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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, 2000
Commission file number: 0-28288
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Eclipse Surgical Technologies, Inc.
(Exact name of Registrant as specified in its charter)
California 77-0223740
(State of incorporation) (I.R.S. Employer
Identification Number)
1049 Kiel Court
Sunnyvale, California 94089
(Address of principal executive officers)
(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 the registrant's knowledge, in definitive proxy or information
statements incorporated herein 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 $23,923,872 as of March 30, 2001, 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 a conclusive determination for any other purpose.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock outstanding as of the last practicable date.
31,696,061 shares
As of March 30, 2001
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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 ...................................................... 12
Item 3. Legal Proceedings ............................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders .......................... 12
PART II
Item 5. Market for Registrant's Shares and Related Shareholder Matters ............... 13
Item 6. Selected Consolidated Financial Data ......................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................... 30
Item 8. Consolidated Financial Statements and Supplementary Schedules ................ 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ................................................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant ........................... 32
Item 11. Executive Compensation ....................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management ............... 32
Item 13. Certain Relationships and Related Transactions ............................... 32
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K ............... 32
Signatures ............................................................................ 34
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. 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. Clinical studies have
demonstrated a significant reduction in angina and increase in exercise
duration in patients treated with TMR or PTMR plus medications, when compared
with patients who received medications alone.
We received CE Mark approval for our TMR system in May 1997 and our PTMR
systems in April 1998. 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 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 pivotal clinical trials involving PTMR, and study
results were submitted to the FDA in a Pre Market Approval application in
December of 1999 along with subsequent amendments. We are currently in final
negotiations with the FDA in the PTMR market approval process. There can be no
assurance, however, that we will receive a favorable decision from that agency.
On March 17, 1999, we merged with CardioGenesis Corporation. Under the
terms of the combination, each share of CardioGenesis common stock was
converted into 0.8 of a share of our common stock, and CardioGenesis has become
a wholly owned subsidiary of ours. As a result of the transaction, our
outstanding shares increased by approximately 9.9 million 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
the 1998 period prior to the merger.
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, which is 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 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 and/or death.
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Based on standards promulgated by the Canadian Heart Association, angina
is typically classified into four classes, ranging from Class 1, in which
angina 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 angina
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 bears the CE Marking and has received FDA approval, and
PTMR, which bears the CE Marking and is currently under review at the FDA for
approval in the U.S., offer potential relief to a large population 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 supply blood to ischemic, or oxygen-deprived regions
of the myocardium and reduce angina in the patient. TMR can be performed using
open chest surgery or minimally invasive surgery through a small incision
between the ribs. TMR offers end-stage cardiac patients who have regions of
ischemia not amenable to PTCA or CABG a means to alleviate their
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symptoms and improve their quality of life. We have received FDA approval for
U.S. commercial distribution of our TMR 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.
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). We have completed pivotal clinical trials
involving PTMR, and study results were submitted to the FDA in a Pre Market
Approval application in December of 1999 along with subsequent amendments.
Business Strategy
Our objective is to become a recognized leader in the field of myocardial
revascularization, with TMR and PTMR established as well-known and acceptable
therapies. 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, the referring physician community and the targeted patient
population. 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 are expanding the domestic sales force to thirty-one
territory managers in four sales areas. We also sell our products in Europe
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. We have completed a pivotal
clinical trial regarding PTMR, and the study results were submitted to the
FDA in a Pre Market Approval Supplemental application in December of 1999.
We are currently in final negotiations with the FDA in the PMA process.
There can be no assurance, however, that we will receive a favorable
decision from the agency.
* 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 91 foreign and U.S. patents
or allowed patent applications and 51 U.S. and 27 foreign patent
applications pending relating to various aspects of TMR, PTMR and other
cardiovascular therapies.
Products and Technology
Eclipse TMR System
The Eclipse TMR system consists of our TMR 2000 laser console 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 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
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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.
SoloGrip. The single use SoloGrip 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.
The SoloGrip 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 PTMR System
The Eclipse PTMR System is currently sold only outside the United States.
The PTMR System consists of the PTMR Laser and ECG Monitor.
Eclipse PTMR Laser. The holmium laser base unit generates laser light of a
2.1 micron wavelength in the mid-infrared spectrum. It provides a reliable
source for laser energy with low maintenance.
The Axcis Catheter system. The Axcis catheter system is an over-the-wire
system that consists of two components, the Axcis laser catheter and Axcis
aligning catheter. The Axcis catheter system is designed to provide controlled
navigation and access to target regions of the left ventricle. The coaxial
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 tip which are designed for safe penetration of the endocardium
and to provide depth control.
SlimFlex Catheter System. The SlimFlex PTMR system is an over-the-wire,
steerable, single use 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.
Regulatory Status
On February 11, 1999, we received final approval from the FDA for use of
our TMR 2000 laser console and SoloGrip handpiece 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.
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We submitted a PMA supplement for our 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. We are currently in final negotiations with
the FDA in the PMA process. There can be no assurance, however, that we will
receive a favorable decision from the agency.
We have decided not to pursue any additional claims for adjunctive
procedures. Therefore, all studies involving adjunctive procedures have been
halted and terminated.
In addition, we have obtained approval to affix the CE Marking to
substantially all of our products, which enables us to commercially distribute
our TMR and PTMR products throughout the European Community.
Sales and Marketing
We have received FDA approval for our surgical TMR laser system. The
Health Care Finance Administration has also announced its coverage policy for
the TMR with FDA approved systems. We are promoting market awareness of our
approved surgical products among opinion leaders in the cardiovascular field
and are recruiting physicians and hospitals. To drive the clinical awareness
and acceptance of the surgical product platform, we are expanding the domestic
sales force to thirty-one territory managers in four sales regions.
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 $2,745. In order to accelerate market adoption of the TMR
procedure, we intend to continue selling lasers to hospitals outright, loaning
lasers to hospitals in return for the hospital purchasing a minimum number of
handpieces at a premium over the list price, and to begin renting lasers to
hospitals.
Internationally, we sell our products through a direct sales and support
organization of four people and distributors and agents.
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. To date over 750 cardiothoracic
surgeons have been trained on the Eclipse TMR system.
We exhibit our products at major cardiovascular meetings. 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
We believe that streamlining our research and product effort is essential
to our ability to stimulate growth and maintain our market leadership position.
Our ongoing research and product development efforts are focused on the
development of new and enhanced lasers and fiber-optic handpieces for TMR and
PTMR applications.
In the fourth quarter of 2000, we increased our ownership interest in
privately-held Microheart Holdings, Inc. to 32.1 percent. Microheart is a
research and development company working on developing a number of
full-featured clinical devices for diagnostic assessment and site-specific
delivery of biopharmaceuticals and other therapeutic agents applicable to the
cardiovascular and other markets.
We believe our future success will depend, in part, upon the success of
our research and development programs. There can be no assurance that we will
realize financial benefit from these efforts or that products or technologies
developed by others will not render our products or technologies obsolete or
non-competitive.
Manufacturing
We manufacture and assemble our products from purchased components and
subassemblies at our facility in Sunnyvale, California.
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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 maintain an inventory of these items for
use in the event of supply interruptions.
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. ("PLC"), Johnson & 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 Pre Market
Approval 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. PLC recently announced a
co-marketing agreement with Edwards Life Sciences to distribute their lasers
and disposables. This action will add another 18 direct domestic sales
representatives involved in promoting the PLC technology.
Johnson & Johnson is a publicly traded company which uses a holmium laser
and fiber-optics in its DMR (direct myocardial revascularization) products.
Johnson & Johnson has acquired a ventricular mapping company to further its DMR
product line and has begun U.S. trials under an IDE. Based upon recently
presented trial results, the status of the regulatory submission for the
Johnson & Johnson DMR system is unclear at this time.
Boston Scientific 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 applications, breadth of product line,
system reliability, brand name recognition and effectiveness of distribution
channels and cost of capital equipment and disposable devices.
TMR and PTMR also 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, achieve regulatory
approval, 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 our doing
so, 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.
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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
and comparable international regulatory agencies. Our devices require the
rigorous PMA process for approval to market the product in the U.S. and must
bear the CE Marketing for commercial distribution in the European Community.
To obtain a Pre Market Approval ("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 Investigational Device Exemption ("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 are accumulated and, if satisfactory, are submitted to the FDA in
support of a PMA application. Prior to U.S. commercial distribution, premarket
approval is required from the FDA. 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 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
Good Manufacturing Practices ("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
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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 and 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. We have
achieved International Standards Organization and European Union certification
for our manufacturing facility. In addition, we have completed CE mark
registration for all of our products in accordance with the implementation of
various medical device directives in the European Union. Failure 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.
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 91 U.S. and foreign
patents or allowed patent applications and 78 U.S. and foreign patent
applications pending relating to various aspects of TMR, PTMR and other
cardiovascular therapies. On December 5, 2000 we were granted United States
Patent No. 6,156,031 entitled "Transmyocardial Revascularization Using
Radiofrequency Energy". 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
8
patent at issue. We 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.
Until recently, patent applications in the U.S. were maintained in secrecy
until patents issue, and patent applications in foreign countries are
maintained in secrecy for a period after filing. Most of our U.S. applications
are maintained in secrecy unless they have issued. 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.
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
9
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.
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. 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 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, 2000 we had 123 employees, including 16 in research and
development, 49 in manufacturing, 38 in sales and marketing and 20 in
administration. Other than confidentiality agreements with all employees, as a
general policy matter, we do not enter into employment agreements with any of
our employees. In connection with the recent hirings of Michael J. Quinn as our
Chief Executive Officer and Darrell Eckstein as our Vice President of
Operations, we did, however, provide both officers with letter employment
agreements. None of our employees is covered by a collective bargaining
agreement and we have not experienced any work stoppages to date.
10
Our executive officers as of March 28, 2001 are as follows:
Name Age Position
- ------------------------- ----- ----------------------------------------------------
Michael J. Quinn 56 Chief Executive Officer, President, Chairman of the
Board and Director
Darrell F. Eckstein 43 Vice President of Operations
Ian A. Johnston 46 Vice President of Finance and Treasurer
Thomas L. Kinder 38 Vice President of Worldwide Sales and Service
Richard P. Lanigan 42 Vice President of Government Affairs and
Business Development
Christopher M. Owens 32 Vice President of Marketing
Ilene L. Janofsky 46 Chief Legal Counsel
Michael J. Quinn has served as our Chief Executive Officer, President and
Chairman of the Board since October 2000. From 1978 to 1988, Mr. Quinn held
senior operating management positions at the level of Vice President, Chief
Operating Officer and President at major healthcare organizations including
American Hospital Supply Corporation, Picker International, Cardinal Health
Group, Bergen Brunswig and Fisher Scientific. Most recently Mr. Quinn served as
President and Chief Executive Officer of Premier Laser Systems, a manufacturer
of surgical and dental products. Prior to that position he served as President
of Imagyn Medical Technologies, a manufacturer of minimally invasive surgical
specialty products.
Darrell F. Eckstein has served as our Vice President of Operations since
December 2000. From 1996 to 2000 he served as Vice President and General
Manager of the Surgical Products Division of Imagyn Medical Technologies, a
manufacturer of minimally invasive surgical specialty products. From 1995 to
1996, Mr. Eckstein was Vice President of Finance, Chief Financial Officer and
an Executive Committee member of Richard-Allen Medical Industries Inc., a
medical devices company. From 1991 to 1995, Mr. Eckstein was Vice President of
Finance, Chief Financial Officer and an Executive Committee member of National
Emergency Services Inc., a health care services company that provides physician
contract management, medical billing and insurance services. Prior to 1991, Mr.
Eckstein worked for Deloitte and Touche, most recently as a Senior Audit
Manager, for 11 years. He received his Bachelor of Science degree in Accounting
from Indiana University.
Ian A. Johnston has been our Vice President of Finance since July 2000 and
Corporate Controller since March 1999. From 1998 to 1999 Mr. Johnston was also
Controller of CardioGenesis Corporation. From 1989 to 1998 Mr. Johnston served
in a variety of financial positions (most recently as Controller) at Toshiba
America MRI, Inc., a medical imaging company. From 1985 to 1989 Mr. Johnston
was an auditor with Arthur Andersen & Co. Mr. Johnston has a Masters in
Business Administration and a Bachelor of Arts in Economics from the University
of California Berkeley and is a member of the American Institute of Certified
Public Accountants.
Thomas L. Kinder has served as our Vice President of Sales since March
2001 and as General Manager, West Area since November 2000. Prior to Eclipse,
Mr. Kinder held senior sales positions at the level of Vice President, General
Manager and National Sales Director at healthcare companies including Karl
Storz Endoscopy, and Imagyn Medical Technologies and Microsurge, Inc. Mr.
Kinder began his medical device sales career with United States Surgical
Corporation.
Richard P. Lanigan has been our Vice President of Government Affairs and
Business Development since March 2001, Vice President of Sales and Marketing
since March 2000 and Director of Marketing since 1997. From 1992 to 1997, Mr.
Lanigan served in various positions, most recently Marketing Manager, at
Stryker Endoscopy. From 1987 to 1992, Mr. Lanigan served in Manufacturing and
Operations management at Raychem Corporation. From 1981 to 1987, he served in
the U.S. Navy where he completed six years of service as Lieutenant in the
Supply Corps. Mr. Lanigan has a Bachelors of Arts in Finance from Notre Dame
and a Masters degree in Systems Management from the University of Southern
California.
11
Christopher M. Owens has been our Vice President of Marketing since March
2001. Prior to Eclipse, Mr. Owens was Director of Marketing for the global
Lamellar Surgery business of Bausch & Lomb. The Lamellar Surgery business
provides surgical products for vision correction procedures. From 1997 to 2000,
Mr. Owens served in a variety of sales related positions (most recently
National Sales Manager) at Imagyn Medical Technologies, Inc., a manufacturer of
minimally invasive surgical specialty products. From 1996 to 1997, Mr. Owens
was Marketing Product Manager for Stackhouse, Inc From 1990 to 1996 he also
served as a Product Development Engineer at Baxter Healthcare Corp. He has both
a Bachelors and Masters degree in Plastics Engineering from the University of
Massachusetts and a Masters in Business Administration from the University of
Phoenix.
Ilene L. Janofsky has served as our Chief Legal Counsel since January
2001. From 1999 to 2000 Ms. Janofsky served as Patent Manager, Intellectual
Property Counsel and from June 1998 to March 1999 she served as Patent Counsel.
From 1993 to 1998 Ms. Janofsky worked as an independent patent law consultant.
From 1990 to 1993 Ms. Janofsky was employed as a Patent Attorney with the
Liposome Company. She has also worked as a Patent Attorney on an independent
basis from 1988 to 1989 and with the New York city law firm of Ladas & Parry
from 1987 to 1988. Ms. Janofsky is admitted to practice law in New York (1986),
New Jersey (1986) and before the United States Patent and Trademark Office
(1983). She passed the California Bar exam in July 2000 and is awaiting
admission. Ms. Janofsky received her Bachelor of Science in Clinical Nutrition
from the University of Florida, Gainesville in 1976 and her Juris Doctorate
from St. John's University Law School in 1985.
Item 2. Description of Property.
Our facilities are comprised of 45,960 square feet under three separate
leases. The manufacturing 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. 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.
12
PART II
Item 5. Market for Registrants Shares and Related Shareholder Matters.
(a) Our common stock has been traded on the Nasdaq National Market under
the symbol, ESTI, since 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.
2000 High Low
---- ---- ---
First Quarter ........... $ 11.50 $ 6.75
Second Quarter .......... $ 7.69 $ 2.88
Third Quarter ........... $ 4.69 $ 3.31
Fourth Quarter .......... $ 4.06 $ 0.50
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
As of December 31, 2000 shares of our common stock were held by 190
shareholders of record.
We have never paid a cash dividend on our common stock and do not
anticipate paying any cash dividends in the foreseeable future, as we intend to
retain our earnings, if any, to generate increased growth and for general
corporate purposes.
Item 6. Selected Consolidated Financial Data.
The following selected consolidated statement of operations data for
fiscal years ended 2000, 1999 and 1998 and the consolidated balance sheet data
for 2000 and 1999 set forth below are derived from the our consolidated
financial statements and are qualified by reference to our consolidated
financial statements included herein.
13
The selected consolidated statement of operations data for fiscal year
ended 1997 and 1996 and the consolidated balance sheet data for 1998, 1997 and
1996 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,
-------------------------------------------------------------------------
2000 1999(1) 1998 1997 1996
------------ ------------ ------------ ------------- ------------
Statement of Operations Data:
Net revenues ............................... $ 22,210 $ 25,324 $ 15,080 $ 13,058 $ 13,718
Cost of revenues ........................... 10,055 13,246 7,868 7,295 6,424
---------- ---------- ---------- --------- ---------
Gross profit ............................ 12,155 12,078 7,212 5,763 7,294
---------- ---------- ---------- --------- ---------
Operating expenses:
Research and development .................. 5,065 11,353 29,861 26,217 13,323
Sales and marketing ....................... 15,349 16,553 17,663 11,542 5,949
General and administrative ................ 6,660 8,028 10,821 9,462 4,820
Merger-related costs ...................... -- 5,214 -- -- --
---------- ---------- ---------- --------- ---------
Total operating expenses ............... 27,074 41,148 58,345 47,221 24,092
---------- ---------- ---------- --------- ---------
Operating loss .......................... (14,919) (29,070) (51,133) (41,458) (16,798)
Interest and other income (expense),
net ....................................... 310 737 3,366 5,240 3,842
---------- ---------- ---------- --------- ---------
Net loss. ............................... $ (14,609) $ (28,333) $ (47,767) $ (36,218) $ (12,956)
========== ========== ========== ========= =========
Net loss per share -- basic and
diluted ................................ $ (0.48) $ (0.99) $ (1.77) $ (1.39) $ (0.65)
========== ========== ========== ========= =========
Shares used in per share
calculation ............................ 30,166 28,629 27,000 26,027 20,019
========== ========== ========== ========= =========
Balance Sheet Data:
Cash, cash equivalents and marketable
securities ................................ $ 3,357 $ 13,313 $ 27,941 $ 75,729 $ 110,271
Working capital ............................ 4,662 10,031 22,243 68,999 105,185
Total assets ............................... 16,965 34,019 52,978 91,714 123,003
Long-term debt, less current portion ....... 405 815 114 10 20
Accumulated deficit ........................ (153,833) (139,224) (110,891) (63,124) (26,906)
Total shareholders' equity ................. 7,974 18,573 37,276 82,374 117,061
(1) Cost of revenues includes $2.5 million of inventory write-offs and upgrades
associated with the March 1999 merger.
14
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
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").
On February 11, 1999, we received final approval from the FDA for our TMR
products for certain indications, and we 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.
We have completed pivotal clinical trials involving PTMR, and study
results were submitted to the FDA in a Pre Market Approval (PMA) application in
December of 1999 along with subsequent amendments. We are currently in final
negotiations with the FDA in the PTMR market approval process. There can be no
assurance, however, that we will receive a favorable decision from the agency.
As of December 31, 2000, we had an accumulated deficit of $153,833,000. We
expect to continue to incur operating losses related to the expansion of sales
and marketing activities. 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 and the status and timing of regulatory approvals.
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net Revenues
Net revenues of $22,210,000 for the year ended December 31, 2000 decreased
$3,114,000 or 12% when compared to net revenues of $25,324,000 for the year
ended December 31, 1999. The decrease in revenue was mainly due to a reduction
in sales of laser systems resulting from a change, made at the end of 1999, to
a new sales model which emphasizes laser system placements to develop the
disposable handpiece market more rapidly. The reduction in laser sales is
partially offset by an increase in disposable handpiece sales generated from
the new sales model. International sales accounted for approximately 10% and
14% of total sales for the years ended December 31, 2000 and 1999,
respectively. We define international sales as sales to customers located
outside of the United States. (See "-- Risk Factors.")
15
Gross Profit
Gross profit increased to $12,155,000 or 55% of net revenues for the year
ended December 31, 2000 as compared to $12,078,000 or 48% of net revenues for
the year ended December 31, 1999. The increase in gross margin in absolute terms
and as a percentage of sales resulted from the fact that in 1999 the Company
wrote-off $2,523,000 of inventory in connenction with the merger, offset in part
by the overall increase in fixed manufacturing costs.
Research and Development
Research and development expenditures of $5,065,000 decreased $6,288,000
or 55% for the year ended December 31, 2000 when compared to $11,353,000 for
the year ended December 31, 1999. The decrease in these expenses reflects the
decrease in activity associated with clinical trials, engineering project
expenses and lower employee expenses. We expect research and development
expenses to continue to decline in the upcoming year with a continuing
reduction in clinical and product development activities.
Sales and Marketing
Sales and Marketing expenditures of $15,349,000 decreased $1,204,000 or 7%
for the year ended December 31, 2000 when compared to $16,553,000 for the year
ended December 31, 1999. The decrease in absolute dollars is mainly due to the
late 1999 termination of a distribution agreement with an outside distributor
in the United States. We expect that spending on sales and marketing will
decrease in the upcoming year, despite continued development of the TMR and
PTMR market, as the Company's focus on cost reduction becomes reflected in
lower expenditures for outside services and travel costs.
General and Administrative
General and administrative expenses decreased by $1,368,000 or 17% to
$6,660,000 in 2000 from $8,028,000 in 1999. The decrease is due mainly to a
reduction of salary and wage expense associated with the CEO position that was
filled for only a portion of 2000, a reduction in bad debt expense and general
cost savings resulting from the merger with CardioGenesis Corporation that
concluded in the quarter ended March 31, 1999. We expect general and
administrative expenses to decline somewhat from prior year levels.
Merger Related Costs
There were no merger related costs in 2000 associated with the merger
between us and CardioGenesis Corporation, while in 1999 there was $5,214,000 in
merger related costs.
Interest and Other Income (Expense), Net
Interest and other income of $400,000 decreased $401,000 or 50% for the
year ended December 31, 2000 when compared to $801,000 for the year ended
December 31, 1999. The decrease was due to lower investments in marketable
securities and cash and cash equivalents.
Interest expense of $32,000 decreased $32,000 or 50% for the year ended
December 31, 2000 when compared to $64,000 for the year ended December 31,
1999. This decrease reflects a lower level of debt outstanding.
Equity in net loss of investee is a new non-cash expense in 2000. It
represents our share of the net loss of Microheart Holdings, Inc., given our
November 15, 2000 exercise of warrants to increase our ownership percentage to
32.1%.
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% 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.")
16
Gross Profit
Gross profit increased to $12,078,000 or 48% 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 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
offset by an inventory write-off of $2,523,000 in connection with the merger.
Gross profit percentage, excluding the inventory write-off related to the
merger, was 58% of net revenues.
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 with CardioGenesis.
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.
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 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
of which $2,523,000 was accounted for in our cost of revenues as a write-off of
inventory. 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 the second part of 2001. 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
--------
Subtotal .................................................. 7,737
Less: Amount included in cost of revenues ................. (2,523)
--------
Total ..................................................... $ 5,214
========
17
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.
Liquidity and Capital Resources
Cash, cash equivalents and short and long-term marketable securities were
$3,357,000 at December 31, 2000 compared to $13,313,000 at December 31, 1999, a
decrease of 75%. We used $12,281,000 of cash for operating activities,
including funding our operating loss and decreases in accrued liabilities in
2000. Investing activities, consisting primarily of purchases and sale of
marketable securities and additions to property and equipment, provided cash of
$6,700,000, $16,100,000 and $28,400,000 in fiscal years 2000, 1999, and 1998
respectively. Financing activities provided cash of $3,400,000, $8,400,000 and
$1,300,000 in fiscal years 2000, 1999 and 1998 respectively primarily from the
issuance of common stock pursuant to exercise of stock options and warrants and
the issuance of common stock.
Since our inception, we have satisfied our capital requirements primarily
through sales of our equity securities. In addition, our operation has been
funded in part through sales of our products.
In September 2000, we sold 526,496 shares of our common stock to Acqua
Wellington at a negotiated purchase price of $3.7987 per share. We did not pay
any other compensation in conjunction with the sale of our common stock.
18
In March 2001, we sold 898,202 shares of common stock to Acqua Wellington
at a negotiated purchase price of $1.1133 per share. We did not pay any other
compensation in conjunction with the sale of our common stock. We are
contractually prohibited from obtaining any future financings under the Acqua
Wellington stock purchase agreement.
In April 2001, we sold 2,000,000 shares of common stock to a governmental
entity at a negotiated purchase price of $1.00 per share. We did not pay any
other compensation in conjunction with the sale of our common stock.
We have incurred significant losses for the last several years and at
December 31, 2000 have an accumulated deficit of $153,833,000. The accompanying
financial statements have been prepared assuming we will continue as a going
concern. Our ability to continue as a going concern is dependent upon achieving
profitable operations in the future. Our plans include increasing sales through
increased direct sales and marketing efforts on existing products and achieving
timely regulatory approval for certain other products under clinical trials. We
have recognized the need for infusion of cash. In September 2000, March 2001 and
April 2001, we raised approximately $1,873,000, $1,000,000 and $1,925,000,
respectively, net of estimated offering costs, from the sale of shares of common
stock. In April 2001, we received a non-binding letter of intent from a business
credit financing company regarding an asset-based financing agreement current
level of which will provide an estimated $1,000,000 of additional financing
based upon current level of our qualified domestic accounts receivable which
will serve as collateral. We believe that if revenue from sales or new funds
from debt or equity instruments is insufficient to maintain the current
expenditure rate, it will be necessary to significantly reduce our operations
until an appropriate solution is implemented.
Quaterly Results of Operations
The following table sets forth certain quarterly financial information for
the periods indicated. This information has been derived from unaudited
financial statements that, in the opinion of management, have been prepared on
the same basis as the audited information, and includes all normal recurring
adjustments necessary for a fair presentation of such information. The results
of operations for any quarter are not necessarily indicative of the results to
be expected for any future periods.
Three Months Ended
---------------------------------------------------------------------------------------------------
2000 1999
--------------------------------------------- -----------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
---------- ----------- ---------- ----------- ------------------ ----------- ---------- -----------
Net revenues ............... $ 5,677 $ 6,608 $ 5,014 $ 4,911 $ 4,474 $ 7,190 $ 6,085 $ 7,575
Gross profit ............... 3,346 3,910 2,554 2,345 1,177 (a) 3,695 (b) 2,954 (c) 4,252 (d)
Operating loss ............. (4,546) (3,398) (3,800) (3,175) (15,474)(a) (4,339)(b) (4,982)(c) (4,275)(d)
Net loss ................... (4,439) (3,262) (3,744) (3,164) (15,166)(a) (4,201)(b) (4,906)(c) (4,060)(d)
Net loss per share:
Basic and diluted ......... (0.15) (0.11) (0.13) (0.10) (0.55) (0.15) (0.17) (0.14)
Weighted average shares
outstanding .............. 29,664 30,064 30,191 30,729 27,576 28,086 28,591 29,425
(a) Gross profit includes cost of revenues of $1,392,000 related to inventory write-offs in connection with the merger. Operating
loss includes merger-related costs of $5,501,000. Net loss includes cost of revenues of $1,392,000 related to inventory
write-offs in connection with the merger and merger-related costs of $5,501,000.
(b) Gross profit includes cost of revenues of $625,000 related to inventory write-offs in connection with the merger. Operating
loss includes a reversal of a previously recorded reserve of $541,000. Net loss includes cost of revenues of $625,000 related
to inventory write-offs in connection with the merger and a reversal of a previously recorded reserve of $541,000.
(c) Gross profit includes cost of revenues of $179,000 related to inventory write-offs in connection with the merger. Operating
loss includes merger-related costs of $257,000. Net loss includes cost of revenues of $179,000 related to inventory write-offs
in connection with the merger and merger-related costs of $257,000.
(d) Gross profit includes cost of revenues of $327,000 related to inventory write-offs in connection with the merger. Operating
loss includes a reversal of a previously recorded reserve of $4,000. Net loss includes cost of revenues of $327,000 related to
inventory write-offs in connection with the merger and a reversal of a previously recorded reserve of $4,000.
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. We do not currently hold derivative instruments or
engage in hedging activities. We will adopt SFAS 133 in the first quarter of
2001 and we do not believe that the initial adoption will have a material
impact on the financial statements.
Factors Affecting Future Results
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS FORM 10-K, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING US AND OUR
BUSINESS.
WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING IN THE FUTURE. In the
future, we may require additional funds for operating expenses. Our capital
requirements may vary and will depend on both internal and external factors.
Internal factors affecting our capital requirements include our ability to
generate increased sales, profits and cash flow from operations. External
factors affecting our capital requirements include the progress of our PTMR
submission with the FDA, and competing technological and market developments. We
may be required to seek additional sources of financing, which could include
short-term debt, long-term debt or equity. There is a risk that we may be
unsuccessful in obtaining such financing and will not have sufficient cash to
fund our operations. If this occurs, we may have to significantly reduce our
operations until an appropriate solution is implemented.
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 PTMR system;
* significant limitations in the indicated uses for which our products may
be marketed;
* substantial costs incurred in obtaining regulatory approvals.
19
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 coronary artery bypass graft,
known as 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. 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 TMR and PTMR systems
fail to achieve significant market acceptance.
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 fully 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;
* provide scientific evidence of long term benefits for treated patients,
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;
* willingness of such physicians to adopt and recommend such procedures to
their patients; and
* raising the awareness of TMR and then PTMR with the targeted patient
population.
Patient acceptance of the procedure will depend on:
* physician recommendations;
* the degree of invasiveness;
* the effectiveness of the procedure; and
20
* 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 DATES 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 U.S. sales of our TMR lasers and disposable
handpieces on a commercial basis since February 1999 and PTMR lasers and
disposable catheters for investigational use only.
In the fourth quarter of 1999, we changed our U.S. sales strategy to
include both selling lasers to hospitals outright, as well as loaning lasers to
hospitals in return for the hospital purchasing a minimum number of handpieces
at a premium over the list price. During the current year, the majority of
lasers shipped have been under this loan program. The purpose of this strategy
is to focus our sales force on increasing market penetration and selling
disposable handpieces used in connection with our TMR procedure. If the sales
force is not successful in increasing market share and selling our disposable
handpieces our business will suffer.
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;
* continue to attract, train and motivate additional qualified personnel in
all areas; and
* achieve manufacturing efficiencies as production volume increases.
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;
* changes in competitive pricing policies;
21
* the ability to develop, introduce and market new and enhanced versions of
products on a timely basis;
* deferrals in customer orders in anticipation of new or enhanced products;
* product quality problems; and
* the enactment of health care reform legislation and any changes in third
party reimbursement policies.
We believe that quarter to quarter comparisons of our operating results
are not a good indication of our future performance. Our operating results
have, in the past, fallen below expectations and it is likely or possible that
our operating results for a future quarter will fall below the expectations of
public market analysts and investors. When this occurred in the past the price
of our common stock fell substantially and if this occurs, the price of our
common stock may fall again, perhaps substantially.
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.
In October 2000, preliminary results from a competitor's clinical trial of
a catheter-based device employing "Direct Myocardial Revascularization" (DMR)
were presented at a medical conference in Washington D.C. The trial's principal
investigator concluded that the DMR device did not show significant evidence of
clinical benefit with regard to angina class reduction or exercise tolerance,
and questioned the efficacy of other devices and procedures relying on TMR. We
believe that the preliminary results of the DMR device study should not call
the results of our PTMR study into question because the devices and procedures
are substantially different. We cannot assure you, however, that the
preliminary results of the DMR device study will not impact our submission for
the Axcis PTMR system to the FDA.
WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET OUR PRODUCTS IF WE FAIL TO
OBTAIN THIRD PARTY REIMBUSEMENT 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 United States, 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
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 procedures. If they do not provide reimbursement, our business will
suffer.
Third party payors may deny reimbursement if they determine that the
device used in a treatment is:
* unnecessary;
* inappropriate;
* experimental;
* used for a non-approved indication; or
* not cost-effective.
Potential purchasers must determine whether the clinical benefits of our
TMR and PTMR laser systems justify:
22
* 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 current or future competitors may
succeed in developing TMR and PTMR products or procedures that:
* are more effective than our products;
* are more effectively marketed than our products; or
* may render our products or technology obsolete.
We currently compete with PLC Systems, Inc., Johnson & Johnson and Boston
Scientific. PLC is currently selling TMR commercially in the United States 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 United States under a
preliminary IDE. PLC recently announced a co-marketing agreement with Edwards
Life Sciences to distribute their lasers and disposables. This action will add
another 18 direct domestic sales representatives involved in promoting the PLC
technology.
Even with the FDA approval for our TMR laser system, we will face
competition for market acceptance and market share for that product. Our
ability to compete may depend in significant part on the timing of introduction
of competitive products into the market, and will be affected by the pace,
relative to competitors, at which we are able to:
* develop products;
* complete clinical testing and regulatory approval processes;
* obtain third party reimbursement acceptance; and
* supply adequate quantities of the product to the market.
OUR PRODUCTS ALSO COMPETE WITH ALTERNATIVE TREATMENT METHODS AND OUR
PRODUCTS MUST REPLACE THESE METHODS TO BE COMMERCIALLY SUCCESSFUL. Many of the
medical indications that may be treatable with TMR and PTMR laser systems are
currently being treated by drug therapies or surgery and other interventional
therapies, including PTCA and CABG.
Our business would be materially harmed if TMR technology fails to replace
or augment existing therapies or to be more effective, safer or more cost
effective than new therapies. A number of the existing therapies are widely
accepted in the medical community, have a long history of use and continue to
be enhanced rapidly.
Procedures using TMR and PTMR technology may not be able to replace or
augment such established treatments.
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 RAPDILY CHANGING WHICH COULD
REQUIRE US TO INCUR SUBSTANTIAL PRODUCT DEVELOPMENT EXPENDITURE. 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.
23
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 United States;
* until such time, if ever, as we obtain FDA and other regulatory approvals
for our PTMR laser systems; and
* for an uncertain period of time after such approvals are obtained.
We may not achieve or sustain profitability in the future.
IF WE EXPERIENCE INCREASED DEMAND FOR OUR PRODUCTS, WE MAY NOT BE ABLE TO
EXPAND OUR BUSINESS TO MEET SUCH DEMAND. We may be required to expand our
business to:
* respond to increasing clinical adoption of the TMR procedure;
* develop future products;
* generally compete successfully;
* complete the clinical trials that are currently in progress; and
* 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 POSITION. 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.
24
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 United States 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 United States suit commenced,
CardioGenesis and PLC settled all litigation between them, both in the United
States and in Germany, with respect to the PLC patent and the European patents.
Under the Settlement and License Agreement signed by the parties, CardioGenesis
stipulated to the validity of the PLC patents and PLC granted CardioGenesis a
non-exclusive worldwide license to the PLC patents. CardioGenesis agreed to pay
PLC a license fee, and minimum royalties, totaling $2.5 million over an
approximately forty-month period, with a running royalty credited against the
minimums.
The Settlement and License Agreement applies only to those products or
that technology covered by the PLC patents, and the agreement does not provide
PLC any rights to any CardioGenesis intellectual property. The Eclipse TMR 2000
laser system does not use the technology associated with the PLC patents.
While we periodically review the scope of our patents and other relevant
patents of which we are aware, the question of patent infringement involves
complex legal and factual issues. Any conclusion regarding infringement may not
be consistent with the resolution of any such issues by a court.
We may not be able to protect our intellectual property because:
* patents may not be issued;
* 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 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 United States Patent and Trademark
Office to determine the priority of inventions.
Defending and prosecuting intellectual property suits, United States
Patent and Trademark 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.
25
Any litigation or interference proceedings will result in substantial
expense and significant diversion of effort by technical and management
personnel. If the results of such litigation or interference proceedings are
adverse to us, then the results may:
* subject us to significant liabilities to third parties;
* require us to seek licenses from third parties;
* prevent us from selling our products in certain markets or at all; or
* require us to modify our products.
Although patent and intellectual property disputes regarding medical
devices are often settled through licensing and similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, we may not be able to obtain the necessary licenses on
satisfactory terms, if at all.
Adverse determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from manufacturing and
selling our products. This would harm our business.
WE RELY ON PATENT AND TRADE SECRET LAWS, WHICH ARE COMPLEX AND MAY BE
DIFFICULT TO ENFORCE. The validity and breadth of claims in medical technology
patents involve complex legal and factual questions and, therefore, may be
highly uncertain. Issued patent or patents based on pending patent applications
or any future patent application may not exclude competitors or may not provide
a competitive advantage to us. In addition, patents issued or licensed to us
may not be held valid if subsequently challenged and others may claim rights in
or ownership of such patents.
Furthermore, we cannot 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.
Because patent applications in the United States were, until recently,
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 United States patent laws 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 WOULD 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
26
required to qualify them as additional or replacement suppliers. Any
significant interruption in the supply of critical materials or components
could delay our ability to manufacture our products and could harm our
manufacturing operations, business and results of operations.
We anticipate that products will be manufactured based on forecasted
demand and will seek to purchase subassemblies and components in anticipation
of the actual receipt of purchase orders from customers. Lead times for
materials and components vary significantly and depend on factors such as the
business practices of each specific supplier and the terms of particular
contracts, as well as the overall market demand for such materials and
components at any given time. If the forecasts are inaccurate, we could
experience fluctuations in inventory levels, resulting in excess inventory, or
shortages of critical components, either of which could cause our business to
suffer.
Certain of our suppliers could have difficulty expanding their
manufacturing capacity to meet our needs if demand for our TMR and PTMR laser
systems were to increase rapidly or significantly. In addition, any defect or
malfunction in the laser or other products provided by such suppliers could
cause a delay in regulatory approvals or adversely affect product acceptance.
We can not predict if:
* materials obtained from outside suppliers will continue to be available
in adequate quantities; or
* alternative suppliers can be located on a timely basis.
We operate on a purchase order basis with most of our suppliers. Such
vendors could at any time determine to cease the supply and production of such
components.
WE HAVE LIMITED MANUFACTURING EXPERIENCE WHICH COULD PREVENT US FROM
SUCCESSFULLY INCREASING CAPACITY IN RESPONSE TO MARKET DEMAND. We have limited
experience in manufacturing products. Manufacturers often encounter
difficulties in increasing production, including problems involving:
* production yields;
* adequate supplies of components;
* 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 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
27
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 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 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 May 1997 and for our
PTMR laser system in April 1998. In the European Economic Area, we will be:
* subject to continued supervision;
* required to report any serious adverse incidents to the appropriate
authorities; and
28
* required to comply with additional national requirements that are outside
the scope of the Medical Device Directive.
We became ISO 9001 certified in May 1997. We may not be able to:
* achieve or maintain the compliance required for CE marking on all or any
of our products; and
* produce our products profitably and in a timely manner while complying
with the requirements of the Medical Device Directive and other
regulatory requirements.
If we fail to comply with applicable regulatory requirements we could
face:
* fines, injunctions, civil penalties;
* recalls or seizures of products;
* total or partial suspensions of production;
* refusals by foreign governments to permit product sales; and
* criminal prosecution.
Furthermore, if existing regulations are changed or new regulations or
policies are adopted, we may:
* not be able to obtain, or affect the timing of, future regulatory
approvals or clearances;
* not be able to obtain necessary regulatory clearances or approvals on a
timely basis or at all; and
* be required to incur significant costs in obtaining or maintaining such
foreign regulatory approvals.
WE SELL OUR PRODUCTS INTERNATIONALLY WHICH SUBJECTS US TO CERTAIN 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 REIMBUSEMENT 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.
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
29
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.
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
December 31, 2000, the closing prices of our common stock as reported on the
NASDAQ National Market ranged from a high of $11.050 to a low of $0.50. 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
shareholders 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 shareholders brought such a
lawsuit against us, we could incur substantial costs defending the lawsuit. The
lawsuit could also divert the time and attention of our management.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
QUANTITATIVE DISCLOSURES
The Company is exposed to market risks inherent in its operations,
primarily related to interest rate risk and currency risk. These risks arise
from transactions and operations entered into in the normal course of business.
The Company does not use derivatives to alter the interest characteristics of
its marketable securities or its debt instruments. The Company has no holdings
of derivative or commodity instruments.
INTEREST RATE RISK. The Company is subject to interest rate risks on cash
and cash equivalents and existing long-term debts and any future financing
requirements. The long-term debt at December 31, 2000 consists of outstanding
balances on a note payable and lease obligations.
30
The following table presents the future principal cash flows or amounts
and related weighted average interest rates expected by year for the Company's
existing cash and cash equivalents and long-term debt instruments:
Total Fair
In Thousands 2001 2002 2003 2004 2005 Value
- ------------------------------------ ----------- ---------- ---------- -------- -------- -----------
Assets
Cash, cash equivalents ............ $ 3,357 $ -- $ -- $ -- $ -- $ 3,357
Weighted average interest rate .... 4.7% -- -- -- -- 4.7%
Liabilities
Fixed Rate Debt
Note payable ...................... $ 86 $ -- $ -- $ -- $ -- $ 86
Weighted average interest rate .... 8.0% -- -- -- -- 8.0%
Lease obligation .................. $ 32 $ 32 $ 32 $ -- $ -- $ 96
Weighted average interest rate .... 6.8% 6.8% 6.8% -- -- 6.8%
Qualitative Disclosures
Interest Rate Risk. The Company's primary interest rate risk exposures
relate to the impact of interest rate movements on the Company's ability to
obtain adequate financing to fund future operations.
The Company manages interest rate risk on its outstanding long-term debts
through the use of fixed rate debt. Management evaluates the Company's
financial position on an ongoing basis.
The Company does not hedge any balance sheet exposures and intercompany
balances against future movements in foreign exchange rates. The exposure
related to currency rate movements would not have a material impact on future
net income or cash flows.
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.
31
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 30, 2001, 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 2001
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 2001 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 2001 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 ................................................. 35
Consolidated Balance Sheets as of December 31, 2000 and 1999 ...................... 36
Consolidated Statements of Operations and Comprehensive Loss for the years ended
December 31, 2000, 1999 and 1998 ................................................. 37
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998 ................................................. 38
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998 .................................................................... 39
Notes to Consolidated Financial Statements ........................................ 40
(2) Financial Statement Schedule.
The following financial statement schedule is filed herewith.
Schedule II -- Valuation and Qualifying Accounts .................................. 52
(3) Exhibits.
The exhibits listed under Item 14(c) are filed or incorporated by reference
herein.
32
(b) Reports on Form 8-K.
We filed no reports on Form 8-K during the three month period ended
December 31, 2000.
(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 (2) Form of Director and Officer Indemnification Agreement.
10.2 (2) Stock Option Plan.
10.3 (2) Director Stock Option Plan.
10.4 (2) 1996 Employee Stock Purchase Plan.
10.5 (2) Facilities Lease for 1049 Kiel Court, Sunnyvale, California.
10.6 (2) Facilities Lease for 1139 Karlstad Drive, Sunnyvale, California.
10.7 (2) 401(k) Plan.
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
10.12 Letter employment agreement dated October 16, 2000 between the Company and Michael
J. Quinn, Chief Executive Officer.
10.13 Letter employment agreement dated December 19, 2000 between the company and Darrell
F. Eckstein, Vice President of Operations.
21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (see page 34)
- ------------
(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).
33
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: April 17, 2001 By: /s/ Michael J. Quinn
------------------------------------
Michael J. Quinn
Chief Executive Officer, President,
Chairman of the Board and Director
(Principal Executive 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, Michael J. Quinn
and/or Ian A. Johnston 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/ MICHAEL J. QUINN Chief Executive Officer, President, April 17, 2001
- --------------------------- Chairman of the Board and Director
Michael J. Quinn (Principal Executive Officer)
/s/ IAN A. JOHNSTON Vice President of Finance and Treasurer April 17, 2001
- --------------------------- (Principal Accounting and
Ian A. Johnston Financial Officer)
/s/ ALAN L. KAGANOV, SC.D. Director April 17, 2001
- ---------------------------
Alan L. Kaganov, Sc.D.
/s/ JACK M. GILL Director April 17, 2001
- ---------------------------
Jack M. Gill
/s/ ROBERT L. MORTENSEN Director April 17, 2001
- ---------------------------
Robert L. Mortensen
/s/ ROBERT C. STRAUSS Director April 17, 2001
- ---------------------------
Robert C. Strauss
34
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 32 present fairly, in all material
respects, the financial position of Eclipse Surgical Technologies, Inc. and its
subsidiaries (the "Company") at December 31, 2000 and December 31, 1999, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(2) on page 32 presents 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 responsiblility 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 of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatements. 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 our opinion.
PricewaterhouseCoopers LLP
San Jose, California
January 26, 2001, except Note 18
as to which the date is April 16, 2001
35
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(in thousands)
ASSETS
2000 1999
------------ ------------
Current assets:
Cash and cash equivalents ................................................ $ 3,357 $ 5,566
Marketable securities .................................................... -- 3,227
Accounts receivable, net of allowance for doubtful accounts of $353 and
$1,079 at December 31, 2000 and 1999, respectively ..................... 3,654 8,119
Inventories, net of reserve of $3,102 and $2,705 at December 31, 2000
and 1999, respectively ................................................. 5,400 6,983
Prepaids and other current assets ........................................ 837 767
---------- ----------
Total current assets ................................................... 13,248 24,662
Property and equipment, net ............................................... 1,048 1,220
Long-term marketable securities ........................................... -- 4,520
Accounts receivable over one year, net of allowance for doubtful accounts
of $443 and $797, at December 31, 2000 and 1999, respectively............. 119 1,125
Other assets .............................................................. 2,550 2,492
---------- ----------
Total assets ........................................................... $ 16,965 $ 34,019
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 689 $ 1,819
Accrued liabilities ...................................................... 5,789 9,557
Customer deposits ........................................................ 186 145
Deferred revenue ......................................................... 1,310 1,720
Note payable ............................................................. 86 --
Current portion of capital lease obligation .............................. 26 26
Current portion of long-term liabilities ................................. 500 1,364
---------- ----------
Total current liabilities .............................................. 8,586 14,631
Capital lease obligation, less current portion ............................ 66 90
Long-term liabilities, less current portion ............................... 339 725
---------- ----------
Total liabilities ...................................................... 8,991 15,446
---------- ----------
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred stock: no par value; 6,600 shares authorized; none issued and
outstanding; ........................................................... -- --
Common stock: no par value; 82,000 shares authorized; 30,836 and 29,437
shares issued and outstanding at December 31, 2000 and 1999,
respectively ........................................................... 161,938 158,338
Deferred compensation .................................................... (66) (466)
Accumulated other comprehensive loss ..................................... (65) (75)
Accumulated deficit ...................................................... (153,833) (139,224)
---------- ----------
Total shareholders' equity ............................................. 7,974 18,573
---------- ----------
Total liabilities and shareholders' equity ............................. $ 16,965 $ 34,019
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements
36
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands, except per share amounts)
2000 1999 1998
-------------- ---------------- ----------
Net revenues ................................................... $ 22,210 $ 25,324 $ 15,080
Cost of revenues ............................................... 10,055 13,246 7,868
---------- --------- --------
Gross profit ............................................. 12,155 12,078 7,212
---------- --------- --------
Operating expenses:
Research and development ...................................... 5,065 11,353 29,861
Sales and marketing ........................................... 15,349 16,553 17,663
General and administrative .................................... 6,660 8,028 10,821
Merger-related costs .......................................... -- 5,214 --
---------- --------- --------
Total operating expenses ................................. 27,074 41,148 58,345
---------- --------- --------
Operating loss ........................................... (14,919) (29,070) (51,133)
Interest expense ............................................... (32) (64) (88)
Interest and other income ...................................... 400 801 3,454
Equity in net loss of investee ................................. (58) -- --
---------- --------- --------
Net loss ................................................. (14,609) (28,333) (47,767)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ..... 44 (145) 38
Less: reclassification adjustment for gains included in net
income ..................................................... -- (5) (50)
Foreign currency translation adjustment .................... (34) 26 3
---------- ----------- --------
Other comprehensive income (loss) .......................... 10 (124) (9)
---------- ----------- --------
Comprehensive loss ....................................... $ (14,599) $ (28,457) $(47,776)
========== =========== ========
Net loss per share:
Basic and diluted ............................................. $ (0.48) $ (0.99) $ (1.77)
========== =========== ========
Weighted average shares outstanding ........................... 30,166 28,629 27,000
========== =========== ========
The accompanying notes are an integral part of these consolidated financial
statements
37
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
Common Stock
----------------------- Deferred
Shares(#) Amount Compensation
----------- ----------- --------------
Balances, December 31, 1997 ...................... 26,511 $146,288 $ (848)
Issuance of common stock pursuant to
exercise of options ........................... 650 1,496 --
Issuance of common stock pursuant to
exercise of warrants .......................... 305 725 --
Deferred stock compensation ..................... -- 438 (438)
Amortization of deferred compensation ........... -- -- 457
Net change in unrealized gain on marketable
securities .................................... -- -- --
Foreign currency translation adjustment ......... -- -- --
Net loss ........................................ -- -- --
------ -------- ------
Balances, December 31, 1998 ...................... 27,466 148,947 (829)
Issuance of common stock pursuant to
exercise of options ........................... 1,522 7,747 --
Issuance of common stock pursuant to
exercise of warrants .......................... 449 833 --
Deferred stock compensation ..................... -- 811 (811)
Amortization of deferred compensation ........... -- -- 1,174
Net change in unrealized gain on marketable
securities .................................... -- -- --
Foreign currency translation adjustment ......... -- -- --
Net loss ........................................ -- -- --
------ -------- ------
Balances, December 31, 1999 ...................... 29,437 158,338 (466)
Issuance of common stock pursuant to
exercise of options ........................... 640 1,064 --
Issuance of common stock pursuant to stock
purchase under the Employee Stock
Purchase Plan ................................. 204 388 --
Issuance of common stock in a private
replacement ................................... 526 1,873 --
Issuance of common stock in lieu of payment
for services .................................. 29 44 --
Deferred stock compensation ..................... -- 231 (231)
Amortization of deferred compensation ........... -- -- 631
Net change in unrealized gain on marketable
securities .................................... -- -- --
Foreign currency translation adjustment ......... -- -- --
Net loss ........................................ -- -- --
------ -------- ------
Balances, December 31, 2000 ...................... 30,836 $161,938 $ (66)
====== ======== ======
Accumulated
Other
Comprehensive
Income Accumulated
(Loss) Deficit Total
-------------- -------------- ------------
Balances, December 31, 1997 ...................... $ 58 $ (63,124) $ 82,374
Issuance of common stock pursuant to
exercise of options ........................... -- -- 1,496
Issuance of common stock pursuant to
exercise of warrants .......................... -- -- 725
Deferred stock compensation ..................... -- -- --
Amortization of deferred compensation ........... -- -- 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 ...................... 49 (110,891) 37,276
Issuance of common stock pursuant to
exercise of options ........................... -- -- 7,747
Issuance of common stock pursuant to
exercise of warrants .......................... -- -- 833
Deferred stock compensation ..................... -- -- --
Amortization of deferred compensation ........... -- -- 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 ...................... (75) (139,224) 18,573
Issuance of common stock pursuant to
exercise of options ........................... -- -- 1,064
Issuance of common stock pursuant to stock
purchase under the Employee Stock
Purchase Plan ................................. -- -- 388
Issuance of common stock in a private
replacement ................................... -- -- 1,873
Issuance of common stock in lieu of payment
for services .................................. -- -- 44
Deferred stock compensation ..................... -- -- --
Amortization of deferred compensation ........... -- -- 631
Net change in unrealized gain on marketable
securities .................................... 44 -- 44
Foreign currency translation adjustment ......... (34) -- (34)
Net loss ........................................ -- (14,609) (14,609)
------ ---------- ----------
Balances, December 31, 2000 ...................... $ (65) $ (153,833) $ 7,974
====== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements
38
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
2000
--------------
Cash flows from operating activities:
Net loss ............................................................................ $ (14,609)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ....................................................... 933
Loss/(gain) from investment in MicroHeart Holdings, Inc ............................. 58
Provision for doubtful accounts ..................................................... 620
Inventory reserves .................................................................. 1,788
Amortization of deferred compensation ............................................... 631
Amortization of license fees ........................................................ 194
Loss on disposal of property and equipment .......................................... --
Issuance of stock to private company in lieu of payment for services ................ 44
Changes in operating assets and liabilities:
Accounts receivable -- short term .................................................. 3,756
Inventories ........................................................................ (694)
Prepaids and other current assets .................................................. (70)
Other assets ....................................................................... --
Accounts receivable -- long term ................................................... 1,096
Accounts payable ................................................................... (1,130)
Accrued liabilities ................................................................ (3,768)
Current portion of long term liabilities ........................................... (375)
Long term liabilities .............................................................. (386)
Customer deposits .................................................................. 41
Deferred revenue ................................................................... (410)
----------
Net cash used in operating activities ............................................. (12,281)
----------
Cash flows from investing activities:
Purchase of marketable securities ................................................... (3,317)
Maturities of marketable securities ................................................. 11,108
Acquisition of property and equipment ............................................... (762)
Exercise of warrants in Microheart Holdings, Inc. ................................... (310)
----------
Net cash provided by investing activities ......................................... 6,719
----------
Cash flows from financing activities:
Net proceeds from issuance of common stock from exercise of options and warrants..... 1,452
Net proceeds from sale of common stock .............................................. 1,873
Proceeds from short term borrowings ................................................. 86
Repayment of note payable ........................................................... --
Repayments of capital lease obligations ............................................. (24)
----------
Net cash provided by financing activities ......................................... 3,387
Effects of exchange rate changes on cash and cash equivalents ..................... (34)
----------
Net increase (decrease) in cash and cash equivalents .............................. (2,209)
Cash and cash equivalents at beginning of year ....................................... 5,566
----------
Cash and cash equivalents at end of year ............................................. $ 3,357
==========
Supplemental schedule of cash flow information:
Interest paid ....................................................................... $ 32
==========
Taxes paid .......................................................................... $ 153
==========
Supplemental schedule of noncash investing and financing activities:
Change in unrealized gain (loss) on marketable securities ........................... $ 44
==========
Investment in MicroHeart Holdings, Inc .............................................. $ --
==========
Deferred compensation ............................................................... $ 231
==========
Acquisition of equipment under capital leases ....................................... $ --
==========
1999 1998
-------------- --------------
Cash flows from operating activities:
Net loss ............................................................................ $ (28,333) $ (47,767)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ....................................................... 1,453 908
Loss/(gain) from investment in MicroHeart Holdings, Inc ............................. -- (400)
Provision for doubtful accounts ..................................................... 1,377 1,017
Inventory reserves .................................................................. 1,782 68
Amortization of deferred compensation ............................................... 1,174 457
Amortization of license fees ........................................................ 195 --
Loss on disposal of property and equipment .......................................... 317 --
Issuance of stock to private company in lieu of payment for services ................ -- --
Changes in operating assets and liabilities:
Accounts receivable -- short term .................................................. 551 (4,548)
Inventories ........................................................................ 799 (4,167)
Prepaids and other current assets .................................................. 1,195 (229)
Other assets ....................................................................... 24 --
Accounts receivable -- long term ................................................... 51 (1,963)
Accounts payable ................................................................... 230 (601)
Accrued liabilities ................................................................ (1,907) 5,595
Current portion of long term liabilities ........................................... -- --
Long term liabilities .............................................................. (687) --
Customer deposits .................................................................. (111) 185
Deferred revenue ................................................................... (425) 1,995
---------- ----------
Net cash used in operating activities ............................................. (22,315) (49,450)
---------- ----------
Cash flows from investing activities:
Purchase of marketable securities ................................................... (44,702) (45,067)
Maturities of marketable securities ................................................. 61,473 73,646
Acquisition of property and equipment ............................................... (637) (173)
Exercise of warrants in Microheart Holdings, Inc. ................................... -- --
---------- ----------
Net cash provided by investing activities ......................................... 16,134 28,406
---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock from exercise of options and warrants..... 8,580 2,221
Net proceeds from sale of common stock .............................................. -- --
Proceeds from short term borrowings ................................................. -- 71
Repayment of note payable ........................................................... (111) (1,000)
Repayments of capital lease obligations ............................................. (21) (22)
---------- ----------
Net cash provided by financing activities ......................................... 8,448 1,270
Effects of exchange rate changes on cash and cash equivalents ..................... 26 3
---------- ----------
Net increase (decrease) in cash and cash equivalents .............................. 2,293 (19,771)
Cash and cash equivalents at beginning of year ....................................... 3,273 23,044
---------- ----------
Cash and cash equivalents at end of year ............................................. $ 5,566 $ 3,273
========== ==========
Supplemental schedule of cash flow information:
Interest paid ....................................................................... $ 64 $ 87
========== ==========
Taxes paid .......................................................................... $ 112 $ --
========== ==========
Supplemental schedule of noncash investing and financing activities:
Change in unrealized gain (loss) on marketable securities ........................... $ (150) $ (12)
========== ==========
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
39
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations:
Eclipse Surgical Technologies, Inc. ("Eclipse" or the "Company") was
founded in 1989 to develop, manufacture and market surgical lasers and
accessories for the treatment of disease. Currently, Eclipse's emphasis is on
the development and manufacture of products used for transmyocardial
revascularization ("TMR") and percutaneous transluminal myocardial
revascularization ("PTMR"), which are cardiovascular procedures. Eclipse
markets its products for sale primarily in the U.S., Europe and Asia. Eclipse
operates in a single segment.
These financial statements contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business. Eclipse has
sustained significant losses for the last several years and expects to continue
to incur losses through at least 2001. Management believes its cash balance as
of December 31, 2001 will not be sufficient to meet the Company's capital and
operating requirements for the next 12 months. Eclipse will require additional
funding and may sell additional shares of its common stock or preferred stock
through private placement of further public offerings or debt financings. (see
Note 18).
Eclipse may require additional financing in the future. There can be no
assurance that Eclipse will be able to obtain additional debt or equity
financing, if and when needed, on terms acceptable to the Company. Any
additional equity or debt financing may involve substantial dilution to
Eclipse's stockholder, restrictive covenants or high interest costs. The
failure to raise needed funds on sufficiently favorable terms could have a
material adverse effect on Eclipse's business, operating results and financial
condition.
Eclipse's long term liquidity also depends upon its ability to increase
revenues from the sale of its products and achieve profitability. The failure
to achieve these goals could have a material adverse effect on the business,
operating results and financial condition.
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 the years 1998 and 1999. 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.
Reclassification:
The Company has reclassified $2,523,000 of inventory write-offs associated
with the merger from merger-related costs to cost of revenues for the year ended
December 31, 1999. The reclassification was made to ensure that the Company's
merger costs are in compliance with the appropriate accounting rules and
interpretations.
Cash and Cash Equivalents:
All highly liquid instruments purchased with an original maturity of three
months or less are considered cash equivalents.
40
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Patent Expenses:
Patent and patent related expenditures are expensed as general and
administrative expenses as incurred.
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 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.
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, 2000, December 31, 1999 and December 31, 1998 no
customer individually accounted for 10% or more of accounts receivable, nor did
any customer individually account for 10% or more of net revenues for the years
ended December 31, 2000, December 31, 1999 or December 31, 1998.
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.
41
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition:
Eclipse has adopted the provisions of Staff Accounting Bulletin ("SAB")
No. 101 "Revenue Recognition in Financial Statements" and believes that its
current and historical revenue recognition is in compliance with the SAB.
Eclipse recognizes revenue on product sales upon receipt of a purchase
order, subsequent shipment of the product and the price is fixed or determinable
and collection of sales proceeds is reasonably assured. Where purchase orders
allow customers an acceptance period or other contingencies, revenue is
recognized upon the earlier of acceptance or removal of the contingency.
Eclipse frequently loans lasers to hospitals in return for the hospital
purchasing a minimum number of handpieces at a premium over the list price. The
placed lasers are depreciated to costs of revenues over a useful life of 24
months. The revenue on the handpieces is recognized upon shipment at an amount
equal to the list price. The premium over the list price is recognized ratable,
generally over several months.
Revenues from service contracts, rentals, and per procedure fees are
recognized upon performance or over the terms of the contract as appropriate.
Research and Development:
Research and development expenses are charged to operations as incurred.
Warranties:
Eclipse's laser products are generally warranted for one year. Eclipse
provides for estimated future costs of repair, replacement, or customer
accommodations which are reflected in the accompanying financial statements.
Advertising:
Eclipse expenses all advertising as incurred. Eclipse's advertising
expenses were $128,000, $75,000, and $18,000 for 2000, 1999 and 1998,
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/loss in shareholders' equity.
Transaction gains and losses are included in the results of operations and have
not been significant for all periods presented.
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.
Eclipse 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."
42
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 incremental shares issuable upon
the conversion of convertible preferred stock (using the "if converted" method)
and the exercise of stock options and warrants (using the "treasury stock"
method).
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,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Numerator -- Basic and Diluted EPS
Net Loss .................................... $ (14,609) $ (28,333) $ (47,767)
========== ========== ==========
Denominator -- Basic and Diluted EPS
Weighted average shares outstanding ......... 30,166 28,629 27,000
========== ========== ==========
Basic and diluted EPS ......................... $ (0.48) $ (0.99) $ (1.77)
========== ========== ==========
Options to purchase 4,277,021, 4,381,335, and 4,533,000 shares of common
stock were outstanding at December 31, 2000, 1999 and 1998, respectively. The
range of exercise prices for these options were $0.03-$15.9375 for 2000,
$0.03-$16.09 for 1999 and $0.03-$18.125 for 1998. No warrants were outstanding
at December 31, 2000 and 1999. Warrants to purchase 466,123 shares of common
stock were outstanding as of December 31, 1998. 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. Eclipse does not currently hold derivative
instruments or engage in hedging activities. Eclipse will adopt SFAS 133 in the
first quarter of 2001 and does not believe that the initial adoption will have
a material impact on the Company's financial statements.
3. Business Combination
On March 17, 1999, Eclipse and CardioGenesis Corporation ("CardioGenesis")
announced the completion of their business combination. Under the terms of the
combination, each share of CardioGenesis Common Stock was converted into 0.8 of
a share of Eclipse Common Stock, and Eclipse assumed all outstanding
CardioGenesis stock options. CardioGenesis became a wholly-owned subsidiary of
Eclipse and its shares are no longer publicly traded. As a result of the
transaction, Eclipse increased its outstanding shares by approximately 9.9
million shares. The transaction was structured to qualify as a tax-free
reorganization and was 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
43
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
severe angina pain through TMR and PTMR. CardioGenesis also manufactured and
marketed disposable products to perform intraoperative transmyocardial
revascularization ("ITMR"), catheter-based percutaneous myocardial
revascularization ("PMR"), and thorascopic transmyocardial revascularization
("TTMR") to treat patients afflicted with debilitating angina. During the
quarter ended March 31, 1999, Eclipse recognized merger-related costs of
$6,893,000 for financial advisory and legal fees, personnel severance,
terminated relationships and other costs including write-offs of fixed assets
and inventory. A majority of the terminated employees were located in
California and worked in operations, sales, marketing, quality, research and
development and administrative functions. A total of 40 employees were
terminated.
During the remaining quarters ended December 31, 1999, 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 of
which $2,523,000 was accounted for in our cost of revenues as a write-off of
inventory. This increase was mainly due to a charge associated with an upgrade
program to replace customer owned equipment rendered unusable by the merger.
Eclipse did not incur any charges for merger related expense in 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
--------
Subtotal ......................................................... $ 7,737
Less: Amount included in cost of revenues ........................ (2,523)
--------
Total ............................................................ $ 5,214
========
The following table summarizes the Company's merger related reserve
balances (in thousands):
Merger-related costs ................................................ $ 7,737
Non-cash charges ................................................. (2,060)
Cash payments .................................................... (5,407)
--------
Merger reserve balance at December 31, 2000 ......................... $ 270
========
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:
For the Years Ended
December 31,
-------------------------------
1998 1997
-------------- --------------
Revenue:
Eclipse previously reported ........................... $ 12,002 $ 5,499
CardioGenesis ......................................... $ 3,078 $ 7,559
Restated Revenue ...................................... $ 15,080 $ 13,058
Net loss:
Eclipse previously reported ........................... $ (20,354) $ (18,247)
CardioGenesis ......................................... $ (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 ........................................ $ (2.80) $ (1.49)
Restated basic and diluted net loss per share ......... $ (1.77) $ (1.39)
44
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 fiscal year 1999 revenues and net
income of Eclipse and CardioGenesis through 3/31/99:
Quarter Ended
March 31, 1999
---------------
CardioGenesis:
Revenues ................ $ 675
Net Income .............. $ (8,317)
Eclipse:
Revenues ................ $ 3,799
Net Income .............. $ (6,849)
4. Investment in Unconsolidated Affiliate, at Equity:
At December 31, 2000, Eclipse had a 32.1% ownership interest in Microheart
Holdings, Inc., "Microheart", which is accounted for under the equity method.
The investment in Microheart is recorded at cost and adjusted for the Company's
share of the income/(loss) of the investment. As of December 31, 2000, Eclipse
recorded net loss of $58,000, which represents Eclipse's equity in the loss
incurred by Microheart subsequent to obtaining the equity interest. Eclipse
recorded no income or loss related to Microheart under the equity method in 1999
or 1998.
5. Marketable Securities:
At December 31, 2000, Eclipse held no marketable securities. At December
31, 1999, marketable securities had a cost basis of approximately $7,649,000 and
a fair value of $7,747,000.
6. Inventories:
Inventories consist of the following (in thousands):
December 31,
-----------------------
2000 1999
---------- ----------
Raw materials ........... $ 2,045 $ 3,074
Work in process ......... 715 624
Finished goods .......... 2,640 3,285
------- -------
$ 5,400 $ 6,983
======= =======
7. Property and Equipment:
Property and equipment consists of the following (in thousands):
December 31,
-----------------------
2000 1999
---------- ----------
Computers and equipment ................................ $ 2,508 $ 2,262
Manufacturing and demonstration equipment .............. 2,216 2,119
Assets in progress ..................................... 183 6
Leasehold improvements ................................. 198 242
-------- --------
5,105 4,627
-------- --------
Less accumulated depreciation and amortization ......... (4,057) (3,407)
-------- --------
$ 1,048 $ 1,220
======== ========
45
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Eclipse leases certain equipment under a capital lease which expires in
December 2003. Accordingly, capitalized costs of $138,000, net of accumulated
amortization of $57,000, are included in computers and equipment at December
31, 2000.
8. Accrued Liabilities:
Accrued liabilities consists of the following (in thousands):
December 31,
----------------------
2000 1999
--------- ----------
Accrued research support .............................. $2,356 $ 2,918
Accrued accounts payable and related expenses ......... 1,256 354
Accrued merger expenses ............................... 270 514
Accrued withholdings on exercised options ............. 74 2,031
Accrued salaries and related expenses ................. 472 1,206
Accrued commissions ................................... 235 468
Accrued consulting fees and related expenses .......... 43 40
Accrued warranty ...................................... 158 225
Accrued legal expense ................................. 30 262
Accrued other ......................................... 895 1,539
------ -------
$5,789 $ 9,557
====== =======
9. Note Payable:
In May 2000, Eclipse financed insurance premiums for Directors & Officers
insurance with a $319,000 note payable to a finance company at 8.0% per annum,
with an outstanding balance of $86,000 at December 31, 2000. At December 31,
1999, there were no outstanding note payable balances.
10. 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 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,
2001 ........................................... $500
2002 ........................................... 375
----
875
Less: Amount representing interest ............. (36)
Present value of long-term liabilities ......... 839
Less: Current portion .......................... (500)
----
Long-term portion .............................. $339
====
46
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. 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,
2001 ................... $ 991
2002 ................... 715
-------
$ 1,706
=======
Rent expense was approximately $950,000, $1,089,000and $883,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
At December 31, 2000 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,
2001 ................................................... $ 32
2002 ................................................... 32
2003 ................................................... 32
-----
Total minimum lease payments ........................... 96
Less: Amount representing interest ..................... (4)
-------
Present value of capital lease obligations ............. 92
Less: Current portion. ................................. (26)
------
Long-term portion of capital lease obligations ......... $ 66
======
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, cash flows or results of operations.
12. Shareholders' Equity:
Warrants:
At December 31, 2000, there were no warrants outstanding. During the years
ended December 31, 2000, 1999 and 1998, none, 448,799, and 304,715 warrants
were exercised, respectively, generating proceeds of approximately none,
$833,000,and $725,000 respectively.
Options Granted to Consultants:
At December 31, 2000, options for consultants to purchase a total of
371,000 shares of common stock at exercise prices ranging from $4.00 to $8.75
per share were outstanding. The exercisability and termination of this plan is
the same as Eclipse's Stock Option Plan which is described below. At December
31, 2000, Eclipse had reserved 371,000 shares of common stock for issuance upon
exercise of these options. Eclipse recorded deferred stock compensation of
$231,000 in 2000 related to these options. These options are included in the
Stock Option Plan disclosures below.
Stock Option Plan:
Eclipse maintains a Stock Option Plan, which includes the Employee Program
under which incentive and nonstatutory options may be granted to employees and
the Consultants Program, under which nonstatutory options may be granted to
consultants of the Company. As of December 31, 2000, Eclipse
47
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2000, 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. The purpose of the Employee Stock
Purchase Plan is to provide eligible employees of Eclipse with a means of
acquiring common stock of Eclipse through payroll deductions. 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 compensations,
subject to certain limitations. During fiscal years 2000, 1999 and 1998,
approximately 172,000, 81,000, 99,000 shares, respectively, were sold through
the ESPP.
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 2000, 1999 and 1998 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,
---------------------------------------------
2000 1999 1998
------------- ------------- -------------
Net loss as reported ..................................... $ (14,609) $ (28,333) $ (47,767)
Pro forma net loss ....................................... $ (17,993) $ (32,362) $ (51,213)
Basic and diluted net loss per share as reported ......... $ (0.48) $ (0.99) $ (1.77)
Pro forma basic and diluted net loss per share ........... $ (0.60) $ (1.13) $ (1.90)
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, 2000, 1999 and 1998 were $2.5 million, $7.9 million, and $6.5
million, and $1.44, $5.25, and $5.46, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions for grants in
2000, 1999 and 1998:
December 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Expected life of option ......... 7 years 7 years 7 years
Risk-free interest rate ......... 5.85% 5.00% 4.86%
Expected dividends .............. -- -- --
Expected volatility ............. 165% 100% 97%
48
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The aggregate fair value and weighted average fair value per share of
purchase rights under the ESPP in fiscal years 2000, 1999 and 1998 was
$167,000, $157,000 and $210,000, and $3.01, $3.42, and $3.90, respectively. The
fair value for the purchase rights under the Employee Stock Purchase Plan is
estimated using the Black-Scholes Option Pricing Model, with the following
assumptions for the rights granted in 2000, 1999 and 1998:
December 31,
-----------------------------------------
2000 1999 1998
------------ ------------ -----------
Expected life ................... .5 years .5 years .5 years
Risk-free interest rate ......... 5.85% 5.00% 4.62%
Expected dividends .............. -- -- --
Expected volatility ............. 100% 100% 95%
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, 1998 .................... 1,792 4,576 $ 4.37
Additional shares reserved ................ 320 -- --
Options granted ........................... (1,243) 1,243 6.89
Options canceled .......................... 702 (612) 8.20
Options exercised ......................... -- (650) 1.37
------ -----
Balance, December 31, 1998 .................. 1,571 4,557 4.86
Additional shares reserved ................ 1,225 -- --
Options granted ........................... (1,494) 1,494 7.75
Options canceled .......................... 222 (222) 8.11
Options exercised ......................... -- (1,447) 5.11
------ ------
Balance, December 31, 1999 .................. 1,524 4,382 5.35
CardioGenesis Stock Plan reserves ......... (539) -- --
Options granted ........................... (1,554) 1,554 1.17
Options canceled .......................... 1,019 (1,019) 7.36
Options exercised ......................... -- (640) 1.66
------ ------
Balance, December 31, 2000 .................. 450 4,277 $ 4.99
====== ======
49
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, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------------- ------------------------------------
Weighted Average
Remaining
Number Contractual Life Weighted Average Number Weighted Average
Exercise Prices Outstanding (#) (in Years) Exercise Price Exercisable(#) Exercise Price
- ----------------- ----------------- ------------------ ------------------ ---------------- -----------------
(in thousands) (in thousands)
$0.15-$ 0.30 88 3.62 $ 0.22 88 $ 0.22
$1.38-$ 1.44 583 6.98 0.92 202 0.46
$1.67-$ 1.67 530 4.87 1.67 530 1.67
$1.69-$ 2.29 824 7.50 1.99 121 1.99
$3.36-$ 5.88 348 8.22 3.80 203 3.90
$6.06-$ 6.94 967 7.93 6.48 635 6.51
$7.00-$ 8.74 550 7.51 8.33 371 8.28
$9.06-$15.94 389 6.52 10.17 326 10.02
--- ---
4,277 6.98 $ 4.99 2,477 $ 5.25
=====
13. 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 2000, 1999 or 1998.
14. Segment Disclosures
International sales accounted for approximately 10%, 14%, and 24% of net
sales for the years ended December 31, 2000, 1999 and 1998, respectively.
15. Interest and Other Income:
Interest and other income consists of the following (in thousands):
Years Ended December 31,
-------------------------------
2000 1999 1998
-------- -------- ---------
Interest and other income ...................... $ 400 $ 796 $ 3,004
Gain on investment in MicroHeart Holdings, Inc. -- -- 400
Gain on sale of marketable securities .......... -- 5 50
----- ----- -------
$ 400 $ 801 $ 3,454
===== ===== =======
50
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Income Taxes:
Significant components of Eclipse's deferred tax assets are as follows (in
thousands):
December 31
-------------------------
2000 1999
----------- -----------
Net operating losses .......................... $ 50,734 $ 43,914
Research and development and other credits .... 3,697 4,284
Capitalized research and development .......... 806 1,858
Reserves ...................................... 2,038 2,705
Accrued liabilities ........................... 1,118 2,116
Depreciation .................................. 259 402
Other ......................................... 763 1,018
--------- ---------
Net deferred tax asset ........................ 59,415 56,297
Less valuation allowance ...................... (59,415) (56,297)
--------- ---------
Net deferred tax assets ....................... $ -- $ --
========= =========
The Company has established a valuation allowance to the extent of its
deferred tax asset since it is not certain that a benefit can be realized in
the future due to the Company's recurring operating losses.
As of December 31, 2000, the Company had federal and state net operating
loss carryforwards of approximately $137 million and $62 million, respectively,
to offset future taxable income. In addition, the Company had federal and state
credit carryforwards of approximately $2,501,000 and $1,195,000 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 2001
through 2020, if not utilized.
The Internal Revenue Code 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.
17. Related Party Transactions:
The Company paid $0, $3,875 and $445,000 for consulting fees and product to
certain stockholders during the years ended December 31, 2000, 1999 and 1998,
respectively.
18. Subsequent Events:
In March 2001, the Company sold 898,202 shares of common stock to Acqua
Wellington North American Equities Fund, Ltd. ("Acqua Wellington") at a
negotiated purchase price of $1.1133 per share pursuant to the common stock
purchased agreement between Eclipse Surgical Technologies, Inc. and Acqua
Wellington dated August 17, 2000. The Company did not pay any other compensation
in conjunction with the sale of our common stock.
In April 2001, the Company sold 2,000,000 shares of common stock to a
governmental entity at a negotiated purchase price of $1.00 per share. The
Company did not pay any other compensation in conjunction with the sale of our
common stock. These securities carry registration rights. If a registration
statement is not declared effective by the SEC on or before July 12, 2001, the
Company will be required to pay liquidated damages in the amount of 0.25% of the
total purchase price of the shares for each week after July 12, 2001 that the
registration statement is not declared effective. The purchaser also has certain
anti-dilution rights that are effective for 90 days following the purchase of
the stock. As a condition of the sale, the Company amended its bylaws to
preclude, absent shareholder approval, the granting of any stock options with an
exercise price which is below the fair market value of the underlying stock on
the date of grant, the repricing of any stock options, the issuance of any
security convertible, exercisable or exchangeable into shares of common stock of
the Company having a conversion, exercise or exchange price per share which is
subject to downward adjustment based on the market price of the common stock at
the time of conversion, exercise or exchange of such security into the Company's
common stock, or enter into any equity line or similar agreement or arrangement
or any agreement to sell common stock at a price fixed after the date of the
agreement.
In April 2001, the Company received a non-binding letter of intent from a
business credit financing company regarding an asset-based financing agreement
which will provide an estimated $1,000,000 of additional financing based upon
our current levels of qualified domestic accounts receivable which will serve as
collateral.
51
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
------------ --------------- ---------------- ----------
Allowance for doubtful accounts:
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
Year ended December 31, 2000
Allowance for doubtful accounts .......... $ 1,876 $ 620 $ 1,700 $ 796
Inventory reserve:
Year ended December 31, 1998
Inventory reserve ........................ $ 432 $ 68 $ 97 $ 403
Year ended December 31, 1999
Inventory reserve ........................ $ 403 $ 1,782 $ 187 $ 1,998
Year ended December 31, 2000
Inventory reserve ........................ $ 1,998 $ 1,788 $ 1,606 $ 2,180
Warranty reserve: .........................
Year ended December 31, 1998
Warrany reserve .......................... $ 78 $ 100 $ -- $ 178
Year ended December 31, 1999
Warranty reserve ......................... $ 178 $ 114 $ 67 $ 225
Year ended December 31, 2000
Warranty reserve ......................... $ 225 $ 95 $ 162 $ 158
Valuation allowance: .....................
Year ended December 31, 1998
Valuation allowance ...................... $ 27,391 $ 19,342 $ -- $ 46,733
Year ended December 31, 1999
Valuation allowance ...................... $ 46,733 $ 9,564 $ -- $ 56,297
Year ended December 31, 2000
Valuation allowance ...................... $ 56,297 $ 3,118 $ -- $ 59,415
- ------------
(1) Charged to costs and expenses.
(2) Amounts written off against the reserve.
52