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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
Commission file number 0-28288
--------------------
ECLIPSE SURGICAL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
----------------------
CALIFORNIA 77-0223740
(State of incorporation) (I.R.S. Employer
Identification Number)
1049 KIEL COURT
SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices)
(408) 548-2100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock outstanding as of the latest practicable date.
28,766,374 shares
As of July 31, 1999
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART 1
FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (unaudited) :
a. Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998 .............. 1
b. Consolidated Statements of Operations & Comprehensive
Loss for the three months and six months ended June 30,
1999 and 1998 ........................................... 2
c. Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998 ......... 3
d. Notes to Consolidated Financial Statements .............. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 24
PART II
OTHER INFORMATION
Item 1. Legal Proceedings................................................... 25
Item 2(d). Changes in Securities and Use of Proceeds ......................... 25
Item 4. Submission of Matters to a Vote of Security Holders ............... 26
Item 6. Exhibits and Reports on Form 8-K .................................. 27
Signatures......................................................... 28
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents ..................................... $ 8,457 $ 3,273
Marketable securities ......................................... 2,811 14,167
Accounts receivable, (net of allowance for doubtful
accounts of $2,202 at June 30, 1999 and $1,698 at ............ 9,569 9,140
December 31, 1998, respectively) .............................
Inventories .................................................... 8,609 9,075
Prepaids and other current assets .............................. 1,108 2,176
---------- ----------
Total current assets ......................................... 30,554 37,831
Property and equipment, net ....................................... 1,532 2,353
Accounts receivable over one year, (net of allowance for
doubtful accounts of $1,260 at June 30, 1999 and $970 at
December 31, 1998, respectively) ................................ 2,215 2,083
Long term marketable securities ................................... 3,150 10,287
Other assets ...................................................... 2,670 424
---------- ----------
Total assets ................................................. $ 40,121 $ 52,978
========== ==========
LIABILITIES
Current liabilities:
Accounts payable ............................................... $ 1,377 $ 1,589
Accrued liabilities ............................................ 11,682 11,464
Customer deposits .............................................. 171 256
Deferred revenue ............................................... 891 2,145
Note payable ................................................... 368 111
Current portion of capital lease obligation .................... 23 23
Current portion of long-term liabilities ....................... 1,500 --
---------- ----------
Total current liabilities ................................... 16,012 15,588
Capital lease obligation, less current portion ................... 103 114
Long-term liabilities, less current portion ...................... 1,511 --
---------- ----------
Total liabilities ........................................... 17,626 15,702
---------- ----------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 28,124 shares at June 30, 1999
and 27,000 shares at December 31, 1998 ...................... 153,635 148,947
Deferred compensation ............................................. (808) (829)
Accumulated other comprehensive income (loss) ..................... (74) 49
Accumulated deficit ............................................... (130,258) (110,891)
---------- ----------
Total shareholders' equity .................................. 22,495 37,276
---------- ----------
Total liabilities and shareholders' equity .................. $ 40,121 $ 52,978
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net revenues ............................................. $ 7,190 $ 4,147 $ 11,664 $ 6,571
Cost of revenues ......................................... 2,870 2,371 4,775 3,909
-------- -------- -------- --------
Gross profit .......................................... 4,320 1,776 6,889 2,662
-------- -------- -------- --------
Operating expenses:
Research and development .............................. 3,007 8,552 6,977 15,489
Sales and marketing ................................... 3,916 4,443 8,039 8,342
General and administrative ............................ 1,652 2,365 4,709 4,590
Merger related costs .................................. 84 -- 6,977 --
-------- -------- -------- --------
Total operating expenses ........................... 8,659 15,360 26,702 28,421
-------- -------- -------- --------
Operating loss ................................... (4,339) (13,584) (19,813) (25,759)
Interest expense ......................................... (17) (21) (20) (54)
Interest income .......................................... 155 885 466 1,879
-------- -------- -------- --------
Net loss ......................................... (4,201) (12,720) (19,367) (23,934)
-------- -------- -------- --------
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period ...................................... 26 (51) 39 (26)
Less: reclassification adjustment for gains included
in net income ...................................... (4) 41 (9) 47
-------- -------- -------- --------
Other comprehensive income (loss) .......... 22 (10) 30 21
-------- -------- -------- --------
Comprehensive loss ................... $ (4,179) $(12,730) $(19,337) $(23,913)
======== ======== ======== ========
Net loss per share:
Basic and diluted ................................ $ (0.15) $ (0.47) $ (0.70) $ (0.90)
======== ======== ======== ========
Weighted average shares outstanding ............. 28,086 26,874 27,778 26,732
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net loss .............................................................. $(19,367) $(23,934)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ....................................... 1,400 943
Loss on write-off of property and equipment ......................... 317 --
Provision for doubtful accounts ..................................... 794 224
Inventory reserves .................................................. 1,770 --
Amortization of deferred compensation ............................... 229 229
Amortization of stock compensation .................................. 283 --
Changes in operating assets and liabilities:
Accounts receivable ............................................. (1,355) 651
Inventories ..................................................... (1,304) (825)
Prepaids and other current assets ............................... 1,068 223
Other Assets .................................................... (949) (88)
Accounts payable ................................................ (212) 2,215
Accrued liabilities ............................................. 218 168
Customer deposits ............................................... (85) 155
Deferred revenue ................................................ (1,254) (150)
Current portion of long term liabilities ........................ 1,500 --
Long-term liabilities ........................................... 214 --
-------- --------
Net cash used in operating activities ........................ (16,733) (20,189)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment ................................. (896) (899)
Purchase of marketable securities ..................................... (17,862) (18,165)
Sale of marketable securities ......................................... 36,254 30,265
-------- --------
Net cash provided by investing activities .................... 17,596 11,201
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants ............... 4,197 1,409
Proceeds from short-term borrowing .................................... 257 --
Payments on short-term borrowings ..................................... (11) (2)
Payments on long-term debt ............................................ -- (2)
-------- --------
Net cash provided by financing activities .................... 4,443 1,405
-------- --------
Effect of foreign currency translation adjustment ....................... (22) --
Net increase (decrease) in cash and cash equivalents ...... 5,184 (7,583)
Cash and cash equivalents at beginning of period ........................ 3,273 23,044
-------- --------
Cash and cash equivalents at end of period .............................. $ 8,457 $ 15,461
======== ========
Supplemental schedule of cash flow information:
Interest paid ......................................................... $ 24 $ 34
======== ========
Taxes paid ............................................................ $ 74 $ --
======== ========
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on marketable securities ....................... $ (101) $ (26)
======== ========
Deferred compensation ................................................. $ 491 $ --
======== ========
The accompanying notes are an integral part of these
consolidated financial statements
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Interim Financial Information (unaudited):
The interim financial statements in this report reflect all adjustments,
consisting of normal recurring adjustments, that are, in the opinion of
management, necessary for a fair presentation of the results of operations and
cash flows for the interim periods covered and of the financial condition of the
Company at the interim balance sheet dates. Results for interim periods are not
necessarily indicative of results to be expected for the full fiscal year. The
year-end balance sheet information was derived from audited financial statements
but does not include all disclosures required by generally accepted accounting
principles. These financial statements should be read in conjunction with
Eclipse's audited financial statements and notes thereto for the year ended
December 31, 1998, contained in the Company's Annual Report on Form 10-K as
filed with the U.S. Securities and Exchange Commission (SEC).
Net Loss Per Share:
Earnings per share are calculated in accordance with the provisions of
Statement of Accounting Standards No. 128, "Earnings per Share," (SFAS 128).
SFAS 128 requires the Company to report both basic earnings per share, which is
the weighted-average number of common shares outstanding, and diluted earnings
per share, which includes the weighted-average common shares outstanding and all
dilutive potential common shares outstanding. For the three and six months ended
June 30, 1999 and 1998 dilutive potential common shares outstanding reflects
shares issuable under the Company's stock option plans.
Basic EPS is computed by dividing loss available to common shareholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS is computed giving effect to all dilutive potential common shares
that were outstanding during the period.
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- ------------------------
1999 1998 1999 1998
----------- ---------- ---------- --------
Numerator - Basic and Diluted EPS
Net Loss ................................. $ (4,201) $ (12,720) $ (19,367) $(23,934)
Denominator - Basic and Diluted EPS
Weighted average shares outstanding ...... 28,086 26,874 27,778 26,732
Basic EPS ..................................... $ (0.15) $ (0.47) $ (0.70) $ (0.90)
========== ========== ========== ========
Diluted EPS ................................... $ (0.15) $ (0.47) $ (0.70) $ (0.90)
========== ========== ========== ========
Options to purchase 4,525,232 and 4,446,873 shares of common stock were
outstanding at June 30, 1999 and 1998 respectively, but were not included in the
calculation of diluted EPS because their inclusion would have been antidilutive.
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies -- (Continued):
Recent Pronouncements:
In June 1998, FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") is effective for the Company beginning in 2001. SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Eclipse does not use derivative instruments and is not involved in hedging
activities and has no plans to do so given Eclipse's current business
operations.
2. Business Combination
On March 17, 1999, Eclipse and CardioGenesis Corporation
("CardioGenesis") announced the completion of their business combination. Under
the terms of the combination, each share of CardioGenesis Common Stock has been
converted into 0.8 of a share of Eclipse Common Stock, and Eclipse has assumed
all outstanding CardioGenesis stock options. CardioGenesis has become a
wholly-owned subsidiary of Eclipse and its shares are no longer publicly traded.
As a result of the transaction, Eclipse has increased its outstanding shares by
approximately 9.9 million shares which are issuable to the former CardioGenesis
stockholders upon proper surrender of their stock certificates. The transaction
has been structured to qualify as a tax-free reorganization and has been
accounted for as a pooling of interests, consequently, all prior period figures
have been restated as if the combined entity existed for all periods presented.
There were no inter-company transactions between the companies prior to the date
of the business combination. The fiscal year remained the same and thus, there
were no changes in retained earnings due to the business combination. Further,
there were no required adjustments needed to conform to the accounting policies
between the two companies.
CardioGenesis was a medical device company like Eclipse which developed,
manufactured, and marketed cardiac revascularization products for the treatment
of advanced cardiovascular disease and severe angina pain through TMR and PTMR.
CardioGenesis also manufactured and marketed disposable products to perform
intraoperative transmyocardial revascularization ("ITMR"), catheter-based
percutaneous myocardial revascularization ("PMR"), and thorascopic
transmyocardial revascularization ("TTMR") to treat patients afflicted with
debilitating angina. During the quarter ended March 31, 1999, Eclipse recognized
merger-related costs of $6,893,000 for financial advisory and legal fees,
personnel severance, terminated relationships and other costs including
write-offs of fixed assets and inventory. A majority of the terminated employees
were located in California and worked in operations, sales, marketing, quality,
research and development and administrative functions. A total of 40 employees
were terminated.
During the quarter ended June 30, 1999, Eclipse recognized additional
merger-related costs of $84,000, bringing the total of merger-related costs to
$6,977,000 for the six months ended June 30, 1999. This increase was largely due
to costs of approximately $625,000 associated with an upgrade program to replace
customer owned equipment rendered unusable by the merger. This increase was
mostly offset by lower than anticipated terminated relationship/contracts.
Eclipse expects the last merger-related payment to occur in January of 2000.
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the merger-related costs (in thousands).
DESCRIPTION AMOUNT
- ----------- ------
Financial advisory and legal fees ........................ $2,468
Personnel severance ...................................... 1,002
Terminated relationships/contracts ....................... 907
Other costs including fixed asset and
inventory write-offs.............................. 2,600
------
Total ............................................... $6,977
======
The following table summarizes the Company's merger related reserve balances (in
thousands):
MERGER RELATED COST ....................................... $ 6,893
(for the three month period ended March 31, 1999)
Less:
Non-cash charges ..................................... 1,183
Cash payments ........................................ 548
-------
Merger Reserve balance at March 31, 1999 .................. $ 5,162
Less (plus):
Additional merger-related costs accrued during the three
month period ended June 30, 1999 ..................... (625)
Change in estimate ................................... 541
Non-cash charges ..................................... 609
Cash payments ........................................ 1,394
-------
Merger Reserve balance at June 30, 1999 ................... $ 3,243
=======
The merger reserve balance is included in accrued liabilities.
3. Inventories:
Inventories are stated at lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
(UNAUDITED)
Raw materials .......................... $2,886 $3,679
Work in process ........................ 262 839
Finished goods ......................... 5,461 4,557
------ ------
$8,609 $9,075
====== ======
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Commitments:
On January 5, 1999, prior to the merger with Eclipse, CardioGenesis
entered into a Settlement and License Agreement with PLC Medical Systems, Inc.
(PLC) which grants CardioGenesis a non-exclusive worldwide license to certain
PLC patents. In return, CardioGenesis agreed to pay PLC a license fee and
minimum royalties totaling $2.5 million over an approximately forty-month
period. The present value of these payments of $2.3 million has been recorded as
a prepaid license fee in other assets, and will be amortized over the life of
the underlying patents. The corresponding liability for outstanding payments due
to PLC is reflected in the current and long term portions of long-term debt.
During the first quarter of 1999, prior to the merger, CardioGenesis entered
into an agreement to terminate a relationship with a distributor. As part of
this agreement, CardioGenesis agreed to repurchase certain inventory and field
units.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains descriptions of Eclipse's expectations regarding
future trends affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Please read the section below titled "Factors That May Affect Future
Results" to review conditions which Eclipse believes could cause actual results
to differ materially from those contemplated by the forward-looking statements.
Forward-looking statements include, but are not limited to, those items
identified with a footnote 1 symbol. Eclipse undertakes no obligation to update
the information contained herein.
The following discussion should be read in conjunction with financial
statements and notes thereto included in this Quarterly Report on Form 10-Q.
OVERVIEW
Eclipse was founded in 1989. From 1989 through September 1995, Eclipse
engaged in the research, development and sale of surgical laser products
principally for procedures such as atherectomy and arthroscopy. In 1995, Eclipse
determined that there was a significant opportunity in the Transmyocardial
Revascularization ("TMR") market, and that Eclipse was well-positioned to enter
this market because of Eclipse's expertise with laser-based surgical techniques
and the treatment of cardiovascular disease. Accordingly, in late 1995, Eclipse
changed its strategic direction to enter the TMR market.
Prior to 1996, Eclipse focused almost exclusively on research and
development activities relating to surgical laser products. Since 1996, Eclipse
has focused on TMR and Percutaneous Transmyocardial Revascularization ("PTMR")
activities, particularly research and development activities and clinical
trials.
On October 22, 1998, Eclipse announced the signing of a definitive
agreement that provided for a business combination with CardioGenesis. On March
17, 1999, Eclipse and CardioGenesis announced the completion of their business
combination. Under the terms of the combination, each share of CardioGenesis
Common Stock has been converted into 0.8 of a share of Eclipse Common Stock, and
Eclipse has assumed all outstanding CardioGenesis stock options. CardioGenesis
has become a wholly-owned subsidiary of Eclipse and its shares are
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no longer publicly traded. As a result of the transaction, Eclipse has increased
its outstanding shares by approximately 9.9 million shares which are issuable to
the former CardioGenesis stockholders upon proper surrender of their stock
certificates. These shares represent approximately 36% of Eclipse's
post-combination outstanding shares. The transaction has been structured to
qualify as a tax-free reorganization and has been accounted for as a pooling of
interests. Accordingly, the accompanying financial statements have been restated
as if the combined entity existed for all periods presented.
On February 11, 1999, Eclipse received final approval from the FDA
for its TMR products for certain indications and is now able to sell those
products in the U.S. on a commercial basis. Eclipse has also received the
European Conforming Mark ("CE Mark") allowing the commercial sale of its TMR
laser systems and its PTMR catheter system to customers in the European
Community. On April 7, 1999, Eclipse received confirmation from the Health Care
Financial Administration ("HCFA") that effective July 1, 1999, HCFA will provide
Medicare coverage for TMR. With this confirmation, hospitals will again receive
Medicare reimbursement for TMR equipment and procedures which is expected to
result in a reduction in Eclipse's costs of clinical trials(1).
At June 30, 1999, Eclipse had an accumulated deficit of
$130,259,000. Eclipse expects to continue to incur operating losses related to
the expansion of sales and marketing resources, research and development
activities, including clinical studies, and the continued development of
corporate infrastructure. The timing and amounts of Eclipse's expenditures will
depend upon a number of factors, including the progress of Eclipse's clinical
trials, the status and timing of regulatory approvals, the timing of market
acceptance, if any, of Eclipse's products, and the efforts required to develop
Eclipse's sales and marketing organization.
RESULTS OF OPERATIONS
Net Revenues
Net revenues increased 73% to $7,190,000 for the three months ended
June 30, 1999 from $4,147,000 for the three months ended June 30, 1998. Net
revenues increased 78% to $11,664,000 for the six months ended June 30, 1999
from $6,571,000 for the six months ended June 30, 1998. The increase in revenues
was due to higher sales of laser systems and disposable products resulting from
the receipt of FDA approval on the Company's TMR products. Export sales
accounted for approximately 6% of total sales for the three months ended June
30, 1999 and 28% for the three months ended June 30, 1998. Export sales
accounted for approximately 14% of total sales for the six months ended June 30,
1999 and 24% for the six months ended June 30, 1998. The Company defines export
sales as sales to customers located outside of the United States.
Future revenues may continue to be affected by restrictions on third
party reimbursement. Eclipse intends to continue selling its laser system to
hospitals outright or placing the systems with hospitals under lease agreements.
On April 7, 1999, Eclipse received confirmation from the Health Care Financial
Administration ("HCFA") that effective July 1, 1999, HCFA will provide Medicare
coverage for TMR. With this confirmation, hospitals will again receive Medicare
reimbursement for TMR equipment and procedures. Eclipse has limited experience
to date with the acceptability of its TMR procedures for reimbursement by
private insurance and private health plans. There can be no assurance that large
numbers of private insurance and private health plans will reimburse the TMR
procedure.
Gross Profit
Gross profit increased to $4,320,000 or 60% of net revenues for the
three months ended June 30, 1999, compared to $1,776,000 or 43% of net revenues
for the three months ended June 30, 1998. Gross profit increased to $6,889,000
or 59% of net revenues for the six months ended June 30, 1999, compared to
$2,662,000 or 41% of net revenues for the six months ended June 30, 1998. The
increase resulted from greater sales volume, a higher average sales price per
laser, and lower unit costs due to the allocation of fixed manufacturing
expenses over higher production volumes.
- --------
(1) Forward looking statement.
8
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Research and Development Expenses
Research and development expenditures decreased to $3,007,000 or 42%
of net revenues for the three months ended June 30, 1999, compared to $8,552,000
or 206% of net revenues for the three months ended June 30, 1998, respectively.
Research and development expenditures decreased to $6,977,000 or 60% of net
revenues for the six months ended June 30, 1999, compared to $15,489,000 or 236%
of net revenues for the six months ended June 30, 1998, respectively. The
decrease in these expenses reflects the decrease in activity associated with
clinical trials coupled with lower employee and patent expenses.
Some of Eclipse's products are currently in clinical trials and
therefore subject to limitations by the FDA. Eclipse believes that a continued
investment in the development of new and improved products and procedures and in
Eclipse's clinical trials is critical to its future success. As a result of the
FDA approval of the Eclipse surgical TMR system and the coverage notice by HCFA
for July 1, 1999, it is anticipated that the level of research and development
expenditures incurred in connection with clinical trials will continue to
decrease as a percentage of revenues. (1) However, there can be no assurance
that Eclipse's future revenues will be sufficient to cover the research and
development expenses required in connection with ongoing efforts including
current and future clinical trials.
Sales and Marketing
Sales and marketing expenses decreased to $3,916,000 or 54% of net
revenues for the three months ended June 30, 1999, from $4,443,000 or 107% of
net revenues for the three months ended June 30, 1998, respectively. Sales and
marketing expenses decreased to $8,039,000 or 69% of net revenues for the six
months ended June 30, 1999, from $8,342,000 or 127% of net revenues for the six
months ended June 30, 1998, respectively. The decreases are due to cost
efficiencies realized from the merger. There can be no assurance that Eclipse
will continue to experience decreases in sales and marketing expenses in the
future. Eclipse expects that absolute dollars spent on sales and marketing may
increase as Eclipse continues to focus resources on the development of the TMR
and PTMR market.(1)
General and Administrative
General and administrative expenses decreased to $1,652,000 or 23%
of net revenues for the three months ended June 30, 1999, compared to $2,365,000
or 57% of net revenues for the three months ended June 30, 1998, respectively.
General and administrative expenses increased to $4,709,000 or 40% of net
revenues for the six months ended June 30, 1999, compared to $4,590,000 or 70%
of net revenues for the six months ended June 30, 1998, respectively. The
decrease in absolute dollars for the three months ended June 30, 1999 compared
to 1998 is due to a reduction in legal litigation expenses and cost savings
resulting from the merger.
Merger Related Costs
CardioGenesis was a medical device company like Eclipse which
developed, manufactured, and marketed cardiac revascularization products for the
treatment of advanced cardiovascular disease and severe angina pain through TMR
and PTMR. CardioGenesis also manufactured and marketed disposable products to
perform intraoperative transmyocardial revascularization ("ITMR"),
catheter-based percutaneous myocardial revascularization ("PMR"), and
thorascopic transmyocardial revascularization ("TTMR") to treat patients
afflicted with debilitating angina. During the quarter ended March 31,1999,
Eclipse recognized merger-related costs of $6,893,000 for financial advisory and
legal fees, personnel severance, terminated relationships and other costs
including write-offs of fixed assets and inventory. A majority of the terminated
employees were located in California and worked in operations, sales, marketing,
quality, research and development and administrative functions. A total of 40
employees were terminated.
During the quarter ended June 30, 1999, Eclipse recognized
additional merger-related costs of $84,000, bringing the total of merger-related
costs to $6,977,000 for the six months ended June 30,1999. This increase was
largely due to costs of approximately $625,000 associated with a upgrade program
to replace customer owned
- --------
(1) Forward looking statement.
9
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equipment rendered unusable by the merger. This increase was mostly offset by
lower than anticipated terminated relationship/contracts. Eclipse expects the
last merger- related payment to occur in January of 2000. Merger related costs
were $6,977,000 for the six months ended June 30, 1999. These were non-recurring
costs associated with the merger.
The following table summarizes the merger-related costs (in
thousands).
DESCRIPTION AMOUNT
- ----------- ------
Financial advisory and legal fees ............................... $2,468
Personnel severance ............................................. 1,002
Terminated relationships/contracts .............................. 907
Other costs including fixed asset and inventory write-offs ...... 2,600
------
Total ...................................................... $6,977
======
Interest Income and Expense
Interest income decreased 82% to $155,000 for the three months ended
June 30, 1999, compared to $885,000 for the three months ended June 30, 1998.
Interest income decreased 75% to $466,000 for the six months ended June 30,
1999, compared to $1,879,000 for the six months ended June 30, 1998. The
decrease was due to lower investments in marketable securities and cash and cash
equivalents.
Interest expense decreased 19% to $17,000 for the three months ended
June 30, 1999, compared to $21,000 for the three months ended June 30, 1998.
Interest expense decreased 63% to $20,000 for the six months ended June 30,
1999, compared to $54,000 for the six months ended June 30, 1998. This decrease
reflects a lower level of debt outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short and long-term marketable securities
were $14,418,000 at June 30, 1999 compared to $27,727,000 at December 31, 1998,
a decrease of 48%. Marketable securities are classified as "available-for-sale"
and are readily marketable at their fair market value. Eclipse used $16,733,000
of cash during the six month period ending June 30, 1999 for operating
activities, including funding its operating loss and increases in inventory,
other assets, accounts payable and deferred revenue.
Since its inception, Eclipse has satisfied its capital requirements
primarily through sales of its equity securities and, to a lesser extent, loans
from shareholders. In addition, Eclipse's operations have been funded in part
through sales of Eclipse's products. At June 30, 1999, Eclipse had an
accumulated deficit of $130,259,000.
Eclipse anticipates that its current cash, cash equivalents and
marketable securities will be sufficient to meet Eclipse's funding requirements
through December 31, 1999(1). There can be no assurance, however, that Eclipse
will not require additional sources of cash at an earlier date, depending upon
the progress of expansion of Eclipse's clinical trials, any need for additional
clinical trials or other testing of Eclipse's products and the timing of other
required expenditures as indicated above. If Eclipse is required to obtain
additional financing in the future, there can be no assurance that capital will
be available on terms acceptable to Eclipse, if at all.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") is effective for the Company beginning in 2001. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Eclipse does not use derivative instruments and is not
involved in hedging activities and has no plans to do so given Eclipse's current
business operations.
- --------------
(1) Forward looking statement.
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YEAR 2000 COMPLIANCE
The Year 2000 compliance issue (in which systems do not properly
recognize date sensitive information when the year changes to 2000) creates
risks for Eclipse if internal data management, accounting, manufacturing and/or
operational software and systems do not adequately or accurately process or
manage day or date information beyond the year 1999. To address the issue,
Eclipse has assembled a cross-functional project team to review and assess
internal software, data management and accounting, manufacturing and operational
systems to ensure that they do not malfunction as a result of the Year 2000 date
transition. The project team has identified the following systems which are in
the process of being evaluated:
Security systems Network equipment
Facility systems Printers, copiers and fax machines
Telephony Server tape backups
Servers Testing equipment
Personal computers Miscellaneous software
The vast majority of Eclipse's information systems hardware and
software is already Year 2000 compliant. These same hardware and software
systems are used for process controls in Eclipse's manufacturing operations
which do not depend otherwise upon date data oriented equipment. Eclipse does
not anticipate any material disruption in its operations as a result of any
failure by Eclipse to be in Year 2000 compliance(1). Eclipse has prepared a
preliminary estimate of total Year 2000 remediation efforts of approximately
$50,000, of which $36,000 has been spent as of June 30, 1999.
Eclipse's products have no internal date clocks, do not use software
that is dependent on date data processing and do not have electrical ports for
connection of other devices that require date data processing. This means that
Eclipse products, when used as intended by Eclipse in accordance with Eclipse
procedures and user/service manuals, will not be affected by the change from
1999 to 2000.
Eclipse is also working with its suppliers of products, services and
systems to assure that the products, services and systems supplied to Eclipse,
and the products Eclipse supplies to its customers, are Year 2000 compliant. As
a contingency plan, Eclipse intends to maintain higher inventory levels at year
end to mitigate any possible supplier delays. With respect to compliance of the
products Eclipse supplies to its customers, the efforts are complete as
Eclipse's products are not dependent upon date data processing and the products
do not have electrical ports for connection of other devices.
Eclipse has not found it necessary to delay or cancel any internal
services, programs, or projects as a result of its preparatory activities for
Year 2000 compliance. Eclipse does not anticipate any material disruption in its
operations as a result of any internal or external failures to be in Year 2000
compliance, however, Eclipse is prepared, as a worse-case scenario, for minor
delivery delays in the receipt of materials and services(1).
Eclipse expects that its Year 2000 compliance project will be
completed during the third quarter of fiscal 1999 and will not have a material
adverse effect on Eclipse's financial condition or overall trends in the results
of operations(1). However, there can be no assurance that unexpected delays or
problems, including the failure to ensure the Year 2000 compliance of systems,
services or products supplied to Eclipse by a third party, will not have an
adverse effect on Eclipse, its financial performance, or the competitiveness or
customer acceptance of its products. Further, Eclipse's current understanding of
expected costs is subject to change as the project progresses and does not
include the potential cost of internal software and hardware replaced in the
normal course of business.
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(1) Forward looking statement.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
Eclipse has identified certain forward-looking statements in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this Quarterly Report on Form 10-Q with a footnote1
symbol. Eclipse may also make oral forward-looking statements from time to time.
Actual results may differ materially from those projected in any such
forward-looking statements due to a number of factors, including those set forth
below and elsewhere in this Form 10-Q.
Eclipse operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The following section lists some, but
not all, of those risks and uncertainties which may have a material adverse
effect on Eclipse's business, financial condition or results of operations. This
section should be read in conjunction with the unaudited Consolidated Financial
Statements and Notes thereto included in Part I-Item I of this Quarterly Report
on Form 10-Q and the audited Consolidated Financial Statements and Notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 1998, contained in Eclipse's 1998
Form 10-K.
Eclipse may fail to obtain required U.S. regulatory approvals to market its PTMR
products, or to obtain U.S. regulatory approvals to market its TMR products for
a more broad set of indications. The business, financial condition and results
of operations of Eclipse could be materially and adversely affected by any of
the following events, circumstances or occurrences related to the regulatory
process:
- delays in completing clinical trials or submitting trial results for
regulatory approval;
- the failure to obtain regulatory approvals for such products;
- significant limitations in the indicated uses for which such
products may be marketed, or
- substantial costs incurred in obtaining such approvals.
Eclipse has applied for and received Investigational Device
Exemptions to engage in clinical trials of its PTMR products. These trials must
be completed before Eclipse can file a Preliminary Market Approval application,
known as a PMA, to the FDA. A PMA application for Eclipse's PTMR laser systems
must be approved by the FDA before the devices can be sold commercially.
On February 11, 1999, Eclipse received final approval from the FDA
to market its TMR products. In July 1999, Eclipse submitted a PMA supplement for
the use of its TMR products for a more broad set of indications. To date, the
FDA has not approved this PMA supplement.
There can be no assurance that Eclipse will receive FDA approvals
either to market its PTMR products or to market is TMR products for a more broad
set of indications.
Eclipse products have not been broadly adopted by the medical community, and
unless they are broadly adopted its business will be adversely affected.
Eclipse's TMR products using lasers have not yet achieved broad commercial
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adoption. Eclipse's PTMR products are experimental and have not yet achieved
broad clinical adoption. Eclipse cannot predict whether or at what rate and how
broadly their products will be adopted by the medical community. The business,
financial condition and results of operations of Eclipse may be adversely
affected if:
- its products fail to achieve significant clinical adoption; or
- its TMR or PTMR laser systems fail to achieve significant market
acceptance.
Positive endorsements by physicians are essential for clinical
adoption of Eclipse's TMR and PTMR laser systems. Even if the clinical efficacy
of TMR and PTMR laser systems is established, physicians may elect not to
recommend TMR and PTMR laser systems for any number of reasons. The reasons why
TMR or PTMR laser systems may effectively treat coronary artery disease are not
well understood. Although Eclipse intends to use research, development and
clinical efforts to understand better the physiological effects of TMR and PTMR
treatment, Eclipse may not achieve such understanding on a timely basis, or at
all. TMR and PTMR laser systems may not be clinically adopted unless Eclipse:
- understands thoroughly the physiological effects of the products, or
- disseminates such understanding within the medical community.
Clinical adoption of these products will also depend upon:
- the ability of Eclipse to facilitate training of cardiothoracic
surgeons and interventional cardiologists in TMR and PTMR therapy;
and
- the willingness of such physicians to adopt and recommend such
procedures to their patients.
Patient acceptance of the procedure will depend on:
- physician recommendations;
- the degree of invasiveness;
- the effectiveness of the procedure; and
- the rate and severity of complications associated with the procedure
as compared to other procedures.
To expand its business, Eclipse will be required to establish effective sales,
marketing and distribution systems, and it has limited experience to date
establishing these operations. To expand its business, Eclipse must establish
effective systems to sell, market and distribute products. To date, Eclipse has
had limited sales which have consisted primarily of sales of its TMR and PTMR
laser systems for investigational use only. Eclipse has only recently begun
commercial sales of its TMR laser systems following final FDA regulatory
approval in February 1999. For this reason, Eclipse has maintained only a
limited sales and marketing organization.
With recent FDA approval of its TMR laser system, Eclipse is
marketing its products primarily through a direct sales force. Eclipse intends
to expand its operations by hiring additional sales and marketing personnel.
This will require substantial management efforts and financial resources. If
Eclipse is not able to establish effective sales and marketing capabilities, its
business and results of operations could be materially adversely affected.
The expansion of Eclipse's business may put added pressure on its management and
operational infrastructure and could create numerous risks and challenges. The
growth in Eclipse's business may place a significant strain on its limited
personnel, management and other resources. The evolving growth of Eclipse's
business involves numerous risks and challenges, including:
- the dependence on the growth of the market for Eclipse's TMR and
PTMR systems;
- domestic and international regulatory developments;
- rapid technological change;
- the highly competitive nature of the medical devices industry; and
- the risk of entering emerging markets in which Eclipse has limited
or no direct experience;
Eclipse's future operating results will be significantly affected by
its ability to:
- successfully and rapidly expand sales to potential customers;
- implement operating, manufacturing and financial procedures and
controls;
- improve coordination among different operating functions; and
- continue to attract, train and motivate additional qualified
personnel in all areas.
- Eclipse cannot assure you that it will be able to manage these
activities and implement these strategies successfully, and any
failure to do so could harm its operating results.
Eclipse may not be able to successfully market its products if it fails to
obtain third party reimbursement for the procedures performed with its products.
Few individuals are able to pay directly for the costs associated with the use
of Eclipse's products. In the U.S., hospitals, physicians and other healthcare
providers that purchase medical devices generally rely on third party payors,
such as Medicare, to reimburse all or part of the cost of the procedure in which
the medical device is being used. A failure by third party payors to provide
adequate reimbursement for the TMR and PTMR procedures that use Eclipse's
products would have a material adverse effect on Eclipse's business, financial
condition, and results of operations.
On April 7, 1999, Eclipse received confirmation from the Health Care
Financing Administration that effective July 1, 1999, HCFA will provide Medicare
coverage for TMR systems for any manufacturer's TMR procedures. Eclipse has
limited experience to date with the acceptability of its TMR procedures for
reimbursement by private insurance and private health plans. There can be no
assurance that private insurance and private health plans will approve
reimbursement for TMR or PTMR.
Although Eclipse does not anticipate receiving Medicare
reimbursements for its laser systems that are in clinical trials, it will seek
reimbursement from other third party payors. There can be no assurance, however,
that such reimbursement will be available.
Third party payors may deny reimbursement if they determine that the
device used in a treatment is:
- unnecessary,
- inappropriate;
- experimental;
- used for a non-approved indication; or
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- not cost-effective.
Potential purchasers must determine whether the clinical benefits of
Eclipse's TMR and PTMR laser systems justify:
- the additional cost or the additional effort required to obtain
prior authorization or coverage; and
- the uncertainty of actually obtaining such authorization or
coverage.
Eclipse faces intense competition and competitive products could render its
products obsoletE. The market for TMR and PTMR laser systems is intensely
competitive and is constantly becoming more competitive. If competitors are more
effective in developing new products and procedures and marketing existing and
future products, the business, financial condition and results of operations of
Eclipse may be materially adversely affected.
The market for TMR and PTMR laser systems is characterized by rapid
technical innovation. Accordingly, competitors may succeed in developing TMR and
PTMR products or procedures that:
- are more effective than products marketed by Eclipse;
- are more effectively marketed than products marketed by Eclipse; or
- may render the products or technology of Eclipse obsolete.
Eclipse competes with:
- PLC Systems, Inc.; and
- Johnson & Johnson.
PLC is currently selling TMR commercially in the U.S. and abroad,
while Johnson & Johnson is currently selling PTMR products for investigational
use.
Earlier entrants in the market in a therapeutic area often obtain
and maintain greater market share than later entrants. PLC obtained a PMA
approval of its TMR laser system in 1998 and thus, could be able to capture a
greater market share.
Even with the FDA approval for its TMR laser system, Eclipse will
face competition for market acceptance and market share for that product.
Eclipse's ability to compete may depend in significant part on the timing of
introduction of competitive products into the market, and will be affected by
the pace, relative to competitors, at which it is able to:
- develop products;
- complete clinical testing and regulatory approval processes;
- obtain third party reimbursement acceptance; and
- supply adequate quantities of the product to the market.
Eclipse's products also compete with alternative treatment methods and its
products must replace these methods to be commercially successful. Many of the
medical indications that may be treatable with TMR and PTMR laser systems are
currently being treated by drug therapies or surgery and other interventional
therapies, including percutaneous transluminal coronary angioplasty (known as
PTCA) and coronary artery bypass graft.
The business, financial condition and results of operations of
Eclipse would be materially adversely affected if TMR technology fails:
- to replace or augment existing therapies; or
- to be more effective, safer or more cost effective than new
therapies.
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A number of the existing therapies:
- are widely accepted in the medical community;
- have a long history of use; and
- continue to be enhanced rapidly.
Procedures using TMR and PTMR technology may not be able to replace
or augment such established treatments. Clinical research results may not
support the use of TMR or PTMR procedures to augment or replace existing
treatments.
Others are developing new surgical procedures and new drug therapies
to treat coronary artery disease. These new procedures and drug therapies could
be more effective, safer or more cost effective than TMR and PTMR laser systems.
The market acceptance and commercial success of Eclipse's TMR and
PTMR laser systems will depend not only upon their safety and effectiveness, but
also upon the relative safety and effectiveness of alternative treatments.
Eclipse products depend on TMR technology which is rapidly changing, which could
require them to incur substantial product development expenditures to respond to
industry changes. TMR and PTMR laser systems are the only products of Eclipse.
Accordingly, if Eclipse fails to develop and commercialize successfully their
TMR and PTMR laser systems, then their business, financial condition and results
of operations would be materially adversely affected.
The medical device industry is characterized by rapid and
significant technological change. The future success of Eclipse will depend in
large part on its ability to respond to such changes. In addition, Eclipse must
expand the indications and applications for its products by developing and
introducing enhanced and new versions of its TMR and PTMR laser systems. Product
research and development requires substantial expenditures and is inherently
risky. Eclipse may not be able to:
- identify products for which demand exists; or
- develop products that have the characteristics necessary to treat
particular indications.
Even if Eclipse identifies and develops such products, it may not
receive regulatory approval and may not be commercially successful.
Overall increases in medical costs could adversely affect Eclipse's business.
Eclipse believes that the overall escalating cost of medical products and
services has led, and will continue to lead, to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by them. There can be no assurance in
either United States or international markets that:
- third party reimbursement and coverage will be available or
adequate;
- current reimbursement amounts will not be decreased in the future;
or
- future legislation, regulation or reimbursement policies of third
party payors will not otherwise adversely affect the demand for or
the ability of Eclipse to profitably sell its products.
Fundamental reforms in the healthcare industry in the United States
and Europe continue to be considered. Eclipse cannot predict whether or when any
healthcare reform proposals will be adopted and what effect such proposals might
have on its business.
Eclipse has a history of losses and may not be profitable in the futurE. Eclipse
has incurred significant losses since inception. Its revenues and operating
income will be constrained:
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- until such time, if ever, as it obtains broad commercial adoption of
its TMR laser systems by healthcare facilities in the U.S.;
- until such time, if ever, as it obtains FDA and other regulatory
approvals for its PTMR laser systems; and
- for an uncertain period of time after such approvals are obtained.
Eclipse may not achieve or sustain profitability in the future.
If Eclipse experiences increased demand for its products, it may not be able to
expand its business to meet such demand. Eclipse may be required to expand its
business to:
- respond to increasing clinical adoption of the TMR procedure;
- develop future products;
- generally compete successfully;
- complete the clinical trials that are currently in progress; and
- prepare additional products for clinical trials;
Such expansion could place a significant strain on managerial,
operational and financial systems and resources. To accommodate such expansion
and compete effectively, Eclipse must:
- improve information systems, procedures and controls; and
- expand, train, motivate and manage its employees.
Third parties may limit the development and protection of Eclipse intellectual
property which could adversely affect their competitive positions. The success
of Eclipse is dependent in large part on its ability to:
- obtain patent protection for its products and processes;
- preserve its trade secrets and proprietary technology; and
- operate without infringing upon the patents or proprietary rights of
third parties.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. Companies
in the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Certain competitors and potential competitors of
Eclipse have obtained United States patents covering technology that could be
used for certain TMR and PTMR procedures. There can be no assurance such
competitors, potential competitors or others have not filed and do not hold
international patents covering other TMR or PTMR technology. In addition,
international patents may not be interpreted the same as any
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counterpart United States patents.
In September 1995, one of Eclipse's competitors sent Eclipse a
notice of potential infringement of their patent regarding a method for TMR
utilizing synchronization of laser pulses to the electrical signals from the
heart. After discussion with patent counsel, Eclipse concluded that it did not
utilize the process and/or apparatus that was the subject of the patent at
issue, and Eclipse provided a response to the competitor to that effect. Eclipse
has not received any additional correspondence from this competitor on these
matters.
In 1996, prior to the merger with Eclipse, CardioGenesis initiated a
suit in the U.S. against PLC seeking a judgment that the PLC patent is invalid
and unenforceable. In 1997, PLC counterclaimed in that suit alleging
infringement by CardioGenesis of the PLC patent. Also in 1997, PLC initiated
suit in Germany against CardioGenesis and CardioGenesis' former German sales
agent alleging infringement of a European counterpart to the PLC patent. In
1997, CardioGenesis filed an Opposition in the European Patent Office to a
European counterpart to the PLC patent, seeking to have the European patent
declared invalid.
On January 5, 1999, before trial on the U.S. suit commenced,
CardioGenesis and PLC settled all litigation between them, both in the U.S. and
in Germany, with respect to the PLC patent and the European patents. Under the
Settlement and License Agreement signed by the parties, CardioGenesis stipulated
to the validity of the PLC patents and PLC granted CardioGenesis a non-exclusive
worldwide license to the PLC patents. CardioGenesis agreed to pay PLC a license
fee, and minimum royalties, totaling $2.5 million over an approximately
forty-month period, with a running royalty credited against the minimums.
The Settlement and License Agreement applies only to those products
or that technology that uses the PLC patents, and the agreement does not provide
PLC any rights to any CardioGenesis intellectual property. The Eclipse TMR
products do not use the technology associated with the PLC patents.
While Eclipse periodically reviews the scope of its patents and
other relevant patents of which it is aware, the question of patent infringement
involves complex legal and factual issues. Any conclusion regarding infringement
may not be consistent with the resolution of any such issues by a court.
Eclipse may not be able to protect its intellectual property
because:
- patents may not be issued;
- patents may be challenged, invalidated or designed around by
competitors; or
- patent protection may not continue to be available for surgical
methods in the future.
Costly litigation may be necessary to protect intellectual property rights.
Eclipse may have to engage in time consuming and costly litigation to protect
its intellectual property rights or to determine the proprietary rights of
others. In addition, Eclipse may become subject to:
- patent infringement claims or litigation; or
- interference proceedings declared by the U.S. Patent Office to
determine the priority of inventions.
Defending and prosecuting intellectual property suits, U.S.
Patent Office interference proceedings and related legal and administrative
proceedings are both costly and time-consuming. Eclipse may be required to
litigate further to:
- enforce its issued patents;
- protect its trade secrets or know-how; or
- determine the enforceability, scope and validity of the proprietary
rights of others.
Any litigation or interference proceedings will result in:
- substantial expense; and
- significant diversion of effort by technical and management
personnel.
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If the results of such litigation or interference proceedings are
adverse to Eclipse, then the results may:
- subject Eclipse to significant liabilities to third parties;
- require Eclipse to seek licenses from third parties;
- prevent Eclipse from selling its products in certain markets or at
all; or
- require Eclipse to modify its products.
Although patent and intellectual property disputes regarding medical
devices are often settled through licensing and similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, there can be no assurance the necessary licenses would
be available on satisfactory terms, if at all.
Adverse determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent Eclipse from manufacturing
and selling its products. This would have a material adverse effect on Eclipse's
business, financial condition and results of operations.
Eclipse relies on patent and trade secret laws which are complex and may be
difficult to enforce. The validity and breadth of claims in medical technology
patents involve complex legal and factual questions and, therefore, may be
highly uncertain. Issued patent or patents based on pending patent applications
or any future patent application may not exclude competitors or may not provide
a competitive advantage to Eclipse. In addition, patents issued or licensed to
Eclipse may not be held valid if subsequently challenged and others may claim
rights in or ownership of such patents.
Furthermore, there can be no assurance that competitors:
- have not developed or will not develop similar products;
- will not duplicate products of Eclipse; or
- will not design around any patents issued to or licensed by Eclipse.
Since patent applications in the United States are maintained in
secrecy until patents issue, Eclipse cannot be certain:
- others did not first file applications for inventions covered by its
pending patent applications, nor
- that it will not infringe any patents that may issue to others on
such applications.
The U.S. patent laws were recently amended to exempt physicians,
other health care professionals, and affiliated entities from infringement
liability for medical and surgical procedures performed on patients. Eclipse is
not able to predict if this amendment will materially affect its ability to
protect their proprietary methods and procedures.
Competitors may:
- independently develop proprietary information substantially
equivalent to the proprietary information and techniques of Eclipse,
or
- otherwise gain access to its proprietary technology.
In addition to its patents, Eclipse relies upon trade secrets,
technical know-how and continuing technological innovation to develop and
maintain its competitive position. Eclipse may not be able to meaningfully
protect its unpatented technology because:
- its employees, consultants and advisors may breach their
confidentiality and invention assignment agreements and there may
not be an adequate remedy for such breach;
- its competitors may independently develop substantially equivalent
proprietary information and techniques; or
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- competitors may otherwise gain access to its proprietary technology.
The inability of Eclipse to protect its unpatented intellectual
property could materially adversely affect its business.
Eclipse depends on single source suppliers for certain key components and
production could be interrupted if a key supplier had to be replaced. Eclipse
currently purchases certain critical laser and fiber-optic components from
single sources. Although Eclipse has identified alternative suppliers, a lengthy
process would be required to qualify them as additional or replacement
suppliers. Any significant interruption in the supply of critical materials or
components could adversely affect the ability of Eclipse to manufacture its
products and could materially adversely affect its manufacturing operations,
business and results of operations.
Eclipse anticipates that products will be manufactured based on
forecasted demand and will seek to purchase subassemblies and components in
anticipation of the actual receipt of purchase orders from customers. Lead times
for materials and components vary significantly and depend on factors such as
the business practices of each specific supplier and the terms of particular
contracts, as well as the overall market demand for such materials and
components at any given time. If the forecasts are inaccurate, Eclipse could
experience fluctuations in inventory levels, resulting in excess inventory, or
shortages of critical components, either of which could materially adversely
affect its business and results of operations.
Certain suppliers to Eclipse could have difficulty expanding their
manufacturing capacity to meet Eclipse's needs if demand for Eclipse's TMR and
PTMR laser systems were to increase rapidly or significantly. In addition, any
defect or malfunction in the laser or other products provided by such suppliers
could cause a delay in regulatory approvals or adversely affect product
acceptance. There can be no assurance that:
- materials obtained from outside suppliers will continue to be
available in adequate quantities; or
- alternative suppliers can be located on a timely basis.
Eclipse operates on a purchase order basis with most of its
suppliers. Such vendors could at any time determine to cease the supply and
production of such components.
Eclipse has limited manufacturing experience which could prevent it from
successfully increasing capacity in response to market demand. Eclipse has
limited experience in manufacturing products. Manufacturers often encounter
difficulties in increasing production, including problems involving:
- production yields;
- adequate supplies of components;
- quality control and assurance (including failure to comply with good
manufacturing practices regulations, international quality standards
and other regulatory requirements); and
- shortages of qualified personnel
There can be no assurance that Eclipse:
- will be able successfully to increase manufacturing capacity; or
- will be able to avoid manufacturing difficulties or product recalls.
Eclipse products may contain defects which could delay regulatory approval or
market acceptance of its products. Eclipse may experience future product
defects, malfunctions, manufacturing difficulties or recalls related to the
lasers or other components used in its TMR and PTMR laser systems. Any such
occurrence could cause a delay in regulatory approvals or adversely affect the
commercial acceptance of its products and could have a material adverse effect
on the business, financial condition and results of operations of Eclipse.
Eclipse must comply with FDA manufacturing standards or face fines or other
penalties including suspension of production. Eclipse is required to demonstrate
compliance with the FDA's current good manufacturing practices regulations if it
markets devices in the United States or manufactures finished devices in the
United States. The FDA inspects manufacturing facilities on a regular basis to
determine compliance. If Eclipse fails to comply with
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applicable FDA or other regulatory requirements, it can be subject to:
- fines, injunctions, and civil penalties;
- recalls or seizures of products;
- total or partial suspensions of production; and
- criminal prosecutions.
Eclipse will be able to obtain FDA approval only for those products that are
proven safe and effective in clinical sites. The FDA has not approved Eclipse's
PTMR laser systems for any indication in the United States. There can be no
assurance regarding the clinical safety or efficacy of such systems.
Completing clinical trials to the point of submission to the FDA could:
- require substantial financial and management resources; and
- take several years.
Eclipse cannot determine if its PTMR laser systems will prove to be
safe or effective, or that its TMR laser systems will prove to be safe and
effective for any indications beyond those for which Eclipse has received FDA
approval. The business, financial condition, and results of operations of
Eclipse would be materially and adversely affected if its PTMR laser systems do
not prove to be safe and effective in clinical trials, or if its TMR laser
systems do not prove to be safe and effective for use with other indications.
Eclipse may suffer losses from product liability claims if its products cause
harm to patientS. Eclipse is exposed to:
- potential product liability claims; and
- product recalls.
These risks are inherent in the design, development, manufacture and
marketing of medical devices. The products of Eclipse are designed to be used in
life-threatening situations where there is a high risk of serious injury or
death and such companies could be subject to product liability claims if the use
of its TMR or PTMR laser systems is alleged to have caused adverse effects on a
patient or such products are believed to be defective.
Any regulatory clearance for commercial sale of these products will
not remove these risks. Any failure to comply with the FDA's GMP or other
regulations could have a material adverse effect on Eclipse's ability to defend
against product liability lawsuits. Although Eclipse has not experienced any
product liability claims to date, any such claims could have a material adverse
effect on its business, financial condition and results of operations.
Eclipse's insurance may be insufficient to cover product liability claims
against it. There can be no assurance that the product liability insurance
maintained by Eclipse will:
- be adequate for any future product liability problems; or
- that such insurance coverage will continue to be available on
commercially reasonable terms, or at all.
If Eclipse were held liable for a product liability claim or series
of claims in excess of its insurance coverage, such liability could have a
material and adverse effect on its business, financial condition and results of
operations.
Eclipse maintains insurance against product liability claims in the
amount of:
- $10 million per occurrence; and
- $10 million in the aggregate.
These coverage limits may not adequately protect Eclipse from
liabilities it might incur in connection with the development, manufacture and
sale of its products since:
- TMR technology is not well understood; and
- there is a lack of data regarding the clinical safety and efficacy
of PTMR laser systems.
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Eclipse may require increased product liability coverage as sales of
approved products increase and as additional products are commercialized.
Product liability insurance is expensive and in the future may not be available
on acceptable terms, if at all.
Eclipse depends heavily on certain key personnel. Eclipse's future business and
results of operations depend in significant part upon the continued
contributions of our key technical and senior management personnel. In
particular, Eclipse relies on Douglas Murphy-Chutorian, M.D., its Chairman of
the Board, Allen W. Hill, its President and Chief Executive Officer, and Richard
Powers, its Executive Vice President and Chief Financial Officer. Eclipse
maintains key person life insurance policy on Dr. Murphy-Chutorian in the amount
of $2 million in total and intends to maintain similar insurance in the future
for its key personnel.
Eclipse's future business and results of operations also depend in
significant part upon its ability to attract and retain additional qualified
management, manufacturing, technical, marketing and sales and support personnel
for its operations. If Eclipse loses a key employee or if a key employee fails
to perform in his or her current position, or if Eclipse is not able to attract
and retain skilled employees as needed, its business and results of operations
could be materially adversely affected.
Eclipse may engage in future acquisitions that distract its management, cause it
to incur debt, or dilute its shareholders. Eclipse may, from time to time,
acquire or invest in other complementary businesses, products or technologies.
While there are currently no commitments with respect to any particular
acquisition or investment, Eclipse's management frequently evaluates the
strategic opportunities available related to complementary businesses, products
or technologies. The process of integrating an acquired company's business into
Eclipse's operations may result in unforeseen operating difficulties and
expenditures and may absorb significant management attention that would
otherwise be available for the ongoing development of Eclipse's business.
Moreover, there can be no assurance that the anticipated benefits of any
acquisition or investment will be realized. Any future acquisitions or
investments by Eclipse could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities and amortization
expenses related to goodwill and other intangible assets, any of which could
materially adversely affect Eclipse's operating results and financial condition.
Eclipse may fail to comply with international regulatory requirements and could
be subject to regulatory delays, fines or other penalties. Regulatory
requirements in foreign countries for international sales of medical devices
often vary from country to country. The impact of the following factors would
have a material adverse effect on the business, financial condition and results
of operations of Eclipse:
- delays in receipt of, or failure to receive, foreign regulatory
approvals or clearances;
- the loss of previously obtained approvals or clearances; or
- the failure to comply with existing or future regulatory
requirements.
Eclipse's products will be subject to other regulatory requirements
in the European Union and other countries. Any enforcement action by
international regulatory authorities with respect to past or future regulatory
noncompliance could have a material adverse effect on the business, financial
condition and results of operations of Eclipse.
The time required to obtain approval for sale in foreign countries
may be longer or shorter than required for FDA approval, and the requirements
may differ. In addition, there may be foreign regulatory barriers other than
regulatory approval. Except as stated in the following sentence, the FDA must
approve exports of devices that require a PMA but are not yet approved
domestically. An unapproved device may be exported without prior FDA approval to
any member country of the European Union and the other "listed" countries,
including Australia, Canada, Israel, Japan, New Zealand, Switzerland and South
Africa:
- if the device is approved for sale by that country; or
- for investigational use in accordance with the laws of that country.
Eclipse received the CE Mark for its TMR laser system in December
1996 and for its PTMR laser system
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in July 1998. In the European Economic Area, Eclipse will be:
- subject to continued supervision;
- required to report any serious adverse incidents to the appropriate
authorities; and
- required to comply with additional national requirements that are
outside the scope of the Medical Device Directive.
Eclipse became ISO 9001 certified in May 1997. Eclipse may not be
able to:
- achieve or maintain the compliance required for CE marking on all or
any of its products; and
- produce its products profitably and in a timely manner while
complying with the requirements of the Medical Device Directive and
other regulatory requirements.
If Eclipse fails to comply with applicable regulatory requirements
it could face:
- fines, injunctions, civil penalties;
- recalls or seizures of products;
- total or partial suspensions of production;
- refusals by foreign governments to permit product sales; and
- criminal prosecution.
Furthermore, if existing regulations are changed or new regulations
or policies are adopted, Eclipse may:
- not be able to obtain, or affect the timing of, future regulatory
approvals or clearances;
- not be able to obtain necessary regulatory clearances or approvals
on a timely basis or at all; and
- be required to incur significant costs in obtaining or maintaining
such foreign regulatory approvals.
Eclipse sells its products internationally which subjects it to certain
significant risks of transacting business in foreign countries. The
international revenue of Eclipse is subject to the following risks:
- foreign currency fluctuations;
- economic or political instability;
- foreign tax laws;
- shipping delays;
- various tariffs and trade regulations;
- restrictions and foreign medical regulations;
- customs duties, export quotas or other trade restrictions; and
- difficulty in protecting intellectual property rights.
Any of these factors could have an adverse effect on international
sales revenues of Eclipse. In future quarters, international sales could become
a significant portion of the revenue of Eclipse.
Eclipse may not achieve wide acceptance of its products in foreign markets if it
fails to obtain third party reimbursement for the procedures performed with its
products. If Eclipse obtains the necessary foreign regulatory registrations or
approvals, market acceptance of Eclipse's products in international markets
would be dependent, in part, upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country. They include
both government sponsored health care and private insurance. Although Eclipse
expects to seek international reimbursement approvals, there can be no assurance
any such approvals will be obtained in a timely manner, if at all. Failure to
receive international reimbursement approvals could have an adverse effect on
market acceptance of TMR products in the international markets in which such
approvals are sought.
Eclipse may experience adverse effects on its business related to Year 2000
issues affecting its suppliers. Many currently installed computer systems and
software products experience functional difficulty distinguishing between
twenty-first century dates and twentieth century dates. This is commonly known
as the Year 2000 Problem. As a
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result, many companies' software and computer systems may need to be upgraded or
replaced in order to function properly in the future.
As the products that Eclipse itself supplies to its customers are
not dependent upon date data processing and do not have electrical ports for the
connection of other devices, Eclipse believes that these products are Year 2000
compliant.
Eclipse does not anticipate any material disruption in its
operations as a result of any internal or external Year 2000 compliance
problems. However, Eclipse expects to prepare for minor delays in the receipt of
materials and services as a result of third parties' failures to meet Year 2000
requirements. Eclipse cannot assure you that it will not experience unexpected
delays or problems as a result of Year 2000 problems.
Eclipse is also working with its suppliers to ensure that its
suppliers are Year 2000 compliant. If Eclipse is not able to procure adequate
supplies, it will not be able to manufacture and sell its products, which would
have a significant material adverse effect on its business and results of
operations. Eclipse believes that the foregoing describes its most reasonably
likely worst case Year 2000 scenario.
As a contingency plan, Eclipse intends to maintain higher inventory
levels at 1999 year end to mitigate any possible supplier delays. With respect
to compliance of the products Eclipse supplies to its customers, the efforts are
complete as Eclipse's products are not dependent upon date data processing and
the products do not have electrical ports for connection of other devices.
Eclipse has not found it necessary to delay or cancel any internal
services, programs, or projects as a result of its preparatory activities for
Year 2000 compliance. Eclipse does not anticipate any material disruption in its
operations as a result of any internal or external failures to be in Year 2000
compliance. However, Eclipse is prepared, as a worse-case scenario, for minor
delivery delays in the receipt of materials and services.
Eclipse expects that its Year 2000 compliance project will be
completed during the third quarter of fiscal 1999 and will not have a material
adverse effect on Eclipse's financial condition or overall trends in the results
of operations. However, there can be no assurance that unexpected delays or
problems, including the failure to ensure the Year 2000 compliance of systems,
services, or products supplied to Eclipse by a third party, will not have an
adverse effect on Eclipse, its financial performance, or the competitiveness or
customer acceptance of its products. Furthermore, Eclipse's current
understanding of expected costs is subject to change as the project progresses
and does not include the potential costs of internal software and hardware
replaced in the normal course of business.
The operating results of Eclipse are expected to fluctuate and quarter to
quarter comparisons of its results may not indicate future performance. The
operating results of Eclipse have fluctuated significantly from quarter to
quarter and are expected to fluctuate significantly from quarter to quarter due
to a number of events and factors, including:
- the timing and results of clinical trials;
- delays associated with the FDA and other regulatory approval
processes;
- the enactment of health care reform legislation and any changes in
third party reimbursement policies;
- the level of product demand and the timing of customer orders;
- changes in competitive pricing policies;
- the ability to develop, introduce and market new and enhanced
versions of products on a timely basis;
- deferrals in customer orders in anticipation of new or enhanced
products;
- product quality problems;
- personnel changes;
- changes in strategy; and
- the level of international sales.
Eclipse believes that quarter to quarter comparisons of its
operating results may not be a good indication of its future performance. It is
likely that the operating results of Eclipse for a future quarter will fall
below the expectations of public market analysts and investors. If this occurs,
the price of Eclipse's common stock may fall, perhaps substantially.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Eclipse has an investment portfolio of fixed income securities that
are classified as "available-for-sale securities". These securities are subject
to interest rate risk and will fall in value if market interest rates increase.
Eclipse attempts to limit this exposure by investing in securities that will
mature within 24 months.
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1996, prior to the merger with Eclipse, CardioGenesis initiated a
suit in the United States against PLC seeking a judgement that the
PLC patent is invalid and unenforceable. In 1997, PLC counterclaimed
in that suit alleging infringement by CardioGenesis of the PLC
patent. Also in 1997, PLC initiated suit in Germany against
CardioGenesis and CardioGenesis' former German sales agent alleging
infringement of a European counterpart to the PLC patent. In 1997,
CardioGenesis filed an Opposition in the European Patent Office to a
European counterpart to the PLC patent, seeking to have the European
patent declared invalid.
On January 5, 1999, before trial on the U.S. suit commenced
CardioGenesis and PLC settled all litigation between them, both in
the U.S. and in Germany, with respect to the PLC patent and the
European patents. Under the Settlement and License Agreement signed
by the parties CardioGenesis stipulated to the validity of the PLC
patents and PLC granted CardioGenesis a non-exclusive worldwide
license to the PLC patents. CardioGenesis agreed to pay PLC a
license fee, and minimum royalties, totaling $2.5 million over an
approximately forty-month period, with a running royalty credited
against the minimums.
The Settlement and License Agreement does not apply to any products
or technology that do not use the PLC patents, nor does the
agreement provide PLC any rights to any CardioGenesis intellectual
property. The Eclipse TMR products do not use the technology
associated with the PLC patents.
ITEM 2(d) CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with its initial public offering in 1996 Eclipse filed
a Registration Statement on Form S-1, SEC File No. 333-03770 (the
"Registration Statement"), which was declared effective by the
Commission on May 31, 1996. Eclipse registered 7,000,000 shares of
its Common Stock, no par value per share. The offering commenced on
May 31, 1996 and 6,400,000 shares were sold. The aggregate offering
price of the registered shares was $124,000,000. The managing
underwriters of the offering were PaineWebber Incorporated, Deutsche
Morgan Grenfell, Jefferies & Company Inc., Bear, Stearns & Company
Inc., Montgomery Securities and Piper Jaffray Inc. Eclipse incurred
the following expenses in connection with the offering:
Underwriting discounts and commissions: $10,013,000
Other expenses: $ 1,565,000
-----------
Total expenses: $11,578,000
===========
All of such expenses were payments to others.
The net offering proceeds to Eclipse after deducting the total
expenses above were approximately $112,422,000. From May 31, 1996 to
June 30, 1999, Eclipse used such net offering proceeds, in direct or
indirect payments to others, as follows:
Purchase and installment of machinery and equipment: $ 2,563,000
Working capital: $ 75,536,000
Investment in short-term, interest-bearing obligations: $ 30,238,000
Repayment of indebtedness: $ 2,077,000
------------
Total $110,414,000
============
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Each of such amounts is a reasonable estimate of the application of
the net offering proceeds. This use of proceeds does not represent a
material change in the use of proceeds described in the prospectus
of the Registration Statement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 30, 1999, the Company held its annual meeting of
shareholders. At that meeting, the following individuals were elected to serve
as directors until the next annual meeting of shareholders or until their
earliest resignation or removal :
Nominee For Withheld
- ------- ---------- --------
Douglas Murphy-Chutorian, M.D 24,787,070 88,730
Allen W. Hill 24,763,231 112,569
Jack M. Gill, Ph. D 24,767,489 108,311
Alan L. Kaganov, Sc. D 24,765,424 110,376
Robert C. Mortensen 24,767,349 108,451
Robert C. Strauss 24,766,849 108,951
Iain M. Watson 24,767,549 108,251
Also at that meeting, the following proposals were voted upon with
the number of votes cast for, against abstentions and broker non-votes as set
forth in the columns opposite the respective matters.
Broker
Proposal Number For Against Abstentions Non-Votes
- --------------- ---------- ---------- ----------- ---------
(2) Increase the number of shares of Common Stock reserved
for issuance under the Company's Stock Option Plan by
1,100,000 shares. 22,687,957 1,771,026 84,035 332,782
(3) Increase the number of shares of Common Stock reserved
for issuance under the Company's 1996 Employee Stock
Purchase Plan by 150,000 shares. 23,136,136 1,358,474 48,408 332,782
(4) Increase the number of shares of Common Stock reserved
for issuance under the Company's Director Stock Option
Plan by 125,000 shares. 22,686,573 1,810,271 46,224 332,732
(5) Ratify the selection of PricewaterhouseCoopers LLP as
independent accountants for the Company for the fiscal
year ending December 31, 1999. 24,814,723 19,944 41,133 0
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 27
b) Reports on Form 8-K
No reports on Form 8-K were filed by Eclipse during the three
month period ended June 30, 1999.
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECLIPSE SURGICAL TECHNOLOGIES, INC.
Registrant
Date: August 16, 1999 /s/ Allen W. Hill
---------------------------------------
Allen W. Hill
Chief Executive Officer and President
Date: August 16, 1999 /s/ Richard P. Powers
---------------------------------------
Richard P. Powers
Executive Vice President of Finance
and Administration
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 FINANCIAL DATA SCHEDULE