<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1997
REGISTRATION NO. 333-20677
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ENDOCARDIAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3815 41-1724963
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Identification Number) Classification Code Number)
</TABLE>
1350 ENERGY LANE, SUITE 110
ST. PAUL, MINNESOTA 55108
(612) 644-7890
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JAMES W. BULLOCK
ENDOCARDIAL SOLUTIONS, INC.
1350 ENERGY LANE, SUITE 110
ST. PAUL, MINNESOTA 55108
(612) 644-7890
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
<TABLE>
<S> <C>
KENNETH L. CUTLER DAVID B. MILLER
Dorsey & Whitney LLP Faegre & Benson LLP
Pillsbury Center South 2200 Norwest Center
220 South Sixth Street 90 South Seventh Street
Minneapolis, Minnesota 55402-3901 Minneapolis, Minnesota 55402-1498
(612) 340-2600 (612) 336-3000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value........................ 3,450,000 shares $12.00 $41,400,000 $12,546(3)
</TABLE>
(1) Including 450,000 shares of Common Stock which the Underwriters have the
option to purchase solely to cover over-allotments, if any.
(2) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457.
(3) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 13, 1997
PROSPECTUS
DATED , 1997
3,000,000 SHARES
[LOGO]
COMMON STOCK
All of the 3,000,000 shares of Common Stock offered hereby are being issued and
sold by Endocardial Solutions, Inc. ("ESI" or the "Company").
Prior to the Offering, there has been no public market for the Common Stock of
the Company. It is currently estimated that the initial public offering price
will be between $10.00 and $12.00 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "ECSI".
Of the 3,000,000 shares of Common Stock offered hereby, the Company intends to
sell, at the Price to Public, up to 750,000 shares of Common Stock to Medtronic,
Inc., an existing shareholder of the Company. See "Sale of Shares to Medtronic."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount Company(1)
<S> <C> <C> <C>
Per Share................................ $ $ $
Total(2)................................. $ $ $
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $400,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 450,000 shares of Common Stock solely to cover
over-allotments, if any, at the Price to Public less the Underwriting
Discount. If all such shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters subject to prior sale
when, as, and if delivered to and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that
certificates for such shares will be available for delivery at the offices of
Piper Jaffray Inc. in Minneapolis, Minnesota on or about , 1997.
Piper Jaffray inc. Volpe, Welty & Company llc
<PAGE>
ENDOCARDIAL Endocardial Solutions, Inc. designs, develops, and
SOLUTIONS manufactures a minimally invasive diagnostic system
LOGO that rapidly diagnoses tachycardia, a potentially fatal
abnormal heart rhythm. The Company believes that its
proprietary EnSite catheter and clinical workstation
(together, the "EnSite System") is a powerful new
diagnostic tool that will enable electrophysiologists
to rapidly and comprehensively map tachycardia and
select the optimal patient treatment.
THE ENSITE SYSTEM
- -------------------------------------------
MAPPING CATHETER -- THE ENSITE CATHETER IS [Graphic of Ensite catheter.]
A NON-CONTACT, SINGLE-USE, MULTI-ELECTRODE
ARRAY PERCUTANEOUS CATHETER, DESIGNED FOR
USE WITH THE ENSITE CLINICAL WORKSTATION.
THE ENSITE CATHETER'S MULTI-ELECTRODE ARRAY
SENSES ELECTRICAL ACTIVITY GENERATED FROM
THE ENDOCARDIAL WALL WHILE FLOATING IN THE
HEART CHAMBER AND TRANSMITS THE ELECTRICAL
INFORMATION TO THE WORKSTATION.
CLINICAL WORKSTATION -- THE CLINICAL [Graphic of Ensite clinical
WORKSTATION CONSISTS OF THE COMPANY'S workstation, including the
PROPRIETARY PATIENT INTERFACE UNIT, A patient interface unit, the
SILICON GRAPHICS-BASED WORKSTATION AND computer workstation and
OTHER PERIPHERALS. other peripheral
instruments.]
THE ENSITE SYSTEM APPLIES PROPRIETARY
MATHEMATICAL ALGORITHMS TO RAPIDLY COMPUTE
MORE THAN 3,000 POINTS OF ELECTRICAL
ACTIVITY WITHIN A HEART CHAMBER, PRODUCING
A HIGH RESOLUTION, REAL-TIME, THREE-
DIMENSIONAL COLOR DISPLAY OF THE ELECTRICAL
ACTIVITY IN THE HEART CHAMBER. THE "VIRTUAL
ELECTROGRAM" FUNCTION OF THE ENSITE SYSTEM
ALLOWS ELECTROPHYSIOLOGISTS TO INSTANTLY
VIEW THE ELECTRICAL ACTIVITY AT ANY OF THE
MORE THAN 3,000 POINTS. THE ENSITE SYSTEM
IS ALSO CAPABLE OF TRACKING AND DISPLAYING
THE LOCATION AND MOVEMENTS OF AUXILIARY
CATHETERS INTRODUCED INTO THE CHAMBER.
<TABLE>
<S> <C> <C> <C>
THE ENSITE SYSTEM ADVANTAGE
- ----------------------------------------------------------------------------------------------------------------------------
ENHANCE DIAGNOSTIC CAPABILITY MAP COMPLEX TACHYCARDIAS REDUCE PROCEDURAL TIME REDUCE RADIATION EXPOSURE
CAPTURES AND DISPLAYS A SIGNIFI- MAPS THE MAJORITY OF RAPIDLY ACQUIRES AND MAPS THE HEART'S ELECTRICAL
CANTLY GREATER AMOUNT OF DATA PATIENTS WHO CANNOT BE DISPLAYS PRECISE MAPPING ACTIVITY AND LOCATES
THAN CURRENTLY AVAILABLE DIAGNOSED EFFECTIVELY IN THE SPAN OF A FEW AUXILIARY CATHETERS RAPIDLY,
CATHETERS. USING CURRENT TECHNOLOGY. HEARTBEATS. WITH REDUCED PATIENT AND
MEDICAL STAFF EXPOSURE TO
RADIATION FROM FLUOROSCOPY.
</TABLE>
- --------------------------------------------------------------------------------
To date, limited clinical testing of the EnSite catheter and
workstation has been performed on 23 patients in the United Kingdom and five
patients in the United States and the EnSite catheter and workstation have
not received approval from the FDA for commercial sale in the United States
or from international regulatory authorities for sale outside the United
States. There can be no assurance that the EnSite System will receive United
States or international regulatory approvals on a timely basis or at all. See
"Risk Factors--Lack of Regulatory Approval."
- -------------------------------------------------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK OF THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A
PENALTY BID, DURING AND AFTER THE OFFERING. IN ADDITION, IN CONNECTION WITH
THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) ALSO MAY
ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET, IN ACCORDANCE WITH THE RULE 103 UNDER THE SECURITIES
EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
EnSiteTM is a trademark of the Company. This Prospectus also includes
trade names, trademarks and registered trademarks of companies other than ESI.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN
CONJUNCTION WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND THE
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED,
ALL INFORMATION IN THIS PROSPECTUS, INCLUDING FINANCIAL INFORMATION, SHARE AND
PER SHARE DATA (I) HAS BEEN ADJUSTED TO REFLECT THE PRO FORMA CONVERSION OF ALL
OUTSTANDING SHARES OF THE COMPANY'S SERIES A, SERIES B, SERIES C AND SERIES D
PREFERRED STOCK (THE "PREFERRED STOCK") INTO SHARES OF COMMON STOCK UPON CLOSING
OF THE OFFERING, (II) REFLECTS THE ONE-FOR-TWO REVERSE STOCK SPLIT OF THE COMMON
STOCK TO BE EFFECTED IN MARCH 1997 AND (III) ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." INVESTORS SHOULD
CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
Endocardial Solutions, Inc. ("ESI" or the "Company") designs, develops, and
manufactures a minimally invasive diagnostic system that diagnoses, within the
span of a few heartbeats, tachycardia, a potentially fatal abnormal heart
rhythm. The Company believes that its proprietary EnSite catheter and clinical
workstation (together, the "EnSite System") is a powerful new diagnostic tool
that will enable electrophysiologists to rapidly and comprehensively map
tachycardia and improve the selection of patient treatment options.
The Company conducted clinical trials of the EnSite System in the United
Kingdom on sixteen patients for ventricular tachycardia and on seven patients
for supraventricular (atrial) tachycardia. The Company conducted in early 1997 a
limited clinical trial on five ventricular tachycardia patients in the United
States under an investigational device exemption ("IDE") from the FDA. Although
clinical data obtained to date are insufficient (and included patients who
experienced complications) to demonstrate the safety and efficacy of the EnSite
System under applicable United States and international regulatory guidelines,
the Company anticipates that this and additional clinical trials will be used to
support a pre-market approval ("PMA") application to obtain approval to market
the EnSite System for the diagnosis of ventricular tachycardia in the United
States. The process of obtaining FDA and other required regulatory approvals is
lengthy, expensive and uncertain. See "Risk Factors--Limited Clinical Testing
Experience; Safety and Efficacy Not Yet Established" and "--Lack of Regulatory
Approval."
Tachycardias are caused by irregular electrical activity in the heart which
disrupts the heart's normal pumping action. Ventricular tachycardia ("VT") occur
in the lower chambers of the heart and frequently lead to serious complications,
including sudden cardiac death. Supraventricular tachycardia ("SVT"), including
atrial fibrillation and flutter, originate in the upper chambers of the heart
and often result in chest pain, fatigue and dizziness and, while generally not
life-threatening, are a leading cause of stroke in the United States.
It is estimated that in the United States approximately one million people
suffer from VT and approximately three million suffer from some form of SVT. The
Company estimates that, based on the experience of members of its Scientific
Advisory Board, a majority of these four million VT and SVT patients suffer from
complex forms of tachycardia that have multiple points of origin in
unpredictable locations in the heart ("complex tachycardia"). To date,
electrophysiologists have generally been unable to adequately diagnose complex
tachycardia due to the limited capabilities of present technology. Currently
available single-point contact catheters require time-consuming and tedious
procedures that generally produce an insufficient amount of data to effectively
locate, diagnose and optimally treat complex tachycardia.
The Company's EnSite System is designed to enable electrophysiologists to
rapidly and precisely locate the multiple, unpredictable points of origin of
complex tachycardia. The EnSite System applies proprietary mathematical
algorithms to compute more than 3,000 points of electrical activity within a
heart chamber, producing a high resolution, real-time, three-dimensional color
display of the electrical activity in the heart chamber. The "virtual
electrogram" function of the EnSite System allows electrophysiologists to
3
<PAGE>
instantly view the electrical activity at any of the more than 3,000 points. The
EnSite System is also capable of tracking and displaying the location and
movements of auxiliary catheters introduced into the chamber.
The Company's strategy is to establish the EnSite System as the leading
cardiac mapping tool for diagnosing complex tachycardia in the more than 700
electrophysiology laboratories in the United States and those in Europe and
Japan. The Company believes that the EnSite System has significant advantages
over single-point contact catheters currently used to diagnose tachycardia,
including:
- ENHANCED DIAGNOSTIC CAPABILITY. The diagnostic power of the EnSite System
is designed to enable electrophysiologists to make more informed decisions
in choosing optimal treatment for tachycardia patients. The high
resolution, three-dimensional color map generated by the EnSite System
should greatly enhance electrophysiologists' diagnostic capabilities
through the system's ability to capture and display a significantly
greater amount of electrical data than can be generated with currently
available contact catheters.
- ABILITY TO MAP COMPLEX TACHYCARDIAS. ESI believes that its technology
will enable electrophysiologists to map complex forms of VT and SVT in the
majority of patients who cannot be mapped effectively using currently
available technology.
- REDUCED PROCEDURAL TIME. Currently available single-point contact
catheters can require several hours of overall procedural time to diagnose
simple tachycardia and can require between six and twelve hours to
diagnose complex tachycardia. The Company believes that the EnSite System
can reduce the overall procedure time significantly, greatly increasing
the number of patients who may be candidates for diagnosis using cardiac
mapping technology.
- REDUCED RADIATION EXPOSURE. The Company believes that the speed with
which its technology can map the heart's electrical activity and locate
auxiliary catheters will reduce the amount of time that patients and
medical staff are exposed to radiation from fluoroscopy, the effects of
which are cumulative.
- REDUCED COSTS. The Company believes that the EnSite System will reduce
the costs associated with treating complex tachycardia by significantly
reducing the amount of time required to locate and diagnose abnormal heart
rhythms and by enabling electrophysiologists to select potentially less
costly treatment for patients.
In April 1996, Medtronic, Inc. ("Medtronic") invested $10 million in the
Company through the purchase of Preferred Stock. In connection with this
investment, the Company entered into an agreement pursuant to which it granted
Medtronic a right of first offer to distribute the Company's products on an
exclusive basis outside of North America. Of the 3,000,000 shares of Common
Stock offered hereby, the Company intends to sell, at the Price to Public, up to
750,000 shares of Common Stock to Medtronic. See "Sale of Shares to Medtronic,"
"Principal Stockholders" and "Underwriting."
The Company is a development stage company that has incurred significant
operating losses since its inception. As of December 31, 1996, the Company had
an accumulated deficit of approximately $16.7 million. See "Risk
Factors--History of Operating Losses; Accumulated Deficit; Expectation of Future
Losses." The Company's offices are located at 1350 Energy Lane, Suite 110, St.
Paul, Minnesota 55108, and its telephone number is (612) 644-7890. The Company
was incorporated in Minnesota in 1992 and was reincorporated in Delaware in
1995.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 3,000,000 shares
Common Stock to be outstanding after the
Offering................................... 8,759,031 shares (1)
Use of proceeds.............................. Working capital, including primarily
continued development and testing of, and
clinical trials and marketing activities for,
the EnSite System; capital expenditures and
other general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... ECSI
</TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 21, 1992
(INCEPTION)
YEAR ENDED DECEMBER 31, TO
------------------------------- DECEMBER 31,
1994 1995 1996 1996
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Research and development......................................... $ 3,352 $ 3,639 $ 4,425 $ 12,118
General and administrative....................................... 857 1,088 1,911 4,197
Sales and marketing.............................................. 282 123 374 818
--------- --------- --------- ------------
Operating loss..................................................... (4,491) (4,850) (6,710) (17,133)
Interest income, net............................................... 83 116 229 433
--------- --------- --------- ------------
Net loss........................................................... $ (4,408) $ (4,734) $ (6,481) $ (16,700)
--------- --------- --------- ------------
--------- --------- --------- ------------
Pro forma net loss per share (2)................................... $ (1.12)
---------
---------
Pro forma weighted average shares outstanding (2).................. 5,809
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
ACTUAL AS ADJUSTED(3)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $ 6,157 $ 36,447
Working capital....................................................................... 5,549 35,839
Total assets.......................................................................... 7,200 37,490
Long-term debt and capital lease obligations, less current portion.................... 302 302
Deficit accumulated during the development stage...................................... (16,623) (16,623)
Total stockholders' equity............................................................ 6,214 36,504
</TABLE>
- ------------------------
(1) Excludes 897,782 shares of Common Stock issuable upon exercise of options
outstanding on such date, which have a weighted average exercise price of
$1.14 per share. Also excludes 56,607 shares of Common Stock issuable upon
exercise of outstanding warrants, which have a weighted average exercise
price of $4.16 per share. See "Description of Capital Stock."
(2) Computed on the basis described in Note 2 of Notes to Financial Statements.
(3) Adjusted to reflect the sale of 3,000,000 shares of Common Stock offered
hereby at an assumed public offering price of $11.00 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS.
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
has 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. See "Business."
LIMITED CLINICAL TESTING EXPERIENCE; SAFETY AND EFFICACY NOT YET ESTABLISHED
The Company has conducted only limited clinical trials in the United States
and in the United Kingdom. The Company conducted clinical trials of the EnSite
System in the United Kingdom on sixteen patients for VT and on seven patients
for SVT. The Company has received an IDE from the FDA for, and conducted in
early 1997 a limited clinical test of the EnSite System for diagnosing VT in
five patients in the United States. Of the nine VT patients which were submitted
in the Company's amendment to its IDE application with the FDA, three
experienced complications, including one death four days following the
procedure. In granting the IDE, the FDA expressed its belief that there is a
significant possibility that one or two of the complications were device
related. Based on the Company's evaluations, the Company believes these
complications were not device related and has submitted its response to the FDA.
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
PMA application to the FDA for marketing approval. The Company currently
estimates, based on preliminary conversations with the FDA, that a PMA
application for marketing approval will require clinical trials on at least 50
additional VT patients. 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. As a result, the Company has not submitted
an IDE application for any atrial fibrillation diagnostic products, nor has it
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
6
<PAGE>
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. See "Business--Government
Regulation."
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 was recently the subject of a clinical trial in the United States
on five 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 filing, if premarket approval is obtained at all. In
addition, the use of the EnSite System to diagnose SVTs 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 SVTs
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 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
7
<PAGE>
existing or future regulatory requirements would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Government Regulation."
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. See
"Business--Background--Ventricular Tachycardia."
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. See "--Significant Competition; Rapid Technological Change." Even
if the 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. See
"--Uncertainty of Third-Party Reimbursement" and "Business--The EnSite System."
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
clinical studies of its technology on only seven patients suffering from atrial
tachycardia. 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
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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. See "Business--
Background--Supraventricular Tachycardia."
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, based on the experience of
members of its Scientific Advisory Board, 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 no assurance as to the number of complex tachycardia patients
that will be 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. See
also "--Uncertainty of Availability of Treatments Employing the EnSite System,"
"--Uncertainty of Market Acceptance; Training of Physicians Required" and
"--Uncertainty of Ability to Diagnose and Treat Atrial Fibrillation."
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. As of December 31, 1996, the Company had
an accumulated deficit of approximately $16.7 million. Net losses for the years
ended December 31, 1994, 1995 and 1996 were approximately $4.4 million, $4.7
million and $6.5 million. 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
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. Among the Company's competitors that offer
single-point contact diagnostic catheters are Bard Electrophysiology, a division
of C.R. Bard, Inc.; EP Technologies, a division of Boston Scientific
Corporation; Electro-Catheter Corporation; Cordis Webster,
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Inc., a division of Johnson & Johnson; Daig Corporation, a division of St. Jude
Medical, Inc. and CardioRythm, Inc., a division of Medtronic, Inc. In addition,
several 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.
The companies known by the Company to be developing basket contact catheters
include Cardiac Pathways Corporation, EP Technologies and Cordis-Webster, Inc.
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 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 the Company's
business, financial condition and results of operations. See
"Business--Competition."
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. See "Business--Competition."
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. As of the
date of this Prospectus, the Company has two U.S. patent applications pending by
which it is seeking to obtain protection for certain enhancements currently
embodied in the EnSite System, relating to the catheter, catheter localization
techniques and user interface elements. The Company also has three issued U.S.
patents which relate to the technology underlying the EnSite System and the
development-stage versions of the system. One of these patents covers the
catheter of the EnSite System and its development-stage versions. The remaining
two issued patents are directed to measurement methodologies used in the
development-stage versions of the EnSite System. The Company has also filed and
has pending several foreign patent applications directed to various aspects of
the technology underlying the EnSite System. 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
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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 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 defend itself from claims of
invalidity. An adverse determination in any litigation could subject the Company
to significant liabilities to third parties, 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.
See "Business--Patents and Proprietary Rights."
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 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.
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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 be required to comply with ISO 9001 standards in
order to sell its products in Europe. Any failure of the Company to comply with
GMP or ISO 9001 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 regulations. There can be
no assurance that the Company will be found in compliance with GMP or ISO 9001
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, 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. Silicon Graphics is the
single source supplier of the EnSite System's computer workstation. 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 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. See "Business--Manufacturing."
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. See "--Dependence on Key Personnel; Need for Additional Personnel"
and "Business--Employees" and "Management."
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
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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. See "Business--Sales and Marketing."
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. See "Certain
Transactions." There can be no assurance that international distributors for the
Company's products will devote adequate resources to selling its products.
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. See "Business--Sales and Marketing."
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 proceeds of the Offering, together with cash flow from operations, are
expected to be sufficient to fund the Company's operations for at least two
years following the consummation of the Offering. The Company may require
substantial additional 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 needs beyond
this two-year period, 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 purchasers in the Offering, 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. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
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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
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. See "Business--Third-Party Reimbursement for the
Company's Products."
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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. In this regard, a federal advisory panel recently
recommended to Congress that the Medicare reimbursement rate to hospitals remain
unchanged in 1998. 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. See
"Business--Third-Party Reimbursement for the Company's Products."
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. See "Business--Third-Party
Reimbursement for the Company's Products."
PRODUCT LIABILITY RISK
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.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF PRICE
Prior to the Offering there has been no public market for the Common Stock.
Accordingly, there can be no assurance that an active trading market will
develop or be sustained upon completion of the Offering or that the market price
of the Common Stock will not decline below the initial public offering price.
The initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Representatives of the Underwriters and
may not be indicative of the prices that will prevail in the public market.
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. See "Underwriting."
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SIGNIFICANT STOCKHOLDERS
Upon completion of the Offering, the Company's directors and executive
officers beneficially will own in the aggregate approximately 5.6%, and certain
of the Company's other principal stockholders (which are affiliated with certain
of the Company's directors and executive officers) beneficially will own in the
aggregate approximately 53.5%, of the Company's outstanding Common Stock
(including shares subject to outstanding options and warrants). See "Principal
Stockholders." Certain substantial stockholders, including Medtronic, New
Enterprise Associates, V, Limited Partnership and its affiliates ("NEA"),
Marquette Venture Partners II, L.P. ("Marquette Ventures") and Coral Partners
IV, Limited Partnership ("Coral"), will be able to substantially influence the
business and affairs of the Company, including the election of individuals to
the Company's Board of Directors, and to otherwise affect the outcome of certain
actions that require stockholder approval, including the adoption of amendments
to the Company's certificate of incorporation, and certain mergers, sales of
assets and other business acquisitions or dispositions. Messrs. Steven LaPorte,
Ronald Kase, James Daverman and Peter McNerney, each of whom is currently a
member of the Board of Directors of the Company, serve in such capacity as
designees of Medtronic, NEA, Marquette Ventures and Coral, respectively. See
"Management--Executive Officers and Directors" and "Principal Stockholders."
ANTITAKEOVER CONSIDERATIONS
Upon completion of the Offering, the Company will have authorized a class of
10,000,000 shares of undesignated preferred stock, $.01 par value, which may be
issued by the Company's Board of Directors on such terms, and with such rights,
preferences and designations, as the Company's Board of Directors may determine.
In addition, the Company's Bylaws provide for a classified Board of Directors
elected to staggered terms. Finally, the Company is subject to certain
provisions of the Delaware General Corporation Law which limit the voting rights
of shares acquired in certain acquisitions and restrict certain business
combinations. Some or all of the foregoing factors could have the effect of
discouraging certain attempts to acquire the Company which could deprive the
Company's stockholders of opportunities to sell their shares of Common Stock at
prices higher than prevailing market prices. See "Description of Capital Stock--
Preferred Stock" and "--Provisions of the Company's Amended and Restated
Certificate of Incorporation and Amended Bylaws and the Delaware General
Corporation Law."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of significant amounts of Common Stock in the public market or the
perception that such sales will occur could adversely affect the market price of
the Common Stock or the future ability of the Company to raise capital through
an offering of its equity securities. Of the 8,759,031 shares of Common Stock to
be outstanding upon completion of the Offering, the 3,000,000 shares offered
hereby will be eligible for immediate sale in the public market without
restriction unless they are held by "affiliates" of the Company within the
meaning of Rule 144 of the Securities Act of 1933, as amended (the "Securities
Act"). The remaining 5,759,031 shares of Common Stock held by existing
stockholders upon completion of the Offering will be "restricted securities" as
that term is defined in Rule 144 under the Securities Act. The Company, its
directors, officers and certain of its stockholders (beneficially holding an
aggregate of 5,623,196 of such restricted shares) have agreed that they will not
sell, directly or indirectly, any Common Stock without the prior consent of
Piper Jaffray Inc. for a period of 180 days from the date of this Prospectus. In
the absence of such agreements, approximately 4,100,551 of the restricted shares
will become eligible for sale 90 days from the date of this Prospectus, subject
to compliance with the volume limitations and other restrictions of Rule 144,
and approximately 538,126 of the restricted shares may become eligible for
immediate sale without restriction pursuant to Rule 144(k). In addition, certain
stockholders, beneficially holding an aggregate of 4,705,603 shares of Common
Stock, have the right, subject to certain conditions, to include their shares in
future registration statements relating to the
16
<PAGE>
Company's securities and to cause the Company to register certain Common Stock
owned by them. See "Shares Eligible for Future Sale" and "Underwriting."
NO DIVIDENDS
The Company has never paid or declared a dividend on its capital stock and
does not anticipate doing so for the foreseeable future. See "Dividend Policy."
BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS
While the Company expects that a significant portion of the anticipated net
proceeds from the Offering will be used to fund working capital requirements,
the Company's management will retain significant discretion with respect to the
specific allocation of such net proceeds. See "Use of Proceeds."
DILUTION
Purchasers of the shares offered hereby will experience an immediate
dilution of $6.84 in net tangible book value per share of Common Stock from the
assumed initial public offering price of $11.00 per share. See "Dilution."
17
<PAGE>
SALE OF SHARES TO MEDTRONIC
As part of this Offering, the Company intends to sell at the Price to Public
up to 750,000 shares of Common Stock to Medtronic. Medtronic currently owns
976,850 shares of Common Stock of the Company, which represents approximately
17.0% of the Company's outstanding Common Stock. If Medtronic purchases 750,000
shares of the Common Stock offered hereby, Medtronic will own 19.7% of the
Company's outstanding Common Stock upon completion of this Offering. See
"Principal Stockholders" and "Underwriting."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be approximately $30.3 million ($34.9 million if the
Underwriters' over-allotment option is exercised in full), after deducting the
underwriting discount and estimated expenses of the Offering and assuming an
initial public offering price of $11.00 per share.
The Company anticipates that approximately $23.0 million of the net
proceeds, including interest earned thereon, will be used to fund working
capital requirements, including primarily continued development and testing of,
and clinical trials and marketing activities for the EnSite System, and
approximately $7.0 million will be used for capital expenditures and other
general corporate purposes, primarily the development of an initial and a
full-scale commercial manufacturing and assembly line. The amount of net
proceeds actually expended for the foregoing purposes is subject to the
discretion of the Company's management, and the amounts actually expended for
these purposes will depend upon numerous factors, including the results of
clinical studies, the design and cost of the Company's manufacturing and
assembly line, the status of competitive products and other factors. See "Risk
Factors--Broad Management Discretion in Use of Proceeds." Pending the use of the
net proceeds of the Offering, the Company will invest the funds in short-term,
interest-bearing, investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock since its inception. The Company currently intends to invest any earnings
in the development and expansion of its business and does not intend to pay
dividends in the foreseeable future. The payment of dividends, if any, in the
future will be at the discretion of the Board of Directors and will depend on
the Company's earnings, financial condition, capital requirements and other
relevant factors.
18
<PAGE>
DILUTION
The Company's pro forma net tangible book value at December 31, 1996, was
approximately $6,168,000 or $1.07 per share. Pro forma net tangible book value
per share represents total assets, less intangible assets and total liabilities,
divided by the number of shares outstanding, adjusted on a pro forma basis for
the conversion into Common Stock of all of the Company's outstanding shares of
Preferred Stock. Without taking into account any changes in such net tangible
book value per share after December 31, 1996, other than to give effect to the
sale of the shares of Common Stock offered hereby at an assumed initial public
offering price of $11.00 per share and the receipt of the net proceeds of such
sale, the pro forma net tangible book value per share at December 31, 1996 would
have been approximately $36,458,000 or $4.16 per share. This represents an
immediate increase in net tangible book value per share of $3.09 to existing
stockholders and an immediate dilution of $6.84 per share to new investors. The
following table sets forth this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $ 11.00
Pro forma net tangible book value per share as of December 31, 1996...... $ 1.07
Increase per share attributable to new investors......................... 3.09
---------
Pro forma net tangible book value per share after the Offering............... 4.16
---------
Dilution per share to new investors.......................................... $ 6.84
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1996, the differences between existing stockholders and investors in the
Offering with respect to the total number of shares of Common Stock purchased
from the Company, the total consideration paid and the average price per share
paid (assuming the sale of 3,000,000 shares of Common Stock at an initial public
offering price of $11.00 per share).
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................... 5,759,031 65.7% $ 22,190,458 40.2% $ 3.85
New investors....................................... 3,000,000 34.3 33,000,000 59.8 11.00
---------- ----- ------------- -----
Total........................................... 8,759,031 100.0% $ 55,190,458 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
- ------------------------
(1) The above calculations do not give effect to the exercise of (i) outstanding
options to purchase 897,782 shares of Common Stock at a weighted average
exercise price of $1.14 per share outstanding on December 31, 1996, (ii)
options to purchase up to an additional 558,791 shares of Common Stock
available for issuance under the Company's Stock Option Plan and (iii)
outstanding warrants to purchase 56,607 shares of Common Stock at a weighted
average exercise price of $4.16 per share issued in connection with
equipment leasing transactions. To the extent that these options and
warrants become exercisable and are exercised, there will be further
dilution to new investors. See "Description of Capital Stock."
19
<PAGE>
CAPITALIZATION
The following table sets forth (i) the pro forma capitalization of the
Company at December 31, 1996, giving effect to the conversion of all outstanding
shares of Preferred Stock into Common Stock and the one-for-two reverse stock
split of the Common Stock to be effected immediately prior to consumation of the
Offering and (ii) such pro forma capitalization as adjusted to give effect to
the issuance and sale by the Company of the 3,000,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $11.00 per share
and the application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
PRO FORMA,
PRO FORMA AS ADJUSTED
----------- -----------
(in thousands)
<S> <C> <C>
Long-term debt, less current portion.................................................... $ 302 $ 302
----------- -----------
Stockholders' equity:
Undesignated preferred stock, $.01 par value, 10,000,000 shares authorized; none
issued and outstanding.............................................................. -- --
Common Stock, $.01 par value, 40,000,000 shares authorized; 5,759,031 shares issued
and outstanding, pro forma; 8,759,031 shares issued and outstanding, pro forma as
adjusted (1)........................................................................ 58 88
Additional paid-in capital............................................................ 23,490 53,750
Deficit accumulated during the development stage...................................... (16,623) (16,623)
Deferred compensation (2)............................................................. (711) (711)
----------- -----------
Total stockholders' equity.......................................................... 6,214 36,504
----------- -----------
Total capitalization.............................................................. $ 6,516 $ 36,806
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) Excludes 897,782 shares of Common Stock issuable upon exercise of options
outstanding on December 31, 1996, which had a weighted average exercise
price of $1.14 per share. Also excludes 56,607 shares of Common Stock
issuable upon exercise of outstanding warrants which had a weighted average
exercise price of $4.16 per share. Reflects an increase in the authorized
shares of Common Stock to 40,000,000 to be effected immediately prior to
consumation of the Offering. See "Description of Capital Stock."
(2) Represents the unamortized value of stock options granted during the year
ended December 31, 1996. See Note 8 of Notes to Financial Statements.
20
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
The following selected financial data of the Company are qualified by reference
to and should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations and the Financial Statements
and the Notes thereto included elsewhere herein. The statement of operations
data for the years ended December 31, 1994, 1995 and 1996, and for the period
from May 21, 1992 (inception) to December 31, 1996, and the balance sheet data
at December 31, 1995 and 1996 are derived from, and are qualified by reference
to, the audited Financial Statements included elsewhere in this Prospectus and
should be read in conjunction with those Financial Statements and Notes thereto.
The statement of operations data for the period from May 21, 1992 (inception) to
December 31, 1992 and for the year ended December 31, 1993 and the balance sheet
data at December 31, 1992, 1993 and 1994 are derived from audited financial
statements not included herein.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MAY 21, 1992 MAY 21, 1992
(INCEPTION) TO YEAR ENDED DECEMBER 31, (INCEPTION)
DECEMBER 31, ------------------------------------------ TO DECEMBER
1992 1993 1994 1995 1996 31, 1996
--------------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Research and development................... $ 16 $ 686 $ 3,352 $ 3,639 $ 4,425 $ 12,118
General and administrative................. 56 285 857 1,088 1,911 4,197
Sales and marketing........................ -- 39 282 123 374 818
----- --------- --------- --------- --------- ------------
Operating loss............................... (72) (1,010) (4,491) (4,850) (6,710) (17,133)
Interest income (expense), net............... -- 5 83 116 229 433
----- --------- --------- --------- --------- ------------
Net loss................................... $ (72) $ (1,005) $ (4,408) $ (4,734) $ (6,481) $ (16,700)
----- --------- --------- --------- --------- ------------
----- --------- --------- --------- --------- ------------
Pro forma net loss per share (1)............. $ (1.12)
---------
---------
Pro forma weighted average shares outstanding
(1)........................................ 5,809
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ 2 $ 4,719 $ 305 $ 1,864 $ 6,157
Working capital (deficit).................................... (35) 4,675 (195) 1,417 5,549
Total assets................................................. 2 4,934 1,013 2,595 7,200
Long-term debt and capital lease obligations, less current
portion.................................................... -- -- 12 160 302
Deficit accumulated during the development stage............. (72) (1,001) (5,409) (10,143) (16,623)
Total stockholders' equity (deficiency) (2).................. (35) 4,884 476 1,916 6,214
</TABLE>
- ------------------------
(1) Computed on the basis described in Note 2 of the Notes to Financial
Statements.
(2) The Company has not declared or paid any dividend for any of the periods
presented. See "Dividend Policy."
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Prospectus. This
Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed elsewhere in this Prospectus.
See "Risk Factors."
GENERAL
ESI is a development stage company incorporated on May 21, 1992, in
Minnesota and reincorporated in Delaware on January 30, 1995. ESI 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 tachycardia.
From inception through December 31, 1996, the Company has incurred losses
totaling $16.7 million, consisting of $12.1 million in research and development
expenses, $4.2 million in general and administrative expenses and $818,000 in
sales and marketing expenses, offset by $433,000 in net interest income. The
Company's activities have consisted of research and product development, initial
clinical trials, fund raising and development of the manufacturing processes and
marketing strategies needed to support the commercial introduction of the
Company's products. The Company expects cumulative net losses to increase
through 1999 because of anticipated spending necessary to complete the design
and development of its products, obtain regulatory approvals, introduce its
products in international markets, and establish and maintain its U.S. sales and
marketing organization. The Company anticipates that sales in certain
international markets will precede sales in the United States.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
GENERAL. Net losses increased to $6.5 million during 1996 from $4.7 million
during 1995 and $4.4 million during 1994.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $4.4 million during 1996 from $3.6 million during 1995 and $3.4
million during 1994. The increases were due primarily to the addition of
employees in software development and applied research and associated costs, as
well as the cost of prototypes of the workstation. Research and development
expenses include engineering salaries, catheter manufacturing and consulting
expenses, clinical trials, software maintenance and depreciation.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $1.9 million during 1996 from $1.1 million during 1995 and $857,000
during 1994. The increases were due to the establishment of a quality assurance
department in mid-1995 and increases in rent and associated expenses related to
expansion of the Company's physical facility.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $374,000
during 1996, up from $123,000 during 1995 and $282,000 during 1994. The decrease
during 1995 is primarily the result of reduced utilization of external
consultants. The increase in 1996 was due primarily to the addition of employees
and increases in associated expenses.
DEFERRED COMPENSATION. Deferred compensation amortization of $773,271 was
recorded as an expense during 1996. This expense was allocated among research
and development, general and administrative and sales and marketing, based upon
the amount of deferred compensation associated with employees in those
respective departments.
22
<PAGE>
OTHER INCOME. Other income increased during 1996 to $229,000, from $116,000
during 1995 and $83,000 during 1994. The increases generally reflect increased
interest earned on increased average levels of cash and securities held by the
Company resulting from the proceeds of the sale of the Company's Preferred
Stock. (See Note 5 of Notes to Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations since inception have been funded by proceeds from
sales of its Capital Stock totaling $22.2 million. As of December 31, 1996, the
Company had cash and cash equivalents of $6.2 million and working capital of
$5.5 million.
The Company has entered into an equipment lease agreement with a venture
leasing company which provides lease financing of up to $1.0 million under a
lease line of credit for the acquisition of furniture, fixtures and equipment.
The line of credit expires on July 15, 1997, and as of December 31, 1996, there
remained $591,000 available under the line of credit. In consideration for the
line of credit, the Company has issued to the lessor a warrant for the purchase
of 15,000 Shares of Series D Preferred Stock at an exercise price of $5.12 per
share which, upon consummation of the offering, automatically converts to a
warrant for the purchase of 7,500 shares of Common Stock at an exercise price of
$10.24 per share. See "Description of Capital Stock--Warrants and Options."
Management of the Company expects that the Company's existing cash balance
and borrowings available under the line of credit discussed above, along with
the anticipated net proceeds of the Offering, will be sufficient to fund the
operations of the Company through at least 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. However, the Company may be
required to raise additional capital. There can be no assurance that such
capital will be available on acceptable terms, or at all. See "Risk
Factors--Future Capital Requirements; No Assurance Future Capital Will Be
Available."
23
<PAGE>
BUSINESS
THE COMPANY
Endocardial Solutions, Inc. ("ESI" or the "Company") designs, develops, and
manufactures a minimally invasive diagnostic system that diagnoses, within the
span of a few heartbeats, tachycardia, a potentially fatal abnormal heart
rhythm. The Company believes that its proprietary EnSite catheter and clinical
workstation (together, the "EnSite System") is a powerful new diagnostic tool
that will enable electrophysiologists to rapidly and comprehensively map
tachycardia and improve the selection of patient treatment options. The Company
has conducted clinical trials of the EnSite System in the United Kingdom on 16
patients for ventricular tachycardia and on seven patients for supraventricular
(atrial) tachycardia. The Company conducted in early 1997 a limited clinical
trial on five ventricular tachycardia patients in the United States under an
investigational device exemption ("IDE") from the FDA. The Company anticipates
that this and additional clinical trials will be used to support a pre-market
approval ("PMA") application to obtain approval to market the EnSite System for
the treatment of ventricular tachycardia in the United States.
BACKGROUND
The heart consists of four chambers: the ventricles, the lower two chambers,
and the atria, the upper two chambers. A normal heartbeat is the result of
electrical impulses generated at the sinoatrial node, the heart's natural
pacemaker located near the top of the right atrium. These impulses form a wave
of electrical activation that travels down the atria, causing them to contract
and fill the ventricles, the heart's primary pumping chambers, with blood. After
a brief delay in the atrioventricular node, located between the chambers, the
electrical activation wave enters the ventricles and produces a coordinated
contraction of the ventricles that pumps blood throughout the body's circulatory
system. The following diagrams illustrate the four chambers of the heart and the
pathway of electrical conduction within the heart.
[ILLUSTRATION]
When defects in the heart tissue interfere with the normal formation or
conduction of the heart's electrical activity, abnormal heart rhythms, known as
cardiac arrhythmias, develop. Cardiac arrhythmias have numerous causes,
including congenital defects, tissue damage due to heart attacks or
arteriosclerosis (the deposition of fatty substances in the inner layer of the
arteries) and other diseases, that accelerate, delay or redirect the
transmission of electrical activity, thereby disrupting the normal coordinated
contractions of the chambers. Arrhythmias characterized by an abnormally fast
heart rate (more than 100 beats per minute) are known as tachycardia.
24
<PAGE>
Tachycardia fall into two categories, ventricular tachycardia (VT) and
supraventricular tachycardia (SVT). VT are tachycardia that originate in the
ventricles. SVT originate in the atria or at the junction between the atria and
the ventricles. Approximately four million people in the United States suffer
from some form of tachycardia.
VENTRICULAR TACHYCARDIA
CHARACTERISTICS OF VENTRICULAR TACHYCARDIAS. Ventricular tachycardia, which
afflicts approximately one million Americans, is a potentially life-threatening
condition caused either by abnormally rapid impulse formation or by slow
ventricular conduction which interferes with the heart's normal electrical
activity and causes abnormally frequent contractions of the ventricles. Rapid
ventricular contractions often result in significantly reduced cardiac output
due to inefficient blood pumping. As a result, the body receives an inadequate
supply of oxygen, which can cause dizziness, unconsciousness, cardiac arrest and
death. VT conditions tend to become more serious over time. Individuals with VT
are at risk of imminent death due to its unpredictable nature.
Many VT result from heart attacks caused by coronary artery disease. When a
heart attack occurs due to a blockage in one or more coronary arteries, a
portion of the heart muscle (most often in the left ventricle) dies. As a
result, irregular borders consisting of intermixed healthy and scar tissue are
formed and VT typically originate at these sites. As the average age of the U.S.
population increases, it is expected that the number of persons who suffer heart
attacks and are at risk of VT will also increase.
VT is a highly complex and transient form of cardiac arrythmia which varies
significantly from patient to patient. A small percentage of ventricular
tachycardia patients have simple forms of the disease which are focused on a
single anatomic site within the ventricle. The Company estimates, however, that,
based on the experience of members of its Scientific Advisory Board, of the one
million patients that suffer from VT, the majority suffer from complex VTs that
(i) have multiple sites of aberrant electrical activity, (ii) prevent sufficient
cardiac output, making them dangerous to induce in the patient (which is
required for diagnosis) and (iii) are nonsustained and, consequently, are only
detectable for several heartbeats. See "Risk Factors--Uncertainty of Ability to
Penetrate Complex Tachycardia Patient Population."
DIAGNOSING VENTRICULAR TACHYCARDIA. Patients suspected of suffering from VT
are initially screened by a cardiologist by means of external cardiac
monitoring, typically in the form of an electrocardiogram or Holter recording,
which captures electrical activity from surface leads placed on the patient's
chest for 24 hours. When further testing is warranted, the patient is referred
to a cardiac electrophysiologist for a cardiac electrophysiology ("EP") study.
An EP study evaluates the electrical integrity of the heart by stimulating
multiple intra-cardiac sites and recording the electrical response. During an EP
study a patient's clinical tachycardia is induced in a controlled setting in
order to diagnose the tachycardia and select an appropriate treatment or
combination of treatments. EP studies using currently available technology are
lengthy and tedious procedures which consist of probing the interior of the left
ventricle with single-point contact catheters, causing significant discomfort
for the patient. In order to analyze the information generated by single-point
contact catheters for the purpose of prescribing treatment, electrophysiologists
review the signals measured by these catheters as multiple rows of waveforms
displayed on a computer screen. Two or more catheters are often used to provide
more information to the electrophysiologist and thereby aid in identifying the
sites of origin of tachycardia. The electrophysiologist generally constructs a
mental image of the sites of the VT within the heart's chamber by calculating
the relative timing of electrical activation among the waveforms displayed on
the computer screen. The electrophysiologist then estimates the site or sites of
origin (which correspond to the physical positions of the catheters) through
two-dimensional fluoroscopic (x-ray) projections. As the tachycardia becomes
more complex, the electrophysiologist's reconstruction of the heart's electrical
activity and location of the sites of origin becomes more difficult.
The limited number of patients suffering from simple forms of VT have been
effectively diagnosed using existing single-point contact catheter technology
with diagnostic procedures that can be time
25
<PAGE>
consuming, tedious and invasive. However, single-point contact catheters have
limited utility in diagnosing complex ventricular tachycardia. The limited data
produced in point-by-point mapping often does not provide the
electrophysiologist with sufficient diagnostic power for a complete
understanding of the ventricular tachycardia. Moreover, when attempted,
diagnosing complex ventricular tachycardia with single-point, contact catheters
can take from six to twelve hours and requires significant use of fluoroscopy to
guide the catheter, which exposes both the patient and the medical staff to
radiation.
In an effort to address the diagnostic shortcomings of single-point contact
catheters, there are currently under development several "basket" contact
catheters measuring multiple points of electrical activity simultaneously. These
basket catheters will require contact with the heart's surface for measurement
of electrical activity, and the Company believes that these catheters will
suffer from many of the shortcomings of single-point contact catheters.
TREATMENTS FOLLOWING DIAGNOSIS OF VENTRICULAR TACHYCARDIA. The Company's
EnSite System is designed for the diagnosis of tachycardia. The Company does not
currently design products for the treatment of this disease. However, the
Company believes that the EnSite System will provide electrophysiologists with a
diagnostic tool to improve their ability to select among available tachycardia
treatment options.
Once a patient's VT is diagnosed, the electrophysiologist chooses among the
various treatment options available. Noncurative treatments include
antiarrhythmic drugs and implantable defibrillators, both of which attempt to
ameliorate the patient's condition and reduce the risks associated with the VT
but do not eliminate the cause of the tachycardia. Historically, the only
curative treatment available for VT was open heart surgery, but it has been
rarely used due to its high morbidity and mortality. More recently, however,
catheter ablation, a potentially curative treatment currently under development,
has been used in a limited number of cases for complex VT. Often
electrophysiologists prescribe a combination of drugs, defibrillators and
ablation for the treatment of VT.
The table below describes the principal treatment options for VT.
<TABLE>
<CAPTION>
IMPLANTABLE
ANTIARRHYTHMIC DEFIBRILLATION CATHETER
DRUG TREATMENT DEVICES ABLATION
--------------------- -------------------- ---------------------
<S> <C> <C> <C>
Result of Treatment........................... Non-curative Non-curative Potentially Curative
Invasiveness.................................. Non-invasive Invasive Minimally invasive
Approximate Cost.............................. $16,000 initially $55,000 $16,000
and (approximately
$8,000 per year five to seven year
device life)
</TABLE>
Antiarrhythmic drugs, which are prescribed to chemically suppress the
arrhythmic activity, have to date been the most common treatment of VT.
Antiarrhythmic drugs are not curative and can result in considerable side
effects limiting the effectiveness of the drugs and the ability of patients to
use them over long periods of time.
Automatic implantable cardioverter defibrillators ("ICDs"), which detect and
stop a tachycardia once it has started by pacing or by applying high energy
pulses, have also become a common treatment for VT. The useful life of an ICD is
approximately five to seven years, at the end of which time the ICD is generally
replaced in another surgical procedure. Many ICD patients also receive
antiarrhythmic drug therapy in an attempt to minimize the frequency of VT
episodes.
There is increasing interest in the United States and Europe in using
catheter ablation to treat VT. Catheter ablation is a minimally invasive and
potentially curative treatment in which a radio frequency current is emitted
from a catheter to selectively destroy the heart tissue responsible for the
abnormal
26
<PAGE>
electrical activity. The use of catheter ablation to date has been limited due
to the inability of single-point contact catheters to effectively map complex VT
cases. Although catheter ablation is not yet commonly prescribed to treat VT and
the devices have not yet been approved by the FDA for marketing in the United
States for treatment of VT, it is the subject of increasing technological
research and development. The Company believes catheter ablation could become a
more commonly used treatment for VT with advances in diagnostic technology such
as that being developed by the Company.
SUPRAVENTRICULAR TACHYCARDIA
Approximately three million of the four million people in the United States
who suffer from tachycardia have some form of SVT. Supraventricular tachycardia
is an abnormally rapid beating of the atria which may reduce the amount of blood
pumped into the ventricles, and, consequently, from the ventricles to the rest
of the body. Although SVT can be debilitating, causing chest palpitations,
fatigue and dizziness, it is generally not life-threatening. The principal types
of SVT are Wolff-Parkinson-White syndrome (WPW), Atrioventricular Nodal
Re-entrant Tachycardia (AVNRT), and atrial fibrillation and flutter.
Approximately one million people in the United States suffer from WPW or
AVNRT. The tachycardia associated with WPW and AVNRT are generally easy to
diagnose and locate due to their more simple, single-site nature and predictable
location within the atria. WPW and AVNRT have been effectively treated by
catheter ablation with available contact catheters.
Approximately two million people in the United States suffer from atrial
fibrillation or atrial flutter. Atrial fibrillation is characterized by a
disorganized and chaotic conduction of electrical activation, which results in
ineffective pumping of the atria. Under these conditions, blood tends to pool
and clot, increasing the risk of stroke. The American Heart Association
estimates that approximately 15 percent of all strokes in the United States are
caused by atrial fibrillation. The incidence of atrial fibrillation is linked to
aging and thus is expected to increase as the average age of the United States
population increases. See "Risk Factors--Uncertainty of Ability to Penetrate
Complex Tachycardia Patient Population."
Typically, diagnosis of atrial fibrillation is easily discerned through an
electrocardiogram recording. Beyond initial detection, electrophysiologists have
had limited success in mapping atrial fibrillation using current single-point
technology due to its highly complex and chaotic nature. The inability to
effectively map and understand the origins of atrial fibrillation has hindered
the development of treatments for the disease.
Antiarrhythmic drugs and anticoagulation therapy are the most commonly
prescribed treatments for atrial fibrillation, but they are not curative and
have undesirable side effects. The only known curative treatment for atrial
fibrillation is a costly and rarely performed open heart surgical procedure
known as the surgical maze procedure. The incisions made in this surgery
electrically isolate the atria into regions that can no longer maintain
fibrillation. In addition, an atrial defibrillator is under development for
detecting and controlling atrial fibrillation with low energy shocks.
Catheters have been approved for ablation treatments in the atria; however,
due to the limited understanding of atrial fibrillation, to date they have not
proven effective. Catheters are under development for potentially curative
ablation of atrial fibrillation. One type of catheter under development is
designed to create linear lesions along the interior wall of the atrium to
electrically isolate regions of the chamber in a manner similar to the surgical
maze procedure. Other emerging methods are aimed at more localized ablation
treatment based on a hypothesis that atrial fibrillation is maintained in an
electrically localized region of the chamber, requiring detailed mapping.
The Company believes that the complexity of atrial fibrillation and the
search for effective and curative treatments, including catheter ablation, will
require a diagnostic mapping technology that provides much greater resolution
and diagnostic capabilities than currently available technology.
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THE ESI SOLUTION
The Company is developing its proprietary EnSite System to address the need
for more rapid, comprehensive and cost-effective diagnosis of complex forms of
VT and SVT. The high resolution, three-dimensional, color display generated by
the EnSite System is designed to provide electrophysiologists greater diagnostic
capabilities than single-point contact catheter mapping devices currently
available. The EnSite System will provide electrophysiologists with a real time,
virtual image of the electrical activity of the heart without contacting the
heart's surface. The EnSite System displays more than 3,000 points of electrical
activity using the Company's proprietary algorithms. Diagnosis will be enhanced
by the "virtual electrogram" function of the EnSite System workstation that
allows electrophysiologists to instantaneously view the electrical activity at
any of the more than 3,000 points displayed by selecting a specified point on
the workstation's three-dimensional color map of the heart with the
workstation's mouse pointer. In addition, the locator function of the EnSite
System workstation will also enhance diagnosis and treatment by providing
electrophysiologists with real-time feedback as to the precise location of
auxiliary catheters introduced into the heart.
The Company believes that its EnSite System for mapping tachycardia has the
following benefits over currently available single-point contact catheters:
- ENHANCED DIAGNOSTIC CAPABILITY. The diagnostic power of the EnSite System
is designed to enable electrophysiologists to make more informed decisions
in choosing optimal treatment for tachycardia patients. The high
resolution, three-dimensional color map generated by the EnSite System
should greatly enhance electrophysiologists' diagnostic capabilities
through the system's ability to capture and display a significantly
greater amount of electrical data than can be generated with currently
available contact catheters.
- ABILITY TO MAP COMPLEX TACHYCARDIAS. ESI believes that its technology will
enable electrophysiologists to map complex forms of VT and SVT in the
majority of patients who cannot be mapped effectively using currently
available technology.
- REDUCED PROCEDURAL TIME. Currently available single-point contact
catheters can require several hours of overall procedural time to diagnose
simple tachycardia and can require between six and twelve hours to
diagnose complex tachycardia. The Company believes that the EnSite System
can reduce the overall procedure time significantly, greatly increasing
the number of patients who may be candidates for diagnosis using cardiac
mapping technology.
- REDUCED RADIATION EXPOSURE. The Company believes that the speed with which
its technology can map the heart's electrical activity and locate
auxiliary catheters will reduce the amount of time that patients and
medical staff are exposed to radiation from fluoroscopy, the effects of
which are cumulative.
- REDUCED COSTS. The Company believes that the EnSite System will reduce the
costs associated with treating complex tachycardia by significantly
reducing the amount of time required to locate and diagnose abnormal heart
rhythms and by enabling electrophysiologists to select potentially less
costly treatment for patients.
STRATEGY
The Company's strategy is to establish the EnSite System as the leading
diagnostic tool for diagnosing tachycardia in the more than 700
electrophysiology laboratories in the United States and those in Europe and
Japan. The key elements of the Company's strategy are as follows:
- DEMONSTRATE SAFETY AND CLINICAL EFFICACY. The EnSite System represents a
new technology for mapping tachycardia. In order to gain acceptance of
this technology in electrophysiology labs, the Company must demonstrate
the safety and effectiveness of the EnSite System through successful
clinical trials. Since October 1995, the Company has conducted clinical
trials in the United
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Kingdom on 16 patients using the EnSite System for diagnosing VT, and in
December 1996 received an IDE from the FDA for, and conducted in early
1997, a limited clinical trial on five ventricular tachycardia patients in
the United States. The Company will file results of its studies and other
product information with the FDA and the appropriate bodies in Europe in
order to seek the required approvals for marketing in the United States
and Europe. In addition, the Company will also seek to demonstrate the
clinical efficacy of the EnSite System through the publication of the
results of its studies and clinical trials and articles on its technology
in medical journals.
- FOCUS ON VENTRICULAR TACHYCARDIAS. The Company believes that the patient
population that suffers from complex VT that are difficult to map using
currently available technology presents a significant market opportunity
for the Company's EnSite System. ESI intends to focus on the ability of
its technology to provide improved speed, increased accuracy and
cost-effectiveness in mapping VT. This improved mapping power should
benefit electrophysiologists in performing diagnostic procedures and
prescribing treatments for an expanded patient population.
- EXTEND TECHNOLOGY TO ATRIAL FIBRILLATION. The Company believes that the
EnSite System can be extended from mapping VT to mapping atrial
tachycardia, including atrial fibrillation and flutter, both of which
share similar complex characteristics, such as multiple sites of origin in
unpredictable locations. The Company has conducted seven studies of its
technology for mapping atrial tachycardia in the United Kingdom, including
two patients suffering from atrial fibrillation and five patients
suffering from atrial flutter.
- LEVERAGE RELATIONSHIPS WITH LEADING ELECTROPHYSIOLOGISTS. The Company has
established a Scientific Advisory Board whose members are among the
world's leading electrophysiologists. Many of these board members have
been highly involved in the development of the Company's technology and
products and will be critical to successful development, testing, approval
and marketing of the Company's technology and products. The Company
intends to utilize its Scientific Advisory Board members to assist in
gaining market acceptance of its products.
THE ENSITE SYSTEM
The Company's EnSite System consists of the EnSite catheter and clinical
workstation that together form an integrated system. The EnSite System is
designed to map ventricular and atrial tachycardia.
THE ENSITE CATHETER
The EnSite catheter is a non-contact, single-use, multi-electrode array,
percutaneous catheter, designed for use with the EnSite clinical workstation.
The EnSite catheter's multi-electrode array senses electrical activity generated
from the endocardial wall while floating in the heart chamber. The array area of
the EnSite catheter is comprised of an inflatable polyurethane balloon within a
mechanically expandable multi-electrode array. The multi-electrode array
contains a wire braid consisting of 64 braided wires. A handle and cable
connector are located at the proximal end of the catheter to allow the physician
to position the distal end of the catheter, deploy the multi-electrode array and
make electrical connection from the array to the patient interface unit of the
EnSite System's workstation.
The EnSite catheter is inserted percutaneously over a standard guidewire
into a selected chamber of the heart. When positioned, the wire braid is
mechanically expanded and the balloon residing under the wire braid in the array
area of the catheter is inflated with a radiopaque solution to form an
ellipsoidal, multi-electrode array. When deployed, the array is small enough to
permit the normal functioning of the heart. In addition to the EnSite catheter,
a standard single-point diagnostic catheter is inserted in a chamber of the
heart in order to facilitate establishing the chamber's spatial boundaries. The
multi-electrode braid array collects data used to compute more than 3,000 points
of the heart chamber's electrical activity in the span of a few heartbeats by
gathering a large amount of the electrical conduction information from the
entire chamber and transmitting this information through the wire braid back
down the catheter shaft to the EnSite System's clinical workstation.
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THE ENSITE CLINICAL WORKSTATION
The EnSite System's clinical workstation consists of the Company's
proprietary patient interface unit and a Silicon Graphics-based workstation and
other third-party peripherals, such as a color monitor, a printer and an optical
disk drive. The patient interface unit is designed to amplify and digitize the
electrical information transmitted by the EnSite catheter. The patient interface
unit also accepts information generated by other auxiliary sensors, including as
many as 32 standard contact catheter electrodes, which allows the
electrophysiologist to monitor clinical events or capture additional data for
simultaneous display on the workstation. The workstation is programmed with
software containing the Company's proprietary algorithms, which process the
electrical information transmitted by the EnSite catheter and reconstruct the
heart's geometric layout and the distribution of electrical activity. The heart
and the electrical activity is displayed on the workstation as high resolution,
three-dimensional isopotential or isochronal color maps. The maps can be viewed
as a snapshot in time or as an animated playback at adjustable rates of speed.
The maps can also be viewed from any perspective in space and may be zoomed in
and out to facilitate rapid diagnosis and treatment of the tachycardia,
including identifying the optimal site or sites for ablation.
The electrical activity displayed on the workstation's three-dimensional map
can also be displayed as time-waveforms, called "Virtual Electrograms," at
multiple selected sites on the endocardium. Virtual Electrograms are produced by
the Company's software contained in the workstation. The electrophysiologist can
instantaneously select any of the more than 3,000 sites and waveforms to be
displayed by pointing and clicking with the workstation's mouse pointer at the
desired location on the map of the heart. The Virtual Electrogram function
provides the equivalent of positioning a standard contact catheter at the same
site on the endocardium--but without the need for actual physical contact.
The EnSite System's workstation also generates a locator signal that can be
emitted from selected electrodes on standard EP catheters introduced into the
heart along with the EnSite catheter. The locator signal provides
electrophysiologists with an interactive method for locating and positioning
auxiliary catheters. The locator function is designed to allow
electrophysiologists to diagnose and treat complex tachycardia with
significantly less use of fluoroscopy than is currently required when using
presently available single-point contact catheters. The locator signal is
detected and displayed on the workstation's three-dimensional map to provide
real-time feedback to the electrophysiologist as to the precise location of the
catheter and to assist in guiding the catheter (or catheters) to a specific site
on the endocardium.
The EnSite System is designed to function as a complete, integrated
electrophysiology laboratory system to provide a wide range of accurate and
versatile diagnostic tools in one product. In addition to displaying high
resolution, graphical, three-dimensional maps, the EnSite System provides
multi-channel recording from standard EP electrode catheters and standard
waveform displays. The Company intends to develop and market periodic software
upgrades and new applications for use with the EnSite System.
RESEARCH AND DEVELOPMENT
To date, the Company's primary activity has been research, development and
testing of the EnSite catheter and the clinical workstation. Virtually all of
the Company's research and development activity is performed internally by the
Company's team of 24 scientists, engineers and technicians, in consultation with
the Company's Scientific Advisory Board and outside consultants. The Company's
research and development team is divided among five groups: software
engineering, applied research, hardware engineering, clinical engineering and
catheter engineering. In addition, various members of the research and
development team support the design and development of the manufacturing
processes used in fabricating the EnSite catheter.
Among the research and development goals the Company is now pursuing are
completing necessary clinical tests, optimizing the functionality of the EnSite
System, finalizing the design of the EnSite System in anticipation of commercial
distribution, and extending the use of the system to diagnosing atrial
tachycardia. The Company expects that its future research and development
objectives will include developing new mapping and catheter configurations and
software upgrades to enhance the capabilities
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and ease-of-use of the EnSite System as well as supporting the Company's
manufacturing personnel in refining manufacturing processes, improvements and
scale-up in connection with the commercialization of the EnSite System. The
Company incurred research and development expenses of approximately $3.4
million, $3.6 million and $4.4 million for the fiscal years ended December 31,
1994, 1995 and 1996, respectively. The Company anticipates that it will continue
to make significant investments in research and development.
MANUFACTURING
The Company manufactures its EnSite catheters in its 3,200 square foot
clean-room facility at its headquarters in St. Paul, Minnesota. The Company also
performs final assembly and system level testing of all hardware and software
components for the EnSite System clinical workstation at this facility.
The manufacturing process for the EnSite catheter involves a number of steps
and component parts. The Company assembles and tests each catheter individually
prior to sterilization and packaging, which it conducts in accordance with the
requirements of the FDA. The Company has designed its manufacturing processes to
utilize automation to the extent appropriate in order to increase production
volume and reduce costs.
The manufacturing of the EnSite System clinical workstation, including the
patient interface unit, involves the assembly, integration and testing of
components purchased from third parties. The Company purchases the basic
computer workstation from Silicon Graphics, and ESI software engineers program
the workstation with its proprietary software, including advanced mathematical
algorithms.
The Company purchases the raw materials and various component parts for the
EnSite System from a number of suppliers. The Company has adopted rigorous
quality control measures to ensure that the component parts it purchases meet
its specifications and standards. Certain of the components are purchased from
sole source suppliers, including the computer workstation. There are relatively
few alternative sources of supply for these components, and it may be difficult
for the Company to locate additional suppliers for these components.
The Company is implementing a manufacturing quality program designed to meet
all domestic and international standards for manufacturing medical devices. The
Company will be required to meet the requirements of the FDA's good
manufacturing practices ("GMP") in order to distribute its products in the
United States and the requirements for ISO 9001 and CE Mark certification in
order to distribute products in Europe. As part of meeting such requirements,
the Company's facilities and manufacturing processes will be subject to
inspection and audit. If the Company fails to satisfy the GMP requirements or
obtain ISO 9001 and CE Mark certification, it may be required to alter its
manufacturing processes. Moreover, any such failure could have a material
adverse effect on the Company's ability to market its products, which could
adversely affect its business and results of operations. The Company's suppliers
will be required to satisfy GMP standards.
SALES AND MARKETING
The Company intends to employ a direct sales force in the United States and
to use distributors for international markets. The Company has entered into an
agreement with Medtronic pursuant to which the Company has granted to Medtronic
a right of first offer to distribute, on an exclusive basis, the Company's
products outside of North America. See "Certain Transactions."
The Company intends to direct its sales and marketing efforts at prominent
domestic and international electrophysiology laboratories that perform the
majority of electrophysiology procedures. The Company believes that prominent
electrophysiology labs are generally more likely to keep abreast of and utilize
new technologies such as the EnSite System for diagnosing and treating
tachycardia. After the Company establishes a presence in major medical centers
housing such electrophysiology labs, it then intends to broaden its sales and
marketing efforts to include the growing number of smaller, community-
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based electrophysiology labs. As part of its strategy to gain the awareness of
and acceptance by electrophysiology laboratories, the Company has focused on and
intends to continue to focus on developing peer reviewed journal articles
authored by leading experts in electrophysiology, sponsoring publication of
papers based on research covering the performance and benefits of the EnSite
System and conducting informational seminars. In addition, as part of its
marketing program the Company expects to hold technical seminars and training
sessions to educate physicians and its direct sales force and distributors in
the use of the Company's products.
The Company believes that it will receive approval to sell its products in
international markets before it gains approval in the United States. See
"--Government Regulation" below. The Company plans to commence selling the
EnSite System in Europe promptly following obtaining the approval of the
European authorities to distribute its products within the countries comprising
the European Union, which the Company currently anticipates should occur
sometime during the first quarter of 1998. There can be no assurance, however,
that the Company will obtain such approval at such time, if at all.
PATENTS AND PROPRIETARY RIGHTS
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 or violating the proprietary rights of third parties.
The Company actively pursues patent protection in the United States and foreign
jurisdictions for each of the areas of invention embodied in the EnSite System,
and will actively pursue patent protection for proprietary aspects of its
technology in the future. As of the date of this Prospectus, the Company has two
U.S. patent applications pending by which it is seeking to obtain protection for
certain enhancements currently embodied in the EnSite System, relating to the
catheter, catheter localization techniques and user interface elements. The
Company also has three issued U.S. patents which relate to the technology
underlying the EnSite System and development-stage versions of the system. One
of these patents covers the catheter of the EnSite System and its
development-stage versions. The remaining two patents are directed to
measurement methodologies used in the development-stage versions of the EnSite
System. The Company has also filed and has pending several foreign patent
applications directed to various aspects of the technology underlying the EnSite
System.
The Company, like other firms that engage in the development and marketing
of medical devices, must address issues and risks relating to patents and trade
secrets. The coverage sought in a patent application can be denied or
significantly reduced before or after the patent is issued. Consequently there
can be no assurance that any of the Company's pending or future U.S. or foreign
patent applications will result in issued patents, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the Company's current or future U.S. or foreign patents
will not be challenged, circumvented by competitors or others or that such
patents will be found to be valid or sufficiently broad to protect the Company's
technology. Since patent applications are secret until patents are issued in the
United States or corresponding applications are published in other countries,
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, the Company cannot be certain that it was
the first to make the inventions covered by each of 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 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.
In addition to patents, the Company relies on trade secrets and proprietary
knowledge, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. In particular, the
Company relies upon such means to protect the proprietary software used in the
EnSite System. The confidentiality and proprietary information agreements
generally provide that all confidential
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information developed or made known to individuals by the Company during the
course of the relationship with the Company is to be kept confidential and not
disclosed to third parties, except in specific circumstances. The agreements
also generally provide that all inventions conceived by the individual in the
course of rendering services to the Company shall be the exclusive property of
the Company. There can be no assurance that proprietary information or
confidentiality agreements with employees, consultants and others 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.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the United States Patent and Trademark
Office (USPTO) to determine the priority of inventions or an opposition to a
patent grant in a foreign jurisdiction. The defense and prosecution of
intellectual property suits, USPTO interference or opposition proceedings and
related legal and administrative proceedings are both costly and time-consuming
and could result in substantial uncertainty to the Company. 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. Any litigation, opposition or interference
proceedings will result in substantial expense to the Company and significant
diversion of effort by the Company's technical and management personnel. There
can be no assurance that the Company will have the financial resources to defend
its patents from infringement or claims of invalidity. The Company is not
currently a party to any patent or other litigation. An adverse determination in
any litigation could subject the Company to significant liabilities to third
parties, require the Company to seek licenses from or pay royalties to third
parties or prevent the Company from manufacturing, selling or using its proposed
products, any of which could have a material adverse effect on the Company's
business and prospects. See "Risk Factors-- Dependence on Patents and
Proprietary Technology."
COMPETITION
The Company believes that its competitive success will depend primarily upon
its ability to demonstrate the clinical efficacy of the EnSite System;
effectively create market awareness and acceptance of the system while
maintaining its proprietary nature; and manufacture and deliver the system on a
timely basis. The tachycardia diagnostic mapping field of the medical device
industry has attracted a high level of interest both from companies with an
established presence in the field of electrophysiology and from more recently
formed companies. The Company's competitors include companies that offer
standard, single-point contact diagnostic catheters, including Bard
Electrophysiology, a division of C.R. Bard, Inc.; EP Technologies, a division of
Boston Scientific Corporation; Electro-Catheter Corporation; Cordis Webster,
Inc., a division of Johnson & Johnson; Daig Corporation, a division of St. Jude
Medical, Inc. and CardioRhythm, Inc., a division of Medtronic, Inc. The Company
also competes with companies that are developing multi-point, basket contact
catheters for diagnosing tachycardia that use multiple electrodes to provide
more data points for the measurement of the heart's electrical activity. Basket
contact catheters have not to date received regulatory approval for diagnosing
tachycardia. The Company believes that these basket contact catheters under
development can currently measure multiple points of electrical activity in the
heart. This group of companies includes Cardiac Pathways Corporation, EP
Technologies, and Cordis-Webster, Inc. The Company is also aware of other
medical device companies, such as Biosense, Inc. and Cardima, Inc., that are
developing alternatives to single-point contact catheter mapping technology.
The Company believes that participants in the market for mapping tachycardia
compete on the basis of clinical effectiveness, ease of use, cost and on the
basis of acceptance by health care professionals. Competition is also affected
by the length of time required for products to be developed and receive
regulatory approval. The medical device industry is characterized by rapid and
significant technological
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change. As a result, the Company's success will depend in part on its ability to
respond quickly to medical and technological changes through the development and
introduction of new products.
Many of the Company's competitors and potential competitors have
substantially greater capital resources, research and development staffs and
facilities than the Company. In addition, most of the Company's competitors and
potential competitors have substantially greater experience than the Company in
researching and developing new products, testing products in clinical trials,
obtaining regulatory approvals and manufacturing and marketing medical devices.
There can be no assurance that the Company will succeed in developing and
marketing technologies and products that are clinically more efficacious and
cost-effective than the more established diagnostic products or the new
approaches and products developed and marketed by its competitors. Moreover,
there can be no assurance that the Company will succeed in developing new
technologies and products that are available prior to its competitors' products.
The failure by the Company to demonstrate the efficacy and cost-effective
advantages of its products over those of its competitors could have a material
adverse effect on the Company's business and results of operations. See "Risk
Factors--Significant Competition; Rapid Technological Change."
THIRD-PARTY REIMBURSEMENT FOR THE COMPANY'S PRODUCTS
In the United States, health care providers, including hospitals and
physicians, that purchase medical products for treatment of their patients
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or a part of the
costs and fees associated with the procedures performed using these products.
The Company's success will be dependent upon, among other things, the ability of
health care providers to obtain satisfactory reimbursement from third-party
payors for medical procedures in which the Company's products are used. If FDA
approval is received, third-party reimbursement would depend upon decisions by
the Health Care Financing Administration for Medicare, as well as by individual
health maintenance organizations and private insurers and other payors.
Third-party payors determine whether to reimburse for a particular procedure
and, if so, will 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 the 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 the EnSite catheter, 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.
Medicare coverage is generally available for items and related services
involving devices that have been classified by the FDA as
"non-experimental/investigational" (Category B) devices and that are furnished
in accordance with the FDA-approved IDE governing clinical trials. Based on the
Company's IDE approval from the FDA for the EnSite System, the system has been
classified as a Category B device. Even with items or services involving
Category B devices, however, Medicare coverage may be denied if any other
coverage requirements are not met, for example, if the treatment is not
medically necessary for the specific patient. There can be no assurance that the
Company's systems will be covered when they are
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used in clinical trials and, if covered, whether the payment amounts for their
use will be considered to be adequate by health care providers. If the devices
are not covered or the payments are considered to be inadequate, the Company may
need to bear additional costs to sponsor such trials, and such costs could have
a material adverse effect on the Company's business, financial condition and
results of operation.
Capital costs for medical equipment purchased by hospitals are currently
reimbursed under Medicare separately from medical procedure payments. Recent
federal Medicare legislation has called for these capital costs to be reimbursed
on a prospective payment system. During a transition period due to end in 2000,
each hospital's capital expenditures will be based in part on its own historical
capital costs and in part on the prospective payment system. There can be no
assurance that the movement to a prospective payment system will not cause
hospitals to reduce their expenditure payments for equipment such as the EnSite
clinical workstation.
Reimbursement systems in international markets vary significantly by country
and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in international
markets targeted by the Company. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
time, for a particular amount, or at all.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. The Company anticipates that hospital administrators and
physicians would justify the use of the Company's products by the attendant cost
savings and clinical benefits that the Company believes would be derived from
the use of its products. However, there can be no assurance that this will be
the case. Accordingly, reimbursement for the Company's products may not be
available in the United States or in international markets under either
government or private reimbursement systems, and health care providers may not
advocate reimbursement for procedures using the Company's products. Failure by
hospitals and other users of the Company's products to obtain reimbursement from
third-party payors, or changes in government and private third-party payors'
policies toward reimbursement for procedures employing the Company's products,
would have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, the Company is unable to predict
what additional legislation or regulation, if any, relating to the health care
industry or third-party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation would have on the Company.
Political, economic and regulatory influences are subjecting the health care
industry in the United States to increased scrutiny. The Company anticipates
that Congress, state legislatures and the private sector will continue to review
and assess alternative health care delivery and payment systems. Potential
approaches that have been considered 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, price controls and other fundamental changes to the health
care delivery system. Legislative debate is expected to continue in the future,
and market forces are expected to demand reduced costs. In this regard, a
federal advisory panel recently recommended to Congress that the Medicare
reimbursement rate to hospitals remain unchanged in 1998. The Company cannot
predict what impact the adoption of any federal or state health care reform
measures, future private sector reform or market forces may have on its
business. See "Risk Factors--Uncertainty of Third-Party Reimbursement."
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GOVERNMENT REGULATION
UNITED STATES
The Company's EnSite System is regulated in the United States as a medical
device by the FDA under the Federal Food, Drug, and Cosmetic Act ("FDC Act") and
requires premarket approval by the FDA prior to commercialization. In addition,
certain material changes or modifications to medical devices also are subject to
FDA review and approval. Pursuant to the FDC Act, the FDA regulates the
research, testing, manufacture, safety, labeling, storage, record keeping,
advertising, distribution and production of medical devices in the United
States. Noncompliance with applicable requirements can result in warning
letters, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the government to grant
premarket approval for devices, and criminal prosecution. Medical devices are
classified into one of three classes, Class I, II or III, on the basis of the
controls deemed by the FDA to be necessary to reasonably ensure their safety and
effectiveness. Class I devices are subject to general controls (E.G., labeling,
premarket notification and adherence to GMPs). Class II devices are subject to
general controls and to special controls (E.G., performance standards,
postmarket surveillance, patient registries, and FDA guidelines). Generally,
Class III devices are those which must receive premarket approval by the FDA to
ensure their safety and effectiveness (E.G., life-sustaining, life-supporting
and implantable devices, or new devices which have not been found substantially
equivalent to legally marketed devices), and require clinical testing to ensure
safety and effectiveness and FDA approval prior to marketing and distribution.
The FDA also has the authority to require clinical testing of Class I and Class
II devices. A PMA application must be filed if the proposed device is not
substantially equivalent to a legally marketed predicate device or if it is a
Class II device for which the FDA has called for such applications.
If human clinical trials of a device are required and if the device presents
a "significant risk," the manufacturer or the distributor of the device is
required to file an IDE application prior to commencing human clinical trials.
The IDE application must be supported by data, typically including the results
of animal and, possibly, mechanical testing. If the IDE application is approved
by the FDA, human clinical trials may begin at a specific number of
investigational sites with a maximum number of patients, as approved by the FDA.
Sponsors of clinical trials are permitted to sell those devices distributed in
the course of the study provided such costs do not exceed recovery of the costs
of manufacture, research, development and handling. The clinical trials must be
conducted under the auspices of an independent institutional review board
("IRB") established pursuant to FDA regulations.
The Company conducted clinical trials of its EnSite Systems in the United
Kingdom in late 1995, 1996 and early 1997 under an authorization of the Medical
Devices Agency ("the MDA") of the British government. These studies involved a
total of 16 patients with ventricular tachycardia. The Company submitted its IDE
application to the FDA in May 1996 based on the results of the initial four
patient trial plus extensive pre-clinical testing. Based on consultation with
the FDA, and to further support its IDE submission, the Company conducted nine
additional ventricular patient trials and submitted this data in November 1996
in an amendment to the IDE application. In the amendment, the Company reported
that three of the nine patients in this study suffered complications, including
one death four days following the procedure. In December 1996, the FDA granted
the Company an IDE to conduct in the United States a limited clinical trial of
the EnSite System for left ventricular tachycardia mapping in five patients at
one institution. In granting the IDE, the FDA expressed its belief that there is
a significant possibility that one or two of the complications were device
related and that further testing may be required to address this concern.
However, based on the Company's evaluation, the Company believes these
complications were not device related and has submitted its response to the FDA.
The Company conducted in early 1997 a limited five patient clinical study
authorized under the IDE. The Company intends to conduct extensive additional
clinical trials in the United States. The Company anticipates that these
clinical trials will be used to support a PMA application to obtain approval to
market the EnSite System in the United States.
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<PAGE>
The Company conducted an initial study of its technology for mapping atrial
tachycardia in seven patients in the United Kingdom during the second half of
1996. The Company believes that it will require an IDE approval from the FDA to
pursue clinical testing of the EnSite System for SVTs in the United States and
significant testing will be required to support a subsequent PMA application.
A PMA application must be supported by extensive data, including preclinical
and clinical trial data, as well as extensive literature to prove the safety and
effectiveness of the device. Following receipt of a PMA application, if the FDA
determines that the application is sufficiently complete to permit a substantive
review the FDA will "file" the application. Under the FDC Act, the FDA has 180
days to review a PMA application, although the review of such an application
more often occurs over a protracted time period, and generally takes
approximately two years or more from the date of filing to complete.
The PMA application approval process can be expensive, uncertain and
lengthy. A number of devices for which premarket approval has been sought have
never been approved for marketing. The review time is often significantly
extended by the FDA, which may require more information or clarification of
information already provided in the filing. During the review period, an
advisory committee likely will be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's GMP requirements prior to approval of an
application. If granted, the approval of the PMA application may include
significant limitations on the indicated uses for which a product may be
marketed.
The Company plans to file a PMA application with the FDA for approval to
sell the EnSite System commercially in the United States when the clinical
studies are completed. There can be no assurance that the Company will be able
to obtain necessary PMA application approvals to market the EnSite System, or
any other products, on a timely basis, if at all, and delays in receipt or
failure to receive such approvals the loss of previously received approvals, or
failure to comply with existing or future regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and state agencies, and to list its products with the FDA. As such,
the Company will be inspected by both the FDA for compliance with the FDA's GMP
and other applicable regulations. These regulations require that the Company
manufacture its products and maintain its documents in a prescribed manner with
respect to manufacturing, testing and control activities. Further, the Company
is required to comply with various FDA requirements for design, safety,
advertising and labeling. The Company has not yet undergone an FDA GMP
inspection.
The Company is required to provide information to the FDA on death or
serious injuries alleged to have been associated with the use of its medical
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. In addition, the
FDA prohibits an approved device from being marketed for unapproved
applications. If the FDA believes that a company is not in compliance with the
law, it can institute proceedings to detain or seize products, issue a recall,
enjoin future violations and assess civil and criminal penalties against the
company, its officers and its employees. Failure to comply with the regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.
The advertising of most FDA-regulated products is subject to both FDA and
Federal Trade Commission jurisdiction. The Company also is subject to regulation
by the Occupational Safety and Health Administration and by other governmental
entities.
Regulations regarding the manufacture and sale of the Company's products are
subject to change. The Company cannot predict what impact, if any, such changes
might have on its business, financial condition or results of operations.
37
<PAGE>
INTERNATIONAL
International sales of the Company's products are subject to the regulatory
agency product registration requirements of each country. The regulatory review
process varies from country to country. There can be no assurance that such
approvals will be obtained on a timely basis or at all.
The Company is in the process of implementing policies and procedures which
are intended to allow the Company to receive ISO 9001 qualification of its
processes. The ISO 9000 series of standards for quality operations have been
developed to ensure that companies know the standards of quality to which they
must adhere to receive certification. The European Union has promulgated rules
which require that medical products receive by mid-1998 the right to affix the
CE Mark, an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. ISO 9000
certification is one of the CE Mark certification requirements. Failure to
receive the right to affix the CE Mark will prohibit the Company from selling
its products in member countries of the European Union. There can be no
assurance that the Company will be successful in meeting certification
requirements.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical products entail significant
risk of product liability claims and product failure claims. The Company has
conducted only limited clinical trials and does not yet have, and will not have
for a number of years, sufficient clinical data to allow the Company to measure
the risk of such claims with respect to its products. The Company faces an
inherent business risk of financial exposure to product liability claims in the
event that the use of its products results in personal injury or death. The
Company also faces the possibility that defects in the design or manufacture of
the Company's products might necessitate a product recall. There can be no
assurance that the Company will not experience losses due to product liability
claims or recalls in the future. The Company currently maintains product
liability insurance with coverage limits of $5 million per occurrence and $5
million annually in the aggregate and there can be no assurance that the
coverage limits of the Company's insurance policies will be adequate. In
addition, the Company will require increased product liability coverage if any
potential products are successfully commercialized. Such insurance is expensive,
difficult to obtain and may not be available in the future on acceptable terms,
or at all. Any claims against the Company, regardless of their merit or eventual
outcome, could have a material adverse effect upon the Company's business,
financial condition and results of operations.
EMPLOYEES
The Company had a total of 50 full-time employees as of December 31, 1996.
Of this number, 24 persons were engaged in research and development or clinical
activities, 5 were involved in regulatory and quality assurance, 14 were
involved with manufacturing and 7 were involved with administration, sales and
marketing and support functions. No employee of the Company is covered by a
collective bargaining agreement. In addition to its full-time workforce, the
Company has consulting or other contractual relationships with four other
individuals. The Company expects to add such new employees as are necessary to
expand its manufacturing capacity for future commercial production.
FACILITIES
The Company leases approximately 17,500 square feet in St. Paul, Minnesota.
The facility is leased through September 1997. The Company has an option to
extend the lease through March 1999. The Company believes that this facility
will be adequate to meet its needs through the full commercial introduction of
its planned products.
LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings.
38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names, ages and positions of the executive officers, key management
personnel and directors of the Company as of the date hereof are listed below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------------- ----------- ----------------------------------------------------
<S> <C> <C>
James W. Bullock.................................... 40 President, Chief Executive Officer and Director
Dennis J. McFadden.................................. 45 Vice President, Finance and Chief Financial Officer
Frank J. Callaghan.................................. 43 Vice President, Research and Development
Richard J. Omilanowicz.............................. 44 Vice President, Manufacturing
Graydon E. Beatty................................... 40 Chief Technical Officer and Director
David A. Teicher.................................... 46 Director of Regulatory Affairs and Quality Assurance
Patrick J. Wethington............................... 28 Director of Marketing
Leota L. Pearson.................................... 38 Controller
James E. Daverman (1)(2)............................ 47 Director
Robert G. Hauser, M.D............................... 57 Director
Ronald H. Kase (1).................................. 38 Director
Steven R. LaPorte................................... 46 Director
Peter H. McNerney (1)(2)............................ 46 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
JAMES W. BULLOCK has been President, Chief Executive Officer and a Director
of the Company since May 1994. In addition, Mr. Bullock served as the Chief
Financial Officer of the Company from May 1994 until May 1996. From April 1992
until joining the Company, Mr. Bullock served as President and Chief Operating
Officer of Stuart Medical, Inc., a cardiac monitoring start-up company. From
April 1990 to April 1992, Mr. Bullock served as Vice President of Sales and
Marketing of the Stackhouse Division of Bird Medical Technologies, a medical
device company. From 1978 to 1990, Mr. Bullock served in a variety of marketing
and sales management positions, most recently as Vice President of Sales, for
the Pharmaseal Division of Baxter International Inc., a medical products
company.
DENNIS J. MCFADDEN has been Vice President, Finance and Chief Financial
Officer of the Company since May 1996. From May 1995 until joining the Company,
Mr. McFadden served as Chief Financial Officer of Diametrics Medical, Inc., a
manufacturer of blood analysis systems. From August 1994 to April 1995, Mr.
McFadden acted as management consultant to Cascade Medical, Inc., a
privately-held medical products company, and from March 1993 to July 1994, Mr.
McFadden served as Chief Financial Officer of Cascade Medical, Inc. From 1985 to
February 1993, Mr. McFadden performed in a number of financial roles, including
Corporate Treasurer and Chief Financial Officer for the entry level systems
division at Cray Research, Inc., a manufacturer of supercomputers.
FRANK J. CALLAGHAN has been Vice President of Research and Development of
the Company since November 1995. From 1987 until joining the Company, Mr.
Callaghan served as a Director of Research and Development at Telectronics
Pacing Systems, Inc., a manufacturer of cardiac rhythm management devices. From
1983 to 1987 Mr. Callaghan served in several capacities, including Manager,
Systems Technology, at Cordis Corporation, a manufacturer of angiographic and
implantable devices.
RICHARD J. OMILANOWICZ has been Vice President of Manufacturing of the
Company since November 1994. From May 1993 until joining the Company, Mr.
Omilanowicz served as General Manager of
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McKechnie Plastic Components, a custom injection molding company. From 1980 to
May 1993, Mr. Omilanowicz served in several capacities at the Pharmaseal
Division of Baxter International Inc., most recently as Director of Research,
Development and Engineering.
GRAYDON E. BEATTY is a founder of the Company and has been Chief Technical
Officer of the Company since May 1995 and a Director since August 1992. Since
the Company's inception in May 1992, Mr. Beatty has served in several technical
and management positions. In addition, from May 1992 until December 1993, Mr.
Beatty served as a consultant with GMN Consulting, an engineering consulting
firm, and as a consulting engineer of AngeMed, a division of Angeion Corp., a
cardiovascular device Company, from February 1992 to September 1992. Mr. Beatty
was Senior Development Engineer of Bio-Medical Design Group, Inc., an
electrophysiology system developer, from December 1991 to May 1992. From 1989 to
December 1991, Mr. Beatty served as Principal Research Engineer at Cardiac
Pacemakers, Inc., a cardiovascular device company.
DAVID A. TEICHER was Director of Regulatory Affairs and Quality Assurance of
the Company from May 1995 to December 1995 and resumed that position in March
1996. Mr. Teicher served as Director of Regulatory and Clinical Affairs of
Instent, Inc. from January 1996 to February 1996. From June 1991 to March 1995,
Mr. Teicher served as Director of Regulatory Affairs, New Technology for SciMed
Life Systems, Inc., a manufacturer of cardiology devices, and as Director of
Regulatory Affairs and Quality Assurance of SciMed Blood Systems Division, a
manufacturer of heart bypass devices, from October 1990 to June 1991. Mr.
Teicher served as Manager of Corporate Regulatory Affairs with Intermedics
Pacemakers, a manufacturer of cardiac pacemakers, from 1987 to September 1990,
and as an investigator biomedical engineer with the FDA from 1976 to 1987.
PATRICK J. WETHINGTON has been Director of Marketing of the Company since
November 1996. From March 1994 to October 1996, Mr. Wethington was the marketing
manager for tachycardia products for Guidant/CPI's implantable cardioverter
defibrillator pulse generator and endocardial lead business. From June 1992 to
March 1994, Mr. Wethington served as a field clinical representative for
Guidant/CPI's cardiac rhythm management products. From September 1990 to June
1992, Mr. Wethington served as a sales and marketing consultant for several
businesses, including 3M, Dayton Hudson Corp. and Syner Service Corporation.
LEOTA L. PEARSON has been Controller of the Company since July 1994. From
November 1993 until joining the Company, Ms. Pearson served as Controller of
General Litho Services, Inc., a printing company. Ms. Pearson completed her MBA
in June 1993. From 1983 to May 1990, Ms. Pearson served as Controller of
Orthomet, Inc., a manufacturer and distributor of orthopedic devices. Ms.
Pearson is a Certified Public Accountant.
JAMES E. DAVERMAN has been a Director of the Company since July 1994. Mr.
Daverman has served as a Managing General Partner and is a founder of Marquette
Venture Partners, a venture capital investment firm, since January 1987. Mr.
Daverman is a director of Colla Genex Pharmaceuticals, Inc., a pharmaceutical
company.
ROBERT G. HAUSER, M.D., has been a Director of the Company since October
1995. Dr. Hauser has been a cardiologist at the Minneapolis Heart Institute
since September 1992, and has served as President of the Cardiovascular Services
Division of Abbott Northwestern Hospital since May 1995 and Executive Director
of the Minneapolis Heart Institute since July 1994. From 1988 to July 1992, Dr.
Hauser served as President and Chief Executive Officer of Cardiac Pacemakers,
Inc., a cardiovascular device company.
RONALD H. KASE has been a Director of the Company since March 1993. Mr. Kase
joined New Enterprise Associates, a venture capital investment firm, in January
1991 and is a limited partner of New Enterprise Associates V, Limited
Partnership. Mr. Kase also serves as a director of several privately held health
care companies.
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STEVEN R. LAPORTE has been a Director of the Company since September 1996.
Mr. LaPorte has served as Vice President and General Manager of the CardioRhythm
Division of Medtronic since January 1994. From 1989 to January 1994, Mr. LaPorte
served as Vice President of Operations for the Neurological Division of
Medtronic, and from 1979 to 1989, as a project manager and then Director of the
Corporate Information Services division of Medtronic.
PETER H. MCNERNEY has been a Director of the Company since January 1995. Mr.
McNerney has been a partner with Coral Ventures, a venture capital investment
firm, since July 1992. From 1989 to June 1992, Mr. McNerney was Managing Partner
of the Kensington Group, a health care management consulting company. Mr.
McNerney serves as a director of Biomira, Inc., a cancer immuno therapy company,
Optical Sensors, Inc., an automated blood gas sensor company, and Aksys, Ltd., a
home hemodyalisis company.
The Company's Board of Directors is divided into three classes as nearly
equal in number as possible, with each class serving a three-year term. One of
the three classes of the Board of Directors is elected each year. The terms of
the Company's current Board of Directors expire as follows: Mr. Beatty and Mr.
Bullock, 1998; Dr. Hauser, Mr. McNerney and Mr. LaPorte, 1999; and Mr. Daverman
and Mr. Kase, 2000.
Messrs. Kase, Daverman, McNerney and LaPorte were elected to the Board of
Directors as designees of various series of Preferred Stock pursuant to
agreements with the Company that will terminate upon closing of the Offering,
and the Company is not aware of any present intention on the part of any of
these individuals to terminate his service as a director after consummation of
this Offering.
COMMITTEES
The Board of Directors has established a Compensation Committee and an Audit
Committee. The Compensation Committee makes recommendations concerning executive
salaries and incentive compensation for employees of the Company, subject to
ratification by the full Board of Directors, and administers the Company's 1993
Long-Term Incentive and Stock Option Plan (the "Stock Option Plan"), the
Directors' Stock Option Plan (the "Directors' Plan") and the Company's 1997
Employee Stock Purchase Plan.
The Audit Committee reviews the results and scope of the audit and other
services provided by the Company's independent auditors, as well as the
Company's accounting principles and its system of internal controls, and reports
the results of its review to the full Board of Directors and to management.
DIRECTORS' COMPENSATION
For their services to the Company, outside directors receive stock options
under the Directors' Plan and each director is reimbursed for expenses actually
incurred in attending meetings of the Board of Directors and its committees. One
existing non-employee director has been granted options to purchase Common Stock
under the Directors' Plan. See "--Stock Plans."
LIMITATION OF LIABILITY
The Company has adopted provisions in its Amended and Restated Certificate
of Incorporation that eliminate to the fullest extent permissible under Delaware
General Corporation Law the liability of its directors to the Company or its
stockholders for monetary damages. Such limitation of liability does not affect
the availability of equitable remedies such as injunctive relief or rescission.
The Company's amended Bylaws provide that the Company shall indemnify its
directors, officers, agents and employees to the fullest extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware General Corporation
Law.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The
41
<PAGE>
Company is not aware of any threatened litigation or proceeding that may result
in a claim for such indemnification.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth the cash and noncash compensation for 1996
awarded to or earned by the Chief Executive Officer and all other executive
officers of the Company whose salary and bonus earned in 1996 exceeded $100,000
(the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
AWARDS
-------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
--------------------- OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS SARS(#)(1) COMPENSATION
- ------------------------------------------------------------ ---------- --------- ------------- -------------
<S> <C> <C> <C> <C>
James W. Bullock............................................ $ 180,000 $ 20,000 285,000 $ --
President, Chief Executive Officer and Director
Frank J. Callaghan.......................................... 120,000 7,698 70,000 50,735(2)
Vice President, Research and Development
Richard J. Omilanowicz...................................... 119,954 -- 70,000 --
Vice President, Manufacturing
Graydon E. Beatty........................................... 110,000 -- 25,000 --
Chief Technical Officer and Director
</TABLE>
- ------------------------
(1) Represents options granted pursuant to the Company's Stock Option Plan.
(2) Represents reimbursement of relocation expenses.
OPTION GRANTS
The following table summarizes options granted during the year ended
December 31, 1996 to the Named Executive Officers.
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION
GRANTED TO EXERCISE FOR OPTION TERM(4)
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------
NAME GRANTED(1) IN 1996(2) PER SHARE(3) DATE 5%($) 10%($)
- ---------------------------------------------- ----------- ------------- --------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James W. Bullock.............................. 70,000 23.9% $ 2.40 06/05/06 $ 105,654 $ 267,749
Frank J. Callaghan............................ 10,000 3.4% 5.00 12/30/06 31,445 76,687
Richard J. Omilanowicz........................ 12,500 4.3% 5.00 12/30/06 39,306 99,609
Graydon E. Beatty............................. -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Each option represents the right to purchase one share of Common Stock. The
options shown in this column are all incentive stock options granted
pursuant to the Stock Option Plan. The options granted
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<PAGE>
to Messrs. Bullock, Callaghan and Omilanowicz, for 70,000, 10,000 and 12,500
shares, respectively, become exercisable on a monthly basis over forty-eight
months beginning six months following such grant. To the extent not already
exercisable, the options generally become exercisable in the event of a
merger in which the Company is not the surviving corporation, a transfer of
all of the Company's stock, a sale of substantially all of the Company's
assets or a dissolution or liquidation of the Company.
(2) In 1996, the Company granted employees options to purchase an aggregate of
292,500 shares of Common Stock.
(3) The exercise price may be paid in cash, or in the case of Mr. Bullock, in
cash, by promissory note or in shares of Common Stock with a market value as
of the date of grant equal to the exercise price or a combination of any of
the above.
(4) The compounding assumes a ten year exercise period for all options grants.
The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
Common Stock prices. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock and overall stock
market conditions. The amounts reflected in the table may not necessarily be
achieved.
OPTION VALUES
The following table summarizes the value of options held at December 31,
1996 by the Named Executive Officers. No options held by such executive officers
were exercised during 1996.
AGGREGATED OPTION VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1996 AT DECEMBER 31, 1996(1)
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------------- ----------- ------------- ------------ -------------
James W. Bullock......................................... 121,875 163,125 $ 1,299,188 $ 1,594,713
Frank J. Callaghan....................................... 16,250 53,750 173,225 586,375
Richard J. Omilanowicz................................... 23,524 46,476 249,791 434,259
Graydon E. Beatty........................................ 22,500 2,500 243,000 27,000
</TABLE>
- ------------------------
(1) Value based on the difference between the fair market value of the shares of
Common Stock at December 31, 1996 ($11.00), as determined by the Board of
Directors, and the exercise price of the options.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL AGREEMENTS
The Company has employment agreements and change-in-control agreements with
the following executive officers.
On December 28, 1994, the Company entered into an agreement with Mr. Bullock
providing for an annual salary of $170,000, benefits consistent with the
Company's employment policies and an annual minimum salary increment of five
percent on each of the first three anniversaries of the commencement of
employment. Pursuant to the agreement, the Company granted to Mr. Bullock an
option to purchase 165,000 shares of the Company's Common Stock at an exercise
price of $0.34 per share, to be vested monthly over a period of 48 months. In
addition, the agreement provides for severance pay, in the event of
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<PAGE>
his termination without cause, equal to 12 months' salary prior to completion of
one year of service, nine months' salary prior to completion of two years of
service, six months' salary prior to completion of three years of service and
three months' salary prior to completion of four years of service, and no
severance pay thereafter.
In June 1996, the Company entered into a change-in-control agreement with
Mr. McFadden providing for severance pay in the event the Company terminates Mr.
McFadden's employment without cause, or Mr. McFadden resigns his employment for
good reason (as such terms are defined in the agreement) after a change in
control of the Company. The amount of the payment to Mr. McFadden will be an
amount equal to 12 months' salary if termination is prior to completion of six
months of service, nine months' salary if termination occurs between six and 12
months of service, six months' salary if termination occurs between 12 and 18
months of service and no severance pay thereafter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Kase, Mr. McNerney and Mr. Daverman served as members of the Company's
Compensation Committee during 1995. Mr. Kase is a limited partner in New
Enterprise Associates V, Limited Partnership. New Enterprise Associates V,
Limited Partnership is affiliated with ONSET Enterprise Associates, L.P.,
Chemicals & Materials Enterprise Associates, Limited Partnership and Catalyst
Ventures. Mr. Daverman is the Managing General Partner of Marquette Venture
Partners II, L.P. and MVP II Affiliates Fund, L.P. Mr. McNerney is a Partner of
Coral Partners IV, Limited Partnership. See "Principal Stockholders."
In March 1993, the Company sold 775,000 shares of Series A Preferred Stock
(convertible into an aggregate of 387,500 shares of Common Stock) to New
Enterprise Associates V, Limited Partnership Catalyst Ventures, ONSET Enterprise
Associates, L.P. and Chemicals & Materials Enterprise Associates pursuant to
preferred stock purchase agreements on substantially similar terms as were sold
to non-affiliated purchasers. See "Certain Transactions."
In October 1993 and November 1993, the Company borrowed an aggregate of
$250,000 from Series A Preferred Stockholders, payable in January 1994 or
convertible into Series B Preferred Stock at a price equal to the price paid per
share by investors purchasing Series B Preferred Stock. In December 1993, the
investors exercised the conversion option, and the Company issued 147,058 shares
of Series B Preferred Stock (convertible into an aggregate of 73,529 shares of
Common Stock). See "Certain Transactions."
From December 1993 through March 1995, the Company sold 6,682,506 shares of
Series B Preferred Stock (convertible into an aggregate of 3,341,253 shares of
Common Stock) to New Enterprise Associates V, Limited Partnership, ONSET
Enterprise Associates, L.P., Chemicals & Materials Enterprise Associates,
Limited Partnership, Catalyst Ventures, Sprout Capital VI, L.P., DLJ Capital
Corporation, Marquette Venture Partners II, L.P., MVP II Affiliates Fund, L.P.
and Coral Partners IV, Limited Partnership pursuant to preferred stock purchase
agreements on substantially similar terms as were sold to non-affiliated
purchasers. See "Certain Transactions."
STOCK PLANS
STOCK OPTION PLAN
Pursuant to the 1993 Long-Term Stock Option Plan (the "Stock Option Plan"),
directors, officers, other employees and consultants of the Company may receive
options to purchase Common Stock. The Stock Option Plan provides for the grant
of both incentive stock options intended to qualify for preferential tax
treatment under Section 422 of the Internal Revenue Code of 1986, as amended
("Incentive Stock Options"), and nonqualified stock options that do not qualify
for such treatment. Only employees of the Company, including officers and
directors who are employees of the Company, are eligible to receive Incentive
Stock Options. The exercise price of all incentive stock options granted under
44
<PAGE>
the Stock Option Plan must equal or exceed the fair market value of the Common
Stock at the time of grant. The Stock Option Plan also provides for grants of
stock appreciation rights, restricted stock awards and performance awards. The
Stock Option Plan is administered by the Compensation Committee.
A total of 1,500,000 shares of Common Stock have been reserved for issuance
under the Stock Option Plan. As of December 31, 1996, the Company had
outstanding options to purchase an aggregate of (i) 897,782 shares, at a
weighted average exercise price of $1.14 per share, pursuant to the Stock Option
Plan and (ii) no shares granted outside of the Stock Option Plan.
DIRECTORS' PLAN
The Company has adopted a Directors' Stock Option Plan (the "Directors'
Plan"). The Directors' Plan provides for the automatic grant of nonstatutory
stock options to purchase 10,000 shares of Common Stock to nonemployee directors
at the time of their election as director, and an option to purchase 5,000
shares of Common Stock on the date of each subsequent annual shareholder
meeting, subject to certain limitations. Options granted on the date an
individual is elected as a director of the Company become vested and thereby
exercisable with respect to 33 1/3% of the shares on the date of such election,
33 1/3% of such shares on the twelve month anniversary date after such election
and 33 1/3% of such shares on the date of the second twelve month anniversary
date after such election; provided, however, that an unvested portion of such
option grant shall only vest so long as the nonemployee director remains a
director on the date such portion vests, and that vested options shall terminate
seven years after the date a director ceases to be a director of the Company or
on the date of termination of the option, whichever occurs earlier. Options
granted on the date of each annual meeting of shareholders become exercisable
six months after the date of grant. The option price for nonemployee directors
is equal to the fair market value of a share of Common Stock as of the date of
grant. The Company has reserved a total of 200,000 shares of Common Stock for
issuance under the Director's Plan, all of which are currently available for
future grant.
EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted a 1997 Employee Stock Purchase Plan (the "Stock
Purchase Plan") covering an aggregate of 200,000 shares of Common Stock. The
Stock Purchase Plan will become effective upon consummation of this Offering and
is intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Code. All employees that have met the service eligibility
requirements will be eligible to participate in the Stock Purchase Plan.
Participating employees will be able to direct the Company to make payroll
deductions of one to fifteen percent of their compensation during a purchase
period for the purchase of shares under the Stock Purchase Plan. The purchase
period for any offering, with the exception of the initial offering period, will
be no more than three months. The Stock Purchase Plan will provide participating
employees with the right, subject to certain limitations, to purchase the
Company's Common Stock at a price equal to 85% of the lesser of the fair market
value of the Company's Common Stock on the first day or the last day of the
applicable purchase period, except that the price on the first day of the
initial purchase period will be the price per share at which the shares of the
Common Stock are first sold to the public in this Offering, as specified on the
cover page of this Prospectus. The Stock Purchase Plan will terminate on such
date as the Board of Directors may determine, or automatically as of the date on
which all of the shares the Company has reserved for purchase under the Stock
Purchase Plan have been sold.
45
<PAGE>
SCIENTIFIC ADVISORY BOARD
The Company has established a Scientific Advisory Board to assist the
Company with its product design and development and clinical trial activities,
as well as other medical and scientific areas relating to the Company's
business. The Company has a Proprietary Information and Inventions Agreement
with each member of the Scientific Advisory Board.
The Scientific Advisory Board is currently comprised of the following
cardiologists:
<TABLE>
<CAPTION>
NAME AFFILIATIONS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Martin Borggrefe, M.D., Ph.D. Consultant Cardiologist and Director of Clinical Electrophysiology,
Department of Cardiology and Angiology, Westfalische
Wilhelms-University, Munster, Germany.
D. Wyn Davies, M.D., FRCP Consultant Cardiologist, St. Mary's Hospital, London, England.
Warren M. Jackman, M.D., FACC Professor of Medicine, George Lynn Cross Research Professor and
Director of Clinical Electrophysiology, The University of Oklahoma
Health Sciences Center.
Alan H. Kadish, M.D., FACC Chester and Deborah Cooley Associate Professor of Internal Medicine,
Director of Electrophysiology Services and Electrocardiology,
Northwestern University.
George J. Klein, M.D., FRCP, FACC Professor, Department of Medicine, University of Western Ontario;
Director, Arrhythmia Service, University Hospital, London, Ontario.
Karl-Heinz Kuck, M.D., FACC Chief of Cardiology, Professor of Internal Medicine and Cardiology,
Director, Electrophysiology Laboratory, Allgemeines Krankenhaus St.
Georg, Hamburg, Germany.
Fred Morady, M.D., FACC Director, Clinical Electrophysiology Laboratory, Professor of Internal
Medicine, Department of Internal Medicine, Division of Cardiology,
University of Michigan.
Bruce L. Wilkoff, M.D., FACC Director of Cardiac Pacing and Tachyrhythmia Devices, Director of the
Cardiovascular Computer Unit, Staff Cardiologist, Cardiac Pacemakers
and Electrophysiology Section, Department of Cardiology, The
Cleveland Clinic Foundation; Associate Professor of Internal
Medicine, Cleveland Clinic Foundation Health Science Center, Ohio
State University.
</TABLE>
46
<PAGE>
CERTAIN TRANSACTIONS
Since March 1993, the Company has sold shares of Preferred Stock as follows:
in March 1993, the Company issued 775,000 shares of Series A Preferred Stock at
a price of $1.00 per share; in December 1993, the Company issued 2,882,354
shares of Series B Preferred Stock at a price of $1.70 per share; in December
1993 (as described below), the Company issued 147,058 shares of Series B
Preferred Stock in connection with the conversion of loans in the aggregate
amount of $250,000 made by certain Series A Preferred Stockholders to the
Company; in January 1995 and in March 1995, the Company issued 3,588,388 and
64,706 shares of Series B Preferred Stock, respectively, at a price of $1.70 per
share; and in April 1996, the Company issued 1,953,700 shares of Series C
Preferred Stock at a price of $5.12 per share. Each share of the Company's
Preferred Stock will convert into one-half share of Common Stock upon completion
of the Offering, as a result of the one-for-two reverse stock split of the
Common Stock. Certain of these shares were sold or issued to the Company's five
percent stockholders and entities affiliated with directors. The Company sold
such securities pursuant to preferred stock purchase agreements on substantially
similar terms as were sold to nonaffiliated purchasers. The following table
summarizes the Series A, Series B and Series C Preferred Stock purchased by the
Company's five percent stockholders and entities affiliated with directors, and
their affiliates:
<TABLE>
<CAPTION>
COMMON STOCK ISSUABLE UPON
CONVERSION OF PREFERRED STOCK
--------------------------------
<S> <C> <C> <C>
STOCKHOLDERS SERIES A SERIES B SERIES C
- ----------------------------------------------------------- --------- ---------- ---------
New Enterprise Associates V, Limited Partnership and
affiliated entities (1).................................. 362,500 1,419,118 --
Marquette Venture Partners II, L.P. and MVP II Affiliates
Fund, L.P................................................ -- 735,294 --
Sprout Capital VI, L.P. and DLJ Capital Corporation........ -- 482,347 --
Coral Partners IV, Limited Partnership..................... -- 441,177 --
Medtronic Asset Management, Inc............................ -- -- 976,850
</TABLE>
- ------------------------
(1) Includes 50,000 shares of Series A Preferred Stock and 411,765 shares of
Series B Preferred Stock held by ONSET Enterprise Associates, L.P., 50,000
Shares of Series A Preferred Stock and 88,236 Shares of Series B Preferred
Stock held by Catalyst Ventures and 50,000 Shares of Series A Preferred
Stock and 183,824 Shares of Series B Preferred Stock held by Chemicals &
Materials Enterprise Associates, Limited Partnership.
The investors in all of the above transactions have rights to require the
Company to register shares pursuant to the Securities Act. See "Shares Eligible
for Future Sale."
Mr. Kase, a director of the Company, is a limited partner in New Enterprise
Associates V, Limited Partnership.
Mr. Daverman, a director of the Company, is the Managing General Partner and
founder of Marquette Venture Partners II, L.P. and MVP II Affiliates Fund, L.P.
Mr. McNerney, a director of the Company, is a partner of Coral Management
Partners IV, the General Partner of Coral Partners IV, Limited Partnership.
Mr. LaPorte, a director of the Company, is Vice President and General
Manager of Medtronic CardioRhythm, an affiliate of Medtronic.
The Company paid $694,000, $475,000 and $59,000 in 1994, 1995 and 1996,
respectively, to Novel Biomedical, Inc. in connection with research and
development activities performed for the Company. The owner of Novel Biomedical,
Inc., Jonathan Kagan, is a founder and stockholder of the Company.
47
<PAGE>
On October 29, 1993 and November 29, 1993, the Company borrowed a total of
$250,000 from certain Series A Preferred stockholders through the issuance of
promissory notes. The promissory notes earned interest at a rate of 7.00% and
were convertible into shares of Series B Preferred Stock at a price equal to the
price paid per share by investors purchasing Series B Preferred Stock. The notes
were converted into 147,058 shares of Series B Preferred Stock on December 23,
1993.
In April 1996, the Company entered into an Investment Agreement (the
"Investment Agreement") with a wholly-owned subsidiary of Medtronic, pursuant to
which the Company sold to Medtronic 1,953,700 shares of the Company's Series C
Preferred Stock for a purchase price of $10 million. See "Principal
Stockholders." Each share of Series C Preferred Stock issued to Medtronic
automatically converts to one-half share of Common Stock upon completion of the
Offering, as a result of the one-for-two reverse stock split of the Common
Stock. Pursuant to the Investment Agreement, the Company has granted Medtronic a
right of first offer with respect to the exclusive distribution of the EnSite
System and related products in territories outside of North America. Under such
right of first offer, Medtronic has the right for forty-five days from the date
the Company delivers notice of its intention to distribute products in a
territory outside of North America to enter into a distribution agreement with
the Company covering that territory. If the Company and Medtronic are not able
to reach agreement during such forty-five day period, the Company then has 180
days to enter into distribution arrangements for the territory with a third
party on terms no less favorable to the Company than the last most favorable
offer made by Medtronic. If no third party distribution agreement is reached
within the 180 day time period, Medtronic's first offer right is reinstated. The
Company also granted Medtronic certain rights to have the shares of Common Stock
issued upon conversion of the Series C Preferred Stock registered under the
federal securities laws. See "Shares Eligible for Future Sale." The Company
intends to sell up to 750,000 shares of Common Stock of the Company (of the
3,000,000 shares offered hereby) to Medtronic at the Price to the Public
indicated on the cover page of this Prospectus. Medtronic currently owns
1,953,700 shares of Preferred Stock of the Company, which assuming conversion
into 976,850 shares of Common Stock in connection with the Offering, represents
17.0% of the Company's outstanding Common Stock. If Medtronic purchases 750,000
shares of the Common Stock offered hereby, Medtronic will own 19.7% of the
Company's outstanding Common Stock upon completion of this Offering. See "Sale
of Shares to Medtronic," "Principal Stockholders" and "Underwriting."
48
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock, as of the date hereof (after giving effect to the
conversion of the outstanding shares of Preferred Stock into Common Stock upon
the closing of the Offering) and as adjusted to reflect the sale by the Company
of the 3,000,000 shares of Common Stock offered hereby, by: (i) each person who
is known by the Company to beneficially own more than five percent of the Common
Stock, (ii) each of the Company's directors, (iii) each of the Named Executive
Officers and (iv) all directors and executive officers of the Company as a
group:
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
SHARES OWNED
SHARES ----------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED(1) OFFERING(1) OFFERING(1)
- -------------------------------------------------------------------------- ----------- --------------- -----------
<S> <C> <C> <C>
Entities affiliated with New Enterprise Associates V, Limited Partnership 1,319,853 22.9% 15.1%
(2) ....................................................................
2490 Sand Hill Road
Menlo Park, CA 94025
Medtronic Asset Management, Inc. ......................................... 976,850 17.0 19.7(3)
7000 Central Avenue NE
Minneapolis, MN 55432
Marquette Venture Partners II, L.P. (4) .................................. 735,294 12.8 8.4
520 Lake Cook Road, Suite 450
Deerfield, IL 60015
Sprout Capital VI, L.P. (5) .............................................. 482,347 8.4 5.5
3000 Sand Hill Road
Building 4, Suite 270
Menlo Park, CA 94025-7114
ONSET Enterprises, L.P. (6) .............................................. 461,765 8.0 5.3
2490 Sand Hill Road
Menlo Park, CA 94025
Coral Partners IV, ....................................................... 441,177 7.7 5.0
Limited Partnership
60 South Sixth Street Suite 3510
Minneapolis, MN 55402
Graydon E. Beatty (7)..................................................... 274,584 4.8 3.1
James W. Bullock (8)...................................................... 158,855 2.7 1.8
James E. Daverman (9)..................................................... -- -- --
Robert G. Hauser, M.D. (8)................................................ 16,667 * *
Ronald H. Kase (10)....................................................... -- -- --
Steven R. LaPorte (11).................................................... -- -- --
Peter H. McNerney (12).................................................... -- -- --
Frank J. Callaghan (8).................................................... 22,500 * *
Richard J. Omilanowicz (8)................................................ 29,145 * *
All executive officers and directors as a group (10 persons)(13).......... 4,442,940 73.8 57.6
</TABLE>
- ------------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes generally voting power
and/or investment power with respect to securities. Shares of Common Stock
subject to options or warrants currently exercisable or exercisable within
60 days of the date hereof ("Currently Exercisable Options") are deemed
outstanding for computing the percentage benefically owned by the person
holding such options but are not deemed outstanding for
49
<PAGE>
computing the percentage beneficially owned by any other person. Except as
indicated by footnote, the Company believes that the persons named in this
table, based on information provided by such persons, have sole voting and
investment power with respect to the shares of Common Stock indicated.
(2) Represents 947,794 shares held by New Enterprises Associates V, Limited
Partnership, 233,824 shares held by Chemicals & Materials Enterprise
Associates, Limited Partnership and 138,236 shares held by Catalyst
Ventures.
(3) Includes 750,000 shares that the Company intends to sell to Medtronic in
this Offering. See "Sale of Shares to Medtronic."
(4) Includes 20,426 shares held by MVP II Affiliates Fund, L.P.
(5) Includes 65,986 shares held by DLJ Capital Corporation.
(6) An affiliate of New Enterprise Associates.
(7) Includes 24,584 shares issuable pursuant to Currently Exercisable Options.
(8) Represents shares issuable pursuant to Currently Exercisable Options.
(9) Excludes 735,294 shares beneficially owned by Marquette Venture Partners II,
L.P. and MVP II Affiliates Fund, L.P. with respect to which Mr. Daverman has
voting and investment power. See Note 4 above. Mr. Daverman is a Managing
General Partner of Marquette Venture Partners II, L.P. Mr. Daverman
disclaims beneficial ownership of these shares, except to the extent of his
proportionate interest in Marquette Venture Partners II, L.P.
(10) Excludes shares beneficially owned by entities affiliated with New
Enterprise Associates. See Notes 2 and 6. Mr. Kase is a limited partner of
New Enterprise Associates V, Limited Partnership. Mr. Kase disclaims
beneficial ownership of these shares, except to the extent of his
proportionate interest in New Enterprise Associates V, Limited Partnership.
(11) Excludes shares beneficially owned by Medtronic Asset Management, Inc. See
Note 3 above. Mr. LaPorte is Vice President and General Manager of Medtronic
CardioRhythm, an affiliate of Medtronic. Mr. LaPorte disclaims beneficial
ownership of these shares.
(12) Excludes 441,177 shares beneficially owned by Coral Partners IV, Limited
Partnership with respect to which Mr. McNerney has voting and investment
power. Mr. McNerney is a partner of Coral Management Partners IV, the
General Partner of Coral Partners IV, Limited Partnership. Mr. McNerney
disclaims beneficial ownership of these shares, except to the extent of his
proportionate interest in Coral Partners IV, Limited Partnership.
(13) See Notes 7, 8, 9, 10, 11 and 12 above. Includes an additional 6,250 shares
of Common Stock issuable upon the exercise of outstanding options held by
Mr. McFadden.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offering, the total number of shares of all classes
of stock which the Company has authority to issue will be 40,000,000 shares of
Common Stock, $.01 par value, and 10,000,000 shares of undesignated preferred
stock, $.01 par value. As of December 31, 1996, there were 5,759,030 shares of
Common Stock outstanding (assuming conversion into Common Stock of all
outstanding shares of Preferred Stock), which were held of record by 68
stockholders, and no shares of undesignated preferred stock outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. There is no
cumulative voting for the election of directors so that holders of more than 50%
of the outstanding Common Stock of the Company can elect all directors. Subject
to preferences that may be applicable to any outstanding preferred stock,
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors of the Company out of funds legally available
therefor and in liquidation proceedings. Holders of Common Stock have no
preemptive or subscription rights and there are no redemption rights with
respect to such shares. The outstanding shares of Common Stock are, and the
shares of Common Stock offered hereby will be, fully paid and nonassessable.
PREFERRED STOCK
As of December 31, 1996, there were outstanding 775,000, 6,682,506 and
1,953,700 shares of Series A, Series B and Series C Preferred Stock,
respectively, and no shares of Series D Preferred Stock. All shares of
outstanding Preferred Stock will be converted into an aggregate of 4,705,603
shares of Common Stock upon the closing of this Offering.
The Company's Board of Directors is authorized, without further stockholder
action, to issue preferred stock in one or more series and to fix the voting
rights, liquidation preferences, dividend rights, repurchase rights, conversion
rights, redemption rights and terms, including sinking fund provisions, and
certain other rights and preferences, of the preferred stock.
Although there is no current intention to do so, the Board of Directors of
the Company may, without stockholder approval, issue shares of a class or series
of preferred stock with voting and conversion rights which could adversely
affect the voting power or dividend rights of the holders of Common Stock and
may have the effect of delaying, deferring or preventing a change in control of
the Company.
WARRANTS AND OPTIONS
The Company has issued a warrant to purchase 5,000 shares of Common Stock at
an exercise price of $.10 per share to Tikkun Resource Development. Such warrant
is currently exercisable and expires in November 2003. Upon completion of the
Offering, such warrant will be exercisable for 2,500 shares of Common Stock at
an exercise price of $.20 per share.
The Company has issued, in connection with equipment leasing arrangements, a
warrant to purchase 93,213 shares of its Series B Preferred Stock at an exercise
price of $1.70 per share and a warrant to purchase 15,000 shares of its Series D
Preferred Stock at an exercise price of $5.12 per share. Such warrants are
currently exercisable and expire in November 2004 and August 2006, respectively.
Upon completion of the Offering, such warrants will be exercisable for 46,607
and 7,500 shares of Common Stock at exercise prices of $3.40 and $10.24 per
share, respectively.
As of December 31, 1996, the Company had issued options to purchase a total
of 897,782 shares of Common Stock at a weighted average exercise of $1.14 per
share. See "Management--Stock Plans."
51
<PAGE>
The above described warrants and all options granted under the Stock Option
Plan provide for antidilution adjustments in the event of certain mergers,
consolidations, reorganizations, recapitalizations, stock dividends, stock
splits or other changes in the corporate structure of the Company.
PROVISIONS OF THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
AND AMENDED BYLAWS AND THE DELAWARE GENERAL CORPORATION LAW
The existence of authorized but unissued preferred stock, described above,
and certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Amended Bylaws and Delaware law, described below, could have
an antitakeover effect. These provisions are intended to provide management
flexibility, to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board of Directors and to discourage an unsolicited takeover of the
Company if the Board of Directors determines that such a takeover is not in the
best interests of the Company and its stockholders. However, these provisions
could have the effect of discouraging certain attempts to acquire the Company
which could deprive the Company's stockholders of opportunities to sell their
shares of Common Stock at prices higher than prevailing market prices.
Pursuant to the Amended Bylaws, the Board of Directors of the Company is
divided into three classes serving staggered three-year terms. As a result, at
least two shareholders' meetings will generally be required for shareholders to
effect a change in control of the Board of Directors.
Following the consummation of the Offering, the Company will be subject to
the "Business Combination" provisions of the Delaware General Corporation Law.
In general, such provisions prohibit a publicly held Delaware corporation from
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder," unless (i) the transaction
is approved by the Board of Directors prior to the date the interested
stockholder obtained such status, (ii) upon consummation of the transaction
which resulted in the stockholder becoming an "interested stockholder," the
"interested stockholder" owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned by
(a) persons who are directors and also officers and (b) employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer, or (iii) on or subsequent to such date the "business combination" is
approved by the board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested stockholder." A
"business combination" is defined to include mergers, asset sales and other
transactions resulting in a financial benefit to a stockholder. In general, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of a corporation's
voting stock. The Company's stockholders which owned 15% of the corporation's
voting stock at the time of this Offering are not interested stockholders
subject to the "Business Combination" provisions of the Delaware General
Corporation Law. The statute could prohibit or delay mergers or other takeover
or change in control attempts with respect to the Company and, accordingly, may
discourage attempts to acquire the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Common Stock will be
Norwest Bank Minnesota, National Association.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect the prevailing market price and impair the
Company's ability to raise additional funds.
Upon completion of the Offering, the Company will have outstanding an
aggregate of 8,759,031 shares of Common Stock, assuming the issuance of
3,000,000 shares of Common Stock offered by the Company hereby. Of the total
outstanding shares of Common Stock, 3,000,000 shares will be freely tradeable
without restriction or further registration under the Securities Act, unless
held by "affiliates" of the Company, as that term is defined in Rule 144 under
the Securities Act (whose sales would be subject to certain volume limitations
and other restrictions described below).
The remaining 5,759,031 shares of Common Stock held by existing stockholders
upon completion of the Offering will be "restricted securities" as that term is
defined in Rule 144 under the Securities Act. The Company, its officers,
directors and certain of its stockholders (beneficially holding an aggregate of
5,623,196 of such restricted shares) have agreed that they will not sell,
directly or indirectly, any Common Stock without the prior consent of Piper
Jaffray Inc. for a period of 180 days from the date of this Prospectus. In the
absence of such agreements, approximately 4,100,551 of the restricted shares
will become eligible for sale 90 days from the date of this Prospectus, subject
to compliance with the volume limitations and other restrictions of Rule 144,
and approximately 538,126 of the restricted shares may become eligible for
immediate sale without restriction pursuant to Rule 144(k).
In general, under Rule 144, as in effect upon expiration of the contractual
restrictions described above, if at least one year has elapsed from the date
that shares of Common Stock were acquired from the Company or an affiliate of
the Company, then the holder is entitled to sell in "brokers' transactions" or
to market makers, within any three-month period commencing 90 days after the
date of this Prospectus, a number of shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (87,590 shares
immediately after the Offering) or (ii) generally, the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the filing
of a Form 144 with respect to such sale, subject to certain other limitations
and restrictions. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the three months preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years, would be entitled to sell such shares under Rule 144(k) without regard to
the requirements described above.
The Company intends to file registration statements under the Securities
Act, covering approximately 1,500,000, 200,000 and 200,000 shares of Common
Stock reserved for issuance under, respectively, the Stock Option Plan the
Directors' Plan and the Stock Purchase Plan. Such registration statements are
expected to be filed soon after the date of this Prospectus and will
automatically become effective upon filing. Accordingly, shares registered under
such registration statements will be available for sale in the open market,
unless such shares are subject to vesting restrictions with the Company or the
contractual restrictions described above. See "Management--Stock Plans."
In addition, after the Offering, the holders of approximately 4,705,603
shares of Common Stock (issued upon the automatic conversion of the Company's
Preferred Stock as a result of the Offering) (together, the "Registrable
Securities") will be entitled to certain rights to cause the Company to register
the sale of such shares under the Securities Act. After the Offering, if the
Company proposes to register any of its securities under the Securities Act for
its own account, holders of Registrable Securities are entitled to notice of
such registration and are entitled to include Registrable Securities therein,
provided, among other conditions, that the underwriters of any such offering
have the right to limit the number of shares included in such registration. The
holders of the Registrable Securities may require the Company to prepare and
file a registration statement under the Securities Act at its expense, and the
Company is required to use its best efforts to effect such registration, subject
to certain conditions and limitations; provided that the Company shall not be
required to obtain the effectiveness of any such registration
53
<PAGE>
statement until 180 days after the date of this Prospectus, at the earliest. The
Company is not obligated to effect more than two of these stockholder-initiated
registrations. Holders of Registrable Securities with an aggregate proposed
offering price of not less than $500,000 may require the Company to file not
more than two additional registration statements on Form S-3 under the
Securities Act, subject to certain conditions and limitations. Registration of
such shares would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by affiliates
of the Company) immediately upon the effectiveness of such registration.
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of Common Stock for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock in the public markets or the perception
that such sales will occur could adversely affect the market price or the future
ability to raise capital through an offering of its equity securities. See "Risk
Factors--Shares Eligible for Future Sale; Registration Rights."
54
<PAGE>
UNDERWRITING
The Company has entered into a Purchase Agreement (the "Purchase Agreement")
with the underwriters listed in the table below (the "Underwriters"), for whom
Piper Jaffray Inc. and Volpe, Welty & Company are acting as representatives (the
"Representatives"). Subject to the terms and conditions set forth in the
Purchase Agreement, the Company has agreed to sell to the Underwriters, and each
of the Underwriters has severally agreed to purchase, the following number of
shares of Common Stock set forth opposite each Underwriter's name in the table
below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Piper Jaffray Inc................................................................
Volpe, Welty & Company LLC.......................................................
----------
Total...................................................................... 3,000,000
----------
----------
</TABLE>
Subject to the terms and conditions of the Purchase Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold pursuant
to the Purchase Agreement, if any is purchased (excluding shares covered by the
over-allotment option granted therein). In the event of a default by any
Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
Purchase Agreement may be terminated.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public initially at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not more than $ per
share. Additionally, the Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After
the Offering, the initial public offering price and other selling terms may be
changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable by the
Representatives within 30 days after the date of the Purchase Agreement, to
purchase up to an additional 450,000 shares of Common Stock at the same price
per share to be paid by the Underwriters for the other shares offered hereby. If
the Underwriters purchase any of such additional shares pursuant to this option,
each Underwriter will be committed to purchase such additional shares in
approximately the same proportion as set forth in the table above. The
Underwriters may exercise the option only for the purpose of covering
over-allotments, if any, made in connection with the distribution of the Common
Stock offered hereby.
The Representatives have informed the Company that neither they, nor any
other member of the National Association of Securities Dealers, Inc. (the
"NASD") participating in the distribution of the Offering, will make sales of
shares of Common Stock offered hereby to accounts over which they exercise
discretionary authority without the prior specific written approval of the
customer.
The Offering of the shares of Common Stock is made for delivery when, as and
if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the Offering without notice. The Underwriters
reserve the right to reject an order for the purchase of shares in whole or in
part.
The officers and directors of the Company and certain other stockholders
designated by the Representatives, which will beneficially own in the aggregate
5,623,196 shares of Common Stock after the
55
<PAGE>
Offering, have agreed that they will not directly or indirectly, sell, contract
to sell, make any short sale, pledge or otherwise dispose of any shares of
Common Stock options to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock owned by them prior
to the date of the Prospectus for a period of 180 days after the date of this
Prospectus, without the prior written consent of Piper Jaffray Inc. See "Shares
Eligible For Future Sale." The Company has agreed that it will not, without the
Representatives' prior written consent, offer, sell, issue or otherwise dispose
of any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common Stock
during the 180-day period following the date of this Prospectus, except that the
Company may issue shares upon the exercise of options and warrants granted prior
to the date hereof, and may grant additional options under the Stock Option
Plans and Directors' Plan.
Of the 3,000,000 shares of Common Stock offered hereby, the Company intends
to sell, at the Price to Public, up to 750,000 shares of Common Stock to
Medtronic. See "Sale of Shares to Medtronic." Any such sale will be made on the
same terms as sales to other investors, except that Medtronic shall have agreed
to the 180-day lock-up described above. Any purchases by Medtronic of shares in
the Offering will be for investment purposes only and not with a view to
distributing the shares to the public.
Piper Jaffray Healthcare Capital Limited Partnership (SBIC) ("PJHCLP") and
The Companion Fund Partnership, a general partnership, own of record and
beneficially 157,313 and 24,326 shares of Common Stock of the Company,
respectively. An entity affiliated with Piper Jaffray Inc., a Representative, is
the general partner of PJHCLP. Certain employees of Piper Jaffray Inc. are
general partners of The Companion Fund Partnership. The shares were purchased in
connection with private placements of Preferred Stock.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock has been determined by
negotiation among the Company and the Representatives. Among the factors
considered in determining the initial public offering price were prevailing
market and economic conditions, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, an assessment of the Company's management and the consideration of
the above factors in relation to the market valuation of companies in related
businesses. The initial public offering price for the Common Stock should not be
considered as an indication of the actual value of the Common Stock offered
hereby. In addition, there can be no assurance that the Common Stock may be
resold at a price equal to or greater than the initial public offering price.
See "Risk Factors--No Prior Public Market; Possible Volatility of Price."
During and after the offering, the Underwriters may purchase and sell Common
Stock in the open market. These transactions may include overallotment,
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in the Offering for their
account may be reclaimed by the syndicate if such securities are repurchased by
the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise, and these activities, if commenced, may be
discontinued at any time.
As permitted by Rule 103 under the Securities Exchange Act of 1934, as
amended, Underwriters or prospective Underwriters that are market makers
("passive market makers") in the Common Stock may make bids for or purchases of
Common Stock in the Nasdaq National Market until such time, if any, when a
stabilizing bid for such securities has been made. Rule 103 generally provides
that (a) a passive market maker's net daily purchases of the Common Stock may
not exceed 30% of its average daily trading volume in such securities for the
two full consecutive calendar months (or any 60 consecutive days ending within
the 10 days) immediately preceding the filing date of the registration statement
of which this Prospectus
56
<PAGE>
forms a part, (b) a passive market maker may not effect transactions or display
bids for the Common Stock at a price that exceeds the highest independent bid
for the Common Stock by persons who are not passive market makers and (c) bids
made by passive market makers must be identified as such.
The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities, including liabilities under the Securities
Act, and to contribute to payments the Underwriters may be required to make in
respect thereof.
VALIDITY OF SHARES
The validity of the securities offered hereby will be passed upon for the
Company by Dorsey & Whitney LLP, Minneapolis, Minnesota, and for the
Underwriters by Faegre & Benson LLP, Minneapolis, Minnesota.
EXPERTS
The financial statements as of December 31, 1995 and 1996, and for each of
the three years in the period ended December 31, 1996, and the period from May
21, 1992 (inception) to December 31, 1996, included in this Prospectus have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein and in the Registration Statement, and such
financial statements are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed with the Securities and
Exchange Commission (the "Commission"). This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete, and
in each instance reference is made to the copy of such contract or documents
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement and the exhibits and schedules thereto. A copy of the
Registration Statement, including exhibits and schedules thereto, may be
inspected by anyone without charge at the Commission's principal office in
Washington, D.C. and copies of all or any part thereof may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of certain fees prescribed by the Commission. A copy of
the Registration Statement is also available on the Commission's EDGAR site on
the World Wide Web at: http:\\www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants
and quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
57
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors............................................................................. F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statement of Changes in Stockholders' Equity............................................................... F-5
Statements of Cash Flows................................................................................... F-7
Notes to Financial Statements.............................................................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Endocardial Solutions, Inc.
We have audited the accompanying balance sheets of Endocardial Solutions,
Inc. (a development stage company) as of December 31, 1995 and 1996, and the
related statements of operations, changes in stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996, and for the
period from May 21, 1992 (inception) to December 31, 1996. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Endocardial Solutions, Inc.
at December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, and for
the period from May 21, 1992 (inception) to December 31, 1996, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
January 9, 1997
F-2
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------
1995 1996
-------------- -------------- PRO FORMA
STOCKHOLDERS'
EQUITY AT
DECEMBER 31,
1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 1,863,788 $ 6,157,491
Prepaid expenses and other current assets...................... 72,211 75,053
-------------- --------------
Total current assets............................................. 1,935,999 6,232,544
Furniture and equipment.......................................... 944,136 1,496,404
Less accumulated depreciation.................................... 381,067 656,695
-------------- --------------
563,069 839,709
Deposits......................................................... 47,034 81,709
Patents, less accumulated amortization (1995--$22,019;
1996--$37,339).................................................. 48,851 46,164
-------------- --------------
Total assets..................................................... $ 2,594,953 $ 7,200,126
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 233,761 $ 265,856
Accrued salaries and expenses.................................. 77,585 164,766
Current portion of long-term debt and capital lease
obligations.................................................. 207,173 252,955
-------------- --------------
Total current liabilities........................................ 518,519 683,577
Long-term debt and capital lease obligations..................... 160,470 302,291
Stockholders' equity:
Undesignated Preferred Stock, $.01 par value:
Authorized shares--10,000,000 pro forma
Issued and outstanding shares--none.......................... -- -- $ --
Series A Preferred Stock, $.01 par value:
Authorized shares--775,000
Issued and outstanding shares--775,000....................... 7,750 7,750 --
Series B Preferred Stock, $.01 par value:
Authorized shares--6,799,096
Issued and outstanding shares--6,682,506..................... 66,825 66,825 --
Series C Preferred Stock, $.01 par value:
Authorized shares--1,953,700
Issued and outstanding shares--1,953,700..................... -- 19,537 --
Common Stock, $.01 par value:
Authorized shares--17,000,000; pro forma 40,000,000
Issued and outstanding shares--1995--1,028,563;
1996--1,053,428; pro forma--5,759,031...................... 10,286 10,534 57,590
Additional paid-in capital..................................... 11,973,840 23,444,359 23,491,415
Deficit accumulated during the development stage............... (10,142,737) (16,623,338) (16,623,338)
Deferred compensation.......................................... -- (711,409) (711,409)
-------------- -------------- --------------
Total stockholders' equity....................................... 1,915,964 6,214,258 $ 6,214,258
-------------- -------------- --------------
--------------
Total liabilities and stockholders' equity....................... $ 2,594,953 $ 7,200,126
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 21, 1992
YEAR ENDED DECEMBER 31, (INCEPTION) TO
------------------------------------------- DECEMBER 31,
1994 1995 1996 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Operating expenses:
Research and development.......................... $ 3,351,600 $ 3,638,868 $ 4,424,905 $ 12,118,323
General and administrative........................ 858,527 1,087,905 1,911,242 4,197,557
Sales and marketing............................... 281,564 122,848 373,348 816,977
------------- ------------- ------------- --------------
Operating loss...................................... (4,491,691) (4,849,621) (6,709,495) (17,132,857)
Other income (expense):
Interest income................................... 89,592 198,878 293,585 590,316
Interest expense.................................. (6,132) (82,993) (64,691) (157,029)
------------- ------------- ------------- --------------
83,460 115,885 228,894 433,287
------------- ------------- ------------- --------------
Net loss for the period and deficit accumulated
during development stage........................... $ (4,408,231) $ (4,733,736) $ (6,480,601) $ (16,699,570)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Net loss per share.................................. $ (3.12) $ (3.33) $ (4.53) $ (11.98)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Weighted average number of common shares
outstanding........................................ 1,411,168 1,422,757 1,429,239 1,393,954
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Supplemental loss per share:
Pro forma net loss per share...................... $ (1.12)
-------------
-------------
Pro forma weighted average number of shares
outstanding..................................... 5,809,225
-------------
-------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C COMMON
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK STOCK
---------------------- ---------------------- -------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
--------- ----------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 21, 1992 (inception)...... -- $ -- -- $ -- -- $ -- --
Original issuance of Common Stock at
$.01 per share....................... -- -- -- -- -- -- 750,000
Sale of Common Stock at $.12 per share
at various dates throughout the
period............................... -- -- -- -- -- -- 250,000
Net loss............................... -- -- -- -- -- -- --
--------- ----------- --------- ----------- --------- --------- ---------
Balance at December 31, 1992............. -- -- -- -- -- -- 1,000,000
Sale of Common Stock at $.60 per share
in January 1993...................... -- -- -- -- -- -- 10,000
Recapitalization resulting from
election of C Corporation status..... -- -- -- -- -- -- --
Sale of Series A Preferred Stock at
$1.00 per share in March 1993........ 775,000 7,750 -- -- -- -- --
Sale of Series B Preferred Stock at
$1.70 in December 1993, net of
offering costs....................... -- -- 2,882,354 28,823 -- -- --
Conversion of notes payable to Series B
Preferred Stock at $1.70 per share in
December 1993........................ -- -- 147,058 1,471 -- -- --
Exercise of stock options.............. -- -- -- -- -- -- 937
Net loss............................... -- -- -- -- -- -- --
--------- ----------- --------- ----------- --------- --------- ---------
Balance at December 31, 1993 (brought
forward)................................ 775,000 7,750 3,029,412 30,294 -- -- 1,010,937
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE DEFERRED
PAID-IN DEVELOPMENT COMPEN-
AMOUNT CAPITAL STAGE SATION TOTAL
--------- ---------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at May 21, 1992 (inception)...... $ -- $ -- $ -- $ -- $ --
Original issuance of Common Stock at
$.01 per share....................... 7,500 -- -- -- 7,500
Sale of Common Stock at $.12 per share
at various dates throughout the
period............................... 2,500 27,500 -- -- 30,000
Net loss............................... -- -- (72,321) -- (72,321)
--------- ---------- ------------ --------- -----------
Balance at December 31, 1992............. 10,000 27,500 (72,321) -- (34,821)
Sale of Common Stock at $.60 per share
in January 1993...................... 100 5,900 -- -- 6,000
Recapitalization resulting from
election of C Corporation status..... -- (76,228) 76,228 -- --
Sale of Series A Preferred Stock at
$1.00 per share in March 1993........ -- 767,250 -- -- 775,000
Sale of Series B Preferred Stock at
$1.70 in December 1993, net of
offering costs....................... -- 4,863,208 -- -- 4,892,031
Conversion of notes payable to Series B
Preferred Stock at $1.70 per share in
December 1993........................ -- 248,529 -- -- 250,000
Exercise of stock options.............. 9 198 -- -- 207
Net loss............................... -- -- (1,004,677) -- (1,004,677)
--------- ---------- ------------ --------- -----------
Balance at December 31, 1993 (brought
forward)................................ 10,109 5,836,357 (1,000,770) -- 4,883,740
</TABLE>
F-5
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C COMMON
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK STOCK
---------------------- ---------------------- -------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
--------- ----------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 (carried
forward)................................ 775,000 $ 7,750 3,029,412 $ 30,294 -- $ -- 1,010,937
Exercise of stock options.............. -- -- -- -- -- -- 3,750
Net loss............................... -- -- -- -- -- -- --
--------- ----------- --------- ----------- --------- --------- ---------
Balance at December 31, 1994........... 775,000 7,750 3,029,412 $ 30,294 -- -- 1,014,687
Sale of Series B Preferred Stock at
$1.70 per share in January and March
1995, net of offering costs.......... -- -- 3,653,094 36,531 -- -- --
Value of warrants granted in connection
with lease agreement................. -- -- -- -- -- -- --
Exercise of stock options.............. -- -- -- -- -- -- 13,876
Net loss............................... -- -- -- -- -- -- --
--------- ----------- --------- ----------- --------- --------- ---------
Balance at December 31, 1995............. 775,000 7,750 6,682,506 66,825 -- -- 1,028,563
Sale of Series C Preferred Stock at
$5.12 per share in April 1996, net of
offering costs....................... -- -- -- -- 1,953,700 19,537 --
Value of warrants granted in connection
with lease agreements................ -- -- -- -- -- -- --
Exercise of stock options.............. -- -- -- -- -- -- 24,865
Deferred compensation related to stock
options.............................. -- -- -- -- -- -- --
Amortization of deferred
compensation......................... -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- --
--------- ----------- --------- ----------- --------- --------- ---------
Balance at December 31, 1996............. 775,000 $ 7,750 6,682,506 $ 66,825 1,953,700 $ 19,537 1,053,428
--------- ----------- --------- ----------- --------- --------- ---------
--------- ----------- --------- ----------- --------- --------- ---------
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE DEFERRED
PAID-IN DEVELOPMENT COMPEN-
AMOUNT CAPITAL STAGE SATION TOTAL
----------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 (carried
forward)................................ $ 10,109 $5,836,357 $(1,000,770) $ -- $4,883,740
Exercise of stock options.............. 38 787 -- -- 825
Net loss............................... -- -- (4,408,231) -- (4,408,231)
----------- ---------- ------------ ---------- ----------
Balance at December 31, 1994........... 10,147 5,837,144 (5,409,001) -- 476,334
Sale of Series B Preferred Stock at
$1.70 per share in January and March
1995, net of offering costs.......... -- 6,116,721 -- -- 6,153,252
Value of warrants granted in connection
with lease agreement................. -- 15,846 -- -- 15,846
Exercise of stock options.............. 139 4,129 -- -- 4,268
Net loss............................... -- -- (4,733,736) -- (4,733,736)
----------- ---------- ------------ ---------- ----------
Balance at December 31, 1995............. 10,286 11,973,840 (10,142,737) -- 1,915,964
Sale of Series C Preferred Stock at
$5.12 per share in April 1996, net of
offering costs....................... -- 9,972,008 -- -- 9,991,545
Value of warrants granted in connection
with lease agreements................ -- 7,680 -- -- 7,680
Exercise of stock options.............. 248 6,151 -- -- 6,399
Deferred compensation related to stock
options.............................. -- 1,484,680 -- (1,484,680) --
Amortization of deferred
compensation......................... -- -- -- 773,271 773,271
Net loss............................... -- -- (6,480,601) -- (6,480,601)
----------- ---------- ------------ ---------- ----------
Balance at December 31, 1996............. $ 10,534 $23,444,359 ($16,623,338) $ (711,409) $6,214,258
----------- ---------- ------------ ---------- ----------
----------- ---------- ------------ ---------- ----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 21, 1992
YEAR ENDED DECEMBER 31, (INCEPTION) TO
------------------------------------------- DECEMBER 31,
1994 1995 1996 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................ $ (4,408,231) $ (4,733,736) $ (6,480,601) $ (16,699,570)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 128,741 242,684 291,712 695,361
Amortization of deferred compensation........... -- -- 773,271 773,271
Value of warrants granted in connection with
lease agreements.............................. -- 15,846 7,680 23,526
Loss on disposal of equipment................... 8,689 -- 784 9,473
Changes in operating assets and liabilities:
Prepaid expenses and other assets............. (22,176) (90,927) (37,517) (156,762)
Accounts payable.............................. 432,013 (232,539) 32,095 265,856
Accrued salaries and expenses................. 25,150 36,438 87,181 164,766
-----------------------------------------------------------
Net cash used in operating activities............... (3,835,814) (4,762,234) (5,325,395) (14,924,079)
INVESTING ACTIVITIES
Purchases of furniture and equipment................ (593,611) (146,286) (553,816) (1,464,236)
Patent expenditures................................. (22,306) (28,553) (12,634) (83,504)
Proceeds from sale of equipment..................... 3,612 -- -- 3,612
------------- ------------- ------------- --------------
Net cash used in investing activities............... (612,305) (174,839) (566,450) (1,544,128)
FINANCING ACTIVITIES
Proceeds from notes payable......................... -- 504,629 409,125 1,163,754
Principal payments on notes payable and capital
lease obligations................................. (17,321) (166,241) (221,522) (405,084)
Proceeds from issuance of common stock.............. 825 4,268 6,403 46,745
Proceeds from issuance of preferred stock........... -- 6,153,252 9,991,542 21,820,283
------------- ------------- ------------- --------------
Net cash provided by (used in) financing
activities........................................ (16,496) 6,495,908 10,185,548 22,625,698
------------- ------------- ------------- --------------
Increase (decrease) in cash and cash equivalents.... (4,464,615) 1,558,835 4,293,703 6,157,491
Cash and cash equivalents at beginning of period.... 4,769,568 304,953 1,863,788 --
------------- ------------- ------------- --------------
Cash and cash equivalents at end of period.......... $ 304,953 $ 1,863,788 $ 6,157,491 $ 6,157,491
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Purchase of equipment through capital lease
obligations....................................... $ 47,655 $ -- $ 409,125 $ 456,780
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Conversion of note payable for Series B Preferred
Stock............................................. $ 250,000 $ -- $ -- $ 250,000
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS
Endocardial Solutions, Inc. (the "Company") designs, develops and
manufactures a minimally invasive and integrated diagnostic system that locates
and facilitates treatment of cardiac tachyarrhythmias. Tachyarrhythmias are
abnormal heart rhythms caused by disorders interfering with the normal
electrical activity of the heart, which, if undetected and untreated, can cause
palpitations, dizziness and fainting, or sudden cardiac death. The Company is
developing products to diagnose ventricular tachycardia, a widespread, complex
and serious form of tachyarrhythmia and intends to utilize its technology to
produce products to diagnose atrial arrhythmias, including atrial fibrillation.
The Company believes that its proprietary technology will enable physicians to
rapidly and accurately map the heart's electric activity and locate the abnormal
heart rhythms through three-dimensional imaging.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At December 31, 1996, the
Company's cost of investments in government securities approximated market
value, with no resulting unrealized gains and losses recognized.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets ranging
from 3 to 7 years.
PATENTS
Patent costs are being amortized on a straight-line basis over five years.
The Company periodically reviews its patents for impairment in value. Any
adjustment from the analysis is charged to operations.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between financial reporting and tax
bases of assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations in
accounting for its stock options. Under APB 25, when the exercise price of stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
F-8
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("Statement 123"). The Company adopted the disclosure only
provisions of Statement 123. Accordingly, the Company has made pro forma
disclosures of what net loss and loss per share would have been had the
provisions of Statement 123 been applied to the Company's stock options.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding during the periods 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
presented.
Pro forma net loss per share computed in accordance with Accounting
Principles Board Opinion No. 15 and SAB No. 83, after giving effect to the
conversion of all series of convertible preferred stock into common stock, would
be $(1.12) for the year ended December 31, 1996 on 5,809,225 pro forma weighted
average number of shares outstanding.
AUTOMATIC CONVERSION OF PREFERRED STOCK
Upon the closing of the offering covered by this Prospectus, all outstanding
shares of convertible preferred stock will automatically be converted in to an
aggregate of 4,705,603 shares of common stock. Assuming conversion of the
convertible preferred stock, but without giving effect to the offering itself,
the unaudited pro forma amounts of stockholders' equity at December 31, 1996 are
presented in the balance sheet.
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
During January 1995, the Company executed a two-year and a three-year loan
agreement for approximately $245,000 and $259,000, respectively. The two-year
and three-year loan agreements accrue interest at 11.5% and 10.5% per annum,
respectively, and are payable in monthly installments of $11,377 and $8,358
including interest, respectively. The total amount payable under the loan
agreements as of December 31, 1995 and 1996 was approximately $368,000 and
$160,000, respectively.
In October 1996, the Company entered into an equipment lease agreement with
a venture leasing company which provides lease financing of up to $1.0 million
under a lease line of credit for the acquisition of furniture, fixtures and
research and development equipment. As of December 31, 1996, the Company
F-9
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
used $409,000 of the line of credit which is included under capital lease
obligations on the Company's balance sheets. The line of credit expires on July
15, 1997, and as of December 31, 1996, there remained $591,000 available under
this agreement.
The Company leases certain research and development equipment under leases
which are accounted for as capital leases for financial statement purposes. The
cost of furniture and equipment in the accompanying balance sheets includes the
following amounts under capital leases:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Research and development equipment..................................... $ 47,655 $ 456,780
Less accumulated amortization.......................................... 22,700 69,096
--------- ----------
Net assets under capital leases........................................ $ 24,955 $ 387,684
--------- ----------
--------- ----------
</TABLE>
Future minimum lease payments under capital leases and principal maturities
of long-term debt consisted of approximately the following as of December 31,
1996:
<TABLE>
<CAPTION>
CAPITAL LONG-TERM
LEASES DEBT TOTAL
---------- ----------- ----------
<S> <C> <C> <C>
Year ending December 31:
1997................................................... $ 154,699 $ 122,091 $ 276,790
1998................................................... 154,699 38,378 193,077
1999................................................... 136,434 -- 136,434
---------- ----------- ----------
Total minimum payments................................... 445,832 160,469 606,301
Less amount representing interest........................ 51,055 -- 51,055
---------- ----------- ----------
Present value of net minimum payments.................... 394,777 160,469 555,246
Less current portion..................................... 130,864 122,091 252,955
---------- ----------- ----------
Long-term obligations, net of current portion............ $ 263,913 $ 38,378 $ 302,291
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
Interest paid for the years ended December 31, 1994, 1995 and 1996 was
$6,132, $82,993 and $64,691, respectively.
4. OPERATING LEASES
The Company leases its office facility and certain equipment under operating
lease agreements which expire on various dates through 1999. Under the office
facility agreement, the Company is required to pay a base rent plus certain
operating expenses. Rent expense was $87,152, $275,311 and $178,419 for the
years ended December 31, 1994, 1995 and 1996, respectively.
F-10
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
4. OPERATING LEASES (CONTINUED)
Future minimum lease commitments required under non-cancelable operating
leases with remaining terms in excess of one year as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
Year ending December 31:
1997............................................................ $ 477,027
1998............................................................ 356,578
1999............................................................ 53,949
---------
$ 887,554
---------
---------
</TABLE>
5. PREFERRED STOCK
On March 26, 1993, the Company issued 775,000 shares of Series A Preferred
Stock to investors at $1.00 per share. On December 22, 1993, the Company issued
2,882,354 shares of Series B Preferred Stock to investors at $1.70 per share. On
January 31, 1995 and on March 7, 1995, the Company issued 3,588,388 and 64,706
shares of Series B Preferred Stock, respectively, to investors at $1.70 per
share. The Series A and Series B Preferred Stock have certain voting and
registration rights, are convertible into common stock on a one-for-one basis
and have preference over common stock upon liquidation.
On October 29, 1993 and on November 29, 1993, the Company borrowed $125,000
on each date from certain Series A Preferred stockholders. The notes earned
interest at 7% and were either payable January 15, 1994 or convertible into
Series B Preferred Stock at a price equal to the price paid per share by
investors purchasing Series B Preferred Stock. The notes were converted into
147,058 shares of Preferred Stock on December 23, 1993.
On April 24, 1996, the Company issued 1,953,700 shares of Series C Preferred
Stock to investors at $5.12 per share from which the Company received net
proceeds of $9,992,000. The Series C Preferred Stock has certain voting and
registration rights, is convertible into common stock on a one-for-one basis and
has preference over common stock upon liquidation.
6. STOCK AUTHORIZATION AND STOCK SPLIT
Subsequent to December 31, 1996, the Board of Directors approved a reverse
stock split of 1-for-2 for the Company's common stock. Accordingly, all share,
per share, weighted average share, and stock option information has been
restated to reflect the split. The reverse stock split will have no effect upon
the numbers 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). Accordingly, all preferred
stock and preferred stock price amounts have not been adjusted for the reverse
stock split. In addition, the Board of Directors approved an increase in the
authorized shares of capital stock to 50,000,000 including 40,000,000 shares of
common stock and 10,000,000 shares of undesignated preferred stock.
7. STOCK OPTIONS AND WARRANTS
The Company has a stock option plan to provide incentives to employees and
consultants. The options can either be incentive stock options (ISO) or
nonstatutory stock options (NSO). Options granted under
F-11
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
the plan are at prices not less than fair market value on the date of the grant.
The plan authorizes the issuance of options to officers, other key employees and
advisors. The following table summarizes activity under the plan:
<TABLE>
<CAPTION>
PLAN OPTIONS
SHARES OUTSTANDING WEIGHTED AVERAGE
AVAILABLE -------------------- EXERCISE PRICE PER
FOR GRANT NSO ISO SHARE
---------- --------- --------- --------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993................................ 243,000 24,063 104,500 $.20
Additional shares reserved for issuance................... 375,000 -- -- --
Granted................................................... (290,000) 27,500 262,500 .34
Canceled.................................................. 20,000 -- (20,000) .34
Exercised................................................. -- (3,750) -- .22
---------- --------- ---------
Balance at December 31, 1994................................ 348,000 47,813 347,000 .29
Granted................................................... (301,500) 33,500 268,000 .34
Canceled.................................................. 47,062 -- (47,062) .33
Exercised................................................. -- -- (13,876) .31
---------- --------- ---------
Balance at December 31, 1995................................ 93,562 81,313 554,062 .32
Additional shares reserved for issuance................... 350,000 -- -- --
Granted................................................... (298,750) 6,250 292,500 2.80
Canceled.................................................. 11,478 -- (11,478) .33
Exercised................................................. -- (10,313) (14,552) .26
---------- --------- ---------
Balance at December 31, 1996................................ 156,290 77,250 820,532 $1.14
---------- --------- ---------
---------- --------- ---------
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -----------------------
WEIGHTED- WEIGHTED-
WEIGHTED- AVERAGE AVERAGE
NUMBER AVERAGE REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ------------------------------------------- ----------- ------------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ .20 - .34 601,532 7 years $ .32 362,384 $ .29
.60 24,750 7 years .60 5,500 .60
2.40 168,500 9 years 2.40 4,021 2.40
3.70 79,000 9 years 3.70 3,750 3.70
5.00 24,000 10 years 5.00 -- --
----------- -------- ----- ---------- -----
$ .20 - $5.00 897,782 7.5 years $ 1.14 375,655 $ .36
----------- ----------
----------- ----------
</TABLE>
Options outstanding under the plan expire at various dates during the period
from April 2003 through December 2006. Exercise prices for options outstanding
as of December 31, 1996 ranged from $.20 to $5.00 per share. The number of
options exercisable as of December 31, 1994, 1995 and 1996 were 107,708,
F-12
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
223,993 and 375,655, respectively at weighted average exercise prices of $.26,
$.29 and $.36 per share, respectively.
The weighted-average grant date fair value of options granted during the
years ended December 31, 1995 and 1996 was $3.12 and $5.58 per share,
respectively.
In November 1994, the Company entered into a three year operating lease
agreement for research and development equipment. In connection with the
agreement, the Company granted the lessor a warrant to purchase 93,213 shares of
Series B Preferred Stock at $1.70 per share. The warrant expires five years from
the grant date and was deemed to have a value of $15,846. Such value was
expensed during the year ended December 31, 1995.
In October 1996, the Company entered into an equipment lease agreement for
research and development equipment. In connection with the agreement, the
Company granted the venture leasing company a warrant to purchase 15,000 shares
of the Company's Series D Preferred Stock at a purchase price of $5.12 per
share. The warrant expires five years from the grant date and was deemed to have
a value of $7,680. Such value was expensed during the year ended December 31,
1996.
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, if the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996: risk-free interest rates ranging from 5.0% to
6.2%, respectively; dividend yield of 0%; volatility factor of the expected
market price of the Company's common stock of .41 and a weighted-average
expected life of the option of 4 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. Because the Company's employee stock options have
characteristics significantly different from those of 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.
F-13
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
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 is as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Pro forma net loss................................................ $ 4,841,089 $ 6,836,294
Pro forma net loss per common share............................... $3.40 $4.78
</TABLE>
The pro forma effect on net loss for 1995 and 1996 is not representative of
the pro forma effect on net loss in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995.
8. DEFERRED COMPENSATION
For options granted during the year ended December 31, 1996 to purchase a
total of 298,750 shares of common stock at exercise prices ranging from $.34 to
$5.00 per share, the Company recognized $1,484,680 as deferred compensation
expense for the excess of the deemed value for accounting purposes of the common
stock issuable upon exercise of such options over the aggregate exercise price
of such options. The deferred compensation expense is amortized ratably over the
vesting period of the options. For the year ended December 31, 1996, $773,271
was expensed.
The remaining unamortized deferred compensation expense is expected to be
charged to operations as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 402,101
1998.............................................................. 216,516
1999.............................................................. 92,792
---------
$ 711,409
---------
---------
</TABLE>
9. INCOME TAXES
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $15,850,000. The net operating loss carryforwards are available to
offset future taxable income and begin to expire in the year 2007. No benefit
has been recorded for such loss carryforwards, and utilization in future years
may be limited under Section 382 of the Internal Revenue Code if significant
ownership changes have occurred.
Components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Net operating loss carryforwards................................ $ 4,054,000 $ 6,340,000
Less valuation allowance........................................ (4,054,000) (6,340,000)
------------- -------------
Deferred tax asset.............................................. $ -- $ --
------------- -------------
------------- -------------
</TABLE>
F-14
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. RELATED PARTY TRANSACTION
The Company paid approximately $694,000, $475,000 and $59,000 for the years
ended December 31, 1994, 1995 and 1996, respectively, to Novel Biomedical in
connection with research and development performed for the Company. The owner of
Novel Biomedical is a founder and stockholder of the Company.
11. SOURCES OF SUPPLY
The Company purchases raw materials and cetain key components of its
products, including the computer workstation and certain components for its
catheter from sole, single or limited source suppliers. 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
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 material and components at reasonable costs,
could adversely affect the Company's business, financial condition and results
of operations.
F-15
<PAGE>
ENDOCARDIAL
SOLUTIONS
LOGO
TACHYCARDIA ARE CAUSED BY
IRREGULAR ELECTRICAL ACTIVITY
IN THE HEART WHICH DISRUPTS
THE HEART'S NORMAL PUMPING
ACTION. [Graphic of a "virtual electrogram"]
display of the EnSite system, showing
THE COMPANY'S ENSITE SYSTEM a three-dimensional color display of
IS DESIGNED TO ENABLE the electrical activity of a chamber
ELECTROPHYSIOLOGISTS TO RAPIDLY of the heart, and a display of an
AND PRECISELY LOCATE THE electrocardiogram.]
UNPREDICTABLE POINTS OF ORIGIN
OF COMPLEX TACHYCARDIA. THE
ENSITE SYSTEM APPLIES
PROPRIETARY MATHEMATICAL
ALGORITHMS TO RAPIDLY COMPUTE
MORE THAN 3,000 POINTS OF
ELECTRICAL ACTIVITY WITHIN A
HEART CHAMBER, PRODUCING A HIGH
RESOLUTION, REAL-TIME, THREE-
DIMENSIONAL COLOR DISPLAY OF
THE ELECTRICAL ACTIVITY IN
THE HEART CHAMBER. THE "VIRTUAL
ELECTROGRAM" FUNCTION OF THE
ENSITE SYSTEM ALLOWS
ELECTROPHYSIOLOGISTS TO INSTANTLY
VIEW THE ELECTRICAL ACTIVITY AT
ANY OF THE MORE THAN 3,000 POINTS.
REAL-TIME THREE DIMENSIONAL DISPLAY
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
[Graphic of a DISPLAYS ORIGIN OF A VT. [Graphic of a THE ACTIVATION WAVE CONTINUES
"virtual electrogram" AS A NORMAL ACTIVATION "virtual electrogram" TO SPREAD AROUND AND UP
display corresponding WAVE DESENDS TO THE BASE display corresponding TOWARDS THE TOP OF THE
to the caption for OF THE VENTRICLE, AN to the caption for VENTRICLE. SUCH COMPLEX AND
Panel 1.] ABNORMAL ACTIVATION Panel 3.] IRREGULAR ACTIVATION SEQUENCES
WAVE ABOVE IT SIMULTANEOUSLY ARE INDICATIVE OF TACHYCARDIA.
ASCENDS TOWARDS THE TOP
OF THE VENTRICLE.
Panel 2 Panel 4
Panel 1 Panel 3
THE SITE OF ORIGIN [Graphic of a "virtual NORMAL HEART BEAT [Graphic of a "virtual
FOR A VENTRICULAR electrogram" display INITIATION OCCURS AT electrogram" display
TACHYCARDIA (VT) IS corresponding to the THE BASE OF THE corresponding to the
SEEN AS THE COLORED caption for Panel 2.] VENTRICLE WHILE caption for Panel 4.
CIRCLE ON THE LOWER ABERRANT ELECTRICAL
LEFT OF THE VENTRICLE ACTIVATION INITIATES
WALL. THE ENSITE NONRHYTHMIC CONTRACTIONS
CATHETER CAN BE SEEN OF THE HEART MUSCLE AT
INSIDE THE PATIENT'S THE TOP OF THE VENTRICLE.
CHAMBER.
</TABLE>
- -------------------------------------------------------------------------------
To date, limited clinical testing of the EnSite catheter and
workstation has been performed on 23 patients in the United Kingdom and five
patients in the United States and the EnSite catheter and workstation have
not received approval from the FDA for commercial sale in the United States
or from international regulatory authorities for sale outside the United
States. There can be no assurance that the EnSite System will receive United
States or international regulatory approvals on a timely basis or at all. See
"Risk Factors--Lack of Regulatory Approval."
- -------------------------------------------------------------------------------
<PAGE>
No dealer, salesperson or other person is authorized to give any information or
to make representations not contained in this Prospectus in connection with the
offer made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or the Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby by anyone
in any jurisdiction in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so or
to anyone to whom it is unlawful to make such an offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the affairs of the Company since the
date hereof or the information herein is correct as of any time subsequent to
the date of this Prospectus.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Sale of Shares to Medtronic.................... 18
Use of Proceeds................................ 18
Dividend Policy................................ 18
Dilution....................................... 19
Capitalization................................. 20
Selected Financial Data........................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 22
Business....................................... 24
Management..................................... 39
Certain Transactions........................... 47
Principal Stockholders......................... 49
Description of Capital Stock................... 51
Shares Eligible for Future Sale................ 53
Underwriting................................... 55
Validity of Shares............................. 57
Experts........................................ 57
Additional Information......................... 57
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,000,000 SHARES
[LOGO]
COMMON STOCK
-----------------
P R O S P E C T U S
-----------------
PIPER JAFFRAY INC.
VOLPE, WELTY & COMPANY LLC
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following fees and expenses will be paid by the Company in connection
with the issuance and distribution of the securities registered hereby and do
not include underwriting commissions and discounts. All such expenses, except
for the SEC, are estimated.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 12,546
NASD filing fee................................................... 5,000
Nasdaq Stock Market listing fee................................... 40,000
Legal fees and expenses........................................... 150,000
Accounting fees and expenses...................................... 80,000
Blue Sky fees and expenses........................................ 10,000
Transfer Agent's and Registrar's fees............................. 10,000
Printing and engraving expenses................................... 75,000
Miscellaneous..................................................... 17,454
---------
Total..................................................... $ 400,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred arising under the Securities Act of 1933, as
amended (the "Securities Act"). Article VIII, Section 8.01 of the Company's
Bylaws provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Company's Certificate of
Incorporation provides that, pursuant to Delaware law, its directors shall not
be liable for monetary damages for breach of the directors' fiduciary duty as
directors to the Company and its stockholders. This provision in the Certificate
of Incorporation does not eliminate the directors' fiduciary duty, and in
appropriate circumstances equitable remedies such as an injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Company for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. Reference is made to section six of the
Purchase Agreement contained in Exhibit 1.1 hereto, indemnifying officers and
directors of the Company against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The information set forth below gives effect to (i) a one-for-two reverse
split of the Company's capital stock to be effected upon closing of the Offering
and (ii) the automatic conversion of all shares of Preferred Stock into shares
of Common Stock upon the closing of the Offering.
Since January 28, 1994, the Company has issued and sold the following
securities that were not registered under the Securities Act:
1. In November 1994, the Company issued a warrant to purchase an aggregate
of 46,607 shares of the Company's Series B Preferred Stock, with an
exercise price of $3.40 per share, to Comdisco, Inc.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (CONTINUED)
2. In January 1995, the Company issued and sold 1,794,194 shares of Series
B Preferred Stock at $3.40 per share, convertible into the same number of
shares of Common Stock, to a total of 12 investors, including certain
existing shareholders, venture capital firms and investment partnerships,
for an aggregate purchase price of $6,100,258.
3. In March 1995, the Company issued and sold 32,353 shares of Series B
Preferred Stock at $3.40 per share, convertible into the same number of
shares of Common Stock, to a total of 2 investors for an aggregate
purchase price of $110,000.
4. In April 1996, the Company issued and sold 976,850 shares of Series C
Preferred Stock at $10.24 per share, convertible into the same number of
shares of Common Stock, to Medtronic for an aggregate purchase price of
$10,000,000.
5. In August 1996, the Company issued a warrant to purchase an aggregate of
7,500 shares of the Company's Series D Preferred Stock, with an exercise
price of $10.24 per share, to Comdisco, Inc.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act pursuant to Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, as transactions by an issuer not involving
a public offering. The recipients of the securities in each such transaction
represented their intention to acquire the securities for investment purposes
only and not with a view to or for sale in connection with any distribution
thereof, and appropriate legends were affixed to the share certificates and
instruments issued in such transactions. All recipients had adequate access,
through their relationship with the Company or otherwise, to information about
the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
1.1 Purchase Agreement
3.1* Certificate of Incorporation of the Company (current)
3.2* Amended and Restated Certificate of Incorporation of the Company (as proposed to be effective upon
closing of the Offering)
3.3* Amended Bylaws of the Company
4.1* Form of Certificate of Common Stock
4.2* Warrant Agreement dated November 18, 1993 between the Company and Tikkun Resource Development
relating to warrant issued to Tikkun Resource Development to purchase shares of Common Stock.
4.3* Warrant Agreement dated November 15, 1994 between the Company and Comdisco, Inc. relating to
Warrant issued to Comdisco, Inc. to purchase shares of Series B Preferred Stock
4.4* Warrant Agreement dated August 20, 1996 between the Company and Comdisco, Inc. relating to Warrant
issued to Comdisco, Inc. to purchase shares of Series D Preferred Stock
5.1 Opinion of Dorsey & Whitney LLP
</TABLE>
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
10.1* Real Property Lease Agreement dated September 15, 1993 between the Company and the Port Authority
of St. Paul, together with Amendment Nos. 1, 2 and 3 thereto dated February 6, 1995, May 16,
1995 and June 4, 1996, respectively
10.2* Master Lease Agreement dated November 14, 1994, as amended, between the Company and Comdisco,
Inc., with Exhibits
10.3* 1993 Long-Term Incentive and Stock Option Plan, including forms of option agreements
10.4* Directors' Stock Option Plan
10.5* 1997 Employee Stock Purchase Plan
10.6* Employment Agreement dated May 25, 1994 between the Company and James W. Bullock
10.7* Change in Control Agreement dated June 28, 1996 between the Company and Dennis J. McFadden
10.8* Investment Agreement dated April 26, 1996 between the Company and Medtronic, Inc.
10.9* Amended and Restated Investors Rights Agreement dated January 31, 1995, together with Amendments
thereto dated March 1, 1995 and April 26, 1996, respectively, between the Company and the
holders of the Company's Series A and Series B Preferred Stock
11.1* Statement Re: Computation of Net Loss Per Share
23.1 Consent of Ernst & Young LLP
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
24.1* Power of Attorney
</TABLE>
- ------------------------
* Previously filed.
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS (CONTINUED)
The undersigned registrant further undertakes that:
(1) It will provide to the Underwriters at the closing specified in the Purchase
Agreement certificates in such denominations and registered in such names as
required by the Underwriters to permit prompt delivery to each purchaser.
(2) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on March 12, 1997.
ENDOCARDIAL SOLUTIONS, INC.
By: /s/ JAMES W. BULLOCK
-----------------------------------------
James W. Bullock
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities indicated on March 12, 1997.
SIGNATURE TITLE
- ------------------------------ --------------------------
President, Chief Executive
/s/ JAMES W. BULLOCK Officer and Director
- ------------------------------ (principal executive
James W. Bullock officer)
Chief Financial Officer
/s/ DENNIS J. MCFADDEN and Vice President,
- ------------------------------ Finance (principal
Dennis J. McFadden financial and accounting
officer)
GRAYDON E. BEATTY* Director
RONALD H. KASE* Director
PETER H. MCNERNEY* Director
JAMES E. DAVERMAN* Director
ROBERT G. HAUSER, M.D.* Director
STEVEN R. LAPORTE* Director
*By: /s/ JAMES W. BULLOCK
-------------------------
James W. Bullock
ATTORNEY-IN-FACT
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Purchase Agreement
3.1 * Certificate of Incorporation of the Company (current)
3.2 * Amended and Restated Certificate of Incorporation of the Company (as proposed to be effective upon
closing of the Offering)
3.3 * Amended Bylaws of the Company
4.1 * Form of Certificate of Common Stock
4.2 * Warrant Agreement dated November 18, 1993 between the Company and Tikkun Resource Development relating
to warrant issued to Tikkun Resource Development to purchase shares of Common Stock.
4.3 * Warrant Agreement dated November 15, 1994 between the Company and Comdisco, Inc. relating to Warrant
issued to Comdisco, Inc. to purchase shares of Series B Preferred Stock
4.4 * Warrant Agreement dated August 20, 1996 between the Company and Comdisco, Inc. relating to Warrant
issued to Comdisco, Inc. to purchase shares of Series D Preferred Stock
5.1 Opinion of Dorsey & Whitney LLP
10.1 * Real Property Lease Agreement dated September 15, 1993 between the Company and the Port Authority of St.
Paul, together with Amendment Nos. 1, 2 and 3 thereto dated February 6, 1995, May 16, 1996 and June 4,
1996, respectively
10.2 * Master Lease Agreement dated November 14, 1994, as amended, between the Company and Comdisco, Inc., with
Exhibits
10.3 * 1993 Long-Term Incentive and Stock Option Plan, including forms of option agreements
10.4 * Directors' Stock Option Plan
10.5 * 1997 Employee Stock Purchase Plan
10.6 * Employment Agreement dated May 25, 1994 between the Company and James W. Bullock
10.7 * Change in Control Agreement dated June 28, 1996 between the Company and Dennis J. McFadden
10.8 * Investment Agreement dated April 26, 1996 between the Company and Medtronic, Inc.
10.9 * Amended and Restated Investors Rights Agreement dated January 31, 1995, together with Amendments thereto
dated March 1, 1995 and April 26, 1996 respectively, between the Company and the holders of the
Company's Series A and Series B Preferred Stock
11.1 * Statement Re: Computation of Net Loss Per Share
23.1 Consent of Ernst & Young LLP
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
24.1 * Power of Attorney
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
3,000,000 SHARES (1)
ENDOCARDIAL SOLUTIONS, INC.
COMMON STOCK
PURCHASE AGREEMENT
March ___, 1997
PIPER JAFFRAY INC.
VOLPE, WELTY & COMPANY
As Representatives of the several
Underwriters named in Schedule I hereto
c/o Piper Jaffray Inc.
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
Endocardial Solutions, Inc., a Delaware corporation (the "Company"),
proposes to sell to the several Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 3,000,000 authorized but unissued shares (the
"Firm Shares") of Common Stock, $.01 par value per share (the "Common Stock"),
of the Company. The Company has also granted to the several Underwriters an
option to purchase up to 450,000 shares of Common Stock on the terms and for the
purposes set forth in Section 3 hereof (the "Option Shares"). The Firm Shares
and any Option Shares purchased pursuant to this Purchase Agreement are herein
collectively called the "Securities."
The Company hereby confirms its agreement with respect to the sale of the
Securities to the several Underwriters, for whom you are acting as
Representatives (the "Representatives").
1. REGISTRATION STATEMENT AND PROSPECTUS. A registration statement on
Form S-1 (File No. 333-___________ ) with respect to the Securities, including a
preliminary form of prospectus, has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations ("Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission; one or more amendments to such registration statement have also been
so prepared and have been, or will be, so filed; and, if the Company has elected
to rely upon Rule 462(b) of the Rules and Regulations to increase the size of
the offering registered under the Act, the Company will prepare and file with
the Commission a registration
__________________________
(1) Plus an option to purchase up to 450,000 additional shares to cover
over-allotments.
<PAGE>
statement with respect to such increase pursuant to Rule 462(b). Copies of such
registration statement(s) and amendments and each related preliminary prospectus
have been delivered to you.
If the Company has elected not to rely upon Rule 430A of the Rules and
Regulations, the Company has prepared and will promptly file an amendment to the
registration statement and an amended prospectus (including a term sheet meeting
the requirements of Rule 434 of the Rules and Regulations). If the Company has
elected to rely upon Rule 430A of the Rules and Regulations, it will prepare and
file a prospectus (or a term sheet meeting the requirements of Rule 434)
pursuant to Rule 424(b) that discloses the information previously omitted from
the prospectus in reliance upon Rule 430A. Such registration statement as
amended at the time it is or was declared effective by the Commission, and, in
the event of any amendment thereto after the effective date and prior to the
First Closing Date (as hereinafter defined), such registration statement as so
amended (but only from and after the effectiveness of such amendment), including
a registration statement (if any) filed pursuant to Rule 462(b) of the Rules and
Regulations increasing the size of the offering registered under the Act and
information (if any) deemed to be part of the registration statement at the time
of effectiveness pursuant to Rules 430A(b) and 434(d) of the Rules and
Regulations, is hereinafter called the "Registration Statement." The prospectus
included in the Registration Statement at the time it is or was declared
effective by the Commission is hereinafter called the "Prospectus," except that
if any prospectus (including any term sheet meeting the requirements of Rule 434
of the Rules and Regulations provided by the Company for use with a prospectus
subject to completion within the meaning of Rule 434 in order to meet the
requirements of Section 10(a) of the Rules and Regulations) filed by the Company
with the Commission pursuant to Rule 424(b) (and Rule 434, if applicable) of the
Rules and Regulations or any other such prospectus provided to the Underwriters
by the Company for use in connection with the offering of the Securities
(whether or not required to be filed by the Company with the Commission pursuant
to Rule 424(b) of the Rules and Regulations) differs from the prospectus on file
at the time the Registration Statement is or was declared effective by the
Commission, the term "Prospectus" shall refer to such differing prospectus
(including any term sheet within the meaning of Rule 434 of the Rules and
Regulations) from and after the time such prospectus is filed with the
Commission or transmitted to the Commission for filing pursuant to such
Rule 424(b) (and Rule 434, if applicable) or from and after the time it is first
provided to the Underwriters by the Company for such use. The term "Preliminary
Prospectus" as used herein means any preliminary prospectus included in the
Registration Statement prior to the time it becomes or became effective under
the Act and any prospectus subject to completion as described in Rule 430A or
434 of the Rules and Regulations.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters as follows:
(i) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission and each
Preliminary Prospectus, at the time of filing thereof, did not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
except that the foregoing shall not apply to statements in or omissions
from any Preliminary Prospectus in reliance upon, and in conformity with,
written information furnished to the Company by you, or by any Underwriter
through you, specifically for use in the preparation thereof.
(ii) As of the time the Registration Statement (or any
post-effective amendment thereto, including a registration statement (if
any) filed pursuant to Rule 462(b) of the Rules and
-2-
<PAGE>
Regulations increasing the size of the offering registered under the
Act) is or was declared effective by the Commission, upon the filing or
first delivery to the Underwriters of the Prospectus (or any supplement
to the Prospectus (including any term sheet meeting the requirements of
Rule 434 of the Rules and Regulations)) and at the First Closing Date
and Second Closing Date (as hereinafter defined), (A) the Registration
Statement and Prospectus (in each case, as so amended and/or
supplemented) conformed or will conform in all material respects to the
requirements of the Act and the Rules and Regulations, (B) the
Registration Statement (as so amended) did not or will not include an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and (C) the Prospectus (as so supplemented) did
not or will not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they
are or were made, not misleading; except that the foregoing shall not
apply to statements in or omissions from any such document in reliance
upon, and in conformity with, written information furnished to the
Company by you, or by any Underwriter through you, specifically for use
in the preparation thereof. If the Registration Statement has been
declared effective by the Commission, no stop order suspending the
effectiveness of the Registration Statement has been issued, and no
proceeding for that purpose has been initiated or, to the Company's
knowledge, threatened by the Commission.
(iii) The financial statements of the Company, together
with the notes thereto, set forth in the Registration Statement and
Prospectus comply in all material respects with the requirements of the Act
and fairly present the financial condition of the Company as of the dates
indicated and the results of operations and changes in cash flows for the
periods therein specified in conformity with generally accepted accounting
principles consistently applied throughout the periods involved (except as
otherwise stated therein); and the supporting schedules included in the
Registration Statement present fairly the information required to be stated
therein. No other financial statements or schedules are required to be
included in the Registration Statement or Prospectus. Ernst & Young LLP,
which has expressed its opinion with respect to the financial statements
and schedules filed as a part of the Registration Statement and included in
the Registration Statement and Prospectus, are independent public
accountants as required by the Act and the Rules and Regulations.
(iv) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
State of Delaware. The Company has full corporate power and authority to
own its properties and conduct its business as currently being carried on
and as described in the Registration Statement and Prospectus, and is duly
qualified to do business as a foreign corporation in good standing in the
State of Minnesota.
(v) Except as contemplated in the Prospectus,
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus, the Company has not incurred any
material liabilities or obligations, direct or contingent, or entered into
any material transactions, or declared or paid any dividends or made any
distribution of any kind with respect to its capital stock; and there has
not been any change in the capital stock (other than a change in the number
of outstanding shares of Common Stock due to the issuance of shares upon
the exercise of outstanding options or warrants), or any material change in
the short-term or long-term debt (including, without limitation, capital
lease obligations), or any issuance of options, warrants, convertible
securities or other rights to purchase the capital stock of the Company, or
any material adverse change, or any development involving a prospective
material adverse change, in the general
-3-
<PAGE>
affairs, condition (financial or otherwise), business, key personnel,
property, prospects, net worth or results of operations of the Company,
taken as a whole.
(vi) Except as set forth in the Prospectus, there is
not pending or, to the knowledge of the Company, threatened or
contemplated, any action, suit or proceeding to which the Company is a
party before or by any court or governmental agency, authority or body, or
any arbitrator, which might result in any material adverse change in the
condition (financial or otherwise), business, prospects, net worth or
results of operations of the Company, taken as a whole.
(vii) There are no contracts or documents of the Company
that are required to be filed as exhibits to the Registration Statement by
the Act or by the Rules and Regulations that have not been so filed.
(viii) This Agreement has been duly authorized, executed
and delivered by the Company, and constitutes a valid, legal and binding
obligation of the Company, enforceable in accordance with its terms, except
as rights to indemnity hereunder may be limited by federal or state
securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting the rights
of creditors generally and subject to general principles of equity. The
execution, delivery and performance of this Agreement and the consummation
of the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any statute, any agreement or instrument to which the Company is a
party or by which it is bound or to which any of its property is subject,
the Company's certificate of incorporation or bylaws, or any order, rule,
regulation or decree of any court or governmental agency or body having
jurisdiction over the Company or any of its properties; no consent,
approval, authorization or order of, or filing with, any court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement or for the consummation of the transactions
contemplated hereby, including the issuance or sale of the Securities by
the Company, except such as may be required under the Act or state
securities or blue sky laws; and the Company has full power and authority
to enter into this Agreement and to authorize, issue and sell the
Securities as contemplated by this Agreement.
(ix) All of the issued and outstanding shares of
capital stock of the Company, including the outstanding shares of Common
Stock, are duly authorized and validly issued, fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities,
and the holders thereof are not subject to personal liability by reason of
being such holders; the Securities which may be sold hereunder by the
Company have been duly authorized and, when issued, delivered and paid for
in accordance with the terms hereof, will have been validly issued and will
be fully paid and nonassessable, and the holders thereof will not be
subject to personal liability by reason of being such holders; and the
capital stock of the Company, including the Common Stock, conforms to the
description thereof in the Registration Statement and Prospectus. Except
as otherwise stated in the Registration Statement and Prospectus, there are
no preemptive rights or other rights to subscribe for or to purchase, or
any restriction upon the voting or transfer of, any shares of Common Stock
pursuant to the Company's certificate of incorporation, bylaws or any
agreement or other instrument to which the Company is a party or by which
the Company is bound. Neither the filing of the Registration Statement nor
the offering or sale of the Securities as contemplated by this Agreement
gives rise to any rights for or relating to the registration of any shares
of Common Stock or other securities of the Company except for those
-4-
<PAGE>
rights that have been validly satisfied or waived prior to the date of this
Agreement. Except as described in the Registration Statement and the
Prospectus, there are no options, warrants, agreements, contracts or other
rights in existence to purchase or acquire from the Company any shares of
the capital stock of the Company. The Company has an authorized and
outstanding capitalization as set forth in the Registration Statement and
the Prospectus under the caption "Capitalization."
(x) The Company holds, and is operating in compliance
in all material respects with, all franchises, grants, authorizations,
licenses, permits, easements, consents, certificates and orders of any
governmental or self-regulatory body required for the conduct of its
business and all such franchises, grants, authorizations, licenses,
permits, easements, consents, certifications and orders are valid and in
full force and effect; and the Company is in compliance in all material
respects with all applicable federal, state, local and foreign laws,
regulations, orders and decrees.
(xi) The Company has good and marketable title to all
property described in the Registration Statement and Prospectus as being
owned by it, in each case free and clear of all liens, claims, security
interests or other encumbrances except such as are described in the
Registration Statement and the Prospectus; the property held under lease by
the Company is held by it under valid, subsisting and enforceable leases
with only such exceptions with respect to any particular lease as do not
interfere in any material respect with the conduct of the business of the
Company.
(xii) The Company owns or possesses all works of
authorship, patents, patent applications, trademarks, service marks, trade
names, trademark registrations, service mark registrations, copyrights,
licenses, inventions, know-how, trade secrets and rights necessary for the
conduct of the business of the Company as currently carried on or intended
to be carried on and as described in the Registration Statement and
Prospectus. Except as stated in the Registration Statement and Prospectus,
no name which the Company uses and no other aspect of the business of the
Company will involve or give rise to any infringement of, or license or
similar fees for, any patent, patent application, trademark, service mark,
trade name, trademark registration, service mark registration, copyright,
license, invention, trade secret or other similar right of others material
to the business or prospects of the Company and the Company has not
received any notice alleging any such infringement or fee.
(xiii) The Company is not in violation of its certificate
of incorporation or bylaws or in breach of or otherwise in default in the
performance of any material obligation, agreement or condition contained in
any bond, debenture, note, indenture, loan agreement or any other material
contract, lease or other instrument to which it is subject or by which any
of them may be bound, or to which any of the material property or assets of
the Company or any of its subsidiaries is subject.
(xiv) The Company has filed all federal, state, local
and foreign income and franchise tax returns required to be filed and is
not in default in the payment of any taxes which were payable pursuant to
said returns or any assessments with respect thereto, other than any which
the Company is contesting in good faith.
(xv) The Company has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Securities other than any Preliminary Prospectus
or the Prospectus or other materials permitted by the Act to be distributed
by the Company.
-5-
<PAGE>
(xvi) The Securities have been conditionally approved
for listing on the Nasdaq National Market and, on the date the Registration
Statement became or becomes effective, the Company's Registration Statement
on Form 8-A or other applicable form under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), became or will become effective.
(xvii) The Company owns no capital stock or other equity
or ownership or proprietary interest in any corporation, partnership,
association, trust or other entity.
(xviii) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that
(A) transactions are executed in accordance with management's general or
specific authorization; (B) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
(C) access to assets is permitted only in accordance with management's
general or specific authorization; and (D) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xix) Other than as contemplated by this Agreement, the
Company has not incurred any liability for any finder's or broker's fee or
agent's commission in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
(xx) Upon completion of the First Closing (A) the
Amended and Restated Co-Sale Agreement dated as of January 31, 1995, will
terminate (B) all outstanding shares of preferred stock of the Company (the
"Preferred Stock") shall be manditorily converted, in accordance with their
respective terms, into shares of duly authorized, validly issued, fully
paid and nonassessable shares of Common Stock and (C) all outstanding
warrants for the purchase of any shares of Preferred Stock shall be
exercisable solely for shares of Common Stock.
(xxi) The Company has received from the U.S. Food and
Drug Administration (FDA) an investigational device exemption (IDE); such
IDE is in full force and effect and neither the Company nor the FDA has
withdrawn or revoked the IDE.
(xxii) Neither the Company nor any of its affiliates is
presently doing business with the government of Cuba or with any person or
affiliate located in Cuba.
(xxiii) The Company is not, and upon completion of the
sale of the Securities will not be, required to register as an "investment
company" under the Investment Company Act of 1940, as amended.
(b) Any certificate signed by any officer of the Company and
delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby.
-6-
<PAGE>
3. PURCHASE, SALE AND DELIVERY OF SECURITIES.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to issue and sell 3,000,000 Firm Shares to the several
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto. The purchase price for each Firm
Share shall be $_______ per share. In making this Agreement, each Underwriter
is contracting severally and not jointly; except as provided in paragraph (c) of
this Section 3 and in Section 8 hereof, the agreement of each Underwriter is to
purchase only the respective number of Firm Shares specified in Schedule I.
The Firm Shares will be delivered by the Company to you for the
accounts of the several Underwriters against payment of the purchase price
therefor by certified or official bank check or other next day funds payable to
the order of the Company at the offices of Faegre & Benson LLP, 2200 Norwest
Center, 90 South Seventh Street, Minneapolis, Minnesota, or such other location
as may be mutually acceptable, at 9:00 a.m. Central time on the third (or if the
Securities are priced, as contemplated by Rule 15c6-1(c) under the Exchange Act,
after 4:30 p.m. Eastern time, the fourth) full business day following the date
hereof, or at such other time and date as you and the Company determine pursuant
to Rule 15c6-1(a) under the Exchange Act, such time and date of delivery being
herein referred to as the "First Closing Date." If the Representatives so
elect, delivery of the Firm Shares may be made by credit through full fast
transfer to the accounts at The Depository Trust Company designated by the
Representatives. Certificates representing the Firm Shares, in definitive form
and in such denominations and registered in such names as you may request upon
at least two business days' prior notice to the Company, will be made available
for checking and packaging not later than 10:30 a.m., Central time, on the
business day next preceding the First Closing Date at the offices of Piper
Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota, or such other location as may be mutually acceptable.
(b) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company, with respect to 450,000 of the Option Shares, hereby grants
to the several Underwriters an option to purchase all or any portion of the
Option Shares at the same purchase price as the Firm Shares, for use solely in
covering any over-allotments made by the Underwriters in the sale and
distribution of the Firm Shares. The option granted hereunder may be exercised
at any time (but not more than once) within 30 days after the effective date of
this Agreement upon notice (confirmed in writing) by the Representatives to the
Company setting forth the aggregate number of Option Shares as to which the
several Underwriters are exercising the option, the names and denominations in
which the certificates for the Option Shares are to be registered and the date
and time, as determined by you, when the Option Shares are to be delivered, such
time and date being herein referred to as the "Second Closing" and "Second
Closing Date", respectively; provided, however, that the Second Closing Date
shall not be earlier than the First Closing Date nor earlier than the second
business day after the date on which the option shall have been exercised. The
number of Option Shares to be purchased by each Underwriter shall be the same
percentage of the total number of Option Shares to be purchased by the several
Underwriters as the number of Firm Shares to be purchased by such Underwriter is
of the total number of Firm Shares to be purchased by the several Underwriters,
as adjusted by the Representatives in such manner as the Representatives deem
advisable to avoid fractional shares. No Option Shares shall be sold and
delivered unless the Firm Shares previously have been, or simultaneously are,
sold and delivered.
The Option Shares will be delivered by the Company, to you for the
accounts of the several Underwriters against payment of the purchase price
therefor by certified or official bank check or other next day funds payable to
the order of the Company at the offices of Faegre & Benson LLP, 2200 Norwest
-7-
<PAGE>
Center, 90 South Seventh Street, Minneapolis, Minnesota, or such other location
as may be mutually acceptable at 9:00 a.m., Central time, on the Second Closing
Date. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives. Certificates representing the
Option Shares in definitive form and in such denominations and registered in
such names as you have set forth in your notice of option exercise, will be made
available for checking and packaging not later than 10:30 a.m., Central time, on
the business day next preceding the Second Closing Date at the office of Piper
Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota, or such other location as may be mutually acceptable.
(c) It is understood that you, individually and not as
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment to the Company, on behalf of any Underwriter for the Securities to
be purchased by such Underwriter. Any such payment by you shall not relieve any
such Underwriter of any of its obligations hereunder. Nothing herein contained
shall constitute any of the Underwriters an unincorporated association or
partner with the Company.
4. COVENANTS. The Company covenants and agrees with the several
Underwriters as follows:
(a) If the Registration Statement has not already been declared
effective by the Commission, the Company will use its best efforts to cause the
Registration Statement and any post-effective amendments thereto to become
effective as promptly as possible; the Company will notify you promptly of the
time when the Registration Statement or any post-effective amendment to the
Registration Statement has become effective or any supplement to the Prospectus
(including any term sheet within the meaning of Rule 434 of the Rules and
Regulations) has been filed and of any request by the Commission for any
amendment or supplement to the Registration Statement or Prospectus or
additional information; if the Company has elected to rely on Rule 430A of the
Rules and Regulations, the Company will prepare and file a Prospectus (or term
sheet within the meaning of Rule 434 of the Rules and Regulations) containing
the information omitted therefrom pursuant to Rule 430A of the Rules and
Regulations with the Commission within the time period required by, and
otherwise in accordance with the provisions of, Rules 424(b), 430A and 434, if
applicable, of the Rules and Regulations; if the Company has elected to rely
upon Rule 462(b) of the Rules and Regulations to increase the size of the
offering registered under the Act, the Company will prepare and file a
registration statement with respect to such increase with the Commission within
the time period required by, and otherwise in accordance with the provisions of,
Rule 462(b) of the Rules and Regulations; the Company will prepare and file with
the Commission, promptly upon your request, any amendments or supplements to the
Registration Statement or Prospectus (including any term sheet within the
meaning of Rule 434 of the Rules and Regulations) that, in your opinion, may be
necessary or advisable in connection with the distribution of the Securities by
the Underwriters; and the Company will not file any amendment or supplement to
the Registration Statement or Prospectus (including any term sheet within the
meaning of Rule 434 of the Rules and Regulations) to which you shall reasonably
object by notice to the Company after having been furnished a copy a reasonable
time prior to the filing.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement, of the
suspension of the qualification of the Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceeding for any such
purpose; and the Company will promptly use its best efforts to prevent the
issuance of any stop order or to obtain its withdrawal if such a stop order
should be issued.
(c) Within the time during which a prospectus (including any
term sheet within the meaning of Rule 434 of the Rules and Regulations) relating
to the Securities is required to be delivered under
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the Act, the Company will comply as far as it is able with all requirements
imposed upon it by the Act, as now and hereafter amended, and by the Rules and
Regulations, as from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Securities as contemplated by the
provisions hereof and the Prospectus. If during such period any event occurs as
a result of which the Prospectus would include an untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in light of the circumstances then existing, not misleading, or if during such
period it is necessary to amend the Registration Statement or supplement the
Prospectus to comply with the Act, the Company will promptly notify you and will
amend the Registration Statement or supplement the Prospectus (at the expense of
the Company) so as to correct such statement or omission or effect such
compliance.
(d) The Company will use its best efforts to qualify the
Securities for sale under the securities laws of such jurisdictions as you
reasonably designate and to continue such qualifications in effect so long as
required for the distribution of the Securities, except that the Company shall
not be required in connection therewith to qualify as a foreign corporation or
to execute a general consent to service of process in any state.
(e) The Company will furnish to the Underwriters copies of the
Registration Statement (three of which will be signed and will include all
exhibits), each Preliminary Prospectus, the Prospectus, and all amendments and
supplements (including any term sheet within the meaning of Rule 434 of the
Rules and Regulations) to such documents, in each case as soon as available and
in such quantities as you may from time to time reasonably request.
(f) During a period of five years commencing with the date
hereof, the Company will furnish to the Representatives, and to each Underwriter
who may so request in writing, copies of all periodic and special reports
furnished to the stockholders of the Company and all information, documents and
reports filed with the Commission, the National Association of Securities
Dealers, Inc., the Nasdaq Stock Market or any securities exchange.
(g) The Company will make generally available to its security
holders as soon as practicable, but in any event not later than 15 months after
the end of the Company's current fiscal quarter, an earnings statement (which
need not be audited) covering a 12-month period beginning after the effective
date of the Registration Statement that shall satisfy the provisions of
Section 11(a) of the Act and Rule 158 of the Rules and Regulations.
(h) The Company, whether or not the transactions contemplated
hereunder are consummated or this Agreement is prevented from becoming effective
under the provisions of Section 9(a) hereof or is terminated, will pay or cause
to be paid (i) all expenses (including transfer taxes allocated to the
respective transferees) incurred in connection with the delivery to the
Underwriters of the Securities, (ii) all expenses and fees (including, without
limitation, fees and expenses of the Company's accountants and counsel but,
except as otherwise provided below, not including fees of the Underwriters'
counsel) in connection with the preparation, printing, filing, delivery, and
shipping of the Registration Statement (including the financial statements
therein and all amendments, schedules, and exhibits thereto), the Securities,
each Preliminary Prospectus, the Prospectus, and any amendment thereof or
supplement thereto, and the printing, delivery, and shipping of this Agreement
and other underwriting documents, including Blue Sky Memoranda, (iii) all filing
fees and fees and disbursements of the Underwriters' counsel incurred in
connection with the qualification of the Securities for offering and sale by the
Underwriters or by dealers under the securities or blue sky laws of the states
and other jurisdictions which you shall designate in accordance with
Section 4(d) hereof, (iv) the fees and expenses of any transfer agent or
registrar, (v) the
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filing fees incident to any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the Securities, (vi)
listing fees, if any, and (vii) all other costs and expenses incident to the
performance of its obligations hereunder that are not otherwise specifically
provided for herein. If the sale of the Securities provided for herein is not
consummated by reason of action by the Company pursuant to Section 9(a) hereof
which prevents this Agreement from becoming effective, or by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled by the Company is
not fulfilled, the Company will reimburse the several Underwriters for all
out-of-pocket disbursements (including fees and disbursements of counsel)
incurred by the Underwriters in connection with their investigation, preparing
to market and marketing the Securities or in contemplation of performing their
obligations hereunder. The Company shall not in any event be liable to any of
the Underwriters for loss of anticipated profits from the transactions covered
by this Agreement.
(i) The Company will apply the net proceeds from the sale of the
Securities to be sold by it hereunder for the purposes set forth in the
Prospectus under the caption "Use of Proceeds" and will file such reports with
the Commission with respect to the sale of the Securities and the application of
the proceeds therefrom as may be required in accordance with Rule 463 of the
Rules and Regulations.
(j) The Company will not, without your prior written consent,
directly or indirectly, offer for sale, sell, contract to sell, grant any option
for the sale of or otherwise issue or dispose of any shares of Common Stock, or
any securities convertible into or exchangeable for Common Stock, or any
options, warrants or other rights to purchase or acquire, Common Stock or
securities convertible or exchangeable for Common Stock, for a period of 180
days after the commencement of the public offering of the Securities by the
Underwriters, except (i) to the Underwriters pursuant to this Agreement (ii)
upon the exercise of options granted or warrants issued prior to the date of
this Agreement, or (iii) for grants of options to directors, officers, employees
or consultants of the Company under the Company's Amended and Restated 1993
Long-Term Incentive and Stock Option Plan, the 1997 Employee Stock Purchase Plan
and the Company's Directors' Stock Option Plan.
(k) The Company either has caused to be delivered to you or will
cause to be delivered to you prior to the effective date of the Registration
Statement a letter from each of the Company's directors, officers and
shareholders stating that such person will not, without your prior written
consent, directly or indirectly, offer for sale, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable for Common Stock, or any options or warrants to acquire,
shares of Common Stock or securities convertible into or exchangeable for Common
Stock for a period of 180 days after the commencement of the public offering of
the Securities by the Underwriters, except (i) as a BONA FIDE gift or gifts,
provided that the donor provides prior written notice of such gift or gifts to
the Underwriters and the donee or donees thereof agree in writing to be bound by
the restrictions set forth herein (ii) as a distribution to stockholders of the
shareholders, provided that the distributee or distributees thereof agree to be
bound by the restrictions set forth herein, or (iii) for shares acquired in the
public market on or after the date of this Agreement.
(l) The Company has not taken and will not take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in, or which has constituted, the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Securities, and has not effected any sales of any securities of the Company
which are required to be disclosed in response to Item 701 of Regulation S-K of
the Commission which have not been so disclosed in the Registration Statement.
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(m) The Company will not incur any liability for any finder's or
broker's fee or agent's commission in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated hereby.
(n) The Company will inform the Florida Department of Banking
and Finance at any time prior to the consummation of the distribution of the
Securities by the Underwriters if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba. Such
information will be provided within 90 days after the commencement thereof or
after a change occurs with respect to previously reported information.
5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters hereunder are subject to the accuracy, as of the date
hereof and at each of the First Closing Date and the Second Closing Date (as if
made at such Closing Date), of and compliance with all representations,
warranties and agreements of the Company contained herein, to the performance by
the Company of its obligations hereunder and to the following additional
conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., Central time, on the date of this Agreement, or such later
time and date as you, as Representatives of the several Underwriters, shall
approve and all filings required by Rules 424, 430A and 434 of the Rules and
Regulations shall have been timely made; no stop order suspending the
effectiveness of the Registration Statement or any amendment thereof shall have
been issued; no proceedings for the issuance of such an order shall have been
initiated or threatened; and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to your satisfaction.
(b) No Underwriter shall have advised the Company that the
Registration Statement or the Prospectus, or any amendment thereof or supplement
thereto (including any term sheet within the meaning of Rule 434 of the Rules
and Regulations), contains an untrue statement of fact which, in your opinion,
is material, or omits to state a fact which, in your opinion, is material and is
required to be stated therein or necessary to make the statements therein not
misleading.
(c) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, the Company shall not have incurred any material liabilities
or obligations, direct or contingent, or entered into any material transactions,
or declared or paid any dividends or made any distribution of any kind with
respect to its capital stock; and there shall not have been any change in the
capital stock (other than a change in the number of outstanding shares of Common
Stock due to the conversion of outstanding shares of Preferred Stock and the
issuance of shares upon the exercise of outstanding options or warrants), or any
material change in the short-term or long-term debt (including, without
limitation, capital lease obligations) of the Company, or any issuance of
options, warrants, convertible securities or other rights to purchase the
capital stock of the Company or any material adverse change or any development
involving a prospective material adverse change (whether or not arising in the
ordinary course of business), in the general affairs, condition (financial or
otherwise), business, key personnel, property, prospects, net worth or results
of operations of the Company, taken as a whole, that, in your judgment, makes it
impractical or inadvisable to offer or deliver the Securities on the terms and
in the manner contemplated in the Prospectus.
(d) On each Closing Date, there shall have been furnished to
you, as Representatives of the several Underwriters, the opinion of Dorsey &
Whitney LLP, counsel for the Company, dated such Closing Date and addressed to
you, to the effect that:
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(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
State of Delaware. The Company has full corporate power and authority to
own its properties and conduct its business as currently being carried on
and as described in the Registration Statement and Prospectus, and is duly
qualified to do business as a foreign corporation and is in good standing
in the State of Minnesota.
(ii) The capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus under
the caption "Description of Capital Stock." All of the issued and
outstanding shares of the capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, and the
holders thereof are not subject to personal liability by reason of being
such holders. The Securities to be issued and sold by the Company
hereunder have been duly authorized and, when issued, delivered and paid
for in accordance with the terms of this Agreement, will have been validly
issued and will be fully paid and nonassessable, and the holders thereof
will not be subject to personal liability by reason of being such holders.
Concurrently with the First Closing, all outstanding shares of Preferred
Stock of the Company shall be manditorily converted in accordance with
their respective terms into shares of duly authorized, validly issued,
fully paid and nonassessable shares of Common Stock, and all outstanding
warrants for the purchase of any shares of Preferred Stock shall be
exercisable solely for shares of Common Stock. There are no preemptive
rights or other rights to subscribe for or to purchase, or any restriction
upon the voting or transfer of, any shares of Common Stock pursuant to the
Company's certificate of incorporation, bylaws or any agreement or other
instrument known to such counsel to which the Company is a party or by
which the Company is bound. To the best of such counsel's knowledge,
neither the filing of the Registration Statement nor the offering or sale
of the Securities as contemplated by this Agreement gives rise to any
rights for or relating to the registration of any shares of Common Stock or
other securities of the Company except for those rights which have been
validly satisfied or waived prior to the date of this Agreement.
(iii) The Registration Statement has become effective
under the Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued
and no proceeding for that purpose has been instituted or, to the knowledge
of such counsel, threatened by the Commission.
(iv) The descriptions in the Registration Statement and
Prospectus of statutes, legal and governmental proceedings, contracts and
other documents are accurate in all material respects and fairly present
the information required to be shown; and such counsel does not know of any
statutes or legal or governmental proceedings required to be described in
the Prospectus that are not described as required, or of any contracts or
documents of a character required to be described in the Registration
Statement or Prospectus or included as exhibits to the Registration
Statement that are not described or included as required.
(v) The Company has full corporate power and authority
to enter into this Agreement, and this Agreement has been duly authorized,
executed and delivered by the Company and constitutes a valid, legal and
binding obligation of the Company enforceable in accordance with its terms
(except as rights to indemnity hereunder may be limited by federal or state
securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting the rights
of creditors generally and subject to general principles of equity); the
execution, delivery and performance of this Agreement and the consummation
of the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or
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constitute a default under, any statute, rule or regulation, any agreement
or instrument known to such counsel to which the Company is a party or by
which it is bound or to which any of its property is subject, the Company's
certificate of incorporation or bylaws, or any order or decree known to
such counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its respective properties; and no
consent, approval, authorization or order of, or filing with, any court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement or for the consummation of the transactions
contemplated hereby, including the issuance or sale of the Securities by
the Company, except such as may be required under the Act or state
securities laws or blue sky laws.
(vi) To the best of such counsel's knowledge, the
Company holds, and is operating in compliance in all material respects
with, all franchises, grants, authorizations, licenses, permits, easements,
consents, certificates and orders of any governmental or self-regulatory
body required for the conduct of its business and all such franchises,
grants, authorizations, licenses, permits, easements, consents,
certifications and orders are valid and in full force and effect.
(vii) To the best of such counsel's knowledge, the
Company is not in violation of its certificate of incorporation or bylaws
and is not in breach of or otherwise in default in the performance of any
material obligation, agreement or condition contained in any bond,
debenture, note, indenture, loan agreement or any other material contract,
lease or other instrument to which it is subject, or to which any of the
material property or assets of the Company is subject.
(viii) The Registration Statement and the Prospectus, and
any amendment thereof or supplement thereto (including any term sheet
within the meaning of Rule 434 of the Rules and Regulations), comply as to
form in all material respects with the requirements of the Act and the
Rules and Regulations; and on the basis of conferences with officers of the
Company, examination of documents referred to in the Registration Statement
and Prospectus and such other procedures as such counsel deemed
appropriate, nothing has come to the attention of such counsel that causes
such counsel to believe that the Registration Statement or any amendment
thereof, at the time the Registration Statement became effective and as of
such Closing Date (including any Registration Statement filed under Rule
462(b) of the Rules and Regulations), contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that
the Prospectus (as of its date and as of such Closing Date), as amended or
supplemented, includes any untrue statement of material fact or omits to
state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; it being
understood that such counsel need express no opinion as to the financial
statements, schedules or other financial data included therein.
(e) On each Closing Date, there shall have been furnished to
you, as Representatives of the several Underwriters, the opinion of Merchant,
Gould, Smith, Edell, Welter and Schmidt, patent counsel for the Company, dated
such Closing Date and addressed to you, to the effect that:
(i) To the best of such counsel's knowledge, the
Company owns or possesses, works of authorship, patents, patent
applications, inventions, trademarks, service marks, trade names,
copyrights, trade secrets and other intellectual property rights
(collectively, the "Intellectual Property Rights") to conduct the business
now being or proposed to be conducted by the Company as described in the
Registration Statement and Prospectus. Title to all patents, patent
applications, trademark applications and registrations
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that are part of the Intellectual Property Rights, are recorded in the name
of the Company, or documents to reflect such recordation have been filed.
(ii) To the best of such counsel's knowledge, there are
no legal or governmental proceedings relating to any Intellectual Property
Rights owned or used by the Company pending against the Company or any
third party and no such proceedings are threatened or contemplated; there
are no legal or governmental proceedings relating to a third party's
Intellectual Property Rights pending against the Company; and, to the best
of such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or others.
(iii) Such counsel does not know of any contracts or
other documents relating to the Intellectual Property Rights of the Company
of a character required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration Statement or the
Prospectus that are not filed or described as required.
(iv) To the best of such counsel's knowledge, the
Company's products, the use of the Company's products or the conduct of the
business now being proposed to be conducted by the Company as described in
the Registration Statement will not infringe or otherwise violate, and the
conduct of the Company, including but not limited to past conduct, does not
infringe or otherwise violate, nor has it been alleged that the Company or
its conduct is infringing or otherwise violating any Intellectual Property
Rights of others and there are no infringements by others of any
Intellectual Property Rights owned or used by the Company.
(v) The Company's pending U.S. patent applications
have been prepared and filed in the USPTO in a form and with accompanying
papers that are acceptable to the USPTO for the purposes of according each
such application a filing date and serial number, and of placing each such
application in condition for eventual examination on the merits as to
patentability. For each such U.S. application, an Official Filing Receipt
has been received from the USPTO. As to each of such applications, counsel
is not aware of any material defect in preparation or filing.
(vi) As to each of the Company's U.S. patent
applications on file more than one year, and as to each of the Company's
U.S. Patents which have issued from patent applications on file more than
one year, corresponding foreign applications claiming priority under the
Paris Convention from the corresponding U.S. applications have been filed
in the appropriate patent offices and are pending.
(vii) Such counsel has reviewed the Registration
Statement, the Preliminary Prospectus and the Prospectus. Nothing has come
to the attention of such counsel that causes such counsel to believe that
as of the date of the Prospectus, at the time the Registration Statement
becomes effective, or on the First Closing Date, the Prospectus (i) under
the caption "Risk Factors - Dependence on Patents and Proprietary
Technology" and (ii) under the caption "Business - Patents and Proprietary
Rights" contained any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(f) On each Closing Date, there shall have been furnished to
you, as Representatives of the several Underwriters, such opinion or opinions
from Faegre & Benson LLP, counsel for the
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Underwriters, dated such Closing Date and addressed to you, with respect to the
formation of the Company, the validity of the Securities, the Registration
Statement, the Prospectus and other related matters as you reasonably may
request, and such counsel shall have received such papers and information as
they request to enable them to pass upon such matters.
(g) On each Closing Date you, as Representatives of the several
Underwriters, shall have received a letter of Ernst & Young LLP, dated such
Closing Date and addressed to you, confirming that they are independent public
accountants within the meaning of the Act and are in compliance with the
applicable requirements relating to the qualifications of accountants under
Rule 2-01 of Regulation S-X of the Commission, and stating, as of the date of
such letter (or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date of such
letter), the conclusions and findings of said firm with respect to the financial
information and other matters covered by its letter delivered to you
concurrently with the execution of this Agreement, and the effect of the letter
so to be delivered on such Closing Date shall be to confirm the conclusions and
findings set forth in such prior letter.
(h) On each Closing Date, there shall have been furnished to
you, as Representatives of the Underwriters, a certificate, dated such Closing
Date and addressed to you, signed by the chief executive officer and by the
chief financial officer of the Company, to the effect that:
(i) The representations and warranties of the Company
in this Agreement are true and correct, in all material respects, as if
made at and as of such Closing Date, and the Company has complied with all
the agreements and satisfied all the conditions on its part to be performed
or satisfied at or prior to such Closing Date;
(ii) No stop order or other order suspending the
effectiveness of the Registration Statement or any amendment thereof or the
qualification of the Securities for offering or sale has been issued, and
no proceeding for that purpose has been instituted or, to the best of their
knowledge, is contemplated by the Commission or any state or regulatory
body; and
(iii) The signers of said certificate have carefully
examined the Registration Statement and the Prospectus, and any amendments
thereof or supplements thereto (including any term sheet within the meaning
of Rule 434 of the Rules and Regulations), and (A) such documents contain
all statements and information required to be included therein, the
Registration Statement, or any amendment thereof, does not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading, and the Prospectus, as amended or supplemented, does not
include any untrue statement of material fact or omit to state a material
fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, (B) since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented prospectus which has
not been so set forth, (C) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company has not incurred any material liabilities or obligations, direct or
contingent, or entered into any material transactions, not in the ordinary
course of business, or declared or paid any dividends or made any
distribution of any kind with respect to its capital stock, and except as
disclosed in the Prospectus, there has not been any change in the capital
stock (other than a change in the number of outstanding shares of Common
Stock due to the conversion of outstanding shares of Preferred Stock or the
issuance of shares upon the exercise of outstanding options or warrants),
or any material change in the short-term or long-term debt (including,
without limitation, capital lease obligations), or any
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issuance of options, warrants, convertible securities or other rights to
purchase the capital stock, of the Company or any material adverse change
or any development involving a prospective material adverse change (whether
or not arising in the ordinary course of business), in the general affairs,
condition (financial or otherwise), business, key personnel, property,
prospects, net worth or results of operations of the Company, taken as a
whole, and (D) except as stated in the Registration Statement and the
Prospectus, there is not pending, or, to the knowledge of the Company,
threatened or contemplated, any action, suit or proceeding to which the
Company is a party before or by any court or governmental agency, authority
or body, or any arbitrator, which might result in any material adverse
change in the condition (financial or otherwise), business, prospects or
results of operations of the Company, taken as a whole.
(i) The Company shall have furnished to you and counsel for the
Underwriters such additional documents, certificates and evidence as you or they
may have reasonably requested.
All such opinions, certificates, letters and other documents will
be in compliance with the provisions hereof only if they are satisfactory in
form and substance to you and counsel for the Underwriters. The Company will
furnish you with such conformed copies of such opinions, certificates, letters
and other documents as you shall reasonably request.
6. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise (including in settlement of any litigation if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, including the information deemed
to be a part of the Registration Statement at the time of effectiveness pursuant
to Rules 430A and 434(d) of the Rules and Regulations, if applicable, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto
(including any term sheet within the meaning of Rule 434 of the Rules and
Regulations), or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse each Underwriter
for any legal or other expenses reasonably incurred by it in connection with
investigating or defending against such loss, claim, damage, liability or
action; provided, however, that the Company shall not be liable in any such case
to the extent that any such loss, claim, damage, liability or action arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any such amendment or supplement, in reliance
upon and in conformity with written information furnished to the Company by you,
or by any Underwriter through you, specifically for use in the preparation
thereof.
In addition to its other obligations under this Section 6(a), the
Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
this Section 6(a), it will reimburse each Underwriter on a monthly basis for all
reasonable legal fees or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To
the extent that any such interim reimbursement payment is so held to have been
improper,
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the Underwriter that received such payment shall promptly return it to the party
or parties that made such payment, together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial lending rate for
borrowers of the highest credit standing) announced from time to time by Norwest
Bank Minnesota, N.A. (the "Prime Rate"). Any such interim reimbursement
payments which are not made to an Underwriter within 30 days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement shall be in addition to any liabilities which
the Company may otherwise have.
(b) Each Underwriter will indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to which the Company
may become subject, under the Act or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto (including any term sheet within the meaning of Rule 434 of
the Rules and Regulations), or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by you, or by such Underwriter through you,
specifically for use in the preparation thereof, and will reimburse the Company
for any legal or other expenses reasonably incurred by the Company in connection
with investigating or defending against any such loss, claim, damage, liability
or action.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any liability
that it may have to any indemnified party. In case any such action shall be
brought against any indemnified party, and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided, however,
that if, in the sole judgment of the Representatives, it is advisable for the
Underwriters to be represented as a group by separate counsel, the
Representatives shall have the right to employ a single counsel to represent the
Representatives and all Underwriters who may be subject to liability arising
from any claim in respect of which indemnity may be sought by the Underwriters
under subsection (a) of this Section 6, in which event the reasonable fees and
expenses of such separate counsel shall be borne by the indemnifying party or
parties and reimbursed to the Underwriters as incurred (in accordance with the
provisions of the second paragraph in subsection (a) above). An indemnifying
party shall not be obligated under any settlement agreement relating to any
action under this Section 6 to which it has not agreed in writing.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages
-17-
<PAGE>
or liabilities referred to in subsection (a) or (b) above, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other from the offering of
the Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
subsection (d) were to be determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in the first sentence of this subsection (d). The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending against any action or claim
which is the subject of this subsection (d). Notwithstanding the provisions of
this subsection (d), no Underwriter shall be required to contribute any amount
in excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 6 shall be
in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who controls
any Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 6 shall be in addition to any liability that the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company (including any person who, with
his consent, is named in the Registration Statement as about to become a
director of the Company), to each officer of the Company who has signed the
Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.
7. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, and agreements of the Company herein or in
certificates delivered pursuant hereto including, without limitation, the
agreements contained in Section 6 hereof, and the agreements of the several
Underwriters, and the Company contained in Section 6 hereof, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter or any controlling person, or the Company or any
of its officers, directors, or controlling persons, and shall survive delivery
of, and payment for, the Securities to and by the Underwriters hereunder.
-18-
<PAGE>
8. SUBSTITUTION OF UNDERWRITERS.
(a) If any Underwriter or Underwriters shall fail to take up and
pay for the amount of Firm Shares agreed by such Underwriter or Underwriters to
be purchased hereunder, upon tender of such Firm Shares in accordance with the
terms hereof, and the amount of Firm Shares not purchased does not aggregate
more than 10% of the total amount of Firm Shares set forth in Schedule I hereto,
the remaining Underwriters shall be obligated to take up and pay for (in
proportion to their respective underwriting obligations hereunder as set forth
in Schedule I hereto except as may otherwise be determined by you) the Firm
Shares that the withdrawing or defaulting Underwriters agreed but failed to
purchase.
(b) If any Underwriter or Underwriters shall fail to take up and
pay for the amount of Firm Shares agreed by such Underwriter or Underwriters to
be purchased hereunder, upon tender of such Firm Shares in accordance with the
terms hereof, and the amount of Firm Shares not purchased aggregates more than
10% of the total amount of Firm Shares set forth in Schedule I hereto, and
arrangements satisfactory to you for the purchase of such Firm Shares by other
persons are not made within 36 hours thereafter, this Agreement shall terminate.
In the event of any such termination the Company shall not be under any
liability to any Underwriter (except to the extent provided in Section 4(h) and
Section 6 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the amount of Firm Shares agreed by such Underwriter to be purchased
hereunder) be under any liability to the Company (except to the extent provided
in Section 6 hereof).
If Firm Shares to which a default relates are to be purchased by
the non-defaulting Underwriters or by any other party or parties, the
Representatives or the Company shall have the right to postpone the First
Closing Date for not more than seven business days in order that the necessary
changes in the Registration Statement, Prospectus and any other documents, as
well as any other arrangements, may be effected. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 8.
9. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at 10:00 a.m., Central
time, on the first full business day following the effective date of the
Registration Statement, or at such earlier time after the effective time of the
Registration Statement as you in your discretion shall first release the
Securities for sale to the public; provided, that if the Registration Statement
is effective at the time this Agreement is executed, this Agreement shall become
effective at such time as you in your discretion shall first release the
Securities for sale to the public. For the purpose of this Section 9, the
Securities shall be deemed to have been released for sale to the public upon
release by you of the publication of a newspaper advertisement relating thereto
or upon release by you of telexes offering the Securities for sale to securities
dealers, whichever shall first occur. By giving notice as hereinafter specified
before the time this Agreement becomes effective, you, as Representatives of the
several Underwriters, or the Company may prevent this Agreement from becoming
effective without liability of any party to any other party, except that the
provisions of Section 4(h) and Section 6 hereof shall at all times be effective.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time at or prior to the First Closing Date, and the option
referred to in Section 3(b), if exercised, may be canceled at any time prior to
the Second Closing Date, if (i) the Company shall have failed, refused or been
unable, at or prior to such Closing Date, to perform any agreement on its part
to be performed hereunder, (ii) any other condition of
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<PAGE>
the Underwriters' obligations hereunder is not fulfilled, (iii) trading on the
New York Stock Exchange or the American Stock Exchange or quotation on the
Nasdaq Stock Market shall have been wholly suspended, (iv) minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required, on the New York Stock Exchange or the
American Stock Exchange, by such exchange or by order of the Commission or any
other governmental authority having jurisdiction, (v) a banking moratorium shall
have been declared by Federal or New York authorities, or (vi) there has
occurred any material adverse change in the financial markets in the United
States or an outbreak of major hostilities (or an escalation thereof) in which
the United States is involved, a declaration of war by Congress, any other
substantial national or international calamity or any other event or occurrence
of a similar character shall have occurred since the execution of this Agreement
that, in your judgment, makes it impractical or inadvisable to proceed with the
completion of the sale of and payment for the Securities. Any such termination
shall be without liability of any party to any other party except that the
provisions of Section 4(h) and Section 6 hereof shall at all times be effective.
(c) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9, the
Company shall be notified promptly by you by telephone or telegram, confirmed by
letter. If the Company elects to prevent this Agreement from becoming
effective, you shall be notified by the Company by telephone or telegram,
confirmed by letter.
10. DEFAULT BY THE COMPANY. If the Company shall fail at the First
Closing Date to sell and deliver the number of Securities which it is obligated
to sell hereunder, then this Agreement shall terminate without any liability on
the part of any Underwriter.
No action taken pursuant to this Section 10 shall relieve the
Company from liability, if any, in respect of such default.
11. INFORMATION FURNISHED BY UNDERWRITERS. The statements set forth in
the last paragraph of the cover page and under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitute the written information
furnished by or on behalf of the Underwriters referred to in Section 2 and
Section 6 hereof.
12. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters or the
Representatives, shall be mailed, telegraphed or delivered to the
Representatives c/o Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth
Street, Minneapolis, Minnesota 55402, except that notices given to an
Underwriter pursuant to Section 6 hereof shall be sent to such Underwriter at
the address stated in the Underwriters' Questionnaire furnished by such
Underwriter in connection with this offering; if to the Company, shall be
mailed, telegraphed or delivered to Endocardial Solutions, Inc., 1350 Energy
Lane, Suite 110, Saint Paul, Minnesota 55108 Attention: President and Chief
Executive Officer, or in each case to such other address as the person to be
notified may have requested in writing. All notices given by telegram shall be
promptly confirmed by letter. Any party to this Agreement may change such
address for notices by sending to the parties to this Agreement written notice
of a new address for such purpose.
13. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective successors and assigns and the controlling persons, officers and
directors referred to in Section 6. Nothing in this Agreement is intended or
shall be construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any provision
herein contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Securities from any of
the several Underwriters.
-20-
<PAGE>
14. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Minnesota.
Signature Page Follows
-21-
<PAGE>
Please sign and return to the Company the enclosed duplicates of
this letter whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
ENDOCARDIAL SOLUTIONS, INC.
By _____________________________________
James W. Bullock; President
and Chief Executive Officer
Confirmed as of the date first
above mentioned, on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
PIPER JAFFRAY INC.
By_____________________________
Managing Director
VOLPE, WELTY & COMPANY
By_____________________________
Managing Director
<PAGE>
SCHEDULE I
Underwriter Number of Firm Shares (1)
- ----------- -------------------------
Piper Jaffray Inc.
Volpe, Welty & Company
---------------
Total. . . . . . . . . . . . ---------------
---------------
_________________
(1) The Underwriters may purchase up to an additional 450,000 Option Shares, to
the extent the option described in Section 3(b) of the Agreement is
exercised, in the proportions and in the manner described in the Agreement.
<PAGE>
Endocardial Solutions, Inc.
1350 Energy Park Lane, Suite 110
St. Paul, Minnesota 55108
Re: Endocardial Solutions, Inc.
Registration Statement on Form S-1
Registration No. 333-20677
Ladies and Gentlemen:
We have acted as counsel to Endocardial Solutions, Inc., a Delaware
corporation (the "Company"), in connection with a Registration Statement on Form
S-1 (the "Registration Statement") relating to the issuance and sale of up to
3,450,000 shares of Common Stock, $.01 par value (the "Shares"), of the Company.
The Shares will be issued pursuant to a Purchase Agreement (the "Purchase
Agreement") to be entered into between the Company and Piper Jaffray Inc. and
Volpe, Welty & Company, as representatives of the several underwriters named
therein (the "Underwriters").
We have examined such documents and have reviewed such questions of
law as we have considered necessary and appropriate for the purposes of our
opinions set forth below. In rendering our opinions set forth below, we have
assumed the authenticity of all documents submitted to us as originals, the
genuineness of all signatures and the conformity to authentic originals of all
documents submitted to us as copies. We have also assumed the legal capacity
for all purposes relevant hereto of all natural persons and, with respect to all
parties to agreements or instruments relevant hereto other than the Company,
that such parties had the requisite power and authority (corporate or otherwise)
to execute, deliver and perform such agreements or instruments, that such
agreements or instruments have been duly authorized by all requisite action
(corporate or otherwise), executed and delivered by such parties and that such
agreements or instruments are the valid, binding and enforceable obligations of
such parties. As to questions of fact material to our opinions, we have relied
upon certificates of officers of the Company and of public officials. We have
also assumed that the Common Stock will be sold for a price per share not less
than the par value per share of the
<PAGE>
Endocardial Solutions, Inc.
March 13, 1997
Page 2
Common Stock, will be priced by the Pricing Committee established by the
authorizing resolutions adopted by the Company's Board of Directors in
accordance with such resolutions and will be issued and sold as described in the
Registration Statement.
Based on the foregoing, we are of the opinion that the shares of
Common Stock to be sold by the Company pursuant to the Registration Statement
have been duly authorized by all requisite corporate action and, upon issuance,
delivery and payment therefor as described in the Registration Statement, will
be validly issued, fully paid and nonassessable.
Our opinions expressed above are limited to the Delaware General
Corporation Law.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm under the caption
"Legal Matters" in the Prospectus constituting part of the Registration
Statement.
Dated: March 13, 1997
Very truly yours,
/s/ DORSEY & WHITNEY LLP
KLC
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 9, 1997, in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-20677) and related Prospectus of Endocardial
Solutions, Inc. for the registration of 3,450,000 shares of its common stock.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 12, 1997
