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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 December 31, 2000.
[ ] 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 94085
(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 February 12, 2001 there were 9,002,240 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)
Condensed Consolidated Balance Sheets as of December 31, 2000 and
June 30, 2000 ........................................................... 3
Condensed Consolidated Statements of Operations for the Three and Six Months
Ended December 31, 2000 and 1999 ........................................ 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 2000 and 1999 ........................................ 5
Notes to Condensed Consolidated Financial Statements .................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market
Risk .................................................................... 25
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ............................... 26
Item 4. Submission of Matters to a Vote of Security Holders...................... 26
Item 6. Exhibits and Reports on Form 8-K ........................................ 26
SIGNATURES .......................................................................... 27
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
CARDIAC PATHWAYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
December 31, June 30,
2000 2000 (1)
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 28,274 $ 8,488
Short-term investments 1,492 4,137
Accounts receivable, net of allowance for doubtful accounts
of $177 at December 31, 2000 and $139 at June 30, 2000 2,332 1,271
Inventories 1,825 2,095
Prepaid expenses 290 227
Other current assets 71 222
--------- ---------
Total current assets 34,284 16,440
Property and equipment, net 4,319 3,506
Notes receivable from related parties 100 100
Intangible assets, net of accumulated amortization of
$567 at December 31, 2000 and $367 at June 30, 2000 1,433 1,633
Deposits and other assets 81 86
--------- ---------
$ 40,217 $ 21,765
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 944 $ 980
Accrued compensation and related benefits 1,542 1,196
Accrued clinical expenses 319 527
Accrued stock issuance cost 2,047 --
Other accrued expenses 1,143 907
Current obligations under capital leases 191 258
Deferred income-current portion 300 400
--------- ---------
Total current liabilities 6,486 4,268
Long-term obligations under capital leases 21 85
Deferred income 1,881 2,031
Accrued Series B Preferred dividends 4,288 2,784
Redeemable Convertible Preferred Stock, $.001 par value
5,000,000 shares authorized and 27,250 issued and outstanding at
December 31, 2000 and at June 30, 2000; liquidation preference of
$31,538 at December 31, 2000 26,828 26,828
Receivable from stockholder (250) (250)
Stockholders' equity (deficit):
Common stock, $.001 par value; 30,000,000 shares authorized; 9,002,240
shares issued and outstanding at December 31, 2000 and 3,078,486
issued and outstanding at June 30, 2000 9 3
Additional paid-in capital 103,951 82,439
Receivable from stockholders (72) (72)
Accumulated deficit (102,916) (96,351)
--------- ---------
Total stockholders' equity (deficit) 972 (13,981)
--------- ---------
$ 40,217 $ 21,765
========= =========
(1) Derived from the Company's audited consolidated balance sheet as of June 30,
2000, as restated.
See notes to condensed consolidated financial statements
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CARDIAC PATHWAYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended Six months ended
December 31, December 31,
------------------------ ------------------------
2000 1999 2000 1999
------- ------- ------- -------
Net sales $ 3,242 $ 1,863 $ 6,284 $ 3,244
Cost of goods sold 2,586 1,535 5,074 2,927
------- ------- ------- -------
Gross margin 656 328 1,210 317
Operating expenses:
Research and development 1,141 1,724 2,142 3,652
Selling, general and administrative 3,346 2,067 5,921 3,695
------- ------- ------- -------
Total operating expenses 4,487 3,791 8,063 7,347
------- ------- ------- -------
Loss from operations (3,831) (3,463) (6,853) (7,030)
Other income (expense):
Interest income 153 341 319 518
Interest expense (6) (13) (14) (48)
Other, net (14) 6 (17) 126
------- ------- ------- -------
Total other income, net 133 334 288 596
------- ------- ------- -------
Net loss (3,698) (3,129) (6,565) (6,434)
Preferred stock dividend 749 880 1,506 1,540
Beneficial conversion feature related to the
issuance of the Series B preferred stock -- -- -- 960
------- ------- ------- -------
Net loss attributable to common stockholders $(4,447) $(4,009) $(8,071) $(8,934)
======= ======= ======= =======
Net loss per share - basic and diluted ($ 1.29) ($ 1.99) ($ 2.47) ($ 4.44)
======= ======= ======= =======
Shares used in computing
net loss per share - basic and diluted 3,451 2,019 3,273 2,014
======= ======= ======= =======
See notes to condensed consolidated financial statements
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CARDIAC PATHWAYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six months ended
December 31,
-------- --------
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,565) $ (6,434)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 833 687
Amortization of deferred compensation -- 84
Changes in operating assets and liabilities:
Accounts receivable (1,061) (115)
Inventories 270 186
Prepaid expenses (63) 108
Other current assets 151 (176)
Accounts payable (36) (72)
Accrued compensation and related benefits 346 (417)
Accrued clinical expenses (208) (170)
Other accrued expenses 2,336 722
Deferred income (250) (150)
-------- --------
Net cash used in operating activities (4,247) (5,747)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments -- (11,120)
Maturities of short-term investments 2,645 --
Purchases of property and equipment, net (1,446) (426)
Purchase of rights to certain patents -- (2,000)
Decrease (increase) in deposits and other assets 5 (21)
-------- --------
Net cash (provided by) used in investing activities 1,204 (13,567)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations (131) (201)
Proceeds from issuance of preferred stock, net of issuance cost -- 28,500
Proceeds from issuance of common stock, net of issuance cost 22,960 31
-------- --------
Net cash provided by financing activities 22,829 28,330
-------- --------
Net increase in cash and cash equivalents 19,786 9,016
Cash and cash equivalents at beginning of period 8,488 2,340
-------- --------
Cash and cash equivalents at end of period $ 28,274 $ 11,356
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash conversion of bridge loan financing to preferred stock $ -- $ 3,000
======== ========
See notes to condensed consolidated financial statements
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CARDIAC PATHWAYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed 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 December 31, 2000 and June 30, 2000 balance sheets reflect the
discount or beneficial conversion feature present in the convertible securities.
The discount was being recognized as a return to the preferred stockholders
(similar to a dividend) over the minimum period in which the preferred
stockholders can realize a return, immediately for the Series B Convertible
Preferred stockholders. The discount was accreted to additional paid in capital
in the quarter ended September 30, 1999 balance sheet. Each share of Series B
Convertible Preferred Stock is initially convertible into 218 shares of the
Company's Common Stock, at the option of the holder. Each share of Series B
Convertible Preferred Stock shall automatically be converted into the Company's
common stock upon the election of a majority of the holders of the Series B
Convertible Preferred Stock. Each share of Series B Convertible Preferred Stock
shall entitle the holder thereof to that number of votes on all matters
submitted to a vote of the stockholders of the Company equal to the number of
shares of common stock into which the Series B Convertible Preferred Stock can
be converted.
The Series B Convertible Preferred Stock Purchase Agreement specifies
that, when, as and if dividends are declared, the holder of Series B Convertible
Preferred Stock are entitled to a cumulative dividend equal to 11% of the
purchase price paid for each share of Series B Convertible Preferred Stock, per
share, per year. At any time after May 31, 2004, the cumulative dividend will
increase by 6 percentage points at the beginning of each year if the Company
elects not to redeem the stock after a redemption request by the holders of a
majority of the then outstanding shares of Series B Convertible Preferred Stock,
voting as a single class. The Series B Convertible Preferred Stock has a
liquidation preference equal to the initial purchase price plus any accrued and
unpaid dividends upon the occurrence of a liquidation, a merger or the sale of
all or substantially all of the Company's stock or assets. As a result of the
liquidation preference, in the event of a liquidation, merger or the sale of
substantially all of the Company's stock or assets, the holders of Series B
Convertible Preferred Stock will receive their original purchase price plus any
accrued and unpaid dividends prior to any distribution to the holders of common
stock. After such payment, any remaining proceeds would be distributed ratably
among the holders of Series B Convertible Preferred Stock and holders of common
stock. As of December 31, 2000, the liquidation preference and redemption value
of the outstanding 27,250 shares of Series B Convertible Preferred Stock is
$31.5 million, which includes the original investment plus the accrued but
unpaid dividends.
In February 2001, the Company reclassified the Series B Convertible
Preferred Stock to exclude it from total stockholder's equity due to the nature
of the redemption features of the stock, and restated its condensed
consolidated balance sheet at June 30, 2000.
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The operating results for the three months and six months ended December
31, 2000 are not necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 2001. The accompanying condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Cardiac Pathways
Corporation (the "Company") Annual Report on Form 10-K/A for the fiscal year
ended June 30, 2000.
2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
other liquid investments are classified as short-term investments. At December
31, 2000, all short-term investments were classified as available-for-sale.
Available-for-sale securities are carried at fair market value with unrealized
gains and losses, net of tax, 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.
The following is a summary of available-for-sale securities at cost, which
approximates fair value:
DECEMBER 31, JUNE 30,
DESCRIPTION 2000 2000
- ----------- ----------- --------
(Dollar amounts in thousands)
Available-for-sale:
U.S. government agency $ -- $ 1,000
Other government agency -- 1,000
Auction rate preferred stock -- 2,000
U.S. corporate obligations 28,874 8,119
------- -------
12,119
Amounts classified as cash equivalents 27,382 7,982
------- -------
Amounts included in short-term investments $ 1,492 $ 4,137
======= =======
There were no material realized or unrealized gains or losses as of or
for the three-month and six-month periods ending December 31, 2000 and 1999. The
cost of securities sold is based on the specific identification method.
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3. CONDENSED CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
DECEMBER 31, JUNE 30,
2000 2000
------------ --------
(Dollar amounts in thousands)
Inventories:
Raw materials $ 936 $1,057
Work-in-process 285 204
Finished goods 604 834
------ ------
$1,825 $2,095
====== ======
DECEMBER 31, JUNE 30,
2000 2000
----------- -------
(Dollar amounts in thousands)
Property and equipment:
Equipment $10,152 $ 8,320
Leasehold improvements 422 422
Equipment-in-process 518 904
------- -------
11,092 9,646
Less accumulated depreciation and
amortization 6,773 6,140
------- -------
$ 4,319 $ 3,506
======= =======
4. RECENT PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities", as amended by FAS 137, which is required to be adopted in years
beginning after June 15, 2000. The Company has not in the past and does not
anticipate in the future using derivative instruments, and the Company does not
expect that the adoption of FAS 133 will have a significant impact on its
financial condition or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") that must be adopted in the quarter ended June 30, 2001. SAB 101
summarizes certain areas of the Staff's views in applying generally accepted
accounting principles to revenue in financial statements. Although the Company
believes that its current revenue recognition policies comply with SAB 101,
additional guidance was issued by the SEC staff and the Company is in the
process of evaluating the effect of adopting SAB 101. The Company does not
expect that the adoption of SAB 101 will have a significant impact on its
financial condition or results of operations.
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5. STOCKHOLDER'S EQUITY
On December 26, 2000, Cardiac Pathways issued and sold 5.9 million
shares of common stock at a price of $4.25 per share for aggregate proceeds, net
of issuance cost, of $22.8 million.
The Company intends to use the net proceeds of this financing to expand
sales, marketing and manufacturing capacity for its key product platforms, the
Realtime Position Management (RPM) Tracking System and the Chilli(R) Cooled
Ablation Catheter, and for working capital and general corporate purposes. The
shares of common stock sold in the financing have not been registered under the
Securities Act of 1933, as amended, and may not be sold in the United States
absent registration, or an applicable exemption from registration. Under the
terms of the financing, the Company has filed a registration statement for the
purpose of registering these shares for resale under the Securities Act of 1933,
as amended.
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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 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 the
expectations of operating losses, the statements in the second paragraph of
"Overview" relating to the range of clinical utility for the RPM Tracking System
and the potential reduction in procedure times, the statements in the third
paragraph of "Overview" relating to the manufacturing, marketing and
distribution of the Company's products, the statements in the last sentence of
"Cost of Goods Sold" relating to expectations for gross margins, the statements
in the last sentence of the first paragraph of "Impact of Adoption of New
Accounting Standards" regarding FAS 133, the statements in the last sentence of
the second paragraph of "Impact of Adoption of New Accounting Standards"
regarding SAB 101, the statements in the first paragraph of "Liquidity and
Capital Resources" regarding the Company's expected liquidity and capital needs,
the statements in the last sentence of the third paragraph of "Liquidity and
Capital Resources" regarding the Company's expected capital expenditures, the
statements in the section of "Factors That May Impact Future Operations"
entitled "Limited Operating History, History of Losses and Expectations of
Future Losses" relating to expectations of operating losses and the statement in
the third paragraph in the section of "Factors That May Impact Future
Operations" entitled "Employees" relating to the Company's need to expand its
operations and hire new personnel.
OVERVIEW AND CURRENT EVENTS
The Company is continuing its shift from a broad-based research &
development (R&D) and clinical development oriented company to one focused on
expansion of marketing, sales, distribution, customer support and manufacturing
capacity. The Company has experienced significant operating losses since
inception and as of December 31, 2000 had an accumulated deficit of
approximately $102.9 million. The Company expects to continue operating at a
loss at least through the end of fiscal year 2002 as it continues to expend
substantial funds to establish commercial-scale manufacturing capabilities and
to expand its sales and marketing activities. In December 2000, the Company
completed the sale and issuance of 5.9 million shares of common stock at a
price of $4.25 per share for aggregate proceeds, net of issuance cost, of
$22.8 million. The company intends to use the net proceeds of this financing to
expand sales, marketing and manufacturing capacity for its key product
platforms, the RPM Tracking System and the Chilli Cooled Ablation Catheter, and
for working capital and general corporate purposes. The shares of common stock
sold in the financing have not been registered under the Securities Act of 1933,
as amended. Under the terms of the financing, the Company has filed a
registration statement for the purpose of registering these shares for resale
under the Securities Act of 1933, as amended.
The RPM Tracking System and Chilli Cooled Ablation Catheter with RPM
tracking were introduced to the U.S. and European markets in May and June of
2000, respectively. The proprietary technology developed by the Company can be
used in most diagnostic electrophysiology procedures for real-time visualization
of catheters utilizing ultra-sound technology. The RPM Tracking System is
expected to assist physicians in precisely manipulating catheters within the
heart during procedures, offering the potential for reductions in procedure
times and improved economic benefit to the hospital and physician. The RPM
Tracking System and Chilli Cooled Ablation Catheter with tracking have received
FDA clearance in the U.S. and CE Mark approval in Europe.
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During the second quarter of fiscal 2001, the Company introduced version
3.1 software for its RPM Tracking System. The software integrates mapping of the
heart's electrical signals and navigation tools that are designed to enable
electrophysiologists to more easily identify and ablate abnormal electrical
impulses in a patient's heart which are responsible for an arrhythmia. The
software, already in use at selected centers in the United States and Europe, is
an enhancement to the company's existing RPM Tracking System. In the new 3.1
software version, non-fluoroscopic catheter navigation has been enhanced with
three-dimensional (3-D) mapping capability applied to a 3-D heart model. The
system uses ultrasound ranging technology to accurately locate catheter
positions within the heart, render 3-D graphical representations of the
catheters and of their positions with respect to the heart wall, and view
electrical sensing data (mapping) of specific electrode positions. These
features enable the physician to more easily identify locations in the
endocardium where ablation energy can be applied to treat the arrhythmia.
The Company's increase in revenues for the quarter ended December 31,
2000 as compared to the quarter ended December 31, 1999 was driven by continued
volume growth of sales of the Chilli Cooled Ablation Catheter in the U.S,
placements of the RPM Tracking Systems and associated RPM catheter set revenues.
The Company is focusing its resources on its two key platforms; the Chilli
Cooled Ablation Catheter and the RPM Tracking System.
For the Company's products that have recently obtained FDA clearance or
approval, there can be no assurance that any such products will be successfully
commercialized or that the Company will achieve significant revenues from either
domestic or international sales. Although the FDA granted 510k clearance for the
RPM Tracking System and PMA approval for the Chilli Cooled Ablation Catheters
with RPM tracking, the Company has limited experience in manufacturing,
marketing or selling these products in commercial quantities. In order to
successfully implement its business plan, the Company must manufacture and sell
the RPM and Chilli Cooled Ablation Catheters in commercial quantities and the
Company 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. The Company intends to market its products primarily
through a direct sales force in the United States and indirect sales channels
internationally. Establishing a marketing and sales capability sufficient to
support sales in commercial quantities will require significant management and
financial resources. See "-- Factors That May Impact Future Operations."
Due to the nature of the redemption features of the Company's Series B
Convertible Preferred Stock, the accompanying Condensed Consolidated Balance
Sheets as of December 31, 2000 and June 30, 2000 reflect a change in
presentation to exclude the Preferred Stock from Stockholders' Equity (Deficit).
In addition, the Company has amended its Quarterly Report on Form 10-Q for the
period ended September 30, 2000 and its Annual Report on Form 10-K for the year
ended June 30, 2000 to restate the consolidated balance sheets appearing therein
to exclude the Series B Preferred Stock from Stockholders' Equity (Deficit). The
Company is in discussions with the holders of the Series B Preferred Stock to
amend the terms of the Series B Preferred Stock in a manner that would allow the
Company to include the Series B Preferred Stock within the Stockholders' Equity
(Deficit) section of future consolidated balance sheets.
RESULTS OF OPERATIONS
Net Sales. The Company's net sales increased 74% to $3.2 million for the
three months ended December 31, 2000 compared to $1.9 million for the three
months ended December 31, 1999. For the six months ended December 31, 2000, the
Company had net sales of $6.3 million compared to $3.2 million for the six
months ended December 31, 1999. The increase in net sales for the three and six
months ended December 31, 2000 was driven by continued volume growth of the
Chilli Cooled Ablation Catheter in the U.S, placements of the RPM Tracking
Systems and associated catheter revenues in the U.S. and Europe. Increases in
sales of all catheters for the three and six months ended December 31, 2000
compared to the three and six months ended December 31, 1999 were primarily
related to unit volume increases rather than price changes.
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In December 1995, the Company received $3.0 million pursuant to a
royalty agreement with Arrow International Inc. ("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 or, at a minimum,
ratably over the period for which the related technology patents expire. $75,000
of royalty income related to the Arrow agreement was recognized for the 3 months
ended December 31, 2000 and 1999. A total of $150,000 of royalty income related
to the Arrow agreement was recognized for both the six months ended December 31,
2000 and 1999.
Cost of Goods Sold. Cost of goods sold primarily includes raw materials
costs, catheter fabrication costs, system assembly costs and test costs. Cost of
goods sold was $2.6 million and $1.5 million for the three months ended December
31, 2000 and 1999, respectively. For the three months ended December 31, 2000,
the Company had a gross margin of $656,000, or 20% of revenue, compared to a
gross margin of $328,000 in the year earlier period. For the six months ended
December 31, 2000, the Company had a gross margin of $1.2 million, or 19% of net
sales, compared to a gross margin of $317,000, or 10% of net sales, for the six
months ended December 31, 1999. The improvement in the gross margins for the
three and six months ended December 31, 2000 compared to the same periods in the
prior year reflects the benefit of increasing product volume, process yield
improvements and material cost reduction programs. The company is continuing to
implement manufacturing process improvements, including continued enhancements
to the assembly training program, which together with increases in product
volume, process yield improvements and material cost reduction programs, are
expected to have positive effects on gross margins.
Research and Development. Research and development expenses include
costs associated with product research, clinical trials, prototype development,
design and testing, and costs associated with obtaining regulatory approvals.
Research and development expenses decreased 34% to $1.1 million for the three
months ended December 31, 2000 from $1.7 million for the three months ended
December 31, 1999. Research and development expenses were $2.1 million for the
six months ended December 31, 2000 compared to $3.7 million for the six months
ended December 31, 1999. The decrease in research and development expenses for
both periods was due primarily to the allocation of a greater share of facility
costs to manufacturing and the continued refocusing of research and development
resources on RPM and Chilli/7 French catheter development and product delivery
initiatives.
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
and costs of trade shows. Selling, general and administrative expenses increased
to $3.3 million for the three months ended December 31, 2000 from $2.1 million
for the three months ended December 31 1999. Selling, general, and
administrative expenses were $5.9 million for the six months ending December 31,
2000 compared to $3.7 million for the six months ended December 31, 1999.
Approximately $500,000 of non-recurring expenditures were incurred during the
three months ended December 31, 2000 related to severance and employee
relocation costs. Additional expense growth for the three and six months ended
December 31, 2000 as compared to the three months and six ended December 31,
1999 resulted primarily from increased marketing and sales infrastructure
supporting the North American and European markets.
Other Income (Expense), Net. Net other income was $133,000 for the
three months ended December 31, 2000, compared to $334,000 for the three
months ended December 31, 1999. Net other income was $288,000 for the six
months ended December 31, 2000 compared to $596,000 for the six months
ended December 31, 1999. Other income consists primarily of interest income
earned on cash balances for the respective periods.
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Net Loss. The net loss attributable to common stockholders for the three
months ended December 31, 2000 was $4.4 million or $1.29 per share compared to a
net loss of $4.0 million or $1.99 for the three months ended December 31, 1999.
The net loss attributable to common stockholders for the six months ended
December 31, 2000 was $8.1 million or $2.47 per share, compared to a net loss
attributable to common stockholders of $8.9 million, or $4.44 per share for the
six months ended December 31, 1999. The net loss attributable to common
stockholders for the three months ended December 31, 2000 and 1999, and the six
months ended December 31, 2000 include the accrued Series B Preferred Stock
dividend. The net loss attributable to common stockholders for the six months
ended December 31, 1999 include the accrued Series B Preferred Stock dividend
and beneficial conversion feature related to the issuance of the Series B
Preferred Stock.
Impact of Adoption of New Accounting Standards.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted in years beginning after June 15,
2000. The Company has not in the past used, and does not anticipate in the
future using, derivative instruments, and the Company does not expect that the
adoption of FAS 133 will have a significant impact on its financial condition or
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") that must be adopted in the quarter ended June 30, 2001. SAB 101
summarizes certain areas of the Staff's views in applying generally accepted
accounting principles to revenue in financial statements. Although the Company
believes that its current revenue recognition policies comply with SAB 101,
additional guidance was issued by the SEC staff and the Company is in the
process of evaluating the effect of adopting SAB 101. The Company does not
expect that the adoption of SAB 101 will have a significant impact on its
financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company closed its initial public offering in June 1996 and raised
net proceeds of $43.1 million. In July 1999, the Company raised net proceeds of
$31.5 million through a Series B Convertible Preferred Stock financing. In
December 2000, the Company raised net proceeds of $22.8 million through the
issuance and sale of common stock through a private placement. As of December
31, 2000, the Company had $29.8 million in cash, cash equivalents and short-term
investments. The Company believes that current cash and investment balances are
sufficient to fund operations for at least the next twelve months.
Net cash used in operating activities was $4.2 million and $5.7 million
for the six months ended December 31, 2000 and 1999, respectively. For each of
these periods, the net cash used in operating activities resulted primarily from
net losses. Net cash generated in investing activities was $1.2 million
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for the six months ended December 31, 2000 compared to a use of cash for
investing activities of $13.6 million for the same period in 1999. For the six
months ended December 31, 2000, net cash provided by investing activities
resulted primarily from maturity of short-term investments offset in part by the
purchases of property and equipment. Net cash provided by financing activities
was $22.8 million and $28.3 million for the six months ended December 31, 2000
and 1999, respectively.
As of the end of December 31, 2000, the Company had capital equipment of
approximately $11.1 million, less accumulated depreciation and amortization of
approximately $6.8 million, to support its product development, manufacturing
and administrative activities. A significant portion of the Company's capital
expenditures resulted from the building and placements of RF Generators and RPM
Systems in the U.S. The Company expects capital expenditures to increase over
the next several years as it builds and places systems and acquires equipment to
support manufacturing and development activities.
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 December 31, 2000, the Company had an accumulated deficit of
$102.9 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 fiscal 2002 as it continues to expend funds to conduct its
research and development activities, establish commercial-scale manufacturing
capabilities and expand its sales and marketing activities. There can be no
assurance that any of the Company's products for diagnosis and treatment of
ventricular tachycardia and other arrhythmias, particularly the RPM Tracking
System or Chilli Cooled Ablation Catheter, 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 scale-up of manufacturing abilities and the expansion of sales
and marketing activities and competition.
No Assurance that Company's Products will Prove to be Safe and Effective
There can be no assurance that the Company's current or future 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. Furthermore, there can be no
assurance that the Company will be successful in perfecting the design of the
RPM Tracking System. With respect to the Chilli Cooled Ablation System, because
ablation treatment of cardiac arrhythmias is relatively new, 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 and
other tachyarrhythmias will not be known for several years
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No Existing Market
The Company's future success will depend upon the successful
commercialization of the Chilli Cooled Ablation Catheter and RPM Tracking
System. These products have only recently received FDA approval and clearance to
be commercialized in the United States for the treatment of certain forms of
cardiac tachyarrhythmias. The Company has to date demonstrated only limited
ability to commercialize these new products. There can be no assurance that
these products will gain any significant degree of market acceptance among
physicians, patients, and health care payors. The Company believes that
physicians' acceptance of procedures using the Company's RPM Tracking System
will be essential for market acceptance of such system. Even though the clinical
efficacy of the system has been established, electrophysiologists, cardiologists
and other physicians may elect not to recommend the use of the RPM Tracking
System for any number of reasons.
There can be no assurance that this system will be successfully
commercialized for the approved product set in the United States and Europe.
There can be no assurance of the ability to obtain regulatory approval in any
market where the Chilli Cooled Ablation Catheter and RPM Tracking System has not
yet received approval. Currently, the Chilli Cooled Ablation Catheter and RPM
Tracking System have been submitted for regulatory approval in Japan. 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 the system will require training of electrophysiologists, and the time
required to complete such training could adversely affect market acceptance.
Failure of the 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 RPM Tracking System achieves market
acceptance, the Company will be required to significantly ramp manufacturing
operations to produce sufficient quantities of the product to satisfy customer
demand. Any failure to manufacture the RPM Tracking System in quantities
sufficient to satisfy demand will materially adversely affect the Company's
business, financial condition and results of operations.
Marketing and Distribution
Establishing a marketing and sales capability sufficient to support
planned sales growth will require substantial efforts and significant management
and financial resources. There can be no assurance that the Company will be able
to continue to expand its marketing staff or sales force, that the establishment
of such a marketing staff or sales force will be cost-effective or that the
Company's sales and marketing efforts will be successful. There can be no
assurance that the Company will be able to maintain or enter into agreements
with existing or new distributors, 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.
The Company currently sells its Chilli Cooled Ablation Catheters,
Radii-T mapping and ablation catheters, Trio/Ensemble diagnostic catheters and
RPM Tracking System Products through distributors in certain international
markets. All sales of the Company's products to date have been denominated in
U.S. dollars. In addition, the Company plans to market its other products in
international markets, subject to receipt of required regulatory approvals.
Changes in overseas economic conditions, currency exchange rates, foreign tax
laws, or tariffs or other trade regulations could have a material adverse effect
on the Company's ability to market its products internationally and therefore on
its business, financial condition and results of operations.
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We Rely on Major Distributors
The Company currently relies upon international distributors of
specialty cardiovascular products to market and sell its products. A large
percentage of the Company's revenues are derived from sales to its Japanese
distributor, Japan Lifeline. Sales to Japan Lifeline accounted for 49%, 52% and
80%, of the Company's net sales in fiscal 2000, 1999 and 1998, respectively.
International sales accounted for 67%, 78% and 87% of the Company's net sales in
fiscal 2000, 1999 and 1998, respectively. In fiscal 2001, the Company
anticipates that Japan Lifeline will continue to account for a significant
percentage of the Company's net sales. Sales to Japan Lifeline accounted for 34%
of the Company's net sales for the six months ended December 31, 2001. The
Company also relies on three distributors in Europe for a significant portion of
its revenues. Ela Medical S.A. ("Ela") covers the territory of France, Italy,
Greece, Turkey, Israel, Belgium, and Switzerland. Curative EP ("Curative") is
the Company's distributor in Germany, while Izasa S.A. ("Izasa") distributes for
the Company in Spain, Canary Islands and Portugal. The distributor agreements
for Japan Lifeline, covering Japan, expires in May 2001. The Ela distributor
agreement expires in June 2003. The distributor agreements for Curative and
Izasa both expire in June 2002. If the Company's sales to any of its
international distributors decline, the Company would experience a material
decline in revenues. Even if the Company is successful in selling its products
through new international distributors, the rate of growth of the Company's net
sales could be materially and adversely effected if its current international
distributors do not continue to sell a substantial number of the Company's
products. If the Company's sales to its current international distributors
decline, the Company cannot be certain that it will be able to attract
additional distributors that can market its products effectively or can provide
timely and cost-effective customer support and service. None of the Company's
international distributors are obligated to sell the Company's products after
its agreement with the Company has expired. Further, the Company cannot be
certain that its current international distributors will continue to represent
its products or that they will continue to devote a sufficient amount of effort
and resources to selling the Company's products.
Strategic Relationships
The Company intends to pursue strategic relationships with corporations
and research institutions with respect to the research, development,
international regulatory approval, manufacturing and marketing of certain of its
products. There can be no assurance that the Company will be successful in
establishing or maintaining any such relationships or that any such relationship
will be successful.
Manufacturing
A number of 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. For some
components, there is currently a long lead-time between purchases and the
receipt of shipments. For those components from a single source, the 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 RPM Tracking System
and other diagnostic and ablation catheters and therefore on its business,
financial condition and marketing efforts.
The Company has limited 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. The
Company needs to expend significant capital resources and develop manufacturing
expertise to establish large scale manufacturing capabilities. Manufacturers
often encounter difficulties in scaling up
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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, 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 QSR
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
ISO9001/EN46001 standards in order to produce products for sale in Europe. Any
failure of the Company to comply with QSR or ISO9001/EN46001 standards may
result in the Company being required to take corrective actions, such as
modification of its policies and procedures. The Company has been granted by the
State of California the required license to manufacture medical devices. 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 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, modify, 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.
The Company currently holds issued and allowed patents and has pending
patents and applications covering a number of fundamental aspects of the
Company's Chilli Cooled Ablation System, RPM Tracking System and other products.
The Company owns 65 United States issued patents and 4 foreign issued patents.
The Company owns exclusive field-of-use license on 26 United States issued
patents. In addition, the Company has 6 United States pending patent
applications, of which two are licensed. The Company has also filed or licensed
22 corresponding foreign patent applications that are currently pending in
Europe and/or Japan. Four of the pending foreign patent applications are Patent
Cooperation Treaty ("PCT") applications, with Europe and Japan as designated
countries for filing at the national phase. One of the PCT applications is
licensed. The Company's 65 United States patents expire at
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various dates ranging from 2012 to 2020 and the 4 foreign issue patents expire
at various dates ranging from 2012 to 2015. The exclusive field of use license
of 26 United States issued patents expires at various dates ranging from 2013 to
2020.
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 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 parties' patents or that a court would find
that such patents are either not infringed by the Company's enhancements or that
the Company's patents 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 other
arrythmias, including ablation systems using ultrasound, microwave, laser and
cryoablation technologies and mapping systems using contact mapping,
single-point spatial 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, including Boston
Scientific Corporation, C.R. Bard, Inc., Johnson and Johnson, St. Jude Medical,
Medtronic, Inc. and Endocardial Solutions, Inc. Many competitors have
substantially greater financial and other resources than the Company, including
larger research and development staffs, more experience, 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
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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 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, pre-clinical 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 PMA clearance or PMA approval for
devices, withdrawal of marketing authorization, 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, a manufacturer
must generally obtain marketing clearance through a premarket notification under
Section 510(k) of the FDC Act or an approval of a PMA application under Section
515 of the FDC Act. 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 Company will be required to make a new 510(k) submission for any
device that is cleared through the 510(k) process if the Company modifies or
enhances the device in a manner that could significantly affect safety or
effectiveness, or if those changes constitute a major modification in the
intended use of the 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. There can be no assurance that the FDA will
act favorably or quickly on any of the Company's PMA applications. 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
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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.
International
The European Union has promulgated rules which require that medical
products distributed after June 14, 1998 bear the CE mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. Quality system certification is
one of the CE mark requirements. The Company has received
ISO9001/EN46001 certification by its ISO Certification Registrar, 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. In July 1998, the Company received the right to affix the
CE mark to its Trio/Ensemble catheters. In April 2000, the Company received CE
mark certification for the RPM tracking system, and for its Chilli Cooled
Ablation Catheters incorporating Real-time Position Management navigation
technology. While the Company intends to satisfy the requisite policies and
procedures that will permit it to receive the CE Mark Certification for other
products, 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 European Union.
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 RPM Tracking System products
are currently undergoing the process and clinical trials necessary to obtain
regulatory approvals in Japan.
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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. Third party reimbursement is
generally provided on the basis of the procedure's DRG code as established by
the HCFA. The failure of the procedures in which the Company's products are used
or an insufficient level of reimbursements for such procedures would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, medical equipment reimbursements have been
mandated by statute to be reduced in the past, and there can be no assurance
that any such reimbursements with respect to the Company's products will be
adequate or provided at all. 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.
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 Company will
obtain reimbursement in any country within 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 procedures using the Company's products.
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Product Liability and Insurance
The development, manufacture and sale of medical products entail
significant risk of product liability claims and product failure claims. The
Company has only limited commercial sales to date 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 of its
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.
We Rely on a Continuous Power Supply to Conduct Our Operations, and
California's Current Energy Crisis Could Disrupt Our Operations and Increase Our
Expenses
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout California. We currently do not have
backup generators or alternate sources of power in the event of a blackout, and
our current insurance does not provide coverage for any damages we or our
customers may suffer as a result of any interruptions in our power supply. If
blackouts interrupt our power supply, we would be temporarily unable to continue
operations at our facilities. Any such interruption in our ability to continue
operations at our facilities could damage our reputation, harm our ability to
retain existing customers and to obtain new customers, and could result in lost
revenue, any of which could substantially harm our business 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, 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.
The Company's management has recently gone through a significant
restructuring. The Company's new President and Chief Executive Officer, Thomas
M. Prescott, joined the Company in May 1999. In addition, the Company's Chief
Financial Officer, Vice President, Operations and Vice President, Sales each
joined the Company in January 2000. The Company also hired a new Vice President
of Human Resources who joined the Company in July 2000 and a new Vice President,
Operations who joined us in December 2000. There can be no assurance that these
newly hired officers of the Company will be able to operate effectively with
that portion of the management team that was retained.
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In order to manufacture and market its products in commercial
quantities, the Company believes that it will be required to expand its
operations, particularly in the areas of manufacturing and sales and marketing
and, in connection therewith, to have new personnel to work in these areas.
There can be no assurance that the Company's officers and its sales and
marketing personnel 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. 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.
Potential Volatility of Stock Price
The market price of shares of Common Stock, like that of the common
stock of many medical product and 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, proportion of ownership between
common stockholders and Series B Convertible Preferred stockholders,
announcements of technological innovations or new commercial products by the
Company 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. 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.
Significant Rights attaching to Series B Convertible Preferred Stock
The Company has 27,250 shares of Series B Convertible Preferred Stock
outstanding which are convertible, at the option of the holder, into 5.95
million shares of the Company's common stock. The holders of Series B
Convertible Preferred Stock are entitled to significant rights, preferences and
privileges over holders of common stock including the right to elect three of
five directors to the board of directors of the Company, to a preferential
cumulative dividend, to certain redemption rights and to a substantial
liquidation payment preference over the Company's common stock which is also
payable upon any transaction or series of transactions (including, without
limitation, any merger, reorganization or consolidation) involving a transfer of
50% or more of the outstanding voting power of the Company. The holders of
Series B Convertible Preferred Stock are also entitled to certain registration
rights and
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enjoy certain protective rights in that their consent is required to effect
certain corporate transactions including, but not limited to, amending the
Company's certificate of incorporation or by-laws, issuing common or preferred
stock, declaring dividends or selling all or substantially all of the Company's
stock or assets. It is likely that the preferences and rights enjoyed by the
holders of Series B Convertible Preferred Stock has a negative impact the market
price of the common stock of the Company. Also, if these holders, by converting
their Series B Convertible Preferred Stock into common stock and then exercising
their registration rights, cause a large number of securities to be registered
and sold in the public market, such sales could materially and adversely affect
the market price for the Company's common stock. In addition, if the Company
were to include in a registration statement shares held by these holders
pursuant to the exercise of their registration rights, such sales may impede the
Company's ability to raise needed capital. For a more complete description of
the rights, preferences and privileges attaching to the Series B Convertible
Preferred Stock refer to the section of "Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters" entitled "Recent Sales of Unregistered
Securities" in the Companys' Form 10-K/A for the year ended June 30, 2000.
Significant Control by Holders of Series B Convertible Preferred Stock
The holders of Series B Convertible Preferred Stock beneficially own an
aggregate of approximately 54.2% of the outstanding voting stock of the Company
and are entitled to elect three of five directors to the Company's Board of
Directors. These stockholders, if acting together, will be able to significantly
influence all matters requiring approval of either the Board of Directors or the
stockholders of the Company, including the approval of significant corporate
transactions. This concentration of ownership may also delay, deter or prevent a
change in control and may make some transactions more difficult or impossible to
complete without the support of these stockholders.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use derivative financial instruments in its
investment portfolio. The Company places it's investments in instruments that
meet high credit quality standards as specified in the Company's investment
policy. The Company also limits the amount of credit exposure to any one issue,
issuer or type of investment. The Company does not expect any material loss with
respect to its investment portfolio.
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CARDIAC PATHWAYS CORPORATION
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On December 26, 2000 the Company issued and sold 5,858,823 shares of
its common stock at a purchase price of $4.25 per share to a limited number of
accredited investors. The aggregate offering price was $24.9 million. Pursuant
to the foregoing sale, the Company agreed to register the shares under the
Securities Act on Form S-3 for resale to the public. Dain Rauscher Wessels
acted as placement agent for the transaction and received a placement agent fee
of $1.75 million.
The foregoing transaction did not involve any public offering, and the
Company believes that the transaction was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof or
Regulation D promulgated thereunder. The recipients in the foregoing transaction
represented their intention to acquire the securities for investment only and
not with a view to or for resale in connection with any distribution thereof,
and appropriate legends were affixed to the share certificates and instruments
issued in the foregoing transaction. All recipients had adequate access, through
their relationships with the Company, to information about us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders on December 15, 2000 the
stockholders approved the following actions:
A. Election of directors
M. Fazle Husain & Mark J. Brooks For: 8,198,761 Against: 73,997
B. The approval of the 2000 Stock Plan with 500,000 shares of Common Stock
reserved for issuance thereunder.
For: 7,429,834 Against: 107,375 Abstain: 844 Broker Non-vote: 734,705
C. The amendment of the 1998 Employee Stock Purchase Plan to provide for a
one-time increase to the amount of shares of Common Stock reserved for
issuance thereunder and to modify the annual increase provisions.
For: 7,488,139 Against: 49,045 Abstain: 869 Broker Non-vote: 734,705
D. The approval of the issue and sale of 5,882,353 shares of Common Stock to
certain investors of Cardiac Pathways.
For: 7,509,209 Against: 26,900 Abstain: 1,944 Broker Non-vote: 734,705
E. Ratification of the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending June 30, 2001.
For: 8,259,278 Against: 12,222 Abstain: 1,258
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) On November 8, 2000 the Company filed a report on Form 8-K
announcing that it had entered into a common stock purchase
agreement with certain investors. On December 28, 2000 the
Company filed a report on Form 8-K announcing that it had closed
the common stock financing disclosed in the November 8, 2000
report on Form 8-K.
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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: FEBRUARY 13, 2001 CARDIAC PATHWAYS CORPORATION
/S/ THOMAS M. PRESCOTT
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THOMAS M. PRESCOTT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/S/ ELDON M. BULLINGTON
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ELDON M. BULLINGTON
VICE PRESIDENT OF FINANCE AND CHIEF
FINANCIAL OFFICER
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