<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO _______.
COMMISSION FILE NO. 0-22233
ENDOCARDIAL SOLUTIONS, INC.
---------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1724963
- -------- ----------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
1350 ENERGY LANE (651) 523-6900
SUITE 110 -------------
SAINT PAUL, MINNESOTA 55108 (REGISTRANT'S TELEPHONE NUMBER
- ---------------------------- INCLUDING AREA CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES
AND ZIP CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING TWELVE (12) MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- -----
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
<TABLE>
<CAPTION>
COMMON STOCK, $.01 PAR VALUE 10,180,236
- ----------------------------
<S> <C>
(CLASS) (NUMBER OF SHARES OUTSTANDING AT OCTOBER 31, 1999)
</TABLE>
<PAGE>
INDEX
ENDOCARDIAL SOLUTIONS, INC.
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1999 and December 31, 1998 3
Statements of Operations - Three and nine month periods ended
September 30, 1998 and September 30, 1999 4
Statements of Cash Flows - Three and nine months ended
September 30, 1998 and September 30, 1999 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 7-10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
PART II. OTHER INFORMATION
Items 1, 3, 4 and 5 have been omitted since all items are inapplicable or
answers negative.
Item 2. Changes in Securities and Use of Proceeds 11
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENDOCARDIAL SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,505,359 $ 654,529
Short-term investments 7,057,071 8,060,303
Accounts Receivable 3,237,168 475,750
Inventories 2,519,809 1,827,061
Prepaid expenses and other current assets 15,327 205,161
------------ ------------
Total current assets 16,334,734 11,222,804
Furniture and equipment 5,017,359 3,942,741
Less accumulated depreciation (2,202,357) (1,668,305)
------------ ------------
2,815,002 2,274,436
Deposits 81,709 81,709
Patents, net of accumulated amortization (1999 - $86,251;
1998 - $74,440) 30,831 42,642
------------ ------------
Total assets $ 19,262,276 $ 13,621,591
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,941,499 $ 762,147
Accrued salaries and expenses 1,261,287 706,724
Current portion of capital lease obligations 715,859 876,959
------------ ------------
Total current liabilities 3,918,645 2,345,830
Capital lease obligations 1,090,266 812,339
Long-term debt 3,500,000 --
Stockholders' equity:
Undesignated Preferred Stock, par value $.01 per share:
Authorized shares--10,000,000
Issued and outstanding shares--none -- --
Common Stock, $.01 par value
Authorized shares--September 30, 1999--40,000,000;
December 31, 1998--40,000,000
Issued and oustanding shares--September 30,
1999--10,173,486; December 31, 1998--9,011,762 101,735 90,118
Additional paid-in capital 59,832,397 50,329,703
Accumulated deficit (49,157,568) (39,863,607)
Deferred compensation (23,199) (92,792)
------------ ------------
Total stockholders' equity 10,753,365 10,463,422
------------ ------------
Total liabilities and stockholders' equity $ 19,262,276 $ 13,621,591
============ ============
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
SEE ACCOMPANYING NOTES.
3
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 3,527,893 $ 692,996 $ 6,540,328 $ 1,128,402
Cost of goods sold 1,984,997 797,644 4,838,741 2,408,162
----------- ----------- ----------- ------------
Gross profit 1,542,896 (104,648) 1,701,587 (1,279,760)
Operating expenses:
Research and development 1,408,565 1,698,316 4,115,566 9,118,647
General and administrative 501,956 466,258 1,506,229 1,280,438
Sales and marketing 2,201,893 317,332 5,349,202 892,048
----------- ----------- ----------- ------------
Operating loss (2,569,518) (2,586,554) (9,269,410) (12,570,893)
Operating income (expense):
Interest income 151,121 188,460 350,722 685,622
Interest expense (108,400) (20,722) (271,512) (53,798)
----------- ----------- ----------- ------------
42,721 167,738 79,210 631,824
----------- ----------- ----------- ------------
Net loss for the period and accumulated
deficit $(2,526,797) $(2,418,816) $(9,190,200) $(11,939,069)
=========== =========== =========== ============
Net loss per share - basic and diluted $ (0.25) $ (0.27) $ (0.98) $ (1.33)
=========== =========== =========== ============
Weighted average shares outstanding 9,984,319 9,000,958 9,352,775 8,983,150
=========== =========== =========== ============
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,526,797) $(2,418,816) $(9,190,200) $(11,939,069)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 217,439 159,334 581,892 435,641
Amortization of deferred compensation 23,199 54,129 69,593 162,387
Value of warrants granted in connection with
purchase of technology -- -- -- 2,085,602
(Gain)/Loss on sale of assets 6,399 -- 6,399 --
Changes in operating assets and liabilities:
Accounts Receivable (1,579,524) (211,880) (2,761,418) (663,240)
Inventory (574,922) (367,682) (692,748) (408,274)
Prepaid expenses and other assets 157,305 (559) 189,834 (73,299)
Accounts payable 530,123 (40,747) 1,347,182 378,226
Accrued salaries and expenses 225,884 (51,811) 386,733 (73,474)
----------- ----------- ----------- ------------
Net cash used in operating activities (3,520,894) (2,878,032) (10,062,733) (10,095,500)
INVESTING ACTIVITIES
Purchases of short-term investments (4,050,894) (6,205,941) (8,001,768) (15,222,989)
Maturities of short-term investments 490,000 7,755,000 9,005,000 25,458,226
Purchases of furniture and equipment (82,086) (145,508) (305,218) (621,864)
Patent expenditures -- (7,894) -- (21,211)
Proceeds from sale of assets 980 -- 980 --
----------- ----------- ----------- ------------
Net cash used in investing activities (3,642,000) 1,395,657 698,994 9,592,162
FINANCING ACTIVITIES
Proceeds from notes payable -- -- 3,500,000 --
Principal payments on notes payable and capital lease
obligations (197,304) (110,899) (695,982) (328,041)
Proceeds from issuance of common stock 9,397,723 9,555 9,410,551 63,416
----------- ----------- ----------- ------------
Net cash provided by (used in) financing activities 9,200,419 (101,344) 12,214,569 (264,625)
Increase (decrease) in cash and cash equivalents 2,037,525 (1,583,719) 2,850,830 (767,963)
Cash and cash equivalents at beginning of period 1,467,834 2,328,412 654,529 1,512,656
----------- ----------- ----------- ------------
Cash and cash equivalents at end of period $ 3,505,359 $ 744,693 $ 3,505,359 $ 744,693
=========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Purchase of equipment and inventory through capital
lease obligations $ 82,117 $ 342,956 $ 812,808 $ 910,380
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Due to the Company's full market release in Europe in the third quarter 1998,
the Company is no longer considered to be in the development stage. Operating
results for the three and nine months ended September 30, 1999, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. These financial statements should be read in conjunction with
the audited financial statements and accompanying notes for the fiscal year
ended December 31, 1998, contained in the Company's 10-K.
2. INVENTORIES
Inventories are carried at the lower of cost (first-in, first-out basis) or
market. The majority of inventory consists of purchased components. To determine
the technological feasibility of its software efforts, the Company utilizes the
working model approach available under SFAS No. 86 and believes that the working
model was achieved when the software was available for commercial use in June
1998.
3. RECLASSIFICATIONS
Certain prior year items have been reclassified to conform to current year
presentations.
4. STOCK OFFERING
In July 1999, the company received proceeds of $10,000,000 from a private
placement of 1,111,111 shares of its common stock at a price of $9.00 per share,
to accredited investors.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Endocardial Solutions Inc. (the "Company"), was incorporated in May 1992. The
Company develops, manufactures and markets the EnSite 3000-Registered Trademark-
clinical workstation and EnSite-Registered Trademark- catheter for use by
electrophysiologists in diagnosing and mapping abnormal heart rhythms known
as arrhythmias. The EnSite 3000 clinical workstation and EnSite catheter
received FDA approval for right atrial use in the U.S. during the second
quarter 1999. Through a distribution agreement with Medtronic, Inc., the
products are available in full market release to electrophysiologists in
Europe and Canada.
RESULTS OF OPERATIONS
GENERAL. Net losses increased to $2,526,797, or $.25 per share, for the three
months ended September 30, 1999, from $2,418,816 or $.27 per share, for the same
period in 1998. The net loss for the nine months ended September 30, 1999 was
$9,190,200 or $.98 per share, compared to a net loss of $11,939,069 or $1.33 per
share, for the same period of 1998. The loss for the nine months ended September
30, 1998 included expenses of $3,585,602 for the acquisition of locator
technology that was purchased during the first quarter from Medtronic, Inc. The
Company expects losses to continue through at least 1999. The Company is
entering a period of growth in marketing expenses related to market
introduction, including increases in personnel costs.
REVENUE AND COST OF GOODS SOLD. The Company recorded revenue for the sixth
consecutive quarter. This was the second quarter of U.S. revenue and the second
quarter with a positive gross profit. Revenue for the three months ended
September 30, 1999 was $3,527,893, compared with revenues of $692,996 for the
same period of 1998. Revenue included sale of the Company's EnSite catheter and
EnSite 3000 clinical workstation, including the Company's proprietary software,
patient interface unit and other peripherals. Revenue for the nine months ended
September 30, 1999 was $6,540,328, compared to revenues of $1,128,402 for the
same period of 1998. The Company began recording revenues in the second quarter
1998. Cost of goods sold and unabsorbed manufacturing expenses were $1,984,997
and $797,644 for the quarter ended September 30, 1999 and 1998, respectively.
Gross profit was 43.7% for the three months ended September 30, 1999, compared
with -15.1% for the same period in 1998. Cost of goods sold and unabsorbed
manufacturing expenses were $4,838,741 and $2,408,162 for the nine months ended
September 30, 1999 and 1998, respectively. Gross profit was 26.0% for the nine
months ended September 30, 1999, compared with -113.4% for the same period in
1998. Manufacturing expenses include costs for unabsorbed overhead from the
production of inventory held for re-sale.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$1,408,565 for the three month period ended September 30, 1999, compared to
$1,698,316 during the same period in 1998, a decrease of $289,751. The expenses
for the nine months ended September 30, 1999 were $4,115,566, compared to
$9,118,647 during the same period in 1998, a decrease of $5,003,081. The
expenses for the nine months ended September 30, 1998 include $3,585,602 for the
acquisition of locator technology that was purchased during the first quarter
from Medtronic, Inc. The Company experienced a decrease of $1,417,479 in
research and development expenses after subtracting for the purchase of the
locator technology. The decrease is attributable to a reduction in clinical
trial expenses and software development costs. The Company believes research and
development expenditures will increase slightly for the remainder of 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$501,956 and $466,258 for the three months ended September 30, 1999 and 1998,
respectively. For the nine months ended September 30, 1999 general and
administrative expenses were $1,506,229, an increase of $225,791 from expenses
of $1,280,438 for the nine months ended September 30, 1998. The increase is due
to an increase in personnel costs.
7
<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$2,201,893 during the three months ended September 30, 1999, from $317,332
during the same period in 1998, an increase of $1,884,561. For the nine months
ended September 30, 1999 sales and marketing expenses increased to $5,349,202,
from $892,048 during the same period in 1998, an increase of $4,457,154. The
increase is primarily attributable to increases in personnel and costs
associated with building and training the U.S. sales and clinical team. In
addition, travel expenses and other costs associated with product introduction
increased. The Company also experienced an increase in expenses attributable the
European market release and market research activities as compared with the same
period in 1998. The Company expects continued increases in sales and marketing
expenses as the Company continues its U.S. product launch.
INTEREST INCOME. Interest income was $151,121 and $188,460 for the three
months ended September 30, 1999 and 1998, respectively. Interest income was
$350,722 and $685,622 for the nine months ended September 30, 1999 and 1998,
respectively. The decrease was due to a reduction in the cash, cash
equivalents and short-term investments.
LIQUIDITY AND CAPITAL RESOURCES.
On March 24, 1997, the Company received net proceeds of approximately
$18,833,000 from an initial public offering of 2,250,000 shares of its common
stock and approximately $6,278,000 from a concurrent private placement to
Medtronic, Inc. of 750,000 shares of its common stock. The Company's common
stock is listed on the NASDAQ National Market under the symbol "ECSI."
The Company's operations since inception have been funded by net proceeds from
the sales of common and preferred stock totaling approximately $59,934,132
through September 30, 1999. As of September 30, 1999 and December 31, 1998, the
Company had cash, cash equivalents and short-term investments of approximately
$10,562,430 and $8,714,832, respectively.
The Company announced a financing agreement with Medtronic, Inc. during the
first quarter 1999. Under the agreement, the Company will receive $7 million
from Medtronic Asset Management, which is repayable by 2001 or, if earlier, at
the close of a significant round of debt or equity financing. During the first
quarter 1999, $3.5 million was received as part of this financing agreement. The
Company anticipates receiving the additional $3.5 million during the fourth
quarter 1999.
In July 1999, the Company received proceeds of $10,000,000 from a private
placement of 1,111,111 shares of its common stock to accredited investors. The
placement was priced at $9.00 per share. In August 1999, these shares were
registered pursuant to the Securities Act of 1933.
The Company believes that its existing cash, cash equivalents, short-term
investments and bank financing will be sufficient to fund the operations of the
Company through 2000. The Company's future liquidity and capital requirements
will depend on numerous factors, including the timing of regulatory actions
regarding the Company's products, the results of clinical trials and
competition, the extent to which the Company's EnSite System gains market
acceptance, the costs and timing of expansion of sales, marketing and
manufacturing activities and the ability of the Company to obtain bank
financing.
YEAR 2000
Many currently installed computer systems and software are coded to accept only
two-digit entries in the date code fields. These date code field will need to
accept four-digit entries to distinguish 21st century dates. This problem could
result in system failures or miscalculations causing disruptions of business
operations (including, among other things, a temporary inability to process
transactions, send invoices or engage in other similar business activities). As
a result, many companies' computer systems and software will need to be upgraded
or replaced in order to comply with Year 2000 requirements. The potential global
impact of the Year 2000 problem is not known, and if not corrected in a timely
manner, could affect the Company and the US and world economy generally.
8
<PAGE>
The Company has formed a project team consisting of representatives from its
information technology, finance, manufacturing, product development and quality
department to address internal and external Year 2000 issues. The Company's
internal financial, manufacturing and other operational computer systems have
been upgraded to address Year 2000 issues. Management believes that the new
software substantially addresses Year 2000 issues. The Company believes it has
completed it Year 2000 compliance program for all of its significant internal
financial and manufacturing systems. The Company may be required, however, to
make minor modification to some of its existing hardware and software packages
in order for its computer system to function properly in the year 2000 and
thereafter.
The Company's product development processes will contain steps to include Year
2000 compliance verification for all current and future products. The Company
has tested the EnSite 3000 System and determined it to be Year 2000 compliant.
In addition, the Company has received assurances from its major suppliers that
they are addressing the Year 2000 issue and that product purchased by the
Company from such suppliers will function properly in the year 2000. These
actions are intended to help mitigate the possible external impact of the Year
2000 problem. Even assuming that all material third parties confirm that they
are or expect to be Year 2000 compliant by December 31, 1999, it is not possible
to state with certainty that such parties will be so compliant. It is impossible
to fully assess the potential consequences in the event service interruptions
from suppliers occur or in the event that there are disruptions in
infrastructure areas as utilities, communication, transportation, banking and
government.
The amount of remediation work required to address Year 2000 problems is not
expected to be extensive and the total estimated cost for resolving the
Company's Year 2000 issues is minimal and not expected to have a material effect
on the Company's financial position, results of operations, or cash flows. The
Company expects the remainder of the Year 2000 compliance program to be
substantially complete by third quarter 1999.
Based on the Company's assessment to date, the Company believes it will not
experience any material disruption as a result of Year 2000 problems in its
financial, internal manufacturing processes or the EnSite 3000-TM- System.
However, there can be no guarantee that the systems of other companies on which
the Company relies will be converted in a timely manner, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company. The
Company has not yet developed a contingency plan to provide for continuity of
processing in such event of various problem scenarios, but it will assess the
need to develop such a plan based on the outcome of its validation phase of its
Year 2000 compliance program and the results of surveying it major suppliers.
Assuming no major disruption in service from utility companies or other critical
third-party providers, the Company believes that it will be able to manage its
total Year 2000 transition without any material effect on the Company's results
of operations or financial condition. There can be no assurance, however, that
unexpected difficulties will not arise and, if so, that the Company will be able
to timely develop and implement a contingency plan.
CAUTIONARY STATEMENT
Except for the historical information contained herein, this Quarterly Report on
Form 10-Q contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. When used in this Form 10-Q and in future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases and in oral statements made with the approval of an
authorized executive officer, the word or phrases "believes," "anticipates,"
"expects," "intends," "will likely result," "estimates," "projects" or similar
expressions are intended to identify such forward-looking statements, but are
not the exclusive means of identifying such statements. These forward-looking
statements involve risks and uncertainties that may cause the Company's actual
results to differ materially from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, the following:
9
<PAGE>
risks associated with the successful development and commercialization of a
new technology: limited clinical testing experience; uncertainty of obtaining
Food and Drug Administration and international regulatory clearances;
uncertainty of availability of treatments employing the Company's diagnostic
system (the "EnSite System"); uncertainty of market acceptance of the EnSite
System; training requirements for electrophysiologists; the uncertainty of
the ability to diagnose and treat atrial fibrillation; the expectation of
future losses; significant competition and rapid technological change in the
tachycardia diagnostic market; risks associated with the Company's dependence
on patents and proprietary technology; risks associated with the Company's
limited manufacturing experience and dependence on suppliers; and the
uncertainty of third-party reimbursement for diagnostic medical procedures
employing the EnSite System. These factors are discussed in the cautionary
statements included in Exhibit 99 to this Form 10-Q for the quarter ended
September 30, 1999. Other forward-looking statements are found in the
Company's discussion of Year 2000 compliance issues. The Company cautions
investors and others to review the statements set forth in Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Exhibit 99 and in the Company's other reports filed with the Securities and
Exchange Commission and that other factors may prove to be important in
affecting the Company's business and results of operations.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company had approximately $7 million of cash and investments on September
30, 1999. Substantially all of the investments were U.S. government or
investment grade, fixed income securities from domestic issuers. Because of the
credit risk criteria of the Company's investment policies, the primary market
risk associated with these investments is interest rate risk. The Company does
not use derivative financial instruments to manage interest rate risk or to
speculate on futures changes in interest rates. A rise in interest rates could
negatively affect the fair value of the Company's investments; however, because
management considers it unlikely that the Company would need or choose to
substantially liquidate the Company's investments, management believes that such
an increase in interest rates would not have a material impact on the Company's
future earnings or cash flows. Even though the Company distributes products
abroad, the Company does not conduct sales in foreign currencies. Therefore,
management does believe that Company is exposed to any material foreign currency
exchange rate risk.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 9, 1999, the Company completed the sale of 1,111,111 share of its
common stock through a private placement to accredited investors at a price
of $9.00 per share, for proceeds of $10 million. In August 1999, these shares
were registered pursuant to the Securities Act of 1933. Proceeds from the
sale of shares will be used for sales and marketing and other general
corporate purposes.
In August 1999, the Board of Directors of the Company adopted a Stockholder
Rights Plan and declared a dividend of one Right on each outstanding share of
Common Stock. The dividend was paid to the shareholders of record on September
15, 1999, and the Rights will expire ten years later unless redeemed or
exchanged at an earlier date. Each Right entitles shareholders of the Company to
buy one one-hundredth of a share of Series A Junior Participating Preferred
Stock of the Company at a price of $60.00 per one-hundredth of a Preferred
Share. The Rights will become exercisable following the public announcement that
a person or group has acquired, without approval of the Board of Directors of
the Company, beneficial ownership of 20% or more (25% in the case of Medtronic,
Inc. and its affiliates) of the Company's outstanding Common Stock (an
"Acquiring Person"), or at the close of business ten days after the commencement
of, or a public announcement of the intent to commence, a tender or exchange
offer that would result in a person or group becoming an Acquiring Person. In
the event any person or group becomes an Acquiring Person, without approval of
the Board of Directors, each holder of Rights other than the Acquiring Person
will have the right to purchase the Company's Common Stock at a 50% discount
from the current market price. After any one of these events, the Company may
also exchange all or any portion of the outstanding Rights, other than Rights
held by such Acquiring Person, for shares of the Company's Common Stock at an
exchange ratio of one share of Common Stock per Right, subject to the provisions
of the Rights Plan. The Board of Directors of the Company may redeem the rights
for $0.01 per Right at any time prior to the date a person or group becomes an
Acquiring Person. In addition, the exercise price and the value of stock that
may be acquired for that price are subject to adjustment for stock splits, stock
dividends and certain other events. Until a Right is exercised, the holder
thereof will have no rights as a shareholder of the Company, including the right
to vote or to receive dividends.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
- ------- ------------
<S> <C>
4 Rights Agreement dated as of August 25, 1999 between the
Company and Norwest Bank Minnesota, National Association, as
Rights Agent (incorporated by reference to Exhibit 1 to the
Company's registration statement on Form 8-A dated
August 25, 1999).
27 Financial Data Schedule (EDGAR filing only)
99 Cautionary Statement
</TABLE>
(b) Reports
The Company filed a report on Form 8-K on September 15,
1999, relating to the adoption of its Stockholder Rights Plan.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENDOCARDIAL SOLUTIONS, INC.
Dated: November 15, 1999 By: /s/ James W. Bullock
--------------------
James W. Bullock
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 15, 1999 By: /s/ Leota L. Pearson
--------------------
Leota L. Pearson
Vice President Finance and
Chief Financial Officcer
(Principal Financial and Accounting Officer)
12
<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
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<PAGE>
EXHIBIT 99
CAUTIONARY STATEMENT
Forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "PSLRA") are included in our Form 10-Q. The
words or phrases "believes," "may," "will," "expects," "should," "continue,"
"anticipates," "intends," "will likely result," "estimates," "projects" or
similar expressions identify forward-looking statements in our Form 10-Q and in
our future filings with the Securities and Exchange Commission, in our press
releases, in our presentations to securities analysts or investors, and in oral
statements made by or approved by an executive officer of Endocardial Solutions,
Inc. Forward-looking statements involve risks and uncertainties that may
materially and adversely affect our business, results of operation, financial
condition or prospects, and may cause our actual results to differ materially
from historical results or the results discussed in the forward-looking
statements.
You should consider carefully the following cautionary statements if you
own our common stock or are planning to buy our common stock. We intend to take
advantage of the "safe harbor" provisions of the PSLRA by providing this
discussion. We are not undertaking to address or update each factor in future
filings or communications regarding our business or results except to the extent
required by law.
OUR SUCCESS DEPENDS ON DEVELOPING AND COMMERCIALIZING THE ENSITE SYSTEM
The EnSite System is currently our only potential product, and our success
depends entirely on the successful development, commercialization and market
acceptance of the EnSite System. Modifications to the EnSite System may require
additional clinical trials and, ultimately, United States and international
regulatory approvals before they can be fully marketed in the United States and
abroad. Problems in the following areas could materially impact the
commercialization of the EnSite System:
- research and development,
- clinical testing,
- regulatory submissions and approval,
- product manufacturing and commercial scale-up,
- marketing, or
- product distribution.
We have recently begun to generate revenue from the EnSite System. We cannot
assure you that we will ever derive substantial revenues from the sale of the
EnSite System.
CLINICAL TESTING OF OUR PRODUCTS CONTINUES TO BE REQUIRED
We have conducted clinical trials on patients for ventricular tachycardia
("VT") and supraventricular tachycardia ("SVT") in the United States and in
Europe, and we have at times experienced complications in our clinical trials.
During the third and fourth quarters of 1998, we submitted to the United States
Food and Drug Administration (the "FDA") two premarket notification applications
under Section 510(k) of the Food, Drug and Cosmetic Act (the "FDC Act")
containing the results of our left ventricular and right atrium multi-center
clinical trials. We believe, however, we will be required to conduct more
extensive clinical testing in the United States in order to support a premarket
approval ("PMA") application to the FDA for marketing approval for use of the
EnSite System in the left ventricle of the heart. Patients selected for
clinical trials must meet stringent guidelines to undergo testing, and we cannot
assure you that patients can be enrolled in clinical trials on a timely basis.
Further, we cannot assure you that any of our products will prove to be safe and
effective in clinical trials under United States or international regulatory
guidelines. The clinical trials may identify significant technical or other
obstacles to be overcome prior to obtaining approvals. If the EnSite System
does not prove to be safe and effective in clinical trials, our business,
financial condition and results of operations would be materially and adversely
affected.
<PAGE>
OUR PRODUCTS ARE SUBJECT TO REGULATORY APPROVAL
The manufacture and sale of medical devices, including the EnSite System,
are subject to extensive regulation in the United States, principally by the FDA
and corresponding state agencies, and in other countries. In the United States,
our products are subject to the FDA's premarket approval requirements, which
have not yet been satisfied for left ventricular use. Securing FDA approvals
requires us to submit extensive clinical data and supporting information to the
FDA. During the third and fourth quarters of 1998, we submitted to the FDA two
premarket notification applications under Section 510(k) of the FDC Act
containing the results of our left ventricular and right atrium multi-center
clinical trials. The FDA has cleared the EnSite System for use in the right
atrium of the heart. In March 1999, we determined that our FDA application for
left ventricular use of the EnSite System will be submitted as a PMA
application. However, we may not be able to file a PMA application with the FDA
to market the EnSite System for diagnosing VT in the United States until we
complete more extensive clinical trials. The process of obtaining FDA and other
required regulatory approvals is lengthy, expensive and uncertain.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country, and
approval for sale internationally may take more or less time than that required
for FDA approval. We have obtained CE certification for the EnSite catheter and
for the EnSite 3000 clinical workstation, allowing us to sell our products in
member countries of the European Union. We may encounter significant costs and
requests for additional information in continuing our efforts to obtain
regulatory approvals in other countries, which could substantially delay or
preclude us from marketing our products internationally.
Marketing approvals, if granted, may require us to limit the indicated use
of our product. FDA enforcement policy strictly prohibits the marketing of
approved medical devices for unapproved uses. Product approvals could be
withdrawn for failure to comply with regulatory standards or the occurrence of
unforeseen problems following the initial marketing. We will be required to
follow FDA regulations regarding Good Manufacturing Practices and similar
regulations in other countries, which include testing, control, and
documentation requirements. Ongoing compliance with Good Manufacturing
Practices and other applicable regulatory requirements will be monitored through
periodic inspections by federal and state agencies, including the FDA, and by
comparable agencies in other countries. If we fail to comply with applicable
regulatory requirements, we could be subjected to warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal of the government to grant premarket approval,
withdrawal of approvals and criminal prosecution.
We cannot assure you that we will be able to obtain the necessary
regulatory approvals on a timely basis or at all. Delays in receipt of or
failure to receive the approvals, the loss of previously obtained approvals, or
failure to comply with existing or future regulatory requirements would have a
material and adverse effect on our business, financial condition and results of
operations.
TREATMENTS USING THE ENSITE SYSTEM MAY NOT BE AVAILABLE TO PATIENTS
We have developed the EnSite System to diagnose tachycardia and assist
electrophysiologists in selecting among treatment options. Current treatments
for VT include drugs, implantable defibrillators, surgery and, potentially,
catheter ablation. We believe that the EnSite System will enable increased use
of catheter ablation for treating complex VT. Because ablation treatment for VT
is relatively new and untested, the long term effects of ablation on patients
are unknown. As a result, the long term success of ablation therapy in treating
VT will not be known for several years. Catheter ablation devices require PMA
approval by the FDA, and we cannot assure you that a catheter ablation market
will develop. Moreover, we cannot assure you that the EnSite System will prove
useful in diagnosing VT for treatment by catheter ablation products. We are not
in the process of developing a catheter for ablation treatment and are entirely
dependent upon other medical device companies to develop those devices. If a
market for treating VT by catheter ablation does not develop, our business,
financial condition and results of operations could be materially and adversely
affected.
2
<PAGE>
OUR PRODUCTS MAY BE UNABLE TO DIAGNOSE ATRIAL FIBRILLATION
In addition to assisting the diagnosis of VT, we intend to apply the EnSite
System to the diagnosis of SVT, including atrial fibrillation. However, we have
conducted only limited clinical studies of our technology on patients suffering
from atrial fibrillation. We may be unable to successfully extend our
technology to the mapping of atrial fibrillation or obtain regulatory approval
to test and market any products developed using the technology to map atrial
fibrillation. We have made, and expect to continue to make, research and
development expenditures to extend our technology to the diagnosis of atrial
fibrillation. We cannot assure you that we will realize any benefit from these
expenditures.
Atrial fibrillation is a complex disease and the subject of continuing
research. The therapies presently available for atrial fibrillation are in the
developmental stage with no proven effectiveness. Even if we are successful in
extending our technology to provide products that are capable of diagnosing
atrial fibrillation, we cannot assure you that treatments for atrial
fibrillation will exist that will require the diagnostic capabilities of any of
our products. As a result, a commercial market may never develop for any
product we develop for the diagnosis of atrial fibrillation. We have no present
intention to develop any medical devices on our own for the treatment of atrial
fibrillation.
OUR PRODUCTS MAY NOT SUCCEED IN THE MARKET
The commercial success of the EnSite System depends upon the number of
diagnostic procedures performed by electrophysiologists using the system.
Our system may not gain any significant degree of market acceptance among
electrophysiologists, patients, health care insurers and managed care
providers. Electrophysiologists will not recommend diagnostic procedures
until clinical data demonstrate the safety and efficacy of those procedures.
Even if we demonstrate the safety and efficacy of the EnSite System,
electrophysiologists and other physicians may elect not to recommend the
procedures for any number of other reasons, including the availability of
alternative procedures and treatment options, or inadequate levels of
reimbursement. Broad use of the EnSite System will require time-consuming
training of electrophysiologists, which could adversely also affect market
acceptance. If our products are not accepted by the market, our business,
financial condition and results of operations would be materially and
adversely affected.
WE FACE SIGNIFICANT INDUSTRY COMPETITION
The cardiac medical device market is highly competitive, and the EnSite
System is a new technology that must compete with more established devices.
Certain of our competitors are developing new approaches and new products for
diagnosing VT and SVT, including contact mapping systems using multi-electrode
basket contact catheters and single-point mapping technologies. Certain of our
competitors have integrated product lines that include products for both
diagnosis and ablation treatment, which may afford them opportunities for
product bundling and other marketing advantages. Many of our competitors have
an established presence in the field of electrophysiology and established
relationships with electrophysiology labs. Many of our competitors have
substantially greater financial and other resources than we do, including larger
research and development staffs and more experience and capabilities in
conducting research and development activities, testing products in clinical
trials, obtaining regulatory approvals, and manufacturing, marketing and
distributing products. Some of our competitors may achieve patent protection,
regulatory approval or product commercialization more quickly than us, which may
decrease our ability to compete.
OUR PRODUCTS MAY BECOME OBSOLETE IF WE ARE UNABLE TO ANTICIPATE AND ADAPT TO
RAPIDLY CHANGING TECHNOLOGY
The medical device industry is subject to rapid technological innovation
and, consequently, the life cycle of any particular product is short.
Alternative diagnostic systems or other discoveries and developments with
respect to mapping tachycardia may render our products obsolete. Furthermore,
the greater financial and other resources of many of our competitors may permit
them to respond more rapidly than us to technological advances. If we fail to
demonstrate the safety, benefit, efficacy and cost effectiveness of our products
as compared to those of our competitors, or if we fail to develop new
technologies and products before our competitors, our business, financial
condition and results of operations would be materially and adversely affected.
3
<PAGE>
WE DEPEND ON OUR PATENTS AND PROPRIETARY TECHNOLOGY, WHICH WE MAY NOT BE ABLE TO
PROTECT
Our success will depend in part on our ability to obtain patent protection
for our products and processes, to preserve our trade secrets and to operate
without infringing the intellectual property rights of others. The patent
positions of medical device companies are uncertain and involve complex and
evolving legal and factual questions. We cannot assure you that any of our
pending or future patent applications will result in issued patents, that any
current or future patents will not be challenged, invalidated or circumvented,
that the scope of any of our patents will exclude competitors or that the patent
rights granted to us will provide us any competitive advantage. We may discover
that our technology infringes patents or other rights owned by others, and we
cannot be certain that we were the first to make the inventions covered by each
of our issued patents and our pending patent applications, or that we were the
first to file patent applications for such inventions. In addition, we cannot
assure you that our competitors will not seek to apply for and obtain patents
that will prevent, limit or interfere with our ability to make, use or sell our
products either in the United States or in international markets. Further, the
laws of certain foreign countries may not protect our intellectual property
rights to the same extent as do the laws of the United States.
In addition to patents, we rely on trade secrets and proprietary knowledge
that we seek to protect, in part, through confidentiality agreements with
employees, consultants and others. We cannot assure you that our proprietary
information or confidentiality agreements will not be breached, that we will
have adequate remedies for any breach, or that our trade secrets will not
otherwise become known to or independently developed by competitors.
WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WHICH WOULD BE COSTLY TO
RESOLVE
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and our competitors
may resort to intellectual property litigation as a means of competition.
Intellectual property litigation is complex and expensive and the outcome is
difficult to predict. We cannot assure you that we will not become subject to
patent infringement claims or litigation, or interference proceedings declared
by the United States Patent and Trademark Office to determine the priority of
inventions. Litigation or regulatory proceedings may also be necessary to
enforce our patent or other intellectual property rights. We may not always
have the financial resources to assert patent infringement suits or to defend
ourselves from claims. An adverse result in any litigation could subject us to
liabilities to, or require us to seek licenses from or pay royalties to, others
that may be substantial. Furthermore, we cannot assure you that the necessary
licenses would be available to us on satisfactory terms, if at all.
WE HAVE LIMITED MANUFACTURING EXPERIENCE
We have limited experience in manufacturing the EnSite catheter and the
patient interface unit of the EnSite System. We currently manufacture our
products in limited quantities for laboratory and clinical testing and only
have begun to manufacture our products for commercial sale. We have limited
experience manufacturing our products in the volumes that will be necessary
for us to achieve significant commercial sales, and we cannot assure you that
reliable, high-volume manufacturing capacity can be established or maintained
at commercially reasonable costs. We will need to expend significant capital
resources and develop the necessary expertise to establish large-scale
manufacturing capabilities. We may encounter the following difficulties in
scaling up production of our products:
- problems involving production yields,
- quality control and assurance,
- component supply shortages,
- shortages of qualified personnel,
- compliance with FDA and foreign regulations, or
- the need for further FDA or foreign regulatory approval of new
manufacturing processes.
Our manufacturing facilities will be periodically inspected by United
States and foreign regulatory authorities. In order to manufacture products for
sale in the United States, our operations must undergo "Good Manufacturing
4
<PAGE>
Practices" compliance inspections conducted by the FDA. Our facilities and
manufacturing processes have not yet undergone any inspections by the FDA. We
will also be required to comply with ISO 9001 or 9002 and CE Mark standards in
order to sell our products in Europe. We received ISO 9001 certification for
our catheter and quality system in August 1997 and ISO 9001 certification for
the clinical workstation in November 1998. We received a CE Mark for each of
the EnSite catheter and the clinical workstation in the first quarter of 1998.
If we fail to comply with Good Manufacturing Practices or ISO 9001 and CE Mark
standards in future audits, we may be required to modify our manufacturing
policies and procedures. In addition, we may be required to stop all or part of
our operations until we can demonstrate that appropriate steps have been taken
to comply with the regulations.
WE DEPEND ON A FEW SUPPLIERS FOR KEY COMPONENTS OF OUR PRODUCTS
We purchase raw materials and certain key components of our products,
including the computer workstation and certain components for our catheter, from
one or a few suppliers. For certain of these components, there are relatively
few alternative sources of supply. We currently have no agreements that would
assure delivery of raw materials and components from alternate suppliers.
Establishing additional or replacement suppliers for any of the components used
in our products, if required, may not be accomplished quickly and could involve
significant additional costs. If our suppliers are unable to provide an
adequate supply of components in a timely manner, or if we are unable to locate
qualified alternate suppliers for materials and components at a reasonable cost,
our business, financial condition and results of operations could be materially
and adversely affected. In the event we had to replace a single source
supplier, a new supplier would be required to meet Good Manufacturing Practices
and other regulatory standards.
WE HAVE LIMITED COMMERCIAL SALES AND MARKETING EXPERIENCE
We have limited experience marketing the EnSite System. We cannot assure
you that we will be able to maintain a suitable sales force or enter into or
maintain satisfactory marketing arrangements with others. Our sales and
marketing efforts may not be successful.
WE WILL NEED TO CAREFULLY MANAGE OUR EXPANDING OPERATIONS
In order to complete clinical trials, prepare additional products for
clinical trials, and develop future products, we believe that we will be
required to expand our operations, particularly in the areas of research and
development, manufacturing, quality assurance and sales and marketing. As we
expand our operations in these areas, the expansion will likely result in new
and increased responsibilities for management. To accommodate any growth and
compete effectively, we must implement and improve our information systems,
procedures, and controls, and expand, train, motivate and manage our work
force. Our future success will depend significantly on the ability of our
current and future management to operate effectively. We cannot assure you
that our personnel, systems, procedures and controls will be adequate to
support our future operations.
INTERNATIONAL OPERATIONS WILL EXPOSE US TO ADDITIONAL RISKS
We plan to market the EnSite System through distributors in international
markets, once we receive the required foreign regulatory approvals, and sales in
foreign markets are initially expected to be our only source of revenue. We
have entered into a distribution agreement granting Medtronic exclusive
distribution rights for our products in Canada, Europe and Japan and certain
rights for distribution in other regions outside of the United States. In the
first quarter of 1998, we received ISO 9002 certification for our workstation
and a CE Mark for each of the EnSite catheter and the clinical workstation,
allowing us to begin selling our products in member countries of the European
Union. ISO 9001 certification for our workstation was subsequently received in
November 1998. We have no distribution arrangements for other international
markets, and currently retain all distribution rights in the United States. We
cannot assure you that international distributors for our products will devote
adequate resources to selling our products.
Changes in overseas economic conditions, currency exchange rates, foreign
tax laws or tariffs or other trade regulations could materially and adversely
affect on our ability to market our products internationally. Our business
5
<PAGE>
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 commercial sales and 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. Insurance, even if
obtained, might not adequately cover any product liability claim.
6
<PAGE>
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT FUTURE LOSSES
We have generated limited revenue and have sustained significant operating
losses each year since our inception. We expect our losses to continue at least
through 1999. We may never generate substantial operating revenues or achieve
profitability. Our ability to generate revenues from operations and make a
profit depends upon successful development, regulatory approval, manufacturing
and commercialization of the EnSite System and our successful transition from a
research and development company to a manufacturing and sales company.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS
We may require substantial funds to meet our working capital requirements
for continued research and development, testing, regulatory approval and
full-scale commercial introduction of our EnSite System. In order to meet our
funding needs, we may be required to raise additional funds through public or
private financings, including the sale of equity or debt. Any additional equity
financings may dilute current stockholders, and debt financing, if available,
may involve restrictive covenants. Adequate funds for our operations, whether
from financial markets or from other sources, may not be available when needed
on attractive terms, if at all. Insufficient funds may require us to delay,
scale back or eliminate some or all of our programs designed to facilitate the
commercial introduction of the EnSite System.
OUR SYSTEMS MAY BE SUBJECT TO YEAR 2000 PROBLEMS
We have formed a project team consisting of representatives from our
information technology, finance, manufacturing, product development and quality
department to address internal and external Year 2000 issues. Based on our
assessment to date, we believe we will not experience any material disruption as
a result of Year 2000 problems in our financial, internal manufacturing
processes or the EnSite 3000 System. However, we cannot guarantee that the
systems of other companies on which we rely will be converted in a timely
manner, or that a failure to convert by another company, or a conversion that is
incompatible with our systems, would not have a material and adverse effect on
us. We have not yet developed a contingency plan in the event of various
problem scenarios, but we will assess the need to develop a plan based on the
outcome of our validation phase of our Year 2000 compliance program and the
results of surveying our major suppliers. Assuming no major disruption in
service from utility companies or other critical third-party providers, we
believe that we will be able to manage our total Year 2000 transition without
any material effect on our results of operations or financial condition. We
cannot assure you, however, that unexpected difficulties will not arise and, if
so, that we will be able to timely develop and implement a contingency plan.
7
