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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER: 0-28288
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CARDIOGENESIS CORPORATION
(formerly known as Eclipse Surgical Technologies, Inc.)
(Exact name of Registrant as specified in its charter)
CALIFORNIA 77-0223740
(State of incorporation) (I.R.S. Employer
Identification Number)
26632 TOWNE CENTER DRIVE
SUITE 320
FOOTHILL RANCH, CALIFORNIA 92610
(Address of principal executive officers)
(714) 649-5000
(Registrant's telephone number, including area code)
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TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Common Stock, no par value Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated herein by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $23,923,872 as of March 30, 2001, based upon
the closing sale price reported for that date on the Nasdaq National Market.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded because such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for any other purpose.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock outstanding as of the last practicable date.
31,696,061 shares
As of March 30, 2001
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INDEX TO FORM 10-K
PAGE
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PART I
Item 1. Business................................................................ 1
Item 2. Description of Property................................................. 12
Item 3. Legal Proceedings....................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders..................... 12
PART II
Item 5. Market for Registrant's Shares and Related Shareholder Matters.......... 13
Item 6. Selected Consolidated Financial Data.................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............. 32
Item 8. Consolidated Financial Statements and Supplementary Schedules........... 33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial
Disclosure.............................................................. 33
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 34
Item 11. Executive Compensation.................................................. 35
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 41
Item 13. Certain Relationships and Related Transactions.......................... 43
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.......... 43
Signatures.......................................................................... 45
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PART I
ITEM 1. BUSINESS.
This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The statements contained herein that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, including without
limitation statements regarding our expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
document or incorporated by reference herein are based on information available
to us on the date hereof, and we assume no obligation to update any such
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in Item 7 and elsewhere.
GENERAL
CardioGenesis Corporation formerly known as Eclipse Surgical
Technologies, Inc., incorporated in California in 1989, designs, develops,
manufactures and distributes laser-based surgical products and disposable
fiber-optic accessories for the treatment of advanced cardiovascular disease
through transmyocardial revascularization ("TMR") and percutaneous transluminal
myocardial revascularization ("PMR"). TMR and PMR are recent laser-based heart
treatments in which channels are made in the heart muscle. It is believed these
procedures encourage new vessel formation, or angiogenesis. TMR is performed by
a cardiac surgeon through a small incision in the chest under general
anesthesia. PMR is performed by a cardiologist in a catheter based procedure
which utilizes local anesthesia. Clinical studies have demonstrated a
significant reduction in angina and increase in exercise duration in patients
treated with TMR or PMR plus medications, when compared with patients who
received medications alone.
We received CE Mark approval for our TMR system in May 1997 and our PMR
systems in April 1998. On February 11, 1999, we received final approval from the
FDA for our TMR products for treatment of stable patients with angina (Canadian
Cardiovascular Society Class 4) refractory to other medical treatments and
secondary to objectively demonstrated coronary artery atherosclerosis and with a
region of the myocardium with reversible ischemia not amenable to direct
coronary revascularization. Effective July 1, 1999, the Health Care Financial
Administration began to provide Medicare coverage for TMR. Hospitals and
physicians are now eligible to receive Medicare reimbursement for TMR equipment
and procedures.
We have completed pivotal clinical trials involving PMR, and study
results were submitted to the FDA in a Pre Market Approval application in
December of 1999 along with subsequent amendments. As discussed below under the
caption "Regulatory Status," the FDA Advisory Panel recommended against approval
of PMR for public sale and use in the United States. However, we will continue
to pursue FDA approval for PMR. There can be no assurance, however, that we will
receive a favorable decision from that agency.
On March 17, 1999, we merged with the former CardioGenesis Corporation.
Under the terms of the combination, each share of the former CardioGenesis
common stock was converted into 0.8 of a share of our common stock, and the
former CardioGenesis has become a wholly owned subsidiary of ours. As a result
of the transaction, our outstanding shares increased by approximately 9.9
million shares. The transaction was structured to qualify as a tax-free
reorganization and has been accounted for as a pooling of interests.
Accordingly, the accompanying financial statements have been restated as if the
combined entity existed for the 1998 period prior to the merger.
BACKGROUND
Cardiovascular disease is the leading cause of death and disability in
the U.S. according to the American Heart Association. Coronary artery disease is
the principal form of cardiovascular disease and is characterized by a
progressive narrowing of the coronary arteries which supply blood to the heart.
This narrowing process is usually due to atherosclerosis, which is the buildup
of fatty deposits, or plaque, on the inner lining of the arteries.
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Coronary artery disease reduces the available supply of oxygenated blood to the
heart muscle, potentially resulting in severe chest pain known as angina, as
well as damage to the heart. Typically, the condition worsens over time and
often leads to heart attack and/or death.
Based on standards promulgated by the Canadian Heart Association, angina
is typically classified into four classes, ranging from Class 1, in which angina
pain results only from strenuous exertion, to the most severe class, Class 4, in
which the patient is unable to conduct any physical activity without angina and
angina may be present even at rest. The American Heart Association estimates
that more than six million Americans experience angina symptoms.
The primary therapeutic options for treatment of coronary artery disease
are drug therapy, balloon angioplasty also known as percutaneous transluminal
coronary angioplasty or ("PTCA"), other interventional techniques which augment
or replace PTCA such as stent placement and atherectomy, and coronary artery
bypass grafting or ("CABG"). The objective of each of these approaches is to
increase blood flow through the coronary arteries to the heart.
Drug therapy may be effective for mild cases of coronary artery disease
and angina either through medical effects on the arteries that improve blood
flow without reducing the plaque or by decreasing the rate of formation of
additional plaque (e.g., by reducing blood levels of cholesterol). Because of
the progressive nature of the disease, however, many patients with angina
ultimately undergo either PTCA or CABG.
PTCA is a less-invasive alternative to CABG introduced in the early
1980s in which a balloon-tipped catheter is inserted into an artery, typically
near the groin, and guided to the areas of blockage in the coronary arteries.
The balloon is then inflated and deflated at each blockage site, thereby
rupturing the blockage and stretching the vessel. Although the procedure is
usually successful in widening the blocked channel, the artery often re-narrows
within six months of the procedure, a process called "restenosis," often
necessitating a repeat procedure. A variety of techniques for use in conjunction
with PTCA have been developed in an attempt to reduce the frequency of
restenosis, including stent placement and atherectomy. Stents are small metal
frames delivered to the area of blockage using a balloon catheter and deployed
or expanded within the coronary artery. The stent is a permanent implant
intended to keep the channel open. Atherectomy is a means of using mechanical,
laser or other techniques at the tip of a catheter to cut or grind away plaque.
CABG is an open chest procedure developed in the 1960s in which conduit
vessels are taken from elsewhere in the body and grafted to the blocked coronary
arteries so that blood can bypass the blockage. CABG typically requires the use
of a heart-lung bypass machine to render the heart inactive (to allow the
surgeon to operate on a still, relatively bloodless heart) and involves
prolonged hospitalization and patient recovery periods. Accordingly, it is
generally reserved for patients with severe cases of coronary artery disease or
those who have previously failed to receive adequate relief of their symptoms
from PTCA or related techniques. Most bypass grafts fail within one to fifteen
years following the procedure. Repeating the surgery ("re-do bypass surgery") is
possible, but is made more difficult because of scar tissue and adhesions that
typically form as a result of the first operation. Moreover, for many patients
CABG is inadvisable for various reasons, such as the severity of the patient's
overall condition, the extent of coronary artery disease or the small size of
the blocked arteries.
When these treatment options are exhausted, the patient is left with no
viable surgical or interventional alternative other than, in limited cases,
heart transplantation. Without a viable surgical alternative, the patient is
generally managed with drug therapy, often with significant lifestyle
limitations. TMR, which bears the CE Marking and has received FDA approval, and
PMR, which bears the CE Marking and for which we are continuing to pursue FDA
approval for use in the U.S., offer potential relief to a large population of
patients with severe cardiovascular disease.
THE TMR AND PMR PROCEDURE
TMR, or transmyocardial revascularization, is a surgical procedure
performed on the beating or non-beating heart, in which a laser device is used
to create pathways through the myocardium directly into the heart
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chamber. The pathways are intended to supply blood to ischemic, or
oxygen-deprived regions of the myocardium and reduce angina in the patient. TMR
can be performed using open chest surgery or minimally invasive surgery through
a small incision between the ribs. TMR offers end-stage cardiac patients who
have regions of ischemia not amenable to PTCA or CABG a means to alleviate their
symptoms and improve their quality of life. We have received FDA approval for
U.S. commercial distribution of our TMR laser system for treatment of stable
patients with angina (Canadian Cardiovascular Society Class 4) refractory to
medical treatment and secondary to objectively demonstrated coronary artery
atherosclerosis and with a region of the myocardium with reversible ischemia not
amenable to direct coronary revascularization.
PMR, or percutaneous transluminal myocardial revascularization, is an
interventional procedure performed by a cardiologist. PMR is based upon the same
principles as TMR, but the procedure is much less invasive. The patient is under
local anesthesia and is treated through a catheter inserted in the femoral
artery at the top of the leg. A laser transmitting catheter is threaded up into
the heart chamber, where channels are created in the inner portion of the
myocardium (i.e. heart muscle). We have completed pivotal clinical trials
involving PMR, and study results were submitted to the FDA in a Pre Market
Approval application in December of 1999 along with subsequent amendments. As
discussed below under the caption "Regulatory Status," the FDA Advisory Panel
recommended against approval of PMR for public sale and use in the United
States. However, we will continue to pursue FDA approval for PMR. There can be
no assurance, however, that we will receive a favorable decision from that
agency.
BUSINESS STRATEGY
Our objective is to become a recognized leader in the field of
myocardial revascularization, with TMR and PMR established as well-known and
acceptable therapies. Our strategies to achieve this goal are as follows:
- Expand Market for our Products. We are seeking to expand market
awareness of our products among opinion leaders in the
cardiovascular field, the referring physician community and the
targeted patient population. In connection with the FDA approved TMR
product, we have prioritized our initial efforts in the U.S. on the
top 600 hospitals that perform the greatest number of cardiovascular
procedures. To support the TMR launch, we are expanding the domestic
sales force to thirty-one territory managers in four sales areas. We
also sell our products in Europe and to the rest of the world
through our direct international sales organization along with
several distributors and agents. In addition, we have developed a
comprehensive training program to assist physicians in acquiring the
expertise necessary to utilize our TMR or PMR products and
procedures.
- Demonstrate Clinical Utility of PMR. We are seeking to demonstrate
the clinical safety and effectiveness of PMR. We have completed a
pivotal clinical trial regarding PMR, and the study results were
submitted to the FDA in a Pre Market Approval Supplemental
application in December of 1999. As discussed below under the
caption "Regulatory Status," the FDA Advisory Panel recommended
against approval of PMR for public sale and use in the United
States. However, we will continue to pursue FDA approval for PMR.
There can be no assurance, however, that we will receive a favorable
decision from the agency.
- Leverage Proprietary Technology. We believe that our significant
expertise in laser and catheter-based systems for cardiovascular
disease and the proprietary technologies we have developed are
important factors in our efforts to demonstrate the safety and
effectiveness of our TMR and PMR procedures. We are seeking to
develop additional proprietary technologies for TMR, PMR and related
procedures. We have 91 foreign and U.S. patents or allowed patent
applications and 51 U.S. and 27 foreign patent applications pending
relating to various aspects of TMR, PMR and other cardiovascular
therapies.
PRODUCTS AND TECHNOLOGY
The Company's TMR System
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The Company's TMR system consists of our TMR 2000 laser console and a
line of fiber-optic, laser-based surgical tools. Each surgical tool utilizes an
optical fiber assembly to deliver laser energy from the source laser base unit
to the distal tip of the surgical handpiece or PMR catheter. The compact base
unit occupies a small amount of operating room floor space, operates on a
standard 208 or 220-volt power supply, and is light enough to move within the
operating room or among operating rooms in order to use operating room space
efficiently. Moreover, the flexible fiberoptic assembly used to deliver the
laser energy to the patient enables ready access to the patient and to various
sites within the heart.
Our TMR system and related surgical procedures are designed to be used
without the requirement of the external systems utilized with certain
competitive TMR systems. For example, our TMR 2000 system does not require
electrocardiogram synchronization, which monitors the electrical output of the
heart and times the use of the laser to minimize electrical disruption of the
heart, or transesophageal echocardiography, which tests each application of the
laser to the myocardium during the TMR procedure to determine if the pathway has
penetrated through the myocardium into the heart chamber.
Our Holmium Laser. Our TMR 2000 laser base unit generates laser light of
a 2-micron wavelength by photoelectric excitation of a solid state holmium
crystal. The holmium laser, because it uses a solid state crystal as its source,
is compact, reliable and requires minimal maintenance.
SoloGrip. The single use SoloGrip handpiece system contains multiple,
fine fiber-optic strands in a one millimeter diameter bundle. The flexible fiber
optic delivery system combined with the ergonomic handpiece provides access for
treating all regions of the left ventricle.
The SoloGrip and SlimFlex PMR fiber-optic delivery systems each have an
easy to install connector which screws into the laser base unit, and each device
is pre-calibrated in the factory so it requires no special preparation.
The Company's PMR System
The Company's PMR System is currently sold only outside the United
States. The PMR System consists of the PMR Laser and ECG Monitor.
Our PMR Laser. The holmium laser base unit generates laser light of a
2.1 micron wavelength in the mid-infrared spectrum. It provides a reliable
source for laser energy with low maintenance.
The Axcis Catheter system. The Axcis catheter system is an over-the-wire
system that consists of two components, the Axcis laser catheter and Axcis
aligning catheter. The Axcis catheter system is designed to provide controlled
navigation and access to target regions of the left ventricle. The coaxial Axcis
laser catheter has an independent, extendible lens with radiopaque lens markers
which show the location and orientation of the tip for optimal contact with the
ventricle wall. The Axcis laser catheter also has nitinol petals at the
laser-lens tip which are designed for safe penetration of the endocardium and to
provide depth control.
SlimFlex Catheter System. The SlimFlex PMR system is an over-the-wire,
steerable, single use catheter system that features torque control, deflection
capability, infusion port and radio-opaque markers for enhanced visualization
and depth control. After insertion into an artery of the leg, the PMR catheter
is advanced over the aortic arch, across the aortic valve and into the heart
chamber. Visualization is achieved using standard fluoroscopic or x-ray
techniques common to all hospitals doing cardiac catheterization.
REGULATORY STATUS
On February 11, 1999, we received final approval from the FDA for use of
our TMR 2000 laser console and SoloGrip handpiece for treatment of stable
patients with angina (Canadian Cardiovascular Society Class 4)
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refractory to other medical treatments and secondary to objectively demonstrated
coronary artery atherosclerosis and with a region of the myocardium with
reversible ischemia not amenable to direct coronary revascularization.
In February 1996, we obtained FDA clearance to undertake Phase I of a
clinical study of TMR intended to assess the safety and effectiveness of "TMR
Used in Conjunction with CABG" as compared with CABG alone. In September 1996,
the FDA provided us with clearance to begin Phase II of this study, which was
subsequently completed. In July 1999, we submitted a PMA supplement to the FDA
for an expanded indication to our approved TMR labeling to include TMR in
conjunction with CABG. In January 2000, we received a response from the FDA
requesting that we either provide more information or modify our labeling
request. Since TMR and CABG are each presently utilized to treat separate
regions of the heart, we concluded that our present FDA approved labeling is
adequate, and that the physician can best decide how to use the laser system
within the approved labeling. As a result, in March 2000, we decided that we
will not pursue any wording changes to our already approved TMR labeling, and
have withdrawn our submission to the FDA for TMR in conjunction with CABG.
We submitted a PMA supplement for our PMR system to the FDA in December
1999. The PMR study compares PMR to conventional medical therapy in patients
with no option for other treatment. As discussed below, the FDA Advisory Panel
recommended against approval of PMR for public sale and use in the United
States. However, we will continue to pursue FDA approval for PMR. There can be
no assurance, however, that we will receive a favorable decision from the
agency.
We have decided not to pursue any additional claims for adjunctive
procedures. Therefore, all studies involving adjunctive procedures have been
halted and terminated.
In addition, we have obtained approval to affix the CE Marking to
substantially all of our products, which enables us to commercially distribute
our TMR and PMR products throughout the European Community.
On July 9, 2001, the Food and Drug Administration Advisory Panel
recommended against approval by the Food and Drug Administration of our PMR
device for public sale and use in the United States. The practical effect of the
Advisory Panel's recommendation is to delay indefinitely, until such time as the
Food and Drug Administration decides differently, the introduction of our PMR
device for sale and use in the United States. Consequently, the Advisory Panel's
recommendation has effectively delayed potential revenue, if any, that may have
been derived in the future from the sale of our PMR device. Moreover, this
recommendation has necessitated the further investment of additional resources
toward obtaining the Food and Drug Administration's approval of our PMR device.
However, we do not expect to conduct further clinical trials. Additionally, the
trading price of our common stock on the NASDAQ National Market fell
substantially after the Advisory Panel's recommendation became public. As
discussed in our risk factor section, if our common stock were to trade under
$1.00 for 30 consecutive days on the NASDAQ National Market, our common stock
could be subject to certain consequences established by the NASDAQ National
Market, such as being delisted.
SALES AND MARKETING
We have received FDA approval for our surgical TMR laser system. The
Health Care Finance Administration has also announced its coverage policy for
the TMR with FDA approved systems. We are promoting market awareness of our
approved surgical products among opinion leaders in the cardiovascular field and
are recruiting physicians and hospitals. To drive the clinical awareness and
acceptance of the surgical product platform, we are expanding the domestic sales
force to thirty-one territory managers in four sales regions.
In the United States, we currently offer a laser base unit at a current
end user list price of $320,000 per unit, and the disposable TMR handpiece (at
least one of which must be used with each TMR procedure) at an end user unit
list price of $2,745. In order to accelerate market adoption of the TMR
procedure, we intend to continue selling lasers to hospitals outright, loaning
lasers to hospitals in return for the hospital purchasing a minimum number of
handpieces at a premium over the list price, and to begin renting lasers to
hospitals.
Internationally, we sell our products through a direct sales and support
organization of four people and distributors and agents.
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We have developed, in conjunction with several major hospitals using our
TMR or PMR products, a training program to assist physicians in acquiring the
expertise necessary to utilize our products and procedures. This program
includes a comprehensive one-day course including didactic training and hands-on
performance of TMR or PMR in vivo. To date over 750 cardiothoracic surgeons have
been trained on the CardioGenesis TMR system.
We exhibit our products at major cardiovascular meetings. Investigators
of our products have made presentations at meetings around the world, describing
their results. Abstracts and articles have been published in peer-reviewed
publications and industry journals to present the results of our clinical
trials.
RESEARCH AND DEVELOPMENT
We believe that streamlining our research and product effort is
essential to our ability to stimulate growth and maintain our market leadership
position. Our ongoing research and product development efforts are focused on
the development of new and enhanced lasers and fiber-optic handpieces for TMR
and PMR applications.
In the fourth quarter of 2000, we increased our ownership interest in
privately-held Microheart Holdings, Inc. to 32.1 percent. Microheart is a
research and development company working on developing a number of full-featured
clinical devices for diagnostic assessment and site-specific delivery of
biopharmaceuticals and other therapeutic agents applicable to the cardiovascular
and other markets.
We believe our future success will depend, in part, upon the success of
our research and development programs. There can be no assurance that we will
realize financial benefit from these efforts or that products or technologies
developed by others will not render our products or technologies obsolete or
non-competitive.
MANUFACTURING
We manufacture and assemble our products from purchased components and
subassemblies at our facility in Sunnyvale, California.
The core components of our laser units and fiber-optic handpieces are
generally acquired from multiple sources. We currently purchase certain laser
and fiber-optic components and subassemblies from single sources. Although we
have identified alternative vendors, the qualification of additional or
replacement vendors for certain components or services is a lengthy process. Any
significant supply interruption would have a material adverse effect on our
ability to manufacture our products and, therefore, would harm our business. We
intend to continue to qualify multiple sources for components that are presently
single sourced and also to maintain an inventory of these items for use in the
event of supply interruptions.
COMPETITION
We expect that the market for TMR and PMR, which is currently in the
early stages of development, will be competitive. At this point in time, we
believe that our only competitor is PLC Systems, Inc. ("PLC") which is selling
FDA-approved TMR products in the U.S. and abroad. Other competitors may also
enter the market, including large companies in the laser and cardiac surgery
markets. Many of these companies have or may have significantly greater
financial, research and development, marketing and other resources than we do.
PLC is a publicly traded corporation which uses a CO2 laser and an
articulated mechanical arm in its TMR products. PLC obtained a Pre Market
Approval for TMR in 1998. PLC has received the CE Marking, which allows sales of
its products commercially in all European Union countries. PLC has been issued
patents for its apparatus and methods for TMR. PLC recently announced a
co-marketing agreement with Edwards Life Sciences to distribute their lasers and
disposables. This action will add another 18 direct domestic sales
representatives involved in promoting the PLC technology.
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We believe that the factors which will be critical to market success
include: the timing of receipt of requisite regulatory approvals, effectiveness
and ease of use of the TMR products and applications, breadth of product line,
system reliability, brand name recognition and effectiveness of distribution
channels and cost of capital equipment and disposable devices.
TMR and PMR also compete with other methods for the treatment of
cardiovascular disease, including drug therapy, PTCA and CABG. Even with the FDA
approval of our TMR system in patients for whom other cardiovascular treatments
are not likely to provide relief, and when used in conjunction with other
treatments, we can not assure you that our TMR or PMR products will be accepted.
Moreover, technological advances in other therapies for cardiovascular disease
such as pharmaceuticals or future innovations in cardiac surgery techniques
could make such other therapies more effective or lower in cost than our TMR
procedure and could render our technology obsolete. We can not assure you that
physicians will use our TMR procedure to replace or supplement established
treatments, or that our TMR procedure will be competitive with current or future
technologies. Such competition could harm our business.
Our TMR laser system and any other product developed by us that gains
regulatory approval will face competition for market acceptance and market
share. An important factor in such competition may be the timing of market
introduction of competitive products. Accordingly, the relative pace at which we
can develop products, complete clinical testing, achieve regulatory approval,
gain reimbursement acceptance and supply commercial quantities of the product to
the market are expected to be important competitive factors. In the event a
competitor is able to obtain a PMA for its products prior to our doing so, we
may not be able to compete successfully. We may not be able to compete
successfully against current and future competitors even if we obtain a PMA
prior to our competitors.
GOVERNMENT REGULATION
Laser-based surgical products and disposable fiber-optic accessories for
the treatment of advanced cardiovascular disease through TMR are considered
medical devices, and as such are subject to regulation in the U.S. by the FDA
and comparable international regulatory agencies. Our devices require the
rigorous PMA process for approval to market the product in the U.S. and must
bear the CE Marketing for commercial distribution in the European Community.
To obtain a Pre Market Approval ("PMA") for a medical device, we must
file a PMA application that includes clinical data and the results of
pre-clinical and other testing sufficient to show that there is a reasonable
assurance of safety and effectiveness of the product for its intended use. To
begin a clinical study, an Investigational Device Exemption ("IDE") must be
obtained and the study must be conducted in accordance with FDA regulations. An
IDE application must contain preclinical test data demonstrating the safety of
the product for human investigational use, information on manufacturing
processes and procedures, and proposed clinical protocols. If the FDA clears the
IDE application, human clinical trials may begin. The results obtained from
these trials are accumulated and, if satisfactory, are submitted to the FDA in
support of a PMA application. Prior to U.S. commercial distribution, premarket
approval is required from the FDA. In addition to the results of clinical
trials, the PMA application must include other information relevant to the
safety and effectiveness of the device, a description of the facilities and
controls used in the manufacturing of the device, and proposed labeling. By law,
the FDA has 180 days to review a PMA application. While the FDA has responded to
PMA applications within the allotted time frame, reviews more often occur over a
significantly longer period and may include requests for additional information
or extensive additional trials. There can be no assurance that we will not be
required to conduct additional trials which may result in substantial costs and
delays, nor can there be any assurance that a PMA will be obtained for each
product in a timely manner, if at all. In addition, changes in existing
regulations or the adoption of new regulations or policies could prevent or
delay regulatory approval of our products. Furthermore, even if a PMA is
granted, subsequent modifications of the approved device or the manufacturing
process may require a supplemental PMA or the submission of a new PMA which
could require substantial additional clinical efficacy data and FDA review.
After the FDA accepts a PMA application for filing, and after FDA review of the
application, a public meeting is frequently held before an FDA advisory panel in
which the PMA is reviewed and discussed. The panel then issues a favorable or
unfavorable recommendation to the FDA or
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recommends approval with conditions. Although the FDA is not bound by the
panel's recommendations, it tends to give such recommendations significant
weight. In February 1999, we received a PMA for our TMR laser system for use in
certain indications. As discussed above under the caption "Regulatory Status,"
the FDA Advisory Panel recommended against approval of PMR for public sale and
use in the United States. However, we will continue to pursue FDA approval for
PMR. There can be no assurance, however, that we will receive a favorable
decision from that agency.
Products manufactured or distributed by us pursuant to a PMA will be
subject to pervasive and continuing regulation by the FDA, including, among
other things, postmarket surveillance and adverse event reporting requirements.
Failure to comply with applicable regulatory requirements can result in, among
other things, warning letters, fines, suspensions or delays of approvals,
seizures or recalls of products, operating restrictions or criminal
prosecutions. The Federal Food, Drug and Cosmetic Act requires us to manufacture
our products in registered establishments and in accordance with Good
Manufacturing Practices ("GMP") regulations and to list our devices with the
FDA. Furthermore, as a condition to receipt of a PMA, our facilities, procedures
and practices will be subject to additional pre-approval GMP inspections and
thereafter to ongoing, periodic GMP inspections by the FDA. These GMP
regulations impose certain procedural and documentation requirements upon us
with respect to manufacturing and quality assurance activities. Labeling and
promotional activities are subject to scrutiny by the FDA. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses. Changes in existing regulatory requirements or adoption of new
requirements could harm our business. We may be required to incur significant
costs to comply with laws and regulations in the future and current or future
laws and regulations may harm our business.
We are also regulated by the FDA under the Radiation Control for Health
and Safety Act, which requires laser products to comply with performance
standards, including design and operation requirements, and manufacturers to
certify in product labeling and in reports to the FDA that our products comply
with all such standards. The law also requires laser manufacturers to file new
product and annual reports, maintain manufacturing, testing and sales records,
and report product defects. Various warning labels must be affixed and certain
protective devices installed, depending on the class of the product. In
addition, we are subject to California regulations governing the manufacture of
medical devices, including an annual licensing requirement. Our facilities are
subject to ongoing, periodic inspections by the FDA and California regulatory
authorities.
Sales, manufacturing and further development of our TMR and PMR systems
also may be subject to additional federal regulations pertaining to export
controls and environmental and worker protection, as well as to state and local
health, safety and other regulations that vary by locality and which may require
obtaining additional permits. We can not predict the impact of these regulations
on our business.
Sales of medical devices outside of the U.S. are subject to foreign
regulatory requirements that vary widely by country. In addition, the FDA must
approve the export of devices to certain countries. To market in Europe, a
manufacturer must obtain the certifications necessary to affix to its products
the CE Marking. The CE Marking is an international symbol of adherence to
quality assurance standards and compliance with applicable European medical
device directives. In order to obtain and to maintain a CE Marking, a
manufacturer must be in compliance with appropriate ISO 9001 standards and
obtain certification of its quality assurance systems by a recognized European
Union notified body. However, certain individual countries within Europe require
further approval by their national regulatory agencies. We have achieved
International Standards Organization and European Union certification for our
manufacturing facility. In addition, we have completed CE mark registration for
all of our products in accordance with the implementation of various medical
device directives in the European Union. Failure to maintain the right to affix
the CE Marking or other requisite approvals could prohibit us from selling our
TMR products in member countries of the European Union or elsewhere.
INTELLECTUAL PROPERTY MATTERS
Our success will depend, in part, on our ability to obtain patent
protection for our products, preserve our trade secrets, and operate without
infringing the proprietary rights of others. Our policy is to seek to protect
our proprietary position by, among other methods, filing U.S. and foreign patent
applications related to our technology, inventions and improvements that are
important to the development of our business. We have 91 U.S.
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and foreign patents or allowed patent applications and 78 U.S. and foreign
patent applications pending relating to various aspects of TMR, PMR and other
cardiovascular therapies. On December 5, 2000 we were granted United States
Patent No. 6,156,031 entitled "Transmyocardial Revascularization Using
Radiofrequency Energy". Our patents or patent applications may be challenged,
invalidated or circumvented in the future or the rights granted may not provide
a competitive advantage. We intend to vigorously protect and defend our
intellectual property. We do not know if patent protection will continue to be
available for surgical methods in the future. Costly and time-consuming
litigation brought by us may be necessary to enforce our patents and to protect
our trade secrets and know-how, or to determine the enforceability, scope and
validity of the proprietary rights of others.
We also rely upon trade secrets, technical know-how and continuing
technological innovation to develop and maintain our competitive position. We
typically require our employees, consultants and advisors to execute
confidentiality and assignment of inventions agreements in connection with their
employment, consulting, or advisory relationships with us. These agreements may
be breached or we may not have adequate remedies for any breach. Furthermore,
our competitors may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our proprietary
technology, or we may not be able to meaningfully protect our rights in
unpatented proprietary technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
have been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. In this regard, our competitors
have been issued a number of patents related to TMR and PMR. In September 1995
we received from a competitor a notice of potential infringement of the
competitor's patent regarding a method for TMR utilizing synchronization of
laser pulses to the electrical signals from the heart. We concluded, following
discussion with our patent counsel, that we did not utilize the process and/or
apparatus which is the subject of the patent at issue. We responded to the
competitor to such effect and have received no further correspondence on this
matter. There can be no assurance, however, that further claims or proceedings
will not be initiated by a competitor, or that claims by other parties will not
arise in the future. Any such claims in the future, with or without merit, could
be time-consuming and expensive to respond to and could divert the attention of
our technical and management personnel. We may be involved in litigation to
defend against claims of our infringement, to enforce our patents, or to protect
our trade secrets. If any relevant claims of third party patents are upheld as
valid and enforceable in any litigation or administrative proceeding, we could
be prevented from practicing the subject matter claimed in such patents, or we
could be required to obtain licenses from the patent owners of each such patent
or to redesign our products or processes to avoid infringement.
Until recently, patent applications in the U.S. were maintained in
secrecy until patents issue, and patent applications in foreign countries are
maintained in secrecy for a period after filing. Most of our U.S. applications
are maintained in secrecy unless they have issued. Publication of discoveries in
the scientific or patent literature tends to lag behind actual discoveries and
the filing of related patent applications. Accordingly, we can not assure you
our current and potential competitors and other third parties have not filed or
in the future will not file applications for, or have not received or in the
future will not receive, patents or obtain additional proprietary rights that
will prevent, limit or interfere with our ability to make, use or sell our
products either in the U.S. or internationally. In the event we were to require
licenses to patents issued to third parties, such licenses may not be available
or, if available, may not be available on terms acceptable to us. In addition,
we may not be successful in any attempt to redesign our products or processes to
avoid infringement or that any such redesign could be accomplished in a
cost-effective manner. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling our products, which would harm our business.
Unrelated to the products used in our TMR procedure, we have received
notices from three holders of patents requesting we become a licensee. Although
we believe that either these patents are subject to challenge as being invalid
or are not infringed by our products, we may not prevail in any such action. In
one case, we have entered into a non-exclusive license to a patent involving
arthroscopy use. In a second case, we buy components only from licensees of the
patent holder, which we believe obviates the need for a separate license. If we
determine that it is necessary to obtain a license to any patents or
intellectual property, any such license may not
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be available on acceptable terms or at all, or we may not be able to develop or
otherwise obtain alternative technology. Failure to obtain necessary licenses
could prevent us from manufacturing and selling our products, which would harm
our business.
THIRD PARTY REIMBURSEMENT
We expect that sales volumes and prices of our products will depend
significantly on the availability of reimbursement for surgical procedures using
our products from third party payors such as governmental programs, private
insurance and private health plans. Reimbursement is a significant factor
considered by hospitals in determining whether to acquire new equipment.
Reimbursement rates from third party payors vary depending on the third party
payor, the procedure performed and other factors. Moreover, third party payors,
including government programs, private insurance and private health plans, have
in recent years been instituting increasing cost containment measures designed
to limit payments made to healthcare providers by, among other measures,
reducing reimbursement rates, limiting services covered, negotiating prospective
or discounted contract pricing and carefully reviewing and increasingly
challenging the prices charged for medical products and services.
Medicare reimburses hospitals on a prospectively determined fixed amount
for the costs associated with an in-patient hospitalization based on the
patient's discharge diagnosis, and reimburses physicians on a prospectively
determined fixed amount based on the procedure performed, regardless of the
actual costs incurred by the hospital or physician in furnishing the care and
unrelated to the specific devices used in that procedure. Medicare and other
third party payors are increasingly scrutinizing whether to cover new products
and the level of reimbursement for covered products. In addition, Medicare
traditionally has considered items or services involving devices that have not
been approved or cleared for marketing by the FDA to be precluded from Medicare
coverage. In July 1999 HCFA began coverage of FDA approved TMR systems for any
manufacturer's TMR procedures.
We have limited experience to date with the acceptability of our TMR
procedures for reimbursement by private insurance and private health plans.
Private insurance and private health plans may not approve reimbursement for TMR
or PMR. The lack of private insurance and health plans reimbursement may harm
our business.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the U.S., health maintenance organizations are emerging in certain European
countries. We may need to seek international reimbursement approvals, and we may
not be able to attain these approvals in a timely manner, if at all. Failure to
receive foreign reimbursement approvals could make market acceptance of our
products in the foreign markets in which such approvals are sought more
difficult.
We believe that reimbursement in the future will be subject to increased
restrictions such as those described above, both in the U.S. and in foreign
markets. We also believe that the escalating cost of medical products and
services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by us. Third party reimbursement and
coverage may not be available or adequate in U.S. or foreign markets, current
levels of reimbursement may be decreased in the future or future legislation,
regulation, or reimbursement policies of third party payors may reduce the
demand for our products or our ability to sell our products on a profitable
basis. Fundamental reforms in the healthcare industry in the U.S. and Europe
that could affect the availability of third party reimbursement continue to be
proposed, and we cannot predict the timing or effect of any such proposal. If
third party payor coverage or reimbursement is unavailable or inadequate, our
business may suffer.
PRODUCT LIABILITY AND INSURANCE
We maintain insurance against product liability claims in the amount of
$10 million per occurrence and $10 million in the aggregate. We may not be able
to obtain additional coverage or continue coverage in the
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amount desired or on terms acceptable to us, and such coverage may not be
adequate for liabilities actually incurred. Any uninsured or underinsured claim
brought against us or any claim or product recall that results in a significant
cost to or adverse publicity against us could harm our business.
EMPLOYEES
As of December 31, 2000 we had 123 employees, including 16 in research
and development, 49 in manufacturing, 38 in sales and marketing and 20 in
administration. Other than confidentiality agreements with all employees, as a
general policy matter, we do not enter into employment agreements with any of
our employees. In connection with the recent hiring of Michael J. Quinn as our
Chief Executive Officer and Darrell Eckstein as our Vice President of
Operations, we did, however, provide both officers with letter employment
agreements. None of our employees is covered by a collective bargaining
agreement and we have not experienced any work stoppages to date.
Our executive officers as of March 28, 2001 are as follows:
NAME AGE POSITION
---- --- --------
Michael J. Quinn 56 Chief Executive Officer, President, Chairman
of the Board and Director
Darrell F. Eckstein 43 Vice President of Operations
Ian A. Johnston 46 Vice President of Finance and Treasurer
Thomas L. Kinder 38 Vice President of Worldwide Sales and
Service
Richard P. Lanigan 42 Vice President of Government Affairs and
Business Development
Christopher M. Owens 32 Vice President of Marketing
Ilene L. Janofsky 46 Chief Legal Counsel
Michael J. Quinn has served as our Chief Executive Officer, President
and Chairman of the Board since October 2000. From November 1999 to September
2000, Mr. Quinn served as Chief Executive Officer, President and a member of the
Board of Directors for Premier Laser Systems, a manufacturer of surgical and
dental products. From January 1998 to November 1999, Mr. Quinn served as
President and Chief Operating Officer of Imagyn Medical Technologies, Inc., a
manufacturer of minimally invasive surgical specialty products. From 1995
through December 1997, Mr. Quinn served as President and Chief Operating Officer
of Fisher Scientific Company. Prior to 1995, Mr. Quinn held senior operating
management positions at major healthcare organizations including American
Hospital Supply Corporation, Picker International, Cardinal Health Group and
Bergen Brunswig.
Darrell F. Eckstein has served as our Vice President of Operations since
December 2000. From 1996 to 2000 he served as Vice President and General Manager
of the Surgical Products Division of Imagyn Medical Technologies, a manufacturer
of minimally invasive surgical specialty products. From 1995 to 1996, Mr.
Eckstein was Vice President of Finance, Chief Financial Officer and an Executive
Committee member of Richard-Allen Medical Industries Inc., a medical devices
company. From 1991 to 1995, Mr. Eckstein was Vice President of Finance, Chief
Financial Officer and an Executive Committee member of National Emergency
Services Inc., a health care services company that provides physician contract
management, medical billing and insurance services. Prior to 1991, Mr. Eckstein
worked for Deloitte and Touche, most recently as a Senior Audit Manager, for 11
years. He received his Bachelor of Science degree in Accounting from Indiana
University.
Ian A. Johnston has been our Vice President of Finance since July 2000
and Corporate Controller since March 1999. From 1998 to 1999 Mr. Johnston was
also Controller of the former CardioGenesis Corporation. From 1989 to 1998 Mr.
Johnston served in a variety of financial positions (most recently as
Controller) at Toshiba America MRI, Inc., a medical imaging company. From 1985
to 1989 Mr. Johnston was an auditor with Arthur Andersen & Co. Mr. Johnston has
a Masters in Business Administration and a Bachelor of Arts in Economics from
the University of California Berkeley and is a member of the American Institute
of Certified Public Accountants.
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Thomas L. Kinder has served as our Vice President of Sales since March
2001 and as General Manager, West Area since November 2000. From June 2000 to
November 2000, Mr. Kinder served as Vice President of Sales for Watchitwork.com.
From September 1999 to November 2000, Mr. Kinder served as General Manager for
Karl Storz Endoscopy. From March 1996 to September 1999, Mr. Kinder served in
the roles of Business Director, Area Vice-President and, most recently, Vice
President of Sales for Imagyn Medical Technologies, Inc. From March 1996 to
April 1997, Mr. Kinder served as Director of Sales for Microsurg, a company that
was later sold to Imagyn Medical Technologies, Inc.
Richard P. Lanigan has been our Vice President of Government Affairs and
Business Development since March 2001, Vice President of Sales and Marketing
since March 2000 and Director of Marketing since 1997. From 1992 to 1997, Mr.
Lanigan served in various positions, most recently Marketing Manager, at Stryker
Endoscopy. From 1987 to 1992, Mr. Lanigan served in Manufacturing and Operations
management at Raychem Corporation. From 1981 to 1987, he served in the U.S. Navy
where he completed six years of service as Lieutenant in the Supply Corps. Mr.
Lanigan has a Bachelors of Arts in Finance from Notre Dame and a Masters degree
in Systems Management from the University of Southern California.
Christopher M. Owens has been our Vice President of Marketing since
March 2001. Prior to CardioGenesis, Mr. Owens was Director of Marketing for the
global Lamellar Surgery business of Bausch & Lomb. The Lamellar Surgery business
provides surgical products for vision correction procedures. From 1997 to 2000,
Mr. Owens served in a variety of sales related positions (most recently National
Sales Manager) at Imagyn Medical Technologies, Inc., a manufacturer of minimally
invasive surgical specialty products. From 1996 to 1997, Mr. Owens was Marketing
Product Manager for Stackhouse, Inc From 1990 to 1996 he also served as a
Product Development Engineer at Baxter Healthcare Corp. He has both a Bachelors
and Masters degree in Plastics Engineering from the University of Massachusetts
and a Masters in Business Administration from the University of Phoenix.
Ilene L. Janofsky has served as our Chief Legal Counsel since January
2001. From 1999 to 2000 Ms. Janofsky served as Patent Manager, Intellectual
Property Counsel and from June 1998 to March 1999 she served as Patent Counsel.
>From 1993 to 1998 Ms. Janofsky worked as an independent patent law consultant.
>From 1990 to 1993 Ms. Janofsky was employed as a Patent Attorney with the
Liposome Company. She has also worked as a Patent Attorney on an independent
basis from 1988 to 1989 and with the New York city law firm of Ladas & Parry
from 1987 to 1988. Ms. Janofsky is admitted to practice law in New York (1986),
New Jersey (1986) and before the United States Patent and Trademark Office
(1983). She passed the California Bar exam in July 2000 and is awaiting
admission. Ms. Janofsky received her Bachelor of Science in Clinical Nutrition
from the University of Florida, Gainesville in 1976 and her Juris Doctorate from
St. John's University Law School in 1985.
ITEM 2. DESCRIPTION OF PROPERTY.
Our headquarters, located in Foothill Ranch, California, are comprised
of 17,845 square feet of leased space. The lease expires in July 2006. Our
facilities, located in Sunnyvale, California, are comprised of 45,960 square
feet. The manufacturing facility contains a Class 10,000 clean room for laser
handpiece and catheter fabrication. The Sunnyvale, California leases expire from
July 2002 through September 2002. We believe our facilities are adequate to meet
our foreseeable requirements. There can be no assurance that additional
facilities will be available to us, if and when needed, thereafter.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending legal proceedings against us other than ordinary
litigation incidental to our business, the outcome of which, individually or in
the aggregate, is not expected to have a material adverse effect on our business
or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANTS SHARES AND RELATED SHAREHOLDER MATTERS.
(a) Our common stock is traded on the Nasdaq National Market under the
symbol CGCP (and, prior to our name change, under the symbol ESTI), since May
31, 1996. For the periods indicated, the following table presents the range of
high and low sale prices for the common stock as reported by the Nasdaq National
Market.
2000 HIGH LOW
---- ---- ---
First Quarter....................................... $11.50 $6.75
Second Quarter...................................... $ 7.69 $2.88
Third Quarter....................................... $ 4.69 $3.31
Fourth Quarter...................................... $ 4.06 $0.50
1999 HIGH LOW
---- ---- ---
First Quarter....................................... $14.25 $7.25
Second Quarter...................................... $12.38 $7.69
Third Quarter....................................... $18.69 $9.75
Fourth Quarter...................................... $15.94 $5.00
As of December 31, 2000 shares of our common stock were held by 190
shareholders of record.
We have never paid a cash dividend on our common stock and do not
anticipate paying any cash dividends in the foreseeable future, as we intend to
retain our earnings, if any, to generate increased growth and for general
corporate purposes.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated statement of operations data for
fiscal years ended 2000, 1999 and 1998 and the consolidated balance sheet data
for 2000 and 1999 set forth below are derived from the our consolidated
financial statements and are qualified by reference to our consolidated
financial statements included herein.
The selected consolidated statement of operations data for fiscal year
ended 1997 and 1996 and the consolidated balance sheet data for 1998, 1997 and
1996 have been derived from our audited financial statements not included
herein. These historical results are not necessarily indicative of the results
of operations to be expected for any future period. As a result of our pooling
of interest with the former CardioGenesis, all prior period data has been
restated as if the combined entity existed for all periods presented.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2000 1999(1) 1998 1997 1996
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net revenues......................... $ 22,210 $ 25,324 $ 15,080 $ 13,058 $ 13,718
Cost of revenues..................... 10,055 13,246 7,868 7,295 6,424
-------- -------- -------- -------- --------
Gross profit........................ 12,155 12,078 7,212 5,763 7,294
-------- -------- -------- -------- --------
Operating expenses:
Research and development............ 5,065 11,353 29,861 26,217 13,323
Sales and marketing................. 15,349 16,553 17,663 11,542 5,949
General and administrative.......... 6,660 8,028 10,821 9,462 4,820
Merger-related costs................ -- 5,214 -- -- --
-------- -------- -------- -------- --------
Total operating expenses............ 27,074 41,148 58,345 47,221 24,092
-------- -------- -------- -------- --------
Operating loss...................... (14,919) (29,070) (51,133) (41,458) (16,798)
Interest and other income (expense),
net.................................. 310 737 3,366 5,240 3,842
-------- -------- -------- -------- --------
Net loss............................ $(14,609) $(28,333) $(47,767) $(36,218) $(12,956)
======== ======== ======== ======== ========
Net loss per share -- basic and
diluted........................... $ (0.48) $ (0.99) $ (1.77) $ (1.39) $ (0.65)
======== ======== ======== ======== ========
Shares used in per share calculation 30,166 28,629 27,000 26,027 20,019
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities......................... $ 3,357 $ 13,313 $ 27,941 $ 75,729 $110,271
Working capital...................... 4,662 10,031 22,243 68,999 105,185
Total assets......................... 16,965 34,019 52,978 91,714 123,003
Long-term debt, less current portion. 405 815 114 10 20
Accumulated deficit.................. (153,833) (139,224) (110,891) (63,124) (26,906)
Total shareholders' equity........... 7,974 18,573 37,276 82,374 117,061
(1) Cost of revenues includes $2.5 million of inventory write-offs and upgrades
associated with the March 1999 merger.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains descriptions of our expectations regarding future
trends affecting our business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Please read the section below titled "Factors Affecting Future Results"
to review conditions which we believe could cause actual results to differ
materially from those contemplated by the forward-looking statements.
Forward-looking statements are identified by words such as "believes,"
"anticipates," "expects," "intends," "plans," "will," "may" and similar
expressions. In addition, any statements that refer to our plans, expectations,
strategies or other characterizations of future events or circumstances are
forward-looking statements. Our business may have changed since the date hereof
and we undertake no obligation to update these forward looking statements.
The following discussion should be read in conjunction with financial
statements and notes thereto included in this Annual Report on Form 10-K.
OVERVIEW
CardioGenesis Corporation formerly known as Eclipse Surgical
Technologies, Inc. ("CardioGenesis", "Company"), incorporated in California in
1989, designs, develops, manufactures and distributes laser-based surgical
products and disposable fiber-optic accessories for the treatment of advanced
cardiovascular disease through transmyocardial revascularization ("TMR") and
percutaneous transluminal myocardial revascularization ("PMR").
On February 11, 1999, we received final approval from the FDA for our
TMR products for certain indications, and we are now able to sell those products
in the U.S. on a commercial basis. We have also received the European Conforming
Mark ("CE Mark") allowing the commercial sale of our TMR laser systems and our
PMR catheter system to customers in the European Community. Effective July 1,
1999, Health Care Financial Administration began providing Medicare coverage for
TMR. Hospitals and physicians are now eligible to receive Medicare reimbursement
for TMR equipment and procedures.
We have completed pivotal clinical trials involving PMR, and study
results were submitted to the FDA in a Pre Market Approval (PMA) application in
December of 1999 along with subsequent amendments. As discussed above under the
caption "Regulatory Status," the FDA Advisory Panel recommended against approval
of PMR for public sale and use in the United States. However, we will continue
to pursue FDA approval for PMR. There can be no assurance, however, that we will
receive a favorable decision from the agency.
As of December 31, 2000, we had an accumulated deficit of $153,833,000.
We expect to continue to incur operating losses related to the expansion of
sales and marketing activities. The timing and amounts of our expenditures will
depend upon a number of factors, including the efforts required to develop our
sales and marketing organization, the timing of market acceptance, if any, of
our products and the status and timing of regulatory approvals.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net Revenues
Net revenues of $22,210,000 for the year ended December 31, 2000
decreased $3,114,000 or 12% when compared to net revenues of $25,324,000 for the
year ended December 31, 1999. The decrease in revenue was mainly due to a
reduction in sales of laser systems resulting from a change, made at the end of
1999, to a new
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sales model which emphasizes laser system placements to develop the disposable
handpiece market more rapidly. The reduction in laser sales is partially offset
by an increase in disposable handpiece sales generated from the new sales model.
Laser revenue fell by $8,750,000 while disposable handpieces revenue
increased by $8,000,000. Handpiece revenue consisted of $3,100,000 in sales of
product to customers operating under the loaned laser program, $2,000,000 in
premiums associated with those handpieces and $7,300,000 in handpiece sales to
customers not operating under the loaned laser program. Compared to the prior
year, these handpiece sales increased $2,600,000, $1,900,000 and $3,500,000,
respectively. Other domestic changes in revenue in the year ended December 31,
2000 were reductions due to no research revenue associated with the sale of
intellectual property compared to $730,000 in the prior year, no domestic PMR
revenue for product sold in conjunction with active clinical trials as compared
to $600,000 in the year prior and a $300,000 increase in service revenue
associated with extended service contracts and service calls. International
sales, accounting for approximately 10% of total sales for the year ended
December 31, 2000, fell $1,300,000 from the prior year when international sales
accounted for 14% of total sales. This reduction can be explained by a reduction
in international sales representation. We define international sales as sales to
customers located outside of the United States. (See "-- Risk Factors.")
Gross Profit
Gross profit increased to $12,155,000 or 55% of net revenues for the
year ended December 31, 2000 as compared to $12,078,000 or 48% of net revenues
for the year ended December 31, 1999. In 1999 we incurred $2,523,000 in cost of
revenues for inventory write-offs and a laser upgrade program resulting from our
merger with the former CardioGenesis Corporation. Excluding these one-time
charges, gross margin in the year ended December 31, 2000 decreased $2,446,000
compared to the prior year. This decrease in gross margin in absolute terms and
as a percentage of sales resulted from the fixed component of cost of goods sold
becoming a larger portion of sales, due to the decrease in sales volumes.
We began using a new sales model in the quarter ending December 31,
1999. The new sales model was derived to expedite the process of laser system
placement and the adoption of TMR. Under the new model, hospitals were given the
opportunity to bypass the capital approval process and, as a result, we were
able to place more lasers than we would have placed if we had continued to sell
lasers to hospitals. Given that product margins of lasers and disposable
handpieces vary only slightly, the change in composition of our revenue did not
significantly affect our gross margin.
Research and Development
Research and development expenditures of $5,065,000 decreased $6,288,000
or 55% for the year ended December 31, 2000 when compared to $11,353,000 for the
year ended December 31, 1999. The decrease in overall research and development
expense is comprised of a $4,875,000 reduction in expenses related to clinical
trials, a $675,000 reduction in engineering project expenses and a $725,000
reduction in employee related expenses as headcount has fallen through general
attrition. We expect research and development expenses to continue to decline in
the upcoming year with a continuing reduction in clinical and product
development activities.
Sales and Marketing
Sales and marketing expenditures of $15,349,000 decreased $1,204,000 or
7% for the year ended December 31, 2000 when compared to $16,553,000 for the
year ended December 31, 1999. The decrease in absolute sales and marketing
dollars is mainly due to commission payments made for laser sales. Not only was
laser revenue in 2000 $8,700,000 lower than in 1999, the average commission rate
on the year 2000 laser sales was substantially lower due to the transition from
an outside distributor to an inside sales force for a region of the US at the
end of 1999. We expect that spending on sales and marketing will decrease in the
upcoming year,
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despite continued development of the TMR and PMR market, as the Company's focus
on cost reduction becomes reflected in lower expenditures for outside services
and travel costs. At year-end a sales force transition was underway which is
expected to continue through the second quarter of 2001. New sales
representatives are being hired to fill openings resulting from general
attrition and the release of sales representatives who did not meet their sales
objectives.
General and Administrative
General and administrative expenses decreased by $1,368,000 or 17% to
$6,660,000 in 2000 from $8,028,000 in 1999. The decrease is due mainly to a
$1,000,000 reduction of salary and wage expense associated with the elimination
of redundant positions that existed between the former CardioGenesis Corporation
and us prior to the March 17, 1999 merger and with the CEO position that was
filled for only a portion of 2000. Another significant reduction was an $850,000
reduction in bad debt expense. We expect general and administrative expenses to
decline somewhat from prior year levels as we anticipate reductions in deferred
compensation and bad debt expense and we plan to outsource patent work.
Merger Related Costs
There were no merger related costs in 2000 associated with the merger
between us and the former CardioGenesis Corporation, while in 1999 there was
$5,214,000 in merger related costs.
Interest and Other Income (Expense), Net
Interest and other income of $400,000 decreased $401,000 or 50% for the
year ended December 31, 2000 when compared to $801,000 for the year ended
December 31, 1999. The decrease was due to lower investments in marketable
securities and cash and cash equivalents.
Interest expense of $32,000 decreased $32,000 or 50% for the year ended
December 31, 2000 when compared to $64,000 for the year ended December 31, 1999.
This decrease reflects a lower level of debt outstanding.
Equity in net loss of investee is a new non-cash expense in 2000. It
represents our share of the net loss of Microheart Holdings, Inc., given our
November 15, 2000 exercise of warrants to increase our ownership percentage to
32.1%.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Revenues
Net revenues of $25,324,000 for the year ended December 31, 1999
increased $10,244,000 or 68% when compared to net revenues of $15,080,000 for
the year ended December 31, 1998. The increase in revenues was due to $7,300,000
in higher sales of laser systems and $2,580,000 in higher sales of disposable
products resulting from the receipt of FDA approval on our TMR products and an
increase in research revenue associated with the sale of intellectual property
of $310,000. Upon receipt of FDA approval, demand for the TMR 2000 laser system
and Sologrip II disposable handpiece increased. Not only did existing sites who
were cleared to perform TMR commercially begin to order more disposable devices,
a large influx of new customers was added which increased the number of laser
systems we shipped and in turn increased the number of handpieces sold. Export
sales accounted for approximately 14% and 24% of total sales for the years ended
December 31, 1999 and 1998, respectively. The percentage decrease relative to
total sales is mainly due to higher domestic sales from the receipt of FDA
approval on our TMR products, as international sales fell by only $30,000. We
define export sales as sales to customers located outside of the United States.
(See "-- Risk Factors.")
Gross Profit
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Gross profit increased to $12,078,000, $14,601,000 net of the merger
related inventory write-offs and a laser upgrade program or 58% of net revenues
for the year ended December 31, 1999, as compared to $7,212,000 or 48% of net
revenues for the year ended December 31, 1998, an increase of $7,389,000. This
increase both in percentage and in absolute terms resulted from greater unit
sales volume and a higher average sales price on lasers and disposables; these
factors increased gross margin by approximately $3,100,000 and $3,800,000,
respectively. Lower unit cost contributed an additional $500,000 towards gross
margin, as the fixed manufacturing expense were applied over higher production
volumes. Gross profit percentage, including the inventory and upgrade program
write-off related to the merger, was 48% of net revenues.
Research and Development
Research and development expenditures of $11,353,000 decreased
$18,508,000 or 62% for the year ended December 31, 1999 when compared to
$29,861,000 for the year ended December 31, 1998. The decrease in these expenses
reflects cost savings resulting from the merger with the former CardioGenesis
Corporation by the elimination of redundant TMR and PMR clinical trials,
engineering and clinical support activity of $2 million, $8 million and $2
million, respectively. There was an additional $6 million of clinical expense
reductions during 1999 attributed to the completion of major trials in 1998 and
early 1999.
Sales and Marketing
Sales and Marketing expenditures of $16,553,000 decreased $1,110,000 or
6% for the year ended December 31, 1999 when compared to $17,663,000 for the
year ended December 31, 1998. The decrease in absolute dollars is mainly due to
cost efficiencies realized from the merger. Prior to the merger, both we and the
former CardioGenesis Corporation were operating separate sales units in Europe.
Cost savings from the elimination of this redundancy was approximately $1.5
million. This savings is partially offset by $250,000 in increased general
marketing expenses supporting the commercial TMR products and $200,000 in
increased commissions.
General and Administrative
General and administrative expenses decreased by $2,793,000 or 26% to
$8,028,000 in 1999 from $10,821,000 in 1998. The decrease is due to a $3.5
million reduction in litigation expenses offset by a $700,000 increase in
deferred compensation to consultants.
Merger Related Costs
The former CardioGenesis Corporation was a medical device company like
us, which developed, manufactured, and marketed cardiac revascularization
products for the treatment of advanced cardiovascular disease and severe angina
pain through TMR and PMR. The former CardioGenesis Corporation also manufactured
and marketed disposable products to perform intraoperative transmyocardial
revascularization, catheter-based percutaneous myocardial revascularization, and
thorascopic transmyocardial revascularization to treat patients afflicted with
debilitating angina. During the quarter ended March 31, 1999, we recognized
merger-related costs of $6,893,000 for financial advisory and legal fees,
personnel severance, terminated relationships and other costs including
write-offs of fixed assets and inventory. A majority of the terminated employees
were located in California and worked in operations, sales, marketing, quality,
research and development and administrative functions. A total of 40 employees
were terminated.
During the remaining three quarters in the year ended December 31, 1999,
we recognized additional merger-related costs of $844,000, which was mainly due
to an upgrade program to replace customer owned equipment rendered unusable by
the merger. This increase brought the total of merger related costs for the
twelve
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months ended December 31, 1999 to $7,737,000; this includes inventory write-offs
and the laser upgrade program totaling $2,523,000 that are accounted for in our
cost of revenues. We do not expect any further charges for merger related
expense and anticipate the last merger-related payment to occur in the second
part of 2001. The following table summarizes the merger-related costs (in
thousands).
DESCRIPTION AMOUNT
----------- ------
Financial advisory and legal fees......................... $ 2,528
Personnel severance....................................... 1,190
Terminated relationships/contracts........................ 910
Other costs including laser upgrade program and fixed
asset and inventory write-offs............................ 3,109
-------
Subtotal................................................. 7,737
Less: Amount included in cost of revenues................ (2,523)
-------
Total.................................................... $ 5,214
=======
Interest and Other Income (Expense), Net
Interest and other income of $801,000 decreased $2,653,000 or 77% for
the year ended December 31, 1999 when compared to $3,454,000 for the year ended
December 31, 1998. The decrease was due to lower investments in marketable
securities and cash and cash equivalents.
Interest expense of $64,000 decreased $24,000 or 27% for the year ended
December 31, 1999 when compared to $88,000 for the year ended December 31, 1998.
This decrease reflects a lower level of debt outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short and long-term marketable securities
were $3,357,000 at December 31, 2000 compared to $13,313,000 at December 31,
1999, a decrease of 75%. We used $12,281,000 of cash for operating activities,
including funding our operating loss and decreases in accrued liabilities in
2000.
Accounts receivable of $3,654,000 at December 31, 2000 decreased 56% to
$8,119,000 at December 31, 1999, even though annual sales only decreased by 12%
when comparing the same periods. The decrease in accounts receivable is
attributed to a decrease in sales in the three month period ending December 31,
2000 as compared to the same period ending in 1999. Non-current accounts
receivable of $119,000 at December 31, 2000 decreased 89% to $1,125,000 at
December 31, 1999. Non-current accounts receivable is comprised of leases that
were recognized in prior years.
Inventories decreased by $1,583,000 or 23% to $5,400,000 at December 31,
2000 from a level of $6,983,000 at December 31, 1999. This decrease is mainly
due to a reduction of $900,000 in gross inventory from lower purchases of raw
materials relative to inventory outflows via cost of revenues, along with the
addition of $670,000 of inventory reserves.
Inventory reserves increased by $182,000 to $2,180,000 at December 31,
2000 compared to $1,998,000 at December 31, 1999. During the year, approximately
$673,000 of new reserves were accrued, with $360,000 of this amount attributed
to lasers in Europe for which there was no intent to sell and $180,000 of the
reserve being attributed to raw materials held in excess of current
requirements. Reserve balances were reduced during the year by write-offs of
approximately $491,000 for obsolete and out-of-date material.
As of December 31, 2000, there were reserves of $2,180,000 against gross
inventory of $7,580,000 for a reserve percentage of 29%. Approximately $980,000
of these reserves relates to lasers in Europe for which there was no intent to
sell, while $600,000 is reserved for raw materials in excess of current
requirements and $440,000
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is reserved for service/obsolete inventory. The Company is closely monitoring
its inventory levels with a view to balancing outlays for raw materials with
sales requirements.
Investing activities, consisting primarily of purchases and sale of
marketable securities and additions to property and equipment, provided cash of
$6,700,000, $16,100,000 and $28,400,000 in fiscal years 2000, 1999, and 1998
respectively. In the fourth quarter of 2000, we increased our ownership interest
in privately-held MicroHeart Holdings, Inc. to 32.1% for cash compensation of
$310,000. The investment in MicroHeart is accounted for under the equity method.
As of December 31, 2000, we recorded a net loss of $58,000, which represents
CardioGenesis' equity in the loss incurred by MicroHeart. Financing activities
provided cash of $3,400,000, $8,400,000 and $1,300,000 in fiscal years 2000,
1999 and 1998 respectively primarily from the issuance of common stock pursuant
to exercise of stock options and warrants and the issuance of common stock.
Since our inception, we have satisfied our capital requirements
primarily through sales of our equity securities. In addition, our operation has
been funded in part through sales of our products.
In September 2000, we sold 526,496 shares of our common stock to Acqua
Wellington at a negotiated purchase price of $3.7987 per share. We did not pay
any other compensation in conjunction with the sale of our common stock.
In March 2001, we sold 898,202 shares of common stock to Acqua
Wellington at a negotiated purchase price of $1.1133 per share. We did not pay
any other compensation in conjunction with the sale of our common stock. In
April 2001, the Board adopted an amendment to our Bylaws which precludes the
Company from entering into or exercising any rights under any equity line
agreement, including the Acqua Wellington equity line agreement, unless approval
from the shareholders holding a majority of the shares is obtained.
In April 2001, we sold 2,000,000 shares of common stock to an
institutional entity at a negotiated purchase price of $1.00 per share. We did
not pay any other compensation in conjunction with the sale of our common stock.
We have incurred significant losses for the last several years and at
December 31, 2000 have an accumulated deficit of $153,833,000. The accompanying
financial statements have been prepared assuming we will continue as a going
concern. Our ability to continue as a going concern is dependent upon achieving
profitable operations in the future. Our plans include increasing sales through
increased direct sales and marketing efforts on existing products and achieving
timely regulatory approval for certain other products under clinical trials.
We also plan to continue our cost containment efforts that are focused
on reducing our cost of revenues and on bringing operating expenses in line with
our revenues. In order to reduce our cost of revenues, we have focused our
efforts on the following activities: (i) downsizing the manufacturing work force
to levels consistent with current production activity; (ii) simplifying and
improving manufacturing procedures; and (iii) reducing the number of products
offered for sale worldwide. In order to reduce our operating expenses, we have
focused our efforts on reducing headcount in functions that are not essential to
critical activities.
Currently, a priority of the Company is to achieve break-even followed
by profitability within a relatively short span of time. In many respects, the
Company's actions have been guided by this imperative, and the resulting cost
containment measures have helped to conserve our cash. The focus of the Company
is upon critical activities. Production activities or operating expenses that
are nonessential to our core operations have been, or are in the process of
being, eliminated.
We have recognized the need for infusion of cash. In September 2000,
March 2001 and April 2001, we raised approximately $1,873,000, $1,000,000 and
$1,925,000, respectively, net of estimated offering costs, from the sale of
shares of common stock. In April 2001, we received a non-binding letter of
intent from a business credit financing company regarding an asset-based
financing agreement current level of which will provide an estimated $1,000,000
of additional financing based upon current level of our qualified domestic
accounts
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receivable which will serve as collateral. We believe that if revenue from sales
or new funds from debt or equity instruments is insufficient to maintain the
current expenditure rate, it will be necessary to significantly reduce our
operations until an appropriate solution is implemented.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly financial information
for the periods indicated. This information has been derived from unaudited
financial statements that, in the opinion of management, have been prepared on
the same basis as the audited information, and includes all normal recurring
adjustments necessary for a fair presentation of such information. The results
of operations for any quarter are not necessarily indicative of the results to
be expected for any future periods.
THREE MONTHS ENDED
----------------------------------------------------------------------------------
2000 1999
------------------------------------ -------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- ------- -------- ------- -------- -------
Net revenues....... $ 5,677 $ 6,608 $ 5,014 $ 4,911 $ 4,474 $ 7,190 $ 6,085 $ 7,575
Gross profit....... 3,346 3,910 2,554 2,345 1,177 (a) 3,695 (b) 2,954 (c) 4,252 (d)
Operating loss..... (4,546) (3,398) (3,800) (3,175) (15,474)(a) (4,339)(b) (4,982)(c) (4,275)(d)
Net loss........... (4,439) (3,262) (3,744) (3,164) (15,166)(a) (4,201)(b) (4,906)(c) (4,060)(d)
Net loss per share:
Basic and diluted. (0.15) (0.11) (0.13) (0.10) (0.55) (0.15) (0.17) (0.14)
Weighted average
shares outstanding. 29,664 30,064 30,191 30,729 27,576 28,086 28,591 29,425
(a) Gross profit includes cost of revenues of $1,392,000 related to inventory
and fixed asset write-offs in connection with the merger. Operating loss
includes merger-related costs of $5,501,000. Net loss includes cost of
revenues of $1,392,000 related to inventory write-offs in connection with
the merger and merger-related costs of $5,501,000.
(b) Gross profit includes cost of revenues of $625,000 related to a laser
upgrade program in connection with the merger. Operating loss includes a
reversal of a previously recorded reserve of $541,000. Net loss includes
cost of revenues of $625,000 related to a laser upgrade program in
connection with the merger and a reversal of a previously recorded reserve
of $541,000.
(c) Gross profit includes cost of revenues of $179,000 related to a laser
upgrade program in connection with the merger. Operating loss includes
merger-related costs of $257,000. Net loss includes cost of revenues of
$179,000 related to a laser upgrade program in connection with the merger
and merger-related costs of $257,000.
(d) Gross profit includes cost of revenues of $327,000 related to a laser
upgrade program in connection with the merger. Operating loss includes a
reversal of a previously recorded reserve of $4,000. Net loss includes cost
of revenues of $327,000 related to a laser upgrade program in connection
with the merger and a reversal of a previously recorded reserve of $4,000.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities. SFAS 133 requires that all derivatives be recognized at
fair value in the statement of financial position, and that the corresponding
gains or losses be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of hedging relationship
that exists. We do not currently hold derivative instruments or engage in
hedging activities. We will adopt SFAS 133 in the first quarter of 2001 and we
do not believe that the initial adoption will have a material impact on the
financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB 25." FIN 44 provides updated accounting
guidance regarding implementing and interpreting APB 25, and should be applied
on a prospective basis from July 1, 2000. The Company's adoption of this
pronouncement had no impact on the Company's financial position or results of
operations.
FACTORS AFFECTING FUTURE RESULTS
In addition to the other information included in this Form 10-K, the
following risk factors should be considered carefully in evaluating us and our
business.
OUR ABILITY TO CONTINUE AS A GOING CONCERN IS DEPENDENT UPON ACHIEVING
PROFITABLE OPERATIONS IN THE FUTURE.
We will have a continuing need for new infusions of cash until revenues
are increased to meet our operating expenses. We plan to increase our sales
through increased direct sales and marketing efforts on existing products and
achieving timely regulatory approval for other products under clinical trials.
If we are unable to increase our sales or achieve timely regulatory approval for
our products, we will be unable to significantly increase our revenues. We
believe that if we are unable to generate sufficient funds from sales or from
debt or equity issuances to maintain our current expenditure rate, it will be
necessary to significantly reduce our operations. This would raise substantial
doubt about our ability to continue as a going concern. We may be required to
seek additional sources of financing, which could include short-term debt,
long-term debt or equity. There is a risk that we may be unsuccessful in
obtaining such financing and will not have sufficient cash to fund our
operations.
WE MAY FAIL TO OBTAIN REQUIRED REGULATORY APPROVALS TO MARKET OUR PRODUCTS
INCLUDING OUR PMR LASER SYSTEM IN THE UNITED STATES.
Our business could be harmed if any of the following events,
circumstances or occurrences related to the regulatory process occurred thereby
causing a reduction in our revenues:
- the failure to obtain regulatory approvals for our PMR system;
- significant limitations in the indicated uses for which our products
may be marketed;
- substantial costs incurred in obtaining regulatory approvals.
The Food and Drug Administration has not approved our PMR laser systems
for any application in the United States. The PMR study compares PMR to
conventional medical therapy in patients with no option for other treatment. The
Food and Drug Administration may not accept the study as safe and effective, and
PMR may not be approved for commercial use in the United States. Responding to
Food and Drug Administration requests for additional information could require
substantial financial and management resources and take several years.
In October 2000, preliminary results from a competitor's clinical trial
of a catheter-based device employing Direct Myocardial Revascularization also
known as DMR were presented at a medical conference in Washington D.C. The
trial's principal investigator concluded that this catheter-based device did not
show significant evidence of clinical benefit with regard to angina class
reduction or exercise tolerance, and questioned the efficacy of other devices
and
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procedures relying on TMR. We believe that the preliminary results of that
catheter-based device study should not call the results of our PMR study into
question because the devices and procedures are substantially different. We
cannot assure you, however, that the preliminary results of that catheter-based
device study will impact the Food and Drug Administration's decision on our PMR
system.
THE MEDICAL COMMUNITY HAS NOT BROADLY ADOPTED OUR PRODUCTS, AND UNLESS OUR
PRODUCTS ARE BROADLY ADOPTED, OUR BUSINESS WILL SUFFER.
Our TMR products have not yet achieved broad commercial adoption, and
our PMR products are experimental and have not yet achieved broad clinical
adoption. We cannot predict whether or at what rate and how broadly our products
will be adopted by the medical community. Our business would be harmed if our
TMR and PMR systems fail to achieve significant market acceptance.
THE RECEIPT OF POSITIVE ENDORSEMENTS BY PHYSICIANS IS ESSENTIAL FOR THE SUCCESS
OF OUR PRODUCTS IN THE MARKET PLACE.
Positive endorsements, by physicians, are essential for clinical
adoption of our TMR and PMR laser systems. Even if the clinical efficacy of TMR
and PMR laser systems is established, physicians may elect not to recommend TMR
and PMR laser systems for any number of reasons.
Clinical adoption of these products will depend upon:
- our ability to facilitate training of cardiothoracic surgeons and
interventional cardiologists in TMR and PMR therapy;
- willingness of such physicians to adopt and recommend such
procedures to their patients; and
- raising the awareness of TMR and then PMR with the targeted patient
population.
Patient acceptance of the procedure will depend on:
- physician recommendations;
- the degree of invasiveness;
- the effectiveness of the procedure; and
- the rate and severity of complications associated with the procedure
as compared to other procedures.
TO EXPAND OUR BUSINESS, WE MUST ESTABLISH EFFECTIVE SALES, MARKETING AND
DISTRIBUTION SYSTEMS.
To expand our business, we must establish effective systems to sell,
market and distribute products. To date, we have had limited sales which have
consisted primarily of U.S. sales of our TMR lasers and disposable handpieces on
a commercial basis since February 1999 and PMR lasers and disposable catheters
for investigational use only. We have been expanding our operations by hiring
additional sales and marketing personnel. This has required and will continue to
require substantial management effort and financial resources.
IF OUR SALES FORCE IS NOT SUCCESSFUL IN INCREASING MARKET SHARE AND SELLING OUR
DISPOSABLE HANDPIECES, OUR BUSINESS WILL SUFFER.
With Food and Drug Administration approval of our TMR laser system, we
are marketing our products primarily through our direct sales force. If the
sales force is not successful in increasing market share and selling our
disposable handpieces, our business will suffer. In the fourth quarter of 1999,
we changed our U.S. sales strategy to include both selling lasers to hospitals
outright, as well as loaning lasers to hospitals in return for the hospital
purchasing a minimum number of disposable handpieces at a higher price. During
the current year, the majority of lasers shipped have been under this loan
program. The purpose of this strategy is to focus our sales force on increasing
market penetration and selling disposable handpieces used in connection with our
TMR procedure.
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THE EXPANSION OF OUR BUSINESS MAY PUT ADDED PRESSURE ON OUR MANAGEMENT AND
OPERATIONAL INFRASTRUCTURE AFFECTING OUR ABILITY TO MEET ANY INCREASED DEMAND
FOR OUR PRODUCTS AND POSSIBLY HAVING AN ADVERSE EFFECT ON OUR OPERATING RESULTS.
The growth in our business may place a significant strain on our limited
personnel, management, financial systems and other resources. The evolving
growth of our business presents numerous risks and challenges, including:
- the dependence on the growth of the market for our TMR and PMR
systems;
- our ability to successfully and rapidly expand sales to potential
customers in response to increasing clinical adoption of the TMR
procedure;
- the costs associated with such growth, which are difficult to
quantify, but could be significant;
- domestic and international regulatory developments;
- rapid technological change;
- completing the clinical trials that are currently in progress as
well as developing and preparing additional products for clinical
trials;
- the highly competitive nature of the medical devices industry; and
- the risk of entering emerging markets in which we have limited or no
direct experience.
To accommodate any such growth and compete effectively, we must obtain
additional funding to improve information systems, procedures and controls and
expand, train, motivate and manage our employees, and such funding may not be
available in sufficient quantities, if at all. If we are not able to manage
these activities and implement these strategies successfully to expand to meet
any increased demand, our operating results could suffer.
OUR OPERATING RESULTS ARE EXPECTED TO FLUCTUATE AND QUARTER-TO-QUARTER
COMPARISONS OF OUR RESULTS MAY NOT INDICATE FUTURE PERFORMANCE.
Our operating results have fluctuated significantly from
quarter-to-quarter and are expected to fluctuate significantly from
quarter-to-quarter due to a number of events and factors, including:
- the level of product demand and the timing of customer orders;
- changes in strategy;
- delays associated with the Food and Drug Administration and other
regulatory approval processes;
- personnel changes including our ability to continue to attract,
train and motivate additional qualified personnel in all areas;
- the level of international sales;
- changes in competitive pricing policies;
- the ability to develop, introduce and market new and enhanced
versions of products on a timely basis;
- deferrals in customer orders in anticipation of new or enhanced
products;
- product quality problems; and
- the enactment of health care reform legislation and any changes in
third party reimbursement policies.
We believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance. Due to the emerging nature
of the markets in which we compete, forecasting operating results is difficult
and unreliable. Over the past year, our revenue has been lower than anticipated,
largely attributable to the transition to our new sales strategy. It is likely
or possible that our operating results for a future quarter will fall below the
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expectations of public market analysts and investors. When this occurred in the
past, the price of our common stock fell substantially, and if this occurs
again, the price of our common stock may fall again, perhaps substantially.
GROWTH IN OUR FUTURE OPERATING RESULTS IS HIGHLY CONTINGENT AND SUBJECT TO
SIGNIFICANT RISKS.
Our future operating results will be significantly affected by our
ability to:
- successfully and rapidly expand sales to potential customers;
- implement operating, manufacturing and financial procedures and
controls;
- improve coordination among different operating functions; and,
- achieve manufacturing efficiencies as production volume increases.
WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET OUR PRODUCTS IF THIRD PARTY
REIMBURSEMENT FOR THE PROCEDURES PERFORMED WITH OUR PRODUCTS IS NOT AVAILABLE
FOR OUR HEALTH CARE PROVIDER CUSTOMERS.
Few individuals are able to pay directly for the costs associated with
the use of our products. In the United States, hospitals, physicians and other
healthcare providers that purchase medical devices generally rely on third party
payors, such as Medicare, to reimburse all or part of the cost of the procedure
in which the medical device is being used.
Effective July 1, 1999 the Health Care Financing Administration
commenced Medicare coverage for TMR systems for any manufacturer's TMR
procedures. Hospitals and physicians are now eligible to receive Medicare
reimbursement covering 100% of the costs for TMR procedures and equipment. The
Health Care Financing Administration may not approve reimbursement for PMR. If
it does not provide reimbursement, our ability to successfully market and sell
our PMR products will be harmed. We have limited experience to date with the
acceptability of our TMR procedures for reimbursement by private insurance and
private health plans and thus do not have reliable data as to the success of our
patients in obtaining reimbursement for the costs of our TMR products outside of
the Medicare system. Private insurance and private health plans may not approve
reimbursement TMR or PMR procedures. If they do not provide reimbursement, our
business will suffer.
Potential purchasers must determine whether the clinical benefits of our
TMR and PMR laser systems justify:
- the additional cost or the additional effort required to obtain
prior authorization or coverage; and
- the uncertainty of actually obtaining such authorization or
coverage.
WE FACE COMPETITION FROM OUR COMPETITOR'S PRODUCTS WHICH COULD LIMIT MARKET
ACCEPTANCE OF OUR PRODUCTS AND RENDER OUR PRODUCTS OBSOLETE.
The market for TMR laser systems is competitive. If our competitor is
more effective in developing new products and procedures and marketing existing
and future products, our business will suffer. The market for TMR laser systems
is characterized by rapid technical innovation. Accordingly, our current or
future competitors may succeed in developing TMR products or procedures that:
- are more effective than our products;
- are more effectively marketed than our products; or
- may render our products or technology obsolete.
We currently compete with PLC Systems. PLC recently announced a
co-marketing agreement with Edwards Life Sciences to distribute their lasers and
disposables which is expected to add another 18 direct domestic sales
representatives involved in promoting the PLC technology.
Even with the Food and Drug Administration approval for our TMR laser
system, we will face competition for market acceptance and market share for that
product. Our ability to compete may depend in significant part on the
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timing of introduction of competitive products into the market, and will be
affected by the pace, relative to competitors, at which we are able to:
- develop products;
- complete clinical testing and regulatory approval processes;
- obtain third party reimbursement acceptance; and
- supply adequate quantities of the product to the market.
OUR PRODUCTS DEPEND ON TMR TECHNOLOGY THAT IS RAPIDLY CHANGING WHICH MAY REQUIRE
US TO INCUR SUBSTANTIAL PRODUCT DEVELOPMENT EXPENDITURES TO PREVENT OUR PRODUCTS
FROM BECOMING OBSOLETE.
The medical device industry is characterized by rapid and significant
technological change. Our future success will depend in large part on our
ability to respond to such changes through further product research and
development. In addition, we must expand the indications and applications for
our products by developing and introducing enhanced and new versions of our TMR
and PMR laser systems. Product research and development requires substantial
expenditures and is inherently risky. We may not be able to:
- identify products for which demand exists; or
- develop products that have the characteristics necessary to treat
particular indications.
OVERALL INCREASES IN MEDICAL COSTS COULD ADVERSELY AFFECT OUR BUSINESS.
We believe that the overall escalating cost of medical products and
services has led, and will continue to lead, to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by them. We cannot assure you that in
either United States or international markets that:
- third party reimbursement and coverage will be available or
adequate;
- current reimbursement amounts will not be decreased in the future;
or
- future legislation, regulation or reimbursement policies of third
party payors will not otherwise adversely affect the demand for our
products or our ability to profitably sell our products.
Fundamental reforms in the healthcare industry in the United States and
Europe continue to be considered. We cannot predict whether or when any
healthcare reform proposals will be adopted and what effect such proposals might
have on our business.
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
We have incurred significant losses since inception. Our revenues and
operating income will be constrained:
- until such time, if ever, as we obtain broad commercial adoption of
our TMR laser systems by healthcare facilities in the United States;
- until such time, if ever, as we obtain Food and Drug Administration
and other regulatory approvals for our PMR laser systems; and
- for an uncertain period of time after such approvals are obtained.
We may not achieve or sustain profitability in the future.
THIRD PARTIES MAY LIMIT THE DEVELOPMENT AND PROTECTION OF OUR INTELLECTUAL
PROPERTY, WHICH COULD ADVERSELY AFFECT OUR COMPETITIVE POSITION.
Our success is dependent in large part on our ability to:
- obtain patent protection for our products and processes;
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- preserve our trade secrets and proprietary technology; and
- operate without infringing upon the patents or proprietary rights of
third parties.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. Companies
in the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Certain competitors and potential competitors of
ours have obtained United States patents covering technology that could be used
for certain TMR and PMR procedures. We do not know if such competitors,
potential competitors or others have filed and hold international patents
covering other TMR or PMR technology. In addition, international patents may not
be interpreted the same as any counterpart United States patents.
In September 1995, one of our competitors sent us a notice of potential
infringement of their patent regarding a method for TMR utilizing
synchronization of laser pulses to the electrical signals from the heart. After
discussion with patent counsel, we concluded that we did not utilize the process
and/or apparatus that was the subject of the patent at issue, and we provided a
response to the competitor to that effect. We have not received any additional
correspondence from this competitor on these matters.
In 1996, prior to the merger with us, the company formerly known as
CardioGenesis Corporation initiated a suit in the United States against PLC
seeking a judgment that the PLC patent is invalid and unenforceable. In 1997,
PLC counterclaimed in that suit alleging infringement by the former
CardioGenesis Corporation of the PLC patent. Also in 1997, PLC initiated suit in
Germany against the former CardioGenesis Corporation and the former
CardioGenesis Corporation's former German sales agent alleging infringement of a
European counterpart to the PLC patent. In 1997, the former CardioGenesis
Corporation filed an Opposition in the European Patent Office to a European
counterpart to the PLC patent, seeking to have the European patent declared
invalid.
On January 5, 1999, before trial on the United States suit commenced,
the company formerly known as CardioGenesis Corporation and PLC settled all
litigation between them, both in the United States and in Germany, with respect
to the PLC patent and the European patents. Under the Settlement and License
Agreement signed by the parties, the former CardioGenesis Corporation stipulated
to the validity of the PLC patents and PLC granted CardioGenesis a non-exclusive
worldwide license to the PLC patents. The former CardioGenesis Corporation
agreed to pay PLC a license fee, and minimum royalties, totaling $2.5 million in
equal monthly installments over an approximately forty-month period, with a
running royalty credited against the minimums.
The Settlement and License Agreement applies only to those products or
that technology covered by the PLC patents, and the agreement does not provide
PLC any rights to any former CardioGenesis Corporation intellectual property.
Our TMR 2000 laser system does not use the technology associated with the PLC
patents.
While we periodically review the scope of our patents and other relevant
patents of which we are aware, the question of patent infringement involves
complex legal and factual issues. Any conclusion regarding infringement may not
be consistent with the resolution of any such issues by a court.
COSTLY LITIGATION MAY BE NECESSARY TO PROTECT INTELLECTUAL PROPERTY RIGHTS.
We may have to engage in time consuming and costly litigation to protect
our intellectual property rights or to determine the proprietary rights of
others. In addition, we may become subject to patent infringement claims or
litigation, or interference proceedings declared by the United States Patent and
Trademark Office to determine the priority of inventions.
Defending and prosecuting intellectual property suits, United States
Patent and Trademark Office interference proceedings and related legal and
administrative proceedings are both costly and time-consuming. We may be
required to litigate further to:
- enforce our issued patents;
- protect our trade secrets or know-how; or
- determine the enforceability, scope and validity of the proprietary
rights of others.
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Any litigation or interference proceedings will result in substantial
expense and significant diversion of effort by technical and management
personnel. If the results of such litigation or interference proceedings are
adverse to us, then the results may:
- subject us to significant liabilities to third parties;
- require us to seek licenses from third parties;
- prevent us from selling our products in certain markets or at all;
or
- require us to modify our products.
Although patent and intellectual property disputes regarding medical
devices are often settled through licensing and similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, we may not be able to obtain the necessary licenses on
satisfactory terms, if at all.
Adverse determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from manufacturing and
selling our products. This would harm our business.
The United States patent laws have been amended to exempt physicians,
other health care professionals, and affiliated entities from infringement
liability for medical and surgical procedures performed on patients. We are not
able to predict if this exemption will materially affect our ability to protect
our proprietary methods and procedures.
WE RELY ON PATENT AND TRADE SECRET LAWS, WHICH ARE COMPLEX AND MAY BE DIFFICULT
TO ENFORCE.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain.
Issued patent or patents based on pending patent applications or any future
patent application may not exclude competitors or may not provide a competitive
advantage to us. In addition, patents issued or licensed to us may not be held
valid if subsequently challenged and others may claim rights in or ownership of
such patents.
Furthermore, we cannot assure you that our competitors:
- have not developed or will not develop similar products;
- will not duplicate our products; or
- will not design around any patents issued to or licensed by us.
Because patent applications in the United States were, until recently,
maintained in secrecy until patents issue, we cannot be certain that:
- others did not first file applications for inventions covered by our
pending patent applications; or
- we will not infringe any patents that may issue to others on such
applications.
WE DEPEND ON SINGLE SOURCE SUPPLIERS FOR KEY COMPONENTS AND PRODUCTION WOULD BE
INTERRUPTED IF A KEY SUPPLIER HAD TO BE REPLACED.
We currently purchase critical laser and fiber-optic components from
single sources. These sources may have difficulties supplying our needs for
these components. In addition, we do not have long term supply contracts. As a
result, these sources are not obligated to continue to provide these critical
components to us. Although we have identified alternative suppliers, a lengthy
process would be required to qualify them as additional or replacement
suppliers. Any significant interruption in the supply of critical materials or
components could delay our ability to manufacture our products and could disrupt
our manufacturing operations and harm our business.
LEAD TIMES FOR MATERIALS AND COMPONENTS VARY SIGNIFICANTLY WHICH COULD LEAD TO
EXCESS INVENTORY LEVELS AS WELL AS SHORTAGES OF CRITICAL COMPONENTS IF OUR
SUPPLY FORECASTS ARE INACCURATE.
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We anticipate that products will be manufactured based on forecasted
demand and will seek to purchase subassemblies and components in anticipation of
the actual receipt of purchase orders from customers. Lead times for materials
and components vary significantly and depend on factors such as the business
practices of each specific supplier and the terms of particular contracts, as
well as the overall market demand for such materials and components at any given
time. If the forecasts are inaccurate, we could experience fluctuations in
inventory levels, resulting in excess inventory, or shortages of critical
components, either of which could cause our business to suffer.
WE MAY NOT BE ABLE TO MEET FUTURE DEMAND INCREASES ON TIMELY BASIS BECAUSE SOME
OF OUR SUPPLIERS COULD HAVE DIFFICULTY MEETING SIGNIFICANT OR RAPIDLY INCREASING
ORDER AMOUNTS.
Some of our suppliers could have difficulty expanding their
manufacturing capacity to meet our needs if demand for our TMR and PMR laser
systems were to increase rapidly or significantly. In addition, any defect or
malfunction in the laser or other products provided by such suppliers could
cause a delay in regulatory approvals or adversely affect product acceptance. We
cannot predict if:
- materials obtained from outside suppliers will be available in
adequate quantities to meet our future needs; or
- replacement suppliers can be qualified on a timely basis if our
current suppliers are unable to meet our needs.
WE HAVE LIMITED MANUFACTURING EXPERIENCE WHICH COULD PREVENT US FROM
SUCCESSFULLY INCREASING CAPACITY IN RESPONSE TO MARKET DEMAND.
We have limited experience in manufacturing products. In the course of
manufacturing our products, we may encounter difficulties in increasing
production, including problems involving:
- production yields;
- adequate supplies of components;
- achieving manufacturing efficiencies as production volume increases;
- quality control and assurance (including failure to comply with good
manufacturing practices regulations, international quality standards
and other regulatory requirements); and
- shortages of qualified personnel.
OUR PRODUCTS MAY CONTAIN DEFECTS WHICH COULD DELAY REGULATORY APPROVAL OR MARKET
ACCEPTANCE OF OUR PRODUCTS.
We may experience future product defects, malfunctions, manufacturing
difficulties or recalls related to the lasers or other components used in our
TMR and PMR laser systems. Any such occurrence could cause a delay in regulatory
approvals or adversely affect the commercial acceptance of our products. We are
unable to quantify the likelihood or costs of any such occurrences, but they
could potentially be significant. Our business could be harmed because we may be
unable to sufficiently remedy a significant product recall while still
maintaining our daily manufacturing quotas.
WE MUST COMPLY WITH FOOD AND DRUG ADMINISTRATION MANUFACTURING STANDARDS OR FACE
FINES OR OTHER PENALTIES INCLUDING SUSPENSION OF PRODUCTION.
We are required to demonstrate compliance with the Food and Drug
Administration's current good manufacturing practices regulations if we market
devices in the United States or manufacture finished devices in the United
States. The Food and Drug Administration inspects manufacturing facilities on a
regular basis to determine compliance. If we fail to comply with applicable Food
and Drug Administration or other regulatory requirements, we can be subject to:
- fines, injunctions, and civil penalties;
- recalls or seizures of products;
- total or partial suspensions of production; and
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- criminal prosecutions.
The impact on the company of any such failure to comply would depend on
the impact of the remedy imposed on us.
WE MAY SUFFER LOSSES FROM PRODUCT LIABILITY CLAIMS IF OUR PRODUCTS CAUSE HARM TO
PATIENTS.
We are exposed to potential product liability claims and product
recalls. These risks are inherent in the design, development, manufacture and
marketing of medical devices. Our products are designed to be used in
life-threatening situations where there is a high risk of serious injury or
death, and we could be subject to product liability claims if the use of our TMR
or PMR laser systems is alleged to have caused adverse effects on a patient or
such products are believed to be defective. We are not aware of any material
side effects or adverse events arising from the use of our products.
Any regulatory clearance for commercial sale of these products will not
remove these risks. Any failure to comply with the Food and Drug
Administration's good manufacturing practices or other regulations could hurt
our ability to defend against product liability lawsuits. Although we have not
experienced any product liability claims to date, any such claims could cause
our business to suffer.
OUR INSURANCE MAY BE INSUFFICIENT TO COVER PRODUCT LIABILITY CLAIMS AGAINST US.
Our product liability insurance may not be adequate for any future
product liability problems or continue to be available on commercially
reasonable terms, or at all.
If we were held liable for a product liability claim or series of claims
in excess of our insurance coverage, such liability could harm our business and
financial condition. We maintain insurance against product liability claims in
the amount of $10 million per occurrence and $10 million in the aggregate.
We may require increased product liability coverage as sales of approved
products increase and as additional products are commercialized. Product
liability insurance is expensive and in the future may not be available on
acceptable terms, if at all.
WE DEPEND HEAVILY ON KEY PERSONNEL AND TURNOVER OF KEY EMPLOYEES AND SENIOR
MANAGEMENT COULD HARM OUR BUSINESS.
Our future business and results of operations depend in significant part
upon the continued contributions of our key technical and senior management
personnel. They also depend in significant part upon our ability to attract and
retain additional qualified management, manufacturing, technical, marketing and
sales and support personnel for our operations. If we lose a key employee or if
a key employee fails to perform in his or her current position, or if we are not
able to attract and retain skilled employees as needed, our business could
suffer.
During the last two years, we have had significant change in our senior
management team. Our former Chief Executive Officer, Allen Hill, resigned from
the company in December 1999. One of our current Directors, Alan Kaganov, acted
as interim CEO until we hired our current CEO, Michael Quinn, in October of
2000. Our former Chief Financial Officer, Dick Powers, resigned from the company
in July 2000. Ian Johnson acted as Interim CFO until our current CFO, J. Stephen
Wilkins, was hired in May 2001. Richard Lanigan moved from Vice President of
Sales to Vice President of Regulatory and Government Affairs in March 2001 and
Thomas Kinder was hired in March 2001 as our new Vice President of Sales.
Darrell Eckstein was hired in December 2000 as our Vice President of Operations,
replacing Bill Picht, who resigned earlier in 2000.
Our future business could be harmed by our turnover in senior management
if we have difficulty familiarizing and training our new management with respect
to our business. Further significant turnover in our senior management could
significantly deplete our institutional knowledge held by our existing senior
management team. We depend on the skills and abilities of these key employees in
managing the manufacturing, technical, marketing and sales aspects of our
business, any part of which could be harmed by further turnover.
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WE MAY FAIL TO COMPLY WITH INTERNATIONAL REGULATORY REQUIREMENTS AND COULD BE
SUBJECT TO REGULATORY DELAYS, FINES OR OTHER PENALTIES.
Regulatory requirements in foreign countries for international sales of
medical devices often vary from country to country. In addition, the Food and
Drug Administration must approve the export of devices to certain countries. The
occurrence and related impact of the following factors would harm our business:
- delays in receipt of, or failure to receive, foreign regulatory
approvals or clearances;
- the loss of previously obtained approvals or clearances; or
- the failure to comply with existing or future regulatory
requirements.
To market in Europe, a manufacturer must obtain the certifications
necessary to affix to its products the CE Marking. The CE Marking is an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. In order to obtain and to
maintain a CE Marking, a manufacturer must be in compliance with the appropriate
quality assurance provisions of the International Standards Organization and
obtain certification of its quality assurance systems by a recognized European
Union notified body. However, certain individual countries within Europe require
further approval by their national regulatory agencies.
We have achieved International Standards Organization and European Union
certification for our manufacturing facility. In addition, we have completed CE
mark registration for all of our products in accordance with the implementation
of various medical device directives in the European Union. Failure to maintain
the right to affix the CE Marking or other requisite approvals could prohibit us
from selling our TMR products in member countries of the European Union or
elsewhere. Any enforcement action by international regulatory authorities with
respect to past or future regulatory noncompliance could cause our business to
suffer. Noncompliance with international regulatory requirements could result in
enforcement action such as not being allowed to market our product in the
European Union, which would significantly reduce international revenue.
WE SELL OUR PRODUCTS INTERNATIONALLY WHICH SUBJECTS US TO SPECIFIC RISKS OF
TRANSACTING BUSINESS IN FOREIGN COUNTRIES.
In future quarters, international sales may become a significant portion
of our revenue if our products become more widely used outside of the United
States according to our plan. Our international revenue is subject to the
following risks, the occurrence of any of which could harm our business:
- foreign currency fluctuations;
- economic or political instability;
- foreign tax laws;
- shipping delays;
- various tariffs and trade regulations;
- restrictions and foreign medical regulations;
- customs duties, export quotas or other trade restrictions; and
- difficulty in protecting intellectual property rights.
WE MAY NOT ACHIEVE WIDE ACCEPTANCE OF OUR PRODUCTS IN FOREIGN MARKETS IF WE FAIL
TO OBTAIN THIRD PARTY REIMBURSEMENT FOR THE PROCEDURES PERFORMED WITH OUR
PRODUCTS.
If we obtain the necessary foreign regulatory registrations or
approvals, market acceptance of our products in international markets would be
dependent, in part, upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement is a significant factor considered by
hospitals in determining whether to acquire new equipment. A hospital is more
inclined to purchase new equipment if third-party reimbursement can be obtained.
Reimbursement and health care payment systems in international markets vary
significantly by country. They include both government sponsored health care and
private insurance. Although we expect to seek international reimbursement
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approvals, any such approvals may not be obtained in a timely manner, if at all.
Failure to receive international reimbursement approvals could hurt market
acceptance of TMR products in the international markets in which such approvals
are sought, which would significantly reduce international revenue.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DISTRACT OUR MANAGEMENT, CAUSE
US TO INCUR DEBT, OR DILUTE OUR SHAREHOLDERS.
We may, from time to time, acquire or invest in other complementary
businesses, products or technologies. While there are currently no commitments
with respect to any particular acquisition or investment, our management
frequently evaluates the strategic opportunities available in complementary
businesses, products or technologies. The process of integrating an acquired
company's business into our operations may result in unforeseen operating
difficulties and expenditures and may absorb significant management attention
that would otherwise be available for the ongoing development of our business.
Moreover, the anticipated benefits of any acquisition or investment may not be
realized. Any future acquisitions or investments by us could result in
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, any of which could materially harm our operating results.
THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY RESULT IN
LOSSES FOR INVESTORS.
The market price for our common stock has been and may continue to be
volatile. For example, during the 52-week period ended July 10, 2001, the
closing prices of our common stock as reported on the NASDAQ National Market
ranged from a high of $4.68 to a low of $0.50. We expect our stock price to be
subject to fluctuations as a result of a variety of factors, including factors
beyond our control. These factors include:
- actual or anticipated variations in our quarterly operating results;
- announcements of technological innovations or new products or
services by us or our competitors;
- announcements relating to strategic relationships or acquisitions;
- changes in financial estimates by securities analysts;
- statements by securities analysts regarding us or our industry;
- conditions or trends in the medical device industry; and
- changes in the economic performance and/or market valuations of
other medical device companies.
Because of this volatility, we may fail to meet the expectations of our
shareholders or of securities analysts at some time in the future, and our stock
price could decline as a result.
In addition, the stock market has experienced significant price and
volume fluctuations that have particularly affected the trading prices of equity
securities of many high technology companies. These fluctuations have often been
unrelated or disproportionate to the operating performance of these companies.
Any negative change in the public's perception of medical device companies could
depress our stock price regardless of our operating results. If our common stock
were to trade under $1.00 for 30 consecutive days on the NASDAQ National Market,
our common stock could be subject to certain consequences established by the
NASDAQ National Market such as being delisted.
Recently, when the market price of a stock has been volatile, holders of
that stock have often instituted securities class action litigation against the
company that issued the stock. If any of our shareholders brought such a lawsuit
against us, we could incur substantial costs defending the lawsuit. The lawsuit
could also divert the time and attention of our management.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Disclosures
The Company is exposed to market risks inherent in its operations,
primarily related to interest rate risk and currency risk. These risks arise
from transactions and operations entered into in the normal course of business.
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The Company does not use derivatives to alter the interest characteristics of
its marketable securities or its debt instruments. The Company has no holdings
of derivative or commodity instruments.
Interest Rate Risk. The Company is subject to interest rate risks on
cash and cash equivalents and existing long-term debts and any future financing
requirements. The long-term debt at December 31, 2000 consists of outstanding
balances on a note payable and lease obligations.
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The following table presents the future principal cash flows or amounts
and related weighted average interest rates expected by year for the Company's
existing cash and cash equivalents and long-term debt instruments:
TOTAL
IN THOUSANDS 2001 2002 2003 2004 2005 FAIR VALUE
------------ ------ ------ ------ ------ ------ ----------
Assets Cash, cash equivalents .. $3,357 $ -- $ -- $ -- $ -- $ 3,357
Weighted average interest rate . 4.7% -- -- -- -- 4.7%
Liabilities Fixed Rate Debt Note
payable ....................... $ 86 $ -- $ -- $ -- $ -- $ 86
Weighted average interest rate . 8.0% -- -- -- -- 8.0%
Lease obligation ............... $ 32 $ 32 $ 32 $ -- $ -- $ 96
Weighted average interest rate . 6.8% 6.8% 6.8% -- -- 6.8%
Qualitative Disclosures
Interest Rate Risk. The Company's primary interest rate risk exposures
relate to the impact of interest rate movements on the Company's ability to
obtain adequate financing to fund future operations.
The Company manages interest rate risk on its outstanding long-term
debts through the use of fixed rate debt. Management evaluates the Company's
financial position on an ongoing basis.
The Company does not hedge any balance sheet exposures and intercompany
balances against future movements in foreign exchange rates. The exposure
related to currency rate movements would not have a material impact on future
net income or cash flows.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 below and the Index therein for a listing of the
consolidated financial statements and supplementary data filed as part of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table and discussion sets forth certain information
concerning our current directors. Certain of the information concerning our
executive officers required by this Item is contained in the Section of Part I
of our Annual Report on Form 10-K filed April 17, 2001 entitled "Item 1.
Business --Employees."
NAME AGE POSITION
------------------------------------ ---- ----------------------------------
Michael J. Quinn.................... 56 Chief Executive Officer, President,
Chairman of the Board
Jack M. Gill, Ph.D. ................ 65 Director
Alan L. Kaganov, Sc.D. ............. 62 Director
Robert L. Mortensen (1)(2) ......... 66 Director
Robert C. Strauss (1)(2) ........... 59 Director
-------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
All directors hold office until the next annual meeting of shareholders
or until their successors have been elected and qualified. Officers serve at the
discretion of our Board of Directors and are appointed annually. There are no
family relationships between any of our directors or officers.
Michael J. Quinn has served as our Chief Executive Officer, President
and Chairman of the Board since October 2000. From 1978 to 1988, Mr. Quinn held
senior operating management positions at the level of Vice President, Chief
Operating Officer and President at major healthcare organizations including
American Hospital Supply Corporation, Picker International, Cardinal Health
Group, Bergen Brunswig and Fisher Scientific. Most recently Mr. Quinn served as
President and Chief Executive Officer of Premier Laser Systems, a manufacturer
of surgical and dental products. Prior to that position, he served as President
of Imagyn Medical Technologies, a manufacturer of minimally invasive surgical
specialty products.
Jack M. Gill, Ph.D. has been one of our directors since March 1999. Dr.
Gill formerly served as Chairman of the Board of Directors of CardioGenesis
Corporation from November 1993 to March 1999. Dr. Gill is a founding general
partner of Vanguard Venture Partners and has served in such capacity since 1981.
Dr. Gill is a director of a number of privately held medical device companies.
Dr. Gill received his B.S. degree in Engineering from Lamar University and his
Ph.D. in Organic Chemistry from Indiana University.
Alan L. Kaganov, Sc.D. has been one of our directors since January 1997.
From December 1999 to October 2000, Dr. Kaganov served as Chief Executive
Officer. Since July 1996, Dr. Kaganov has been a Venture Partner at U.S. Venture
Partners. From May 1993 to June 1996, Dr. Kaganov was Vice President of Business
Development and Strategic Planning at Boston Scientific Corporation. From June
1991 until December 1992 he was President and CEO of EP Technologies, a
catheter-based electrophysiology company. Dr. Kaganov has a Masters and
Doctorate of Science in biomedical engineering from Columbia University and an
M.B.A. from New York University.
Robert L. Mortensen has been one of our directors since April 1992.
Since 1984, Mr. Mortensen has been either President or Chairman of the Board and
a director of Lightwave Electronics Corporation, a solid-state laser company
that he founded. He holds an M.B.A. from Harvard University.
Robert C. Strauss has been one of our directors since March 1999. Mr.
Strauss formerly served on the Board of Directors of CardioGenesis Corporation
from December 1997 to March 1999. Mr. Strauss has served as President and Chief
Executive Officer of Noven Pharmaceuticals, Inc. since December 1997. From March
1997 to July 1997, Mr. Strauss served as President and Chief Operating Officer
of IVAX Corporation, a pharmaceutical company. In 1983, Mr. Strauss joined
Cordis Corporation, a medical device company, as Chief Financial Officer. From
February 1987 to February 1997, he served as President and Chief Executive
Officer of Cordis Corporation
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and in 1995, Mr. Strauss was named Chairman of the Board. Mr. Strauss serves on
the board of trustees for the University of Miami and holds positions on the
board of directors of Noven Pharmaceuticals, Columbia Laboratories, Inc.,
Percardia, Inc., and TissueLink Medical, Inc.. Mr. Strauss received his B.S.
degree in Engineering Physics from the University of Illinois and his M.S. in
Physics from the University of Idaho.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers and directors, and persons who own more than ten percent of a
registered class of our equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc. Executive officers, directors
and greater-than-ten-percent shareholders are required by SEC regulation to
furnish us with copies of all Section 16(a) forms they file. Based solely on our
review of the copies of such forms received by us or written representations
from certain reporting persons, we believe that, with respect to 2000, all of
our executive officers, directors and ten percent shareholders complied with all
applicable filing requirements, except for the following: Michael J. Quinn,
Chief Executive Officer, filed a Form 3 twelve days late.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER MATTERS.
The following table sets forth certain information concerning the annual
and long-term compensation for services rendered in all capacities to
CardioGenesis for the fiscal year 2000 by (i) all individuals who served at one
point during 2000 as CardioGenesis' Chief Executive Officer, (ii) the four most
highly compensated executive officers having compensation of $100,000 serving at
the end of the fiscal year 2000, and (iii) two additional individuals who served
as executive officers for CardioGenesis during the fiscal year 2000 but were not
employed as executive officers at the end of the fiscal year 2000 (collectively,
the "Named Executive Officers").
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SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
ANNUAL ----------
COMPENSATION SECURITIES
-------------- OTHER ANNUAL UNDERLYING ALL OTHER
FISCAL SALARY BONUS COMPENSATION OPTIONS/SAR COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
-----------------------------------------------------------------------------------------------------
Michael J. Quinn(1)................... 2000 $66,000 -- $15,217(2) 700,000 --
Chief Executive Officer 1999 -- -- -- -- --
1998 -- -- -- -- --
Alan L. Kaganov(1)(3)................. 2000 7,500 -- -- 7,500 --
Former Chief Executive Officer 1999 15,000 -- -- 157,500 --
1998 19,000 -- -- 7,500 --
Janet K. Castaneda(4)................. 2000 170,000 $26,300 -- 25,000 --
Former Vice President of Legal 1999 140,425 -- -- 40,001 --
Affairs 1998 132,500 12,825 -- 9,999 --
Ian A. Johnston....................... 2000 137,000 -- -- 30,000 --
Vice President of Finance and 1999 105,594 20,000 -- 30,000 --
Treasurer 1998 -- -- -- -- --
Richard P. Lanigan(5)................. 2000 170,000 24,600 -- 50,000 --
Vice President of Sales and Marketing 1999 134,458 -- -- 33,000 --
1998 105,528 10,398 -- 15,500 --
Nancy Lince(4)........................ 2000 162,000 34,800 -- 30,000 --
Former Vice President of Regulatory 1999 105,398 20,000 -- 44,500 --
and Clinical Affairs 1998 85,728 7,716 -- -- --
William E. Picht(6)................... 2000 135,088 32,700 -- -- --
Former Vice President of Operations 1999 204,909 -- -- 30,000 --
1998 181,500 16,335 -- 15,000 --
Richard P. Powers(7).................. 2000 170,000 34,800 -- -- --
Former Executive Vice President of 1999 219,248 36,765 -- 79,280 --
Administration and Chief Financial 1998 -- -- -- -- --
Officer
-----------------
(1) Effective as of October 16, 2000, Dr. Kaganov resigned as CardioGenesis'
Chief Executive Officer and Mr. Quinn became our Chief Executive Officer,
President and Chairman of the Board.
(2) Housing allowance and health insurance premiums.
(3) Dr. Kaganov received no salary as the Chief Executive Officer, but was paid
for his services as one of our directors in 1998, 1999 and 2000.
(4) Ms. Castaneda and Ms. Lince are no longer employees of CardioGenesis.
(5) Effective March 2001, Mr. Lanigan became Vice President of Government
Affairs and Business Development.
(6) Mr. Picht resigned on August 25, 2000.
(7) Mr. Powers resigned on July 18, 2000.
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OPTION GRANTS IN FISCAL YEAR 2000
The following tables set forth information regarding stock options
granted to and exercised by the Named Executive Officers during our fiscal year
ended December 31, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1)
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE
SECURITIES OPTIONS EXERCISE VALUE AT ANNUAL
UNDERLYING GRANTED TO PRICE RATES OF STOCK PRICE
OPTIONS EMPLOYEES IN PER EXPIRATION APPRECIATION FOR
NAME GRANTED FISCAL YEAR SHARE DATE OPTION TERM(2)
5% 10%
---------------------------- ---------- ------------ -------- ---------- ---------- -----------
Michael J. Quinn ........... 700,000 45% $ 1.688 10/17/10 $ 743,102 $1,883,166
Alan L. Kaganov, Sc.D. (3) . 7,500 -- $ 3.875 5/31/10 13,000 32,000
Janet K. Castaneda ......... 25,000 2% $ 1.375 11/28/10 21,618 54,785
Ian A. Johnston ............ 5,000 0.3% $ 4.00 7/11/10 12,578 31,875
25,000 2% $ 1.375 11/28/10 21,618 54,785
Richard P. Lanigan ......... 25,000 2% $ 6.563 4/11/10 57,373 188,544
25,000 2% $ 1.375 11/28/10 21,618 54,785
Nancy Lince ............... 5,000 0.3% $ 4.00 7/11/10 12,578 31,875
25,000 2% $ 1.375 11/28/10 21,618 31,875
William E. Picht ........... -- -- -- -- -- --
Richard P. Powers .......... -- -- -- -- -- --
----------
(1) Each of these options was granted pursuant to our Stock Option Plan. A
total of 1,554,150 shares of Common Stock issuable upon exercise of
options were granted to our employees in the year ended December 31, 2000.
(2) In accordance with the rules of the Securities and Exchange Commission,
shown are the hypothetical gains or "option spreads" that would exist for
the respective options. These gains are based on assumed rates of annual
compounded stock price appreciation of 5% and 10% from the date the option
was granted over the full option term. The 5% and 10% assumed rates of
appreciation are mandated by the rules of the SEC and do not represent our
estimate or projection of future increases in the price of our Common
Stock.
(3) Dr. Kaganov was granted 7,500 stock options pursuant to our Director Stock
Option Plan during the year ended December 31, 2000.
38
41
OPTIONS OUTSTANDING IN FISCAL YEAR 2000
The following table sets forth certain information for the year ended
December 31, 2000 concerning exercised, exercisable and unexercisable stock
options held by each of the Named Executive Officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED FISCAL YEAR-END (#): AT FISCAL YEAR-END ($)
ON VALUE --------------------------- ---------------------------
EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
Michael J. Quinn .... -- -- 38,889 661,111 -- --
Alan L. Kaganov, Sc.D -- -- 372,500 -- -- --
Janet K. Castaneda .. -- -- 58,053 46,947 -- --
Ian A. Johnston ..... -- -- 27,386 52,614 -- --
Richard P. Lanigan .. -- -- 40,957 65,043 -- --
Nancy Lince ........ -- -- 20,305 54,487 -- --
William E. Picht .... -- -- -- -- -- --
Richard P. Powers ... -- -- 186,653 43,346 -- --
The value for an "in the money" option represents the difference between
the exercise price of such option as determined by CardioGenesis' Board of
Directors and the closing price of CardioGenesis' Common Stock on December 31,
2000 ($0.844), multiplied by the total number of shares subject to the option.
COMPENSATION OF DIRECTORS
For serving on the Board of Directors, directors who are not compensated
as our employees or as consultants to us receive fees of $1,500 per board
meeting and $1,500 per committee meeting, provided such committee meeting does
not occur on the same day as a board meeting. We also have a Director Stock
Option Plan for non-employee directors. In fiscal year 2000, directors Jack M.
Gill, Robert C. Strauss, Alan L. Kaganov and Robert L. Mortensen were each
granted an option to purchase an aggregate of 7,500 shares of Common Stock each
upon re-election to our Board of Directors.
EMPLOYMENT CONTRACTS OF EXECUTIVE OFFICERS
Michael J. Quinn entered into a letter employment agreement with
CardioGenesis effective October 16, 2000. The agreement provides for an annual
salary of $330,000, subject to annual review and increase at the discretion of
the Board of Directors and options to acquire 700,000 shares of CardioGenesis'
Common Stock at an exercise price equal to $1.688 per share, which is the price
of CardioGenesis' Common Stock on the date the option was granted. Mr. Quinn may
also be entitled to receive (i) an annual bonus, the amount of which shall be
determined by the Board of Directors and (ii) options or other rights to acquire
CardioGenesis' Common Stock, under terms and conditions determined by the
Compensation Committee of the Board of Directors. In the event of termination
for any reason other than for "cause" or voluntary termination after the first
year of employment, Mr. Quinn will receive salary paid as severance for six
months. Mr. Quinn's letter employment agreement provides that his employment is
"at will" at the discretion of CardioGenesis, and that he may be terminated at
any time with or without notice and with or without cause.
Darrell F. Eckstein entered into a letter employment agreement with
CardioGenesis effective December 19, 2000. The agreement provides for an annual
salary of $225,000, subject to annual review and increase at the discretion of
the Board of Directors and options to acquire 100,000 shares of CardioGenesis'
Common Stock at an exercise price equal to $0.563 per share, which is the price
of CardioGenesis' Common Stock on the date the option was granted. Mr. Eckstein
may also be entitled to receive (i) an annual bonus, the amount of which shall
be determined by the Board of Directors and (ii) options or other rights to
acquire CardioGenesis' Common Stock, under terms and conditions determined by
the Compensation Committee of the Board of Directors. In the event of a change
of control of CardioGenesis, Mr. Eckstein will receive salary paid as severance
for six months. Mr.
39
42
Eckstein's letter employment agreement provides that his employment is "at will"
at the discretion of CardioGenesis, and that he may be terminated at any time
with or without notice and with or without cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of our Board of Directors for the year ended
December 31, 2000 consisted of Robert L. Mortensen and Robert C. Strauss. No
member of the Compensation Committee has a relationship that would constitute an
interlocking relationship with executive officers or directors of another
entity.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The following is the Report of the CardioGenesis Compensation Committee,
describing the compensation policies and rationale applicable to our executive
officers with respect to the compensation paid to such executive officers for
the year ended December 31, 2000. The information contained in the report shall
not be deemed to be "soliciting material" or to be "filed" with the Securities
and Exchange Commission, nor shall such information be incorporated by reference
into any future filing under the Securities Act of 1933, as amended or the
Securities Exchange Act of 1934, as amended, except to the extent that we
specifically incorporate it by reference into such filing.
TO: Board of Directors
The Compensation Committee (the "Committee") of the Board of Directors
reviews and approves CardioGenesis' executive compensation policies. The
Committee administers CardioGenesis' various incentive plans, including the
Stock Option Plan and the Employee Stock Purchase Plan, sets compensation
policies applicable to CardioGenesis' executive officers and evaluates the
performance of CardioGenesis' executive officers. The following is a report of
the Committee describing compensation policies and rationale applicable with
respect to the compensation paid to CardioGenesis' executive officers for the
fiscal year ended December 31, 2000.
Two non-employee members of CardioGenesis' Board of Directors, Robert L.
Mortensen and Robert C. Strauss, served as the Compensation Committee of the
Board of Directors during 2000.
Compensation Philosophy
CardioGenesis' executive compensation programs are designed to attract,
motivate and retain executives who will contribute significantly to the
long-term success of CardioGenesis and the enhancement of shareholder value. In
addition to base salary, certain elements of total compensation are payable in
the form of variable incentive plans tied to the performance of CardioGenesis
and the individual, and in the equity-based plans designed to closely align
executive and shareholder interests.
Base Salary
Base salary for executives, including that of the chief executive
officer, is set according to the responsibilities of the position, the specific
skills and experience of the individual and the competitive market for executive
talent. In order to evaluate the competitive position of CardioGenesis' salary
structure, the Committee makes reference to publicly available compensation
information and informal compensation surveys obtained by management with
respect to cash compensation and stock option grants to officers of comparable
companies in the high-technology sector, CardioGenesis' industry and its
geographic location. Executive salary levels are set to approximate average
rates, with the intent that superior performance under incentive bonus plans
will enable the executive to elevate his total cash compensation levels that are
above average of comparable companies. The Committee reviews salaries annually
and adjusts them as appropriate to reflect changes in market conditions and
individual performance and responsibilities.
40
43
Compensation to Chief Executive Officer in 2000
Pursuant to an employment agreement effective October 16, 2000, Mr.
Michael Quinn, CardioGenesis' Chief Executive Officer, received base
compensation at a rate of $330,000, or $66,000, during 2000.
Mr. Quinn's base salary was initially established by the Board of
Directors. It was based on the Board's assessment that Mr. Quinn was uniquely
qualified to lead CardioGenesis with his strong operational experience and
history of accomplishments in the marketing and sales of products. The Board
determined that his vision for CardioGenesis and his proven record of successful
team building, would be pivotal to realizing the full potential of
CardioGenesis.
Stock Option Plan
The Committee believes that CardioGenesis' Stock Option Plan is an essential
tool to link the long-term interests of shareholders and employees, especially
executive management, and serves to motivate executives to make decisions that
will, in the long run, give the best returns to shareholders. Stock options are
generally granted when an executive joins CardioGenesis, with subsequent grants
also taking into account the individual's performance and the vesting status of
previously granted options. These options typically vest over a three year
period and are granted at an exercise price equal to the fair market value of
CardioGenesis' Common Stock at the date of grant. The sizes of initial option
grants are based upon the position, responsibilities and expected contribution
of the individual. This approach is designed to maximize shareholder value over
a long term, as no benefit is realized from the option grant unless the price of
CardioGenesis' Common Stock has increased over a number of years.
In addition to the Stock Option Plan, executive officers are eligible to
participate in CardioGenesis' Employee Stock Purchase Plan. This plan allows
employees to purchase CardioGenesis' Common Stock at a price equal to 85% of the
lower of the fair market value at the beginning of the offering period or the
fair market value at the end of the purchase period.
Other elements of executive compensation include life and long-term
disability insurance, medical benefits and a 401(k) deferred compensation plan
with no employer matching contribution for the fiscal year ended December 31,
2000. All such benefits are available to all regular, full-time employees of
CardioGenesis.
The foregoing report has been furnished by the Compensation Committee of
the Board of Directors of CardioGenesis.
Compensation Committee
Robert L. Mortensen
Robert C. Strauss
STOCK PERFORMANCE GRAPH
The Stock Performance Graph below shall not be deemed "soliciting
material" or to be "filed" with the Securities and Exchange Commission, nor
shall such information be incorporated by reference in any general statement
incorporating by reference this proxy statement into any filing under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, except to the extent that we specifically incorporate this information
by reference.
The following Graph sets forth CardioGenesis' total cumulative
shareholder return as compared to the Nasdaq Stock Market - Total Return Index
(the "Nasdaq Total Return Index") and the Nasdaq Stock Market - Medical Devices,
Instruments and Supplies, Manufacturers and Distributors Total Return Index (the
"Nasdaq Medical Devices Index") from May 31, 1996 through December 31, 2000.
41
44
Total shareholder return assumes $100 was invested at the beginning of
the period in the Common Stock of CardioGenesis, the stocks represented in the
Nasdaq Total Return Index and the stocks represented in the Nasdaq Medical
Devices Index, respectively. Total return also assumes reinvestment of
dividends. CardioGenesis has paid no dividends on its Common Stock.
Historical stock price performance should not be relied upon as
indicative of future stock price performance.
CARDIOGENESIS CORPORATION
NASDAQ STOCK MARKET -- TOTAL RETURN INDEX
NASDAQ STOCK MARKET - MEDICAL DEVICES INDEX
[CHART]
----------------------------------------------------------------------------------------------
5/31/96 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
----------------------------------------------------------------------------------------------
CardioGenesis Corporation $100.00 $ 53.03 $ 35.61 $ 44.32 $ 44.70 $ 5.12
----------------------------------------------------------------------------------------------
NASDAQ Total Return Index 100.00 103.23 126.06 174.29 321.20 196.46
----------------------------------------------------------------------------------------------
NASDAQ Medical Devices Index 100.00 86.65 99.19 111.12 134.40 138.46
----------------------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of March 31, 2001 (except as noted in
the footnotes) certain information with respect to the beneficial ownership of
our Common Stock by (i) each person known by us to own beneficially more than 5%
of our outstanding shares of Common Stock; (ii) each of our directors; (iii)
each of our current Named Executive Officers; and (iv) all directors and
executive officers as a group. Except as indicated in the footnotes to this
table, the persons and entities named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where applicable.
42
45
SHARES OF COMMON
STOCK
BENEFICIALLY
OWNED(1)
--------------------
PERCENTAGE
NAME OF BENEFICIAL OWNER NUMBER OWNERSHIP
------------------------ --------- ----------
5% SHAREHOLDERS:
Douglas Murphy-Chutorian, M.D(2) ....................................... 3,370,921 10.6%
c/o MD DataDirect, Inc.
724 Oak Grove Avenue, Suite 120, Menlo Park, CA 94025
Brown Capital Management, Inc. (3) ..................................... 2,708,073 8.5%
1201 North Calvert Street
Baltimore, MD 21202
State of Wisconsin Investment Board (4) ................................ 4,088,000 12.9%
120 East Wilson Street
Madison, WI 53703
DIRECTORS:
Jack M. Gill, Ph.D.(5).................................................. 1,201,325 3.8%
Alan L. Kaganov, Sc.D(6)................................................ 365,000 1.2%
Robert L. Mortensen(7).................................................. 95,196 *
Robert C. Strauss(8).................................................... 24,190 *
NAMED EXECUTIVE OFFICERS:
Michael J. Quinn(9)(10)................................................. 166,110 *
Janet F. Castaneda(11).................................................. 63,609 *
Ian A. Johnston(12)..................................................... 37,805 *
Richard P. Lanigan(13) ................................................. 79,273 *
Nancy Lince(14) ........................................................ 25,818 *
William E. Picht ....................................................... -- *
Richard P. Powers(15) .................................................. 197,632 *
All directors and officers as a group
(11 persons)(16)...................................................... 2,255,958 7.1%
-------------------
* Less than 1%.
(1) Percentage ownership is based on 31,696,061 shares of Common Stock
outstanding as of March 31, 2001. The number of shares of Common Stock
beneficially owned or of record has been determined solely from information
provided to CardioGenesis from the Douglas Murphy-Chutorian as of April 26,
2001. Includes an aggregate of 413,274 shares of Common Stock held by
Leslie Murphy-Chutorian, the wife of Dr. Murphy-Chutorian, as custodian for
Blair Murphy-Chutorian, UTMA California, an aggregate of 413,274 shares of
Common Stock held by Leslie Murphy-Chutorian as custodian for Dana
Murphy-Chutorian, UTMA California. Also includes an aggregate of 1,719,973
shares of Common Stock held by Leslie Murphy-Chutorian and Dr.
Murphy-Chutorian as Trustees of The Murphy-Chutorian Family Trust UDT dated
1-13-97. Also includes 12,000 shares of Common Stock held by The Murphy
Chutorian Family Foundation. Also includes 49,998 shares of Common Stock
subject to stock options held by Dr. Murphy-Chutorian that are exercisable
within 60 days of March 31, 2001.
(3) The number of shares of Common Stock beneficially owned or of record has
been determined solely from information reported on a Schedule 13G as of
December 31, 2000.
(4) The number of shares of Common Stock beneficially owned or of record has
been determined solely from information provided to CardioGenesis from the
State of Wisconsin Investment Board as of April 11, 2001.
(5) Includes 23,507 shares of Common Stock subject to stock options held by Dr.
Gill that are exercisable within 60 days of March 31, 2001.
(6) Includes 365,000 shares of Common Stock subject to stock options held by
Dr. Kaganov that are exercisable within 60 days of March 31, 2001.
(7) Includes 95,196 shares of Common Stock subject to stock options held by Mr.
Mortensen that are exercisable within 60 days of March 31, 2001.
(8) Includes 24,190 shares of Common Stock subject to stock options held by Mr.
Strauss that are exercisable within 60 days of March 31, 2001.
(9) Michael J. Quinn is both a member of the Board of Directors and a Named
Executive Officer in his positions as CardioGenesis' Chief Executive
Officer, President and Chairman of the Board.
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46
(10) Includes 136,110 shares of Common Stock subject to stock options held by
Mr. Quinn that are exercisable within 60 days of March 31, 2001.
(11) Includes 63,609 shares of Common Stock subject to stock options held by
Ms. Castaneda that are exercisable within 60 days of March 31, 2001.
(12) Includes 37,805 shares of Common Stock subject to stock options held by
Mr. Johnston that are exercisable within 60 days of March 31, 2001.
(13) Includes 79,273 shares of Common Stock subject to stock options held by
Mr. Lanigan that are exercisable within 60 days of March 31, 2001.
(14) Includes 25,818 shares of Common Stock subject to stock options held by
Ms. Lince that are exercisable within 60 days of March 31, 2001.
(15) Includes 197,632 shares of Common Stock subject to stock options held by
Mr. Powers that are exercisable within 60 days of March 31, 2001.
(16) Includes options to purchase an aggregate of 1,048,140 shares of Common
Stock held by all officers and directors as a group exercisable within 60
days of March 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In November 2000, CardioGenesis exercised warrants in MicroHeart
Holdings, Inc. ("MicroHeart"), a Delaware company previously formed by U.S.
Ventures and Venrock Associates, in exchange for common stock. This transaction
resulted in an increase in CardioGenesis' ownership in Microheart to 32.1%. Dr.
Alan Kaganov, former Chief Executive Officer and a current director of
CardioGenesis is also a director of MicroHeart. Dr. Kaganov is also a Venture
Partner of U.S. Venture Partners.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS. The financial statements required to be filed by
Item 8 herewith are as follows:
PAGE
----
Report of Independent Accountants .......................................... 46
Consolidated Balance Sheets as of December 31, 2000 and 1999 ............... 47
Consolidated Statements of Operations and Comprehensive Loss for the years
ended December 31, 2000, 1999 and 1998 ................................... 48
Consolidated Statements of Shareholders' Equity for the years ended December
31, 2000, 1999 and 1998 .................................................. 49
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998 ............................................................ 50
Notes to Consolidated Financial Statements ................................. 51
(2) FINANCIAL STATEMENT SCHEDULE.
The following financial statement schedule is filed herewith.
Schedule II -- Valuation and Qualifying Accounts..................... 62
(3) EXHIBITS.
The exhibits listed under Item 14(c) are filed or incorporated by reference
herein.
(b) REPORTS ON FORM 8-K.
We filed no reports on Form 8-K during the three month period ended December
31, 2000.
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47
(c) EXHIBITS.
The exhibits below are filed or incorporated herein by reference.
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
2.1(2) Agreement and Plan of Reorganization among the Company, the
former CardioGenesis Corporation and RW Acquisition Corporation
dated October 21, 1998.
3.1(2) Certificate of Amendment and Restated Articles of
Incorporation of Registrant.
3.2(2) Amended and Restated Bylaws of Registrant.
10.1(2) Form of Director and Officer Indemnification Agreement.
10.2(2) Stock Option Plan.
10.3(2) Director Stock Option Plan.
10.4(2) 1996 Employee Stock Purchase Plan.
10.5(2) Facilities Lease for 1049 Kiel Court, Sunnyvale, California.
10.6(2) Facilities Lease for 1139 Karlstad Drive, Sunnyvale,
California.
10.7(2) 401(k) Plan.
10.8(3) 1993 Equity Incentive Plan of the former CardioGenesis
Corporation
10.9(3) 1996 Directors Stock Option Plan of the former CardioGenesis
Corporation
10.10(3) 1996 Employee Stock Purchase Plan of the former CardioGenesis
Corporation
10.11(4) 1996 Equity Incentive Plan of the former CardioGenesis
Corporation
10.12* Letter employment agreement dated October 16, 2000 between the
Company and Michael J. Quinn, Chief Executive Officer.
10.13* Letter employment agreement dated December 19, 2000 between
the company and Darrell F. Eckstein, Vice President of
Operations.
21.1* List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
24.1* Power of Attorney (see page 34)
---------------
(1) Incorporated herein by reference to Appendix 1 to the Company's Registration
Statement on S-4 filed with the Securities and Exchange Commission on
February 9, 1999 (File No. 333-72063).
(2) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (File No. 333-03770), as amended, filed on April 18, 1996.
(3) Incorporated herein by reference from the former CardioGenesis Corporation's
Form SB-2, (File No. 333-3752-LA), declared effective on May 21, 1996.
(4) Incorporated herein by reference from the former CardioGenesis Corporation's
Form S-8, (File No. 333-35095, dated September 8, 1997).
* Previously filed.
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48
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
CARDIOGENESIS CORPORATION
Registrant
Date: July 13, 2001 By: /s/ Michael J. Quinn
-----------------------------------
Michael J. Quinn
Chief Executive Officer, President,
Chairman of the Board and Director
(Principal Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MICHAEL J. QUINN Chief Executive Officer, President, July 13, 2001
----------------------------------- Chairman of the Board and Director
Michael J. Quinn (Principal Executive Officer)
/s/ J. STEPHEN WILKINS Chief Financial Officer July 13, 2001
----------------------------------- (Principal Accounting and Financial
J. Stephen Wilkins Officer)
* Director July 13, 2001
-----------------------------------
Alan L. Kaganov, Sc.D.
* Director July 13, 2001
-----------------------------------
Jack M. Gill
* Director July 13, 2001
-----------------------------------
Robert L. Mortensen
* Director July 13, 2001
-----------------------------------
Robert C. Strauss
* BY:/s/ Michael J. Quinn Attorney-in-Fact
-----------------------------
Michael J. Quinn
President and Chief Executive Officer
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Eclipse Surgical Technologies, Inc.
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) on page 32 present fairly, in all material
respects, the financial position of Eclipse Surgical Technologies, Inc. and its
subsidiaries (the "Company") at December 31, 2000 and December 31, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item
14(a)(2) on page 32 presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and the financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Jose, California
January 26, 2001, except Note 18
as to which the date is April 16, 2001
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50
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS)
ASSETS 2000 1999
--------- --------
Current assets:
Cash and cash equivalents........................................ $ 3,357 $ 5,566
Marketable securities............................................ -- 3,227
Accounts receivable, net of allowance for doubtful accounts of
$353 and $1,079 at December 31, 2000 and 1999, respectively.... 3,654 8,119
Inventories, net of reserve of $2,180 and $1,998 at December 31,
2000 and 1999, respectively.................................... 5,400 6,983
Prepaids and other current assets................................ 837 767
-------- --------
Total current assets............................................. 13,248 24,662
Property and equipment, net....................................... 1,048 1,220
Long-term marketable securities................................... -- 4,520
Accounts receivable over one year, net of allowance for doubtful
accounts of $443 and $797, at December 31, 2000 and 1999,
respectively................................................... 119 1,125
Other assets...................................................... 2,550 2,492
-------- --------
Total assets..................................................... $ 16,965 $ 34,019
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 689 $ 1,819
Accrued liabilities.............................................. 5,789 9,557
Customer deposits................................................ 186 145
Deferred revenue................................................. 1,310 1,720
Note payable..................................................... 86 --
Current portion of capital lease obligation...................... 26 26
Current portion of long-term liabilities......................... 500 1,364
-------- --------
Total current liabilities........................................ 8,586 14,631
Capital lease obligation, less current portion.................... 66 90
Long-term liabilities, less current portion....................... 339 725
-------- --------
Total liabilities................................................ 8,991 15,446
-------- --------
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred stock: no par value; 6,600 shares authorized; none
issued and outstanding;....................................... -- --
Common stock: no par value; 50,000 shares authorized; 30,836 and
29,437 shares issued and outstanding at December 31, 2000 and
1999, respectively............................................ 161,938 158,338
Deferred compensation............................................ (66) (466)
Accumulated other comprehensive loss............................. (65) (75)
Accumulated deficit.............................................. (153,833) (139,224)
-------- --------
Total shareholders' equity....................................... 7,974 18,573
-------- --------
Total liabilities and shareholders' equity....................... $ 16,965 $ 34,019
======== ========
The accompanying notes are an integral part of these
consolidated financial statements
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51
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998
-------- -------- --------
Net revenues............................................ $ 22,210 $ 25,324 $ 15,080
Cost of revenues(1)..................................... 10,055 13,246 7,868
-------- -------- --------
Gross profit........................................... 12,155 12,078 7,212
-------- -------- --------
Operating expenses:
Research and development............................... 5,065 11,353 29,861
Sales and marketing.................................... 15,349 16,553 17,663
General and administrative............................. 6,660 8,028 10,821
Merger-related costs................................... -- 5,214 --
-------- -------- --------
Total operating expenses............................... 27,074 41,148 58,345
-------- -------- --------
Operating loss......................................... (14,919) (29,070) (51,133)
Interest expense........................................ (32) (64) (88)
Interest and other income............................... 400 801 3,454
Equity in net loss of investee.......................... (58) -- --
-------- -------- --------
Net loss............................................... (14,609) (28,333) (47,767)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 44 (145) 38
Less: reclassification adjustment for gains included in
net
Income................................................. -- (5) (50)
Foreign currency translation adjustment................ (34) 26 3
-------- -------- --------
Other comprehensive income (loss)...................... 10 (124) (9)
-------- -------- --------
Comprehensive loss..................................... $(14,599) $(28,457) $(47,776)
======== ======== ========
Net loss per share:
Basic and diluted...................................... $ (0.48) $ (0.99) $ (1.77)
======== ======== ========
Weighted average shares outstanding.................... 30,166 28,629 27,000
======== ======= =======
(1) Fiscal year 1999 includes $2,523 of inventory write-offs and a laser upgrade
program resulting from the merger - Note 3
The accompanying notes are an integral part of these
consolidated financial statements
49
52
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
ACCUMULATED
OTHER
COMMON STOCK COMPREHENSIVE
--------------------- DEFERRED INCOME ACCUMULATED
SHARES(#) AMOUNT COMPENSATION (LOSS) DEFICIT TOTAL
--------- ------ ------------ -------------- ----------- -----
Balances, December 31, 1997 ...... 26,511 $ 146,288 $ (848) $ 58 $ (63,124) $ 82,374
Issuance of common stock
pursuant to exercise of options 650 1,496 -- -- -- 1,496
Issuance of common stock
pursuant to exercise of warrants 305 725 -- -- -- 725
Deferred stock compensation ..... -- 438 (438) -- -- --
Amortization of deferred
compensation ................... -- -- 457 -- -- 457
Net change in unrealized gain on
marketable securities .......... -- -- -- (12) -- (12)
Foreign currency translation
adjustment ..................... -- -- -- 3 -- 3
Net loss ........................ -- -- -- -- (47,767) (47,767)
--------- --------- --------- --------- --------- ---------
Balances, December 31, 1998 ...... 27,466 148,947 (829) 49 (110,891) 37,276
Issuance of common stock
pursuant to exercise of options 1,522 7,747 -- -- -- 7,747
Issuance of common stock
pursuant to exercise of warrants 449 833 -- -- -- 833
Deferred stock compensation ..... -- 811 (811) -- -- --
Amortization of deferred
compensation ................... -- -- 1,174 -- -- 1,174
Net change in unrealized gain on
marketable securities .......... -- -- -- (150) -- (150)
Foreign currency translation
adjustment ..................... -- -- -- 26 -- 26
Net loss ........................ -- -- -- -- (28,333) (28,333)
--------- --------- --------- --------- --------- ---------
Balances, December 31, 1999 ...... 29,437 158,338 (466) (75) (139,224) 18,573
Issuance of common stock
pursuant to exercise of options 640 1,064 -- -- -- 1,064
Issuance of common stock
pursuant to stock purchase
under the Employee Stock
Purchase Plan .................. 204 388 -- -- -- 388
Issuance of common stock in a
private replacement ............ 526 1,873 -- -- -- 1,873
Issuance of common stock in lieu
of payment for services ........ 29 44 -- -- -- 44
Deferred stock compensation ..... -- 231 (231) -- -- --
Amortization of deferred
compensation ................... -- -- 631 -- -- 631
Net change in unrealized gain on
marketable securities .......... -- -- -- 44 -- 44
Foreign currency translation
adjustment ..................... -- -- -- (34) -- (34)
Net loss ........................ -- -- -- -- (14,609) (14,609)
--------- --------- --------- --------- --------- ---------
Balances, December 31, 2000 ...... 30,836 $ 161,938 $ (66) $ (65) $(153,833) $ 7,974
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements
50
53
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net loss ............................................................ $(14,609) $(28,333) $(47,767)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ....................................... 933 1,453 908
Loss/(gain) from investment in MicroHeart Holdings, Inc. ............ 58 -- (400)
Provision for doubtful accounts ..................................... 620 1,377 1,017
Inventory reserves .................................................. 1,788 1,782 68
Amortization of deferred compensation ............................... 631 1,174 457
Amortization of license fees ........................................ 194 195 --
Loss on disposal of property and equipment .......................... -- 317 --
Issuance of stock to private company in lieu of payment for services 44 -- --
Changes in operating assets and liabilities:
Accounts receivable -- short term ................................... 3,756 551 (4,548)
Inventories ......................................................... (694) 799 (4,167)
Prepaids and other current assets ................................... (70) 1,195 (229)
Other assets ........................................................ -- 24 --
Accounts receivable -- long term .................................... 1,096 51 (1,963)
Accounts payable .................................................... (1,130) 230 (601)
Accrued liabilities ................................................. (3,768) (1,907) 5,595
Current portion of long term liabilities ............................ (375) -- --
Long term liabilities ............................................... (386) (687) --
Customer deposits ................................................... 41 (111) 185
Deferred revenue .................................................... (410) (425) 1,995
-------- -------- --------
Net cash used in operating activities ............................... (12,281) (22,315) (49,450)
-------- -------- --------
Cash flows from investing activities:
Purchase of marketable securities ................................... (3,317) (44,702) (45,067)
Maturities of marketable securities ................................. 11,108 61,473 73,646
Acquisition of property and equipment ............................... (762) (637) (173)
Exercise of warrants in Microheart Holdings, Inc. ................... (310) -- --
-------- -------- --------
Net cash provided by investing activities ........................... 6,719 16,134 28,406
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock from exercise of options
and warrants ...................................................... 1,452 8,580 2,221
Net proceeds from sale of common stock .............................. 1,873 -- --
Proceeds from short term borrowings ................................. 86 -- 71
Repayment of note payable ........................................... -- (111) (1,000)
Repayments of capital lease obligations ............................. (24) (21) (22)
-------- -------- --------
Net cash provided by financing activities ........................... 3,387 8,448 1,270
Effects of exchange rate changes on cash and cash equivalents ....... (34) 26 3
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ................ (2,209) 2,293 (19,771)
Cash and cash equivalents at beginning of year ....................... 5,566 3,273 23,044
-------- -------- --------
Cash and cash equivalents at end of year ............................. $ 3,357 $ 5,566 $ 3,273
======== ======== ========
Supplemental schedule of cash flow information:
Interest paid ....................................................... $ 32 $ 64 $ 87
======== ======== ========
Taxes paid .......................................................... $ 153 $ 112 $ --
======== ======== ========
Supplemental schedule of noncash investing and financing activities:
Change in unrealized gain (loss) on marketable securities ........... $ 44 $ (150) $ (12)
======== ======== ========
Investment in MicroHeart Holdings, Inc. ............................. $ -- $ -- $ 400
======== ======== ========
Deferred compensation ............................................... $ 231 $ 811 $ 438
======== ======== ========
Acquisition of equipment under capital leases ....................... $ -- $ -- $ 138
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements
51
54
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Eclipse Surgical Technologies, Inc. ("Eclipse" or the "Company") was
founded in 1989 to develop, manufacture and market surgical lasers and
accessories for the treatment of disease. Currently, Eclipse's emphasis is on
the development and manufacture of products used for transmyocardial
revascularization ("TMR") and percutaneous transluminal myocardial
revascularization ("PTMR"), which are cardiovascular procedures. Eclipse markets
its products for sale primarily in the U.S., Europe and Asia. Eclipse operates
in a single segment.
These financial statements contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business. Eclipse has
sustained significant losses for the last several years and expects to continue
to incur losses through at least 2001. Management believes its cash balance as
of December 31, 2001 will not be sufficient to meet the Company's capital and
operating requirements for the next 12 months. Eclipse will require additional
funding and may sell additional shares of its common stock or preferred stock
through private placement of further public offerings or debt financings. (see
Note 18).
Eclipse may require additional financing in the future. There can be no
assurance that Eclipse will be able to obtain additional debt or equity
financing, if and when needed, on terms acceptable to the Company. Any
additional equity or debt financing may involve substantial dilution to
Eclipse's stockholder, restrictive covenants or high interest costs. The failure
to raise needed funds on sufficiently favorable terms could have a material
adverse effect on Eclipse's business, operating results and financial condition.
Eclipse's long term liquidity also depends upon its ability to increase
revenues from the sale of its products and achieve profitability. The failure to
achieve these goals could have a material adverse effect on the business,
operating results and financial condition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
On March 17, 1999, Eclipse completed the acquisition of CardioGenesis
Corporation (CardioGenesis) pursuant to the Agreement and Plan of Reorganization
(the "merger') dated as of October 21, 1998. The merger was accounted for using
the pooling of interests method of accounting for business combinations.
Accordingly, Eclipse's financial statements have been restated to include the
accounts of CardioGenesis for the years 1998 and 1999. The accompanying
consolidated financial statements include the accounts of Eclipse (and
CardioGenesis) and its then wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification:
The Company has reclassified $2,523,000 from merger-related costs to
cost of revenues for the year ended December 31, 1999 for inventory write-offs
and a laser upgrade program related to the merger. The
52
55
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reclassification was made to ensure that the Company's merger costs are in
compliance with the appropriate accounting rules and interpretations.
Cash and Cash Equivalents:
All highly liquid instruments purchased with an original maturity of
three months or less are considered cash equivalents.
Marketable Securities:
Marketable securities are classified as available-for-sale and are
carried at fair value. Marketable securities classified as current assets have
scheduled maturities of less than one year, while marketable securities
classified as noncurrent assets have scheduled maturities of more than one year.
Unrealized holding gains or losses on such securities are included in
accumulated comprehensive income/(loss) in shareholders' equity. Realized gains
and losses on sales of all such securities are reported in earnings and computed
using the specific identification cost method.
Inventories:
Inventories are stated at the lower of cost (principally standard cost,
which approximates actual cost on a first-in, first-out basis) or market value.
Patent Expenses:
Patent and patent related expenditures are expensed as general and
administrative expenses as incurred.
Property and Equipment:
Property and equipment are stated at cost and depreciated on a
straight-line basis over their estimated useful lives of two to seven years.
Assets acquired under capital leases are amortized over the shorter of their
estimated useful lives or the term of the related lease (generally three to five
years). Amortization of leasehold improvements is based on the straight-line
method over the shorter of the estimated useful life or the lease term.
Long-Lived Assets:
Eclipse evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS 121"). SFAS 121 requires recognition of the impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.
Fair Value of Financial Instruments:
The carrying amounts of certain of Eclipse's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable,
accrued liabilities and customer deposits approximate fair value due to their
short maturities.
Certain Risks and Concentrations:
Eclipse sells its products primarily to hospitals and other healthcare
providers in North America, Europe and Asia. Eclipse performs ongoing credit
evaluations of its customers and generally does not require collateral. Although
Eclipse maintains allowances for potential credit losses that it believes to be
adequate, a payment default
53
56
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
on a significant sale could materially and adversely affect its operating
results and financial condition. At years ending December 31, 2000, December 31,
1999 and December 31, 1998 no customer individually accounted for 10% or more of
accounts receivable, nor did any customer individually account for 10% or more
of net revenues for the years ended December 31, 2000, December 31, 1999 or
December 31, 1998.
Eclipse purchases certain laser and fiber-optic components and
subassemblies from single sources. Although Eclipse has identified alternative
vendors, the qualification of additional or replacement vendors for certain
components or services is a lengthy process. Any significant supply interruption
could affect Eclipse's ability to manufacture its products and would, therefore,
adversely affect operating results.
Revenue Recognition:
Eclipse has adopted the provisions of Staff Accounting Bulletin ("SAB")
No. 101 "Revenue Recognition in Financial Statements" and believes that its
current and historical revenue recognition is in compliance with the SAB.
Eclipse recognizes revenue on product sales upon receipt of a purchase
order, subsequent shipment of the product and the price is fixed or determinable
and collection of sales proceeds is reasonably assured. Where purchase orders
allow customers an acceptance period or other contingencies, revenue is
recognized upon the earlier of acceptance or removal of the contingency.
Revenues from sales to distributors and agents are recognized upon
shipment when there is evidence that an arrangement exists, delivery has
occurred, the sales price is fixed or determinable and collectibility of sales
proceeds is reasonably assured. The contracts regarding these sales do not
include any rights of return or price protection clauses.
Eclipse frequently loans lasers to hospitals in return for the hospital
purchasing a minimum number of handpieces at a premium over the list price. The
loaned lasers are depreciated to costs of revenues over a useful life of 24
months. The revenue on the handpieces is recognized upon shipment at an amount
equal to the list price. The premium over the list price represents revenue
related to the use of the laser unit and is recognized ratably, generally over
the 24 month useful life of the placed lasers.
Revenues from service contracts, rentals, and per procedure fees are
recognized upon performance or over the terms of the contract as appropriate.
Research and Development:
Research and development expenses are charged to operations as incurred.
Warranties:
Eclipse's laser products are generally warranted for one year. Eclipse
provides for estimated future costs of repair, replacement, or customer
accommodations which are reflected in the accompanying financial statements.
Advertising:
Eclipse expenses all advertising as incurred. Eclipse's advertising
expenses were $128,000, $75,000, and $18,000 for 2000, 1999 and 1998,
respectively.
54
57
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income Taxes:
Eclipse accounts for income taxes using the liability method under which
deferred tax assets or liabilities are calculated at the balance sheet date
using current tax laws and rates in effect for the year in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amounts expected to be
realized.
Foreign Currency Translation:
Eclipse's international subsidiary uses its local currency as its
functional currency. Assets and liabilities are translated at exchange rates in
effect at the balance sheet date and income and expense accounts at average
exchange rates during the year. Resulting translation adjustments are recorded
in accumulated other comprehensive income/loss in shareholders' equity.
Transaction gains and losses are included in the results of operations and have
not been significant for all periods presented.
Stock-Based Compensation:
Eclipse accounts for its stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Eclipse has elected to adopt the disclosure only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), which requires pro forma disclosures
in the financial statements as if the measurement provisions of SFAS 123 had
been adopted.
Eclipse accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force Issue
No. 96-18 "Accounting for Equity Instruments that are issued to other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
Net Loss Per Share:
Basic earnings per share ("EPS") is computed by dividing the net loss
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed giving effect to all
dilutive potential common shares that were outstanding during the period.
Dilutive potential common shares consist of incremental shares issuable upon the
conversion of convertible preferred stock (using the "if converted" method) and
the exercise of stock options and warrants (using the "treasury stock" method).
A reconciliation of the numerator and denominator of basic and diluted
EPS is as follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Numerator -- Basic and Diluted EPS
Net Loss.............................. $(14,609) $(28,333) $(47,767)
======== ======== ========
Denominator -- Basic and Diluted EPS
Weighted average shares outstanding... 30,166 28,629 27,000
======== ======== ========
Basic and diluted EPS.................. $ (0.48) $ (0.99) $ (1.77)
======== ======== ========
Options to purchase 4,277,021, 4,381,335, and 4,533,000 shares of common
stock were outstanding at December 31, 2000, 1999 and 1998, respectively. The
range of exercise prices for these options were $0.03-$15.9375 for 2000,
$0.03-$16.09 for 1999 and $0.03-$18.125 for 1998. No warrants were outstanding
at December 31, 2000 and 1999. Warrants to purchase 466,123 shares of common
stock were outstanding as of
55
58
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998. Both the options and warrants were not included in the
calculation of diluted EPS because their inclusion would have been
anti-dilutive.
Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities. SFAS 133 requires that all derivatives be recognized at
fair value in the statement of financial position, and that the corresponding
gains or losses be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of hedging relationship
that exists. Eclipse does not currently hold derivative instruments or engage in
hedging activities. Eclipse will adopt SFAS 133 in the first quarter of 2001 and
does not believe that the initial adoption will have a material impact on the
Company's financial statements.
3. BUSINESS COMBINATION
On March 17, 1999, Eclipse and CardioGenesis Corporation
("CardioGenesis") announced the completion of their business combination. Under
the terms of the combination, each share of CardioGenesis Common Stock was
converted into 0.8 of a share of Eclipse Common Stock, and Eclipse assumed all
outstanding CardioGenesis stock options. CardioGenesis became a wholly-owned
subsidiary of Eclipse and its shares are no longer publicly traded. As a result
of the transaction, Eclipse increased its outstanding shares by approximately
9.9 million shares. The transaction was structured to qualify as a tax-free
reorganization and was accounted for as a pooling of interests, consequently,
all prior period figures have been restated as if the combined entity existed
for all periods presented. There were no inter-company transactions between the
companies prior to the date of the business combination. The fiscal year
remained the same and thus, there were no changes in retained earnings due to
the business combination. Further, there were no required adjustments needed to
conform to the accounting policies between the two companies.
CardioGenesis was a medical device company like Eclipse which developed,
manufactured, and marketed cardiac revascularization products for the treatment
of advanced cardiovascular disease and severe angina pain through TMR and PTMR.
CardioGenesis also manufactured and marketed disposable products to perform
intraoperative transmyocardial revascularization ("ITMR"), catheter-based
percutaneous myocardial revascularization ("PMR"), and thorascopic
transmyocardial revascularization ("TTMR") to treat patients afflicted with
debilitating angina. During the quarter ended March 31, 1999, Eclipse recognized
merger-related costs of $6,893,000 for financial advisory and legal fees,
personnel severance, terminated relationships and other costs including
write-offs of fixed assets and inventory. A majority of the terminated employees
were located in California and worked in operations, sales, marketing, quality,
research and development and administrative functions. A total of 40 employees
were terminated.
During the remaining quarters ended December 31, 1999, Eclipse
recognized additional merger-related costs of $1,385,000 offset by a reversal of
$541,000, as costs associated with terminated relationships/contracts were lower
than anticipated. The total of merger-related cost of $7,737; this includes
inventory write-offs and a laser upgrade program totaling $2,523,000 that is
accounted for in our cost of revenues.
The inventory and upgrade program write-off of $2,523,000 consisted of
three primary components. The first includes inventory for domestic product that
was written-off in full at the time of the merger since the CardioGenesis laser
platform was not approved by the FDA and thus abandoned in favor of the FDA
approved Eclipse TMR2000 laser platform. Approximately, $350,000 was written-off
for CardioGenesis lasers on loan in the United States in addition to $600,000 of
raw materials inventory components used for domestic laser assembly.
CardioGenesis' relationship with their laser vendor was terminated at the time
of the merger, so any
56
59
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
raw material remaining could not be returned or utilized to build additional
lasers. The second type of inventory that was written-off in full at the time of
the merger was approximately $400,000 of Eclipse laser parts for lasers in
clinical trials abandoned in favor of future CardioGenesis products. Lastly,
$1,100,000 of the write-off was the result of an upgrade program where Eclipse
would replace lasers made obsolete by the decision to abandon certain platforms
to customers who previously paid for their system. This amount was accrued over
the course of 1999 as these systems were identified, and later applied to the
cost of the laser when the upgrade was shipped out to the customer.
As a result of the merger, various assets were determined to no longer
have recognizable value and were written off completely. Of the lasers used
internally at CardioGenesis, $118,000 were no longer useful post merger given
the decision to make the Eclipse TMR2000 laser system the platform of choice. We
recorded $118,000 of loss on disposal of assets and classified the expense as
merger-related cost. Of the remaining asset value for all leasehold improvements
to CardioGenesis' Oakmead facility, $117,0000 was also written off, as that
facility was vacated at the time of the merger. Lastly, the two companies
utilized different manufacturing and accounting software prior to the merger, so
the $35,000 remaining net value of the software used by CardioGenesis prior to
the merger was written off, in full as it was no longer going to be utilized. We
recorded $35,000 of loss on disposal of the manufacturing and accounting
software and classified the expense as merger-related cost.
The following table summarizes the merger-related costs (in thousands).
DESCRIPTION AMOUNT
----------- -------
Financial advisory and legal fees ............. $ 2,528
Personnel severance ........................... 1,190
Terminated relationships/contracts ............ 910
Other costs including fixed asset and inventory
write-offs ................................... 3,109
-------
Subtotal ...................................... $ 7,737
Less: Amount included in cost of revenues ..... (2,523)
-------
Total ......................................... $ 5,214
=======
57
60
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the Company's merger related reserve
balances (in thousands):
Merger-related costs ...................... $ 7,737
Non-cash charges ......................... (2,060)
Cash payments ............................ (5,407)
-------
Merger reserve balance at December 31, 2000 $ 270
=======
The merger reserve balance is included in accrued liabilities.
The following table summarizes the combined operating results of Eclipse
and CardioGenesis as if the merger had occurred at the beginning of the periods
presented:
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1998 1997
-------- ---------
Revenue:
Eclipse previously reported ................. $ 12,002 $ 5,499
CardioGenesis ............................... $ 3,078 $ 7,559
Restated Revenue ............................ $ 15,080 $ 13,058
Net loss:
Eclipse previously reported ................. $(20,354) $(18,247)
CardioGenesis ............................... $(27,413) $(17,971)
Restated net loss ........................... $(47,767) $(36,218)
Basic and diluted net loss per share:
Eclipse previously reported ................. $ (1.18) $ (1.11)
CardioGenesis ............................... $ (2.80) $ (1.49)
Restated basic and diluted net loss per share $ (1.77) $ (1.39)
The earnings per common share are based on the sum of historical average
common shares outstanding, as reported by Eclipse, and the historical average
common shares outstanding for CardioGenesis (adjusted for the exchange ratio).
The following table summarizes the fiscal year 1999 revenues and net
income of Eclipse and CardioGenesis through 3/31/99:
QUARTER ENDED
MARCH 31, 1999
--------------
CardioGenesis:
Revenues.................................... $ 675
Net Income.................................. $(8,317)
Eclipse:
Revenues.................................... $ 3,799
Net Income.................................. $(6,849)
58
61
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the Company's merger related reserve
balances (in thousands):
Merger Related Cost (for the twelve month period
ended December 31, 1999) $ 8,278
Less:
Change in estimate................................. 541
Non-cash charges................................... 2,060
Cash payments...................................... 5,163
-------
Merger Reserve balance at December 31, 1999 $ 514
Less:
Cash payments.................................... 244
-------
Merger Reserve balance at December 31, 2000 $ 270
=======
4. INVESTMENT IN UNCONSOLIDATED AFFILIATE, AT EQUITY:
At December 31, 2000, Eclipse had a 32.1% ownership interest in
MicroHeart Holdings, Inc., "MicroHeart", which is accounted for under the equity
method. The investment in MicroHeart is recorded at cost and adjusted for the
Company's share of the income/(loss) of the investment. As of December 31, 2000,
Eclipse recorded net loss of $58,000, which represents Eclipse's equity in the
loss incurred by MicroHeart subsequent to obtaining the equity interest. Eclipse
recorded no income or loss related to MicroHeart under the equity method in 1999
or 1998.
5. MARKETABLE SECURITIES:
At December 31, 2000, Eclipse held no marketable securities. At December
31, 1999, marketable securities had a cost basis of approximately $7,649,000 and
a fair value of $7,747,000.
6. INVENTORIES:
Inventories consist of the following (in thousands):
DECEMBER 31,
-----------------
2000 1999
------ ------
Raw materials ..... $2,045 $3,074
Work in process ... 715 624
Finished goods .... 2,640 3,285
------ ------
$5,400 $6,983
====== ======
7. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
DECEMBER 31,
--------------------
2000 1999
------- -------
Computers and equipment ...................... $ 2,508 $ 2,262
Manufacturing and demonstration equipment .... 2,216 2,119
Assets in progress ........................... 183 6
Leasehold improvements ....................... 198 242
------- -------
5,105 4,627
Less accumulated depreciation and amortization (4,057) (3,407)
------- -------
$ 1,048 $ 1,220
======= =======
59
62
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Eclipse leases certain equipment under a capital lease which expires in
December 2003. Accordingly, capitalized costs of $138,000, net of accumulated
amortization of $57,000, are included in computers and equipment at December 31,
2000.
8. ACCRUED LIABILITIES:
Accrued liabilities consists of the following (in thousands):
DECEMBER 31,
-----------------
2000 1999
------ ------
Accrued research support .................... $2,356 $2,918
Accrued accounts payable and related expenses 1,256 354
Accrued merger expenses ..................... 270 514
Accrued withholdings on exercised options ... 74 2,031
Accrued salaries and related expenses ....... 472 1,206
Accrued commissions ......................... 235 468
Accrued consulting fees and related expenses 43 40
Accrued warranty ............................ 158 225
Accrued legal expense ....................... 30 262
Accrued other ............................... 895 1,539
------ ------
$5,789 $9,557
====== ======
9. NOTE PAYABLE:
In May 2000, Eclipse financed insurance premiums for Directors &
Officers insurance with a $319,000 note payable to a finance company at 8.0% per
annum, with an outstanding balance of $86,000 at December 31, 2000. At December
31, 1999, there were no outstanding note payable balances.
10. LONG-TERM LIABILITIES:
On January 5, 1999, prior to the merger with Eclipse, CardioGenesis
entered into a Settlement and License Agreement with PLC Medical Systems, Inc.
(PLC) which grants CardioGenesis a non-exclusive worldwide license to certain
PLC patents. In return, CardioGenesis agreed to pay PLC a license fee and
minimum royalties totaling $2.5 million over an approximately forty-month
period. The present value of these payments of $2.3 million has been recorded as
a prepaid license fee in other assets, and is being amortized over the life of
the underlying patents. The liability for outstanding payments due to PLC is
reflected in the current and long term portions of long-term liabilities and
payable as follows (in thousands):
Year Ending December 31,
2001..................................... $ 500
2002..................................... 375
-----
875
Less: Amount representing interest....... (36)
Present value of long-term liabilities... 839
Less: Current portion.................... (500)
-----
Long-term portion........................ $ 339
=====
60
63
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
Eclipse has entered into three operating leases for office facilities
with terms extending through September 2002. The minimum future rental payments
are as follows (in thousands):
Year Ending December 31,
2001..................................... $ 991
2002..................................... 715
------
$1,706
======
Rent expense was approximately $950,000, $1,089,000 and $883,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
At December 31, 2000 the Company held a capital lease which bears
interest at 6.8% and expires in December 2003. Future minimum lease payments
under this capital lease are as follows (in thousands):
Year Ending December 31,
2001 ..................................... $ 32
2002 ..................................... 32
2003 ..................................... 32
----
Total minimum lease payments ............. 96
Less: Amount representing interest ....... (4)
----
Present value of capital lease obligations 92
Less: Current portion .................... (26)
----
Long-term portion of capital lease
obligations ............................ $ 66
====
Eclipse is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions at this time, management
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's financial position, cash flows or results of operations.
12. SHAREHOLDERS' EQUITY:
Warrants:
At December 31, 2000, there were no warrants outstanding. During the
years ended December 31, 2000, 1999 and 1998, none, 448,799, and 304,715
warrants were exercised, respectively, generating proceeds of approximately
none, $833,000, and $725,000 respectively.
Options Granted to Consultants:
At December 31, 2000, options for consultants to purchase a total of
371,000 shares of common stock at exercise prices ranging from $4.00 to $8.75
per share were outstanding. The exercisability and termination of this plan is
the same as Eclipse's Stock Option Plan which is described below. At December
31, 2000, Eclipse had reserved 371,000 shares of common stock for issuance upon
exercise of these options. Eclipse recorded deferred stock compensation of
$231,000 in 2000 related to these options. These options are included in the
Stock Option Plan disclosures below.
61
64
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Option Plan:
Eclipse maintains a Stock Option Plan, which includes the Employee
Program under which incentive and nonstatutory options may be granted to
employees and the Consultants Program, under which nonstatutory options may be
granted to consultants of the Company. As of December 31, 2000, Eclipse had
reserved a total of 5,100,000 shares of common stock for issuance under this
plan. Under the plan, options may be granted at not less than fair market value
(110% of fair market value for options granted to 10% shareholders), as
determined by the Board of Directors. Options generally vest over a period of
three years and expire ten years from date of grant (five years for options
granted to 10% shareholders). No shares of common stock issued under the plan
are subject to repurchase.
Directors' Stock Option Plan:
Eclipse maintains a Directors' Stock Option Plan which provides for the
grant of nonstatutory options to directors who are not officers or employees of
the Company. As of December 31, 2000, Eclipse had reserved 325,000 shares of
common stock for issuance under this plan. Under this plan, options are granted
at the trading price of the common stock at the date of grant. Options generally
vest over twelve to thirty-six months and expire ten years from date of grant.
No shares of common stock issued under the plan are subject to repurchase.
Employee Stock Purchase Plan:
Eclipse maintains an Employee Stock Purchase Plan, under which 578,400
shares of common stock have been reserved for issuance. Eclipse adopted the
Employee Stock Purchase Plan in April 1996. The purpose of the Employee Stock
Purchase Plan is to provide eligible employees of Eclipse with a means of
acquiring common stock of Eclipse through payroll deductions. Eligible employees
are permitted to purchase common stock at 85% of the fair market value through
payroll deductions of up to 15% of an employee's compensations, subject to
certain limitations. During fiscal years 2000, 1999 and 1998, approximately
172,000, 81,000, 99,000 shares, respectively, were sold through the ESPP.
Stock-Based Compensation:
The Company has adopted the disclosure only provisions of SFAS 123.
Eclipse, however, continues to apply APB 25 and related interpretations in
accounting for its plans. Had compensation cost for the Stock Option Plan, the
Director's Stock Option Plan and the Employee Stock Purchase Plan been
determined based on the fair value of the options at the grant date for awards
in 2000, 1999 and 1998 consistent with the provisions of SFAS 123, Eclipse's net
loss and net loss per share would have increased to the pro forma amounts
indicated below (in thousands, except per share amounts):
DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- --------
Net loss as reported........................ $(14,609) $(28,333) $(47,767)
Pro forma net loss.......................... $(17,993) $(32,362) $(51,213)
Basic and diluted net loss per share as
reported.................................... $ (0.48) $ (0.99) $ (1.77)
Pro forma basic and diluted net loss per
share....................................... $ (0.60) $ (1.13) $ (1.90)
The above pro-forma disclosures are not necessarily representative of
the effects on reported net income for future years. The aggregate fair value
and weighted average fair value per share of options granted in the years ended
December 31, 2000, 1999 and 1998 were $2.5 million, $7.9 million, and $6.5
million, and $1.44, $5.25, and $5.46, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions for grants in
2000, 1999 and 1998:
62
65
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Expected life of option......................... 7 years 7 years 7 years
Risk-free interest rate......................... 5.85% 5.00% 4.86%
Expected dividends.............................. -- -- --
Expected volatility............................. 165% 100% 97%
The aggregate fair value and weighted average fair value per share of
purchase rights under the ESPP in fiscal years 2000, 1999 and 1998 was $167,000,
$157,000 and $210,000, and $3.01, $3.42, and $3.90, respectively. The fair value
for the purchase rights under the Employee Stock Purchase Plan is estimated
using the Black-Scholes Option Pricing Model, with the following assumptions for
the rights granted in 2000, 1999 and 1998:
DECEMBER 31,
-----------------------------
2000 1999 1998
-------- -------- --------
Expected life................................ .5 years .5 years .5 years
Risk-free interest rate...................... 5.85% 5.00% 4.62%
Expected dividends........................... -- -- --
Expected volatility.......................... 100% 100% 95%
Option activity under the Stock Option Plan and the Directors Stock
Option Plan is as follows (in thousands, except per share amounts):
OUTSTANDING OPTIONS
-----------------------------
SHARES AVAILABLE NUMBER WEIGHTED AVERAGE
FOR GRANT OF SHARES(#) PRICE PER SHARE
---------------- ----------- ----------------
Balance, January 1, 1998....... 1,792 4,576 $4.37
Additional shares reserved.... 320 -- --
Options granted............... (1,243) 1,243 6.89
Options canceled.............. 702 (612) 8.20
Options exercised............. -- (650) 1.37
------- -------
Balance, December 31, 1998..... 1,571 4,557 4.86
Additional shares reserved.... 1,225 -- --
Options granted............... (1,494) 1,494 7.75
Options canceled.............. 222 (222) 8.11
Options exercised............. -- (1,447) 5.11
------- -------
Balance, December 31, 1999..... 1,524 4,382 5.35
CardioGenesis Stock Plan (539) -- --
reserves.......................
Options granted............... (1,554) 1,554 1.17
Options canceled.............. 1,019 (1,019) 7.36
Options exercised............. -- (640) 1.66
------- -------
Balance, December 31, 2000..... 450 4,277 $4.99
======= =======
63
66
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about the Company's stock
options outstanding and exercisable under the Stock Option Plan and the
Director's Stock Option Plan at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
WEIGHTED AVERAGE
REMAINING
NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING(#) (IN YEARS) EXERCISE PRICE EXERCISABLE(#) EXERCISE PRICE
--------------- ------------- ------------------ ---------------- -------------- -----------------
(IN THOUSANDS) (IN THOUSANDS)
$0.15-$ 0.30 88 3.62 $ 0.22 88 $ 0.22
$1.38-$ 1.44 583 6.98 0.92 202 0.46
$1.67-$ 1.67 530 4.87 1.67 530 1.67
$1.69-$ 2.29 824 7.50 1.99 121 1.99
$3.36-$ 5.88 348 8.22 3.80 203 3.90
$6.06-$ 6.94 967 7.93 6.48 635 6.51
$7.00-$ 8.74 550 7.51 8.33 371 8.28
$9.06-$15.94 389 6.52 10.17 326 10.02
----- -----
4,277 6.98 $ 4.99 2,477 $ 5.25
=====
13. EMPLOYEE RETIREMENT PLAN:
Eclipse maintains a 401(k) plan for its employees. The plan allows
eligible employees to defer up to 15% of their earnings, not to exceed the
statutory amount per year on a pretax basis through contributions to the plan.
The plan provides for employer contributions at the discretion of the Board of
Directors, however, no such contributions were made in 2000, 1999 or 1998.
14. SEGMENT DISCLOSURES
The Company operates in the cardiovascular medical device segment. The
principal markets for the Company's products are in the United States of
America. International sales were in Europe and amounted to $2.2 million, $3.5
million and $3.6 million for the years ended December 31, 2000, 1999 and 1998,
respectively. The international sales represent 10%, 14% and 24% of total sales
for the years ended December 31, 2000, 1999 and 1998, respectively. The
international sales are denominated in US dollars.
15. INTEREST AND OTHER INCOME:
Interest and other income consists of the following (in thousands):
YEARS ENDED DECEMBER 31,
2000 1999 1998
------ ------ ------
Interest and other income ................ $ 400 $ 796 $3,004
Gain on investment in MicroHeart
Holdings, Inc. ....................... -- -- 400
Gain on sale of marketable securities .... -- 5 50
------ ------ ------
$ 400 $ 801 $3,454
====== ====== ======
64
67
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. INCOME TAXES:
Significant components of Eclipse's deferred tax assets are as follows
(in thousands):
DECEMBER 31
----------------------
2000 1999
-------- --------
Net operating losses ..................... $ 50,734 $ 43,914
Research and development and other credits 3,697 4,284
Capitalized research and development ..... 806 1,858
Reserves ................................. 2,038 2,705
Accrued liabilities ...................... 1,118 2,116
Depreciation ............................. 259 402
Other .................................... 763 1,018
-------- --------
Net deferred tax asset ................... 59,415 56,297
Less valuation allowance ................. (59,415) (56,297)
-------- --------
Net deferred tax assets .................. $ -- $ --
======== ========
The Company has established a valuation allowance to the extent of its
deferred tax asset since it is not certain that a benefit can be realized in the
future due to the Company's recurring operating losses.
As of December 31, 2000, the Company had federal and state net operating
loss carryforwards of approximately $137 million and $62 million, respectively,
to offset future taxable income. In addition, the Company had federal and state
credit carryforwards of approximately $2,501,000 and $1,195,000 available to
offset future tax liabilities. The Company's net operating loss carryforwards,
as well as credit carryforwards, will expire at various dates beginning in 2001
through 2020, if not utilized.
The Internal Revenue Code limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. The Company believes that the sale of common stock in
its initial public offering and the merger with CardioGenesis resulted in
changes in ownership which could restrict the utilization of the carryforwards.
17. RELATED PARTY TRANSACTIONS:
The Company paid $0, $3,875 and $445,000 for consulting fees and product
to certain stockholders during the years ended December 31, 2000, 1999 and 1998,
respectively.
18. SUBSEQUENT EVENTS:
In March 2001, the Company sold 898,202 shares of common stock to Acqua
Wellington North American Equities Fund, Ltd. ("Acqua Wellington") at a
negotiated purchase price of $1.1133 per share pursuant to the common stock
purchased agreement between Eclipse Surgical Technologies, Inc. and Acqua
Wellington dated August 17, 2000. The Company did not pay any other compensation
in conjunction with the sale of our common stock.
In April 2001, the Company sold 2,000,000 shares of common stock to a
governmental entity at a negotiated purchase price of $1.00 per share. The
Company did not pay any other compensation in conjunction with the sale of our
common stock. These securities carry registration rights. If a registration
statement is not declared effective by the SEC on or before July 12, 2001, the
Company will be required to pay liquidated damages in the amount of 0.25% of the
total purchase price of the shares for each week after July 12, 2001 that the
registration statement is not declared effective. The purchaser also has certain
anti-dilution rights that are effective for 90 days following the purchase of
the stock. As a condition of the sale, the Company amended its bylaws to
65
68
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
preclude, absent shareholder approval, the granting of any stock options with an
exercise price which is below the fair market value of the underlying stock on
the date of grant, the repricing of any stock options, the issuance of any
security convertible, exercisable or exchangeable into shares of common stock of
the Company having a conversion, exercise or exchange price per share which is
subject to downward adjustment based on the market price of the common stock at
the time of conversion, exercise or exchange of such security into the Company's
common stock, or enter into any equity line or similar agreement or arrangement
or any agreement to sell common stock at a price fixed after the date of the
agreement.
In April 2001, the Company received a non-binding letter of intent from
a business credit financing company regarding an asset-based financing agreement
which will provide an estimated $1,000,000 of additional financing based upon
our current levels of qualified domestic accounts receivable which will serve as
collateral.
66
69
ECLIPSE SURGICAL TECHNOLOGIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT
BEGINNING BALANCE AT
OF PERIOD ADDITIONS(1) DEDUCTIONS(2) END OF PERIOD
--------- ------------ ------------- -------------
Allowance for doubtful accounts:
Year ended December 31, 1998
Allowance for doubtful accounts $ 1,727 $ 1,017 $ 75 $ 2,669
Year ended December 31, 1999
Allowance for doubtful accounts $ 2,669 $ 1,377 $ 2,170 $ 1,876
Year ended December 31, 2000
Allowance for doubtful accounts $ 1,876 $ 620 $ 1,700 $ 796
Inventory reserve:
Year ended December 31, 1998
Inventory reserve .............. $ 432 $ 68 $ 97 $ 403
Year ended December 31, 1999
Inventory reserve .............. $ 403 $ 1,782 $ 187 $ 1,998
Year ended December 31, 2000
Inventory reserve .............. $ 1,998 $ 673 $ 491 $ 2,180
Warranty reserve:
Year ended December 31, 1998
Warranty reserve ............... $ 78 $ 100 $ -- $ 178
Year ended December 31, 1999
Warranty reserve ............... $ 178 $ 114 $ 67 $ 225
Year ended December 31, 2000
Warranty reserve ............... $ 225 $ 95 $ 162 $ 158
Valuation allowance:
Year ended December 31, 1998
Valuation allowance ............ $27,391 $19,342 $ -- $46,733
Year ended December 31, 1999
Valuation allowance ............ $46,733 $ 9,564 $ -- $56,297
Year ended December 31, 2000
Valuation allowance ............ $56,297 $ 3,118 $ -- $59,415
-----------------
(1) Charged to costs and expenses.
(2) Amounts written off against the reserve.
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE YEAR
ENDED DECEMBER 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
67