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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
( X ) Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year ended December 31, 1997
or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _________________
Commission file number 0-24540
INCONTROL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1501619
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6675 - 185TH AVENUE N.E.
REDMOND, WA 98052-6734
(425) 861-9800
(Address and telephone number of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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 shorter periods that the
registrant has been required to file such reports), and (2) was subject to
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 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 nonaffiliates of the
registrant, based on the closing sale price of the registrant's Common Stock
on March 23, 1998, as reported on the Nasdaq National Market, was
$94,990,475.
As of March 23, 1998, there were 18,818,000 shares of the registrant's
Common Stock outstanding.
Portions of the registrant's Proxy Statement relating to its 1998 annual
meeting of stockholders are incorporated by reference into Part III hereof.
Such Proxy Statement will be filed with the Securities and Exchange
Commission no later than 120 days after the registrant's fiscal year ended
December 31, 1997.
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INCONTROL, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
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Item 1. Business ............................................................................... 1
Business of the Company ............................................................ 1
Products ........................................................................... 2
Field Clinical Engineering
and Clinical Research ............................................................. 4
Sales in the United States and Europe .............................................. 4
Manufacturing ...................................................................... 5
Atrial Defibrillator Market ........................................................ 5
Post Operative Atrial Defibrillation
and Cardiac Pacing Heartwire Market ............................................... 6
Competition ........................................................................ 6
Patents and Proprietary Rights ..................................................... 6
Government Regulation .............................................................. 7
Employees .......................................................................... 9
Important Factors Regarding
Forward-Looking Statements ........................................................ 9
Item 2. Properties ............................................................................. 13
Item 3. Legal Proceedings ...................................................................... 13
Item 4. Submission of Matters to a Vote of the Security Holders ................................ 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .................. 14
Item 6. Selected Consolidated Financial Data ................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................. 16
Item 8. Financial Statements and Supplementary Data ............................................ 20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................................... 35
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PART III
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Item 10. Directors and Executive Officers of the Registrant ................................. 35
Item 11. Executive Compensation ............................................................. 35
Item 12. Security Ownership of Certain Beneficial Owners and Management ..................... 35
Item 13. Certain Relationships and Related Transactions ..................................... 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................... 36
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PART I
ITEM 1. BUSINESS
The discussion within the following description of the Company's business and
elsewhere in the Form 10-K contains forward-looking statements that are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those projected. The words "believe", "expect", "intend",
"anticipate" and similar expressions identify forward-looking statements.
Factors that could affect the Company's actual results include, among other
things, the rate of market acceptance and the adoption of the METRIX System, the
availability of adequate funding, the availability of third-party reimbursement
for the Company's products, the progress and costs of preclinical studies and
clinical trials, the recruitment of suitable patients, the timing of regulatory
approvals, the ability to obtain and defend patent and intellectual property
rights and to market the Company's products, and the status of competing
products. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report.
InControl undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date of this report or to reflect the occurrences of
unanticipated events. See "-- Important Factors Regarding Forward-Looking
Statements".
BUSINESS OF THE COMPANY
Founded in 1990, InControl, Inc. (the "Company" or "InControl") is a leader in
the development of therapeutic devices for the treatment of atrial fibrillation
("AF"), a common heart rhythm disorder. The Company's first and most important
product is an automatic implantable atrial defibrillation system (the
"METRIX(TM) System"), which includes an implantable device (the "METRIX
device"), a transvenous lead system (the "PERIMETER(R) Lead System"), the
Defibrillator System Analyzer (the "DSA") and the INCONTROL(R) Programmer (the
"Programmer"). The METRIX System entered clinical trials in the United States in
1996 and these trials will continue through 1998. In Europe the METRIX System
completed safety trials and was awarded the conformite europeenne ("CE") mark in
June, signifying European regulatory approval. Following the receipt of the CE
mark, the Company initiated a series of post-approval METRIX System study
protocols within several European countries required before a device will be
eligible for reimbursement through the various national and local health care
financing authorities. The Company is developing a line of products known
collectively as the Temporary Atrial Defibrillation ("TAD") products. The TAD
products include a family of defibrillation catheters ("TADCATH" products), and
temporary pacing and defibrillation heartwires ("TADPOLE" heartwires).
AF is a common heart arrhythmia. The Company estimates that in each of the
United States and Europe approximately 2,000,000 people suffer from AF,
approximately 160,000 new cases develop annually and the disease accounts for
hospitalization more often than any other heart rhythm disorder. It is also
estimated that temporary post-surgical AF occurs in up to 1/4 of patients who
have undergone thoracic surgery. There are approximately 400,000 such surgeries
performed annually in the United States and the Company believes that a like
number are performed in Europe. AF is a condition in which the regular pumping
action of the atria, or upper chambers of the heart, is replaced by disorganized
quivering caused by chaotic conduction of electrical signals in the atria. This
disease may cause up to a 30% reduction in cardiac output, resulting in symptoms
such as shortness of breath, fainting, fatigue and reduced exercise capacity.
Moreover, although not immediately life threatening, AF significantly increases
the risk of stroke. The American Heart Association estimates that 75,000 strokes
per year in the United States are related to AF. In addition to these clinical
consequences/complications, patients who suffer post-surgical AF can require
extended hospital stays for up to five days resulting in increased costs for
health care providers.
The Company believes that the METRIX System will be best suited for the
treatment of patients with symptomatic persistent episodes of AF who are drug
refractory and at risk for stroke. For these patients, it may offer significant
advantages over current therapies, including reduced morbidity, decreased
mortality risk, fewer adverse side effects and more effective and prompt
treatment of AF. These therapies consist mainly of the administration of a
combination of pharmaceuticals and external electrical cardioversion. Less
frequently, AF is treated by permanent
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destruction of the heart's normal atrial-ventricular conduction system (a
process known as AV nodal ablation) accompanied by pacemaker implantation, and
occasionally by open-heart surgery. All these therapies present certain
significant risks and side effects. With both antiarrhythmic pharmaceuticals and
external cardioversion, AF recurs in a substantial percentage of patients
treated. In addition, studies have indicated that antiarrhythmic pharmaceuticals
may be associated with adverse side effects, including an increased risk of
life-threatening ventricular arrhythmias. The Company believes that the TADCATH
products will serve patients with similar AF characteristics as will be served
by the METRIX System, in a non-implanted, temporary therapeutic protocol.
InControl anticipates that certain of the patients successfully treated with the
TADCATH products will become candidates for METRIX device implants. The TADPOLE
heartwires are designed for treatment of temporary procedurally induced AF
suffered by patients after thoracic surgery, including coronary artery bypass
grafts ("CABG") and valve replacement surgery.
In 1996 InControl received approval from the Food and Drug Administration (the
"FDA") to begin clinical trials of the METRIX System under an implanted clinical
protocol. These trials continued into 1997 and in June the Company received
permission from the FDA to expand the clinical sites from 5 to 25 and to expand
patient enrollment from 10 to 170. The Company expects to file a Pre-Market
Approval ("PMA") application with the FDA seeking panel review of the data from
the clinical trial being conducted in the United States after such trial is
completed. Once a PMA application is filed, the FDA may accept it and call for
an advisory panel recommendation or the FDA may reject the PMA application for
insufficient data. After the PMA is reviewed by the advisory panel, the FDA may
approve or reject the product. This process is lengthy and unpredictable and
there can be no assurance when such approval will be received, if at all. See
"--Important Factors Regarding Forward-Looking Statements--Extensive
Governmental Regulation and Uncertainty of Product Approvals."
In June 1997, the Company obtained the CE mark for the METRIX System and then
initiated a series of post-approval METRIX System study protocols within several
European countries required before the product will be eligible for
reimbursement. These studies will continue during 1998. Studies which have been
started include investigations into quality of life of AF patients and the total
cost of care for AF patients. The Company has also initiated investigations in
selected European clinical sites designed to study the benefits of the METRIX
System in patients with conditions such as congestive heart failure, congenital
heart defects and valvular disease. See "--Important Factors Regarding
Forward-Looking Statements--Extensive Governmental Regulation and Uncertainty of
Product Approvals."
PRODUCTS
METRIX(TM) System
The METRIX System is comprised of four components: the METRIX 3020 implantable
atrial defibrillator, three transvenous leads, the DSA and the Programmer. Much
like an implantable ventricular defibrillator ("ICD"), the METRIX 3020 is
designed to be surgically implanted in the pectoral region of the chest and
connected to the heart via the transvenous leads. The three-lead set includes
InControl's proprietary PERIMETER RA (right atrium) and PERIMETER CS (coronary
sinus), shocking and sensing leads and a standard right ventricular bipolar
pacing lead. The leads are designed to be positioned in the heart to optimize
signal sensing and shock delivery vectors. The DSA, an external instrument, is
used at the time of implant to help verify lead placement, evaluate atrial
defibrillation thresholds and determine device settings. The Programmer utilizes
sophisticated digital telemetry designed to allow the physician to rapidly
assess the implanted device on follow-up visits and easily reprogram the device,
if necessary.
METRIX 3020 Implantable Atrial Defibrillator
The METRIX 3020 is a small (approximately 53 cc, 80 grams) implantable device
similar in size to a stopwatch. Maximum energy output of the device is
approximately 6 joules. For most patients the device is expected to last
approximately four years, although this period will vary by patient depending on
the programming of the device and
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the therapy required. The device is designed to be replaced as needed;
procedures for device replacements are expected to be similar to the procedures
followed for pacemaker replacements. Proprietary technology is incorporated in
the device that is intended to optimize safety, minimize energy requirements for
atrial defibrillation and for device operation and provide a digital telemetry
link with the Programmer.
The METRIX 3020 is designed to detect the presence of AF, confirm the
persistence of the arrhythmia, deliver a low-energy synchronized shock on a safe
R-R interval (heartbeat to heartbeat interval), monitor the heart and initiate
post-shock ventricular back-up pacing if required, store relevant
electrocardiograms and reinitiate the therapy cycle if the patient's heart has
not been converted to normal heart rhythm. Once normal heart rhythm is restored,
the device is designed to reset and reinitiate the therapy cycle when AF is
again detected. To optimize shock safety, the device incorporates patented
redundant ventricular sensing channels designed to enhance shock
synchronization. In addition, proprietary technology incorporated into the
device will enable it to be programmed to emit a very low-energy output warning
signal, if desired by the patient and physician, to alert the patient when a
therapeutic level shock is about to be delivered. To minimize defibrillation
energy requirements and shock intensity, the device utilizes a proprietary
biphasic shock waveform generated by a single capacitor. To minimize the
device's power consumption and to maximize its life, InControl has incorporated
a proprietary approach to intermittently power-up the microprocessors at
preprogrammed intervals, and has patented a means to charge the capacitor
efficiently in preparation for shock delivery.
PERIMETER Transvenous Sensing and Defibrillation Lead System
Three permanent transvenous leads, providing what InControl believes to be a
unique three-way view of the electrical conduction system of the heart, are
attached to the heart and connected to the METRIX 3020. One lead is positioned
in each of the coronary sinus, the right atrium and the right ventricle.
InControl has developed a proprietary single electrode sensing and shocking lead
for the coronary sinus, the PERIMETER CS lead. The PERIMETER CS lead is designed
with a pre-formed helical shape to improve fixation in the coronary sinus. The
PERIMETER RA lead is a single electrode sensing and shocking lead designed for
fixation in the right atrium. These two leads provide a bipolar system for both
sensing and shock delivery. A third lead, a standard right ventricular bipolar
pacing lead, provides cardiac signals needed for shock synchronization, rhythm
discrimination and post-shock back-up ventricular pacing.
Defibrillator System Analyzer and Programmer
A pen-based touch screen computer serves as the system platform for the DSA and
the Programmer. The Company has designed innovative displays for
device-programming parameters, and electrogram, as well as AF episode data. The
DSA emulates the implanted device and will allow the implanting physician to
verify proper lead placement and performance, test initial device settings and
determine the patient's atrial defibrillation threshold prior to device
implantation. The Programmer allows the physician to assess and adjust device
performance at follow-up evaluations and prints selected data and electrogram
information for patient chart documentation. Employing proprietary technology,
the Programmer transfers information to or from the METRIX 3020, via digital
wireless communication. Each implant center will be equipped with a DSA and a
Programmer.
TADCATH -- Temporary Atrial Defibrillation Catheters
The TADCATH products are a family of defibrillation catheters designed and
developed by InControl with manufacturing, and in some instances design,
completed by selected qualified suppliers. These products provide physicians and
patients a therapeutic alternative for the acute, temporary treatment of AF,
particularly those patients who have failed external cardioversion. The products
are also used to perform part of the pre-implant testing associated with the
METRIX System clinical trials. InControl believes that use of these products at
implant centers will help identify patients with AF characteristics that would
make the patient suitable for a METRIX device implant. These catheters are sold
by the Company in Europe whereas in the United States, the investigating
physician generally provides the catheters for the procedures. In 1997, the
Company was awarded the CE mark for TADCATH products. The Company currently has
no plans to enter the regulatory process to seek FDA approval for these
products.
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TADPOLE - Temporary Atrial Defibrillation and Cardiac Pacing
Heartwires
TADPOLE is a proprietary system of temporary cardiac pacing and atrial
defibrillation heartwires designed and developed by InControl to serve patients
who suffer from AF as result of thoracic surgical procedures including CABG and
valve replacement procedures. The TADPOLE heartwires are designed to be placed
post-surgery on the heart. This procedure for the placement of the heartwires is
similar to that utilized by cardiovascular surgeons to place temporary cardiac
pacing heartwires. Each patient receives at least two TADPOLE heartwires. The
heartwires are then attached to a temporary pacemaker or to an external
defibrillation energy source if the patient requires either pacing or atrial
defibrillation during the post-operative recovery time period. The TADPOLE
heartwires are designed to be removed via simple manual traction prior to the
patient's discharge from the hospital. In 1997, the Company was awarded the CE
mark for TADPOLE heartwires. The regulatory process will require that the
Company file an Investigational Device Exemption ("IDE") with the FDA and enter
into the PMA process for approval. See "--Important Factors Regarding
Forward-Looking Statements--Extensive Governmental Regulation and Uncertainty of
Product Approvals."
Next Generation Atrial Defibrillators and Leads/Other Products Under
Development
A portion of InControl's resources are devoted to the design and development of
the next generation of the Company's products, including follow-on generations
of atrial defibrillators, transvenous leads and accessories, improvements to the
programmer and DSA and a new device for therapy activation for patients with
METRIX System implants. Future generations of atrial defibrillators are being
designed to be smaller and lighter and to have a longer battery life. Future
devices are also being designed to include additional functionality and to offer
therapy for a broader range of indications to serve larger patient populations.
The Company believes that by combining the current atrial defibrillation therapy
available in the METRIX System with additional therapies, patient recruitment
will be simplified and accelerated. InControl anticipates significant design
challenges in completing such a device. There can be no assurances, however,
that the Company can successfully develop such future generation products in a
timely manner, if at all. The Company is also developing new PERIMETER
transvenous leads to improve on existing designs and to address requirements of
future generations of atrial defibrillators.
The successful introduction of any new product depends upon the timing and
completion of the final design work, design verification and qualification
testing, component availability and manufacture. InControl invested $24.9
million, $23.1 million and $20.1 million in research and development for the
years ended December 31, 1997, 1996 and 1995, respectively.
FIELD CLINICAL ENGINEERING AND CLINICAL RESEARCH
The Company believes that a field clinical engineering group that supports
implanting physicians will continue to be critical to market acceptance of the
METRIX System. A clinical engineering team is in place in Europe and the United
States to conduct training programs, attend implant procedures, and assist with
patient follow-up and device troubleshooting.
The Company also employs a Clinical Research group in the United States, which
group has initiated studies into quality of life and cost of care for AF
patients. InControl believes that the results from such studies will influence
the rate of market acceptance and the availability of third-party reimbursement
for its products in the United States and Europe. Certain of these studies are
ongoing in the United States and Europe, and the Company anticipates initiating
additional studies on an ongoing basis. See "--Important Factors Regarding
Forward-Looking Statements--Market Acceptance; Substantial Dependence on
Single Product" and "--Dependence on Reimbursement."
SALES IN THE UNITED STATES AND EUROPE
During the investigational period of the METRIX System, the number of devices
and implant centers in the United States will be controlled by the FDA.
Marketing and promotional activities in the United States are heavily restricted
until product approval is granted. If approval to market the METRIX System in
the United States is
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granted by the FDA, the Company intends to establish a direct sales force to
serve the estimated 1,500 cardiac electrophysiologists in the United States.
Limited marketing and sales activities in Europe have commenced with the
European safety trials completed and the CE mark obtained in 1997. The Company
has established a subsidiary in Belgium (InControl, Europe, S.A./N.V.) which
serves as its European headquarters and base for its European marketing, sales,
regulatory, clinical engineering and administrative activities. InControl also
has sales subsidiaries in Germany (InControl, GmbH) and France (InControl
France, S.A.S.). InControl added sales and marketing personnel to all three
European offices in 1997 and anticipates adding additional sales personnel in
future years in anticipation of the expected growth in customers and clinical
activity. The Company also sells the METRIX System through selected independent
medical device distributors in certain countries in Europe.
MANUFACTURING
InControl has a manufacturing facility consisting of an approximately 4,100
square foot Class-10,000 clean room and approximately 5,900 square feet of
manufacturing support area at its headquarters in Redmond, Washington. The
Company currently is assembling METRIX 3020 devices and leads at this location.
The DSA, the Programmer and the TAD products are currently being manufactured
under contract with qualified suppliers. InControl believes that its Redmond
facility will meet its manufacturing capacity requirements through at least
1999. During 1997, InControl was recertified to be in compliance with the
International Standards Organization ("ISO") 9001 standards, as well as with the
quality systems requirements of the European Active Implantable Device Directive
(the "AIMDD"). The Company will be required to meet and adhere to all applicable
requirements of, and the Company's manufacturing facilities will be subject to
periodic inspection by, both United States and European regulatory agencies.
The manufacturing process for the METRIX System consists primarily of assembly
of purchased components, testing operations, sterilization and packaging.
Components are purchased according to InControl's specifications from approved
suppliers. A number of product components, such as hybrid circuits, batteries,
integrated circuits, capacitors and transformers, are currently supplied by sole
source vendors. Because of the long lead time for some components, a vendor's
inability to supply such components in a timely manner and in the quantity
required would have a material adverse effect on the Company's ability to
manufacture its products. The Company believes that it is taking appropriate
action to minimize the risk of component shortages, including entering into
long-term and volume commitments and stockpiling some key materials required for
production of its products.
ATRIAL DEFIBRILLATOR MARKET
The Company expects that during the initial phase of market development, in both
the United States and Europe, the decision to treat a patient with the METRIX
3020 will be made primarily by cardiac electrophysiologists ("EPs"), specialists
in the management of patients with persistent rhythm disorders. InControl also
expects that in the initial phases of market development of the TADCATH products
the decisions to utilize the TADCATH products will also be made by the EPs.
Today, the majority of patients with AF are cared for by their general
practitioner, internist or cardiologist. Because there have been few new
electrophysiology-based therapies for AF, referral of patients to EPs has been
limited. The Company believes that, with the introduction of the METRIX 3020,
treatment referral patterns to EPs will develop in a similar manner to
referrals to EPs for patients with persistent ventricular arrhythmias and for
patients with heart rhythm disorders responsive to ablation techniques.
The Company estimates that there are currently 1,500 EPs who practice at 600
centers in the United States and 500 EPs who practice at 200 implant centers in
Europe. The Company's initial marketing and sales activities will concentrate on
EPs based in those centers most active in the implantation of ICDs.
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The Company believes that the key to adoption of the METRIX System as a new
therapy will be positive clinical experience with the METRIX implantable atrial
defibrillator as well as continued research and publication of results by
leading electrophysiology academic researchers. In addition to a strong clinical
and research base, the Company believes that the commercial success of the
METRIX System will require active marketing and sales efforts to build name and
brand loyalty and the development of a strong clinical engineering team to
support physicians at implanting centers.
POST OPERATIVE ATRIAL DEFIBRILLATION AND CARDIAC PACING HEARTWIRE MARKET
The Company expects that the decision to use TADPOLE heartwires will be made by
cardiovascular surgeons and their staff. The Company believes that this is
similar to the process that currently exists for the post-operative cardiac
pacing heartwires. InControl estimates that there are approximately 1,000
cardiac surgery centers in the United States and another 400 in Europe. The
Company's initial marketing and sales activities will concentrate on the centers
with the largest number on surgical procedures in each geographical area.
The Company believes that the key to adoption of the TADPOLE heartwires as a new
therapy will be positive clinical experience, including efficacy, safety and
ease of use, as well as publication of early clinical results by leading
cardiovascular surgery academic researchers. In addition to a strong clinical
results, the Company believes that the commercial success of the TADPOLE
heartwires will require active marketing and sales efforts to build name and
brand loyalty and the development of adequate supply and distribution
capabilities.
COMPETITION
METRIX System and TADCATH Products
The METRIX System is a new technology that must compete with other more
established treatments for AF such as pharmaceuticals, external electrical
cardioversion, ablation accompanied by pacemaker implantation and open-heart
surgery. Furthermore, although currently no implantable device is being marketed
to treat AF, one manufacturer of ICD's and pacemakers is developing a
dual-chamber defibrillator/dual chamber pacemaker system that will likely
address patients with both ventricular and atrial arrhythmias and may be
marketed to patients who have only AF. This device entered the clinic in Europe
in early 1997 and has reportedly been implanted in the United States in at least
one patient suffering from only AF. InControl believes that other manufacturers
of ICD's and pacemakers are currently involved in, or will soon begin, efforts
to develop implantable devices to treat both ventricular and atrial arrhythmias.
In addition, these and other companies, academic institutions, governmental
agencies and other research organizations may be pursuing alternative approaches
to the treatment of AF. The Company believes that the primary competitive
factors in the market for the treatment of symptomatic AF are therapeutic
efficacy, safety and patient acceptance. Additional factors that will impact the
Company's competitiveness in future years will be marketing and distribution
capabilities and manufacturing costs and capacities.
TADPOLE heartwires
The TADPOLE heartwires represent a new technology that must compete with
existing treatments for temporary post-surgical AF. Existing approaches are
primarily pharmaceuticals and watchful waiting. Furthermore, although currently
no defibrillation heartwires are being marketed to treat temporary post-surgical
AF, InControl believes that manufacturers of cardiac pacing heartwires may be
developing systems designed to be used to treat patients suffering from
temporary post-surgical AF. In addition, these and other companies, academic
institutions, governmental agencies and other research organizations may be
pursuing alternative approaches to the treatment of temporary post-surgical AF.
The Company believes that the primary competitive factors in the market for the
treatment of temporary post-surgical AF are therapeutic efficacy, safety,
distribution capabilities and cost competitiveness.
PATENTS AND PROPRIETARY RIGHTS
InControl is committed to developing and protecting its intellectual property.
The Company files patent applications to protect innovative technology,
inventions and innovative improvements that are significant to the development
of
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its business. As of December 31, 1997, InControl had 59 United States and 20
non-United States patents issued, and 8 United States and 91 non-United States
patent applications pending, covering various aspects of the Company's
technology. Because of the substantial length of time and expense associated
with bringing new products through development and regulatory approval to the
marketplace, the medical device industry places considerable importance on
obtaining patent protection and protecting trade secrets for new technologies,
products and processes. The Company also relies on trade secrets and know-how
that it seeks to protect, in part, through confidentiality agreements with
employees, consultants and other parties.
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 InControl, 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 InControl to significant liabilities 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. See "--Important Factors
Regarding Forward-Looking Statements--Industry History of Patent Litigation;
Dependence on Patents and Proprietary Rights."
The Company has six federally registered marks in the United States:
InControl(R), InControl(R) and Design, a miscellaneous design (a stylized heart
with a trailing catheter), InC(R), AAD(R), and PERIMETER(R), and has obtained
registrations in several foreign countries for the marks InControl(R) and
InControl(R) and Design. InControl also has pending applications for
registration of the marks METRIX(TM), PERIMETER SOLO(TM), TADCATH(TM),
TADPOLE(TM), ATRIOVERTER(TM), ATRIOVERSION(TM), MIRROR IMAGE(TM) and
POLYSIL(TM) in the United States.
GOVERNMENT REGULATION
UNITED STATES
Under the Federal Food, Drug and Cosmetic Act (the "FDC Act"), the METRIX System
is a Class III medical device, subject to the most stringent FDA review to
ensure that the device is safe and effective before commencement of marketing,
sales and commercial distribution in the United States. The FDA regulates the
development, manufacturing, packaging, labeling, distribution, promotion and
post-market surveillance of medical devices in the United States. Preclinical
studies of medical devices must be conducted in conformity with the FDA's Good
Laboratory Practice regulations. In addition, state and local permits may be
required under regulations relating to laboratory activities. During 1996, the
Company filed an IDE application with the FDA to begin human clinical trials of
the METRIX System in the United States. The IDE application was approved and
human clinical trials began in April 1996. These clinical trials continued
through 1997 during which time they were expanded to include 22 centers, up from
5, and 37 patients, up from 10. The Company is approved to expand to 25 centers
and to implant up to a maximum of 170 METRIX atrial defibrillators in these
trials under the currently approved IDE. The trials are being managed in
compliance with the FDA's IDE regulations and regulations regarding
institutional review board approval and informed consent.
After completing the clinical trials, the Company must submit a 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 ("QSR") regulations (formerly known
as Good Manufacturing Practices) and the Medical Device Reporting ("MDR")
regulations and other regulations under the 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. See "--Important Factors Regarding Forward-Looking
Statements--Extensive Governmental Regulation and Uncertainty of Product
Approvals."
7
<PAGE> 11
The QSR regulations are designed to ensure that a medical device company
maintains significant quality controls over its development, manufacturing,
storage, and distribution activities. The MDR regulations require a medical
device company to establish and maintain a system to conduct post-market
surveillance and to provide periodic reports containing safety and effectiveness
information. This system would then be used to detect evidence that would
reasonably suggest that one of its devices may have caused or contributed to a
death or serious injury, or the device malfunctioned and the device or any other
device marketed by the Company would be likely to cause or contribute to a death
or serious injury if the malfunction were to recur. Should such an event occur,
the MDR regulations obligate the Company to provide this information to the FDA
through a formal reporting system.
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 InControl, including forcing
more costly studies, an adverse impact the market acceptance of the METRIX
System and 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 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.
Future product enhancements that the Company may develop and eventually wish to
add to the METRIX System will be evaluated by the FDA to determine if the
enhancement is an improvement or substantially changes its intended use. If the
enhancement is deemed to be an improvement then the Company will be allowed to
undergo an abbreviated approval process (known as a PMA supplement) as opposed
to the more stringent PMA process. However, if the FDA believes that new product
enhancements change the intended use, then the new product will be required to
undergo a new PMA approval process. FDA determinations of the nature of future
product enhancements will have a significant impact on the Company's marketing
and distribution plans, which in turn would materially impact the adoption rate
of the Company's atrial defibrillation therapy.
EUROPE
InControl has pursued product registration in Europe simultaneously with its
efforts in the United States. In order to market and distribute in countries
that are members of the European Community ("EC") and the European Free Trade
Association, the Company had to obtain the right to affix the CE mark on the
components of the METRIX System. The Company was required to obtain two
certifications from TUV Product Services of Munich, Germany (the "Notified
Body"), an organization accredited to certify that a medical device company is
in compliance with the requirements of the AIMDD.
The first certification verified that the Company had in place a Quality System
that met all requirements of the AIMDD. The Company received such certification
in mid-1995. The Notified Body has and 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. The Company passed these
required re-certifications in 1996 and 1997.
The second certification was of the Company's technical and clinical data used
to verify that the device was safe. After meeting the requirements of the first
certification and receiving a safety opinion from the Notified Body, and after
having filed notifications with the appropriate national agencies in the EC with
authority over approval of medical devices, the Company began clinical
investigation of the METRIX System in Europe in April 1996. The clinical
investigation was concluded in the second quarter of 1997 and the results of the
trial were submitted to the Notified Body for evaluation. The Notified Body
evaluated the clinical and pre-clinical reports and the Company received
notification that it was able to declare that it was in compliance with the
AIMDD and therefor affix the CE mark to the components of the METRIX System in
June 1997. The Company has since initiated a series of post-approval METRIX
System study protocols within several EC countries required in order to be
eligible for
8
<PAGE> 12
reimbursement and to obtain market acceptance. See "--Important Factors
Regarding Forward-Looking Statements--Extensive Governmental Regulation and
Uncertainty of Product Approvals" and "--Dependence on Reimbursement."
In addition, the Company has also voluntarily obtained ISO 9001 certification.
While this voluntary certification is not required in order to market and
distribute product in the EC, it does reflect positively on the Company's
ability to stay in compliance with recognized quality requirements. The Company
will undergo periodic audits to maintain its ISO 9001 certification and the
Notified Body will evaluate the Company's ISO 9001 status during its periodic
reviews.
EMPLOYEES
As of December 31, 1997, the Company had 223 employees. None of the Company's
employees are covered by collective bargaining agreements, and management
believes that its relationship with its employees is good.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The following important factors, among others, could cause the Company's actual
results to differ materially from those expressed in the Company's
forward-looking statements in this report and presented elsewhere by management
from time to time.
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 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 AND CAPITAL NEEDS
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 $129.7 million as of December 31, 1997. InControl
expects to incur substantial additional losses in the near future. The Company
expects that revenues from clinical trials and sales of the Company's products
will increase, which increases will moderate future deficit growth. Future
increases in expenses are expected to be primarily due to InControl's continuing
investment in research and development efforts, increases in clinical trial
activities, the expansion of European and domestic marketing and sales
capabilities and increasing domestic manufacturing activity. The amount and
timing of the Company's future revenues and, as a
9
<PAGE> 13
result, the amount and timing of the Company's future losses will be affected
by, among other things, 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, the availability of third-party reimbursement for 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. During the
first half of 1998 and from time to time thereafter, the Company will be
required to obtain additional funding through public or private financing,
including equity financing. Adequate funds may not be available when needed or
may not be available on terms favorable to the Company. If funding is
insufficient or not timely, the Company will be required to delay, reduce or
eliminate some or all of its research and development activities, planned
clinical trials, marketing activities, manufacturing activities, administrative
programs and may be required to sell assets or technology or to cease
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
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 regulations 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 FDA approval process. At the end of
1997, the METRIX System was in clinical trials in the United States in 22
centers and had 37 patients enrolled in those trials. The Company is approved to
expand to 25 centers and to implant up to a maximum of 170 METRIX atrial
defibrillators in those trials. There can be no assurances 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.
Once approval in the U.S. is imminent, the Company will be required to
demonstrate that it has strict controls over its manufacturing, marketing,
distribution and medical device reporting systems as required by the FDC Act and
FDA regulations. The Company will be subject to an initial audit during the PMA
submission process, which includes an inspection of the Company's facilities,
and the Company will be subject to periodic audits for compliance with the FDC
Act and FDA regulations. See "Business--Government Regulation." 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
10
<PAGE> 14
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 AIMDD and affix the CE mark to the METRIX System
components. While the CE Mark allows the Company to distribute and market the
METRIX System throughout the 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 with the Company's Notified
Body, TUV Product Services of Munich Germany, 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. 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 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. 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
11
<PAGE> 15
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's inability to obtain acceptable
components in a timely manner or find and maintain suitable replacement
suppliers would have a material adverse effect on the Company's ability to
manufacture the METRIX System and therefore on its business and financial
condition. See "Business--Manufacturing."
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 System, the Company will depend on the efforts of third parties. There
can be no assurance that such efforts will be successful. See "Business--Sales
in the United States and Europe" and "--Manufacturing."
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. Competition among medical
device companies for highly skilled and uniquely experienced scientific and
professional personnel is intense. 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.
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
12
<PAGE> 16
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.
ITEM 2. PROPERTIES
The Company leases approximately 85,000 square feet in Redmond, Washington.
These facilities contain approximately 15,000 square feet used for manufacturing
and assembly with 70,000 square feet used for research, lab space and
administrative offices. The facilities are leased through December 2003. The
Company believes that these facilities will be adequate to meet its needs
through 1999. The Company believes that it will be able to find additional space
for manufacturing and research and administrative offices as needed, without an
adverse impact on its operations.
The Company also leases approximately 4,000 square feet in Brussels, Belgium for
use as its European headquarters offices, 1,100 square feet in Lyon, France for
use as the Company's French sales office and 1,500 square feet in Siegburg,
Germany for use as its German sales office.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its properties are currently subject to any material
legal proceedings at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1997.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the Nasdaq National Market under the
symbol INCL. The following table sets forth, for the period since January 1,
1996, the high and low sales prices of the common stock on the Nasdaq National
Market as reported in published financial sources. These prices reflect
inter-dealer prices, without retail mark-up or commission, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Year High Low
---- -------- --------
<S> <C> <C>
1996
First quarter $ 18 $ 13 3/4
Second quarter $ 17 $ 11 1/4
Third quarter $ 12 1/8 $ 8
Fourth quarter $ 10 3/8 $ 7 1/8
1997
First quarter $ 10 3/8 $ 6 7/8
Second quarter $ 10 5/8 $ 7 1/16
Third quarter $ 10 3/16 $ 8 7/8
Fourth quarter $ 10 $ 5 1/2
1998
First quarter (through March 23, 1998) $ 6 1/4 $ 4
</TABLE>
As of March 23, 1998, there were approximately 169 holders of record of the
common stock (which does not include the number of stockholders whose shares are
held of record by a broker or clearing agency, but does include such a brokerage
house or clearing agency as one holder of record).
The Company has never paid cash dividends on its common stock. The Company
currently intends to retain all earnings, if any, for future growth and,
therefore, does not intend to pay cash dividends on its common stock in the
foreseeable future.
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<PAGE> 18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data) Restated
STATEMENT OF OPERATIONS DATA:
Revenues $ 1,976 $ 306 $ 25 $ -- $ --
Cost of sales 1,482 -- -- -- --
------------ ------------ ------------ ----------- --------
Gross profit 494 306 25 -- --
Expenses:
Research and development 24,927 23,112 20,117 16,424 9,053
Sales and marketing 5,470 2,823 1,537 783 325
General and administrative 4,669 4,329 3,111 2,013 1,153
Compensation charge -- 8,557 -- -- --
------------ ------------ ------------ ----------- --------
35,066 38,821 24,765 19,220 10,531
Interest expense 533 440 485 566 279
Interest income (1,647) (2,131) (1,512) (990) (546)
------------ ------------ ------------ ----------- --------
Net loss $ (33,458) $ (36,824) $ (23,713) $ (18,796) $(10,264)
============ ============ ============ =========== ========
Net loss per share (1) $ 1.88 $ 2.31 $ 1.83 $ 4.00 Not Meaningful
============ ============ ============ ===========
Shares used in computation of
net loss per share (1) 17,768,643 15,966,399 12,934,553 4,703,521 Not Meaningful
============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and
securities available for sale $15,670 $37,002 $19,214 $30,444 $19,774
Total assets 28,918 45,917 27,470 37,203 24,354
Long-term obligations, less
current portion 525 1,419 2,264 2,294 1,659
Total stockholders' equity(2) 22,137 41,026 22,192 32,333 21,275
</TABLE>
(1) Net loss per share amounts are computed on the basis described in Note 1
of Notes to Consolidated Financial Statements.
(2) No cash dividends have been declared.
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion contains forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. The words "believe", "expect", "intend", "anticipate" and
similar expressions identify forward-looking statements. Factors that could
affect the Company's financial results include, among other things, the
availability of adequate funding, 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, 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. Reference is made to the Company's Annual Report on Form 10-K filed
with the Commission for a more detailed description of such factors. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. InControl undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date of
this report or to reflect the occurrence of unanticipated events. See "Important
Factors Regarding Forward-Looking Statements."
OVERVIEW
InControl is engaged in the design, development and manufacture of implantable
atrial defibrillators and related products, including transvenous defibrillation
leads, temporary defibrillation catheters and temporary heartwires designed for
post-operative atrial defibrillation. The majority of the Company's resources
have been, and continue to be, devoted to research and development activities
related to the METRIX System, a proprietary system designed to treat atrial
fibrillation. The METRIX System is comprised of an implantable defibrillator,
transvenous leads to connect the defibrillator to the heart, a system analyzer
and a system programmer. The Company is also party to agreements under which the
Company distributes defibrillation and diagnostic catheters and related products
in certain geographic markets.
The design and development of an implantable medical device has required the
Company to make significant investments in research and development activities
and, as such, the Company has accumulated a deficit of $129.7 million as of
December 31, 1997. InControl expects to incur substantial additional losses in
the near future. The Company expects that revenues from clinical trials and
sales of the Company's products will increase and that these increases will
moderate future deficit growth. 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 the adoption of the METRIX System, 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. Future increases in expenses are
expected to be primarily due to InControl's continuing investment in research
and development efforts, increases in clinical trial activities, the expansion
of European and domestic marketing and sales capabilities and increasing
domestic manufacturing activity.
During 1997, InControl achieved several clinical and business milestones that
had been identified by the Company as important to its future success. In
Europe, the Company was awarded the Conformite Europeenne ("CE") mark on the
METRIX System and the Company's newest product, the TADPOLE heartwires, that are
designed to provide a new therapeutic alternative for patients suffering from
post-operative atrial fibrillation. Currently, the METRIX System is in limited
commercial release in Europe, while undergoing further trials required before a
device will be eligible for reimbursement from various European reimbursement
authorities. In the United States, the Company was granted clearance by the Food
and Drug Administration (the "FDA") for expansion of the clinical trial of the
METRIX System to 170 patients, in a total of 25 centers, and approved the use of
the device for out-of-hospital therapy. Subsequently, the METRIX device has been
used successfully in the patient-activated mode. In July, the
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<PAGE> 20
Company completed the private offering of 1,615,740 shares of common stock
raising $14.6 million, net of related fees.
The Company believes that it will incur losses at least until the METRIX System
has gained market acceptance in the United States. Market acceptance of the
METRIX System in the United States is dependent on, among other things,
obtaining regulatory approval from the FDA for its commercial release, which is
in turn dependent on the success of the METRIX System clinical trials in the
United States. There can be no assurance that clinical trials in the United
States will be successful. Further, there can be no assurance that regulatory
approval for the METRIX System will be obtained, or if such approval is
obtained, that the METRIX System will achieve market acceptance in the United
States. In Europe the Company has received the needed certifications required in
order to affix the CE mark to the METRIX System. 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 and quality of life improvements of the therapy in order to be eligible
for reimbursement approvals from the medical reimbursing authorities in various
EC member countries. There can be no assurance that such approvals from such
reimbursing authorities will be obtained in a timely manner, if at all. Even
with reimbursement approvals there can be no assurance that the METRIX System
will achieve market acceptance in Europe.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or products that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions in the Company's
operations or potential problems with its products.
The Company has begun an assessment of its software, key suppliers and products
to determine if the Company faces any business or financial risk from the Year
2000 issue. Inquiries to the Company's software vendors have revealed no
problems, and the Company plans to test these vendors assertions before the year
2000. The Company is also planning to inquire with key component suppliers to
verify that supplies of raw material components will not be at risk from this
problem. If tests of the Company's software reveal Year 2000 compliance problems
or any of the Company's key components suppliers do not successfully and in a
timely manner achieve Year 2000 compliance, the Company's business or operations
could be adversely affected. The Company believes its products are not subject
to this problem, with certain Programmers needing only minor adjustments in the
year 2000. These minor adjustments can be done by the Company's field clinical
engineers. Based on these early indications from the Company's assessment, there
appears to be no material business or financial risk to the Company.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
REVENUES
The Company recorded net revenues of $2.0 million, $306,000 and $25,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. Revenues result from
the sale of METRIX devices, leads, and accessories and to a lesser degree,
distribution of catheters and related products, in Europe, together with sales
of METRIX Systems in clinical investigations in the United States.
The Company anticipates that its revenues will increase in 1998. Any increase
will be primarily dependent on the timing and outcome of certain limited
clinical studies required for European reimbursement authorities, the success
and timing of the Company's United States clinical trial activities and the
subsequent rate of market acceptance in Europe and the United States. There can
be no assurance, however, that such trials will be completed successfully or
that the METRIX System will achieve market acceptance in Europe or the United
States.
17
<PAGE> 21
GROSS PROFITS
Gross profit totaled $494,000, $306,000 and $25,000 for the years ended December
31, 1997, 1996, and 1995, respectively. Gross profit in 1997 was 25% of net
revenues. Gross profit was identical to net revenues for 1996 and 1995 since
they were exclusively the result of implants during clinical trials and,
accordingly, the cost of sales were charged to research and development expense.
The Company's products are at an early stage in their product life cycles;
current cost of sales and gross profits therefore probably are not indicative of
future cost of sales or gross profits.
The Company's cost of sales and gross profit are affected by many factors. The
Company currently has limited experience in manufacturing and is operating at
volumes well below expected facility capacity. These two factors give rise to
certain experience and capacity-related costs which the Company considers part
of its ongoing manufacturing development. Accordingly, the Company has charged
these expenses to research and development.
The Company anticipates that in future years, to the extent its products gain
market acceptance, the Company's sales volume and manufacturing experience will
increase. As a result, these manufacturing development costs will both decrease
and be incorporated into cost of sales, and to that extent will not be included
in research and development. In addition, net revenues and, as a result, gross
profits will be influenced by sales discounts and allowances that the Company
may make during clinical trials or in connection with the initial commercial
release of the Company's products.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $24.9 million, $23.1 million and $20.1
million for the years ended December 31, 1997, 1996 and 1995, respectively. The
increases from year-to-year are primarily attributable to increases in personnel
who were engaged in the design, development and primary research associated with
the current and next generations of atrial defibrillation systems, the funding
of preclinical and clinical trials and expenditures associated with
manufacturing development. The Company anticipates that research and development
expenses will grow moderately in future quarters as the Company continues to
invest in primary research and development activities associated with future
atrial defibrillation products. The Company also believes that it will fund
preclinical studies and clinical trials in Europe and the United States at
levels at least as large as the current period. Manufacturing expenditures will
continue to be a component of research and development, but are expected to
moderate in future periods as the Company increases production volume and gains
manufacturing experience.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $5.5 million, $2.8 million and $1.5 million
for the years ended December 31, 1997, 1996 and 1995, respectively. Increases in
these expenses resulted from increases in the number of sales and marketing
personnel worldwide, primarily in the Company's European subsidiaries. These
additional personnel have been hired to support the commercial release and
ongoing distribution of the Company's products in Europe. InControl believes
that the expansion of European and domestic sales and marketing activities and
personnel and personnel-related costs associated with the expansion will result
in a substantial increase in sales and marketing expenses in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $4.7 million, $4.3 million and $3.1
million for the years ended December 31, 1997, 1996 and 1995, respectively. The
period-to-period increase is primarily related to an increase in administrative
personnel and facilities costs throughout the Company and, to a lesser degree,
an increase in period-to-period professional services expenses. The Company
anticipates that general and administrative expenses will increase moderately in
future periods.
18
<PAGE> 22
COMPENSATION CHARGE
The financial statements for 1996 have been restated to reflect a $8.6 million
non-cash compensation charge. This charge resulted from modifications to loan
agreements associated with the Company's program to accelerate the vesting of
certain stock options prior to the Company's initial public offering. The
Company has presented this expense as a single line on the income statement, as
the Company believes this will allow more meaningful period-to-period
comparisons of operating expenses. The components of this net charge, had they
been allocated, would have increased research and development by $4.8 million,
sales and marketing by $792,000, and general and administrative by $3.0 million.
No additional charges or credits related to the accelerated option vesting
program are expected.
INTEREST INCOME AND INTEREST EXPENSE
Interest income was $1.6 million, $2.1 million and $1.5 million for the years
ended December 31, 1997, 1996 and 1995, respectively. Fluctuations in interest
income for the years presented were primarily related to the fluctuations of
average balances of investments outstanding during the coinciding time periods.
During 1997, the Company funded its investments with a $14.6 million (net of
fees) private placement of stock completed in July 1997. However, the overall
average investment balance for 1997 decreased from 1996 due to the funding of
operations. Average investment balance increases in 1996 over that of 1995 were
the result of proceeds from an April 1996 sale of common stock.
Interest expense was $533,000, $440,000 and $485,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. The increase in period-to-period
interest expense is related to the Company's average balance of equipment lease
financing. Interest expense in future periods will depend on the rate of capital
expenditures and the success and timing of the Company's efforts to secure
additional sources of lease financing for those expenditures. The Company
expects that in 1998 interest expense will remain at levels similar to 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash, cash equivalents and securities
available-for-sale totaling $15.7 million, compared to a balance of $37.0
million at December 31, 1996. The decrease was used to fund $31.3 million in
operating activities and $5.7 million in purchases of property and equipment,
which was partially offset by a net increase in lease financing of $3.2 million.
During the comparable period in 1996, the Company used $25.7 million to fund
operating activities and $2.1 million to purchase property and equipment. In
July 1997, the Company completed a private offering of 1,615,740 shares of
common stock at $9.45 per share, resulting in approximately $14.6 million in net
proceeds to the Company.
The report of the Company's independent auditors with respect to the 1997
consolidated financial statements states that the Company's recurring operating
losses and negative cash flows raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements
have been prepared assuming the Company will continue as a going concern and do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets and liabilities that may result from
this uncertainty.
InControl expects its cash needs to increase in future periods due to the
Company's planned investment in research and development, anticipated increases
in spending on clinical trial activities and the planned 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, 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. In addition, as a result of the Company's available cash for 1998, the
Company anticipates that it will not meet the minimum level of cash covenant
associated with certain of its capital lease arrangements for 1998. Accordingly,
the Company has classified the amounts payable under these arrangements as a
current liability in the accompanying consolidated
19
<PAGE> 23
financial statements. The Company believes that its existing cash, cash
equivalents, securities available-for-sale, and interest thereon will be
sufficient to meet its capital requirements to the second quarter of 1998.
Within this period, the Company will seek additional funding, through either
public or private sources, to meet its future operational requirements. There
can be no assurance such funds will be available as needed or on terms that are
acceptable to the Company. If the Company is unable to obtain sufficient funds
to satisfy its cash requirements, the Company will be forced to delay, reduce or
eliminate some or all of its research and development activities, planned
clinical trials and manufacturing and administrative programs, or dispose of
assets or technology.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
20
<PAGE> 24
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
InControl, Inc.
We have audited the accompanying consolidated balance sheets of InControl, Inc.
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of InControl, Inc. at
December 31, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred substantial operating losses and negative cash flows. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in note 1. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that may result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
Seattle, Washington
January 29, 1998
21
<PAGE> 25
INCONTROL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
RESTATED
Current assets:
Cash and cash equivalents $ 2,336,703 $ 4,287,617
Securities available-for-sale 13,333,038 32,714,022
Trade accounts receivable, net 915,285 194,895
Inventories 2,492,583 2,314,841
Prepaid expenses and other current assets 964,424 532,631
----------- -----------
Total current assets 20,042,033 40,044,006
Property and equipment, net 7,835,514 4,861,566
Notes receivable from employees 801,042 746,042
Other assets 239,716 265,273
----------- -----------
Total assets $28,918,305 $45,916,887
=========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable $ 608,908 $ 313,888
Accrued expenses 1,972,958 1,960,642
Current portion of long-term obligations 3,674,333 1,197,614
------------- -------------
Total current liabilities 6,256,199 3,472,144
Long-term obligations, less current portion 525,076 1,418,701
Commitments (Note 7)
Stockholders' equity:
Convertible preferred stock, $.01 par value:
Authorized shares--10,000,000;
Issued and outstanding shares--none -- --
Common stock, $.01 par value:
Authorized shares--40,000,000;
Issued and outstanding shares--
18,775,864 in 1997, and 16,960,700 in 1996 152,505,419 137,794,938
Accumulated deficit (129,663,683) (96,171,031)
Notes receivable from stockholders (581,000) (660,000)
Cumulative translation adjustment (123,706) 62,135
------------- -------------
Total stockholders' equity 22,137,030 41,026,042
------------- -------------
Total liabilities and stockholders' equity $ 28,918,305 $ 45,916,887
============= =============
</TABLE>
See accompanying notes.
22
<PAGE> 26
INCONTROL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
RESTATED
Revenues $ 1,975,667 $ 305,605 $ 25,488
Cost of sales 1,482,100 -- --
------------ ------------ ------------
Gross profit 493,567 305,605 25,488
Expenses:
Research and development 24,926,941 23,112,242 20,116,695
Sales and marketing 5,469,934 2,822,296 1,536,751
General and administrative 4,669,212 4,329,160 3,111,379
Compensation charge (Note 5) -- 8,557,000 --
------------ ------------ ------------
35,066,087 38,820,698 24,764,825
Interest income 1,647,722 2,131,572 1,511,745
Interest expense (533,251) (440,224) (485,281)
------------ ------------ ------------
Net loss $(33,458,049) $(36,823,745) $(23,712,873)
============ ============ ============
Basic and diluted net loss per share
(Note 1) $ 1.88 $ 2.31 $ 1.83
============ ============ ============
Shares used in computation of
net loss per share 17,768,643 15,966,399 12,934,553
</TABLE>
See accompanying notes.
23
<PAGE> 27
INCONTROL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES TOTAL
CONVERTIBLE RECEIVABLE CUMULATIVE STOCK-
PREFERRED COMMON DEFICIT FROM TRANSLATION HOLDERS'
STOCK STOCK ACCUMULATED STOCKHOLDERS ADJUSTMENT EQUITY
----------- ------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 -- $ 68,965,681 $ (36,056,313) $ (575,400) $ (714) $ 32,333,254
Sale of common stock to public,
net issuance costs of $1,066,898 -- 13,933,102 -- -- -- 13,933,102
Exercise of 95,907 stock options -- 63,678 -- -- -- 63,678
Retirement of common stock -- (27,954) -- 22,884 -- (5,070)
Cumulative translation adjustment -- -- -- -- (63,119) (63,119)
Change in unrealized gains and losses
on securities available-for-sale -- -- 328,730 -- -- 328,730
Loans to stockholders -- -- -- (686,000) -- (686,000)
Net loss for year -- -- (23,712,873) -- -- (23,712,873)
----------- ------------ ------------- ------------- ------------- ------------
Balance at December 31, 1995 -- 82,934,507 (59,440,456) (1,238,516) (63,833) 22,191,702
Sale of common stock to public,
net issuance costs of $3,344,735 -- 46,155,265 -- -- -- 46,155,265
Equity compensation arising from
modifications to stockholders' loans
(Note 5) -- 8,557,000 -- -- -- 8,557,000
Exercise of 152,268 stock options -- 148,166 -- -- -- 148,166
Cumulative translation adjustment -- -- -- -- 125,968 125,968
Change in unrealized gains and losses
on securities available-for-sale -- -- 93,170 -- -- 93,170
Reduction in loans to stockholders -- -- -- 578,516 -- 578,516
Net loss for year (Restated) -- -- (36,823,745) -- -- (36,823,745)
----------- ------------ ------------- ------------- ------------- ------------
Balance at December 31, 1996 (Restated) -- 137,794,938 (96,171,031) (660,000) 62,135 41,026,042
Sale of common stock to public,
net issuance costs of $702,462 -- 14,566,281 -- -- -- 14,566,281
Exercise of 146,389 stock options -- 158,436 -- -- -- 158,436
Repurchase of common stock -- (14,236) -- -- -- (14,236)
Cumulative translation adjustment -- -- -- -- (185,841) (185,841)
Change in unrealized gains and losses on
securities available-for-sale -- -- (34,603) -- -- (34,603)
Reduction in loans to stockholders -- -- -- 79,000 -- 79,000
Net loss for year -- -- (33,458,049) -- -- (33,458,049)
----------- ------------ ------------- ------------- ------------- ------------
Balance at December 31, 1997 -- $152,505,419 $(129,663,683) $ (581,000) $ (123,706) $ 22,137,030
=========== ============ ============= ============= ============= ============
</TABLE>
See accompanying notes.
24
<PAGE> 28
INCONTROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
RESTATED
OPERATING ACTIVITIES:
Net loss $(33,458,049) $(36,823,745) $(23,712,873)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,929,287 2,492,340 2,121,088
Equity compensation arising from
modifications to stockholders' loans -- 8,557,000 --
Employees' compensation used to retire
loans to stockholders -- 552,516 --
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts
receivable, prepaid expenses
and other current assets (986,695) 142,537 (82,099)
(Increase) in inventories (179,410) (949,461) (727,808)
Increase in accounts payable,
accrued expenses, and sales tax
payable 382,216 300,655 436,420
------------ ------------ ------------
Net cash used in operating activities (31,312,651) (25,728,158) (21,965,272)
INVESTING ACTIVITIES:
Purchases of property and equipment (5,742,090) (2,151,267) (2,295,390)
Loans to employees (60,000) (60,000) (60,250)
Proceeds from collection of employee loans -- 12,000 12,000
Purchases of securities (16,365,129) (39,371,676) (15,703,565)
Proceeds from maturity of securities 28,703,771 22,218,010 25,120,000
Proceeds from sale of securities 6,566,089 1,618,182 912,033
------------ ------------ ------------
Net cash provided by (used in) investing
activities 13,102,641 (17,734,751) 7,984,828
FINANCING ACTIVITIES:
Repayment of note payable -- -- (20,498)
Proceeds from lease financing 3,159,805 448,957 996,801
Payments on lease financing (1,538,179) (1,061,793) (1,004,499)
Loans to stockholders -- -- (686,000)
Proceeds from collection of stockholders' loans 79,000 26,000 --
Proceeds from exercise of stock options 143,595 148,166 63,678
Net proceeds from sale of common stock 14,566,886 46,155,265 13,933,102
------------ ------------ ------------
Net cash provided by financing activities 16,411,107 45,716,595 13,282,584
Effect of exchange rates on cash (152,011) (14,669) --
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (1,950,914) 2,239,017 (697,860)
Cash and cash equivalents at beginning of
period 4,287,617 2,048,600 2,746,460
------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,336,703 $ 4,287,617 $ 2,048,600
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH PAID:
Interest $ 533,251 $ 440,224 $ 498,281
============ ============ ============
</TABLE>
See accompanying notes.
25
<PAGE> 29
INCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
InControl, Inc. (the "Company"), is engaged in the design, development, and
manufacture of implantable atrial defibrillators (METRIX devices) and related
products designed to treat Atrial Fibrillation (AF), a common heart rhythm
disorder. The Company has devoted substantially all of its efforts to research
and development activities, clinical trials, marketing and promotion,
manufacturing activities, recruitment and training personnel, establishing
European operations and raising capital.
GOING CONCERN
The Company has incurred operating losses and negative cash flow from operations
each year since its inception. As of December 31, 1997, the Company had an
accumulated deficit of $129.7 million. The consolidated financial statements
have been prepared assuming the Company will continue as a going concern and do
not include adjustments to reflect possible future effects on the recoverability
and classification of assets and liabilities that may result from the outcome of
this uncertainty.
As a result of its significant research and development efforts, the Company has
required substantial working capital to fund its operations. To date, the
Company has financed its operations principally through the net proceeds from
its equity offerings. As of December 31, 1997, the Company had cash, cash
equivalents, and securities available-for-sale of $15.7 million. These funds
will enable the Company to sustain operations until approximately the second
quarter of 1998. The Company is actively pursuing possible sources of additional
working capital, through either public or private sources, to meet its future
operational requirements. If the Company is not able to secure additional
sources of working capital, it will be forced to curtail operations or dispose
of assets or technology. There can be no assurance such funds will be available
as needed or on terms that are acceptable to the Company or that the Company
will successfully complete other steps necessary to continue as a going concern.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Significant intercompany transactions and
balances have been eliminated. Certain reclassifications of previously reported
amounts have been made to conform with current year presentation.
TRANSLATION OF FOREIGN CURRENCIES
All assets and liabilities of the Company's foreign subsidiaries are translated
at exchange rates in effect on the balance sheet dates and differences due to
changing translation rates are charged or credited to "cumulative translation
adjustment" in stockholders' equity. Income and expense items are translated at
rates that approximate those in effect on transaction dates. Transaction gains
and losses had an insignificant effect on the statement of operations for all
periods presented.
CASH EQUIVALENTS
Liquid investments with a purchased maturity of three months or less are
considered to be cash equivalents. Cash equivalents are stated at cost, which
approximates fair value.
26
<PAGE> 30
SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale consist primarily of investment-grade corporate
obligations, all of which mature in 1998.
Management currently classifies the Company's entire investment portfolio as
available-for-sale. As such, securities are stated at fair value based on quoted
market prices, with the related unrealized gains and losses reflected in
stockholders' equity. Interest earned on securities available-for-sale is
included in interest income. The cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion are included in interest income. Realized gains
and losses and declines in value judged to be other than temporary on securities
available-for-sale (none in 1997, 1996 and 1995) would also be included in
interest income. The cost of securities sold is calculated using the specific
identification method.
CONCENTRATION OF CREDIT RISK
The Company is subject to concentrations of credit risk from its securities
available-for-sale. The Company's credit risk is managed through the purchase of
investment-grade securities and diversification of the investment portfolio
among issuers, industries, and maturities. See note 2 for additional
information.
INVENTORIES
Inventories are valued at the lower of cost (first in, first out method) or
market. Allowances are made for obsolete, unsalable, or unusable inventories.
Components of inventories, net of allowances, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $ 733,181 $ 888,639
Work In Process 671,972 727,284
Finished Products 1,087,430 698,918
---------- ----------
$2,492,583 $2,314,841
========== ==========
</TABLE>
The Company purchases components and certain related peripheral equipment for
its products from outside vendors, including components from sole source
vendors. Establishment of additional or replacement sources of supply would
require the Company to qualify any such vendor in order to comply with the
regulations of the Food and Drug Administration (FDA) and European regulatory
authorities, which, in the case of certain components, would cause delays in the
Company's manufacturing process.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation of property and equipment is provided using
accelerated methods over the assets' estimated useful lives, ranging from three
to seven years. Property and equipment acquired under capital leases are
amortized on a straight-line basis over the lesser of the lease term or the
assets' estimated useful lives.
REVENUE RECOGNITION
Revenue is recognized at the time a device is implanted or, in the case of sales
to distributors, upon shipment.
STOCK-BASED COMPENSATION
The Company accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no
compensation expense for the stock option grants, since all options are granted
at fair market value on the date of grant.
27
<PAGE> 31
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The estimated value of certain inventories is based upon expected sales of the
inventory. Inventory is subject to technological obsolescence.
BASIC AND DILUTED NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement No.
128, "Earnings per Share" (FAS 128). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is similar to the previously reported fully diluted earnings
per share. The effect of outstanding options and warrants have been excluded
from the calculation because they are antidilutive. All earnings per share
amounts for all periods have been presented to conform with FAS 128
requirements.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued Statement No. 130, "Reporting Comprehensive Income" (FAS 130)
and Statement No. 131, "Disclosure about Segments of an Enterprise and Related
Information" (FAS 131). FAS 130 established standards for reporting
comprehensive income in annual and interim financial statements. FAS 131
established standards for the way a public business enterprise reports
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. FAS 130 and 131 are effective for financial statements having fiscal
years beginning after December 15, 1997. The adoption of FAS 130 and 131 will
have no significant impact on the Company's consolidated results of operations,
financial position, or cash flows.
2. SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale consist of the following at December 31, 1997:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
U.S. corporate bonds $11,908,454 $ 32,542 $ (7,226) $11,933,770
Bankers acceptances 893,220 -- (545) 892,675
Government bonds 506,282 311 -- 506,593
----------- ---------- --------- -----------
Total securities $13,307,956 $ 32,853 $ (7,771) $13,333,038
=========== ========== ========= ===========
</TABLE>
Securities available-for-sale consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. corporate bonds $32,035,614 $ 76,984 $ (17,966) $32,094,632
Certificates of deposit 308,533 -- -- 308,533
Government bonds 310,925 -- (68) 310,857
----------- ---------- ---------- -----------
Total securities $32,655,072 $ 76,984 $ (18,034) $32,714,022
=========== ========== ========== ===========
</TABLE>
28
<PAGE> 32
The net adjustment for unrealized gains or (losses) on available-for-sale
securities included as a component of stockholders' equity was $25,082 and
$58,950 at December 31, 1997 and 1996, respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Computer equipment and software $ 6,169,327 $ 4,074,997
Engineering and production equipment 5,548,222 3,364,771
Leasehold improvements 2,724,334 1,991,152
Manufacturing furniture, fixtures, and office equipment 2,443,541 1,903,655
----------- -----------
16,885,424 11,334,575
Less accumulated depreciation and amortization 9,049,910 6,473,009
----------- -----------
$ 7,835,514 $ 4,861,566
=========== ===========
</TABLE>
Included above are assets acquired under capital leases as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Computer equipment and software $2,725,622 $2,142,227
Engineering and production equipment 3,591,900 2,503,353
Manufacturing furniture, fixtures, and office equipment 1,415,582 1,137,627
---------- ----------
7,733,104 5,783,207
Less accumulated amortization 4,484,519 4,068,759
---------- ----------
$3,248,585 $1,714,448
========== ==========
</TABLE>
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Capital lease obligations $4,090,058 $2,480,362
Deferred rent 13,616 23,227
Deferred sales tax 95,735 112,726
---------- ----------
4,199,409 2,616,315
Less current portion 3,674,333 1,197,614
---------- ----------
$ 525,076 $1,418,701
========== ==========
</TABLE>
Deferred sales tax represents sales tax on property and equipment purchases. The
Company has obtained approval from the State of Washington Department of Revenue
to delay payment of sales tax for three years after asset acquisition. The
amount is payable over five years with no interest. Remaining payments are due
as follows: $30,876 in 1998; $34,191 in 1999; and $30,668 in 2000.
The Company has entered into capital lease arrangements whereby certain property
and equipment are financed through two to four year capitalized lease
obligations at interest rates ranging from approximately 10% to 21%. Under the
provisions of certain capital lease arrangements, the Company is required to
maintain minimum levels of cash and securities. As a result of the Company's
funding requirements during 1998, the Company does not
29
<PAGE> 33
anticipate that it will meet the minimum levels for 1998. Accordingly, the
Company has classified the amounts payable under certain of the capital lease
arrangements as a current liability in the accompanying consolidated balance
sheet. The obligations are secured by the assets under lease. See notes 3 and 7
for additional information.
5. STOCKHOLDERS' EQUITY
COMMON STOCK
Information regarding common stock activity for the years ended December 31 is
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Shares issued and outstanding at beginning of year 16,960,700 13,808,432 12,181,983
Sale of stock 1,615,740 3,000,000 1,558,442
Options exercised for stock 146,389 152,268 95,907
Warrants exercised for stock 70,441 -- --
Stock retired (17,406) -- (27,900)
----------- ---------- -----------
Shares issued and outstanding at end of year 18,775,864 16,960,700 13,808,432
=========== ========== ===========
</TABLE>
The Company had reserved 4,044,336 shares of common stock for the exercise of
stock options and warrants as of December 31, 1997.
WARRANTS
The Company had warrants outstanding for the purchase of 102,901 and 341,963
shares of common stock for the exercise of stock warrants as of December 31,
1997 and 1996, respectively. Those warrants outstanding as of December 31, 1997
are exercisable for common stock at a price of $10.04, as compared to those
warrants outstanding as of December 31, 1996 which are exercisable for common
stock at prices ranging from $6.40 to $10.04. These warrants expire in 1998.
STOCK OPTIONS
The Company maintains three stock option plans. One plan is for the granting of
stock options to employees, another plan is for the granting of options to
non-employee directors of the Company and the final plan governs certain options
previously granted to non-employee directors of the Company. Stock options
generally have a ten year term and generally vest ratably over a four year
period.
In accordance with FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), pro forma information regarding net loss and net loss
per share has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value of
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for 1997, 1996 and
1995, respectively: risk free interest rates of 6.04%, 6.02% and 6.13%;
volatility factors of the expected market price of the Company's common stock of
.39, .35 and .60; an expected life of the options of 3.10, 2.93 and 2.97; and a
dividend yield rate of 0% for all years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different than traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information for the years ended December 31 follows:
30
<PAGE> 34
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net loss as reported $33,458,049 $36,823,745 $23,712,873
Pro forma net loss $34,298,588 $38,654,754 $24,977,873
Pro forma basic and diluted
net loss per share $ 1.93 $ 2.42 $ 1.99
</TABLE>
A summary of the Company's stock option activity, and related weighted-average
exercise prices for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 2,376,217 $ 9.66 1,879,610 $ 8.07 967,171 $ 3.46
Granted 1,000,922 $ 8.44 763,250 $ 11.97 1,026,014 $ 11.65
Exercised (146,389) $ 1.09 (152,268) $ 0.97 (95,907) $ 0.67
Canceled (140,462) $ 11.46 (114,375) $ 10.60 (17,668) $ 3.66
---------- ---------- ----------
End of year 3,090,288 $ 9.59 2,376,217 $ 9.66 1,879,610 $ 8.07
========== ========== ==========
Exercisable at
end of year 1,181,492 $ 9.05 888,687 $ 7.53 737,275 $ 6.44
========== ========== ==========
Available for grant
at end of year 851,147 711,607 206,482
========== ========== ==========
Weighted-average fair value of
options granted during the year $ 2.76 $ 3.56 $ 3.55
=========== =========== ===========
</TABLE>
Information regarding the weighted-average remaining contractual life and
weighted-average exercise price of options outstanding and options exercisable
at December 31, 1997 for selected exercise price ranges is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------------
REMAINING
RANGE OF CONTRACTUAL NUMBER EXERCISE NUMBER EXERCISE
EXERCISE PRICES LIFE IN YEARS OUTSTANDING PRICE EXERCISABLE PRICE
- --------------- ------------- ----------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 0.53 - $ 4.00 .99 256,215 $ 1.25 250,852 $ 1.22
$ 5.88 - $ 9.00 7.92 799,028 $ 7.85 163,577 $ 8.28
$ 9.06 - $10.00 8.84 884,253 $ 9.62 208,520 $ 9.65
$10.06 - $18.00 7.91 1,150,792 $ 12.63 558,543 $ 12.57
--------- ---------
$ 0.53 - $18.00 7.60 3,090,288 $ 9.59 1,181,492 $ 9.05
========= =========
</TABLE>
NOTES RECEIVABLE FROM STOCKHOLDERS
On March 31, 1994, the Company's Board of Directors approved the acceleration of
vesting on certain options for continuing employees holding a minimum number of
options who elected to exercise such options. The Company has the right to
repurchase certain of these shares, at original issue price, in the event the
holder's relationship with the Company terminates. The repurchase rights expire
ratably through 1998. At December 31, 1997, 9,531 outstanding common shares were
subject to repurchase.
31
<PAGE> 35
In connection with the exercise of these accelerated options and existing vested
options, certain employees elected to have the Company carry notes for up to 75%
of the purchase price, totaling $575,400. In May 1996, the Company's Board of
Directors, approved a bonus to holders of these notes. Participating employees
elected to receive payment of the bonus by offsetting principal and interest on
these notes. Subsequently, it was determined that the substance of this
transaction required the Company to remeasure the associated options and incur a
$13.3 million non-cash compensation charge while simultaneously increasing the
balance of common stock.
During 1995, additional loans of $686,000 were made to participants of the
accelerated option vesting program. These loans were used to pay the associated
tax liabilities arising from the exercise of the program's options. These loans
accrue interest at rates of 6.8% and 7.2%. Interest is due on the anniversary
date of the loans with the balance of the loans due on the second anniversary
date. The loans originally matured in January and April of 1997, but were
extended by the Company's Board of Directors in December 1996 for an additional
twelve months, thereby causing a new measurement date. As a result, the Company
remeasured the options associated with these loans and recorded a $4.7 million
non-cash compensation credit while simultaneously decreasing the balance of
common stock. All loans are secured by common stock.
The financial statements for 1996 have been restated to reflect the net non-cash
compensation charge of $8.6 million. Net loss per share increased $.54 as a
result of the restatement.
6. INCOME TAXES
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $112.5 million and research and development credit carryforwards
of $1.6 million for federal income tax purposes, which will begin to expire
between 2005 and 2012. Utilization of federal income tax carryforwards is
subject to certain limitations under Section 382 of the Internal Revenue Code of
1986, as amended.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 38,233 $ 28,555
Accruals for book purposes in excess of tax purposes 470 832
Research and development tax credit carryforward 1,571 1,147
Property and equipment basis differences 1,411 286
Other 136 (6)
-------- --------
Total deferred tax assets 41,821 30,814
Valuation allowance (41,821) (30,814)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
</TABLE>
Due to uncertainty of the Company's ability to generate taxable income needed to
realize its net deferred tax assets at December 31, 1997 and 1996, a valuation
allowance has been recognized for financial reporting purposes. The Company's
valuation allowance increased $11.0 million and $9.6 million for the years ended
December 31, 1997 and 1996, respectively.
32
<PAGE> 36
7. COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases, and furniture and equipment under capital leases. Future minimum
payments under these leases at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FOR THE YEARS ENDING DECEMBER 31: LEASES LEASES
- --------------------------------- ---------- ----------
<S> <C> <C>
1998 $3,725,545 $2,464,460
1999 358,511 995,200
2000 127,870 973,275
2001 8,931 864,234
2002 224 892,433
Thereafter -- 2,628,724
---------- ----------
Total minimum lease payments 4,221,081 $8,818,326
==========
Less amount representing interest 131,023
----------
Present value of net minimum capital lease obligations 4,090,058
Less current installments 3,643,457
----------
Capital lease obligations, less current installments $ 446,601
==========
</TABLE>
Total rent expense for the years ended December 31, 1997, 1996, and 1995 was
$1,597,662, $1,083,308, and $1,120,335, respectively.
8. NOTES RECEIVABLE FROM EMPLOYEES
The Company has made advances and loans to employees in connection with their
relocation to Washington State. Notes totaling $801,042 and $741,042 are with
the Company's Chief Executive Officer as of December 31, 1997 and 1996,
respectively. These loans have an interest rate set at 4.9% per annum, or the
minimum interest necessary to prevent each loan from being classified as a
"below market loan" under Section 7872 of the Internal Revenue Code of 1986, as
amended, but not to exceed 8.0% in any event. The officer has pledged 70,000
shares of common stock as collateral for these loans.
Other notes, which are unsecured, may be, in some circumstances, forgiven
ratably over four years and charged to expense.
Information with respect to the classification of employee notes receivable is
as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current $ 5,000 $ 20,000
Long-term 801,042 746,042
-------- --------
Total notes receivable from employees $806,042 $766,042
======== ========
</TABLE>
33
<PAGE> 37
9. BUSINESS SEGMENT INFORMATION
The Company primarily is involved in the treatment of AF. As such, the Company
operates entirely in the medical device and accessory business. Current markets
include clinical trials and sales activity in Europe and Hong Kong and clinical
trials in the United States. Information regarding the Company's revenues and
assets within specific geographic areas is set forth below. Amounts presented
for Europe include revenues relating to Hong Kong activity, which is not
considered to be significant for segregated disclosure. Corporate assets
represent cash, cash equivalents, and securities available-for-sale that are
held in the United States and Europe.
Geographic information for 1997:
<TABLE>
<CAPTION>
NORTH AMERICA EUROPE CONSOLIDATED
------------- ---------- ------------
<S> <C> <C> <C>
Revenues $ 451,020 $1,524,647 $ 1,975,667
============= ========== ============
Identifiable assets $ 10,670,566 $2,577,998 $ 13,248,564
============= ==========
Corporate assets 15,669,741
------------
Total assets $ 28,918,305
============
</TABLE>
Geographic information for 1996:
<TABLE>
<CAPTION>
NORTH AMERICA EUROPE CONSOLIDATED
------------- ---------- ------------
<S> <C> <C> <C>
Revenues from clinical trials $ 86,680 $ 218,925 $ 305,605
============= ========== ============
Identifiable assets $ 8,394,711 $1,935,506 $ 10,330,217
============= ==========
Corporate assets 35,586,670
------------
Total assets $ 45,916,887
============
</TABLE>
Geographic information for 1995:
<TABLE>
<CAPTION>
NORTH AMERICA EUROPE CONSOLIDATED
------------- ---------- ------------
<S> <C> <C> <C>
Revenues from clinical trials $ -- $ 25,488 $ 25,488
============= ========== ============
Identifiable assets $ 8,531,611 $ 609,335 $ 9,140,946
============= ==========
Corporate assets 18,328,631
------------
Total assets $ 27,469,577
============
</TABLE>
34
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the information under the captions "Election of
Directors," "Executive Officers," and "Certain Relationships and Related
Transactions" in the Company's Proxy Statement relating to its 1998 annual
meeting of stockholders (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the information under the captions "Election of
Directors" and "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the information under the captions "Election of
Directors," "Executive Compensation," and "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the information under the captions "Election of
Directors" and "Certain Relationships and Related Transactions" in the Proxy
Statement.
35
<PAGE> 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements and Schedules
The following Consolidated Financial Statements, Notes thereto, and Report of
Independent Auditors thereon are included in Part II, Item 8.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 21
Consolidated Balance Sheets 22
Consolidated Statements of Operations 23
Consolidated Statements of Stockholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26
</TABLE>
Financial Statement Schedules
There are no Financial Statement Schedules included in this report because they
are inapplicable or the requested information is shown in the consolidated
financial statements of the registrant or related notes thereto.
Exhibits
Exhibit No.
(i) 3.1 Restated Certificate of Incorporation
(iv) 3.2 Amended and Restated By-laws
(ii) 4.1 Rights Agreement, dated as of February 27, 1996,
between the registrant and First Interstate Bank of
Washington, N.A., as Rights Agent. (Exhibit 2.1)
(v) 4.2 Form of Stock Purchase Agreement between the
registrant and United States investors, dated July
28, 1997.
(v) 4.3 Form of Stock Purchase Agreement between the
registrant and United States investors, dated July
25, 1997.
(iv) 10.1 Executive Employment Agreement between the
registrant and Kurt C. Wheeler, dated April 1, 1995,
together with First Amendment thereto dated
September 30, 1996.
(iv) 10.2 Lease and related Agreement between Michael R.
Mastro and Redmond East Associates, and the
registrant, dated August 19, 1991 ("Lease"), as
amended by addendum dated August 19, 1991, and
amendments dated June 1, 1992 and October 15, 1992.
(iv) 10.3 Ninth Amendment to Lease between Carr Redmond
Corporation (Successor to Redmond East Associates)
and registrant dated January 31, 1997.
10.4 Restated 1990 Stock Option Plan
36
<PAGE> 40
(iv) 10.5 1994 Stock Option Plan for Nonemployee Directors
10.6 1996 Stock Option Plan for Nonemployee Directors
(iv) 10.7 Employment Agreement between the registrant and
Michel E. Lussier, dated August 17, 1994.
10.8 Second Amendment to Executive Employment Agreement
between the registrant and Kurt C. Wheeler dated
September 1, 1997, together with related Promissory
Note and Stock Pledge Agreement, each dated
September 1, 1997, issued to the registrant by Kurt
C. Wheeler
(iii) 10.9 Promissory Note, dated May 16, 1994, issued to the
registrant by John M. Adams (Exhibit 10.8)
(iii) 10.10 Form of Warrants to Purchase Stock issued to private
placement agents, together with schedule of actual
warrants (Exhibit 10.12)
(iii) 10.11 Agreement between Teleydne Microelectronics and the
registrant, dated March 17, 1993 (Exhibit 10.13)
(iii) 10.12 Form of Proprietary Information Agreement (Exhibit
10.15)
(iii) 10.13 Restated Stockholders Rights Agreement, dated August
17, 1993 (Exhibit 10.16)
(iii) 10.14 Form of Stock Repurchase Agreement, Promissory Note
and Stock Pledge Agreement, together with schedule
of actual agreements (Exhibit 10.17)
(iii) 10.15 Form of Indemnification Agreement for officers and
directors (Exhibit 10.18)
(iv) 10.16 Form of Senior Management Employment Agreement,
together with schedule of actual agreements.
10.17 Tenth Amendment to Lease between Carr Redmond
Corporation (Successor to Redmond East Associates)
and registrant, dated May 1, 1997.
(i) 21.1 Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (included on the signature page of
this Form 10-K)
27.1 Financial Data Schedule
- --------------------------
(i) Incorporated by reference to the registrant's Annual Report on Form 10-K
for the year ended December 31, 1995, as same Exhibit Number.
(ii) Incorporated by reference to the registrant's Registration Statement on
Form 8-A, as amended, filed March 1, 1996, as the indicated Exhibit
Number.
(iii) Incorporated by reference to the registrant's Registration Statement on
Form S-1, as amended, Registration No. 33-81048, as the indicated Exhibit
Number.
(iv) Incorporated by reference to the registrant's Annual Report on Form 10-K
for the year ended December 31, 1997, as same Exhibit Number.
(v) Incorporated by reference to the registrant's Current Report on Form 8-K,
filed August 11, 1997, as the indicated Exhibit Number.
Reports on Form 8-K
During the quarter ended December 31, 1997, no reports were filed by the Company
on Form 8-K.
37
<PAGE> 41
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, in the City of Redmond,
State of Washington, on the 27th day of March 1998.
INCONTROL, INC.
By: /s/ KURT C. WHEELER
--------------------------------
Kurt C. Wheeler
Chairman, President and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints Kurt C. Wheeler and Donald F. Seaton, III, and each of them, with full
power of substitution and full power to act without the other, as his true and
lawful attorney-in-fact and agent to act in his place and stead, and to execute
in the name and on behalf of each person, individually and in each capacity
stated below, and to file any and all amendments to this report, including any
and all other documents in connection therewith.
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed by the following persons in the capacities indicated below on the 27th
day of March 1998.
Signature Title
/s/ KURT C. WHEELER Chairman, President and Chief Executive Officer
- ----------------------------
Kurt C. Wheeler
/s/ DONALD F. SEATON, III Vice President, Finance, Chief Financial Officer
- ----------------------------
Donald F. Seaton, III and Secretary
/s/ ALAN D. FRAZIER Director
- ----------------------------
Alan D. Frazier
/s/ MARK B. KNUDSON Director
- ----------------------------
Mark B. Knudson
/s/ DONALD C. HARRISON Director
- ----------------------------
Donald C. Harrison
/s/ MICHAEL J. LEVINTHAL Director
- ----------------------------
Michael J. Levinthal
38
<PAGE> 42
EXHIBIT INDEX
Exhibits
Exhibit No.
(i) 3.1 Restated Certificate of Incorporation
(iv) 3.2 Amended and Restated By-laws
(ii) 4.1 Rights Agreement, dated as of February 27, 1996,
between the registrant and First Interstate Bank
of Washington, N.A., as Rights Agent. (Exhibit
2.1)
(v) 4.2 Form of Stock Purchase Agreement between
the registant and United States investors, dated
July 28, 1997.
(v) 4.3 Form of Stock Purchase Agreement between
the registant and United States investors, dated
July 25, 1997.
(iv) 10.1 Executive Employment Agreement between the
registrant and Kurt C. Wheeler, dated April 1,
1995, together with First Amendment thereto dated
September 30, 1996.
(iv) 10.2 Lease and related Agreement between Michael R.
Mastro and Redmond East Associates, and the
registrant, dated August 19, 1991 ("Lease"), as
amended by addendum dated August 19, 1991, and
amendments dated June 1, 1992 and October 15,
1992.
(iv) 10.3 Ninth Amendment to Lease between Carr Redmond
Corporation (Successor to Redmond East Associates)
and registrant dated January 31, 1997.
10.4 Restated 1990 Stock Option Plan
(iv) 10.5 1994 Stock Option Plan for Nonemployee Directors
10.6 1996 Stock Option Plan for Nonemployee Directors
(iv) 10.7 Employment Agreement between the registrant and
Michel E. Lussier, dated August 17, 1994.
10.8 Second Amendment to Executive Employment Agreement
between the registrant and Kurt C. Wheeler dated
September 1, 1997, together with related
Promissory Note and Stock Pledge Agreement, each
dated September 1, 1997, issued to the registrant
by Kurt C. Wheeler
(iii) 10.9 Promissory Note, dated May 16, 1994, issued to the
registrant by John M. Adams (Exhibit 10.8)
(iii) 10.10 Form of Warrants to Purchase Stock issued to
private placement agents, together with schedule
of actual warrants (Exhibit 10.12)
(iii) 10.11 Agreement between Teleydne Microelectronics and
the registrant, dated March 17, 1993 (Exhibit
10.13)
(iii) 10.12 Form of Proprietary Information Agreement (Exhibit
10.15)
(iii) 10.13 Restated Stockholders Rights Agreement, dated
August 17, 1993 (Exhibit 10.16)
(iii) 10.14 Form of Stock Repurchase Agreement, Promissory
Note and Stock Pledge Agreement, together with
schedule of actual agreements (Exhibit 10.17)
39
<PAGE> 43
(iii) 10.15 Form of Indemnification Agreement for officers and
directors (Exhibit 10.18)
(iv) 10.16 Form of Senior Management Employment Agreement,
together with schedule of actual agreements.
10.17 Tenth Amendment to Lease between Carr Redmond
Corporation (Successor to Redmond East Associates)
and registrant dated May 1, 1997.
(i) 21.1 Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (included on the signature page
of this Form 10-K)
27.1 Financial Data Schedule
- --------------------------
(i) Incorporated by reference to the registrant's Annual Report on Form 10-K
for the year ended December 31, 1995, as same Exhibit Number.
(ii) Incorporated by reference to the registrant's Registration Statement on
Form 8-A, as amended, filed March 1, 1996, as the indicated Exhibit
Number.
(iii) Incorporated by reference to the registrant's Registration Statement on
Form S-1, as amended, Registration No. 33-81048, as the indicated Exhibit
Number.
(iv) Incorporated by reference to the registrant's Annual Report on Form 10-K
for the year ended December 31, 1997, as same Exhibit Number.
(v) Incorporated by reference to the registrant's Current Report on Form 8-K,
filed August 11, 1997, as the indicated Exhibit Number.
40
<PAGE> 1
EXHIBIT 10.4
INCONTROL, INC.COMPANYINCONTROL, INC.COMPANYINCONTROL, INC.
RESTATED 1990 STOCK OPTION PLAN
AS AMENDED AND RESTATED AS OF SEPTEMBER 17, 1997
SECTION 1. PURPOSES
The purpose of the InControl, Inc. Restated 1990 Stock Option Plan (this
"Plan") is to provide a means whereby selected employees, directors, officers,
agents, consultants, advisors and independent contractors of InControl, Inc.
(the "Company"), or of any parent or subsidiary (as defined in subsection 5.8
and referred to hereinafter as "related corporations") thereof, may be granted
incentive stock options and/or nonqualified stock options to purchase the Common
Stock (as defined in Section 3) of the Company, in order to attract and retain
the services or advice of such employees, directors, officers, agents,
consultants, advisors and independent contractors and to provide added incentive
to such persons by encouraging stock ownership in the Company.
SECTION 2. ADMINISTRATION
This Plan shall be administered by the Board of Directors of the Company
(the "Board") or a committee or committees (which term includes subcommittees)
appointed by and consisting of two or more members of, the Board. The
administrator of this Plan shall hereinafter be referred to as the "Plan
Administrator."
If and so long as the Common Stock is registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the Board shall consider in selecting the Plan Administrator and the membership
of any committee acting as Plan Administrator of the Plan with respect to any
persons subject or likely to become subject to Section 16 under the Exchange Act
the provisions regarding (a) "outside directors" as contemplated by Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and (b)
"nonemployee directors" as contemplated by Rule 16b-3 under the Exchange Act.
The Board may delegate the responsibility for administering the Plan with
respect to designated classes of eligible Participants to different committees,
subject to such limitations as the Board deems appropriate. Committee members
shall serve for such term as the Board may determine, subject to removal by the
Board at any time.
2.1 PROCEDURES
The Board shall designate one of the members of the Plan Administrator
as chairman. The Plan Administrator may hold meetings at such times and places
as it shall determine. The acts of a majority of the members of the Plan
Administrator present at meetings at which a quorum exists, or acts reduced to
or approved in writing by all Plan Administrator members, shall be valid acts of
the Plan Administrator.
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InControl, Inc. Restated 1990 Stock Option Plan Page 1
<PAGE> 2
2.2 RESPONSIBILITIES
Except for the terms and conditions explicitly set forth in this Plan,
the Plan Administrator shall have the authority, in its discretion, to determine
all matters relating to the options to be granted under this Plan, including
selection of the individuals to be granted options, the number of shares to be
subject to each option, the exercise price, and all other terms and conditions
of the options. Grants under this Plan need not be identical in any respect,
even when made simultaneously. The interpretation and construction by the Plan
Administrator of any terms or provisions of this Plan or any option issued
hereunder, or of any rule or regulation promulgated in connection herewith,
shall be conclusive and binding on all interested parties, so long as such
interpretation and construction with respect to incentive stock options
correspond to the requirements of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder and any amendments
thereto.
2.3 RULE 16B-3 COMPLIANCE AND BIFURCATION OF PLAN
Notwithstanding anything in this Plan to the contrary, the Board, in its
absolute discretion, may bifurcate this Plan so as to restrict, limit or
condition the application of any provision of this Plan to participants who are
subject to Section 16 of the Exchange Act without so restricting, limiting or
conditioning this Plan with respect to other participants.
SECTION 3. SHARES SUBJECT TO THE PLAN
The shares subject to this Plan shall be the Company's Common Stock, par
value $.01 per share (the "Common Stock"), currently authorized but unissued or
now held or subsequently acquired by the Company as treasury shares. Subject to
adjustment as provided in Section 7, the aggregate amount of Common Stock to be
delivered upon the exercise of all options granted under this Plan shall not
exceed 5,425,000 shares1. If any option granted under this Plan shall expire or
be surrendered, exchanged for another option, cancelled or terminated for any
reason without having been exercised in full, the unpurchased shares subject
thereto shall thereupon again be available for purposes of this Plan, including
for replacement options which may be granted in exchange for such expired,
surrendered, exchanged, cancelled or terminated options.
SECTION 4. ELIGIBILITY
An incentive stock option may be granted only to an individual who, at
the time the option is granted, is an employee of the Company or a related
corporation. A nonqualified stock option may be granted to any employee,
director, officer, agent, consultant, advisor or independent contractor of the
Company or any related corporation, whether an individual or an entity. Any
party to whom an option is granted under this Plan shall be referred to
hereinafter as an "Optionee."
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(1) As constituted on January 1, 1997.
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InControl, Inc. Restated 1990 Stock Option Plan Page 2
<PAGE> 3
SECTION 5. TERMS AND CONDITIONS OF OPTIONS
Options granted under this Plan shall be evidenced by written agreements
which shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and which are not inconsistent with this
Plan. Notwithstanding the foregoing, options shall include or incorporate by
reference the following terms and conditions:
5.1 NUMBER OF SHARES AND PRICE
The maximum number of shares that may be purchased pursuant to the
exercise of each option and the price per share at which such option is
exercisable (the "exercise price") shall be as established by the Plan
Administrator; provided, however, that the maximum number of shares with respect
to which an option or options may be granted to any Optionee in any one fiscal
year of the Company shall not exceed 200,000 shares (the "Maximum Annual
Optionee Grant"); provided further that the Plan Administrator shall act in good
faith to establish an exercise price which shall be not less than the fair
market value per share of the Common Stock at the time the option is granted and
not less than the par value per share of the Common Stock at the time the option
is granted with respect to nonqualified stock options and also provided that,
with respect to incentive stock options granted to greater than 10%
Stockholders, the exercise price shall be as required by subsection 6.1.
5.2 TERM AND MATURITY
Subject to the restrictions contained in Section 6 with respect to
granting incentive stock options to greater than 10% Stockholders, the term of
each incentive stock option shall be as established by the Plan Administrator
and, if not so established, shall be 10 years from the date it is granted but in
no event shall it exceed 10 years. The term of each nonqualified stock option
shall be as established by the Plan Administrator and, if not so established,
shall be 10 years. To ensure that the Company or related corporation will
achieve the purpose and receive the benefits contemplated by this Plan, any
option granted to any Optionee hereunder shall, unless the condition of this
sentence is waived or modified in the agreement evidencing the option or by
resolution adopted at any time by the Plan Administrator, be exercisable
according to the following schedule:
<TABLE>
<CAPTION>
PERIOD OF OPTIONEE'S CONTINUOUS
RELATIONSHIP WITH THE COMPANY OR RELATED PORTION OF
CORPORATION FROM THE DATE TOTAL OPTION WHICH
THE OPTION IS GRANTED IS EXERCISABLE
------------------------------------------ ------------------
<S> <C>
Less than twelve months 0%
Twelve months 25%
Twenty-four months 50%
Thirty-six months 75%
Forty-eight months or greater 100%
</TABLE>
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InControl, Inc. Restated 1990 Stock Option Plan Page 3
<PAGE> 4
5.3 EXERCISE
Subject to the vesting schedule described in subsection 5.2, each option
may be exercised in whole or in part at any time and from time to time;
provided, however, that no fewer than 100 shares (or the remaining shares then
purchasable under the option, if less than 100 shares) may be purchased upon any
exercise of any option hereunder and that only whole shares will be issued
pursuant to the exercise of any option and that the exercise price shall not be
less than the par value per share of the Common Stock at the time the option is
exercised. An Option shall be exercised by delivery to the Company of notice of
the number of shares with respect to which the option is exercised, together
with payment of the exercise price.
5.4 PAYMENT OF EXERCISE PRICE
Payment of the option exercise price shall be made in full at the time
the notice of exercise of the option is delivered to the Company and shall be in
cash, bank certified or cashier's check, or personal check (unless at the time
of exercise the Plan Administrator in a particular case determines not to accept
a personal check) for the shares being purchased.
The Plan Administrator can determine at any time before exercise that
additional forms of payment will be permitted. To the extent permitted by
applicable laws and regulations (including, but not limited to, federal tax and
securities laws and regulations and state corporate law), and unless the Plan
Administrator determines otherwise, an option also may be exercised, either
singly or in combination with one or more of the alternative forms of payment
authorized by this Section 5.4, by:
(a) tendering (either actually or by attestation) shares of
Common Stock of the Company held by an Optionee having a fair market value equal
to the exercise price, such fair market value to be determined in good faith by
the Plan Administrator; provided, however, that payment in stock held by an
Optionee shall not be made unless the stock shall have been owned by the
Optionee for a period of at least six months (or any shorter period necessary to
avoid a charge to the Company's earnings for financial accounts purposes); or
(b) delivery of a properly executed exercise notice, together
with irrevocable instructions to a broker, all in accordance with the
regulations of the Federal Reserve Board, to promptly deliver to the Company the
amount of sale or loan proceeds to pay the exercise price and any federal, state
or local withholding tax obligations that may arise in connection with the
exercise.
In addition, the exercise price for shares purchased under an option may
be paid, either singly or in combination with one or more of the alternative
forms of payment authorized by this Section 5.4, by (y) delivery of a
full-recourse promissory note executed by the Optionee in an amount which shall
not exceed that portion of the exercise price which is in excess of the amount
determined to be stated capital pursuant to Section 154 of the Delaware General
Corporation Law; provided that (i) such note delivered in connection with an
incentive stock option shall, and such note delivered in connection with a
nonqualified stock option may, in the
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InControl, Inc. Restated 1990 Stock Option Plan Page 4
<PAGE> 5
sole discretion of the Plan Administrator, bear interest at a rate specified by
the Plan Administrator but in no case less than the rate required to avoid
imputation of interest (taking into account any exceptions to the imputed
interest rules) for federal income tax purposes, (ii) the Plan Administrator in
its sole discretion shall specify the term and other provisions of such note at
the time an incentive stock option is granted or at any time prior to exercise
of a nonqualified stock option, (iii) the Plan Administrator may require that
the Optionee pledge to the Company for the purpose of securing the payment of
such note the shares of Common Stock to be issued to the Optionee upon exercise
of the option and may require that the certificate representing such shares be
held in escrow in order to perfect the Company's security interest, and (iv) the
Plan Administrator in its sole discretion may at any time restrict or rescind
this right upon notification to the Optionee or (z) such other consideration as
the Plan Administrator may permit.
5.5 WITHHOLDING TAX REQUIREMENT
The Company or any related corporation shall have the right to retain
and withhold from any payment of cash or shares of Common Stock under this Plan
the amount of taxes required by any government to be withheld or otherwise
deducted and paid with respect to such payment. At its discretion, the Company
may require an Optionee receiving shares of Common Stock to reimburse the
Company for any such taxes required to be withheld by the Company and withhold
any distribution in whole or in part until the Company is so reimbursed. In lieu
thereof, the Company shall have the right to withhold from any other cash
amounts due or to become due from the Company to the Optionee an amount equal to
such taxes. The Company may also retain and withhold or the Optionee may elect,
subject to approval by the Company at its sole discretion, to have the Company
retain and withhold a number of shares having a market value not less than the
amount of such taxes required to be withheld by the Company to reimburse the
Company for any such taxes and cancel (in whole or in part) any such shares so
withheld.
5.6 HOLDING PERIODS
5.6.1 SECTION 16 OF THE EXCHANGE ACT
Shares of Common Stock obtained upon the exercise of any option granted
under this Plan may not be sold by persons subject to Section 16 of the Exchange
Act until six (6) months after the date the option was granted; provided that
this restriction shall lapse to the extent the vesting of an option is
accelerated pursuant to Section 7.
5.6.2 TAXATION OF STOCK OPTIONS
In order to obtain certain tax benefits afforded to incentive stock
options under Section 422 of the Code, an Optionee must hold the shares issued
upon the exercise of an incentive stock option for two years after the date of
grant of the option and one year from the date of exercise. An Optionee may be
subject to the alternative minimum tax at the time of exercise of an incentive
stock option.
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InControl, Inc. Restated 1990 Stock Option Plan Page 5
<PAGE> 6
Tax advice should be obtained by an Optionee when exercising any option
and prior to the disposition of the shares issued upon the exercise of any
option.
5.7 TRANSFERABILITY OF OPTIONS
No option granted under the Plan may be assigned, pledged or transferred
by the Optionee other than by will or by the laws of descent and distribution,
and during the Optionee's lifetime, such options may be exercised only by the
Optionee or a permitted assignee or transferee of the Optionee (as provided
below). Notwithstanding the foregoing, and to the extent permitted by Section
422 of the Code, the Plan Administrator, in its sole discretion, may permit such
assignment, transfer and exercisability and may permit an Optionee to designate
a beneficiary who may exercise the option after the Optionee's death; provided,
however, that any option so assigned or transferred shall be subject to all the
same terms and conditions contained in the instrument evidencing the option.
5.8 TERMINATION OF RELATIONSHIP
If the Optionee's relationship with the Company or any related
corporation ceases for any reason other than termination for Cause (as defined
in Section 7.5.1), death or total disability, and unless by its terms the option
sooner terminates or expires, then the portion of the option which is not
exercisable at the time of such cessation shall terminate immediately upon such
cessation, unless the Plan Administrator determines otherwise, and the portion
of the option which is exercisable at the time of such cessation (i) may be
exercised for a three-month period after such cessation and (ii) shall terminate
at the end of such period following such cessation as to all shares for which it
has not theretofore been exercised, unless the Plan Administrator determines
otherwise. If, in the case of an incentive stock option, an Optionee's
relationship with the Company or any related corporation changes (i.e., from
employee to nonemployee, such as a consultant), such change shall constitute a
termination of an Optionee's employment with the Company or any related
corporation and the Optionee's incentive stock option shall terminate in
accordance with this subsection 5.8. Upon the expiration of the three-month
period following cessation of employment in the case of an incentive stock
option, or at any time prior to the expiration of the option in the case of a
nonqualified stock option, the Plan Administrator shall have sole discretion in
a particular circumstance to extend the exercise period following such cessation
to any date up to the termination or expiration of the option. If, however, in
the case of an incentive stock option, the Optionee does not exercise the
Optionee's option within three months after cessation of employment, the option
will no longer qualify as an incentive stock option under the Code.
If an Optionee's relationship with the Company or any related
corporation ceases because of a total disability, the portion of Optionee's
option that is exercisable at the time of such cessation shall not terminate or,
in the case of an incentive stock option, cease to be treated as an incentive
stock option until the end of the 12-month period following such cessation
(unless by its terms it sooner terminates or expires). As used in this Plan, the
term "total disability" refers to a mental or physical impairment of the
Optionee which is expected to result in death or which has lasted or is expected
to last for a continuous period of 12 months
- --------------------------------------------------------------------------------
InControl, Inc. Restated 1990 Stock Option Plan Page 6
<PAGE> 7
or more and which causes the Optionee to be unable, in the opinion of the
Company and two independent physicians, to perform his or her duties for the
Company and to be engaged in any substantial gainful activity. Total disability
shall be deemed to have occurred on the first day after the Company and the two
independent physicians have furnished their opinion of total disability to the
Plan Administrator.
Options granted under the Plan shall not be affected by any change of
relationship with the Company so long as the Optionee continues to be an
employee, director, officer, agent, consultant, advisor or independent
contractor of the Company or of a related corporation; however, a change in an
Optionee's status from an employee to a nonemployee (e.g., consultant or
independent contractor) shall result in the termination of an outstanding
incentive stock option held by such Optionee. The Plan Administrator, in its
absolute discretion, may determine all questions of whether particular leaves of
absence constitute a termination of services; provided, however, that with
respect to incentive stock options, such determination shall be subject to any
requirements contained in the Code. The foregoing notwithstanding, with respect
to incentive stock options, employment shall not be deemed to continue beyond
the first 90 days of such leave, unless the Optionee's reemployment rights are
guaranteed by statute or by contract.
As used herein, the term "related corporation," when referring to a
subsidiary corporation, shall mean any corporation (other than the Company) in,
at the time of the granting of the option, an unbroken chain of corporations
ending with the Company, if stock possessing 50% or more of the total combined
voting power of all classes of stock of each of the corporations other than the
Company is owned by one of the other corporations in such chain. When referring
to a parent corporation, the term "related corporation" shall mean any
corporation in an unbroken chain of corporations ending with the Company if, at
the time of the granting of the option, each of the corporations other than the
Company owns stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
5.9 DEATH OF OPTIONEE
If an Optionee dies while he or she has a relationship with the Company
or any related corporation or within the three-month period (or 12-month period
in the case of totally disabled Optionees) following cessation of such
relationship, any option held by such Optionee to the extent that the Optionee
would have been entitled to exercise such option, may be exercised within one
year after his or her death by the personal representative of his or her estate
or by the person or persons to whom the Optionee's rights under the option shall
pass (i) by will or by the applicable laws of descent and distribution or (ii)
by a designation or transfer pursuant to Section 5.7.
5.10 NO STATUS AS STOCKHOLDER
Neither the Optionee nor any party to which the Optionee's rights and
privileges under the option may pass shall be, or have any of the rights or
privileges of, a Stockholder of the
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InControl, Inc. Restated 1990 Stock Option Plan Page 6
<PAGE> 8
Company with respect to any of the shares issuable upon the exercise of any
option granted under this Plan unless and until such option has been exercised.
5.11 CONTINUATION OF RELATIONSHIP
Nothing in this Plan or in any option shall confer upon any Optionee any
right to continue in the employ or other relationship of the Company or of a
related corporation, or to interfere in any way with the right of the Company or
of any such related corporation to terminate his or her employment or other
relationship with the Company at any time.
5.12 MODIFICATION AND AMENDMENT OF OPTION
Subject to the requirements of Code Section 422 with respect to
incentive stock options and to the terms and conditions and within the
limitations of this Plan, the Plan Administrator may modify or amend any
outstanding option granted under this Plan. The modification or amendment of an
outstanding option shall not, without the consent of the Optionee, impair or
diminish any of his or her rights or any of the obligations of the Company under
such option. Except as otherwise provided in this Plan, no outstanding option
shall be terminated without the consent of the Optionee.
5.13 LIMITATION ON VALUE FOR INCENTIVE STOCK OPTIONS
As to all incentive stock options granted under the terms of this Plan,
to the extent that the aggregate fair market value of the shares (determined at
the time the incentive stock option is granted) with respect to which incentive
stock options are exercisable for the first time by the Optionee during any
calendar year (under this Plan and all other incentive stock option plans of the
Company, a related corporation or a predecessor corporation) exceeds $100,000,
such options shall be treated as nonqualified stock options, to the extent
required by Section 422 of the Code.
5.14 FORFEITURE CONDITIONS
The Committee may provide in an option agreement for conditions of
forfeiture of an employee's rights with respect to an option in the event of (i)
the termination of employment of the employee for "cause" (as defined in an
option agreement), (ii) the employee's breach of such restrictive covenants
(e.g., noncompetition and confidentiality restrictions) as may apply to the
employee, or (iii) the employee's having engaged in an activity that is
detrimental to the Company (including, without limitation, criminal activity or
accepting employment with a competitor of the Company). Such conditions of
forfeiture may include, in the discretion of the Committee, (a) suspension or
cancellation of the employee's right to exercise an option (whether or not then
otherwise exercisable) or (b) with respect to shares of Common Stock issued upon
exercise of an option during the period beginning sixty days before the date of
the employee's termination of employment with the Company and ending twelve
months after such date, either (1) cancellation of the shares so issued (and
repayment to the employee of the full purchase price paid for such shares) or
(2) requiring the employee to pay to the Company in
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InControl, Inc. Restated 1990 Stock Option Plan Page 8
<PAGE> 9
cash an amount equal to the gain realized by the employee upon exercise of such
option (measured at the date of exercise).
SECTION 6. GREATER THAN 10% STOCKHOLDERS
6.1 EXERCISE PRICE AND TERM OF INCENTIVE STOCK OPTIONS
If an incentive stock option is granted under this Plan to any employee
who own more than 10% of the total combined voting power of all classes of stock
of the Company or any related corporation, the term of such incentive stock
options shall not exceed five years and the exercise price shall be not less
than 110% of the fair market value of the shares at the time the incentive stock
option is granted. This provision shall control notwithstanding any contrary
terms contained in an option agreement or any other document.
6.2 ATTRIBUTION RULE
For purposes of subsection 6.1, in determining stock ownership, an
employee shall be deemed to own the shares owned, directly or indirectly, by or
for his or her brothers, sisters, spouse, ancestors and lineal descendants.
Shares owned, directly or indirectly, by or for a corporation, partnership,
estate or trust shall be deemed to be owned proportionately by or for its
Stockholders, partners or beneficiaries. If an employee or a person related to
the employee owns an unexercised option or warrant to purchase shares of the
Company, the shares subject to that portion of the option or warrant which is
unexercised shall not be counted in determining stock ownership. For purposes of
this Section 6, shares owned by an employee shall include all shares actually
issued and outstanding immediately before the grant of the incentive stock
option to the employee.
SECTION 7. ADJUSTMENTS
7.1 ADJUSTMENT OF SHARES
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a cash dividend,
or other change in the Company's corporate or capital structure results in (a)
the outstanding shares, or any securities exchanged therefor or received in
their place, being exchanged for a different number or class of securities of
the Company or of any other corporation or (b) new, different or additional
securities of the Company or of any other corporation being received by the
holders of shares of Common Stock of the Company, then the Plan Administrator
shall make proportional adjustments in (i) the maximum number and class of
securities subject to the Plan as set forth in Section 3, (ii) the maximum
number and class of securities that may be made subject to options granted to
any individual participant as set forth in Section 5.1, and (iii) the number and
class of securities that are subject to any outstanding option and the per share
price of such securities, without any change in the aggregate price to be paid
therefor. The determination by the Plan Administrator as to the terms of any of
the foregoing adjustments shall be conclusive and binding.
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InControl, Inc. Restated 1990 Stock Option Plan Page 9
<PAGE> 10
7.2 CHANGE IN CONTROL
Except as otherwise provided in the instrument that evidences the
option, in the event of any Change in Control, each option that is at the time
outstanding shall automatically accelerate so that each such option shall,
immediately prior to the specified effective date for the Change in Control,
become 100% vested, except that such acceleration will not occur, if in the
opinion of the Company's accountants, it would render unavailable "pooling of
interest" accounting for a Change in Control that would otherwise qualify for
such accounting treatment. Such option shall not so accelerate, however, if and
to the extent that (a) such option is, in connection with the Change in Control,
either to be assumed by the successor corporation or parent thereof (the
"Successor Corporation") or to be replaced with a comparable award for the
purchase of shares of the capital stock of the Successor Corporation or (b) such
option is to be replaced with a cash incentive program of the Successor
Corporation that preserves the spread existing at the time of the Change in
Control and provides for subsequent payout in accordance with the same vesting
schedule applicable to such option. The determination of comparability under
clause (a) above shall be made by the Plan Administrator, and its determination
shall be conclusive and binding. All such options shall terminate and cease to
remain outstanding immediately following the consummation of the Change in
Control, except to the extent assumed by the Successor Corporation. Any such
options that are assumed or replaced in the Change in Control and do not
otherwise accelerate at that time shall be accelerated in the event the
Optionee's employment or services should subsequently terminate within two years
following such Change in Control, unless such employment or services are
terminated by the Successor Corporation for Cause or by the Optionee voluntarily
without Good Reason.
7.3 FURTHER ADJUSTMENT OF OPTIONS
Subject to the preceding Section 7.2, the Plan Administrator shall have
the discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or Change in Control of the Company to take such
further action as it determines to be necessary or advisable, and fair and
equitable to participants, with respect to options. Such authorized action may
include (but shall not be limited to) establishing, amending or waiving the
type, terms, conditions or duration of, or restrictions on, options so as to
provide for earlier, later, extended or additional time for exercise, lifting
restrictions and other modifications, and the Plan Administrator may take such
actions with respect to all participants, to certain categories of participants
or only to individual participants. The Plan Administrator may take such actions
before or after granting options to which the action relates and before or after
any public announcement with respect to such sale, merger, consolidation,
reorganization, liquidation or change in control that is the reason for such
action.
7.4 LIMITATIONS
The grant of options will in no way affect the Company's right to
adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
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InControl, Inc. Restated 1990 Stock Option Plan Page 10
<PAGE> 11
7.5 DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set
forth below:
7.5.1 CAUSE
"Cause" means dishonesty, fraud, misconduct, unauthorized use or
disclosure of confidential information or trade secrets, or conviction or
confession of a crime punishable by law (except minor violations), in each case
as determined by the Plan Administrator, and its determination shall be
conclusive and binding.
7.5.2 CHANGE IN CONTROL
"Change in Control" means any of the following events:
(a) A change in the Board such that a majority of the seats
(other than vacant seats) on the Board have been occupied by individuals who
were neither (i) nominated or appointed by a majority of the Incumbent Directors
nor (b) nominated or appointed by directors so nominated or appointed.
"Incumbent Director" means a member of the Board who has been either (x)
nominated by a majority of the directors of the Company then in office or (y)
appointed by directors so nominated, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board.
(b) The acquisition (whether directly or indirectly, beneficially
or of record) by any Person of (i) fifteen percent (15%) or more of the combined
voting power of the then outstanding voting securities of the Company entitled
to vote generally in the election of directors, which acquisition is not
approved in advance by a majority of the Incumbent Directors; or (ii)
thirty-three percent (33%) or more of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors, which acquisition has been approved in advance by a
majority of the Incumbent Directors; provided, however, that the following
acquisitions shall not constitute a Change in Control: (x) any acquisition by
the Company, (y) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any company controlled by the Company,
or (z) any acquisition by any company pursuant to a reorganization, merger or
consolidation, if, following such reorganization, merger or consolidation, the
conditions described in clauses (i), (ii) and (iii) of the following subsection
(c) are satisfied; or
(c) Approval by the shareholders of the Company of a
reorganization, merger or consolidation in which the Company is not the
continuing or surviving corporation, or pursuant to which shares of the
Company's Common Stock are converted into cash, securities or other property,
unless following such reorganization, merger or consolidation (i) at least
sixty-six and two-thirds percent (66-2/3%) of the then outstanding shares of
common
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InControl, Inc. Restated 1990 Stock Option Plan Page 11
<PAGE> 12
stock of the company resulting from such reorganization, merger or consolidation
and the combined voting power of the then outstanding voting securities of such
company entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners of the Company's voting
securities immediately prior to such reorganization, merger or consolidation,
(ii) no Person (excluding the Company, any employee benefit plan (or related
trust) of the Company or such company resulting from such reorganization, merger
or consolidation and any Person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, thirty-three
percent (33%) or more of the Company's voting securities) beneficially owns,
directly or indirectly, thirty-three percent (33%) or more of, respectively, the
then outstanding shares of common stock of the company resulting from such
reorganization, merger or consolidation or the combined voting power of the then
outstanding voting securities of such company entitled to vote generally in the
election of directors, and (iii) at least a majority of the members of the board
of directors of the company resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of the execution
of the initial agreement providing for such reorganization, merger or
consolidation; or
(d) Approval by the shareholders of the Company of (i) any plan
or proposal for liquidation or dissolution of the Company or (ii) any sale,
lease, exchange or other transfer in one transaction or a series of transactions
of all or substantially all of the assets of the Company other than to a company
with respect to which following such sale or other disposition (A) at least
sixty-six and two-thirds percent (66-2/3%) of the then outstanding shares of
common stock of such company and the combined voting power of the then
outstanding voting securities of such company entitled to vote generally in the
election of directors is then beneficially owned, directly or indirectly, by all
or substantially all of the individuals and entities who were the beneficial
owners of the Company's voting securities immediately prior to such sale or
other disposition, (B) no Person (excluding the Company and any employee benefit
plan (or related trust) of the Company or such company and any Person
beneficially owning, immediately prior to such sale or other disposition,
directly or indirectly, thirty-three percent (33%) or more of the Company's
voting securities) beneficially owns, directly or indirectly, thirty-three
percent (33%) or more of, respectively, the then outstanding shares of common
stock of such company and the combined voting power of the then outstanding
voting securities of such company entitled to vote generally in the election of
directors, and (C) at least a majority of the members of the board of directors
of such company were approved by a majority of the Incumbent Board at the time
of the execution of the initial agreement or action of the Board providing for
such sale or other disposition of assets of the Company.
7.5.3 GOOD REASON
"Good Reason" means the occurrence of any of the following events or
conditions and the failure of the Successor Corporation to cure such event or
condition within 30 days after receipt of written notice by the Optionee:
- --------------------------------------------------------------------------------
InControl, Inc. Restated 1990 Stock Option Plan Page 12
<PAGE> 13
"Good Reason" means, without the Optionee's written consent:
(a) (i) the assignment to the Optionee of duties, or limitation of
the Optionee's responsibilities, inconsistent with the Optionee's
title, position, duties, responsibilities and status with the
Company or any related corporation that employs the Optionee as
such duties and responsibilities existed immediately prior to the
date of the Change in Control, or (ii) removal of the Optionee
from, or failure to re-elect the Optionee to, the Optionee's
positions with the Company or any related corporation that
employs the Optionee immediately prior to the Change in Control,
except in connection with the involuntary termination of the
Optionee's employment by the Company for Cause or as a result of
the Optionee's death or disability, as defined by the Plan
Administrator; or
(b) failure by the Company to pay, or reduction by the Company of,
the Optionee's annual base salary, as reflected in the Company's
payroll records for the Optionee's last pay period immediately
prior to the Change in Control;
(c) the relocation of the principal place of the Optionee's
employment to a location that is more than 25 miles further from
the Optionee's principal residence than such principal place of
employment immediately prior to the Change in Control; or
(d) the breach by the Company of any material provision of any
material agreement between the Optionee and the Company.
7.6 FRACTIONAL SHARES
In the event of any adjustment in the number of shares covered by any
option, any fractional shares resulting from such adjustment shall be
disregarded and each such option shall cover only the number of full shares
resulting from such adjustment.
7.7 DETERMINATION OF BOARD TO BE FINAL
All Section 7 adjustments shall be made by the Board, and its
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive. Unless an Optionee agrees otherwise, any
change or adjustment to an incentive stock option shall be made in such a manner
so as not to constitute a "modification" as defined in Code Section 425(h) and
so as not to cause his or her incentive stock option issued hereunder to fail to
continue to qualify as an incentive stock option as defined in Code Section
422(b).
SECTION 8. SECURITIES REGULATION
Shares shall not be issued with respect to an option granted under this
Plan unless the exercise of such option and the issuance and delivery of such
shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, any applicable state securities laws, the
Securities Act of 1933, as amended, the Exchange Act, the rules and
- --------------------------------------------------------------------------------
InControl, Inc. Restated 1990 Stock Option Plan Page 13
<PAGE> 14
regulations promulgated thereunder, and the requirements of any stock exchange
upon which the shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance, including
the availability, if applicable, of an exemption from registration for the
issuance and sale of any shares hereunder.
SECTION 9. AMENDMENT AND TERMINATION
9.1 BOARD ACTION
The Board may at any time suspend, amend or terminate this Plan,
provided that, to the extent required for compliance with Section 422 of the
Code or Section 162(m) of the Code or by any applicable law or regulation, the
Company's Stockholders must approve any amendment which will:
(a) increase the total number of shares that may be issued under
this Plan;
(b) modify the class of participants eligible for participation
in this Plan; or
(c) otherwise require Stockholder approval under any applicable
law or regulation.
Such Stockholder approval must be obtained (i) within 12 months of the
adoption by the Board of such amendment.
Any amendment made to this Plan since its original adoption which would
constitute a "modification" to incentive stock options outstanding on the date
of such amendment, shall not be applicable to such outstanding incentive stock
options, but shall have prospective effect only, unless the Optionee agrees
otherwise.
9.2 AUTOMATIC TERMINATION
Unless sooner terminated by the Board, this Plan shall terminate ten
years from the earlier of (a) the date on which this Plan is adopted by the
Board or (b) the date on which this Plan is approved by the Stockholders of the
Company. No option may be granted after such termination or during any
suspension of this Plan. The amendment or termination of this Plan shall not,
without the consent of the option holder, impair or diminish any rights or
obligations under any option theretofore granted under this Plan.
SECTION 10. EFFECTIVENESS OF THIS PLAN
This Plan shall become effective upon adoption by the Board so long as
it is approved by the Company's Stockholders at any time within 12 months of
such adoption of this Plan or, if earlier, and to the extent required for
compliance with Rule 16b-3 under the Exchange Act, at the next annual meeting of
Stockholders after adoption by the Board.
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InControl, Inc. Restated 1990 Stock Option Plan Page 14
<PAGE> 15
Original Plan adopted by the Board of Directors on November 16, 1990 and
approved by the Stockholders on December 14, 1990; restated by the Board of
Directors on May 4, 1993 and approved by the Stockholders on May 4, 1993;
restated by the Board of Directors on December 13, 1993 and approved by the
Stockholders on December 27, 1993; restated by the Board of Directors on June 1,
1994 and approved by the Stockholders on June 29, 1994; amended and restated by
the Board of Directors on February 2, 1995 and approved by the Stockholders on
May 9, 1995; amended and restated by the Board of Directors on February 27, 1996
and approved by the Stockholders on May 7, 1996. Amended and restated by the
Board on September 24, 1996; no Stockholder approval required. Amended and
restated by the Board on January 8, 1997 to be effective as of January 1, 1997;
no Stockholder approval required. Amended and restated by the Board of Directors
on February 25, 1997 and approved by the Stockholders on May 15, 1997. Amended
and restated by the Board on September 17, 1997, no Stockholder approval
required.
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InControl, Inc. Restated 1990 Stock Option Plan Page 15
<PAGE> 1
EXHIBIT 10.6
INCONTROL, INC.
1996 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
AS AMENDED AND RESTATED ON AUGUST 5, 1997
SECTION 1. PURPOSES
The purposes of the InControl, Inc. 1996 Stock Option Plan for
Nonemployee Directors (this "Plan") are to attract and retain the services of
experienced and knowledgeable nonemployee directors for InControl, Inc. (the
"Company") and to provide added incentive to such directors by providing an
opportunity for stock ownership in the Company.
SECTION 2. ADMINISTRATION
The administrator of this Plan (the "Plan Administrator") shall be the
Board of Directors of the Company (the "Board"). Subject to the terms of this
Plan, the Plan Administrator shall have the power to construe the provisions of
this Plan, to determine all questions arising hereunder and to adopt and amend
such rules and regulations for the administration of this Plan as it may deem
desirable. No member of the Plan Administrator shall participate in any vote by
the Plan Administrator on any matter materially affecting the rights of any such
member under this Plan.
SECTION 3. SHARES SUBJECT TO THE PLAN
Subject to adjustment in accordance with Section 6 hereof, the total
number of shares of the Company's common stock (the "Common Stock") for which
options may be granted under this Plan is 300,000, as such Common Stock was
constituted on the effective date of this Plan (the "Shares"). The Shares shall
be shares currently authorized but unissued or subsequently acquired by the
Company as treasury shares and shall include shares representing the unexercised
portion of any option granted under this Plan which expires or terminates
without being exercised in full.
SECTION 4. ELIGIBILITY; PARTICIPATION IN THE PLAN
4.1 ELIGIBLE DIRECTORS
Each member of the Board elected or appointed who is not otherwise an
employee of the Company or any parent or subsidiary corporation (an "Eligible
Director") shall be eligible to participate in this Plan.
4.2 INITIAL GRANTS
Each existing member of the Board immediately prior to the effective
date of this Plan who will continue service as an Eligible Director immediately
following the 1996 Annual Meeting of Stockholders shall automatically receive
the grant of an option to purchase 20,000 Shares on the effective date of this
Plan.
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InControl, Inc. 1996 Stock Option Plan For Nonemployee Directors Page 1
<PAGE> 2
Commencing with the effective date of this Plan, immediately following
his or her initial election or appointment to the Board, each Eligible Director
shall automatically receive an Option to purchase 30,000 Shares.
4.3 ANNUAL GRANTS
Commencing with the 1997 Annual Meeting of Stockholders each Eligible
Director continuing service as an Eligible Director immediately following an
Annual Meeting of Stockholders shall automatically receive an option to purchase
10,000 Shares immediately following each year's Annual Meeting of Stockholders
as an annual grant; provided that an Eligible Director who has received an
initial grant of 30,000 Shares on such date shall not receive an annual grant
until the next Annual Meeting.
4.4 SUPPLEMENTAL GRANTS
In addition to the grants under Sections 4.2 and 4.3, from time to time,
during any fiscal year, the Plan Administrator may grant to each Eligible
Director additional options to purchase in the aggregate no more than 15,000
Shares.
4.5 AVAILABILITY OF SHARES
No grant shall be made under this Plan if the effect of such grant would
be to obligate the Company to issue more Shares than are reserved under Section
3. If insufficient Shares are reserved under Section 3 to fully fund one or more
grants to be made under this Section 4 on the same date of grant, then the
Shares available shall be divided by the number of Eligible Directors then
entitled to a grant and each such Eligible Director shall be granted an option
for that number of Shares.
SECTION 5. TERMS AND CONDITIONS OF OPTIONS
Each option granted to an Eligible Director under this Plan (such an
Eligible Director, an "Optionee") and the issuance of Shares thereunder shall be
subject to the following terms:
5.1 OPTION AGREEMENT
Each option shall be evidenced by an option agreement (an "Agreement")
duly executed on behalf of the Company. Each Agreement shall comply with and be
subject to the terms and conditions of this Plan. Any Agreement may contain such
other terms, provisions and conditions not inconsistent with this Plan as may be
determined by the Plan Administrator.
5.2 OPTION EXERCISE PRICE
The option exercise price for an option shall be the closing price, or
if there is no closing price, the mean between the high and the low sales price
of shares of Common Stock as reported on the Nasdaq Stock Market on the day the
option is granted or, if no Common Stock was traded on such date, on the next
succeeding day on which Common Stock is so traded.
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InControl, Inc. 1996 Stock Option Plan For Nonemployee Directors Page 2
<PAGE> 3
5.3 VESTING AND EXERCISABILITY
Each stock option granted hereunder shall vest and become exercisable in
accordance with the following schedule:
<TABLE>
<CAPTION>
Period of Eligible Director's Portion of Total
Continuous Option Which Is
Service as a Director With the Company Exercisable
From the Date the Option is Granted
------------------------------------- ----------------
<S> <C>
Less than twelve months 0%
Twelve months 33 1/3%
Twenty-four months 66 2/3%
Thirty-six months 100%
</TABLE>
5.4 TIME AND MANNER OF EXERCISE OF OPTION
Each option may be exercised in whole or in part at any time and from
time to time, subject to stockholder approval of this Plan; provided, however,
that no fewer than 20% of the Shares purchasable under the option (or the
remaining Shares then purchasable under the option, if less than 20%) may be
purchased upon any exercise of any option hereunder and that only whole Shares
will be issued pursuant to the exercise of any option.
Any option may be exercised by giving written notice, signed by the
person exercising the option, to the Company stating the number of Shares with
respect to which the option is being exercised, accompanied by payment in full
for such Shares, which payment may be in whole or in part (a) in cash or by
check, (b) in shares of Common Stock already owned for at least six months by
the person exercising the option, valued at fair market value at the time of
such exercise, or (c) by delivery of a properly executed exercise notice,
together with irrevocable instructions to a broker, to properly deliver to the
Company the amount of sale or loan proceeds to pay the exercise price, all in
accordance with the regulations of the Federal Reserve Board.
5.5 TERM OF OPTIONS
Each option shall expire ten years from the date of the granting
thereof, but shall be subject to earlier termination as follows:
(a) In the event that an Optionee ceases to be a director of the
Company for any reason other than the death of the Optionee, the unvested
portion of the options granted to such Optionee shall terminate immediately and
the vested portion of the options granted to such Optionee may be exercised by
him or her only within three months after the date such Optionee ceases to be a
director of the Company.
(b) In the event of the death of an Optionee, whether during the
Optionee's service as a director or during the three-month period referred to in
Section 5.5(a), the unvested portion of the options granted to such Optionee
shall terminate immediately and the vested portion of the options granted to
such Optionee shall be exercisable, and such options shall expire unless
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InControl, Inc. 1996 Stock Option Plan For Nonemployee Directors Page 3
<PAGE> 4
exercised within twelve months after the date of the Optionee's death, by the
legal representatives or the estate of such Optionee, by any person or persons
whom the Optionee shall have designated in writing on forms prescribed by and
filed with the Company or, if no such designation has been made, by the person
or persons to whom the Optionee's rights have passed by will or the laws of
descent and distribution.
5.6 TRANSFERABILITY
During an Optionee's lifetime, an option may be exercised only by the
Optionee or a permitted transferee or assignee. Options granted under this Plan
and the rights and privileges conferred thereby shall not be subject to
execution, attachment or similar process and may not be transferred, assigned,
pledged or hypothecated in any manner (whether by operation of law or otherwise)
other than by (a) will or by the applicable laws of descent and distribution,
(b) designation by the Optionee in writing during the Optionee's lifetime of a
beneficiary to receive and exercise options in the event of the Optionee's death
(as provided in Section 5.5(b)) or (c) by gift or other transfer of an option to
either (i) a spouse or other immediate family member of the Optionee or (ii) any
trust, partnership or other entity in which the original Optionee or such
Optionee's spouse or other immediate family member has a substantial interest
except that any option so assigned or transferred shall be subject to all the
same terms and conditions contained in this Plan . Any attempt to transfer,
assign, pledge, hypothecate or otherwise dispose of any option under this Plan
or of any right or privilege conferred thereby, contrary to the provisions of
this Plan, or the sale or levy or any attachment or similar process upon the
rights and privileges conferred hereby, shall be null and void.
5.7 HOLDING PERIOD
Shares of Common Stock obtained upon the exercise of any option granted
under this Plan may not be sold by persons subject to Section 16 of the Exchange
Act until six (6) months after the date the option was granted; provided that
this restriction shall lapse to the extent the vesting of an option is
accelerated pursuant to Section 6.2.
5.8 PARTICIPANT'S OR SUCCESSOR'S RIGHTS AS STOCKHOLDER
Neither an Optionee nor the Optionee's successor in interest shall have
any rights as a stockholder of the Company with respect to any Shares subject to
an option granted to such person until such person becomes a holder of record of
such Shares.
5.9 LIMITATION AS TO DIRECTORSHIP
Neither this Plan, nor the granting of an option, nor any other action
taken pursuant to this Plan shall constitute or be evidence of any agreement or
understanding, express or implied, that an Optionee has a right to continue as a
director for any period of time or at any particular rate of compensation.
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InControl, Inc. 1996 Stock Option Plan For Nonemployee Directors Page 4
<PAGE> 5
5.10 REGULATORY APPROVAL AND COMPLIANCE
The Company shall not be required to issue any certificate or
certificates for Shares upon the exercise of an option granted under this Plan,
or record as a holder of record of Shares the name of the individual exercising
an option under this Plan, without obtaining to the complete satisfaction of the
Company the approval of all regulatory bodies deemed necessary by the Company,
and without complying, to the Company's complete satisfaction, with all rules
and regulations under federal, state or local law deemed applicable by the
Company.
SECTION 6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
6.1 RECAPITALIZATION
The aggregate number and class of shares for which options may be
granted under this Plan, the number and class of shares covered by each
outstanding option and the exercise price per share thereof (but not the total
price), and the number and class of shares that may be made subject to options
as set forth in Section 4 of the Plan, shall all be proportionately adjusted for
any increase or decrease in the number of issued shares of Common Stock of the
Company resulting from a split or consolidation of shares or any like capital
adjustment, or the payment of any stock dividend.
6.2 EFFECT OF LIQUIDATION OR REORGANIZATION
Upon a merger (other than a merger of the Company in which the holders
of shares of Common Stock immediately prior to the merger have the same
proportionate ownership of shares of Common Stock in the surviving corporation
immediately after the merger), consolidation, acquisition of property or stock,
separation, reorganization (other than a mere reincorporation or the creation of
a holding company) or liquidation of the Company (each a "corporate
transaction"), as a result of which the stockholders of the Company receive
cash, stock or other property in exchange for or in connection with their shares
of Common Stock, then the exercisability of each option outstanding under the
Plan shall be automatically accelerated so that each such option shall,
immediately prior to the specified effective date for any such transaction,
become fully exercisable with respect to the total number of shares of Common
Stock purchasable under such option and may be exercised for all or any portion
of such shares. To the extent such option is not exercised, it shall terminate,
except that in the event of a corporate transaction in which stockholders of the
Company receive capital stock of another corporation in exchange for their
shares of Common Stock, such unexercised option shall be assumed or an
equivalent option shall be substituted by the successor corporation or a parent
or subsidiary of such successor corporation. Any such assumed or equivalent
option shall be 100% vested and exercisable with respect to the total number of
shares purchasable under such option. Upon a merger of the Company in which the
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of Common Stock in the surviving corporation immediately
after the merger or a mere reincorporation or the creation of a holding company,
each option outstanding under the Plan shall be assumed or an equivalent option
shall be substituted by the successor corporation or a parent or subsidiary of
such corporation, and the vesting schedule set forth in the option agreement
shall continue to apply to such assumed or equivalent option.
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InControl, Inc. 1996 Stock Option Plan For Nonemployee Directors Page 5
<PAGE> 6
6.3 FRACTIONAL SHARES
In the event of any adjustment in the number of shares covered by any
option, any fractional shares resulting from such adjustment shall be
disregarded and each such option shall cover only the number of full shares
resulting from such adjustment.
SECTION 7. EXPENSES
All costs and expenses of the adoption and administration of this Plan
shall be borne by the Company; none of such expenses shall be charged to any
Optionee.
SECTION 8. COMPLIANCE WITH RULE 16b-3
It is the intention of the Company that this Plan comply in all respects
with the requirements for a "formula plan" within the meaning attributed to that
term for purposes of Rule 16b-3 under Section 16(b) of the Exchange Act.
Therefore, if any Plan provision is later found not to be in compliance with
such requirements, that provision shall be deemed null and void, and in all
events this Plan shall be construed in favor of its meeting such requirements.
SECTION 9. AMENDMENT AND TERMINATION
The Board may amend, terminate or suspend this Plan at any time, in its sole and
absolute discretion; provided, however, that if required to qualify this Plan as
a formula plan for purposes of Rule 16b-3 under Section 16(b) of the Exchange
Act, no amendment may be made more than once every six months that would change
the amount, price, timing or vesting of the options, other than to comply with
changes in the Internal Revenue Code of 1986, as amended, or the rules and
regulations thereunder; provided further that to the extent required by any
applicable law or regulation, no amendment shall be made without the approval of
the Company's stockholders.
SECTION 10. EFFECTIVE DATE AND DURATION
This Plan shall be effective upon approval of the Company's stockholders
at or before the next Annual Meeting of Stockholders of the Company as defined
in the Company's Bylaws. This Plan shall continue in effect unless it is
terminated by action of the Board or the Company's stockholders, but such
termination shall not affect the then-outstanding terms of any options.
Adopted by the Company's Board of Directors on February 27, 1996 and
approved by the Company's stockholders on May 7, 1996. Amended and Restated on
September 24, 1996. Amended and Restated on August 5, 1997.
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InControl, Inc. 1996 Stock Option Plan For Nonemployee Directors Page 6
<PAGE> 1
EXHIBIT 10.8
SECOND AMENDMENT TO
EXECUTIVE EMPLOYMENT AGREEMENT
FIRST AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT, dated as of September
1, 1997, between INCONTROL, INC., a Delaware corporation (the "Company"), and
KURT C. WHEELER (the "Executive").
RECITALS
A. The Company and the Executive have entered into that certain
Executive Employment Agreement dated as of April 1, 1995, as amended on
September 30, 1996 (the "Agreement").
B. The Company and the Executive desire to amend the Agreement as
hereinafter set forth.
AGREEMENTS
1. RELOCATION LOAN TO EXECUTIVE
Section 5.1 of the Agreement is hereby amended to read in its entirety
as follows:
5.1 MONTHLY ALLOWANCES
(a) As long as the Executive is an employee of the Company, the
Company shall periodically lend to the Executive an aggregate total of
Three Hundred Sixteen Thousand Forty-One and 93/100 Dollars
($316,041.93) as a component of the Executive's relocation package.
(b) As of the date of this Amendment, the Company has made, and
the Executive hereby acknowledges receipt of, advances under Section
5.16(a) hereof in the amount of Two Hundred Eighty-Six Thousand
Forty-One and 93/100 Dollars ($286,041.93). The balance of the advance
shall be disbursed in six (6) equal monthly advances in the amount of
Five Thousand Dollars ($5,000). In the event that this Agreement is
terminated (i) by the Company with Cause or (ii) by the Executive, no
additional advances shall be made under this Section 5.1.
2. NOTE
The Executive shall execute a promissory to evidence the maximum amount
of the Loan (the "Note") in form and substance satisfactory to the Company and
to the Executive.
<PAGE> 2
3. CONFIRMATION
Except as expressly modified in this Amendment, all terms, conditions,
representations, warranties and covenants contained in the Agreement are hereby
confirmed and shall remain in full force and effect.
4. COUNTERPARTS
This Amendment may be executed in any number of counterparts, each of
which shall be deemed an original if fully executed, but all of which shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
INCONTROL, INC.
By: /s/ Donald F. Seaton, III
--------------------------------------------
Its: Vice President and Chief Financial Officer
EXECUTIVE
/s/ Kurt C. Wheeler
------------------------------------------------
-2-
<PAGE> 3
PROMISSORY NOTE
$816,041.93 Seattle, Washington
September 1, 1997
FOR VALUE RECEIVED, the undersigned KURT C. WHEELER ("Maker"), hereby promises
to pay to the order of INCONTROL, INC. (the "Company"), at its office in
Redmond, Washington, or at such other place as the holder of this Note may
designate in writing from time to time, (a) the principal sum of Eight Hundred
Sixteen Thousand Forty-One and 93/100 Dollars ($816,041.93) or (b) the aggregate
principal amount of all advances made by the Company under this Note and
outstanding on the date of payment, whichever is less.
EXECUTIVE EMPLOYMENT AGREEMENT. This Note is issued pursuant to the
terms and conditions of the Executive Employment Agreement, dated as of April 1,
1995, between the Company and Maker, as amended (the "Employment Agreement"),
and supersedes any and all promissory notes issued pursuant to the Employment
Agreement prior to this Note.
INTEREST. Interest shall accrue on the principal balance until final
maturity with interest compounded semi-annually at the rate of four and 94/100
percent (4.94%) per annum.
PAYMENTS OF PRINCIPAL AND INTEREST. Principal, together with accrued
interest, shall be payable in accordance with the terms of the Employment
Agreement.
PREPAYMENT. Maker may prepay all or any portion of the principal due
under this Note without premium or penalty.
PENALTY INTEREST. In the event Maker fails to pay principal and interest
when due in the manner provided herein, the principal balance of this Note and
accrued but unpaid interest thereon shall thereafter bear interest at a rate
equal to fifteen percent (15%) per annum, until payment in full of the amount
owed. Notwithstanding the foregoing, the interest paid under this Note shall
never be greater than the maximum rate of interest permitted under applicable
law.
LIABILITY AND WAIVER. Maker hereby waives diligence, presentment,
demand, protest and notice of any kind whatsoever. The nonexercise by the holder
of this Note of its rights hereunder in any particular instance shall not
constitute a waiver thereof in that or any subsequent instance.
COSTS OF COLLECTION. Maker agrees to pay all costs of collection and
reasonable attorneys' fees in case of any default in any payment required under
this Note.
APPLICABLE LAW. This Note shall be governed by and construed in
accordance with the laws of the state of Washington.
COLLATERAL. This Note is secured by 88,312 shares of Common Stock issued
by the Company, together with all proceeds thereof (the "Collateral"). Except
for the Collateral, this Note shall be nonrecourse to Maker.
/s/ Kurt C. Wheeler
-----------------------------------
Kurt C. Wheeler
<PAGE> 4
INCONTROL, INC.
STOCK PLEDGE AGREEMENT
STOCK PLEDGE AGREEMENT, dated as of September 1, 1997, between
INCONTROL, INC., a Delaware corporation (the "Company"), and Kurt C. Wheeler
("Employee").
RECITALS
A. In connection with the Executive Employment Agreement dated as of
April 1, 1995 between the Company and Employee, as amended ("Employment
Agreement"), the Company has made certain loans to Employee as evidenced by a
promissory note dated September 1, 1997 in the principal amount of $813,041.93,
a copy of which is attached hereto as Exhibit A (the "Employment Agreement
Note").
B. In connection with the exercise of options to purchase shares of the
Company's Common Stock under the Company's Restated 1990 Stock Option Plan,
Employee was required to recognize and pay alternative minimum tax in the amount
of approximately $167,000 (the "AMT").
C. In order to facilitate Employee's payment of the AMT, the Company
made a loan to Employee as evidenced by a promissory note dated April 13, 1995
in the principal amount of $167,000, a copy of which is attached hereto as
Exhibit B (the "AMT Note").
D. In consideration for certain amendments to the Employment Agreement
and in order to secure the payment of the Employment Agreement Note and the AMT
Note (collectively, the "Notes"), Employee has agreed to pledge to the Company
88,312 shares of the Company's Common Stock owned by Employee (the "Shares").
AGREEMENTS
1. SECURED OBLIGATIONS
This Agreement is made in order to secure the due and timely payment and
performance of any and all obligations of Employee pursuant to the Notes,
including, without limitation, any and all amounts payable to the Company
hereunder or thereunder, and prompt observance and performance by Employee of
all of his obligations hereunder and thereunder (collectively, the "Secured
Obligations").
<PAGE> 5
2. PLEDGE
To secure the payment and performance in full of the Secured
Obligations, Employee hereby grants, pledges, assigns, transfers and delivers to
the Company a first-priority security interest in Employee's right, title and
interest in, to and under (a) the Shares and all rights and privileges of
Employee with respect thereto, (b) all cash dividends, noncash dividends, stock
dividends, interest, cash, instruments and other property from time to time
received, receivable or otherwise distributed in respect of or in exchange for
any or all of the Shares, (c) any and all certificates or other instruments or
documents representing any of the foregoing, and (d) all proceeds of any of the
foregoing and any property of any character whatsoever into which any of the
foregoing may be converted (all such property, collectively, the "Pledged
Collateral").
3. REPRESENTATIONS AND WARRANTIES
Employee represents and warrants to the Company as follows:
(a) The Shares are legally and beneficially owned by Employee on
the date hereof.
(b) Employee has all requisite power and authority and full legal
right to execute, deliver and perform all of Employee's obligations under this
Agreement and to pledge and grant a first-priority security interest in the
Pledged Collateral in the manner and for the purpose contemplated by this
Agreement.
(c) This Agreement has been duly executed and delivered by
Employee and constitutes the legal, valid and binding obligation of Employee,
enforceable against Employee in accordance with its terms.
(d) The pledge of, and the grant of a first-priority security
interest in, the Pledged Collateral by Employee in the manner and for the
purpose contemplated by this Agreement do not and will not (i) violate any law,
rule, regulation, order, judgment or decree applicable to Employee or (ii)
result in (except as contemplated by this Agreement), or require, the creation
or imposition of any lien, security interest, encumbrance or right of others of
any nature upon or with respect to any of the Pledged Collateral.
4. VOTING RIGHTS
(a) Subject to Section 4(b) hereof, Employee shall exercise all
voting and consensual rights and powers with respect to the Pledged Collateral.
-2-
<PAGE> 6
(b) If an Employee Default (as defined below) has occurred and
the Company provides notice to Employee that it intends to exercise any or all
voting and consensual rights and powers with respect to the Pledged Collateral,
such rights of Employee to exercise the voting and consensual rights and powers
which Employee is entitled to exercise with respect to the Pledged Collateral
shall cease, and such rights shall thereupon become vested in the Company.
Thereafter, and until such time as any such Employee Default shall no longer be
continuing, the Company shall have the sole and exclusive right and authority to
exercise such voting and consensual rights and powers.
5. DELIVERY OF PLEDGED COLLATERAL
The Company hereby acknowledges receipt of the Shares. Employee shall
promptly deliver or cause to be delivered to the Company all other Pledged
Collateral. At the time of any such delivery, Employee shall deliver to the
Company duly executed stock transfer powers in blank with respect to any Pledged
Collateral the transfer of which would require such powers.
6. REMEDIES UPON DEFAULT
(a) If Employee fails to pay and perform in full any of the
Secured Obligations at any time on or after such Secured Obligations become due,
or if Employee breaches any of his other representations, warranties or
covenants hereunder (any of the foregoing, an "Employee Default"), the Company
may exercise all rights of a secured party under the applicable Uniform
Commercial Code with respect to the Pledged Collateral and, in addition, the
Company may, without being required to give any notice, except as herein
provided or as may be required by applicable law, sell, assign, transfer,
endorse and deliver the whole or, from time to time, any part of the Pledged
Collateral, for cash, upon credit or for other property, for immediate or future
delivery, and for such price or prices and on such terms as the Company in its
reasonable discretion shall deem appropriate.
(b) Upon consummation of any such sale, the Company shall have
the right to assign, transfer, endorse and deliver to the purchaser or
purchasers thereof the Pledged Collateral sold, and all of the voting and
consensual rights and powers granted and reserved to the Company pursuant hereto
shall thereupon become vested in such purchaser or purchasers, subject to any
reservations or qualifications reasonably imposed by the Company as part of such
sale. Each purchaser at any sale shall hold the property sold absolutely free
from any claim or right on the part of Employee, and Employee hereby waives and
releases (to the extent permitted by law) all rights of redemption, stay or
appraisal which Employee now has or may at any
-3-
<PAGE> 7
time in the future have under any rule of law or statute now existing or
hereafter enacted.
(c) The Company shall give Employee ten (10) days' written notice
(which Employee agrees is reasonable notification within the meaning of Section
9-504(3) of the Uniform commercial Code) of its intention to sell any of the
Pledged Collateral. The Company shall not be obligated to make any sale of the
Pledged Collateral if it shall determine not to do so, regardless of the fact
that notice of sale of such Pledged Collateral may have been given.
(d) At any sale made pursuant to this Section 6, the Company may
bid for or purchase, free (to the extent permitted by law) from any right of
redemption, stay or appraisal on the part of Employee, the Pledged Collateral or
any part thereof offered for sale, and the Company may upon compliance with the
terms of sale, hold, retain and dispose of such property without further
accountability to Employee therefor. In the event that the Company becomes the
purchaser at any such sale, the Company shall be entitled to credit against the
purchase price the amount then outstanding of the Secured Obligations.
(e) As an alternative to exercising the power of sale herein
conferred upon it, the Company may proceed by a suit or suits at law or in
equity to foreclose this Agreement and to sell the Pledged Collateral, or any
portion thereof.
7. APPLICATION OF COLLATERAL
Any proceeds of any sale of, or realization upon, all or any part of the
Pledged Collateral and cash retained by the Company pursuant to this Agreement
shall be applied by the Company in the following order of priorities:
(a) to the payment of all reasonable costs, expenses, liabilities
and advances made or incurred by the Company, its agents, attorneys and counsel,
in managing and maintaining the Pledged Collateral or in protecting, perfecting,
enforcing or exercising any right or remedy under this Agreement;
(b) to the payment of any and all of the Secured Obligations; and
(c) to the extent of any amounts then remaining from such
proceeds, to Employee, its successors or assigns, or to whosoever may be
lawfully entitled to receive the same, or as a court of competent jurisdiction
may direct.
-4-
<PAGE> 8
8. THE COMPANY APPOINTED ATTORNEY-IN-FACT
Upon the occurrence and during the continuance of an Employee Default,
Employee shall be deemed to have appointed the Company as the attorney-in-fact
of Employee, with full authority in the place and stead of Employee and in the
name of Employee or otherwise, for the purpose of carrying out the provisions of
this Agreement and taking any action and executing any instrument which the
Company may deem necessary or advisable to accomplish the purposes hereof.
Employee hereby declares that the foregoing powers are granted for valuable
consideration, constitute powers granted as security for the performance of the
Secured Obligations and are coupled with an interest and shall be irrevocable by
Employee.
9. TERMINATION OF SECURITY INTERESTS; RELEASE OF COLLATERAL
This Agreement and the assignments, pledges and security interests
created or granted hereby shall terminate, and the Company shall release the
Pledged Collateral to Employee, upon payment in full of the Notes.
10. PAYMENT OF COSTS AND EXPENSES
Employee shall pay on demand to or for the account of the Company, on or
before the date such payment is due, or reimburse the Company promptly on demand
for, all reasonable out-of-pocket costs and expenses (including, without
limitation, the reasonable fees and the disbursements of counsel) of the Company
in connection with the exercise or enforcement of any of the rights of the
Company hereunder and the failure by Employee to perform or observe any of the
provisions hereof to be performed or observed by it. The Company shall pay all
reasonable costs and attorneys fees incurred by Employee to enforce the
provisions of Section 9 hereof if the Company breaches its obligations under
such Section 9.
11. REASONABLE CARE
All Pledged Collateral at any time delivered to the Company shall be
held by the Company or its nominee in the same manner as that accorded to other
valuable securities subject to the terms, covenants and conditions herein set
forth. Neither the Company nor any director, officer, employee or counsel of the
Company shall be liable for any action taken or omitted to be taken by it or
them relative to any of the Pledged Collateral except for their own gross
negligence or willful misconduct, and the Company shall not be liable for any
action or omission to act on the part of any agent appointed and selected by the
Company with reasonable care to act with respect to the Pledged Collateral (or
any part thereof).
-5-
<PAGE> 9
12. NO IMPLIED WAIVERS; RIGHTS CUMULATIVE
No failure on the part of the Company to exercise and no delay in
exercising any right, power, remedy or privilege under this Agreement or the
Notes or provided by statute or at law or in equity or otherwise, including,
without limitation, the right to accelerate the maturity of any of the Secured
Obligations or the power of sale or foreclosure hereunder following any Employee
Default, shall impair, prejudice or constitute a waiver of any such right,
power, remedy or privilege or be construed as a waiver of any Employee Default
or as an acquiescence therein nor shall any single or partial exercise of any
such right, power, remedy or privilege preclude any other or further exercise
thereof or the exercise of any other right, power, remedy or privilege.
13. NOTICES
All notices, requests and other communications to the Company or
Employee hereunder shall be in writing and shall refer specifically to this
Agreement and shall be personally delivered or sent by telecopy or other
electronic facsimile transmission or by registered mail, or certified mail,
return receipt requested, postage prepaid, in each case to the respective
address below.
To the Company:
InControl, Inc.
6675 - 185th Avenue N.E.
Redmond, WA 98052
Attention: Chief Financial Officer
To Employee:
Kurt C. Wheeler
3248 - 78th Place N.E.
Medina, WA 98039
14. FURTHER ASSURANCES
Employee shall duly execute and deliver (to the Company or otherwise),
or cause to be duly executed and delivered (to the Company or otherwise), such
further instruments and do and cause to be done such further acts that may be
necessary or as the Company may at any time and from time to time reasonably
request in connection with its administration of this Agreement.
15. SUCCESSORS AND ASSIGNS
The terms and provisions of this Agreement shall inure to the benefit of
and be binding upon Employee, the Company and all other persons from time to
time entitled
-6-
<PAGE> 10
to the benefit of any of the Secured Obligations, and their respective
successors and assigns; provided, however, that Employee may neither assign or
otherwise transfer any of his rights and interests nor delegate any of his
obligations hereunder, without the prior written consent of the Company. Subject
to the foregoing, any reference to Employee or the Company hereunder shall be
deemed to include the successors thereto and assigns thereof.
16. AMENDMENTS
No amendment, modification, waiver, termination or discharge of any
provision of this Agreement, nor consent to any departure by Employee thereof,
shall in any event be effective unless the same shall be in writing specifically
identifying this Agreement and the provision intended to be amended, modified,
waived, terminated or discharged and signed by the Company and Employee, and
each such amendment, modification, waiver, termination or discharge shall be
effective only in the specific instance and for the specific purpose for which
given. No provision of this Agreement shall be varied, contradicted or explained
by any oral agreement, course of dealing or performance or any other matter not
set forth in an agreement in writing and signed by the Company and Employee.
17. SEVERABILITY
If any provision hereof shall be held invalid, illegal or unenforceable
in any respect, then, to the fullest extent permitted by law, all other
provisions hereof shall remain in full force and effect and shall be liberally
construed in favor of the Company in order to carry out the intentions of the
parties hereto as nearly as may be possible. To the extent permitted by
applicable law, Employee hereby waives any provision of law which would render
any provision hereof prohibited or unenforceable in any respect.
18. EXECUTION IN COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which, when so executed and delivered, shall be deemed to be an original, and
all of which taken together, shall constitute one and the same instrument.
19. ENTIRE AGREEMENT
This Agreement, the Employment Agreement and the Notes constitute, on
and as of the date hereof, the entire agreement of Employee and the Company with
respect to the subject matter hereof, and all prior or contemporaneous
understandings or agreements, whether written or oral, between the Company and
Employee with respect to such subject matter are hereby superseded in their
entireties.
-7-
<PAGE> 11
20. PRIOR AGREEMENTS
This Agreement is entered into in substitution of, and supersedes in
their entireties, the two prior Stock Pledge Agreements entered into between the
Company and Employee, dated October 1, 1993 and April 13, 1995, respectively.
21. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the state of Washington.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first above written.
INCONTROL, INC.
By: /s/ Donald F. Seaton, III
-------------------------------------------
Its: Vice President and Chief Financial Officer
EMPLOYEE:
/s/ Kurt C. Wheeler
-----------------------------------------------
Kurt C. Wheeler
-8-
<PAGE> 12
STOCK CERTIFICATES
#397 60,000 7/31/96
#398 28,312 7/31/96
#838 14,062 7/10/97
-9-
<PAGE> 1
Exhibit 10.17
TENTH AMENDMENT TO LEASE
ADDITION AND DELETION OF SQUARE FOOTAGE
That certain Lease dated August 19, 1991, as amended by the First
Addendum to Lease dated August 19, 1991, the Second Amendment to Lease dated
June 1, 1992, the Third Amendment to Lease dated October 15, 1992, the Fourth
Amendment of Lease dated August 24, 1993, the Fifth Amendment to Lease dated
September 9, 1994, the Sixth Amendment to Lease dated May 31, 1995, the Seventh
Amendment to Lease dated March 29, 1996, the Eighth Amendment to Lease dated
April 29, 1996 and the Ninth Amendment to the Lease dated January 31, 1997
(collectively the "Lease"), by and between Carr Redmond Corporation, a
Washington corporation, successor in interest to Redmond East, L.L.C. ("Lessor")
and InControl, Inc. a Delaware corporation ("Lessee"), for the Premises located
at 6675 185th Avenue NE and 6645 185th Avenue NE, Redmond, Washington 98052, is
amended this 1st day of May, 1997 solely as hereinafter described.
Effective the 1st day of May, 1997, Landlord and Tenant desire to amend
the Lease to, among other things, provide for further expansion space on the
second floor of Building 14 and at the same time remove the warehouse portion of
the Premises from the leased area which was never occupied. The portions of the
Lease as numbered below are amended to read as follows:
1. PARAGRAPH 1. PREMISES.
Building 13 - 42,422 rentable square footage has not changed
(inadvertently identified as 42,444 square feet in Paragraph C of the
Ninth Amendment to Lease).
Building 14 - 26,521 rentable square feet calculated as follows:
Current square footage of 22,206 rentable square feet (inadvertently
identified as 22,260 square feet in Paragraph C of the Ninth
Amendment), plus the balance of the second floor office space of 4,315
rentable square feet added by this amendment. The total square footage
in Building 14 is 35,091 rentable square feet.
Building 14 - Future expansion area. The future expansion area
identified in Paragraph 3 of the Ninth Amendment as the Office
Expansion Space of 9,500 square feet has been changed. The Office
Expansion Space which shall become part of the Premises no later than
June 1, 1999 in accordance with the Ninth Amendment, is the remaining
first floor office space of 4,270 rentable square feet and warehouse
space of 4,300 rentable square feet ("Warehouse Expansion Space").
<PAGE> 2
2. PARAGRAPH 6. ADDITIONAL RENTAL.
Effective May 1, 1997, the Tenant share of expenses in Building 14
shall be amended to 75.58%; Building 13 is unchanged at 100%. When
Tenant expands into the Office Expansion Space and Warehouse Expansion
Space, the Tenant's share of expenses in Building 14 shall become 100%.
3. PARAGRAPH 10. CONSTRUCTION.
Lessor agrees that it shall provide Lessee a $5.00 per square foot
tenant allowance for the Office Expansion Space in accordance with the
terms of Paragraph 3 of the Ninth Amendment to Lease. No tenant
improvement allowance will be provided for the Warehouse Expansion
Space, it will be delivered broom clean and in "AS IS" condition.
4. PARAGRAPH 5. RENTAL.
BUILDING 14 - 6645 185TH AVENUE NE, REDMOND, WA 98052
<TABLE>
<CAPTION>
Effective Monthly Rent New Monthly
Date Base Rent Escalation Base Rent
- -------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
January 1, 1997 $16,562.50
(Office space of 15,000 s.f. at $13.25 s.f.)
May 1, 1997 $16,562.50 $4,764.48 $21,326.98
(Office space of 4,315 s.f. at $13.25 s.f.)
June 1, 1997 $21,326.98 $7,956.63 $29,283.61
</TABLE>
(end of free rent period for Sixth Expansion Premises of 7,206 s.f.,
(inadvertently identified as 7,260 s.f. in Paragraph 5 of the Ninth Lease
Amendment.))
<TABLE>
<S> <C> <C> <C>
June 1, 1999 (not later than) $29,283.61 $8,310.42(1) $37,594.03
June 1, 1999 $37,594.03 $4,972.68(2) $42,566.71
</TABLE>
1 (addition of Office Expansion Space of 4,270 s.f. at $15.50 s.f. and Warehouse
Expansion Space of 4,300 s.f. at $7.80 s.f.)
2 (rent increase to $15.50 s.f. for office area of 26,521 s.f.)
<TABLE>
<S> <C> <C> <C>
June 1, 2002 $42,566.71 $5,521.02 $48,085.54
</TABLE>
(rent increase to $17.50 for office area of 30,791 s.f. and to $8.88 per s.f.
for warehouse area of 4,300 s.f.)
BUILDING 13 - 6675 185TH AVENUE NE, REDMOND, WA 98052
<TABLE>
<CAPTION>
EFFECTIVE MONTHLY RENT New Monthly
DATE BASE RENT ESCALATION Base Rent
- --------------- ---------- ---------- -----------
<S> <C> <C> <C>
January 1, 1997 $49,492.33
June 1, 1999 $49,492.33 $5,302.75 $54,795.08
June 1, 2002 $54,795.08 $7,070.33 $61,865.41
</TABLE>
-2-
<PAGE> 3
All other terms and conditions of the above-described Lease shall remain in full
force and effect.
Lessor: Carr Redmond Corporation Lessee: InControl, Inc.
a Washington corporation a Delaware corporation
By: /s/ PHILIP L. HAWKINS By: /s/ DONALD F. SEATON III
----------------------------- ---------------------------
Its: Managing Director Its: VP Finance
Date: 5/1/97 Date: 28 April 1997
-3-
<PAGE> 4
DISTRICT OF COLUMBIA)
)ss
)
On this 2nd day of May, 1997, before me, the undersigned, a Notary
Public in and for the District of Columbia, duly commissioned and sworn as such,
personally appeared Philip L. Hawkins, to me known to be the Managing Director
of CARR REDMOND CORPORATION the corporation that executed the within and
foregoing instrument, and acknowledged the said instrument to be the free and
voluntary act and deed of said corporation for the uses and purposes therein
mentioned, and on oath stated that he was authorized to execute said instrument,
and that the seal affixed is the corporate seal of said corporation.
WITNESS my hand and official seal the day and year in this certificate
first above written.
Printed Name: /s/ Olivia M. Kerr
-------------------------
NOTARY PUBLIC in and for the District
of Columbia, residing at
8915 Cullun Dr., Lorton, VA 22079
My commission expires: 11/30/01
STATE OF WASHINGTON)
)ss
COUNTY OF KING )
On this 29th day of April, 1997, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn as such,
personally appeared Donald F Seaton III, to me known to be the V.P. Finance of
InControl, Inc., the corporation that executed the within and foregoing
instrument, and acknowledged the said instrument to be the free and voluntary
act and deed of said corporation for the uses and purposes therein mentioned,
and on oath stated that he/she was authorized to execute said instrument, and
that the seal affixed is the corporate seal of said corporation.
WITNESS my hand and official seal the day and year in this certificate
first above written.
[Notary Seal] Printed Name: /s/ K. Kay Hannah
-----------------------
NOTARY PUBLIC in and for the State
of Washington, residing at
Redmond, WA
My commission expires: 2/14/00
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-92350) pertaining to the Stock Option Plan for Nonemployee Directors
and the 1990 Restated Stock Option Plan of InControl, Inc. of our report dated
January 29, 1998, with respect to the consolidated financial statements of
InControl, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1997.
/s/ Ernst & Young LLP
Seattle, Washington
March 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INCONTROL,
INC'S. 1997 10-K CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF
OPERATIONS AND 1996 10-K BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000871629
<NAME> INCONTROL, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 2,337 4,288
<SECURITIES> 13,333 32,714
<RECEIVABLES> 1,056 333
<ALLOWANCES> 141 139
<INVENTORY> 2,493 2,315
<CURRENT-ASSETS> 20,042 40,044
<PP&E> 16,885 11,335
<DEPRECIATION> 9,050 6,473
<TOTAL-ASSETS> 28,918 45,917
<CURRENT-LIABILITIES> 6,256 3,472
<BONDS> 525 1,419
0 0
0 0
<COMMON> 152,505 137,795
<OTHER-SE> 130,368 (96,769)
<TOTAL-LIABILITY-AND-EQUITY> 28,918 45,917
<SALES> 1,976 306
<TOTAL-REVENUES> 1,976 306
<CGS> 1,482 0
<TOTAL-COSTS> 1,482 0
<OTHER-EXPENSES> 35,066 38,821
<LOSS-PROVISION> 145 0
<INTEREST-EXPENSE> 533 440
<INCOME-PRETAX> (33,458) (36,824)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (33,458) (36,824)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (33,458) (33,824)
<EPS-PRIMARY> (1.88) (2.31)
<EPS-DILUTED> (1.88) (2.31)
</TABLE>
