associated with clinical trials, lower employee expenses
and cost savings resulting from the merger.
Some of our products are currently in clinical trials and therefore
subject to limitations by the FDA. We believe that a continued investment in the
development of new and improved products and procedures and in our clinical
trials is critical to our future success. As a result of the FDA approval of our
surgical TMR system and the coverage notice by HCFA for July 1, 1999, we
anticipate that the level of research and development expenditures incurred in
connection with clinical trials will continue to decrease as a percentage of
revenues. However, future revenues may not be sufficient to cover the research
and development expenses required in connection with our ongoing efforts
including current and future clinical trials.
Sales and Marketing
Sales and marketing expenditures of $4,549,000 increased $426,000 or 10%
for the quarter ended March 31, 2000 when compared to $4,123,000 for the quarter
ended March 31, 1999. This increase is mainly due to higher staffing levels. We
expect spending on sales and marketing will increase as we continue to focus
resources on the development of the TMR and PTMR market.
General and Administrative
General and administrative expenses decreased by $1,501,000 or 49% to
$1,556,000 in the quarter ended March 31, 2000 from $3,057,000 in 1999. The
decrease is due to cost savings resulting from the merger.
Merger Related Costs
There were no merger related costs incurred during the three-month
period ended March 31, 2000, compared to $6,893,000 of merger related costs
recognized for the first quarter of 1999. The first quarter 1999 charges
resulted from our merger with CardioGenesis Corporation. We do not expect any
further merger related charges, and anticipate that the last merger-related
payment will occur in July of 2000.
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<PAGE> 10
Interest and Other Income
Interest and other income of $117,000 decreased $193,000 or 62% for the
quarter ended March 31, 2000 when compared to $310,000 for the quarter ended
March 31, 1999. The decrease was due to lower investments in marketable
securities and cash and cash equivalents.
Interest expense of $10,000 increased $8,000 or 400% for the quarter
ended March 31, 2000 when compared to $2,000 for the quarter ended March 31,
1999. This increase reflects a higher level of debt outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short and long-term marketable securities
were $9,942,000 at March 31, 2000 compared to $13,313,00 at December 31, 1999, a
decrease of 25%. Marketable securities are classified as "available-for-sale"
and are readily marketable at their fair market value. We used $4,279,000 of
cash for operating activities, including funding our operating loss and
decreases in accrued liabilities during the three month period ended March 31,
2000. Investing activities, consisting primarily of purchases and sale of
marketable securities and additions to property and equipment, provided cash of
$3,327,000 during the three month period ended March 31, 2000. Financing
activities provided cash of $1,027,000 primarily from the issuance of stock
pursuant to exercise of stock options during the three month period ended March
31, 2000.
Since our inception, we have satisfied our capital requirements
primarily through sales of our equity securities and, to a lesser extent, loans
from shareholders. In addition, our operations have been funded in part through
sales of our products. At March 31, 2000, we had an accumulated deficit of
$143,663,000.
We anticipate that our current cash, cash equivalents and marketable
securities will be sufficient to meet our funding requirements through December
31, 2000. There can be no assurance, however, that we will not require
additional sources of cash at an earlier date. If we are required to obtain
additional financing in the future, capital may not be available on terms
acceptable to us, if at all.
YEAR 2000
We have not incurred material costs associated with our efforts to
become Year 2000 compliant. Furthermore, based on our assessment to date, we
believe that any future costs associated with our Year 2000 compliance efforts
will not be material.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting with Derivative Instruments
and Hedging Activities Deferral of the Effective Date of FASB Statement No.
133" ("SFAS 137"). SFAS 137 deferred the effective date until the first fiscal
quarter ending June 30, 2000. The Company will adopt SFAS 133 in its quarter
ending June 30, 2000. The Company has not engaged in hedging activities or
invested in derivative instruments and accordingly does not believe
implementation of SFAS 133 will have a material effect on its financial
statements.
In December 1999, the Securities Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, which outlines the
basic criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. We believe that adopting
SAB 101 will not have a material impact on our financial position and results of
operations.
8
<PAGE> 11
FACTORS AFFECTING FUTURE RESULTS
In addition to the other information included in this Form 10-Q, the
following risk factors should be considered carefully in evaluating us and our
business.
We may fail to obtain required regulatory approvals to market our
products in the United States. Our business, financial condition and results of
operations could be harmed by any of the following events, circumstances or
occurrences related to the regulatory process:
- the failure to obtain regulatory approvals for our products;
- significant limitations in the indicated uses for which our products may
be marketed;
- substantial costs incurred in obtaining regulatory approvals, or
- delays in initiating or completing new clinical trials.
We must submit, and the FDA must approve applications for preliminary market
approval, known as PMA, before we can sell our TMR and PTMR laser systems as
medical devices. Before submitting a PMA application, we must complete clinical
testing to demonstrate the safety and effectiveness of our products.
In 1997, we submitted a PMA application to the FDA for certain
applications of our TMR laser system. On October 27, 1998, an advisory panel of
the FDA recommended that the FDA approve our PMA application for the TMR laser
system. Along with our approval, the FDA panel requested that we conduct
postmarket surveillance in a form to be determined through further discussions
with the FDA. On February 11, 1999, we received final approval from the FDA for
use of our 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.
In February 1996, we obtained FDA clearance to undertake Phase I of a
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 us with clearance to begin Phase II of this study, which was
subsequently completed. In July 1999, we submitted a PMA supplement to FDA for
an expanded indication to our approved TMR labeling to include TMR in
conjunction with CABG. In January 2000, we received a response from the FDA
requesting that we either provide more information or modify our labeling
request. Since TMR and CABG are each presently utilized to treat separate
regions of the heart, we concluded that our present FDA approved labeling is
adequate, and that the physician can best decide how to use the laser system
within the approved labeling. As a result, in March 2000, we decided that we
will not pursue any wording changes to our already approved TMR labeling and
have withdrawn our submission to the FDA for TMR in conjunction with CABG.
We applied for and received Investigational Device Exemptions, known as
IDEs, to engage in various clinical trials of our PTMR products and procedures.
In December, 1999, we submitted a PMA application to the FDA seeking marketing
clearance for PTMR in the United States. To date, the FDA has not granted
approval of this application. The FDA may not approve this application in a
timely manner, if ever.
The medical community has not broadly adopted our products, and unless our
products are broadly adopted, our business will suffer. Our TMR products have
not yet achieved broad commercial adoption, and our PTMR products are
experimental and have not yet achieved broad clinical adoption. We cannot
predict whether or at what rate and how broadly our products will be adopted by
the medical community. Our business would be harmed if:
- our products fail to achieve significant clinical adoption; or
- our TMR or PTMR laser systems fail to achieve significant market
acceptance.
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<PAGE> 12
Positive endorsements by physicians are essential for clinical adoption
of our TMR and PTMR laser systems. Even if the clinical efficacy of TMR and PTMR
laser systems is established, physicians may elect not to recommend TMR and PTMR
laser systems for any number of reasons. The reasons why TMR or PTMR laser
systems may effectively treat coronary artery disease are not well understood.
Although we intend to use research, development and clinical efforts to
understand better the physiological effects of TMR and PTMR treatment, we may
not achieve such understanding on a timely basis, or at all. TMR and PTMR laser
systems may not be clinically adopted unless we:
- understand thoroughly the physiological effects of the products; and
- disseminate such understanding within the medical community.
Clinical adoption of these products will also depend upon:
- our ability to facilitate training of cardiothoracic surgeons and
interventional cardiologists in TMR and PTMR therapy; and
- willingness of such physicians to adopt and recommend such procedures to
their patients.
Patient acceptance of the procedure will depend on:
- physician recommendations;
- the degree of invasiveness;
- the effectiveness of the procedure; and
- the rate and severity of complications associated with the procedure as
compared to other procedures.
To expand our business, we must establish effective sales, marketing and
distribution systems, and we have limited experience to date establishing these
operations. To expand our business, we must establish effective systems to sell,
market and distribute products. To date, we have had limited sales which have
consisted primarily of sales of our TMR laser systems on a commercial basis
since February, 1999 and PTMR laser systems for investigational use only.
With FDA approval of our TMR laser system, we are marketing our products
primarily through our direct sales force. We have been expanding our operations
by hiring additional sales and marketing personnel. This has required and will
continue to require substantial management efforts and financial resources. If
we are not able to establish effective sales and marketing capabilities our
business will suffer.
The expansion of our business may put added pressure on our management and
operational infrastructure and could create numerous risks and challenges. The
growth in our business may place a significant strain on our limited personnel,
management and other resources. The evolving growth of our business involves
numerous risks and challenges, including:
- the dependence on the growth of the market for our TMR and PTMR systems;
- domestic and international regulatory developments;
- rapid technological change;
- the highly competitive nature of the medical devices industry; and
- the risk of entering emerging markets in which we have limited or no
direct experience;
Our future operating results will be significantly affected by our
ability to:
- successfully and rapidly expand sales to potential customers;
- implement operating, manufacturing and financial procedures and
controls;
- improve coordination among different operating functions; and
- continue to attract, train and motivate additional qualified personnel
in all areas.
We may not be able to manage these activities and implement these strategies
successfully, and any failure to do so could harm our operating results.
10
<PAGE> 13
Our operating results will fluctuate and quarter to quarter comparisons
of our results may not indicate future performance. Our operating results have
fluctuated significantly from quarter to quarter and are expected to fluctuate
significantly from quarter to quarter due to a number of events and factors,
including:
- the level of product demand and the timing of customer orders;
- changes in strategy;
- delays associated with the FDA and other regulatory approval processes;
- personnel changes;
- the level of international sales;
- the timing and results of clinical trials;
- changes in competitive pricing policies;
- the ability to develop, introduce and market new and enhanced
versions of products on a timely basis;
- deferrals in customer orders in anticipation of new or enhanced
products;
- product quality problems; and
- the enactment of health care reform legislation and any changes in
third party reimbursement policies.
We believe that quarter to quarter comparisons of our operating results
are not a good indication of our future performance. Our operating results
have, in the past, fallen and it is likely that our operating results for a
future quarter will fall below the expectations of public market analysts and
investors. When this occurred in the past the price of our common stock fell
substantially and if this occurs again, the price of our common stock may fall,
perhaps substantially.
We may not be able to successfully market our products if we fail to
obtain third party reimbursement for the procedures performed with our products.
Few individuals are able to pay directly for the costs associated with the use
of our products. In the U.S., hospitals, physicians and other healthcare
providers that purchase medical devices generally rely on third party payors,
such as Medicare, to reimburse all or part of the cost of the procedure in which
the medical device is being used. A failure by third party payors to provide
adequate reimbursement for the TMR and PTMR procedures that use our products
would harm our business.
Effective July 1, 1999 the Health Care Financing Administration
commenced Medicare coverage for TMR systems for any manufacturer's TMR
procedures. Hospitals are now eligible to receive Medicare reimbursement for TMR
equipment and procedures. The Health Care Financing Administration may not
approve reimbursement for PTMR; if it does not provide reimbursement, our
business will suffer. We have limited experience to date with the acceptability
of our TMR procedures for reimbursement by private insurance and private health
plans. Private insurance and private health plans may not approve reimbursement
for TMR or PTMR; if they do not provide reimbursement, our business will suffer.
Although we do not anticipate receiving Medicare reimbursements for our
laser systems that are in clinical trials, we will seek reimbursement from other
third party payors. However, such reimbursement may not 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 our
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.
We face intense competition and competitive products could render our
products OBSOLETE. The market for
11
<PAGE> 14
TMR and PTMR laser systems is intensely competitive and is constantly becoming
more competitive. If our current or future competitors are more effective in
developing new products and procedures and marketing existing and future
products, our business will suffer.
The market for TMR and PTMR laser systems is characterized by rapid
technical innovation. Accordingly, our competitors may succeed in developing TMR
and PTMR products or procedures that:
- are more effective than our products;
- are more effectively marketed than our products; or
- may render our products or technology obsolete.
We currently compete with:
- PLC Systems, Inc.;
- Johnson & Johnson and
- Boston Scientific.
PLC is currently selling TMR commercially in the U.S. and abroad, while
Johnson & Johnson is currently selling PTMR products for investigational use.
Boston Scientific has acquired radio frequency technology to begin a
percutaneous feasibility trial in the U.S. under a preliminary IDE.
Earlier entrants in the market in a therapeutic area often obtain and
maintain greater market share than later entrants. PLC obtained a PMA approval
of its TMR laser system in 1998 prior to our PMA approval and thus, could be
able to capture a greater market share.
Even with the FDA approval for our TMR laser system, we will face
competition for market acceptance and market share for that product. Our ability
to compete may depend in significant part on the timing of introduction of
competitive products into the market, and will be affected by the pace, relative
to competitors, at which we are 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.
Our products also compete with alternative treatment methods and our
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 PTCA and CABG.
Our business would be materially harmed 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.
12
<PAGE> 15
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 our 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.
Our products depend on TMR technology that is rapidly changing, which
could require us to incur substantial product development expenditures to
respond to industry changes. TMR and PTMR laser systems are our only products.
Accordingly, if we fail to develop and commercialize successfully our TMR and
PTMR laser systems, then our business would suffer.
The medical device industry is characterized by rapid and significant
technological change. Our future success will depend in large part on our
ability to respond to such changes. In addition, we must expand the indications
and applications for our products by developing and introducing enhanced and new
versions of our TMR and PTMR laser systems. Product research and development
requires substantial expenditures and is inherently risky. We 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 we identify and develop such products, we may not receive
regulatory approval and may not be commercially successful.
Overall increases in medical costs could adversely affect our business.
We believe that the overall escalating cost of medical products and services has
led, and will continue to lead, to increased pressures on the health care
industry, both foreign and domestic, to reduce the cost of products and
services, including products offered by them. We can not assure you that in
either United States or international markets that:
- third party reimbursement and coverage will be available or adequate;
- current reimbursement amounts will not be decreased in the future; or
- future legislation, regulation or reimbursement policies of third party
payors will not otherwise adversely affect the demand for our products
or our ability to profitably sell our products.
Fundamental reforms in the healthcare industry in the United States and
Europe continue to be considered. We cannot predict whether or when any
healthcare reform proposals will be adopted and what effect such proposals might
have on our business.
We have a history of losses and may not be profitable in the future. We
have incurred significant losses since inception. Our revenues and operating
income will be constrained:
- until such time, if ever, as we obtain broad commercial adoption of our
TMR laser systems by healthcare facilities in the U.S.;
- until such time, if ever, as we obtain FDA and other regulatory
approvals for our PTMR laser systems; and
- for an uncertain period of time after such approvals are obtained.
We may not achieve or sustain profitability in the future.
If we experience increased demand for our products, we may not be able to
expand our business to meet such demand. We may be required to expand our
business to:
- respond to increasing clinical adoption of the TMR procedure;
- develop future products;
- generally compete successfully;
- complete the clinical trials that are currently in progress; and
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<PAGE> 16
- prepare additional products for clinical trials;
Such expansion could place a significant strain on managerial,
operational and financial systems and resources. To accommodate such expansion
and compete effectively, we must:
- improve information systems, procedures and controls; and
- expand, train, motivate and manage our employees.
Third parties may limit the development and protection of our intellectual
property, which could adversely affect our competitive positions. Our success is
dependent in large part on our ability to:
- obtain patent protection for our products and processes;
- preserve our 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
ours have obtained United States patents covering technology that could be used
for certain TMR and PTMR procedures. We do not know if such competitors,
potential competitors or others have filed and hold international patents
covering other TMR or PTMR technology. In addition, international patents may
not be interpreted the same as any counterpart United States patents.
In September 1995, one of our competitors sent us 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, we concluded that we did not utilize the process
and/or apparatus that was the subject of the patent at issue, and we provided a
response to the competitor to that effect. We have not received any additional
correspondence from this competitor on these matters.
In 1996, prior to the merger with us, CardioGenesis initiated a suit in
the U.S. against PLC seeking a judgment that the PLC patent is invalid and
unenforceable. In 1997, PLC counterclaimed in that suit alleging infringement by
CardioGenesis of the PLC patent. Also in 1997, PLC initiated suit in Germany
against CardioGenesis and CardioGenesis' former German sales agent alleging
infringement of a European counterpart to the PLC patent. In 1997, CardioGenesis
filed an Opposition in the European Patent Office to a European counterpart to
the PLC patent, seeking to have the European patent declared invalid.
On January 5, 1999, before trial on the U.S. suit commenced,
CardioGenesis and PLC settled all litigation between them, both in the U.S. and
in Germany, with respect to the PLC patent and the European patents. Under the
Settlement and License Agreement signed by the parties, CardioGenesis stipulated
to the validity of the PLC patents and PLC granted CardioGenesis a non-exclusive
worldwide license to the PLC patents. CardioGenesis agreed to pay PLC a license
fee, and minimum royalties, totaling $2.5 million over an approximately
forty-month period, with a running royalty credited against the minimums.
The Settlement and License Agreement applies only to those products or
that technology covered by the PLC patents, and the agreement does not provide
PLC any rights to any CardioGenesis intellectual property. The Eclipse TMR 2000
laser system does not use the technology associated with the PLC patents.
While we periodically review the scope of our patents and other relevant
patents of which we are 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.
We may not be able to protect our intellectual property because:
- patents may not be issued;
14
<PAGE> 17
- 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.
We may have to engage in time consuming and costly litigation to protect our
intellectual property rights or to determine the proprietary rights of others.
In addition, we 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. We may be required to litigate further to:
- enforce our issued patents;
- protect our trade secrets or know-how; or
- determine the enforceability, scope and validity of the proprietary
rights of others.
Any litigation or interference proceedings will result in:
- substantial expense; and
- significant diversion of effort by technical and management personnel.
If the results of such litigation or interference proceedings are
adverse to us, then the results may:
- subject us to significant liabilities to third parties;
- require us to seek licenses from third parties;
- prevent us from selling our products in certain markets or at all; or
- require us to modify our 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, we may not be able to obtain the necessary licenses on
satisfactory terms, if at all.
Adverse determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from manufacturing and
selling our products. This would harm our business.
We rely on patent and trade secret laws, which are complex and may be
difficult to enforce. The validity and breadth of claims in medical technology
patents involve complex legal and factual questions and, therefore, may be
highly uncertain. Issued patent or patents based on pending patent applications
or any future patent application may not exclude competitors or may not provide
a competitive advantage to us. In addition, patents issued or licensed to us may
not be held valid if subsequently challenged and others may claim rights in or
ownership of such patents.
Furthermore, we can not assure you that our competitors:
- have not developed or will not develop similar products;
- will not duplicate our products; or
- will not design around any patents issued to or licensed by us.
Since patent applications in the United States are currently maintained
in secrecy until patents issue, we cannot be certain that:
- others did not first file applications for inventions covered by our
pending patent applications; or
- we will not infringe any patents that may issue to others on such
applications.
15
<PAGE> 18
The U.S. patent laws were recently amended to exempt physicians, other
health care professionals, and affiliated entities from infringement liability
for medical and surgical procedures performed on patients. We are not able to
predict if this amendment will materially affect our ability to protect our
proprietary methods and procedures.
Competitors may:
- independently develop proprietary information substantially equivalent
to our proprietary information and techniques; or
- otherwise gain access to our proprietary technology.
In addition to our patents, we rely upon trade secrets, technical
know-how and continuing technological innovation to develop and maintain our
competitive position. We may not be able to meaningfully protect our unpatented
technology because:
- our employees, consultants and advisors may breach their confidentiality
and invention assignment agreements and there may not be an adequate
remedy for such breach;
- our competitors may independently develop substantially equivalent
proprietary information and techniques; or
- competitors may otherwise gain access to our proprietary technology.
Our inability to protect our unpatented intellectual property could
materially harm our business.
We depend on single source suppliers for certain key components and
production could be interrupted if a key supplier had to be replaced. We
currently purchase certain critical laser and fiber-optic components from single
sources. Although we have 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
delay our ability to manufacture our products and could harm our manufacturing
operations, business and results of operations.
We anticipate 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, we could experience fluctuations in
inventory levels, resulting in excess inventory, or shortages of critical
components, either of which could cause our business to suffer.
Certain of our suppliers could have difficulty expanding their
manufacturing capacity to meet our needs if demand for our 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. We
can not predict if:
- materials obtained from outside suppliers will continue to be available
in adequate quantities; or
- alternative suppliers can be located on a timely basis.
We operate on a purchase order basis with most of our suppliers. Such
vendors could at any time determine to cease the supply and production of such
components.
We have limited manufacturing experience which could prevent us from
successfully increasing capacity in response to market demand. We have limited
experience in manufacturing products. Manufacturers often encounter difficulties
in increasing production, including problems involving:
- production yields;
- adequate supplies of components;
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<PAGE> 19
- quality control and assurance (including failure to comply with good
manufacturing practices regulations, international quality standards and
other regulatory requirements); and
- shortages of qualified personnel.
We also may not be able to:
- successfully increase manufacturing capacity; or
- avoid manufacturing difficulties or product recalls.
Our products may contain defects which could delay regulatory approval or
market acceptance of our products. We may experience future product defects,
malfunctions, manufacturing difficulties or recalls related to the lasers or
other components used in our TMR and PTMR laser systems. Any such occurrence
could cause a delay in regulatory approvals or adversely affect the commercial
acceptance of our products and could cause harm to our business.
We must comply with FDA manufacturing standards or face fines or other
penalties including suspension of production. We are required to demonstrate
compliance with the FDA's current good manufacturing practices regulations if we
market devices in the United States or manufacture finished devices in the
United States. The FDA inspects manufacturing facilities on a regular basis to
determine compliance. If we fail to comply with applicable FDA or other
regulatory requirements, we can be subject to:
- fines, injunctions, and civil penalties;
- recalls or seizures of products;
- total or partial suspensions of production; and
- criminal prosecutions.
We will be able to obtain FDA approval only for those products that are
proven safe and effective in clinical sites. The FDA has not approved our PTMR
laser systems for any indication in the United States. We submitted a PMA
supplement for our Axcis PTMR system to the FDA in December, 1999 . The PTMR
study compares PTMR to conventional medical therapy in patients with no option
for other treatment. The FDA may not accept the study as safe and effective, and
PTMR may not be approved for commercial use in the United States. Responding to
FDA requests for additional information could:
- require substantial financial and management resources; and
- take several years.
We cannot determine if our PTMR laser systems will prove to be safe or
effective. Our business would be materially and adversely harmed if our PTMR
laser systems do not prove to be safe and effective in clinical trials.
We may suffer losses from product liability claims if our products cause
harm to patients. We are exposed to:
- potential product liability claims; and
- product recalls.
These risks are inherent in the design, development, manufacture and
marketing of medical devices. Our products are designed to be used in
life-threatening situations where there is a high risk of serious injury or
death, and we could be subject to product liability claims if the use of our 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 good manufacturing
practices or other regulations could hurt our ability to defend against product
liability lawsuits. Although we have not experienced any product liability
claims to date, any such claims could cause our business to suffer.
Our insurance may be insufficient to cover product liability claims against
us. Our product liability insurance
17
<PAGE> 20
may not:
- be adequate for any future product liability problems; or
- continue to be available on commercially reasonable
terms, or at all.
If we were held liable for a product liability claim or series of claims
in excess of our insurance coverage, such liability could harm our business and
financial condition.
We maintain insurance against product liability claims in the amount of:
- $10 million per occurrence; and
- $10 million in the aggregate.
We may require increased product liability coverage as sales of approved
products increase and as additional products are commercialized. Product
liability insurance is expensive and in the future may not be available on
acceptable terms, if at all.
We depend heavily on certain key personnel. Our future business and
results of operations depend in significant part upon the continued
contributions of our key technical and senior management personnel.
Our future business and results of operations also depend in significant
part upon our ability to attract and retain additional qualified management,
manufacturing, technical, marketing and sales and support personnel for our
operations. If we lose a key employee or if a key employee fails to perform in
his or her current position, or if we are not able to attract and retain skilled
employees as needed, our business could suffer.
We may engage in future acquisitions that distract our management, cause
us to incur debt, or dilute our shareholders. We 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, our management frequently evaluates the strategic opportunities
available related to complementary businesses, products or technologies. The
process of integrating an acquired company's business into our 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 our business. Moreover, the anticipated benefits of any
acquisition or investment may not be realized. Any future acquisitions or
investments by us 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 harm our operating results and financial condition.
We 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
harm our business:
- 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.
Our products will be subject to other regulatory requirements in the
European Union and other countries. Any enforcement action by international
regulatory authorities with respect to past or future regulatory noncompliance
could cause our business to suffer.
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:
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<PAGE> 21
- if the device is approved for sale by that country; or
- for investigational use in accordance with the laws of that country.
We received the CE Mark for our TMR laser system in December 1996 and
for our PTMR laser system in July 1998. In addition, the Vertex TMR Probe and
the Axcis PTMR Catheter system, acquired in the merger with CardioGenesis,
received CE mark approval in July 1996 and January 1998, respectively. In the
European Economic Area, we 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.
We became ISO 9001 certified in May 1997. We may not be able to:
- achieve or maintain the compliance required for CE marking on all or
any of our products; and
- produce our products profitably and in a timely manner while complying
with the requirements of the Medical Device Directive and other
regulatory requirements.
If we fail to comply with applicable regulatory requirements we 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, we 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.
We sell our products internationally which subjects us to certain
significant risks of transacting business in foreign countries. Our
international revenue is subject to the following risks:
- foreign currency fluctuations;
- economic or political instability;
- foreign tax laws;
- shipping delays;
- various tariffs and trade regulations;
- restrictions and foreign medical regulations;
- customs duties, export quotas or other trade restrictions; and
- difficulty in protecting intellectual property rights.
Any of these factors could have an adverse effect on our international
sales revenues. In future quarters, international sales could become a
significant portion of our revenue.
We may not achieve wide acceptance of our products in foreign markets if
we fail to obtain third party reimbursement for the procedures performed with
our products. If we obtain the necessary foreign regulatory registrations or
approvals, market acceptance of our products in international markets would be
dependent, in part, upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country. They include both
government sponsored health care and private insurance. Although we expect to
seek international reimbursement approvals,
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<PAGE> 22
any such approvals may not be obtained in a timely manner, if at all. Failure to
receive international reimbursement approvals could hurt market acceptance of
TMR products in the international markets in which such approvals are sought.
The price of our common stock may fluctuate significantly, which may
result in losses for investors. The market price for our common stock has been
and may continue to be volatile. For example, during the 52-week period ended
May 4, 2000, the closing prices of our common stock as reported on the Nasdaq
National Market ranged from a high of $18.69 to a low of $2.88. We expect our
stock price to be subject to fluctuations as a result of a variety of factors,
including factors beyond our control. These factors include:
- actual or anticipated variations in our quarterly operating
results;
- announcements of technological innovations or new products or
services by us or our competitors;
- announcements relating to strategic relationships or
acquisitions;
- changes in financial estimates by securities analysts;
- statements by securities analysts regarding us or our industry;
- conditions or trends in the medical device industry; and
- changes in the economic performance and/or market valuations of
other medical device companies.
Because of this volatility, we may fail to meet the expectations of our
stockholders or of securities analysts at some time in the future, and our stock
price could decline as a result.
In addition, the stock market has experienced significant price and
volume fluctuations that have particularly affected the trading prices of equity
securities of many high technology companies. These fluctuations have often been
unrelated or disproportionate to the operating performance of these companies.
Any negative change in the public's perception of medical device companies could
depress our stock price regardless of our operating results.
Recently, when the market price of a stock has been volatile, holders of
that stock have often instituted securities class action litigation against the
company that issued the stock. If any of our stockholders brought such a lawsuit
against us, we could incur substantial costs defending the lawsuit. The lawsuit
could also divert the time and attention of our management.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have an investment portfolio of fixed income securities that are
classified as "available-for-sale securities". The investment portfolio is
comprised of highly liquid instruments. These securities are subject to interest
rate risk and will fall in value if market interest rates increase. We do not
use derivative financial instruments in our investment portfolio. The table
below presents principal amounts as of March 31, 2000 (in thousands) and related
weighted average interest rates as of March 31, 2000 for our investment
portfolio and cash and cash equivalents.
Assets
<TABLE>
<CAPTION>
<S> <C> <C>
Cash and cash equivalents.................... $5,640
Average interest rate............................4.0%
Available-for-sale securities................ $4,302
Average interest rate............................5.8%
</TABLE>
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<PAGE> 23
ECLIPSE SURGICAL TECHNOLOGIES, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending legal proceedings against us other than ordinary
litigation incidental to our business, the outcome of which, individually or in
the aggregate, is not expected to have a material adverse effect on our business
or financial condition.
ITEM 5. OTHER INFORMATION
Effective March 15, 2000, Iain Watson resigned as a member of our Board
of Directors due to personal reasons.
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, 2000.
21
<PAGE> 24
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 10, 2000 /s/ Alan L. Kaganov, Sc.D
------------------------------------
Alan L. Kaganov, Sc.D
Chief Executive Officer
Date: May 10, 2000 /s/ Richard P. Powers
------------------------------------
Richard P. Powers
Executive Vice President and
Chief Financial Officer (Principal
Accounting and Financial Officer)
22
<PAGE> 25
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,640
<SECURITIES> 2,280
<RECEIVABLES> 6,240
<ALLOWANCES> 0
<INVENTORY> 7,092
<CURRENT-ASSETS> 452
<PP&E> 1,090
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,082
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0
0
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</TABLE>
