<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO . --------------
--------------
COMMISSION FILE NO. 0-22233
---------
ENDOCARDIAL SOLUTIONS, INC.
- ---------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1724963
- -------- ----------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
1350 ENERGY LANE (612) 644-7890
SUITE 110 --------------
SAINT PAUL, MINNESOTA 55108 (REGISTRANT'S TELEPHONE NUMBER
- ---------------------------- INCLUDING AREA CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES
AND ZIP CODE)
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 TWELVE (12) MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
-------- --------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $.01 PAR VALUE 8,814,761
- ----------------------------
(CLASS) (NUMBER OF SHARES OUTSTANDING AT JUNE
30, 1997)
1
<PAGE>
INDEX
ENDOCARDIAL SOLUTIONS, INC.
(A Development Stage Company)
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets -June 30, 1997 and December 31, 1996 3
Statements of Operations - Three and six month periods
ended June 30, 1997 and June 30, 1996 and the period
from May 21, 1992 (inception) through June 30, 1997 4
Statements of Cash Flows - Three and six months ended
June 30, 1997 and June 30, 1996 and the period from
May 21, 1992 (inception) through June 30, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted since all items are inapplicable or answers
negative.
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENDOCARDIAL SOLUTIONS, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $27,198,404 $ 6,157,491
Prepaid expenses and other current assets 162,967 75,053
----------- -----------
Total current assets 27,361,371 6,232,544
Furniture and equipment 2,079,967 1,496,404
Less accumulated depreciation (861,139) (656,695)
----------- -----------
1,218,828 839,709
Deposits 81,709 81,709
Patents, net 41,294 46,164
----------- -----------
Total assets $28,703,202 $ 7,200,126
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 466,973 $ 265,856
Accrued salaries and expenses 318,260 164,766
Current portion of long-term debt and capital lease obligations 335,927 252,955
----------- -----------
Total current liabilities 1,121,160 683,577
Long-term debt and capital lease obligations 450,976 302,291
Stockholders' equity:
Undesignated Preferred Stock, par value $.01 per share:
Authorized shares--10,000,000
Issued and outstanding shares--none 0 0
Convertible Preferred Stock, Series A through D, par value $.01 per share
Authorized shares--June 30, 1997--none; December 31, 1996--9,527,796
Issued and outstanding shares--June 30, 1997--none; December 31, 1996--9,411,206 0 94,112
Common Stock, $.01 par value
Authorized shares--June 30, 1997--40,000,000; December 31, 1996--17,000,000
Issued and outstanding shares--June 30, 1997--8,814,761; December 31, 1996--1,053,428 88,148 10,534
Additional paid-in capital 48,122,204 23,444,359
Deficit accumulated during the development stage (20,571,170) (16,623,338)
Deferred compensation (508,116) (711,409)
----------- -----------
Total stockholders' equity 27,131,066 6,214,258
----------- -----------
Total liabilities and stockholders' equity $28,703,202 $ 7,200,126
----------- -----------
----------- -----------
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that
date but does not include all of the information and footnotes required by
generally accepted accounting
principles for complete financial statements.
SEE ACCOMPANYING NOTES.
3
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period from
For the Three Months Ended For the Six Months Ended May 21, 1992
-------------------------- -------------------------- (inception) to
June 30, June 30, June 30, June 30, June 30,
1997 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development $1,525,327 $1,107,649 $2,739,048 $2,000,742 $14,857,371
General and administrative 690,233 388,484 1,231,259 744,842 5,428,816
Sales and marketing 231,886 45,795 403,626 70,983 1,220,603
----------- ----------- ----------- ----------- -----------
Operating loss (2,447,446) (1,541,928) (4,373,933) (2,816,567) (21,506,790)
Other income (expense):
Interest income 387,158 66,472 465,470 85,000 1,055,786
Interest expense (22,280) (13,596) (39,369) (29,437) (196,398)
----------- ----------- ----------- ----------- -----------
364,878 52,876 426,101 55,563 859,388
----------- ----------- ----------- ----------- -----------
Net loss for the period and deficit
accumulated during development stage ($2,082,568) ($1,489,052) ($3,947,832) ($2,761,004) ($20,647,402)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net loss per share ($0.24) ($0.27) ($0.53) ($0.51) ($5.38)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average number of shares outstanding 8,802,711 5,566,196 7,410,193 5,361,756 3,838,804
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from
For the Three Months Ended For the Six Months Ended May 21, 1992
-------------------------- -------------------------- (inception) to
June 30, June 30, June 30, June 30, June 30,
1997 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ($2,082,568) ($1,489,052) ($3,947,832) ($2,761,004) ($20,647,402)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 116,261 65,193 212,794 128,644 908,155
Amortization of deferred compensation 99,404 0 203,293 0 976,564
Value of warrants granted in connection with
lease agreements 0 0 0 0 23,526
Loss on disposal of equipment 0 0 0 784 9,473
Changes in operating assets and liabilities:
Prepaid expenses and other assets 13,855 (11,254) (87,914) (19,334) (244,676)
Accounts payable (84,984) 110,848 201,117 236,621 466,973
Accrued salaries and expenses 214,263 25,752 153,494 77,246 318,260
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities (1,723,769) (1,298,513) (3,265,048) (2,337,043) (18,189,127)
INVESTING ACTIVITIES
Purchases of furniture and equipment (126,903) (90,196) (161,555) (105,780) (1,169,011)
Patent expenditures (3,479) (1,026) (3,479) (4,519) (86,982)
Proceeds from sale of equipment 0 0 0 0 3,612
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities (130,382) (91,222) (165,034) (110,299) (1,252,381)
FINANCING ACTIVITIES
Proceeds from notes payable 0 0 0 0 706,974
Principal payments on notes payable and capital
lease obligations (85,819) (52,170) (190,351) (102,094) (595,436)
Proceeds from (offering costs related to)
issuance of common stock (312,692) 2,369 24,661,346 2,369 24,708,091
Proceeds from issuance of preferred stock 0 9,991,542 0 9,991,542 21,820,283
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities (398,511) 9,941,741 24,470,995 9,891,817 46,639,912
Increase (decrease) in cash and cash
equivalents (2,252,662) 8,552,006 21,040,913 7,444,475 27,198,404
Cash and cash equivalents at beginning of
period 29,451,066 756,257 6,157,491 1,863,788 0
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $27,198,404 $9,308,263 $27,198,404 $9,308,263 $27,198,404
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Purchase of equipment through capital lease
obligations $108,248 $0 $422,008 $0 $878,788
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. These financial statements should be read in conjunction
with the audited financial statements and accompanying notes for the fiscal year
ended December 31, 1996, contained in the Company's Prospectus dated March 19,
1997.
2. REVERSE STOCK SPLIT
On January 27, 1997, the Board approved a reverse stock split of 1 for 2 for the
Company's outstanding common stock. The Company's stockholders approved this
reverse stock split February 4, 1997. All information in the financial
statements with respect to the common stock and to the conversion prices and
ratios of the preferred stock have been adjusted to reflect this change. The
reverse stock split had no effect on the number of shares of preferred stock
issued and outstanding (as opposed to the conversion prices of the preferred
stock and the numbers of shares of common stock into which the preferred stock
will convert).
3. INITIAL PUBLIC OFFERING
On March 24, 1997, the Company received net proceeds of $18,832,500 from an
initial public offering of 2,250,000 shares of its common stock and $6,277,500
from a concurrent private placement to Medtronic, Inc. of 750,000 shares of its
common stock at $9.00 per share. Also on March 24, 1997, all outstanding shares
of the Company's preferred stock were automatically converted into an aggregate
of 4,705,602 shares of common stock following the 1 for 2 reverse stock split.
4. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares of
common stock outstanding during the period presented. Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 83 ("SAB No. 83"), shares
convertible into common stock issued by the Company at prices less than the
initial offering price during the 12 months immediately preceding the initial
public offering, plus stock options and warrants granted at exercise prices less
than the initial public offering price during the same period, have been
included in the determination of shares used in calculating the net loss per
share, using the treasury method, as if they were outstanding for all periods up
to and including December 31, 1996. The net loss per share also assumes
conversion of all previously outstanding preferred stock into common stock
during the entirety of each respective reporting period.
In February 1997, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 128, "Earnings Per Share" ("Statement"). This Statement replaces
the presentation of primary earnings per share ("EPS") with basic EPS and also
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. This Statement is effective for financial statements for
periods ending after December 15, 1997. For the three and six months ended June
30, 1997, there is no difference between basic loss per share under Statement
No. 128 and loss per share as reported.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Endocardial Solutions Inc. (the "Company"), a development stage company, was
incorporated in May 1992. The Company is engaged in the development of the
EnSite diagnostic catheter and clinical workstation for use by
electrophysiologists in diagnosing and mapping abnormal heart rhythms known as
tachycardias.
RESULTS OF OPERATIONS
GENERAL. From inception through June 30, 1997, the Company has incurred losses
totaling $20,657,402. Net losses increased to $2,082,568 for the three months
ended June 30, 1997, from $1,489,052 during the same period in 1996. The net
loss as of the six months ended June 30, 1997 and 1996 was $3,947,832 and
$2,761,004, respectively. The Company expects losses to continue through at
least 1999. The Company is entering a period of growth in clinical trial
activity, product development activity, including increases in costs relating to
personnel, and marketing expenses related to market introduction.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
to $1,525,327 or 38% for the three month period ended June 30, 1997, from
$1,107,649 during the same period in 1996. For the six months ended June 30,
1997, research and development expenses were $2,739,048, an increase of $738,306
or 37%, from expenses of $2,000,742 for the six months ended June 30, 1996. The
increase in each period is attributable to increases in clinical trial expenses,
personnel costs related to hiring additional engineering staff and amortization
of deferred compensation. The Company believes that research and development
expenditures will increase in the future as the Company expands clinical
research activity and increases personnel to support product development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$690,233 and $388,484 for the three months ended June 30, 1997 and 1996,
respectively. For the six months ended June 30, 1997 and 1996, general and
administrative expenses were $1,231,259 and $744,842, respectively, an increase
of $486,417 or 65%. The increase in both periods was due to increases in
personnel and related expenses in quality assurance and regulatory activities,
as well as expenses related to expansion of the Company's facility and
amortization of deferred compensation. Administrative costs associated with
being a publicly held company, such as costs attributable to certain insurance
policies contributed to the increase for the three months ended June 30, 1997,
from the same period in 1996.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$231,886 during the three months ended June 30, 1997, from $45,795 during the
same period in 1996. Total sales and marketing expenses for the six months
ended June 30, 1997 and 1996, were $403,626 and $70,983, respectively. This
increase is due to the establishment of a marketing department. The increase
for the three month period ended June 30, 1997, from the same period in 1996 was
due to participation at a medical industry conference. The Company expects
continued increases in sales and marketing expenses due to expanded marketing
activity, including participation at medical industry conferences and seminars
and market research activities.
INTEREST INCOME. Interest income was $387,158 and $66,472 for the three months
ended June 30, 1997 and 1996, respectively. Interest income for the six months
ended June 30, 1997 and 1996 was $465,470 and $85,000, respectively. The
increase was due to the higher cash and cash equivalent balances from the
Company's equity offerings completed during the quarter ended March 31, 1997.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.
On March 24, 1997, the Company received net proceeds of approximately
$18,800,000 from an initial public offering of 2,250,000 shares of its common
stock and approximately $6,300,000 from a concurrent private placement to
Medtronic, Inc. of 750,000 shares of its common stock (together, the "equity
offerings)." The Company's common stock is listed on the NASDAQ National Market
under the symbol "ECSI."
The Company's operations since inception have been funded by net proceeds from
the sales of common and preferred stock totaling approximately $47,000,000
through June 30, 1997. As of June 30, 1997 and December 31, 1996, the Company
had cash and cash equivalents of approximately $27,200,000 million and
$6,200,000, respectively.
For the three months ended June 30, 1997, the Company used cash and cash
equivalents of $1,700,000 for operations and $235,000 for capital expenditures.
For the six months ended June 30, 1997, the Company used $3,300,000 for
operations and $584,000 for capital expenditures. The capital expenditures were
financed primarily through capital leases.
The Company believes that its existing cash and cash equivalents (including
proceeds from the equity offerings) and borrowings available under the Company's
equipment lease line of credit will be sufficient to fund the operations of the
Company through the next two years. The Company's future liquidity and capital
requirements will depend on numerous factors, including the timing of regulatory
actions regarding the Company's products, the results of clinical trials and
competition, the extent to which the Company's EnSite System gains market
acceptance and the costs and timing of expansion of sales, marketing and
manufacturing activities.
CAUTIONARY STATEMENT
Except of the historical information contained herein, this Quarterly Report on
Form 10-Q contains forward-looking statements with in the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. When used in this Form 10-Q and in future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases and in oral statements made with the approval of an
authorized executive officer, the word or phrases "believes," "anticipates,"
"expects," "intends," "will likely result," "estimates," "projects" or similar
expressions are intended to identify such forward-looking statements, but are
not the exclusive means of identifying such statements. These forward-looking
statements involve risks and uncertainties that may cause the Company's actual
results to differ materially from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, the following: risks associated with the successful development and
commercialization of a new technology: limited clinical testing experience;
uncertainty of obtaining Food and Drug Administration and international
regulatory clearances; uncertainty of availability of treatments employing the
Company's diagnostic system (the "EnSite System"); uncertainty of market
acceptance of the EnSite System; training requirements for electrophysiologists;
the uncertainty of the ability to diagnose and treat atrial fibrillation; the
expectation of future losses; significant competition and rapid technological
change in the tachycardia diagnostic market; risks associated with the company's
dependence on patents and proprietary technology; risks associated with the
Company's limited manufacturing experience and dependence on suppliers; and the
uncertainty of third-party reimbursement for diagnostic medical procedures
employing the EnSite System. These factors are discussed in the cautionary
statements included in Exhibit 99 to this Form 10-Q for the quarter ended June
30, 1997. The Company cautions investors and others to review the statements
set forth in Exhibit 99 and in the Company's other reports filed with the
Securities and Exchange Commission and that other factors may prove to be
important in affecting the Company's business and results of operations.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
- ------- -----------
27 Financial Data Schedule (EDGAR filing only)
99 Cautionary Statement
(b) Reports
The Company filed no reports on Form 8-K during the quarter ended June 30, 1997.
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENDOCARDIAL SOLUTIONS, INC.
Dated: July 23, 1997 By: /s/ James W. Bullock
------------------------
James W. Bullock
President and Chief Executive Officer
(Principal Executive Officer)
Dated: July 23, 1997 By: /s/ Dennis J. McFadden
------------------------
Dennis J. McFadden
Chief Financial Officer
(Principal Financial and Accounting Officer)
10
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EXHIBIT 99.1
CAUTIONARY STATEMENT
Endocardial Solutions, Inc. (the "Company"), or persons acting on behalf of
the Company, or outside reviewers retained by the Company making statements on
behalf of the Company, or underwriters, from time to time make, in writing or
orally, "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended). When used in conjunction with an identified forward-looking
statement, this Cautionary Statement is for the purpose of qualifying for the
"safe harbor" provisions of such sections and is intended to be a readily
available written document that contains factors which could cause results to
differ materially from such forward-looking statements. These factors are in
addition to any other cautionary statements, written or oral, which may be made
or referred to in connection with any such forward-looking statement.
The following matters, among others, may have a material adverse effect on
the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this Cautionary
Statement in the context of a forward-looking statement or statements shall be
deemed to be a statement that any or more of the following factors may cause
actual results to differ materially from those in such forward-looking statement
or statements:
DEPENDENCE ON SUCCESSFUL DEVELOPMENT AND COMMERCIALIZATION OF THE ENSITE SYSTEM
The Company's future success is entirely dependent upon the successful
development, commercialization and market acceptance of the EnSite System, the
development of which is ongoing and the complete efficacy and safety of which
have not yet been demonstrated. The EnSite System is currently the Company's
only potential product, and the Company could be required to cease operations if
the system is not successfully commercialized. The EnSite System will require
further development, significant additional clinical trials and, ultimately,
United States and international regulatory approvals before it can be marketed
in the United States and internationally. There can be no assurance that
unforeseen problems will not occur in research and development, clinical
testing, regulatory submissions and approval, product manufacturing and
commercial scale-up, marketing or product distribution. Any such occurrence
could materially delay the commercialization of the EnSite System or prevent its
market introduction entirely. The Company will not generate any significant
revenue until such time, if ever, as the EnSite System is successfully
commercialized. There can be no assurance that the Company will ever derive
substantial revenues from the sale of the EnSite System.
1
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LIMITED CLINICAL TESTING EXPERIENCE; SAFETY AND EFFICACY NOT YET ESTABLISHED
The Company has conducted only limited clinical trials on patients for VT
and SVT in the United States and in the United Kingdom. Clinical data obtained
to date are insufficient to demonstrate the safety and efficacy of the EnSite
System under applicable United States and international regulatory guidelines.
Accordingly, the Company believes it will be required to conduct extensive
clinical testing in the United States in order to support a pre-market approval
("PMA") application to the United States Food and Drug Administration ("FDA")
for marketing approval. Patients selected for clinical trials must meet
stringent guidelines to undergo testing, and there can be no assurance that
patients can be enrolled in clinical trials on a timely basis. Further, there
can be no assurance that any of the Company's products will prove to be safe and
effective in clinical trials under United States or international regulatory
guidelines or that the Company will not encounter problems in clinical testing
that will cause a delay in the commercialization of the EnSite System. Moreover,
the clinical trials may identify significant technical or other obstacles to be
overcome prior to obtaining necessary regulatory or reimbursement approvals. In
addition, the Company's development of the EnSite System for diagnosing atrial
fibrillation is in its early stages. The Company submitted an investigational
device exemption ("IDE") application for the use of the EnSite System in
diagnosing atrial fibrillation in June 1997, but has not yet applied for
regulatory approval in international markets for the use of the EnSite System in
diagnosing atrial fibrillation. Securing regulatory approval in the United
States or in international markets for use of the EnSite System in diagnosing
atrial fibrillation will require extensive clinical trials. If the EnSite System
does not prove to be safe and effective in clinical trials, the Company's
business, financial condition and results of operations will be materially
adversely affected.
LACK OF REGULATORY APPROVAL
The manufacture and sale of medical devices, including the EnSite System,
are subject to extensive regulation by numerous governmental authorities in the
United States, principally the FDA and corresponding state agencies, and in
other countries. In the United States, the Company's products are regulated as
medical devices and are subject to the FDA's premarket approval requirements,
which have not been satisfied. Securing FDA approvals requires the submission of
extensive clinical data and supporting information to the FDA. Although the
EnSite System has been used in limited clinical trials in the United States on
patients suffering from VT, under an IDE approved by the FDA, the Company cannot
file with the FDA a PMA application to market the EnSite System for diagnosing
VT in the United States until more extensive clinical trials are completed. The
process of obtaining FDA and other required regulatory approvals is lengthy,
expensive and uncertain and frequently requires from one to several years from
the date of FDA
2
<PAGE>
filing, if premarket approval is obtained at all. In addition, the use of the
EnSite System to diagnose SVT is in the initial stages of clinical development.
The Company believes that it will require an IDE approval from the FDA to pursue
clinical testing of the EnSite System for SVT in the United States and
significant additional testing will be required to support a subsequent PMA
application.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sale internationally may be longer or
shorter than that required for FDA approval, and the requirements may differ.
After mid-1998, the Company will be required to obtain the certifications
necessary to enable the CE Mark to be affixed to the Company's products in order
to sell its products in member countries of the European Union. The Company has
not obtained such certifications and there can be no assurance it will be able
to do so in a timely manner. In addition, significant costs and requests for
additional information may be encountered by the Company in its efforts to
obtain regulatory approvals. Any such events could substantially delay or
preclude the Company from marketing its products internationally.
Regulatory approvals, if granted, may include significant limitations on
the indicated uses for which the product may be marketed. In addition, to obtain
such approvals, the FDA and certain foreign regulatory authorities may impose
numerous other requirements with which medical device manufacturers must comply.
FDA enforcement policy strictly prohibits the marketing of approved medical
devices for unapproved uses. In addition, product approvals could be withdrawn
for failure to comply with regulatory standards or the occurrence of unforeseen
problems following the initial marketing. The Company will be required to adhere
to applicable FDA regulations regarding Good Manufacturing Practices ("GMP") and
similar regulations in other countries, which include testing, control, and
documentation requirements. Ongoing compliance with GMP and other applicable
regulatory requirements will be monitored through periodic inspections by
federal and state agencies, including the FDA, and by comparable agencies in
other countries. Failure to comply with applicable regulatory requirements,
including the marketing of products for unapproved uses, could result in, among
other things, warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to grant premarket approval for devices, withdrawal of approvals and
criminal prosecution. Changes in existing regulations or adoption of new
governmental regulations or policies could prevent or delay regulatory approval
of the Company's products. Certain material changes to medical devices also are
subject to FDA review and approval.
There can be no assurance that the Company will be able to obtain PMA
approval for the EnSite System for use in diagnosing VT and SVT, the
certifications
3
<PAGE>
necessary for affixation of the CE Mark on the Company's products or other
necessary regulatory approvals on a timely basis or at all. Delays in receipt of
or failure to receive such approvals, the loss of previously obtained approvals,
or failure to comply with existing or future regulatory requirements would have
a material adverse effect on the Company's business, financial condition and
results of operations.
UNCERTAINTY OF AVAILABILITY OF TREATMENTS EMPLOYING ENSITE SYSTEM
The Company has developed its EnSite System to diagnose VT and assist
electrophysiologists in selecting among treatment options. Current treatments
for VT include drugs, implantable defibrillators, surgery and, potentially,
catheter ablation. The Company believes that the EnSite System will enable
increased use of catheter ablation for treating complex VT. Because ablation
treatment for VT is a relatively new and to date an untested treatment, the long
term effects of ablation on patients are unknown. As a result, the long term
success of ablation therapy in treating VT will not be known for several years.
To date, no medical devices for treating VT patients in the United States
through catheter ablation have been approved by the FDA. Such catheter ablation
devices require PMA approval by the FDA, and there can be no assurance that any
such device will be approved by the FDA, or that any FDA approval will be
granted in the near future. Accordingly, there can be no assurance that the
catheter ablation market will develop in the near term or ever. Moreover, even
if medical devices for catheter ablation are approved by the FDA, there can be
no assurance that the market for treating VT through catheter ablation will
develop or that the EnSite System will prove useful in diagnosing VT for
treatment by catheter ablation products approved by the FDA. The Company is not
in the process of developing a catheter for ablation treatment and is entirely
dependent upon other medical device companies for the development of such
devices. If the medical devices for treating ventricular tachycardia through
catheter ablation are not approved by the FDA or, even with such approval, if a
market for treating ventricular tachycardia by catheter ablation does not
develop, the business, financial condition and results of operations of the
Company would be materially adversely affected.
UNCERTAINTY OF MARKET ACCEPTANCE; TRAINING OF PHYSICIANS REQUIRED
The commercial success of the EnSite System is dependent upon the number of
diagnostic procedures performed by electrophysiologists using the system. There
can be no assurance that the Company's EnSite System will gain any significant
degree of market acceptance among electrophysiologists, patients and health care
insurers and managed care providers. Electrophysiologists will not recommend
that diagnostic procedures be performed using the Company's products until such
time, if at all, as clinical data demonstrate the efficacy of such procedures as
compared to other diagnostic procedures currently available or under
development. Even if the
4
<PAGE>
clinical efficacy of procedures using the EnSite System is established,
electrophysiologists and other physicians may elect not to recommend the
procedures for any number of other reasons, including inadequate levels of
reimbursement. Broad use of the EnSite System will require training of
electrophysiologists, and the time required to complete such training could
adversely affect market acceptance. Failure of the Company's products to achieve
significant market acceptance would have a material adverse effect on the
Company's business, financial condition and results of operations.
UNCERTAINTY OF ABILITY TO DIAGNOSE AND TREAT ATRIAL FIBRILLATION
The Company intends to apply the EnSite System to the diagnosis of atrial
tachycardia, including atrial fibrillation; however, the Company has conducted
only limited clinical studies of its technology on patients suffering from
atrial tachycardia. Although the Company has submitted an IDE application to the
FDA for the clinical testing of the EnSite System in the right atrium, there can
be no assurance that the Company will be able to successfully extend its
technology to the mapping of atrial fibrillation or obtain regulatory approval
to test and market any products developed using such technology to map atrial
fibrillation. In addition, the Company has made and expects to continue to make
significant research and development expenditures in extending its technology to
the diagnosis of atrial fibrillation. There can be no assurance that the Company
will realize any benefit from these expenditures.
Atrial fibrillation is a complex disease and the subject of continuing
research. The therapies presently available for atrial fibrillation are in the
developmental stage with no proven effectiveness. Even if the Company is
successful in extending its technology to provide products that are capable of
diagnosing atrial fibrillation, there can be no assurance that treatments for
atrial fibrillation will exist that will require the diagnostic capabilities of
any products developed by the Company. As a result, there can be no assurance
that a commercial market will ever develop for any product developed by the
Company for the diagnosis of atrial fibrillation. The Company is not currently
engaged and has no present intention to engage in researching or developing any
medical devices for the treatment of atrial fibrillation.
UNCERTAINTY OF ABILITY TO PENETRATE COMPLEX TACHYCARDIA PATIENT POPULATION
The Company's EnSite System is designed to diagnose patients suffering from
complex tachycardia. The Company estimates that a majority of the four million
patients who suffer from tachycardia have complex forms of this disease.
Although the Company believes that the patients who suffer from complex
tachycardia are potential candidates for diagnosis using the Company's EnSite
System, there can be no assurance as to the number of complex tachycardia
patients that will be
5
<PAGE>
diagnosed using the Company's products due to a number of factors, including
patient preferences, the health and clinical history of the particular patient,
the access of the patient to electrophysiology labs employing the EnSite System,
the availability of alternative diagnostic procedures, the availability of
treatment options and the expense of the diagnosis using the EnSite System
vis-a-vis alternative diagnostic procedures. Failure of the Company's products
to achieve significant penetration of the population of patients suffering from
complex tachycardia could have a material adverse effect on the Company's
business, financial condition and results of operations.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES
The Company has generated no revenue and has sustained significant
operating losses each year since its inception. The Company expects such losses
to continue at least through 1999. There can be no assurance that the Company
will ever generate substantial operating revenues or achieve profitability. The
Company's ability to generate revenues from operations and achieve profitability
is dependent upon successful development, regulatory approval, manufacturing and
commercialization of the EnSite System and the Company's successful transition
from a development stage company to a manufacturing and sales company.
SIGNIFICANT COMPETITION; RAPID TECHNOLOGICAL CHANGE
The cardiac medical device market is highly competitive and characterized
by rapid innovation and technological change. The Company's EnSite System for
the mapping of ventricular tachycardia is a new technology that must compete
with more established mapping procedures and devices such as single-point
contact catheters that are currently widely used to map tachycardia and which
are generally less expensive and, unlike EnSite catheters, are generally reused
after resterilization. Single-point contact diagnostic catheters have been
approved by the FDA for VT mapping. In addition, certain of the Company's
competitors are developing new approaches and new products for diagnosing
ventricular tachycardia and atrial fibrillation for which regulatory approval
has not been granted, including contact mapping systems using multi-electrode
basket contact catheters and single-point mapping technologies. There can be no
assurance that any of these competitors will not receive required regulatory
approval to market their products before the Company. Certain competitors have
integrated product lines that include products for both diagnosis and ablation
treatment, which may afford opportunities for product bundling and other
marketing advantages. Many of the Company's competitors have an established
presence in the field of electrophysiology and established relationships with
electrophysiology labs. Many of these competitors have substantially greater
financial and other resources than the Company, including larger research and
development staffs and more experience and capabilities in conducting research
and development activities, testing products in
6
<PAGE>
clinical trials, obtaining regulatory approvals, and manufacturing, marketing
and distributing products. There can be no assurance that the Company will
succeed in developing and marketing technologies and products that are more
clinically efficacious or cost effective than the more established products or
the new approaches and products developed and marketed by its competitors.
Certain of the Company's competitors may achieve patent protection, regulatory
approval or product commercialization more quickly than the Company, which may
negatively impact the Company's ability to compete. The failure of the Company
to demonstrate the efficacy and cost effectiveness of its products as compared
to those of its competitors or the failure to develop new technologies and
products before its competitors would have a material adverse effect on
business, financial condition and results of operations.
The medical device industry is subject to rapid technological innovation
and, consequently, the life cycle of any particular product is short. There can
be no assurance that alternative diagnostic systems or other discoveries and
developments with respect to mapping tachycardia will not render the Company's
products obsolete. Furthermore, the greater financial and other resources of
many of the Company's competitors may permit such competitors to respond more
rapidly than the Company to technological advances.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend in part on its ability to obtain patent
protection for its products and processes, to preserve its trade secrets and to
operate without infringing the proprietary rights of third parties. The patent
positions of medical device companies, including the Company, are uncertain and
involve complex and evolving legal and factual questions. There can be no
assurance that any pending or future patent applications will result in issued
patents, that any current or future patents will not be challenged, invalidated
or circumvented, that the scope of any of the Company's patents will exclude
competitors or that the rights granted thereunder will provide any competitive
advantage to the Company, that any of the Company's patents will be held valid
if subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held by the Company. Furthermore,
there can be no assurance that others will not independently develop similar
technologies or duplicate any technology by the Company or that the Company's
technology will not infringe patents or other rights owned by others. Moreover,
the Company cannot be certain that it was the first to make the inventions
covered by each of its issued patents and its pending patent applications, or
that it was the first to file patent applications for such inventions. In
addition, there can be no assurance that competitors, many of which have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use or sell its products
either in the
7
<PAGE>
United States or in international markets. Further, the laws of certain foreign
countries may not protect the Company's intellectual property rights to the same
extent as do the laws of the United States.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and competitors may
resort to intellectual property litigation as a means of competition.
Intellectual property litigation is complex and expensive and the outcome of
such litigation is difficult to predict. There can be no assurance that the
Company will not become subject to patent infringement claims or litigation in a
court of law, or interference proceedings declared by the United States Patent
and Trademark Office to determine the priority of inventions or an opposition to
a patent grant in a foreign jurisdiction. Litigation or regulatory proceedings,
which could result in substantial cost and uncertainty to the Company, may also
be necessary to enforce patent or other intellectual property rights of the
Company or to determine the scope and validity of other parties' proprietary
rights. There can be no assurance that the Company will have the financial
resources to assert patent infringement suits or to defend itself from claims of
invalidity. An adverse determination in any litigation could subject the Company
to significant liabilities to third parties, or require the Company to seek
licenses from or pay royalties to third parties that may be substantial.
Furthermore, there can be no assurance that the necessary licenses would be
available to the Company on satisfactory terms, if at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing, selling
or using its proposed products, any of which would have a material adverse
effect on the Company's business, financial condition, results of operations and
prospects.
In addition to patents, the Company relies on trade secrets and proprietary
knowledge, which it seeks to protect, in part, through confidentiality
agreements with employees, consultants and other parties. In particular, the
Company relies upon such means to protect the proprietary software used in the
EnSite System. There can be no assurance that the Company's proprietary
information or confidentiality agreements will not be breached, that the Company
will have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known to or independently developed by competitors.
LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK
The Company has only limited experience in manufacturing the EnSite
catheter and the patient interface unit of the EnSite System's clinical
workstation. The Company currently manufactures its catheters and patient
interface units in limited quantities for laboratory and clinical testing and
intends to manufacture the EnSite catheter for commercial sale. The Company has
no experience manufacturing its products in the volumes that will be necessary
for the Company
8
<PAGE>
to achieve significant commercial sales, and there can be no assurance that
reliable, high-volume manufacturing capacity can be established or maintained at
commercially reasonable costs. If the Company receives FDA or foreign approval
for its products, it will need to expend significant capital resources and
develop the necessary expertise to establish large-scale manufacturing
capabilities. Manufacturers often encounter difficulties in scaling up
production of new products, including problems involving production yields,
quality control and assurance, component supply shortages, shortages of
qualified personnel, compliance with FDA and foreign regulations, and the need
for further FDA or foreign regulatory approval of new manufacturing processes.
Any inability of the Company to establish and maintain large-scale manufacturing
capabilities would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's manufacturing facilities will be subject to periodic
inspection by United States and foreign regulatory authorities. In order to
manufacture products for sale in the United States, the Company's operations
must undergo GMP compliance inspections conducted by the FDA. To date, the
Company's facilities and manufacturing processes have not undergone any such
inspections. The Company will also be required to comply with ISO 9001 and 9002
and CE Mark standards in order to sell its products in Europe. Any failure of
the Company to comply with GMP or ISO 9001 and 9002 and CE Mark standards may
result in the Company being required to take corrective actions, such as
modification of its manufacturing policies and procedures. In addition, the
Company may be required to cease all or part of its operations for some period
of time until it can demonstrate that appropriate steps have been taken to
comply with GMP or ISO 9001 and 9002 and CE Mark regulations. There can be no
assurance that the Company will be found in compliance with GMP or ISO 9001 and
9002 and CE Mark standards in future audits by regulatory authorities or that
the Company will not experience difficulties in the course of developing its
manufacturing capability. A failure to comply with GMP or ISO 9001 and 9002 and
CE Mark standards, or to develop its manufacturing capability in compliance with
such standards, would prohibit the Company from manufacturing and distributing
its products and therefore have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON SOLE OR LIMITED SOURCE SUPPLIERS
The Company purchases raw materials and certain key components of its
products, including the computer workstation and certain components for its
catheter, from sole, single or limited source suppliers. For certain of these
components, there are relatively few alternative sources of supply. The Company
currently has no agreements that would assure delivery of raw materials and
components from such suppliers. Establishing additional or replacement suppliers
for any of the numerous components used in the Company's products, if required,
may not be accomplished quickly and could involve significant additional costs.
The
9
<PAGE>
inability of any of the Company's suppliers to provide an adequate supply of
components in a timely manner, or the inability of the Company to locate
qualified alternative suppliers for materials and components at a reasonable
cost, could adversely affect the Company's business, financial condition and
results of operations. In the event the Company had to replace a single source
supplier, such replacement would be required to meet GMP and certain other
regulatory standards.
NEED TO MANAGE EXPANDING OPERATIONS
In order to complete clinical trials in progress, prepare additional
products for clinical trials, and develop future products, the Company believes
that it will be required to expand its operations, particularly in the areas of
research and development, manufacturing, quality assurance and sales and
marketing. As the Company expands its operations in these areas, such expansion
will likely result in new and increased responsibilities for management
personnel. To accommodate any such growth and compete effectively, the Company
will be required to implement and improve information systems, procedures, and
controls, and to expand, train, motivate and manage its work force. The
Company's future success will depend to a significant extent on the ability of
its current and future management personnel to operate effectively, both
independently and as a group. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's future operations. Any failure to implement and improve the Company's
operational, financial and management systems or to expand, train, motivate or
manage employees as required by future growth, if any, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
LACK OF COMMERCIAL SALES AND MARKETING EXPERIENCE
The Company has no experience marketing the EnSite System and has not yet
entered into any marketing or distribution arrangements for the system or hired
sales personnel. There can be no assurance that the Company will be able to
build and maintain a suitable sales force or enter into satisfactory marketing
arrangements with third parties when commercial potential develops, if ever, or
that its sales and marketing efforts will be successful.
RISKS RELATING TO INTERNATIONAL OPERATIONS
The Company plans to market the EnSite System through distributors in
international markets, subject to receipt of required foreign regulatory
approvals. Sales in foreign markets are initially expected to be the Company's
only source of revenue. The Company is obligated by agreement to extend a right
of first offer for distribution outside North America to Medtronic, Inc. There
can be no assurance that international distributors for the Company's products
will devote adequate resources to selling its products.
10
<PAGE>
Changes in overseas economic conditions, currency exchange rates, foreign
tax laws or tariffs or other trade regulations could have a material adverse
effect on the Company's ability to market its products internationally and
therefore on its business, financial condition and results of operations. The
Company's business is also expected to subject it and its representatives,
agents and distributors to laws and regulations of the foreign jurisdictions in
which they operate or the Company's products are sold. The Company may depend on
foreign distributors and agents for compliance and adherence to foreign laws and
regulations. The regulation of medical devices in a number of such
jurisdictions, particularly in the European Union, continues to develop and
there can be no assurance that new laws or regulations will not have an adverse
effect on the Company's business, financial condition and results of operations.
In addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The success of the Company is dependent in large part upon the ability of
the Company to attract and retain key management and operating personnel.
Qualified individuals are in high demand and are often subject to competing
offers. In the future, the Company will need to add additional skilled personnel
in the areas of research and development, sales, marketing and manufacturing.
There can be no assurance that the Company will be able to attract and retain
the qualified personnel needed for its business. The loss of the services of one
or more members of the Company's research, manufacturing or management group or
the inability to hire additional personnel as needed would likely have a
material adverse effect on the Company's business and prospects.
FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE
The Company may require substantial funds to meet its working capital
requirements for continued research and development, testing, regulatory
approval and full-scale commercial introduction of its EnSite System. In order
to meet its funding needs, the Company may be required to raise additional funds
through public or private financings, including the sale of equity or debt. Any
additional equity financings may be dilutive to current stockholders, and debt
financing, if available, may involve restrictive covenants. Adequate funds for
the Company's operations, whether from financial markets or from other sources,
may not be available when needed on terms attractive to the Company, if at all.
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its programs designed to facilitate the commercial introduction
of the EnSite System or prevent such commercial introduction altogether.
11
<PAGE>
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT
Sales of the Company's proposed products in most markets in the United
States and internationally will be dependent on availability of adequate
reimbursement for tachycardia diagnostic procedures from third-party payors,
such as government and private insurance plans, health maintenance organizations
and preferred provider organizations. In the United States, the Company's
products, if and when approved for commercial sale, would be purchased primarily
by health care providers which will then seek to be reimbursed by various third
party payors, such as Medicare, Medicaid and other government programs and
private insurance plans, for the health care services provided to their
patients. Third-party payors reimburse health care providers for medical
treatment based on a variety of methods, including a lump sum prospective
payment system based on a diagnosis related group or per diem, a blend between
the health care provider's reported costs and a fee schedule, a payment for all
or a portion of charges deemed reasonable and customary, or a negotiated per
capita fixed payment. Third-party payors are increasingly challenging the
pricing of medical products and procedures. Even if a procedure is eligible for
reimbursement, the level of reimbursement may not be adequate. Additionally,
payors may deny reimbursement if they determine that the device used in a
treatment was unnecessary, inappropriate or not cost-effective, experimental or
used for a non-approved indication.
It is anticipated that the Company's EnSite catheter will be sold at a
premium in comparison to existing single point catheters used in current
diagnostic or mapping procedures, in addition to requiring an initial capital
outlay for the companion clinical workstation. Existing single point catheters,
unlike EnSite catheters, are generally reused after sterilization. In addition
to establishing the safety and efficacy of the EnSite System, and assuming no
increase in the level of reimbursement for cardiovascular procedures expected to
utilize the Company's products, the Company will be required to economically
justify the relative increased cost of utilizing the EnSite System by
satisfactorily demonstrating the enhanced benefits of the EnSite System to
health care providers and payors in terms of such factors as enhanced patient
procedural efficiencies, reduced radiation exposure and improved patient
outcomes.
The commercial success of the Company's EnSite System may also be affected
by the availability of adequate reimbursement for treatments for complex VT,
including catheter ablation. To date, catheter ablation has not been approved by
the FDA for treatment of VT and is not a commonly prescribed treatment for VT.
The Company believes that the improved mapping technology of the EnSite System
may enable catheter ablation for treating complex VT.
There can be no assurance that adequate levels of reimbursement will be
available to enable the Company to achieve or maintain market acceptance of its
12
<PAGE>
products or maintain price levels which exceed the Company's costs of developing
and manufacturing its products. In addition, use of the Company's products will
also depend on the adequacy of third-party reimbursement for treatments that
would be used in connection with the Company's products, such as catheter
ablation treatment. There can be no assurance that adequate levels of
reimbursement for ablation treatment will be available to support the use of the
Company's products. Without adequate support from third-party payors, the market
for the Company's products may be severely limited. Moreover, the Company is
unable to predict what additional legislation or regulation, if any, relating to
the health care industry or third-party coverage and reimbursement may be
enacted in the future, or what effect such legislation or regulation would have
on the Company. There is significant uncertainty concerning third-party
reimbursement of medical devices, and there can be no assurance that third-party
reimbursement will be available in the future for the EnSite System or that any
third-party reimbursement that is obtained will be adequate. Any failure to
obtain third party reimbursement for diagnostic procedures using the Company's
products or treatment procedures that rely on the Company's products could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company expects that there will be continued pressure on
cost-containment throughout the United States health care system. Reforms may
include mandated basic health care benefits, controls on health care spending
through limitations on the growth of private health insurance premiums and
Medicare and Medicaid spending, greater reliance on prospective payment systems,
the creation of large insurance purchasing groups and fundamental changes to the
health care delivery system. The Company anticipates that Congress and state
legislatures will continue to review and assess alternative health care delivery
systems and payment methodologies and public debate of these issues will likely
continue in the future. Due to uncertainties regarding the ultimate features of
reform initiatives and their enactment and implementation, the Company cannot
predict which, if any, of such reform proposals will be adopted, when such
proposals may be adopted or what impact they may have on the Company.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
devices and procedures. In most markets there are private insurance systems as
well as government managed systems. There can be no assurance that reimbursement
for the Company's products will be available in international markets under
either government or private reimbursement systems.
PRODUCT LIABILITY RISK
13
<PAGE>
The Company faces an inherent business risk of exposure to product
liability claims in the event that an electrophysiology patient is adversely
affected by its products. The Company currently carries a product liability
insurance policy covering the Company's clinical trial operations with an
aggregate limit of $5 million, although there can be no assurance that the
Company's existing insurance coverage limits are adequate to cover the Company
from any liabilities it might incur in connection with the distribution of its
products. Although the Company expects to obtain product liability insurance
coverage in connection with the commercialization of the EnSite System, there
can be no assurance that such insurance will be available on commercially
reasonable terms, or at all, or that such insurance, even if obtained, would
adequately cover any product liability claim. A product liability or other claim
with respect to uninsured liabilities or in excess of insured liabilities could
have a material adverse effect on the business and prospects of the Company.
POSSIBLE VOLATILITY OF PRICE
The trading prices of the Company's Common Stock could be subject to wide
fluctuations in response to quarter to quarter variations in the Company's
operating results, announcements by the Company or its competitors regarding the
results of regulatory approval filings or clinical trials or testing,
developments or disputes concerning proprietary rights, technological
innovations or new commercial products, governmental regulatory action,
third-party reimbursement decisions, general conditions in the medical
technology industry, or other events or factors, many of which are beyond the
Company's control. In addition, the stock market has experienced extreme price
and volume fluctuations, which have particularly affected the market prices of
many medical technology companies and which have often been unrelated to the
operating performance of such companies.
14
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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SUCH FINANCIAL STATEMENTS.
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