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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
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.
8
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
9
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.
10
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
11
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,
12
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
13
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
14
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:
NAME AGE POSITION
- ------------------------------------ --- ----------------------------------------------------------------------
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
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,
15
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.
16
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.
1998 1997
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
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
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
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.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
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
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
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
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
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
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
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
ENDOCARDIAL SOLUTIONS, INC.
BALANCE SHEETS
DECEMBER 31
------------------------
1998 1997
----------- -----------
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
----------- -----------
----------- -----------
SEE ACCOMPANYING NOTES.
24
ENDOCARDIAL SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
-----------------------------------------------
1998 1997 1996
--------------- -------------- --------------
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
--------------- -------------- --------------
--------------- -------------- --------------
SEE ACCOMPANYING NOTES.
25
ENDOCARDIAL SOLUTIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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
--------- -------- ----------- -------- ---------- ------- --------- ------- -----------
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
--------- -------- ----------- -------- ---------- ------- --------- ------- -----------
--------- -------- ----------- -------- ---------- ------- --------- ------- -----------
DEFERRED
ACCUMULATED COMPEN-
DEFICIT SATION TOTAL
------------ ----------- -----------
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
------------ ----------- -----------
------------ ----------- -----------
SEE ACCOMPANYING NOTES.
26
ENDOCARDIAL SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
--------------------------------------------
1998 1997 1996
-------------- ------------- -------------
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
-------------- ------------- -------------
-------------- ------------- -------------
SEE ACCOMPANYING NOTES.
27
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
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:
DECEMBER 31
------------------------
1998 1997
------------ ----------
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
------------ ----------
------------ ----------
29
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:
DECEMBER 31
--------------------------
1998 1997
------------ ------------
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
------------ ------------
------------ ------------
30
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:
CAPITAL
LEASES
-------------
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
-------------
-------------
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:
Year ending December 31:
1999.......................................................... $ 124,449
---------
---------
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
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
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:
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
----------- ----------- --------- --------- --------- -----------
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
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
The following table summarizes information about the stock options
outstanding at December 31, 1998:
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
- ------------------------------ ----------- ----------- --------- ----------- ---------
$ .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
----------- -----------
----------- -----------
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
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:
1998 1997 1996
------------- ------------ ------------
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
------------- ------------ ------------
------------- ------------ ------------
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
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:
1999............................................................... $ 92,792
---------
---------
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:
DECEMBER 31,
-------------------------
1998 1997
------------ -----------
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.................... $ -- $ --
------------ -----------
------------ -----------
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
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
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
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.
PAGE IN THIS
ANNUAL
REPORT
---------------
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
(2) Financial Statement Schedules
None. All financial statement schedules are omitted because of the
absence of conditions under which they are required.
(3) EXHIBITS
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))
38
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))
39
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)
- ------------------------
* 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
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.
SIGNATURE TITLE
- ------------------------------ --------------------------
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
41
INDEX TO EXHIBITS
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))
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)
- ------------------------
* 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.