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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-28288
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 77-0223740
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
1049 KIEL COURT
SUNNYVALE, CALIFORNIA 94089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(408) 548-2100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, NO PAR VALUE NASDAQ NATIONAL MARKET
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $212,033,559 as of February 29, 2000, based
upon the closing sale price reported for that date on the Nasdaq National
Market. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded
because such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily conclusive for other purposes.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock outstanding as of the last practicable date.
29,876,630 shares
As of February 29, 2000
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INDEX TO FORM 10-K
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Description of Property..................................... 13
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
PART II
Item 5. Market for Registrant's Shares and Related Shareholder
Matters..................................................... 13
Item 6. Selected Consolidated Financial Data........................ 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 32
Item 8. Consolidated Financial Statements and Supplementary
Schedules................................................... 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 32
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 33
Item 11. Executive Compensation and Other Matters.................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 33
Item 13. Certain Relationships and Related Transactions.............. 33
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form
8-K......................................................... 33
Signatures............................................................. 35
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PART I
ITEM 1. BUSINESS.
This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The statements contained herein that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, including without
limitation statements regarding our expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
document or incorporated by reference herein are based on information available
to us on the date hereof, and we assume no obligation to update any such
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in Item 7 and elsewhere.
GENERAL
Eclipse Surgical Technologies, Inc., incorporated in California in 1989,
designs, develops, manufactures and distributes laser-based surgical products
and disposable fiber-optic accessories for the treatment of advanced
cardiovascular disease through transmyocardial revascularization ("TMR") and
percutaneous transluminal myocardial revascularization ("PTMR"). TMR and PTMR
are recent laser-based heart treatments in which channels are made in the heart
muscle. It is believed these procedures encourage new vessel formation, or
angiogenesis, and result in reduced angina pain. TMR is performed by a cardiac
surgeon through a small incision in the chest under general anesthesia. PTMR is
performed by a cardiologist in a catheter based procedure which utilizes local
anesthesia.
In the U.S., we offered our laser systems for sale in limited numbers for
investigational use only pursuant to Investigational Device Exemptions ("IDEs")
from the U.S. Food and Drug Administration. On February 11, 1999, we received
final approval from the FDA for 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. Effective July 1,
1999, the Health Care Financial Administration ("HCFA") began to provide
Medicare coverage for TMR. Hospitals and physicians are now eligible to receive
Medicare reimbursement for TMR equipment and procedures.
We have completed a pivotal clinical trial regarding PTMR, and the study
results were submitted to the FDA in a Pre Market Approval (PMA) application in
December of 1999. To date, no approval has been received from the agency.
On October 22, 1998, we announced the signing of a definitive agreement
that provided for a business combination with CardioGenesis Corporation. On
March 17, 1999, we announced with CardioGenesis the completion of our business
combination. 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 have increased our outstanding shares
by approximately 9.9 million shares. 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. Accordingly, the accompanying financial
statements have been restated as if the combined entity existed for all periods
presented.
BACKGROUND
Cardiovascular disease is the leading cause of death and disability in the
U.S., according to the American Heart Association. Coronary artery disease is
the principal form of cardiovascular disease and is characterized by a
progressive narrowing of the coronary arteries, which supply blood to the heart.
This narrowing process is usually due to atherosclerosis, the buildup of fatty
deposits, or plaque, on the inner lining of the arteries. Coronary artery
disease reduces the available supply of oxygenated blood to the heart muscle,
potentially
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resulting in severe chest pain known as angina, as well as damage to the heart.
Typically, the condition worsens over time and often leads to heart attack or
death.
Based on standards promulgated by the Canadian Heart Association, angina is
typically classified into four classes, ranging from Class 1, in which anginal
pain results only from strenuous exertion, to the most severe class, Class 4, in
which the patient is unable to conduct any physical activity without angina and
angina may be present even at rest. The American Heart Association estimates
that more than six million Americans experience anginal symptoms.
The primary therapeutic options for treatment of coronary artery disease
are drug therapy, balloon angioplasty also known as percutaneous transluminal
coronary angioplasty or ("PTCA"), other interventional techniques, which augment
or replace PTCA such as stent placement and atherectomy, and coronary artery
bypass grafting or ("CABG"). The objective of each of these approaches is to
increase blood flow through the coronary arteries to the heart.
Drug therapy may be effective for mild cases of coronary artery disease and
angina either through medical effects on the arteries that improve blood flow
without reducing the plaque or by decreasing the rate of formation of additional
plaque (e.g., by reducing blood levels of cholesterol). Because of the
progressive nature of the disease, however, many patients with angina ultimately
undergo either PTCA or CABG.
PTCA is a less-invasive alternative to CABG introduced in the early 1980s
in which a balloon-tipped catheter is inserted into an artery, typically near
the groin, and guided to the areas of blockage in the coronary arteries. The
balloon is then inflated and deflated at each blockage site, thereby rupturing
the blockage and stretching the vessel. Although the procedure is usually
successful in widening the blocked channel, the artery often re-narrows within
six months of the procedure, a process called "restenosis," often necessitating
a repeat procedure. A variety of techniques for use in conjunction with PTCA
have been developed in an attempt to reduce the frequency of restenosis,
including stent placement and atherectomy. Stents are small metal frames
delivered to the area of blockage using a balloon catheter and deployed or
expanded within the coronary artery. The stent is a permanent implant intended
to keep the channel open. Atherectomy is a means of using mechanical, laser or
other techniques at the tip of a catheter to cut or grind away plaque.
CABG is an open chest procedure developed in the 1960s in which conduit
vessels are taken from elsewhere in the body and grafted to the blocked coronary
arteries so that blood can bypass the blockage. CABG typically requires the use
of a heart-lung bypass machine to render the heart inactive (to allow the
surgeon to operate on a still, relatively bloodless heart) and involves
prolonged hospitalization and patient recovery periods. Accordingly, it is
generally reserved for patients with severe cases of coronary artery disease or
those who have previously failed to receive adequate relief of their symptoms
from PTCA or related techniques. Most bypass grafts fail within one to fifteen
years following the procedure. Repeating the surgery ("re-do bypass surgery") is
possible, but is made more difficult because of scar tissue and adhesions that
typically form as a result of the first operation. Moreover, for many patients
CABG is inadvisable for various reasons, such as the severity of the patient's
overall condition, the extent of coronary artery disease or the small size of
the blocked arteries.
When these treatment options are exhausted, the patient is left with no
viable surgical or interventional alternative other than, in limited cases,
heart transplantation. Without a viable surgical alternative, the patient is
generally managed with drug therapy, often with significant lifestyle
limitations. TMR, which has received FDA approval for certain indications, and
PTMR, currently under clinical investigation by us and by certain other
companies, offer potential relief to a large class of patients with severe
cardiovascular disease.
THE TMR AND PTMR PROCEDURE
TMR, or transmyocardial revascularization, is a surgical procedure
performed on the beating or non-beating heart, in which a laser device is used
to create pathways through the myocardium directly into the heart chamber. The
pathways are intended to enable improved perfusion, or supply, of blood to
ischemic, or oxygen-deprived regions of the myocardium and reduce angina in the
patient. TMR potentially can be performed using any of several different
surgical approaches, including open chest surgery, minimally invasive
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surgery through a small incision between the ribs, or videoscopically through
small openings or ports in the chest. TMR offers end-stage cardiac patients who
have regions of ischemia not amenable to PTCA or CABG a means to alleviate their
symptoms and improve their quality of life. We have received FDA approval for
commercial distribution in the U.S. of the Eclipse TMR 2000 Holmium laser system
for treatment of stable patients with angina (Canadian Cardiovascular Society
Class 4) refractory to medical treatment and secondary to objectively
demonstrated coronary artery atherosclerosis and with a region of the myocardium
with reversible ischemia not amenable to direct coronary revascularization. TMR
may also be effective when used in conjunction with CABG to treat areas of the
heart not treated after bypass surgery.
PTMR, or percutaneous transluminal myocardial revascularization, is an
interventional procedure performed by a cardiologist. PTMR is based upon the
same principles as TMR, but the procedure is much less invasive. The patient is
under local anesthesia, and is treated through a catheter inserted in the
femoral artery at the top of the leg. A laser transmitting catheter is threaded
up into the heart chamber, where channels are created in the inner portion of
the myocardium (i.e. heart muscle). PTMR potentially offers angina sufferers
another treatment option before being referred to a surgeon for a more invasive
course of treatment. PTMR may also be effective when used in conjunction with
PTCA to treat areas of the heart not revascularized by a balloon or stent. We
have completed a pivotal clinical trial regarding PTMR, and the study results
were submitted to the FDA in a Pre Market Approval (PMA) application in December
of 1999. We have also been conducting a FDA approved clinical trial to study
PTMR in conjunction with PTCA.
BUSINESS STRATEGY
Our objective is to become established as a recognized leader in the field
of myocardial revascularization, particularly in TMR and PTMR. Our strategies to
achieve this goal are as follows:
- Expand Market for our Products. We are seeking to expand market
awareness of our products among opinion leaders in the cardiovascular
field, subject to appropriate regulatory guidelines. In connection with the
FDA approved TMR product, we have prioritized our initial efforts in the
U.S. on the top 600 hospitals that perform the greatest number of
cardiovascular procedures. To support the TMR launch, we have expanded the
domestic sales force to twenty-two sales representatives in four sales
regions. Additionally, we have implemented a field based clinical marketing
team to support the implementation of TMR at customer sites, with 14
clinical professionals in the field. We also sell our products in Europe
through a sales subsidiary based in Amsterdam, the Netherlands, and to the
rest of the world through our direct international sales organization along
with several distributors and agents. In addition, we have developed a
comprehensive training program to assist physicians in acquiring the
expertise necessary to utilize our TMR or PTMR products and procedures.
- Demonstrate Clinical Utility of PTMR. We are seeking to demonstrate
the clinical safety and effectiveness of PTMR and achieve FDA approval of
additional products through clinical trials. We have completed a pivotal
clinical trial regarding PTMR, and the study results were submitted to the
FDA in a Pre Market Approval (PMA) application in December of 1999. To
date, no approval has been received from the agency.
- Develop Comprehensive Product Lines for TMR and PTMR. We are seeking
to develop multiple surgical platforms and provide a comprehensive suite of
high quality products for TMR. We believe that our compact, flexible,
fiber-optic based system will enable us to offer effective TMR solutions
across the three principal TMR surgical approaches for TMR, open chest
surgery, minimally invasive surgery and PTMR.
- Leverage Proprietary Technology. We believe that our significant
expertise in laser and catheter-based systems for cardiovascular disease
and the proprietary technologies we have developed are important factors in
our efforts to demonstrate the safety and effectiveness of our TMR and PTMR
procedures. We are seeking to develop additional proprietary technologies
for TMR, PTMR and related procedures. We have 72 foreign and U.S. patents
or allowed patent applications and 87 U.S. and 26 foreign patent
applications pending relating to various aspects of TMR, PTMR and other
cardiovascular therapies.
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PRODUCTS AND TECHNOLOGY
Our merger with CardioGenesis in March 1999 combined two leading companies
in cardiac laser technology and has resulted in the expansion of our product
line.
Eclipse TMR 2000 System
The Eclipse TMR 2000 system consists of our TMR 2000 laser base unit and a
line of fiber-optic, laser-based surgical tools. Each surgical tool utilizes an
optical fiber assembly to deliver laser energy from the source laser base unit
to the distal tip of the surgical handpiece or PTMR catheter. The compact base
unit occupies a small amount of operating room floor space, operates on a
standard 208 or 220-volt power supply, and is light enough to move within the
operating room or among operating rooms in order to use operating room space
efficiently. Moreover, the flexible fiberoptic assembly used to deliver the
laser energy to the patient enables ready access to the patient and to various
sites within the heart.
Our TMR 2000 system and related surgical procedures are designed to be used
without the requirement of the external systems utilized with certain
competitive TMR systems. For example, our TMR 2000 system does not require
electrocardiogram synchronization, which monitors the electrical output of the
heart and times the use of the laser to minimize electrical disruption of the
heart, or transesophageal echocardiography, which tests each application of the
laser to the myocardium during the TMR procedure to determine if the pathway has
penetrated through the myocardium into the heart chamber.
Eclipse Holmium Laser. Our TMR 2000 laser base unit generates laser light
of a 2-micron wavelength by photoelectric excitation of a solid state holmium
crystal. The holmium laser, because it uses a solid state crystal as its source,
is compact, reliable and requires minimal maintenance.
Disposable Tools. Our disposable surgical tools are designed to give the
surgeon control of the procedure, access to difficult-to-reach areas of the
heart and clear visualization of the surgical field. Each such tool is designed
for disposal after use in a single surgical procedure. The products include the
following devices:
Solo-Grip. The Solo-Grip handpiece system contains multiple, fine
fiber-optic strands in a one millimeter diameter bundle. The flexible fiber
optic delivery system combined with the ergonomic handpiece provides access
for treating all regions of the left ventricle.
SlimFlex PTMR System. The SlimFlex PTMR system is an over-the-wire,
steerable, disposable catheter system that features torque control,
deflection capability, infusion port and radio-opaque markers for enhanced
visualization and depth control. After insertion into an artery of the leg,
the PTMR catheter is advanced over the aortic arch, across the aortic valve
and into the heart chamber. Visualization is achieved using standard
fluoroscopic or x-ray techniques common to all hospitals doing cardiac
catheterization.
The Solo-Grip and SlimFlex PTMR fiber-optic delivery systems each have an
easy to install connector which screws into the laser base unit, and each device
is pre-calibrated in the factory so it requires no special preparation.
Eclipse AdVent Laser System
The Eclipse AdVent Laser System was acquired when we merged with
CardioGenesis. It is sold only outside the United States. The AdVent System
consists of the dual purpose AdVent Laser, AdVent ECG Monitor, Vertex TMR Probe
and the Axcis PMR Catheter system. The compact, light-weight, mobile system
operates on a standard 208 or 220-volt power supply.
Eclipse AdVent Laser. The holmium AdVent laser base unit generates laser
light of a 2.1 micron of the mid-infrared spectrum. It provides a reliable
source for laser energy with low maintenance.
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Vertex TMR Probe. The Vertex TMR probe system contains a flexible
fiberoptic system for easy, controlled access to regions of the left
ventricle of the heart. It can be used with precise, one-handed operation.
The Axcis PTMR system. The Axcis PTMR system is an over-the-wire
system that consists of two components, the Axcis laser catheter and Axcis
aligning catheter. The Axcis PTMR system is designed to provide controlled
navigation and access to target regions of the left ventricle. The
torqueable Axcis laser catheter has an independent, extendible lens with
radiopaque lens markers which show the location and orientation of the tip
for optimal contact with the ventricle wall. The Axcis laser catheter also
has nitinol petals at the laser-lens which are designed for safe
penetration of the endocardium and to provide depth control.
REGULATORY STATUS
On February 11, 1999, we received final approval from the FDA for use of
our TMR 2000 laser and Solo-Grip handpiece 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 the 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 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
procedure as safe and effective, and PTMR may not be approved for commercial use
in the United States.
In November of 1999, follow-up was completed on a study comparing PTMR to
conventional medical therapy using our Slimflex PTMR system in patients with no
other option for treatment. Final data collection is under way.
In October 1997, we received approval to begin Phase I of another PTMR
clinical trial. This trial is studying PTMR in conjunction with PTCA or various
other interventional procedures, compared to people receiving only PTCA. In
April 1998, the FDA provided us with clearance to begin Phase II of this trial
and Phase II is currently in process.
SALES AND MARKETING
We have received FDA approval for our surgical TMR laser system. The Health
Care Finance Administration ("HCFA") has also announced its coverage policy for
the TMR with FDA approved systems. We expect revenues from sales of surgical TMR
systems to increase over the short-term and possibly thereafter. We are
promoting market awareness of our approved surgical products among opinion
leaders in the cardiovascular field and are recruiting physicians and hospitals.
To support the surgical launch, we have expanded the domestic sales force to
twenty-two sales representatives in four sales regions. Additionally, we have
implemented a field based clinical marketing team to support the implementation
of TMR at customer sites, with 14 clinical professionals in the field.
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In the United States, we currently offer a laser base unit, at a current
end user list price of $320,000 per unit, and the disposable TMR handpiece (at
least one of which must be used with each TMR procedure) at an end user unit
list price of $2,495. In order to accelerate market adoption of the TMR
procedure, we intend to continue selling lasers to hospitals outright or to
begin loaning lasers to hospitals in return for the hospital purchasing a
minimum number of handpieces at a premium over the list price.
We intend to continue to broaden our line of disposable products as part of
our strategy to develop multiple platforms for TMR. The open chest, minimally
invasive TMR procedures and percutaneous TMR procedures are made possible by the
use of our flexible, lightweight and slender fiber-optic based surgical tools.
Internationally, we sell our products through a direct sales and support
organization of eleven people and distributors and agents.
From January 1, 1999 through December 31, 1999, we shipped 130 systems
worldwide.
We have developed, in conjunction with several major hospitals using our
TMR or PTMR products, a training program to assist physicians in acquiring the
expertise necessary to utilize our products and procedures. This program
includes a comprehensive one-day course including didactic training and hands-on
performance of TMR or PTMR in vivo.
We exhibit our products at major cardiovascular meetings and recruit new
investigators to buy our products for investigational use in their hospitals.
Investigators of our products have made presentations at meetings around the
world, describing their results. Abstracts and articles have been published in
peer-reviewed publications and industry journals to present the results of our
clinical trials.
RESEARCH AND DEVELOPMENT
Our ongoing research and product development efforts are focused on the
development of new and enhanced lasers, fiber-optic handpieces and TMR and PTMR
applications. In addition, we continue to develop new laser handpieces in order
to enhance the utility and quality of our line of disposable surgical tools and
to expand the indications for use and variety of procedures that can be
performed with our surgical tools. Specifically, we are seeking to achieve
continual improvements in our TMR and PTMR procedures, including greater
surgical access and visualization of the surgical field; greater precision in
the placement of pathways; reduced epicardial bleeding and bruising of heart
muscle; greater margins of safety with respect to underlying heart structures;
and reduced likelihood of induction of arrhythmia.
MANUFACTURING AND QUALITY ASSURANCE
We manufacture and assemble our products from purchased components and
subassemblies, primarily at our facility in Sunnyvale, California.
Each laser is mobile and shock resistant, complies with Underwriters
Laboratory ("UL") standards and is equipped with safety interlocks and user
friendly controls and meters. Our production personnel assemble and test each
laser system in a process designed to test the integrity of the laser system and
to provide for accurate calibration of system components. Upon completion of
these tests, the laser is packaged for shipment. Our personnel uncrate and
install the laser at the hospital, and verify that the system meets acceptance
criteria, including all laser power output specifications.
Laser handpieces are fabricated from tubing, connectors and optical fibers,
each of which is purchased from outside vendors. The individual optical fibers
are cut to the appropriate length, bundled (except for the Axcis PTMR catheter
and the Vertex TMR handpiece), and placed in the extruded tubing and metal
connectors, and the tip of the device is molded and polished. Prior to
packaging, each handpiece is tested on a laser system to verify acceptable power
output.
Our assembly and manufacturing activities have historically consisted
primarily of producing limited quantities of laser units and fiber-optic
accessories for sale to clinical investigators. During 1999, production
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volumes increased following FDA approval of our TMR procedure. Our future
profitability will depend, in part, on our ability to achieve manufacturing
efficiencies as production volumes continue to increase.
The core components of our laser units and fiber-optic handpieces are
generally acquired from multiple sources. We currently purchase certain laser
and fiber-optic components and subassemblies from single sources. Although we
have identified alternative vendors, the qualification of additional or
replacement vendors for certain components or services is a lengthy process. Any
significant supply interruption would have a material adverse effect on our
ability to manufacture our products and, therefore, would harm our business. We
intend to continue to qualify multiple sources for components that are presently
single sourced and also to build an inventory of these items for use in the
event of supply interruptions.
In May 1997, we received ISO 9001 Certification for our quality assurance
process. We are committed to continuous quality improvement in our manufacturing
and assembly operations. Each subassembly and product is thoroughly tested at
multiple stages of production to ensure proper operation and compliance with
applicable regulatory standards. Manufacturing quality is documented and
monitored continually under ISO guidelines.
We are required to register as a manufacturer of medical devices with the
FDA and state agencies such as the California Department of Health Services. Our
facilities, procedures and practices will be subject to ongoing, periodic Good
Manufacturing Practices inspections by the FDA and such other regulatory
agencies.
We are also subject to certain federal, state and local regulations
regarding environmental protection and hazardous substance controls, among
others. Although we believe we currently comply in all material respects with
such regulations, failure to comply could subject us to fines or other
enforcement actions.
We provide to our customers in the U.S. and to our foreign distributors a
free one-year parts and service warranty for each laser unit. We offer extended
warranty coverage for one-year periods to customers in the U.S. We also perform
on a fee basis service on laser units that are no longer covered by warranty.
Annual service contracts are generally priced at 10% of the purchase price of
the laser unit. Handpieces are sold without warranty.
COMPETITION
We expect that the market for TMR and PTMR, which is currently in the early
stages of development, will be intensely competitive. Competitors include PLC
Systems, Inc., Johnson and Johnson, and Boston Scientific which are either
selling FDA-approved TMR products in the U.S. and abroad, or PTMR products for
investigational use in the U.S. and commercially abroad. Other competitors may
also enter the market, including large companies in the laser and cardiac
surgery markets. Many of these companies have or may have significantly greater
financial, research and development, marketing and other resources than we do.
PLC is a publicly traded corporation, which uses a CO2 laser and an
articulated mechanical arm in its TMR products. PLC obtained a PMA for TMR in
1998. PLC has received the CE Marking, which allows sales of its products
commercially in all European Union countries. PLC has been issued patents for
its apparatus and methods for TMR.
Johnson & Johnson is a publicly traded company which uses a holmium laser
and fiber-optics in its PTMR products. Johnson & Johnson has acquired a
ventricular mapping company to further its PTMR product line and has begun U.S.
trials under an IDE.
Boston Scientic is a publicly traded company, which has acquired radio
frequency technology to begin a percutaneous feasibility trial in the U.S. under
a preliminary IDE.
We believe that the factors which will be critical to market success
include: the timing of receipt of requisite regulatory approvals, effectiveness
and ease of use of the TMR products and procedures on both a stand alone basis
and in conjunction with other procedures such as CABG and PTCA, breadth of
product line, system reliability, brand name recognition and effectiveness of
distribution channels and cost of capital equipment and disposable devices.
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TMR and PTMR also compete with other methods for the treatment of
cardiovascular disease, including drug therapy, PTCA and CABG. Even with the FDA
approval of our TMR system in patients for whom other cardiovascular treatments
are not likely to provide relief, and when used in conjunction with other
treatments, we can not assure you that our TMR or PTMR products will be
accepted. Moreover, technological advances in other therapies for cardiovascular
disease such as pharmaceuticals or future innovations in cardiac surgery
techniques could make such other therapies more effective or lower in cost than
our TMR procedure and could render our technology obsolete. We can not assure
you that physicians will use our TMR procedure to replace or supplement
established treatments, or that our TMR procedure will be competitive with
current or future technologies. Such competition could harm our business.
Our TMR laser system and any other product developed by us that gains
regulatory approval will face competition for market acceptance and market
share. An important factor in such competition may be the timing of market
introduction of competitive products. Accordingly, the relative pace at which we
can develop products, complete clinical testing and regulatory approval
processes, gain reimbursement acceptance and supply commercial quantities of the
product to the market are expected to be important competitive factors. In the
event a competitor is able to obtain a PMA for its products prior to us, we may
not be able to compete successfully. We may not be able to compete successfully
against current and future competitors even if we obtain a PMA prior to our
competitors.
GOVERNMENT REGULATION
Laser-based surgical products and disposable fiber-optic accessories for
the treatment of advanced cardiovascular disease through TMR are considered
medical devices, and as such are subject to regulation in the U.S. by the FDA.
We have FDA clearance for the sale of the our laser system for thoracic surgery.
In February 1999, we obtained FDA approval through the more rigorous PMA process
for the performance of TMR with the our TMR 2000 laser system for treatment of
stable patients with angina (Canadian Cardiovascular Society Class 4) refractory
to medical treatment and secondary to objectively demonstrated coronary artery
atherosclerosis and with a region of the myocardium with reversible ischemia not
amenable to direct coronary revascularization.
To obtain a PMA for a medical device, we must file a PMA application that
includes clinical data and the results of pre-clinical and other testing
sufficient to show that there is a reasonable assurance of safety and
effectiveness of the product for its intended use. To begin a clinical study, an
IDE must be obtained and the study must be conducted in accordance with FDA
regulations. An IDE application must contain preclinical test data demonstrating
the safety of the product for human investigational use, information on
manufacturing processes and procedures, and proposed clinical protocols. If the
FDA clears the IDE application, human clinical trials may begin. The results
obtained from these trials, if satisfactory, are accumulated and submitted to
the FDA in support of a PMA application. Prior to U.S. commercial distribution,
premarket approval from the FDA is required for devices developed by us. In
addition to the results of clinical trials, the PMA application must include
other information relevant to the safety and effectiveness of the device, a
description of the facilities and controls used in the manufacturing of the
device, and proposed labeling. By law, the FDA has 180 days to review a PMA
application. While the FDA has responded to PMA applications within the allotted
time frame, reviews more often occur over a significantly longer period and may
include requests for additional information or extensive additional trials.
There can be no assurance that we will not be required to conduct additional
trials which may result in substantial costs and delays, nor can there be any
assurance that a PMA will be obtained for each product in a timely manner, if at
all. In addition, changes in existing regulations or the adoption of new
regulations or policies could prevent or delay regulatory approval of our
products. Furthermore, even if a PMA is granted, subsequent modifications of the
approved device or the manufacturing process may require a supplemental PMA or
the submission of a new PMA which could require substantial additional clinical
efficacy data and FDA review. After the FDA accepts a PMA application for
filing, and after FDA review of the application, a public meeting is frequently
held before an FDA advisory panel in which the PMA is reviewed and discussed.
The panel then issues a favorable or unfavorable recommendation to the FDA or
recommends approval with conditions. Although the FDA is not
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bound by the panel's recommendations, it tends to give such recommendations
significant weight. In February 1999, we received a PMA for our TMR laser system
for use in certain indications.
Products manufactured or distributed by us pursuant to a PMA will be
subject to pervasive and continuing regulation by the FDA, including, among
other things, postmarket surveillance and adverse event reporting requirements.
Failure to comply with applicable regulatory requirements can result in, among
other things, warning letters, fines, suspensions or delays of approvals,
seizures or recalls of products, operating restrictions or criminal
prosecutions. The Federal Food, Drug and Cosmetic Act requires us to manufacture
our products in registered establishments and in accordance with GMP regulations
and to list our devices with the FDA. Furthermore, as a condition to receipt of
a PMA, our facilities, procedures and practices will be subject to additional
pre-approval GMP inspections and thereafter to ongoing, periodic GMP inspections
by the FDA. These GMP regulations impose certain procedural and documentation
requirements upon us with respect to manufacturing and quality assurance
activities. Labeling and promotional activities are subject to scrutiny by the
FDA. Current FDA enforcement policy prohibits the marketing of approved medical
devices for unapproved uses. Changes in existing regulatory requirements or
adoption of new requirements could harm our business. We may be required to
incur significant costs to comply with laws and regulations in the future and
current or future laws and regulations may harm our business.
We are also regulated by the FDA under the Radiation Control for Health and
Safety Act, which requires laser products to comply with performance standards,
including design and operation requirements, and manufacturers to certify in
product labeling and in reports to the FDA that our products comply with all
such standards. The law also requires laser manufacturers to file new product
and annual reports, maintain manufacturing, testing and sales records, and
report product defects. Various warning labels must be affixed and certain
protective devices installed, depending on the class of the product. In
addition, we are subject to California regulations governing the manufacture of
medical devices, including an annual licensing requirement. Our facilities are
subject to ongoing, periodic inspections by the FDA and California regulatory
authorities.
Sales, manufacturing and further development of our TMR and PTMR systems
also may be subject to additional federal regulations pertaining to export
controls and environmental and worker protection, as well as to state and local
health, safety and other regulations that vary by locality, which may require
obtaining additional permits. We can not predict the impact of these regulations
on our business.
Sales of medical devices outside of the U.S. are subject to foreign
regulatory requirements that vary widely by country. In addition, the FDA must
approve the export of devices to certain countries. To market in Europe, a
manufacturer must obtain the certifications necessary to affix to its products
the CE Marking. The CE Marking is an international symbol of adherence to
quality assurance standards and compliance with applicable European medical
device directives. In order to obtain and to maintain a CE Marking, a
manufacturer must be in compliance with appropriate ISO 9001 standards and
obtain certification of its quality assurance systems by a recognized European
Union notified body. However, certain individual countries within Europe require
further approval by their national regulatory agencies. Failure to receive or to
maintain the right to affix the CE Marking or other requisite approvals could
prohibit us from selling our TMR products in member countries of the European
Union or elsewhere, and we may not be successful in meeting the European
certification requirements. In December 1996, we obtained a CE Marking for our
TMR laser system. In July 1998, we obtained CE Marking for our PTMR catheter
system. In addition, the Vertex TMR Probe and the Axcis PMR Catheter system,
acquired when we merged with CardioGenesis, received CE mark approval in July
1996 and January 1998, respectively.
INTELLECTUAL PROPERTY MATTERS
Our success will depend, in part, on our ability to obtain patent
protection for our products, preserve our trade secrets, and operate without
infringing the proprietary rights of others. Our policy is to seek to protect
our proprietary position by, among other methods, filing U.S. and foreign patent
applications related to our technology, inventions and improvements that are
important to the development of our business. We have 72 patents or allowed
patent applications and 87 patent applications pending relating to various
aspects of
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TMR, PTMR and other cardiovascular therapies. Our patents or patent applications
may be challenged, invalidated or circumvented in the future or the rights
granted may not provide a competitive advantage. We intend to vigorously protect
and defend our intellectual property. We do not know if patent protection will
continue to be available for surgical methods in the future. Costly and
time-consuming litigation brought by us may be necessary to enforce our patents
and to protect our trade secrets and know-how, or to determine the
enforceability, scope and validity of the proprietary rights of others.
We also rely upon trade secrets, technical know-how and continuing
technological innovation to develop and maintain our competitive position. We
typically require our employees, consultants and advisors to execute
confidentiality and assignment of inventions agreements in connection with their
employment, consulting, or advisory relationships with us. These agreements may
be breached or we may not have adequate remedies for any breach. Furthermore,
our competitors may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our proprietary
technology, or we may not be able to meaningfully protect our rights in
unpatented proprietary technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
have been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. In this regard, our competitors
have been issued a number of patents related to TMR and PTMR. In September 1995
we received from a competitor a notice of potential infringement of the
competitor's patent regarding a method for TMR utilizing synchronization of
laser pulses to the electrical signals from the heart. We concluded, following
discussion with our patent counsel, that we did not utilize the process and/or
apparatus which is the subject of the patent at issue, and responded to the
competitor to such effect and have received no further correspondence on this
matter. There can be no assurance, however, that further claims or proceedings
will not be initiated by a competitor, or that claims by other parties will not
arise in the future. Any such claims in the future, with or without merit, could
be time-consuming and expensive to respond to and could divert the attention of
our technical and management personnel. We may be involved in litigation to
defend against claims of our infringement, to enforce our patents, or to protect
our trade secrets. If any relevant claims of third party patents are upheld as
valid and enforceable in any litigation or administrative proceeding, we could
be prevented from practicing the subject matter claimed in such patents, or we
could be required to obtain licenses from the patent owners of each such patent
or to redesign our products or processes to avoid infringement.
Patent applications in the U.S. are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a period after filing. Publication of discoveries in the scientific or
patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Accordingly, we can not assure you our current and
potential competitors and other third parties have not filed or in the future
will not file applications for, or have not received or in the future will not
receive, patents or obtain additional proprietary rights that will prevent,
limit or interfere with our ability to make, use or sell our products either in
the U.S. or internationally. In the event we were to require licenses to patents
issued to third parties, such licenses may not be available or, if available,
may not be available on terms acceptable to us. In addition, we may not be
successful in any attempt to redesign our products or processes to avoid
infringement or that any such redesign could be accomplished in a cost-effective
manner. Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent us from
manufacturing and selling our products, which would harm our business.
Unrelated to the products used in our TMR procedure, we have received
notices from three holders of patents requesting we become a licensee. Although
we believe that either these patents are subject to challenge as being invalid
or are not infringed by our products, we may not prevail in any such action. In
one case, we have entered into a non-exclusive license to a patent involving
arthroscopy use. In a second case, we buy components only from licensees of the
patent holder, which we believe obviates the need for a separate license. If we
determine that it is necessary to obtain a license to any patents or
intellectual property, any such license may not be available on acceptable terms
or at all, or we may not be able to develop or otherwise obtain alternative
technology. Failure to obtain necessary licenses could prevent us from
manufacturing and selling our products, which would harm our business.
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THIRD PARTY REIMBURSEMENT
We expect that sales volumes and prices of our products will depend
significantly on the availability of reimbursement for surgical procedures using
our products from third party payors such as governmental programs, private
insurance and private health plans. Reimbursement is a significant factor
considered by hospitals in determining whether to acquire new equipment.
Reimbursement rates from third party payors vary depending on the third party
payor, the procedure performed and other factors. Moreover, third party payors,
including government programs, private insurance and private health plans, have
in recent years been instituting increasing cost containment measures designed
to limit payments made to healthcare providers by, among other measures,
reducing reimbursement rates, limiting services covered, negotiating prospective
or discounted contract pricing and carefully reviewing and increasingly
challenging the prices charged for medical products and services.
Medicare reimburses hospitals on a prospectively determined fixed amount
for the costs associated with an in-patient hospitalization based on the
patient's discharge diagnosis, and reimburses physicians on a prospectively
determined fixed amount based on the procedure performed, regardless of the
actual costs incurred by the hospital or physician in furnishing the care and
unrelated to the specific devices used in that procedure. Medicare and other
third party payors are increasingly scrutinizing whether to cover new products
and the level of reimbursement for covered products. In addition, Medicare
traditionally has considered items or services involving devices that have not
been approved or cleared for marketing by the FDA to be precluded from Medicare
coverage. In July 1999 HCFA began coverage of FDA approved TMR systems for any
manufacturer's TMR procedures. While we are unable to determine the ultimate
effect of this reimbursement approval on our business, we anticipate that
revenues from the sale of our FDA approved surgical TMR products are likely to
increase, at least over the short-term and possibly thereafter.
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. The lack of private insurance and health plans reimbursement may harm
our business.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the U.S., health maintenance organizations are emerging in certain European
countries. We may need to seek international reimbursement approvals, and we may
not be able to attain these approvals in a timely manner, if at all. Failure to
receive foreign reimbursement approvals could make market acceptance of our
products in the foreign markets in which such approvals are sought more
difficult.
We believe that reimbursement in the future will be subject to increased
restrictions such as those described above, both in the U.S. and in foreign
markets. We also believe that the escalating cost of medical products and
services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by us. Third party reimbursement and
coverage may not be available or adequate in U.S. or foreign markets, current
levels of reimbursement may be decreased in the future or future legislation,
regulation, or reimbursement policies of third party payors may reduce the
demand for our products or our ability to sell our products on a profitable
basis. Fundamental reforms in the healthcare industry in the U.S. and Europe
that could affect the availability of third party reimbursement continue to be
proposed, and we cannot predict the timing or effect of any such proposal. If
third party payor coverage or reimbursement is unavailable or inadequate, our
business may suffer.
PRODUCT LIABILITY AND INSURANCE
We maintain insurance against product liability claims in the amount of $10
million per occurrence and $10 million in the aggregate, and we are considering
increasing such coverage now that we have received a PMA. We may not be able to
obtain additional coverage or continue coverage in the amount desired or on
terms acceptable to us, and such coverage may not be adequate for liabilities
actually incurred. Any uninsured
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or underinsured claim brought against us or any claim or product recall that
results in a significant cost to or adverse publicity against us could harm our
business.
EMPLOYEES
As of December 31, 1999 we had 163 employees, including 32 in research and
development, 46 in manufacturing, 63 in sales and marketing and 22 in
administration. Other than confidentiality agreements with all employees, we do
not enter into employment agreements with any of our employees. None of our
employees is covered by a collective bargaining agreement and we have not
experienced any work stoppages to date.
Our executive officers as of February 29, 2000 are as follows:
NAME AGE POSITION
---- --- --------
Douglas Murphy-Chutorian, M.D. 45 Chairman of the Board of Directors
Alan Kaganov, Sc.D. 61 Chief Executive Officer
Richard P. Powers 58 Executive Vice President of Administration and Chief
Financial Officer and Assistant Secretary
William Picht 54 Vice President of Operations
Douglas Murphy-Chutorian, M.D. has been our Chairman of the Board since
June 1989, He also served as our Chief Executive Officer from June 1989 to March
1999. Dr. Murphy-Chutorian was also Chairman of the Board of Atlantis Catheter
Company, Inc. ("Atlantis") from November 1993 to March 1996 when Atlantis was
acquired by Biocompatibles International plc. Dr. Murphy-Chutorian is an
interventional cardiologist and served as a Clinical Assistant Professor in the
Department of Cardiology and Cardiovascular Medicine at Albert Einstein College
of Medicine (Montefiore Division) and Stanford University Medical Center from
1986 through July 1990. He is currently a member of the voluntary clinical staff
of Stanford University Medical Center and of Montefiore Medical Center. Dr.
Murphy-Chutorian received his M.D. degree from the College of Physicians and
Surgeons, Columbia University, completed his residency at New York
University/Bellevue Hospital and completed his cardiology training at Stanford
University Medical Center.
Alan L. Kaganov, Sc.D. has served as our Chief Executive Officer since
December 1999 and been a director since January 1997. Since July 1996, Dr.
Kaganov has been a Venture Partner at U.S. Venture Partners. From May 1993 to
June 1996 Dr. Kaganov was Vice President of Business Development and Strategic
Planning at Boston Scientific Corporation. From June 1991 until December 1992 he
was President and CEO of EP Technologies, a catheter-based electrophysiology
company. Dr. Kaganov has a Masters and Doctorate of Science in biomedical
engineering from Columbia University and an M.B.A. from New York University.
Richard P. Powers has been our Executive Vice President of Administration
and Chief Financial Officer and Assistant Secretary since March 1999. Mr. Powers
was also Executive Vice President of Finance of CardioGenesis from July 1998 to
March 1999, and Vice President of Finance and Administration and Chief Financial
Officer of CardioGenesis from March 1996 to June 1998. From September 1995 to
February 1996, Mr. Powers served as a consultant to and director of Qualtos
Computer Inc., a provider of on-line support networks and software. From 1986 to
August 1995, Mr. Powers was Senior Vice President and Chief Financial Officer of
Syntex Corporation, a pharmaceutical company. He received his B.S. degree in
Accounting from Canisius College and his M.B.A. from the University of
Rochester.
William E. Picht has been our Vice President of Operations since August
1996. From 1987 to September 1996, Mr. Picht served as Vice President of
Operations with Behring Diagnostics, Inc. From 1986 to 1987, Mr. Picht served as
Vice President of Reagent Manufacturing with Cooper Technicon, Inc., from 1985
to 1986 as Vice President of Operations and from 1983 to 1985 as Director of
Operations/Plant Manager. Mr. Picht received his B.A. degree in Biology from
Lycoming College.
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ITEM 2. DESCRIPTION OF PROPERTY.
Our facilities are comprised of 45,960 square feet under three separate
leases. The facility contains a Class 10,000 clean room for laser handpiece and
catheter fabrication. The leases expire from July 2002 through September 2002.
Our headquarters is located in Sunnyvale, California. We believe our facilities
are adequate to meet our foreseeable requirements through at least 2000. There
can be no assurance that additional facilities will be available to us, if and
when needed, thereafter.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANTS SHARES AND RELATED SHAREHOLDER MATTERS.
(A) Our common stock is traded on the Nasdaq National Market under the
symbol, ESTI, commencing May 31, 1996. For the periods indicated, the following
table presents the range of high and low sale prices for the Common Stock as
reported by the Nasdaq National Market.
1999 HIGH LOW
---- ------ -----
First Quarter............................................... $14.25 $7.25
Second Quarter.............................................. $12.38 $7.69
Third Quarter............................................... $18.69 $9.75
Fourth Quarter.............................................. $15.94 $5.00
1998 HIGH LOW
---- ------ -----
First Quarter............................................... $14.38 $5.63
Second Quarter.............................................. $13.50 $9.25
Third Quarter............................................... $10.75 $5.53
Fourth Quarter.............................................. $ 9.31 $5.94
As of December 31, 1999 shares of our common stock were held by 217
registered shareholders.
We have never paid a cash dividend on our capital stock and do not
anticipate paying any cash dividends on the common stock in the foreseeable
future, as we intend to retain our earnings, if any, to generate increased
growth and for general corporate purposes.
(B) CHANGES IN SECURITIES AND USE OF PROCEEDS.
In connection with our initial public offering in 1996, we filed a
Registration Statement on Form S-1, SEC File No. 333-03770, which was declared
effective by the Commission on May 31, 1996. We registered 4,600,000 shares of
our common stock, no par value per share. The offering commenced on May 31, 1996
and 4,000,000 shares were sold. The aggregate offering price of the registered
shares was $64,000,000. The managing underwriters of the offering were
PaineWebber Incorporated, Deutsche Morgan Grenfell, and Jefferies & Company Inc.
We incurred the following expenses in connection with the offering:
Underwriting discounts and commissions...................... $4,480,000
Other expenses.............................................. $1,565,000
----------
Total expenses.............................................. $6,045,000
==========
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All of such expenses were payments to others.
In connection with its initial public offering in 1996, CardioGenesis
Corporation filed a Registration Statement on Form SB-2, SEC File No.
333-3752-LA, which was declared effective by the SEC on May 21, 1996.
CardioGenesis registered 3,000,000 shares of its Common Stock, $.001 par value
per share. The offering commenced on May 21, 1996 and 3,000,000 shares were
sold. The aggregate offering price of the shares sold was $60,000,000. The
managing underwriters of the offering were Bear Stearns & Company Inc.,
Montgomery Securities and Piper Jaffray Inc. Expenses and underwriting discounts
and commissions incurred in connection with the offering totaled $5,533,000.
The net offering proceeds to us (including CardioGenesis) after deducting
the total expenses above were approximately $112,422,000. From May 31, 1996 to
December 31, 1999, we (including CardioGenesis) used such net offering proceeds,
in direct or indirect payments to others, as follows:
Purchase and installment of machinery and equipment......... $ 3,371,000
Working capital............................................. $ 70,863,000
Investment in short-term, interest- bearing obligations..... $ 34,695,000
Repayment of indebtedness................................... $ 3,493,000
------------
Total............................................. $112,422,000
============
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.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated statement of operations data for fiscal
years ended 1999, 1998 and 1997 and the consolidated balance sheet data for 1999
and 1998 set forth below are derived from the our consolidated financial
statements and are qualified by reference to our consolidated financial
statements audited by PricewaterhouseCoopers LLP, independent accountants,
included herein.
The selected consolidated statement of operations data for fiscal years
ended 1996 and 1995 and the consolidated balance sheet data for 1997, 1996 and
1995 have been derived from our audited financial statements not included
herein. These historical results are not necessarily indicative of the results
of operations to be expected for any future period. As a result of our pooling
of interest with CardioGenesis, all prior period data has been restated as if
the combined entity existed for all periods presented.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $ 25,324 $ 15,080 $ 13,058 $ 13,718 $ 2,707
Cost of revenues.......................... 10,723 7,868 7,295 6,424 1,642
--------- --------- -------- -------- --------
Gross profit......................... 14,601 7,212 5,763 7,294 1,065
--------- --------- -------- -------- --------
Operating expenses:
Research and development................ 11,353 29,861 26,217 13,323 4,977
Sales and marketing..................... 16,553 17,663 11,542 5,949 2,057
General and administrative.............. 8,028 10,821 9,462 4,820 1,017
Merger-related costs.................... 7,737 -- -- -- --
--------- --------- -------- -------- --------
Total operating expenses........ 43,671 58,345 47,221 24,092 8,051
--------- --------- -------- -------- --------
Operating loss....................... (29,070) (51,133) (41,458) (16,798) (6,986)
Interest and other income (expense),
net..................................... 737 3,366 5,240 3,842 (739)
--------- --------- -------- -------- --------
Net loss............................. $ (28,333) $ (47,767) $(36,218) $(12,956) $ (7,725)
========= ========= ======== ======== ========
Net loss per share -- basic and
diluted............................ $ (0.99) $ (1.77) $ (1.39) $ (0.65) $ (0.74)
========= ========= ======== ======== ========
Shares used in per share
calculation........................ 28,629 27,000 26,027 20,019 10,470
========= ========= ======== ======== ========
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities.............................. $ 13,313 $ 27,941 $ 75,729 $110,271 $ 14,159
Working capital........................... 10,031 22,243 68,999 105,185 12,643
Total assets.............................. 34,019 52,978 91,714 123,003 18,682
Long-term debt, less current portion...... 815 114 10 20 --
Accumulated deficit....................... (139,224) (110,891) (63,124) (26,906) (13,846)
Redeemable convertible preferred stock.... -- -- -- -- 22,390
Total shareholders' equity (deficit)...... 18,573 37,276 82,374 117,061 (9,260)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains descriptions of 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 Annual Report on Form 10-K.
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 with CardioGenesis Corporation the
completion of our business combination. 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 system 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 December 31, 1999, we had an accumulated deficit of $139,224,000. 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, and the status and timing of regulatory approvals.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Revenues
Net revenues of $25,324,000 for the year ended December 31, 1999 increased
$10,244,000 or 68% when compared to net revenues of $15,080,000 for the year
ended December 31, 1998. 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 14% and 24.1% of
total sales for the years ended December 31, 1999 and 1998, respectively. The
percentage decrease relative to total sales is mainly due to higher domestic
sales 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 "-- Risk
Factors.")
Gross Profit
Gross profit increased to $14,601,000 or 58% of net revenues for the year
ended December 31, 1999 as compared to $7,212,000 or 48% of net revenues for the
year ended December 31, 1998. The increase in absolute terms and as a percentage
of sales resulted from greater sales volume, a higher average sales price per
laser and lower unit costs due to lower fixed manufacturing expenses and higher
production volumes.
Research and Development
Research and development expenditures of $11,353,000 decreased $18,508,000
or 62% for the year ended December 31, 1999 when compared to $29,861,000 for the
year ended December 31, 1998. 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 $16,553,000 decreased $1,110,000 or 6%
for the year ended December 31, 1999 when compared to $17,663,000 for the year
ended December 31, 1998. The decrease in absolute dollars is due to cost
efficiencies realized from the merger. We expect that 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 $2,793,000 or 26% to
$8,028,000 in 1999 from $10,821,000 in 1998. The decrease is due to a reduction
in litigation expenses and cost savings resulting from the merger.
Merger Related Costs
CardioGenesis was a medical device company like us, 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, catheter-based percutaneous
myocardial revascularization, and thorascopic transmyocardial revascularization
to treat patients afflicted with debilitating angina. During the quarter ended
March 31, 1999, we recognized merger-related costs of $6,893,000 for financial
advisory and
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legal fees, personnel severance, terminated relationships and other costs
including write-offs of fixed assets and inventory. A majority of the terminated
employees were located in California and worked in operations, sales, marketing,
quality, research and development and administrative functions. A total of 40
employees were terminated.
During the remaining three quarters in the year ended December 31, 1999, we
recognized additional merger-related costs of $844,000, bringing the total of
merger related costs to $7,737,000 for the twelve months ended December 31,
1999. This increase was mainly due to a change associated with an upgrade
program to replace customer owned equipment rendered unusable by the merger. We
do not expect any further charges for merger related expense and anticipate the
last merger-related payment to occur in July of 2000. The following table
summarizes the merger-related costs (in thousands).
DESCRIPTION AMOUNT
----------- ------
Financial advisory and legal fees........................... $2,528
Personnel severance......................................... 1,190
Terminated relationships/contracts.......................... 910
Other costs including fixed asset and inventory
write-offs................................................ 3,109
------
Total............................................. $7,737
======
Interest and Other Income (Expense), Net
Interest and other income of $801,000 decreased $2,653,000 or 77% for the
year ended December 31, 1999 when compared to $3,454,000 for the year ended
December 31, 1998. The decrease was due to lower investments in marketable
securities and cash and cash equivalents.
Interest expense of $64,000 decreased $24,000 or 27% for the year ended
December 31, 1999 when compared to $88,000 for the year ended December 31, 1998.
This decrease reflects a lower level of debt outstanding.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Revenues
Net revenues of $15,080,000 for the year ended December 31, 1998 increased
$2,022,000 or 15% when compared to net revenues of $13,058,000 for the year
ended December 31, 1997. The increase was a result of higher laser system and
disposable product sales.
Gross Profit
Gross profit increased to $7,212,000 or 48% of net revenues for the year
ended December 31, 1998 as compared to $5,763,000 or 44% of net revenues for the
year ended December 31, 1997. The increase resulted from greater sales volume
and a higher average sales price per laser in 1998 compared to 1997. The
increase in sales volumes in 1998 resulted in increased production volumes,
which resulted in lower per unit manufacturing costs as a result of production
efficiencies.
Research and Development
Research and development expenditures of $29,861,000 increased $3,644,000
or 14% for the year ended December 31, 1998 when compared to $26,217,000 for the
year ended December 31, 1997. The increase in these expenses reflected a higher
level of costs related to the development of new products, increases in the
number of clinical trials and the cost of supporting these trials.
Sales and Marketing
Sales and marketing expenditures of $17,663,000 increased $6,121,000 or 53%
for the year ended December 31, 1998 when compared to $11,542,000 for the year
ended December 31, 1997. The increase was due primarily to increases in
headcount, sales commissions and physician training.
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General and Administrative
General and administrative expenses increased $1,359,000 or 14% to
$10,821,000 in 1998 from $9,462,000 in 1997. The increase for the year ended
December 31, 1998 as compared to for the year ended December 31, 1997 reflects
an increase in litigation expense.
Interest and Other Income (Expense), Net
Interest income of $3,454,000 decreased $1,847,000 or 35% for the year
ended December 31, 1998 as compared to $5,301,000 for the year ended December
31, 1997. The decrease was due to lower investments in marketable securities and
cash and cash equivalents.
Interest expense of $88,000 increased $27,000 or 44% for the year ended
December 31, 1998 as compared to $61,000 for the year ended December 31, 1997.
This increase was due to a note payable held by our subsidiary, MicroHeart, Inc.
from October 1997 to October 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short and long-term marketable securities were
$13,313,000 at December 31, 1999 compared to $27,941,000 at December 31, 1998, a
decrease of 52%. Marketable securities are classified as "available-for-sale"
and are readily marketable at their fair market value. We used $22,315,000 of
cash for operating activities, including funding our operating loss and
decreases in accrued liabilities in 1999. Investing activities, consisting
primarily of purchases and sale of marketable securities and additions to
property and equipment, provided cash of $16.1 million, $28.4 million and $29.7
million in fiscal years 1999, 1998 and 1997 respectively. Financing activities
provided cash of $8.4 million, $1.3 million and $2.3 million in fiscal years
1999, 1998 and 1997 respectively primarily from the issuance of stock pursuant
to exercise of stock options and warrants.
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 operation has been funded in part through sales
of our products. At December 31, 1999, we had an accumulated deficit of
$139,224,000.
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 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities. SFAS 133 requires that all derivatives be recognized at
fair value in the statement of financial position, and that the corresponding
gains or losses be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of hedging relationship
that exists. SFAS 133 will be effective for fiscal years beginning after July
15, 2000. We do not currently hold derivative instruments or engage in hedging
activities.
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
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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.
FACTORS AFFECTING FUTURE RESULTS
In addition to the other information included in this Annual Report on Form
10-K, 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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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.
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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.
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. It is likely that our operating
results for a future quarter will fall below the expectations of public market
analysts and investors. If this occurs, 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.
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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 TMR and PTMR laser systems is intensely
competitive and is constantly becoming more competitive. If our 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 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.
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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 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
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- 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
- 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.
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The Settlement and License Agreement applies only to those products or that
technology that uses the PLC patents, and the agreement does not provide PLC any
rights to any CardioGenesis intellectual property. The Eclipse TMR 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;
- 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.
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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 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.
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
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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;
- 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.
28
31
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 does 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 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.
29
32
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:
- 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 PMR 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.
30
33
We sell our products internationally which subjects it 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, 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 March 24,
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 $5.00. 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
31
34
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 7A. 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 and related weighted average interest rates as
of December 31, 1999 (in thousands) for our investment portfolio and cash and
cash equivalents.
Assets
Cash and cash equivalents................................. $5,566
Average interest rate..................................... 4.0%
Available-for-sale securities............................. $7,747
Average interest rate..................................... 5.5%
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 below and the Index therein for a listing of the consolidated
financial statements and supplementary data filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
32
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information required by Part III is omitted from this Annual Report
on Form 10-K because we will file a definitive proxy statement within 120 days
after the end of our fiscal year pursuant to Regulation 14A for our Annual
Meeting of Shareholders, currently scheduled for May 31, 2000, and the
information included in the proxy statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER MATTERS.
Certain of the information concerning our executive officers required by
this Item is contained in the section of Part I of this Annual Report on Form
10-K entitled "Item 1. Business -- Employees."
The information concerning our directors and the remaining information
concerning our executive officers required by this item is incorporated by
reference to the information set forth under the similarly titled caption
contained in the proxy statement to be used by us in connection with our 2000
Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
information set forth under the similarly titled caption contained in the proxy
statement to be used by us in connection with our 2000 Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
information set forth under the similarly titled caption contained in the proxy
statement to be used by us in connection with our 2000 Annual Meeting of
Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a)(1)FINANCIAL STATEMENTS. The financial statements required to be filed by
Item 8 herewith are as follows:
PAGE
----
Report of Independent Accountants........................... 36
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 37
Consolidated Statements of Operations and Comprehensive Loss
for the years ended December 31, 1999, 1998 and 1997...... 38
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. 39
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 40
Notes to Consolidated Financial Statements.................. 41
(2) FINANCIAL STATEMENT SCHEDULE.
The following financial statement schedule is filed herewith.
Schedule II -- Valuation and Qualifying Accounts............ 53
33
36
(3) EXHIBITS.
The exhibits listed under Item 14(c) are filed or incorporated by reference
herein.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by us during the three month period ended
December 31, 1999.
(c) EXHIBITS.
The exhibits below are filed or incorporated herein by reference.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1(2) Agreement and Plan of Reorganization among the Company,
CardioGenesis Corporation and RW Acquisition Corporation
dated October 21, 1998.
3.1(2) Certificate of Amendment and Restated Articles of
Incorporation of Registrant.
3.2(2) Amended and Restated Bylaws of Registrant.
10.1 Form of Director and Officer Indemnification Agreement.
10.2(2) Stock Option Plan.
10.3(2) Director Stock Option Plan.
10.4(2) 1996 Employee Stock Purchase Plan.
10.5(2) Facilities Lease for 1049 Kiel Court, Sunnyvale, California.
10.6(2) Facilities Lease for 1139 Karlstad Drive, Sunnyvale,
California.
10.7(2) 401(k) Plan.
10.8(3) CardioGenesis 1993 Equity Incentive Plan.
10.9(3) CardioGenesis 1996 Directors Stock Option Plan.
10.10(3) CardioGenesis 1996 Employee Stock Purchase Plan.
10.11(4) CardioGenesis 1996 Equity Incentive Plan.
21.1 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (see page 35).
27.1 Financial Data Schedule.
- ---------------
(1) Incorporated herein by reference to Appendix 1 to the Company's Registration
Statement on S-4 filed with the Securities and Exchange Commission on
February 9, 1999 (File No. 333-72063).
(2) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (File No. 333-03770), as amended, filed on April 18, 1996.
(3) Incorporated herein by reference from CardioGenesis Corporation's Form SB-2,
(File No. 333-3752-LA), declared effective on May 21, 1996.
(4) Incorporated herein by reference from CardioGenesis Corporation's Form S-8,
(File No. 333-35095, dated September 8, 1997).
34
37
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ECLIPSE SURGICAL TECHNOLOGIES, INC.
Registrant
Date: March, 28, 2000 By: /s/ RICHARD P. POWERS
------------------------------------
Richard P. Powers
Executive Vice President and
Chief Financial Officer
(Principal Accounting and Financial
Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATE INDICATED.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, Alan L. Kaganov,
Douglas Murphy-Chutorian and/or Richard P. Powers and each one of them, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DOUGLAS MURPHY-CHUTORIAN, M.D. Chairman March 28, 2000
- --------------------------------------------------------
Douglas Murphy-Chutorian, M.D.
/s/ ALAN L. KAGANOV, SC.D Chief Executive Officer March 28, 2000
- -------------------------------------------------------- (Principal Executive Officer)
Alan L. Kaganov, Sc.D and Director
/s/ RICHARD P. POWERS Executive Vice President and March 28, 2000
- -------------------------------------------------------- Chief Financial Officer
Richard P. Powers (Principal Accounting and
Financial Officer)
/s/ ROBERT L. MORTENSEN Director March 28, 2000
- --------------------------------------------------------
Robert L. Mortensen
/s/ JACK M. GILL Director March 28, 2000
- --------------------------------------------------------
Jack M. Gill
/s/ ROBERT C. STRAUSS Director March 28, 2000
- --------------------------------------------------------
Robert C. Strauss
35
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Eclipse Surgical Technologies,
Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 33 present fairly, in all material
respects, the financial position of Eclipse Surgical Technologies, Inc. and its
subsidiaries (the "Company") at December 31, 1999 and December 31, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
on page 33 present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and the financial statement schedule are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 27, 2000
36
39
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
ASSETS
1999 1998
--------- ---------
Current assets:
Cash and cash equivalents................................. $ 5,566 $ 3,273
Marketable securities..................................... 3,227 14,381
Accounts receivable, net of allowance for doubtful
accounts of $1,079 and $1,699 at December 31, 1999 and
1998, respectively..................................... 8,119 9,140
Inventories............................................... 6,983 9,075
Prepaids and other current assets......................... 767 1,962
--------- ---------
Total current assets.............................. 24,662 37,831
Property and equipment, net................................. 1,220 2,353
Long-term marketable securities............................. 4,520 10,287
Accounts receivable over one year, net of allowance for
doubtful accounts of $797 and $970, at December 31, 1999
and 1998, respectively.................................... 1,125 2,083
Other assets................................................ 2,492 424
--------- ---------
Total assets...................................... $ 34,019 $ 52,978
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,819 $ 1,589
Accrued liabilities....................................... 9,557 11,464
Customer deposits......................................... 145 256
Deferred revenue.......................................... 1,720 2,145
Note payable.............................................. -- 111
Current portion of capital lease obligation............... 26 23
Current portion of long-term liabilities.................. 1,364 --
--------- ---------
Total current liabilities......................... 14,631 15,588
Capital lease obligation, less current portion.............. 90 114
Long-term liabilities, less current portion................. 725 --
--------- ---------
Total liabilities................................. 15,446 15,702
--------- ---------
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred stock: no par value; 6,600 shares authorized;
none issued and outstanding;........................... -- --
Common stock: no par value; 82,000 shares authorized;
29,437 and 27,466 shares issued and outstanding at
December 31, 1999 and 1998, respectively............... 158,338 148,947
Deferred compensation..................................... (466) (829)
Accumulated other comprehensive (loss) income............. (75) 49
Accumulated deficit....................................... (139,224) (110,891)
--------- ---------
Total shareholders' equity........................ 18,573 37,276
--------- ---------
Total liabilities and shareholders' equity........ $ 34,019 $ 52,978
========= =========
The accompanying notes are an integral part of these consolidated financial
statements
37
40
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997
-------- -------- --------
Net revenues............................................... $ 25,324 $ 15,080 $ 13,058
Cost of revenues........................................... 10,723 7,868 7,295
-------- -------- --------
Gross profit..................................... 14,601 7,212 5,763
-------- -------- --------
Operating expenses:
Research and development................................. 11,353 29,861 26,217
Sales and marketing...................................... 16,553 17,663 11,542
General and administrative............................... 8,028 10,821 9,462
Merger-related costs..................................... 7,737 -- --
-------- -------- --------
Total operating expenses......................... 43,671 58,345 47,221
-------- -------- --------
Operating loss................................... (29,070) (51,133) (41,458)
Interest expense........................................... (64) (88) (61)
Interest and other income.................................. 801 3,454 5,301
-------- -------- --------
Net loss......................................... (28,333) (47,767) (36,218)
-------- -------- --------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period.............................................. (145) 38 87
Less: reclassification adjustment for gains included
in net income....................................... (5) (50) (496)
Foreign currency translation adjustment............. 26 3 (27)
-------- -------- --------
Other comprehensive income (loss)................... (124) (9) (436)
-------- -------- --------
Comprehensive loss............................... $(28,457) $(47,776) $(36,654)
======== ======== ========
Net loss per share:
Basic and diluted........................................ $ (0.99) $ (1.77) $ (1.39)
======== ======== ========
Weighted average shares outstanding...................... 28,629 27,000 26,027
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements
38
41
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
ACCUMULATED
OTHER
COMMON STOCK COMPREHENSIVE
------------------ DEFERRED INCOME ACCUMULATED
SHARES AMOUNT COMPENSATION (LOSS) DEFICIT TOTAL
------ -------- ------------ ------------- ----------- --------
Balances, December 31, 1996........... 25,745 $144,801 $(1,328) $ 494 $ (26,906) $117,061
Issuance of common stock pursuant to
exercise of options............... 632 1,186 -- -- -- 1,186
Issuance of common stock pursuant to
exercise of warrants.............. 134 301 -- -- -- 301
Amortization of deferred
compensation...................... -- 480 -- -- 480
Net change in unrealized gain on
marketable securities............. -- -- -- (409) -- (409)
Foreign currency translation
adjustment........................ -- -- -- (27) -- (27)
Net loss............................ -- -- -- -- (36,218) (36,218)
------ -------- ------- ----- --------- --------
Balances, December 31, 1997........... 26,511 146,288 (848) 58 (63,124) 82,374
Issuance of common stock pursuant to
exercise of options............... 650 1,496 -- -- -- 1,496
Issuance of common stock pursuant to
exercise of warrants.............. 305 725 -- -- -- 725
Deferred stock compensation......... -- 438 (438) -- -- --
Amortization of deferred
compensation...................... -- -- 457 -- -- 457
Net change in unrealized gain on
marketable securities............. -- -- -- (12) -- (12)
Foreign currency translation
adjustment........................ -- -- -- 3 -- 3
Net loss............................ -- -- -- -- (47,767) (47,767)
------ -------- ------- ----- --------- --------
Balances, December 31, 1998........... 27,466 148,947 (829) 49 (110,891) 37,276
Issuance of common stock pursuant to
exercise of options............... 1,522 7,747 -- -- -- 7,747
Issuance of common stock pursuant to
exercise of warrants.............. 449 833 -- -- -- 833
Deferred stock compensation for
options to consultants............ -- 811 (811) -- -- --
Amortization of deferred
compensation...................... -- 1,174 -- -- 1,174
Net change in unrealized gain on
marketable securities............. -- -- -- (150) -- (150)
Foreign currency translation
adjustment........................ -- -- -- 26 -- 26
Net loss............................ -- -- -- -- (28,333) (28,333)
------ -------- ------- ----- --------- --------
Balances, December 31, 1999........... 29,437 $158,338 $ (466) $ (75) $(139,224) $ 18,573
====== ======== ======= ===== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements
39
42
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $(28,333) $(47,767) $(36,218)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 1,453 908 1,099
Gain from investment in MicroHeart Holdings, Inc...... -- (400) --
Provision for doubtful accounts....................... 1,377 1,017 477
Inventory reserves.................................... 1,782 68 --
Amortization of deferred compensation for IPO......... 392 457 480
Amortization of deferred compensation for options to
consultants........................................ 782 -- --
Amortization of license fees.......................... 195 -- --
Loss on disposal of property and equipment............ 317 -- 2
Changes in operating assets and liabilities:
Accounts receivable -- short term.................. 551 (4,548) (1,316)
Inventories........................................ 799 (4,167) (1,403)
Prepaids and other current assets.................. 1,195 (229) (848)
Other assets....................................... 24 -- --
Accounts receivable -- long term................... 51 (1,963) (25)
Accounts payable................................... 230 (601) 1,272
Accrued liabilities................................ (1,907) 5,595 1,519
Long-term liabilities.............................. (687) -- --
Customer deposits.................................. (111) 185 43
Deferred revenue................................... (425) 1,995 (220)
-------- -------- --------
Net cash used in operating activities.............. (22,315) (49,450) (35,138)
-------- -------- --------
Cash flows from investing activities:
Purchase of marketable securities......................... (44,702) (45,067) (129,897)
Maturities of marketable securities....................... 61,473 73,646 161,247
Acquisition of property and equipment..................... (637) (173) (1,598)
-------- -------- --------
Net cash provided by investing activities.......... 16,134 28,406 29,752
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock from exercise
of options and warrants................................. 8,580 2,221 1,487
Proceeds from short term borrowings....................... -- 71 --
Proceeds from note payable................................ -- -- 1,000
Repayment of note payable................................. (111) (1,000) (175)
Repayments of capital lease obligations................... (21) (22) (41)
-------- -------- --------
Net cash provided by financing activities.......... 8,448 1,270 2,271
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 2,267 (19,774) (3,115)
Effect of exchange rates on cash and cash
equivalents...................................... 26 3 (27)
Cash and cash equivalents at beginning of year.............. 3,273 23,044 26,186
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 5,566 $ 3,273 $ 23,044
======== ======== ========
Supplemental schedule of cash flow information:
Interest paid............................................. $ 64 $ 87 $ 31
======== ======== ========
Taxes paid................................................ $ 112 $ -- $ --
======== ======== ========
Supplemental schedule of noncash investing and financing
activities:
Change in unrealized gain (loss) on marketable
securities.............................................. $ (150) $ (12) $ 409
======== ======== ========
Investment in MicroHeart Holdings, Inc.................... $ -- $ 400 $ --
======== ======== ========
Deferred compensation..................................... $ 811 $ 438 $ --
======== ======== ========
Acquisition of equipment under capital leases............. $ -- $ 138 $ --
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements
40
43
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Eclipse Surgical Technologies, Inc. ("Eclipse" or the "Company") was
founded in 1989 to design, develop, manufacture and market surgical lasers and
accessories for the treatment of disease. Currently, Eclipse's emphasis is on
the development and manufacture of products used for transmyocardial
revascularization ("TMR") and percutaneous transluminal myocardial
revascularization ("PTMR"), which are cardiovascular procedures. Eclipse markets
its products for sale primarily in the U.S., Europe and Asia. Eclipse operates
in a single segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
On March 17, 1999, Eclipse completed the acquisition of CardioGenesis
Corporation ("CardioGenesis") pursuant to the Agreement and Plan of
Reorganization (the "merger") dated as of October 21, 1998. The merger was
accounted for using the pooling of interests method of accounting for business
combinations. Accordingly, Eclipse's financial statements have been restated to
include the accounts of CardioGenesis for all periods presented. The
accompanying consolidated financial statements include the accounts of Eclipse
(and CardioGenesis) and its then wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents:
All highly liquid instruments purchased with an original maturity of three
months or less are considered cash equivalents.
Marketable Securities:
Marketable securities are classified as available-for-sale and are carried
at fair value. Marketable securities classified as current assets have scheduled
maturities of less than one year, while marketable securities classified as
noncurrent assets have scheduled maturities of more than one year. Unrealized
holding gains or losses on such securities are included in accumulated
comprehensive income/(loss) in shareholders' equity. Realized gains and losses
on sales of all such securities are reported in earnings and computed using the
specific identification cost method.
Inventories:
Inventories are stated at the lower of cost (principally standard cost,
which approximates actual cost on a first-in, first-out basis) or market value.
Property and Equipment:
Property and equipment are stated at cost and depreciated on a
straight-line basis over their estimated useful lives of two to seven years.
Assets acquired under capital leases are amortized over the shorter of their
estimated useful lives or the term of the related lease (generally three to five
years). Amortization of leasehold
41
44
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
improvements is based on the straight-line method over the shorter of the
estimated useful life or the lease term.
Long-Lived Assets:
Eclipse evaluates the recoverability of its long-lived assets in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). SFAS 121 requires recognition of the impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.
Fair Value of Financial Instruments:
The carrying amounts of certain of Eclipse's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable,
accrued liabilities and customer deposits approximate fair value due to their
short maturities. Based on borrowing rates currently available to Eclipse for
loans with similar terms, the carrying value of the long-term debt obligations
also approximates fair value.
Certain Risks and Concentrations:
Eclipse sells its products primarily to hospitals and other healthcare
providers in North America, Europe and Asia. Eclipse performs ongoing credit
evaluations of its customers and generally does not require collateral. Although
Eclipse maintains allowances for potential credit losses that it believes to be
adequate, a payment default on a significant sale could materially and adversely
affect its operating results and financial condition. At years ending December
31, 1999 and December 31, 1998 no customer individually accounted for 10% or
more of accounts receivable. At December 31, 1997, one customer accounted for
36% of accounts receivable. No customer individually accounted for 10% or more
of net revenues for the year ended December 31, 1999 or for the year ended
December 31, 1998. For the year ended December 31, 1997, two customers accounted
for a total of 46% of revenues: 35% and 11% respectively, of total revenues.
Eclipse purchases certain laser and fiber-optic components and
subassemblies from single sources. Although Eclipse has identified alternative
vendors, the qualification of additional or replacement vendors for certain
components or services is a lengthy process. Any significant supply interruption
could affect Eclipse's ability to manufacture its products and would, therefore,
adversely affect operating results.
Revenue Recognition:
Eclipse recognizes revenue on product sales upon receipt of a purchase
order and subsequent shipment of the product. Where purchase orders allow
customers an acceptance period or other contingencies, revenue is deferred and
recognized upon acceptance or removal of the contingency.
Revenues from service contracts, rentals, and per procedure fees are
recognized upon performance or over the terms of the contract as appropriate.
Research and Development:
Research and development expenses are charged to operations as incurred.
Patent Expenses:
Patent and patent related expenditures are expensed as general and
administrative expenses as incurred.
42
45
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Warranties:
Eclipse's laser products are generally warranted for one year. Eclipse
provides for estimated future costs of repair, replacement, or customer
accommodations which are reflected in the accompanying financial statements.
Advertising:
Eclipse expenses all advertising as incurred. Eclipse's advertising
expenses were $75,000, $18,000, and $334,000 for 1999, 1998 and 1997,
respectively.
Income Taxes:
Eclipse accounts for income taxes using the liability method under which
deferred tax assets or liabilities are calculated at the balance sheet date
using current tax laws and rates in effect for the year in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amounts expected to be
realized.
Foreign Currency Translation
Eclipse's international subsidiary uses its local currency as its
functional currency. Assets and liabilities are translated at exchange rates in
effect at the balance sheet date and income and expense accounts at average
exchange rates during the year. Resulting translation adjustments are recorded
in accumulated other comprehensive income in shareholders' equity. Transaction
gains and losses are included in the results of operations.
Stock-Based Compensation:
Eclipse accounts for its stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Eclipse has elected to adopt the disclosure only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), which requires pro forma disclosures
in the financial statements as if the measurement provisions of SFAS 123 had
been adopted.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force Issue
no. 96-18 "Accounting for Equity Instruments that are issued to other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services".
Net Loss Per Share:
Basic earnings per share ("EPS") is computed by dividing the net loss
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed giving effect to all
dilutive potential common shares that were outstanding during the period.
Dilutive potential common shares consist of the exercise of stock options and
warrants (using the "treasury stock" method).
43
46
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the numerator and denominator of basic and diluted EPS
is as follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Numerator -- Basic and Diluted EPS
Net Loss................................. $(28,333) $(47,767) $(36,218)
Denominator -- Basic and Diluted EPS
Weighted average shares outstanding...... 28,629 27,000 26,027
======== ======== ========
Basic and diluted EPS...................... $ (0.99) $ (1.77) $ (1.39)
======== ======== ========
Options to purchase 4,381,335, 4,533,000, and 4,517,000 shares of common
stock were outstanding at December 31, 1999, 1998 and 1997, respectively. The
range of exercise prices for these options were $0.03 -- $16.09 for 1999 and
$0.03-$18.125 for 1998 and 1997. Warrants to purchase 0, 466,123, and 770,838
shares of common stock were outstanding at December 31, 1999, 1998 and 1997,
respectively. Both the options and warrants were not included in the calculation
of diluted EPS because their inclusion would have been anti-dilutive.
Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities. SFAS 133 requires that all derivatives be recognized at
fair value in the statement of financial position, and that the corresponding
gains or losses be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of hedging relationship
that exists. SFAS 133 will be effective for fiscal years beginning after July
15, 2000. The Company does not currently hold derivative instruments or engage
in hedging activities.
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.
3. BUSINESS COMBINATION
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. 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
44
47
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to perform intraoperative transmyocardial revascularization ("ITMR"),
catheter-based percutaneous myocardial revascularization ("PMR"), and
thorascopic transmyocardial revascularization ("TTMR") to treat patients
afflicted with debilitating angina. During the quarter ended March 31, 1999,
Eclipse recognized merger-related costs of $6,893,000 for financial advisory and
legal fees, personnel severance, terminated relationships and other costs
including write-offs of fixed assets and inventory. A majority of the terminated
employees were located in California and worked in operations, sales, marketing,
quality, research and development and administrative functions. A total of 40
employees were terminated.
During the remaining three quarters, Eclipse recognized additional
merger-related costs of $844,000, bringing the total of merger related costs to
$7,737,000 for the twelve months ended December 31, 1999. This increase was
mainly due to a change associated with an upgrade program to replace customer
owned equipment rendered unusable by the merger. Eclipse does not expect any
further charges for merger related expense and anticipates the last
merger-related payment to occur in July of 2000.
The following table summarizes the merger-related costs (in thousands).
DESCRIPTION AMOUNT
----------- ------
Financial advisory and legal fees........................... $2,528
Personnel severance......................................... 1,190
Terminated relationships/contracts.......................... 910
Other costs including fixed asset and inventory
write-offs................................................ 3,109
------
Total............................................. $7,737
======
The following table summarizes the Company's merger related reserve
balances (in thousands):
Merger Related Cost......................................... $ 7,737
Non-cash charges.......................................... (2,060)
Cash payments............................................. (5,163)
-------
Merger reserve balance at December 31, 1999................. $ 514
=======
The merger reserve balance is included in accrued liabilities
The following table summarizes the combined operating results of Eclipse
and CardioGenesis as if the merger had occurred at the beginning of the periods
presented (in thousands, except per share data):
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1998 1997
-------- --------
Revenue:
Eclipse previously reported.......................... $ 12,002 $ 5,499
CardioGenesis previously reported.................... $ 3,078 $ 7,559
Restated Revenue..................................... $ 15,080 $ 13,058
Net loss:
Eclipse previously reported.......................... $(20,354) $(18,247)
CardioGenesis previously reported.................... $(27,413) $(17,971)
Restated net loss.................................... $(47,767) $(36,218)
Basic and diluted net loss per share:
Eclipse previously reported.......................... $ (1.18) $ (1.11)
Cardio Genesis previously reported................... $ (2.80) $ (1.49)
Restated basic and diluted net loss per share........ $ (1.77) $ (1.39)
45
48
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The earnings per common share are based on the sum of historical average
common shares outstanding, as reported by Eclipse, and the historical average
common shares outstanding for CardioGenesis (adjusted for the exchange ratio).
The following table summarizes the first quarter of fiscal 1999 revenues
and net income of Eclipse and CardioGenesis (in thousands):
QUARTER ENDED
MARCH 31, 1999
--------------
CardioGenesis:
Revenues.................................................. $ 675
Net Loss.................................................. $(8,317)
Eclipse:
Revenues.................................................. $ 3,799
Net Loss.................................................. $(6,849)
4. MARKETABLE SECURITIES:
At December 31, 1999, marketable securities consisted of U.S. government
and high grade domestic corporate securities. These marketable securities had a
cost basis of approximately $7,649,000 and a fair value of $7,747,000 and mature
at various dates through 2001. These securities are classified as
available-for-sale and are readily marketable at their fair market value. At
December 31, 1998, marketable securities had a cost basis of approximately
$24,592,000 and a fair value of $24,668,000.
5. INVENTORIES:
Inventories consist of the following (in thousands):
DECEMBER 31,
----------------
1999 1998
------ ------
Raw materials.............................................. $3,074 $3,972
Work in process............................................ 624 905
Finished goods............................................. 3,285 4,198
------ ------
$6,983 $9,075
====== ======
6. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
DECEMBER 31,
------------------
1999 1998
------- -------
Computers and equipment.................................. $ 2,261 $ 2,482
Manufacturing and demonstration equipment................ 2,118 1,832
Leasehold improvements................................... 242 753
Assets in progress....................................... 6 75
------- -------
4,627 5,142
Less accumulated depreciation and amortization........... (3,407) (2,789)
------- -------
$ 1,220 $ 2,353
======= =======
Eclipse leases certain equipment under a capital lease which expires in
December 2003. Accordingly, capitalized costs of $138,000, net of accumulated
amortization of $30,000, are included in computers and equipment at December 31,
1999.
46
49
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ACCRUED LIABILITIES:
Accrued liabilities consists of the following (in thousands):
DECEMBER 31,
-----------------
1999 1998
------ -------
Accrued research support.................................. $2,918 $ 4,874
Accrued accounts payable and related expenses............. 354 3,154
Accrued merger expenses................................... 514 496
Accrued withholdings on exercised options................. 2,031 591
Accrued salaries and related expenses..................... 1,206 1,177
Accrued commissions....................................... 468 532
Accrued consulting fees and related expenses.............. 40 337
Accrued warranty.......................................... 225 177
Accrued legal expense..................................... 262 --
Accrued other............................................. 1,539 126
------ -------
$9,557 $11,464
====== =======
8. NOTE PAYABLE:
In May 1998, Eclipse financed an insurance premium with a $171,000 note
payable to a finance company at 7.6% per annum, with an outstanding balance of
$111,000 at December 31, 1998. The remaining principal and interest were repaid
during 1999.
9. LONG-TERM LIABILITIES:
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 is being amortized over the life of the
underlying patents. The corresponding liability for outstanding payments due to
PLC is reflected in the current and long term portions of long-term liabilities
and payable as follows (in thousands):
Year Ending December 31,
2000........................................................ $ 875
2001........................................................ 500
2002........................................................ 375
------
Total....................................................... 1,750
Less: Amount representing interest.......................... (150)
------
Present value of long term liabilities...................... 1,600
Less: current portion....................................... (875)
------
Long-term Portion........................................... $ 725
======
In addition, the current portion of long-term liabilities includes an amount of
$489,000 relating to a purchase of inventory payable in full by June 2000.
47
50
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES:
Eclipse has entered into three operating leases for office facilities with
terms extending through September 2002. The minimum future rental payments are
as follows (in thousands):
Year Ending December 31,
2000........................................................ $ 980
2001........................................................ 991
2002........................................................ 715
------
$2,686
======
Rent expense was approximately $1,089,000, $883,000 and $704,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
At December 31, 1999 the Company held a capital lease which bears interest
at 6.8% and expires in December 2003. Future minimum lease payments under this
capital lease are as follows (in thousands):
Year Ending December 31,
2000........................................................ $ 32
2001........................................................ 32
2002........................................................ 30
2003........................................................ 30
----
Total minimum lease payments................................ 124
Less: Amount representing interest.......................... (8)
----
Present value of capital lease obligations.................. 116
Less: Current portion....................................... (26)
----
Long-term portion of capital lease obligations.............. $ 90
====
Eclipse is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions at this time, management
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's financial position or results of operations.
11. SHAREHOLDERS' EQUITY:
Warrants:
At December 31, 1999, there were no warrants outstanding. During the years
ended December 31, 1999, 1998 and 1997, 448,799, 304,715, and 133,743 warrants
were exercised, respectively, generating proceeds of approximately $833,000,
$725,000,and $301,000 respectively.
Options Granted to Consultants:
At December 31, 1999, options for consultants to purchase a total of
678,000 shares of common stock at exercise prices ranging from $1.44 to $8.00
per share were outstanding. The exercisability and termination of this plan is
the same as Eclipse's Stock Option Plan which is described below. At December
31, 1999, Eclipse had reserved 678,000 shares of common stock for issuance upon
exercise of these options. Eclipse recorded deferred stock compensation of
$811,000 in 1999 related to these options. These options are included in the
Stock Option Plan disclosures below. At December 31, 1999, there was no
remaining balance of deferred compensation resulting from the initial public
offering.
48
51
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Option Plan:
Eclipse maintains a Stock Option Plan, which includes the Employee Program
under which incentive and nonstatutory options may be granted to employees and
the Consultants Program, under which nonstatutory options may be granted to
consultants of the Company. As of December 31, 1999, Eclipse had reserved a
total of 5,100,000 shares of common stock for issuance under this plan. Under
the plan, options may be granted at not less than fair market value (110% of
fair market value for options granted to 10% shareholders), as determined by the
Board of Directors. Options generally vest over a period of three years and
expire ten years from date of grant (five years for options granted to 10%
shareholders). No shares of common stock issued under the plan are subject to
repurchase.
Directors' Stock Option Plan:
Eclipse maintains a Directors' Stock Option Plan which provides for the
grant of nonstatutory options to directors who are not officers or employees of
the Company. As of December 31, 1999, Eclipse had reserved 325,000 shares of
common stock for issuance under this plan. Under this plan, options are granted
at the trading price of the common stock at the date of grant. Options generally
vest over twelve to thirty-six months and expire ten years from date of grant.
No shares of common stock issued under the plan are subject to repurchase.
Employee Stock Purchase Plan:
Eclipse maintains an Employee Stock Purchase Plan, under which 578,400
shares of common stock have been reserved for issuance. Eclipse adopted the
Employee Stock Purchase Plan in April 1996. Eligible employees are permitted to
purchase common stock at 85% of the fair market value through payroll deductions
of up to 15% of an employee's compensation, subject to certain limitations. At
December 31, 1999, 256,005 shares had been issued under this plan.
Stock-Based Compensation:
The Company has adopted the disclosure only provisions of SFAS 123.
Eclipse, however, continues to apply APB 25 and related interpretations in
accounting for its plans. Had compensation cost for the Stock Option Plan, the
Director's Stock Option Plan and the Employee Stock Purchase Plan been
determined based on the fair value of the options at the grant date for awards
in 1999, 1998 and 1997 consistent with the provisions of SFAS 123, Eclipse's net
loss and net loss per share would have increased to the pro forma amounts
indicated below (in thousands, except per share amounts):
DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Net loss as reported....................... $(28,333) $(47,767) $(36,218)
Pro forma net loss......................... $(32,362) $(51,213) $(40,429)
Basic and diluted net loss per share as
reported................................. $ (0.99) $ (1.77) $ (1.39)
Pro forma basic and diluted net loss per
share.................................... $ (1.13) $ (1.90) $ (1.55)
The above pro-forma disclosures are not necessarily representative of the
effects on reported net income for future years. The aggregate fair value and
weighted average fair value per share of options granted in the years ended
December 31, 1999, 1998 and 1997 were $7.9 million, $6.5 million, and $9.1
million, and $5.25, $5.46, and $4.82 , respectively. The fair value of each
option grant is estimated on the date of grant using the
49
52
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1999, 1998 and 1997:
DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
Expected life of option......................... 7 years 7 years 8 years
Risk-free interest rate......................... 5.00% 4.86% 5.85%
Expected dividends.............................. -- -- --
Expected volatility............................. 100% 97% 36%
Option activity under the Stock Option Plan and the Directors Stock Option
Plan is as follows (in thousands, except per share amounts):
OUTSTANDING OPTIONS
----------------------------
SHARES AVAILABLE NUMBER WEIGHTED AVERAGE
FOR GRANT OF SHARES PRICE PER SHARE
---------------- --------- ----------------
Balance, January 1, 1997............... 1,714 3,982 $3.34
Additional shares reserved........... 240 -- --
Options granted...................... (1,829) 1,829 8.55
Options canceled..................... 663 (663) 9.71
Options exercised.................... -- (632) 1.18
------ ------ -----
Balance, December 31, 1997............. 788 4,516 4.37
Additional shares reserved........... 320 -- --
Options granted (Price = Fair
Value)............................ (1,111) 1,111 7.05
Options granted (Price > Fair
Value)............................ (110) 110 8.50
Options granted (Price < Fair
Value)............................ (23) 23 5.12
Options canceled..................... 578 (578) 8.20
Options exercised.................... -- (650) 1.37
------ ------ -----
Balance, December 31, 1998............. 442 4,532 4.86
Additional shares reserved........... 1,225 -- --
Cancellation of CardioGenesis Stock
Plan reserves..................... (159) -- --
Options granted (Price = Fair
Value)............................ (1,472) 1,472 7.75
Options canceled..................... 206 (206) 8.11
Options exercised.................... -- (1,522) 5.11
------ ------ -----
Balance, December 31, 1999............. 242 4,276 5.34
====== ====== =====
50
53
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about the Company's stock
options outstanding and exercisable under the Stock Option Plan and the
Director's Stock Option Plan at December 31, 1998:
OPTIONS OUTSTANDING
----------------------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
REMAINING ---------------------------------
NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------- -------------- ---------------- ---------------- -------------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
$0.03 - $ 1.44 624 3.85 $0.48 624 $0.48
$1.67 - $ 1.67 725 5.88 1.67 725 1.67
$2.29 - $ 3.36 27 8.73 3.08 11 2.91
$4.17 - $ 6.50 880 9.42 6.00 147 5.66
$6.50 - $ 6.94 582 8.15 6.73 315 6.73
$7.00 - $ 8.50 482 7.90 7.86 302 7.85
$8.63 - $16.00 956 8.12 9.52 385 9.60
----- ---- ----- ----- -----
4,276 7.33 $5.34 2,509 $4.11
===== ==== ===== ===== =====
12. EMPLOYEE RETIREMENT PLAN:
Eclipse maintains a 401(k) plan for its employees. The plan allows eligible
employees to defer up to 15% of their earnings, not to exceed the statutory
amount per year on a pretax basis through contributions to the plan. The plan
provides for employer contributions at the discretion of the Board of Directors,
however, no such contributions were made in 1999, 1998 or 1997.
13. SEGMENT DISCLOSURES
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"), which supersedes Statement of Financial Accounting Standards No.
14, "Financial Reporting for Segments of a Business Enterprise" ("SFAS 14").
SFAS 131 changes current practice under SFAS 14 by establishing a new framework
on which to base segment reporting and also by requiring interim reporting of
segment information. The annual reporting requirements of SFAS 131 were adopted
by Eclipse in 1998. The Company currently operates under one segment.
Export sales accounted for approximately 14%, 24%, and 48% of net sales for
the years ended December 31, 1999, 1998 and 1997, respectively. At December 31,
1999, one customer accounted for a total of 23% of export sales. For the year
ended December 31, 1998, three customers accounted for a total of 61% of export
sales: 30%, 16% and 15% of the respective total. For the year ended December 31,
1997, two customers accounted for 94% of export sales: 72% and 22% of the
respective total.
14. INTEREST AND OTHER INCOME:
Interest and other income consists of the following (in thousands):
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ------ ------
Interest income.................................... $796 $3,004 $4,805
Gain on investment in MicroHeart Holdings, Inc..... -- 400 --
Gain on sale of marketable securities.............. 5 50 496
---- ------ ------
$801 $3,454 $5,301
==== ====== ======
51
54
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. INCOME TAXES:
Significant components of Eclipse's deferred tax assets are as follows (in
thousands):
DECEMBER 31
--------------------
1999 1998
-------- --------
Net operating losses................................... $ 43,914 $ 37,331
Research and development and other credits............. 4,284 3,788
Capitalized research and development................... 1,858 2,807
Reserves............................................... 2,705 1,069
Accrued liabilities.................................... 2,116 1,167
Other.................................................. 1,420 571
-------- --------
Net deferred tax asset................................. 56,297 46,733
Less valuation allowance............................... (56,297) (46,733)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========
The net valuation allowance increased by $9,564,000 during the year ended
December 31, 1999.
The Company has established a valuation allowance to the extent of its
deferred tax asset since it is more likely than not that a benefit cannot be
realized in the future due to the Company's recurring operating losses.
The noncurrent portion of the deferred tax assets, which totaled
$50,550,000 and $44,066,000 at December 31, 1999 and December 31,1998,
respectively, is included above.
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $120,538,000 and $50,237,000, respectively,
to offset future taxable income. In addition, Eclipse had federal and state
credit carryforwards of approximately $2,355,000 and $1,930,000 available to
offset future tax liabilities. The Company's net operating loss carryforwards,
as well as credit carryforwards, will expire at various dates beginning in 2000
through 2019, if not utilized.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. The Company believes that the sale of common stock in
its initial public offering and the merger with CardioGenesis resulted in
changes in ownership which could restrict the utilization of the carryforwards.
16. RELATED PARTY TRANSACTIONS:
The Company paid $4,000, $445,000 and $161,000 for consulting fees and
product to certain stockholders during the years ended December 31, 1999, 1998
and 1997, respectively.
52
55
ECLIPSE SURGICAL TECHNOLOGIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT BALANCE
BEGINNING AT END
OF PERIOD ADDITIONS(1) DEDUCTIONS(2) OF PERIOD
---------- ------------ ------------- ---------
Year ended December 31, 1997
Allowance for doubtful accounts............ $1,632 $ 477 $ 382 $1,727
Year ended December 31, 1998
Allowance for doubtful accounts............ $1,727 $1,017 $ 75 $2,669
Year ended December 31, 1999
Allowance for doubtful accounts............ $2,669 $1,377 $2,170 $1,876
- ---------------
(1) Charged to costs and expenses.
(2) Accounts written off against the reserve.
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56
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1(2) Agreement and Plan of Reorganization among the Company,
CardioGenesis Corporation and RW Acquisition Corporation
dated October 21, 1998.
3.1(2) Certificate of Amendment and Restated Articles of
Incorporation of Registrant.
3.2(2) Amended and Restated Bylaws of Registrant.
10.1 Form of Director and Officer Indemnification Agreement.
10.2(2) Stock Option Plan.
10.3(2) Director Stock Option Plan.
10.4(2) 1996 Employee Stock Purchase Plan.
10.5(2) Facilities Lease for 1049 Kiel Court, Sunnyvale, California.
10.6(2) Facilities Lease for 1139 Karlstad Drive, Sunnyvale,
California.
10.7(2) 401(k) Plan.
10.8(3) CardioGenesis 1993 Equity Incentive Plan.
10.9(3) CardioGenesis 1996 Directors Stock Option Plan.
10.10(3) CardioGenesis 1996 Employee Stock Purchase Plan.
10.11(4) CardioGenesis 1996 Equity Incentive Plan.
21.1 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (see page 35).
27.1 Financial Data Schedule.
- ---------------
(1) Incorporated herein by reference to Appendix 1 to the Company's Registration
Statement on S-4 filed with the Securities and Exchange Commission on
February 9, 1999 (File No. 333-72063).
(2) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (File No. 333-03770), as amended, filed on April 18, 1996.
(3) Incorporated herein by reference from CardioGenesis Corporation's Form SB-2,
(File No. 333-3752-LA), declared effective on May 21, 1996.
(4) Incorporated herein by reference from CardioGenesis Corporation's Form S-8,
(File No. 333-35095, dated September 8, 1997).
54