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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2000

OR

For the transition period from                to                

Commission File Number
0-22233

ENDOCARDIAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)

(651) 523-6900
(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
Preferred Share Purchase Rights

   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 26, 2001 was approximately $46,279,253 (based on the last sale price of such stock as quoted on the Nasdaq National Market ($3.13) on such date).

   As of March 26, 2001, the number of shares outstanding of the registrant's common stock, par value $.01 per share, was 14,809,361.

DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the registrant's Proxy Statement for its 2001 Annual Meeting of Stockholders to be held on May 15, 2001 are incorporated by reference into Part III of this Annual Report on Form 10-K (the "Form 10-K Report").

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, arrhythmia, a potentially fatal abnormal heart rhythm. Arrhythmias are caused by irregular electrical activity in the heart, that disrupts the heart's normal pumping action. Ventricular tachycardia ("VT"), a type of arrhythmia, 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 arrhythmia due to the limited capabilities of present technology. The Company believes that its proprietary EnSite® catheter and EnSite 3000® clinical workstation (together, the "EnSite System") is a powerful new diagnostic tool that will enable electrophysiologists to rapidly and comprehensively map arrhythmia 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 arrhythmia. 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 arrhythmia in the more than 1,200 electrophysiology laboratories worldwide. The EnSite System represents a new technology for mapping arrhythmia. In 1998, the Company received the necessary approval to market its products in the European Community and in 1999, the Company received FDA approval to market its product for right atrial use in the U.S. In the second quarter of 2000, the Company received the necessary FDA and European approvals to allow it to release Clarity™ ("Clarity"), an upgraded version of the Company's software product for use in the EnSite System that offers a more simplified user interface and increased automation of arrhythmia analysis. The key elements of the Company's strategy are as follows:

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Increase Clinical Awareness With Electrophysiologists. With its multi-center clinical studies and its United States and European product launch, the Company has established relationships with several leading electrophysiologists, which are expected to continue to enhance market acceptance of the EnSite System. A Center of Excellence program in the United States is in place with several leading institutions to further develop market acceptance of the EnSite System. The Company will also continue to demonstrate the clinical efficacy of the EnSite System through the publication of the results of its post-market studies and at various scientific shows such as NASPE, AHA and ACC. The Company has over 150 abstracts and 20 peer-reviewed articles that have been published in various scientific journals.



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Expand Technology. The Company believes that the EnSite System can be extended from mapping complex atrial tachycardia to mapping complex VT and atrial fibrillation and flutter, all of which share similar complex characteristics, such as multiple sites of origin in unpredictable locations. The Company believes that the patient population that suffers from complex arrhythmias that are difficult to map using currently available technology presents a significant market opportunity for the Company's EnSite System. ESI intends to continue to focus on the ability of its technology to

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provide improved speed, increased accuracy and cost-effectiveness in mapping other arrhythmias. 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.

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 and in April 1999 received FDA approval to market the EnSite System for use in the right atrium.

In January 2001, the Company received FDA approval for the use of its EnSite System in the left atrium in a multi-center clinical study for diagnosing arrhythmias including atrial fibrillation. The Company expects to begin this study in the second quarter of 2001.

    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. In January 1998, the Company signed a license agreement with Medtronic, Inc. which gives the Company co-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.

    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.

    In the first quarter of 1999, the Company announced a financing agreement with Medtronic, Inc. Under the agreement, the Company received $7 million from Medtronic Asset Management. This loan was paid in full in February 2001. In July 1999, the Company received proceeds of $10,000,000 in a private placement of 1,111,111 shares of its common stock to accredited investors. In June 2000, the Company received proceeds of $12,687,500 in a private placement of 2,030,000 shares of its common stock to accredited investors. In March 2001, the Company received proceeds of $7,349,000 in a private placement of 2,449,666 shares of its common stock to accredited investors. Proceeds from the sale of these shares are being used for expenses associated with current operating expenses, U.S. market expansion, clinical trials for atrial fibrillation, software and hardware product development and repayment of the loan from Medtronic, Inc.

    The Company's offices are located at 1350 Energy Lane, Suite 110, St. Paul, Minnesota 55108, and its telephone number is (651) 523-6900. The address of the Company's web site is www.endocardial.com.

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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 the chambers, the electrical activation wave enters the ventricles and produces a coordinated contraction of the ventricles that pump 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 arrhythmia, that 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

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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 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 that 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

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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.

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, atrial flutter, and atrial tachycardia.

    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.

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The EnSite System

    The Company has developed and continues to enhance its proprietary EnSite System to address the need for more rapid, comprehensive and cost-effective diagnosis of complex forms of arrhythmia. 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 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 and therapy 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 arrhythmia.

The EnSite Catheter

    The EnSite catheter is a non-contact, single-use, multi-electrode array, and 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 positioned 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 are displayed on the workstation as high resolution, three-dimensional isopotential or isochronal color maps.

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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 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™ 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 or therapy 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. In the second quarter of 2000, the Company released Clarity, an upgraded version of the Company's software product for use in the EnSite System that offers a more simplified user interface and increased automation of arrhythmia analysis. The Clarity software is designed to simplify use of the EnSite System and reduce training time for hospital staff. 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 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 Company's products.

    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 $10.7 million, $5.1 million and $4.4 million for the fiscal years ended December 31, 1998, 1999 and 2000, respectively. The Company anticipates that it will continue to make significant investments in research and development.

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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.

    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 is 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 CE Mark certification in order to distribute products in Europe. During the third quarter 1999, the Company passed a FDA inspection of the facility and the manufacturing processes. 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. ISO 9001 certification for our workstation was subsequently received in November 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 has employed a direct sales force in the United States and uses 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 Company intends to have additional distributors in various markets throughout the world. The Company retains all distribution rights in the United States.

    In the first quarter of 1998, the Company received 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

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second quarter of 1998. In the second quarter 1999, the Company received FDA approval to market the EnSite catheter and EnSite System for right atrial use in the United States.

    In 2000, the Company received regulatory approval to market the EnSite System in the following countries: Australia, Korea, Thailand and Taiwan. The Company also began marketing the EnSite System in Malaysia and Hong Kong.

    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 holds technical seminars and training sessions to educate physicians and its direct sales force and distributors in the use of the Company's products.

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 fifteen (15) U.S. patent applications 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. Additionally, one U.S. patent application has been allowed, with issuance expected with the year. 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. which gives the Company co-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

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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 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

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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.

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. Specific to Medicare, the EnSite catheter is currently reimbursable under both inpatient and outpatient procedure scenarios. For inpatient situations, the EnSite catheter will most typically be reimbursed under Diagnosis Related Group 112. For outpatient procedures the EnSite catheter is eligible for separate reimbursement in addition to the hospital's Ambulatory Payment Classification for cardiac mapping. 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.

    The Company's EnSite catheter is sold at a premium in comparison to existing single point catheters used in current diagnostic or mapping procedures and requires 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 may 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.

    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. There can be no assurance that the

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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 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.

    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 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 in the United States or in international markets 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 and adherence to GMPs). Class II devices are subject to general

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controls and to special controls (e.g., performance standards, and premarket notification). Generally, Class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness (e.g., life-sustaining, 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 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

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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 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. In April 1999 received FDA approval to market the EnSite System for use in the right atrium. In January 2001, the Company received IDE approval from the FDA for use in a multi-center clinical study of the EnSite System in the left atrium for diagnosing arrhythmias, including atrial fibrillation in the left atrium. The Company expects to begin this study in the second quarter of 2001.

    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 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 9001 certification for the clinical workstation in November 1998. The Company has obtained CE certification for the EnSite catheter and for the EnSite 3000 clinical workstation. 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 promulgated rules which required 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 was one of the CE Mark certification requirements.

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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 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. Product liability insurance is expensive, may be 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 136 full-time employees as of December 31, 2000. Of this number, 24 persons were engaged in research and development, 12 were involved in regulatory and quality assurance, 46 were involved with manufacturing and 54 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 3 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:

    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 MVMD Corp., a manufacturer of medical devices.

    Michael D. Dale has been Vice President of Sales and Marketing since March 2000. Mr. Dale joined the Company in December 1998 as Vice President Worldwide Sales. From October 1996 until joining the Company, Mr. Dale was Vice President of Global Sales for Cyberonics, Inc., a medical device company, and additionally as managing director of Cyberonics Europe S.A. From July 1988 to October 1996,

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Mr. Dale served in several capacities at St. Jude Medical, most recently as the Business Unit Director for St. Jude Medical Europe.

    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, and Vice President of Operations since January 2001. 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.

    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.

Forward-Looking Statements

    This Form 10-K Annual Report and the Company's financial statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and other documents incorporated by reference contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our expectations or beliefs, including, but not limited to, our current assumptions about future financial performance, anticipated problems, and our plans for future operations, which are subject to various risks and uncertainties. When used in this Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in our press releases, presentations to securities analysts or investors, in oral statements made by or with the approval of an executive officer of the Company, the words or phrases "believes," "may," "will," "expects," "should," "continue," "anticipates," "intends," "will likely result," "estimates," "projects," or similar expressions and variations thereof are intended to identify such forward-looking statements. However, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending upon a variety of important factors, including those described in Exhibit 99 to this Form 10-K.

ITEM 2. PROPERTIES

    The Company leases approximately 26,000 square feet in St. Paul, Minnesota as its corporate headquarters and production facility. The facility is leased through March 2004. The Company believes that this facility will be adequate to meet its needs through the full commercial introduction of its planned products.

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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, 2000.

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. In July 1999, the Company received proceeds of $10,000,000 from a private placement of 1,111,111 shares of its common stock to accredited investors. In June 2000, the Company received proceeds of $12,687,500 from a private placement of 2,030,000 shares of its common stock to accredited investors. On March 26, 2001, the Company received proceeds of $7,349,000 from a private placement of 2,449,666 shares of its common stock to accredited investors. The Company also issued warrants to purchase an additional 122,450 shares of common stock, at an exercise price of $4.00 per share, to the placement agent in the transaction. Proceeds from the sale of these shares are being used for expenses associated with current operating expenses, U.S. market expansion, clinical trials for atrial fibrillation, software and hardware product development and repayment of the loan from Medtronic, Inc. The shares of common stock were sold pursuant to Section 4(2) of the Securities Act of 1933, as amended. Such proceeds have been, and will continue to be, used to fund U.S. market expansion; the continued development and testing of, including clinical trials for, the EnSite System; 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.

    On March 26, 2001, the closing sales price per share of the Company's common stock as quoted on the Nasdaq National Market was $3.13 per share. On March 26, 2001, there were approximately 101 holders of record of the Company's common stock, representing approximately 2,750 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.

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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.

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.

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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 received FDA approval for right atrial use in the U.S. during the second quarter 1999. Through a distribution agreement with Medtronic, Inc., the products are available in full market release to electrophysiologists in Europe.

Results of Operations

Years ended December 31, 2000 and 1999

    General.  Net losses decreased to $10,311,147, or $.92 per share, for the year ended December 31, 2000, from $11,728,656, or $1.23 per share, for the year ended December 31, 1999. The Company expects losses to continue at least through first quarter of 2002. The Company is in a period of growth in sales and marketing expenses related to market introduction, including increases in personnel costs.

    Revenue and Cost of Goods Sold.  Revenue for the years ended December 31, 2000 and 1999 was $14,562,894 and $9,597,193, respectively. Revenues include the sale of the Company's EnSite catheter and EnSite 3000 clinical workstation, including the Company's proprietary software, patient interface unit and other peripherals. The increase in revenues is mainly attributable to the Company's increase in unit sales and the Company's presence in the U.S. for the full year in 2000, compared to eight months of sales in 1999. Additionally, with the increased installed base, the sales of the Company's EnSite® catheter increased proportionately.

    Cost of goods sold including unabsorbed manufacturing expenses was $7,174,431 and $6,592,409 for the years ended December 31, 2000 and 1999, respectively. With the market release of the Company's Clarity software starting in June 2000, capitalized software development costs are being amortized through cost of goods sold over the expected 18-month product life cycle.

    The gross profit margin for the years ended December 31, 2000 and 1999 was 50.7% and 31.3%, respectively. The increase in margins for the year 2000 versus 1999 is related to favorable revenue mix, material cost reductions and manufacturing operation efficiency gains.

    Research and Development Expenses.  Research and development expenses include compensation and benefit costs within the clinical, software, hardware, catheter and applied research departments as well as costs associated with regulatory expenses. Research and development expenses were $4,459,737 for the year ended December 31, 2000, compared to $5,102,378 during the same period in 1999, a decrease of $642,641. The decrease is attributable to the capitalization beginning in late 1999, after reaching technological feasibility, of software development costs related to the Clarity release. The Company believes research and development expenditures will increase for the year 2001 because of the left atrium study, which is expected to begin second quarter of 2001.

    General and Administrative Expenses.  General and administrative expenses were $2,073,795 and $2,004,991 for the years ended December 31, 2000 and 1999, respectively, an increase of $68,804. The increase is due primarily to a rise in personnel costs and professional services expense. The Company expects general and administrative expenses to increase slightly during the 2001 year.

    Sales and Marketing.  Sales and marketing expenses increased to $11,093,095 during the year ended December 31, 2000, from $7,712,522 during the same period in 1999, an increase of $3,380,573. The increase is primarily attributable to increases in personnel and costs associated with building and training of the U.S. sales and clinical team. As the Company continues to penetrate the U.S. market, increases in sales and marketing expenses are expected in the next year, as it adds additional headcount in both its selling and field clinical engineering areas.

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