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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER
0-22233
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ENDOCARDIAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1724963
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
1350 ENERGY LANE, SUITE 110, ST. PAUL, MN 55108
(Address of principal executive offices) (Zip Code)
(651) 644-7890
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: common stock, par
value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of common stock, par value $.01 per share, held
by non-affiliates of the registrant as of March 15, 1999 was approximately
$61,977,464 (based on the last sale price of such stock as quoted on the Nasdaq
National Market ($10.125) on such date).
As of March 15, 1999, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was 9,045,400.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 1999 Annual Meeting of
Stockholders to be held on May 27, 1999 are incorporated by reference into Part
III of this Annual Report on Form 10-K (the "Form 10-K Report").
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PART I
ITEM 1. BUSINESS
THE COMPANY
Endocardial Solutions, Inc. ("ESI" or the "Company") designs, develops, and
manufactures a minimally invasive diagnostic system that diagnoses, within the
span of a few heartbeats, arryhthmia, a potentially fatal abnormal heart rhythm.
Arryhthmias are caused by irregular electrical activity in the heart which
disrupts the heart's normal pumping action. Ventricular tachycardia ("VT"), a
type of arryhthmia, occur in the lower chambers of the heart and frequently lead
to serious complications, including sudden cardiac death. Supraventricular
tachycardia ("SVT"), including atrial fibrillation and flutter, originate in the
upper chambers of the heart and often result in chest pain, fatigue and
dizziness and, while generally not life-threatening, are a leading cause of
stroke in the United States. To date, electrophysiologists have generally been
unable to adequately diagnose complex arryhthmia due to the limited capabilities
of present technology. The Company believes that its proprietary EnSite-TM-
catheter and EnSite 3000-TM- clinical workstation (together, the "EnSite
System") is a powerful new diagnostic tool that will enable electrophysiologists
to rapidly and comprehensively map arryhthmia and improve the selection of
patient treatment options.
The Company's EnSite System is designed to enable electrophysiologists to
rapidly and precisely locate the multiple, unpredictable points of origin of
complex arryhthmia. The EnSite System applies proprietary mathematical
algorithms to compute more than 3,000 points of electrical activity within a
heart chamber, producing a high resolution, real-time, three dimensional color
display of the electrical activity in the heart chamber. The "virtual
electrogram" function of the EnSite System allows electrophysiologists to
instantly view the electrical activity at any of the more than 3,000 points. The
EnSite System is also capable of tracking and displaying the location and
movements of auxiliary catheters introduced into the chamber.
The Company's strategy is to establish the EnSite System as the leading
diagnostic tool for diagnosing arryhthmia in the more than 1,200
electrophysiology laboratories worldwide. The key elements of the Company's
strategy are as follows:
- DEMONSTRATE SAFETY AND CLINICAL EFFICACY. The EnSite System represents a
new technology for mapping arryhthmia. In order to gain acceptance of this
technology in electrophysiology labs, the Company must demonstrate the
safety and effectiveness of the EnSite System through successful clinical
trials. The Company has conducted clinical trials on VT and SVT patients
in the United States and the United Kingdom using the EnSite System. The
Company has filed the results of its studies and other product information
with the U.S. Food and Drug Administration (the "FDA") in order to seek
the required approvals for marketing in the United States. In 1998, the
Company received the necessary approval to market its products in the
European Community. The Company will also seek to demonstrate the clinical
efficacy of the EnSite System through the publication of the results of
its studies and clinical trials and articles on its technology in medical
journals.
- DEVELOP TECHNOLOGY FOR VENTRICULAR TACHYCARDIAS. The Company believes that
the patient population that suffers from complex VT that are difficult to
map using currently available technology presents a significant market
opportunity for the Company's EnSite System. ESI intends to focus on the
ability of its technology to provide improved speed, increased accuracy
and cost-effectiveness in mapping VT. This improved mapping power should
benefit electrophysiologists in performing diagnostic procedures and
prescribing treatments for an expanded patient population. In June 1997,
the Company received FDA approval for the use of its EnSite System in the
left ventricle of the heart in a multi-center clinical study. In December
1998, the Company filed a premarket notification application with the FDA
under Section 510(k) of the Food, Drug and Cosmetic Act containing the
results of its left ventricular multi-center clinical trials. In March
1999, the Company announced that its FDA application for left ventricular
use of the EnSite System will be submitted as a premarket approval ("PMA")
application.
- DEVELOP TECHNOLOGY FOR ATRIAL FIBRILLATION AND FLUTTER. The Company
believes that the EnSite System can be extended from mapping VT to mapping
atrial tachycardia, including atrial fibrillation and
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flutter, both of which share similar complex characteristics, such as
multiple sites of origin in unpredictable locations. In August 1997, the
Company received FDA approval for the use of its EnSite System in the
right atrium in a multi-center clinical study. In September 1998, the
Company filed a 510(k) application with the FDA containing the results of
its right atrial multi-center clinical trials.
- LEVERAGE RELATIONSHIPS WITH LEADING ELECTROPHYSIOLOGISTS. With its
multi-center clinical studies and its European product launch, the Company
has established relationships with several leading electrophysiologists,
which the Company hopes will enhance market acceptance of the EnSite
System. The Company has established a Scientific Advisory Board whose
members are among the world's leading electrophysiologists. Many of these
board members have been highly involved in the development of the
Company's technology and products and will be instrumental to successful
development, testing, approval and marketing of the Company's technology
and products. The Company intends to utilize its Scientific Advisory Board
members to assist in gaining market acceptance of its products.
The Company was incorporated in Minnesota in 1992 and was reincorporated in
Delaware in 1995. The Company's common stock began trading on The Nasdaq
National Market under the symbol "ECSI" on March 19, 1997. The Company sold
2,250,000 shares of its common stock to the public pursuant to a registered
public offering, and sold 750,000 shares of its common stock in a concurrent
private placement to Medtronic, Inc. Also at such time, all outstanding shares
of the Company's preferred stock were automatically converted into an aggregate
of 4,705,602 shares of common stock following the 1 for 2 reverse stock split.
Prior to such date, there was no established public trading market for the
Company's securities.
In September 1997, the Company signed a seven-year exclusive distribution
agreement with Medtronic, Inc. to market the Company's diagnostic products for
the electrophysiology markets in Europe and Japan. The distribution agreement
was amended in December 1998 to provide Medtronic with exclusive distribution
rights for the Company's products in Canada. In January 1998, the Company signed
a license agreement with Medtronic, Inc. that gives the Company exclusive use of
3D intracardiac location technology for its EnSite System. The technology, when
integrated with the EnSite System, will improve intracradiac catheter
positioning while significantly reducing the use of harmful radiation.
In the first quarter of 1998, the Company received ISO 9002 certification
for its workstation and a CE Mark for each of the EnSite catheter and EnSite
3000 clinical workstation, allowing the Company to begin selling its products in
the European Community. Distribution by Medtronic in Europe of the EnSite System
began in the second quarter of 1998.
The Company has recently announced a financing agreement with Medtronic,
Inc. 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. The financing will facilitate the
Company's continued growth in Europe and preparation for the Company's U.S.
product launch, pending FDA approval.
The Company's offices are located at 1350 Energy Lane, Suite 110, St. Paul,
Minnesota 55108, and its telephone number is (651) 644-7890. The address of the
Company's web site is www.endocardial.com.
BACKGROUND
The heart consists of four chambers: the ventricles, the lower two chambers,
and the atria, the upper two chambers. A normal heartbeat is the result of
electrical impulses generated at the sinoatrial node, the heart's natural
pacemaker located near the top of the right atrium. These impulses form a wave
of electrical activation that travels down the atria, causing them to contract
and fill the ventricles, the heart's primary pumping chambers, with blood. After
a brief delay in the atrioventricular node, located between
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the chambers, the electrical activation wave enters the ventricles and produces
a coordinated contraction of the ventricles that pumps blood throughout the
body's circulatory system.
When defects in the heart tissue interfere with the normal formation or
conduction of the heart's electrical activity, abnormal heart rhythms, known as
cardiac arrhythmias, develop. Cardiac arrhythmias have numerous causes,
including congenital defects, tissue damage due to heart attacks or
arteriosclerosis (the deposition of fatty substances in the inner layer of the
arteries) and other diseases, that accelerate, delay or redirect the
transmission of electrical activity, thereby disrupting the normal coordinated
contractions of the chambers. Arrhythmias characterized by an abnormally fast
heart rate (more than 100 beats per minute) are known as tachycardia.
VENTRICULAR TACHYCARDIA
CHARACTERISTICS OF VENTRICULAR TACHYCARDIAS. Ventricular tachycardia, which
afflicts approximately one million Americans, is a potentially life-threatening
condition caused either by abnormally rapid impulse formation or by slow
ventricular conduction which interferes with the heart's normal electrical
activity and causes abnormally frequent contractions of the ventricles. Rapid
ventricular contractions often result in significantly reduced cardiac output
due to inefficient blood pumping. As a result, the body receives an inadequate
supply of oxygen, which can cause dizziness, unconsciousness, cardiac arrest and
death. VT conditions tend to become more serious over time. Individuals with VT
are at risk of imminent death due to its unpredictable nature.
Many VT result from heart attacks caused by coronary artery disease. When a
heart attack occurs due to a blockage in one or more coronary arteries, a
portion of the heart muscle (most often in the left ventricle) dies. As a
result, irregular borders consisting of intermixed healthy and scar tissue are
formed and VT typically originate at these sites. As the average age of the U.S.
population increases, it is expected that the number of persons who suffer heart
attacks and are at risk of VT will also increase.
VT is a highly complex and transient form of cardiac arryhthmia which varies
significantly from patient to patient. A small percentage of ventricular
tachycardia patients have simple forms of the disease which are focused on a
single anatomic site within the ventricle. The Company estimates, however, that
of the one million patients that suffer from VT, the majority suffer from
complex VTs that (i) have multiple sites of aberrant electrical activity, (ii)
prevent sufficient cardiac output, making them dangerous to induce in the
patient (which is required for diagnosis) and (iii) are nonsustained and,
consequently, are only detectable for several heartbeats.
DIAGNOSING VENTRICULAR TACHYCARDIA. Patients suspected of suffering from VT
are initially screened by a cardiologist by means of external cardiac
monitoring, typically in the form of an electrocardiogram or Holter recording,
which captures electrical activity from surface leads placed on the patient's
chest for 24 hours. When further testing is warranted, the patient is referred
to a cardiac electrophysiologist for a cardiac electrophysiology ("EP") study.
An EP study evaluates the electrical integrity of the heart by stimulating
multiple intra-cardiac sites and recording the electrical response. During an EP
study a patient's clinical tachycardia is induced in a controlled setting in
order to diagnose the tachycardia and select an appropriate treatment or
combination of treatments. EP studies using currently available technology are
lengthy and tedious procedures which consist of probing the interior of the left
ventricle with single-point contact catheters, causing significant discomfort
for the patient. In order to analyze the information generated by single-point
contact catheters for the purpose of prescribing treatment, electrophysiologists
review the signals measured by these catheters as multiple rows of waveforms
displayed on a computer screen. Two or more catheters are often used to provide
more information to the electrophysiologist and thereby aid in identifying the
sites of origin of tachycardia. The electrophysiologist generally constructs a
mental image of the sites of the VT within the heart's chamber by calculating
the relative timing of electrical activation among the waveforms displayed on
the computer screen. The electrophysiologist then estimates the site or sites of
origin (which
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correspond to the physical positions of the catheters) through two-dimensional
fluoroscopic (x-ray) projections. As the tachycardia becomes more complex, the
electrophysiologist's reconstruction of the heart's electrical activity and
location of the sites of origin becomes more difficult.
The limited number of patients suffering from simple forms of VT have been
effectively diagnosed using existing single-point contact catheter technology
with diagnostic procedures that can be time consuming, tedious and invasive.
However, single-point contact catheters have limited utility in diagnosing
complex ventricular tachycardia, including those which are hemo-dynamically
ill-tolerated or short in duration. The limited data produced in point-by-point
mapping often does not provide the electrophysiologist with sufficient
diagnostic power for a complete understanding of the ventricular tachycardia.
Moreover, when attempted, diagnosing complex ventricular tachycardia with
single-point, contact catheters can take from six to twelve hours and requires
significant use of fluoroscopy to guide the catheter, which exposes both the
patient and the medical staff to radiation.
In an effort to address the diagnostic shortcomings of single-point contact
catheters, there are currently under development several "basket" contact
catheters measuring multiple points of electrical activity simultaneously. These
basket catheters will require contact with the heart's surface for measurement
of electrical activity, and the Company believes that these catheters will
suffer from many of the shortcomings of single-point contact catheters.
TREATMENTS FOLLOWING DIAGNOSIS OF VENTRICULAR TACHYCARDIA. The Company's
EnSite System is designed for the diagnosis of tachycardia. The Company does not
currently design products for the treatment of this disease. However, the
Company believes that the EnSite System will provide electrophysiologists with a
diagnostic tool to improve their ability to select among available tachycardia
treatment options.
Once a patient's VT is diagnosed, the electrophysiologist chooses among the
various treatment options available. Noncurative treatments include
antiarrhythmic drugs and implantable defibrillators, both of which attempt to
ameliorate the patient's condition and reduce the risks associated with the VT
but do not eliminate the cause of the tachycardia. Historically, the only
curative treatment available for VT was open heart surgery, but it has been
rarely used due to its high morbidity and mortality. More recently, however,
catheter ablation, a potentially curative treatment currently under development,
has been used in a limited number of cases for complex VT. Often
electrophysiologists prescribe a combination of drugs, defibrillators and
ablation for the treatment of VT.
Antiarrhythmic drugs, which are prescribed to chemically suppress the
arrhythmic activity, have to date been the most common treatment of VT.
Antiarrhythmic drugs are not curative and can result in considerable side
effects limiting the effectiveness of the drugs and the ability of patients to
use them over long periods of time.
Automatic implantable cardioverter defibrillators ("ICDs"), which detect and
stop a tachycardia once it has started by pacing or by applying high energy
pulses, have also become a common treatment for VT. The useful life of an ICD is
approximately five to seven years, at the end of which time the ICD is generally
replaced in another surgical procedure. Many ICD patients also receive
antiarrhythmic drug therapy in an attempt to minimize the frequency of VT
episodes.
There is increasing interest in the United States and Europe in using
catheter ablation to treat VT. Catheter ablation is a minimally invasive and
potentially curative treatment in which a radio frequency current is emitted
from a catheter to selectively destroy the heart tissue responsible for the
abnormal electrical activity. The use of catheter ablation to date has been
limited due to the inability of single-point contact catheters to effectively
map complex VT cases. Although catheter ablation is not yet commonly prescribed
to treat VT and the devices have not yet been approved by the FDA for marketing
in the United States for treatment of VT, it is the subject of increasing
technological research and development. The Company believes catheter ablation
could become a more commonly used treatment for VT with advances in diagnostic
technology such as that being developed by the Company.
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SUPRAVENTRICULAR TACHYCARDIA
Approximately three million of the four million people in the United States
who suffer from tachycardia have some form of SVT. Supraventricular tachycardia
is an abnormally rapid beating of the atria which may reduce the amount of blood
pumped into the ventricles, and, consequently, from the ventricles to the rest
of the body. Although SVT can be debilitating, causing chest palpitations,
fatigue and dizziness, it is generally not life-threatening. The principal types
of SVT are Wolff-Parkinson-White syndrome ("WPW"), Atrioventricular Nodal
Re-entrant Tachycardia ("AVNRT"), and atrial fibrillation and flutter.
Approximately one million people in the United States suffer from WPW or
AVNRT. The tachycardia associated with WPW and AVNRT are generally easy to
diagnose and locate due to their more simple, single-site nature and predictable
location within the atria. WPW and AVNRT have been effectively treated by
catheter ablation with available contact catheters.
Approximately two million people in the United States suffer from atrial
fibrillation or atrial flutter. Atrial fibrillation is characterized by a
disorganized and chaotic conduction of electrical activation, which results in
ineffective pumping of the atria. Under these conditions, blood tends to pool
and clot, increasing the risk of stroke. The American Heart Association
estimates that approximately fifteen percent of all strokes in the United States
are caused by atrial fibrillation. The incidence of atrial fibrillation is
linked to aging and thus is expected to increase as the average age of the
United States population increases.
Typically, diagnosis of atrial fibrillation is easily discerned through an
electrocardiogram recording. Beyond initial detection, electrophysiologists have
had limited success in mapping atrial fibrillation using current single-point
technology due to its highly complex and chaotic nature. The inability to
effectively map and understand the origins of atrial fibrillation has hindered
the development of treatments for the disease.
Antiarrhythmic drugs and anticoagulation therapy are the most commonly
prescribed treatments for atrial fibrillation, but they are not curative and
have undesirable side effects. The only known curative treatment for atrial
fibrillation is a costly and rarely performed open heart surgical procedure
known as the surgical maze procedure. The incisions made in this surgery
electrically isolate the atria into regions that can no longer maintain
fibrillation. In addition, an atrial defibrillator is under development for
detecting and controlling atrial fibrillation with low energy shocks.
Catheters have been approved for ablation treatments in the atria; however,
due to the limited understanding of atrial fibrillation, to date they have not
proven effective. Catheters are under development for potentially curative
ablation of atrial fibrillation. One type of catheter under development is
designed to create linear lesions along the interior wall of the atrium to
electrically isolate regions of the chamber in a manner similar to the surgical
maze procedure. Other emerging methods are aimed at more localized ablation
treatment based on a hypothesis that atrial fibrillation is maintained in an
electrically localized region of the chamber, requiring detailed mapping.
The Company believes that the complexity of atrial fibrillation and the
search for effective and curative treatments, including catheter ablation, will
require a diagnostic mapping technology that provides much greater resolution
and diagnostic capabilities than currently available technology.
THE ENSITE SYSTEM
The Company is developing its proprietary EnSite System to address the need
for more rapid, comprehensive and cost-effective diagnosis of complex forms of
arryhthmia. The high resolution, three-dimensional, color display generated by
the EnSite System is designed to provide electrophysiologists greater diagnostic
capabilities than single-point contact catheter mapping devices currently
available. The EnSite System will provide electrophysiologists with a real time,
virtual image of the electrical activity of the heart without contacting the
heart's surface. The EnSite System displays more than 3,000 points of
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electrical activity using the Company's proprietary algorithms. Diagnosis will
be enhanced by the "virtual electrogram" function of the EnSite System
workstation that allows electrophysiologists to instantaneously view the
electrical activity at any of the more than 3,000 points displayed by selecting
a specified point on the workstation's three-dimensional color map of the heart
with the workstation's mouse pointer. In addition, the locator function of the
EnSite System workstation will also enhance diagnosis and treatment by providing
electrophysiologists with real-time feedback as to the precise location of
auxiliary catheters introduced into the heart.
The Company's EnSite System consists of the EnSite catheter and clinical
workstation that together form an integrated system. The EnSite System is
designed to map ventricular and atrial arryhthmia.
THE ENSITE CATHETER
The EnSite catheter is a non-contact, single-use, multi-electrode array,
percutaneous catheter, designed for use with the EnSite clinical workstation.
The EnSite catheter's multi-electrode array senses electrical activity generated
from the endocardial wall while floating in the heart chamber. The array area of
the EnSite catheter is comprised of an inflatable polyurethane balloon within a
mechanically expandable multi-electrode array. The multi-electrode array
contains a wire braid consisting of 64 braided wires. A handle and cable
connector are located at the proximal end of the catheter to allow the physician
to position the distal end of the catheter, deploy the multi-electrode array and
make electrical connection from the array to the patient interface unit of the
EnSite System's workstation.
The EnSite catheter is inserted percutaneously over a standard guidewire
into a selected chamber of the heart. When positioned, the wire braid is
mechanically expanded and the balloon residing under the wire braid in the array
area of the catheter is inflated with a radiopaque solution to form an
ellipsoidal, multi-electrode array. When deployed, the array is small enough to
permit the normal functioning of the heart. In addition to the EnSite catheter,
a standard single-point diagnostic catheter is inserted in a chamber of the
heart in order to facilitate establishing the chamber's spatial boundaries. The
multi-electrode braid array collects data used to compute more than 3,000 points
of the heart chamber's electrical activity in the span of a few heartbeats by
gathering a large amount of the electrical conduction information from the
entire chamber and transmitting this information through the wire braid back
down the catheter shaft to the EnSite System's clinical workstation.
THE ENSITE 3000 CLINICAL WORKSTATION
The EnSite System's clinical workstation consists of the Company's
proprietary patient interface unit and a Silicon Graphics-based workstation and
other third-party peripherals, such as a color monitor, a printer and an optical
disk drive. The patient interface unit is designed to amplify and digitize the
electrical information transmitted by the EnSite catheter. The patient interface
unit also accepts information generated by other auxiliary sensors, including as
many as 32 standard contact catheter electrodes, which allows the
electrophysiologist to monitor clinical events or capture additional data for
simultaneous display on the workstation. The workstation is programmed with
software containing the Company's proprietary algorithms, which process the
electrical information transmitted by the EnSite catheter and reconstruct the
heart's geometric layout and the distribution of electrical activity. The heart
and the electrical activity is displayed on the workstation as high resolution,
three-dimensional isopotential or isochronal color maps. The maps can be viewed
as a snapshot in time or as an animated playback at adjustable rates of speed.
The maps can also be viewed from any perspective in space and may be zoomed in
and out to facilitate rapid diagnosis and treatment of the tachycardia,
including identifying the optimal site or sites for ablation.
The electrical activity displayed on the workstation's three-dimensional map
can also be displayed as time-waveforms, called "Virtual Electrograms," at
multiple selected sites on the endocardium. Virtual Electrograms are produced by
the Company's software contained in the workstation. The electrophysiologist can
instantaneously select any of the more than 3,000 sites and waveforms to be
displayed by pointing
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and clicking with the workstation's mouse pointer at the desired location on the
map of the heart. The Virtual Electrogram function provides the equivalent of
positioning a standard contact catheter at the same site on the endocardium--but
without the need for actual physical contact.
The EnSite System's workstation also generates the EnGuide-TM- locator
signal that can be emitted from selected electrodes on standard EP catheters
introduced into the heart along with the EnSite catheter. The EnGuide locator
signal provides electrophysiologists with an interactive method for locating and
positioning auxiliary catheters. The locator function is designed to allow
electrophysiologists to diagnose and treat complex tachycardia with
significantly less use of fluoroscopy than is currently required when using
presently available single-point contact catheters. The EnGuide locator signal
is detected and displayed on the workstation's three-dimensional map to provide
real-time feedback to the electrophysiologist as to the precise location of the
catheter and to assist in guiding the catheter (or catheters) to a specific site
on the endocardium.
The EnSite System is designed to function as a complete, integrated
electrophysiology laboratory system to provide a wide range of accurate and
versatile diagnostic tools in one product. In addition to displaying high
resolution, graphical, three-dimensional maps, the EnSite System provides
multi-channel recording from standard EP electrode catheters and standard
waveform displays. The Company intends to develop and market periodic software
upgrades and new applications for use with the EnSite System.
RESEARCH AND DEVELOPMENT
To date, the Company's primary activity has been research, development and
testing of the EnSite catheter and the clinical workstation. Virtually all of
the Company's research and development activity is performed internally by the
Company's team of scientists, engineers and technicians, in consultation with
the Company's Scientific Advisory Board and outside consultants. The Company's
research and development team is divided among five groups: software
engineering, applied research, hardware engineering, verification and
validation, and catheter engineering. In addition, various members of the
research and development team support the design and development of the
manufacturing processes used in fabricating the EnSite catheter.
Among its research and development goals, the Company is now pursuing the
optimization of the EnSite System functionality for future software releases,
incorporating location technology for use in conventional EP studies and
developing new catheter technologies for reduced size and cost. The Company
expects that its future research and development objectives will include
developing new mapping and catheter configurations and software upgrades to
enhance the capabilities and ease-of-use of the EnSite System as well as
supporting the Company's manufacturing personnel in refining manufacturing
processes, improvements and scale-up in connection with the commercialization of
the EnSite System. The Company incurred research and development expenses of
approximately $4.6 million, $6.7 million and $10.7 million for the fiscal years
ended December 31, 1996, 1997 and 1998, respectively. The Company anticipates
that it will continue to make significant investments in research and
development.
MANUFACTURING
The Company manufactures its EnSite catheters in its 3,200 square foot
clean-room facility at its headquarters in St. Paul, Minnesota. The Company also
performs final assembly and system level testing of all hardware and software
components for the EnSite System clinical workstation at this facility.
The manufacturing process for the EnSite catheter involves a number of steps
and component parts. The Company assembles and tests each catheter individually
prior to packaging and sterilization, which it conducts in accordance with the
requirements of the FDA. The Company has designed its manufacturing processes to
utilize automation to the extent appropriate in order to increase production
volume and reduce costs.
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The manufacturing of the EnSite System clinical workstation, including the
patient interface unit, involves the assembly, integration and testing of
components purchased from third parties. The Company purchases the basic
computer workstation from Silicon Graphics, and ESI software engineers program
the workstation with its proprietary software, including advanced mathematical
algorithms.
The Company purchases the raw materials and various component parts for the
EnSite System from a number of suppliers. The Company has adopted rigorous
quality control measures to ensure that the component parts it purchases meet
its specifications and standards. Certain of the components are purchased from
sole source suppliers, including the computer workstation. There are relatively
few alternative sources of supply for these components, and it may be difficult
for the Company to locate additional suppliers for these components.
The Company has implemented a manufacturing quality program designed to meet
all domestic and international standards for manufacturing medical devices. The
Company will be required to meet the requirements of the FDA's good
manufacturing practices ("GMP") in order to distribute its products in the
United States, and the requirements for ISO 9001 and 9002 and CE Mark
certification in order to distribute products in Europe. The Company received
ISO 9001 certification for its catheter and quality system in August 1997, and
ISO 9002 certification for the clinical work station and a CE Mark for each of
the EnSite catheter and the EnSite 3000 clinical workstation in the first
quarter of 1998. As part of the regulatory requirements, the Company's
facilities and manufacturing processes will be subject to inspection and audit.
If the Company fails to satisfy the GMP requirements, it may be required to
alter its manufacturing processes. Moreover, any such failure could have a
material adverse effect on the Company's ability to market its products, which
could adversely affect its business and results of operations. The Company's
suppliers will also be required to satisfy GMP standards.
SALES AND MARKETING
The Company intends to employ a direct sales force in the United States and
to use distributors for certain international markets. In September 1997 the
Company signed a seven-year distribution agreement (the "Distribution
Agreement") with Medtronic, Inc. to market the Company's diagnostic products for
the electrophysiology markets in Europe and Japan. Under the terms of the
Distribution Agreement, Medtronic has been granted exclusive distribution rights
for the Company's products in Europe and Japan and has been granted certain
rights for distribution in other regions outside North America. The Distribution
Agreement was amended in January 1999 to provide Medtronic with exclusive
distribution rights for the Company's products in Canada. The Company retains
all distribution rights in the United States. In the first quarter of 1998 the
Company received ISO 9002 certification for its workstation and a CE Mark for
each of the EnSite catheter and the EnSite 3000 clinical workstation, allowing
the Company to begin selling its products in the European Community.
Distribution by Medtronic in Europe of the EnSite System and EnSite catheter
began in the second quarter of 1998.
The Company intends to direct its sales and marketing efforts at prominent
domestic and international electrophysiology laboratories that perform the
majority of electrophysiology procedures. The Company believes that prominent
electrophysiology labs are generally more likely to keep abreast of and utilize
new technologies such as the EnSite System for diagnosing and treating
tachycardia. After the Company establishes a presence in major medical centers
housing such electrophysiology labs, it then intends to broaden its sales and
marketing efforts to include the growing number of smaller, community-based
electrophysiology labs. As part of its strategy to gain the awareness of and
acceptance by electrophysiology laboratories, the Company has focused on and
intends to continue to focus on developing peer reviewed journal articles
authored by leading experts in electrophysiology, sponsoring publication of
papers based on research covering the performance and benefits of the EnSite
System and conducting informational seminars. In addition, as part of its
marketing program the Company expects to hold technical seminars and training
sessions to educate physicians and its direct sales force and distributors in
the use of the Company's products.
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PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain patent
protection for its products and processes, to preserve its trade secrets and to
operate without infringing or violating the proprietary rights of third parties.
The Company actively pursues patent protection in the United States and foreign
jurisdictions for each of the areas of invention embodied in the EnSite System,
and will actively pursue patent protection for proprietary aspects of its
technology in the future. Currently, the Company has one U.S. patent application
pending by which it is seeking to obtain protection for certain enhancements
currently embodied in the EnSite System, relating to the catheter, catheter
localization techniques and user interface elements. The Company also has four
issued U.S. patents which relate to the technology underlying the EnSite System
and development-stage versions of the system. One of these patents covers the
catheter of the EnSite System and its development-stage versions. The remaining
three patents are directed to measurement methodologies used in the
development-stage versions of the EnSite System. The Company has also filed and
has pending several foreign patent applications directed to various aspects of
the technology underlying the EnSite System.
In January 1998, the Company signed a license agreement with Medtronic, Inc.
that gives the Company exclusive use of 3D intracardiac location technology for
its EnSite System. The technology, when integrated with the EnSite System, will
improve intracardiac catheter positioning while significantly reducing the use
of harmful radiation.
The Company, like other firms that engage in the development and marketing
of medical devices, must address issues and risks relating to patents and trade
secrets. The coverage sought in a patent application can be denied or
significantly reduced before or after the patent is issued. Consequently there
can be no assurance that any of the Company's pending or future U.S. or foreign
patent applications will result in issued patents, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the Company's current or future U.S. or foreign patents
will not be challenged, circumvented by competitors or others or that such
patents will be found to be valid or sufficiently broad to protect the Company's
technology. Since patent applications are secret until patents are issued in the
United States or corresponding applications are published in other countries,
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, the Company cannot be certain that it was
the first to make the inventions covered by each of its pending patent
applications, or that it was the first to file patent applications for such
inventions. In addition, there can be no assurance that competitors, many of
which have substantial resources and have made substantial investments in
competing technologies, will not seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or in international markets. Further, the
laws of certain foreign countries may not protect the Company's intellectual
property rights to the same extent as do the laws of the United States.
In addition to patents, the Company relies on trade secrets and proprietary
knowledge, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. In particular, the
Company relies upon such means to protect the proprietary software used in the
EnSite System. The confidentiality and proprietary information agreements
generally provide that all confidential information developed or made known to
individuals by the Company during the course of the relationship with the
Company is to be kept confidential and not disclosed to third parties, except in
specific circumstances. The agreements also generally provide that all
inventions conceived by the individual in the course of rendering services to
the Company shall be the exclusive property of the Company. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to or independently developed by competitors.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and companies in the
medical device industry have employed intellectual property
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litigation to gain a competitive advantage. There can be no assurance that the
Company will not become subject to patent infringement claims or litigation in a
court of law, or interference proceedings declared by the United States Patent
and Trademark Office ("USPTO") to determine the priority of inventions or an
opposition to a patent grant in a foreign jurisdiction. The defense and
prosecution of intellectual property suits, USPTO interference or opposition
proceedings and related legal and administrative proceedings are both costly and
time-consuming and could result in substantial uncertainty to the Company.
Litigation or regulatory proceedings, which could result in substantial cost and
uncertainty to the Company, may also be necessary to enforce patent or other
intellectual property rights of the Company or to determine the scope and
validity of other parties' proprietary rights. Any litigation, opposition or
interference proceedings will result in substantial expense to the Company and
significant diversion of effort by the Company's technical and management
personnel. There can be no assurance that the Company will have the financial
resources to defend its patents from infringement or claims of invalidity. An
adverse determination in any litigation could subject the Company to significant
liabilities to third parties, require the Company to seek licenses from or pay
royalties to third parties or prevent the Company from manufacturing, selling or
using its proposed products, any of which could have a material adverse effect
on the Company's business and prospects. The Company is not currently a party to
any patent or other litigation.
COMPETITION
The Company believes that its competitive success will depend primarily upon
its ability to demonstrate the clinical efficacy of the EnSite System;
effectively create market awareness and acceptance of the system while
maintaining its proprietary nature; and manufacture and deliver the system on a
timely basis. The tachycardia diagnostic mapping field of the medical device
industry has attracted a high level of interest both from companies with an
established presence in the field of electrophysiology and from more recently
formed companies. The Company's competitors include companies that offer
standard, single-point contact diagnostic catheters, and companies that offer
multi-point, basket contact catheters for diagnosing tachycardia that use
multiple electrodes to provide more data points for the measurement of the
heart's electrical activity. The Company is also aware of other medical device
companies that are developing alternatives to single-point contact catheter
mapping technology.
The Company believes that participants in the market for mapping tachycardia
compete on the basis of clinical effectiveness, ease of use, cost and on the
basis of acceptance by health care professionals. Competition is also affected
by the length of time required for products to be developed and receive
regulatory approval. The medical device industry is characterized by rapid and
significant technological change. As a result, the Company's success will depend
in part on its ability to respond quickly to medical and technological changes
through the development and introduction of new products.
Many of the Company's competitors and potential competitors have
substantially greater capital resources, research and development staffs and
facilities than the Company. In addition, most of the Company's competitors and
potential competitors have substantially greater experience than the Company in
researching and developing new products, testing products in clinical trials,
obtaining regulatory approvals and manufacturing and marketing medical devices.
There can be no assurance that the Company will succeed in developing and
marketing technologies and products that are clinically more efficacious and
cost-effective than the more established diagnostic products or the new
approaches and products developed and marketed by its competitors. Moreover,
there can be no assurance that the Company will succeed in developing new
technologies and products that are available prior to its competitors' products.
The failure by the Company to demonstrate the efficacy and cost-effective
advantages of its products over those of its competitors could have a material
adverse effect on the Company's business and results of operations.
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THIRD-PARTY REIMBURSEMENT FOR THE COMPANY'S PRODUCTS
In the United States, health care providers, including hospitals and
physicians, that purchase medical products for treatment of their patients
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or a part of the
costs and fees associated with the procedures performed using these products.
The Company's success will be dependent upon, among other things, the ability of
health care providers to obtain satisfactory reimbursement from third-party
payors for medical procedures in which the Company's products are used. If FDA
approval is received, third-party reimbursement would depend upon decisions by
the Health Care Financing Administration for Medicare, as well as by individual
health maintenance organizations and private insurers and other payors.
Third-party payors determine whether to reimburse for a particular procedure
and, if so, will reimburse health care providers for medical treatment based on
a variety of methods, including a lump sum prospective payment system based on a
diagnosis related group or per diem, a blend between the health care provider's
reported costs and a fee schedule, a payment for all or a portion of charges
deemed reasonable and customary, or a negotiated per capita fixed payment. Third
party payors are increasingly challenging the pricing of medical products and
procedures. Even if a procedure is eligible for reimbursement, the level of
reimbursement may not be adequate. Additionally, payors may deny reimbursement
if they determine that the device used in the treatment was unnecessary,
inappropriate or not cost-effective, experimental or used for a non-approved
indication.
It is anticipated that the Company's EnSite catheter will be sold at a
premium in comparison to existing single point catheters used in current
diagnostic or mapping procedures, in addition to requiring an initial capital
outlay for the companion clinical workstation. In addition to establishing the
safety and efficacy of the EnSite System, and assuming no increase in the level
of reimbursement for cardiovascular procedures expected to utilize the Company's
products, the Company will be required to economically justify the relative
increased cost of utilizing the EnSite System by satisfactorily demonstrating
the enhanced benefits of the EnSite System to health care providers and payors
in terms of such factors as enhanced patient procedural efficiencies, reduced
radiation exposure and improved patient outcomes.
Medicare coverage is generally available for items and related services
involving devices that have been classified by the FDA as
"non-experimental/investigational" (Category B) devices and that are furnished
in accordance with the FDA-approved investigational device exemption ("IDE")
governing clinical trials. Based on the Company's IDE approval from the FDA for
the EnSite System, the system has been classified as a Category B device. Even
with items or services involving Category B devices, however, Medicare coverage
may be denied if any other coverage requirements are not met, for example, if
the treatment is not medically necessary for the specific patient. There can be
no assurance that the Company's systems will be covered when they are used in
clinical trials and, if covered, whether the payment amounts for their use will
be considered to be adequate by health care providers. If the devices are not
covered or the payments are considered to be inadequate, the Company may need to
bear additional costs to sponsor such trials, and such costs could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Capital costs for medical equipment purchased by hospitals are currently
reimbursed under Medicare separately from medical procedure payments. Recent
federal Medicare legislation has called for these capital costs to be reimbursed
on a prospective payment system. During a transition period due to end in 2000,
each hospital's capital expenditures will be based in part on its own historical
capital costs and in part on the prospective payment system. There can be no
assurance that the movement to a prospective payment system will not cause
hospitals to reduce their expenditure payments for equipment such as the EnSite
clinical workstation.
Reimbursement systems in international markets vary significantly by country
and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
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products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in international
markets targeted by the Company. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
time, for a particular amount, or at all.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. The Company anticipates that hospital administrators and
physicians would justify the use of the Company's products by the attendant cost
savings and clinical benefits that the Company believes would be derived from
the use of its products. However, there can be no assurance that this will be
the case. Accordingly, reimbursement for the Company's products may not be
available in the United States or in international markets under either
government or private reimbursement systems, and health care providers may not
advocate reimbursement for procedures using the Company's products. Failure by
hospitals and other users of the Company's products to obtain reimbursement from
third-party payors, or changes in government and private third-party payors'
policies toward reimbursement for procedures employing the Company's products,
would have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, the Company is unable to predict
what additional legislation or regulation, if any, relating to the health care
industry or third-party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation would have on the Company.
Political, economic and regulatory influences are subjecting the health care
industry in the United States to increased scrutiny. The Company anticipates
that Congress, state legislatures and the private sector will continue to review
and assess alternative health care delivery and payment systems. Potential
approaches that have been considered include mandated basic health care
benefits, controls on health care spending through limitations on the growth of
private health insurance premiums and Medicare and Medicaid spending, greater
reliance on prospective payment systems, the creation of large insurance
purchasing groups, price controls and other fundamental changes to the health
care delivery system. Legislative debate is expected to continue in the future,
and market forces are expected to demand reduced costs. The Company cannot
predict what impact the adoption of any federal or state health care reform
measures, future private sector reform or market forces may have on its
business.
GOVERNMENT REGULATION
UNITED STATES
The Company's EnSite System is regulated in the United States as a medical
device by the FDA under the federal Food, Drug, and Cosmetic Act ("FDC Act") and
requires premarket approval by the FDA prior to commercialization. In addition,
certain material changes or modifications to medical devices also are subject to
FDA review and approval. Pursuant to the FDC Act, the FDA regulates the
research, testing, manufacture, safety, labeling, storage, record keeping,
advertising, distribution and production of medical devices in the United
States. Noncompliance with applicable requirements can result in warning
letters, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the government to grant
premarket approval for devices, and criminal prosecution.
Medical devices are classified into one of three classes, Class I, II or
III, on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness. Class I devices are subject to
general controls (e.g., labeling, premarket notification and adherence to GMPs).
Class II devices are subject to general controls and to special controls (e.g.,
performance standards, postmarket surveillance, patient registries, and FDA
guidelines). Generally, Class III devices are those which must receive premarket
approval by the FDA to ensure their safety and effectiveness (e.g.,
life-sustaining,
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life-supporting and implantable devices, or new devices which have not been
found substantially equivalent to legally marketed devices), and require
clinical testing to ensure safety and effectiveness and FDA approval prior to
marketing and distribution. The FDA also has the authority to require clinical
testing of Class I and Class II devices.
If human clinical trials of a device are required and if the device presents
a "significant risk," the manufacturer or the distributor of the device is
required to file an IDE application prior to commencing human clinical trials.
The IDE application must be supported by data, typically including the results
of animal and, possibly, mechanical testing. If the IDE application is approved
by the FDA, human clinical trials may begin at a specific number of
investigational sites with a maximum number of patients, as approved by the FDA.
Sponsors of clinical trials are permitted to sell those devices distributed in
the course of the study provided such costs do not exceed recovery of the costs
of manufacture, research, development and handling. The clinical trials must be
conducted under the auspices of an independent institutional review board
("IRB") established pursuant to FDA regulations.
The FDC Act provides two basic review procedures for medical devices.
Certain products may qualify for a submission authorized by Section 510(k) of
the FDC Act, wherein the manufacturer gives the FDA a premarket notification of
the manufacturer's intention to commence marketing the product. The manufacturer
must, among other things, establish that the product to be marketed is
substantially equivalent to another legally marketed product. Marketing may
commence when the FDA issues a letter finding substantial equivalence. If a
medical device does not qualify for the 510(k) procedure, the manufacturer must
file a premarket approval ("PMA") application. This procedure requires more
extensive prefiling testing than the 510(k) procedure and involves a
significantly longer FDA review process.
A PMA application must be supported by extensive data, including preclinical
and clinical trial data, as well as extensive literature to prove the safety and
effectiveness of the device. Following receipt of a PMA application, if the FDA
determines that the application is sufficiently complete to permit a substantive
review, the FDA will "file" the application. Under the FDC Act, the FDA has 180
days to review a PMA application, although the review of such an application
more often occurs over a protracted time period, and generally takes
approximately two years or more from the date of filing to complete.
The PMA application approval process can be expensive, uncertain and
lengthy. A number of devices for which premarket approval has been sought have
never been approved for marketing. The review time is often significantly
extended by the FDA, which may require more information or clarification of
information already provided in the filing. During the review period, an
advisory committee likely will be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's GMP requirements prior to approval of an
application. If granted, the approval of the PMA application may include
significant limitations on the indicated uses for which a product may be
marketed.
The Company conducted clinical trials of its EnSite System on patients with
VT in the United Kingdom in late 1995, 1996 and 1997 under an authorization of
the Medical Devices Agency ("the MDA") of the British government. The Company
submitted its IDE application to the FDA in May 1996 based on the results of the
initial four patient trial plus extensive pre-clinical testing. Based on
consultation with the FDA, and to further support its IDE submission, the
Company conducted nine additional ventricular patient trials and submitted this
data in November 1996 in an amendment to the IDE application. In December 1996,
the FDA granted the Company an IDE to conduct in the United States a limited
clinical trial of the EnSite System for left ventricular tachycardia mapping in
five patients at one institution. The Company conducted in early 1997 a limited
five patient clinical study authorized under the IDE. Based on the results of
those trials, the FDA approved testing of the EnSite System on an additional ten
patients. The Company had completed 13 of the 15 clinical trials in June 1997
when the FDA authorized full-scale testing of the EnSite System in 73 patients
at up to five institutions in the United States. In December 1998, the Company
filed a premarket notification application with the FDA under Section 510(k) of
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the FDC Act containing the results of its left ventricular multi-center clinical
trials and indicating the Company's intention to commence marketing in the U.S.
In March 1999, the Company announced that its FDA application for left
ventricular use of the EnSite System will be submitted as a PMA application.
The Company conducted an initial study of its technology for mapping atrial
tachycardia in seven patients in the United Kingdom during the second half of
1996. The Company submitted an IDE application to the FDA in June 1997 for use
of the EnSite System in the right atrium, and received an IDE approval in August
1997. In September 1998, the Company filed a 510(k) application with the FDA
containing the results of its right atrial multi-center clinical trials.
The Company is also required to register as a medical device manufacturer
with the FDA and state agencies, and to list its products with the FDA. As such,
the Company will be inspected by both the FDA for compliance with the FDA's GMP
and other applicable regulations. These regulations require that the Company
manufacture its products and maintain its documents in a prescribed manner with
respect to manufacturing, testing and control activities. Further, the Company
is required to comply with various FDA requirements for design, safety,
advertising and labeling. The Company has not yet undergone an FDA GMP
inspection.
The Company is required to provide information to the FDA on death or
serious injuries alleged to have been associated with the use of its medical
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. In addition, the
FDA prohibits an approved device from being marketed for unapproved
applications. If the FDA believes that a company is not in compliance with the
law, it can institute proceedings to detain or seize products, issue a recall,
enjoin future violations and assess civil and criminal penalties against the
Company, its officers and its employees. Failure to comply with the regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.
The advertising of most FDA-regulated products is subject to both FDA and
Federal Trade Commission jurisdiction. The Company also is subject to regulation
by the Occupational Safety and Health Administration and by other governmental
entities.
Regulations regarding the manufacture and sale of the Company's products are
subject to change. The Company cannot predict what impact, if any, such changes
might have on its business, financial condition or results of operations.
INTERNATIONAL
International sales of the Company's products are subject to the regulatory
agency product registration requirements of each country. The regulatory review
process varies from country to country. There can be no assurance that such
approvals will be obtained on a timely basis or at all.
The Company received ISO 9001 certification for its catheter and quality
system in August 1997, and ISO 9002 certification for the clinical workstation
in March 1998. The ISO 9000 series of standards for quality operations have been
developed to ensure that companies know the standards of quality to which they
must adhere to receive certification. The European Union has promulgated rules
which require that medical products receive, by mid-1998, the right to affix the
CE Mark, an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. ISO 9000
certification is one of the CE Mark certification requirements. The Company has
obtained CE certification for the EnSite catheter and for the EnSite 3000
clinical workstation.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical products entail significant
risk of product liability claims and product failure claims. The Company has
conducted only limited clinical trials and does not yet have, and will not have
for a number of years, sufficient clinical data to allow the Company to measure
the
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risk of such claims with respect to its products. The Company faces an inherent
business risk of financial exposure to product liability claims in the event
that the use of its products results in personal injury or death. The Company
also faces the possibility that defects in the design or manufacture of the
Company's products might necessitate a product recall. There can be no assurance
that the Company will not experience losses due to product liability claims or
recalls in the future. The Company currently maintains product liability
insurance with coverage limits of $5 million per occurrence and $5 million
annually in the aggregate and there can be no assurance that the coverage limits
of the Company's insurance policies will be adequate. In addition, the Company
will require increased product liability coverage if any potential products are
successfully commercialized. Such insurance is expensive, difficult to obtain
and may not be available in the future on acceptable terms, or at all. Any
claims against the Company, regardless of their merit or eventual outcome, could
have a material adverse effect upon the Company's business, financial condition
and results of operations.
EMPLOYEES
The Company had a total of 91 full-time employees as of December 31, 1998.
Of this number, 27 persons were engaged in research and development, 10 were
involved in regulatory and quality assurance, 39 were involved with
manufacturing and 15 were involved with administration, sales and marketing and
support functions. No employee of the Company is covered by a collective
bargaining agreement. In addition to its full-time workforce, the Company has
consulting or other contractual relationships with 14 other individuals. The
Company expects to add such new employees as are necessary to expand its
manufacturing capacity for future commercial production.
EXECUTIVE OFFICERS
The executive officers of the Company, their ages and positions and a brief
biography of each individual are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ----------------------------------------------------------------------
<S> <C> <C>
James W. Bullock.................... 42 President and Chief Executive Officer and Director
Leota L. Pearson.................... 40 Vice President, Finance and Chief Financial Officer
Frank J. Callaghan.................. 45 Vice President, Research and Development
Richard J. Omilanowicz.............. 46 Vice President, Manufacturing
Michael D. Dale..................... 39 Vice President, Worldwide Sales
Graydon E. Beatty................... 42 Chief Technical Officer and Director
Andrew K. Balo...................... 51 Vice President of Regulatory, Clinical Affairs and Quality Assurance
Patrick J. Wethington............... 30 Director of Marketing
</TABLE>
JAMES W. BULLOCK has been President, Chief Executive Officer and a Director
of the Company since May 1994. In addition, Mr. Bullock served as the Chief
Financial Officer of the Company from May 1994 until May 1996. From April 1992
until joining the Company, Mr. Bullock served as President and Chief Operating
Officer of Stuart Medical, Inc., a cardiac monitoring start-up company. From
April 1990 to April 1992, Mr. Bullock served as Vice President of Sales and
Marketing of the Stackhouse Division of Bird Medical Technologies, a medical
device company. From 1978 to 1990, Mr. Bullock served in a variety of marketing
and sales management positions, most recently as Vice President of Sales, for
the Pharmaseal Division of Baxter International Inc., a medical products
company. Mr. Bullock is a director of XRT Corp., a manufacturer of x-ray
catheters.
LEOTA L. PEARSON has been Vice President, Finance and Chief Financial
Officer since January 1999. In addition, Ms. Pearson served as Controller of the
Company from July 1994 to January 1999. From November 1993 until joining the
Company, Ms. Pearson served as Controller of General Litho Services, Inc., a
printing company. Ms. Pearson completed her MBA in June 1993. From 1983 to 1990,
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Ms. Pearson served as Controller of Orthomet, Inc., a manufacturer and
distributor of orthopedic devices. Ms. Pearson is a Certified Public Accountant.
FRANK J. CALLAGHAN has been Vice President of Research and Development of
the Company since November 1995. From 1987 until joining the Company, Mr.
Callaghan served as a Director of Research and Development at Telectronics
Pacing Systems, Inc., a manufacturer of cardiac rhythm management devices. From
1983 to 1987 Mr. Callaghan served in several capacities, including Manager,
Systems Technology, at Cordis Corporation, a manufacturer of angiographic and
implantable devices.
RICHARD J. OMILANOWICZ has been Vice President of Manufacturing of the
Company since November 1994. From May 1993 until joining the Company, Mr.
Omilanowicz served as General Manager of McKechnie Plastic Components, a custom
injection molding company. From 1980 to May 1993, Mr. Omilanowicz served in
several capacities at the Pharmaseal Division of Baxter International Inc., most
recently as Director of Research, Development and Engineering.
MICHAEL D. DALE has been Vice President of Worldwide Sales since December
1998. From October 1996 until joining the Company, Mr. Dale was Vice President
of Global Sales for Cyberonics, Inc., and was managing director of Cyberonics
Europe S.A. From July 1988 to October 1996, Mr. Dale served in several
capacities at St. Jude Medical, lastly as the Business Unit Director for St.
Jude Medical Europe.
GRAYDON E. BEATTY is a founder of the Company and has been Chief Technical
Officer of the Company since May 1995 and a Director since August 1992. Since
the Company's inception in May 1992, Mr. Beatty has served in several technical
and management positions. In addition, from May 1992 until December 1993, Mr.
Beatty served as a consultant with GMN Consulting, an engineering consulting
firm, and as a consulting engineer of AngeMed, a division of Angeion Corp., a
cardiovascular device Company, from February 1992 to September 1992. Mr. Beatty
was Senior Development Engineer of Bio-Medical Design Group, Inc., an
electrophysiology system developer, from December 1991 to May 1992. From 1989 to
December 1991, Mr. Beatty served as Principal Research Engineer at Cardiac
Pacemakers, Inc., a cardiovascular device company.
ANDREW K. BALO has been Vice President of Regulatory, Clinical and Quality
of the Company since October 1997. From September 1995 until joining the
Company, Mr. Balo served as Vice President, Regulatory/Clinical/Technical
Services at Pacesetter, Cardiac Rhythm Management Division of St. Jude
Medical, Inc. From July 1992 to September 1995, Mr. Balo served as Vice
President Regulatory/Clinical/ Quality of St. Jude Medical, a manufacturer of
mechanical and tissue heart valves. From 1978 to 1992, Mr. Balo served in a
variety of regulatory, clinical and quality management positions, most recently
as Vice President of Regulatory and Quality for the Operating Room Division of
Baxter International, a medical products company.
PATRICK J. WETHINGTON has been Director of Marketing of the Company since
November 1996. From March 1994 to October 1996, Mr. Wethington was the marketing
manager for tachycardia products for Guidant/CPI's implantable cardioverter
defibrillator pulse generator and endocardial lead business. From June 1992 to
March 1994, Mr. Wethington served as a field clinical representative for
Guidant/CPI's cardiac rhythm management products. From September 1990 to June
1992, Mr. Wethington served as a sales and marketing consultant for several
businesses, including 3M, Dayton Hudson Corp. and Synet Service Corporation.
FORWARD-LOOKING STATEMENTS
The above Business section and other parts of the Form 10-K Report contain
forward-looking statements that involve risk and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those contained above in this Item 1, the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 and Exhibit 99 to the Form 10-K Report.
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ITEM 2. PROPERTIES
The Company leases approximately 23,000 square feet in St. Paul, Minnesota
as its corporate headquarters and production facility. The facility is leased
through March 1999, and the Company is negotiating an extension of the lease.
The Company believes that it will be able to extend its lease on reasonable
terms and that this facility will be adequate to meet its needs through the full
commercial introduction of its planned products.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any pending or threatened
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the Nasdaq National Market under
the symbol "ECSI" on March 19, 1997. 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. Such proceeds have been, and will continue to be, used to fund the
continued development and testing of, and including continued development and
testing of, and including clinical trials for, the EnSite System; capital
expenditures; research and development, manufacturing, sales and marketing
activities; and working capital and other general corporate purposes.
The following table sets forth, for the period indicated, the high and low
sales prices of the Company's common stock, as quoted on the Nasdaq National
Market.
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
First Quarter.................................. $ 14.75 $ 9.63 $ 9.25 $ 9.00
Second Quarter................................. 14.25 9.38 10.00 6.88
Third Quarter.................................. 10.75 6.25 15.00 9.63
Fourth Quarter................................. 10.50 4.13 14.00 9.50
</TABLE>
On March 15, 1999, the closing sales price per share of the Company's common
stock as quoted on the Nasdaq National Market was $10.125 per share. On March
15, 1999, there were approximately 109 holders of record of the Company's common
stock, representing approximately 1,550 stockholder accounts.
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain future earnings for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 below and the Consolidated Financial Statements and the
Notes thereto included in Item 8 below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................... $ 1,950 $ -- $ -- $ -- $ --
Cost of Goods Sold............ 3,624 -- -- -- --
---------- ---------- ---------- ---------- ----------
Gross Margin.................. (1,674) -- -- -- --
Operating Expenses:
Research & Development...... 10,652 6,745 4,612 3,639 3,352
General & Administrative.... 1,774 2,106 1,724 1,088 857
Sales & Marketing........... 1,310 831 374 123 282
Operating Loss................ (15,410) (9,682) (6,710) (4,850) (4,491)
Net Interest Income........... 725 1,127 229 116 83
---------- ---------- ---------- ---------- ----------
Net Loss.................... $ (14,685) $ (8,555) $ (6,481) $ (4,734) $ (4,408)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net loss per share-basic and
diluted..................... $ (1.63) $ (1.21) $ (6.30) $ (4.63) $ (4.36)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average shares
outstanding................. 8,989,477 7,065,378 1,029,239 1,022,757 1,011,168
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 8,718 $ 22,230 $ 6,157 $ 1,864 $ 305
Working capital (deficit)........................... 8,877 21,495 5,549 1,417 (195)
Total assets........................................ 13,621 25,036 7,200 2,595 1,013
Long-term debt and capital lease obligations less
current portion................................... 812 439 302 160 12
Accumulated deficit................................. (39,864) (25,178) (16,623) (10,143) (5,409)
Total stockholders' equity.......................... 10,463 22,776 6,214 1,916 476
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, and the other financial
information included elsewhere in this Form 10-K Report. This Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains descriptions of the Company's expectations regarding future trends
affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The following discussion sets forth certain factors the Company believes
could cause actual results to differ materially from those contemplated by the
forward looking statements.
18
<PAGE>
SUMMARY
The Company was incorporated in May 1992. The Company develops, manufactures
and markets the EnSite 3000 clinical workstation and EnSite catheter for use by
electrophysiologists in diagnosing and mapping abnormal heart rhythms known as
tachycardias. The EnSite 3000 clinical workstation and EnSite catheter are
available in full market release to electrophysiologists in Europe.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
GENERAL. During the year ended December 31, 1998, the Company incurred
losses totaling $14,685,275, an increase of $6,130,281 from $8,554,994 for the
year ended December 31, 1997. The Company is entering a period of growth in
sales and marketing expenses related to market introduction.
REVENUE AND COST OF GOODS SOLD. The Company began recording revenue in the
second quarter of 1998. Revenue for the year ended December 31, 1998 was
$1,950,497 and included sales of the Company's EnSite catheter and EnSite 3000
clinical workstation, including the Company's proprietary software, patient
interface unit and other peripherals. Cost of goods sold and unabsorbed
manufacturing expenses were $3,624,291 for the year ended December 31, 1998.
Manufacturing expenses include costs for unabsorbed overhead from the production
of inventory held for resale. The year ended December 31, 1998 includes an
inventory write-off of $370,800 for the obsolescence of Silicon Graphics
computer equipment
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expense
included compensation and benefit costs associated with the software, hardware,
catheter and applied research departments, clinical trials, including regulatory
expenses and prototype development. Research and development expenses increased
to $10,651,709 from $6,744,553 for the years ended December 31, 1998, and 1997,
respectively. The increase of $3,907,156 included $3,585,602 for the purchase of
locator technology from Medtronic. The remaining increase was attributable to
increases in clinical trial expenses, including regulatory expenses. The Company
believes that research and development expenses will remain relatively flat
during 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include professional and legal fees as well as personnel costs. Expenses were
$1,774,326 for the year ended December 31, 1998, a decrease of $332,184 compared
to expenses of $2,106,510 for the year ended December 31, 1997. The decrease was
related to a reduction in personnel costs as well as a reduction in deferred
compensation and expenses associated with the public offering.
SALES AND MARKETING. Sales and marketing expenses include the cost of trade
shows and marketing personnel costs. Expenses increased from $830,590 for the
year ended December 31, 1997, to $1,310,284 for the year ended December 31,
1998. This increase of $479,694 was related to the European product
introduction, market research activities and attendance at various scientific
shows. Sales and marketing expenses are expected to increase throughout 1999 as
the Company prepares for a U.S. product launch.
INTEREST INCOME. Interest income was $811,482 and $1,212,122 for the years
ended December 31, 1998 and 1997, respectively. The decrease was due primarily
to the lower cash and cash equivalent balances.
YEARS ENDED DECEMBER 31, 1997 AND 1996
GENERAL. From inception through December 31, 1997, the Company has incurred
losses totaling $25,254,564. Net losses increased to $8,554,994 for the year
ended December 31, 1997, from $6,480,601 for the year ended December 31, 1996.
The Company is entering a period of growth in product development activity,
including increases in costs relating to personnel, accelerated clinical trial
activity, and marketing expenses related to market introduction.
19
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include costs associated with clinical trials including regulatory expenses,
prototype development and compensation and benefits within the clinical,
software, hardware, catheter and applied research departments. Research and
development expenses increased to $6,744,553 or 46.2% in the year ended December
31, 1997, from $4,611,706 during the same period in 1996. The increase of
$2,132,847 is attributable to increases in clinical trial expenses, personnel
costs related to hiring additional engineering staff and amortization of
deferred compensation. The Company believes that research and development
expenditures will increase in the future as the Company expands clinical
research activity and increases personnel to support product development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include personnel costs and professional and legal fees associated with being a
publicly held company. Expenses were $2,106,510 and $1,724,441 for the years
ended December 31, 1997 and 1996, respectively. The increase of $382,069 or
22.2% was due to increases in personnel, as well as amortization of deferred
compensation, rent and associated expenses related to expansion of the Company's
facility.
SALES AND MARKETING. Sales and marketing expenses include the cost of trade
shows and marketing personnel costs. Expenses increased to $830,590 during the
year ended December 31, 1997, from $373,348 during the same period in 1996. This
increase is due to the establishment of a marketing department and related
increases in salaries and related expenses. The Company expects continued
increases in sale and marketing expenses as market research activities and
scientific shows occur.
INTEREST INCOME. Interest income was $1,212,122 and $293,585 for the years
ended December 31, 1997 and 1996, respectively. The increase was due primarily
to the higher cash and cash equivalent balances from the Company's equity
offerings.
LIQUIDITY AND CAPITAL RESOURCES
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. Also on March 24, 1997,
all outstanding shares of the Company's preferred stock were automatically
converted into an aggregate of 4,705,603 shares of common stock following the 1
for 2 reverse stock split.
The Company's operations since inception have been primarily funded by net
proceeds from the sales of common and preferred stock totaling approximately
$50,420,000 through December 31, 1998. As of December 31, 1998 and December 31,
1997, the Company had cash, cash equivalents and short-term investments of
$8,714,832 and $22,229,839, respectively.
For the year ended December 31, 1998, the Company used $12,696,704 for
operations and $1,288,210 for capital expenditures. Of the capital expenditures
$1,049,230 was financed through capital leases.
The Company has recently announced a financing agreement with Medtronic,
Inc. 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.
The Company believes that its existing cash, cash equivalents and short-term
investments, with the addition of the Medtronic financing, will be sufficient to
fund the operations of the Company through at least the next 12 months. The
Company's future liquidity and capital requirements will depend on numerous
factors, including the timing of regulatory actions regarding the Company's
products, the results of clinical trials and competition, the extent to which
the Company's EnSite System gains market acceptance and the costs and timing of
expansion of sales, marketing and manufacturing activities.
20
<PAGE>
YEAR 2000
Many currently installed computer systems and software are coded to accept
only two-digit entries in the date code fields. These date code field will need
to accept four-digit entries to distinguish 21st century dates. This problem
could result in system failures or miscalculations causing disruptions of
business operations (including, among other things, a temporary inability to
process transactions, send invoices or engage in other similar business
activities). As a result, many companies' computer systems and software will
need to be upgraded or replaced in order to comply with Year 2000 requirements.
The potential global impact of the Year 2000 problem is not known, and if not
corrected in a timely manner, could affect the Company and the US and world
economy generally.
The Company has formed a project team consisting of representatives from its
information technology, finance, manufacturing, product development and quality
department to address internal and external Year 2000 issues. The Company's
internal financial, manufacturing and other operational computer systems have
been upgraded to address Year 2000 issues. Management believes that the new
software substantially addresses Year 2000 issues. The Company believes it has
completed its Year 2000 compliance program for all of its significant internal
financial and manufacturing systems. The Company may be required, however, to
make minor modification to some of its existing hardware as well as various
product development software packages in order for its computer system to
function properly in the year 2000 and thereafter. The Company is currently
assessing both of these areas and expects to complete this assessment in the
first quarter 1999.
The Company's product development processes will contain steps to include
Year 2000 compliance verification for all current and future products. The
Company believes that the EnSite System is Year 2000 compliant because it
operates on a Unix operating system which should be unaffected by the Year 2000
issue. The Company is currently completing validation testing for its products
and expects to complete its Year 2000 compliance testing for its products during
the first quarter 1999.
In addition, the Company 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 second quarter 1999.
Based on the Company's assessment to date, the Company believes it will not
experience any material disruption as a result of Year 2000 problems in its
financial, internal manufacturing processes or the EnSite 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
21
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had approximately $8.7 million of cash and investments on
December 31, 1998. 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 future 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.
22
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Endocardial Solutions, Inc.
We have audited the accompanying balance sheets of Endocardial Solutions,
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Endocardial Solutions, Inc.
at December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 12, 1999
23
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 654,529 $ 1,512,656
Short-term investments......................................... 8,060,303 20,717,173
Accounts receivable............................................ 475,750 --
Inventories.................................................... 1,827,061 848,063
Prepaid expenses and other current assets...................... 205,161 238,184
----------- -----------
Total current assets............................................. 11,222,804 23,316,076
Furniture and equipment.......................................... 3,942,741 2,690,609
Less accumulated depreciation.................................... (1,668,305) (1,093,978)
----------- -----------
2,274,436 1,596,631
Deposits......................................................... 81,709 81,709
Patents, net of accumulated amortization (1998--$74,440;
1997--$54,593)................................................. 42,642 41,278
----------- -----------
Total assets..................................................... $13,621,591 $25,035,694
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 762,147 $ 910,782
Accrued salaries and expenses.................................. 706,724 515,620
Current portion of capital lease obligations................... 876,959 356,057
Current portion of long-term debt.............................. -- 38,378
----------- -----------
Total current liabilities........................................ 2,345,830 1,820,837
Capital lease obligations........................................ 812,339 438,524
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--40,000,000
Issued and outstanding shares--December 31, 1998--9,011,762;
December 31, 1997--8,934,409............................... 90,118 89,344
Additional paid-in capital..................................... 50,329,703 48,174,629
Accumulated deficit............................................ (39,863,607) (25,178,332)
Deferred compensation.......................................... (92,792) (309,308)
----------- -----------
Total stockholders' equity....................................... 10,463,422 22,776,333
----------- -----------
Total liabilities and stockholders' equity....................... $13,621,591 $25,035,694
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
24
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Revenue.......................................................... $ 1,950,497 $ -- $ --
Cost of goods sold............................................... 3,624,291 -- --
--------------- -------------- --------------
Gross margin..................................................... (1,673,794) -- --
Operating expenses:
Research and development....................................... 10,651,709 6,744,553 4,611,706
General and administrative..................................... 1,774,326 2,106,510 1,724,441
Sales and marketing............................................ 1,310,284 830,590 373,348
--------------- -------------- --------------
Operating loss................................................... (15,410,113) (9,681,653) (6,709,495)
Other income (expense):
Interest income................................................ 811,482 1,212,122 293,585
Interest expense............................................... (86,644) (85,463) (64,691)
--------------- -------------- --------------
724,838 1,126,659 228,894
--------------- -------------- --------------
Net loss for the period and accumulated deficit.................. $ (14,685,275) $ (8,554,994) $ (6,480,601)
--------------- -------------- --------------
--------------- -------------- --------------
Net loss per share--basic and dilutive........................... $ (1.63) $ (1.21) $ (6.30)
--------------- -------------- --------------
--------------- -------------- --------------
Weighted average shares outstanding.............................. 8,989,477 7,065,378 1,029,239
--------------- -------------- --------------
--------------- -------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
25
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- --------------------- ------------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- -------- ----------- -------- ---------- ------- --------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... 775,000 $ 7,750 6,682,506 $ 66,825 -- $ -- 1,028,563 $10,286 $11,973,840
Sale of Series C Preferred
Stock at $5.12 per share in
April 1996, net of offering
costs....................... -- -- -- -- 1,953,700 19,537 -- -- 9,972,008
Value of warrants granted in
connection with lease
agreements.................. -- -- -- -- -- -- -- -- 7,680
Exercise of stock options..... -- -- -- -- -- -- 24,865 248 6,151
Deferred compensation related
to stock options............ -- -- -- -- -- -- -- -- 1,484,680
Amortization of deferred
compensation................ -- -- -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- -- -- --
--------- -------- ----------- -------- ---------- ------- --------- ------- -----------
Balance at December 31, 1996.... 775,000 7,750 6,682,506 66,825 1,953,700 19,537 1,053,428 10,534 23,444,359
Sale of Common Stock at $9.00
per share in March 1997, net
of offering costs........... -- -- -- -- -- -- 3,000,000 30,000 24,582,727
Conversion of Preferred Stock
to Common Stock............. (775,000) (7,750) (6,682,506) (66,825) (1,953,700) (19,537) 4,705,602 47,056 47,056
Exercise of stock options..... -- -- -- -- -- -- 175,411 1,754 100,631
Redemption of Common Stock.... -- -- -- -- -- -- (32) -- (144)
Amortization of deferred
compensation................ -- -- -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- -- -- --
--------- -------- ----------- -------- ---------- ------- --------- ------- -----------
Balance at December 31, 1997 -- -- -- -- -- -- 8,934,409 89,344 48,174,629
Value of warrants granted in
connection with purchase of
technology.................. -- -- -- -- -- -- -- -- 2,085,602
Exercise of stock options..... -- -- -- -- -- -- 77,353 774 69,472
Amortization of deferred
compensation................ -- -- -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- -- -- --
--------- -------- ----------- -------- ---------- ------- --------- ------- -----------
Balance at December 31, 1998.... -- $ -- -- $ -- -- $ -- 9,011,762 $90,118 $50,329,703
--------- -------- ----------- -------- ---------- ------- --------- ------- -----------
--------- -------- ----------- -------- ---------- ------- --------- ------- -----------
<CAPTION>
DEFERRED
ACCUMULATED COMPEN-
DEFICIT SATION TOTAL
------------ ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995.... $(10,142,737) $ -- $ 1,915,964
Sale of Series C Preferred
Stock at $5.12 per share in
April 1996, net of offering
costs....................... -- -- 9,991,545
Value of warrants granted in
connection with lease
agreements.................. -- -- 7,680
Exercise of stock options..... -- -- 6,399
Deferred compensation related
to stock options............ -- (1,484,680) --
Amortization of deferred
compensation................ -- 773,271 773,271
Net loss...................... (6,480,601) -- (6,480,601)
------------ ----------- -----------
Balance at December 31, 1996.... (16,623,338) (711,409) 6,214,258
Sale of Common Stock at $9.00
per share in March 1997, net
of offering costs........... -- -- 24,612,727
Conversion of Preferred Stock
to Common Stock............. -- -- --
Exercise of stock options..... -- -- 102,385
Redemption of Common Stock.... -- -- (144)
Amortization of deferred
compensation................ -- 402,101 402,101
Net loss...................... (8,554,994) -- (8,554,994)
------------ ----------- -----------
Balance at December 31, 1997 (25,178,332) (309,308) 22,776,333
Value of warrants granted in
connection with purchase of
technology.................. -- -- 2,085,602
Exercise of stock options..... -- -- 70,246
Amortization of deferred
compensation................ -- 216,516 216,516
Net loss...................... (14,685,275) -- (14,685,275)
------------ ----------- -----------
Balance at December 31, 1998.... $(39,863,607) $ (92,792) $10,463,422
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
26
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................................... $ (14,685,275) $ (8,554,994) $ (6,480,601)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 619,483 463,666 291,712
Amortization of deferred compensation.......................... 216,516 402,101 773,271
Value of warrants granted in connection with lease
agreements................................................... -- -- 7,680
Value of warrants granted in connection with purchase of
technology................................................... 2,085,602 -- --
Loss on disposal of equipment.................................. 4,971 1,726 784
Changes in operating assets and liabilities:
Accounts receivable.......................................... (475,750)
Inventory.................................................... (537,744) (848,063) --
Prepaid expenses and other assets............................ 33,024 (163,131) (37,517)
Accounts payable............................................. (148,635) 644,926 32,095
Accrued salaries and expenses................................ 191,104 350,854 87,181
-------------- ------------- -------------
Net cash used in operating activities.............................. (12,696,704) (7,702,915) (5,325,395)
INVESTING ACTIVITIES
Purchase of short-term investments................................. (21,872,986) (35,422,173) --
Maturities of short-term investments............................... 34,529,855 14,705,000 --
Purchase of furniture and equipment................................ (238,980) (584,499) (144,691)
Patent expenditures................................................ (21,211) (12,368) (12,634)
Proceeds from sale of equipment.................................... 5,797 1,958 --
-------------- ------------- -------------
Net cash provided by (used in) investing activities................ 12,402,475 (21,312,082) (157,325)
FINANCING ACTIVITIES
Principal payments on notes payable and capital lease
obligations...................................................... (634,144) (344,806) (221,522)
Proceeds from issuance of common stock............................. 70,246 24,714,968 6,403
Proceeds from issuance of preferred stock.......................... -- -- 9,991,542
-------------- ------------- -------------
Net cash (used in) provided by financing activities................ (563,898) 24,370,162 9,776,423
-------------- ------------- -------------
(Decrease) increase in cash and cash equivalents................... (858,127) (4,644,835) 4,293,703
Cash and cash equivalents at beginning of year..................... 1,512,656 6,157,491 1,863,788
-------------- ------------- -------------
Cash and cash equivalents at end of year........................... $ 654,529 $ 1,512,656 $ 6,157,491
-------------- ------------- -------------
-------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Purchase of equipment and inventory through capital lease
obligations...................................................... $ 1,490,484 $ 622,519 $ 409,125
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
27
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF BUSINESS
Endocardial Solutions, Inc. (the "Company") designs, develops and
manufactures a minimally invasive and integrated system that locates and
facilitates treatment of cardiac arrhythmias. Arrhythmias are abnormal heart
rhythms caused by disorders interfering with the normal electrical activity of
the heart, which, if undetected and untreated, can cause palpitations, dizziness
and fainting, or sudden cardiac death. The Company is developing products to
diagnose ventricular tachycardia, a widespread, complex and serious form of
arrhythmia, and intends to utilize its technology to produce products to
diagnose atrial arrhythmias, including atrial fibrillation. The Company believes
that its proprietary technology will enable physicians to rapidly and accurately
map the heart's electrical activity and locate the abnormal heart rhythms
through three-dimensional imaging. Prior to 1998, the Company was a development
stage company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At December 31, 1998 and
1997, the Company's cash equivalents consisted of investments in government
securities carried at amortized cost which approximated market value, with no
resulting unrealized gains and losses recognized.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets ranging
from 3 to 7 years.
PATENTS
Patent costs are being amortized on a straight-line basis over five years.
The Company periodically reviews its patents for impairment in value. Any
adjustment from the analysis is charged to operations.
SHORT-TERM INVESTMENTS
Short-term investments consist of U.S. Government obligations and corporate
debt securities with maturities of less than one year. Management determines the
appropriate classification of debt and equity securities at the time of purchase
and reevaluates such designation as of each balance sheet date. Management has
classified the debt securities as available for sale. Available for sale
securities are carried at fair value with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. At December
31, 1998, the fair value of the Company's investments approximates cost.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between financial reporting and tax
bases of assets and liabilities.
28
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
but applies Accounting Principles Board Opinion No. 25 (APB 25) and related
interpretations in accounting for its options granted to employees and
directors. Under APB 25, when the exercise price of employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation is recognized. The Company applies the provisions of Statement 123
for options granted to members of its Scientific Advisory Board.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
NET LOSS PER SHARE
Basic loss per share is computed using the weighted average number of common
shares outstanding. Diluted loss per share is computed using the combination of
dilutive common share equivalents and the weighted average number of common
shares outstanding. Diluted earnings per share is not presented as the effect of
outstanding options and warrants is antidilutive.
RECLASSIFICATION
Certain prior year items have been reclassified to conform with the 1998
presentation.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997
------------ ----------
<S> <C> <C>
Raw materials....................................................... $ 1,187,677 $ 444,289
Work-in-progress.................................................... 235,908 136,343
Finished goods...................................................... 403,476 267,431
------------ ----------
$ 1,827,061 $ 848,063
------------ ----------
------------ ----------
</TABLE>
29
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
During January 1995, the Company executed a two-year and a three-year loan
agreement for approximately $245,000 and $259,000, respectively. The two-year
and three-year loan agreements accrue interest at 11.5% and 10.5% per annum,
respectively, and are payable in monthly installments of $11,377 and $8,358
including interest, respectively. The total amount payable under the loan
agreements as of December 31, 1998 and 1997 was $-0- and $38,378, respectively.
The Company has entered into an equipment lease agreement with a venture
leasing company which provides lease financing of up to $1.1 million under a
lease line of credit for the acquisition of furniture, fixtures and research and
development equipment. As of December 31, 1998, the Company had used the entire
line of credit, the sum of which is included under capital lease obligations on
the Company's balance sheets. The Company had outstanding capital lease
obligations of $438,519 and $794,581 at December 31, 1998 and 1997,
respectively.
The Company has entered into an equipment lease agreement with a venture
leasing company which provides lease financing of up to $2.0 million under a
lease line of credit for the acquisition of furniture, fixtures and research and
development equipment. As of December 31, 1998, the Company had used $1,049,238
of the line of credit the sum of which is included under capital lease
obligations on the Company's balance sheets. The Company had outstanding capital
lease obligations of $968,633 at December 31, 1998.
The Company has entered into a capital lease agreement with a third party
related to the purchase of inventory components. At December 31, 1998, the
Company had $282,146 under this obligation.
The cost of furniture and equipment in the accompanying balance sheets
includes the following amounts under capital leases:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Research and development equipment................................ $ 2,077,331 $ 1,082,158
Less accumulated amortization..................................... 606,992 269,584
------------ ------------
Net assets under capital leases................................... $ 1,470,339 $ 812,574
------------ ------------
------------ ------------
</TABLE>
30
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
Future minimum lease payments under capital leases consisted of the
following as of December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL
LEASES
-------------
<S> <C>
Year ending December 31:
1999....................................................................... $ 967,516
2000....................................................................... 391,083
2001....................................................................... 306,368
2002....................................................................... 194,239
-------------
Total minimum payments......................................................... 1,859,206
Less amount representing interest.............................................. 169,908
-------------
Present value of net minimum payments.......................................... 1,689,298
Less current portion........................................................... 876,959
-------------
Long-term obligations, net of current portion.................................. $ 812,339
-------------
-------------
</TABLE>
Interest paid for the years ended December 31, 1998, 1997 and 1996 was
$86,644, $85,463 and $64,691, respectively.
5. OPERATING LEASES
The Company leases its office facility and certain equipment under operating
lease agreements which expire on various dates through 1999. Under the office
facility agreement, the Company is required to pay a base rent plus certain
operating expenses. Rent expense was $381,714, $258,895 and $178,419 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Future minimum lease commitments required under non-cancelable operating
leases as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999.......................................................... $ 124,449
---------
---------
</TABLE>
6. PREFERRED STOCK
On March 26, 1993, the Company issued 775,000 shares of Series A Preferred
Stock to investors at $1.00 per share. On December 22, 1993, the Company issued
2,882,354 shares of Series B Preferred Stock to investors at $1.70 per share. On
January 31, 1995 and on March 7, 1995, the Company issued 3,588,388 and 64,706
shares of Series B Preferred Stock, respectively, to investors at $1.70 per
share. The Series A and Series B Preferred Stock had certain voting and
registration rights, were convertible into common stock on a one-for-one basis
and had preference over common stock upon liquidation.
On October 29, 1993 and on November 29, 1993, the Company borrowed $125,000
on each date from certain Series A Preferred stockholders. The notes earned
interest at 7% and were either payable January 15, 1994 or convertible into
Series B Preferred Stock at a price equal to the price paid per share by
31
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. PREFERRED STOCK (CONTINUED)
investors purchasing Series B Preferred Stock. The notes were converted into
147,058 shares of Preferred Stock on December 23, 1993.
On April 24, 1996, the Company issued 1,953,700 shares of Series C Preferred
Stock to investors at $5.12 per share from which the Company received net
proceeds of $9,992,000. The Series C Preferred Stock had certain voting and
registration rights, was convertible into common stock on a one-for-one basis
and had preference over common stock upon liquidation.
In conjunction with the initial public offering, all outstanding shares of
convertible preferred stock were automatically converted into an aggregate of
4,705,602 shares of common stock.
7. REVERSE STOCK SPLIT
On February 3, 1997, the Board of Directors approved a reverse stock split
of 1-for-2 for the Company's common stock and preferred stock. Accordingly, all
share, per share, weighted average share, and stock option information were
restated to reflect the split. The reverse stock split had no effect upon the
number of shares of preferred stock issued and outstanding (as opposed to the
conversion prices of the preferred stock and the number of shares of common
stock into which the preferred stock is converted). Accordingly, the preferred
stock and preferred stock price amounts were not adjusted for the reverse stock
split.
8. STOCK OPTIONS AND WARRANTS
The Company has adopted the 1993 Long-Term Stock Option Plan (the "Plan")
under which directors, officers, employees and consultants of the Company may
receive options to purchase common stock. The options granted under the Plan can
either be incentive stock options or non-statutory stock options. Options
granted under the Plan may not be at a price less then the fair market value of
the common stock on the date of grant.
In 1997, the Company adopted the Directors' Stock Option Plan (the
"Directors' Plan"). The Directors' Plan provides for the automatic grant of
non-statutory stock options of common stock to non-employee directors. The
option price for non-employee directors is equal to the fair market value of a
share of common stock as of the grant date.
32
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes the activity under the Company's stock option
plans:
<TABLE>
<CAPTION>
1993 LONG-TERM PLAN OPTIONS
DIRECTOR'S PLAN OUTSTANDING WEIGHTED
------------------------ ------------------------------- AVERAGE
SHARES SHARES EXERCISE
AVAILABLE OPTIONS AVAILABLE PRICE
FOR GRANT OUTSTANDING FOR GRANT NSO ISO PER SHARE
----------- ----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995...... -- -- 93,562 81,313 554,062 $ .32
Additional shares reserved for
issuance.................... -- -- 350,000 -- -- --
Granted....................... -- -- (298,750) 6,250 292,500 2.80
Canceled...................... -- -- 11,478 -- (11,478) .33
Exercised..................... -- -- -- (10,313) (14,552) .26
----------- ----------- --------- --------- ---------
Balance at December 31, 1996...... -- -- 156,290 77,250 820,532 1.14
Additional shares reserved for
issuance.................... 200,000 -- 600,000 -- -- --
Granted....................... (50,000) 50,000 (235,500) -- 235,500 11.00
Canceled...................... -- -- 36,407 -- (36,407) 9.69
Exercised..................... -- -- -- (34,750) (140,659) .59
----------- ----------- --------- --------- ---------
Balance at December 31, 1997...... 150,000 50,000 557,197 42,500 878,966 3.68
Granted....................... (20,000) 20,000 (224,500) -- 224,500 9.98
Canceled...................... -- -- 88,982 -- (88,982) 4.18
Exercised..................... -- -- -- (5,000) (72,353) 1.41
----------- ----------- --------- --------- ---------
Balance at December 31, 1998...... 130,000 70,000 421,679 37,500 942,131 $ 5.26
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
NUMBER CONTRACTUAL PRICE PER NUMBER PRICE PER
RANGE OF EXERCISE PRICES OUTSTANDING LIFE SHARE EXERCISABLE SHARE
- ------------------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ .20 - $ .60............... 401,845 5.95 $ .34 363,716 $ .34
2.40 - 3.70............... 143,439 7.62 2.89 80,358 2.80
5.00 - 9.38............... 227,847 8.40 8.36 69,120 8.45
10.50 - 13.13............... 276,500 9.12 11.11 44,411 11.54
----------- -----------
$ .20 - $13.13............... 1,049,631 7.54 5.26 557,605 2.58
----------- -----------
----------- -----------
</TABLE>
Options outstanding under the stock option plans expire at various dates
during the period from April 2003 through December 2008. Exercise prices for
options outstanding as of December 31, 1998 ranged from $.20 to $13.13 per
share. The number of options exercisable as of December 31, 1998, 1997 and 1996
were 557,605, 405,670 and 375,655, respectively, at weighted-average exercise
prices of $2.58, $1.18 and $.36 per share, respectively.
33
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The weighted-average grant date fair value of options granted during the
years ended December 31, 1998, 1997 and 1996 was $4.87, $4.70 and $5.58 per
share, respectively.
In November 1994, the Company entered into a three year operating lease
agreement for research and development equipment. In connection with the
agreement, the Company granted the lessor a warrant to purchase 46,605 shares of
common stock at $3.40 per share. The warrant expires five years from the grant
date and was deemed to have a value of $15,846. Such value was expensed during
the year ended December 31, 1995.
In October 1996, the Company entered into an equipment lease agreement for
research and development equipment. In connection with the agreement, the
Company granted the venture leasing company a warrant to purchase 7,500 shares
of common stock at a purchase price of $10.24 per share. The warrant expires
five years from the grant date and was deemed to have a value of $7,680. Such
value was expensed during the year ended December 31, 1996.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996: risk-free interest rates ranging from 5.0% to 6.2%, dividend
yields of -0-, volatility factors of the expected market price of the Company's
stock ranging from .41 to .56 and a weighted-average expected life of the
options of four years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Pro forma net loss................................ $ 15,568,720 $ 9,425,150 $ 6,836,294
------------- ------------ ------------
------------- ------------ ------------
Pro forma net loss per common share............... $ 1.73 $ 1.33 $ 6.64
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
The pro forma effect on net loss for 1998, 1997 and 1996 is not
representative of the pro forma effect on net loss in future years because it
does not take into consideration expense related to grants made prior to 1995.
The Company also has an Employee Stock Purchase Plan under which 200,000
shares have been reserved for purchase by employees. The purchase price of the
shares under the Employee Stock Purchase Plan is the lesser of 85% of the fair
market value on the first or last day of the offering period. Offering periods
are each three months. Employees may designate up to 15% of their compensation
for the purchase of stock under the Employee Stock Purchase Plan.
34
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
9. DEFERRED COMPENSATION
For options granted during the year ended December 31, 1996 to purchase a
total of 298,750 shares of common stock at exercise prices ranging from $.34 to
$5.00 per share, the Company recognized $1,484,680 as deferred compensation for
the excess of the deemed value for accounting purposes of the common stock
issuable upon exercise of such options over the aggregate exercise price of such
options. The deferred compensation expense is amortized ratably over the vesting
period of the options. For the years ended December 31, 1998, 1997 and 1996,
$216,516, $402,101 and $773,271 was expensed, respectively.
The remaining unamortized deferred compensation is expected to be charged to
operations as follows:
<TABLE>
<S> <C>
1999............................................................... $ 92,792
---------
---------
</TABLE>
10. INCOME TAXES
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $36,464,000. The net operating loss carryforwards are available to
offset future taxable income and begin to expire in the year 2008. No benefit
has been recorded for such loss carryforwards, and utilization in future years
may be limited under Section 382 of the Internal Revenue Code if significant
ownership changes have occurred.
Components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............. $ 14,585,600 $ 9,762,000
Inventory reserve............................ 12,000 21,000
Accrued liabilities.......................... 283,000 201,000
------------ -----------
14,880,600 9,984,000
Deferred tax liabilities:
Depreciation and amortization................ (248,000) (186,000)
------------ -----------
Net deferred tax assets.......................... 14,632,600 9,798,000
Valuation allowance.............................. (14,632,600) (9,798,000)
------------ -----------
Total net deferred tax assets.................... $ -- $ --
------------ -----------
------------ -----------
</TABLE>
11. RELATED PARTY TRANSACTION
The Company paid approximately $8,600, $16,000 and $59,000 for the years
ended December 31, 1998, 1997 and 1996, respectively, to Novel Biomedical in
connection with research and development performed for the Company. The owner of
Novel Biomedical is a founder and stockholder of the Company.
12. SOURCES OF SUPPLY
The Company purchases raw materials and certain key components of its
products, including the computer workstation and certain components for its
catheter from sole, single or limited source suppliers.
35
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
12. SOURCES OF SUPPLY (CONTINUED)
The Company currently has no agreements that would assure delivery of raw
materials and components from such suppliers. Establishing additional or
replacement suppliers for any of the numerous components used in the Company's
products, if required, may not be accomplished quickly and could involve
significant additional costs. The inability of any of the Company's suppliers to
provide an adequate supply of components in a timely manner, or the inability of
the Company to locate qualified alternative suppliers for material and
components at reasonable costs, could adversely affect the Company's business,
financial condition and results of operations.
13. LICENSE AGREEMENT
In January 1998, the Company entered into a license agreement with
Medtronic, Inc. to license certain technology developed by Medtronic. As
consideration for the rights to utilize the developed technology, the Company
paid Medtronic $1,500,000 and granted Medtronic a warrant to purchase 447,554
shares of the Company's common stock at an exercise price of $11.1125 per share.
The warrant was deemed to have a value of $2,085,602. This amount, along with
the cash payment to Medtronic, has been expensed as research and development. If
the Company develops a product that reaches commercialization, the Company will
grant to Medtronic an additional warrant to purchase 223,777 shares of common
stock. The exercise price of the warrant will be 1.25 times the average closing
price of the Company's common stock for the twenty days prior to the commercial
products introduction. The value of the additional warrants will be amortized
over the shorter of the license agreement or the life of the developed product.
This additional warrant becomes exercisable one year after being granted and
remains outstanding for five years. The additional warrant will also be granted
if the Company undergoes a change in control. If the option is granted due to a
change in control it becomes immediately exercisable.
14. SIGNIFICANT CUSTOMER
The Company has a distributor that represents 100% of all net revenues for
the year ended December 31, 1998.
15. SUBSEQUENT EVENT
In February 1999, the Company entered into a $7,000,000 note agreement with
Medtronic. Under the agreement, the Company received $3,500,000 in February 1999
and has the option to receive an additional $3,500,000 upon the Company
providing a written request to Medtronic on or before December 31, 1999. The
note agreement bears interest at 8%. Accrued interest on the note is payable on
a quarterly basis. Any borrowings under the note are due on the earlier of the
following: (i) the closing of any financing from which the Company receives net
proceeds of at least $20,000,000; (ii) a change of control; or (iii) February 2,
2001. Medtronic also received a warrant to purchase shares of the Company's
common stock. The number of shares Medtronic can purchase is based upon the
amount outstanding under the note agreement, plus any accrued interest, divided
by the exercise price, which as of the note agreement date was $10.08. The
warrant may be exercised only immediately before a change of control in the
Company if there remains an amount outstanding under the note agreement, or upon
an event of default by the Company. Medtronic may exercise the warrant by either
converting any outstanding amounts due under the note agreement or paying cash
for the shares of common stock acquired.
36
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section under the heading "Election of Directors" and the section
entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement for its Annual Meeting of Stockholders to be held on
May 27, 1999 (the "1999 Proxy Statement"), which definitive 1999 Proxy Statement
will be filed within 120 days after the close of the fiscal year ended December
31, 1998, are incorporated herein by reference.
See Item 1 in Part I hereof for information regarding Executive Officers of
the Company.
ITEM 11. EXECUTIVE COMPENSATION
The section under the heading "Election of Directors" entitled "Compensation
of Directors" and the section entitled "Executive Compensation" in the 1999
Proxy Statement, which definitive 1999 Proxy Statement will be filed within 120
days after the close of the fiscal year ended December 31, 1998, are
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the 1999 Proxy Statement, which definitive 1999 Proxy Statement
will be filed within 120 days after the close of the fiscal year ended December
31, 1998, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" in the 1999 Proxy Statement,
which definitive 1999 Proxy Statement will be filed within 120 days after the
close of the fiscal year ended December 31, 1998, is incorporated herein by
reference.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
(1) Financial Statements. The following financial statements of the Company
are included in Part II, Item 8, of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
PAGE IN THIS
ANNUAL
REPORT
---------------
<S> <C>
Report of Independent Auditors......................................... 23
Audited Financial Statements
Balance Sheets......................................................... 24
Statements of Operations............................................... 25
Statements of Changes in Stockholders' Equity.......................... 26
Statements of Cash Flows............................................... 27
Notes to Financial Statements.......................................... 28
</TABLE>
(2) Financial Statement Schedules
None. All financial statement schedules are omitted because of the
absence of conditions under which they are required.
(3) EXHIBITS
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1,
dated January 29, 1997, as amended on March 5, 1997, March 13, 1997 and March 18,
1997 (File No. 333-20677))
3.2 Amended Bylaws of the Company (incorporated by reference to Exhibit 3.3 to the
Company's Registration Statement on Form S-1, dated January 29, 1997, as amended
on March 5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
4.1 Warrant Agreement dated November 18, 1993 between the Company and Tikkun Resource
Development relating to warrant issued to Tikkun Resource Development to purchase
shares of common stock (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended on March
5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
4.2 Warrant Agreement dated November 15, 1994 between the Company and Comdisco, Inc.
relating to Warrant issued to Comdisco, Inc. to purchase shares of Series B
Preferred Stock (incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended on March
5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
4.3 Warrant Agreement dated August 20, 1996 between the Company and Comdisco, Inc.
relating to Warrant issued to Comdisco, Inc. to purchase shares of Series D
Preferred Stock (incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended on March
5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
</TABLE>
38
<PAGE>
<TABLE>
<C> <S>
10.1 Real Property Lease Agreement dated September 15, 1993 between the Company and the
Port Authority of St. Paul, together with Amendment Nos. 1, 2 and 3 thereto dated
February 6, 1995, May 16, 1995, June 4, 1996, respectively (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1,
dated January 29, 1997, as amended on March 5, 1997, March 13, 1997 and March 18,
1997 (File No. 333-20677))
10.2 Amendment No 4 to the Real Property Lease Agreement dated September 15, 1993
between the Company and the Port Authority of St. Paul (incorporated by reference
to Exhibit 10.2 to the Company's Annual Report on Form 10-K, dated March 31, 1998
(File No. 0-22233)).
10.3 Master Lease Agreement dated November 14, 1994, as amended, between the Company and
Comdisco, Inc., with Exhibits (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1, dated January 29, 1997, as amended
on March 5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
10.4* 1993 Long-Term Incentive and Stock Option Plan, including forms of option
agreements (incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended on March
5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
10.5* Directors' Stock Option Plan (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, dated January 29, 1997, as amended
on March 5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
10.6* 1997 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1, dated January 29, 1997, as amended
on March 5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
10.7* Employment Agreement dated May 25, 1994 between the Company and James W. Bullock
(incorporated by reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1, dated January 29, 1997, as amended on March 5, 1997, March
13, 1997 and March 18, 1997 (File No. 333-20677))
10.8 Investment Agreement dated April 26, 1996 between the Company and Medtronic, Inc.
(incorporated by reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1, dated January 29, 1997, as amended on March 5, 1997, March
13, 1997 and March 18, 1997 (File No. 333-20677))
10.9 Amended and Restated Investors Rights Agreement dated January 31, 1995, together
with Amendments thereto dated March 1, 1995 and April 26, 1996, respectively,
between the Company and the holders of the Company's Series A and Series B
Preferred Stock (incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended on March
5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
10.10 Stock Purchase Agreement between the Company and Medtronic, Inc. (incorporated by
reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1,
dated January 29, 1997, as amended on March 5, 1997, March 13, 1997 and March 18,
1997 (File No. 333-20677))
10.11 Purchase Agreement between the Company, Piper Jaffray Inc., and Volpe, Welty &
Company LLC (incorporated by reference to Exhibit 1.1 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended on March
5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
</TABLE>
39
<PAGE>
<TABLE>
<C> <S>
10.12 Distribution/Supply Agreement, dated September 8, 1997, between the Company and
Medtronic, Inc. (incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-1, dated July 23, 1997, as amended on January 9,
1998, June 4, 1998 and July 31, 1998 (File No. 333-31927))
10.13 License Agreement, dated January 30, 1998, between the Company and Medtronic, Inc.
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998, as amended on July 31, 1998 (File
No. 0-22233))
10.14 Master Lease Agreement dated May 4, 1998, between the Company and Transamerica
Business Credit Corporation (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (file
No. 0-22233))
10.15** Amendment to Distribution/Supply Agreement dated December 11, 1998 between the
Company and Medtronic, Inc. (filed herewith)
10.16 Note Purchase Agreement dated February 2, 1999, between the Company and Medtronic
Asset Management, Inc. (filed herewith)
10.17 Warrant, dated February 2, 1999, to purchase shares of common stock, issued by the
Company to Medtronic Asset Management, Inc. (filed herewith)
10.18 Extension of Lease Commitment, dated February 12, 1999, by Transamerica Business
Credit Corporation (filed herewith)
23 Consent of Ernst & Young LLP (filed herewith)
24 Power of Attorney (included on signature page of this Report)
27 Financial Data Schedule (filed herewith)
99 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995 (filed herewith)
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to Form 10-K pursuant to Item 14(c) of the Form 10-K Report.
** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of Exhibit 10.15 have been deleted and filed
separately with the Securities and Exchange commission pursuant to a request
for confidential treatment.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of St.
Paul, Minnesota.
Date: March 30, 1999 ENDOCARDIAL SOLUTIONS, INC.
By /s/ JAMES W. BULLOCK
-----------------------------------------
James W. Bullock
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on the 30th day of March, 1999.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Bullock and Leota L. Pearson (with full
power to act alone), as his or her true and lawful attorneys-in-fact and agents,
with full powers of substitution and resubstitution, for him or her and in his
or her name, place and stead, in any and all capacities, to sign any and all
amendments to the Annual Report on Form 10-K of Endocardial Solutions, Inc., and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, lawfully do or cause to be done by virtue
hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
President, Chief Executive
/s/ JAMES W. BULLOCK Officer and Director
- ------------------------------ (Principal Executive
James W. Bullock Officer)
/s/ LEOTA L. PEARSON Chief Financial Officer
- ------------------------------ (Principal Financial and
Leota L. Pearson Accounting Officer)
/s/ GRAYDON E. BEATTY
- ------------------------------ Director
Graydon E. Beatty
/s/ JAMES E. DAVERMAN
- ------------------------------ Director
James E. Daverman
/s/ ROBERT G. HAUSER, M.D.
- ------------------------------ Director
Robert G. Hauser, M.D.
/s/ RONALD H. KASE
- ------------------------------ Director
Ronald H. Kase
/s/ STEVEN R. LAPORTE
- ------------------------------ Director
Steven R. LaPorte
</TABLE>
41
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1,
dated January 29, 1997, as amended on March 5, 1997, March 13, 1997 and March 18,
1997 (File No. 333-20677))
3.2 Amended Bylaws of the Company (incorporated by reference to Exhibit 3.3 to the
Company's Registration Statement on Form S-1, dated January 29, 1997, as amended
on March 5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
4.1 Warrant Agreement dated November 18, 1993 between the Company and Tikkun Resource
Development relating to warrant issued to Tikkun Resource Development to purchase
shares of common stock (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended on March
5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
4.2 Warrant Agreement dated November 15, 1994 between the Company and Comdisco, Inc.
relating to Warrant issued to Comdisco, Inc. to purchase shares of Series B
Preferred Stock (incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended on March
5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
4.3 Warrant Agreement dated August 20, 1996 between the Company and Comdisco, Inc.
relating to Warrant issued to Comdisco, Inc. to purchase shares of Series D
Preferred Stock (incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended on March
5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
10.1 Real Property Lease Agreement dated September 15, 1993 between the Company and the
Port Authority of St. Paul, together with Amendment Nos. 1, 2 and 3 thereto dated
February 6, 1995, May 16, 1995, June 4, 1996, respectively (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1,
dated January 29, 1997, as amended on March 5, 1997, March 13, 1997 and March 18,
1997 (File No. 333-20677))
10.2 Amendment No 4 to the Real Property Lease Agreement dated September 15, 1993
between the Company and the Port Authority of St. Paul (incorporated by reference
to Exhibit 10.2 to the Company's Annual Report on Form 10-K, dated March 31, 1998
(File No. 0-22233)).
10.3 Master Lease Agreement dated November 14, 1994, as amended, between the Company and
Comdisco, Inc., with Exhibits (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1, dated January 29, 1997, as amended
on March 5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
10.4* 1993 Long-Term Incentive and Stock Option Plan, including forms of option
agreements (incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended on March
5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
10.5* Directors' Stock Option Plan (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, dated January 29, 1997, as amended
on March 5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
10.6* 1997 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1, dated January 29, 1997, as amended
on March 5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
10.7* Employment Agreement dated May 25, 1994 between the Company and James W. Bullock
(incorporated by reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1, dated January 29, 1997, as amended on March 5, 1997, March
13, 1997 and March 18, 1997 (File No. 333-20677))
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.8 Investment Agreement dated April 26, 1996 between the Company and Medtronic, Inc.
(incorporated by reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1, dated January 29, 1997, as amended on March 5, 1997, March
13, 1997 and March 18, 1997 (File No. 333-20677))
10.9 Amended and Restated Investors Rights Agreement dated January 31, 1995, together
with Amendments thereto dated March 1, 1995 and April 26, 1996, respectively,
between the Company and the holders of the Company's Series A and Series B
Preferred Stock (incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended on March
5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
10.10 Stock Purchase Agreement between the Company and Medtronic, Inc. (incorporated by
reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1,
dated January 29, 1997, as amended on March 5, 1997, March 13, 1997 and March 18,
1997 (File No. 333-20677))
10.11 Purchase Agreement between the Company, Piper Jaffray Inc., and Volpe, Welty &
Company LLC (incorporated by reference to Exhibit 1.1 to the Company's
Registration Statement on Form S-1, dated January 29, 1997, as amended on March
5, 1997, March 13, 1997 and March 18, 1997 (File No. 333-20677))
10.12 Distribution/Supply Agreement, dated September 8, 1997, between the Company and
Medtronic, Inc. (incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-1, dated July 23, 1997, as amended on January 9,
1998, June 4, 1998 and July 31, 1998 (File No. 333-31927))
10.13 License Agreement, dated January 30, 1998, between the Company and Medtronic, Inc.
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998, as amended on July 31, 1998 (File
No. 0-22233))
10.14 Master Lease Agreement dated May 4, 1998, between the Company and Transamerica
Business Credit Corporation (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (file
No. 0-22233))
10.15** Amendment to Distribution/Supply Agreement dated December 11, 1998 between the
Company and Medtronic, Inc. (filed herewith)
10.16 Note Purchase Agreement dated February 2, 1999, between the Company and Medtronic
Asset Management, Inc. (filed herewith)
10.17 Warrant, dated February 2, 1999, to purchase shares of common stock, issued by the
Company to Medtronic Asset Management, Inc. (filed herewith)
10.18 Extension of Lease Commitment, dated February 12, 1999, by Transamerica Business
Credit Corporation (filed herewith)
23 Consent of Ernst & Young LLP (filed herewith)
24 Power of Attorney (included on signature page of this Report)
27 Financial Data Schedule (filed herewith)
99 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995 (filed herewith)
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to Form 10-K pursuant to Item 14(c) of the Form 10-K Report.
** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of Exhibit 10.15 have been deleted and filed
separately with the Securities and Exchange commission pursuant to a request
for confidential treatment.
<PAGE>
EXHIBIT 10.15
F.N.
AMENDMENT TO S.N.
DISTRIBUTION / SUPPLY AGREEMENT
This AMENDMENT is made this 11th day of December, 1998 to the
Distribution/Supply Agreement dated September 4, 1997 by and between
Endocardial Solutions, Inc. ("ESI") and Medtronic, Inc., a Minnesota
("Medtronic").
Under Section 1.1, "Medtronic Territories" is hereby deleted and replaced as
follows:
"MEDTRONIC TERRITORIES" means those countries included within Medtronic's
currently designated "Europe," "Japan" and "Canada" sales regions, as more
fully described in Schedule 1.2.
The following sentence is hereby added to the beginning of Section 2.4(c):
ESI hereby provides Medtronic with a one-year warranty on parts and labor
related to the repair of all Systems purchased by Medtronic, regardless of
whether such Systems are purchased for Medtronic's own use or if Medtronic
sells such Systems to or places them with third party purchasers or users.
Section 2.5(b) and (c) are hereby removed in their entirety and replaced as
follows:
(b) Medtronic shall be responsible for System installations, technical
support, administration and personnel costs for Systems sold in the Field
of Use in Europe.
(c) Medtronic shall be responsible for software and hardware repairs and
servicing for all Systems in the Field of Use within the Medtronic
Territories which will be provided in accordance with Exhibit A attached
hereto. ESI's service obligations are also described in Exhibit A.
(d) Medtronic will provide reasonable and appropriate space to warehouse
System spare parts in Europe. Medtronic will provide support staff
necessary to service and administer the system spare parts inventory. ESI
will maintain an inventory of System spare parts sufficient to comply with
the down-time and time-to-repair commitments to System customers for any
ESI warranties and extended service plans. Medtronic will reimburse ESI for
the cost of any hardware replacement parts required after the expiration of
the one-year ESI System warranty for Systems in the Field of Use in Europe.
The transfer price for such replacement parts will be fully allocated costs
plus a mutually agreed upon market markup. ESI will assume costs of
shipping System spare parts from a designated Europe inventory site or ESI
service center to customers during the one-year ESI System warranty period.
Thereafter, Medtronic will be responsible for the costs of shipping System
spare parts from the designated Europe inventory site or ESI service center
to customers.
<PAGE>
(e) Medtronic will be responsible for offering for sale and administering
extended service contracts to System purchasers in Europe. All revenue
generated from the sale of extended service contracts will be retained by
Medtronic.
(f) The parties acknowledge the country specific service agreements with
Silicon Graphics and Endocardial Solutions. ESI will be responsible for the
cost associated with the first year of the SGI Contract. Medtronic will
assume the cost of the second and third years under the SGI Contract for
Systems sold by Medtronic in Europe. Medtronic and SGI will negotiate
mutually agreeable payment terms under the SGI Contract for years two and
three. This would include any costs associated with any demonstration
System utilized by Medtronic for internal or promotional purposes.
(g) ESI will provide software upgrades free of charge for the three-year
term of the SGI Contract, including versions that add certain convention
capabilities. Medtronic will pay for other system upgrades that include new
or additional hardware configurations or System software upgrades that
constitute new products including but not limited to the "Loca Lisa"
technology.
The former Section 2.5(d) shall now become Section 2.5(h).
Schedule 2.1 is hereby modified as follows:
Canada shall be added as a Territory.
Schedule 2.3 is hereby modified as follows:
The price for a System as defined shall be changed to (***) Dollars ($***),
and the price for catheters as defined shall be changed to (***) Dollars
($***).
The pricing above shall become effective on September 8, 1997. These prices
shall remain in effect until December 31, 2000.
Except to the extent provided above, the remaining terms and conditions of
the original agreement shall remain in full force and effect.
MEDTRONIC, INC. ENDOCARDIAL SOLUTIONS, INC.
By /s/ Steve LaPorte By /s/ James W. Bullock
------------------------------- ----------------------------------
Title VP/GM Title President/Chief Executive Officer
------------------------------- ----------------------------------
Date: 12/11/98 Date: 12/16/98
------------------------------- ----------------------------------
- ----------------
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
EXHIBIT A
ENSITE 3000 SYSTEM EUROPEAN SERVICE PLAN
MEDTRONIC RESPONSIBILITIES
- Medtronic will receive and document customer calls and complaints
and route to the appropriate Medtronic representative. The local
Medtronic representative will return the calls to the customer and
perform initial troubleshooting as follows:
* Within 24 hours of a customer service call, the customer will be
contracted by telephone by the appropriate local Medtronic
representative to determine if the basic first-line System
diagnostics have been performed.
* Within 48 hours, if required, a Medtronic representative will
provide a site visit to assist the hospital technician with the
basic first-line System diagnostics.
* Within 72 hours, if the System problem(s) continue the Medtronic
representative would, as required:
* Replace the power supply chassis
* Replace the electronic chassis board
* Coordinate System service with SGI and/or other third
party vendors
* Complete the RGA and System documentation
* Coordinate shipment of any loaner Systems
* Perform a PIU System diagnostic test utilizing the
service diagnostic laptop
* Replace the electronic chassis
* Replace the breakout box
* Replace cables (breakout box, fiber optic, ECG, etc.)
* Perform a system calibration with the laptop and
calibration fixture (when required)
* Coordinate shipment/swap-out of System parts and
components
- Medtronic is responsible for System installations and customer
training after the limited market release ("LMR") period. This
period was completed September 1998.
- Medtronic is responsible for System contract sales, financing and
accounts receivable.
* System service contracts will be issued to customers in
Medtronic's name.
<PAGE>
* Service contracts discounts will be offered at Medtronic's
discretion.
* Customers may elect to extend coverage at any time prior to
initial expiration date.
- Any other responsibilities mutually agreed to by Medtronic and ESI
ESI RESPONSIBILITIES
- ESI will be responsible for training Medtronic sales and technical
representatives for all new System software, hardware and
catheter-related product developments.
- ESI (initially through Graydon Beatty) will provide training to
clinical investigators and Medtronic sales and technical
representatives during the SYSTEM's initial LMR period.
- ESI will be responsible for assisting Medtronic with System
installations durining the LMR period.
- ESI will provide 24-hour technical customer service support to
Medtronic's local and technical representatives.
- ESI will maintain the appropriate inventory levels of System
replacement parts and components in Europe, as well as complete loaner
Systems at the designated Medtronic inventory location.
- ESI will maintain the necessary inventory levels for:
* Breakout box swap-outs
* Cable swap-outs (e.g., breakout boxes, fiber optics, ECGs, etc.)
* PIU electronic chassis boards, BBIF, mother boards, SERIF,
BIO/DEMOD boards, etc.
* PIU power supply chassis
- For Systems covered by the applicable ESI warranty, ESI will bear the
cost of shipping and installing loaner Systems and System replacement
parts and components at customer locations for one year following
installation.
- For Systems covered by the applicable ESI warranty, ESI will bear the
cost of shipping and repairing Systems and System component/parts
returned to ESI for inspection, service and/or repair (excluding
cables after the 90-day ESI warranty period).
- Any other responsibilities mutually agreed to by ESI and Medtronic.
<PAGE>
CUSTOMER RESPONSIBILITIES
- The System service contract would require that customers train a lab
technician to perform the functions outlined below following
installation of a System:
- Reboot the SGI and PIU System(s)
- Read the diagnostic test results after a reboot of the SGI and
PIU System(s)
<PAGE>
Exhibit 10.16
NOTE PURCHASE AGREEMENT
THIS NOTE PURCHASE AGREEMENT is made and entered into as of February 2,
1999 by and between ENDOCARDIAL SOLUTIONS, INC. (the "Company"), a Delaware
corporation, and MEDTRONIC ASSET MANAGEMENT, INC. ("Medtronic"), a Minnesota
corporation.
RECITALS
WHEREAS, the Company desires to issue and sell to Medtronic, and
Medtronic desires to purchase from the Company, on the terms and subject to
the conditions set forth in this Agreement, a promissory note of even date
herewith having a principal amount of up to $7,000,000 in the form attached
hereto as Exhibit A (the "Note") and a Warrant to purchase shares of the
Company's Common Stock, par value $.01 per share, in the form attached hereto
as Exhibit B (the "Warrant").
AGREEMENT
NOW, THEREFORE, in consideration of the respective representations,
warranties, covenants and agreements contained herein, and for other valuable
consideration, the receipt and adequacy of which is hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 SPECIFIC DEFINITIONS. As used in this Agreement, the following
terms shall have the meanings set forth or as referenced below:
"AGREEMENT" means this Agreement and all exhibits and schedules hereto.
"COMMON STOCK" means the shares of the Company's common stock, par value
$.01 per share, authorized for issuance under the Company's Certificate of
Incorporation.
"COMPANY REPORTS" means each registration statement, report, proxy
statement or information statement prepared by the Company since December 31,
1996 including, without limitation, (i) the Company's Annual Reports on Form
10-K, and (ii) the Company's Quarterly Reports on Form 10-Q, each in the form
(including exhibits and any amendments thereto) filed with the SEC, and each
annual and quarterly report sent to its stockholders
<PAGE>
"DISTRIBUTION" shall mean the declaration or payment of any dividend on
or in respect of any shares of any class of capital stock of the Company,
other than dividends payable solely in shares of common stock of the Company;
the purchase, redemption, or other retirement of any shares of any class of
capital stock of the Company, directly or indirectly; the return of capital
by the Company to its shareholders as such; or any other distribution on or
in respect of any shares of any class of capital stock of the Company.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"FORM S-3" means such form under the Securities Act in effect on the
date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
"HOLDER" means Medtronic or any person owning of record Registrable
Securities that have not been sold to the public or any assignee of record of
such Registrable Securities in accordance with Article VII hereof.
"INDEBTEDNESS" shall mean all obligations, contingent and otherwise,
that in accordance with generally accepted accounting principles should be
classified upon the obligor's balance sheet as liabilities, or to which
reference should be made by footnotes thereto, including in any event and
whether or not so classified: (a) all debt and similar monetary obligations,
whether direct or indirect; (b) all liabilities secured by any mortgage,
pledge, security interest, lien, charge or other encumbrance existing on
property owned or acquired subject thereto, whether or not the liability
secured thereby shall have been assumed; and (c) all guarantees, endorsements
and other contingent obligations whether direct or indirect in respect of
indebtedness of others, including any obligation to supply funds to or in any
manner to invest in, directly or indirectly, the debtor, to purchase
indebtedness, or to assure the owner of indebtedness against loss, through an
agreement to purchase goods, supplies, or services for the purpose of
enabling the debtor to make payment of the indebtedness held by such owner or
otherwise, and the obligations to reimburse the issuer in respect of any
letters of credit, but excluding all guarantees, endorsements and other
contingent obligations which would not, in accordance with generally accepted
accounting principles, be classified as liabilities upon the obligor's
balance sheet.
"INITIATING HOLDERS" means Holders of the Warrant and/or outstanding
Registrable Securities at the time of the request for registration pursuant
hereto, provided that the amount of the Warrant and Registrable Securities so
held by such Holders represents more than fifty percent (50%) of the total
of: (i) then oustanding Registrable Securities and (ii) Registrable
Securities issuable upon the then outstanding Warrant.
"INVESTMENTS " shall mean all expenditures made and all liabilities
incurred (contingently or otherwise) for the acquisition of stock or
Indebtedness of, or for loans, advances, capital contributions or transfers
of property to, or in respect of any guaranties (or other
-2-
<PAGE>
commitments as described under Indebtedness), or obligations of, others,
including without limitation, investments in joint ventures or limited
partnerships.
"KNOWLEDGE" means actual knowledge of a fact or the knowledge which such
person could reasonably be expected to have based on reasonable inquiry. The
knowledge of an entity shall include the knowledge of such entity's officers.
"LIENS" means liens, mortgages, charges, security interests, claims,
voting trusts, pledges, encumbrances, options, assessments, restrictions, or
third-party or spousal interests of any nature.
"NOTE" has the meaning assigned to such term in the recitals of this
Agreement.
"REGISTER," and "REGISTRATION" means a registration effected by
preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of effectiveness of such
registration statement.
"REGISTRABLE SECURITIES" means (i) the Shares and (ii) any shares of
Common Stock of the Company issued (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued) as a
dividend or other distribution with respect to, or in exchange for or in
replacement of, the Shares. Notwithstanding the foregoing, Registrable
Securities shall not include any securities sold by a person to the public
either pursuant to a registration statement or Rule 144 under the Securities
Act or sold in a private transaction in which the transferror's rights under
Article VII of this Agreement are not assigned.
"REGISTRATION EXPENSES" means all expenses incurred by the Company in
complying with Article VII hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, reasonable fees and disbursements not to exceed Ten
Thousand Dollars ($10,000) of a single special counsel for the holders of
Registrable Securities, blue sky fees and expenses (but excluding the
compensation of regular employees of the Company which shall be paid in any
event by the Company).
"SEC" means the United States Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SELLING EXPENSES" means all underwriting discounts and commissions
applicable to a sale of Registrable Securities.
"SHARES" means the shares of the Company's Common Stock issued or
issuable upon exercise of the Warrant.
"WARRANT" has the meaning assigned to such term in the recitals of this
Agreement.
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1.2 DEFINITIONAL PROVISIONS.
(a) The words "hereof," "herein," and "hereunder" and words of
similar import, when used in this Agreement, shall refer to this Agreement
as a whole and not to any particular provisions of this Agreement.
(b) Terms defined in the singular shall have a comparable meaning
when used in the plural, and vice-versa.
(c) References to an "Exhibit" or to a "Schedule" are, unless
otherwise specified, to one of the Exhibits or Schedules attached to or
referenced in this Agreement, and references to an "Article" or a "Section"
are, unless otherwise specified, to one of the Articles or Sections of this
Agreement.
(d) The term "person" includes any individual, partnership, joint
venture, corporation, trust, unincorporated organization or government or
any department or agency thereof.
ARTICLE II
PURCHASE OF NOTE AND WARRANT
2.1 PURCHASE AND SALE OF NOTE. The Company hereby issues and delivers
to Medtronic, and Medtronic hereby purchases from the Company, the Note.
2.2 PURCHASE AND SALE OF WARRANT. The Company hereby issues and
delivers to Medtronic, and Medtronic hereby purchases from the Company, the
Warrant.
2.3 PURCHASE PRICE. The purchase price for the Note and the Warrant
shall be an amount equal to $3,500,000, payable upon signature of this
Agreement by wire transfer of immediately available funds to the Company's
account designated by the Company to Medtronic. Medtronic shall be obligated
to advance up to an additional $3,500,000 to the Company within thirty (30)
days following receipt of the Company's written request for such funds,
provided that the written request for such advance is received by Medtronic
prior to the close of business on December 31, 1999 and the Note is not then
in default and no event has occurred which with notice or the passage of time
would result in a default under the Note.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Medtronic as follows:
3.1 ORGANIZATION, QUALIFICATIONS AND CORPORATE POWER. The Company is a
corporation duly incorporated, validly existing and in good standing under
the laws of the State of Delaware and is duly licensed or qualified to
transact business as a foreign
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corporation and is in good standing in each jurisdiction in which the nature
of the business transacted by it or the character of the properties owned or
leased by it requires such licensing or qualification and where the failure
to be so licensed or qualified could have material adverse effect upon the
Company or its business. The Company has the corporate power and authority
to own and hold its properties and to carry on its business as now conducted
and as proposed to be conducted, to execute, deliver and perform this
Agreement, and to issue, sell and deliver the Shares. The Company has no
subsidiaries.
3.2 AUTHORIZATION OF AGREEMENT, ETC.
(a) The execution and delivery by the Company of this Agreement, the
performance by the Company of its obligations hereunder, and the issuance,
sale and delivery of the Note and the Warrant have been duly authorized by
all requisite corporate action and will not violate any provision of law,
any order of any court or other agency of government, the Certificate of
Incorporation or the By-laws of the Company, in each case as amended, or
any provision of any material indenture, agreement or other instrument to
which the Company or any of its properties or assets is bound, or conflict
with, result in a breach of or constitute (with due notice or lapse of time
or both) a default under any such material indenture, agreement or other
instrument, or result in the creation or imposition of any material Lien
upon any of the properties or assets of the Company.
(b) The shares issuable upon exercise of the Warrant have been duly
reserved for issuance and, if and when so issued and paid for in accordance
with this Agreement and the Warrant, will be duly authorized, validly
issued, fully paid and nonassessable shares of the Company's Common Stock
and will be free and clear of all Liens imposed by or through the Company.
3.3 VALIDITY. This Agreement, the Note and the Warrant have been duly
executed and delivered by the Company and constitute the legal, valid and
binding obligations of the Company, enforceable in accordance with their
terms, subject, as to the enforcement of remedies, to the discretion of the
courts in awarding equitable relief and to applicable bankruptcy,
reorganization, insolvency, moratorium and similar laws affecting the rights
of creditors generally.
3.4 SEC DOCUMENTS. The Company has delivered or made available to
Medtronic for its inspection all of the Company Reports. As of their
respective dates, the Company Reports (x) were prepared in all material
respects in accordance with the applicable requirements of the Securities
Act, the Exchange Act, and the rules and regulations thereunder and (y) did
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 made therein, in the light of the circumstances under which they
were made, not misleading. Each of the balance sheets of the Company
included in or incorporated by reference into the Company Reports (including
the related notes and schedules) fairly presents the financial position of
the Company as of its date and each of the statements of income, retained
earnings and cash flows of the Company included in or incorporated by
reference into the Company Reports (including any related notes and
schedules) fairly presents the results of operations, retained earnings or
cash flows, as the case may be, of
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the Company for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end audit adjustments which would not be
material in amount or effect), in each case in accordance with generally
accepted accounting principles consistently applied during the periods
involved, except as may be noted therein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MEDTRONIC
Medtronic represents and warrants to the Company as follows:
4.1 ACCREDITED STATUS. Medtronic is an "accredited investor" within
the meaning of Rule 501 under the Securities Act and was not organized for
the specific purpose of acquiring the Note and the Warrant. Medtronic has
sufficient knowledge and experience in investing in companies similar to the
Company in terms of the Company's stage of development so as to be able to
evaluate the risks and merits of Medtronic's investment in the Company and
Medtronic is able financially to bear the risks thereof. Medtronic, in its
capacity as a shareholder of the Company, has had an opportunity to discuss
the Company's business, management and financial affairs with the Company's
management. The Note and the Warrant are being acquired for Medtronic's own
account for the purpose of investment and not with a view to or for sale in
connection with any distribution thereof. Medtronic understands that (i)
neither the Note, the Warrant nor the Shares have been registered under the
Securities Act by reason of their issuance or, with respect to the Shares,
anticipated issuance, in a transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof or
Regulation D promulgated under the Securities Act, (ii) the Note and the
Warrant must be held indefinitely unless a subsequent disposition thereof is
registered under the Securities Act or is exempt from such registration and
(iii) the Note and Warrant will bear a legend to such effect.
4.2 CORPORATE AUTHORITY. The execution, delivery and performance by
Medtronic of this Agreement and the transactions contemplated hereby has been
duly and validly authorized and approved by all requisite corporate action on
the part of Medtronic, and the execution and the delivery of this Agreement
and consummation of the transactions contemplated hereby and compliance with
and fulfillment of the terms and provisions hereof will not (i) conflict with
or result in a breach of the terms, conditions or provisions of or constitute
a default under the Articles of Incorporation or Bylaws of Medtronic, or (ii)
require any affirmative approval, consent, authorization or other order or
action of any court, governmental authority, regulatory body, creditor or any
other person. Medtronic has all requisite power and authority to do and
perform all acts and things required to be done by it under this Agreement
and the agreements contemplated hereby. This Agreement constitutes the valid
and binding obligation of Medtronic enforceable in accordance with its terms
subject, as to the enforcement of remedies, to the discretion of the courts
in awarding equitable relief and to applicable bankruptcy, reorganization,
insolvency, moratorium and similar laws affecting the rights of creditors
generally.
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ARTICLE V
COVENANTS
The Company covenants and agrees that for so long as the Note is
outstanding:
5.1 RESTRICTIONS ON INVESTMENTS. Except as set forth in SCHEDULE 5.1
hereto, the Company will not permit to exist or to remain outstanding any
Investment except Investments in:
a) marketable direct or guaranteed obligations of the United States
of America that mature within two (2) years from the date of purchase;
b) demand deposits, certificates of deposit, bankers acceptances and
time deposits of United States banks having total assets in excess of
$1,000,000,000, provided that none of the foregoing shall have a term
of more than two (2) years from the date of purchase; and
c) securities commonly known as "commercial paper" issued by a
corporation organized and existing under the laws of the United States
of America or any state thereof with a term of not more than two (2)
years that at the time of purchase have been rated and the ratings for
which are not less than "P 1" if rated by Moody's Investors Services,
Inc., and not less than "A 1" if rated by Standard and Poor's.
5.2 RESTRICTIONS ON INDEBTEDNESS. The Company will not create, incur,
assume, guarantee or be or remain liable, contingently or otherwise, with
respect to any Indebtedness other than:
a) Indebtedness to Medtronic arising under this Note or otherwise;
b) existing debt and lease financing facilities of the Company
listed on SCHEDULE 5.2(b) attached hereto in an amount not exceeding
the maximum amounts set forth on such Schedule and all renewals and
refinancings thereof, or liabilities incurred in the ordinary course
of business not incurred through (A) the borrowing of money, or (B)
the obtaining of credit except for credit on an open account basis
customarily extended and in fact extended in connection with normal
purchases of goods and services;
c) Indebtedness in respect of taxes, assessments, governmental
charges or levies and claims for labor, materials and supplies not yet
due or which are being contested in good faith by appropriate
proceedings promptly initiated and diligently conducted, if such
reserve or other appropriate provision, if any, as shall be required
by generally accepted accounting principles shall have been made
therefor;
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d) Indebtedness in respect of judgments or awards that have been in
force for less than the applicable period for taking an appeal so long
as execution is not levied thereunder or in respect of which the
Company shall at the time in good faith be prosecuting an appeal or
proceedings for review and in respect of which a stay of execution
shall have been obtained pending such appeal or review;
e) endorsements for collection, deposit or negotiation and
warranties of products or services, in each case incurred in the
ordinary course of business; or
g) Indebtedness incurred in connection with the acquisition after
the date hereof of any real or personal property in the ordinary
course of business by the Company which is secured by a security
interest in the acquired real or personal property, PROVIDED that the
aggregate principal amount of such Indebtedness of the Company shall
not exceed the aggregate amount of $2,500,000 at any one time.
h) Indebtedness incurred in connection with the lease of real
property at market rates for the Company's facilities in the ordinary
course of business.
5.3 DISTRIBUTIONS; USE OF PROCEEDS The Company will not make any
Distributions. The Company will use the $7,000,000 proceeds from the sale of
the Note and Warrant for general corporate purposes.
5.4 RESTRICTIONS ON LIENS. The Company will not (i) create or incur or
suffer to be created or incurred or to exist any Liens upon any of its
property or assets of any character whether now owned or hereafter acquired,
or upon the income or profits therefrom; (ii) transfer any of such property
or assets or the income or profits therefrom for the purpose of subjecting
the same to the payment of Indebtedness or performance of any other
obligation in priority to payment of its general creditors; (iii) acquire, or
agree or have an option to acquire, any property or assets upon conditional
sale or other title retention or purchase money security agreement, device or
arrangement; (iv) suffer to exist for a period of more than thirty (30) days
after the same shall have been incurred any Indebtedness or claim or demand
against it that if unpaid might by law or upon bankruptcy or insolvency, or
otherwise, be given any priority whatsoever over its general creditors; or
(v) sell, assign, pledge or otherwise transfer any accounts, contract rights,
general intangibles, chattel paper or instruments, with or without recourse;
PROVIDED that the Company may create or incur or suffer to be created or
incurred or to exist:
a) liens to secure taxes, assessments, other government charges and
claims for labor, material or supplies not yet due or which are being
contested in good faith by appropriate proceedings promptly initiated
and diligently conducted, if such reserve or other appropriate
provision, if any, as shall be required by generally accepted
accounting principles shall have been made therefor;
b) deposits or pledges made in connection with, or to secure payment
of, workmen's compensation, unemployment insurance, old age pensions
or other social security obligations;
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c) liens on properties in respect of judgments or awards, the
Indebtedness with respect to which is permitted by Section 5.2(d);
d) liens of carriers, warehousemen, mechanics and materialmen, and
other like liens on properties in existence less than 120 days from
the date of creation thereof in respect of obligations not overdue;
e) encumbrances on real estate consisting of easements, rights of
way, zoning restrictions, restrictions on the use of real property and
defects and irregularities in the title thereto, landlord's or
lessor's liens under leases to which the Company is a party, and other
minor liens or encumbrances none of which in the opinion of the
Company interferes materially with the use of the property affected in
the ordinary conduct of the business of the Company, which defects do
not individually or in the aggregate have a materially adverse effect
on the business of the Company;
f) Liens existing on the date hereof and listed on SCHEDULE 5.4(f)
hereto;
g) purchase money security interests in or purchase money mortgages
on real or personal property acquired after the date hereof to secure
purchase money Indebtedness of the type and amount permitted by
Section 5.2(g), incurred in connection with the acquisition of such
property, which security interests or mortgages cover only the real or
personal property so acquired; and
h) Liens in favor of Medtronic.
5.5 SALE OF ASSETS. The Company will not become a party to, or agree
to or effect any sale or other disposition of any assets which, together
with all assets disposed of in the preceding twelve months, have an aggregate
net book value of more than 10% of the Company's consolidated net tangible
assets computed as of the end of the most recent fiscal quarter preceding
such disposition. Notwithstanding the foregoing, the following dispositions
shall be permitted and shall be disregarded for purposes of determining the
aggregate book value of assets sold or disposed of pursuant to the preceding
sentence:
(a) the disposition of assets in the ordinary course of business,
consistent with past practices;
(b) a disposition of assets resulting in proceeds which within the twelve
months following such disposition are reinvested in the Company's
business or a business related to the Company in a manner which will
cause the reinvested proceeds to have a demonstrable benefit to the
Company; or
(c) a disposition of assets resulting in proceeds which immediately after
such disposition are used to prepay the Note at par plus accrued
interest.
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5.6 MERGER, CONSOLIDATION OR ACQUISITIONS. The Company will not become
a party to or agree to or effect any merger or consolidation, asset
acquisition or stock acquisition (other than the acquisition of assets in the
ordinary course of business).
5.7 SALE AND LEASEBACK. The Company will not enter into any
arrangement, directly or indirectly, whereby the Company shall sell or
transfer any property owned by it in order then or thereafter to lease such
property or lease other property that the Company intends to use for
substantially the same purpose as the property being sold or transferred.
5.8 CAPITAL EXPENDITURES. The Company will not make Capital
Expenditures in any fiscal year that exceed, in the aggregate, $2,500,000 for
such fiscal year, provided, however, that notwithstanding this limitation the
Company shall be entitled to make Capital Expenditures of not more than
$3,000,000 for furniture, fixtures and leasehold improvements in connection
with the Company's move to new facilities.
5.9 NOTICE OF DEFAULTS. The Company will promptly notify Medtronic in
writing of the occurrence of any Event of Default hereunder or any
circumstances likely to lead to an Event of Default.
ARTICLE VI
EVENTS OF DEFAULT
6.1 EVENTS OF DEFAULT. The entire outstanding principal amount of the
Note and all accrued but unpaid interest thereon shall, at the option of
Medtronic, become immediately due and payable upon the occurrence of any of
the following events (each, an "Event of Default") (whether such occurrence
shall be voluntary or involuntary or come about or be effected by operation
of law or otherwise):
(a) if the Company shall fail to pay when due any installment of
interest on the Note, which failure has not been cured within ten (10)
days after such due date; or
(b) if the Company shall fail to pay on the maturity of the Note the
entire unpaid principal amount of the Note together with all accrued
and unpaid interest; or
(c) if the Company shall make an assignment for the benefit of
creditors, or admit in writing its inability to pay or generally fail
to pay its debts as they mature or become due, or shall petition or
apply for the appointment of a trustee or other custodian, liquidator
or receiver of the Company or of any substantial part of the assets of
the or shall commence any case or other proceeding relating to the
Company under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation or similar law of any
jurisdiction, now or hereafter in effect, or shall take any action to
authorize or in furtherance of any of the foregoing, or if any such
petition or application shall be filed or any
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such case or other proceeding shall be commenced against the
Company and the Company shall indicate its approval thereof, consent
thereto or acquiescence therein; or
(d) if a decree or order is entered appointing any such trustee,
custodian, liquidator or receiver or adjudicating the Company bankrupt
or insolvent, or approving a petition in any such case or other
proceeding, or a decree or order for relief is entered in respect of
the Company in an involuntary case under federal bankruptcy laws as
now or hereafter constituted; or
(e) if there shall remain in force, undischarged, unsatisfied and
unstayed, for more than ten (10) days, whether or not consecutive, any
final (as to which the time for further appeals has expired or to
which the appeals process has been exhausted) judgment against the
Company that, with other outstanding final judgments, undischarged,
against the Company exceeds in the aggregate $100,000; or
(f) if the Company shall be in default under the terms of any
indebtedness in excess of $100,000 or such other event has occurred
and remains uncured for a period of ten(10) days resulting in the
acceleration of any indebtedness in excess of $100,000; or
(g) if the Company shall be indicted for a federal crime, a
punishment for which could include the forfeiture of any assets of the
Company having a fair market value in excess of $100,000; or
(h) if the Company breaches any of its representations, warranties,
covenants or agreements set forth herein and such breach continues
unremedied for a period of the earlier of (i) twenty (20) days from
the date an executive officer of the Company has actual knowledge of
such breach or (ii) five (5) days after Medtronic has provided the
Company with written notice of such breach, except that any such
breach by the Company will not result in an Event of Default hereunder
if waived by Medtronic in writing.
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ARTICLE VII
REGISTRATION RIGHTS
7.1 DEMAND REGISTRATIONS.
(a) Subject to the conditions of this Section 7.1, if the Company
shall receive at any time after the date hereof, a written request
from Initiating Holders that the Company file a registration statement
under the Securities Act covering the registration of Registrable
Securities having an aggregate price to public of at least $500,000,
then the Company shall, within thirty (30) days of the receipt
thereof, give written notice of such request to all Holders, and
subject to the limitations of Section 7.1(b), effect, as soon as
practicable, the registration under the Securities Act of all
Registrable Securities that the Holders request to be registered.
(b) If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they
shall so advise the Company as a part of their request made pursuant
to this Section 7.1 and the Company shall include such information in
the written notice referred to in Section 7.1(a). In such event, the
right of any Holder to include his Registrable Securities in such
registration shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Registrable
Securities in the underwriting (unless otherwise mutually agreed by a
majority in interest of the Initiating Holders and such Holder) to the
extent provided herein. All Holders proposing to distribute their
securities through such underwriting shall enter into an underwriting
agreement in customary form with the underwriter or underwriters
selected for such underwriting by a majority in interest of the
Initiating Holders (which underwriter or underwriters shall be
reasonably acceptable to the Company). Notwithstanding any other
provision of this Section 7.1, if the underwriter advises the Company
in writing that marketing factors require a limitation of the number
of securities to be underwritten (including Registrable Securities)
then the Company shall so advise all Holders of Registrable Securities
which would otherwise be underwritten pursuant hereto, and the number
of shares that may be included in the underwriting shall be allocated
to the Holders of such Registrable Securities on a pro rata basis
based on the number of Registrable Securities held by all Holders
participating in the related registration (including the Initiating
Holders). Any Registrable Securities excluded or withdrawn from such
underwriting shall be withdrawn from the registration.
(c) The Company shall not be obligated to effect more than two (2)
registrations pursuant to this Section 7.1.
7.2 PIGGYBACK REGISTRATIONS
(a) The Company shall notify all Holders of Registrable Securities in
writing at least thirty (30) days prior to the filing of any
registration statement under the
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Securities Act for purposes of a public offering of securities of
the Company (including, but not limited to, registration statements
relating to secondary offerings of securities of the Company, but
excluding registration statements relating to employee benefit
plans and corporate reorganizations) and will afford each such
Holder an opportunity to include in such registration statement all
or part of such Registrable Securities of such Holder. Each Holder
desiring to include in any such registration statement all or any
part of such Holder's Registrable Securities shall, within twenty
(20) days after receipt of the above-described notice from the
Company, so notify the Company in writing. Such notice shall state
the intended method of disposition of the Registrable Securities by
such Holder. If a Holder of Registrable Securities decides not to
include all of such Holder's Registrable Securities in any
registration statement thereafter filed by the Company, such Holder
shall nevertheless continue to have the right to include any
Registrable Securities in any subsequent registration statement or
registration statements as may be filed by the Company with respect
to offerings of its securities, all upon the terms and conditions
set forth herein.
(b) If the registration statement under which the Company gives
notice under this Section 7.2 is for an underwritten offering, the
Company shall so advise the Holders of Registrable Securities. In
such event, the right of any such Holder to be included in a
registration pursuant to this Section 7.2 shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of
such Holder's Registrable Securities in the underwriting to the extent
provided herein. All Holders proposing to distribute their
Registrable Securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting. Notwithstanding any
other provisions of this Agreement, if the underwriter determines in
good faith that marketing factors require a limitation of the number
of shares to be underwritten, the number of shares that may be
included in the underwriting shall be allocated, first, to the
Company; and second, to the Holders and any other selling shareholders
on a pro rata basis based on the total number of securities held by
such Holders and other selling shareholders.
7.3 FORM S-3 REGISTRATIONS. In case the Company shall receive from any
Holder or Holders of Registrable Securities a written request or requests
that the Company effect the registration under the Securities Act, and any
related qualification or compliance with respect to, all or a part of the
Registrable Securities owned by such Holder or Holders by the filing with the
SEC of a registration statement on Form S-3 covering such Registrable
Securities, the Company will:
(a) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders of
Registrable Securities; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion
of such Holder's or Holders' Registrable
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Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written
request given within fifteen (15) days after receipt of such
written notice from the Company; provided, however, that the
Company shall not be obligated to effect any such registration,
qualification or compliance pursuant to this Section 7.3: (i) if
Form S-3 under the Securities Act is not available for such
offering by the Holders, (ii) if the Holders, together with the
holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at an aggregate price
to the public of less than $500,000, (iii) if the Company shall
furnish to the Holders a certificate signed by the Chief Executive
Officer stating that in the good faith judgment of the Board, it
would be seriously detrimental to the Company and its shareholders
for such registration to be effected at such time, in which event
the Company shall have the right to defer the filing of the Form
S-3 registration statement for a period of not more than one
hundred twenty (120) days after receipt of the request of the
Holder or Holders under this Section 7.3, (iv) if the Company has
already effected two (2) registrations for the Holders pursuant to
this Section 7.3, or (v) in any particular jurisdiction in which
the Company would be required to qualify to do business or to
execute a general consent to service of process in effecting such
registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after
receipt of the request or requests of the Holders.
7.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Section 7.1 or any registration under Section 7.2 or Section 7.3 shall be
borne by the Company. All Selling Expenses incurred in connection with any
such registration shall be borne by the holders of the securities so
registered pro rata on the basis of the number of shares so registered. The
Company shall not, however, be required to pay for expenses of any
registration proceeding begun pursuant to Section 7.1 or Section 7.3, the
request of which has been subsequently withdrawn by the Initiating Holders
unless (a) the withdrawal is based upon material adverse information
concerning the Company of which the Company was aware but the Initiating
Holders were not aware at the time of such request or (b) the Holders of a
majority of the total of: (i) then outstanding Registrable Securities and
(ii) Registrable Securities issuable upon exercise of the then outstanding
Warrant, agree to forfeit their right to one requested registration pursuant
to Section 7.1 or Section 7.3 (in which event such right shall be forfeited
by all Holders). If the Holders are required to pay the Registration
Expenses, such expenses shall be borne by the holders of securities
(including Registrable Securities) requesting such registration in proportion
to the number of shares for which registration was requested. If the Company
is required to pay the Registration Expenses of a withdrawn offering pursuant
to this Section 7.4, then the Holders shall not forfeit their rights pursuant
to Section 7.1 or Section 7.3 to a demand registration.
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7.5 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement on Form
S-3 (or such other Form as is then available to the Company in
connection with such registration) with respect to such Registrable
Securities and use its best efforts to cause such registration
statement to become effective, and, upon the request of the Holders of
a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to one year.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with
such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement.
(c) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they
may reasonably request in order to facilitate the disposition of
Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested
by the Holders, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any
such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering.
Each Holder participating in such underwriting shall also enter into
and perform its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto
is required to be delivered under the Securities Act of the happening
of any event as a result of which the prospectus included in such
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 not misleading in the light of the circumstances then
existing.
(g) Furnish, at the request of a majority of the Holders
participating in the registration, on the date that such Registrable
Securities are delivered to the underwriters for sale, if such
securities are being sold through underwriters, or, if such securities
are not being sold through underwriters, on the date that the
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registration statement with respect to such securities becomes
effective, (i) an opinion, dated as of such date, of the counsel
representing the Company for the purposes of such registration, in
form and substance as is customarily given to underwriters in an
underwritten public offering and reasonably satisfactory to a majority
in interest of the Holders requesting registration, addressed to the
underwriters, if any, and to the Holders requesting registration of
Registrable Securities and (ii) a letter dated as of such date, from
the independent certified public accountants of the Company, in form
and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering and
reasonably satisfactory to a majority in interest of the Holders
requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities.
7.6 TERMINATION OF REGISTRATION RIGHTS. All registration rights
granted under this Article VII shall terminate and be of no further force and
effect five (5) years after the exercise in full or expiration of the Warrant.
7.7 DELAY OF REGISTRATION. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Article VII.
7.8 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 7.1, 7.2 or 7.3:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the partners, officers and directors of
each Holder and each person, if any, who controls such Holder within
the meaning of the Securities Act or the Exchange Act, and each
underwriter, if any, and each person, if any, who controls any
underwriter within the meaning of the Securities Act or the Exchange
Act, against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Securities Act,
the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation") by the Company:
(i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) 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,
or (iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule
or regulation promulgated under the Securities Act, the Exchange Act
or any state securities law in connection with the offering covered by
such registration statement; and the Company will reimburse each such
Holder, partner, officer, director, underwriter and controlling person
for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim,
damage, liability or action;
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provided however, that the indemnity agreement contained in this
Section 7.8(a) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in
any such case for any such loss, claim, damage, liability or action
to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such
registration by such Holder, partner, officer, director, or
controlling person of such Holder.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each
of its officers, each person, if any, who controls the Company within
the meaning of the Securities Act, and each underwriter, if any, and
each person, if any, who controls any underwriter within the meaning
of the Securities Act or the Exchange Act, and any other Holder
selling securities under such registration statement or any of such
other Holder's partners, directors or officers or any person who
controls such Holder, against any losses, claims, damages or
liabilities (joint or several) to which the Company or any such
director, officer, underwriter, controlling person, or other such
Holder, or partner, director, officer or controlling person of such
other Holder may become subject under the Securities Act, the Exchange
Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or
are 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 by such Holder and
stated to be specifically for use in connection with such
registration; and each such Holder will reimburse any legal or other
expenses reasonably incurred by the Company or any such director,
officer, underwriter, controlling person, or other Holder, or partner,
officer, director or controlling person of such other Holder in
connection with investigating or defending any such loss, claim,
damage, liability or action if it is judicially determined that there
was such a Violation; provided, however, that the indemnity agreement
contained in this Section 7.8(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if
such settlement is effected without the consent of the Holder, which
consent shall not be unreasonably withheld; provided further that in
no event shall any indemnity under this Section 7.8(b) exceed the
gross proceeds from the offering received by such Holder unless the
Violation is the result of fraud on the part of such Holder.
(c) Promptly after receipt by an indemnified party under this Section
7.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under
this Section 7.8, deliver to the indemnifying party a written notice
of the commencement thereof and the indemnifying party shall have the
right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed,
to assume the
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defense thereof with counsel mutually satisfactory to the parties;
provided, however, that an indemnified party shall have the right
to retain its own counsel, with the fees and expenses to be paid by
the indemnifying party provided however, that if there is more than
one indemnified party, the indemnifying party shall pay for the
fees and expenses of one counsel for any and all indemnified
parties to be mutually agreed upon by such indemnified parties, if
representation of such indemnified party by the counsel retained by
the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and
any other party represented by such counsel in such proceeding.
The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if
materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified
party under this Section 7.8, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than
under this Section 7.8.
(d) If the indemnification provided for in this Section 7.8 is held
by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any losses, claims, damages or
liabilities referred to herein, the indemnifying party, in lieu of
indemnifying such indemnified party thereunder, shall to the extent
permitted by applicable law contribute to the amount paid or payable
by such indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative
fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted
in such loss, claim, damage or liability, as well as any other
relevant equitable considerations. The relative fault of the
indemnifying party and of the indemnified party shall be determined by
a court of law by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission to
state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
(e) The foregoing indemnity agreements of the Company and Holders are
subject to the condition that, insofar as they relate to any Violation
made in a preliminary prospectus but eliminated or remedied in the
amended prospectus on file with the SEC at the time the registration
statement in question becomes effective or the final prospectus filed
with the SEC pursuant to SEC Rule 424(b), such indemnity agreement
shall not inure to the benefit of any person if a copy of such final
prospectus was furnished to the indemnified party and was not
furnished to the person asserting the loss, liability, claim or damage
at or prior to the time such action is required by the Securities Act.
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(f) The obligations of the Company and Holders under this Section 7.8
shall survive the completion of any offering of Registrable Securities
in a registration statement, and otherwise.
7.9 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company
to register Registrable Securities pursuant to this Article VII may be
assigned by a Holder to a transferee or assignee of Registrable Securities or
a portion of the Warrant; provided, however, that no such transferee or
assignee shall be entitled to registration rights under this Article VII
hereof unless it acquires Registrable Securities, Warrants, or a combination
thereof, that represent at least fifty thousand (50,000) shares of
Registrable Securities (as adjusted for stock splits and combinations) and
the Company shall, within twenty (20) days after such transfer, be 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
assigned; provided, however, that a Holder's failure to provide such notice
to the Company shall not in any way impair a Holder's right to make an
assignment under this Section 7.9, but until such notice is provided the
Company may continue to treat the original Holder (and not the Holder's
assignee) as the Holder of the registration rights. Notwithstanding the
foregoing, rights to cause the Company to register securities may be assigned
to any person or entity who is a subsidiary, parent, general partner or
limited partner of a Holder regardless of the number of securities
transferred to such person or entity.
7.10 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Article
VII may be amended and the observance thereof may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the Holders of Registrable
Securities and/or Warrant representing at least seventy percent (70%) of the
total of: (i) then outstanding Registrable Securities and (ii) Registrable
Securities issuable upon exercise of the then outstanding Warrant. Any
amendment or waiver effected in accordance with this Section 7.10 shall be
binding upon each Holder and the Company. By acceptance of any benefits
under this Article VII, Holders of Registrable Securities hereby agree to be
bound by the provisions hereunder.
7.11 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. From and after the
date of this Agreement, the Company shall not, without the prior written
consent of the Holders of at least a majority of the total of: (i) then
outstanding Registrable Securities and (ii) Registrable Securities issuable
upon exercise of the then outstanding Warrant, enter into any agreement with
any person or persons providing for the granting to such holder of
registration rights pari passu or senior to those granted to Holders pursuant
to this Article VII, or of registration rights which might cause a reduction
in the number of shares includable by the Holders in any offering pursuant to
Section 7.1 or in any offering subject to Section 7.2.
7.12 REGISTRATION RIGHTS SEPARATE FROM OTHER REGISTRATION RIGHTS. The
registration rights granted to any Holder hereunder shall be deemed to be
separate and distinct from any other registration rights (the "Other
Registration Rights") granted by the Company to any such Holders or any other
holder of the Company's securities, including without limitation,
registration rights granted by the Company to holders of its securities
pursuant to the Amended and Restated Investors' Rights Agreement dated as of
January 31, 1995, as amended
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April 26, 1996, between the Company and the purchasers of the Company's
Series A Preferred Stock and Series B Preferred Stock identified on the
signature pages thereto; the Investment Agreement dated April 26, 1996
between the Company and Medtronic; the Stock Purchase Agreement dated March
18, 1997 between the Company and Medtronic; and the Registration Rights
Agreement dated January 30, 1998 by and between the Company and Medtronic.
In addition, any registration of Registrable Securities pursuant to the
rights granted hereunder shall not affect the rights of any Holder or any
other person under the Other Registration Rights, and any registration of the
Company's securities under the Other Registration Rights shall not affect the
rights of any Holder of Registrable Securities hereunder.
ARTICLE VIII
INDEMNIFICATION
8.1 INDEMNIFICATION OF MEDTRONIC. The Company shall indemnify, defend
and hold harmless Medtronic and each of its subsidiaries, officers, directors
and stockholders (Medtronic and such other indemnitees referred to in this
Article VIII as "Medtronic") from and against and in respect of any and all
demands, claims, actions or causes of action, assessments, losses, damages,
liabilities, interest and penalties, costs and expenses (including, without
limitation, reasonable legal fees and disbursements incurred in connection
therewith and in seeking indemnification therefor, and any amounts or
expenses required to be paid or incurred in connection with any action, suit,
proceeding, claim, appeal, demand, assessment or judgment) ("Indemnifiable
Losses"), resulting from, arising out of, or imposed upon or incurred by any
person to be indemnified hereunder by reason of any breach of any
representation, warranty, covenant or agreement of the Company contained in
this Agreement or any agreement, certificate or document executed and
delivered by the Company pursuant hereto or in connection with any of the
transactions contemplated by this Agreement.
8.2 INDEMNIFICATION OF THE COMPANY. Medtronic shall indemnify, defend
and hold harmless the Company and each of its subsidiaries, officers,
directors and stockholders (the Company and such other indemnitees referred
to in this Article VIII as the "Company") from and against and in respect of
any and all demands, claims, actions or causes of action, assessments,
losses, damages, liabilities, interest and penalties, costs and expenses
(including, without limitation, reasonable legal fees and disbursements
incurred in connection therewith and in seeking indemnification therefor, and
any amounts or expenses required to be paid or incurred in connection with
any action, suit, proceeding, claim, appeal, demand, assessment or judgment),
resulting from, arising out of, or imposed upon or incurred by any person to
be indemnified hereunder by reason of any breach of any representation,
warranty, covenant or agreement of Medtronic contained in this Agreement or
any agreement, certificate or document executed and delivered by Medtronic
pursuant hereto or in connection with the transactions contemplated by this
Agreement.
8.3 THIRD-PARTY CLAIMS. If a claim by a third party is made against an
indemnified party and if the indemnified party intends to seek indemnity with
respect thereto under this Article VIII, such indemnified party shall
promptly notify the indemnifying party of such claim; provided, however, that
failure to give timely notice shall not affect the rights of the indemnified
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party so long as the failure to give timely notice does not adversely affect
the indemnifying party's ability to defend such claim against a third party.
The indemnified party shall not settle such claim without the consent of the
indemnifying party, which consent shall not be unreasonably withheld or
delayed. If the indemnifying party acknowledges in writing its indemnity
obligations for Indemnifiable Losses resulting therefrom, the indemnifying
party may participate at its own cost and expense in the settlement or
defense of any claim for which indemnification is sought; PROVIDED THAT such
settlement or defense shall be controlled by the indemnified party.
8.4 COOPERATION AS TO INDEMNIFIED LIABILITY. Each party hereto shall
cooperate fully with the other parties with respect to access to books,
records, or other documentation within such party's control, if deemed
reasonably necessary or appropriate by any party in the defense of any claim
which may give rise to indemnification hereunder.
ARTICLE IX
OTHER PROVISIONS
9.1 FURTHER ASSURANCES. At such time and from time to time on and
after the date hereof upon request by Medtronic, the Company will execute,
acknowledge and deliver, or will cause to be done, executed, acknowledged and
delivered, all such further acts, certificates and assurances that may be
required for the better conveying, transferring, assigning, delivering,
assuring and confirming to Medtronic, or to its respective successors and
assigns, the Note, the Warrant and, upon exercise of the Warrant, the Shares
or to otherwise carry out the purposes of this Agreement.
9.2 COMPLETE AGREEMENT. The schedules and exhibits to this Agreement
shall be construed as an integral part of this Agreement to the same extent
as if they had been set forth verbatim herein. This Agreement and the
schedules and exhibits hereto constitute the entire agreement between the
parties hereto with respect to the subject matter hereof and supersede all
prior agreements whether written or oral relating hereto.
9.3 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The
representations, warranties, covenants and agreements contained herein shall
survive the purchase of the Note and the Warrant and remain in full force and
effect. No independent investigation of the Company by Medtronic, its
counsel, or any of its agents or employees shall in any way limit or restrict
the scope of the representations and warranties made by the Company in this
Agreement.
9.4 WAIVER, DISCHARGE, AMENDMENT, ETC. The failure of any party hereto
to enforce at any time any of the provisions of this Agreement shall not,
absent an express written waiver signed by the party making such waiver
specifying the provision being waived, be construed to be a waiver of any
such provision, nor in any way to affect the validity of this Agreement or
any part thereof or the right of the party thereafter to enforce each and
every such provision. No waiver of any breach of this Agreement shall be
held to be a waiver of any other or subsequent breach. This Agreement may be
amended by the Company and Medtronic, by
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mutual action approved by their respective Boards of Directors or their
respective officers authorized by such Board of Directors, at any time prior
to the Closing Date. Any amendment to this Agreement shall be in writing and
signed by the Company and Medtronic.
9.5 NOTICES. All notices or other communications to a party required
or permitted hereunder shall be in writing and shall be delivered personally
or by telecopy (receipt confirmed) to such party (or, in the case of an
entity, to an executive officer of such party) or shall be sent by a
reputable express delivery service or by certified mail, postage prepaid with
return receipt requested, addressed as follows:
if to Medtronic to:
Medtronic Asset Management, Inc.
Corporate Center
7000 Central Avenue N.E.
Minneapolis, Minnesota 55432
with separate copies thereof addressed to:
Attention: General Counsel
FAX: (612) 572-5459
and
Attention: Vice President and Chief Development Officer
FAX: (612) 572-5404
if to the Company to:
Endocardial Solutions, Inc.
1350 Energy Lane, Suite 110
St. Paul, Minnesota 55108-5254
Attention: James W. Bullock,
President and Chief Executive Officer
FAX (651) 644-7897
Any party may change the above-specified recipient and/or mailing address by
notice to all other parties given in the manner herein prescribed. All
notices shall be deemed given on the day when actually delivered as provided
above (if delivered personally or by telecopy) or on the day shown on the
return receipt (if delivered by mail or delivery service).
9.6 PUBLIC ANNOUNCEMENT. In the event any party proposes to issue any
press release or public announcement concerning any provisions of this
Agreement or the transactions contemplated hereby, such party shall so advise
the other parties hereto, and the parties shall thereafter use their best
efforts to cause a mutually agreeable release or announcement to be issued.
Neither party will publicly disclose or divulge any provisions of this
Agreement or the transactions contemplated hereby without the other parties'
written consent, except as may be required by applicable law or stock
exchange regulation, and except for communications to employees.
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9.7 EXPENSES. Except as otherwise provided in this Agreement, the
Company and Medtronic shall each pay their own expenses incident to this
Agreement and the preparation for, and consummation of, the transactions
provided for herein.
9.8 GOVERNING LAW. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Minnesota, including all matters
of construction, validity, performance and enforcement, without giving effect
to principles of conflict of laws.
9.9 TITLES AND HEADINGS; CONSTRUCTION. The titles and headings to the
Articles and Sections herein are inserted for the convenience of reference
only and are not intended to be a part of or to affect the meaning or
interpretation of this Agreement. This Agreement shall be construed without
regard to any presumption or other rule requiring construction hereof against
the party causing this Agreement to be drafted.
9.10 BENEFIT. Nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective successors or assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
9.11 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed as original and all of which
together shall constitute one instrument.
9.12 PARTIES IN INTEREST. All representations, covenants and agreements
contained in this Agreement by or on behalf of any of the parties hereto
shall bind and inure to the benefit of the respective successors and assigns
of the parties hereto whether so expressed or not.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed as of the date first written above.
ENDOCARDIAL SOLUTIONS, INC.
By /s/ James W. Bullock
----------------------------------
Name: James W. Bullock
Title: President and Chief
Executive Officer
MEDTRONIC ASSET MANAGEMENT, INC.
By /s/ Michael D. Ellwein
----------------------------------
Name: Michael D. Ellwein
Title: V.P. and CDO
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EXHIBIT A
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE STATE LAW, AND NO INTEREST HEREIN MAY BE
SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS
(A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION INVOLVING THIS
PROMISSORY NOTE, OR (B) THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH TRANSACTION IS
EXEMPT FROM REGISTRATION.
PROMISSORY NOTE
$7,000,000.00 February 2, 1999
FOR VALUE RECEIVED, the undersigned, ENDOCARDIAL SOLUTIONS, INC.
("Maker"), promises to pay to the order of MEDTRONIC ASSET MANAGEMENT, INC.
("Medtronic") at Medtronic's principal corporate offices, or at such other
place as the holder hereof may from time to time designate in writing, the
principal sum of $7,000,000.00 or so much thereof as has been advanced by
Medtronic to or for the benefit of the Maker pursuant to that certain Note
Purchase Agreement, dated as of the date hereof, as amended from time to
time, between the Maker and Medtronic and remains unpaid at maturity, plus
interest (compounded monthly) commencing on the date hereof at a rate equal
to eight percent (8%) per annum based on the actual number of days elapsed in
a 360-day year. Interest accruing under this Note shall be payable on each
March 3 1, June 30, September 30 and December 31 during the term of this Note
and at maturity or earlier prepayment in full. The entire principal amount
and all accrued and unpaid interest hereunder shall be due and payable in
full on the first to occur of the following: (i) the closing of any financing
transaction, including debt or equity financing, from which Maker receives
proceeds, after deduction of offering expenses, of $20 million or more; (ii)
a Change of Control of Maker, as defined below; or (iii) February 2, 2001.
Payments hereunder shall be applied first to the payment of accrued interest
and then to the reduction of principal. Principal, interest and all other
sums payable hereunder shall be paid in lawful money of the United States of
America.
For purposes of this Note, a "Change of Control of Maker" means any of
the following events: (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934), other than
Medtronic, acquires "beneficial ownership" (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934), directly or indirectly, of securities
of Maker or of an entity that directly or indirectly owns Maker, or is an
affiliate that directly or indirectly controls Maker, (referred to as "Maker
Parent") representing 20% or more of the combined voting power (with respect
to the election of directors) of Maker's or Maker Parent's, as the case may
be, then outstanding securities; (ii) the consummation of a merger, share
exchange, combination or consolidation of Maker or Maker Parent, as the case
may be, with or into any other corporation, which would result in the voting
securities of Maker or Maker Parent, as the case may be, outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) less than 80% of the combined voting power (with respect to the
election of directors) of the securities of Maker or Maker Parent, as the
case may be, or of such surviving entity outstanding immediately after such
merger, share exchange, combination or consolidation; or (iii) the
consummation of a plan of complete liquidation of Maker or Maker Parent, as
the case may be, or (iv) the consummation of an agreement for the sale or
disposition by Maker
<PAGE>
or Maker Parent, as the case may be, of all or substantially all of Maker's
or Maker Parent's, as the case may be, business or assets.
This Note is issued in connection with that certain Note Purchase
Agreement dated February 2, 1999 between Maker and Medtronic (the "Note
Purchase Agreement"). This Note is subject to, among other things, the
default provisions and rights of acceleration as provided in the Note
Purchase Agreement upon the occurrence of an Event of Default as defined in
the Note Purchase Agreement.
Except as expressly set forth in the Note Purchase Agreement, Maker
waives demand, diligence, presentment for payment, protest and demand, and
notice of extension, dishonor, protest, demand and nonpayment of this Note.
Maker agrees to pay all costs of collection, defense and enforcement of this
Note and the Note Purchase Agreement, including attorneys' fees, whether suit
is brought or not, that the holder may incur.
This Note shall be binding upon Maker and its successors and assigns and
shall inure to the benefit of the payee hereof, and any subsequent holders of
this Note, and their successors and assigns. Maker may not, without the
holder's prior written consent, assign any of its rights, powers or
obligations under this Note. Any such consent shall not relieve Maker of
liability for payment in the event of default by the assignee.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of Minnesota.
IN WITNESS WHEREOF, the Maker has executed this Note and caused it to be
dated as of the date first written above.
ENDOCARDIAL SOLUTIONS, INC.
By:
-----------------------------------
Its:
----------------------------------
<PAGE>
Exhibit 10.17
THIS WARRANT, AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF,
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE REOFFERED OR SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT
TO (1) REGISTRATION OR (2) AN OPINION OF COUNSEL FOR THE COMPANY OR OTHER
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY TO THE EFFECT THAT SUCH
REGISTRATION IS NOT REQUIRED.
WARRANT
To Purchase Shares of Common Stock of
ENDOCARDIAL SOLUTIONS, INC.
February 2, 1999
Endocardial Solutions, Inc., a Delaware corporation (the "Company"), for
value received, hereby certifies that Medtronic Asset Management, Inc., a
Minnesota corporation, or its registered assigns (the "Holder"), is entitled,
subject to the terms set forth below, upon exercise of this Warrant to
purchase from the Company that number of shares of Common Stock, $.01 par
value, of the Company ("Common Stock") determined by dividing (i) the
outstanding balance of principal and accrued interest owed at the time of
exercise of this Warrant by the Company pursuant to that certain Promissory
Note of the Company issued on date hereof to Medtronic Asset Management, Inc.
(the "Promissory Note") by (ii) the exercise price per share applicable at
the time of exercise (the "Exercise Price"). Until adjusted as provided by
the terms of this Warrant, the Exercise Price shall be $10.08, which the
Company hereby represents and warrants to equal the average closing price per
share of Common Stock for the twenty (20) trading days ending on and
including the trading day immediately preceding the date hereof. The shares
issuable upon exercise or conversion of this Warrant as adjusted from time to
time pursuant to the provisions of this Warrant, are hereinafter referred to
as the "Warrant Shares."
This Warrant is further subject to the following provisions, terms and
conditions:
1. CONDITIONS TO EXERCISE. This Warrant may be exercised only during
the period beginning immediately before a Change of Control of the Company,
as defined below, or if earlier, upon the occurrence of an Event of Default,
as defined below, and ending on the date on which all outstanding principal
and accrued interest under the Promissory Note is paid in full. For purposes
of this Warrant, an Event of Default means an Event of Default under the Note
Purchase Agreement dated of even date herewith by and between the Company and
Medtronic Asset Management, Inc. For purposes of this Warrant, a "Change of
Control of the Company" means any of the following events: (i) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934), other than Medtronic, acquires "beneficial ownership" (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, of securities of the Company or of an entity that
1
<PAGE>
directly or indirectly owns the Company, or is an affiliate that directly or
indirectly controls the Company, (referred to as "the Company Parent")
representing 20% or more of the combined voting power (with respect to the
election of directors) of the Company's or the Company Parent's, as the case
may be, then outstanding securities; (ii) the consummation of a merger, share
exchange, combination or consolidation of the Company or the Company Parent,
as the case may be, with or into any other corporation, which would result in
the voting securities of the Company or the Company Parent, as the case may
be, outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) less than 80% of the combined voting power (with respect to
the election of directors) of the securities of the Company or the Company
Parent, as the case may be, or of such surviving entity outstanding
immediately after such merger, share exchange, combination or consolidation;
or (iii) the consummation of a plan of complete liquidation of the Company or
the Company Parent, as the case may be, or (iv) the consummation of an
agreement for the sale or disposition by the Company or the Company Parent,
as the case may be, of all or substantially all of the Company's or the
Company Parent's, as the case may be, business or assets.
2. MANNER OF EXERCISE. This Warrant may be exercised by the Holder,
in whole or in part (but not as to any fraction of a share of Common Stock),
by surrendering this Warrant, with the Exercise Form attached hereto as
Exhibit A filled-in and duly executed by such Holder or by such Holder's duly
authorized attorney, to the Company at its principal office accompanied by
payment of the Exercise Price in the amount of the Exercise Price multiplied
by the number of shares as to which the Warrant is being exercised. The
Exercise Price may be paid by cancellation of all or a portion of the Note
Balance or in the form of a check or wire transfer of funds.
3. CONVERSION OF WARRANT.
(a) The Holder shall also have the right (the "Conversion Right") at
any time when this Warrant may be exercised to convert all or any portion
of this Warrant into such number of shares (rounded to the nearest whole
share) of Company Common Stock equal to the quotient obtained by dividing
(i) the "Aggregate Warrant Spread" as of the date the Conversion Right is
exercised, by (ii) the "Market Price of the Common Stock" as of the date
the Conversion Right is exercised. The Conversion Right shall be
exercisable at any time that this Warrant is exercisable pursuant to
Section 1 above, by surrendering this Warrant with the Conversion Form
attached hereto as Exhibit B filled-in and duly executed by such Holder or
by such Holder's duly authorized attorney to the Company at its principal
office.
(b) For purposes of this Section 3, the "Aggregate Warrant Spread" of
all or a portion of this Warrant as of a particular date shall equal (i)
the Market Price of the Common Stock multiplied by the number of shares of
Common Stock purchasable upon exercise of all or such portion of this
Warrant on such date, minus (ii) the Exercise Price multiplied by the
number of shares of Common Stock purchasable upon exercise of all or such
portion of this Warrant on such date. For purposes of this Warrant, the
"Market Price of the Common Stock" as of a particular date shall equal: (i)
if the Common Stock is traded on an exchange or is quoted on either the
Nasdaq National Market or Small-Cap Market, then the average of the closing
or last sale prices, respectively, reported for the ten (10) trading days
immediately preceding such date, or (ii) if the Common Stock is not traded
on an exchange, the Nasdaq National Market, or the Nasdaq Small-Cap Market
but is traded in the local over-the-counter market, then the average of
2
<PAGE>
the mid-points between the highest bid and lowest asked quotations for
each of the ten (10) trading days immediately preceding such date.
4. EFFECTIVE DATE OF EXERCISE OR CONVERSION. Each exercise or
conversion of this Warrant shall be deemed effective as of the close of
business on the day on which this Warrant is surrendered to the Company as
provided in Section 2 or Section 3(a) above. At such time, the person or
persons in whose name or names any certificates for Warrant Shares shall be
issuable upon such exercise or conversion shall be deemed to have become the
holder or holders of record of the Warrant Shares represented by such
certificates. Within ten (10) days after the exercise or conversion of this
Warrant in full or in part, the Company will, at its expense, cause to be
issued in the name of and delivered to the Holder or such other person as the
Holder may (upon payment by such Holder of any applicable transfer taxes)
direct: (i) a certificate or certificates for the number of full Warrant
Shares to which such Holder is entitled upon such exercise or conversion, and
(ii) unless this Warrant has expired, a new Warrant or Warrants (dated the
date hereof and in form identical hereto) representing the right to purchase
the remaining number of shares of Common Stock, if any, with respect to which
this Warrant has not then been exercised or converted.
5. ADJUSTMENTS TO EXERCISE PRICE. The above provisions are, however,
subject to the following:
(a) (i) If the Company shall at anytime after the date of this
Warrant subdivide or combine the outstanding shares of Common Stock or
declare a dividend payable in Common Stock, then the number of shares of
Common Stock for which this Warrant may be exercised as of immediately
prior to the subdivision, combination or record date for such dividend
payable in Common Stock shall forthwith be proportionately decreased, in
the case of combination, or increased, in the case of subdivision or
dividend payable in Common Stock.
(ii) If the Company shall at anytime after the date of this
Warrant subdivide or combine the outstanding shares of Common Stock or
declare a dividend payable in Common Stock, the Exercise Price in effect
immediately prior to the subdivision, combination or record date for such
dividend payable in Common Stock shall forthwith be proportionately
increased, in the case of combination, or decreased, in the case of
subdivision or dividend payable in Common Stock.
(iii) Upon the occurrence of an Event of Default, if the Market
Price of the Common Stock (as defined in Section 3(b)) on the date of the
Event of Default is lower than the Exercise Price in effect immediately
prior to such Event of Default, then the Exercise Price shall be changed to
the Market Price of the Common Stock on the date of the Event of Default.
(b) If any capital reorganization or reclassification of the capital
stock of the Company, or share exchange, combination, consolidation or
merger of the Company with another corporation, or the sale of all or
substantially all of its assets to another corporation shall be effected in
such a way that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then,
as a condition of such reorganization, reclassification, share exchange,
combination, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the Holder shall thereafter have the right
3
<PAGE>
to receive upon exercise of this Warrant upon the basis and upon the
terms and conditions specified in this Warrant and in lieu of the shares
of the Common Stock of the Company into which this Warrant could be
exercisable or convertible, such shares of stock, securities or assets
as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock equal to the maximum number
of shares of such stock into which this Warrant would have been
exercisable had such reorganization, reclassification, share exchange,
combination, consolidation, merger or sale represented a Change of
Control of the Company as defined in Section 1 of this Warrant, and in
any such case appropriate provisions shall be made with respect to the
rights and interests of Holder to the end that the provisions hereof
(including without limitation provisions for adjustments of the Exercise
Price and of the number of shares purchasable upon exercise or
conversion of this Warrant) shall thereafter be applicable, as nearly as
may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise or conversion hereof. The
Company shall not effect any such share exchange, combination,
consolidation, merger or sale, unless prior to the consummation thereof
the successor corporation (if other than the Company) resulting from
such share exchange, combination, consolidation or merger or the
corporation purchasing such assets shall assume by written instrument
executed and mailed to the Holder at the last address of such Holder
appearing on the books of the Company, the obligation to deliver to such
Holder such shares of stock, securities or assets which, in accordance
with the foregoing provisions, such Holder may thereafter be entitled to
receive upon exercise or conversion of this Warrant.
(c) If at anytime after the date of this Warrant the Company
distributes to all holders of Common Stock any assets (excluding ordinary
cash dividends), debt securities, or any rights or warrants to purchase
debt securities, assets or other securities (including Common Stock), the
Exercise Price shall be adjusted in accordance with the formula:
E(1) = E x (O x M) - F
---------------
O x M
where:
E(1) = the adjusted Exercise Price.
E = the current Exercise Price.
M = the average market price of Common Stock for the 30
consecutive trading days commencing 45 trading days
before the record date mentioned below.
O = the number of shares of Common Stock outstanding on the
record date mentioned below.
F = the fair market value on the record date of the
aggregate of all assets, securities, rights or
warrants distributed. The Company's Board of Directors
shall determine the fair market value in the exercise
of its reasonable judgment.
The adjustment shall be made successively whenever any such distribution
is made and shall become effective immediately after the record date for the
determination of stockholders entitled to receive the distribution.
4
<PAGE>
(d) Upon any adjustment of the Exercise Price, then and in each such
case, the Company shall give written notice thereof, by first class mail,
postage prepaid, addressed to the Holder of this Warrant at the address of
such Holder as shown on the books of the Company, which notice shall state
the Exercise Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares for which this Warrant may be
exercised, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
6. COMMON STOCK. As used herein, the term "Common Stock" shall mean
and include the Company's presently authorized shares of common stock and
shall also include any capital stock of any class of the Company hereafter
authorized which shall not be limited to a fixed sum or percentage in respect
of the rights of the holders thereof to participate in dividends or in the
distribution, dissolution or winding up of the Company.
7. NO VOTING RIGHTS. This Warrant shall not entitle the Holder to any
voting rights or other rights as a shareholder of the Company unless and
until exercised or converted pursuant to the provisions hereof.
8. EXERCISE OR TRANSFER OF WARRANT OR RESALE OF COMMON STOCK. The
Holder, by acceptance hereof, agrees to give written notice to the Company
before transferring this Warrant, in whole or in part, or transferring any
shares of Common Stock issued upon the exercise or conversion hereof, of such
Holder's intention to do so, describing briefly the manner of any proposed
transfer. Such notice shall include an opinion of counsel reasonably
satisfactory to the Company that (i) the proposed exercise or transfer may be
effected without registration or qualification under the Securities Act of
1933, as amended (the "Act") and any applicable state securities or blue sky
laws, or (ii) the proposed exercise or transfer has been registered under
such laws. Upon delivering such notice, such Holder shall be entitled to
transfer this Warrant or such Warrant Shares, all in accordance with the
terms of the notice delivered by such Holder to the Company, provided that an
appropriate legend may be endorsed on the certificates for such shares
respecting restrictions upon transfer thereof necessary or advisable in the
opinion of counsel to the Company to prevent further transfer which would be
in violation of Section 5 the Act and applicable state securities or blue sky
laws.
If in the opinion of counsel to the Company or other counsel reasonably
acceptable to the Company the proposed transfer or disposition of this
Warrant or the Warrant Shares described in the written notice given pursuant
to this Section 7 may not be effected without registration of this Warrant or
the Warrant Shares, the Company shall promptly give written notice thereof to
the Holder within 10 days after the Company receives such notice, and such
holder will limit its activities in respect to such as, in the opinion of
such counsel, is permitted by law.
9. COVENANTS OF THE COMPANY. The Company covenants and agrees that
all shares which may be issued upon conversion of this Warrant will, upon
issuance, be duly authorized and issued, fully paid, nonassessable and free
from all taxes, liens and charges with respect to the issue thereof. The
Company further covenants and agrees that the Company will at all times have
authorized, and reserved for the purpose of issue upon exercise hereof, a
sufficient number of shares of its Common Stock to provide for the exercise
of this Warrant.
5
<PAGE>
10. CERTAIN NOTICES. The Holder shall be entitled to receive from the
Company immediately upon declaration thereof and at least thirty (30) days
prior to the record date for determination of shareholders entitled thereto
or to vote thereon (or if no record date is set, prior to the event), written
notice of any event which could require an adjustment pursuant to Section 4
hereof or of the dissolution or liquidation of the Company. All notices
hereunder shall be in writing and shall be delivered personally or by
telecopy (receipt confirmed) to such party (or, in the case of an entity, to
an executive officer of such party) or shall be sent by a reputable express
delivery service or by certified mail, postage prepaid with return receipt
requested, addressed as follows:
if to Medtronic, to:
Medtronic, Inc.
Corporate Center
7000 Central Avenue N.E.
Minneapolis, MN 55432
with separate copies thereof addressed to:
Attention: General Counsel
FAX (612) 572-5459
Attention: Vice President, Corporate Development and Associate
General Counsel
FAX (612) 572-5404
if to the Company to:
Endocardial Solutions, Inc.
1350 Energy Lane, Suite 110
St. Paul, MN 55108-5254
Attention: President and Chief Executive Officer
FAX (651) 644-7897
Any party may change the above-specified recipient and/or mailing
address by notice to all other parties given in the manner herein prescribed.
All notices shall be deemed given on the day when actually delivered as
provided above (if delivered personally or by telecopy) or on the day shown
on the return receipt (if delivered by mail or delivery service).
11. REGISTRATION RIGHTS. The Holders of this Warrant and the Warrant
Shares are entitled to the rights and benefits of all of the terms,
provisions and conditions of that certain Note Purchase Agreement dated of
even date herewith between the Company and Medtronic Asset Management, Inc.,
provided an express sharing or assignment of such rights and benefits is made
to each such Holder by such Holder's transferor.
6
<PAGE>
12. MISCELLANEOUS.
(a) No amendment, modification or waiver of any provision of this
Warrant shall be effective unless the same shall be in writing and signed
by the holder hereof.
(b) This Warrant shall be governed by and construed in accordance
with the laws of the State of Minnesota.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its authorized officer and dated as of the date stated above.
ENDOCARDIAL SOLUTIONS, INC.
By: [COPY]
----------------------------------
James W. Bullock, President and
Chief Executive Officer
7
<PAGE>
Exhibit A
NOTICE OF EXERCISE OF WARRANT -- To Be Executed by the Registered Holder in
Order to Exercise the Warrant
The undersigned hereby irrevocably elects to exercise the attached
Warrant to purchase, for cash pursuant to Section 2 thereof, ________________
shares of Common Stock issuable upon the exercise of such Warrant. The
undersigned requests that certificates for such shares be issued in the name
of __________________________________. If this Warrant is not fully
exercised, the undersigned requests that a new Warrant to purchase the
balance of shares remaining purchasable hereunder be issued in the name of
______________________________.
Date: ,
----------- -------- --------------------------------------
[name of registered Holder]
--------------------------------------
[signature]
--------------------------------------
[street address]
--------------------------------------
[city, state, zip]
--------------------------------------
[tax identification number]
<PAGE>
Exhibit B
NOTICE OF CONVERSION OF WARRANT -- To Be Executed by the Registered Holder in
Order to Convert the Warrant on a Cashless
Basis
The undersigned hereby irrevocably elects to convert, on a cashless
basis, a total of ______________ shares of Common Stock otherwise purchasable
upon exercise of the attached Warrant into such lesser number of shares of
Common Stock as determined by Section 3 of the Warrant. The undersigned
requests that certificates for such shares be issued in the name of
__________________________________. If this Warrant is not fully converted,
the undersigned requests that a new Warrant to purchase the balance of shares
remaining purchasable hereunder be issued in the name of
____________________________.
Date: ,
----------- -------- --------------------------------------
[name of registered Holder]
--------------------------------------
[signature]
--------------------------------------
[street address]
--------------------------------------
[city, state, zip]
--------------------------------------
[tax identification number]
<PAGE>
Exhibit 10.18
[Transamerica Business Credit letterhead]
February 12, 1999
Ms. Leota L. Pearson
Controller
Endocardial Solutions, Inc.
1350 Energy Lane
Suite 110
Saint Paul, MN 55108-5254
Dear Leota:
Transamerica Business Credit Corporation - Technology Finance Division is
pleased to offer to amend its Commitment Letter dated as of March 4, 1998
(the "Commitment") as provided below:
The Commitment is hereby reaffirmed and shall continue in full force and
effect except that:
1. The paragraph titled "Lease Term Commencement" is hereby deleted in its
entirety and replaced with the following:
LEASE TERM COMMENCEMENT: Upon delivery of the Equipment or upon each completion
of deliveries of items of Equipment with aggregate cost
of not less than $50,000, but no later than June 30,
1999.
Should you have any questions, please call me.
Yours truly,
TRANSAMERICA BUSINESS CREDIT
CORPORATION - TECHNOLOGY
FINANCE DIVISION
By /s/ Gerald A. Michaud
--------------------------------------
Gerald A. Michaud
Senior Vice President - Marketing
<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-34169 and 333-27979) of our report dated February 12, 1999,
with respect to the financial statements of Endocardial Solutions, Inc. included
in the Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ESI AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 654,529
<SECURITIES> 8,060,303
<RECEIVABLES> 475,750
<ALLOWANCES> 0
<INVENTORY> 1,827,061
<CURRENT-ASSETS> 11,222,804
<PP&E> 3,942,741
<DEPRECIATION> (1,668,305)
<TOTAL-ASSETS> 13,621,591
<CURRENT-LIABILITIES> 2,345,830
<BONDS> 0
0
0
<COMMON> 90,118
<OTHER-SE> 50,329,703
<TOTAL-LIABILITY-AND-EQUITY> 13,621,591
<SALES> 1,950,497
<TOTAL-REVENUES> 1,950,497
<CGS> 3,624,291
<TOTAL-COSTS> 3,624,291
<OTHER-EXPENSES> 13,736,319
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,644
<INCOME-PRETAX> (14,685,275)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,685,275)
<EPS-PRIMARY> (1.63)
<EPS-DILUTED> (1.63)
</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-K. 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-K 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 operations, 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. Development of the EnSite System is ongoing
and we have not yet demonstrated our system to be effective and safe according
to United States and international regulatory guidelines. The EnSite System
will require additional clinical trials and, ultimately, United States and
international regulatory approvals before it can be fully marketed in the United
States and abroad. Problems in the following areas could materially delay the
commecialization of the EnSite System or prevent its market introduction
entirely:
- research and development,
- clinical testing,
- regulatory submissions and approval,
- product manufacturing and commercial scale-up,
- marketing, or
- product distribution.
We will not generate any significant revenue until the EnSite System is
successfully commercialized. We cannot assure you that we will ever derive
substantial revenues from the sale of the EnSite System.
OUR LIMITED CLINICAL TESTING HAS NOT YET PROVEN OUR PRODUCTS TO BE SAFE AND
EFFECTIVE
We have conducted only limited 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. 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>
WE MUST OBTAIN REGULATORY APPROVAL BEFORE WE CAN SELL OUR PRODUCTS
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. 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. 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. To date, no medical devices for
treating VT patients in the United States through catheter ablation have been
approved by the FDA. Catheter ablation devices require PMA approval by the FDA,
which may not be granted in the near future or at all. Accordingly, we cannot
assure you that a catheter ablation market will develop. Moreover, even if
medical devices for catheter ablation are approved by the FDA, we cannot assure
you that the market for treating VT through catheter ablation will develop or
that the EnSite System will prove useful in diagnosing VT for treatment by
catheter ablation products. 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 the medical devices for treating VT
through catheter ablation are not approved by the FDA or, even with FDA
approval, 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 AND FLUTTER
In addition to assisting the diagnosis of VT, we intend to apply the EnSite
System to the diagnosis of SVT, including atrial fibrillation and flutter.
However, we have conducted only limited clinical studies of our technology on
patients suffering from atrial fibrillation and flutter. We may be unable to
successfully extend our technology to the mapping of SVT or obtain regulatory
approval to test and market any products developed using the technology to map
SVT. We have made, and expect to continue to make, significant research and
development expenditures to extend our technology to the diagnosis of SVT. We
cannot assure you that we will realize any benefit from these expenditures.
SVT is a complex disease and the subject of continuing research. The
therapies presently available for atrial fibrillation and flutter 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 and flutter, we cannot assure you that treatments for atrial
fibrillation and flutter 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 SVT. We have no present
intention to develop any medical devices on our own for the treatment of atrial
fibrillation and flutter.
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 for which regulatory approval has not been granted,
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
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fail to develop new technologies and products before our competitors, our
business, financial condition and results of operations would be materially and
adversely affected.
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 no 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.
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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
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 and 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 9002 certification for
the clinical workstation and 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 9002 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 build and 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 in progress, 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. 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.
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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 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 or prevent commercial introduction
altogether.
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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