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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-22233
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ENDOCARDIAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1724963
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
1350 ENERGY LANE, SUITE 110, ST. PAUL, 55108
MN (Zip Code)
(Address of principal executive offices)
(612) 644-7890
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of Common Stock, par value $.01 per share, held
by non-affiliates of the registrant as of March 27, 1998 was approximately
$53,727,716 (based on the last sale price of such stock as quoted on the Nasdaq
National Market ($14.00) on such date).
As of March 27, the number of shares outstanding of the registrant's Common
Stock, par value $.01 per share, was 8,975,895.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders to be held on May 21, 1998 are incorporated by reference into Part
III of this Annual Report on Form 10-K (the "Form 10-K Report").
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PART I
ITEM 1. 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 3000-TM- EP 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 limited clinical trials of the EnSite System
in the United States and the United Kingdom on patients for ventricular
tachycardia and supraventricular (atrial) tachycardia. The Company anticipates
that these 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 and a 510(k)
premarket notification for atrial fibrillation mapping.
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.
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.
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.
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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
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.
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 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
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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 DRUG DEFIBRILLATION CATHETER
TREATMENT DEVICES ABLATION
---------------------- -------------------- ---------------
<S> <C> <C> <C>
Results of Treatment.............................. Non-curative Non-curative Potentially
Curative
Invasiveness...................................... Non-invasive Invasive Minimally
invasive
Approximate Cost.................................. $16,000 initially and $55,000 $12,000 (one-
$8,000 per year (approximately five time cost)
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 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.
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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.
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.
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
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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. The Company has conducted clinical trials on VT patients
in the United States and the United Kingdom using the EnSite System. 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 AND FLUTTER. 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 studies of its
technology for mapping atrial tachycardia in the United Kingdom, and in
August 1997 the Company received an IDE from the FDA for the use of the
EnSite System in the right atrium.
- 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
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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.
THE ENSITE 3000-TM- EP 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
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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 27 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 four groups: software
engineering, applied research, hardware 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 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 $3.6 million, $4.4 million and $5.9
million for the fiscal years ended December 31, 1995, 1996 and 1997,
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.
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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 9002 and CE Mark
certification in order to distribute products in Europe. The Company received
ISO 9001 certification for its quality system in August 1997. 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 9002 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 certain international markets. In September 1997 the
Company signed a seven-year distribution agreement (the "Distribution
Agreement") with Medtronic to market the EnSite System for the electrophysiology
markets in Europe, Japan and the Middle East. The initial market release is
expected to include two sites in Germany, one in France, one in Italy and one in
the United Kingdom. Under the terms of the Distribution Agreement, Medtronic has
been granted exclusive distribution rights for the Company's products in Europe,
Japan and the Middle East and has been granted certain rights for distribution
in other regions outside North America. The Company retains all distribution
rights in North America.
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-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. 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
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occur sometime during the second 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 one
U.S. patent application 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 four 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 three 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 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
9
<PAGE>
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.
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, and 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. The Company is also aware of other medical
device companies 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 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.
10
<PAGE>
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 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
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<PAGE>
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.
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
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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 System on patients with
ventricular tachycardia in the United Kingdom in late 1995, 1996 and 1997 under
an authorization of the Medical Devices Agency ("the MDA") of the British
government. 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 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. The Company
conducted in early 1997 a limited five patient clinical study authorized under
the IDE. Based on the results of those trials, the FDA approved testing of the
EnSite System on an additional ten patients. The Company had completed 13 of the
15 clinical trials in June 1997 when the FDA authorized full-scale testing of
the EnSite System in 71 patients at up to five institutions 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 for the diagnosis of ventricular tachycardia and a 510(k)
premarket notification for atrial fibrillation mapping.
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 submitted an IDE application to the FDA in June 1997 for use
of the EnSite System in the right atrium, and received an IDE approval in August
1997. The Company believes that significant testing of the EnSite System for
SVTs will be required to support a 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.
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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.
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 received ISO 9001 certification in August 1997, and is in the
process of implementing policies and procedures which are intended to allow the
Company to receive ISO 9002 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
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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 62 full-time employees as of December 31, 1997.
Of this number, 27 persons were engaged in research and development, 10 were
involved in regulatory and quality assurance, 14 were involved with
manufacturing and 11 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.
FORWARD-LOOKING STATEMENTS
The above Business section and other parts of the Form 10-K Report contain
forward-looking statements that involve risk and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those contained above in this Item 1, the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 and Exhibit 99.1 to the Form 10-K Report.
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EXECUTIVE OFFICERS
The executive officers and key management personnel of the Company, their
ages and positions and a brief biography of each individual are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- --------------------------------------------------
<S> <C> <C>
James W. Bullock........................ 41 President, Chief Executive Officer and Director
Frank J. Callaghan...................... 44 Vice President, Research and Development
Richard J. Omilanowicz.................. 45 Vice President, Manufacturing
Graydon E. Beatty....................... 41 Chief Technical Officer and Director
Andrew Balo............................. 50 Vice President of Regulatory, Clinical Affairs and
Quality Assurance
Leota L. Pearson........................ 39 Controller
Patrick J. Wethington................... 29 Director of Marketing
James E. Daverman(1)(2)................. 48 Director
Robert G. Hauser, M.D................... 58 Director
Ronald H. Kase(1)....................... 39 Director
Steven R. LaPorte....................... 47 Director
Peter H. McNerney(1)(2)................. 47 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. Mr. Bullock is a director of XRT Corp., a manufacturer of x-ray
catheters.
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 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
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December 1991, Mr. Beatty served as Principal Research Engineer at Cardiac
Pacemakers, Inc., a cardiovascular device company.
ANDREW K. BALO has been Vice President of Regulatory, Clinical and Quality
of the Company since October 1997. From September 1995 until joining the
Company, Mr. Balo served as Vice President, Regulatory/Clinical/Technical
Services at Pacesetter, Cardiac Rhythm Management Division of St. Jude Medical,
Inc. From July 1992 to September 1995, Mr. Balo served as Vice President
Regulatory/Clinical/ Quality of St. Jude Medical, a manufacturer of mechanical
and tissue heart valves. From 1978 to 1992, Mr. Balo served in a variety of
regulatory, clinical and quality management positions, most recently as Vice
President of Regulatory and Quality for the Operating Room Division of Baxter
International, a medical products company.
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.
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 Synert Service Corporation.
ITEM 2. PROPERTIES
The Company leases approximately 17,500 square feet in St. Paul, Minnesota.
The facility is leased 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the Nasdaq National Market under
the symbol "ECSI" on March 19, 1997. Prior to such date, there was no
established public trading market for the Company's Common Stock.
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The following table sets forth, for the period indicated, the high and low
sales prices of the Company's Common Stock, as quoted on the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1997
First quarter (commencing March 19, 1997)................................... $ 9.25 $ 9.00
Second Quarter.............................................................. $ 10.00 $ 6.88
Third Quarter............................................................... $ 15.00 $ 9.63
Fourth Quarter.............................................................. $ 14.00 $ 9.50
</TABLE>
On March 27, 1998, the closing sales price per share of the Company's Common
Stock as quoted on the Nasdaq National Market was $14.00 per share. On March 27,
1998, there were approximately 117 holders of record of the Company's Common
Stock.
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain future earnings for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
The net proceeds to the Company from its initial public offering of Common
Stock in March 1996 were approximately $18,400,000. Such proceeds have been, and
will continue to be, used to fund the continued development and testing of, and
including continued development and testing of, and including clinical trials
for, the EnSite System; capital expenditures; research and development,
manufacturing and marketing activities; and working capital and other general
corporate purposes.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 below and the Consolidated Financial Statements and the
Notes thereto included in Item 8 below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating Expenses:
Research & Development........................... $ 5,854 $ 4,425 $ 3,639 $ 3,352 $ 686
General & Administrative......................... 2,997 1,911 1,088 857 285
Sales & Marketing................................ 831 374 123 282 39
------------ ------------ ------------ ------------ ------------
Operating Loss..................................... (9,682) (6,710) (4,850) (4,491) (1,010)
Net Interest income................................ 1,127 229 116 83 5
------------ ------------ ------------ ------------ ------------
Net loss......................................... $ (8,555) $ (6,481) $ (4,734) $ (4,408) $ (1,005)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net loss per share--basic and diluted.............. $ (1.21) $ (6.30) $ (4.63) $ (4.36) $ (1.00)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average shares outstanding................ 7,065,378 1,029,239 1,022,757 1,011,168 1,009,167
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 22,230 $ 6,157 $ 1,864 $ 305 $ 4,719
Working capital (deficit).......................... 21,495 5,549 1,417 (195) 4,675
Total assets....................................... 25,036 7,200 2,595 1,013 4,934
Long-term debt and capital lease obligations, less
current portion.................................. 439 302 160 12 --
Deficit accumulated during the development stage... (25,178) (16,623) (10,143) (5,409) (1,001)
Total stockholders' equity (deficiency)............ 22,776 6,214 1,916 476 4,884
</TABLE>
ITEM 7. 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 Company's
Consolidated Financial Statements and Notes thereto, and the other financial
information included elsewhere in the Form 10-K Report. This Discussion and
Analysis of Financial Condition and Results of Operations contains descriptions
of the Company's expectations regarding future trends affecting its business.
These forward-looking statements and other forward-looking statements made
elsewhere in this document are made in reliance upon safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The following discussion
sets forth certain factors the Company believes could cause actual results to
differ materially from those contemplated by the forward looking statements. The
Company undertakes no obligation to update the information contained in this
Item 7.
SUMMARY
The Company is a development stage company incorporated on May 21, 1992, in
Minnesota and reincorporated in Delaware on January 30, 1995. Since its
inception the Company has engaged in designing, developing, manufacturing and
obtaining regulatory clearance for its product. The Company is developing a
diagnostic catheter and clinical workstation to enhance physicians' ability to
effectively diagnose and map potentially life-threatening arrhythmias. The
technology is designed to provide a three dimensional graphical display of the
heart's electrical activity gathered simultaneously from more than 3,000 points.
The Company has generated no revenue from the sale of product and has
experienced significant operating losses. The Company has never been profitable
and expects cumulative losses to continue through 1999 as it continues to fund
clinical trials in support of regulatory approval, expand manufacturing
capabilities and fund sales and marketing activities associated with the
introduction and sale of product.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
GENERAL. From inception through December 31, 1997, the Company has incurred
losses totaling $25,254,564. Net losses increased to $8,554,994 for the year
ended December 31, 1997, from $6,480,601 for the year ended December 31, 1996.
The Company is entering a period of growth in product development activity,
including increases in costs relating to personnel, accelerated clinical trial
activity, and marketing expenses related to market introduction.
19
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include costs associated with clinical trials including regulatory expenses,
prototype development and compensation and benefits within the clinical,
software, hardware, catheter and applied research departments. Research and
development expenses increased to $5,853,565 or 32.3% in the year ended December
31, 1997, from $4,424,905 during the same period in 1996. The increase of
$1,428,660 is attributable to increases in clinical trial expenses, personnel
costs related to hiring additional engineering staff and amortization of
deferred compensation. The Company believes that research and development
expenditures will increase in the future as the Company expands clinical
research activity and increases personnel to support product development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include personnel costs and professional and legal fees associated with being a
publicly held company. Expenses were $2,997,498 and $1,911,242 for the years
ended December 31, 1997 and 1996, respectively. The increase of $1,086,254 or
56.8% was due to increases in personnel and related expenses in quality
assurance, as well as amortization of deferred compensation, rent and associated
expenses related to expansion of the Company's facility.
SALES AND MARKETING. Sales and marketing expenses include the cost of trade
shows and marketing personnel costs. Expenses increased to $830,590 during the
year ended December 31, 1997, from $373,348 during the same period in 1996. This
increase is due to the establishment of a marketing department and related
increases in salaries and related expenses. The Company expects continued
increases in sales and marketing expenses as market research activities and
scientific shows occur.
INTEREST INCOME. Interest income was $1,212,122 and $293,585 for the years
ended December 31, 1997 and 1996, respectively. The increase was due primarily
to the higher cash and cash equivalent balances from the Company's equity
offerings.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's operations since inception have been funded by net proceeds
from the sales of common and preferred stock totaling approximately $47,000,000
through December 31, 1997. As of December 31, 1997 and December 31, 1996, the
Company had cash, cash equivalents and short-term investments of $22,229,829 and
$6,157,491, respectively.
On March 24, 1997, the Company received net proceeds of approximately
$18,400,000 from an initial public offering of 2,250,000 shares of its common
stock and approximately $6,200,000 from a concurrent private placement to
Medtronic, Inc. of 750,000 shares of its common stock. The Company's common
stock is quoted on the Nasdaq Stock Market under the symbol "ECSI".
For the year ended December 31, 1997, the Company used $7,702,915 for
operations and $1,207,018 for capital expenditures. Of the capital expenditures
$622,519 was financed through capital leases.
The Company believes the proceeds from the initial public offering, along
with its existing cash and borrowings available under an equipment capital lease
agreement, will be sufficient to fund the operations of the Company through the
next eighteen months. 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 3000-TM- System gains
market acceptance and the costs and timing of expansion of sales, marketing and
manufacturing activities.
YEAR 2000
The Company is currently evaluating the potential impact of systems that
could be affected by the "Year 2000" issue which involves the inability of
certain software and systems to properly recognize and
20
<PAGE>
process date information relating to the Year 2000. The Year 2000 problem is the
result of computer programs being written using two digits rather than four to
define the applicable year. The Company's product development processes
currently contain steps to include Year 2000 compliance verification for all
current and future products. The Company believes that the EnSite 3000-TM-
System is Year 2000 compliant. However, there can be no guarantee that the
systems of other companies on which the Company relies will be timely converted,
or that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
GENERAL. Net losses increased to $6.5 million during 1996 from $4.7 million
during 1995.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $4.4 million during 1996 from $3.6 million during 1995. The
increase was 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. The
increase was 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. The increase 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.
OTHER INCOME. Other income increased during 1996 to $229,000, from $116,000
during 1995. The increase generally reflects 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 6 of
Notes to Financial Statements.)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
21
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1997 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, 1997, and for the
period from May 21, 1992 (inception) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Endocardial Solutions, Inc.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, and for
the period from May 21, 1992 (inception) to December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 6, 1998
22
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 1,512,656 $ 6,157,491
Short-term investments.......................... 20,717,173 --
Inventories..................................... 848,063 --
Prepaid expenses and other current assets....... 238,184 75,053
------------ ------------
Total current assets........................ 23,316,076 6,232,544
Furniture and equipment........................... 2,690,609 1,496,404
Less accumulated depreciation..................... (1,093,978) (656,695)
------------ ------------
1,596,631 839,709
Deposits.......................................... 81,709 81,709
Patents, less accumulated amortization
(1997--$54,593; 1996--$37,339).................. 41,278 46,164
------------ ------------
Total assets................................ $ 25,035,694 $ 7,200,126
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 910,782 $ 265,856
Accrued salaries and expenses................... 515,620 164,766
Current portion of capital lease obligations.... 356,057 130,864
Current portion of long-term debt............... 38,378 122,091
------------ ------------
Total current liabilities................... 1,820,837 683,577
Capital lease obligations......................... 438,524 263,913
Long-term debt.................................... -- 38,378
Stockholders' equity:
Undesignated Preferred Stock, par value $.01 per
share:
Authorized shares--10,000,000
Issued and outstanding shares--none........... -- --
Convertible Preferred Stock, Series A through C,
$.01 per share:
Authorized shares--December 31, 1997--none;
December 31, 1996--9,527,796
Issued and outstanding shares--December 31,
1997--none; December 31, 1996--9,411,206.... -- 94,112
Common Stock, $.01 par value:
Authorized shares--40,000,000
Issued and outstanding shares--December 31,
1997--8,934,409; December 31,
1996--1,053,428............................. 89,344 10,534
Additional paid-in capital...................... 48,174,629 23,444,359
Deficit accumulated during the development
stage......................................... (25,178,332) (16,623,338)
Deferred compensation........................... (309,308) (711,409)
------------ ------------
Total stockholders' equity.................. 22,776,333 6,214,258
------------ ------------
Total liabilities and stockholders'
equity.................................... $ 25,035,694 $ 7,200,126
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
23
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 21, 1992
YEAR ENDED DECEMBER 31, (INCEPTION)
---------------------------------------- TO DECEMBER
1997 1996 1995 31, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating expenses:
Research and development................................ $ 5,853,565 $ 4,424,905 $ 3,638,868 $ 17,971,888
General and administrative.............................. 2,997,498 1,911,242 1,087,905 7,195,055
Sales and marketing..................................... 830,590 373,348 122,848 1,647,567
------------ ------------ ------------ ------------
Operating loss............................................ (9,681,653) (6,709,495) (4,849,621) (26,814,510)
Other income (expense):
Interest income......................................... 1,212,122 293,585 198,878 1,802,438
Interest expense........................................ (85,463) (64,691) (82,993) (242,492)
------------ ------------ ------------ ------------
1,126,659 228,894 115,885 1,559,946
------------ ------------ ------------ ------------
Net loss for the period and deficit accumulated during
development stage....................................... $ (8,554,994) $ (6,480,601) $ (4,733,736) $(25,254,564)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share--basic and diluted..................... $ (1.21) $ (6.30) $ (4.63) $ (12.04)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares outstanding....................... 7,065,378 1,029,239 1,022,757 2,097,661
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes.
24
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES C
SERIES A SERIES B PREFERRED
PREFERRED STOCK PREFERRED STOCK STOCK
-------------------------- -------------------------- ------------
SHARES AMOUNT SHARES AMOUNT SHARES
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at May 21, 1992 (inception)....................... -- $ -- -- $ -- --
Original issuance of Common Stock at $.01 per share..... -- -- -- -- --
Sale of Common Stock at $.12 per share at various dates
throughout the period................................. -- -- -- -- --
Net loss................................................ -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1992.............................. -- -- -- -- --
Sale of Common Stock at $.60 per share in January
1993.................................................. -- -- -- -- --
Recapitalization resulting from election of C
Corporation status.................................... -- -- -- -- --
Sale of Series A Preferred Stock at $1.00 per share in
March 1993, net of offering costs..................... 775,000 7,750 -- -- --
Sale of Series B Preferred Stock at $1.70 per share 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............................... -- -- -- -- --
Net loss................................................ -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1993.............................. 775,000 7,750 3,029,412 30,294 --
Exercise of stock options............................... -- -- -- -- --
Net loss................................................ -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994.............................. 775,000 7,750 3,029,412 30,294 --
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............................... -- -- -- -- --
Net loss................................................ -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 (carried forward)............ 775,000 7,750 6,682,506 66,825 --
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
-------------------------- PAID-IN DEVELOPMENT
AMOUNT SHARES AMOUNT CAPITAL STAGE
------------ ------------ ------------ ------------ ------------
<S> <C> <C>
Balance at May 21, 1992 (inception)....................... $ -- -- $ -- $ -- $ --
Original issuance of Common Stock at $.01 per share..... -- 750,000 7,500 -- --
Sale of Common Stock at $.12 per share at various dates
throughout the period................................. -- 250,000 2,500 27,500 --
Net loss................................................ -- -- -- -- (72,321)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1992.............................. -- 1,000,000 10,000 27,500 (72,321)
Sale of Common Stock at $.60 per share in January
1993.................................................. -- 10,000 100 5,900 --
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, net of offering costs..................... -- -- -- 767,250 --
Sale of Series B Preferred Stock at $1.70 per share in
December 1993, net of offering costs.................. -- -- -- 4,863,208 --
Conversion of notes payable to Series B Preferred Stock
at $1.70 per share in December 1993................... -- -- -- 248,529 --
Exercise of stock options............................... -- 937 9 198 --
Net loss................................................ -- -- -- -- (1,004,677)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1993.............................. -- 1,010,937 10,109 5,836,357 (1,000,770)
Exercise of stock options............................... -- 3,750 38 787 --
Net loss................................................ -- -- -- -- (4,408,231)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994.............................. -- 1,014,687 10,147 5,837,144 (5,409,001)
Sale of Series B Preferred Stock at $1.70 per share in
January and March 1995, net of offering costs......... -- -- -- 6,116,721 --
Value of warrants granted in connection with lease
agreement............................................. -- -- -- 15,846 --
Exercise of stock options............................... -- 13,876 139 4,129 --
Net loss................................................ -- -- -- -- (4,733,736)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 (carried forward)............ -- 1,028,563 10,286 11,973,840 (10,142,737)
<CAPTION>
DEFERRED
COMPEN-
SATION TOTAL
------------ ------------
Balance at May 21, 1992 (inception)....................... $ -- $ --
Original issuance of Common Stock at $.01 per share..... -- 7,500
Sale of Common Stock at $.12 per share at various dates
throughout the period................................. -- 30,000
Net loss................................................ -- (72,321)
------------ ------------
Balance at December 31, 1992.............................. -- (34,821)
Sale of Common Stock at $.60 per share in January
1993.................................................. -- 6,000
Recapitalization resulting from election of C
Corporation status.................................... -- --
Sale of Series A Preferred Stock at $1.00 per share in
March 1993, net of offering costs..................... -- 775,000
Sale of Series B Preferred Stock at $1.70 per share in
December 1993, net of offering costs.................. -- 4,892,031
Conversion of notes payable to Series B Preferred Stock
at $1.70 per share in December 1993................... -- 250,000
Exercise of stock options............................... -- 207
Net loss................................................ -- (1,004,677)
------------ ------------
Balance at December 31, 1993.............................. -- 4,883,740
Exercise of stock options............................... -- 825
Net loss................................................ -- (4,408,231)
------------ ------------
Balance at December 31, 1994.............................. -- 476,334
Sale of Series B Preferred Stock at $1.70 per share in
January and March 1995, net of offering costs......... -- 6,153,252
Value of warrants granted in connection with lease
agreement............................................. -- 15,846
Exercise of stock options............................... -- 4,268
Net loss................................................ -- (4,733,736)
------------ ------------
Balance at December 31, 1995 (carried forward)............ -- 1,915,964
</TABLE>
25
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
SERIES C
SERIES A SERIES B PREFERRED
PREFERRED STOCK PREFERRED STOCK STOCK
-------------------------- -------------------------- ------------
SHARES AMOUNT SHARES AMOUNT SHARES
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 (brought forward)............ 775,000 $ 7,750 6,682,506 $ 66,825 --
Sale of Series C Preferred Stock at $5.12 per share in
April 1996, net of offering costs..................... -- -- -- -- 1,953,700
Value of warrants granted in connection with lease
agreements............................................ -- -- -- -- --
Exercise of stock options............................... -- -- -- -- --
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
Sale of Common Stock at $9.00 per share in March 1997,
net of offering costs................................. -- -- -- -- --
Conversion of Preferred Stock to Common Stock........... (775,000) (7,750 ) (6,682,506) (66,825) (1,953,700)
Exercise of stock options............................... -- -- -- -- --
Redemption of Common Stock.............................. -- -- -- -- --
Amortization of deferred compensation................... -- -- -- -- --
Net loss................................................ -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997.............................. -- $ -- -- $ -- --
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
-------------------------- PAID-IN DEVELOPMENT
AMOUNT SHARES AMOUNT CAPITAL STAGE
------------ ------------ ------------ ------------ ------------
<S> <C> <C>
Balance at December 31, 1995 (brought forward)............ $ -- 1,028,563 $ 10,286 $ 11,973,840 $(10,142,737)
Sale of Series C Preferred Stock at $5.12 per share in
April 1996, net of offering costs..................... 19,537 -- -- 9,972,008 --
Value of warrants granted in connection with lease
agreements............................................ -- -- -- 7,680 --
Exercise of stock options............................... -- 24,865 248 6,151 --
Deferred compensation related to stock options.......... -- -- -- 1,484,680 --
Amortization of deferred compensation................... -- -- -- -- --
Net loss................................................ -- -- -- -- (6,480,601)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996.............................. 19,537 1,053,428 10,534 23,444,359 (16,623,338)
Sale of Common Stock at $9.00 per share in March 1997,
net of offering costs................................. -- 3,000,000 30,000 24,582,727 --
Conversion of Preferred Stock to Common Stock........... (19,537 ) 4,705,602 47,056 47,056 --
Exercise of stock options............................... -- 175,411 1,754 100,631 --
Redemption of Common Stock.............................. -- (32) -- (144) --
Amortization of deferred compensation................... -- -- -- -- --
Net loss................................................ -- -- -- -- (8,554,994)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997.............................. $ -- 8,934,409 $ 89,344 $ 48,174,629 $(25,178,332)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<CAPTION>
DEFERRED
COMPEN-
SATION TOTAL
------------ ------------
Balance at December 31, 1995 (brought forward)............ $ -- $ 1,915,964
Sale of Series C Preferred Stock at $5.12 per share in
April 1996, net of offering costs..................... -- 9,991,545
Value of warrants granted in connection with lease
agreements............................................ -- 7,680
Exercise of stock options............................... -- 6,399
Deferred compensation related to stock options.......... (1,484,680) --
Amortization of deferred compensation................... 773,271 773,271
Net loss................................................ -- (6,480,601)
------------ ------------
Balance at December 31, 1996.............................. (711,409) 6,214,258
Sale of Common Stock at $9.00 per share in March 1997,
net of offering costs................................. -- 24,612,727
Conversion of Preferred Stock to Common Stock........... -- --
Exercise of stock options............................... -- 102,385
Redemption of Common Stock.............................. -- (144)
Amortization of deferred compensation................... 402,101 402,101
Net loss................................................ -- (8,554,994)
------------ ------------
Balance at December 31, 1997.............................. $ (309,308) $ 22,776,333
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
26
<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
1997 1996 1995 31, 1997
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $ (8,554,994) $ (6,480,601) $ (4,733,736) $ (25,254,564)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 463,666 291,712 242,684 1,159,027
Amortization of deferred compensation................... 402,101 773,271 -- 1,175,372
Value of warrants granted in connection with lease
agreements............................................ -- 7,680 15,846 23,526
Loss on disposal of equipment........................... 1,726 784 -- 11,199
Changes in operating assets and liabilities:
Inventories........................................... (848,063) -- -- (848,063)
Prepaid expenses and other assets..................... (163,131) (37,517) (90,927) (319,893)
Accounts payable...................................... 644,926 32,095 (232,539) 910,782
Accrued salaries and expenses......................... 350,854 87,181 36,438 515,620
------------- ------------ ------------ -------------
Net cash used in operating activities............... (7,702,915) (5,325,395) (4,762,234) (22,626,994)
INVESTING ACTIVITIES
Purchase of short-term investments........................ (35,422,173) -- -- (35,422,173)
Maturities of short-term investments...................... 14,705,000 -- -- 14,705,000
Purchase of furniture and equipment....................... (584,499) (144,691) (146,286) (1,591,955)
Patent expenditures....................................... (12,368) (12,634) (28,553) (95,872)
Proceeds from sale of equipment........................... 1,958 -- -- 5,570
------------- ------------ ------------ -------------
Net cash used in investing activities............... (21,312,082) (157,325) (174,839) (22,447,085)
FINANCING ACTIVITIES
Proceeds from notes payable............................... -- -- 504,629 706,974
Principal payments on notes payable and capital lease
obligations............................................. (344,806) (221,522) (166,241) (749,890)
Proceeds from issuance of common stock.................... 24,714,968 6,403 4,268 24,761,713
Proceeds from issuance of preferred stock................. -- 9,991,542 6,153,252 21,820,283
------------- ------------ ------------ -------------
Net cash provided by financing activities........... 24,370,162 9,776,423 6,495,908 46,586,735
------------- ------------ ------------ -------------
(Decrease) increase in cash and cash equivalents.......... (4,644,835) 4,293,703 1,558,835 1,512,656
Cash and cash equivalents at beginning of period.......... 6,157,491 1,863,788 304,953 --
------------- ------------ ------------ -------------
Cash and cash equivalents at end of period.......... $ 1,512,656 $ 6,157,491 $ 1,863,788 $ 1,512,656
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Purchase of equipment through capital lease obligations... $ 622,519 $ 409,125 $ -- $ 1,079,298
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Conversion of note payable for Series B Preferred Stock... $ -- $ -- $ -- $ --
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
See accompanying notes.
27
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. DESCRIPTION OF BUSINESS
Endocardial Solutions, Inc. (the "Company") designs, develops and
manufactures a minimally invasive and integrated 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 is proprietary technology will enable physicians to
rapidly and accurately map the heart's electrical 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, 1997 and
1996, the Company's cash equivalents consisted of investments in government
securities carried at amortized cost which 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.
SHORT-TERM INVESTMENTS
Short-term investments consist of U.S. Government obligations and corporate
debt securities with maturities of less than one year. Management determines the
appropriate classification of debt and equity securities at the time of purchase
and reevaluates such designation as of each balance sheet date. Management has
classified the debt securities as available for sale. Available for sale
securities are carried at fair value with the unrealized gains and losses, net
of tax, reported as a separate component of shareholders' equity. At December
31, 1997, the fair value of the Company's investments approximates cost.
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.
28
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards no. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION," but applies Accounting Principles Board Opinion No. 25 (APB 25)
and related interpretations in accounting for its plans. Under APB 25, when the
exercise price of employee stock options equals the market price of the
underlying stock on the date of grant, no compensation is recognized.
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
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
EARNINGS PER SHARE ("Statement 128"). Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. All earnings
per share amounts for all periods have been presented, and where necessary,
restated to conform to the Statement 128 requirements.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Raw materials............................................. $ 444,289 $ --
Work-in-progress.......................................... 136,343 --
Finished goods............................................ 267,431 --
------------ ------
$ 848,063 $ --
------------ ------
------------ ------
</TABLE>
29
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
4. 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, 1997 and 1996 was approximately $38,378 and
$160,469, respectively.
The Company has entered into an equipment lease agreement with a venture
leasing company which provides lease financing of up to $1.1 million under a
lease line of credit for the acquisition of furniture, fixtures and research and
development equipment. As of December 31, 1997, the Company had used the entire
line of credit, the sum of which is included under capital lease obligations on
the Company's balance sheets. The Company had outstanding capital lease
obligations of $794,589 and $394,777 at December 31, 1997 and 1996,
respectively.
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,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Research and development equipment........................ $ 1,082,158 $ 456,780
Less accumulated amortization............................. 269,584 69,096
------------ ------------
Net assets under capital leases......................... $ 812,574 $ 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,
1997:
<TABLE>
<CAPTION>
CAPITAL LONG-TERM
LEASES DEBT TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Year ending December 31:
1998.................................................... $ 410,101 $ 38,378 $ 448,479
1999.................................................... 379,014 -- 379,014
2000.................................................... 80,275 -- 80,275
------------ ------------ ------------
Total minimum payments................................ 869,390 38,378 907,768
Less amount representing interest......................... 74,809 -- 74,809
------------ ------------ ------------
Present value of net minimum payments................. 794,581 38,378 832,959
Less current portion...................................... 356,057 38,378 394,435
------------ ------------ ------------
Long-term obligations, net of current portion......... $ 438,524 $ -- $ 438,524
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Interest paid for the years ended December 31, 1997, 1996 and 1995 was
$85,463, $64,691 and $82,993, respectively.
30
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. 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 $258,895, $178,419 and $275,311 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Future minimum lease commitments required under non-cancelable operating
leases with remaining terms in excess of one year as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Year ending December 31:
1998.................................................... $ 356,578
1999.................................................... 53,949
------------
$ 410,527
------------
------------
</TABLE>
6. 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 had certain voting and
registration rights, were convertible into common stock on a one-for-one basis
and had 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 had certain voting and
registration rights, was convertible into common stock on a one-for-one basis
and had preference over common stock upon liquidation.
In conjunction with the initial public offering, all outstanding shares of
convertible preferred stock were automatically converted into an aggregate of
4,705,602 shares of common stock.
7. REVERSE STOCK SPLIT
On February 3, 1997, the Board of Directors approved a reverse stock split
of 1-for-2 for the Company's common stock and preferred stock. Accordingly, all
share, per share, weighted average share, and stock option information has been
restated to reflect the split. The reverse stock split has no effect upon the
number of shares of preferred stock issued and outstanding (as opposed to the
conversion prices of the preferred stock and the number of shares of common
stock into which the preferred stock is converted). Accordingly, the 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
31
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. REVERSE STOCK SPLIT (CONTINUED)
capital stock to 50,000,000, including 40,000,000 shares of common stock and
10,000,000 shares of undesignated preferred stock.
8. STOCK OPTIONS AND WARRANTS
The Company has adopted the 1993 Long-Term Stock Option Plan ("the Plan")
under which directors, officers, employees and consultants of the Company may
receive options to purchase Common Stock. The options granted under the Plan can
either be incentive stock options or non-statutory stock options. Options
granted under the Plan may not be at a price less then the fair market value of
the Common Stock on the date of grant.
In 1997, the Company adopted the Directors' Stock Option Plan ("the
Directors' Plan"). The Directors' Plan provides for the automatic grant of
non-statutory stock options of Common Stock to non-employee directors. The
option price for non-employee directors is equal to the fair market value of a
share of Common Stock as of the grant date.
The following table summarizes the activity under the Company's stock option
plans:
<TABLE>
<CAPTION>
1993 LONG-TERM
DIRECTOR'S PLAN PLAN OPTIONS OUTSTANDING WEIGHTED
-------------------------- ---------------------------------------- AVERAGE
SHARES SHARES EXERCISE
AVAILABLE OPTIONS AVAILABLE PRICE PER
FOR GRANT OUTSTANDING FOR GRANT NSO ISO SHARE
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
Additional shares reserved for
issuance.......................... 200,000 -- 600,000 -- -- --
Granted............................. (50,000 ) 50,000 (235,500) -- 235,500 11.00
Canceled............................ -- -- 36,407 -- (36,407) 9.69
Exercised........................... -- -- -- (34,750) (140,659) .59
------------ ------ ------------ ------------ ------------
Balance at December 31, 1997.......... 150,000 50,000 557,197 42,500 878,966 $ 3.68
------------ ------ ------------ ------------ ------------
------------ ------ ------------ ------------ ------------
</TABLE>
32
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about the stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE ------------------------------
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE PRICE NUMBER EXERCISE PRICE
EXERCISE PRICES OUTSTANDING LIFE PER SHARE EXERCISABLE PER SHARE
- ----------------- ----------- --------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.20--$ 0.60 461,902 7.06 $ 0.35 328,595 $ 0.33
2.40-- 3.70 225,064 8.58 2.78 68,599 2.69
5.00-- 9.38 147,000 8.46 8.46 25,454 8.11
11.06-- 13.13 137,500 9.87 11.26 729 11.06
----------- -----------
$ 0.20--$13.13 971,466 8.03 $ 3.71 423,377 $ 1.20
----------- -----------
----------- -----------
</TABLE>
Options outstanding under the stock option plans expire at various dates
during the period from April 2003 through December 2007. Exercise prices for
options outstanding as of December 31, 1997 ranged from $.20 to $13.13 per
share. The number of options exercisable as of December 31, 1997, 1996 and 1995
were 405,670, 375,655 and 223,993, respectively, at weighted-average exercise
prices of $1.18, $.36 and $.29 per share, respectively.
The weighted-average grant date fair value of options granted during the
years ended December 31, 1997, 1996 and 1995 was $4.70, $5.58 and $3.12 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 46,605 shares of
Common Stock at $3.40 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 7,500 shares
of Common Stock at a purchase price of $10.24 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.
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 a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1996 and 1995: risk-free interest rates ranging from 5.0% to 6.2%, dividend
yields of -0-, volatility factors of the expected market price of the Company's
stock ranging from .41 to .44 and a weighted-average expected life of the
options of four 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
33
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
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.
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>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net loss........................................ $ 9,425,150 $ 6,836,294 $ 4,841,089
------------ ------------ ------------
------------ ------------ ------------
Pro forma net loss per common share....................... $ 1.33 $ 6.64 $ 4.73
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The pro forma effect on net loss for 1997, 1996 and 1995 is not
representative of the pro forma effect on net loss in future years because it
does not take into consideration expense related to grants made prior to 1995.
The Company also has an Employee Stock Purchase Plan under which 200,000
shares have been reserved for purchase by employees. The purchase price of the
shares under the Plan is the lesser of 85% of the fair market value on the first
or last day of the offering period. Offering periods are each three months.
Employees may designate up to 15% of their compensation for the purchase of
stock under the Plan.
9. 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 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 years ended December 31, 1997 and 1996, $402,101
and $773,271 was expensed, respectively.
The remaining unamortized deferred compensation is expected to be charged to
operations as follows:
<TABLE>
<S> <C>
1998...................................................... $ 216,516
1999...................................................... 92,792
------------
$ 309,308
------------
------------
</TABLE>
10. INCOME TAXES
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $24,405,000. 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
34
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
10. INCOME TAXES (CONTINUED)
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,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforwards.......................... $ 9,762,000 $ 6,340,000
Less valuation allowance.................................. (9,762,000) (6,340,000)
------------ ------------
Deferred tax asset........................................ $ -- $ --
------------ ------------
------------ ------------
</TABLE>
11. RELATED PARTY TRANSACTION
The Company paid approximately $16,000, $59,000 and $475,000 for the years
ended December 31, 1997, 1996 and 1995, 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.
12. SOURCES OF SUPPLY
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. 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.
13. SUBSEQUENT EVENT
In January 1998, the Company entered into a license agreement with
Medtronic, Inc. to license certain technology developed by Medtronic. As
consideration for the rights to utilize the developed technology, the Company
paid Medtronic $1,500,000 and granted Medtronic a warrant to purchase 447,554
shares of the Company's common stock at an exercise price of $11.1125 per share.
The warrant was deemed to have a value of $2,273,574. This amount, along with
the cash payment to Medtronic, will be expensed in the first quarter of 1998. If
the Company develops a product that reaches commercialization, the Company will
grant to Medtronic an additional warrant to purchase 223,777 shares of common
stock. The exercise price of the warrant will be 1.25 times the average closing
price of the Company's common stock for the twenty days prior to the commercial
products introduction. This additional warrant becomes exercisable one year
after being granted and remains outstanding for five years. The additional
warrant will also be granted if the Company undergoes a change in control. If
the option is granted due to a change in control it becomes immediately
exercisable.
35
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section under the heading "Election of Directors" and the section
entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement for its 1998 Annual Meeting of Stockholders to be held
on May 21, 1998 ("1998 Proxy Statement") are incorporated herein by reference.
The information contained in Item 1 in Part I hereof under the heading
"Executive Officers" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section under the heading "Election of Directors" entitled "Compensation
of Directors" and the section entitled "Executive Compensation" in the 1998
Proxy Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the 1998 Proxy Statement are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" in the 1998 Proxy Statement are
incorporated herein by reference.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
(1) Financial Statements. The following financial statements of the
Company are included in Part II, Item 8, of this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
PAGE IN THIS
ANNUAL REPORT
-------------------
<S> <C>
Report of Independent Auditors..................................................................... 22
Audited Financial Statements
Balance Sheets..................................................................................... 23
Statements of Operations........................................................................... 24
Statements of Changes in Stockholders' Equity...................................................... 25
Statements of Cash Flows........................................................................... 27
Notes to Financial Statements...................................................................... 28
</TABLE>
(2) Financial Statement Schedules
None. All financial statement schedules are omitted because of the
absence of conditions under which they are required.
(3) EXHIBITS
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1, dated January 29, 1997, as amended on March 5,
1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
3.2 Amended Bylaws of the Company (incorporated by reference to Exhibit 3.3 to
the Company's Registration Statement on Form S-1, dated January 29,
1997, as amended on March 5, 1997, March 13, 1997 and March 18, 1997
(File No. 333-20677))
4.1 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 (incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on Form
S-1, dated January 29, 1997, as amended on March 5, 1997, March 13, 1997
and March 18, 1997 (File No. 333-20677))
4.2 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 (incorporated by reference to Exhibit
4.3 to the Company's Registration Statement on Form S-1, dated January
29, 1997, as amended on March 5, 1997, March 13, 1997 and March 18, 1997
(File No. 333-20677))
4.3 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 (incorporated by reference to Exhibit 4.4 to
the Company's Registration Statement on Form S-1, dated January 29,
1997, as amended on March 5, 1997, March 13, 1997 and March 18, 1997
(File No. 333-20677))
</TABLE>
37
<PAGE>
<TABLE>
<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, June 4, 1996,
respectively (incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended
on March 5, 1997, March 13, 1997 and March 18, 1997 (File No.
333-20677))
10.2 Amendment No 4 to the Real Property Lease Agreement dated September 15,
1993 between the Company and the Port Authority of St. Paul (filed
herewith)
10.3 Master Lease Agreement dated November 14, 1994, as amended, between the
Company and Comdisco, Inc., with Exhibits (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1, dated
January 29, 1997, as amended on March 5, 1997, March 13, 1997 and March
18, 1997 (File No. 333-20677))
10.4* 1993 Long-Term Incentive and Stock Option Plan, including forms of option
agreements (incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended
on March 5, 1997, March 13, 1997 and March 18, 1997 (File No.
333-20677))
10.5* Directors' Stock Option Plan (incorporated by reference to Exhibit 10.4 to
the Company's Registration Statement on Form S-1, dated January 29,
1997, as amended on March 5, 1997, March 13, 1997 and March 18, 1997
(File No. 333-20677))
10.6* 1997 Employee Stock Purchase Plan (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-1, dated January
29, 1997, as amended on March 5, 1997, March 13, 1997 and March 18, 1997
(File No. 333-20677))
10.7* Employment Agreement dated May 25, 1994 between the Company and James W.
Bullock (incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended
on March 5, 1997, March 13, 1997 and March 18, 1997 (File No.
333-20677))
10.8* Change in Control Agreement dated June 28, 1996 between the Company and
Dennis J. McFadden (incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1, dated January 29, 1997, as
amended on March 5, 1997, March 13, 1997 and March 18, 1997 (File No.
333-20677))
10.9 Investment Agreement dated April 26, 1996 between the Company and
Medtronic, Inc. (incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1, dated January 29, 1997, as
amended on March 5, 1997, March 13, 1997 and March 18, 1997 (File No.
333-20677))
10.10 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 (incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-1, dated
January 29, 1997, as amended on March 5, 1997, March 13, 1997 and March
18, 1997 (File No. 333-20677))
10.11 Stock Purchase Agreement between the Company and Medtronic, Inc.
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended
on March 5, 1997, March 13, 1997 and March 18, 1997 (File No.
333-20677))
</TABLE>
38
<PAGE>
<TABLE>
<C> <S>
10.12 Purchase Agreement between the Company, Piper Jaffray Inc., and Volpe,
Welty & Company LLC (incorporated by reference to Exhibit 1.1 to the
Company's Registration Statement on Form S-1, dated January 29, 1997, as
amended on March 5, 1997, March 13, 1997 and March 18, 1997 (File No.
333-20677))
23.1 Consent of Ernst & Young LLP (filed herewith)
24.1 Power of Attorney (filed herewith)
27.1 Financial Data Schedule (filed herewith)
99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995 (filed herewith)
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to Form 10-K pursuant to Item 14(c) of the Form 10-K Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal year ended December
31, 1997.
(c) See Exhibit Index and Exhibits filed with this Report.
(d) See the Financial Statement Schedule included at the end of this Report.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
Date: March 27, 1998 ENDOCARDIAL SOLUTIONS, INC.
By /s/ JAMES W. BULLOCK
-----------------------------------------
James W. Bullock
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on the 27th day of March, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S> <C>
President, Chief Executive
/s/ JAMES W. BULLOCK Officer and Director
- ------------------------------ (Principal Executive
James W. Bullock Officer)
/s/ LEOTA L. PEARSON Controller (principal
- ------------------------------ financial and accounting
Leota L. Pearson officer)
*
- ------------------------------ Director
Graydon E. Beatty
*
- ------------------------------ Director
James E. Daverman
*
- ------------------------------ Director
Robert G. Hauser, M.D.
*
- ------------------------------ Director
Ronald H. Kase
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S> <C>
*
- ------------------------------ Director
Steven R. LaPorte
*
- ------------------------------ Director
Peter H. McNerney
</TABLE>
<TABLE>
<S> <C> <C> <C>
* By /s/ JAMES W. BULLOCK
-------------------------
James W. Bullock
ATTORNEY-IN-FACT
</TABLE>
41
<PAGE>
[LOGO] [LETTERHEAD]
March 31, 1997
Mr. Gerald P. Driessen
CB Commercial Real Estate
Group, Inc.
7760 France Avenue South
Suite 770
Minneapolis, Minnesota 55435
Dear Mr. Driessen:
This letter is to advise you that we intend to exercise our option to extend
our lease until March 31, 1999.
If you have any questions, please telephone me. Thank you.
Sincerely,
Leota Pearson
Controller
<PAGE>
LEASE AMENDMENT NUMBER FOUR
THIS LEASE AMENDMENT NUMBER FOUR is made this 23rd day of January, 1998,
by and between the Port Authority of the City of St. Paul, a public body
corporate and politic, created pursuant to Chapter 469 of Minnesota
Statutes, herein called "Lessor", and Endocardial Solutions, Inc., a Delaware
corporation, herein called "Tenant".
RECITALS
WHEREAS, by a Lease dated September 15, 1993, Endocardial Therapeutics,
Inc. did lease from Lessor Suite 110E on the first floor in that certain
office building known as Energy Park Place East Building, located at 1350
Energy Lane, St. Paul, Minnesota.; and by the Lease Modification and
Extension Agreement dated February 6, 1995, Tenant did lease Suite 107E and
extended term; and by the Lease Amendment Number Two dated May 16, 1995, the
tax clause was modified; and by Lease Amendment Number Three dated June 4,
1996, Tenant did Lease Suite 113E and extended term; and by a notice letter
dated March 31, 1997 and acceptance letter dated June 16, 1997, Tenant
exercised its option to extend. Said space consists of approximately 17,479
rentable square feet, is shown in Exhibit A attached to said Lease, and is
herein called the "Premises" and the "Existing Space"
WHEREAS, the term of said Lease is scheduled to expire on March 31,
1999; and
WHEREAS, Tenant is the successor to the interests of Endocardial
Therapeutics, Inc. under said Lease; and
WHEREAS, the parties wish to add certain space to the Premises, and
make certain changes to said Lease.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and in said Lease, the parties hereto agree as follows:
1. ENLARGEMENT OF PREMISES: Effective as of March 1, 1998, the
description of the Premises contained in said lease is amended so as to add
Suite 207, consisting of approximately 4,056 rentable square feet and
hereinafter called the "Additional Space". As of March 1, 1998, the total
space (hereinafter called the "Enlarged Premises") leased to Tenant under
said Lease shall consist of a total area of approximately 21,535 rentable
square feet. The Enlarged Premises are generally shown on the floor plan
attached hereto as Exhibit "A", which exhibit is made a part hereof by this
reference. As of March 1, 1998, that certain Exhibit "A" attached to said
Lease is hereby superseded (by Exhibit "A" attached hereto) and of no further
force and effect.
2. RENT: The base rent payable shall increase as follows:
--------------------------------------------------------------
SUITE DATES SF BASE MONTHLY BASE
RENT/SF/YR
207 3/1/98- 4,056 $8.50 $2,873.00
3/31/99
--------------------------------------------------------------
The base rent, as increased herein, shall continue to be payable in advance
by the first of each month and subject to operating expenses and taxes
(estimated at $6.97/RSF for 1998) as well as its proportionate share of
utilities. Tenant is solely responsible for its own janitorial and garbage
removal and disposal for the Enlarged Premises. If the Additional Space is
added to the Premises on a date prior to March 1, 1998, the resulting increase
in rent shall be prorated for such partial month.
3. CONDITION OF EXISTING AND ADDITIONAL SPACE/TENANT'S WORK: Tenant is
presently in possession of the Premises and accepts same in its present
condition as of the date hereof. Tenant has inspected the Additional Space
including but not limited to HVAC capacity and distribution, electrical
capacity and distribution, and telecommunication capacity and distribution
and accepts same as of the date hereof. Any improvements to be done by Tenant
to the Additional Space shall be at Tenant's sole cost and expense, and shall
be performed in accordance with the provisions of said Lease. Tenant agrees
that any additional HVAC modifications must comply with Energy Center
regulations. Any supplemental, non Energy Center connected, existing HVAC
units must remain as designed prior to Tenant's occupancy. Pursuant to
Sections 5 and 6 of this Lease and provided Lessor approves plan, and
contractors are licensed, bonded and insured, Tenant shall proceed to
complete certain improvements to Suite 207E as shown on attached Exhibit E.
Provided Tenant is not in default, and in consideration of Tenant accepting
the Premises in "as-in" condition and completing its own tenant improvements,
Lessor agrees to reimburse
-1-
<PAGE>
Tenant for the cost of building standard improvements, including
architectural fees, permits, performance payment bonds, demolition, and
construction financing, prior to April 30, 1998. The tenant improvement
reimbursement shall be given to Tenant in the form of Base Rent Abatement.
Upon completion of tenant improvements, Tenant shall present Lessor with
copies of all invoices, contractor unconditional lien releases and a complete
set of "As-Built" drawings. Then, Tenant and Lessor agree to execute an
amendment to this Lease setting forth the amount of Rent Abatement which
shall be equivalent to the actual amount Tenant spends on building standard
improvements for Suite 207E, not to exceed $8,761.00 in Base Rent. If Tenant
does not improve Suite 207E by said amount by April 30, 1998, said rent
credit is null and void. Any improvement costs amount over this allowance is
Tenant's sole responsibility. In the event Tenant does not improve the suite
by $8,761.00 by April 30, 1998, Tenant will then only receive 50% of any
unused allowance as a rent credit for the next month's base rent, once all
contractors are paid in full.
Tenant agrees at its cost (within the above allowance) to:
A) Provide for the taping and sanding of the new demise wall on
Tenant's side only (The new wall adjacent to the new vacant
suite 205E.)
B) Paint entire Suite (except walls that have existing wallcover).
C) Recarpet entire Suite.
4. LESSOR'S WORK: Lessor and Tenant hereby acknowledge that Lessor will
hire Lessor's contractor to construct the following Lessor's work to the
Premises at Lessor's sole cost:
A) Replace southerly exit door to the corridor with one that is fire
rated.
B) Provide and install another entry door (without sidelight) on the
corridor.
C) Provide fire rated assembly of demise wall.
D) HVAC to remain with cross over. The 5 ton thermostat to be in the
neighboring suite.
E) Sprinkler modification due to the new demise wall.
F) Light fixture relocation and light switch separation due to new
demise wall.
G) Ceiling repair.
Tenant and Lessor also acknowledge that Lessor has hired CB Commercial to
manage the Energy Park Place and Lessor hereby directs Tenant to pay Tenant's
rent directly to:
CB Commercial Real Estate Group, Inc.
7760 France Avenue South, Suite 770
Bloomington, MN 55435
Tenant and Lessor hereby acknowledge that CB Commercial shall be allowed to
retain Tenant's first rental payments necessary to repay Lessor's contractor
for the actual amount spent for improvements, architectural, construction
financing, permits and performance payment bonds. Upon full payment of
Tenant's improvements as set out above, CB Commercial shall deposit Tenant's
rental payments in the operating account for the Energy Park Place.
Lessor is not required to build the new demise wall or make the other Lessor
work changes stated above until the neighboring Tenant, Questpoint, signs its
expansion contract on the new remaining vacancy #205E. If Questpoint does
sign its expansion contract on or before January 28, 1998, Tenant agrees to
take the remaining 2,344 RSF for the full remaining term at the above rental
rates, and Lessor will provide a $2.16/RSF building standard improvement
allowance in the same fashion stated in Article 3 above.
5. FINANCIAL STATEMENT: Attached as Exhibit "F" are Tenant's updated
audited corporate financial statements.
6. CONFIDENTIALITY: Article 49 of the Master Lease is hereby deleted
with no further force or effect.
7. MISCELLANEOUS:
a) The provisions of this Lease Amendment shall be fully applicable
to the Enlarged Premises and shall remain in full force and effect for the
duration of the term of said Lease.
b) Except as otherwise set forth herein, all of the terms and
conditions of said Lease shall remain in full force and effect, and shall be
fully applicable to the Additional Space as well as the Existing Space,
throughout the duration of the term of said Lease. Said Lease, as amended
herein, constitutes the entire agreement between the parties hereto, and no
further modification of said Lease shall be binding unless evidenced by an
agreement in writing signed by Lessor and Tenant.
-2-
<PAGE>
c) The captions and paragraph numbers appearing in the Amendment are
inserted only as a matter of convenience and in no way define, limit,
construe, affect or describe the scope or intent of the provisions in this
Amendment.
8. This Lease Amendment Number Four will not be in effect until duly
signed by Lessor and Tenant.
IN WITNESS WHEREOF, Lessor and Tenant have executed this Lease Amendment
Number Four as of the day and year first above written.
LESSOR: TENANT:
PORT AUTHORITY OF THE CITY OF SAINT PAUL ENDOCARDIAL SOLUTIONS, INC.
By: /s/ [ILLEGIBLE] By: /s/ Leota Pearson
------------------------------------ -------------------------------
Its: President Its: Controller
----------------------------------- ------------------------------
By: By:
------------------------------------ -------------------------------
Its: Its:
----------------------------------- ------------------------------
- --------------------------------------------------------------------------------
CONSULT YOUR ATTORNEY: This document has been prepared for approval by your
attorney. No representation or recommendation is made by Broker as to the
legal sufficiency, legal effect, or tax consequence of this document or the
transaction to which it relates. These are questions for your attorney and
financial advisors.
- --------------------------------------------------------------------------------
-3-
<PAGE>
EXHIBIT 11.1
ENDOCARDIAL SOLUTIONS, INC.
COMPUTATION OF PRO FORMA NET INCOME PER SHARE (1)
<TABLE>
<CAPTION>
Primary EPS Fully Diluted EPS
----------------------- -----------------------
Year ended December 31, Year ended December 31,
1997 1996 1997 1996
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding
Common Stock equivalents:
Assumed conversion of mandatorily
redeemable preferred stock
Stock option (2)
--------- ---------- ---------- -----------
Pro forma weighted average common
and common equivalent shares
outstanding
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
Net income $ $ $ $
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
Unaudited pro forma net income per share $ $ $ $
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
</TABLE>
(1) Unaudited pro forma net income per share is based on the unaudited pro
forma weighted average number of shares of common stock and common equivalent
shares outstanding for the period.
(2) Effect of applying the treasury stock method to weighted average stock
option outstanding during the period.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-34169 and 333-27979) of our report dated February 6, 1998,
with respect to the financial statements of Endocardial Solutions, Inc. included
in the Annual Report (Form 10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 30, 1998
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James W. Bullock and Leota L.
Pearson (with full power to act alone), as his or her true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign an Annual Report on Form 10-K of Endocardial
Solutions, Inc., and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James W. Bullock
- ------------------------------ President, Chief Executive February 25, 1998
James W. Bullock Officer and Director
/s/ Leota L. Pearson
- ------------------------------ Controller February 4, 1998
Leota L. Pearson
/s/ Graydon E. Beatty
- ------------------------------ Director February 25, 1998
Graydon E. Beatty
/s/ James E. Daverman
- ------------------------------ Director February 4, 1998
James E. Daverman
/s/ Robert G. Hauser, M.D.
- ------------------------------ Director February 4, 1998
Robert G. Hauser, M.D.
/s/ Ronald H. Kase
- ------------------------------ Director February 4, 1998
Ronald H. Kase
/s/ Steven R. LaPorte
- ------------------------------ Director February 9, 1998
Steven R. LaPorte
/s/ Peter H. McNerney
- ------------------------------ Director February 4, 1998
Peter H. McNerney
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ESI AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,512,656
<SECURITIES> 20,717,173
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 848,063
<CURRENT-ASSETS> 23,316,076
<PP&E> 2,690,609
<DEPRECIATION> (1,093,978)
<TOTAL-ASSETS> 25,035,691
<CURRENT-LIABILITIES> 1,820,837
<BONDS> 0
0
0
<COMMON> 89,344
<OTHER-SE> 48,174,629
<TOTAL-LIABILITY-AND-EQUITY> 25,035,694
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,681,653
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85,463
<INCOME-PRETAX> (8,554,994)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,554,994)
<EPS-PRIMARY> (1.21)
<EPS-DILUTED> (1.21)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ESI AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 3-MOS
3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 MAR-31-1997 JUN-30-1997
SEP-30-1997
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1997 APR-01-1997
JUL-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1995 MAR-31-1997 JUN-30-1997
SEP-30-1997
<CASH> 6,157,491 1,863,788 29,451,066 27,198,404
5,971,430
<SECURITIES> 0 0 0 0
19,153,144
<RECEIVABLES> 0 0 0 0
0
<ALLOWANCES> 0 0 0 0
0
<INVENTORY> 0 0 0 0
0
<CURRENT-ASSETS> 6,232,544 1,935,999 29,627,888 27,361,371
25,446,135
<PP&E> 1,496,404 944,136 1,844,815 2,079,967
2,320,145
<DEPRECIATION> (656,695) (381,067) (749,053) (861,139)
(973,955)
<TOTAL-ASSETS> 7,200,126 2,594,953 30,847,348 28,703,201
26,910,920
<CURRENT-LIABILITIES> 683,577 518,519 986,701 1,121,160
1,370,269
<BONDS> 0 0 0 0
0
0 0 0 0
0
94,112 74,575 0 0
0
<COMMON> 10,534 10,286 87,850 88,148
88,980
<OTHER-SE> 23,444,359 11,973,840 0 0
0
<TOTAL-LIABILITY-AND-EQUITY> 7,200,126 2,594,953 30,847,348 28,703,201
26,910,920
<SALES> 0 0 0 0
0
<TOTAL-REVENUES> 0 0 0 0
0
<CGS> 0 0 0 0
0
<TOTAL-COSTS> 0 0 0 0
0
<OTHER-EXPENSES> 6,709,495 4,849,621 1,926,487 2,447,446
2,539,478
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 64,691 82,993 78,312 22,280
23,943
<INCOME-PRETAX> (6,480,601) (4,733,736) (1,865,264) (2,082,568)
(2,182,974)
<INCOME-TAX> 0 0 0 0
0
<INCOME-CONTINUING> 0 0 0 0
0
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> (6,480,601) (4,733,736) (1,865,264) (2,082,568)
(2,182,974)
<EPS-PRIMARY> (6.30) (4.63) ($1.09) ($.40)
($.34)
<EPS-DILUTED> (6.30) (4.63) ($1.09) ($.40)
($.34)
</TABLE>
<PAGE>
EXHIBIT 99.1
Endocardial Solutions, Inc. (the "Company"), or persons acting on
behalf of the Company, or outside reviewers retained by the Company making
statements on behalf of the Company, or underwriters, from time to time make,
in writing or orally, "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended). When used in conjunction with an
identified forward-looking statement, this Cautionary Statement is for the
purpose of qualifying for the "safe harbor" provisions of such sections and
is intended to be a readily available written document that contains factors
which could cause results to differ materially from such forward-looking
statements. These factors are in addition to any other cautionary
statements, written or oral, which may be made or referred to in connection
with any such forward-looking statement.
The following matters, among others, may have a material adverse effect
on the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this
Cautionary Statement in the context of a forward-looking statement or
statements shall be deemed to be a statement that any or more of the
following factors may cause actual results to differ materially from those in
such forward-looking statement or statements:
DEPENDENCE ON SUCCESSFUL DEVELOPMENT AND COMMERCIALIZATION OF THE ENSITE SYSTEM
The Company's future success is entirely dependent upon the successful
development, commercialization and market acceptance of the EnSite System,
the development of which is ongoing and the complete efficacy and safety of
which have not yet been demonstrated. The EnSite System is currently the
Company's only potential product, and the Company could be required to cease
operations if the system is not successfully commercialized. The EnSite
System will require further development, significant additional clinical
trials and, ultimately, United States and international regulatory approvals
before it can be marketed in the United States and internationally. There
can be no assurance that unforeseen problems will not occur in research and
development, clinical testing, regulatory submissions and approval, product
manufacturing and commercial scale-up, marketing or product distribution.
Any such occurrence could materially delay the commercialization of the
EnSite System or prevent its market introduction entirely. The Company will
not generate any significant revenue until such time, if ever, as the EnSite
System is successfully commercialized. There can be no assurance that the
Company will ever derive substantial revenues from the sale of the EnSite
System.
LIMITED CLINICAL TESTING EXPERIENCE; SAFETY AND EFFICACY NOT YET ESTABLISHED
The Company has conducted only limited clinical trials on patients for
VT and SVT in the United States and in the United Kingdom. The Company has
experienced complications in its clinical trials, and clinical data obtained
to date are insufficient to demonstrate the safety and efficacy of the EnSite
System under applicable United States and international regulatory
guidelines. Accordingly, the Company believes it will be required to conduct
extensive clinical testing in the United States in order to support a
pre-market approval ("PMA") application to the United States Food and Drug
Administration ("FDA") for marketing approval. Patients selected for
clinical trials must meet stringent guidelines to undergo testing, and there
can be no assurance that patients can be enrolled in clinical trials on a
timely basis. Further, there can be no assurance that any of the Company's
products will prove to be safe and effective in clinical trials under United
States or international regulatory guidelines or that the Company will not
encounter problems in clinical testing that will cause a delay in the
commercialization of the EnSite System. Moreover, the clinical trials may
identify significant technical or other obstacles to be overcome prior to
obtaining necessary regulatory or reimbursement approvals. In addition, the
Company's development of the EnSite System for diagnosing atrial fibrillation
is in its early stages. The Company received an investigational device
exemption ("IDE") from the FDA for a multi-center clinical study of the
EnSite System in diagnosing atrial fibrillation in August 1997, but to date
has conducted only limited clinical trials on patients for atrial
fibrillation.
<PAGE>
The Company has not yet applied for regulatory approval in international
markets for the use of the EnSite System in diagnosing atrial fibrillation.
Securing regulatory approval in the United States or in international markets
for use of the EnSite System in diagnosing atrial fibrillation will require
extensive clinical trials. If the EnSite System does not prove to be safe
and effective in clinical trials, the Company's business, financial condition
and results of operations will be materially adversely affected.
LACK OF REGULATORY APPROVAL
The manufacture and sale of medical devices, including the EnSite
System, are subject to extensive regulation by numerous governmental
authorities in the United States, principally the FDA and corresponding state
agencies, and in other countries. In the United States, the Company's
products are regulated as medical devices and are subject to the FDA's
premarket approval requirements, which have not been satisfied. Securing FDA
approvals requires the submission of extensive clinical data and supporting
information to the FDA. Although the EnSite System has been used in limited
clinical trials in the United States on patients suffering from VT, under an
IDE approved by the FDA, the Company cannot file with the FDA a PMA
application to market the EnSite System for diagnosing VT in the United
States until more extensive clinical trials are completed. The process of
obtaining FDA and other required regulatory approvals is lengthy, expensive
and uncertain and frequently requires from one to several years from the date
of FDA filing, if premarket approval is obtained at all. In addition, the
use of the EnSite System to diagnose SVT is in the initial stages of clinical
development. Though the Company has received an IDE approval from the FDA to
pursue clinical testing of the EnSite System for atrial fibrillation in the
United States, significant additional testing will be required to support a
subsequent 510(k) premarket notification.
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.
<PAGE>
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 existing or future
regulatory requirements would have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY OF AVAILABILITY OF TREATMENTS EMPLOYING ENSITE SYSTEM
The Company has developed its EnSite System to diagnose VT and assist
electrophysiologists in selecting among treatment options. Current
treatments for VT include drugs, implantable defibrillators, surgery and,
potentially, catheter ablation. The Company believes that the EnSite System
will enable increased use of catheter ablation for treating complex VT.
Because ablation treatment for VT is a relatively new and to date an untested
treatment, the long term effects of ablation on patients are unknown. As a
result, the long term success of ablation therapy in treating VT will not be
known for several years. To date, no medical devices for treating VT
patients in the United States through catheter ablation have been approved by
the FDA. Such catheter ablation devices require PMA approval by the FDA, and
there can be no assurance that any such device will be approved by the FDA,
or that any FDA approval will be granted in the near future. Accordingly,
there can be no assurance that the catheter ablation market will develop in
the near term or ever. Moreover, even if medical devices for catheter
ablation are approved by the FDA, there can be no assurance that the market
for treating VT through catheter ablation will develop or that the EnSite
System will prove useful in diagnosing VT for treatment by catheter ablation
products approved by the FDA. The Company is not in the process of
developing a catheter for ablation treatment and is entirely dependent upon
other medical device companies for the development of such devices. If the
medical devices for treating ventricular tachycardia through catheter
ablation are not approved by the FDA or, even with such approval, if a market
for treating ventricular tachycardia by catheter ablation does not develop,
the business, financial condition and results of operations of the Company
would be materially adversely affected.
UNCERTAINTY OF MARKET ACCEPTANCE; TRAINING OF PHYSICIANS REQUIRED
The commercial success of the EnSite System is dependent upon the number
of diagnostic procedures performed by electrophysiologists using the system.
There can be no assurance that the Company's EnSite System will gain any
significant degree of market acceptance among electrophysiologists, patients
and health care insurers and managed care providers. Electrophysiologists
will not recommend that diagnostic procedures be performed using the
Company's products until such time, if at all, as clinical data demonstrate
the efficacy of such procedures as compared to other diagnostic procedures
currently available or under development. Even if the clinical efficacy of
procedures using the EnSite System is established, electrophysiologists and
other physicians may elect not to recommend the procedures for any number of
other reasons, including inadequate levels of reimbursement. Broad use of
the EnSite System will require training of electrophysiologists, and the time
required to complete such training could adversely affect market acceptance.
Failure of the Company's products to achieve significant market acceptance
would have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTY OF ABILITY TO DIAGNOSE AND TREAT ATRIAL FIBRILLATION
The Company intends to apply the EnSite System to the diagnosis of
atrial tachycardia, including atrial fibrillation; however, the Company has
conducted only limited clinical studies of its technology on patients
suffering from atrial tachycardia. Although the Company has received an IDE
from to the FDA for a multi-center clinical study of the EnSite System in
diagnosing atrial fibrillation, to date the Company has conducted only
limited clinical trials on patients for atrial fibrillation, and there can be
no assurance that the Company will be able to successfully extend its
technology to the
<PAGE>
mapping of atrial fibrillation or obtain regulatory approval to test and
market any products developed using such technology to map atrial
fibrillation. In addition, the Company has made and expects to continue to
make significant research and development expenditures in extending its
technology to the diagnosis of atrial fibrillation. There can be no
assurance that the Company will realize any benefit from these expenditures.
Atrial fibrillation is a complex disease and the subject of continuing
research. The therapies presently available for atrial fibrillation are in
the developmental stage with no proven effectiveness. Even if the Company is
successful in extending its technology to provide products that are capable
of diagnosing atrial fibrillation, there can be no assurance that treatments
for atrial fibrillation will exist that will require the diagnostic
capabilities of any products developed by the Company. As a result, there
can be no assurance that a commercial market will ever develop for any
product developed by the Company for the diagnosis of atrial fibrillation.
The Company is not currently engaged and has no present intention to engage
in researching or developing any medical devices for the treatment of atrial
fibrillation.
UNCERTAINTY OF ABILITY TO PENETRATE COMPLEX TACHYCARDIA PATIENT POPULATION
The Company's EnSite System is designed to diagnose patients suffering
from complex tachycardia. The Company estimates that a majority of the four
million patients who suffer from tachycardia have complex forms of this
disease. Although the Company believes that the patients who suffer from
complex tachycardia are potential candidates for diagnosis using the
Company's EnSite System, there can be no assurance as to the number of
complex tachycardia patients that will be diagnosed using the Company's
products due to a number of factors, including patient preferences, the
health and clinical history of the particular patient, the access of the
patient to electrophysiology labs employing the EnSite System, the
availability of alternative diagnostic procedures, the availability of
treatment options and the expense of the diagnosis using the EnSite System
vis-a-vis alternative diagnostic procedures. Failure of the Company's
products to achieve significant penetration of the population of patients
suffering from complex tachycardia could have a material adverse effect on
the Company's business, financial condition and results of operations.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES
The Company has generated no revenue and has sustained significant
operating losses each year since its inception. The Company expects such
losses to continue at least through 1999. There can be no assurance that the
Company will ever generate substantial operating revenues or achieve
profitability. The Company's ability to generate revenues from operations
and achieve profitability is dependent upon successful development,
regulatory approval, manufacturing and commercialization of the EnSite System
and the Company's successful transition from a development stage company to a
manufacturing and sales company.
SIGNIFICANT COMPETITION; RAPID TECHNOLOGICAL CHANGE
The cardiac medical device market is highly competitive and
characterized by rapid innovation and technological change. The Company's
EnSite System for the mapping of ventricular tachycardia is a new technology
that must compete with more established mapping procedures and devices such
as single-point contact catheters that are currently widely used to map
tachycardia and which are generally less expensive and, unlike EnSite
catheters, are generally reused after resterilization. Single-point contact
diagnostic catheters have been approved by the FDA for VT mapping. In
addition, certain of the Company's competitors are developing new approaches
and new products for diagnosing ventricular tachycardia and atrial
fibrillation for which regulatory approval has not been granted, including
contact mapping systems using multi-electrode basket contact catheters and
single-point mapping technologies. There can be no assurance that any of
these competitors will not receive required regulatory approval to market
their products before the Company. Certain
<PAGE>
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 business,
financial condition and results of operations.
The medical device industry is subject to rapid technological innovation
and, consequently, the life cycle of any particular product is short. There
can be no assurance that alternative diagnostic systems or other discoveries
and developments with respect to mapping tachycardia will not render the
Company's products obsolete. Furthermore, the greater financial and other
resources of many of the Company's competitors may permit such competitors to
respond more rapidly than the Company to technological advances.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend in part on its ability to obtain
patent protection for its products and processes, to preserve its trade
secrets and to operate without infringing the proprietary rights of third
parties. The patent positions of medical device companies, including the
Company, are uncertain and involve complex and evolving legal and factual
questions. There can be no assurance that any pending or future patent
applications will result in issued patents, that any current or future
patents will not be challenged, invalidated or circumvented, that the scope
of any of the Company's patents will exclude competitors or that the rights
granted thereunder will provide any competitive advantage to the Company,
that any of the Company's patents will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the
patents and other proprietary rights held by the Company. Furthermore, there
can be no assurance that others will not independently develop similar
technologies or duplicate any technology by the Company or that the Company's
technology will not infringe patents or other rights owned by others.
Moreover, the Company cannot be certain that it was the first to make the
inventions covered by each of its issued patents and its pending patent
applications, or that it was the first to file patent applications for such
inventions. In addition, there can be no assurance that competitors, many of
which have substantial resources and have made substantial investments in
competing technologies, will not seek to apply for and obtain patents that
will prevent, limit or interfere with the Company's ability to make, use or
sell its products either in the 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
<PAGE>
substantial cost and uncertainty to the Company, may also be necessary to
enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. There
can be no assurance that the Company will have the financial resources to
assert patent infringement suits or to defend itself from claims of
invalidity. An adverse determination in any litigation could subject the
Company to significant liabilities to third parties, or require the Company
to seek licenses from or pay royalties to third parties that may be
substantial. Furthermore, there can be no assurance that the necessary
licenses would be available to the Company on satisfactory terms, if at all.
Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing, selling or using its proposed products, any of which
would have a material adverse effect on the Company's business, financial
condition, results of operations and prospects.
In addition to patents, the Company relies on trade secrets and
proprietary knowledge, which it seeks to protect, in part, through
confidentiality agreements with employees, consultants and other parties. In
particular, the Company relies upon such means to protect the proprietary
software used in the EnSite System. There can be no assurance that the
Company's proprietary information or confidentiality agreements will not be
breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known to or
independently developed by competitors.
LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK
The Company has only limited experience in manufacturing the EnSite
catheter and the patient interface unit of the EnSite System's clinical
workstation. The Company currently manufactures its catheters and patient
interface units in limited quantities for laboratory and clinical testing and
intends to manufacture the EnSite catheter for commercial sale. The Company
has no experience manufacturing its products in the volumes that will be
necessary for the Company to achieve significant commercial sales, and there
can be no assurance that reliable, high-volume manufacturing capacity can be
established or maintained at commercially reasonable costs. If the Company
receives FDA or foreign approval for its products, it will need to expend
significant capital resources and develop the necessary expertise to
establish large-scale manufacturing capabilities. Manufacturers often
encounter difficulties in scaling up production of new products, including
problems involving production yields, quality control and assurance,
component supply shortages, shortages of qualified personnel, compliance with
FDA and foreign regulations, and the need for further FDA or foreign
regulatory approval of new manufacturing processes. Any inability of the
Company to establish and maintain large-scale manufacturing capabilities
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's manufacturing facilities will be subject to periodic
inspection by United States and foreign regulatory authorities. In order to
manufacture products for sale in the United States, the Company's operations
must undergo GMP compliance inspections conducted by the FDA. To date, the
Company's facilities and manufacturing processes have not undergone any such
inspections. The Company will also be required to comply with ISO 9001 and
9002 and CE Mark standards in order to sell its products in Europe. The
Company received ISO 9001 certification for its quality system in August
1997. Any failure of the Company to comply with GMP or ISO 9001 and 9002 and
CE Mark standards may result in the Company being required to take corrective
actions, such as modification of its manufacturing policies and procedures.
In addition, the Company may be required to cease all or part of its
operations for some period of time until it can demonstrate that appropriate
steps have been taken to comply with GMP or ISO 9001 and 9002 and CE Mark
regulations. Although the Company has received ISO 9001 certification, there
can be no assurance that the Company will be found in compliance with GMP or
ISO 9001 and 9002 and CE Mark standards in future audits by regulatory
authorities or that the Company will not experience difficulties in the
course of developing its manufacturing capability. A failure to comply with
GMP or ISO 9001 and 9002 and CE Mark standards, or to develop its
manufacturing capability in compliance with such standards, would prohibit
the Company from
<PAGE>
manufacturing and distributing its products and therefore have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON SOLE OR LIMITED SOURCE SUPPLIERS
The Company purchases raw materials and certain key components of its
products, including the computer workstation and certain components for its
catheter, from sole, single or limited source suppliers. For certain of
these components, there are relatively few alternative sources of supply.
The Company currently has no agreements that would assure delivery of raw
materials and components from such suppliers. Establishing additional or
replacement suppliers for any of the numerous components used in the
Company's products, if required, may not be accomplished quickly and could
involve significant additional costs. The inability of any of the Company's
suppliers to provide an adequate supply of components in a timely manner, or
the inability of the Company to locate qualified alternative suppliers for
materials and components at a reasonable cost, could adversely affect the
Company's business, financial condition and results of operations. In the
event the Company had to replace a single source supplier, such replacement
would be required to meet GMP and certain other regulatory standards.
NEED TO MANAGE EXPANDING OPERATIONS
In order to complete clinical trials in progress, prepare additional
products for clinical trials, and develop future products, the Company
believes that it will be required to expand its operations, particularly in
the areas of research and development, manufacturing, quality assurance and
sales and marketing. As the Company expands its operations in these areas,
such expansion will likely result in new and increased responsibilities for
management personnel. To accommodate any such growth and compete
effectively, the Company will be required to implement and improve
information systems, procedures, and controls, and to expand, train, motivate
and manage its work force. The Company's future success will depend to a
significant extent on the ability of its current and future management
personnel to operate effectively, both independently and as a group. There
can be no assurance that the Company's personnel, systems, procedures and
controls will be adequate to support the Company's future operations. Any
failure to implement and improve the Company's operational, financial and
management systems or to expand, train, motivate or manage employees as
required by future growth, if any, would have a material adverse effect on
the Company's business, financial condition and results of operations.
LACK OF COMMERCIAL SALES AND MARKETING EXPERIENCE
The Company has limited experience marketing the EnSite System and has
not yet hired sales personnel. There can be no assurance that the Company
will be able to build and maintain a suitable sales force or enter into or
maintain satisfactory marketing arrangements with third parties when
commercial potential develops, if ever, or that its sales and marketing
efforts will be successful.
RISKS RELATING TO INTERNATIONAL OPERATIONS
The Company plans to market the EnSite System through distributors in
international markets, subject to receipt of required foreign regulatory
approvals. Sales in foreign markets are initially expected to be the
Company's only source of revenue. In September 1997 the Company signed a
seven-year distribution agreement (the "Distribution Agreement") with
Medtronic to market the EnSite System for the electrophysiology markets in
Europe, Japan and the Middle East. The initial market release is expected to
include two sites in Germany, one in France, one in Italy and one in the
United Kingdom. Under the terms of the Distribution Agreement, Medtronic has
been granted exclusive distribution rights for the Company's products in
Europe, Japan and the Middle East and has been granted certain rights for
distribution in other regions outside North America. The Company retains all
distribution rights in North America. There can be no assurance that
international distributors for
<PAGE>
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.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The success of the Company is dependent in large part upon the ability
of the Company to attract and retain key management and operating personnel.
Qualified individuals are in high demand and are often subject to competing
offers. In the future, the Company will need to add additional skilled
personnel in the areas of research and development, sales, marketing and
manufacturing. There can be no assurance that the Company will be able to
attract and retain the qualified personnel needed for its business. The loss
of the services of one or more members of the Company's research,
manufacturing or management group or the inability to hire additional
personnel as needed would likely have a material adverse effect on the
Company's business and prospects.
FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE
The Company may require substantial funds to meet its working capital
requirements for continued research and development, testing, regulatory
approval and full-scale commercial introduction of its EnSite System. In
order to meet its funding needs, the Company may be required to raise
additional funds through public or private financings, including the sale of
equity or debt. Any additional equity financings may be dilutive to current
stockholders, and debt financing, if available, may involve restrictive
covenants. Adequate funds for the Company's operations, whether from
financial markets or from other sources, may not be available when needed on
terms attractive to the Company, if at all. Insufficient funds may require
the Company to delay, scale back or eliminate some or all of its programs
designed to facilitate the commercial introduction of the EnSite System or
prevent such commercial introduction altogether.
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
<PAGE>
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.
The Company expects that there will be continued pressure on
cost-containment throughout the United States health care system. Reforms
may include mandated basic health care benefits, controls on health care
spending through limitations on the growth of private health insurance
premiums and Medicare and Medicaid spending, greater reliance on prospective
payment systems, the creation of large insurance purchasing groups and
fundamental changes to the health care delivery system. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative health care delivery systems and payment methodologies and
public debate of these issues will likely continue in the future. Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of
such reform proposals will be adopted, when such proposals may be adopted or
what impact they may have on the Company.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must
be obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
devices and procedures. In most markets there are private insurance systems
as well as government managed systems. There can be no assurance that
reimbursement for the Company's products will be available in international
markets under either government or private reimbursement systems.
<PAGE>
The Company faces an inherent business risk of exposure to product
liability claims in the event that an electrophysiology patient is adversely
affected by its products. The Company currently carries a product liability
insurance policy covering the Company's clinical trial operations with an
aggregate limit of $5 million, although there can be no assurance that the
Company's existing insurance coverage limits are adequate to cover the
Company from any liabilities it might incur in connection with the
distribution of its products. Although the Company expects to obtain product
liability insurance coverage in connection with the commercialization of the
EnSite System, there can be no assurance that such insurance will be
available on commercially reasonable terms, or at all, or that such
insurance, even if obtained, would adequately cover any product liability
claim. A product liability or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on the business and prospects of the Company.
POSSIBLE VOLATILITY OF PRICE
The trading prices of the Company's Common Stock could be subject to
wide fluctuations in response to quarter to quarter variations in the
Company's operating results, announcements by the Company or its competitors
regarding the results of regulatory approval filings or clinical trials or
testing, developments or disputes concerning proprietary rights,
technological innovations or new commercial products, governmental regulatory
action, third-party reimbursement decisions, general conditions in the
medical technology industry, or other events or factors, many of which are
beyond the Company's control. In addition, the stock market has experienced
extreme price and volume fluctuations, which have particularly affected the
market prices of many medical technology companies and which have often been
unrelated to the operating performance of such companies.
REGISTRATION RIGHTS
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
Company's securities and to cause the Company to register certain Common
Stock owned by them.
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.
