<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 MARCH 31, 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1350 ENERGY LANE (612) 644-7890
SUITE 110 --------------
SAINT PAUL, MINNESOTA 55108 (REGISTRANT'S TELEPHONE NUMBER
- ---------------------------- INCLUDING AREA CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES
AND ZIP CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 DURING THE PRECEDING TWELVE (12) MONTHS (OR FOR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
------ ------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $.01 PAR VALUE 8,976,182
- ----------------------------
(Class) (NUMBER OF SHARES OUTSTANDING AT MARCH 31, 1998)
1
<PAGE>
INDEX
ENDOCARDIAL SOLUTIONS, INC.
(A Development Stage Company)
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 1998 and December 31, 1997 3
Statements of Operations - Three month periods ended
March 31, 1998 and March 31, 1997 and the period from
May 21, 1992 (inception) through March 31, 1998 4
Statements of Cash Flows - Three months ended
March 31, 1998 and March 31, 1997 and the period from
May 21, 1992 (inception) through March 31, 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 8
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted since all items are inapplicable
or answers negative.
Item 6. Exhibits and Reports on Form 8-K 9
</TABLE>
2
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $426,237 $1,512,656
Short-term investments 17,207,680 20,717,173
Inventories 1,113,577 848,063
Prepaid expenses and other current assets 317,220 238,184
------------ ------------
Total current assets 19,064,714 23,316,076
Furniture and equipment 2,846,367 2,690,609
Less accumulated depreciation -1,213,070 -1,093,978
------------ ------------
1,633,297 1,596,631
Deposits 81,709 81,209
Patents, net of accumulated amortization
(1998 - $ 59,287: 1997 - $54,593) 36,584 41,278
------------ ------------
Total Assets $20,816,304 $25,035,694
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $1,211,960 $910,782
Accrued salaries and expenses 170,580 515,620
Current portion of capital lease obligations 363,071 356,057
Current portion of long-term debt 0 38,378
------------ ------------
Total current liabilities 1,745,611 1,820,837
Capital lease obligations 345,271 438,524
Long-term debt 0 0
Stockholders' equity:
Undesignated Preferred Stock, par value $.01 per share:
Authorized shares--10,000,000
Issued and outstanding shares--none 0 0
Convertible Preferred Stock, Series A through D,
par value $.01 per share
Authorized shares--March 31,1998--none; December 31, 1997--none
Issued and outstanding shares--March 31, 1998--none;
December 31, 1997--none 0 0
Common Stock, $.01 par value
Authorized shares--March 31, 1998--40,000,000; December 31, 1997--40,000,000
Issued and outstanding shares--March 31, 1998--8,976,182;
December 31, 1997--8,934,409 89,762 89,344
Additional paid-in capital 50,286,554 48,174,629
Deficit accumulated during the development stage -31,395,715 -25,178,332
Deferred compensation 255,179 -309,308
------------ ------------
Total stockholders' equity 18,725,422 22,776,333
------------ ------------
Total Liabilities and stockholders' equity $20,816,304 $25,035,694
------------ ------------
------------ ------------
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.
</TABLE>
3
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period from
For the Three Months Ended May 21, 1992
------------------------------ (inception) to
March 31, March 31, March 31,
1998 1997 1998
------------ ------------ --------------
<S> <C> <C> <C>
Operating expenses:
Manufacturing $517,125 $0 $517,125
Research and development 4,843,339 1,213,721 22,815,227
General and administrative 870,442 541,026 8,065,497
Sales and marketing 247,239 171,740 1,894,806
------------ ------------ -------------
Operating loss -6,478,145 -1,926,487 -33,292,655
Other income (expense):
Interest income 277,935 78,312 2,080,373
Interest expense -17,173 -17,089 -259,665
------------ ------------ -------------
260,762 61,223 1,820,708
------------ ------------ -------------
Net loss for the period and deficit
accumulated during development stage ($6,217,383) ($1,865,264) ($31,471,947)
------------ ------------ -------------
------------ ------------ -------------
Net loss per share - basic and diluted ($0.69) ($1.09) ($12.24)
------------ ------------ -------------
------------ ------------ -------------
Weighted average shares outstanding 8,961,187 1,704,207 2,571,952
------------ ------------ -------------
------------ ------------ -------------
SEE ACCOMPANYING NOTES.
</TABLE>
4
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from
For the Three Months Ended May 21, 1992
------------------------------ (inception) to
March 31, March 31, March 31,
1998 1997 1998
------------ ------------ --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ($6,217,383) ($1,865,264) ($31,471,947)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 123,787 96,533 1,282,814
Amortization of deferred compensation 54,129 103,889 1,229,501
Value of warrants granted in connection
with lease agreements 0 0 23,526
Value of warrants granted in connection
with purchase of technology 2,085,602 0 2,085,602
Loss on disposal of equipment 0 0 11,199
Changes in operating assets and liabilities:
Inventory -265,514 0 -1,113,577
Prepaid expenses and other assets -79,036 -101,769 -398,929
Accounts payable 301,178 286,101 1,211,960
Accrued salaries and expenses -345,040 -60,769 170,580
------------ ------------ --------------
Net cash used in operating activities -342,277 -1,541,279 -26,969,271
INVESTING ACTIVITIES
Purchases of short-term investments -3,183,113 0 -38,605,286
Maturities of short-term investments 6,692,606 0 21,397,606
Purchases of furniture and equipment -155,758 -34,651 -1,747,713
Patent expenditures 0 0 -95,872
Proceeds from sale of equipment 0 0 5,570
------------ ------------ --------------
Net cash used in investing activities 3,353,735 -34,651 -19,045,695
FINANCING ACTIVITIES
Proceeds from notes payable 0 0 706,974
Principal payments on notes payable and
capital lease obligations -124,617 -104,533 -874,507
Proceeds from issuance of common stock 26,740 24,974,038 24,788,453
Proceeds from issuance of preferred stock 0 0 21,820,283
------------ ------------ --------------
Net cash provided by (used in) financing activities -97,877 24,869,505 46,441,203
Increase (decrease) in cash and cash equivalents -1,086,419 23,293,575 426,237
Cash and cash equivalents at beginning of period 1,512,656 6,157,491 0
------------ ------------ -------------
Cash and cash equivalents at end of period 426,237 29,451,066 $426,237
------------ ------------ -------------
------------ ------------ -------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Purchase of equipment through capital lease
obligations $0 $313,760 $1,079,298
SEE ACCOMPANYING NOTES.
</TABLE>
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 months ended
March 31, 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.
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.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Endocardial Solutions Inc. (the "Company"), a development stage company, was
incorporated in May 1992. The Company is engaged in the development of the
EnSite diagnostic catheter and clinical workstation for use by
electrophysiologists in diagnosing and mapping abnormal heart rhythms known
as tachycardias.
RESULTS OF OPERATIONS
GENERAL. From inception through March 31, 1998, the Company has incurred
losses totaling $31,471,947. Net losses increased to $6,217,383 for the
three months ended March 31, 1998, from $1,865,264 for the same period in
1997. The net loss for the quarter ended March 31, 1998, includes expenses
of $3,585,602 for the acquisition of locator technology that was purchased
during the 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
costs relating to personnel, clinical trial activity and product development
activity.
MANUFACTURING EXPENSES. Manufacturing expenses were $517,125 for the quarter
ended March 31, 1998. Manufacturing expenses include costs for unabsorbed
overhead from the production of inventory held for re-sale.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $4,843,339 for the three month period ended March 31, 1998, from
$1,213,721 during the same period in 1997. The expenses for the quarter
ended March 31, 1998, include $3,585,602 for the acquisition of locator
technology that was purchased during the quarter from Medtronic, Inc. The
increase in the period is attributable to increases in personnel costs
related to hiring additional engineering staff and amortization of deferred
compensation. The Company believes that research and development
expenditures will increase in the future as the Company expands clinical
research activity and increases personnel to support product development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $870,442 and $541,026 for the three months ended March 31, 1998 and
1997, respectively. The increase of 61% was due to increases in personnel,
regulatory activities and expenses in quality assurance associated with
attaining ISO certification. In addition, the Company incurred expenses
related to expansion of the Company's facility and amortization of deferred
compensation. Administrative costs associated with being a publicly held
company, such as costs attributable to certain insurance policies and
investor relations material contributed to the increase for the three months
ended March 31, 1998, from the same period in 1997.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$247,239 during the three months ended March 31, 1998, from $171,740 during
the same period in 1997. The Company expects continued increases in sales
and marketing expenses due to expanded marketing activity including market
release in Europe, participation at medical industry conferences and seminars
and market research activities.
INTEREST INCOME. Interest income was $277,935 and $78,312 for the three
months ended March 31, 1998 and 1997, respectively. The increase was due to
the 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
$46,608,000 through March 31, 1998. As of March 31, 1998 and December 31,
1997, the Company had cash, cash equivalents and short-term investments of
approximately $17,634,000 million and $22,230,000, respectively.
For the three months ended March 31, 1998, the Company used cash and cash
equivalents of $4,342,000 for operations and $156,000 for capital
expenditures.
The Company believes that its existing cash, cash equivalents and short-term
investments will be sufficient to fund the operations of the Company through
the next two years. The Company's future liquidity and capital requirements
will depend on numerous factors, including the timing of regulatory actions
regarding the Company's products, the results of clinical trials and
competition, the extent to which the Company's EnSite System gains market
acceptance and the costs and timing of expansion of sales, marketing and
manufacturing activities.
CAUTIONARY STATEMENT
Except for the historical information contained herein, this Quarterly Report
on Form 10-Q contains forward-looking statements with in the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. When used in this Form 10-Q and
in future filings by the Company with the Securities and Exchange Commission,
in the Company's press releases and in oral statements made with the approval
of an authorized executive officer, the word or phrases "believes,"
"anticipates," "expects," "intends," "will likely result," "estimates,"
"projects" or similar expressions are intended to identify such
forward-looking statements, but are not the exclusive means of identifying
such statements. These forward-looking statements involve risks and
uncertainties that may cause the Company's actual results to differ
materially from the results discussed in the forward-looking statements.
Factors that might cause such differences include, but are not limited to,
the following: risks associated with the successful development and
commercialization of a new technology: limited clinical testing experience;
uncertainty of obtaining Food and Drug Administration and international
regulatory clearances; uncertainty of availability of treatments employing
the Company's diagnostic system (the "EnSite System"); uncertainty of market
acceptance of the EnSite System; training requirements for
electrophysiologists; the uncertainty of the ability to diagnose and treat
atrial fibrillation; the expectation of future losses; significant
competition and rapid technological change in the tachycardia diagnostic
market; risks associated with the company's dependence on patents and
proprietary technology; risks associated with the Company's limited
manufacturing experience and dependence on suppliers; and the uncertainty of
third-party reimbursement for diagnostic medical procedures employing the
EnSite System. These factors are discussed in the cautionary statements
included in Exhibit 99 to this Form 10-Q for the quarter ended March 31,
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.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
10.1** License Agreement, dated January 30, 1998, between the Company
and Medtronic, Inc.
27 Financial Data Schedule (EDGAR filing only)
99 Cautionary Statement
</TABLE>
** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as
amended, confidential portions of Exhibit 10.1 has been deleted and filed
separately with the Securities and Exchange Commission pursuant to a request
for confidential treatment.
(b) Reports
The Company filed no reports on Form 8-K during the quarter ended March 31,
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.
Dated: May 15, 1998 By: /s/ James W. Bullock
-------------------------------------
James W. Bullock
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 15, 1998 By: /s/ Leota L. Pearson
-------------------------------------
Leota L. Pearson
Controller
(Principal Financial and Accounting
Officer)
10
<PAGE>
EXHIBIT 10.1
LICENSE AGREEMENT
This License Agreement is made this 30th day of January, 1998, by and among
Endocardial Solutions, Inc. ("Licensee"), a Delaware corporation, and Medtronic,
Inc. ("Medtronic"), a Minnesota corporation.
RECITALS:
A. Medtronic has developed certain technology related to catheter
navigation and mapping.
B. Medtronic desires to grant, and Licensee desires to obtain, a license
to the "Licensed Technology" (as defined below) in the "Field of Use" (as
defined below) in accordance with all of the terms of this Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
As used herein, the following definitions and terms shall have the
designated meanings:
1.1 "ACTION" shall mean any claim, action, suit or proceeding, whether
civil or criminal, or in law or equity and including any arbitration.
1.2 "AFFILIATE" of any entity shall mean any other entity that directly,
or indirectly through one or more intermediaries, controls, or is controlled by,
or is under common control with, the first entity. "CONTROL" shall mean owning
more than 50 percent of the total voting power of the entity.
1.3 "CONFIDENTIAL INFORMATION" shall mean all written or oral information
provided to a party (the "receiving party") by a party (the "disclosing party")
or its employees, agents or consultants, excluding any information which:
(a) is or becomes publicly available through no fault of the
receiving party; or
(b) can be reasonably demonstrated to have been known to the
receiving party independently of any disclosure of "Confidential
Information" by the disclosing party or its employees, agents or
consultants; or
<PAGE>
(c) is disclosed to the receiving party by a third party who, to the
best of the receiving party's knowledge, is lawfully in possession of the
same and has the right to make such disclosure without restriction; or
(d) has been independently developed by the receiving party without
reference to the information disclosed to the receiving party by the
disclosing party or its employees, agents or consultants.
All "Confidential Information" disclosed to the receiving party in writing under
this Agreement shall ultimately be in writing and bear a legend "Proprietary",
"Confidential" or words of similar import.
1.4 "EXPIRATION" or "EXPIRED" shall mean with respect to a particular
patent, the patent's expiration, abandonment, cancellation, disclaimer, award to
another party other than Medtronic or an Affiliate of Medtronic in an
interference proceeding, or declaration of invalidity or unenforceability of all
claims thereof by a court or other authority of competent jurisdiction
(including a re-examination or reissue proceeding) from which no further appeal
has or can be taken. References to an "Unexpired" patent shall mean a patent
that has not Expired.
1.5 "FIELD OF USE" shall mean electrophysiological intracardiac mapping
applications for the treatment of cardiac arrhythmias.
1.6 "FIRST COMMERCIAL INTRODUCTION" shall mean the first commercial sale
by Licensee of any product which incorporates any invention described in the
patents and other intellectual property constituting the Licensed Technology
within the Field of Use in the United States, Japan or any country that is a
member of the European Union.
1.7 "LAW" shall mean any law, regulation, rule, ordinance or governmental
regulation or guideline or any judicial, administrative or arbitration, order or
award, judgment, writ, injunction or decree which is applicable to a person or
by which a person is bound.
1.8 "LICENSED PRODUCTS" shall mean medical products, devices, or systems,
including software, the development, manufacture, use or sale of which uses or
incorporates any of the Licensed Technology.
1.9 "LICENSED TECHNOLOGY" shall mean (i) the issued patents, and patents
arising out of the patent applications, listed on Exhibit A hereto, including,
specifically, U.S Patent No. (***) issued to (***) and assigned to Medtronic,
(ii) all reissues, continuations, continuations-in-part, extensions,
reexaminations, and foreign counterparts thereof, (iii) all trade secrets and
know-how owned by Medtronic prior to the date of this Agreement which relate
- --------------------
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
specifically and directly to 3-D electrode localization devices and techniques
as disclosed in the patents or patent applications listed on Exhibit A,
including but not necessarily limited to software developed specifically to
practice the inventions disclosed in the patents included in the Licensed
Technology, and iv) new patents arising out of patent applications filed, or
inventions reduced to practice, within twelve (12) months of the "Effective
Date" (as defined in Section 3.1) of this Agreement that are owned by Medtronic,
arise out of Medtronic's work with (***) and relate specifically and directly to
3-D electrode localization devices and techniques.
1.10 "NET SALES" of Licensed Products for a particular period shall mean
the amounts that Licensee or any Affiliate of Licensee invoices third parties
(eliminating transactions between Affiliates) for sales of Licensed Products
during such period, excluding sales, use or excise tax, freight, duty or
insurance included therein, and credits or repayments due to rejection, defect
or return. If Licensee or any Affiliate of Licensee sells at a single price or
rate a packaged combination of products, not all of which if sold individually
would be Licensed Products, then "Net Sales" of Licensed Products with respect
to such sales of packaged products shall equal the total sales price of the
packaged combination multiplied by the ratio of the individual retail list price
of the Licensed Products contained in the packaged combination to the sum of all
individual retail list prices of every item in the packaged combination (if all
of such items were sold separately). If all such items are not sold separately,
any item not sold separately shall have a price attributed to it for purposes of
this definition consistent with pricing of similar products or their functional
equivalents. Without limitation of the foregoing, Net Sales shall include all
transfers of Licensed Products that Licensee or any Affiliate of Licensee
records as a sale pursuant to generally accepted accounting principles
consistently applied. Net Sales which are denominated in currencies other than
U.S. Dollars shall be converted into U.S. Dollars on a monthly basis at the
average of the applicable daily exchange rates listed in the Wall Street Journal
for the calendar month in which such Net Sales occurred, or on such other basis
to which the parties may hereafter mutually agree.
1.11 "PRODUCT LIABILITY CLAIMS" shall mean claims for personal injury or
death based on alleged breach of product warranty, strict liability in tort, or
negligent product design or manufacture.
1.12 "QUARTER" means each three-month period ending March 31, June 30,
September 30, and December 31.
- -----------------
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
ARTICLE 2
LICENSE; TERM AND TERMINATION
2.1 LICENSE GRANT. Subject to the terms and provisions hereof, Medtronic
hereby grants to Licensee a worldwide, non-transferable, and non-sublicensable
(except as expressly provided in Section 2.6 below) license to make, have made,
use and sell Licensed Products in the Field of Use. The licensed granted shall
be co-exclusive, meaning that Medtronic or any Affiliate of Medtronic shall also
have the worldwide right to make, have made, use, sell or otherwise
commercialize and exploit the Licensed Technology in the Field of Use, provided
that Medtronic shall not grant any licenses (other than to an Affiliate of
Medtronic or a supplier of Medtronic or its Affiliate, provided any sale of
Licensed Products by such supplier is to Medtronic or a Medtronic Affiliate or
is under trademarks owned by Medtronic or a Medtronic Affiliate) to the Licensed
Technology in the Field of Use during the term of this Agreement. In addition,
Medtronic agrees that it shall not manufacture Licensed Products in the Field of
Use on an original equipment manufacturer basis ("Medtronic OEM basis") for any
person or entity. The term "Medtronic OEM basis" includes, without limitation,
the manufacture and sale of a Licensed Product to any person or entity for (i)
incorporation into or sale as such other person's or entity's product, or (ii)
the resale of such Licensed Product by such person or entity under trademarks
other than those owned by Medtronic or a Medtronic Affiliate.
2.2 RESTRICTION ON OEM SALES. The license granted to Licensee pursuant to
this Agreement shall not be used by Licensee in such a way as to manufacture
Licensed Products on an original equipment manufacturer basis ("Licensee OEM
basis") for any person or entity. The term "Licensee OEM basis" includes,
without limitation, the manufacture and sale of a Licensed Product to any person
or entity for (i) incorporation into or sale as such other person's or entity's
product, or (ii) the resale of such Licensed Product by such person or entity
under trademarks other than those owned by Licensee. It is the intent of the
parties that the license granted herein be used for the sole and exclusive
benefit of Licensee and its Affiliates in the Field of Use.
2.3 TERM OF LICENSE. Unless otherwise terminated under provisions of this
Article 2: the license granted under Section 2.1, as it pertains to the patents
and patent applications included within the Licensed Technology, shall continue
until such time as all of the patents included within the Licensed Technology
(and all extensions thereof) have Expired while the license granted under
Section 2.1, as it pertains to any know-how or trade secret information of
Medtronic included within the Licensed Technology, shall continue in perpetuity.
2.4 TERMINATION. Notwithstanding the provisions of Section 3.5, if
Licensee (i) violates the prohibitions on sublicensing or manufacturing on an
OEM basis under this Agreement, or (ii) fails to restrict its sales of Licensed
Products and other activities hereunder to the Field of Use, then Medtronic may
terminate this Agreement, at its option and without prejudice to any of its
other legal and equitable rights and remedies, including, but not limited to,
seeking monetary damages and/or an injunction, by giving Licensee sixty (60)
days' notice in writing, particularly specifying the breach. Such notice of
termination shall not be effective if
<PAGE>
Licensee cures the specified breach within such sixty (60) day period. During
such 60-day period, one or more executive officers of each party (meaning for
purposes hereunder any vice president or higher level officer) shall meet or
correspond to discuss such alleged breach and/or attempted cure thereof, and
attempt in good faith to resolve any dispute between the parties with respect
thereto; provided that if any such dispute is not resolved to Medtronic's
satisfaction, then Medtronic may terminate this Agreement without prejudice to
any of its other legal and equitable rights and remedies including, but not
limited to, seeking monetary damages and/or an injunction. If Licensee cures
the breach during the 60-day period but, within one (1) year thereafter, engages
in the same or a substantially similar breach, then Medtronic may terminate this
Agreement, at its option and without prejudice to any of its other legal and
equitable rights and remedies, including, but not limited to, seeking monetary
damages and/or an injunction, by giving written notice to Licensee and without
providing Licensee further opportunity to cure such breach. Licensee may
terminate this Agreement at any time in its discretion upon sixty (60) days'
prior written notice. Termination of this Agreement shall not affect Licensee's
obligation to grant and honor the warrant under Section 3.2 and, if First
Commercial Introduction or Change of Control of Licensee occurs prior to such
termination, the warrant under Section 3.3 and shall not result in any refund to
Licensee of any consideration previously paid to Medtronic. The parties
acknowledge that, with respect to any other breaches by Licensee of the terms,
conditions or agreements of this Agreement, Medtronic may pursue its full legal
and equitable rights and remedies against Licensee, including, but not limited
to, seeking monetary damages and/or an injunction.
2.5 DELIVERY AND RETURN OF CONFIDENTIAL INFORMATION. Upon termination of
this Agreement or the license granted hereunder as provided herein, Licensee
shall within 30 days of such termination return to Medtronic all Confidential
Information of Medtronic. Notwithstanding the foregoing, Licensee shall have
the right to retain in strict confidence one copy of such Confidential
Information in its legal department files solely for archival purposes only.
2.6 NO SUBLICENSE, TRANSFER OR CHANGE OF CONTROL.
(a) Licensee may not sublicense any of its rights or obligations under
this Agreement, except that Licensee may grant sublicenses to Affiliates of
Licensee, provided that (i) Licensee shall cause such sublicensee to comply with
all of Licensee's obligations hereunder, and (ii) any such sublicense granted by
Licensee shall terminate automatically upon the earlier of such sublicensee
ceasing to be an Affiliate of Licensee or termination of this Agreement.
(b) Licensee may not assign or transfer in any manner any of its rights or
obligations under this Agreement, except that all of Licensee's rights and
obligations under this Agreement may be assigned as part of a sale or other
transfer of substantially all of the business of Licensee. If such transfer or
if a "Change of Control of Licensee" results in Licensee or its business
directly or indirectly becoming part of, or an Affiliate of, a "Medtronic
Competitor" as defined in Exhibit B, then in addition to the fees and warrants
required under Article 3, after such transfer or such Change of Control of
Licensee, Licensee shall pay a royalty (the "Royalty" or "Royalties") equal
<PAGE>
to (***) percent (***%) of Net Sales thereafter of Licensed Products. For
purposes of this Agreement, a "Change of Control of Licensee" means any of the
following events: (i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) acquires "beneficial ownership"
(as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly
or indirectly, of securities of Licensee or of an entity that directly or
indirectly owns Licensee, or is an Affiliate that directly or indirectly
controls Licensee, (referred to as "Licensee Parent") representing 50% or more
of the combined voting power (with respect to the election of directors) of
Licensee's or Licensee Parent's, as the case may be, then outstanding
securities; (ii) the consummation of a merger, share exchange, combination or
consolidation of Licensee or Licensee Parent, as the case may be, with or into
any other corporation, which would result in the voting securities of Licensee
or Licensee Parent, as the case may be, outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) less than 50% of the combined
voting power (with respect to the election of directors) of the securities of
Licensee or Licensee Parent, as the case may be, or of such surviving entity
outstanding immediately after such merger, share exchange, combination or
consolidation; or (iii) the consummation of a plan of complete liquidation of
Licensee or Licensee Parent, as the case may be, or of an agreement for the sale
or disposition by Licensee or Licensee Parent, as the case may be, of all or
substantially all of Licensee's or Licensee Parent's, as the case may be,
business or assets. The parties acknowledge that the intent of this Section is
to prevent any of the rights granted to Licensee under this Agreement from
inuring to the benefit of any Medtronic Competitor either directly or indirectly
without thereafter the Royalty on Net Sales of Licensed Products being paid to
Medtronic.
2.7 ACCESS TO MEDTRONIC'S CONSULTANT. Upon reasonable notice by Licensee
to Medtronic, during the first two months after execution of the Agreement,
Medtronic will use reasonable efforts to make (***) and a lead design engineer
of Medtronic that is familiar with the Licensed Technology (mutually selected by
the parties) available at such person's place of work to meet with Licensee,
subject to (***)'s or such engineer's other commitments and schedule, for up to
an aggregate ten hours in the case of ** or 40 hours in the case of the design
engineer, in the presence of one or more Medtronic representatives, to disclose
to Licensee on Medtronic's behalf those trade secrets and know-how included
within the Licensed Technology to allow Licensee to better understand and
practice the inventions disclosed therein to which the license under this
Agreement pertains. No such disclosures by (***) or Medtronic's design engineer
on Medtronic's behalf nor payment to (***) or Medtronic's design engineer shall
be deemed to amend, negate, or otherwise modify the exclusive consulting or
employment relationship between (***) or such design engineer, as the case may
be, and Medtronic or to transfer or otherwise grant any rights to Licensee other
than those rights to the Licensed Technology specifically set forth in this
Agreement.
- -----------------
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
ARTICLE 3
LICENSE CASH PAYMENT AND WARRANTS
3.1 LICENSE CASH PAYMENT. On the date of the execution of this Agreement
by the parties (the "Effective Date"), Licensee shall immediately pay to
Medtronic a non-refundable royalty of One Million Five Hundred Thousand Dollars
($1,500,000) by wire transfer of such amount in immediately available funds to
an account designated by Medtronic.
3.2 INITIAL WARRANT. On the Effective Date, Licensee shall also
immediately grant and deliver to Medtronic or to a subsidiary designated by
Medtronic, as an additional royalty payment, the warrant (the "Initial Warrant")
attached as Exhibit C, entitling the holder to purchase 447,554 shares of common
stock of Licensee, which Licensee represents is equal to 5% (five percent) of
the total issued and outstanding common stock of Licensee as of the Effective
Date. The per share exercise price of such Initial Warrant shall be the average
closing price of Licensee's common stock for the twenty (20) trading days ending
on and including the trading day immediately preceding the Effective Date. The
Initial Warrant shall be immediately exercisable and shall expire four (4) years
from the Initial Warrant's issuance. Licensee represents that the Initial
Warrant conforms to and complies with the specifications set forth in this
Section 3.2.
3.3 ADDITIONAL WARRANT. Upon the First Commercial Introduction, Licensee
shall promptly grant and deliver (within thirty (30) days of the First
Commercial Introduction) to Medtronic or to a subsidiary designated by
Medtronic, as an additional royalty payment, an additional warrant (the
"Additional Warrant"), in the form attached as Exhibit C, except that: (i) the
Additional Warrant shall entitle the holder to purchase 223,777 shares of common
stock of Licensee, which Licensee represents is equal to 2.5% (two and one-half
percent) of the total issued and outstanding common stock of Licensee as of the
Effective Date; (ii) the per share exercise price of such Additional Warrant
shall be equal to: (A) 1.25 (one and one-quarter) times the average closing
price of Licensee's common stock for the twenty (20) trading days ending on and
including the trading day immediately preceding the date of the First Commercial
Introduction, in the event the Additional Warrant is being issued because of the
First Commercial Introduction, (B) the average closing price of Licensee's
common stock for the twenty (20) trading days ending on and including the
trading day immediately preceding the date of the announcement of the proposed
Change of Control, in the event the Additional Warrant is being issued because
of a Change of Control as provided in clause (iv) below, and (C) 1.25 (one and
one-quarter) times the average closing price of Licensee's common stock for the
twenty (20) trading days ending on and including the trading day immediately
preceding the 24-month anniversary date of the execution of this Agreement, in
the event the Additional Warrant is being issued prior to the First Commercial
Introduction as provided in the last sentence of this Section 3.3; (iii) the
Additional Warrant shall not become exercisable (except in the event of a Change
of Control of Licensee, as defined in Section 2.6) until the one-year
anniversary of the Additional Warrant's issuance and shall expire five (5) years
from the date of the Additional Warrant's issuance; and (iv) notwithstanding
anything herein to the contrary, the Additional Warrant shall,
<PAGE>
if not already issued, be issued immediately prior to any Change of Control of
Licensee and, shall, by its terms, automatically become exercisable immediately
prior to any Change of Control of Licensee. Furthermore, if the First
Commercial Introduction has not occurred by the twenty-four (24) month
anniversary of the execution of this Agreement, then the Licensee shall have the
right to issue and deliver to Medtronic the Additional Warrant as of such
twenty-four (24) month anniversary, provided, however, that if Licensee does not
issue and deliver such Additional Warrant to Medtronic by such twenty-four (24)
month anniversary, the license granted under this Agreement shall, without any
action on the part of the parties hereto, thereafter be a nonexclusive license
and the Additional Warrant shall not be issued and delivered until the First
Commercial Introduction.
3.4 REGISTRATION RIGHTS. Upon execution of this Agreement, Licensee shall
immediately execute and deliver to Medtronic or to a subsidiary designated by
Medtronic the registration rights agreement (the "Registration Rights
Agreement") attached as Exhibit D hereto, providing the registration rights set
forth therein with respect to the shares issuable pursuant to the Initial
Warrant and the shares issuable pursuant to the Additional Warrant.
3.5 PAID-UP LICENSE. Upon receipt by Medtronic of the royalty to be paid
by Licensee in cash under Section 3.1 and receipt by Medtronic or its designated
subsidiary of the warrants, constituting additional royalties, to be granted by
Licensee under Sections 3.2 and 3.3, the license granted by Medtronic to
Licensee under Section 2.1 shall be fully paid-up and no further payments shall
be due to Medtronic from Licensee under this Agreement, except for the Royalty
payments as and when required under Sections 2.6 and 4.5.
ARTICLE 4
ADDITIONAL OBLIGATIONS
4.1 RESTRICTIONS ON USE. Licensee will use all reasonable efforts to
ensure that all Licensed Products designed, developed, manufactured or sold by
Licensee or its Affiliates are not used outside of the Field of Use. Such
reasonable efforts shall include, but not be limited to:
(i) causing all such Licensed Products to be packaged, labeled,
advertised, marketed and otherwise identified and promoted in such manner
as to ensure to the fullest extent reasonably possible, subject to all
applicable laws and regulations, that such Licensed Products are not used
in an application outside of the Field of Use; and
(ii) advising Licensee's and its Affiliates' sales forces of such
Licensed Products, and any authorized distributors which are actively
promoting, representing and selling such Licensed Products, of the
permitted Field of Use hereunder and the provisions of this Section 4.1.
4.2 CONFIDENTIALITY. The parties acknowledge that the patent applications
listed in Exhibit A hereto, the inventions claimed therein, and all trade
secrets and know-how included
<PAGE>
within the Licensed Technology constitute "Confidential Information" of
Medtronic, subject to the exceptions set forth in Section 1.3. Licensee agrees
not to disclose or use any Medtronic Confidential Information except as
expressly permitted in connection with the exercise of its rights hereunder.
Licensee shall not disclose Medtronic Confidential Information to any employee
or consultant unless such employee or consultant is obligated under a
confidentiality agreement to maintain such Medtronic Confidential Information in
strict confidence, and not to use such information other than, in accordance
with the terms of this Agreement. Licensee agrees to hold the Medtronic
Confidential Information in strict confidence and treat it with not less than
the same degree of care to avoid disclosure as Licensee employs with respect to
Licensee's information of like importance.
4.3 INFRINGEMENT BY THIRD PARTY. Licensee shall promptly notify Medtronic
in writing if Licensee knows or has reason to believe that the rights of
Medtronic or Licensee relating to the Licensed Technology are being infringed by
a third party.
4.4 COVENANT REGARDING CLAIMS. Licensee agrees, for itself and for its
Affiliates, successors, assigns, and other parties claiming any title or license
to any Licensed Technology, not to sue or otherwise assert any claim against
Medtronic, or any of its Affiliates, successors, assigns, customers, vendors, or
others in contractual privity with any of the foregoing, by reason of or with
respect to the use of such Licensed Technology, or any improvements thereto, by
Medtronic or any of its Affiliates or any such other party; provided, however,
the foregoing shall not prevent any action on the part of Licensee, its
Affiliates, successors or assigns brought to enforce Licensee's rights and
Medtronic's obligations under this Agreement.
4.5 REPORTS AND PAYMENTS. From and after the event giving rise to the
Royalty obligation as provided in Section 2.6, within forty-five (45) days after
the end of each Quarter, Licensee shall provide Medtronic with a written report
indicating (i) the amount of Net Sales of Licensed Products during such Quarter,
and (ii) the amount of the Royalties due for such Quarter. Simultaneously with
making such report, Licensee shall pay to Medtronic the amount of Royalties then
due.
4.6 RECORDS. Licensee agrees to keep accurate written records sufficient
in detail to enable Medtronic to verify the information contained in the reports
described in Section 4.5. Such records for a particular Quarter shall be
retained by Licensee for a period of not less than four years after the end of
such Quarter.
4.7 AUDIT OF RECORDS. Upon reasonable notice and during regular business
hours, Licensee shall from time to time (but no more frequently than once
annually) make available the records referred to in Section 4.6 for audit by an
independent nationally recognized accounting firm selected by Medtronic to
verify the accuracy of the reports provided to Medtronic. Such representatives
shall execute a suitable confidentiality agreement reasonably acceptable to
Licensee prior to conducting such audit. Such representatives may disclose to
Medtronic only their conclusions regarding the accuracy and completeness of the
reports described in Section 4.5 and the records related thereto, and shall not
disclose Licensee's confidential business information
<PAGE>
to Medtronic without the prior written consent of Licensee. Such audits shall
be at Medtronic's cost and expense; provided that if any such audit reveals
underpayment of Royalties by five percent (5%) or more for any year, then
Licensee shall reimburse Medtronic for the fees and expenses of Medtronic's
independent auditors incurred by Medtronic in connection with such audit.
ARTICLE 5
INTELLECTUAL PROPERTY
5.1 NO OTHER REPRESENTATION OR WARRANTY. Medtronic represents that it
owns all right, title and interest in and to the Licensed Technology.
MEDTRONIC MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE
LICENSED TECHNOLOGY OR ANY LICENSED PRODUCTS, INCLUDING WITHOUT LIMITATION,
ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE,
PATENTABILITY, PATENT VALIDITY, NON-INFRINGEMENT, OR WARRANTIES ARISING FROM
COURSE OF DEALING OR USAGE OF TRADE.
5.2 CONTROL OF LICENSED TECHNOLOGY. Medtronic shall have the sole and
exclusive right, in Medtronic's absolute discretion, to exercise complete
control over the Licensed Technology, including, but not limited to, the right
to (i) prosecute any alleged infringement, misappropriation or misuse of the
Licensed Technology, and (ii) apply for, prosecute, or cause the issuance,
amendment, abandonment, maintenance, re-examination or reissue of any patents
included within the Licensed Technology, or any patent applications listed in
Exhibit A hereto.
5.3 INDEMNIFICATION.
(a) Licensee shall indemnify, defend and hold harmless Medtronic, its
Affiliates and Medtronic's and its Affiliates' respective officers, directors,
shareholders, employees and agents (collectively, all such indemnitees are
referred to in this Section 5.3(a) as "Medtronic Indemnitees") against and in
respect of any and all claims, demands, losses, obligations, liabilities,
damages (and including without limitation compensatory and punitive damages),
deficiencies, Actions, settlements, judgments, costs and expenses which the
Medtronic Indemnitees may incur or suffer or with which it may be faced
(including reasonable costs and legal fees incident thereto or in seeking
indemnification therefor) (collectively referred to as "Medtronic Damages")
arising out of or based upon (i) any Product Liability Claims resulting from
Licensee's development, manufacture, use, or sale of any Licensed Product, or
(ii) any breach of this Agreement by Licensee.
(b) Medtronic shall indemnify and hold harmless Licensee, its Affiliates
and Licensee's and its Affiliates' respective officers, directors, shareholders,
employees and agents (collectively, all such indemnitees are referred to in this
Section 5.3(b) as "Licensee Indemnitees") against and in respect of any and all
demands, losses, obligations, liabilities, damages (and
<PAGE>
including without limitation compensatory and punitive damages), deficiencies,
Actions, settlements, judgments, costs and expenses which the Licensee
Indemnitees may incur or suffer or with which it may be faced (including
reasonable costs and legal fees incident thereto or in seeking indemnification
therefor) (collectively referred to as "Licensee Damages") arising out of or
based upon any breach of this Agreement by Medtronic.
5.4 LICENSEE REGULATORY INTERACTION RIGHTS. Notwithstanding Section 5.2
above, interaction with the regulatory agencies in any country, including,
without limitation the FDA, concerning Licensed Products of Licensee or its
Affiliates in the Field of Use shall be exclusively conducted by Licensee and
Licensee shall be the official company sponsor. Subject to Section 5.3(a)
hereof, Licensee shall have complete authority to act as Licensee, in its sole
discretion, deems appropriate with respect to any such regulatory matter.
5.5 LICENSEE MARKETING RIGHTS. Subject to Sections 4.1 and 5.3(a) hereof,
nothing herein shall prevent or limit Licensee from setting its own prices for
Licensed Products or determining Licensee's marketing policies and practices in
its sole discretion.
5.6 TRADEMARK. Nothing in this Agreement shall be deemed to grant to
Licensee any right to use the trademark "Medtronic", the Medtronic corporate
logo, or any other trademark owned by Medtronic or its Affiliates.
ARTICLE 6
REPRESENTATIONS & WARRANTIES
6.1 ORGANIZATION. Each party represents and warrants to the other party
that such party is a corporation duly organized, validly existing, and in good
standing under the laws of the jurisdiction of its incorporation.
6.2 AUTHORIZATION OF TRANSACTION. Each party represents and warrants to
the other party that it has full power and authority (including full corporate
power and authority) to execute and deliver this Agreement and to perform its
obligations hereunder. All necessary corporate proceedings (including any
necessary approval by a party's board of directors) have been taken by such
party to duly authorize the execution, delivery, and performance of this
Agreement by such party. This Agreement constitutes the valid and legally
binding obligation of such party, enforceable against such party in accordance
with its terms and conditions.
ARTICLE 7
MISCELLANEOUS
7.1 ASSIGNMENT. Except as set forth in Section 2.6, Licensee may not
assign or transfer in any manner (whether by merger, share exchange, combination
or consolidation of any type, operation of Law, purchase or otherwise) any of
its rights or obligations under this
<PAGE>
Agreement. Any prohibited assignment or transfer shall be null and void.
Medtronic may assign or otherwise transfer its rights and obligations under this
Agreement to any successor in interest (by merger, share exchange, combination,
consolidation, operation of Law, purchase or otherwise), provided that such
assignee or successor agrees to be bound by the terms hereof.
7.2 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof and supersedes all
previous proposals or agreements, oral or written, and all negotiations,
conversations or discussions heretofore had between the parties related to the
subject matter of this Agreement.
7.3 SURVIVAL. All of the covenants, warranties and indemnifications made
in this Agreement are intended, or by their terms and provisions required, to be
observed and performed by the parties after the execution and delivery, and the
termination hereof and shall survive such execution, delivery and termination
and continue thereafter in full force and effect.
7.4 WAIVER, DISCHARGE, ETC. This Agreement may not be released,
discharged, abandoned, changed or modified in any manner, except by an
instrument in writing signed on behalf of each of the parties to this Agreement
by their duly authorized representatives. The failure of either party to
enforce at any time any of the provisions of this Agreement shall in no way be
construed to be a waiver of any such provision, nor in any way to affect the
validity of this Agreement or any part of it or the right of either party after
any such failure to enforce each and every such provision. No waiver of any
breach of this Agreement shall be held to be a waiver of any other or subsequent
breach.
7.5 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become a binding agreement when one or more counterparts have been
signed by each party and delivered to the other party.
7.6 TITLES AND HEADINGS: CONSTRUCTION. The titles and headings to
Sections herein are inserted for the convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement. This Agreement shall be construed without regard to any presumption
or other rule requiring construction hereof against the party causing this
Agreement to be drafted.
7.7 BENEFIT. Nothing in this Agreement, expressed or implied, is intended
to confer on any person other than the parties to this Agreement or their
respective permitted successors or assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
7.8 NOTICES. All notices or other communications to a party required or
permitted hereunder shall be in writing and shall be delivered personally or by
telecopy (receipt confirmed) to such party (or, in the case of an entity, to an
executive officer of such party) or shall be given by certified mail, postage
prepaid with return receipt requested, addressed as follows:
<PAGE>
if to Licensee, to:
Endocardial Solutions, Inc.
1350 Energy Lane, Suite 110
St. Paul, Minnesota 55108-5254
Attention: President and Chief Executive Officer
Telecopy Number: (612) 644-7897
and if to Medtronic, to:
Medtronic, Inc.
Corporate Center
7000 Central Avenue N.E.
Minneapolis, Minnesota 55432
with separate copies thereof addressed to:
Attention: General Counsel
Telecopy number: (612) 572-5459
Attention: Vice President, Corporate Development and
Associate General Counsel
Telecopy number: (612) 572-5404
Licensee or Medtronic may change their respective above-specified recipient
and/or mailing address by notice to the other party given in the manner herein
prescribed. All notices shall be deemed given on the day when actually
delivered as provided above (if delivered personally or by telecopy) or on the
day shown on the return receipt (if delivered by mail).
7.9 SEVERABILITY. If any provision of this Agreement is held invalid by a
court of competent jurisdiction, the remaining provisions shall nonetheless be
enforceable according to their terms. Further, if any provision is held to be
overbroad as written, such provision shall be deemed amended to narrow its
application to the extent necessary to make the provision enforceable according
to applicable Law and shall be enforced as amended.
7.10 MARKING. If requested by Medtronic, Licensee shall cause all Licensed
Products manufactured or sold under this license in the United States by it or
its Affiliates with a notice to the effect that such product is licensed under
the U.S. patents designated by Medtronic.
7.11 RIGHT OF FIRST OFFER. During the term of this Agreement, if
Medtronic determines to license any of the Licensed Technology for the field
of percutaneous myocardial revascularization, then Medtronic shall provide
notice to Licensee of its determination and give Licensee the opportunity to
negotiate in good faith with Medtronic for the grant of a license to Licensee
to make, use and sell Licensed Products in the field of percutaneous
myocardial
<PAGE>
revascularization. If a definitive agreement for such license has not been
entered into by the parties within sixty (60) days of the above-mentioned
notice, then Medtronic shall have no further obligation to conduct discussions
with Licensee and may enter into such agreements with third parties where the
material terms, in the aggregate, are no less favorable to Medtronic than those
offered by Licensee for acceptance by Medtronic to form a binding agreement
during such discussions with Medtronic.
(Signatures on the following page)
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this License Agreement
to be executed in the manner appropriate to each, effective as of the date first
above written.
ENDOCARDIAL SOLUTIONS, INC.
By: Jim Bullock
Its: President/CEO
MEDTRONIC, INC.
By: Michael Ellwein
Its: Vice President
<PAGE>
EXHIBIT A
U.S. PATENTS
Patent No. (***); Issued (***); Inventor: (***);
Entitled: (***)
U.S. PATENT APPLICATIONS
Serial No. (***); Filed (***); Inventor: (***)
Entitled: (***)
- -----------------
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
EXHIBIT B
MEDTRONIC COMPETITORS
"Medtronic Competitors" for purposes of this Agreement include the following
entities, any Affiliates of any of the following entities or of any group or
combination of the following entities, or any successor thereto:
(***)
- -----------------
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
EXHIBIT C
WARRANT
THIS DOCUMENT IS SET UP USING HEADING NUMBERING STYLES. LEVEL 1 IS ALT 1, LEVEL
2 IS ALT 2 AND LEVEL 3 IS ALT 3. IF UNFAMILIAR WITH THIS FEATURE, PLEASE SEEK
ASSISTANCE.THIS WARRANT, AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE REOFFERED OR SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO
(1) REGISTRATION OR (2) AN OPINION OF COUNSEL FOR THE COMPANY OR OTHER COUNSEL
REASONABLY ACCEPTABLE TO THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION IS NOT
REQUIRED.
WARRANT
To Purchase 447,554
Shares of Common Stock of
ENDOCARDIAL SOLUTIONS, INC.
January 30, 1998
Endocardial Solutions, Inc., a Delaware corporation (the "Company"), for
value received, hereby certifies that Medtronic Asset Management, Inc., a
Minnesota corporation, or its registered assigns (the "Holder"), is entitled,
subject to the terms set forth below, upon exercise of this Warrant to purchase
from the Company, at any time or from time to time on or after the date hereof
and on or before 11:59 p.m. (Minneapolis, Minnesota time) on the four-year
anniversary of the date hereof, up to Four Hundred Forty-seven Thousand Five
Hundred Fifty-four (447,554) shares of Common Stock, $.01 par value, of the
Company ("Common Stock") at a purchase price per share equal to $11.1125
(subject to adjustment in accordance with Section 4 hereof), which number of
shares the Company hereby represents and warrants to equal five percent (5%) of
the total number of shares of Common Stock issued and outstanding on the date
hereof, and which per share purchase price the Company hereby represents and
warrants to equal the average closing price of Common Stock for the twenty (20)
trading days ending on and including the trading day immediately preceding the
date hereof. The shares issuable upon exercise or conversion of this Warrant,
and the purchase price per share, each as adjusted from time to time pursuant to
the provisions of this Warrant, are hereinafter referred to as the "Warrant
Shares" and the "Exercise Price," respectively.
This Warrant is further subject to the following provisions, terms and
conditions:
<PAGE>
EXERCISE OF WARRANT. This Warrant may be exercised by the Holder, in whole
or in part (but not as to any fraction of a share of Common Stock), by
surrendering this Warrant, with the Exercise Form attached hereto as Exhibit A
filled-in and duly executed by such Holder or by such Holder's duly authorized
attorney, to the Company at its principal office accompanied by payment of the
Exercise Price in the form of a check or wire transfer in the amount of the
Exercise Price multiplied by the number of shares as to which the Warrant is
being exercised.
CONVERSION OF WARRANT.
The Holder shall also have the right (the "Conversion Right") to
convert all or any portion of this Warrant into such number of shares
(rounded to the nearest whole share) of Company Common Stock equal to the
quotient obtained by dividing (i) the "Aggregate Warrant Spread" as of the
date the Conversion Right is exercised, by (ii) the "Market Price of the
Common Stock" as of the date the Conversion Right is exercised. The
Conversion Right shall be exercisable at any time or from time to time
prior to expiration of this Warrant by surrendering this Warrant with the
Conversion Form attached hereto as Exhibit B filled-in and duly executed by
such Holder or by such Holder's duly authorized attorney to the Company at
its principal office.
For purposes of this Section 2, the "Aggregate Warrant Spread" of all
or a portion of this Warrant as of a particular date shall equal (i) the
Market Price of the Common Stock multiplied by the number of shares of
Common Stock purchasable upon exercise of all or such portion of this
Warrant on such date, minus (ii) the Exercise Price multiplied by the
number of shares of Common Stock purchasable upon exercise of all or such
portion of this Warrant on such date. For purposes of this Section 2, the
"Market Price of the Common Stock" as of a particular date shall equal: (i)
if the Common Stock is traded on an exchange or is quoted on either the
Nasdaq National Market or Small-Cap Market, then the average of the closing
or last sale prices, respectively, reported for the ten (10) trading days
immediately preceding such date, or (ii) if the Common Stock is not traded
on an exchange, the Nasdaq National Market, or the Nasdaq Small-Cap Market
but is traded in the local over-the-counter market, then the average of the
mid-points between the highest bid and lowest asked quotations for each of
the ten (10) trading days immediately preceding such date.
EFFECTIVE DATE OF EXERCISE OR CONVERSION. Each exercise or conversion of
this Warrant shall be deemed effective as of the close of business on the day on
which this Warrant is surrendered to the Company as provided in Section 1 or
Section 2(a) above. At such time, the person or persons in whose name or names
any certificates for Warrant Shares shall be issuable upon such exercise or
conversion shall be deemed to have become the holder or holders of record of the
Warrant Shares represented by such certificates. Within ten (10) days after the
exercise or conversion of this Warrant in full or in part, the Company will, at
its expense, cause to be issued in the name of and delivered to the Holder or
such other person as the Holder may (upon payment by such Holder of any
applicable transfer taxes) direct: (i) a certificate or certificates for the
number of full Warrant Shares to which such Holder is entitled upon such
exercise or
<PAGE>
conversion, and (ii) unless this Warrant has expired, a new Warrant or Warrants
(dated the date hereof and in form identical hereto) representing the right to
purchase the remaining number of shares of Common Stock, if any, with respect to
which this Warrant has not then been exercised or converted.
ADJUSTMENTS TO EXERCISE PRICE. The above provisions are, however, subject
to the following:
(i) If the Company shall at anytime after the date of this Warrant
subdivide or combine the outstanding shares of Common Stock or declare
a dividend payable in Common Stock, then the number of shares of
Common Stock for which this Warrant may be exercised as of immediately
prior to the subdivision, combination or record date for such dividend
payable in Common Stock shall forthwith be proportionately decreased,
in the case of combination, or increased, in the case of subdivision
or dividend payable in Common Stock.
(ii) If the Company shall at anytime after the date of this
Warrant subdivide or combine the outstanding shares of Common Stock or
declare a dividend payable in Common Stock, the Exercise Price in
effect immediately prior to the subdivision, combination or record
date for such dividend payable in Common Stock shall forthwith be
proportionately increased, in the case of combination, or decreased,
in the case of subdivision or dividend payable in Common Stock.
If any capital reorganization or reclassification of the capital stock
of the Company, or share exchange, combination, consolidation or merger of
the Company with another corporation, or the sale of all or substantially
all of its assets to another corporation shall be effected in such a way
that holders of Common Stock shall be entitled to receive stock, securities
or assets with respect to or in exchange for Common Stock, then, as a
condition of such reorganization, reclassification, share exchange,
combination, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the Holder shall thereafter have the right to receive
upon exercise of this Warrant upon the basis and upon the terms and
conditions specified in this Warrant and in lieu of the shares of the
Common Stock of the Company into which this Warrant was immediately
theretofore exercisable or convertible, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a
number of outstanding shares of such Common Stock equal to the number of
shares of such stock into which this Warrant was immediately theretofore
exercisable had such reorganization, reclassification, share exchange,
combination, consolidation, merger or sale not taken place, and in any such
case appropriate provisions shall be made with respect to the rights and
interests of Holder to the end that the provisions hereof (including
without limitation provisions for adjustments of the Exercise Price and of
the number of shares purchasable upon exercise or conversion of this
Warrant) shall thereafter be applicable, as nearly as may be, in relation
to any shares of stock, securities or assets thereafter deliverable upon
the exercise or conversion hereof. The Company shall not effect any
<PAGE>
such share exchange, combination, consolidation, merger or sale, unless
prior to the consummation thereof the successor corporation (if other than
the Company) resulting from such share exchange, combination, consolidation
or merger or the corporation purchasing such assets shall assume by written
instrument executed and mailed to the Holder at the last address of such
Holder appearing on the books of the Company, the obligation to deliver to
such Holder such shares of stock, securities or assets which, in accordance
with the foregoing provisions, such Holder may thereafter be entitled to
receive upon exercise or conversion of this Warrant.
If at anytime after the date of this Warrant the Company distributes
to all holders of Common Stock any assets (excluding ordinary cash
dividends), debt securities, or any rights or warrants to purchase debt
securities, assets or other securities (including Common Stock), the
Exercise Price shall be adjusted in accordance with the formula:
1
E = E x (O x M) - F
---------------
O x M
where:
1
E = the adjusted Exercise Price.
E = the current Exercise Price.
M = the average market price of Common Stock for the 30
consecutive trading days commencing 45 trading days before
the record date mentioned below.
O = the number of shares of Common Stock outstanding on the
record date mentioned below.
F = the fair market value on the record date of the aggregate of
all assets, securities, rights or warrants distributed. The
Company's Board of Directors shall determine the fair market
value in the exercise of its reasonable judgment.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of stockholders entitled to receive the distribution.
(d) Upon any adjustment of the Exercise Price, then and in each such
case, the Company shall give written notice thereof, by first class mail,
postage prepaid, addressed to the Holder of this Warrant at the address of
such Holder as shown on the books of the Company, which notice shall state
the Exercise Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares for which this Warrant may be
exercised, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
<PAGE>
COMMON STOCK. As used herein, the term "Common Stock" shall mean and
include the Company's presently authorized shares of common stock and shall also
include any capital stock of any class of the Company hereafter authorized which
shall not be limited to a fixed sum or percentage in respect of the rights of
the holders thereof to participate in dividends or in the distribution,
dissolution or winding up of the Company.
NO VOTING RIGHTS. This Warrant shall not entitle the Holder to any voting
rights or other rights as a shareholder of the Company unless and until
exercised or converted pursuant to the provisions hereof.
EXERCISE OR TRANSFER OF WARRANT OR RESALE OF COMMON STOCK. The Holder, by
acceptance hereof, agrees to give written notice to the Company before
transferring this Warrant, in whole or in part, or transferring any shares of
Common Stock issued upon the exercise or conversion hereof, of such Holder's
intention to do so, describing briefly the manner of any proposed transfer.
Such notice shall include an opinion of counsel reasonably satisfactory to the
Company that (i) the proposed exercise or transfer may be effected without
registration or qualification under the Securities Act of 1933, as amended (the
"Act") and any applicable state securities or blue sky laws, or (ii) the
proposed exercise or transfer has been registered under such laws. Upon
delivering such notice, such Holder shall be entitled to transfer this Warrant
or such Warrant Shares, all in accordance with the terms of the notice delivered
by such Holder to the Company, provided that an appropriate legend may be
endorsed on the certificates for such shares respecting restrictions upon
transfer thereof necessary or advisable in the opinion of counsel to the Company
to prevent further transfer which would be in violation of Section 5 the Act and
applicable state securities or blue sky laws.
If in the opinion of counsel to the Company or other counsel reasonably
acceptable to the Company the proposed transfer or disposition of this Warrant
or the Warrant Shares described in the written notice given pursuant to this
Section 7 may not be effected without registration of this Warrant or the
Warrant Shares, the Company shall promptly give written notice thereof to the
Holder within 10 days after the Company receives such notice, and such holder
will limit its activities in respect to such as, in the opinion of such counsel,
is permitted by law.
COVENANTS OF THE COMPANY. The Company covenants and agrees that all shares
which may be issued upon conversion of this Warrant will, upon issuance, be duly
authorized and issued, fully paid, nonassessable and free from all taxes, liens
and charges with respect to the issue thereof. The Company further covenants
and agrees that the Company will at all times have authorized, and reserved for
the purpose of issue upon exercise hereof, a sufficient number of shares of its
Common Stock to provide for the exercise of this Warrant.
CERTAIN NOTICES. The Holder shall be entitled to receive from the Company
immediately upon declaration thereof and at least thirty (30) days prior to the
record date for determination of shareholders entitled thereto or to vote
thereon (or if no record date is set, prior to the event), written notice of any
event which could require an adjustment pursuant to Section 4 hereof or of the
dissolution or liquidation of the Company. All notices hereunder shall be in
writing and shall be delivered personally or by telecopy (receipt confirmed) to
such party (or, in the case of an
<PAGE>
entity, to an executive officer of such party) or shall be sent by a reputable
express delivery service or by certified mail, postage prepaid with return
receipt requested, addressed as follows:
if to Medtronic, to:
Medtronic, Inc.
Corporate Center
7000 Central Avenue N.E.
Minneapolis, MN 55432
with separate copies thereof addressed to:
Attention: General Counsel
FAX (612) 572-5459
Attention: Vice President, Corporate Development and Associate General
Counsel
FAX (612) 572-5404
if to the Company to:
Endocardial Solutions, Inc.
1350 Energy Lane, Suite 110
St. Paul, MN 55108-5254
Attention: President and Chief Executive Officer
FAX (612) 644-7897
Any party may change the above-specified recipient and/or mailing address
by notice to all other parties given in the manner herein prescribed. All
notices shall be deemed given on the day when actually delivered as provided
above (if delivered personally or by telecopy) or on the day shown on the return
receipt (if delivered by mail or delivery service).
REGISTRATION RIGHTS. The Holders of this Warrant and the Warrant Shares
are entitled to the rights and benefits of all of the terms, provisions and
conditions of that certain Registration Rights Agreement dated January 30, 1998
between Medtronic, Inc. and the Company, provided an express sharing or
assignment of such rights and benefits is made to each such Holder by such
Holder's transferor.
MISCELLANEOUS.
No amendment, modification or waiver of any provision of this Warrant
shall be effective unless he same shall be in writing and signed by the
holder hereof.
This Warrant shall be governed by and construed in accordance with the
laws of the State of Minnesota.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
authorized officer and dated as of the date stated above.
ENDOCARDIAL SOLUTIONS, INC.
By:
James W. Bullock, President and Chief
Executive Officer
<PAGE>
Exhibit A
NOTICE OF EXERCISE OF WARRANT -- To Be Executed by the Registered Holder in
Order to Exercise the Warrant
The undersigned hereby irrevocably elects to exercise the attached Warrant
to purchase, for cash pursuant to Section 1 thereof, ________________ shares of
Common Stock issuable upon the exercise of such Warrant. The undersigned
requests that certificates for such shares be issued in the name of
____________________. If this Warrant is not fully exercised, the
undersigned requests that a new Warrant to purchase the balance of shares
remaining purchasable hereunder be issued in the name of ______________________.
Date: _________, ______
[name of registered Holder]
[signature]
[street address]
[city, state, zip]
[tax identification number]
<PAGE>
Exhibit B
NOTICE OF CONVERSION OF WARRANT -- To Be Executed by the Registered Holder
in Order to Convert the Warrant on a
Cashless Basis
The undersigned hereby irrevocably elects to convert, on a cashless basis,
a total of ______________ shares of Common Stock otherwise purchasable upon
exercise of the attached Warrant into such lesser number of shares of Common
Stock as determined by Section 2 of the Warrant. The undersigned requests that
certificates for such shares be issued in the name of
__________________________________. If this Warrant is not fully converted, the
undersigned requests that a new Warrant to purchase the balance of shares
remaining purchasable hereunder be issued in the name of ______________________.
Date: _________, ______
[name of registered Holder]
[signature]
[street address]
[city, state, zip]
[tax identification number]
<PAGE>
EXHIBIT D
REGISTRATION RIGHTS AGREEMENT
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ESI AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 426,237
<SECURITIES> 17,207,680
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,113,577
<CURRENT-ASSETS> 19,064,714
<PP&E> 2,846,367
<DEPRECIATION> (1,213,070)
<TOTAL-ASSETS> 20,816,304
<CURRENT-LIABILITIES> 1,745,611
<BONDS> 0
0
0
<COMMON> 89,762
<OTHER-SE> 50,286,554
<TOTAL-LIABILITY-AND-EQUITY> 20,816,304
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,478,145
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,173
<INCOME-PRETAX> (6,217,383)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,217,383)
<EPS-PRIMARY> (.69)
<EPS-DILUTED> (.69)
</TABLE>
<PAGE>
EXHIBIT 99.1
Endocardial Solutions, Inc. (the "Company"), or persons acting on
behalf of the Company, or outside reviewers retained by the Company making
statements on behalf of the Company, or underwriters, from time to time make,
in writing or orally, "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended). When used in conjunction with an
identified forward-looking statement, this Cautionary Statement is for the
purpose of qualifying for the "safe harbor" provisions of such sections and
is intended to be a readily available written document that contains factors
which could cause results to differ materially from such forward-looking
statements. These factors are in addition to any other cautionary
statements, written or oral, which may be made or referred to in connection
with any such forward-looking statement.
The following matters, among others, may have a material adverse effect
on the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this
Cautionary Statement in the context of a forward-looking statement or
statements shall be deemed to be a statement that any or more of the
following factors may cause actual results to differ materially from those in
such forward-looking statement or statements:
DEPENDENCE ON SUCCESSFUL DEVELOPMENT AND COMMERCIALIZATION OF THE ENSITE SYSTEM
The Company's future success is entirely dependent upon the successful
development, commercialization and market acceptance of the EnSite System,
the development of which is ongoing and the complete efficacy and safety of
which have not yet been demonstrated. The EnSite System is currently the
Company's only potential product, and the Company could be required to cease
operations if the system is not successfully commercialized. The EnSite
System will require further development, significant additional clinical
trials and, ultimately, United States and international regulatory approvals
before it can be marketed in the United States and internationally. There
can be no assurance that unforeseen problems will not occur in research and
development, clinical testing, regulatory submissions and approval, product
manufacturing and commercial scale-up, marketing or product distribution.
Any such occurrence could materially delay the commercialization of the
EnSite System or prevent its market introduction entirely. The Company will
not generate any significant revenue until such time, if ever, as the EnSite
System is successfully commercialized. There can be no assurance that the
Company will ever derive substantial revenues from the sale of the EnSite
System.
LIMITED CLINICAL TESTING EXPERIENCE; SAFETY AND EFFICACY NOT YET ESTABLISHED
The Company has conducted only limited clinical trials on patients for
VT and SVT in the United States and in the United Kingdom. The Company has
experienced complications in its clinical trials, and clinical data obtained
to date are insufficient to demonstrate the safety and efficacy of the EnSite
System under applicable United States and international regulatory
guidelines. Accordingly, the Company believes it will be required to conduct
extensive clinical testing in the United States in order to support a
pre-market approval ("PMA") application to the United States Food and Drug
Administration ("FDA") for marketing approval. Patients selected for
clinical trials must meet stringent guidelines to undergo testing, and there
can be no assurance that patients can be enrolled in clinical trials on a
timely basis. Further, there can be no assurance that any of the Company's
products will prove to be safe and effective in clinical trials under United
States or international regulatory guidelines or that the Company will not
encounter problems in clinical testing that will cause a delay in the
commercialization of the EnSite System. Moreover, the clinical trials may
identify significant technical or other obstacles to be overcome prior to
obtaining necessary regulatory or reimbursement approvals. In addition, the
Company's development of the EnSite System for diagnosing atrial fibrillation
is in its early stages. The Company received an investigational device
exemption ("IDE") from the FDA for a multi-center clinical study of the
EnSite System in diagnosing atrial fibrillation in August 1997, but to date
has conducted only limited clinical trials on patients for atrial
fibrillation.
<PAGE>
The Company has not yet applied for regulatory approval in international
markets for the use of the EnSite System in diagnosing atrial fibrillation.
Securing regulatory approval in the United States or in international markets
for use of the EnSite System in diagnosing atrial fibrillation will require
extensive clinical trials. If the EnSite System does not prove to be safe
and effective in clinical trials, the Company's business, financial condition
and results of operations will be materially adversely affected.
LACK OF REGULATORY APPROVAL
The manufacture and sale of medical devices, including the EnSite
System, are subject to extensive 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, but has not
yet received such certification for the EnSite 3000 clinical workstation, and
there can be no assurance it will be able to do so in a timely manner. In
addition, significant costs and requests for additional information may be
encountered by the Company in its efforts to obtain regulatory approvals.
Any such events could substantially delay or preclude the Company from
marketing its products internationally.
Regulatory approvals, if granted, may include significant limitations on
the indicated uses for which the product may be marketed. In addition, to
obtain such approvals, the FDA and certain foreign regulatory authorities may
impose numerous other requirements with which medical device manufacturers
must comply. FDA enforcement policy strictly prohibits the marketing of
approved medical devices for unapproved uses. In addition, product approvals
could be withdrawn for failure to comply with regulatory standards or the
occurrence of unforeseen problems following the initial marketing. The
Company will be required to adhere to applicable FDA regulations regarding
Good Manufacturing Practices ("GMP") and similar regulations in other
countries, which include testing, control, and documentation requirements.
Ongoing compliance with GMP and other applicable regulatory requirements will
be monitored through periodic inspections by federal and state agencies,
including the FDA, and by comparable agencies in other countries. Failure to
comply with applicable regulatory requirements, including the marketing of
products for unapproved uses, could result in, among other things, warning
letters, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal of the government to grant
premarket approval for devices, withdrawal of approvals and criminal
prosecution. Changes in existing regulations or adoption of new governmental
regulations or policies could prevent or delay regulatory approval of the
Company's products. Certain material changes to medical devices also are
subject to FDA review and approval.
<PAGE>
There can be no assurance that the Company will be able to obtain PMA
approval for the EnSite System for use in diagnosing VT or 510(k) approval
for SVT, the certifications necessary for affixation of the CE Mark on the
Company's clinical workstation 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 no revenue and has sustained significant
operating losses each year since its inception. The Company expects such
losses to continue at least through 1999. There can be no assurance that the
Company will ever generate substantial operating revenues or achieve
profitability. The Company's ability to generate revenues from operations
and achieve profitability is dependent upon successful development,
regulatory approval, manufacturing and commercialization of the EnSite System
and the Company's successful transition from a development stage company to a
manufacturing and sales company.
SIGNIFICANT COMPETITION; RAPID TECHNOLOGICAL CHANGE
The cardiac medical device market is highly competitive and
characterized by rapid innovation and technological change. The Company's
EnSite System for the mapping of ventricular tachycardia is a new technology
that must compete with more established mapping procedures and devices such
as single-point contact catheters that are currently widely used to map
tachycardia and which are generally less expensive and, unlike EnSite
catheters, are generally reused after resterilization. Single-point contact
diagnostic catheters have been approved by the FDA for VT mapping. In
addition, certain of the Company's competitors are developing new approaches
and new products for diagnosing ventricular tachycardia and atrial 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 is expected to include 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
<PAGE>
treatment was unnecessary, inappropriate or not cost-effective, experimental
or used for a non-approved indication.
It is anticipated that the Company's EnSite catheter will be sold at a
premium in comparison to existing single point catheters used in current
diagnostic or mapping procedures, in addition to requiring an initial capital
outlay for the companion clinical workstation. Existing single point
catheters, unlike EnSite catheters, are generally reused after sterilization.
In addition to establishing the safety and efficacy of the EnSite System,
and assuming no increase in the level of reimbursement for cardiovascular
procedures expected to utilize the Company's products, the Company will be
required to economically justify the relative increased cost of utilizing the
EnSite System by satisfactorily demonstrating the enhanced benefits of the
EnSite System to health care providers and payors in terms of such factors as
enhanced patient procedural efficiencies, reduced radiation exposure and
improved patient outcomes.
The commercial success of the Company's EnSite System may also be
affected by the availability of adequate reimbursement for treatments for
complex VT, including catheter ablation. To date, catheter ablation has not
been approved by the FDA for treatment of VT and is not a commonly prescribed
treatment for VT. The Company believes that the improved mapping technology
of the EnSite System may enable catheter ablation for treating complex VT.
There can be no assurance that adequate levels of reimbursement will be
available to enable the Company to achieve or maintain market acceptance of
its products or maintain price levels which exceed the Company's costs of
developing and manufacturing its products. In addition, use of the Company's
products will also depend on the adequacy of third-party reimbursement for
treatments that would be used in connection with the Company's products, such
as catheter ablation treatment. There can be no assurance that adequate
levels of reimbursement for ablation treatment will be available to support
the use of the Company's products. Without adequate support from third-party
payors, the market for the Company's products may be severely limited.
Moreover, the Company is unable to predict what additional legislation or
regulation, if any, relating to the health care industry or third-party
coverage and reimbursement may be enacted in the future, or what effect such
legislation or regulation would have on the Company. There is significant
uncertainty concerning third-party reimbursement of medical devices, and
there can be no assurance that third-party reimbursement will be available in
the future for the EnSite System or that any third-party reimbursement that
is obtained will be adequate. Any failure to obtain third party
reimbursement for diagnostic procedures using the Company's products or
treatment procedures that rely on the Company's products could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company expects that there will be continued pressure on
cost-containment throughout the United States health care system. Reforms
may include mandated basic health care benefits, controls on health care
spending through limitations on the growth of private health insurance
premiums and Medicare and Medicaid spending, greater reliance on prospective
payment systems, the creation of large insurance purchasing groups and
fundamental changes to the health care delivery system. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative health care delivery systems and payment methodologies and
public debate of these issues will likely continue in the future. Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of
such reform proposals will be adopted, when such proposals may be adopted or
what impact they may have on the Company.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must
be obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
devices and procedures. In most markets there are private insurance systems
as well as government managed systems. There can be no assurance that
reimbursement for the Company's products will be available in international
markets under either government or private reimbursement systems.
<PAGE>
The Company faces an inherent business risk of exposure to product
liability claims in the event that an electrophysiology patient is adversely
affected by its products. The Company currently carries a product liability
insurance policy covering the Company's clinical trial operations with an
aggregate limit of $5 million, although there can be no assurance that the
Company's existing insurance coverage limits are adequate to cover the
Company from any liabilities it might incur in connection with the
distribution of its products. Although the Company expects to obtain product
liability insurance coverage in connection with the commercialization of the
EnSite System, there can be no assurance that such insurance will be
available on commercially reasonable terms, or at all, or that such
insurance, even if obtained, would adequately cover any product liability
claim. A product liability or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on the business and prospects of the Company.
POSSIBLE VOLATILITY OF PRICE
The trading prices of the Company's Common Stock could be subject to
wide fluctuations in response to quarter to quarter variations in the
Company's operating results, announcements by the Company or its competitors
regarding the results of regulatory approval filings or clinical trials or
testing, developments or disputes concerning proprietary rights,
technological innovations or new commercial products, governmental regulatory
action, third-party reimbursement decisions, general conditions in the
medical technology industry, or other events or factors, many of which are
beyond the Company's control. In addition, the stock market has experienced
extreme price and volume fluctuations, which have particularly affected the
market prices of many medical technology companies and which have often been
unrelated to the operating performance of such companies.
REGISTRATION RIGHTS
Certain stockholders, beneficially holding an aggregate of 4,705,603
shares of Common Stock, have the right, subject to certain conditions, to
include their shares in future registration statements relating to the
Company's securities and to cause the Company to register certain Common
Stock owned by them.
NO DIVIDENDS
The Company has never paid or declared a dividend on its capital stock
and does not anticipate doing so for the foreseeable future.
