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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-Q/A
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
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COMMISSION FILE NUMBER: 000-28372
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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
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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 [ ]
As of November 10, 2000 there were 3,143,590 shares of the Registrant's
Common Stock outstanding.
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CARDIAC PATHWAYS CORPORATION
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Notes (Unaudited).................. 1
Condensed Consolidated Balance Sheets as of September 30,
2000 and June 30, 2000...................................... 1
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2000 and 1999.............. 2
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2000 and 1999.............. 3
Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 21
SIGNATURES........................................................... 22
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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)
ASSETS
SEPTEMBER 30,
2000 JUNE 30,
(RESTATED) 2000(1)
------------- --------
Current assets:
Cash and cash equivalents................................. $ 6,021 $ 8,488
Short-term investments.................................... 3,138 4,137
Accounts receivable, net of allowance for doubtful
accounts of $112 at September 30, 2000 and $139 at June
30, 2000............................................... 1,731 1,271
Inventories............................................... 1,552 2,095
Prepaid expenses.......................................... 243 227
Other current assets...................................... 104 222
-------- --------
Total current assets.............................. 12,789 16,440
Property and equipment, net................................. 4,104 3,506
Notes receivable from related parties....................... 100 100
Intangible assets, net of accumulated amortization of $467
at September 30, 2000 and $367 at June 30, 2000........... 1,533 1,633
Deposits and other assets................................... 61 86
-------- --------
$ 18,587 $ 21,765
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 792 $ 980
Accrued compensation and related benefits................. 1,280 1,196
Accrued clinical expenses................................. 426 527
Other accrued expenses.................................... 952 907
Current obligations under capital leases.................. 233 258
Deferred income -- current portion........................ 300 400
-------- --------
Total current liabilities......................... 3,983 4,268
Long-term obligations under capital leases.................. 45 85
Deferred income............................................. 1,956 2,031
Accrued Series B Preferred dividends........................ 3,540 2,784
Redeemable Convertible Preferred stock, $.001 par value;
5,000,000 shares authorized and 27,250 issued and
outstanding September 30, 2000 and at June 30, 2000;
redemption amount and liquidation preference of $30,791 at
September 30, 2000........................................ 26,828 26,828
Receivables from stockholder................................ (250) (250)
Stockholders' equity (deficit):
Common stock, $.001 par value; 6,000,000 shares
authorized; 3,100,991 shares issued and outstanding at
September 30, 2000 and 3,078,486 issued and outstanding
at June 30, 2000....................................... 3 3
Additional paid-in capital................................ 81,772 82,439
Receivable from stockholders.............................. (72) (72)
Accumulated deficit....................................... (99,218) (96,351)
-------- --------
Total stockholders' equity (deficit).............. (17,515) (13,981)
-------- --------
$ 18,587 $ 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 PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
------- -------
Net sales................................................... $ 3,042 $ 1,381
Cost of goods sold.......................................... 2,488 1,392
------- -------
Gross margin (deficit).................................... 554 (11)
Operating expenses:
Research and development.................................. 1,001 1,928
Selling, general and administrative....................... 2,575 1,627
------- -------
Total operating expenses.......................... 3,576 3,555
------- -------
Loss from operations........................................ (3,022) (3,566)
Other income (expense):
Interest income........................................... 167 177
Interest expense.......................................... (8) (35)
Other, net................................................ (4) 120
------- -------
Total other income, net........................... 155 262
------- -------
Net loss.................................................... (2,867) (3,304)
Preferred stock dividend.................................... 756 660
Beneficial conversion feature related to the issuance of the
Series B preferred stock.................................. -- 960
------- -------
Net loss applicable to common stockholders.................. $(3,623) $(4,924)
======= =======
Net loss per common share -- basic and diluted.............. $ (1.17) $ (2.45)
======= =======
Shares used in computing net loss per common share -- basic
and diluted............................................... 3,095 2,008
======= =======
See notes to condensed consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(2,867) $ (3,304)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 600 404
Amortization of deferred compensation..................... -- 45
Changes in operating assets and liabilities:
Accounts receivable....................................... (460) (295)
Inventories............................................... 543 (16)
Prepaid expenses.......................................... (16) 50
Other current assets...................................... 118 (165)
Accounts payable.......................................... (188) 102
Accrued compensation and related benefits................. 84 (202)
Accrued clinical expenses................................. (101) --
Other accrued expenses.................................... 45 823
Deferred income........................................... (175) (75)
------- ----------
Net cash used in operating activities....................... (2,419) (2,633)
------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments......................... -- (8,960)
Maturities and sales of short-term investments.............. 999 --
Purchases of property and equipment, net.................... (1,097) (125)
Increase in notes receivable................................ -- (7)
Purchase of rights to certain patents....................... -- (2,000)
Decrease (increase) in deposits and other assets............ 25 (10)
------- ----------
Net cash used in investing activities....................... (73) (11,102)
------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations.......... (65) (120)
Proceeds from issuance of preferred stock, net of issuance
cost...................................................... -- 28,500
Proceeds from issuance of common stock...................... 90 --
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Net cash provided by financing activities................... 25 28,380
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Net (decrease) increase in cash and cash equivalents........ (2,467) 14,645
Cash and cash equivalents at beginning of period.......... 8,488 2,340
------- ----------
Cash and cash equivalents at end of period................ $ 6,021 $ 16,985
======= ==========
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
SEPTEMBER 30, 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 September 30, 2000 and 1999 balance sheets also 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 200 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.
In February 2001, the Company reclassified the Series B Convertible
Preferred Stock to exclude it from total stockholders' equity due to the nature
of the redemption features of the stock, and restated its condensed consolidated
balance sheets at September 30, 2000 and June 30, 2000.
The operating results for the three months ended September 30, 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, as amended, for the fiscal year ended
June 30, 2000.
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CARDIAC PATHWAYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
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 September
30, 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:
SEPTEMBER 30, JUNE 30,
DESCRIPTION 2000 2000
----------- ------------- --------
(DOLLAR AMOUNTS IN
THOUSANDS)
Available for sale:
U.S. government agency.................................... $ -- $ 1,000
Other government agency................................... 1,000 1,000
Auction rate preferred stock.............................. 2,000 2,000
U.S. corporate obligations................................ 5,795 8,119
------ -------
8,795 12,119
Amounts classified as cash equivalents...................... 5,657 7,982
------ -------
Amounts included in short-term investments.................. $3,138 $ 4,137
====== =======
There were no material realized gains or losses for the three-month periods
ending September 30, 2000 and 1999. The cost of securities sold is based on the
specific identification method.
3. CONDENSED CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
SEPTEMBER 30, JUNE 30,
2000 2000
------------- --------
(DOLLAR AMOUNTS IN
THOUSANDS)
Inventories:
Raw materials............................................. $ 753 $1,057
Work-in-process........................................... 315 204
Finished goods............................................ 484 834
------ ------
$1,552 $2,095
====== ======
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CARDIAC PATHWAYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
SEPTEMBER 30, JUNE 30,
2000 2000
------------- --------
(DOLLAR AMOUNTS IN
THOUSANDS)
Property and equipment:
Equipment................................................. $ 9,421 $8,320
Leasehold improvements.................................... 422 422
Equipment-in-process...................................... 900 904
------- ------
10,743 9,646
Less accumulated depreciation and amortization............ 6,639 6,140
------- ------
$ 4,104 $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 affect 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.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25. The Interpretation, which
has been adopted prospectively as of July 1, 2000, requires that stock options
that have been modified to reduce the exercise price be accounted for as
variable. Under the Interpretation, the options are accounted for as variable
from July 1, 2000 until the options are exercised, forfeited or expire
unexercised. The Company believes that its current accounting principles for
stock compensation comply with APB Opinion No. 25, and that adoption of FASB
Interpretation No. 44 is not expected to have a significant impact on its
financial condition or results of operations.
5. SUBSEQUENT EVENT
The Company has signed definitive agreements in connection with a Common
Stock financing (the "Financing"). The investors in the Financing are selected
institutional and other accredited investors. If the Financing closes, the
Company will issue 5,858,823 shares of Common Stock at a purchase price of $4.25
per share for aggregate net proceeds of $22.5 million. The shares of Common
Stock have not been registered under the Securities Act of 1933, as amended, and
may not be offered or sold in the United States absent registration, or
applicable exemption from registration. The Company has also agreed to file a
registration statement, within 30 days of the close of the Financing, for the
purpose of registering under the Securities Act of 1933 the resale of all of the
common stock sold pursuant to the Financing.
The Company intends to use the net proceeds from this Financing to expand
sales, marketing and manufacturing capacity for its key products, and for
working capital and general corporate operations.
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CARDIAC PATHWAYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
The closing of the Financing is contingent upon the Company satisfying the
stockholder approval requirements of the NASDAQ National Market in connection
with the Financing and obtaining the approval of the holders of a majority of
the shares of Series B Convertible Preferred Stock of the Company. The closing
of the Financing is also subject to other customary closing conditions,
including the absence of a material adverse change in the Company's financial
condition since the date of its most recent Annual Report on Form 10-K, as
amended. Subject to the conditions of closing, the Financing is expected to
close during the third week of December.
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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 fourth 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
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 September 30, 2000 had an accumulated deficit of
approximately $99.2 million. The Company's Chilli Cooled Ablation Catheter sales
exceeded $1 million during the quarter driven by a growing base of acceptance
and utilization by clinicians in the U.S. and Europe. The Company's increase in
revenues was also driven by sales of the Ensemble/Trio/Radii-T mapping and
ablation catheter in Japan and the initial placements of RPM Tracking Systems in
the U.S. and Europe. The Company is focusing its resources on its two key
platforms; the Chilli Cooled Ablation Catheter and the new RPM Tracking System.
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.
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
this year. 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.
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
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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."
RESULTS OF OPERATIONS
Net Sales. The Company's net sales increased 120% to $3.0 million for the
three months ended September 30, 2000 compared to $1.4 million for the three
months ended September 30, 1999. The increase in net sales for the three months
ended September 30, 2000 was driven primary by growth in Chilli Cooled Ablation
Catheter sales on a worldwide basis, initial placements of RPM Tracking Systems
in the U.S. and Europe and growth in Japan driven primarily by
Ensemble/Trio/Radii-T catheters. Increases in sales for all catheters for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999 were primarily related to unit volume increases rather than
price changes.
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 thousand of royalty
income related to the Arrow agreement was recognized for the 3 months ended
September 30, 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 $2.5 million and $1.4 million for the three months ended
September 30, 2000 & 1999, respectively. For the three months ended September
30, 2000, the Company had a gross margin $554 thousand, or 18% of revenue,
compared to a gross margin deficit of ($11) thousand in the year earlier period.
The improvement in the gross margins for the three months ended September 30,
2000 compared to the same period in the prior year reflects the impact of
increasing product volume, process yield improvements and material cost
reduction programs.
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 48% to $1.0 million for the three months
ended September 30, 2000 from $1.9 million for the three months ended September
30, 1999. The decrease in research and development expenses was due primarily to
the allocation of a greater share of facility costs to manufacturing and
refocusing R&D resources on RPM and Chilli/7 French catheter development
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
including those in connection with obtaining patent protection, and costs of
trade shows. Selling, general and administrative expenses increased to $2.6
million for the three months ended September 30, 2000 from $1.6 million for the
three months ended September 30 1999. The increase in selling, general and
administrative expenses resulted primarily from increased marketing and sales
infrastructure supporting the North America and European markets.
Other Income (Expense), Net. Net other income was $155 thousand for the
three months ended September 30, 2000, compared to $262 thousand for the three
months ended September 30, 1999. Other income consists primarily of interest
income.
Net Loss. The net loss applicable to common stockholders for the three
months ended September 30, 2000 was $3.6 million or $1.17 per share compared to
a net loss of $4.9 million or $2.45 for the three months ended September 30,
1999.
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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", 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 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, 2000. 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 principles 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.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25. The Interpretation, which
has been adopted prospectively as of July 1, 2000, requires that stock options
that have been modified to reduce the exercise price be accounted for as
variable. Under the Interpretation, the options are accounted for as variable
from July 1, 2000 until the options are exercised, forfeited or expire
unexercised. The Company believes that its current accounting principles for
stock compensation comply with APB Opinion No. 25, and that adoption of FASB
Interpretation No. 44 is not expected to have a significant impact on its
financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through a
combination of private placements of equity securities yielding $33.5 million,
equipment lease financing arrangements yielding $4.0 million and a prepaid
royalty arrangement yielding $3.0 million. In addition, 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. As of September 30, 2000, the Company
had $9.2 million in cash, cash equivalents and short-term investments.
Net cash used in operating activities was $2.4 million and $2.6 million for
the three months ended September 30, 2000 and 1999, respectively. For each of
these periods, the net cash used in operating activities resulted primarily from
net losses. Net cash used in investing activities was $73 thousand and $11.1
million for the three months ended September 30, 2000 and 1999, respectively.
Net cash used in investing activities resulted primarily from purchases of
property and equipment, offset in part by maturities and sales of short-term
investments. Net cash provided by financing activities was $25 thousand and
$28.4 million for the three months ended September 30, 2000 and 1999. The net
cash provided by financing activities for the period ending September 30, 1999
resulted primarily from the proceeds of the Series B Convertible Preferred stock
transaction, offset in part by repayment of the bridge loan.
As of the end of September 30, 2000, the Company had capital equipment of
approximately $10.7 million, less accumulated depreciation and amortization of
approximately $6.6 million, to support its product development, manufacturing
and administrative activities. The Company expects capital expenditures to
increase over the next several years as it acquires equipment to support
manufacturing and development activities.
The Company's liquidity and capital requirements are such that in order for
the Company to continue to manufacture, develop and market its core products,
the Company will be required to raise additional funds through public or private
financing, collaborative relationships or other arrangements prior to the end of
fiscal 2001.
On November 3, 2000, the Company entered into definitive agreement with
certain investors, some of whom are stockholders of the Company, which provide
for the issue and sale of 5,858,823 shares of common
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stock to these investors at a per share purchase price of $4.25. The shares of
common stock being sold in this financing have not been registered under the
Securities Act of 1933, as amended, and may not be offered or sold in the United
States absent registration or an applicable exemption from registration. The
Company will realize aggregate net proceeds of $22.5 million from the financing.
The closing for this financing is contingent upon a number of things, including
the Company satisfying the stockholder approval requirements of the Nasdaq
National Market and obtaining the approval of holders representing a majority of
the outstanding Series B Convertible Preferred Stock as well as other customary
closing conditions. There can be no assurance that this financing will close or
that the Company will be receiving funding from investors on the terms described
above.
There can be no assurance that additional funding will be available on
terms acceptable to the Company, if at all. Furthermore, any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve additional restrictive covenants. Collaborative arrangements with a
capital raising component may require the Company to relinquish its rights to
certain of its technologies, products or marketing territories.
The failure of the Company to raise capital when needed will have a
material adverse effect on the Company's business, financial condition and
results of operations. The factors described in the following paragraph,
"Factors That May Impact Future Operations" and elsewhere in this Report will
impact the Company's future capital requirements and the adequacy of its
available funds.
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 September 30, 2000, the Company had an accumulated deficit of
$99.2 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 radio frequency 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.
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
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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.
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. 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 is Spain, Canary Islands and
Portugal. The distributor agreement for Japan Lifeline, covering
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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 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.
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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.
Cardiac Pathways 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 Stated 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 Stated 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 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
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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
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)
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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 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
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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.
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.
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
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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 interruption 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. 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.
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.
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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 5.45
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 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".
Significant Control by Holders of Series B Convertible Preferred Stock
The holders of Series B Convertible Preferred Stock beneficially own an
aggregate of approximately 63.9% 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying Exhibit Index are filed as a
part hereof.
(b) No reports on Form 8-K have been filed for the quarter ended September
30, 2000.
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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
--------------------------------------
Thomas M. Prescott
President and Chief Executive Officer
/s/ ELDON M. BULLINGTON
--------------------------------------
Eldon M. Bullington
Vice President of Finance and Chief
Financial Officer
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CARDIAC PATHWAYS CORPORATION
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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27.1 Financial Data Schedule