<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO
______________.
COMMISSION FILE NO. 0-22233
ENDOCARDIAL SOLUTIONS, INC.
- ---------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1724963
- -------- ----------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
1350 ENERGY LANE (651) 523-6900
SUITE 110 --------------
SAINT PAUL, MINNESOTA 55108 (REGISTRANT'S TELEPHONE NUMBER
- ---------------------------- INCLUDING AREA CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES
AND ZIP CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING TWELVE (12) MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES /X/ NO / /
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $.01 PAR VALUE 10,170,956
- ----------------------------
(CLASS) (NUMBER OF SHARES OUTSTANDING AT JULY 31, 1999)
1
<PAGE>
INDEX
ENDOCARDIAL SOLUTIONS, INC.
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1999 and December 31, 1998 3
Statements of Operations - Three and six month periods ended
June 30, 1998 and June 30, 1999 4
Statements of Cash Flows - Three and six months ended
June 30, 1998 and June 30, 1999 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 7-9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 9
PART II. OTHER INFORMATION
Items 1 through 3 have been omitted since all items are inapplicable or answers
negative.
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENDOCARDIAL SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,467,834 $ 654,529
Short-term investments 3,496,176 8,060,303
Accounts Receivable 1,657,645 475,750
Inventories 1,944,887 1,827,061
Prepaid expenses and other current assets 172,632 205,161
------------ ------------
Total current assets 8,739,174 11,222,804
Furniture and equipment 4,896,564 3,942,741
Less accumulated depreciation (2,024,709) (1,668,305)
------------ ------------
2,871,855 2,274,436
Deposits 81,709 81,709
Patents, net of accumulated amortization (1999 - $82,489; 1998 - $74,440) 34,593 42,642
------------ ------------
Total assets $ 11,727,331 $ 13,621,591
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,549,709 $ 762,147
Accrued salaries and expenses 897,070 706,724
Current portion of capital lease obligations 774,053 876,959
------------ ------------
Total current liabilities 3,220,832 2,345,830
Capital lease obligations 1,147,258 812,339
Long-term debt 3,500,000 -
Stockholders' equity:
Undesignated Preferred Stock, par value $.01 per share:
Authorized shares--10,000,000
Issued and outstanding shares--none - -
Common Stock, $.01 par value
Authorized shares--June 30, 1999--40,000,000; December 31, 1998--40,000,000
Issued and outstanding shares--June 30, 1999--9,055,887; December 31, 1998--9,011,762 90,559 90,118
Additional paid-in capital 50,445,850 50,329,703
Accumulated deficit (46,630,770) (39,863,607)
Deferred compensation (46,398) (92,792)
------------ ------------
Total stockholders' equity 3,859,241 10,463,422
------------ ------------
Total liabilities and stockholders' equity $ 11,727,331 $ 13,621,591
------------ ------------
------------ ------------
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
SEE ACCOMPANYING NOTES.
3
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
----------------------------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Revenue $ 1,719,053 $ 435,406 $ 3,012,435 $ 435,406
Cost of goods sold 1,411,825 1,093,393 2,853,744 1,610,518
----------- ----------- ----------- -------------
Gross profit 307,228 (657,987) 158,691 (1,175,112)
Operating expenses:
Research and development 1,342,020 2,080,682 2,707,001 7,420,331
General and administrative 528,724 440,049 1,004,273 814,181
Sales and marketing 2,168,768 327,477 3,147,309 574,716
----------- ----------- ----------- -------------
Operating loss (3,732,284) (3,506,195) (6,699,892) (9,984,340)
Other income (expense):
Interest income 86,525 219,226 199,602 497,161
Interest expense (104,561) (15,902) (163,112) (33,075)
----------- ----------- ----------- -------------
(18,036) 203,324 36,490 464,086
----------- ----------- ----------- -------------
Net loss for the period and accumulated deficit $(3,750,320) $(3,302,871) $(6,663,402) $ (9,520,254)
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Net loss per share - basic and diluted $ (0.41) $ (0.37) $ (0.74) $ (1.06)
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Weighted average shares outstanding 9,050,375 8,987,306 9,037,003 8,974,246
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-----------------------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss (3,750,320) $ (3,302,871) $ (6,663,402)$ (9,520,254)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 188,256 152,520 364,453 276,306
Amortization of deferred compensation 23,198 54,129 46,394 108,258
Value of warrants granted in connection with purchase of technology -- -- -- 2,085,602
Changes in operating assets and liabilities:
Accounts Receivable (726,446) (451,360) (1,181,895) (451,360)
Inventory (16,580) 224,922 (117,826) (40,592)
Prepaid expenses and other assets (3,568) 6,295 32,528 (72,740)
Accounts payable 409,490 117,796 817,059 418,974
Accrued salaries and expenses 343,208 323,377 160,849 (21,663)
------------ ------------ ------------ ------------
Net cash used in operating activities (3,532,762) (2,875,192) (6,541,840) (7,217,469)
INVESTING ACTIVITIES
Purchases of short-term investments (1,952,143) (5,833,934) (3,950,873) (9,017,047)
Maturities of short-term investments 5,805,000 11,010,620 8,515,000 17,703,226
Purchases of furniture and equipment (136,492) (320,598) (223,132) (476,356)
Patent expenditures -- (13,317) -- (13,317)
------------ ------------ ------------ ------------
Net cash used in investing activities 3,716,365 4,842,771 4,340,995 8,196,506
FINANCING ACTIVITIES
Proceeds from notes payable -- -- 3,500,000 --
Principal payments on notes payable and capital lease obligations (338,365) (92,525) (498,679) (217,142)
Proceeds from issuance of common stock 8,673 27,121 12,829 53,861
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities (329,692) (65,404) 3,014,150 (163,281)
Increase (decrease) in cash and cash equivalents (146,089) 1,902,175 813,305 815,756
Cash and cash equivalents at beginning of period 1,613,923 426,237 654,529 1,512,656
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,467,834 $ 2,328,412 $ 1,467,834 $ 2,328,412
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchase of equipment and inventory through capital lease obligations $ 491,440 $ 567,424 $ 730,691 $ 567,424
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Due
to the Company's full market release in Europe in the third quarter 1998, the
Company is no longer considered to be in the development stage. Operating
results for the three and six months ended June 30, 1999, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. These financial statements should be read in conjunction with the audited
financial statements and accompanying notes for the fiscal year ended December
31, 1998, contained in the Company's 10-K.
2. INVENTORIES
Inventories are carried at the lower of cost (first-in, first-out basis) or
market. The majority of inventory consists of purchased components. To determine
the technological feasibility of its software efforts, the Company utilizes the
working model approach available under SFAS No. 86 and believes that the working
model was achieved when the software was available for commercial use in June
1998.
3. RECLASSIFICATIONS
Certain prior year items have been reclassified to conform to current year
presentations.
4. SUBSEQUENT EVENT
In July 1999, the company received proceeds of $10,000,000 from a private
placement of 1,111,111 shares of its common stock to accredited investors. The
placement was priced at $9.00 per share.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Endocardial Solutions Inc. (the "Company"), was incorporated in May 1992. The
Company develops, manufactures and markets the EnSite 3000-Registered
Trademark- clinical workstation and EnSite-Registered Trademark- catheter for
use by electrophysiologists in diagnosing and mapping abnormal heart rhythms
known as arrhythmias. The EnSite 3000-Registered Trademark- clinical
workstation and EnSite-Registered Trademark- catheter received FDA approval
for right atrial use in the U.S. during the second quarter 1999. Through a
distribution agreement with Medtronic, Inc., the products are available in a
full market release to electrophysiologists in Europe and Canada.
RESULTS OF OPERATIONS
GENERAL. Net losses increased to $3,750,320, or $.41 per share, for the three
months ended June 30, 1999, from $3,302,871, or $.37 per share, for the same
period in 1998. The net loss for the six months ended June 30, 1999 was
$6,663,402 or $.74 per share, compared to a net loss of $9,520,254 or $1.06 per
share, for the same period of 1998. The loss for the six months ended June 30,
1998 includes expenses of $3,585,602 for the acquisition of locator technology
that was purchased during the first quarter from Medtronic, Inc. The Company
expects losses to continue through at least 1999. The Company is entering a
period of growth in marketing expenses related to market introduction, including
increases in personnel costs.
REVENUE AND COST OF GOODS SOLD. The Company recorded revenue for the fifth
consecutive quarter. In addition, this was the first quarter of U.S. revenue
and the first quarter with a positive gross profit. Revenue for the three
months ended June 30, 1999 was $1,719,053, compared with revenues of $435,406
for the same period of 1998. Revenue included sales of the Company's
EnSite-Registered Trademark- catheter and EnSite 3000-Registered Trademark-
clinical workstation, including the Company's proprietary software, patient
interface unit and other peripherals. Revenue for the six months ended June
30, 1999 was $3,012,435, compared to revenues of $435,406 for the same period
of 1998. The Company began recording revenues in the second quarter 1998.
Cost of goods sold and unabsorbed manufacturing expenses were $1,411,825 and
$1,093,393 for the quarter ended June 30, 1999 and 1998, respectively. Cost
of goods sold and unabsorbed manufacturing expenses were $2,853,744 and
$1,610,518 for the six months ended June 30, 1999 and 1998, respectively.
Manufacturing expenses include costs for unabsorbed overhead from the
production of inventory held for re-sale.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$1,324,020 for the three month period ended June 30, 1999, compared to
$2,080,682during the same period in 1998, an increase of $756,662 The expenses
for the six months ended June 30, 1999 were $2,707,001, compared to $7,420,331
during the same period in 1998, a decrease of $4,713,330. The expenses for the
six months ended June 30, 1998 include $3,585,602 for the acquisition of locator
technology that was purchased during the first quarter from Medtronic, Inc. The
Company experienced a decrease of $1,127,728 in research and development
expenses after subtracting for the purchase of the locator technology. The
decrease is attributable to a reduction in clinical trial expenses and software
development costs. The Company believes research and development expenditures
will increase slightly for the remainder of 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$528,724 and $440,049 for the three months ended June 30, 1999 and 1998,
respectively. For the six months ended June 30, 1999 general and administrative
expenses were $1,004,273, an increase of $190,092 from expenses of $814,181 for
the six months ended June 30, 1998. The increase is due to an increase in
personnel costs.
7
<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$2,168,76 during the three months ended June 30, 1999, from $327,477 during the
same period in 1998, an increase of $1,841,291. For the six months ended June
30, 1999 sales and marketing expenses increased to $3,147,309, from $574,716
during the same period in 1998, an increase of $2,572,593. The increase is
attributable to increases in personnel and costs associated with building and
training the U.S. sales and clinical team as well as increased expenses
attributable the European market release and market research activities. The
Company expects continued increases in sales and marketing expenses as the
Company continues its U.S. product launch.
INTEREST INCOME. Interest income was $86,525 and $219,226 for the three months
ended June 30, 1999 and 1998, respectively. Interest income was $199,602 and
$497,161 for the six months ended June 30, 1999 and 1998, respectively. The
decrease was due to a reduction in the cash, cash equivalents and short-term
investments.
LIQUIDITY AND CAPITAL RESOURCES.
On March 24, 1997, the Company received net proceeds of approximately
$18,833,000 from an initial public offering of 2,250,000 shares of its common
stock and approximately $6,278,000 from a concurrent private placement to
Medtronic, Inc. of 750,000 shares of its common stock. The Company's common
stock is listed on the NASDAQ National Market under the symbol "ECSI."
The Company's operations since inception have been funded by net proceeds from
the sales of common and preferred stock totaling approximately $50,536,000
through June 30, 1999. As of June 30, 1999 and December 31, 1998, the Company
had cash, cash equivalents and short-term investments of approximately
$4,965,000 and $8,715,000, respectively.
The Company announced a financing agreement with Medtronic, Inc. during the
first quarter 1999. Under the agreement, the Company will receive $7 million
from Medtronic Asset Management, which is repayable by 2001 or, if earlier, at
the close of a significant round of debt or equity financing. During the first
quarter 1999, $3.5 million was received as part of this financing agreement. The
Company anticipates receiving the additional $3.5 million during the fourth
quarter 1999.
In July 1999, the Company received proceeds of $10,000,000 from a private
placement of 1,111,111 shares of its common stock to accredited investors. The
placement was priced at $9.00 per share.
The Company believes that its existing cash, cash equivalents and short-term
investments will be sufficient to fund the operations of the Company through
2000. The Company's future liquidity and capital requirements will depend on
numerous factors, including the timing of regulatory actions regarding the
Company's products, the results of clinical trials and competition, the extent
to which the Company's EnSite System gains market acceptance and the costs and
timing of expansion of sales, marketing and manufacturing activities.
YEAR 2000
Many currently installed computer systems and software are coded to accept only
two-digit entries in the date code fields. These date code field will need to
accept four-digit entries to distinguish 21st century dates. This problem could
result in system failures or miscalculations causing disruptions of business
operations (including, among other things, a temporary inability to process
transactions, send invoices or engage in other similar business activities). As
a result, many companies' computer systems and software will need to be upgraded
or replaced in order to comply with Year 2000 requirements. The potential global
impact of the Year 2000 problem is not known, and if not corrected in a timely
manner, could affect the Company and the US and world economy generally.
8
<PAGE>
The Company has formed a project team consisting of representatives from its
information technology, finance, manufacturing, product development and quality
department to address internal and external Year 2000 issues. The Company's
internal financial, manufacturing and other operational computer systems have
been upgraded to address Year 2000 issues. Management believes that the new
software substantially addresses Year 2000 issues. The Company believes it has
completed it Year 2000 compliance program for all of its significant internal
financial and manufacturing systems. The Company may be required, however, to
make minor modification to some of its existing hardware and software packages
in order for its computer system to function properly in the year 2000 and
thereafter.
The Company's product development processes will contain steps to include
Year 2000 compliance verification for all current and future products. The
Company has tested the EnSite 3000-Registered Trademark- System and
determined it to be Year 2000 compliant.
In addition, the Company has received assurances from its major suppliers that
they are addressing the Year 2000 issue and that product purchased by the
Company from such suppliers will function properly in the year 2000. These
actions are intended to help mitigate the possible external impact of the Year
2000 problem. Even assuming that all material third parties confirm that they
are or expect to be Year 2000 compliant by December 31, 1999, it is not possible
to state with certainty that such parties will be so compliant. It is impossible
to fully assess the potential consequences in the event service interruptions
from suppliers occur or in the event that there are disruptions in
infrastructure areas as utilities, communication, transportation, banking and
government.
The amount of remediation work required to address Year 2000 problems is not
expected to be extensive and the total estimated cost for resolving the
Company's Year 2000 issues is minimal and not expected to have a material effect
on the Company's financial position, results of operations, or cash flows. The
Company expects the remainder of the Year 2000 compliance program to be
substantially complete by third quarter 1999.
Based on the Company's assessment to date, the Company believes it will not
experience any material disruption as a result of Year 2000 problems in its
financial, internal manufacturing processes or the EnSite 3000-Registered
Trademark- System. However, there can be no guarantee that the systems of
other companies on which the Company relies will be converted in a timely
manner, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company. The Company has not yet developed a contingency plan
to provide for continuity of processing in such event of various problem
scenarios, but it will assess the need to develop such a plan based on the
outcome of its validation phase of its Year 2000 compliance program and the
results of surveying it major suppliers. Assuming no major disruption in
service from utility companies or other critical third-party providers, the
Company believes that it will be able to manage its total Year 2000
transition without any material effect on the Company's results of operations
or financial condition. There can be no assurance, however, that unexpected
difficulties will not arise and, if so, that the Company will be able to
timely develop and implement a contingency plan.
CAUTIONARY STATEMENT
Except for the historical information contained herein, this Quarterly Report on
Form 10-Q contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. When used in this Form 10-Q and in future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases and in oral statements made with the approval of an
authorized executive officer, the word or phrases "believes," "anticipates,"
"expects," "intends," "will likely result," "estimates," "projects" or similar
expressions are intended to identify such forward-looking statements, but are
not the exclusive means of identifying such statements. These forward-looking
statements involve risks and uncertainties that may cause the Company's actual
results to differ materially from the results discussed in the forward-
9
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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: continued clinical
testing requirements; uncertainty of obtaining regulatory clearances;
uncertainty of availability of treatments employing the Company's
EnSite-Registered Trademark- System; uncertainty of market acceptance of the
EnSite-Registered Trademark- System; training requirements for
electrophysiologists; the uncertainty of the ability to diagnose and treat
atrial fibrillation; the expectation of future losses; significant
competition and rapid technological change in the tachycardia diagnostic
market; risks associated with the Company's dependence on patents and
proprietary technology; risks associated with the Company's limited
manufacturing experience and dependence on suppliers; and the uncertainty of
third-party reimbursement for diagnostic medical procedures employing the
EnSite System. These factors are discussed in the cautionary statements
included in Exhibit 99 to this Form 10-Q for the quarter ended June 30, 1999.
Other forward-looking statements are found in the Company's discussion of
Year 2000 compliance issues and disclosures about market risk. The Company
cautions investors and others to review the statements set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Exhibit 99 and in the Company's other reports filed with the
Securities and Exchange Commission and that other factors may prove to be
important in affecting the Company's business and results of operations.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company had approximately $5 million of cash and investments on June 30,
1999. Substantially all of the investments were U.S. government or investment
grade, fixed income securities from domestic issuers. Because of the credit risk
criteria of the Company's investment policies, the primary market risk
associated with these investments is interest rate risk. The Company does not
use derivative financial instruments to manage interest rate risk or to
speculate on futures changes in interest rates. A rise in interest rates could
negatively affect the fair value of the Company's investments; however, because
management considers it unlikely that the Company would need or choose to
substantially liquidate the Company's investments, management believes that such
an increase in interest rates would not have a material impact on the Company's
future earnings or cash flows. Even though the Company distributes products
abroad, the Company does not conduct sales in foreign currencies. Therefore,
management does not believe the Company is exposed to any material foreign
currency exchange rate risk.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's stockholders was held on May 27, 1999. At
the meeting, stockholders voted on the reelection of two directors for terms
expiring at the Annual Meeting of the Company in 2002. Each of the directors was
reelected by a vote as follows: Robert G. Hauser, M.D. received 7,133,086 "For"
and 96,565 "Withheld"; Steven R. LaPorte received 7,130,986 "For" and 98,665
"Withheld".
The stockholders also voted on an amendment to the Amended and Restated 1993
Long-Term Incentive and Stock Option Plan. The amendment was approved and
received 6,718,095 votes "For," 4,22,251 "Against", 10,352 "Abstain" and 78,143
"Broker Non-vote."
ITEM 5. OTHER INFORMATION
On July 9, 1999, the Company completed the sale in a private placement of
1,111,111 shares of its common stock to accredited investors at a price of $9.00
per share, for proceeds of $10 million.
10
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
10.1 Amended and Restated 1993 Long-Term Incentive and Stock Option Plan
10.2 Securities Purchase Agreement dated July 9, 1999, among the
Company and the Investors named therein.
10.3 Registration Rights Agreement dated July 9, 1999, among the Company and
the Investors named therein.
27 Financial Data Schedule (EDGAR filing only)
99 Cautionary Statement
</TABLE>
(b) Reports
The Company filed no reports on Form 8-K during the quarter ended June 30, 1999.
11
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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: August 13, 1999 By: /s/ James W. Bullock
-----------------------------------------
James W. Bullock
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 13, 1999 By:/s/ Leota L. Pearson
-----------------------------------------
Leota L. Pearson
Vice President Finance and Chief Financial
Officer
(Principal Financial and Accounting Officer)
12
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Exhibit 10.1
ENDOCARDIAL SOLUTIONS, INC.
AMENDED AND RESTATED
1993 LONG-TERM INCENTIVE
AND
STOCK OPTION PLAN
SECTION 1.PURPOSE OF PLAN.
PURPOSE. This Plan shall be known as the "ENDOCARDIAL
SOLUTIONS, INC. AMENDED AND RESTATED 1993 LONG-TERM INCENTIVE AND STOCK OPTION
PLAN" and is hereinafter referred to as the "Plan." The purpose of the Plan is
to aid in maintaining and developing personnel capable of assuring the future
success of Endocardial Solutions, Inc., a Minnesota corporation (the "Company"),
to offer such personnel additional incentives to put forth maximum efforts for
the success of the business, and to afford them an opportunity to acquire a
proprietary interest in the Company through stock options and other long-term
incentive awards as provided herein. Options granted under this Plan may be
either incentive stock options ("Incentive Stock Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986 (the "Code"), or options that
do not qualify as Incentive Stock Options. Awards granted under this Plan shall
be SARs, restricted stock or performance awards as hereinafter described. With
respect to outstanding Incentive Stock Options at the time of amendment of this
Plan, such options shall continue to be governed by the terms of the Plan prior
to this amendment.
SECTION 2. STOCK SUBJECT TO PLAN.
Subject to the provisions of Section 15 hereof, the stock to
be subject to options or other awards under the Plan shall be the Company's
authorized but unissued shares of Common Stock, $.01 par value (the "Common
Shares"). Such shares shall be authorized but unissued shares. Subject to
adjustment as provided in Section 15 hereof, the maximum number of shares on
which options may be exercised or other awards issued under this Plan shall be
1,800,000 shares. If an option or award under the Plan expires, or for any
reason is terminated or unexercised with respect to any shares, such shares
shall again be available for options or awards thereafter granted during the
term of the Plan.
SECTION 3. ADMINISTRATION OF PLAN.
(a) The Plan shall be administered by the Board of Directors
of the Company or a committee thereof. The members of any such committee shall
be appointed by and serve at the pleasure of the Board of Directors. (The group
administering the Plan shall hereinafter be referred to as the "Committee".)
(b) The Committee shall have plenary authority in its
discretion, but subject to the express provisions of the Plan: (i) to determine
the purchase price of the Common Shares covered by each option or award, (ii) to
determine the employees to whom and the time or times at which such options and
awards shall be granted and the number of shares to be subject to each, (iii) to
determine the form of payment to be made upon the exercise of an SAR or in
connection with performance awards, either cash, Common Shares of the Company or
a combination thereof, (iv) to determine the terms of exercise of each option
and award, (v) to accelerate the time at which all or any part of an option or
award may be exercised, (vi) to amend or modify the terms of any option or award
with the consent of the optionee, (vii) to interpret the Plan, (viii) to
prescribe, amend and rescind rules and regulations relating to the Plan, (ix) to
determine the terms and provisions of each option and award agreement under the
Plan (which agreements need not be identical), including the designation of
those options intended to be
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Incentive Stock Options, and (x) to make all other determinations necessary or
advisable for the administration of the Plan, subject to the exclusive authority
of the Board of Directors under Section 16 herein to amend or terminate the
Plan. The Committee's determinations on the foregoing matters, unless otherwise
disapproved by the Board of Directors of the Company, shall be final and
conclusive.
(c) The Committee shall select one of its members as its Chair
and shall hold its meetings at such times and places as it may determine. A
majority of its members shall constitute a quorum. All determinations of the
Committee shall be made by not less than a majority of its members. Any decision
or determination reduced to writing and signed by all of the members of the
Committee shall be fully effective as if it had been made by a majority vote at
a meeting duly called and held. The grant of an option or award shall be
effective only if a written agreement shall have been duly executed and
delivered by and on behalf of the Company following such grant. The Committee
may appoint a Secretary and may make such rules and regulations for the conduct
of its business as it shall deem advisable.
SECTION 4.ELIGIBILITY AND GRANT.
(a) ELIGIBILITY. Incentive Stock Options may only be granted
under this Plan to any full or part-time employee (which term as used herein
includes, but is not limited to, officers and directors who are also employees)
of the Company and of its present and future subsidiary corporations within the
meaning of Section 424(f) of the Code (herein called "subsidiaries"). Full or
part-time employees, officers, consultants, directors (including directors who
are not employees of the Company) or independent contractors of the Company or
one of its subsidiaries shall be eligible to receive options which do not
qualify as Incentive Stock Options and awards. In determining the persons to
whom options and awards shall be granted and the number of shares subject to
each, the Committee may take into account the nature of services rendered by the
respective employees or consultants, their present and potential contributions
to the success of the Company and such other factors as the Committee in its
discretion shall deem relevant.
(b) GRANT OF ADDITIONAL OPTIONS. A person who has been granted
an option or award under this Plan may be granted additional options or awards
under the Plan if the Committee shall so determine; provided, however, that for
Incentive Stock Options to the extent the aggregate fair market value
(determined at the time the Incentive Stock Option is granted) of the Common
Shares with respect to which all Incentive Stock Options are exercisable for the
first time by an employee during any calendar year (under all plans described in
subsection (d) of Section 422 of the Cede of his or her employer corporation and
its parent and subsidiary corporations) exceeds $100,000, such options shall be
treated as options that do not qualify as Incentive Stock Options. Nothing in
the Plan or in any agreement thereunder shall confer on any employee any right
to continue in the employ of the Company or any of its subsidiaries or affect,
in any way, the right of the Company or any of its subsidiaries to terminate his
or her employment at any time.
SECTION 5. PRICE.
The option price for all Incentive Stock Options granted under
the Plan shall be determined by the Committee but shall not be less than 100% of
the fair market value of the Common Shares at the date of grant of such option.
The option price for options granted under the Plan that do not qualify as
Incentive Stock Options and, if applicable, the price for all awards shall also
be determined by the Committee. For purposes of the preceding sentence and for
all other valuation purposes under the Plan, the fair market value of the Common
Shares shall be as reasonably determined by the Committee. If on the date of
grant of any option or award hereunder the Common Shares are not traded on an
established securities market, the Committee shall make a good faith attempt to
satisfy the requirements of this Section 5 and in connection therewith shall
take such action as it deems necessary or advisable.
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SECTION 6. TERM.
Each option and award and all rights and obligations
thereunder shall expire on the date determined by the Committee and specified in
the option or award agreement. The Committee shall be under no duty to provide
terms of like duration for options or awards granted under the Plan, but the
term of an Incentive Stock Option may not extend more than ten (10) years from
the date of grant of such option and the term of options granted under the Plan
which do not qualify as Incentive Stock Options may not extend more than fifteen
(15) years from the date of granting of such option.
SECTION 7. EXERCISE OF OPTION OR AWARD.
(a) EXERCISABILITY. The Committee shall have full and complete
authority to determine whether an option or award will be exercisable in full at
any time or from time to time during the term thereof, or to provide for the
exercise thereof in such installments, upon the occurrence of such events (such
as termination of employment for any reason) and at such times during the term
of the option as the Committee may determine and specify in the option or award
agreement.
(b) NO VIOLATION OF STATE OR FEDERAL LAWS. The exercise of any
option or award granted hereunder shall only be effective at such time that the
sale of Common Shares pursuant to such exercise will not violate any state or
federal securities or other laws.
(c) METHOD OF EXERCISE. An optionee or grantee electing to
exercise an option or award shall give written notice to the Company of such
election and of the number of shares subject to such exercise. The full purchase
price of such shares shall be tendered with such notice of exercise. Payment
shall he made to the Company in cash (including bank check, certified check,
personal check, or money order), or, at the discretion of the Committee and as
specified by the Committee, (i) by delivering certificates for the Company's
Common Shares already owned by the optionee or grantee having a fair market
value as of the date of grant equal to the full purchase price of the shares, or
(ii) by delivering the optionee's or grantee's promissory note, which shall
provide for interest at a rate not less than the minimum rate required to avoid
the imputation of income, original issue discount or a below-market-rate loan
pursuant to Sections 483, 1274 or 7872 of the Code or any successor provisions
thereto, or (iii) a combination of cash, the optionee's or grantee promissory
note and such shares. The fair market value of such tendered shares shall be
determined as provided in Section 5 herein. The optionee's or grantee's
promissory note shall be a full recourse liability of the optionee and may, at
the discretion of the Committee, be secured by a pledge of the shares being
purchased. Until such person has been issued the shares subject to such
exercise, he or she shall possess no rights as a shareholder with respect to
such shares.
SECTION 8. STOCK APPRECIATION RIGHTS.
(a) GRANT. At the time of grant of an option or award under
the Plan (or at any other time), the Committee, in its discretion, may grant a
Stock Appreciation Right ("SAR") evidenced by an agreement in such form as the
Committee shall from time to time approve. Any such SAR may be subject to
restrictions on the exercise thereof as may be set forth in the agreement
representing such SAR, which agreement shall comply with and be subject to the
following terms and conditions and any additional terms and conditions
established by the Committee that are consistent with the terms of the Plan.
(b) EXERCISE. An SAR shall be exercised by the delivery to
the Company of a written notice which shall state that the holder thereof
elects to exercise his or her SAR as to the number of
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shares specified in the notice and which shall further state what portion, if
any, of the SAR exercise amount (hereinafter defined) the holder thereof
requests is to be paid in cash and what portion, if any, is to be paid in Common
Shares of the Company. The Committee promptly shall cause to be paid to such
holder the SAR exercise amount either in cash, in Common Shares of the Company,
or any combination of cash and shares as the Committee may determine. Such
determination may be either in accordance with the request made by the holder of
the SAR or in the sole and absolute discretion of the Committee. The SAR
exercise amount is the excess of the fair market value of one share of the
Company's Common Shares on the date of exercise over the per share exercise
price in respect of which the SAR was granted, multiplied by the number of
shares as to which the SAR is exercised. For the purposes hereof, the fair
market value of the Company's shares shall be determined as provided in Section
5 herein.
SECTION 9. RESTRICTED STOCK AWARDS.
Awards of Common Shares subject to forfeiture and transfer
restrictions may be granted by the Committee. Any restricted stock award shall
be evidenced by an agreement in such form as the Committee shall from time to
time approve, which agreement shall comply with and be subject to the following
terms and conditions and any additional terms and conditions established by the
Committee that are consistent with the terms of the Plan:
(a) GRANT OF RESTRICTED STOCK AWARDS. Each restricted stock
award made under the Plan shall be for such number of Common Shares as shall be
determined by the Committee and set forth in the agreement containing the terms
of such restricted stock award. Such agreement shall set forth a period of time
during which the grantee must remain in the continuous employment of the Company
in order for the forfeiture and transfer restrictions to lapse. If the Committee
so determines, the restrictions may lapse during such restricted period in
installments with respect to specified portions of the shares covered by the
restricted stock award. The agreement may also, in the discretion of the
Committee, set forth performance or other conditions that will subject the
Common Shares to forfeiture and transfer restrictions. The Committee may, at its
discretion, waive all or any part of the restrictions applicable to any or all
outstanding restricted stock awards.
(b) DELIVERY OF COMMON SHARES AND RESTRICTIONS. At the time of
a restricted stock award, a certificate representing the number of Common shares
awarded thereunder shall be registered in the name of the grantee. Such
certificate shall be held by the Company or any custodian appointed by the
Company for the account of the grantee subject to the terms and conditions of
the Plan, and shall bear such a legend setting forth the restrictions imposed
thereon as the Committee, in its discretion, may determine. The grantee shall
have all rights of a shareholder with respect to the Common Shares, including
the right to receive dividends and the right to vote such shares, subject to the
following restrictions: (i) the grantee shall not be entitled to delivery of the
stock certificate until the expiration of the restricted period and the
fulfillment of any other restrictive conditions set forth in the restricted
stock agreement with respect to such Common Shares; (ii) none of the Common
Shares may be sold, assigned, transferred, pledged, hypothecated or otherwise
encumbered or disposed of during such restricted period or until after the
fulfillment of any such other restrictive conditions; and (iii) except as
otherwise determined by the Committee, all of the Common Shares shall be
forfeited and all rights of the grantee to such Common Shares shall terminate,
without further obligation on the part of the Company, unless the grantee
remains in the continuous employment of the Company for the entire restricted
period in relation to which such Common Shares were granted and unless any other
restrictive conditions relating to the restricted stock award are met. Any
Common Shares, any other securities of the Company and any other property
(except for cash dividends) distributed with respect to the Common Shams subject
to restricted stock awards shall be subject to the same restrictions, terms and
conditions as such restricted Common Shares.
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(c) TERMINATION OF RESTRICTIONS. At the end of the restricted
period and provided that any other restrictive conditions of the restricted
stock award are met, or at such earlier time as otherwise determined by the
Committee, all restrictions set forth in the agreement relating to the
restricted stock award or in the Plan shall lapse as to the restricted Common
Shares subject thereto, and a stock certificate for the appropriate number of
Common Shares, free of the restrictions and the restricted stock legend, shall
be delivered to the grantee or his or her beneficiary or estate, as the case may
be.
SECTION 10. PERFORMANCE AWARDS.
The Committee is further authorized to grant performance
awards. Subject to the terms of this Plan and any applicable award agreement, a
performance awards granted under the Plan (i) may be denominated or payable in
cash, Common Shares (including, without limitation, restricted stock), other
securities, other awards, or other property and (ii) shall confer on the holder
thereof rights valued as determined by the Committee, in its discretion, and
payable to, or exercisable by, the holder of the performance awards, in whole or
in part, upon the achievement of such performance goals during such performance
periods as the Committee, in its discretion, shall establish. Subject to the
terms of this Plan and any applicable award agreement, the performance goals to
be achieved during any performance period, the length of any performance period,
the amount of any performance award granted, and the amount of any payment or
transfer to be made by the grantee and by the Company under any Performance
award shall be determined by the Committee.
SECTION 11. INCOME TAX WITHHOLDING AND TAX BONUSES.
(a) WITHHOLDING OF TAXES. In order to comply with all
applicable federal or state income tax laws or regulations, the Company may take
such action as it deems appropriate to ensure that all applicable federal or
state payroll, withholding, income or other taxes, which are the sole and
absolute responsibility of an optionee or grantee under the Plan, are withheld
or collected from such optionee or grantee. In order to assist an optionee or
grantee in paying all federal and state taxes to be withheld or collected upon
exercise of an option or award which does not qualify as an Incentive Stock
Option hereunder, the Committee, in its absolute discretion and subject to such
additional terms and conditions as it may adopt, shall permit the optionee or
grantee to satisfy such tax obligation by (i) electing to have the Company
withhold a portion of the shares otherwise to be delivered upon exercise of such
option or award with a fair market value, determined in accordance with Section
5 herein, equal to such taxes or (ii) delivering to the Company Common Shares
other than the shares issuable upon exercise of such option or award with a fair
market value, determined in accordance with Section 5, equal to such taxes.
(b) TAX BONUS. The Committee shall have the authority, at the
time of grant of an option under the Plan or at any time thereafter, to approve
tax bonuses to designated optionees or grantees to be paid upon their exercise
of options or awards granted hereunder. The amount of any such payments shall be
determined by the Committee. The Committee shall have full authority in its
absolute discretion to determine the amount of any such tax bonus and the terms
and conditions affecting the vesting and payment thereafter.
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SECTION 12 ADDITIONAL RESTRICTIONS.
The Committee shall have full and complete authority to
determine whether all or any part of the Common Shares of the Company acquired
upon exercise of any of the options or awards granted under the Plan shall be
subject to restrictions on the transferability thereof or any other restrictions
affecting in any manner the optionee's or grantee's rights with respect thereto,
but any such restriction shall be contained in the agreement relating to such
options or awards.
SECTION 13. TEN PERCENT SHAREHOLDER RULE.
Notwithstanding any other provision in the Plan, if at the
time an option is otherwise to be granted pursuant to the Plan the optionee owns
directly or indirectly (within the meaning of Section 424(d) of the Code) Common
Shares of the Company possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or its parent or
subsidiary corporations, if any (within the meaning of Section 422(b)(6) of the
Code), then any Incentive Stock Option to be granted to such optionee pursuant
to the Plan shall satisfy the requirements of Section 422(c)(5) of the Code, and
the option price shall be not less than 110% of the fair market value of the
Common Shares of the Company determined as described herein, and such option by
its terms shall not be exercisable after the expiration of five (5) years from
the date such option is granted.
SECTION 14. NON-TRANSFERABILITY.
No option or award granted under the Plan shall be
transferable by an optionee or grantee, otherwise than by will or the laws of
descent or distribution. Except as otherwise provided in an option or award
agreement, during the lifetime of an optionee or grantee, the option shall be
exercisable only by such optionee or grantee.
SECTION 15. DILUTION OR OTHER ADJUSTMENTS.
If there shall be any change in the Common Shares through
merger, consolidation, reorganization, recapitalization, dividend in the form of
stock (of whatever amount), stock split or other change in the corporate
structure, appropriate adjustments in the Plan and outstanding options and
awards shall be made by the Committee. In the event of any such changes,
adjustments shall include, where appropriate, changes in the aggregate number of
shares subject to the Plan, the number of shares and the price per share subject
to outstanding options and awards and the amount payable upon exercise of
outstanding awards, in order to prevent dilution or enlargement of option or
award rights.
SECTION 16. AMENDMENT OR DISCONTINUANCE OF PLAN.
The Board of Directors may amend or discontinue the Plan at
any time. Subject to the provisions of Section 15 no amendment of the Plan,
however, shall without shareholder approval: (i) increase the maximum number of
shares under the Plan as provided in Section 2 herein, (ii) decrease the minimum
price provided in Section 5 herein, (iii) extend the maximum term under Section
6, or (iv) modify the eligibility requirements for participation in the Plan.
The Board of Directors shall not alter or impair any option or award theretofore
granted under the Plan without the consent of the holder of the option.
SECTION 17. TIME OF GRANTING.
Nothing contained in the Plan or in any resolution adopted or
to be adopted by the Board of Directors or by the shareholders of the Company,
and no action taken by the Committee or the Board of Directors (other than the
execution and delivery of an option or award agreement), shall constitute the
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granting of an option or award hereunder.
SECTION 18. EFFECTIVE DATE AND TERMINATION OF PLAN.
(a) The Plan was approved by the Board of Directors on May 5,
1993, and as amended on_________________ ,1994 and the amendments shall be
effective upon the approval by the shareholders of the Company (the "Effective
Date").
(b) Unless the Plan shall have been discontinued as provided
in Section 15 hereof, the Plan shall terminate May 4, 2003. No option or award
may be granted after such termination, but termination of the Plan shall not,
without the consent of the optionee or grantee, alter or impair any rights or
obligations under any option or award theretofore granted.
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EXHIBIT 10.2
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of July 9,
1999 is made by and among Endocardial Solutions, Inc., a Delaware corporation,
with headquarters located at 1350 Energy Lane, St. Paul, Minnesota (the
"COMPANY"), and the investors named on the signature pages hereto, together with
their permitted transferees (the "INVESTORS").
RECITALS:
A. The Company and the Investors are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Section 4(2) of the Securities Act and Rule 506 under Regulation D.
B. The Investors desire, upon the terms and conditions stated in this
Agreement, to purchase shares of the Company's Common Stock, for an aggregate
purchase price of $9,999,999.00. The purchase price per share of the Common
Stock is $9.00.
C. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
under which the Company has agreed to provide certain registration rights under
the Securities Act, the rules and regulations promulgated thereunder and
applicable state securities laws.
D. The capitalized terms used herein and not otherwise defined have
the meanings given them in Article 9 hereof.
In consideration of the premises and the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Company and the Investors hereby agree as follows:
ARTICLE I
PURCHASE AND SALE OF SECURITIES
1.1 PURCHASE AND SALE OF SECURITIES. At the Closing, subject to the
terms of this Agreement and the satisfaction or waiver of the conditions set
forth in Articles VI and VII hereof, the Company will issue and sell to each
Investor, and each Investor will (on a several and not a joint basis) purchase
from the Company, the number of shares of Common Stock set forth beneath such
Investor's name on the signature pages hereof.
1.2 PAYMENT. Each Investor will pay the purchase price for the number
of Securities set forth beneath its name on the signature pages hereof, by wire
transfer of immediately available funds in accordance with the Company's written
wire instructions, upon delivery by the Company to each Investor of certificates
representing the Securities so purchased by such
<PAGE>
Investor and the Company will deliver such certificates against delivery of the
purchase price as described above.
1.3 CLOSING DATE. Subject to the satisfaction or waiver of the
conditions set forth in Articles VI and VII hereof, the Closing will take place
at 10:00 a.m. Minneapolis Time on June 30, 1999 or at another date or time
agreed upon by the parties to this Agreement (the "CLOSING DATE"). The Closing
will be held at the offices of Dorsey & Whitney LLP, 220 South Sixth Street,
Minneapolis, Minnesota or at such other place as the parties agree.
ARTICLE II
INVESTOR'S REPRESENTATIONS AND WARRANTIES
Each Investor represents and warrants to the Company, severally and solely
with respect to itself and its purchase hereunder and not with respect to any
other Investor, that:
2.1 INVESTMENT PURPOSE. The Investor is purchasing the Securities for
its own account and not with a present view toward the public sale or
distribution thereof, except pursuant to sales registered or exempted from
registration under the Securities Act; provided, however, that by making the
representation herein, the Investor does not agree to hold any of the Securities
for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the Securities Act.
2.2 ACCREDITED INVESTOR STATUS. The Investor is an "accredited
investor" as defined in Rule 501(a) of Regulation D.
2.3 RELIANCE ON EXEMPTIONS. The Investor understands that the
Securities are being offered and sold to it in reliance upon specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying upon the truth and accuracy of, and the
Investor's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Investor set forth herein in order to
determine the availability of such exemptions and the eligibility of the
Investor to acquire the Securities.
2.4 INFORMATION. The Investor and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company, and materials relating to the offer and sale of the Securities,
that have been requested by the Investor or its advisors, if any. The Investor
and its advisors, if any, have been afforded the opportunity to ask questions of
the Company. Neither such inquiries nor any other due diligence investigation
conducted by Investor or any of its advisors or representatives modify, amend or
affect the Investor's right to rely on the Company's representations and
warranties contained in Article III below. The Investor acknowledges and
understands that its investment in the Securities involves a significant degree
of risk, including the risks reflected in the SEC Documents.
2.5 GOVERNMENTAL REVIEW. The Investor understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities or an
investment therein.
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2.6 TRANSFER OR RESALE. The Investor understands that:
(a) except as provided in the Registration Rights Agreement, the
Securities have not been and are not being registered under the Securities Act
or any applicable state securities laws and, consequently, the Investor may have
to bear the risk of owning the Securities for an indefinite period of time
because the Securities may not be transferred unless (i) the resale of the
Securities is registered pursuant to an effective registration statement under
the Securities Act; (ii) the Investor has delivered to the Company an opinion of
counsel (in form, substance and scope customary for opinions of counsel in
comparable transactions) to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from such
registration; (iii) the Securities are sold or transferred pursuant to Rule 144
or (iv) the Securities are sold or transferred to an affiliate (as defined in
Rule 144) of the Investor;
(b) any sale of the Securities made in reliance on Rule 144 may be
made only in accordance with the terms of Rule 144 and, if Rule 144 is not
applicable, any resale of the Securities under circumstances in which the seller
(or the person through whom the sale is made) may be deemed to be an underwriter
(as that term is defined in the Securities Act) may require compliance with some
other exemption under the Securities Act or the rules and regulations of the SEC
thereunder; and
(c) except as set forth in the Registration Rights Agreement,
neither the Company nor any other person is under any obligation to register the
Securities under the Securities Act or any state securities laws or to comply
with the terms and conditions of any exemption thereunder.
2.7 LEGENDS. The Investor understands that until (a) the Securities may
be sold by the Investor under Rule 144(k) or (b) such time as the resale of the
Securities have been registered under the Securities Act as contemplated by the
Registration Rights Agreement, the certificates representing the Securities will
bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the certificates for such
Securities):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE OF THE UNITED STATES. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR
ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR UNLESS OFFERED, SOLD OR
TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
The legend set forth above will be removed and the Company will issue a
certificate without the legend to the holder of any certificate upon which it is
stamped, in accordance with the terms of Article V hereof.
2.8 AUTHORIZATION; ENFORCEMENT. This Agreement and the Registration
Rights Agreement have been duly and validly authorized, executed and delivered
on behalf of the
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Investor and are valid and binding agreements of the Investor enforceable in
accordance with their terms, subject to the effect of any applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally and the application of general principles of equity.
2.9 RESIDENCY. The Investor is a resident of the jurisdiction set forth
immediately below such Investor's name on the signature pages hereto.
2.10 ACKNOWLEDGEMENTS REGARDING PLACEMENT AGENT. Purchaser acknowledges
that U.S. Bancorp Piper Jaffray Inc. is acting as placement agent (the
"Placement Agent") for the Securities being offered hereby and will be
compensated by the Company for acting in such capacity. Purchaser further
acknowledge that the Placement Agent has acted solely as placement agent in
connection with the offering of the Securities by the Company, that the
information and data provided to Purchaser in connection with the transactions
contemplated hereby have not been subjected to independent verification by the
Placement Agent, and that the Placement Agent makes no representation or
warranty with respect to the accuracy or completeness of such information, data
or other related disclosure material. Purchaser further acknowledges that in
making its decision to enter into this Agreement and purchase the Securities it
has relied on its own examination of the Company and the terms of, and
consequences, of holding the Securities. Purchaser further acknowledges that the
provisions of this Section 2.10 are for the benefit of, and may be enforced by,
the Placement Agent.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investors that:
3.1 ORGANIZATION AND QUALIFICATION. The Company is duly incorporated,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated, with full power and authority (corporate and other) to
own, lease, use and operate its properties and to carry on its business as and
where now owned, leased, used, operated and conducted. The Company is duly
qualified to do business and is in good standing in every jurisdiction in which
the nature of the business conducted by it makes such qualification necessary,
except where the failure to be so qualified or in good standing would not have a
Material Adverse Effect.
3.2 AUTHORIZATION; ENFORCEMENT. (a) The Company has all requisite
corporate power and authority to enter into and to perform its obligations under
this Agreement and the Registration Rights Agreement, to consummate the
transactions contemplated hereby and thereby and to issue the Securities in
accordance with the terms hereof and thereof; (b) the execution, delivery and
performance of this Agreement and the Registration Rights Agreement by the
Company and the consummation by it of the transactions contemplated hereby and
thereby (including without limitation the issuance of the Securities) have been
duly authorized by the Company's Board of Directors and no further consent or
authorization of the Company, its Board or Directors, or its shareholders is
required; (c) this Agreement and the Registration Rights Agreement have been
duly executed by the Company; and (d) each of this Agreement and the
Registration Rights Agreement constitutes a legal, valid and binding obligation
of the Company enforceable against the Company in accordance with its terms,
subject to the effect of
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any applicable bankruptcy, insolvency, reorganization, or moratorium or similar
laws affecting the rights of creditors generally and the application of general
principles of equity.
3.3 CAPITALIZATION. As of the date hereof, the authorized capital stock
of the Company consists of (a) 40,000,000 shares of Common Stock, of which
9,052,449 shares are issued and outstanding, 1,800,000 shares are reserved for
issuance under the Company's employee and director stock option plans, 200,000
are reserved for issuance pursuant to the Company's employee stock purchase
plan, and 678,831shares are reserved for issuance pursuant to securities (other
than securities issued under the foregoing plans) exercisable for, or
convertible into or exchangeable for shares of Common Stock; (b) 10,000,000
shares of preferred stock, par value $0.01 per share, of which no shares are
designated and none are issued and outstanding. All of such outstanding shares
of capital stock are, or upon issuance will be, duly authorized, validly issued,
fully paid and nonassessable. No shares of capital stock of the Company,
including the Securities issuable pursuant to this Agreement, are subject to
preemptive rights or any other similar rights of the stockholders of the Company
or any liens or encumbrances imposed through the actions or failure to act of
the Company. Except as disclosed in SCHEDULE 3.3 and except for the transactions
contemplated hereby, (i) there are no outstanding options, warrants, scrip,
rights to subscribe for, puts, calls, rights of first refusal, agreements,
understandings, claims or other commitments or rights of any character
whatsoever relating to, or securities or rights convertible into, exercisable
for, or exchangeable for any shares of capital stock of the Company, or
arrangements by which the Company is or may become bound to issue additional
shares of capital stock of the Company; (ii) there are no agreements or
arrangements (other than the Registration Rights Agreement) under which the
Company is obligated to register the sale of any of its securities under the
Securities Act and (iii) there are no anti-dilution or price adjustment
provisions contained in any security issued by the Company (or in any agreement
providing rights to security holders) that will be triggered by the issuance of
the Securities. The Company has furnished to the Investors true and correct
copies of the Company's Certificate of Incorporation, as amended, as in effect
on the date hereof, the Company's By-laws as in effect on the date hereof and
the terms of all securities convertible into or exercisable for Common Stock of
the Company and the material rights of the holders thereof in respect thereto.
3.4 ISSUANCE OF SECURITIES. The Securities are duly authorized and, upon
issuance in accordance with the terms of this Agreement, will be validly issued,
fully paid and non-assessable, free from all taxes, liens, claims, encumbrances
and charges with respect to the issue thereof, will not be subject to preemptive
rights or other similar rights of stockholders of the Company, and will not
impose personal liability on the holders thereof.
3.5 NO CONFLICTS; NO VIOLATION.
(a) The execution, delivery and performance of this Agreement and
the Registration Rights Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby (including, without
limitation, the issuance of the Securities) will not (i) conflict with or result
in a violation of any provision of the Certificate of Incorporation or By-laws
or (ii) violate or conflict with, or result in a breach of any provision of, or
constitute a default (or an event which with notice or lapse of time or both
could become a
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default) under, or give to others any rights of termination, amendment
(including without limitation, the triggering of any anti-dilution provision),
acceleration or cancellation of, any agreement, indenture, patent, patent
license, or instrument to which the Company is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
U.S. federal and state securities laws and regulations and regulations of any
self-regulatory organizations to which the Company or its securities are
subject) applicable to the Company or by which any property or asset of the
Company is bound or affected (except for such conflicts, breaches, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect).
(b) The Company is not in violation of its Certificate of
Incorporation, By-laws or other organizational documents and the Company is not
in default (and no event has occurred which with notice or lapse of time or both
could put the Company in default) under any agreement, indenture or instrument
to which the Company is a party or by which any property or assets of the
Company is bound or affected, except for possible defaults as would not,
individually or in the aggregate, have a Material Adverse Effect.
(c) The Company is not conducting its business in violation of any
law, ordinance or regulation of any governmental entity, the failure to comply
with which would, individually or in the aggregate, have a Material Adverse
Effect.
(d) Except as specifically contemplated by this Agreement and as
required under the Securities Act and any applicable state securities laws or
any listing agreement with any securities exchange or automated quotation
system, the Company is not required to obtain any consent, authorization or
order of, or make any filing or registration with, any court or governmental
agency or any regulatory or self regulatory agency in order for it to execute,
deliver or perform any of its obligations under this Agreement or the
Registration Rights Agreement, in each case in accordance with the terms hereof
or thereof, or to issue and sell the Securities in accordance with the terms
hereof. Except as set forth in SCHEDULE 3.6, all consents, authorizations,
orders, filings and registrations which the Company is required to obtain
pursuant to the preceding sentence have been obtained or effected on or prior to
the date hereof. The Company is not in violation of the listing requirements of
Nasdaq.
3.6 SEC DOCUMENTS, FINANCIAL STATEMENTS. Since December 31, 1997, the
Company has timely filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the Exchange Act (all of the foregoing filed prior to the date
hereof and all exhibits included therein and financial statements and schedules
thereto and documents (other than exhibits) incorporated by reference therein,
being hereinafter referred to herein as the "SEC DOCUMENTS"). The Company has
delivered to each Investor, or each Investor has had access to, true and
complete copies of the SEC Documents, except for such exhibits and incorporated
documents. As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Exchange Act or the Securities
Act, as the case may be, and the rules and regulations of the SEC promulgated
thereunder applicable to the SEC Documents, and none of the SEC Documents, at
the time they were filed with the SEC, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. As of their respective
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dates, the financial statements of the Company included in the SEC Documents
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto. Such financial statements have been prepared in accordance with U.S.
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). Except as set forth
in the financial statements included in the SEC Documents, the Company has no
liabilities, contingent or otherwise, other than liabilities incurred in the
ordinary course of business subsequent to March 31, 1999, and liabilities of the
type not required under generally accepted accounting principles to be reflected
in such financial statements. Such liabilities incurred subsequent to March 31,
1999, are not, in the aggregate, material to the financial condition or
operating results of the Company.
3.7 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the SEC
Documents, since March 31, 1999, there has been no material adverse change in
the assets, liabilities, business, properties, operations, financial condition,
prospects or results of operations of the Company.
3.8 ABSENCE OF LITIGATION. There is no action, suit, claim, proceeding,
inquiry or investigation before or by any court, public board, government
agency, self-regulatory organization or body pending or, to the knowledge of the
Company, threatened against or affecting the Company or any of its officers or
directors acting as such that could, individually or in the aggregate, have a
Material Adverse Effect.
3.9 INTELLECTUAL PROPERTY RIGHTS. The Company owns or possesses the
licenses or rights to use all patents, patent applications, patent rights,
inventions, know-how, trade secrets, trademarks, trademark applications, service
marks, service names, trade names and copyrights necessary to enable it to
conduct its business as now operated (the "INTELLECTUAL PROPERTY"), There is no
claim or action or proceeding pending or, to the Company's knowledge, threatened
that challenges the right of the Company with respect to any Intellectual
Property.
3.10 TAX STATUS. Except as set forth on SCHEDULE 3.10, the Company has
made or filed all federal, state and foreign income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject
(unless and only to the extent that the Company has set aside on its books
provisions reasonably adequate for the payment of all unpaid and unreported
taxes) and has paid all taxes and other governmental assessments and charges
that are material in amount, shown or determined to be due on such returns,
reports and declarations, except those being contested in good faith, and has
set aside on its books provisions reasonably adequate for the payment of all
taxes for periods subsequent to the periods to which such returns, reports or
declarations apply. To the knowledge of the Company, there are no unpaid taxes
in any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any such
claim. The Company has not executed a waiver with respect to the statute of
limitations relating to the assessment or collection of any foreign, federal,
state or local tax. Except as set forth on SCHEDULE 3.10, none of the Company's
tax returns is presently being audited by any taxing authority.
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3.11 ENVIRONMENTAL LAWS. The Company (i) is in compliance with all
applicable foreign federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii)
has received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct its business and (iii) is in compliance
with all terms and conditions of any such permit, license or approval where, in
each of the three foregoing clauses, the failure to so comply would have,
individually or in the aggregate, a Material Adverse Effect
3.12 NO INTEGRATED OFFERING. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales in any security or solicited any offers to
buy any security under circumstances that would require registration under the
Securities Act of the issuance of the Securities to the Investors. The issuance
of the Securities to the Investors will not be integrated with any other
issuance of the Company's securities (past, current or future) for purposes of
the Securities Act or any applicable rules of Nasdaq.
3.13 NO BROKERS. The Company has taken no action which would give rise
to any claim by any person for brokerage commissions, finder's fees or similar
payments relating to this Agreement or the transactions contemplated hereby,
except for dealings with U.S. Bancorp Piper Jaffray Inc., whose commissions and
fees will be paid for by the Company.
3.14 INSURANCE. The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company is engaged.
3.15 EMPLOYMENT MATTERS. The Company is in compliance with all federal,
state, local and foreign laws and regulations respecting employment and
employment practices, terms and conditions of employment and wages and hours
except where failure to be in compliance would not have a Material Adverse
Effect.
3.16 INVESTMENT COMPANY STATUS. The Company is not and upon consummation
of the sale of the Securities will not be an "investment company," a company
controlled by an "investment company" or an "affiliated person" of, or
"promoter" or "principal underwriter" for, an "investment company" as such terms
are defined in the Investment Company Act of 1940, as amended.
ARTICLE IV
COVENANTS
4.1 BEST EFFORTS. Each party will use its best efforts to satisfy in a
timely fashion each of the conditions to be satisfied by it under Articles VI
and VII of this Agreement.
4.2 FORM D; BLUE SKY LAWS. The Company will file a Notice of Sale of
Securities on Form D with respect to the Securities, as required under
Regulation D, and to provide a copy thereof to each Investor promptly after such
filing. The Company will, on or before the Closing Date, take such action as it
reasonably determines to be necessary to qualify the Securities for sale to the
Investors under this Agreement under applicable securities (or "blue sky") laws
of the
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states of the United States (or to obtain an exemption from such qualification),
and will provide evidence of any such action so taken to the Investors on or
prior to the date of the Closing. The Company will file with the SEC a Current
Report on Form 8-K disclosing this Agreement and the transactions contemplated
hereby within 10 business days after the Closing Date.
4.3 REPORTING STATUS; ELIGIBILITY TO USE FORM S-3. The Company's Common
Stock is registered under Section 12 of the Exchange Act. Throughout the
Registration Period (as defined in the Registration Rights Agreement), the
Company will timely file all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC under the reporting
requirements of the Exchange Act, and the Company will not terminate its status
as an issuer required to file reports under the Exchange Act even if the
Exchange Act or the rules and regulations thereunder would permit such
termination. The Company currently meets, and will take all reasonably necessary
action to continue to meet, the "registrant eligibility" requirements set forth
in the general instructions to Form S-3.
4.4 EXPENSES. The Company and each Investor is liable for, and will pay,
its own expenses incurred in connection with the negotiation, preparation,
execution and delivery of this Agreement and the other agreements to be executed
in connection herewith, including, without limitation, attorneys' and
consultants' fees and expenses.
4.5 FINANCIAL INFORMATION. The financial statements of the Company will
be prepared in accordance with United States generally accepted accounting
principles, consistently applied, and will fairly present in all material
respects the consolidated financial position of the Company and results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). The Company will
send the following reports to each Investor until such Investor transfers,
assigns, or sells all of the Securities owned by it: (a) within ten business
days after filing with the SEC, a copy of its Annual Report on Form 10-K, its
Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K; and (b)
contemporaneously with the making available or giving to the stockholders of the
Company, copies of any notices or other information the Company makes available
or gives to its stockholders.
4.6 LISTING. On or before the tenth business day after the date of this
Agreement, the Company will secure the listing of the Securities upon each
national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed (subject to official notice of issuance)
and, so long as any Investor owns any of the Securities, will maintain such
listing of the Securities. The Company will use its best efforts to obtain and,
so long as any Investor owns any of the Securities, maintain the listing and
trading of its Common Stock on Nasdaq, the American Stock Exchange or the New
York Stock Exchange and will comply in all respects with the Company's
reporting, filing and other obligations under the bylaws or rules of the
National Association of Securities Dealers, Inc. and such exchanges, as
applicable. Until an Investor transfers, assigns or sells all of the Securities
owned by it, the Company will promptly provide to each Investor copies of any
notices it receives regarding the continued eligibility of the Common Stock for
listing on Nasdaq or other principal exchange or quotation system on which the
Common Stock is listed or traded.
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4.7 COMPLIANCE WITH LAW. Until each Investor transfers, assigns or
sells all of the Securities owned by it, the Company will conduct its business
in compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting business, including, without limitation,
all applicable local, state and federal environmental laws and regulations, the
failure to comply with which would have a Material Adverse Effect.
4.8 NO INTEGRATION. The Company will not make any offers or sales of
any security (other than the Securities) under circumstances that would cause
the offering of Securities to be integrated with any other offering of
securities by the Company (i) for the purpose of any stockholder approval
provision applicable to the Company or its securities or (ii) for purposes of
any registration requirement under the Securities Act.
4.9 SALES BY INVESTORS. Each Investor will sell any Securities sold by
it in compliance with applicable prospectus delivery requirements, if any, or
otherwise in compliance with the requirements for an exemption from registration
under the Securities Act and the rules and regulations promulgated thereunder.
No Investor will make any sale, transfer or other disposition of the Securities
in violation of federal or state securities laws.
ARTICLE V
TRANSFER AGENT INSTRUCTIONS; REMOVAL OF LEGENDS
5.1 ISSUANCE OF CERTIFICATES. The Company will instruct its transfer
agent to issue certificates, registered in the name of each Investor or its
nominee, for the Securities. All such certificates will bear the restrictive
legend described in Section 2.7, except as otherwise specified in this Article
V. The Company will not give to its transfer agent any instruction other than as
described in this Article V and stop transfer instructions to give effect to
Section 2.7 hereof (prior to registration of the Securities under the Securities
Act). Nothing in this Section will affect in any way the Investor's obligations
and agreement set forth in Section 2.7 hereof to comply with all applicable
prospectus delivery requirements, if any, upon resale of the Securities.
5.2 UNRESTRICTED SECURITIES. If, unless otherwise required by
applicable state securities laws, (a) the Securities represented by a
certificate have been registered under an effective registration statement filed
under the Securities Act, (b) a holder of Securities provides the Company and
the Transfer Agent with an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions, to the effect that
a public sale or transfer of such Securities may be made without registration
under the Securities Act and such sale either has occurred or may occur without
restriction on the manner of such sale or transfer, (c) such holder provides the
Company and the Transfer Agent with reasonable assurances that such Securities
can be sold under Rule 144, or (d) the Securities represented by a certificate
can be sold without restriction as to the number of securities sold under Rule
144(k), the Company will permit the transfer of the Securities, and the Transfer
Agent will issue one or more certificates, free from any restrictive legend, in
such name and in such denominations as specified by such holder. Notwithstanding
anything herein to the contrary, the Securities may be pledged as collateral in
connection with a bona fide margin account or other lending arrangement;
provided that such pledge will not alter the provisions of this Article V with
respect to the removal of restrictive legends.
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5.3 ENFORCEMENT OF PROVISION. The Company acknowledges that a breach by
it of its obligations hereunder will cause irreparable harm to the Investor by
vitiating the intent and purpose of the transaction contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations under this Article V will be inadequate and agrees, in the event of
a breach or threatened breach by the Company of the provisions of this Section,
that the Investor will be entitled, in addition to all other available remedies,
to an injunction restraining any breach and requiring immediate transfer,
without the necessity of showing economic loss and without any bond or other
security being required.
ARTICLE VI
CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL
The obligation of the Company to issue and sell the Securities to each
Investor at the Closing is subject to the satisfaction by such Investor, on or
before the Closing Date, of each of the following conditions. These conditions
are for the Company's sole benefit and may be waived by the Company at any time
in its sole discretion:
6.1 The Investor will have executed this Agreement and the Registration
Rights Agreement and will have delivered those agreements to the Company.
6.2 The Investor will have delivered the purchase price for the
Securities to the Company in accordance with this Agreement.
6.3 The representations and warranties of the Investor must be true and
correct in all material respects as of the Closing Date as though made at that
time (except for representations and warranties that speak as of a specific
date, which representations and warranties must be correct as of such date), and
the Investor will have performed and complied in all material respects with the
covenants and conditions required by this Agreement to be performed or complied
with by the Investor at or prior to the Closing.
6.4 No statute, rule, regulation, executive order, decree, ruling or
injunction will have been enacted, entered, promulgated or endorsed by or in any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
ARTICLE VII
CONDITIONS TO THE INVESTOR'S OBLIGATION TO PURCHASE
The obligation of each Investor hereunder to purchase the Securities from
the Company at the Closing is subject to the satisfaction, on or before the
Closing Date, of each of the following conditions. These conditions are for each
Investor's respective benefit and may be waived by any Investor at any time in
its sole discretion:
7.1 The Company will have executed this Agreement and the Registration
Rights Agreement and will have delivered those Agreements to the Investor.
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7.2 The Company will have delivered to the Investors duly executed
certificates representing the Securities in the amounts specified in Sections
1.1 hereof.
7.3 The representations and warranties of the Company must be true and
correct in all material respects as of the Closing as though made at that time
(except for representations and warranties that speak as of a specific date,
which representations and warranties must be true and correct as of such date)
and the Company must have performed and complied in all material respects with
the covenants and conditions required by this Agreement to be performed or
complied with by the Company at or prior to the Closing. The Investor must have
received a certificate or certificates dated as of the Closing Date and executed
by the Chief Executive Officer or the Chief Financial Officer of the Company
certifying as to the matters in contained in this Section 7.3 and as to such
other matters as may be reasonably requested by such Investor, including, but
not limited to, the Company's Certificate of Incorporation, By-laws, Board of
Directors' resolutions relating to the transactions contemplated hereby and the
incumbency and signatures of each of the officers of the Company who may execute
on behalf of the Company any document delivered at the Closing.
7.4 No litigation, statute, rule, regulation, executive order, decree,
ruling or injunction will have been enacted, entered, promulgated or endorsed by
or in any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions contemplated
by this Agreement.
7.5 Trading and listing of the Common Stock on Nasdaq must not have
been suspended by the SEC or Nasdaq.
7.6 The Investors will have received an opinion of the Company's
counsel, dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to the Investors and in substantially the form attached hereto as
Exhibit B.
7.7 The Irrevocable Transfer Agent Instructions, in form and substance
satisfactory to the Investors, will have been delivered to the Company's
transfer agent and acknowledged in writing by such transfer agent.
ARTICLE VIII
INDEMNIFICATION
In consideration of each Investor's execution and delivery of this
Agreement and its acquisition of the Securities hereunder, and in addition to
all of the Company's other obligations under this Agreement and the Registration
Rights Agreement, the Company will defend, protect, indemnify and hold harmless
each Investor and each other holder of the Securities and all of their
stockholders, officers, directors, employees and direct or indirect investors
and any of the foregoing person's agents or other representatives (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the "INDEMNITEES") from and
against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages, and expenses in connection therewith
(regardless of whether any such Indemnitee is a party to the action for which
indemnification hereunder is
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sought), and including reasonable attorneys' fees and disbursements (the
"INDEMNIFIED LIABILITIES"), incurred by an Indemnitee as a result of, or arising
out of, or relating to (a) any breach of any representation or warranty made by
the Company herein or in any other certificate, instrument or document
contemplated hereby or thereby, (b) any breach of any covenant, agreement or
obligation of the Company contained herein or in any other certificate,
instrument or document contemplated hereby or thereby or (c) any cause of
action, suit or claim brought or made against such Indemnitee and arising out of
or resulting from the execution, delivery, performance, breach or enforcement of
this Agreement or the Registration Rights Agreement by the Company. To the
extent that the foregoing undertaking by the Company is unenforceable for any
reason, the Company will make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities that is permissible under
applicable law.
ARTICLE IX
DEFINITIONS
9.1 "Closing" means the closing of the purchase and sale of the
Securities under this Agreement.
9.2 "Closing Date" has the meaning set forth in Section 1.3.
9.3 "Common Stock" means the common stock, par value $.01 per share, of
the Company.
9.4 "Company" means Endocardial Solutions, Inc.
9.5 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
9.6 "Indemnified Liabilities" has the meaning set forth in Article VIII.
9.7 "Indemnitees" has the meaning set forth in Article VIII.
9.9 "Investors" means the investors whose names are set forth on the
signature pages of this Agreement, and their permitted transferees.
9.10 "Material Adverse Effect" means a material adverse effect on (a)
the business, operations, assets or financial condition of the Company or (b)
the ability of the Company to perform its obligations pursuant to the
transactions contemplated by this Agreement or under the agreements or
instruments to be entered into or filed in connection herewith.
9.11 Nasdaq National Market System.
9.12 "Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date of this Agreement and among the parties to this
Agreement, in the form attached hereto as EXHIBIT A.
9.13 "Regulation D" means Regulation D as promulgated under by the SEC
under the Securities Act.
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9.14 "Rule 144" and "Rule 144(k)" mean Rule 144 and Rule 144(k),
respectively, promulgated under the Securities Act, or any successor rule.
9.15 "SEC" means the United States Securities and Exchange Commission.
9.16 "SEC Documents" has the meaning set forth in Section 3.8.
9.17 "Securities" means the Common Stock sold pursuant to this
agreement.
9.18 "Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations thereunder, or any similar successor statute.
ARTICLE X
GOVERNING LAW; MISCELLANEOUS
10.1 GOVERNING LAW; JURISDICTION. This Agreement will be governed by and
interpreted in accordance with the laws of the State of Minnesota without regard
to the principles of conflict of laws. The parties hereto hereby submit to the
exclusive jurisdiction of the United States federal and state courts located in
the State of Minnesota with respect to any dispute arising under this Agreement,
the agreements entered into in connection herewith or the transactions
contemplated hereby or thereby.
10.2 COUNTERPARTS; SIGNATURES BY FACSIMILE. This Agreement may be
executed in two or more counterparts, all of which are considered one and the
same agreement and will become effective when counterparts have been signed by
each party and delivered to the other parties. This Agreement, once executed by
a party, may be delivered to the other parties hereto by facsimile transmission
of a copy of this Agreement bearing the signature of the party so delivering
this Agreement.
10.3 HEADINGS. The headings of this Agreement are for convenience of
reference only, are not part of this Agreement and do not affect its
interpretation.
10.4 SEVERABILITY. If any provision of this Agreement is invalid or
unenforceable under any applicable statute or rule of law, then such provision
will be deemed modified in order to conform with such statute or rule of law.
Any provision hereof that may prove invalid or unenforceable under any law will
not affect the validity or enforceability of any other provision hereof.
10.5 ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the Registration
Rights Agreement (including all schedules and exhibits thereto) constitute the
entire agreement among the parties hereto with respect to the subject matter
hereof and thereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein or therein. This
Agreement supersedes all prior agreements and understandings among the parties
hereto with respect to the subject matter hereof. No provision of this Agreement
may be waived or amended other than by an instrument in writing signed by the
party to be charged with enforcement.
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10.6 NOTICES. Any notices required or permitted to be given under the
terms of this Agreement must be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier (including a recognized
overnight delivery service) or by facsimile and will be effective five days
after being placed in the mail, if mailed by regular U.S. mail, or upon receipt,
if delivered personally, by courier (including a recognized overnight delivery
service) or by facsimile, in each case addressed to a party. The addresses for
such communications are:
If to the Company: Endocardial Solutions, Inc.
1350 Energy Lane, Suite 110
St. Paul, Minnesota 55108
Attention: Chief Executive Officer
Facsimile: (651) 644-7897
With a copy to: Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Kenneth L. Cutler, Esq.
Facsimile: (612) 340-8738
If to an Investor: To the address set forth immediately below such
Investor's name on the signature pages hereto.
Each party will provide written notice to the other parties of any change
in its address.
10.7 SUCCESSORS AND ASSIGNS. This Agreement is binding upon and inures
to the benefit of the parties and their successors and assigns. The Company will
not assign this Agreement or any rights or obligations hereunder without the
prior written consent of the Investors, and no Investor may assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the Company. Notwithstanding the foregoing, an Investor may assign
all or part of its rights and obligations hereunder to any of its "affiliates,"
as that term is defined under the Securities Act, without the consent of the
Company so long as the affiliate is an accredited investor (within the meaning
of Regulation D under the Securities Act) and agrees in writing to be bound by
this Agreement. This provision does not limit the Investor's right to transfer
the Securities pursuant to the terms of this Agreement or to assign the
Investor's rights hereunder to any such transferee pursuant to the terms of this
Agreement.
10.8 THIRD PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
10.9 SURVIVAL. The representations and warranties of the Company and
the agreements and covenants set forth herein will survive the Closing
hereunder. The Company makes no representations or warranties in any oral or
written information provided to Investors, other than the representations and
warranties included herein.
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10.10 FURTHER ASSURANCES. Each party will do and perform, or cause to
be done and performed, all such further acts and things, and will execute and
deliver all other agreements, certificates, instruments and documents, as
another party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
10.11 NO STRICT CONSTRUCTION. The language used in this Agreement is
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.
10.12 EQUITABLE RELIEF. The Company recognizes that, if it fails to
perform or discharge any of its obligations under this Agreement, any remedy at
law may prove to be inadequate relief to the Investors. The Company therefore
agrees that the Investors are entitled to temporary and permanent injunctive
relief in any such case without the necessity of proving actual damages.
[The remainder of this page has been intentionally left blank]
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IN WITNESS WHEREOF, the undersigned Investors and the Company have caused
this Agreement to be duly executed as of the date first above written.
COMPANY:
ENDOCARDIAL SOLUTIONS, INC.
By: /s/ Leota L. Pearson
--------------------------------
Name: Leota L. Pearson
Title: Chief Financial Officer
[Signatures continued on next page]
17
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INVESTORS:
THE KAUFMANN FUND, INC.
By: /s/ Lawrence Auriana
--------------------------------
Name: Lawrence Auriana
Its: Chairman
Aggregate Subscription Amount: $4,000,005
Number of Shares of Common Stock: 444,445
RESIDENCE:
ADDRESS:
The Kaufmann Fund, Inc.
140 East 45th Street, 43rd Floor
New York, NY 10017
[Signatures continued on next page]
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INVESTORS:
SCUDDER VARIABLE LIFE INVESTMENT
FUND SMALL COMPANY GROWTH
By: /s/ Roy C. McKay
--------------------------------
Name: Roy C. McKay
Its: Vice President
Aggregate Subscription Amount: $38,160
Number of Shares of Common Stock: 4,240
RESIDENCE:
ADDRESS:
c/o Scudder Kemper Investments
345 Park Avenue
New York, NY 10154
[Signatures continued on next page]
18
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INVESTORS:
AST KEMPER SMALL CAP FUND
By: /s/ Roy C. McKay
--------------------------------
Name: Roy C. McKay
Its: Vice President
Aggregate Subscription Amount: $5,353,974
Number of Shares of Common Stock: 594,886
RESIDENCE:
ADDRESS:
c/o Scudder Kemper Investments
345 Park Avenue
New York, NY 10154
[Signatures continued on next page]
18
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INVESTORS:
SCUDDER 21ST CENTURY GROWTH FUND
By: /s/ Roy C. McKay
--------------------------------
Name: Roy C. McKay
Its: Vice President
Aggregate Subscription Amount: $607,860
Number of Shares of Common Stock: 67,540
RESIDENCE:
ADDRESS:
c/o Scudder Kemper Investments
345 Park Avenue
New York, NY 10154
[Signatures continued on next page]
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EXHIBIT 10.3
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT, dated as of July 9, 1999 (this
"AGREEMENT"), is made by and among Endocardial Solutions, Inc., a Delaware
corporation, with headquarters located at 1350 Energy Lane, St. Paul, Minnesota
(the "COMPANY"), and the investors named on the signature pages hereto (the
"INITIAL INVESTORS").
RECITALS:
A. In connection with the Securities Purchase Agreement dated July 9,
1999 between the Initial Investors and the Company (the "PURCHASE AGREEMENT"),
the Company has agreed, upon the terms and subject to the conditions of the
Purchase Agreement, to issue and sell to the Initial Investors 1,111,111 shares
of the Company's Common Stock (the "COMMON SHARES").
B. In order to induce the Initial Investors to execute and deliver the
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act and applicable state securities laws with
respect to the Common Shares.
In consideration of the premises and the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Company and the Initial Investors hereby agree as
follows:
ARTICLE I
DEFINITIONS
Capitalized terms used and not otherwise defined herein have the respective
meanings given them set forth in the Purchase Agreement. In addition, as used in
this Agreement, the following terms have the following meanings:
1.1 "COMMON SHARES" means the shares of Common Stock sold pursuant to
the Purchase Agreement.
1.2 "INVESTORS" means the Initial Investors and any of their
transferees or assignees who agree to become bound by the provisions of this
Agreement in accordance with Article IX hereof.
1.3 "REGISTRABLE SECURITIES" means the Common Shares sold pursuant to
the Purchase Agreement and any shares of capital stock issued or issuable from
time to time (with any adjustments) in exchange for or otherwise with respect to
the Common Shares.
1.4 "REGISTRATION PERIOD" means the period between the date of this
Agreement and the earlier of (i) the date on which all of the Registrable
Securities have been sold and no further Registrable Securities may be issued in
the future, (ii) the date on which all the
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Registrable Securities (in the opinion of the Investors' counsel) may be
immediately sold without registration and without restriction (including without
limitation as to volume by each holder thereof) as to the number of Registrable
Securities to be sold, pursuant to Rule 144 or otherwise, or (iii) the second
anniversary of the date of this Agreement.
1.5 "Registration Statement" means a Registration Statement of the
Company filed under the Securities Act.
1.6 The terms "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a Registration Statement or
statements in compliance with the Securities Act and pursuant to Rule 415 and
the declaration or ordering of effectiveness of such Registration Statement by
the SEC.
1.7 "RULE 415" means Rule 415 under the Securities Act, or any
successor Rule providing for offering securities on a continuous basis, and
applicable rules and regulations thereunder.
ARTICLE II
REGISTRATION
2.1 MANDATORY REGISTRATION. The Company will use best efforts to file
with the SEC a Registration Statement on Form S-3 registering the Registrable
Securities and no other securities for resale within 30 business days after the
Closing Date of the purchase of the Common Shares under the Purchase Agreement.
If Form S-3 is not available at that time, then the Company will file a
Registration Statement on such form as is then available to effect a
registration of the Registrable Securities, subject to the consent of the
Initial Investors, which consent will not be unreasonably withheld.
2.2 EFFECTIVENESS OF THE REGISTRATION STATEMENT. The Company will use
its best efforts to cause the Registration Statement to be declared effective by
the SEC as soon as practicable after filing, and in any event no later than the
90th day after the Closing Date (the "REQUIRED EFFECTIVE DATE"). However, so
long as the Company filed the Registration Statement within 30 business days
after the Closing Date, (a) if the SEC takes the position that registration of
the resale of the Registrable Securities by the Investors is not available under
applicable laws, rules and regulation and that the Company must register the
offering of the Registrable Securities as a primary offering by the Company, or
(b) if the Registration Statement receives SEC review, then the Required
Effective Date will be the 120th day after the Closing Date. In the case of an
SEC response described in clause (a), the Company will, within 40 business days
after the date the Company receives such SEC response, file a Registration
Statement as a primary offering. The Company's best efforts will include, but
not be limited to, promptly responding to all comments received from the staff
of the SEC. If the Company receives notification from the SEC that the
Registration Statement will receive no action or review from the SEC, then the
Company will cause the Registration Statement to become effective within five
business days after such SEC notification. Once the Registration Statement is
declared effective by the SEC, the Company will cause the
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Registration Statement to remain effective throughout the Registration Period,
except as permitted under Section 3.
2.3 PAYMENTS BY THE COMPANY. If (i) at any time after effectiveness of
the Registration Statement, sales cannot be made thereunder for any reason,
other than suspension of effectiveness of the Registration Statement as
described in Section 3.6, for a period of more than 10 consecutive business
days, or 30 days in the aggregate, during any 12-month period or (ii) the Common
Stock is not listed or included for quotation on Nasdaq, Nasdaq SmallCap, the
NYSE or AMEX for more than an aggregate of 10 business days in any 12-month
period, then the Company will make a cash payment to each Investor as partial
compensation for such delay. The amount of the cash payment made to each
Investor will be equal to 1% of the purchase price paid for the Common Shares
purchased by the Investor and not previously sold by the Investor for the first
30 days that sales cannot be made under the effective Registration Statement or
the Common Stock is not listed or included for quotation on Nasdaq, Nasdaq
SmallCap, the NYSE or AMEX. These payments will be paid to each Investor in cash
within five business days following the end of such 30-day period.
2.4 EFFECT OF LATE REGISTRATION. If the Registration Statement has not
been declared effective by the Required Effective Date, then the Company will
make cash payments to each Investor as partial compensation for such delay (the
"LATE REGISTRATION PAYMENTS"). The Late Registration Payments will be equal to
1% of the purchase price paid for the Common Shares purchased by such Investor
and not previously sold by such Investor for the first 30 days after the
Required Effective Date. The Late Registration Payments will be paid to the
Initial Investors in cash within five business days after the earlier of (i) the
end of the 30-day period following the Required Effective Date or (ii) the
effective date of the Registration Statement. Nothing herein limits any
Investor's right to pursue actual damages for the Company's failure to file a
Registration Statement or to have it declared effective by the SEC on or prior
to the Required Effective Date in accordance with the terms of this Agreement.
2.5 PIGGYBACK REGISTRATIONS.
(a) If, at any time prior to the expiration of the Registration
Period, a Registration Statement is not effective with respect to all of the
Registrable Securities and the Company decides to register any of its securities
for its own account or for the account of others, then the Company will promptly
give the Investors written notice thereof and will use its best efforts to
include in such registration all or any part of the Registrable Securities
requested by such Investors to be included therein (excluding any Registrable
Securities previously included in a Registration Statement). This requirement
does not apply to Company registrations on Form S-4 or S-8 or their equivalents
relating to equity securities to be issued solely in connection with an
acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans. Each Investor must
give its request for registration under this paragraph to the Company in writing
within 15 days after receipt from the Company of notice of such pending
registration. If the registration for which the Company gives notice is a public
offering involving an
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underwriting, the Company will so advise the Investors as part of the
above-described written notice. In that event, if the managing underwriter(s) of
the public offering impose a limitation on the number of shares of Common Stock
that may be included in the Registration Statement because, in such
underwriter(s)' judgment, such limitation would be necessary to effect an
orderly public distribution, then the Company will be obligated to include only
such limited portion, if any, of the Registrable Securities with respect to
which such Investors have requested inclusion hereunder. Any exclusion of
Registrable Securities will be made pro rata among all holders of the Company's
securities seeking to include shares of Common Stock in proportion to the number
of shares of Common Stock sought to be included by those holders. However, the
Company will not exclude any Registrable Securities unless the Company has first
excluded all outstanding securities the holders of which are not entitled by
right to inclusion of securities in such Registration Statement or are not
entitled pro rata inclusion with the Registrable Securities.
(b) No right to registration of Registrable Securities under this
Section 2.5 limits in any way the registration required under Section 2.1 above.
The obligations of the Company under this Section 2.5 expire upon the earlier of
(i) the effectiveness of the Registration Statement filed pursuant to Section
2.1 above, (ii) after the Company has afforded the opportunity for the Investors
to exercise registration rights under this Section 2.5 for two registrations
(provided, however, that any Investor that has had any Registrable Securities
excluded from any Registration Statement in accordance with this Section 2.5 may
include in any additional Registration Statement filed by the Company the
Registrable Securities so excluded), (iii) when all of the Registrable
Securities held by any Investor may be sold by such Investor under Rule 144
without being subject to any volume restrictions, or (iv) the second anniversary
of the date of this Agreement.
2.6 ELIGIBILITY TO USE FORM S-3. The Company represents and warrants
that it meets the requirements for the use of Form S-3 for registration of the
sale by the Investors of the Registrable Securities. The Company will file all
reports required to be filed by the Company with the SEC in a timely manner so
as to preserve its eligibility for the use of Form S-3.
ARTICLE III
ADDITIONAL OBLIGATIONS OF THE COMPANY
3.1 CONTINUED EFFECTIVENESS OF REGISTRATION STATEMENT. Subject to the
limitations set forth in Section 3.6, the Company will keep the Registration
Statement covering the Registrable Securities effective under Rule 415 at all
times during the Registration Period.
3.2 ACCURACY OF REGISTRATION STATEMENT. Any Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein) filed by the Company covering Registrable Securities will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein, or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading. The Company
will prepare and file with the SEC such amendments (including post-effective
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amendments) and supplements to the Registration Statement and the prospectus
used in connection with the Registration Statement as may be necessary to permit
sales pursuant to the Registration Statement at all times during the
Registration Period, and, during such period, will comply with the provisions of
the Securities Act with respect to the disposition of all Registrable Securities
of the Company covered by the Registration Statement until the termination of
the Registration Period, or if earlier, until such time as all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof as set forth in the
Registration Statement.
3.3 FURNISHING DOCUMENTATION. The Company will furnish to each Investor
whose Registrable Securities are included in a Registration Statement, and to
its legal counsel, (a) promptly after each document is prepared and publicly
distributed, filed with the SEC or received by the Company, one copy of any
Registration Statement filed pursuant to this Agreement and any amendments
thereto, each preliminary prospectus and final prospectus and each amendment or
supplement thereto; and, in the case of a Registration Statement filed under
Section 2.1 above, each letter written by or on behalf of the Company to the SEC
and each item of correspondence from the SEC or the staff of the SEC, in each
case relating to such Registration Statement (other than any portion of any item
thereof which contains information for which the Company has sought confidential
treatment); and (b) a number of copies of a prospectus, including a preliminary
prospectus, and all amendments and supplements thereto, and such other documents
as the Investor may reasonably request in order to facilitate the disposition of
the Registrable Securities owned by the Investor. The Company will immediately
notify by facsimile each Investor whose Registrable Securities are included in
any Registration Statement of the effectiveness of the Registration Statement
and any post-effective amendment.
3.4 ADDITIONAL OBLIGATIONS. The Company will use its best efforts to
(a) register and qualify the Registrable Securities covered by a Registration
Statement under such other securities or blue sky laws of such jurisdictions as
each Investor who holds (or has the right to hold) Registrable Securities being
offered reasonably requests, (b) prepare and file in those jurisdictions any
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain their
effectiveness during the Registration Period, (c) take any other actions
necessary to maintain such registrations and qualifications in effect at all
times during the Registration Period, and (d) take any other actions reasonably
necessary or advisable to qualify the Registrable Securities for sale in such
jurisdictions. Notwithstanding the foregoing, the Company is not required, in
connection such obligations, to (i) qualify to do business in any jurisdiction
where it would not otherwise be required to qualify but for this Section 3.4,
(ii) subject itself to general taxation in any such jurisdiction, (iii) file a
general consent to service of process in any such jurisdiction, (iv) provide any
undertakings that cause material expense or burden to the Company, or (v) make
any change in its charter or bylaws, which in each case the Board of Directors
of the Company determines to be contrary to the best interests of the Company
and its stockholders.
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3.5 UNDERWRITTEN OFFERINGS. If the Investors who hold a majority in
interest of the Registrable Securities being offered in an offering pursuant to
a Registration Statement or any amendment or supplement thereto under this
Agreement select underwriters reasonably acceptable to the Company for such
offering, the Company will enter into and perform its obligations under an
underwriting agreement in usual and customary form including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering.
3.6 SUSPENSION OF REGISTRATION.
(a) The Company will notify (by telephone and also by facsimile and
reputable overnight courier) each Investor who holds Registrable Securities
being sold pursuant to a Registration Statement of the happening of any event of
which the Company has knowledge as a result of which the prospectus included in
the Registration Statement as then in effect includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Company will make such notification as
promptly as practicable after the Company becomes aware of the event (but in no
event, without the prior written consent of the Investor, will the Company
disclose to any Investor any of the facts or circumstances regarding the event),
will promptly (but in no event more than ten business days) prepare a supplement
or amendment to the Registration Statement to correct such untrue statement or
omission, and will deliver a number of copies of such supplement or amendment to
each Investor as such Investor may reasonably request.
(b) Notwithstanding the obligations under Section 3.6(a), if in the
good faith judgment of the Company, following consultation with legal counsel,
resales of Registrable Securities made pursuant to the Registration Statement
(i) would be detrimental to the Company and its stockholders due to the
existence of a material development or potential material development involving
the Company which the Company would be obligated to disclose in the Registration
Statement, which disclosure would be premature or otherwise inadvisable at such
time or would have a Material Adverse Effect upon the Company and its
stockholders, or (ii) would adversely affect or require premature disclosure of
the filing of a Company-initiated registration of any class of its equity
securities, the Company will have the right to suspend the use of the
Registration Statement for a period of not more than sixty days, PROVIDED,
HOWEVER, that the Company may so defer or suspend the use of the Registration
Statement no more than one time in any twelve-month period, and PROVIDED,
FURTHER, that, after deferring or suspending the use of the Registration
Statement, the Company may not again defer or suspend the use of the
Registration Statement until a period of thirty days has elapsed after
resumption of the use of the Registration Statement.
(c) Subject to the Company's rights under this Section 3, the Company
will use its best efforts to prevent the issuance of any stop order or other
suspension of effectiveness of a Registration Statement and, if such an order is
issued, will use its best efforts to obtain the withdrawal of such order at the
earliest possible time and to notify each Investor that holds Registrable
Securities being sold (or, in the event of an underwritten offering, the
managing
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underwriters) of the issuance of such order and the resolution thereof.
(d) Notwithstanding anything to the contrary contained herein or in the
Purchase Agreement, if the use of the Registration Statement is suspended by the
Company, the Company will promptly give notice of the suspension to all
Investors whose securities are covered by the Registration Statement, and will
promptly notify each such Investor as soon as the use of the Registration
Statement may be resumed. Notwithstanding anything to the contrary contained
herein or in the Purchase Agreement, the Company will cause the Transfer Agent
to deliver unlegended shares of Common Stock to a transferee of an Investor in
accordance with the terms of the Purchase Agreement in connection with any sale
of Registrable Securities with respect to which such Investor has entered into a
contract for sale prior to receipt of notice of such suspension and for which
such Investor has not yet settled.
3.7 REVIEW BY THE INVESTORS. The Company will permit a single firm of
legal counsel, designated by the Investors who hold a majority in interest of
the Registrable Securities being sold pursuant to a Registration Statement, to
review the Registration Statement and all amendments and supplements thereto (as
well as all requests for acceleration or effectiveness thereof) a reasonable
period of time prior to their filing with the SEC, and will not file any
document in a form to which such counsel reasonably objects, unless otherwise
required by law in the opinion of the Company's counsel. The sections of any
such Registration Statement including information with respect to the Investors,
the Investors' beneficial ownership of securities of the Company or the
Investors' intended method of disposition of Registrable Securities must conform
to the information provided to the Company by each of the Investors.
3.8 INFORMATION. The Company will make generally available to its
security holders as soon as practicable, but not later than 90 days after the
close of the period covered thereby, an earnings statement (in a form complying
with the provisions of Rule 158 under the Securities Act) covering a 12-month
period beginning not later than the first day of the Company's fiscal quarter
next following the effective date of the Registration Statement.
3.9 COMFORT LETTER; LEGAL OPINION. At the request of the Investors who
hold a majority in interest of the Registrable Securities being sold pursuant to
a Registration Statement, and on the date that Registrable Securities are
delivered to an underwriter for sale in connection with the Registration
Statement, the Company will furnish to the Investors and the underwriters (i) a
letter, dated such date, from the Company's independent certified public
accountants, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters; and (ii) an opinion, dated such date, from
counsel representing the Company for purposes of the Registration Statement, in
form and substance as is customarily given in an underwritten public offering,
addressed to the underwriters and Investors.
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3.10 DUE DILIGENCE; CONFIDENTIALITY.
(a) The Company will make available for inspection by any Investor
whose Registrable Securities are being sold pursuant to a Registration
Statement, any underwriter participating in any disposition pursuant to the
Registration Statement, and any attorney, accountant or other agent retained by
any such Investor or underwriter (collectively, the "INSPECTORS"), all pertinent
financial and other records, pertinent corporate documents and properties of the
Company (collectively, the "RECORDS"), as each Inspector reasonably deems
necessary to enable the Inspector to exercise its due diligence responsibility.
The Company will cause its officers, directors and employees to supply all
information that any Inspector may reasonably request for purposes of performing
such due diligence.
(b) Each Inspector will hold in confidence, and will not make any
disclosure (except to an Investor) of, any Records or other information that the
Company determines in good faith to be confidential, and of which determination
the Inspectors are so notified, unless (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement, (ii) the release of such Records is ordered pursuant to a subpoena or
other order from a court or government body of competent jurisdiction, (iii) the
information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement (to the
knowledge of the relevant Inspector), (iv) the Records or other information was
developed independently by an Inspector without breach of this Agreement, (v)
the information was known to the Inspector before receipt of such information
from the Company, or (vi) the information was disclosed to the Inspector by a
third party without restriction. The Company is not required to disclose any
confidential information in the Records to any Inspector unless and until such
Inspector has entered into a confidentiality agreement (in form and substance
satisfactory to the Company) with the Company with respect thereto,
substantially in the form of this Section 3.11. Each Investor will, upon
learning that disclosure of Records containing confidential information is
sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt notice to the Company and allow the Company, at
the Company's expense, to undertake appropriate action to prevent disclosure of,
or to obtain a protective order for, the Records deemed confidential. Nothing
herein will be deemed to limit the Investor's ability to sell Registrable
Securities in a manner that is otherwise consistent with applicable laws and
regulations.
(c) The Company will hold in confidence, and will not make any
disclosure of, information concerning an Investor provided to the Company under
this Agreement unless (i) disclosure of such information is necessary to comply
with federal or state securities laws, (ii) the disclosure of such information
is necessary to avoid or correct a misstatement or omission in any Registration
Statement, (iii) the release of such information is ordered pursuant to a
subpoena or other order from a court or governmental body of competent
jurisdiction, (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement (v) the information was disclosed to the Company by a third party
without restriction or (vi) such Investor consents to the form and content of
any such disclosure. If the Company learns that
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disclosure of such information concerning an Investor is sought in or by a court
or governmental body of competent jurisdiction or through other means, the
Company will give prompt notice to such Investor prior to making such disclosure
and allow such Investor, at its expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, such information.
3.11 LISTING. The Company will (i) cause all of the Registrable
Securities covered by each Registration Statement to be listed on each national
securities exchange on which securities of the same class or series issued by
the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange, or (ii) to the
extent the securities of the same class or series are not then listed on a
national securities exchange, secure the designation and quotation of all of the
Registrable Securities covered by each Registration Statement on Nasdaq and,
without limiting the generality of the foregoing, arrange for at least two
market makers to register with the National Association of Securities Dealers,
Inc. as such with respect to such Registrable Securities.
3.12 TRANSFER AGENT; REGISTRAR. The Company will provide a transfer
agent and registrar, which may be a single entity, for the Registrable
Securities not later than the effective date of the Registration Statement.
3.13 SHARE CERTIFICATES. The Company will cooperate with the Investors
who hold Registrable Securities being sold and with the managing underwriter(s),
if any, to facilitate the timely preparation and delivery of certificates (not
bearing any restrictive legends) representing Registrable Securities to be
offered pursuant to a Registration Statement and will enable such certificates
to be in such denominations or amounts as the case may be, and registered in
such names as the Investors or the managing underwriter(s), if any, may
reasonably request, all in accordance with Article V of the Purchase Agreement.
3.14 PLAN OF DISTRIBUTION. At the request of the Investors holding a
majority in interest of the Registrable Securities registered pursuant to a
Registration Statement, the Company will promptly prepare and file with the SEC
such amendments (including post-effective amendments) and supplements to the
Registration Statement, and the prospectus used in connection with the
Registration Statement, as may be necessary in order to change the plan of
distribution set forth in such Registration Statement.
3.15 SECURITIES LAWS COMPLIANCE. The Company will comply with all
applicable laws related to any Registration Statement relating to the sale of
Registrable Securities and to offering and sale of securities and with all
applicable rules and regulations of governmental authorities in connection
therewith (including, without limitation, the Securities Act, the Exchange Act
and the rules and regulations promulgated by the SEC).
3.16 FURTHER ASSURANCES. The Company will take all other reasonable
actions as any Investor or the underwriters, if any, may reasonably request to
expedite and facilitate disposition by such Investor of the Registrable
Securities pursuant to the Registration Statement.
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3.17 NO ADDITIONAL SELLING SHAREHOLDERS. The Company will not, and will
not agree to, allow the holders of any securities of the Company to include any
of their securities in any Registration Statement under Section 2.1 hereof, or
any amendment or supplement thereto under Section 3.2 hereof, without the
consent of the holders of a majority in interest of the Registrable Securities.
ARTICLE IV
OBLIGATIONS OF THE INVESTORS
4.1 INVESTOR INFORMATION. As a condition to the obligations of the
Company to complete any registration pursuant to this Agreement with respect to
the Registrable Securities of each Investor, such Investor will furnish to the
Company such information regarding itself, the Registrable Securities held by it
and the intended method of disposition of the Registrable Securities held by it
as is reasonably required by the Company to effect the registration of the
Registrable Securities. At least 10 business days prior to the first anticipated
filing date of a Registration Statement for any registration under this
Agreement, the Company will notify each Investor of the information the Company
requires from that Investor if the Investor elects to have any of its
Registrable Securities included in the Registration Statement. If, within three
business days prior to the filing date, the Company has not received the
requested information from an Investor, then the Company may file the
Registration Statement without including Registrable Securities of that
Investor.
4.2 FURTHER ASSURANCES. Each Investor will cooperate with the Company,
as reasonably requested by the Company, in connection with the preparation and
filing of any Registration Statement hereunder, unless such Investor has
notified the Company in writing of such Investor's election to exclude all of
such Investor's Registrable Securities from the Registration Statement.
4.3 SUSPENSION OF SALES. Upon receipt of any notice from the Company of
the happening of any event of the kind described in Section 3.6, each Investor
will immediately discontinue disposition of Registrable Securities pursuant to
the Registration Statement covering such Registrable Securities until it
receives copies of the supplemented or amended prospectus contemplated by
Section 3.6. If so directed by the Company, each Investor will deliver to the
Company (at the expense of the Company) or destroy (and deliver to the Company a
certificate of destruction) all copies in the Investor's possession (other than
a limited number of file copies) of the prospectus covering such Registrable
Securities that is current at the time of receipt of such notice.
4.4 UNDERWRITTEN OFFERINGS.
(a) If Investors holding a majority in interest of the Registrable
Securities being registered (with the approval of the Initial Investors)
determine to engage the services of an underwriter, each Investor will enter
into and perform such Investor's obligations under an underwriting agreement, in
usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering, and will take such other actions as are reasonably required in
order to expedite
10
<PAGE>
or facilitate the disposition of the Registrable Securities, unless such
Investor has notified the Company in writing of such Investor's election to
exclude all of its Registrable Securities from such Registration Statement.
(b) Without limiting any Investor's rights under Section 2.1 hereof,
no Investor may participate in any underwritten distribution hereunder unless
such Investor (a) agrees to sell such Investor's Registrable Securities on the
basis provided in any underwriting arrangements approved by the Investors
entitled hereunder to approve such arrangements, (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, and (c) agrees to pay its pro rata share of all underwriting
discounts and commissions and other fees and expenses of investment bankers and
any manager or managers of such underwriting, and legal expenses of the
underwriter, applicable with respect to its Registrable Securities, in each case
to the extent not payable by the Company under the terms of this Agreement.
ARTICLE V
EXPENSES OF REGISTRATION
The Company will bear all reasonable expenses, other than underwriting
discounts and commissions, and transfer taxes, if any, incurred in connection
with registrations, filings or qualifications pursuant to Articles II and III of
this Agreement, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, the fees and disbursements of
counsel for the Company, and the reasonable fees and disbursements of one firm
of legal counsel selected by the Initial Investors pursuant to Section 3.8
hereof.
ARTICLE VI
INDEMNIFICATION
In the event that any Registrable Securities are included in a Registration
Statement under this Agreement:
6.1 To the extent permitted by law, the Company will indemnify and hold
harmless each Investor that holds such Registrable Securities, any underwriter
(as defined in the Securities Act) for the Investors, any directors or officers
of such Investor or such underwriter and any person who controls such Investor
or such underwriter within the meaning of the Securities Act or the Exchange Act
(each, an "INDEMNIFIED PERSON") against any losses, claims, damages, expenses or
liabilities (joint or several) (collectively, and together with actions,
proceedings or inquiries by any regulatory or self-regulatory organization,
whether commenced or threatened in respect thereof, "CLAIMS") to which any of
them become subject under the Securities Act, the Exchange Act or otherwise,
insofar as such Claims arise out of or are based upon any of the following
statements, omissions or violations in a Registration Statement filed pursuant
to this Agreement, any post-effective amendment thereof or any prospectus
included therein: (a) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any
11
<PAGE>
post-effective amendment thereof or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, (b) any untrue statement or alleged untrue
statement of a material fact contained in the prospectus (as it may be amended
or supplemented) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading, or
(c) any violation or alleged violation by the Company of the Securities Act, the
Exchange Act or any other law, including without limitation any state securities
law or any rule or regulation thereunder (the matters in the foregoing clauses
(a) through (c) being, collectively, "VIOLATIONS"). Subject to the restrictions
set forth in Section 6.3 with respect to the number of legal counsel, the
Company will reimburse the Investors and each such underwriter or controlling
person and each such other Indemnified Person, promptly as such expenses are
incurred and are due and payable, for any legal fees or other reasonable
expenses incurred by them in connection with investigating or defending any
Claim. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6.1 (i) does not apply to a
Claim arising out of or based upon a Violation that occurs in reliance upon and
in conformity with information furnished in writing to the Company by any
Indemnified Person expressly for use in connection with the preparation of the
Registration Statement or any such amendment thereof or supplement thereto, if
such prospectus was timely made available by the Company pursuant to Section 3.3
hereof; and (ii) does not apply to amounts paid in settlement of any Claim if
such settlement is made without the prior written consent of the Company, which
consent will not be unreasonably withheld. This indemnity obligation will remain
in full force and effect regardless of any investigation made by or on behalf of
the Indemnified Persons and will survive the transfer of the Registrable
Securities by the Investors under Article IX of this Agreement.
6.2 In connection with any Registration Statement in which an Investor
is participating, each such Investor will indemnify and hold harmless, to the
same extent and in the same manner set forth in Section 6.1 above, the Company,
each of its directors, each of its officers who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the Exchange Act, and any other stockholder selling
securities pursuant to the Registration Statement or any of its directors or
officers or any person who controls such stockholder within the meaning of the
Securities Act or the Exchange Act (each an "INDEMNIFIED PERSON") against any
Claim to which any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such Claim arises out of or is based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Investor expressly for use in connection with
such Registration Statement. Subject to the restrictions set forth in Section
6.3, such Investor will promptly reimburse any legal or other expenses (promptly
as such expenses are incurred and due and payable) reasonably incurred by them
in connection with investigating or defending any such Claim. However, the
indemnity agreement contained in this Section 6.2 does not apply to amounts paid
in settlement of any Claim if such settlement is effected without the prior
written consent of such Investor, which consent will not be unreasonably
withheld, and no Investor will be liable under this Agreement (including this
Section 6.2 and
12
<PAGE>
Article VII) for the amount of any Claim that exceeds the net proceeds actually
received by such Investor as a result of the sale of Registrable Securities
pursuant to such Registration Statement. This indemnity will remain in full
force and effect regardless of any investigation made by or on behalf of an
Indemnified Party and will survive the transfer of the Registrable Securities by
the Investors under Article IX of this Agreement.
6.3 Promptly after receipt by an Indemnified Person under this Article
VI of notice of the commencement of any action (including any governmental
action), such Indemnified Person will, if a Claim in respect thereof is to be
made against any indemnifying party under this Article VI, deliver to the
indemnifying party a written notice of the commencement thereof. The
indemnifying party may participate in, and, to the extent the indemnifying party
so desires, jointly with any other indemnifying party similarly given notice,
assume control of the defense thereof with counsel mutually satisfactory to the
indemnifying parties and the Indemnified Person. In that case, the indemnifying
party will diligently pursue such defense. If, in the reasonable opinion of
counsel retained by the indemnifying party, the representation by such counsel
of the Indemnified Person and the indemnifying party would be inappropriate due
to actual or potential conflicts of interest between the Indemnified Person and
any other party represented by such counsel in such proceeding or the actual or
potential defendants in, or targets of, any such action including the
Indemnified Person, and any such Indemnified Person reasonably determines that
there may be legal defenses available to such Indemnified Person that are
different from or in addition to those available to the indemnifying party, then
the Indemnified Person is entitled to assume such defense and may retain its own
counsel, with the fees and expenses to be paid by the indemnifying party. The
Company will pay for only one separate legal counsel for the Investors
collectively, and such legal counsel will be selected by the Investors holding a
majority in interest of the Registrable Securities. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action does not relieve an indemnifying party of any
liability to an Indemnified Person under this Article 6, except to the extent
that the indemnifying party is prejudiced in its ability to defend such action.
The indemnification required by this Article 6 will be made by periodic payments
of the amount thereof during the course of the investigation or defense, as such
expense, loss, damage or liability is incurred and is due and payable.
ARTICLE VII
CONTRIBUTION
To the extent that any indemnification provided for herein is prohibited or
limited by law, the indemnifying party will make the maximum contribution with
respect to any amounts for which it would otherwise be liable under Article 6 to
the fullest extent permitted by law. However, (a) no contribution will be made
under circumstances where the maker would not have been liable for
indemnification under the fault standards set forth in Article 6, (b) no seller
of Registrable Securities guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) will be entitled to contribution
from any seller of Registrable Securities who was not guilty of such fraudulent
misrepresentation, and (c) contribution (together with any indemnification or
other
13
<PAGE>
obligations under this Agreement) by any seller of Registrable Securities will
be limited in amount to the net amount of proceeds received by such seller from
the sale of such Registrable Securities.
ARTICLE VIII
EXCHANGE ACT REPORTING
In order to make available to the Investors the benefits of Rule 144 or any
similar rule or regulation of the SEC that may at any time permit the Investors
to sell securities of the Company to the public without registration, the
Company will:
(a) File with the SEC in a timely manner, and make and keep
available, all reports and other documents required of the Company under the
Securities Act and the Exchange Act so long as the Company remains subject to
such requirements (it being understood that nothing herein limits the Company's
obligations under Section 4.3 of the Purchase Agreement) and the filing and
availability of such reports and other documents is required for the applicable
provisions of Rule 144; and
(b) Furnish to each Investor, so long as such Investor holds
Registrable Securities, promptly upon the Investor's request, (i) a written
statement by the Company that it has complied with the reporting requirements of
Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents filed by the Company with the SEC and (iii) such other information as
may be reasonably requested to permit the Investors to sell such securities
pursuant to Rule 144 without registration.
ARTICLE IX
ASSIGNMENT OF REGISTRATION RIGHTS
The rights of the Investors hereunder, including the right to have the
Company register Registrable Securities pursuant to this Agreement, will be
automatically assigned by the Investors to transferees or assignees of all or
any portion of the Registrable Securities, but only if (a) the Investor agrees
in writing with the transferee or assignee to assign such rights, and a copy of
such agreement is furnished to the Company within a reasonable time after such
assignment, (b) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being transferred or assigned, (c) after such transfer
or assignment, the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act and applicable state securities
laws, (d) at or before the time the Company received the written notice
contemplated by clause (b) of this sentence, the transferee or assignee agrees
in writing with the Company to be bound by all of the provisions contained
herein, (e) such transfer is made in accordance with the applicable requirements
of the Purchase Agreement, and (f) the transferee is an "accredited investor" as
that term is defined in Rule 501 of Regulation D.
14
<PAGE>
ARTICLE X
AMENDMENT OF REGISTRATION RIGHTS
This Agreement may be amended and the obligations hereunder may be waived
(either generally or in a particular instance, and either retroactively or
prospectively) only with the written consent of the Company and of the Investors
who then hold a majority in interest of the Registrable Securities (but not
including any Investor who is not affected by such amendment or waiver). Any
amendment or waiver effected in accordance with this Article X is binding upon
each Investor and the Company. Notwithstanding the foregoing, no amendment or
waiver will retroactively affect any Investor without its consent, or will
prospectively adversely affect any Investor who no longer owns any Registrable
Securities without its consent. Neither Article VI nor Article VII hereof may be
amended or waived in a manner adverse to an Investor without its consent.
ARTICLE XI
MISCELLANEOUS
11.1 CONFLICTING INSTRUCTIONS. A person or entity is deemed to be a
holder of Registrable Securities whenever such person or entity owns of record
such Registrable Securities. If the Company receives conflicting instructions,
notices or elections from two or more persons or entities with respect to the
same Registrable Securities, the Company will act upon the basis of
instructions, notice or election received from the registered owner of such
Registrable Securities.
11.2 NOTICES. Any notices required or permitted to be given under the
terms of this Agreement will be given as set forth in the Purchase Agreement.
11.3 WAIVER. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, does not operate as a waiver thereof.
11.4 GOVERNING LAW. This Agreement will be governed by and interpreted
in accordance with the laws of the State of Delaware without regard to the
principles of conflict of laws. The parties hereto hereby submit to the
exclusive jurisdiction of the United States federal and state courts located in
the State of Delaware with respect to any dispute arising under this Agreement,
the agreements entered into in connection herewith or the transactions
contemplated hereby or thereby.
11.5 SEVERABILITY. If any provision of this Agreement is invalid or
unenforceable under any applicable statute or rule of law, then such provision
will be deemed modified in order to conform with such statute or rule of law.
Any provision hereof that may prove invalid or unenforceable under any law will
not affect the validity or enforceability of any other provision hereof.
15
<PAGE>
11.6 ENTIRE AGREEMENT. This Agreement, the Purchase Agreement, the
Certificate of Designations, the Escrow Agreement (including all schedules and
exhibits thereto) constitute the entire agreement among the parties hereto with
respect to the subject matter hereof and thereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein or therein. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
11.7 SUCCESSORS AND ASSIGNS. Subject to the requirements of Article 9
hereof, this Agreement inures to the benefit of and is binding upon the
successors and assigns of each of the parties hereto. Notwithstanding anything
to the contrary herein, including, without limitation, Article 9, the rights of
an Investor hereunder are assignable to and exercisable by a bona fide pledgee
of the Registrable Securities in connection with an Investor's margin or
brokerage accounts.
11.8 USE OF PRONOUNS. All pronouns refer to the masculine, feminine or
neuter, singular or plural, as the context may require.
11.9 HEADINGS. The headings of this Agreement are for convenience of
reference only, are not part of this Agreement and do not affect its
interpretation.
11.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which is deemed an original but all of which constitute
one and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile transmission, and facsimile
signatures are binding on the parties hereto.
11.11 FURTHER ASSURANCES. Each party will do and perform, or cause to
be done and performed, all such further acts and things, and will execute and
deliver all other agreements, certificates, instruments and documents, as
another party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
11.12 CONSENTS. All consents and other determinations to be made by the
Investors pursuant to this Agreement will be made by the Initial Investors or
the Investors holding a majority in interest of the Registrable Securities.
11.13 NO STRICT CONSTRUCTION. The language used in this Agreement is
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.
16
<PAGE>
IN WITNESS WHEREOF, the undersigned Investors and the Company have caused
this Agreement to be duly executed as of the date first above written.
COMPANY:
ENDOCARDIAL SOLUTIONS, INC.
By: /s/ Leota L. Pearson
------------------------------------
Name: Leota L. Pearson
Title: Chief Financial Officer
[Signatures continued on next page]
17
<PAGE>
INVESTORS:
THE KAUFMANN FUND, INC.
By: /s/ Lawrence Auriana
------------------------------------
Name: Lawrence Auriana
Its: Chairman
RESIDENCE:
ADDRESS:
The Kaufmann Fund, Inc.
140 East 45th Street, 43rd Floor
New York, NY 10017
[Signatures continued on next page]
18
<PAGE>
INVESTORS:
SCUDDER VARIABLE LIFE INVESTMENT
FUND SMALL COMPANY GROWTH
By: /s/ Roy C. McKay
------------------------------------
Name: Roy C. McKay
Its: Vice President
RESIDENCE:
ADDRESS:
c/o Scudder Kemper Investments
345 Park Avenue
New York, NY 10154
[Signatures continued on next page]
18
<PAGE>
INVESTORS:
AST KEMPER SMALL CAP GROWTH
By: /s/ Roy C. McKay
------------------------------------
Name: Roy C. McKay
Its: Vice President
RESIDENCE:
ADDRESS:
c/o Scudder Kemper Investments
345 Park Avenue
New York, NY 10154
[Signatures continued on next page]
18
<PAGE>
INVESTORS:
SCUDDER 21ST CENTURY GROWTH FUND
By: /s/ Roy C. McKay
------------------------------------
Name: Roy C. McKay
Its: Vice President
RESIDENCE:
ADDRESS:
c/o Scudder Kemper Investments
345 Park Avenue
New York, NY 10154
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ENDOCARDIAL SOLUTIONS, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 1,467,834
<SECURITIES> 3,496,176
<RECEIVABLES> 1,657,645
<ALLOWANCES> 0
<INVENTORY> 1,944,887
<CURRENT-ASSETS> 8,739,174
<PP&E> 4,896,564
<DEPRECIATION> (2,024,709)
<TOTAL-ASSETS> 11,727,331
<CURRENT-LIABILITIES> 3,220,832
<BONDS> 0
0
0
<COMMON> 90,559
<OTHER-SE> 50,445,850
<TOTAL-LIABILITY-AND-EQUITY> 11,727,331
<SALES> 3,012,435
<TOTAL-REVENUES> 3,012,435
<CGS> 2,853,744
<TOTAL-COSTS> 2,853,744
<OTHER-EXPENSES> (6,858,583)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 163,112
<INCOME-PRETAX> (6,663,402)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,663,402)
<EPS-BASIC> (.74)
<EPS-DILUTED> (.74)
</TABLE>
<PAGE>
EXHIBIT 99
CAUTIONARY STATEMENT
Forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "PSLRA") are included in our Form 10-Q.
The words or phrases "believes," "may," "will," "expects," "should,"
"continue," "anticipates," "intends," "will likely result," "estimates,"
"projects" or similar expressions identify forward-looking statements in our
Form 10-Q and in our future filings with the Securities and Exchange
Commission, in our press releases, in our presentations to securities
analysts or investors, and in oral statements made by or approved by an
executive officer of Endocardial Solutions, Inc. Forward-looking statements
involve risks and uncertainties that may materially and adversely affect our
business, results of operation, financial condition or prospects, and may
cause our actual results to differ materially from historical results or the
results discussed in the forward-looking statements.
You should consider carefully the following cautionary statements if you
own our common stock or are planning to buy our common stock. We intend to
take advantage of the "safe harbor" provisions of the PSLRA by providing this
discussion. We are not undertaking to address or update each factor in future
filings or communications regarding our business or results except to the
extent required by law.
OUR SUCCESS DEPENDS ON DEVELOPING AND COMMERCIALIZING THE ENSITE SYSTEM
The EnSite System is currently our only potential product, and our
success depends entirely on the successful development, commercialization and
market acceptance of the EnSite System. Modifications to the EnSite System
may require additional clinical trials and, ultimately, United States and
international regulatory approvals before they can be fully marketed in the
United States and abroad. Problems in the following areas could materially
impact the commercialization of the EnSite System:
- research and development,
- clinical testing,
- regulatory submissions and approval,
- product manufacturing and commercial scale-up,
- marketing, or
- product distribution.
We have recently begun to generate revenue from the EnSite System. We cannot
assure you that we will ever derive substantial revenues from the sale of the
EnSite System.
CLINICAL TESTING OF OUR PRODUCTS CONTINUES TO BE REQUIRED
We have conducted clinical trials on patients for ventricular
tachycardia ("VT") and supraventricular tachycardia ("SVT") in the United
States and in Europe, and we have at times experienced complications in our
clinical trials. During the third and fourth quarters of 1998, we submitted
to the United States Food and Drug Administration (the "FDA") two premarket
notification applications under Section 510(k) of the Food, Drug and Cosmetic
Act (the "FDC Act") containing the results of our left ventricular and right
atrium multi-center clinical trials. We believe, however, we will be required
to conduct more extensive clinical testing in the United States in order to
support a premarket approval ("PMA") application to the FDA for marketing
approval for use of the EnSite System in the left ventricle of the heart.
Patients selected for clinical trials must meet stringent guidelines to
undergo testing, and we cannot assure you that patients can be enrolled in
clinical trials on a timely basis. Further, we cannot assure you that any of
our products will prove to be safe and effective in clinical trials under
United States or international regulatory guidelines. The clinical trials may
identify significant technical or other obstacles to be overcome prior to
obtaining approvals. If the EnSite System does not prove to be safe and
effective in clinical trials, our business, financial condition and results
of operations would be materially and adversely affected.
<PAGE>
OUR PRODUCTS ARE SUBJECT TO REGULATORY APPROVAL
The manufacture and sale of medical devices, including the EnSite
System, are subject to extensive regulation in the United States, principally
by the FDA and corresponding state agencies, and in other countries. In the
United States, our products are subject to the FDA's premarket approval
requirements, which have not yet been satisfied for left ventricular use.
Securing FDA approvals requires us to submit extensive clinical data and
supporting information to the FDA. During the third and fourth quarters of
1998, we submitted to the FDA two premarket notification applications under
Section 510(k) of the FDC Act containing the results of our left ventricular
and right atrium multi-center clinical trials. The FDA has cleared the EnSite
System for use in the right atrium of the heart. In March 1999, we determined
that our FDA application for left ventricular use of the EnSite System will
be submitted as a PMA application. However, we may not be able to file a PMA
application with the FDA to market the EnSite System for diagnosing VT in the
United States until we complete more extensive clinical trials. The process
of obtaining FDA and other required regulatory approvals is lengthy,
expensive and uncertain.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country, and
approval for sale internationally may take more or less time than that
required for FDA approval. We have obtained CE certification for the EnSite
catheter and for the EnSite 3000 clinical workstation, allowing us to sell
our products in member countries of the European Union. We may encounter
significant costs and requests for additional information in continuing our
efforts to obtain regulatory approvals in other countries, which could
substantially delay or preclude us from marketing our products
internationally.
Marketing approvals, if granted, may require us to limit the indicated
use of our product. FDA enforcement policy strictly prohibits the marketing
of approved medical devices for unapproved uses. Product approvals could be
withdrawn for failure to comply with regulatory standards or the occurrence
of unforeseen problems following the initial marketing. We will be required
to follow FDA regulations regarding Good Manufacturing Practices and similar
regulations in other countries, which include testing, control, and
documentation requirements. Ongoing compliance with Good Manufacturing
Practices 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. If we fail to comply with
applicable regulatory requirements, we could be subjected to 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, withdrawal of approvals and criminal prosecution.
We cannot assure you that we will be able to obtain the necessary
regulatory approvals on a timely basis or at all. Delays in receipt of or
failure to receive the approvals, the loss of previously obtained approvals,
or failure to comply with existing or future regulatory requirements would
have a material and adverse effect on our business, financial condition and
results of operations.
TREATMENTS USING THE ENSITE SYSTEM MAY NOT BE AVAILABLE TO PATIENTS
We have developed the EnSite System to diagnose tachycardia and assist
electrophysiologists in selecting among treatment options. Current treatments
for VT include drugs, implantable defibrillators, surgery and, potentially,
catheter ablation. We believe that the EnSite System will enable increased
use of catheter ablation for treating complex VT. Because ablation treatment
for VT is relatively new and untested, 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. Catheter ablation devices
require PMA approval by the FDA, and we cannot assure you that a catheter
ablation market will develop. Moreover, we cannot assure you that the EnSite
System will prove useful in diagnosing VT for treatment by catheter ablation
products. We are not in the process of developing a catheter for ablation
treatment and are entirely dependent upon other medical device companies to
develop those devices. If a market for treating VT by catheter ablation does
not develop, our business, financial condition and results of operations
could be materially and adversely affected.
2
<PAGE>
OUR PRODUCTS MAY BE UNABLE TO DIAGNOSE ATRIAL FIBRILLATION
In addition to assisting the diagnosis of VT, we intend to apply the
EnSite System to the diagnosis of SVT, including atrial fibrillation.
However, we have conducted only limited clinical studies of our technology on
patients suffering from atrial fibrillation. We may be unable to successfully
extend our technology to the mapping of atrial fibrillation or obtain
regulatory approval to test and market any products developed using the
technology to map atrial fibrillation. We have made, and expect to continue
to make, research and development expenditures to extend our technology to
the diagnosis of atrial fibrillation. We cannot assure you that we will
realize any benefit from these expenditures.
Atrial fibrillation is a complex disease and the subject of continuing
research. The therapies presently available for atrial fibrillation are in
the developmental stage with no proven effectiveness. Even if we are
successful in extending our technology to provide products that are capable
of diagnosing atrial fibrillation, we cannot assure you that treatments for
atrial fibrillation will exist that will require the diagnostic capabilities
of any of our products. As a result, a commercial market may never develop
for any product we develop for the diagnosis of atrial fibrillation. We have
no present intention to develop any medical devices on our own for the
treatment of atrial fibrillation.
OUR PRODUCTS MAY NOT SUCCEED IN THE MARKET
The commercial success of the EnSite System depends upon the number of
diagnostic procedures performed by electrophysiologists using the system. Our
system may not gain any significant degree of market acceptance among
electrophysiologists, patients, health care insurers and managed care
providers. Electrophysiologists will not recommend diagnostic procedures
until clinical data demonstrate the safety and efficacy of those procedures.
Even if we demonstrate the safety and efficacy of the EnSite System,
electrophysiologists and other physicians may elect not to recommend the
procedures for any number of other reasons, including the availability of
alternative procedures and treatment options, or inadequate levels of
reimbursement. Broad use of the EnSite System will require time-consuming
training of electrophysiologists, which could adversely also affect market
acceptance. If our products are not accepted by the market, our business,
financial condition and results of operations would be materially and
adversely affected.
WE FACE SIGNIFICANT INDUSTRY COMPETITION
The cardiac medical device market is highly competitive, and the EnSite
System is a new technology that must compete with more established devices.
Certain of our competitors are developing new approaches and new products for
diagnosing VT and SVT, including contact mapping systems using
multi-electrode basket contact catheters and single-point mapping
technologies. Certain of our competitors have integrated product lines that
include products for both diagnosis and ablation treatment, which may afford
them opportunities for product bundling and other marketing advantages. Many
of our competitors have an established presence in the field of
electrophysiology and established relationships with electrophysiology labs.
Many of our competitors have substantially greater financial and other
resources than we do, 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. Some of
our competitors may achieve patent protection, regulatory approval or product
commercialization more quickly than us, which may decrease our ability to
compete.
OUR PRODUCTS MAY BECOME OBSOLETE IF WE ARE UNABLE TO ANTICIPATE AND ADAPT TO
RAPIDLY CHANGING TECHNOLOGY
The medical device industry is subject to rapid technological innovation
and, consequently, the life cycle of any particular product is short.
Alternative diagnostic systems or other discoveries and developments with
respect to mapping tachycardia may render our products obsolete. Furthermore,
the greater financial and other resources of many of our competitors may
permit them to respond more rapidly than us to technological advances. If we
fail to demonstrate the safety, benefit, efficacy and cost effectiveness of
our products as compared to those of our competitors, or if we fail to
develop new technologies and products before our competitors, our business,
financial condition and results of operations would be materially and
adversely affected.
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WE DEPEND ON OUR PATENTS AND PROPRIETARY TECHNOLOGY, WHICH WE MAY NOT BE ABLE TO
PROTECT
Our success will depend in part on our ability to obtain patent
protection for our products and processes, to preserve our trade secrets and
to operate without infringing the intellectual property rights of others. The
patent positions of medical device companies are uncertain and involve
complex and evolving legal and factual questions. We cannot assure you that
any of our 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 our patents will
exclude competitors or that the patent rights granted to us will provide us
any competitive advantage. We may discover that our technology infringes
patents or other rights owned by others, and we cannot be certain that we
were the first to make the inventions covered by each of our issued patents
and our pending patent applications, or that we were the first to file patent
applications for such inventions. In addition, we cannot assure you that our
competitors will not seek to apply for and obtain patents that will prevent,
limit or interfere with our ability to make, use or sell our products either
in the United States or in international markets. Further, the laws of
certain foreign countries may not protect our intellectual property rights to
the same extent as do the laws of the United States.
In addition to patents, we rely on trade secrets and proprietary
knowledge that we seek to protect, in part, through confidentiality
agreements with employees, consultants and others. We cannot assure you that
our proprietary information or confidentiality agreements will not be
breached, that we will have adequate remedies for any breach, or that our
trade secrets will not otherwise become known to or independently developed
by competitors.
WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WHICH WOULD BE COSTLY
TO RESOLVE
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and our
competitors may resort to intellectual property litigation as a means of
competition. Intellectual property litigation is complex and expensive and
the outcome is difficult to predict. We cannot assure you that we will not
become subject to patent infringement claims or litigation, or interference
proceedings declared by the United States Patent and Trademark Office to
determine the priority of inventions. Litigation or regulatory proceedings
may also be necessary to enforce our patent or other intellectual property
rights. We may not always have the financial resources to assert patent
infringement suits or to defend ourselves from claims. An adverse result in
any litigation could subject us to liabilities to, or require us to seek
licenses from or pay royalties to, others that may be substantial.
Furthermore, we cannot assure you that the necessary licenses would be
available to us on satisfactory terms, if at all.
WE HAVE LIMITED MANUFACTURING EXPERIENCE
We have limited experience in manufacturing the EnSite catheter and the
patient interface unit of the EnSite System. We currently manufacture our
products in limited quantities for laboratory and clinical testing and only
have begun to manufacture our products for commercial sale. We have limited
experience manufacturing our products in the volumes that will be necessary
for us to achieve significant commercial sales, and we cannot assure you that
reliable, high-volume manufacturing capacity can be established or maintained
at commercially reasonable costs. If we receive regulatory approval for our
products, we will need to expend significant capital resources and develop
the necessary expertise to establish large-scale manufacturing capabilities.
We may encounter the following difficulties in scaling up production of our
products:
- problems involving production yields,
- quality control and assurance,
- component supply shortages,
- shortages of qualified personnel,
- compliance with FDA and foreign regulations, or
- the need for further FDA or foreign regulatory approval of new
manufacturing processes.
Our manufacturing facilities will be periodically inspected by United
States and foreign regulatory authorities. In order to manufacture products
for sale in the United States, our operations must undergo "Good
Manufacturing
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Practices" compliance inspections conducted by the FDA. Our facilities and
manufacturing processes have not yet undergone any inspections by the FDA. We
will also be required to comply with ISO 9001 or 9002 and CE Mark standards
in order to sell our products in Europe. We received ISO 9001 certification
for our catheter and quality system in August 1997 and ISO 9001 certification
for the clinical workstation in November 1998. We received a CE Mark for each
of the EnSite catheter and the clinical workstation in the first quarter of
1998. If we fail to comply with Good Manufacturing Practices or ISO 9001 and
CE Mark standards in future audits, we may be required to modify our
manufacturing policies and procedures. In addition, we may be required to
stop all or part of our operations until we can demonstrate that appropriate
steps have been taken to comply with the regulations.
WE DEPEND ON A FEW SUPPLIERS FOR KEY COMPONENTS OF OUR PRODUCTS
We purchase raw materials and certain key components of our products,
including the computer workstation and certain components for our catheter,
from one or a few suppliers. For certain of these components, there are
relatively few alternative sources of supply. We currently have no agreements
that would assure delivery of raw materials and components from alternate
suppliers. Establishing additional or replacement suppliers for any of the
components used in our products, if required, may not be accomplished quickly
and could involve significant additional costs. If our suppliers are unable
to provide an adequate supply of components in a timely manner, or if we are
unable to locate qualified alternate suppliers for materials and components
at a reasonable cost, our business, financial condition and results of
operations could be materially and adversely affected. In the event we had to
replace a single source supplier, a new supplier would be required to meet
Good Manufacturing Practices and other regulatory standards.
WE HAVE LIMITED COMMERCIAL SALES AND MARKETING EXPERIENCE
We have limited experience marketing the EnSite System. We cannot assure
you that we will be able to maintain a suitable sales force or enter into or
maintain satisfactory marketing arrangements with others. Our sales and
marketing efforts may not be successful.
WE WILL NEED TO CAREFULLY MANAGE OUR EXPANDING OPERATIONS
In order to complete clinical trials, prepare additional products for
clinical trials, and develop future products, we believe that we will be
required to expand our operations, particularly in the areas of research and
development, manufacturing, quality assurance and sales and marketing. As we
expand our operations in these areas, the expansion will likely result in new
and increased responsibilities for management. To accommodate any growth and
compete effectively, we must implement and improve our information systems,
procedures, and controls, and expand, train, motivate and manage our work
force. Our future success will depend significantly on the ability of our
current and future management to operate effectively. We cannot assure you
that our personnel, systems, procedures and controls will be adequate to
support our future operations.
INTERNATIONAL OPERATIONS WILL EXPOSE US TO ADDITIONAL RISKS
We plan to market the EnSite System through distributors in
international markets, once we receive the required foreign regulatory
approvals, and sales in foreign markets are initially expected to be our only
source of revenue. We have entered into a distribution agreement granting
Medtronic exclusive distribution rights for our products in Canada, Europe
and Japan and certain rights for distribution in other regions outside of the
United States. In the first quarter of 1998, we received ISO 9002
certification for our workstation and a CE Mark for each of the EnSite
catheter and the clinical workstation, allowing us to begin selling our
products in member countries of the European Union. ISO 9001 certification
for our workstation was subsequently received in November 1998. We have no
distribution arrangements for other international markets, and currently
retain all distribution rights in the United States. We cannot assure you
that international distributors for our products will devote adequate
resources to selling our products.
Changes in overseas economic conditions, currency exchange rates,
foreign tax laws or tariffs or other trade regulations could materially and
adversely affect on our ability to market our products internationally. Our
business
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is also expected to subject us and our representatives, agents and
distributors to laws and regulations of the foreign jurisdictions in which we
operate or our products are sold. We may depend on foreign distributors and
agents for compliance and adherence to foreign laws and regulations.
OUR SUCCESS MAY DEPEND ON ACHIEVING ADEQUATE LEVELS OF THIRD-PARTY
REIMBURSEMENT
Sales of our products will depend largely on the 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, our
products, if and when approved for commercial sale, would be purchased
primarily by health care providers such as doctors and hospitals who will
then seek to be reimbursed for the health care services provided to their
patients. Third-party payors are increasingly challenging the pricing of
medical products and procedures they consider unnecessary, inappropriate, not
cost-effective, experimental or used for a non-approved indication. Even if a
procedure is eligible for reimbursement, the level of reimbursement may not
be adequate to enable us to achieve or maintain market acceptance of our
products or maintain price levels which exceed our costs of developing and
manufacturing our products.
It is anticipated that our EnSite catheter will be sold at a premium
compared to existing single point catheters used in current diagnostic or
mapping procedures. In addition, an initial capital outlay will be required
for the EnSite clinical workstation. Assuming no increase in the level of
reimbursement for cardiovascular procedures utilizing our products, we will
be required to justify the relative increased cost of using the EnSite
System. This will require us to demonstrate 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. Without adequate support from third-party payors,
the market for our products may be severely limited.
Moreover, we are 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 us. Reforms may include mandated
basic health care benefits, 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. We
anticipate that Congress and state legislatures will continue to review and
assess alternative health care delivery systems and payment methodologies. We
cannot predict whether any reform proposals will be adopted or what impact
they may have on us.
Reimbursement systems in international markets vary significantly by
country and by region within some countries. Many international markets have
government managed health care systems that control reimbursement for new
devices and procedures. In most international markets, there are private
insurance systems as well as government managed systems. We cannot assure you
that reimbursement for our products will be available in international
markets under either government or private reimbursement systems.
OUR PRODUCTS MAY EXPOSE US TO COSTLY LITIGATION
We may be exposed to product liability claims if a patient is adversely
affected by our products. We currently carry product liability insurance
covering our clinical trial operations with an aggregate limit of $5 million.
We cannot assure you that our existing insurance coverage limits are adequate
to cover any liabilities we might incur in connection with the distribution
of our products. Although we expect to obtain product liability insurance
coverage in connection with the commercialization of the EnSite System,
insurance may not be available on commercially reasonable terms, if at all.
Insurance, even if obtained, might not adequately cover any product liability
claim.
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WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT FUTURE LOSSES
We have generated limited revenue and have sustained significant
operating losses each year since our inception. We expect our losses to
continue at least through 1999. We may never generate substantial operating
revenues or achieve profitability. Our ability to generate revenues from
operations and make a profit depends upon successful development, regulatory
approval, manufacturing and commercialization of the EnSite System and our
successful transition from a research and development company to a
manufacturing and sales company.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS
We may require substantial funds to meet our working capital
requirements for continued research and development, testing, regulatory
approval and full-scale commercial introduction of our EnSite System. In
order to meet our funding needs, we may be required to raise additional funds
through public or private financings, including the sale of equity or debt.
Any additional equity financings may dilute current stockholders, and debt
financing, if available, may involve restrictive covenants. Adequate funds
for our operations, whether from financial markets or from other sources, may
not be available when needed on attractive terms, if at all. Insufficient
funds may require us to delay, scale back or eliminate some or all of our
programs designed to facilitate the commercial introduction of the EnSite
System.
OUR SYSTEMS MAY BE SUBJECT TO YEAR 2000 PROBLEMS
We have formed a project team consisting of representatives from our
information technology, finance, manufacturing, product development and
quality department to address internal and external Year 2000 issues. Based
on our assessment to date, we believe we will not experience any material
disruption as a result of Year 2000 problems in our financial, internal
manufacturing processes or the EnSite 3000 System. However, we cannot
guarantee that the systems of other companies on which we rely will be
converted in a timely manner, or that a failure to convert by another
company, or a conversion that is incompatible with our systems, would not
have a material and adverse effect on us. We have not yet developed a
contingency plan in the event of various problem scenarios, but we will
assess the need to develop a plan based on the outcome of our validation
phase of our Year 2000 compliance program and the results of surveying our
major suppliers. Assuming no major disruption in service from utility
companies or other critical third-party providers, we believe that we will be
able to manage our total Year 2000 transition without any material effect on
our results of operations or financial condition. We cannot assure you,
however, that unexpected difficulties will not arise and, if so, that we will
be able to timely develop and implement a contingency plan.
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