<PAGE> 1
Filed Pursuant To Rule 424(b)(3)
Registration Statement No. 333-53117
PROSPECTUS
2,552,534 SHARES OF COMMON STOCK
OF
INCONTROL, INC.
This Prospectus relates to up to 2,552,534 shares (together with a
presently indeterminate number of additional shares, as described below, the
"Shares") of Common Stock, $.01 par value per share (the "Common Stock"), of
InControl, Inc. (the "Company"). The Shares may be offered by certain
stockholders of the Company (the "Selling Stockholders") from time to time in
transactions in the over-the-counter market through the Nasdaq National Market
("Nasdaq"), or on one or more other securities markets and exchanges, in
privately negotiated transactions, or otherwise, at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices relating to
such prevailing market prices or at negotiated prices. The Selling Stockholders
may effect such transactions by selling the Shares to or through broker-dealers,
and such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders and/or the purchasers
of the Shares for whom such broker-dealers may act as agents or to whom they may
sell as principals, or both (which compensation as to a particular broker-dealer
may be in excess of customary commissions). See "Selling Stockholders" and "Plan
of Distribution."
None of the proceeds from the sale of the Shares by the Selling
Stockholders will be received by the Company. The Company has agreed to bear all
expenses (other than selling commissions and fees and stock transfer taxes) in
connection with the registration and sale of the Shares being offered by the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders and any broker-dealers who act in connection with the sale of the
Shares hereunder against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). On July 15, 1998, the
Company issued an additional 88 shares of its Series B Stock to the Selling
Stockholders in payment of dividends on the Series B Stock.
On April 20, 1998, the Company sold 7,500 shares of its Series B
Convertible Preferred Stock, $.01 par value (the "Series B Stock") to the
Selling Stockholders in a private transaction. See "Description of the Series B
Stock." Pursuant to the terms of the Certificate of Designations of the Series B
Stock regarding payment of dividends, the Company may, from time to time, issue
additional shares of Series B Stock to the Selling Stockholders in payment of
dividends on the Series B Stock. See "Description of the Series B Stock --
Dividends."
The Shares being offered hereby by the Selling Stockholders include (i) the
shares of Common Stock acquired by the Selling Stockholders upon conversion of
the Series B Stock prior to August 13, 1998 and (ii) the shares of Common Stock
that may be acquired, from time to time, upon conversion of the Series B Stock.
The Shares include such presently indeterminate number of additional shares of
Common Stock as may become issuable upon conversion of the Series B Stock and
shares of Series B Stock issued in payment of dividends thereon as a result of
stock splits, stock dividends or similar transactions in accordance with Rule
416 under the Securities Act. The actual number of shares of Common Stock issued
or issuable upon conversion of the Series B Stock is subject to adjustment
depending on factors which cannot be predicted by the Company at this time,
including, among others, the future market prices of the Common Stock, the
payment of dividends on the Series B Stock in additional shares of Series B
Stock and the date on which the Registration Statement of which this Prospectus
forms a part is declared effective by the Securities and Exchange Commission
(the "Commission"). See "Description of the Series B Stock -- Conversion."
The Common Stock is quoted on Nasdaq under the symbol "INCL." On August 11,
1998, the closing sales price for the Common Stock as reported on Nasdaq was
$5.625 per share.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is August 13, 1998.
<PAGE> 2
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company may be inspected and copied (at prescribed rates) at the public
reference facilities maintained by the Commission in Washington, D.C. (450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549) and at the Commission's
Regional Offices in New York (7 World Trade Center, 13th Floor, New York, New
York 10048) and Chicago (Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661). The Company is an electronic filer and the Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the web site is "http://www.sec.gov." The Company's
reports, proxy statements and other information may also be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
This Prospectus is part of a Registration Statement on Form S-3 (together
with all amendments and exhibits thereto, the "Registration Statement") filed
with the Commission under the Securities Act with respect to the Shares offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted in
accordance with the Commission's rules and regulations. For further information
with respect to the Company and the Shares offered hereby, reference is made to
the Registration Statement and the exhibits thereto. The statements in this
Prospectus are qualified in their entirety by reference to the contents of any
agreement or other document incorporated herein by reference, a copy of which is
filed as an exhibit to either the Registration Statement or other filings by the
Company with the Commission.
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). The PSLRA
provides a "safe harbor" for such statements to encourage companies to provide
prospective information about themselves so long as such information is
identified as forward-looking and is accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in the information. All statements other
than statements of historical fact made in this Prospectus or incorporated by
reference are forward-looking. In particular, the statements herein regarding
the availability of adequate funding, progress in the Company's clinical trials,
the granting and timing of regulatory approval for the Company's primary
product, the METRIX System, the status of competitive treatments and products
for the treatment of atrial fibrillation, and the availability and adequacy of
third-party reimbursement for the Company's products are forward-looking
statements. Forward-looking statements represent management's current
expectations and are inherently uncertain. Investors are warned that the
Company's actual results may differ significantly from management's expectations
and, therefore, from the results discussed in such forward-looking statements.
Factors that might cause such differences include, but are not limited to, the
"Risk Factors" described herein.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon such
person's written or oral request, a copy of any and all of the documents
incorporated by reference herein (other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference into the information
that this Prospectus incorporates). Requests should be directed to InControl,
Inc., 6675 - 185th Avenue N.E., Redmond, Washington 98052, Attention: Secretary,
telephone: (425) 861-9800.
2
<PAGE> 3
\The following documents filed with the Commission by the Company are
incorporated by reference into this Prospectus:
(1) The Company's Annual Report on Form 10-K, as amended by Form 10-K/A No.
1 and Form 10-K/A No. 2, for the year ended December 31, 1997;
(2) The Company's Quarterly Report on Form 10-Q, as amended by Form 10-Q/A
No. 1 and Form 10-Q/A No. 2, for the quarter ended March 31, 1998;
(3) The Company's Current Report on Form 8-K, as amended by Form 8-K/A No.
1, Form 8-K/A No. 2 and Form 8-K/A No. 3, dated April 20, 1998;
(4) The Company's Current Reports on Form 8-K dated June 26, 1998 and
August 10, 1998;
(5) The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A as of September 8, 1994, including
any amendment or report filed for the purpose of updating such
description; and
(6) The description of the Company's rights contained in the Company's
Registration Statement on Form 8-A filed with the Commission on March
1, 1996, including any amendment or report filed for the purpose of
updating such description.
All documents filed with the Commission by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Shares shall be
deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the respective dates of filing such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed modified, superseded or replaced for purposes of this
Prospectus to the extent that a statement contained herein or in any
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies, supersedes or replaces such statement. Any statement
so modified, superseded or replaced shall not be deemed, except as so modified,
superseded or replaced, to constitute a part of this Prospectus.
------------------------
The Company's principal executive offices are located at 6675 - 185th
Avenue N.E., Redmond, Washington 98052, telephone: (425) 861-9800.
3
<PAGE> 4
RISK FACTORS
THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS
CONTAINED IN THIS PROSPECTUS 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 THE
COMPANY'S EXPECTATIONS, BELIEFS, ESTIMATES, INTENTIONS AND STRATEGIES ABOUT THE
FUTURE. WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES,"
"SEEKS," "ESTIMATES," VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS, BUT THEIR ABSENCE DOES NOT
MEAN THE STATEMENT IS NOT FORWARD-LOOKING. THESE STATEMENTS ARE NOT GUARANTEES
OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE
FOLLOWING RISK FACTORS, ELSEWHERE IN THIS PROSPECTUS AND IN THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE
PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE. POTENTIAL INVESTORS SHOULD CONSIDER CAREFULLY THE
FOLLOWING FACTORS, AS WELL AS THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE
IN THIS PROSPECTUS AND IN THE DOCUMENTS INCORPORATED BY REFERENCE, BEFORE MAKING
A DECISION TO INVEST IN THE SHARES OFFERED HEREBY.
MARKET ACCEPTANCE; SUBSTANTIAL DEPENDENCE ON SINGLE PRODUCT
Regulatory approval is required in all important markets in which the
Company plans to sell the METRIX System. There can be no assurance, however,
that such approval will be obtained in a timely manner, if at all. Even if
regulatory approval is obtained in each market, there can be no assurance that
the METRIX System will gain market acceptance in any area. Moreover, in Europe,
market acceptance will depend upon the successful completion of various
post-regulatory approval protocols designed to demonstrate the clinical benefits
of the METRIX System, including improvements in patients' quality of life and
the cost-effectiveness of the therapy.
The METRIX System is a new invasive approach to the treatment of atrial
fibrillation ("AF"). Currently, the METRIX System may be marketed only in
Europe, and there are no other implantable devices to treat AF on the market
anywhere in the world. The timing and rate of adoption of new medical technology
cannot be predicted. Substantial clinical experience with the METRIX System will
be required to address patients' and physicians' concerns, including potential
ventricular proarrhythmia, potential shock discomfort and early recurrence of
atrial fibrillation, a condition involving the recurrence of AF within the first
two minutes following a successful cardioversion shock. There can be no
assurance that these concerns will be adequately addressed so as to permit the
successful commercialization of the METRIX System. Since the Company anticipates
that for the foreseeable future it will be substantially dependent on the
successful development and commercialization of the METRIX System and related
future products, failure of the Company to successfully develop and
commercialize the METRIX System and related future products would have a
material adverse effect on the Company's business, financial condition and
results of operations.
HISTORY OF LOSSES; FUTURE LOSSES; ABILITY TO CONTINUE AS A GOING CONCERN
The design and development of an implantable medical device has required
the Company to make significant investments in research and development
activities since its incorporation in November 1990 and, as such, the Company
has accumulated a deficit of $138.8 million as of March 31, 1998. The Company
4
<PAGE> 5
reported net losses of $33.5 million, $36.8 million and $23.7 million for the
years ended December 31, 1997, 1996 and 1995, respectively. In addition, the
Company reported a $9.1 million loss in the quarter ended March 31, 1998. The
Company expects to incur substantial additional losses in the near future. The
Company's independent auditors have included an explanatory paragraph in their
report covering the December 31, 1997 consolidated financial statements, which
expresses substantial doubt about the Company's ability to continue as a going
concern. The Company expects that revenues from clinical trials and sales of the
Company's products will increase, which will moderate future deficit growth.
Future increases in expenses are expected to be primarily due to the Company's
continuing investment in research and development efforts, increases in clinical
trial activities, the maintenance of the European sales organization, the
expansion of domestic marketing and sales capabilities and increasing domestic
manufacturing activity. The amount and timing of the Company's future revenues
and, as a result, the amount and timing of the Company's future losses will be
affected by, among other things, the availability of adequate funding, the
progress and costs of preclinical studies and clinical trials, including the
recruitment of suitable patients, the timing of regulatory approvals, the rate
of market acceptance and adoption of the METRIX System and related future
products, the availability of third-party reimbursement for the Company's
products, the ability to obtain and defend patent and intellectual property
rights and to market the Company's products and the status of competing
products. There can be no assurance that the Company will ever achieve
profitability or generate product revenues sufficient to offset the Company's
losses.
CONSUMMATION OF THE TENDER OFFER AND MERGER
On August 10, 1998, the Company and Guidant Corporation ("Guidant")
announced that they had entered into an Agreement and Plan of Merger dated as of
August 10, 1998 between Guidant, Pegasus Acquisitions Corp. ("Pegasus") and the
Company (the "Merger Agreement") providing for the acquisition of the Company by
Guidant. Pursuant to the Merger Agreement, Guidant has agreed to purchase each
outstanding share of the Company's Common Stock at an offer price of $6.00 per
share (the "Offer Price"). To implement the Merger Agreement, Guidant will
commence a cash tender offer for all outstanding shares of the Common Stock
within five business days of the execution of the Merger Agreement. The
completion of the tender offer is subject to a number of customary conditions,
including the acquisition of a majority of the Company's outstanding Common
Stock on a fully diluted basis and the expiration of the waiting period under
the Hart-Scott-Rodino Antitrust Improvement Act of 1976.
Following successful completion of the tender offer, subject to certain
customary conditions, Pegasus, an indirect wholly owned subsidiary of Guidant,
will be merged with and into the Company and the Company will continue as the
surviving corporation. As a result of the merger, each outstanding share of the
Common Stock not tendered pursuant to the tender offer, if any, will be
converted into the right to receive the Offer Price, or such higher price as
Guidant pays pursuant to the tender offer.
There can be no assurance that the conditions to the tender offer and the
subsequent merger will be satisfied or waived, and, therefore, there can be no
assurance that the tender offer or the subsequent merger will be consummated on
the terms provided in the Merger Agreement, if at all. If the tender offer or
the subsequent merger are not consummated, the Company's stockholders will have
no right to receive the Offer Price pursuant to the tender offer or the Merger
Agreement.
NEED FOR SUBSTANTIAL ADDITIONAL CAPITAL
The Company expects its cash needs to continue at their present levels in
future periods due to the Company's planned investment in research and
development, anticipated increases in spending on clinical studies and trial
activities and expansion of marketing, sales and manufacturing capabilities. The
Company's future capital requirements will depend on many factors, including the
progress and costs of preclinical studies and clinical trials, the recruitment
of suitable patients, the timing of regulatory approvals, the rate of market
acceptance and the adoption of the METRIX System and related future products,
the availability of third-party reimbursement for the Company's products, the
ability to obtain and defend patent and intellectual property rights and to
market the Company's products and the status of competing products.
5
<PAGE> 6
To date, the Company has raised $73.9 million, net of issuance costs,
through the sale of Common Stock and convertible preferred stock in private
placements. In addition, the Company has raised $75.9 million, net of issuance
costs, through its initial and subsequent public offerings. In April 1998, the
Company raised $7.5 million through the sale of 7,500 shares of the Series B
Stock in a private transaction. The Company raised an additional $2.5 million
through the sale of 400,000 shares of Common Stock in a private transaction.
As a result of its failure to maintain certain minimum levels of cash, the
Company has defaulted under certain of its capital lease arrangements. As a
result, the Company has entered into a letter of credit agreement with the
lessor pursuant to which the Company has agreed to maintain an irrevocable
letter of credit in the face amount of $500,000 for the purpose of securing its
obligations under the lease. At the present time, the Company believes it is
unlikely the lessor will foreclose under the leases or accelerate rental
payments and has received verbal assurances to that effect. However, if funding
continues to be insufficient in the future, notwithstanding the letter of credit
agreement, the lessor may accelerate the payments due under these capital lease
arrangements. Accordingly, the Company has classified $1.6 million of the
amounts payable under these lease arrangements as a current liability in its
consolidated financial statements included in its Quarterly Report on Form 10-Q,
as amended by Form 10-Q/A No. 1 and Form 10-Q/A No. 2. If the lessor were to
foreclose under the leases or accelerate rental payments, it could have a
material adverse effect on the Company's business, financial condition and
results of operations.
On August 10, 1998, the Company entered into a credit agreement with
Guidant pursuant to which the Company is able, subject to certain customary
conditions, to borrow up to an aggregate of $10 million in amounts not to exceed
$3 million per month (both amounts subject to adjustment upwards as provided in
the credit agreement).
The Company estimates that, at its planned rate of spending, its existing
cash, cash equivalents, securities available-for-sale, and interest income
thereon, including the $10 million in capital that was raised in April 1998 and
the funds available under the Company's $10 million credit agreement with
Guidant, will be sufficient to meet its capital requirements into the first
quarter of 1999. There can be no assurance that the underlying assumed levels of
revenue and expense will prove to be accurate. Whether or not these assumptions
prove to be accurate, if the Company is unable to consummate the transactions
contemplated by the Merger Agreement, the Company will need to raise substantial
additional capital in 1998 to fund operations. The Company intends to seek
additional funding through public or private financing, including equity
financing. Adequate funds for these purposes, whether obtained through financial
markets or from other sources, may not be available when needed or may not be
available on terms favorable to the Company, if at all. If additional funds are
raised by issuing equity securities, dilution to existing shareholders will
result. If funding is insufficient at any time in the future, the Company will
be forced to delay, reduce or eliminate some or all of its research and
development activities, clinical studies and trials and manufacturing and
administrative programs, dispose of assets or technology, or cease operations.
MANDATORY REDEMPTION OF SERIES B STOCK
The number of shares of Common Stock issuable upon conversion of the Series
B Stock is limited to the Maximum Share Amount. If at any time after July 19,
1998, the number of shares issuable upon conversion of the Series B Stock
exceeds the Maximum Share Amount, the holders of the Series B Stock may compel
the Company to redeem that portion (on a pro rata basis) of their shares as
would not have been convertible because of the Maximum Share Amount restriction.
If requested by the holders of Series B Stock, the Company must redeem shares of
Series B Stock at a price equal to the greater of (i) 115% of the purchase price
and any accrued but unpaid dividends and (ii) the price that is equal to the
number of shares issuable upon conversion of the Series B Stock multiplied by
the average of the closing bid price of the Common Stock for the previous five
trading days. If the market price of the Common Stock falls below the level
necessary to allow full conversion of the Series B Stock (depending upon the
applicable conversion percentage), the Company may be required to redeem shares
of Series B Stock at a premium or seek stockholder approval for the issuance of
a greater number of shares. Any such redemption of shares of Series B Stock
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Description of the Series B Stock."
6
<PAGE> 7
DEPENDENCE ON REIMBURSEMENT
Successful sales of the METRIX System in the United States and Europe will
depend on the availability of reimbursement from third-party payors such as
government and private insurance plans. There is significant uncertainty
concerning third-party reimbursement of investigational and newly approved
healthcare products, and there can be no assurance that third-party
reimbursement will be made available for the METRIX System or that any
third-party reimbursement that is obtained will be adequate. Government and
other third-party payors are increasingly scrutinizing patient indications for
medical device therapy and limiting coverage. In Europe, post-regulatory
approval study protocols are required before a device will be eligible for
reimbursement through the various national and local health care financing
authorities. There can be no assurance that these European study protocols will
be completed successfully or that reimbursement will be available in a timely
manner, if at all. If adequate coverage and reimbursement levels are not
provided by government and third-party payors for the METRIX System, the
Company's business and financial condition would be materially adversely
affected.
EXTENSIVE GOVERNMENTAL REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS
The Company is subject to significant regulation by authorities in the
United States and Europe regarding the approval of devices and the subsequent
marketing, manufacture and distribution of approved devices.
In the United States, the Company's products have and will continue to
undergo clinical testing followed by an extensive Food and Drug Administration
("FDA") approval process. At the end of the first quarter of 1998, the METRIX
System was in clinical trials in the United States in 25 centers, the number
approved by the FDA. The Company currently has 37 patients enrolled in those
trials, with approval to implant up to a maximum of 170 METRIX atrial
defibrillators. There can be no assurance that the clinical trials will
demonstrate that the METRIX System is safe and effective, or that the Company
will receive FDA approval in a timely manner, if at all. The time required to
complete the U.S. trials is dependent on the rate of patient recruitment, the
performance of the device during the trials and the number of times therapy is
applied to patients enrolled in the study. In addition, delays or rejections may
be encountered based on changes in FDA policy that occur during the development
and approval process. FDA approvals may also be limited, which could limit the
patient population to which the Company's products may be marketed and
distributed. Delays, setbacks or approval limitations related to any of the
factors listed above may have a material adverse effect on the Company's
business and financial condition.
After completing the clinical trials, the Company must submit a Pre-Market
Approval ("PMA") application that is supported by extensive data, including
preclinical and clinical trial data, relating to the safety and effectiveness of
the device. As part of the PMA application process the Company will be required
to submit a full description of its facilities, manufacturing methods and
manufacturing controls. The Company must also fully describe the METRIX System
and the System's components in the PMA application. The Company will then be
required to undergo an initial audit, including a facility inspection, to ensure
that the Company is in compliance with the FDA's Quality System Requirements
regulations (formerly known as Good Manufacturing Practices) and the Medical
Device Reporting regulations and other regulations under the Federal Food, Drug
and Cosmetic Act ("FDC Act") and FDA regulations. There can be no assurance that
the Company will be able to comply with such regulations in a timely fashion,
particularly given the Company's limited manufacturing experience.
Once a PMA application is filed, the FDA may accept it and call for an
advisory panel recommendation or may reject it for insufficient data. Such a
rejection could have significant negative consequences for the Company,
including forcing more costly studies, adversely impacting the market acceptance
of the METRIX System and forcing a possible product recall. After the PMA is
reviewed by the advisory panel, the FDA may approve or reject the product. This
process is lengthy and unpredictable. If the METRIX System PMA application is
approved and the Company markets the METRIX System, the Company will be required
to register with the FDA and to submit device listing information for products
in commercial distribution. The Company and its facilities will then be
periodically re-inspected by the FDA for compliance with the FDC Act
7
<PAGE> 8
and FDA regulations, including those described above. Labeling and promotional
activities will be subject to scrutiny by the FDA and, in certain circumstances,
by the Federal Trade Commission.
If the FDA determines during the initial audit or during any subsequent
audit that the Company is not in compliance, the FDA has the authority to take
actions that it deems appropriate for any infractions. Such penalties include,
but are not limited to, monetary fines, product recalls, withdrawal of product
approvals, "cease distribution" orders for both domestic and international
products, product seizure and the slowing or stopping of future product approval
processes. In addition, the FDA may institute civil or criminal legal
proceedings against the Company or its officers. Any such action by the FDA
could result in the disruption of the Company's operations for an indeterminate
time, which may have a material adverse effect on the Company's business and
financial condition.
In Europe, the Company has received the needed certifications required in
order to declare compliance with the European Active Implantable Device
Directive ("AIMDD") and affix the conformite europeenne ("CE") mark to the
METRIX System components. While the CE mark allows the Company to distribute and
market the METRIX System throughout the European Community ("EC"), the Company
will need to complete studies regarding the cost benefits of the therapy before
it will be eligible to receive reimbursement approvals from the medical
reimbursing authorities in various EC member countries. There can be no
assurance that such approvals from the reimbursing authorities will be obtained
in a timely manner, if at all. Failure to obtain such approvals could
significantly delay or prevent the adoption of the METRIX System in Europe and
thereby have a material adverse effect on the Company's business and financial
condition.
As part of the CE mark approval process the Company was required to obtain
certifications of its quality system under the AIMDD from TUV Product Services
of Munich, Germany (the "Notified Body"), an organization accredited to provide
such quality system certification. The Notified Body will perform periodic
audits to ascertain whether the Company has maintained its quality system and is
in compliance with the certification requirements under the AIMDD. If
certification is revoked, the Company may be prevented from distributing its
product in the EC. In addition, if an individual EC country's regulatory
authority deems the METRIX System to be "unsafe" for any reason, the Company may
find it impossible to distribute its product throughout the EC. A
de-certification of the Company's quality system or an "unsafe" determination by
any regulatory authority would have a material adverse effect on the Company's
business and financial condition.
SIGNIFICANT COMPETITION
The METRIX System is a new technology that must compete with the
established treatments for AF: pharmaceuticals, external electrical
cardioversion, atrioventricular node ablation accompanied by pacemaker
implantation and open-heart surgical ablation. Furthermore, although currently
no implantable device is being marketed to treat AF (with the exception of the
METRIX atrial defibrillator in Europe), certain manufacturers of implantable
ventricular defibrillators and pacemakers are developing dual-chamber
defibrillator systems that will be used to treat patients with both ventricular
and atrial arrhythmias and may be marketed to patients who have only AF. One
such dual chamber defibrillator system has started clinical trials in Europe.
Some of the Company's competitors are also researching other approaches to the
treatment of AF, including endocardial ablation and preventative pacing
techniques. In addition, other companies and research organizations, academic
institutions and governmental agencies may be pursuing alternative approaches
for the treatment of AF. These entities may market products to treat AF either
on their own or through collaborative efforts. The Company believes that the
primary competitive factors in the market for the treatment of symptomatic AF
are therapeutic efficacy, safety and patient acceptance. Many of the Company's
competitors have substantially greater financial and other resources, larger
research and development staffs and more experience and capabilities in
conducting research and development activities, testing products in clinical
trials, obtaining regulatory approvals and manufacturing, marketing and
distributing products than the Company. The Company's competitors may develop
new technologies and products that are available for sale prior to the METRIX
System or that are more effective than the METRIX System. In addition,
competitive products may be manufactured and marketed more successfully than the
METRIX System. Such developments could render the METRIX System less competitive
or obsolete and could have a material adverse effect on the Company's business
and financial condition. In addition, the Company intends for its future
8
<PAGE> 9
products to include bradycardia pacing technology. Any such products are likely
to face direct competition from more established medical device companies with
financial and other resources significantly greater than those of the Company.
DEPENDENCE ON SOLE SOURCES OF SUPPLY
The Company relies on outside vendors to manufacture certain major
components used in the METRIX System. For efficiency reasons the Company does
not at the present time maintain supply contracts with most of these outside
vendors. A number of significant components, such as hybrid circuits, batteries,
integrated circuits, capacitors and transformers, are supplied by sole source
vendors. For certain of these components, there are relatively few alternative
sources of supply, and establishing additional or replacement suppliers for such
components, particularly hybrid circuits and batteries, cannot be accomplished
quickly. In addition, each supplier and each component must be qualified with
the FDA, and the time required for such qualification may be lengthy. The
establishment of additional or replacement sources of supply would require the
Company to certify the new suppliers, which, in the case of certain components,
would cause a delay in the Company's ability to manufacture its products. The
Company actively maintains its relationships with its suppliers and presently
has no reason to believe that its sources of supply are in danger of disruption.
However, if the Company's supply sources were disrupted and the Company was
unable to obtain acceptable components in a timely manner or find and maintain
suitable replacement suppliers, such a disruption would have a material adverse
effect on the Company's ability to manufacture the METRIX System and therefore
on its business and financial condition.
INDUSTRY HISTORY OF PATENT LITIGATION; DEPENDENCE ON PATENTS AND PROPRIETARY
RIGHTS
The segment of the medical device industry that includes implantable
defibrillator systems has been characterized by extensive litigation regarding
patents and other intellectual property rights. Litigation may be necessary to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company or to determine the enforceability, scope and validity of
proprietary rights of others. Such litigation may result in substantial expense
to the Company and significant diversion of effort by the Company's technical
and management personnel. An adverse determination in any such litigation could
subject the Company to significant liability to third parties or require the
Company to seek licenses from third parties. Although patent and intellectual
property disputes in the medical device industry have often been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include ongoing royalties. Moreover, there can be no
assurance that necessary licenses would be available to the Company on
satisfactory terms, if at all. If such licenses could not be obtained on
acceptable terms, the Company could be prevented from marketing certain devices
in the METRIX System family or future related products. Accordingly, an adverse
determination in such litigation could have a material adverse effect on the
Company's business and financial condition. The Company's success will depend in
part on its ability to obtain and maintain patent protection for its
technologies. There can be no assurance that issued patents or pending
applications will not be challenged or circumvented by competitors, or that the
rights granted thereunder will provide competitive advantages to the Company.
LIMITED MANUFACTURING AND MARKETING EXPERIENCE
The METRIX System has never been manufactured on a commercial scale and
there can be no assurance that it can be manufactured at a cost or in quantities
necessary to make it commercially viable. There can be no assurance that the
Company's reliance on others for the manufacture of its components will not
result in problems with product supply. Interruptions in the availability of
components would delay or prevent the development and commercialization of the
METRIX System. The Company expects to expand its domestic manufacturing capacity
and its European and domestic marketing and sales capabilities. There can be no
assurance that the Company will be able to recruit and retain skilled sales,
marketing and manufacturing management, direct salespersons or distributors, or
that the Company's expansion efforts will be successful. In markets where the
Company has entered or enters into distribution arrangements for the sale of the
METRIX
9
<PAGE> 10
System, the Company will depend on the efforts of third parties. There can be no
assurance that such efforts will be successful.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on certain members of its scientific and
professional staff, the loss of whose services might impede the achievement of
its research and development or strategic objectives. At the present time, the
Company does not have long-term employment agreements with, and does not carry
key person life insurance on, any of its scientific and professional personnel.
Competition among medical device companies for highly skilled and uniquely
experienced scientific and professional personnel is intense. To help retain its
key personnel, the Company offers a salary and benefits structure that is
competitive with its local geographic market, as well as the medical device
industry nationwide. The Company offers a broad-based stock option plan through
which all employees of the Company are granted stock options upon hire, and key
employees are periodically granted additional stock options. The Company has
recently initiated a stock option repricing program, whereby all employees with
underwater options are offered the opportunity to exchange their underwater
options for a lesser number of options with an exercise price at current market
value. The number of new options to which each employee is entitled is
determined by multiplying the number of options being exchanged by the ratio of
the new exercise price to the old exercise price.
The Company's currently limited financial resources may compromise its
ability to compete effectively for skilled personnel. The Company's anticipated
growth and expansion in areas and activities requiring additional expertise,
such as marketing and sales, clinical trials and manufacturing, are expected to
place significant increased demands on the Company's resources. These demands
are expected to require the addition of new professional personnel and the
development of additional expertise by existing personnel. The failure to
recruit such personnel, loss of such existing personnel or failure to develop
such expertise would have a material adverse effect on the Company's business
and financial condition. There can be no assurance that the Company will be able
to retain or recruit needed scientific and professional expertise, particularly
given the Company's currently limited financial resources.
PRODUCT LIABILITY AND PRODUCT RECALL
The testing, manufacture, marketing and sale of medical devices entail the
inherent risk of liability claims or product recalls. Although the Company has
not been subject to liability claims or product recalls to date, there can be no
assurances that the Company will not be subject to liability claims or product
recalls for products that have already been distributed or on products to be
distributed in the future. Although the Company maintains product liability
insurance in the United States and in other countries in which the Company
intends to conduct business, including clinical trials and product marketing and
sales, there can be no assurance that such coverage is adequate or will continue
to be available. Product liability insurance is expensive and in the future may
not be available on acceptable terms, if at all. In addition, the Company has
agreed to indemnify certain of its component suppliers for certain potential
product liability. A successful product liability claim or product recall could
inhibit or prevent commercialization of the METRIX System, or cause a
significant financial burden on the Company, or both, and could have a material
adverse effect on the Company's business and financial condition.
SHARES ELIGIBLE FOR FUTURE SALE
Sale of substantial amounts of the Common Stock in the public market or the
prospect of such sales could materially and adversely affect the market price of
the Common Stock. As of August 11, 1998, the Company had outstanding 20,974,122
shares of Common Stock, 2,999 shares of Series B Stock convertible into certain
of the shares offered hereby and warrants to purchase 102,901 shares of Common
Stock. The number of shares of Common Stock issuable upon conversion of the
Series B Stock changes depending upon the lowest sale prices of the Common Stock
during the applicable measurement period immediately preceding the date of
conversion. Pursuant to the terms of the Certificate of Designations, the number
of shares of Common Stock issuable upon conversion of the Series B Stock is
limited to the Maximum Share Amount, unless the stockholders of the Company
approve the issuance of a greater number of shares (as required by
10
<PAGE> 11
Nasdaq) or Nasdaq waives the requirement for stockholder approval. See
"Description of the Series B Stock -- Conversion." In addition, as of August 5,
1998, the Company had granted options to purchase 1,442,217 shares of Common
Stock under its 1990 Restated Stock Option Plan, 1994 Stock Option Plan for
Nonemployee Directors and 1996 Stock Option Plan for Nonemployee Directors
(collectively, the "Stock Option Plans"). Almost all of the Company's
outstanding shares of Common Stock may be sold without substantial restrictions.
Moreover, the Company has filed with the Commission another registration
statement on Form S-3, as amended by Form S-3/A No. 1, Form S-3/A No. 2 and Form
S-3/A No. 3, which registers for resale an aggregate of 400,000 shares of Common
Stock sold in a private placement. All of the shares purchased under the Stock
Option Plans are available for sale in the public market, subject in some cases
to volume and other limitations.
Sales in the public market of substantial amounts of Common Stock,
including sales of Common Stock issued upon conversion of the Series B Stock, or
the perception that such sales could occur, could depress prevailing market
prices for the Common Stock. The conversion terms of the Series B Stock, which
allow holders of the Series B Stock to convert their shares of Series B Stock
into shares of Common Stock at a discount to the current market price of the
Common Stock, and then immediately resell such shares at market prices, could
result in downward pressure on the price of the Common Stock, making it
difficult for a sustained rise in the price of the Common Stock to occur, if
such a rise occurs at all.
The existence of the private warrants and any other options or warrants may
prove to be a hindrance to future equity financing by the Company. Further, the
holders of such warrants and options may exercise them at a time when the
Company would otherwise be able to obtain additional equity capital on terms
more favorable to the Company.
RISKS ASSOCIATED WITH FOREIGN OPERATIONS
The Company's revenues from international sales of the METRIX System
(primarily in Europe) were 77.2%, 71.6% and 100.0% of total revenues for the
years ended December 31, 1997, 1996 and 1995, respectively, and the Company
currently derives a significant percentage of its revenue from the European
sales of the METRIX System. While the Company anticipates that, as the METRIX
System progresses in clinical trials in the United States, a greater portion of
its future revenues will be derived from the sale of the METRIX System in the
United States, it is possible that European sales of the METRIX System may
continue to account for a significant percentage of the Company's total
revenues. A number of risks are inherent in international operations and
transactions. The Company's business and its representatives, agents and
distributors are subject to laws and regulations of the countries in which they
operate or the Company's products are sold. International sales and operations
may be limited or disrupted by the imposition of government controls, the level
of reimbursement available for use of the METRIX System, export license
requirements, political instability, trade restrictions, changes in tariffs and
difficulties in staffing, coordinating and managing international operations. As
long as the Company's revenues continue to depend substantially on international
sales, they may be adversely affected by fluctuations in foreign currency
exchange rates as well as constraints on the Company's ability to maintain or
increase prices. The Company has not hedged against foreign currency exchange
rate risks to date. The Company may in the future seek to implement hedging
techniques with respect to foreign currency transactions. There can be no
assurance, however, that such hedging techniques would successfully protect
against foreign currency exchange losses or against other international sales
risks such as exchange limitations, price controls or other foreign currency
restrictions. Any of the foregoing would have a material adverse effect on the
Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICE
Since the Company's initial public offering in September 1994, the price of
the Common Stock has ranged from $2.06 to $18.50 per share. Factors such as the
results of clinical trials by the Company or its competitors, concern as to the
safety or efficacy of products of the Company or its competitors, announcements
of technological innovations or new products by the Company or its competitors,
governmental regulation, healthcare legislation, developments in patent or other
proprietary rights of the Company or its
11
<PAGE> 12
competitors and fluctuations in the Company's results of operations will have a
significant impact on the price of the Common Stock. Conversion and sale of
large amounts of the Series B Stock, or the perception that such sales could
occur, also could have a material adverse effect on the price of the Common
Stock. See "Shares Eligible for Future Sale."
NASDAQ LISTING REQUIREMENTS
The Common Stock is quoted on the Nasdaq National Market System. The
maintenance criteria for continued quotation on the Nasdaq National Market
System include, among other criteria, (i) net tangible assets of $4.0 million,
(ii) a minimum bid price per share of $1.00, (iii) a public float of 750,000
shares with market value of $5.0 million, (iv) 400 round lot shareholders and
(v) two market makers. If the Company is unable to obtain substantial additional
capital in 1998, it may be unable to maintain net tangible assets of $4.0
million. See "Need for Substantial Additional Capital." The remaining
maintenance criteria, including the minimum bid price of the Common Stock, the
volume and value of its public float, the number of holders of the Common Stock
and the number of market makers in the Common Stock, all are dependent upon
numerous market factors not within the Company's control. Although the Company
presently meets the above maintenance criteria, there can be no assurance that
it will continue to do so.
Failure of the Company to continue to meet such maintenance criteria could
result in the Common Stock losing its Nasdaq National Market System designation.
The Nasdaq National Market System provides brokers and others with immediate
access to the best bid and ask prices and other information about the Common
Stock during each trading day. If the Company were to lose its Nasdaq National
Market System designation, real-time price information for the Common Stock
might cease to be available. As a result, an investor might find it more
difficult to dispose of, or to obtain more accurate quotations as to the price
of, the Common Stock.
If the Company were to lose its Nasdaq National Market System designation,
the Company would seek to have its securities listed on the Nasdaq SmallCap
Market or another securities exchange, subject to the Company's ability to
satisfy the eligibility criteria for such exchange. If the Company were unable
to meet the Nasdaq SmallCap Market maintenance criteria, trading, if any, in the
Common Stock might continue to be conducted in non-Nasdaq over-the-counter
markets. The Common Stock would then be subject to the risk that it could become
characterized as a low-priced or "penny stock" which characterization could have
a material adverse effect on the Common Stock's market liquidity. See "Penny
Stock Regulation." In addition, if the Company was delisted from the Nasdaq
National Market and was unable to obtain listing with the Nasdaq SmallCap
Market, holders of the Series B Stock could compel the Company to redeem all or
any portion of the Series B Stock at a price equal to 115% of the purchase price
and any accrued but unpaid dividends. See "Description of the Series B
Stock -- Optional Redemption." Any such redemption of shares of Series B Stock
could have a material adverse effect on the Company's business, financial
condition and results of operations.
PENNY STOCK REGULATION
Broker-dealer practices in connection with transactions in "penny stocks"
are regulated by certain penny stock rules adopted by the Commission. Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the Nasdaq Stock Market system, provided that current price and volume
information with respect to transactions in such securities is provided by the
exchange or system). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document that provides information about penny
stocks and the risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and monthly account statements showing the market value of each penny stock held
in the customer's account. In addition, the penny stock rules generally require
that prior to a transaction in a penny stock the broker-dealer make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level
12
<PAGE> 13
of trading activity in the secondary market for a stock that becomes subject to
the penny stock rules. If the Common Stock becomes subject to the penny stock
rules, investors may find it more difficult to sell their Common Stock.
DESCRIPTION OF THE SERIES B STOCK
Pursuant to two Subscription Agreements dated April 16, 1998 by and between
the Company and each of the Selling Stockholders named herein, the Company sold
7,500 shares of its Series B Stock. The shares of Series B Stock were issued and
sold to the Selling Stockholders pursuant to the provisions of Regulation D
promulgated by the Commission under the Securities Act. The aggregate offering
price of the Series B Stock was $7,500,000, based on a per share price of
$1,000.
The following description of the Series B Stock is a summary, does not
purport to be complete or to give a complete description of the rights and
preferences of the Series B Stock, and is subject in all respects to the
applicable provisions of law, and to the Certificate of Designations of the
Series B Stock (the "Certificate of Designations"), which is filed hereto as
Exhibit 3.1, and is incorporated herein by reference.
DIVIDENDS
The shares of Series B Stock accrue dividends of $50 per annum per share,
payable quarterly in cash or in additional shares of Series B Stock, at the
option of the Company. Pursuant to the Merger Agreement, the Company has agreed
to pay dividends on the outstanding shares of Series B Stock in cash rather than
stock.
CONVERSION
The Series B Stock is convertible into Common Stock as follows (subject to
adjustments for stock splits, stock dividends, combinations, reclassifications
and similar events and to adjustments resulting from a "Registration Event," as
described below): (i) until July 19, 1998, each share of Series B Stock is
convertible at a price per share (based upon the $1,000 value of each share of
Series B Stock) of $7.91; (ii) from July 20, 1998 until January 15, 1999, each
share of Series B Stock, together with accrued and unpaid dividends, is
convertible at a price per share equal to the lesser of (a) 92.5% of the average
of the two lowest sale prices of the Common Stock during the 12 trading days
immediately prior to the conversion and (b) $7.6275 and (iii) thereafter, each
share of Series B Stock, together with accrued and unpaid dividends, is
convertible at a price per share equal to the lesser of (a) 87.5% of the average
of the two lowest sale prices of the Common Stock during the 15 trading days
immediately prior to the conversion and (b) $7.345. For purposes of determining
the conversion price for the Series B Stock, the price for the Common Stock will
be determined from the first applicable among the following: (i) a national
securities exchange on which the shares of Common Stock are listed which
constitutes the principal securities market for the Common Stock, (ii) Nasdaq,
if Nasdaq constitutes the principal securities market for the Common Stock, or
(iii) the Nasdaq SmallCap Market, if the Nasdaq SmallCap Market constitutes the
principal market for the Common Stock.
Upon the occurrence of the events listed below ("Registration Events"), the
price at which the Series B Stock is convertible into shares of Common Stock
will be further discounted on a permanent basis by one twelfth of one percent
per day for each day on which such event continues. A Registration Event is
deemed to occur if (i) the Registration Statement is not effective on or before
July 19, 1998; (ii) the Company fails to file the Registration Statement on or
before May 20, 1998; (iii) the Company fails to submit a request for
acceleration of the effective date of the Registration Statement within three
business days after learning that the Commission has no further comments on the
Registration Statement or (iv) the Registration Statement ceases to be available
for use by the Selling Stockholders for any reason (including, without
limitation, by reason of a Commission stop order, a material omission or
misstatement in the Registration Statement or the information contained in the
Registration Statement having become outdated), provided that, in certain
circumstances, the Company may suspend the use of the Registration Statement for
an aggregate of 30 days without triggering a Registration Event.
13
<PAGE> 14
Because the Registration Statement was not declared effective by the
Commission on or prior to July 19, 1998, a Registration Event has occurred. As a
result, assuming that the Registration Statement were declared effective on
August 13, 1998, the Series B Stock would now be convertible as follows: (i)
from July 20, 1998 until January 15, 1999, each share of Series B Stock,
together with accrued and unpaid dividends, would be convertible at a price per
share equal to the lesser of (a) 90.5% of the average of the two lowest sale
prices of the Common Stock during the twelve trading days immediately prior to
the conversion and (b) $7.475 and (iii) thereafter, each share of Series B
Stock, together with accrued and unpaid dividends, would be convertible at a
price per share equal to the lesser of (a) 85.5% of the average of the two
lowest sale prices of the Common Stock during the 15 trading days immediately
prior to the conversion and (b) $7.1981. If the Registration Statement is not
declared effective on or before August 13, 1998, the rate at which the Series B
Stock is convertible into shares of Common Stock will continue to be discounted
by one twelfth of one percent per day until the Registration Statement is
declared effective by the Commission.
Because the Series B Stock is convertible by the holders thereof at a
discount to the prevailing market price of the Common Stock at the time of
conversion (if such price is below the applicable fixed conversion price), any
downturn in the price of the Company's Common Stock will, subject to the
conversion restrictions discussed above, increase the number of shares of Common
Stock issuable to such holders upon conversion of the Series B Stock. As a
result, if a holder converts Series B Stock when the Common Stock trades at such
lower prices and holds the shares of Common Stock acquired upon such conversion,
in the event of a subsequent upturn in the price of the Common Stock and sale of
such shares of Common Stock, profits to such holder of the Series B Stock would
be increased by virtue of such holder's acquisition of a greater number of
shares of Common Stock.
Investors in the marketplace, including holders of Series B Stock, may
engage in short selling transactions from time to time which may adversely
affect the market price of the Company's Common Stock. However, unlike other
investors in the marketplace, the holders of the Series B Stock may replace
shares which they sell short with shares issued upon conversion of the Series B
Stock. Because the conversion rate for the Series B Stock fluctuates, the
holders of the Series B Stock may be able to engage in short selling
transactions at market prices that are higher than the applicable conversion
price at the time of such sales, obtaining immediate profits not available to
investors who do not hold shares of the Series B Stock. The ability of a holder
of Series B Stock to convert Series B Stock for such purpose is subject to the
conversion restrictions described below.
CONVERSION RESTRICTIONS
Pursuant to the terms of the Certificate of Designations, the Series B
Stock is convertible by each holder thereof only to the extent that the number
of shares of Common Stock then owned by such holder and its related persons (not
including shares underlying unconverted shares of Series B Stock) would not
exceed 4.9% of the then outstanding shares of Common Stock as determined in
accordance with Sections 13(d) and 16 of the Exchange Act (the "Beneficial
Ownership Restriction"). The Company is under no obligation to redeem shares of
Series B Stock which are not convertible by reason of the Beneficial Ownership
Restriction.
As a result of Nasdaq rules requiring stockholder approval for the issuance
of certain securities, the number of shares of Common Stock issuable upon
conversion of the shares of Series B Stock is limited to a maximum share amount
equal to 20% of the number of shares of Common Stock outstanding at the time of
issuance of the Series B Stock, which equals 3,769,000 shares (or such greater
number as is permitted by the rules of Nasdaq) (the "Maximum Share Amount"),
unless the stockholders of the Company approve the issuance of a greater number
of shares (as required by Nasdaq) or Nasdaq waives the requirement of
stockholder approval. If at any time after July 19, 1998, the number of shares
issuable upon conversion of the Series B Stock (based upon the conversion price
formula discussed above) exceeds the Maximum Share Amount, the holders of the
Series B Stock may compel the Company to redeem that portion (on a pro rata
basis) of their shares as would not have been convertible because of the Maximum
Share Amount restriction. If requested by the holders of Series B Stock, unless
the Company obtains stockholder approval for the issuance of a greater number of
shares, the Company must redeem the inconvertible portion of the shares of
14
<PAGE> 15
Series B Stock at a price equal to the greater of (i) 115% of the purchase price
and any accrued but unpaid dividends and (ii) the price that is equal to the
number of shares issuable upon conversion of the Series B Stock, multiplied by
the average of the closing bid price of the Common Stock for the previous five
trading days.
If the Company's stock price remains below $4.00 per share for a period of
10 consecutive trading days, the holders of Series B Stock will be precluded
from converting shares of Series B Stock for a period of 30 days. Thereafter, so
long as the price of the Company's Common Stock remains below $4.00 per share,
the holders of Series B Stock will be precluded from converting more than 1,500
shares (in the aggregate for all holders) of Series B Stock per month.
The following table sets forth (i) the maximum and minimum number of shares
of Common Stock issuable upon conversion of the outstanding shares of Series B
Stock pursuant to the conversion terms provided in the Certificate of
Designations and described above and (ii) the number of shares of Common Stock
issuable upon conversion of the Series B Stock pursuant to the conversion terms
of the Certificate of Designations described above (assuming that the average of
the two lowest sale prices of the Common Stock during the applicable measurement
period immediately prior to the conversion is equal to each of the prices set
forth in the left column of the table and that no additional shares of Series B
Stock are issued in payment of dividends on the Series B Stock):
<TABLE>
<CAPTION>
FROM JULY 20, 1998
CONVERSION OF 7,500 SHARES UNTIL JANUARY 15,
OF SERIES B STOCK 1999(1) AFTER JANUARY 16, 1999(2)
-------------------------- ------------------ -------------------------
<S> <C> <C>
Maximum Number of Shares.......................... 3,769,000 shares(3) 3,769,000 shares(3)
Shares at $2.50................................. 3,314,917 shares 3,508,771 shares
Shares at $5.00................................. 1,657,458 shares 1,754,385 shares
Minimum Number of Shares.......................... 998,256 shares(4) 1,036,656 shares(4)
</TABLE>
- ---------------
(1) Assuming that the Registration Statement were declared effective on August
13, 1998, then until January 15, 1999, each share of Series B Stock will be
convertible at a price per share equal to the lesser of (a) 90.5% of the
average of the two lowest sale prices of the Common Stock during the 12
trading days immediately prior to the conversion and (b) $7.475.
(2) Assuming that the Registration Statement were declared effective by the
Commission on August 13, 1998, then after January 15, 1999, each share of
Series B Stock would be convertible at a price per share equal to the lesser
of (a) 85.5% of the average of the two lowest sale prices of the Common
Stock during the 15 trading days immediately prior to the conversion and (b)
$7.1981.
(3) As a result of the Maximum Share Amount restriction, the maximum number of
shares of Common Stock issuable upon conversion of the Series B Stock is
3,769,000, unless the stockholders of the Company approve the issuance of a
greater number of shares (as required by Nasdaq) or Nasdaq waives the
requirement of stockholder approval.
(4) Based on the applicable ceiling price at the time of conversion. Assuming
that the Registration Statement were declared effective by the Commission on
August 13, 1998, then until January 15, 1999, the applicable ceiling price
would be $7.475; thereafter, the applicable ceiling price would be $7.1981.
OPTIONAL REDEMPTION
Upon the occurrence of any of the events listed below ("Optional Redemption
Events"), the holders of the Series B Stock may compel the Company to redeem all
or any portion of the Series B Stock at a price equal to the greater of (i) 115%
of the purchase price and any accrued but unpaid dividends and (ii) the price
that is equal to the number of shares issuable upon conversion of the Series B
Stock, multiplied by the average of the closing bid prices of the Common Stock
for the previous five trading days. Optional Redemption Events are (i) the
delisting of the Common Stock from any national securities exchange, Nasdaq or
the Nasdaq
15
<PAGE> 16
SmallCap Market or the absence for five consecutive trading days of a closing
bid price for the Common Stock on any one of such markets, (ii) the inability
for 30 or more days of the Selling Stockholders to sell the shares pursuant to
the Registration Statement of which this Prospectus forms a part, (iii) the
default by the Company of any material obligation to the holders of Series B
Stock under the Subscription Agreements and the documents related thereto or the
Certificate of Designations or the taking of any action without the consent of
the holders of Series B Stock that materially and adversely affects their
rights, or (iv) certain business combinations entered into by the Company.
The Company may, at its option and at any time, redeem all or a portion of
the outstanding shares of Series B Stock at a price per share equal to the
greater of: (i) 115% of the purchase price and any accrued but unpaid dividends
and (ii) the price that is equal to the number of shares of Common Stock
issuable upon conversion of the Series B Stock, multiplied by the average of the
closing bid prices of the Common Stock for the previous five trading days. In
addition, if at any time prior to April 4, 2001, the price of the Company's
Common Stock exceeds $7.91 per share, or at any time later than April 4, 2001,
the Company may redeem all (but not less than all) of the outstanding shares of
Series B Stock at a price per share equal to $1,000 plus any accrued but unpaid
dividends and interest. Pursuant to the Merger Agreement, the Company has agreed
to redeem all shares of Series B Stock outstanding and not converted to Common
Stock prior to, and as a condition of, the consummation of the tender offer.
VOTING AND LIQUIDATION
Holders of Series B Stock have no voting rights. In the event of the
dissolution, liquidation or winding up of the Company, the holders of the Series
B Stock are entitled to receive out of the assets of the Company an amount per
share equal to $1,000 plus any accrued but unpaid dividends and interest.
SELLING STOCKHOLDERS
The following table provides certain information regarding the Selling
Stockholders and the number of Shares being offered by them.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON STOCK THAT
STOCK BENEFICIALLY MAY BE SOLD SHARES OF COMMON STOCK
OWNED --------------------------- BENEFICIALLY OWNED
SHARES OF PRIOR TO OFFERING AFTER OFFERING
SERIES B ----------------------- PERCENTAGE ------------------------
STOCK PERCENTAGE OF COMMON PERCENTAGE
OWNED OF COMMON STOCK OF COMMON
PRIOR TO STOCK OUTSTANDING STOCK
NAME AND ADDRESS OFFERING(1) AMOUNT OUTSTANDING AMOUNT(2) (2)(3) AMOUNT(4) OUTSTANDING
---------------- ----------- --------- ----------- ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Advantage Fund II Ltd. ......... 2,162 1,027,732(5) 4.9%(5) 1,565,258 6.9% -0- -0-
c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
Koch Industries, Inc............ 837 987,276 4.5% 987,276 4.5% -0- -0-
4111 East 37th Street North
Wichita, Kansas 67220
</TABLE>
- ---------------
(1) On April 20, 1998, Advantage Fund II, Ltd. and Koch Industries, Inc.
acquired 4,500 and 3,000 shares, respectively, of the Series B Stock in a
private transaction. On July 15, 1998, Advantage Fund II, Ltd. and Koch
Industries, Inc. acquired an additional 53 and 35 shares, respectively, of
the Series B Stock in payment of dividends on the shares of Series B Stock
held by them on such date. Prior to August 13, 1998, Advantage Fund II, Ltd.
and Koch Industries, Inc., in accordance with the conversion terms described
above, converted 2,391 and 2,198 shares of Series B Stock into a total of
956,175 and 751,475 shares of Common Stock, respectively.
16
<PAGE> 17
(2) Based on the average of the two lowest sale prices of the Common Stock
during the 12 trading days immediately preceding August 13, 1998 and
assuming that (i) the Company pays any future dividends on the Series B
Stock in cash, rather than shares of Series B Stock and (ii) all outstanding
shares of the Series B Stock were converted in full on August 13, 1998, the
total number of shares issuable upon conversion of the remaining shares of
Series B Stock (including accrued dividends thereon) would equal 844,884
shares. The number of shares of Common Stock shown as shares that may be
sold by each of the Selling Stockholders includes (i) the 956,175 and
751,475 shares of Common Stock acquired by the Selling Shareholders,
respectively, upon conversion of the Series B Stock prior to August 13, 1998
and (ii) the 609,083 and 235,801 shares of Common Stock issuable to the
Selling Stockholders, respectively, upon conversion of the Series B stock
subject to the assumptions described above. The actual number of shares of
Common Stock issuable to the Selling Stockholders through conversion of the
Series B Stock is subject to adjustment depending on factors which cannot be
predicted by the Company at this time, including, among others, the future
market prices of the Common Stock, the payment of dividends on the Series B
Stock in additional shares of Series B Stock and the date on which the
Registration Statement of which this Prospectus forms a part is declared
effective by the Commission. In no event will the Company issue more than
the Maximum Share Amount upon conversion of the Series B Stock, unless the
stockholders of the Company approve the issuance of additional shares or the
requirement for stockholder approval is waived by Nasdaq.
(3) Computed in accordance with Rule 13d-3(d)(i) promulgated under the Exchange
Act (without taking into account the 4.9% beneficial ownership limitation
described in note (5)) and based upon 20,974,122 shares of Common Stock
outstanding as of August 11, 1998, treating as outstanding the number of
shares issuable upon the assumed conversion by the named Selling Stockholder
of the full amount of such Selling Stockholder's Series B Stock, but not
assuming the conversion of the Series B Stock of any other Selling
Stockholder.
(4) Assumes the sale of all the Shares offered by each of the Selling
Stockholders.
(5) The number of shares of Common Stock shown as beneficially owned by the
Selling Stockholder represents the maximum number of shares that the Selling
Stockholder could beneficially own at any one time based on the number of
shares of Common Stock outstanding as of August 5, 1998. Pursuant to the
terms of the Certificate of Designations of the Series B Stock, the Series B
Stock is convertible by the holder thereof only to the extent that (i) the
number of shares of Common Stock then beneficially owned by such holder and
its related persons (not including shares underlying unconverted shares of
Series B Stock) would not exceed 4.9% of the then outstanding shares of
Common Stock as determined in accordance with Sections 13(d) and 16 of the
Exchange Act. Accordingly, the number of shares of Common Stock ultimately
acquired by the Selling Stockholder through conversion of the Series B Stock
and sold hereby may exceed the actual number of shares of Common Stock that
the Selling Stockholder could own beneficially at any one time through its
ownership of Series B Stock.
Neither of the Selling Stockholders has had any material relationship with
the Company, or any of its affiliates, within the past three years.
The Selling Stockholders have represented to the Company that they
purchased the Shares for their own account for investment only and not with a
view towards the public sale or distribution thereof, except pursuant to sales
registered under the Securities Act or exemptions therefrom. In recognition of
the fact that the Selling Stockholders, even though purchasing the Shares for
investment, may wish to be legally permitted to sell their Shares when they deem
appropriate, the Company agreed with the Selling Stockholders to file with the
Commission under the Securities Act the Registration Statement with respect to
the resale of the Shares from time to time in transactions described under "Plan
of Distribution" below, and has agreed to prepare and file such amendments and
supplements to the Registration Statement as may be necessary to keep the
Registration Statement effective until the Shares are no longer required to be
registered for the sale thereof by the Selling Stockholders.
17
<PAGE> 18
PLAN OF DISTRIBUTION
All of the Shares offered hereby may be sold from time to time by the
Selling Stockholders, or by their pledgees, donees, transferees or other
successors-in-interest. The sale of the Shares by the Selling Stockholders may
be effected from time to time in transactions in the over-the-counter market
through Nasdaq, or on one or more other securities markets and exchanges, in
privately negotiated transactions, or through a combination of such methods of
sale, at fixed prices that may be changed, at market prices prevailing at the
time of sale, at prices relating to such prevailing market prices or at
negotiated prices. The Selling Stockholders may effect the above-mentioned
transactions by selling the Shares to or through broker-dealers; including block
trades in which brokers or dealers will attempt to sell the Shares to or through
broker-dealers and block trades in which brokers or dealers will attempt to sell
the Shares as agent but may position and resell the block as principal to
facilitate the transaction, or in one or more underwritten offerings on a firm
commitment or best efforts basis. In addition, any of the Shares that qualify
for sale pursuant to Rule 144 promulgated under the Securities Act may be sold
in transactions complying with such Rule 144, rather than pursuant to this
Prospectus.
In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Any broker-dealers who act in connection with the sale of the Shares
hereunder may be deemed to be "underwriters" within the meaning of Section 2(11)
of the Securities Act, and any commissions received by them and profit on any
resale of the Shares as principal may be deemed to be underwriting discounts and
commissions under the Securities Act. None of the proceeds from the sale of the
Shares by the Selling Stockholders will be received by the Company. The Company
has agreed to bear all expenses (other than selling commissions and fees and
stock transfer taxes) in connection with the registration and sale of the Shares
being offered by the Selling Stockholders. The Company has agreed to indemnify
the Selling Stockholders and broker-dealers who act in connection with the sale
of the Shares hereunder against certain liabilities, including liabilities under
the Securities Act.
To the extent required under the Securities Act, the aggregate amount of
Selling Stockholders' Shares being offered and the terms of the offering, the
names of any such agents, brokers, dealers or underwriters and any applicable
commission with respect to a particular offering will be set forth in an
accompanying Prospectus supplement. Any underwriters, dealers, brokers or agents
participating in the distribution of the Shares may receive compensation in the
form of underwriting discounts, concessions or commissions from the Selling
Stockholders or the purchasers of the Shares for whom such underwriters or
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation to a particular underwriter or broker-dealer might be in
excess of customary commissions). The Selling Stockholders will be responsible
for all brokerage commissions and other amounts payable with respect to any sale
of Shares with respect to such Selling Stockholders and any legal, accounting or
other expenses incurred.
From time to time, one or more of the Selling Stockholders may transfer,
pledge, hypothecate, donate, assign or grant a security interest in some or all
of the Shares owned by them to lenders or others, and each such person will be
deemed to be a "Selling Stockholder" for purposes of this Prospectus. The number
of Selling Stockholders' Shares beneficially owned by those Selling Stockholders
who so transfer, pledge, donate or assign Selling Stockholders' Shares will
decrease as and when they take such actions. The plan of distribution for
Selling Stockholders' Shares sold hereunder will otherwise remain unchanged,
except that the transferees, pledgees, donees or other successors will be
Selling Stockholders hereunder.
A Selling Stockholder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the Common
Stock in the course of hedging the position they assume with such Selling
Stockholder, including, without limitation, in connection with distributions of
the Common Stock by such broker-dealers. In addition, a Selling Stockholder may,
from time to time, sell short the Common Stock of the Company, and in such
instances, this Prospectus may be delivered in connection with such short sales
and the Shares offered hereby may be used to cover such short sales. A Selling
Stockholder may also enter
18
<PAGE> 19
into options or other transactions with broker-dealers that involve the delivery
of the Common Stock to the broker-dealers, who may then resell or otherwise
transfer such Common Stock. A Selling Stockholder may also loan or pledge the
Common Stock to a broker-dealer and the broker-dealer may sell the Common Stock
so loaned or, upon a default, may sell or otherwise transfer the pledged Common
Stock.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Shares may not bid for or purchase shares of
Common Stock during a period which commences one business day (five business
days if the Company's public float is less than $25 million or its average daily
trading volume is less than $100,000) prior to such person's participation in
the distribution, subject to exceptions for certain passive market making
activities. In addition and without limiting the foregoing, each Selling
Stockholder will be subject to applicable provisions of the Exchange Act and the
rules and regulations thereunder, including without limitation, Regulation M,
which provisions may limit the timing of purchases and sales of shares of the
Company's Common Stock by such Selling Stockholder.
There can be no assurance that the Selling Stockholders will sell any or
all of the Shares offered by them hereunder.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon for
the Company by Perkins Coie, Seattle, Washington.
EXPERTS
The consolidated financial statements of the Company appearing in the
Company's Annual Report (Form 10-K) for the year ended December 31, 1997, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon (which contains an explanatory paragraph describing conditions
that raise substantial doubt about the Company's ability to continue as a going
concern as described in Note 1 to the consolidated financial statements)
included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
19
<PAGE> 20
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING HEREIN CONTAINED AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, THE SHARES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Forward-Looking Statements............ 2
Incorporation of Certain Documents by
Reference........................... 2
Risk Factors.......................... 4
Description of the Series B Stock..... 13
Selling Stockholders.................. 16
Plan of Distribution.................. 18
Legal Matters......................... 19
Experts............................... 19
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
INCONTROL, INC.
2,552,534 SHARES OF
COMMON STOCK
------------------------
PROSPECTUS
------------------------
AUGUST 13, 1998
- ------------------------------------------------------
- ------------------------------------------------------
