<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 8,991,026
- ---------------------------- (NUMBER OF SHARES OUTSTANDING AT JUNE 30, 1998)
(Class)
1
<PAGE>
INDEX
ENDOCARDIAL SOLUTIONS, INC.
(A Development Stage Company)
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1998 and December 31, 1997 3
Statements of Operations - Three and six month periods ended
June 30, 1998 and June 30, 1997 and the period from
May 21, 1992 (inception) through June 30, 1998 4
Statements of Cash Flows - Three and six months ended
June 30, 1998 and June 30, 1997 and the period from
May 21, 1992 (inception) through June 30, 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 7-8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 9
PART II. OTHER INFORMATION
Items 1 through 3 and 5 have been omitted since all items are inapplicable or
answers negative.
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 9
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENDOCARDIAL SOLUTIONS, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,328,412 $ 1,512,656
Short-term investments 12,030,994 20,717,173
Accounts Receivable 451,360 -
Inventories 1,329,909 848,063
Prepaid expenses and other current assets 310,925 238,184
------------ ------------
Total current assets 16,451,600 23,316,076
Furniture and equipment 3,293,135 2,690,609
Less accumulated depreciation (1,360,718) (1,093,978)
------------ ------------
1,932,417 1,596,631
Deposits 81,709 81,709
Patents, net of accumulated
amortization (1998 - $64,159; 1997 - $54,593) 45,028 41,278
------------ ------------
Total assets $ 18,510,754 $ 25,035,694
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,329,756 $ 910,782
Accrued salaries and expenses 493,957 515,620
Current portion of capital lease obligations 399,912 356,057
Current portion of long-term debt 318,240 38,378
------------ ------------
Total current liabilities 2,541,865 1,820,837
Capital lease obligations 342,075 438,524
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 - -
Convertible Preferred Stock, Series A through D, par
value $.01 per share
Authorized shares--June 30, 1998--none;
December 31, 1997--none
Issued and outstanding shares--June 30, 1998--none;
December 31, 1997--none - -
Common Stock, $.01 par value
Authorized shares--June 30, 1998--40,000,000;
December 31, 1997--40,000,000
Issued and outstanding shares--June 30, 1998--8,991,026;
December 31, 1997--8,934,409 89,910 89,344
Additional paid-in capital 50,313,526 48,174,629
Deficit accumulated during the development stage (34,698,586) (25,178,332)
Deferred compensation (201,050) (309,308)
------------ ------------
Total stockholders' equity 15,503,800 22,776,333
------------ ------------
Total liabilities and stockholders' equity $ 18,510,754 $ 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.
3
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period from
For the Three Months Ended For the Six Months Ended May 21, 1992
------------------------------------------------------------ (inception) to
June 30, June 30, June 30, June 30, June 30,
1998 1997 1998 1997 1998
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenue $ 435,406 $ - $ 435,406 $ - $ 435,406
Cost of goods sold 1,093,393 - 1,610,518 - 1,610,518
------------ ------------ ------------ ------------ -------------
Gross margin (657,987) - (1,175,112) - (1,175,112)
Operating expenses:
Research and development 1,463,113 1,525,327 6,306,452 2,739,048 24,278,340
General and administrative 1,057,618 690,233 1,928,060 1,231,259 9,123,115
Sales and marketing 327,477 231,886 574,716 403,626 2,222,283
------------ ------------ ------------ ------------ -------------
Operating loss (3,506,195) (2,447,446) (9,984,340) (4,373,933) (36,798,850)
Other income (expense):
Interest income 219,226 387,158 497,161 465,470 2,299,599
Interest expense (15,902) (22,280) (33,075) (39,369) (275,567)
------------ ------------ ------------ ------------ -------------
203,324 364,878 464,086 426,101 2,024,032
------------ ------------ ------------ ------------ -------------
Net loss for the period and deficit accumulated
during development stage $ (3,302,871) $ (2,082,568) $(9,520,254) $(3,947,832) $ (34,774,818)
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Net loss per share - basic and diluted $ (0.37) $ (0.24) $ (1.06) $ (0.75) $ (12.12)
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Weighted average shares outstanding 8,987,306 8,802,711 8,974,246 5,253,459 2,870,044
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from
For the Three Months Ended For the Six Months Ended May 21, 1992
------------------------------ --------------------------- (inception) to
June 30, June 30, June 30, June 30, June 30,
1998 1997 1998 1997 1998
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,302,871) $ (2,082,568) $ (9,520,254) $ (3,947,832) $(34,774,818)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 152,520 116,261 276,306 212,794 1,435,334
Amortization of deferred compensation 54,129 99,404 108,258 203,293 1,283,630
Value of warrants granted in connection with
lease agreements - - - - 23,526
Value of warrants granted in connection with
purchase of technology - - 2,085,602 - 2,085,602
Loss on disposal of equipment - - - - 11,199
Changes in operating assets and liabilities:
Accounts Receivable (451,360) - (451,360) - (451,360)
Inventory (216,332) - (481,846) - (1,329,909)
Prepaid expenses and other assets 6,295 13,855 (72,740) (87,914) (392,634)
Accounts payable 117,796 (84,984) 418,974 201,117 1,329,756
Accrued salaries and expenses 323,377 214,263 (21,663) 153,494 493,957
------------ ------------ ------------ ------------ -------------
Net cash used in operating activities (3,316,446) (1,723,769) (7,658,723) (3,265,048) (30,285,717)
INVESTING ACTIVITIES
Purchases of short-term investments (5,833,934) - (9,017,047) - (44,439,220)
Maturities of short-term investments 11,010,620 - 17,703,226 - 32,408,226
Purchases of furniture and equipment (320,598) (126,903) (476,356) (161,555) (2,068,311)
Patent expenditures (13,317) (3,479) (13,317) (3,479) (109,189)
Proceeds from sale of equipment - - - - 5,570
------------ ------------ ------------ ------------ -------------
Net cash used in investing activities 4,842,771 (130,382) 8,196,506 (165,034) (14,202,924)
FINANCING ACTIVITIES
Proceeds from notes payable 441,254 - 441,254 - 1,148,228
Principal payments on notes payable and
capital lease obligations (92,525) (85,819) (217,142) (190,351) (967,032)
Proceeds from issuance of common stock 27,121 (312,692) 53,861 24,661,346 24,815,574
Proceeds from issuance of preferred stock - - - - 21,820,283
------------ ------------ ------------ ------------ -------------
Net cash provided by (used in) financing activities 375,850 (398,511) 277,973 24,470,995 46,817,053
Increase (decrease) in cash and cash equivalents 1,902,175 (2,252,662) 815,756 21,040,913 2,328,412
Cash and cash equivalents at beginning of period 426,237 29,451,066 1,512,656 6,157,491 -
------------ ------------ ------------ ------------ -------------
Cash and cash equivalents at end of period $ 2,328,412 $ 27,198,404 $ 2,328,412 $ 27,198,404 $ 2,328,412
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Purchase of equipment through capital
lease obligations $ 126,170 $ 108,248 $ 126,170 $ 422,008 $ 1,205,468
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six
months ended June 30, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Endocardial Solutions Inc. (the "Company"), a development stage company, was
incorporated in May 1992. The Company is engaged in the development of the
EnSite diagnostic catheter and clinical workstation for use by
electrophysiologists in diagnosing and mapping abnormal heart rhythms known
as tachycardias.
6
<PAGE>
RESULTS OF OPERATIONS
GENERAL. From inception through June 30, 1998, the Company has incurred
losses totaling $34,774,818. Net losses increased to $3,302,871 for the
three months ended June 30, 1998, from $2,082,568 for the same period in
1997. The net loss for the six months ended June 30, 1998 and 1997 was
$9,520,254 and $3,947,832, respectively. The loss for the six months ended
June 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 first
time since inception. Revenue for the three months ended June 30, 1998 was
$435,406 and included sales of the Company's EnSite 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 $1,093,393 for the quarter ended June
30, 1998. Manufacturing expenses include costs for unabsorbed overhead from
the production of inventory held for re-sale. The three months ended June
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
$1,463,113 for the three month period ended June 30, 1998, from $1,525,327
during the same period in 1997, a decrease of $62,214. For the six months
ended June 30, 1998, research and development expenses were $6,306,452, an
increase of $3,567,404 from expenses of $2,739,048 for the six months ended
June 30, 1997. The expenses for the six months ended June 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 $1,057,618 and $690,233 for the three months ended June 30, 1998 and
1997, respectively. The increase of $367,385 or 53% was due to increases in
clinical trials, regulatory activities and personnel. For the six months
ended June 30, 1998 general and administrative expenses were $1,928,060, an
increase of $696,801, from expenses of $1,231,259 for the six months ended
June 30, 1997. This increase is related to expansion of the Company's
facility and amortization of deferred compensation. In addition,
administrative costs associated with being a publicly held company, such as
costs attributable to certain insurance policies and investor relations
material contributed to the increase.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$327,477 during the three months ended June 30, 1998, from $231,886 during
the same period in 1997. For the six months ended June 30, 1998 and 1997,
sales and marketing expenses were $574,716 and $403,626, respectively. The
increase is attributable to increases in personnel and costs associated with
the limited market release in Europe. The Company expects continued
increases in sales and 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 $219,226 and $387,158 for the three
months ended June 30, 1998 and 1997, respectively. The decrease of $167,932
was due to a reduction in the cash, cash equivalents and short-term
investments between June 30, 1998 and June 30, 1997. For the six months
ended June 30, 1998 and 1997 interest income was $497,161 and $465,470,
respectively. This increased $31,691 because of higher cash, cash
equivalents and short-term investment balances from the Company's equity
offerings completed during the quarter ended March 31, 1997.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.
On March 24, 1997, the Company received net proceeds of approximately
$18,833,000 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 (together, the "equity
offerings"). The Company's common stock is listed on the NASDAQ National
Market under the symbol "ECSI."
The Company's operations since inception have been funded by net proceeds
from the sales of common and preferred stock totaling approximately
$46,635,000 through June 30, 1998. As of June 30, 1998 and December 31,
1997, the Company had cash, cash equivalents and short-term investments of
approximately $14,359,000 and $22,230,000, respectively.
For the three months ended June 30, 1998, the Company used cash and cash
equivalents of $3,316,000 for operations and $321,000 for capital
expenditures bringing total capital expenditures for the year to $476,000.
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 twelve 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.
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 system (the "EnSite System"); uncertainty of market
acceptance of the EnSite System; training requirements for
electrophysiologists; the uncertainty of the ability to diagnose and treat
atrial fibrillation; the expectation of future losses; significant
competition and rapid technological change in the tachycardia diagnostic
market; risks associated with the Company's dependence on patents and
proprietary technology; risks associated with the Company's limited
manufacturing experience and dependence on suppliers; and the uncertainty of
third-party reimbursement for diagnostic medical procedures employing the
EnSite System. These factors are discussed in the cautionary statements
included in Exhibit 99 to this Form 10-Q for the quarter ended June 30, 1998.
The Company cautions investors and others to review the statements set forth
in Exhibit 99 and in the Company's other reports filed with the Securities
and Exchange Commission and that other factors may prove to be important in
affecting the Company's business and results of operations.
8
<PAGE>
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's shareholders was held on
May 21, 1998. At the meeting, shareholders voted on the reelection of two
directors for terms expiring at the Annual Meeting of the Company in 2001.
Each of the directors was reelected by a vote as follows: James W. Bullock
received 7,210,285 "For" and 6,142 "Withheld"; Graydon E. Beatty received
votes 7,210,335 "For" and 6,092 "Withheld."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
Exhibit Description
- ------- -----------
<S> <C>
10.1 Master Lease Agreement dated May 4, 1998, between the Company and
Transamerica Business Credit Corporation
27 Financial Data Schedule (EDGAR filing only)
99 Cautionary Statement
</TABLE>
(b) Reports
The Company filed no reports on Form 8-K during the quarter ended June 30, 1998.
9
<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.
---------------------------
<TABLE>
<S> <C> <C>
Dated: August 11, 1998 By: /S/ James W. Bullock
--------------------
James W. Bullock
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 11, 1998 By: /S/ Leota L. Pearson
--------------------
Leota L. Pearson
Controller
(Principal Financial and Accounting Officer)
</TABLE>
10
<PAGE>
CUSTOMER NO. 1114
MASTER LEASE AGREEMENT
Lessor: TRANSAMERICA BUSINESS CREDIT CORPORATION
RIVERWAY 11
WEST OFFICE TOWER
WEST HIGGINS
ROSEMONT, ILLINOIS 60018
Lessee: ENDOCARDIAL SOLUTIONS, INC.
1350 ENERGY LANE
SUITE 110
SAINT PAUL, MINNESOTA 55108-5254
The lessor pursuant to this Master Lease Agreement ("Agreement") dated as of
May 4, 1998, is Transamerica Business Credit Corporation ("Lessor"). All
equipment, together with all present and future additions, parts,
accessories, attachments, substitutions, repairs, improvements, and
replacements thereof or thereto, which are the subject of a Lease (as defined
in the next sentence) shall be referred to as "Equipment." Simultaneous with
the execution and delivery of this Agreement, the parties are entering into
one or more Lease Schedules (each, a "Schedule") which refer to and
incorporate by reference this Agreement, each of which constitutes a lease
(each, a "Lease") for the Equipment specified therein. Additional details
pertaining to each Lease are specified in the applicable Schedule. Each
Schedule that the parties hereafter enter into shall constitute a Lease.
Except as provided in Paragraph 1 below, Lessor has no obligation to enter
into any additional leases with, or extend any future financing to, Lessee.
I . LEASE. Subject to and upon all of the terms and conditions of this
Agreement and each Schedule, Lessor hereby agrees to lease to Lessee and
Lessee hereby agrees to lease from Lessor the Equipment for the Term (as
defined in Paragraph 2 below) thereof. The timing and financial scope of
Lessor's obligation to enter into Leases hereunder are limited as set forth
in the Commitment Letter executed by Lessor and Lessee, dated as of March 4,
1998 and attached hereto as Exhibit A (the "Commitment Letter").
2. TERM. Each Lease shall be effective and the term of each Lease
("Term") shall commence on the commencement date specified in the applicable
Schedule and, unless sooner terminated (as hereinafter provided), shall
expire at the end of the term specified in such Schedule; PROVIDED, however
that obligations due to be performed by Lessee during the Term shall continue
until they have been performed in full. Schedules will only be executed
after the delivery and acceptance in writing of the Equipment to Lessee or
upon completion of deliveries and acceptance in writing of items of such
Equipment with aggregate cost of not less than $50,000.
3 . RENT. Lessee shall pay as rent to Lessor, for use of the Equipment
during the Term or Renewal Term (as defined in Paragraph 8), rental payments
equal to the sum of all rental payments including, without limitation,
security deposits, advance rents, and interim rents payable in the amounts
and on the dates specified in the applicable Schedule ("Rent"). If any Rent
or other amount payable by Lessee is not paid within five days after the day
on which it becomes payable, Lessee will pay on demand, as a late charge, an
amount equal to 3% of such unpaid Rent or other amount but only to the extent
permitted by applicable law. All payments provided for herein shall be
payable to Lessor at its address specified above, or at any other place
designated by Lessor.
4. LEASE NOT CANCELABLE; LESSEE'S OBLIGATIONS ABSOLUTE. No Lease may
be canceled or terminated except as expressly provided herein. Lessee's
obligation to pay all Rent due or to become due hereunder shall be absolute
and unconditional and shall not be subject to any delay, reduction, set-off,
defense, counterclaim, or recoupment for any reason whatsoever, including any
failure of the Equipment or any representations by the manufacturer or the
vendor thereof. If the Equipment is unsatisfactory for any reason, Lessee
<PAGE>
shall make any claim solely against the manufacturer or the vendor thereof
and shall, nevertheless, pay Lessor all Rent payable hereunder.
5. SELECTION AND USE OF EQUIPMENT. Lessee agrees that it shall be
responsible for the selection and use of, and results obtained from, the
Equipment and any other associated equipment or services.
6. WARRANTIES. LESSOR MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR
IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE
DESIGN OR CONDITION OF THE EQUIPMENT OR ITS MERCHANTABILITY, SUITABILITY,
QUALITY, OR FITNESS FOR A PARTICULAR PURPOSE, AND HEREBY DISCLAIMS ANY SUCH
WARRANTY. LESSEE SPECIFICALLY WAIVES ALL RIGHTS TO A CLAIM AGAINST LESSOR FOR
BREACH OF ANY WARRANTY WHATSOEVER. LESSEE LEASES THE EQUIPMENT "AS IS." IN
NO EVENT SHALL LESSOR HAVE ANY LIABILITY, NOR SHALL LESSEE HAVE ANY REMEDY
AGAINST LESSOR, FOR ANY LIABILITY, CLAIM, LOSS, DAMAGE, OR EXPENSE CAUSED
DIRECTLY OR INDIRECTLY BY THE EQUIPMENT OR ANY DEFICIENCY OR DEFECT THEREOF
OR THE OPERATION, MA NANCE, OR REPAIR THEREOF OR ANY CONSEQUENTIAL DAMAGES AS
THAT TERM IS USED IN SECTION 2-719(3) OF THE MODEL UNIFORM COMMERCIAL CODE,
AS AMENDED FROM TIME TO TIME ("UCC"). Lessor grants to Lessee, for the sole
purpose of prosecuting a claim, the benefits of any and all warranties made
available by the manufacturer or the vendor of the Equipment to the extent
assignable.
7. DELIVERY. Lessor hereby appoints Lessee as Lessor's agent for the
sole and limited purpose of accepting delivery of the Equipment from each
vendor thereof. Lessee shall pay any and all delivery and installation
charges. Lessor shall not be liable to Lessee for any delay in, or failure
of, delivery of the Equipment.
8. RENEWAL. So long as no Event of Default or event which, with the
giving of notice, the passage of time, or both, would constitute an Event of
Default, shall have occurred and be continuing, or the Lessee shall not have
exercised its purchase option under Paragraph 9 hereof, each Lease will
automatically renew for a term specified in the applicable Schedule (the
"Renewal Term") on the terms and conditions of this Agreement or as set forth
in such Schedule; PROVIDED, HOWEVER, that Obligations due to be performed by
the Lessee during the Renewal Term shall continue until they have been
performed in full.
9. PURCHASE OPTION. So long as no Event of Default or event which,
with the giving of notice, the passage of time, or both, would constitute an
Event of Default, shall have occurred and be continuing, Lessee may, upon
written notice to Lessor received at least ninety days before the expiration
of a Term, purchase all, but not less than all, the Equipment covered by the
applicable Lease on the date specified therefor in the applicable Schedule
("Purchase Date"). The purchase price for such Equipment shall be its fair
market value as set forth in the applicable Schedule determined on an
"In-place, In-use" basis, as mutually agreed by Lessor and Lessee, or, if
they cannot agree, as determined by an independent appraiser selected by
Lessor and approved by Lessee, which approval will not be unreasonably
delayed or withheld. Lessee shall pay the cost of any such appraisal. So
long as no Event of Default or event which, with the giving of notice, the
passage of time, or both, would constitute an Event of Default shall have
occurred and be continuing, Lessee may, upon written notice to Lessor
received at least ninety days prior to the expiration of the Renewal Term,
purchase all, but not less than all, the Equipment covered by the applicable
Schedule by the last date of the Renewal Term (the "Alternative Purchase
Date") at a purchase price equal to its then fair market value on an
"In-place, In-use" basis. On the Purchase Date or the Alternative Purchase
Date, as the case may be, for any Equipment, Lessee shall pay to Lessor the
purchase price, together with all sales and other taxes applicable to the
transfer of the Equipment and any other amount payable and arising hereunder,
in immediately available funds, whereupon Lessor shall transfer to Lessee,
without recourse or warranty of any kind (except as to the absence of
transfers by Lessor of its interest in the Equipment and Lessor Liens),
express or implied, all of Lessor's right, title, and interest in and to such
Equipment on an "As Is, Where Is" basis. The term "Lessor Liens" shall mean
(a) liens resulting from (I) an affirmative act of Lessor to create such
liens and (ii) that are not Permitted Liens, or consented to by Lessee, and
(b5 liens resulting from claims against Lessor not related to the
transactions contemplated hereby (other than such liens which are either not
delinquent or which are being contested in good faith by appropriate
proceedings that suspend the collection of any amounts due or which have been
adequately bonded or with respect to which a stay of execution has been
obtained pending an appeal or proceeding for review).
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10. OWNERSHIP; INSPECTION; MARKING; FINANCING STATEMENTS. Lessee shall
affix to the Equipment any labels supplied by Lessor indicating ownership of
such Equipment. 'The Equipment is and shall be the sole property of Lessor.
Lessee shall have no right, title, or interest therein, except as lessee
under a Lease. The Equipment is and shall at all times be and remain
personal property and shall not become a fixture. Lessee shall obtain and
record such instruments and take such steps as may be necessary to prevent
any person from acquiring any rights in the Equipment by reason of the
Equipment being claimed or deemed to be real property. Upon request by
Lessor, Lessee shall obtain and deliver to Lessor valid and effective
waivers, in recordable form, by the owners, landlords, and mortgagees of the
real property upon which the Equipment is located or certificates of Lessee
that it is the owner of such real property or that such real property is
neither leased nor mortgaged. Lessee shall make the Equipment and its
maintenance records available for inspection by Lessor at reasonable times
and upon reasonable notice. Lessee shall execute and deliver to Lessor for
filing any UCC financing statements or similar documents Lessor may
reasonably request.
11. EQUIPMENT USE. Lessee agrees that the Equipment will be operated
by competent, qualified personnel in connection with Lessee's business for
the purpose for which the Equipment was designed and in accordance with
applicable operating instructions, laws, and government regulations, and that
Lessee shall use all reasonable precautions to prevent loss or damage to the
Equipment from fire and other hazards. Lessee shall procure and maintain in
effect all orders, licenses, certificates, permits, approvals, and consents
required by federal, state, or local laws or by any governmental body,
agency, or authority in connection with the delivery, installation, use, and
operation of the Equipment.
12. MAINTENANCE. Lessee, at its sole cost and expense, shall keep the
Equipment in a suitable environment as specified by the manufacturer's
guidelines or the equivalent, shall meet all recertification requirements, if
any, and shall maintain the Equipment in its original condition and working
order, ordinary wear and tear excepted. At the reasonable request of Lessor,
Lessee shall furnish all proof of maintenance.
13. ALTERATION; MODIFICATIONS; PARTS. Lessee may materially alter or
modify the Equipment only with the prior written consent of Lessor. Any
alteration shall be removed and the Equipment restored to its normal,
unaltered condition at Lessee's expense (without damaging the Equipment
originally intended function or its value) prior to its return to Lessor.
Any part installed in connection with warranty or maintenance service or
which cannot be removed in accordance with the preceding sentence shall be
the property of Lessor.
14. RETURN OF EQUIPMENT. Except for Equipment that has suffered a
Casualty Loss (as defined in Paragraph 15 below) and is not required to be
repaired pursuant to Paragraph 15 below or Equipment purchased by Lessee
pursuant to Paragraph 9 above, upon the expiration of the Renewal Term of a
Lease, or upon demand by Lessor pursuant to Paragraph 22 below, Lessee shall
contact Lessor for shipping instructions and, at Lessee's own risk,
immediately return the Equipment, freight prepaid, to a location in the
continental United States specified by Lessor. At the time of such return to
Lessor, the Equipment shall (i) be in the operating order, repair, and
condition as required by or specified in the original specifications and
warranties of each manufacturer and vendor thereof, ordinary wear and tear
excepted, (ii) meet all recertification requirements, if any, and (iii) be
capable of being promptly assembled and operated by a third party purchaser
or third party lessee without further repair, replacement, alterations, or
improvements, and in accordance and compliance with any and all statutes,
laws, ordinances, rules, and regulations of any governmental authority or any
political subdivision thereof applicable to the use and operation of the
Equipment. Except as otherwise provided under Paragraph 9 hereof, at least
one hundred eighty days before the expiration of the Renewal Term, Lessee
shall give Lessor notice of its intent to return the Equipment at the end of
such Renewal Term. During the ninety-day period prior to the end of a Term
or the Renewal Term, Lessor and its prospective purchasers or lessees shall
have, upon not less than two business days' prior written notice to Lessee
and during normal business hours, or at any time and without prior notice
upon the occurrence and continuance of an Event of Default, the right of
access to the premises on which the Equipment is located to inspect the
Equipment, and Lessee shall cooperate in all other respects with Lessor's
remarketing of the Equipment. The provisions of this Paragraph 14 are of the
essence of the Lease, and upon application to any court of equity having
jurisdiction in the premises, Lessor shall be entitled to a decree against
Lessee requiring specific performance of the covenants of Lessee set forth in
this Paragraph 14. If Lessee fails to return the Equipment when
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required, the terms and conditions of the Lease shall continue to be
applicable and Lessee shall continue to pay Rent until the Equipment is
received by Lessor.
15. CASUALTY INSURANCE; LOSS OR DAMAGE. Lessee will maintain, at its
own expense, liability and property damage insurance relating to the
Equipment, insuring against such risks as are customarily insured against on
the type of equipment leased hereunder by businesses in which Lessee is
engaged in such amounts, in such form, and with insurers satisfactory to
Lessor; PROVIDED, HOWEVER, that the amount of insurance against damage or
loss shall not be less than the greater of (a) the replacement value f the
Equipment and (b) the stipulated loss value of the Equipment specified in the
applicable Schedule ("Stipulated Loss Value"). Each liability insurance
policy shall provide coverage (including, without limitation, personal injury
coverage) of not less than $1,000,000 for each occurrence, and shall name
Lessor as an additional insured; and each property damage policy shall name
Lessor as sole loss payee and all policies shall contain a clause requiring
the insurer to give Lessor at least thirty days' prior written notice of any
alteration in the terms or cancellation of the policy. Lessee shall furnish
to Lessor a copy of each insurance policy (with endorsements) or other
evidence satisfactory to Lessor that the required insurance coverage is in
effect; PROVIDED, HOWEVER, Lessor shall have no duty to ascertain the
existence of or to examine the insurance policies to advise Lessee if the
insurance coverage does not comply with the requirements of this Paragraph.
If Lessee fails to insure the Equipment as required, Lessor shall have the
right but not the obligation to obtain such insurance, and the cost of the
insurance shall be for the account of Lessee due as part of the next due
Rent. Lessee consents to Lessor's release, upon its failure to obtain
appropriate insurance coverage, of any and all information necessary to
obtain insurance with respect to the Equipment or Lessor's interest therein.
Until the Equipment is returned to and received by Lessor as provided in
Paragraph 14 above, Lessee shall bear the entire risk of theft or destruction
of, or damage to, the Equipment including, without limitation, any
condemnation, seizure, or requisition of title or use ("Casualty Loss"). No
Casualty Loss shall relieve Lessee from its obligations to pay Rent except as
provided in clause (b) below. When any Casualty Loss occurs, Lessee shall
immediately notify Lessor and, at the option of Lessor, shall promptly (a)
place such Equipment in good repair and working order; or (b) pay Lessor an
amount equal to the Stipulated Loss Value of such Equipment and all other
amounts (excluding Rent) payable by Lessee hereunder, together with a late
charge on such amounts at a rate per annum equal to the rate imputed in the
Rent payments hereunder (as reasonably determined by Lessor) from the date of
the Casualty Loss through the date of payment of such amounts (to the extent
any such amounts were not shall transfer to Lessee, without recourse or
warranty (express or implied) (except as to the absence of Lessor Liens), all
of Lessor's interest, if any, in and to such Equipment on an "AS IS WHERE IS"
basis. The proceeds of any insurance payable with respect to the Equipment
shall be applied, at the option of Lessor, either towards (i) repair of the
Equipment or (ii) payment of an amount equal to the Stipulated Loss Value of
such Equipment and all other amounts (excluding Rent) payable by Lessee
hereunder, together with a late charge on such amounts at a rate per annum
equal to the rate imputed in the Rent payments hereunder (as reasonably
determined by Lessor) from the date of the Casualty Loss through the date of
payment of such amounts (to the extent any such amounts were not paid when
due). Lessee hereby appoints Lessor as Lessee's attorney-in-fact to make
claim for, receive payment of, and execute and endorse all documents, checks
or drafts issued with respect to any Casualty Loss under any insurance policy
relating to the Equipment.
16. TAXES. Lessee shall pay when due, and indemnify and hold Lessor
harmless from all sales, use, excise, and other taxes, charges, and fees
(including, without limitation, income, franchise, business and occupation,
gross receipts, licensing, registration, titling, personal property, stamp
and intrest equalization taxes, levies, imposts, duties, charges, or
withholdings of any nature), and any fines, penalties, or interest thereon,
imposed or levied by any governmental body, agency, or tax authority upon or
in connection with the Equipment, its purchase, ownership, delivery, leasing,
possession, use, or relocation of the Equipment or otherwise in connection
with the transactions contemplated by each Lease or the Rent thereunder,
excluding taxes on or measured by the net income of Lessor. Upon request,
Lessee will provide proof of payment. Unless Lessor elects otherwise, Lessee
will pay all property taxes on the Equipment. Lessee shall timely prepare
and file all reports and returns which are required to be made with respect
to any obligation of Lessee under this Paragraph 16. Lessee shall, to the
extent permitted by law, cause all billings of such fees, taxes, levies,
imposts, duties, withholdings, and governmental charges to be made to Lessor
in care of Lessee. Upon request, Lessee will provide Lessor with copies of
all such billings.
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17. LESSOR'S PAYMENT. If Lessee fails to perform its obligations under
Paragraph 15 or 16 above, or Paragraph 23 below, Lessor shall have the right
to substitute performance, in which case Lessee shall immediately reimburse
Lessor therefor.
18. GENERAL INDEMNITY. Each Lease is a net lease. Therefore, Lessee
shall indemnify Lessor and its successors and assigns against, and hold
Lessor and its successors and assigns harmless from, any and all claims,
actions, damages, obligations, liabilities, and all costs and expenses,
including, without limitation, legal fees incurred by Lessor or its
successors and assigns arising out of each Lease including, without
limitation, the purchase, ownership, delivery, lease, possession,
maintenance, condition, use, or return of the Equipment, or arising by
operation of law, except that Lessee shall not be liable for any claims,
actions, damages, obligations, and costs and expenses determined by a
non-appealable, final order of a court of competent jurisdiction to have
occurred as a result of the gross negligence or willful misconduct of Lessor
or its successors and assigns. Lessor agrees to provide Lessee written
notice of any claim for indemnification under this Paragraph 18 within 30
days after Lessor has actual knowledge of such claim. Lessee agrees that
upon written notice by Lessor of the assertion of any claim, action, damage,
obligation, liability, or lien, Lessee shall assume full responsibility for
the defense thereof, provided that Lessor's failure to give such notice shall
not limit or otherwise affect its rights hereunder. Any payment pursuant to
this Paragraph (except for any payment of Rent) shall be of such amount as
shall be necessary so that, after payment of any taxes required to be paid
thereon by Lessor, including taxes on or measured by the net income of
Lessor, the balance will equal the amount due hereunder. The provisions of
this Paragraph with regard to matters arising during a Lease shall survive
for two years after the expiration or termination of such Lease.
19. ASSIGNMENT BY LESSEE. Lessee shall not, without the prior written
consent of Lessor, (a) assign, transfer, pledge, or otherwise dispose of any
Lease or Equipment, or any interest therein; (b) sublease or lend any
Equipment or permit it to be used by anyone other than Lessee and its
employees; or (c) move any Equipment from the location specified for it in
the applicable Schedule, except that Lessee may move Equipment to another
location within the United States provided that Lessee has delivered to
Lessor (A) prior written notice thereof and (B) duly executed financing
statements and other agreements and instruments (all in form and substance
satisfactory to Lessor) necessary or, in the opinion of the Lessor, desirable
to protect Lessor's interest in such Equipment. Not with standing anything
to the contrary in the immediately preceding sentence, Lessee may keep any
Equipment consisting of motor vehicles or rolling stock at any location in
the United States.
20. ASSIGNMENT BY LESSOR. Lessor may assign its interest or grant a
security interest in any Lease and the Equipment individually or together, in
whole or in part. If Lessee is given written notice of any such assignment,
it shall immediately make all payments of Rent and other amounts hereunder
directly to such assignee. Each such assignee shall have all of the rights of
Lessor under each Lease assigned to it. Lessee shall not assert against any
such assignee any set-off, defense, or counterclaim that Lessee may have
against Lessor or any other person.
21. DEFAULT; NO WAIVER. Lessee or any guarantor of any or all of the
obligations of Lessee hereunder (together with Lessee, the "Lease Parties")
shall be in default under each Lease upon the occurrence of any of the
following events (each, an "Event of Default"): (a) Lessee fails to pay
within five days of when due any amount required to be paid by Lessee under
or in connection with any Lease; (b) any of the Lease Parties fails to
perform any other provision under or in connection with a Lease or violates
any of the covenants or agreements of such Lease Party under or in connection
with a Lease and such failure or violation continues for fifteen (15) days
after written notice thereof from Lessor to Lessee; (c) any representation
made or financial information delivered or furnished by any of the Lease
Parties under or in connection with a Lease shall prove to have been
inaccurate in any material respect when made; (d) any of the Lease Parties
makes an assignment for the benefit of creditors, whether voluntary or
involuntary, or consents to the appointment of a trustee or receiver, or if
either shall be appointed for any of the Lease Parties or for a substantial
part of its property without its consent and, in the case of any such
involuntary proceeding, such proceeding remains undismissed or unstayed for
forty-five days following the commencement thereof; (e) any petition or
proceeding is filed by or against any of the Lease Parties under any Federal
or State bankruptcy or insolvency code or similar law and, in the case of any
such involuntary petition or proceeding, such petition or proceeding remains
undismissed or unstayed for forty-five days following the filing or
commencement thereof, or any of the Lease Parties takes any action
authorizing any such
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petition or proceeding; (f) any of the Lease Parties fails to pay when due
any indebtedness for borrowed money in excess of $100,000 or under
conditional sales or installment sales contracts or similar agreements,
leases, or obligations in excess of $100,000 evidenced by bonds, debentures,
notes, or other similar agreements or instruments to any creditor (including
Lessor under any other agreement) after any and all applicable cure periods
therefor shall have elapsed; (g) any judgment in excess of $100,000 shall be
rendered against any of the Lease Parties which shall remain unpaid or
unstayed for a period of sixty days; (h) any of the Lease Parties shall
dissolve, liquidate, wind up or cease its business, sell or otherwise dispose
of all or substantially all of its assets, or make any material change in its
lines of business; (i) any of the Lease Parties shall amend or modify its
name, unless such Lease Party delivers to Lessor, thirty days prior to any
such proposed amendment or modification, written notice of such amendment or
modification and within ten days after written request by Lessor, delivers
executed financing statements (in form and substance satisfactory to the
Lessor); (j) any of the Lease Parties shall merge or consolidate with any
other entity or make any material change in its capital structure, in each
case without Lessor's prior written consent, which shall not be unreasonably
withheld; (k) any of the Lease Parties shall suffer any loss or suspension of
any material license, permit, or other right or asset necessary to the
profitable conduct of its business, fail generally to pay its debts as they
mature, or call a meeting for purposes of compromising its debts; or (1) any
of the Lease Parties shall deny or disaffirm its obligations hereunder or
under any of the documents delivered in connection herewith.
22. REMEDIES. Upon the occurrence and continuation of an Event of
Default, Lessor shall have the right, in its sole discretion, to exercise any
one or more of the following remedies: (a) terminate each Lease; (b) declare
any and all Rent and other amounts then due and any and all Rent and other
amounts to become due under each Lease (collectively, the "Lease
Obligations") immediately due and payable; (c) take possession of any or all
items of Equipment, wherever located, without demand, notice, court order, or
other process of law, and without liability for entry to Lessee's premises,
for damage to Lessee's property, or otherwise; (d) demand that Lessee shall
fail to return any or all Equipment to Lessor in accordance with Paragraph 14
above, and, for each day that Lessee shall fail to return any item of
Equipment, Lessor may demand an amount equal to the per them Rent payable for
such Equipment in accordance with Paragraph 14 above; (e) lease, sell, or
otherwise dispose of the Equipment in a commercially reasonable manner, with
or without notice and on public or private bid; (f) recover the following
amounts from the Lessee (as damages, including reimbursement of costs and
expenses, liquidated for all purposes and not as a penalty): (i) all costs
and expenses of Lessor reimbursable to it hereunder, including, without
limitation, expenses of disposition of the Equipment, legal fees, and all
other amounts specified in Paragraph 23 below; (ii) an amount equal to the
sum of (A) any accrued and unpaid Rent through the later of (1) the date of
the applicable default, (2) the date that Lessor has obtained possession of
the Equipment, or (3) such other date as Lessee has made an effective tender
of possession of the Equipment to Lessor (the "Default Date") and (B) if
Lessor resells or re-lets the Equipment, Rent at the periodic rate provided
for in each Lease for the additional period that it takes Lessor to resell or
re-let all of the Equipment; (iii) the present value of all future Rent
reserved in the Leases and contracted to be paid over the unexpired Term of
the Leases discounted at five percent compound interest; (iv) the
reversionary value of the Equipment as of the expiration of the Term of the
applicable Lease as set forth on the applicable Schedule (provided that
Lessor has not taken possession of such Equipment); and (v) any indebtedness
for Lessee's indemnity under Paragraph 18 above, plus a late charge at the
rate specified in Paragraph 3 above, less the amount received by Lessor, if
any, upon sale or re-let of the Equipment, PROVIDED, however, that Lessor
shall not be entitled to recover an amount in excess of the amount it would
have received had each Lease been fully performed for its full term, plus any
out-of-pocket expenses incurred in connection with the Leases; and (g)
exercise any other right or remedy to recover damages or enforce the terms of
the Leases. Upon the occurrence and continuance of an Event of Default or an
event which with the giving of notice or the passage of time, or both, would
result in an Event of Default, Lessor shall have the right, whether or not
Lessor has made any demand or the obligations of Lessee hereunder have
matured, to appropriate and apply to the payment of the obligations of Lessee
hereunder all security deposits and other deposits (general or special, time
or demand, provisional or final) now or hereafter held by and other
indebtedness or property now or hereafter owing by Lessor to Lessee. Lessor
may pursue any other rights or remedies available at law or in equity,
including, without limitation, rights or remedies seeking damages, specific
performance, and injunctive relief. Any failure of Lessor to require strict
performance by Lessee, or any waiver by Lessor of any provision hereunder or
under any Schedule, shall not be construed as a consent or waiver of any
other breach of the same or of any other provision. Any amendment or waiver
of any provision hereof or under any Schedule or consent to any departure by
Lessee herefrom or therefrom shall be in writing and signed by Lessor.
No right or remedy is exclusive of any other provided herein or permitted
by law or equity. All
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such rights and remedies shall be cumulative and may be enforced concurrently
or individually from time to time.
23. LESSOR'S EXPENSE. Lessee shall pay Lessor on demand all costs and
expenses (including legal fees and expenses) incurred in connection with the
preparation, execution and delivery of this Agreement and any other
agreements and transactions contemplated hereby and all costs and expenses in
protecting and enforcing Lessor's rights and interests in each Lease and the
equipment, including, without limitation, reasonable legal, collection, and
remarketing fees and expenses incured by Lessor in enforcing the terms,
conditions, or provisions of each Lease or upon the occurrence and
continuation of an Event of Default.
24. LESSEE'S WAIVERS. To the extent permitted by applicable law, Lessee
hereby waives any and all rights and remedies conferred upon a lessee by
Sections 2A-508 through 2A-522 of the UCC. To the extent permitted by
applicable law, Lessee also hereby waives any rights now or hereafter
conferred by statute or otherwise which may require Lessor to sell, lease, or
otherwise use any Equipment in mitigation of Lessor's damages as set forth in
Paragraph 22 above or which may otherwise limit or modify any of Lessor's
rights or remedies under Paragraph 22. Any action by Lessee against Lessor
for any default by Lessor under any Lease shall be commenced within two years
after any such cause of action accrues.
25. NOTICES; ADMINISTRATION. Except as otherwise provided herein, all
notices, approvals, consents, correspondence, or other communications
required or desired to be given hereunder shall be given in writing and shall
be delivered by overnight courier, hand delivery, or certified or registered
mail, postage prepaid, if to Lessor, then to Transamerica Technology Finance
Division, 76 Batterson Park Road, Farmington, Connecticut 06032, Attention:
Assistant Vice President, Lease Administration, with a copy to Lessor at
Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois
60018, Attention: Legal Department, if to Lessee, then to Endocardial
Solutions, Inc., 1350 Energy Lane, Suite 1 10, Saint Paul, Minnesota
55108-5254, Attention: Controller or such other address as shall be
designated by Lessee or Lessor to the other party. All such notices and
correspondence shall be effective when received.
26. REPRESENTATIONS. Lessee represents and warrants to Lessor that (a)
Lessee is duly organized, validly existing, and in good standing under the
laws of the State of its incorporation; (b) the execution, delivery, and
performance by Lessee of this Agreement are within Lessee's powers, have been
duly authorized by all necessary action, and do not and will not contravene
(i) Lessee's organizational documents or (ii) any law, regulation, rule, or
contractual restriction binding on or affecting Lessee; (c) no authorization
or approval or other action by, and no notice to or filing with, any
governmental authority or regulatory body is required for the due execution,
delivery, and performance by Lessee of this Agreement; (d) each Lease
constitutes the legal, valid, and binding obligations of Lessee enforceable
against Lessee in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, fraudulent conveyance, or any similar laws
affecting creditors rights generally, and general principles of equity,
whether or not such enforceability is considered in a proceeding at equity or
in law; (e) the cost of each item of Equipment does not exceed the fair and
usual price for such type of equipment purchased in like quantity and
reflects all discounts, rebates, and allowances for the Equipment (including,
without limitation, discounts for advertising, prompt payment, testing, or
other services) given to the Lessee by the manufacturer, supplier, or any
other person; and (f) all information supplied by Lessee to Lessor in writing
connection herewith is correct and does not omit any material statement
necessary to insure that the information supplied is not misleading.
27. FURTHER ASSURANCES. Lessee, upon the request of Lessor, will
execute, acknowledge, record, or file, as the case may be, such further
documents and do such further acts as may be reasonably necessary, desirable,
or proper to carry out more effectively the purposes of this Agreement.
Lessee hereby appoints Lessor as its attorney-in-fact to execute on behalf of
Lessee and authorizes Lessor to file without Lessee's signature any UCC
financing statements and amendments Lessor reasonably deems advisable.
28. FINANCIAL STATEMENTS. Lessee shall deliver to Lessor. (a) as soon
as available, but not later than 120 days after the end of each fiscal year
of Lessee and its consolidated subsidiaries, the consolidated balance sheet,
income statement, and statements of cash flows and shareholders equity for
Lessee and its consolidated subsidiaries (the "Financial Statements") for
such year, reported on by independent certified public accountants without an
adverse qualification; and (b) as soon as available, but not later than 60
days after the end of
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each of the first three fiscal quarters in any fiscal year of Lessee and its
consolidated subsidiaries, the Financial Statements for such fiscal quarter,
together with a certification duly executed by a responsible officer of
Lessee that such Financial Statements have been prepared in accordance with
generally accepted accounting principles and are fairly stated in all
material respects (subject to normal year-end audit adjustments). Lessee
shall also deliver to Lessor as soon as available copies of all press
releases and other similar communications issued by Lessee.
29. CONSENT TO JURISDICTION. Lessee irrevocably submits to the
jurisdiction of any Illinois state or federal court sitting in Illinois for
any action or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby, and Lessee irrevocably agrees that all
claims in respect of any such action or proceeding may be heard and
determined in such Illinois state or federal court.
30. WAIVER OF JURY TRAIL. LESSEE AND LESSOR IRREVOCABLY WAIVE ALL
RIGHT TO TRIAL BY ANY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT
OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
31. FINANCE LEASE. Lessee and Lessor agree that each Lease is a
"Finance Lease" as defined by Section 2A-103(g) of the UCC. Lessee
acknowledges that Lessee has reviewed and approved each written Supply
Contract (as defined by UCC 2A-103(y)) covering Equipment purchased from each
"Supplier" (as defined by UCC 2A-103(x)) thereof.
32. NO AGENCY. Lessee acknowledges and agrees that neither the
manufacturer or supplier, nor any salesman, representative, or other agent of
the manufacturer or supplier, is an agent of Lessor. No salesman,
representative, or agent of the manufacturer or supplier is authorized to
waive or alter any term or condition of this Agreement or any Schedule and no
representation as to the Equipment or any other matter by the manufacturer or
supplier shall in any way affect Lessee's duty to pay Rent and perform its
other obligations as set forth in this Agreement or any Schedule.
33. SPECIAL TAX INDEMNIFICATION. Lessee acknowledges that Lessor, in
determining the Rent due hereunder, has assumed that certain tax benefits as
are provided to an owner of property under the Internal Revenue Code of 1986,
as amended (the "Code"), and under applicable state tax law, including,
without limitation, depreciation deductions under Section 168(b) of the Code,
and deductions under Section 163 of the Code in an amount at least equal to
the amount of interest paid or accrued by Lessor with respect to any
indebtedness incurred by Lessor in financing its purchase of the Equipment,
are available to Lessor as a result of the lease of the Equipment. In the
event Lessor is unable to obtain such tax benefits as a result of an act or
omission of Lessee, is required to include in income any amount other than
the Rent, or is required to recognize income in respect of the Rent earlier
than anticipated pursuant to this Agreement, Lessee shall pay Lessor
additional rent ("Additional Rent") in a lump sum in an amount needed to
provide Lessor with the same after-tax yield and after-tax cash flow as would
have been realized by Lessor had Lessor (i) been able to obtain such tax
benefits, (ii) not been required to include any amount in income other than
the Rent, and (iii) not been required to recognize income in respect of the
Rent earlier than anticipated pursuant to this Agreement. The Additional
Rent shall be computed by Lessor, which computation shall be binding on
Lessee absent manifest error. The Additional Rent shall be due immediately
upon written notice by Lessor to Lessee of Lessor's inability to obtain tax
benefits, the inclusion of any amount in income other than the Rent or the
recognition of income in respect of the Rent earlier than anticipated
pursuant to this Agreement. The provisions of this Paragraph 33 shall
survive for two years after the termination of this Agreement.
34. GOVERNING LAW; SEVERABILITY. EACH LEASE SHALL BE GOVERNED BY THE
LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW
PRINCIPLES THEREOF. IF ANY PROVISION SHALL BE HELD TO BE INVALID OR
UNENFORCEABLE, THE VALIDITY AND ENFORCEABILITY OF THE REMAINING PROVISIONS
SHALL NOT IN ANY WAY BE AFFECTED OR IMPAIRED.
LESSEE ACKNOWLEDGES THAT LESSEE HAS READ THIS AGREEMENT AND THE SCHEDULE
HERETO, UNDERSTANDS THEM, AND AGREES TO BE BOUND BY THEIR TERMS AND
CONDITIONS. FURTHER, LESSEE AND LESSOR AGREE THAT THIS AGREEMENT, THE
SCHEDULES DELIVERED IN CONNECTION HEREWITH FROM TIME TO TIME, AND THE
COMMITMENT LETTER ARE THE
8
<PAGE>
COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES,
SUPERSEDING ALL PROPOSALS OR PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER
COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF.
SHOULD THERE EXIST ANY INCONSISTENCY BETWEEN THE TERMS OF THE COMMITMENT
LETTER AND THE AGREEMENT, THE TERMS OF THIS AGREEMENT SHALL PREVAIL.
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be duly executed by their duly authorized officers as of the
date first written above.
ENDOCARDIAL SOLUTIONS, INC.
By:
-------------------------------------------
Name:
Title:
Federal Tax ID: 41-1724963
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By:
-------------------------------------------
Name:
Title:
Form 1
9
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<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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,328,412
<SECURITIES> 12,030,994
<RECEIVABLES> 451,360
<ALLOWANCES> 0
<INVENTORY> 1,329,909
<CURRENT-ASSETS> 16,451,600
<PP&E> 3,293,135
<DEPRECIATION> 1,360,718
<TOTAL-ASSETS> 18,510,754
<CURRENT-LIABILITIES> 2,541,865
<BONDS> 0
0
0
<COMMON> 89,910
<OTHER-SE> 50,313,526
<TOTAL-LIABILITY-AND-EQUITY> 18,510,754
<SALES> 435,406
<TOTAL-REVENUES> 435,406
<CGS> 1,093,393
<TOTAL-COSTS> 1,093,393
<OTHER-EXPENSES> 3,506,195
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,902
<INCOME-PRETAX> (3,302,871)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,302,871)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</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 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.
<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 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. 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 endocardial mapping in the
atrium 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 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.
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 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 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 to
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
<PAGE>
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 is a complex disease and the subject of
continuing research. The therapies presently available for atrial flutter
and tachycardia 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 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 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 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
<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 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 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. 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 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
<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.
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 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
<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
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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.
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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.
