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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
-----------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended March 31, 1998.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ________________to_______________.
COMMISSION FILE NUMBER: 000-28372
CARDIAC PATHWAYS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0278793
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
995 BENECIA AVENUE, SUNNYVALE, CA 94086
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 737-0505
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. [X] Yes No [ ]
As of May 1, 1998 there were 9,753,956 shares of the Registrant's Common Stock
outstanding.
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CARDIAC PATHWAYS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements and Notes (Unaudited)
Consolidated Balance Sheets as of March 31, 1998 and
June 30, 1997 ..................................................... 3
Consolidated Statements of Operations for the three and nine
months Ended March 31, 1998 and 1997 .............................. 4
Consolidated Statements of Cash Flows for the nine months
ended March 31, 1998 and 1997 ..................................... 5
Notes to Consolidated Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities ............................................. 26
Item 6. Exhibits and Reports on Form 8-K .................................. 26
SIGNATURES ..................................................................... 27
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, June 30,
1998 1997(1)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,010,266 $ 5,091,426
Short-term investments 23,832,876 36,475,534
Accounts receivable, net of allowance for doubtful accounts
of $16,500 at March 31, 1998 and $9,500 at June 30, 1997 494,067 168,828
Inventories 537,553 420,005
Prepaid expenses 187,145 411,758
Other current assets 431,626 530,080
------------ ------------
Total current assets 30,493,533 43,097,631
Property and equipment, net 3,659,417 3,140,849
Notes receivable from related parties 177,999 319,491
Deposits and other assets 180,400 97,283
============ ============
$ 34,511,349 $ 46,655,254
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 712,650 $ 788,384
Accrued compensation and related benefits 529,195 462,814
Accrued clinical expenses 988,396 696,106
Other accrued expenses 820,656 870,242
Current obligations under capital leases 522,102 768,813
------------ ------------
Total current liabilities 3,572,999 3,586,359
Long-term obligations under capital leases 372,727 472,588
Deferred royalty income 2,932,339 2,950,473
Note payable 4,500,000 4,500,000
Interest payable on note 1,444,750 1,153,625
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized and none
issued and outstanding at March 31, 1998 and June 30, 1997 -- --
Common stock, $.001 par value; 30,000,000 shares authorized; 9,752,201
shares issued and outstanding at March 31, 1998 and 9,523,540
at June 30, 1997 9,752 9,524
Additional paid-in capital 79,565,275 79,089,193
Receivables from stockholders (410,000) (420,000)
Accumulated deficit (56,905,744) (43,918,832)
Deferred compensation (570,749) (767,676)
------------ ------------
Total stockholders' equity 21,688,534 33,992,209
------------ ------------
$ 34,511,349 $ 46,655,254
============ ============
(1) Derived from the Company's audited consolidated balance sheet as of
June 30, 1997.
See notes to consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
March 31, March 31,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales $ 737,947 $ 500,348 $ 1,659,451 $ 2,183,268
Cost of goods sold 793,057 682,517 2,063,366 1,960,133
------------ ------------ ------------ ------------
Gross margin (deficit) (55,110) (182,169) (403,915) 223,135
Operating expenses:
Research and development 3,581,398 2,945,191 10,687,922 8,502,755
Selling, general and administrative 1,041,843 918,194 3,000,259 2,315,329
------------ ------------ ------------ ------------
Total operating expenses 4,623,241 3,863,385 13,688,181 10,818,084
------------ ------------ ------------ ------------
Loss from operations (4,678,351) (4,045,554) (14,092,096) (10,594,949)
Other income (expense):
Interest income 427,663 646,207 1,483,191 2,023,413
Interest expense (130,717) (133,335) (439,089) (391,382)
Other, net 37,752 12,420 61,082 23,509
------------ ------------ ------------ ------------
Total other income, net 334,698 525,292 1,105,184 1,655,540
============ ============ ============ ============
Net loss $ (4,343,653) $ (3,520,262) $(12,986,912) $ (8,939,409)
============ ============ ============ ============
Net loss per share - basic and diluted $ (0.45) $ (0.37) $ (1.35) $ (0.96)
============ ============ ============ ============
Shares used in computing
net loss per share - basic and diluted 9,723,000 9,417,000 9,603,000 9,340,000
============ ============ ============ ============
See notes to consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
March 31,
-------------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(12,986,912) $ (8,939,409)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 970,909 905,668
Amortization of deferred royalty income (18,134) (39,527)
Amortization of deferred compensation 196,927 176,707
Gain on disposal of property and equipment (30,122) --
Issuance of common stock warrants 60,351 --
Issuance of nonqualified stock options for services 65,121 10,000
Changes in operating assets and liabilities:
Accounts receivable (325,239) (65,810)
Inventories (117,548) (274,784)
Prepaid expenses 224,613 59,283
Other current assets 148,454 (153,635)
Accounts payable (75,734) (146,307)
Accrued compensation and related benefits 66,381 277,371
Accrued clinical expenses 292,290 367,838
Other accrued expenses (49,586) 72,039
Interest payable 291,125 282,517
------------ ------------
Net cash used in operating activities (11,287,104) (7,468,049)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (22,658,792) (45,924,257)
Maturities and sales of short-term investments 35,301,450 31,045,000
Purchases of property and equipment, net (1,139,300) (6,402)
(Increase) decrease in notes receivable 141,492 (13,836)
(Increase) in deposits and other assets (83,117) (28,917)
------------ ------------
Net cash provided by (used in) investing activities 11,561,733 (14,928,412)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations (716,627) (620,355)
Proceeds from sale of common stock 350,838 368,219
(Increase) decrease in notes receivable from stockholders 10,000 (14,000)
------------ ------------
Net cash used in financing activities (355,789) (266,136)
------------ ------------
Net increase (decrease) in cash and cash equivalents (81,160) (22,662,597)
Cash and cash equivalents at beginning of period 5,091,426 29,112,255
============ ============
Cash and cash equivalents at end of period $ 5,010,266 $ 6,449,658
============ ============
See notes to consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
financial information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The operating results for the three and nine month periods ended March
31, 1998 are not necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 1998. The accompanying consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1997.
2. SHORT-TERM INVESTMENTS
At March 31, 1998 and June 30, 1997, all short-term investments were
classified as held-to-maturity and available-for-sale. The amortized cost of
held-to-maturity securities is adjusted for the amortization of premiums and the
accretion of discounts to maturity. Such amortization of premiums and accretion
of discounts are included in interest income. At March 31, 1998 and June 30,
1997, these securities were valued at amortized cost, which approximates fair
value. Available-for-sale securities are carried at fair value with unrealized
gains and losses reported as a separate component of stockholders' equity. To
date, the Company has not experienced any significant unrealized gains or losses
on available-for-sale securities and, accordingly, no adjustments have been made
to stockholders' equity.
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The following is a summary of held-to-maturity and available-for-sale
securities at cost, which approximates fair value:
MARCH 31, JUNE 30,
DESCRIPTION 1998 1997
- ----------- ----------- -----------
Held-to-maturity:
U.S. government agency $ 4,994,103 $15,485,479
U.S. corporate obligations 15,538,773 20,329,767
Available-for-sale:
Auction rate preferred stock 3,300,000 2,100,000
U.S. corporate obligations -- 1,055,206
----------- -----------
23,832,876 38,970,452
Amounts classified as cash equivalents -- 2,494,918
----------- -----------
Amounts included in short-term investments $23,832,876 $36,475,534
=========== ===========
There were no material realized gains or losses for the three and nine
month periods ending March 31, 1998 and 1997. The cost of securities sold is
based on the specific identification method. Held-to-maturity securities at
March 31, 1998 mature at various dates through October 1999.
3. CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
MARCH 31, JUNE 30,
1998 1997
---------- ----------
Inventories:
Raw materials $ 335,453 $ 252,349
Work-in-process 21,927 26,929
Finished goods 180,173 140,727
---------- ----------
$ 537,553 $ 420,005
========== ==========
MARCH 31, JUNE 30,
1998 1997
---------- ----------
Property and equipment:
Equipment $5,343,498 $4,799,030
Leasehold improvements 348,610 274,307
Equipment-in-process 1,533,712 1,076,157
---------- ----------
7,225,820 6,149,494
Less accumulated depreciation
and amortization 3,566,403 3,008,645
---------- ----------
$3,659,417 $3,140,849
========== ==========
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4. NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (FAS 128), "Earnings per
Share," which the Company adopted on December 31, 1997 pursuant to the
requirements of FAS 128. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options is excluded. The
adoption of FAS 128 did not have a material impact on the Company's reported
basic and diluted net loss per share due to the exclusion of antidilutive
options from the calculations in periods when the Company incurred a net loss
which occurred in all periods reported herein.
5. RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive
Income" which requires the reporting and presentation of comprehensive income
and its components in the financial statements. Comprehensive income reflects
certain items not currently reported in measuring net income such as changes in
the value of available-for-sale securities and foreign currency translation
adjustments. FAS 130 will become effective for the Company's year ending June
30, 1999. The Company does not expect the adoption of FAS 130 to have a material
impact on its financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments
of an Enterprise and Related Information" which supercedes the current segment
reporting requirements of Statement of Financial Accounting Standards No. 14
(FAS 14), "Financial Reporting for Segments of a Business Enterprise," as
amended. FAS 131 requires the reporting of certain financial and other
disclosures related to the Company's operating segments which are identified
using a "management approach." Operating segments are revenue-producing
components of the business for which separate financial information is produced
internally and are subject to evaluation by the chief operating decision maker
in the resource allocation process. FAS 131 will become effective for the
Company's year ending June 30, 1999. The Company does not expect the adoption of
FAS 131 to have a material impact on its financial position or results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements based
upon current expectations that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, that include, but are
not limited to, the risks discussed in "Factors That May Impact Future
Operations" as well as those discussed in the following "Overview" section.
These forward-looking statements include the statement in the first paragraph of
"Overview" relating to expectations of operating losses, the statement in the
second paragraph of "Overview" relating to anticipated filing and approval time
periods for premarket approval ("PMA") applications and the commercialization of
products that have received United States Food and Drug Administration ("FDA")
marketing clearance or approval, the statements in the third paragraph of
"Overview" related to the manufacturing, marketing and distribution of the
Company's products, the statements in the last sentence of the first paragraph
and the entire second paragraph of "Cost of Goods Sold," the statements in the
last sentence of each of the "Research and Development" and "Selling, General,
and Administrative" paragraphs, the statements regarding future capital
expenditures in the third
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paragraph of "Liquidity and Capital Resources" and the Company's forecast in the
fourth paragraph of "Liquidity and Capital Resources" of the period of time
through which its financial resources will be adequate to support its
operations.
OVERVIEW
The Company was founded in April 1991 and to date has engaged primarily
in researching, developing, testing and obtaining regulatory clearances for its
products. The Company has experienced significant operating losses since
inception and, as of March 31, 1998, had an accumulated deficit of $56.9
million. The Company has generated only limited revenues from sales of Radii
supraventricular tachycardia mapping and ablation catheters, Trio/Ensemble
diagnostic catheters, Chilli cooled ablation catheters, Mercator Mapping
Baskets, Radiofrequency Generator Systems and Arrhythmia Mapping Systems. The
Company expects its operating losses to continue through at least the end of
calendar 1999 as it continues to expend substantial funds for clinical trials in
support of regulatory approvals, expansion of research and development
activities, establishment of commercial-scale manufacturing capabilities and
expansion of sales and marketing activities.
The Company believes that its Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System and their
component catheters and equipment are currently the Company's only significant
potential products. The Atrial Fibrillation Ablation System is also being
developed for use in treating atrial flutter. The FDA granted clearance pursuant
to Section 510(k) of the Food, Drug and Cosmetic Act of 1938, as amended
("510(k) Clearance") to the Company in August 1997 for the Model 8100/8300
Arrhythmia Mapping System for basic diagnostic electrophysiology studies. The
Company filed a PMA application for the Ventricular Tachycardia Ablation System
in January 1998. The Arrhythmia Mapping System for diagnostic mapping of
ventricular tachycardia is in various stages of clinical testing, and clinical
data obtained to date are insufficient to demonstrate the safety and efficacy of
this product under applicable FDA regulatory guidelines. In addition, the
ablation catheter and ablation equipment that together form the Atrial
Fibrillation Ablation System and the mapping catheter and mapping equipment that
together form the Arrhythmia Mapping System for atrial fibrillation and atrial
flutter are in the early stages of clinical testing and will require further
development. See "Factors That May Impact Future Operating Results - Clinical
Trials" for a discussion of the status of the clinical trials conducted to date
for the Company's products. The design, manufacturing, labeling, distribution
and marketing of the Company's products are subject to extensive and rigorous
government regulation in the United States and certain other countries where the
process of obtaining required regulatory approvals is lengthy, expensive and
uncertain. In order for the Company to market the Ventricular Tachycardia
Ablation System, Arrhythmia Mapping Systems or Atrial Fibrillation Ablation
System and related catheters and equipment in the United States, the Company
must obtain clearance or approval from the FDA. At the earliest, the Company
does not anticipate filing a PMA application for any system for at least nine
months, and does not anticipate receiving clearance from the FDA of a PMA for
any such system until at least one to two years after such PMA application is
accepted for filing, if at all. The Company will not generate any significant
revenue in the United States until such time, if ever, as its Ventricular
Tachycardia Ablation System, Arrhythmia Mapping Systems or its Atrial
Fibrillation Ablation System obtain clearance or approval from the FDA. Even if
one or more of the Company's products obtain FDA clearance or approval, there
can be no assurance that any of the Company's products for diagnosis and
treatment of ventricular tachycardia, atrial fibrillation and atrial flutter
will be successfully commercialized or that the Company will achieve significant
revenues from either international or domestic sales. Although the FDA granted
510(k) Clearance for basic electrophysiology studies for the Company's Model
8100/8300 Arrhythmia Mapping System in August 1997, such product cannot be
marketed for use with the Company's diagnostic mapping catheters unless and
until such catheters receive marketing clearance from the FDA. Until such
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regulatory approval is obtained, the Arrhythmia Mapping System may only be used
with other manufacturer's catheters. There can be no assurance that this system
will be successfully commercialized in the United States or in international
markets where it has not yet received approval.
The Company does not have any experience in manufacturing, marketing or
selling its products for diagnosis and treatment of ventricular tachycardia and
atrial fibrillation in commercial quantities. If the Company receives FDA
clearance or approval for its products, it will need to expend significant
capital resources and develop manufacturing expertise to establish large scale
manufacturing capabilities. Nor does the Company have any experience in
manufacturing, marketing or selling its mapping equipment for the Arrhythmia
Mapping System in commercial quantities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply
shortages, shortages of qualified personnel, compliance with FDA regulations,
and the need for further FDA approval of new manufacturing processes. In
addition, if FDA clearances or approvals are received, the Company intends to
market its products primarily through a direct sales force in the United States
and indirect sales channels internationally. Although the Company received
marketing clearance for the Model 8100/8300 Arrhythmia Mapping System in August
1997, the Company has begun to established a direct sales force to market this
product. Establishing a marketing and sales capability sufficient to support
sales in commercial quantities will require substantial efforts and require
significant management and financial resources.
RESULTS OF OPERATIONS
Net Sales. The Company's net sales to date have resulted primarily from
limited sales of Radii supraventricular tachycardia mapping and ablation
catheters, Trio/Ensemble diagnostic catheters, Chilli cooled ablation catheters,
Mercator Mapping Baskets, Radiofrequency Generator Systems and Arrhythmia
Mapping Systems. The Company's net sales increased to $738,000 for the three
months ended March 31, 1998 compared to $500,000 for the three months ended
March 31, 1997. The increase in net sales was primarily attributable to
increased sales of Radii catheters in Japan following the initial launch of the
Radii product line in the Japanese market during the first quarter of fiscal
1998. In addition, the Company had increased demand for Trio/Ensemble catheters
in Japan during the quarter. These increases were offset in part by decreased
international sales of Arrhythmia Mapping Systems. For the nine months ended
March 31, 1998, the Company had net sales of $1.7 million compared to $2.2
million for the nine months ended March 31, 1997. The decrease in net sales was
attributable to a decrease in Trio/Ensemble catheter sales in Japan following
the shipment of initial stocking orders for this product in the prior fiscal
year and overall lower demand for these products following the transfer, during
fiscal 1997, of manufacturing and distribution for the U.S. market and certain
international markets to Arrow International, Inc. ("Arrow"). In addition, the
Company had decreased international sales of Arrhythmia Mapping Systems during
the nine months ended March 31, 1998. However, these decreases were offset in
part by increased overall sales of Radii catheters during the nine months ended
March 31, 1998 due to the Japanese product launch noted above.
In the second quarter of fiscal 1998, one customer indicated that it
would return certain Radii catheters to the Company due to the failure of such
catheters to meet a change in certain customer specifications. The Company
completed the re-supply of such catheters in the third quarter of fiscal 1998,
and the impact of such return and re-supply was approximately $104,000 on net
revenue in the nine months ended March 31, 1998. In addition to the above, the
Company has experienced a delay in the international launch of Radii catheters
in Europe, a delay in the release of a software revision for the Company's
Arrhythmia Mapping System and delays in obtaining CE mark approval for the
Chilli cooled ablation catheter and Atrial Mapping Basket in Europe, resulting
in lower than expected revenue in the nine months ended March 31, 1998.
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In December 1995, the Company received $3.0 million pursuant to a
royalty agreement with Arrow. This amount was recorded as deferred royalty
income and will be amortized to income for those Trio/Ensemble catheters that
Arrow manufactures and sells. The royalty rate is 5% of the Trio/Ensemble
catheter's sales price, and a total of $68,000 of royalty income related to the
agreement has been recorded through March 31, 1998, of which $3,000 was
recognized in the third quarter of fiscal 1998.
Cost of Goods Sold. Cost of goods sold primarily includes raw materials
costs, catheter fabrication costs, and system assembly and test costs. Cost of
goods sold was $793,000 for the three months ended March 31, 1998, resulting in
a gross margin deficit of $55,000. For the three months ended March 31, 1997,
cost of goods sold was $683,000, resulting in a gross margin deficit of
$182,000. The increase in the gross margin in the three months ended March 31,
1998 compared to March 31, 1997 was due to higher sales. For the nine months
ended March 31, 1998, the Company had a gross margin deficit of $404,000
compared to a gross margin of $223,000 for the nine months ended March 31, 1997.
The decrease in the gross margin in the nine months ended March 31, 1998
compared to March 31, 1997 was primarily attributable to lower net sales,
changes in sales mix, increased fixed overhead costs resulting from the
expansion of catheter and equipment production capacity, higher catheter
materials and procurement costs, and increased compensation and associated labor
costs for assembly, quality control and engineering support personnel. In
addition, cost of goods sold increased in the nine months ended March 31, 1998
due to the additional expenses arising from the change in specifications in the
Radii catheters discussed in "Net Sales" above. The Company expects future gross
margins to fluctuate as other products are commercialized.
The Company is currently encountering low yields and other production
inefficiencies in the manufacture of its Sector mapping catheters, and Nexus
ablation catheters. Although the Company believes it is taking appropriate steps
to address these yield and other production inefficiencies, there can be no
assurance that such improvements will be achieved. Although the Company
anticipates resolving such production inefficiencies in calendar 1998, no
assurance can be given that the Company will succeed in such attempts. Failure
to obtain acceptable yields in the manufacture of such products will adversely
affect the ability of the Company to complete the mapping system and atrial
flutter clinical studies and commence commercialization of these products in
international markets.
Research and Development. Research and development expenses include
costs associated with product research, clinical trials, prototype development,
obtaining regulatory approvals and costs associated with hiring regulatory,
clinical, research and engineering personnel. Research and development expenses
increased to $3.6 million for the three months ended March 31, 1998 compared to
$2.9 million for the three months ended March 31, 1997. Research and development
expenses were $10.7 million for the nine months ended March 31, 1998 compared to
$8.5 million for the nine months ended March 31, 1997. The increases in research
and development expenses in both the three and nine month periods were primarily
attributable to increased costs associated with the hiring of additional
engineering personnel, costs in connection with procurement of certain materials
and vendor qualification, increased facilities costs, increased costs for
regulatory and other consulting services, increased costs related to conducting
clinical trials in the United States and the placement of Arrhythmia Mapping
Systems, Radiofrequency Generator Systems and catheter products at clinical
sites in the United States and Europe. The Company believes that research and
development expenditures will increase in the future as the Company invests in
product and process improvements related to its ventricular tachycardia and
atrial fibrillation products, expands clinical research activities and increases
its research and development efforts related to new products and technologies.
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Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, senior
management and administrative personnel, various legal and professional fees
including those in connection with obtaining patent protection, and costs of
trade shows. Selling, general and administrative expenses increased to $1.0
million for the three months ended March 31, 1998 compared to $918,000 for the
three months ended March 31, 1997. Selling, general and administrative expenses
were $3.0 million for the nine months ended March 31, 1998 compared to $2.3
million for the nine months ended March 31, 1997. The increases in both the
three and nine month periods were primarily attributable to increased
expenditures for sales and marketing personnel and services to support expanding
international sales and marketing activities, increased costs associated with
demonstration units, product marketing materials, insurance and certain
facilities related costs. The Company anticipates that selling, general and
administrative expenses will increase in future periods as additional personnel
are added to support growing business operations in all functional areas.
Other Income, Net. Other income, net decreased to $335,000 for the three
months ended March 31, 1998 compared to $525,000 for the three months ended
March 31, 1997. Other income, net was $1.1 million for the nine months ended
March 31, 1998 compared to $1.7 million for the nine months ended March 31,
1997. The reduction in net other income was the result of declining interest
income on lower cash, cash equivalent and short-term investment balances.
Net Loss. The Company's net loss increased to $4.3 million for the three
months ended March 31, 1998 compared to $3.5 million for the three months ended
March 31, 1997. The net loss was $13.0 million for the nine months ended March
31, 1998 compared to $8.9 million for the nine months ended March 31, 1997. The
increases in the Company's net loss primarily resulted from the larger gross
margin deficits, increased operating expenses, including product development,
clinical research and selling, general and administrative expenses, and lower
interest income.
Impact of Adoption of New Accounting Standards. In February 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128 (FAS 128), "Earnings per Share," which the Company adopted on
December 31, 1997 pursuant to the requirements of FAS 128. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options is excluded. The adoption of FAS 128 did not have a material
impact on the Company's reported basic and diluted net loss per share due to the
exclusion of antidilutive options from the calculations when the Company
incurred a net loss which occurred in all periods reported herein.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive
Income" which requires the reporting and presentation of comprehensive income
and its components in the financial statements. Comprehensive income reflects
certain items not currently reported in measuring net income such as changes in
the value of available-for-sale securities and foreign currency translation
adjustments. FAS 130 will become effective for the Company's year ending June
30, 1999. The Company does not expect the adoption of FAS 130 to have a material
impact on its financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments
of an Enterprise and Related Information" which supercedes the current segment
reporting requirements of Statement of Financial Accounting Standards No. 14
(FAS 14), "Financial Reporting for Segments of a Business Enterprise," as
amended. FAS 131 requires the reporting of certain financial and other
disclosures related to the Company's operating segments which are identified
using a "management approach." Operating segments are revenue-producing
components of the business for which separate financial information is produced
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internally and are subject to evaluation by the chief operating decision maker
in the resource allocation process. FAS 131 will become effective for the
Company's year ending June 30, 1999. The Company does not expect the adoption of
FAS 131 to have a material impact on its financial position or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through a
combination of private placements of equity securities yielding $33.5 million, a
private placement of debt securities yielding $4.5 million, equipment lease
financing arrangements yielding $3.5 million and a prepaid royalty arrangement
yielding $3.0 million. In addition, the Company closed its initial public
offering in June 1996 raising net proceeds of $43.1 million. As of March 31,
1998, the Company had $28.8 million in cash, cash equivalents and short-term
investments.
Net cash used in operating activities was $11.3 million and $7.5 million
for the nine months ended March 31, 1998 and 1997, respectively. For such
periods, net cash used in operating activities resulted primarily from net
losses. Net cash provided by investing activities was $11.6 million for the nine
months ended March 31, 1998 and net cash used in investing activities was $14.9
million for the nine months ended March 31, 1997. Net cash provided by investing
activities primarily resulted from maturities and sales of short-term
investments, offset in part by purchases of short-term investments and
equipment. The net cash used in investing activities for the nine months ended
March 31, 1997 was primarily attributable to the purchase of short-term
investments following the Company's initial public offering in June 1996,
partially offset by maturities and sales of short-term investments. Net cash
used in financing activities was $356,000 for the nine months ended March 31,
1998 and $266,000 for the nine months ended March 31, 1997.
As of March 31, 1998, the Company had capital equipment of $7.2 million
less accumulated depreciation and amortization of $3.5 million to support its
clinical, development, manufacturing and administrative activities. The Company
has financed approximately $3.5 million from capital lease obligations through
March 31, 1998. In September 1997, the Company secured an additional equipment
lease financing facility of $2.0 million, which is available to the Company in
two equal annual increments of $1.0 million. In connection with the origination
of the $2.0 million lease facility in September 1997, the Company issued a
warrant to purchase 35,170 shares of its Common Stock to the lessor at an
exercise price of $8.53 per share. As of March 31, 1998, the Company has
utilized approximately $370,000 of the first increment of this lease line and
expects to utilize its remaining unused lease line and a portion of existing
cash resources in connection with the purchase of additional capital equipment
over the next 12 months. The Company expects capital expenditures to increase
over the next several years as it expands facilities and acquires equipment to
support the planned expansion of manufacturing capabilities.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the progress of the Company's product development
efforts, the progress of the Company's clinical trials, actions relating to
regulatory matters, the costs and timing of expansion of product development,
manufacturing, marketing and sales activities, the extent to which the Company's
products gain market acceptance, and competitive developments. Although the
Company believes that its current cash, cash equivalent and short-term
investment balances and cash generated from the future sale of products will be
sufficient to meet the Company's operating and capital requirements through
calendar 1998, there can be no assurance that the Company will not require
additional financing within this time frame.
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The factors described in the previous paragraph and elsewhere in this
Report will impact the Company's future capital requirements and the adequacy of
its available funds. The Company may be required to raise additional funds
through public or private financing, collaborative relationships or other
arrangements. There can be no assurance that such additional funding, if needed,
will be available on terms attractive to the Company, or at all. Furthermore,
any additional equity financing may be dilutive to existing stockholders, and
debt financing, if available, may involve restrictive covenants. Collaborative
arrangements, if necessary to raise additional funds, may require the Company to
relinquish its rights to certain of its technologies, products or marketing
territories. The failure of the Company to raise capital when needed could have
a material adverse effect on the Company's business, financial condition and
results of operations.
FACTORS THAT MAY IMPACT FUTURE OPERATIONS
LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES
The Company was founded in 1991 and to date has engaged primarily in
researching, developing, testing and obtaining regulatory clearances for its
products. The Company has experienced significant operating losses since
inception. As of March 31, 1998, the Company had an accumulated deficit of $56.9
million. To date, the Company has generated only limited revenues from sales of
its products and expects its operating losses to continue through at least the
end of calendar 1999 as it continues to expend substantial funds for clinical
trials in support of regulatory approvals, expansion of research and development
activities, establishment of commercial scale manufacturing capabilities and
expansion of sales and marketing activities. There can be no assurance that any
of the Company's potential products for diagnosis and treatment of ventricular
tachycardia, atrial fibrillation and atrial flutter will be successfully
commercialized or that the Company will achieve significant revenues from either
international or domestic sales. In addition, there can be no assurance that the
Company will achieve or sustain profitability in the future or meet the
expectations of securities industry analysts. The Company's results of
operations may fluctuate significantly from quarter to quarter or year to year
and will depend on numerous factors, including actions relating to regulatory
matters, progress of clinical trials, the extent to which the Company's products
gain market acceptance, the timing of scale-up of manufacturing abilities, the
timing of expansion of sales and marketing activities and competition.
CLINICAL TRIALS
The Ventricular Tachycardia Ablation System, Arrhythmia Mapping System
for diagnostic mapping of ventricular tachycardia, Arrhythmia Mapping System for
diagnostic mapping of the right atrium and Atrial Fibrillation Ablation System
for use in treating atrial fibrillation and/or atrial flutter are in various
stages of clinical testing. Clinical data obtained to date are insufficient to
demonstrate the safety and efficacy of these products under applicable FDA
regulatory guidelines. There can be no assurance that any of the Company's
products will prove to be safe and effective in clinical trials under applicable
United States or international regulatory guidelines or that additional
modifications to the Company's products will not be necessary. In addition, the
clinical trials may identify significant technical or other obstacles to be
overcome prior to obtaining necessary regulatory or reimbursement approvals. In
addition, the ablation catheter and ablation equipment that together form the
Company's Atrial Fibrillation Ablation System are still under development. There
can be no assurance that the Company will be successful in completing
development of the atrial fibrillation product and submitting the appropriate
Investigational Device Exemption supplement ("IDEs") or that the FDA will permit
the Company to undertake clinical trials of the atrial fibrillation product.
Although the FDA granted 510(k) Clearance for basic electrophysiology studies
for the Company's Arrhythmia Mapping System in August 1997, such product cannot
be marketed with the Company's mapping catheters unless and until such
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catheters receive FDA marketing clearance or approval. Until such regulatory
approval is obtained, the Arrhythmia Mapping System may only be used with other
manufacturers' catheters. There can be no assurance that physicians will adopt
the Arrhythmia Mapping System for electrophysiology studies in lieu of a system
incorporating mapping equipment and catheters from a single manufacturer or at
all. If the Ventricular Tachycardia Ablation System, Arrhythmia Mapping Systems
and Atrial Fibrillation Ablation System and their component catheters and
equipment do not prove to be safe and effective in clinical trials or if the
Company is otherwise unable to commercialize these products successfully, the
Company's business, financial condition and results of operations will be
materially adversely affected. In addition, because ablation treatment of
cardiac arrhythmias is a relatively new and to date untested treatment, the
long-term effects of radiofrequency ablation on patients are unknown. As a
result, the long-term success of ablation therapy in treating ventricular
tachycardia, atrial fibrillation and atrial flutter will not be known for
several years.
In December 1997, the Company completed enrollment in a clinical trial
of the Chilli Cooled Ablation Catheter and the Models 8002 and 8004
Radiofrequency Generator and Integrated Fluid Pump, the products that together
form the Company's Ventricular Tachycardia Ablation System. In May 1997, the
Company completed an IDE feasibility study of the Mercator Left Ventricular
Mapping Basket and the Model 8100/8300 Arrhythmia Mapping System, the products
that together form the Company's Arrhythmia Mapping System for diagnostic
mapping of ventricular tachycardia. The Company is currently conducting a
clinical trial for the Local Sector Mapping Basket, a variation of the Mercator
Left Ventricular Mapping Basket. The Company completed a clinical trial of the
Mercator Atrial Mapping Basket and the Model 8100/8300 Arrhythmia Mapping System
in March 1998, the products that together form the Company's Arrhythmia Mapping
System for diagnostic mapping of the right atrium. In February 1998, the Company
filed an IDE for a clinical trial of the Local Sector Mapping Basket in the
right atrium. In April 1997, the Company completed a feasibility study of the
Nexus Linear Lesion Catheter and Model 8002 Radiofrequency Generator and
Integrated Fluid Pump, the products that together form the Company's Atrial
Fibrillation Ablation System. The Company is currently conducting a clinical
trial for a second version of the Nexus Linear Lesion Catheter for the treatment
of atrial flutter.
Ventricular Tachycardia Ablation System. The Company initiated a
clinical trial for the Ventricular Tachycardia Ablation System in the United
States and Europe in November 1995 under an IDE approved by the FDA. The
clinical trials are being conducted at a maximum of 15 clinical sites. Pursuant
to the IDE, the FDA will evaluate the safety and efficacy of the Ventricular
Tachycardia Ablation System. The primary endpoint of the clinical trial is
clinical recurrence of ventricular tachycardia in patients randomized to receive
ablation treatment versus patients in the control group receiving antiarrhythmic
drugs. The required post-treatment follow-up prior to submission of a PMA
application was 30 days for safety and the Company is required to follow some
patients for up to 24 months after the PMA application filing. Enrollment for
the clinical trial was completed on December 19, 1997. A PMA application was
submitted on January 29, 1998 for approval to market the Ventricular Tachycardia
Ablation System and its component catheters and equipment in the United States,
and the Company expects that the FDA's review process will take at least nine
months from the date of filing. The Company has been granted its request to the
FDA permitting continuation of the study and expansion to a maximum of 20
clinical sites and 200 patients while the PMA application is under review.
As of May 15, 1997, the FDA no longer required randomization, and all
patients enrolled have been able to receive ablation initially. This
modification to the protocol resulted in more rapid enrollment into the clinical
trial. As of April 28, 1998, 187 patients had been enrolled in the trial; 75
patients randomized to ablation, 80 patients non-randomized to ablation, and 32
patients randomized to drug therapy of which 17 patients have subsequently
received ablation therapy due to VT recurrence. In addition, 23 patients have
received ablation therapy under a compassionate use protocol. Analysis of 150 of
such patients was
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included in the PMA application. The Company believes that such analysis shows
that clinical recurrence of VT was significantly less in the patients randomized
to ablation compared to patients randomized to control. Acute success of
ablation therapy, defined as eradication of all mappable VT at the end of the
ablation procedure, was attained in 76% of patients. The incidence of major
adverse events associated with the procedure was 8.6%.
Arrhythmia Mapping System for Ventricular Tachycardia. In January 1997,
the Company received FDA approval to conduct an IDE feasibility study to
evaluate the safety of the Arrhythmia Mapping System for diagnostic mapping of
ventricular tachycardia. The feasibility study was conducted at three clinical
sites in the United States and Europe and involved a total of 14 patients. The
purpose of the clinical trial was to evaluate and test the success of the
deployment of the Mercator Left Ventricular Mapping Basket into the ventricle,
the fit of the catheter and the system's ability to accurately map the
electrical signals of the left ventricle. In addition, as of April 28, 1998, 17
patients have been studied in Europe outside of the IDE in a similar protocol.
There was no thrombus formation on any mapping basket used in the 31 studies. Of
the 31 patients evaluated, one patient developed asymptomatic aortic
regurgitation, one patient had a transient ischemic attack, and two patients
developed pericardial effusions associated with the procedure. In July 1997, the
Company submitted an IDE supplement to support commercialization of two types of
baskets; the Mercator Left Ventricular Mapping Basket, the full chamber "global"
basket evaluated in the feasibility study, as well as a smaller, partial chamber
high density Local Sector basket. Conditional approval was granted to initiate
enrollment of 30 patients at five sites for the global basket. This study has
been initiated at one clinical site, and two patients have been enrolled. The
FDA requested a separate IDE for a study of the Sector Mapping Basket. A new IDE
was submitted and received conditional approval in November 1997 to initiate
enrollment of 30 patients at five sites in the Sector study. This study was
initiated April 8, 1998, and two patients have been enrolled in this trial. This
study allows the use of either of the ventricular mapping baskets with the
Ventricular Tachycardia Ablation System simultaneously. Furthermore, the Company
believes that ventricular mapping should enable the treatment of high rate
ventricular tachycardia, which is more common than slow rate ventricular
tachycardia which is the only type amenable to ablation therapy using current
techniques.
Arrhythmia Mapping System for Atrial Fibrillation. In June 1997, the
Company received IDE approval by the FDA to conduct a clinical trial of the
Mercator Atrial Mapping Basket for the right atrium and Arrhythmia Mapping
System for complex atrial tachyarrhythmias including atrial fibrillation. The
clinical trial is being conducted at eight clinical sites in the United States
and one in Europe. The purpose of this clinical trial is to demonstrate the
equivalency of the Mercator Atrial Mapping Basket and the Arrhythmia Mapping
System to commercially available mapping catheters. As of April 28, 1998, the
Mercator Atrial Mapping Basket had been evaluated in 78 patients. There was no
thrombus formation on any mapping basket used in the 78 studies. Enrollment in
the trial is complete. The Company anticipates that it will submit a 510(k)
application for clearance of the Mercator Atrial Mapping Basket in the near
future. An IDE was submitted for a clinical study of the Local Sector Mapping
Basket for the right atrium. The Company was granted conditional approval to
test 10 subjects at five clinical sites.
Atrial Fibrillation Ablation System. The Company received FDA approval
of an IDE feasibility study to evaluate the safety of the Atrial Fibrillation
Ablation System in August 1997. The purpose of the IDE feasibility study for the
Atrial Fibrillation Ablation System was to assess the safety and performance in
creating continuous linear lesions. The feasibility study was completed with 10
patients undergoing testing. The purpose of the clinical test was to verify that
a linear lesion could be made in a location in the atrium anticipated to
eliminate atrial fibrillation. In a majority of the patients undergoing
ablation, linear lesions were created in the right atrium either with the Nexus
Linear Lesion Catheter alone or with commercial ablation catheter
supplementation. One patient developed a pericardial effusion attributed to
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perforation by a commercial diagnostic (non-ablation) catheter. No other
complications occurred. The Company also tested the Nexus Linear Lesion Catheter
in two patients in Europe.
The Nexus Linear Lesion Catheter was modified to improve its ability to
create linear lesions minimizing the need for commercial ablation catheter
supplementation. The modifications include the addition of active deflection to
facilitate tissue contact. An IDE supplement was submitted in October 1997 to
support commercialization of the Nexus Linear Lesion Catheter in the right
atrium to treat atrial flutter. Atrial flutter is an abnormal heart rhythm now
commonly treated using catheter ablation, requiring the creation of a two to
four centimeter linear lesion in the right atrium. The study received
conditional approval in December 1997 to involve 30 patients at five sites. The
study was initiated in February 1998 and to date four patients have been
enrolled.
A feasibility IDE for use of the modified Nexus Linear Lesion Catheter
in the right atrium to treat atrial fibrillation is expected to be submitted in
calendar 1998.
NO EXISTING MARKET
The Company's Model 8100/8300 Arrhythmia Mapping System (the "Model 8100/8300")
received 510(k) Clearance from the FDA in August 1997 for basic diagnostic
electrophysiology studies. In September 1997, the Company began marketing such
system commercially in the United States. However, there can be no assurance
that such system will gain any significant degree of market acceptance among
physicians, patients, and health care payors. The Company believes that
physician's acceptance of procedures performed using the Company's Model
8100/8300 will be essential for market acceptance of such system. Even though
the clinical efficacy of such system has been established, electrophysiologists,
cardiologists, and other physicians may elect not to recommend the use of the
Model 8100/8300 for any number of reasons. Although the FDA granted 510(k)
Clearance for basic electrophysiology studies for the Company's Model 8100/8300
Arrhythmia Mapping System in August 1997, such product cannot be marketed for
use with the Company's diagnostic mapping catheters unless and until such
catheters receive marketing clearance from the FDA. Until such regulatory
approval is obtained, the Arrhythmia Mapping System may only be used with other
manufacturer's catheters. There can be no assurance that this system will be
successfully commercialized in the United States or in international markets
where it has not yet received approval. The Company believes that, as with any
novel medical technology, there will be a significant learning process involved
for physicians to become proficient. Broad use of such system will require
training of electrophysiologists, and the time required to complete such
training could adversely affect market acceptance. Failure of such product to
achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations. Even if
the Model 8100/8300 achieves market acceptance, if the Company is unable to
manufacture sufficient quantities of such product to satisfy customer demand,
the Company's business, financial condition and results of operations would be
materially adversely affected.
MARKETING AND DISTRIBUTION
The Company currently has only a limited sales and marketing
organization. If FDA clearances or approvals are received for the Company's
ventricular tachycardia or atrial fibrillation products, the Company intends to
market its products primarily through a direct sales force in the United States
and indirect sales channels internationally. Although the Company received
marketing clearance for the Arrhythmia Mapping System in August 1997, the
Company has only started to establish a direct sales force to market this
product.
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Establishing a marketing and sales capability sufficient to support
sales in commercial quantities will require substantial efforts and require
significant management and financial resources. There can be no assurance that
the Company will be able to build such a marketing staff or sales force, that
establishing such a marketing staff or sales force will be cost effective or
that the Company's sales and marketing efforts will be successful. If the
Company is successful in obtaining the necessary regulatory approvals for its
ventricular tachycardia and atrial fibrillation products in international
markets, it expects to establish a sales and marketing capability in those
markets primarily through distributors. There can be no assurance that the
Company will be able to enter into agreements with desired distributors on a
timely basis or at all, or that such distributors will devote adequate resources
to selling the Company's products. Failure to establish appropriate distribution
relationships could have a material adverse effect upon the Company's business,
financial condition and results of operations.
MANUFACTURING
Components and raw materials are purchased from various qualified
suppliers and subjected to stringent quality specifications. The Company
conducts quality audits of suppliers and is establishing a vendor certification
program. A number of the components for the Company's products are provided by
sole source suppliers. For certain of these components, there are relatively few
alternative sources of supply, and establishing additional or replacement
vendors for such components could not be accomplished quickly. The Company plans
to qualify additional suppliers if and as future production volumes increase.
Because of the long lead time for some components that are currently available
from a single source, a vendor's inability to supply such components in a timely
manner could have a material adverse effect on the Company's ability to
manufacture the mapping basket, mapping equipment and ablation equipment and
therefore on its business, financial condition and ability to market its
products as currently contemplated.
The Company has no experience manufacturing its products in the volumes
that will be necessary for the Company to achieve significant commercial sales,
and there can be no assurance that reliable, high volume manufacturing capacity
can be established or maintained at commercially reasonable costs. If the
Company receives FDA clearance or approval for its products, it will need to
expend significant capital resources and develop manufacturing expertise to
establish large scale manufacturing capabilities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply
shortages, shortages of qualified personnel, compliance with FDA regulations,
and the need for further FDA approval of new manufacturing processes. For
example, the Company has encountered low yields, and other production
inefficiencies in the manufacture of its Sector mapping basket catheters and
Radii catheters. In addition, the Company believes that substantial cost
reductions in its manufacturing operations will be required for it to
commercialize its catheters and systems on a profitable basis. Any inability of
the Company to establish and maintain large scale manufacturing capabilities
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's manufacturing facilities are subject to periodic
inspection by regulatory authorities, and its operations must undergo Quality
System Regulations ("QSR;" the successor regulations to current Good
Manufacturing Practices Regulations) compliance inspections conducted by the
FDA. The Company is required to comply with QSR in order to produce products for
sale in the United States and with ISO 9001/EN46001 standards in order to
produce products for sale in Europe. In December 1997, the Company received ISO
9001/EN46001 certification for the Medical Device Directive QSR from its
European Notified Body. Any failure of the Company to comply with QSR or ISO
9001/EN46001 standards may result in the Company being required to take
corrective actions, such as modification of its policies and procedures. The
State of California also requires that the Company obtain a license to
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manufacture medical devices. The Company has applied for a device manufacturing
license from the California Department of Health Services ("CDHS") and was
inspected by the CDHS in October 1997. As a result of the inspection, CDHS
recommended the issuance of a device manufacturing license to the Company which
was granted in February 1998. If the Company is unable to maintain such a
license, it would be unable to manufacture or ship any product, and such
inability would have a material adverse effect on the Company's business,
financial condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain
patent and copyright protection for its products and processes, to preserve its
trade secrets and to operate without infringing or violating the proprietary
rights of third parties. The Company's strategy is to actively pursue patent
protection in the United States and foreign jurisdictions for technology that it
believes to be proprietary and that offers a potential competitive advantage for
its products. The Company holds issued and allowed patents covering a number of
fundamental aspects of the Company's Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System. The patent
positions of medical device companies, including those of the Company, are
uncertain and involve complex and evolving legal and factual questions. The
coverage sought in a patent application either can be denied or significantly
reduced before or after the patent is issued. Consequently, there can be no
assurance that any patents from pending patent applications or from any future
patent application will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. In addition, there can be no assurance
that competitors, many of which have substantial resources and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets. Litigation or regulatory proceedings, which could result
in substantial cost and uncertainty to the Company may also be necessary to
enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. There can
be no assurance that the Company will have the financial resources to defend its
patents from infringement or claims of invalidity.
In addition to patents, the Company relies on trade secrets and
proprietary know how to compete, which it seeks to protect, in part, through
appropriate confidentiality and proprietary information agreements. These
agreements generally provide that all confidential information developed or made
known to individuals by the Company during the course of the relationship with
the Company is to be kept confidential and not disclosed to third parties,
except in specific circumstances. The agreements also generally provide that all
inventions conceived by the individual in the course of rendering service to the
Company shall be the exclusive property of the Company. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to or independently developed by competitors.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and
companies in the medical device industry have employed intellectual property
litigation to gain a competitive advantage. There can be no assurance that the
Company will not become subject to patent infringement claims or litigation in a
court of law, or interference proceedings declared by the United States Patent
and Trademark Office ("USPTO") to determine the priority of inventions or an
opposition to a patent grant in a foreign jurisdiction. The defense and
prosecution of intellectual property suits, USPTO interference or opposition
proceedings and related legal and
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administrative proceedings are both costly and time consuming. Any litigation,
opposition or interference proceedings will result in substantial expense to the
Company and significant diversion of effort by the Company's technical and
management personnel. An adverse determination in litigation or interference
proceedings to which the Company may become a party could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require the Company to cease using such technology.
Although patent and intellectual property disputes in the medical device area
have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, there can be no assurance that necessary licenses from
others would be available to the Company on satisfactory terms, if at all.
Adverse determinations in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing and
selling its products, which would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is aware of certain patents owned or licensed by others and relating to cardiac
catheters and cardiac monitoring. Certain enhancements of the Company's products
are still in the design and pre-clinical testing phase. Depending on the
ultimate design specifications and results of pre-clinical testing of these
enhancements there can be no assurance that the Company would be able to obtain
a license to such patents or that a court would find that such patents are
either not infringed by such enhancements or are invalid. Further, there can be
no assurance that owners or licensees of these patents will not attempt to
enforce their patent rights against the Company in a patent infringement suit or
other legal proceeding, regardless of the likely outcome of such suit or
proceeding.
COMPETITION
At present, the Company considers its primary competition to be
companies involved in current, more established therapies for the treatment of
ventricular tachycardia and atrial fibrillation, including drugs, external
electrical cardioversion and defibrillation, implantable defibrillators,
ablation accompanied by pacemaker implantation, and open-heart surgery. In
addition, several competitors are also developing new approaches and new
products for the treatment and mapping of ventricular tachycardia and atrial
fibrillation, including ablation systems using ultrasound, microwave, laser and
cryoablation technologies and mapping systems using contact mapping,
single-point spacial mapping and non-contact, multisite electrical mapping
technologies. Many of the Company's competitors have an established presence in
the field of interventional cardiology and electrophysiology. Many competitors
have substantially greater financial and other resources than the Company,
including larger research and development staffs and more experience and
capabilities in conducting research and development activities, testing products
in clinical trials, obtaining regulatory approvals, and manufacturing, marketing
and distributing products. There can be no assurance that the Company will
succeed in developing and marketing technologies and products that are more
clinically efficacious and cost effective than the more established treatments
or the new approaches and products developed and marketed by its competitors.
Furthermore, there can be no assurance that the Company will succeed in
developing new technologies and products that are available prior to its
competitors' products. The failure of the Company to demonstrate the efficacy
and cost effective advantages of its products over those of its competitors or
the failure to develop new technologies and products before its competitors
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company believes that the primary competitive factors in the market for
cardiac ablation and mapping devices are safety, efficacy, ease of use and
price. In addition, the length of time required for products to be developed and
to receive regulatory and, in some cases, third party payor reimbursement
approval are important competitive factors. The medical device industry is
characterized by rapid and significant technological change. Accordingly, the
Company's success will depend in part on its ability to respond quickly to
medical and technological changes through the development and introduction of
new
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products. Product development involves a high degree of risk and there can be no
assurance that the Company's new product development efforts will result in any
commercially successful products. The Company believes it competes favorably
with respect to these factors, although there is no assurance that it will be
able to continue to do so.
GOVERNMENT REGULATION
United States
The design, preclinical and clinical testing, manufacture, labeling,
sale, distribution and promotion of the Company's products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign regulatory agencies. Noncompliance with
applicable requirements can result in, among other things, fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals, a recommendation by the
FDA that the Company not be permitted to enter into government contracts and/or
criminal prosecution. The FDA also has the authority to request repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through a 510(k) Clearance or an
approval of a PMA application under Section 515 of the Federal Food, Drug and
Cosmetic Act of 1938, as amended. Commercial distribution of a device for which
a 510(k) Clearance is required can begin only after the FDA issues an order
finding the device to be "substantially equivalent" to a predicate device. If
the Company cannot establish that a proposed device is substantially equivalent
to a legally marketed predicate device, the Company must seek premarket approval
of the proposed device from the FDA through the submission of a PMA application.
The process of obtaining a PMA and other required regulatory approvals
can be expensive, uncertain, and lengthy, and there can be no assurance that the
Company will ever obtain such approvals. At the earliest, the Company does not
anticipate filing any additional PMA applications for any system for at least
the next nine months, and does not anticipate receiving a PMA for any such
system until at least one to two years after such PMA application is accepted
for filing, if at all. There can be no assurance that the FDA will act favorably
or quickly on any of the Company's submissions to the FDA and significant
difficulties and costs may be encountered by the Company in its efforts to
obtain FDA clearance that could delay or preclude the Company from selling its
products in the United States. Furthermore, there can be no assurance that the
FDA will not request additional data or require that the Company conduct further
clinical studies, causing the Company to incur substantial cost and delay. In
addition, there can be no assurance that the FDA will not impose strict labeling
requirements, onerous operator training requirements or other requirements as a
condition of its PMA approval, any of which could limit the Company's ability to
market its systems. Labeling and promotional activities are subject to scrutiny
by the FDA and, in certain circumstances, by the Federal Trade Commission
("FTC"). FDA enforcement policy strictly prohibits the marketing of FDA cleared
or approved medical devices for unapproved uses. Further, if a company wishes to
modify a product after FDA approval of a PMA, including changes in indications
or other modifications that could affect safety or efficacy, additional
clearances or approvals will be required from the FDA. Failure to receive or
delays in receipt of FDA clearances or approvals, including the need for
additional clinical trials or data as a prerequisite to clearance or approval,
or any FDA conditions that limit the ability of the Company to market its
systems, could have a material adverse effect on the Company's business,
financial condition and results of operations.
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International
The European Union ("EU") has promulgated rules which require that
medical products receive by June 12, 1998 the right to affix the CE mark, an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. QSR certification is one of
the CE mark requirements. The Company has received Medical Device Directive QSR
certification by its European Notified Body, one of the CE mark certification
prerequisites for its manufacturing facility in Sunnyvale, California.
Furthermore, in January 1998, the Company received the right to affix the CE
mark to its Arrhythmia Mapping System and Chilli Cooled Ablation System. In
April 1998, the Company received the right to affix the CE mark to its Radii
catheters. While the Company intends to satisfy the requisite policies and
procedures that will permit it to receive the CE mark certification for other
products, including the Trio/Ensemble SVT catheters, there can be no assurance
that the Company will be successful in meeting the European certification
requirements and failure to receive the right to affix the CE mark will prohibit
the Company from selling these and other products in member countries of the EU.
The time required to obtain approval for sale in foreign countries may
be longer or shorter than that required for FDA approval, and the requirements
may differ. Export sales of medical devices that have not received FDA marketing
authorization are subject to FDA export requirements. In accordance with the FDA
Export Reform & Enforcement Act of 1996, such devices may be exported to any
country provided that the device meets a number of criteria including marketing
authorization in one of the "Tier I" countries identified in that act. If the
device has no marketing authorization in a Tier I country, and is intended for
marketing, it may be necessary to obtain approval from the FDA to export the
device. In order to obtain export approval, the Company may be required to
provide the FDA with documentation from the medical device regulatory authority
of the country in which the study is to be conducted or the purchaser is
located, stating that the device has the approval of the country. In addition,
the FDA must find that the exportation of the device is not contrary to the
public health and safety of the country in order for the Company to obtain the
permit. The Company currently has marketing authorization in one or more Tier I
countries for all its clinically used products. The Company is in the process of
obtaining the necessary marketing approvals or is conducting clinical trials in
the United Kingdom, Germany, France, Canada, Japan and several other countries
in Europe and Asia.
THIRD-PARTY REIMBURSEMENT AND UNCERTAINTY RELATED TO HEALTH CARE REFORM
In the United States, health care providers, including hospitals and
physicians, that purchase medical products for treatment of their patients,
generally rely on third party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or a part of the
costs and fees associated with the procedures performed using these products.
The Company's success will be dependent upon, among other things, the ability of
health care providers to obtain satisfactory reimbursement from third party
payors for medical procedures in which the Company's products are used. Third
party payors may deny reimbursement if they determine that a prescribed device
has not received appropriate regulatory clearances or approvals, is not used in
accordance with cost effective treatment methods as determined by the payor, or
is experimental, unnecessary or inappropriate.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country by country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in international
markets targeted by the Company. There can be no assurance that the
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Company will obtain reimbursement in any country within a particular time, for a
particular time, for a particular amount, or at all.
Regardless of the type of reimbursement system, the Company believes
that physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. In addition, the Company believes that treatment with the
Company's products will be more efficacious than currently available therapies.
The Company anticipates that hospital administrators and physicians would
justify the use of the Company's products by the attendant cost savings and
clinical benefits that the Company believes would be derived from the use of its
products. However, there can be no assurance that this will be the case. There
can be no assurance that reimbursement for the Company's products will be
available in the United States or in international markets under either
government or private reimbursement systems, or that physicians will support and
advocate reimbursement for procedures using the Company's products. Failure by
hospitals and other users of the Company's products to obtain reimbursement from
third party payors, or changes in government and private third-party payors'
policies toward reimbursement for procedures employing the Company's products,
would have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, the Company is unable to predict
what additional legislation or regulation, if any, relating to the health care
industry or third party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation would have on the Company.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical products entails
significant risk of product liability claims and product failure claims. The
Company has conducted only limited clinical trials and does not yet have, and
will not have for a number of years, sufficient clinical data to allow the
Company to measure the risk of such claims with respect to its products. The
Company faces an inherent business risk of financial exposure to product
liability claims in the event that the use of its products results in personal
injury or death. The Company also faces the possibility that defects in the
design or manufacture of the Company's products might necessitate a product
recall. There can be no assurance that the Company will not experience losses
due to product liability claims or recalls in the future. In addition, the
Company will require increased product liability coverage if any potential
products are successfully commercialized. Such insurance is expensive, difficult
to obtain and may not be available in the future on acceptable terms, or at all.
Any claims against the Company, regardless of their merit or eventual outcome,
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
EMPLOYEES
The Company's ability to operate successfully depends in significant
part upon the continued service of certain key scientific, technical, clinical,
regulatory and managerial personnel, and its continuing ability to attract and
retain additional highly qualified scientific, technical, clinical, regulatory
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that the Company can retain such personnel or that it can
attract or retain other highly qualified scientific, technical, clinical,
regulatory and managerial personnel in the future, including key sales and
marketing personnel. The loss of key personnel or the inability to hire and
retain qualified personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations.
In addition, in order to complete clinical trials in progress, prepare
additional products for clinical trials, and develop future products, the
Company believes that it will be required to expand its operations,
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particularly in the areas of research and development, manufacturing and sales
and marketing. The Company hired a new Vice President of North American Sales in
January 1998 and a new Vice President of International Sales in March 1998.
However, there can be no assurance that they will be able to build a successful
sales force or that they will be able to operate effectively with the existing
management team. As the Company expands its operations in these areas, such
expansion will likely result in new and increased responsibilities for
management personnel and place significant strain upon the Company's management,
operating and financial systems and resources. To accommodate any such growth
and compete effectively, the Company will be required to implement and improve
information systems, procedures, and controls, and to expand, train, motivate
and manage its work force. The Company's future success will depend to a
significant extent on the ability of its current and future management personnel
to operate effectively, both independently and as a group. There can be no
assurance that the Company's personnel, systems, procedures and controls will be
adequate to support the Company's future operations. Any failure to implement
and improve the Company's operational, financial and management systems or, to
expand, train, motivate or manage employees as required by future growth, if
any, could have a material adverse effect on the Company's business, financial
condition and results of operations.
YEAR 2000 COMPLIANCE
The Company's proprietary software products that operate its Arrhythmia
Mapping System and Radiofrequency Generator System are designed for use with
certain hardware developed by other vendors. Furthermore, these systems will be
used in various operating environments once installed at customer sites. It is
likely that, commencing in the year 2000, the functionality of certain operating
environments will be adversely affected when one or more component products of
the environment would not be in "Year 2000 compliance." The Company believes its
products are in Year 2000 compliance, but has not conducted any formal audit of
its products with respect to Year 2000 compliance. There can be no assurance
that the Company's fully compliant products will be able to function properly
when integrated with other vendor's noncompliant component products.
The Company is in the process of identifying Year 2000 dependencies in
the Company's internal systems and implementing changes to its internal
information systems to make them Year 2000 compliant. While the Company
currently expects that the Year 2000 will not pose significant operational
problems, delays in the implementation of new information systems, or a failure
to fully identify all Year 2000 dependencies in the Company's systems could have
material adverse consequences, including delays in the delivery or sale of
products.
ISSUANCE OF PREFERRED STOCK COULD DELAY OR PREVENT CORPORATE TAKEOVER
The Board of Directors has the authority to issue up to 5,000,000 shares
of undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
the stockholders. To date, the Board of Directors has designated 30,000 shares
as Series A Participating Preferred Stock in connection with the Company's
Stockholder Rights Plan. The issuance of Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company or otherwise adversely affecting the rights of the
holders of Common Stock.
On April 22, 1997, pursuant to a Preferred Shares Rights Agreement (the
"Rights Agreement") between the Company and Norwest Bank Minnesota, N.A. (the
"Rights Agent"), the Company's Board of Directors declared a dividend of one
right to purchase 1/1000th of a share of the Company's Series A Participating
Preferred Stock ("Series A Preferred") for each outstanding share of Common
Stock of the Company (a "Right"). Each Right entitles the registered holder to
purchase from the Company 1/1000th
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of a share of Series A Preferred at an exercise price of $125 (the "Purchase
Price"), subject to adjustment. The Rights approved by the Board are designed to
protect and maximize the value of the outstanding equity interests in the
Company in the event of an unsolicited attempt by an acquirer to take over the
Company, in a manner or on terms not approved by the Board of Directors. The
Rights have been declared by the Board in order to deter coercive tactics,
including a gradual accumulation of shares in the open market of a 15% or
greater position to be followed by a merger or a partial or two tier tender
offer that does not treat all stockholders equally. The Rights should not
interfere with any merger or business combination approved by the Board of
Directors. However, the Rights may have the effect of rendering more difficult
or discouraging an acquisition of the Company deemed undesirable by the Board of
Directors. The Rights may cause substantial dilution to a person or group that
attempts to acquire the Company on terms or in a manner not approved by the
Company's Board of Directors, except pursuant to an offer conditioned upon the
negation, purchase or redemption of the Rights.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of shares of Common Stock, like that of the common
stock of many medical products and high technology companies, has in the past
been, and is likely in the future to continue to be highly volatile. Factors
such as fluctuations in the Company's operating results, announcements of
technological innovations or new commercial products by the Company's or
competitors, government regulation, changes in the current structure of the
health care financing and payment systems, developments in or disputes regarding
patent or other proprietary rights, release of reports by securities analysts,
change in securities analysts recommendations, economic and other external
factors and general market conditions may have a significant effect on the
market price of the Common Stock. Also, at some future time, the Company's
revenues and results of operations may be below the expectations of securities
analysts or investors, resulting in significant fluctuations in the market price
of the Company's Common Stock. Moreover, the stock market has from time to time
experienced extreme price and volume fluctuations which have particularly
affected the market prices for medical products and high technology companies
and which have often been unrelated to the operating performance of such
companies. These broad market fluctuations, as well as general economic,
political and market conditions, may adversely affect the market price of the
Company's Common Stock. In the past, following periods of volatility in the
market price of a company's stock, securities class action litigation has
occurred against the issuing company. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, operating results and financial condition. Any adverse
determination in such litigation could also subject the Company to significant
liabilities.
ABSENCE OF DIVIDENDS
The Company has not paid any cash dividends since inception and does not
anticipate paying cash dividends in the foreseeable future.
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CARDIAC PATHWAYS CORPORATION
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities. Since December 31, 1997, the
Company has issued and sold (without payment of any selling commission to any
person) the following unregistered securities:
1. On January 28, 1998 the Company issued an option to purchase 90,000
shares of the Company's Common Stock to an employee of the Company
pursuant to a stock option agreement in connection with the
commencement of his employment with the Company at an exercise price
of $6.75 per share, the closing price of the Company's Common Stock
on the Nasdaq National Market on the date of grant.
2. On April 14, 1998 the Company issued an option to purchase 90,000
shares of the Company's Common Stock to an employee of the Company
pursuant to a stock option agreement in connection with the
commencement of his employment with the Company at an exercise price
of $8.50 per share, the closing price of the Company's Common Stock
on the Nasdaq National Market on the date of grant.
The sale of the above securities was deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on Section 4(2) of the Securities Act, or Regulation D
promulgated thereunder, as a transaction by an issuer not involving a public
offering. Each of the recipients of securities in the transaction represented
his intention to acquire the securities for investment only and not with a view
to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and instruments issued in such
transactions. The recipients each had adequate access, through his relationship
with the Company or otherwise, to information about the Registrant.
Use of Proceeds. With respect to the requirements of Item 701(f) of
Regulation S-K regarding the reporting of use of proceeds, pursuant to the
information required to be reported by Item 701(f)(4)(viii), the Company used
net proceeds in the amounts noted for the stated purposes since its December 31,
1997 report on Form 10-Q: purchase and installation of machinery and equipment -
$383,841; repayment of indebtedness - $257,492; and working capital -
$3,929,087.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying Exhibit Index are
filed as a part hereof.
(b) No reports on Form 8-K were filed by the Registrant during the
three months ended March 31, 1998.
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CARDIAC PATHWAYS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: MAY 1, 1998 CARDIAC PATHWAYS CORPORATION
/S/ WILLIAM N. STARLING
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WILLIAM N. STARLING
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/S/ DAVID W. GRYSKA
---------------------------------------
DAVID W. GRYSKA
VICE PRESIDENT OF FINANCE AND CHIEF
FINANCIAL OFFICER
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CARDIAC PATHWAYS CORPORATION
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION PAGE NO.
- ---------------- ---------------------------------------------------------- --------
10.11.1 Lease Modification Agreement effective as of February
24, 1998 between the Registrant and Brock Properties
27.1 Financial Data Schedule
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