<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________.
COMMISSION FILE NO. 0-22233
ENDOCARDIAL SOLUTIONS, INC.
- ---------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1724963
- -------- ----------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
1350 ENERGY LANE (612) 523-6900
SUITE 110 --------------
SAINT PAUL, MINNESOTA 55108 (REGISTRANT'S TELEPHONE NUMBER
- ---------------------------- INCLUDING AREA CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES
AND ZIP CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING TWELVE (12) MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES___X_______ NO__________
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $.01 PAR VALUE 9,006,849
- ---------------------------- (NUMBER OF SHARES OUTSTANDING AT
(Class) SEPTEMBER 30, 1998)
<PAGE>
INDEX
ENDOCARDIAL SOLUTIONS, INC.
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1998 and December 31, 1997 3
Statements of Operations - Three and nine month periods ended
September 30, 1998 and September 30, 1997 4
Statements of Cash Flows - Three and nine months ended
September 30, 1998 and September 30, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 7-9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted since all items are inapplicable or answers
negative.
Item 6. Exhibits and Reports on Form 8-K 10
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENDOCARDIAL SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- ---------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 744,693 $ 1,512,656
Short-term investments 10,481,935 20,717,173
Accounts Receivable 663,240
-
Inventories 1,697,591 848,063
Prepaid expenses and other current assets 311,484 238,184
--------------- ---------------
Total current assets 13,898,943 23,316,076
Furniture and equipment 3,781,599 2,690,609
Less accumulated depreciation (1,514,716) (1,093,978)
--------------- ---------------
2,266,883 1,596,631
Deposits 81,709 81,709
Patents, net of accumulated amortization (1998 - $69,496; 1997 - $54,593) 47,586 41,278
--------------- ---------------
Total assets $ 16,295,121 $ 25,035,694
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,289,009 $ 910,782
Accrued salaries and expenses 442,146 515,620
Current portion of capital lease obligations 479,472 356,057
Current portion of long-term debt 318,240 38,378
--------------- ---------------
Total current liabilities 2,528,867 1,820,837
Capital lease obligations 494,572 438,524
Long-term debt 123,014 -
-
Stockholders' equity:
Undesignated Preferred Stock, par value $.01 per share:
Authorized shares--10,000,000
Issued and outstanding shares--none - -
Common Stock, $.01 par value
Authorized shares--September 30, 1998--40,000,000; December 31, 1997--40,000,000
Issued and outstanding shares--September 30, 1998--9,006,849;
December 31, 1997--8,934,409 90,068 89,344
Additional paid-in capital 50,322,922 48,174,629
Accumulated deficit (37,117,401) (25,178,332)
Deferred compensation (146,921) (309,308)
--------------- ---------------
Total stockholders' equity 13,148,668 22,776,333
--------------- ---------------
Total liabilities and stockholders' equity $ 16,295,121 $ 25,035,694
--------------- ---------------
--------------- ---------------
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
SEE ACCOMPANYING NOTES.
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 692,996 $ - $ 1,128,402 $ -
Cost of goods sold 797,644 - 2,408,162 -
------------- ------------- ------------- -------------
Gross margin (104,648) - (1,279,760) -
Operating expenses:
Research and development 1,698,316 1,836,106 8,004,768 4,575,155
General and administrative 466,258 589,863 2,394,317 1,821,122
Sales and marketing 317,332 113,509 892,048 517,134
------------- ------------- ------------- -------------
Operating loss (2,586,554) (2,539,478) (6,913,411)
(12,570,893)
Other income (expense):
Interest income 188,460 380,447 685,622 845,917
Interest expense (20,722) (23,943) (53,798) (63,313)
------------- ------------- ------------- -------------
167,738 356,504 631,824 782,604
------------- ------------- ------------- -------------
Net loss for the period and deficit accumulated during
development stage $(2,418,816) $(2,182,974) $(11,939,069) $(6,130,807)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per share - basic and diluted $ (0.27) $ (0.25) $ (1.33) $ (0.78)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average shares outstanding 9,000,958 8,851,832 8,983,150 7,890,739
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
------------------------------ -----------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,418,816) $(2,182,974) $(11,939,069) $(6,130,807)
Adjustments to reconcile net loss to net cash used in operating
activitites:
Depreciation and amortization 159,334 126,351 435,641 339,145
Amortization of deferred compensation 54,129 99,404 162,387 302,697
Value of warrants granted in connection with lease agreements - - - -
Value of warrants granted in connection with purchase of
technology - - 2,085,602 -
Loss on disposal of equipment - 1,726 - 1,726
Changes in operating assets and liabilities:
Accounts Receivable (211,880) - (663,240) -
Inventory (367,682) (88,613) (849,528) (88,613)
Prepaid expenses and other assets (559) (69,981) (73,299) (157,894)
Accounts payable (40,747) 131,525 378,226 332,642
Accrued salaries and expenses (51,811) 55,983 (73,474) 209,477
------------- ------------- ------------- ------------
Net cash used in operating activities (2,878,032) (1,926,579) (10,536,754) (5,191,627)
INVESTING ACTIVITIES
Purchases of short-term investments (6,205,941) (26,898,144) (15,222,989) (26,898,144)
Maturities of short-term investments 7,755,000 7,745,000 25,458,226 7,745,000
Purchases of furniture and equipment (145,508) (62,871) (621,864) (224,425)
Patent expenditures (7,894) - (21,211) (3,479)
Proceeds from sale of equipment - 1,958 - 1,958
------------- ------------- ------------- ------------
Net cash used in investing activities 1,395,657 (19,214,057) 9,592,162 (19,379,090)
FINANCING ACTIVITIES
Proceeds from notes payable - - 441,254 -
Principal payments on notes payable and capital lease obligations (110,899) (96,805) (328,041) (287,156)
Proceeds from issuance of common stock 9,555 10,467 63,416 24,671,812
Proceeds from issuance of preferred stock - - - -
------------- ------------- ------------- ------------
Net cash provided by (used in) financing activities (101,344) (86,338) 176,629 24,384,656
Increase (decrease) in cash and cash equivalents (1,583,719) (21,226,974) (767,963) (186,061)
Cash and cash equivalents at beginning of period 2,328,412 27,198,404 1,512,656 6,157,491
------------- ------------- ------------- ------------
Cash and cash equivalents at end of period $ 744,693 $ 5,971,430 $ 744,693 $ 5,971,430
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Purchase of equipment through capital lease obligations $ 342,956 $ 190,119 $ 469,126 $ 612,128
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. In
the third quarter 1998, due to the Company's full market release in Europe, the
Company is no longer considered to be in the development stage. Operating
results for the three and nine months ended September 30, 1998, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. These financial statements should be read in conjunction
with the audited financial statements and accompanying notes for the fiscal year
ended December 31, 1997, contained in the Company's 10-K.
2. INVENTORIES
Inventories are carried at the lower of cost (first-in, first-out basis) or
market. The majority of inventory consists of purchased components. To
determine the technological feasibility of its software efforts, the Company
utilizes the working model approach available under SFAS No. 86 and believes
that the working model was achieved when the software was available for
commercial use in June 1998.
3. INITIAL PUBLIC OFFERING
On March 24, 1997, the Company received net proceeds of $18,832,500 from an
initial public offering of 2,250,000 shares of its common stock and $6,277,500
from a concurrent private placement to Medtronic, Inc. of 750,000 shares of its
common stock at $9.00 per share. Also on March 24, 1997, all outstanding shares
of the Company's preferred stock were automatically converted into an aggregate
of 4,705,603 shares of common stock following the 1 for 2 reverse stock split.
4. NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 128, "Earnings Per Share" ("Statement") which the Company adopted
on December 31, 1997. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement
requirements. Basic earning per share is computed on the basis of the average
number of common shares outstanding. Diluted earnings per share does not
include the effect of outstanding stock options as they are anti-dilutive.
5. RECLASSIFICATIONS
Certain prior year items have been reclassified to conform with current year
presentations.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
Endocardial Solutions Inc. (the "Company"), was incorporated in May 1992. The
Company develops, manufactures and markets the EnSite 3000-TM- clinical
workstation and EnSite-TM- catheter for use by electrophysiologists in
diagnosing and mapping abnormal heart rhythms known as tachycardias. The EnSite
3000-TM- clinical workstation and EnSite-TM- catheter are available in full
market release to electrophysiologists in Europe.
RESULTS OF OPERATIONS
GENERAL. Net losses increased to $2,418,816 for the three months ended
September 30, 1998, from $2,182,974 for the same period in 1997. The net loss
for the nine months ended September 30, 1998 and 1997 was $11,939,069 and
$6,130,807, respectively. The loss for the nine months ended September 30, 1998
includes expenses of $3,585,602 for the acquisition of locator technology that
was purchased during the first quarter from Medtronic, Inc. The Company expects
losses to continue through at least 1999. The Company is entering a period of
growth in marketing expenses related to market introduction, including increases
in personnel costs.
REVENUE AND COST OF GOODS SOLD. The Company recorded revenue for the second
consecutive quarter since inception. Revenue for the three months ended
September 30, 1998 was $692,996 and included sales of the Company's EnSite-TM-
catheter and EnSite 3000-TM- clinical workstation, including the Company's
proprietary software, patient interface unit and other peripherals. Cost of
goods sold and unabsorbed manufacturing expenses were $797,644 for the quarter
ended September 30, 1998. Manufacturing expenses include costs for unabsorbed
overhead from the production of inventory held for re-sale. Year-to-date
revenues are $1,128,402 and cost of goods sold and unabsorbed manufacturing
expenses are $2,408,162 for the nine months ended September 30, 1998. The nine
months ended September 30, 1998 include an inventory write-off of $370,800 for
the obsolescence of Silicon Graphics computer equipment.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$1,698,316 for the three month period ended September 30, 1998, compared to
$1,836,106 during the same period in 1997, a decrease of $137,790. For the nine
months ended September 30, 1998, research and development expenses were
$8,004,768, an increase of $3,429,613 from expenses of $4,575,155 for the nine
months ended September 30, 1997. The expenses for the nine months ended
September 30, 1998, include $3,585,602 for the acquisition of locator technology
that was purchased during the first quarter from Medtronic, Inc. The Company
believes research and development expenditures will remain relatively flat for
the remainder of 1998 and early 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$466,258 and $589,863 for the three months ended September 30, 1998 and 1997,
respectively. The decrease of $123,605 was due to a reduction in personnel
costs. For the nine months ended September 30, 1998 general and administrative
expenses were $2,394,317, an increase of $573,195 from expenses of $1,821,122
for the nine months ended September 30, 1997. This increase is related to costs
associated with the Company's clinical trials, regulatory activities and
personnel.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$317,332 during the three months ended September 30, 1998, from $113,509 during
the same period in 1997, an increase of 96,177. For the nine months ended
September 30, 1998 and 1997, sales and marketing expenses were $892,048 and
$517,134, respectively. The increase is attributable to increases in personnel
and costs associated with the limited and full market release in Europe. The
Company expects continued increases in sales and
7
<PAGE>
marketing expenses due to expanded marketing activity including the full
market release in Europe, participation at medical industry conferences and
seminars and market research activities.
INTEREST INCOME. Interest income was $188,460 and $380,447 for the three months
ended September 30, 1998 and 1997, respectively. The decrease of $191,987 was
due to a reduction in the cash, cash equivalents and short-term investments
between September 30, 1998 and September 30, 1997. For the nine months ended
September 30, 1998 and 1997 interest income was $685,622 and $845,917,
respectively. This decreased $160,295 because of lower cash, cash equivalents
and short-term investment balances from the Company's equity offerings completed
during the quarter ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES.
On March 24, 1997, the Company received net proceeds of approximately
$18,833,000 from an initial public offering of 2,250,000 shares of its common
stock and approximately $6,278,000 from a concurrent private placement to
Medtronic, Inc. of 750,000 shares of its common stock. The Company's common
stock is listed on the NASDAQ National Market under the symbol "ECSI."
The Company's operations since inception have been funded by net proceeds from
the sales of common and preferred stock totaling approximately $50,645,000
through September 30, 1998. As of September 30, 1998 and December 31, 1997, the
Company had cash, cash equivalents and short-term investments of approximately
$11,227,000 and $22,230,000, respectively.
For the nine months ended September 30, 1998, the Company used cash and cash
equivalents of $2,878,000 for operations and $146,000 for capital expenditures
bringing total capital expenditures for the year to $621,000.
The Company believes that its existing cash, cash equivalents and short-term
investments will be sufficient to fund the operations of the Company through
approximately the next nine 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 System gains market
acceptance and the costs and timing of expansion of sales, marketing and
manufacturing activities.
YEAR 2000
Many currently installed computer systems and software are coded to accept only
two-digit entries in the date code fields. These date code field will need to
accept four-digit entries to distinguish 21st century dates. This problem
could result in system failures or miscalculations causing disruptions of
business operations (including, among other things, a temporary inability to
process transactions, send invoices or engage in other similar business
activities). As a result, many companies' computer systems and software will
need to be upgraded or replaced in order to comply with Year 2000 requirements.
The potential global impact of the Year 2000 problem is not known, and if not
corrected in a timely manner, could affect the Company and the US and world
economy generally.
The Company has formed a project team consisting of representatives from its
information technology, finance, manufacturing, product development and quality
department to address internal and external Year 2000 issues. The Company's
internal financial, manufacturing and other operational computer systems have
been upgraded to address Year 2000 issues. Management believes that the new
software substantially addresses Year 2000 issues. The Company believes it has
completed it Year 2000 compliance program for all of its significant internal
financial and manufacturing systems. The Company may be required, however, to
make minor modification to some of its existing hardware as well as various
product development software packages in order for its computer system to
function properly in the year 2000 and
8
<PAGE>
thereafter. The Company is currently assessing both of these areas and
expects to complete this assessment in the first quarter 1999.
The Company's product development processes will 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 because it
operates on a Unix operating system which should be unaffected by the Year 2000
issue. The Company is currently completing validation testing for its
products and expects to complete its Year 2000 compliance testing for its
products during the first quarter 1999.
In addition, the Company is requesting assurances from its major suppliers that
they are addressing the Year 2000 issue and that product purchased by the
Company from such suppliers will function properly in the year 2000. These
actions are intended to help mitigate the possible external impact of the Year
2000 problem. Even assuming that all material third parties confirm that they
are or expect to be Year 2000 compliant by December 31, 1999, it is not possible
to state with certainty that such parties will be so compliant. It is
impossible to fully assess the potential consequences in the event service
interruptions from suppliers occur or in the event that there are disruptions in
infrastructure areas as utilities, communication, transportation, banking and
government.
The amount of remediation work required to address Year 2000 problems is not
expected to be extensive and the total estimated cost for resolving the
Company's Year 2000 issues is minimal and not expected to have a material effect
on the Company's financial position, results of operations, or cash flows. The
Company expects the remainder of the Year 2000 compliance program to be
substantially complete by second quarter 1999.
Based on the Company's assessment to date, the Company believes it will not
experience any material disruption as a result of Year 2000 problems in its
financial, internal manufacturing processes or the EnSite 3000-TM- System.
However, there can be no guarantee that the systems of other companies on which
the Company relies will be converted in a timely manner, 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. The
Company has not yet developed a contingency plan to provide for continuity of
processing in such event of various problem scenarios, but it will assess the
need to develop such a plan based on the outcome of its validation phase of its
Year 2000 compliance program and the results of surveying it major suppliers.
Assuming no major disruption in service from utility companies or other critical
third-party providers, the Company believes that it will be able to manage its
total Year 2000 transition without any material effect on the Company's results
of operations or financial condition. There can be no assurance, however, that
unexpected difficulties will not arise and, if so, that the Company will be able
to timely develop and implement a contingency plan.
CAUTIONARY STATEMENT
Except for the historical information contained herein, this Quarterly Report on
Form 10-Q contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. When used in this Form 10-Q and in future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases and in oral statements made with the approval of an
authorized executive officer, the word or phrases "believes," "anticipates,"
"expects," "intends," "will likely result," "estimates," "projects" or similar
expressions are intended to identify such forward-looking statements, but are
not the exclusive means of identifying such statements. These forward-looking
statements involve risks and uncertainties that may cause the Company's actual
results to differ materially from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, the following: risks associated with the successful development and
commercialization of a new technology: limited clinical testing experience;
uncertainty of obtaining Food and Drug Administration and international
regulatory clearances; uncertainty of availability of treatments employing the
Company's diagnostic
9
<PAGE>
system (the "EnSite System"); uncertainty of market acceptance of the EnSite
System; training requirements for electrophysiologists; the uncertainty of
the ability to diagnose and treat atrial fibrillation; the expectation of
future losses; significant competition and rapid technological change in the
tachycardia diagnostic market; risks associated with the Company's dependence
on patents and proprietary technology; risks associated with the Company's
limited manufacturing experience and dependence on suppliers; and the
uncertainty of third-party reimbursement for diagnostic medical procedures
employing the EnSite System. These factors are discussed in the cautionary
statements included in Exhibit 99 to this Form 10-Q for the quarter ended
September 30, 1998. Other forward-looking statements are found in the
Company's discussion of Year 2000 compliance issues. The Company cautions
investors and others to review the statements set forth in Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Exhibit 99 and in the Company's other reports filed with the Securities and
Exchange Commission and that other factors may prove to be important in
affecting the Company's business and results of operations.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
- ------- -----------
27 Financial Data Schedule (EDGAR filing only)
99 Cautionary Statement
(b) Reports
The Company filed no reports on Form 8-K during the quarter ended September 30,
1998.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENDOCARDIAL SOLUTIONS, INC.
---------------------------
Dated: November 12, 1998 By: /S/ James W. Bullock
--------------------
James W. Bullock
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 12, 1998 By:/S/ Leota L. Pearson
--------------------
Leota L. Pearson
Controller
(Principal Financial and Accounting
Officer)
11
<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 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 744,693
<SECURITIES> 10,481,935
<RECEIVABLES> 633,240
<ALLOWANCES> 0
<INVENTORY> 1,697,591
<CURRENT-ASSETS> 13,898,943
<PP&E> 3,781,599
<DEPRECIATION> (1,541,716)
<TOTAL-ASSETS> 16,295,121
<CURRENT-LIABILITIES> 2,528,867
<BONDS> 0
0
0
<COMMON> 90,068
<OTHER-SE> 50,322,922
<TOTAL-LIABILITY-AND-EQUITY> 16,295,121
<SALES> 692,996
<TOTAL-REVENUES> 692,996
<CGS> 797,644
<TOTAL-COSTS> 797,644
<OTHER-EXPENSES> (2,586,554)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,722
<INCOME-PRETAX> (2,418,816)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,418,816)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
<PAGE>
EXHIBIT 99
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 Europe. The Company has experienced
complications in its clinical trials, and clinical data obtained to date are
insufficient to demonstrate the safety and efficacy of
<PAGE>
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. 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 ongoing 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. The Company
has received an IDE approval from the FDA to pursue clinical testing of the
EnSite System for endocardial mapping in the atrium in the United States. A
510(k) premarket notification was submitted to the FDA during the third quarter
of 1998 with the findings of the Company's multi-center right atrial clinical
trial.
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
obtained CE certification for the EnSite catheter and for the EnSite 3000
clinical workstation. 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.
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Regulatory approvals, if granted, may include significant limitations on the
indicated uses for which the product may be marketed. In addition, to obtain
such approvals, the FDA and certain foreign regulatory authorities may impose
numerous other requirements with which medical device manufacturers must comply.
FDA enforcement policy strictly prohibits the marketing of approved medical
devices for unapproved uses. In addition, product approvals could be withdrawn
for failure to comply with regulatory standards or the occurrence of unforeseen
problems following the initial marketing. The Company will be required to adhere
to applicable FDA regulations regarding Good Manufacturing Practices ("GMP") and
similar regulations in other countries, which include testing, control, and
documentation requirements. Ongoing compliance with GMP and other applicable
regulatory requirements will be monitored through periodic inspections by
federal and state agencies, including the FDA, and by comparable agencies in
other countries. Failure to comply with applicable regulatory requirements,
including the marketing of products for unapproved uses, could result in, among
other things, warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to grant premarket approval for devices, withdrawal of approvals and
criminal prosecution. Changes in existing regulations or adoption of new
governmental regulations or policies could prevent or delay regulatory approval
of the Company's products. Certain material changes to medical devices also are
subject to FDA review and approval.
There can be no assurance that the Company will be able to obtain PMA
approval for the EnSite System for use in diagnosing VT or 510(k) approval for
SVT 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
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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 safety and efficacy of such
procedures as compared to other diagnostic procedures currently available or
under development. Even if the clinical safety and 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 FLUTTER AND
TACHYCARDIA
The Company intends to apply the EnSite System to the diagnosis of atrial
flutter and tachycardia; however, the Company has conducted only limited
clinical studies of its technology on patients suffering from atrial flutter and
tachycardia. Although the Company has received an IDE from the FDA for a
multi-center clinical study of the EnSite System in diagnosing atrial flutter
and tachycardia, to date the Company has conducted only limited clinical trials
on patients for atrial flutter and tachycardia, and there can be no assurance
that the Company will be able to successfully extend its technology to the
mapping of atrial flutter and tachycardia or obtain regulatory approval to test
and market any products developed using such technology to map atrial flutter
and tachycardia. 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 flutter and tachycardia. There can be no
assurance that the Company will realize any benefit from these expenditures.
Atrial flutter and tachycardia are complex diseases and the subject of
continuing research. The therapies presently available for atrial flutter and
tachycardia are in the developmental stage
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with no proven effectiveness. Even if the Company is successful in extending its
technology to provide products that are capable of diagnosing atrial flutter and
tachycardia, there can be no assurance that treatments for atrial flutter and
tachycardia 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 flutter and tachycardia. 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 flutter and tachycardia.
UNCERTAINTY OF ABILITY TO PENETRATE COMPLEX TACHYCARDIA PATIENT
POPULATION
The Company's EnSite System is designed to diagnose patients suffering from
complex tachycardia. The Company estimates that 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 limited 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 research and development 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
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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
flutter and tachycardia for which regulatory approval has not been granted,
including contact mapping systems using multi-electrode basket contact catheters
and single-point mapping technologies. There can be no assurance that any of
these competitors will not receive required regulatory approval to market their
products before the Company. Certain competitors have integrated product lines
that include products for both diagnosis and ablation treatment, which may
afford opportunities for product bundling and other marketing advantages. Many
of the Company's competitors have an established presence in the field of
electrophysiology and established relationships with electrophysiology labs.
Many of these competitors have substantially greater financial and other
resources than the Company, including larger research and development staffs and
more experience and capabilities in conducting research and development
activities, testing products in 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 safety, benefit, 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
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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 opposition to a
patent grant in a foreign jurisdiction. Litigation or regulatory proceedings,
which could result in substantial cost and uncertainty to the Company, may also
be necessary to enforce patent or other intellectual property rights of the
Company or to determine the scope and validity of other parties' proprietary
rights. There can be no assurance that the Company will have the financial
resources to assert patent infringement suits or to defend itself from claims of
invalidity. An adverse determination in any litigation could subject the Company
to significant liabilities to third parties, or require the Company to seek
licenses from or pay royalties to third parties that may be substantial.
Furthermore, there can be no assurance that the necessary licenses would be
available to the Company on satisfactory terms, if at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing, selling
or using its proposed products, any of which would have a material adverse
effect on the Company's business, financial condition, results of operations and
prospects.
In addition to patents, the Company relies on trade secrets and proprietary
knowledge, which it seeks to protect, in part, through confidentiality
agreements with employees, consultants and other parties. In particular, the
Company relies upon such means to protect the proprietary software used in the
EnSite System. There can be no assurance that the Company's proprietary
information or confidentiality agreements will not be breached, that the Company
will have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known to or independently developed by competitors.
7
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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. The Company currently
manufactures its catheters and patient interface units in limited quantities for
laboratory and clinical testing and has begun to manufacture the EnSite catheter
and the patient interface unit 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 catheter and quality system in August
1997 and ISO 9002 certification for the clinical workstation and CE Mark for the
EnSite catheter in January 1998. 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 and 9002
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 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
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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.
LIMITED COMMERCIAL SALES AND MARKETING EXPERIENCE
The Company has limited experience marketing the EnSite System. 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
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market the EnSite System for the electrophysiology markets in Europe and Japan.
The initial market release included sites in Germany, Italy and the United
Kingdom. Under the terms of the Distribution Agreement, Medtronic has been
granted exclusive distribution rights for the Company's products in Europe and
Japan and has been granted certain rights for distribution in other regions
outside North America. The Company has no distribution arrangements for other
international markets, and currently retains all distribution rights in North
America. There can be no assurance that international distributors for the
Company's products will devote adequate resources to selling its products.
Changes in overseas economic conditions, currency exchange rates, foreign
tax laws or tariffs or other trade regulations could have a material adverse
effect on the Company's ability to market its products internationally and
therefore on its business, financial condition and results of operations. The
Company's business is also expected to subject it and its representatives,
agents and distributors to laws and regulations of the foreign jurisdictions in
which they operate or the Company's products are sold. The Company may depend on
foreign distributors and agents for compliance and adherence to foreign laws and
regulations. The regulation of medical devices in a number of such
jurisdictions, particularly in the European Union, continues to develop and
there can be no assurance that new laws or regulations will not have an adverse
effect on the Company's business, financial condition and results of operations.
In addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States.
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
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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
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
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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.
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
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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.
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.
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