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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 ENDING APRIL 30, 2003
[ ] 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: 0-28010
MEDWAVE, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1493458
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4382 ROUND LAKE ROAD WEST, ARDEN HILLS MINNESOTA 55112
(Address or principal executive offices, zip code)
Registrant's telephone number, including area code: (651) 639-1227
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: COMMON STOCK,
NO PAR VALUE
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 information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 126-2). YES NO X
--- ---
The aggregate market value of Common Stock held by non-affiliates of the
Registrant, based on the last sale price as of the last business day of the
registrant's most recently completed second fiscal quarter, October 31, 2002,
was approximately $5,831,390.
As of July 11, 2003, 8,659,666 shares of Common Stock, no par value per share,
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
PART I
ITEM 1 DESCRIPTION OF BUSINESS................................................................3
ITEM 2 PROPERTIES............................................................................20
ITEM 3 LEGAL PROCEEDINGS.....................................................................20
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................20
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.............................21
ITEM 6 SELECTED FINANCIAL DATA...............................................................22
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS.......................................23
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................28
ITEM 8 FINANCIAL STATEMENTS..................................................................28
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..................................................................47
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT................................................48
ITEM 11 EXECUTIVE COMPENSATION................................................................50
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................51
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................53
ITEM 14 CONTROLS AND PROCEDURES ...............................................................53
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................53
MEDWAVE(R), VASOTRAC(R), VASOTRAX(R) ARE TRADEMARKS OF THE COMPANY.
Forward Looking Statements
CERTAIN STATEMENTS CONTAINED HEREIN CONSTITUTE "FORWARD-LOOKING STATEMENTS" AS
THAT TERM IS DEFINED UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
(THE "ACT") AND RELEASES ISSUED BY THE SECURITIES AND EXCHANGE COMMISSIONS AND
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE EXCHANGE ACT OF 1934. THE WORDS "BELIEVE", "EXPECT", "ANTICIPATE",
"INTEND", "ESTIMATE", AND OTHER EXPRESSIONS WHICH ARE PREDICTIONS OF OR INDICATE
FUTURE EVENTS AND TRENDS AND WHICH DO NOT RELATE TO HISTORICAL MATTERS IDENTIFY
FORWARD-LOOKING STATEMENTS. RELIANCE SHOULD NOT BE PLACED ON FORWARD-LOOKING
STATEMENTS BECAUSE THEY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER
FACTORS, WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE
COMPANY TO DIFFER MATERIALLY FROM ANTICIPATED FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENT WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS
OR OTHERWISE. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY
OF FACTORS, INCLUDING THOSE SET FORTH IN ITEM 1. SOME OF THE RISKS AND
UNCERTAINTIES THAT MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE
GENERAL ECONOMIC CONDITIONS, LENGTHY ACQUISITION CYCLES BY POTENTIAL CUSTOMERS,
OUR ABILITY TO SUCCESSFULLY MARKET OUR PRODUCTS, AS WELL AS THOSE RISKS AND
UNCERTAINTIES SET FORTH UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 13.
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
COMPANY PROFILE
Medwave was organized under Minnesota law in 1984. In May, 2003, our
shareholders voted to re-incorporate the company into the state of Delaware. We
anticipate consummating the re-incorporation into Delaware in the near future.
Upon the consummation of the merger, Medwave, Inc., a Minnesota corporation,
will cease to exist, and Medwave, Inc., a Delaware corporation, will assume all
of the assets and liabilities of the Minnesota corporation. We are engaged
exclusively in the development, manufacture, and sale of non-invasive, blood
pressure measurement and monitoring systems and of related technologies.
Our principal offices are located at 4382 Round Lake Road West, Arden Hills,
Minnesota 55112 and 435 Newbury Street, Danvers, Massachusetts, and our
telephone numbers are 651/639-1227-Minnesota and 978/762-8999-Massachusetts.
BUSINESS
GENERAL
Medwave currently employs twenty-two (22) employees, three of whom are part
time. Since our inception, we have been engaged exclusively in the development
of devices for monitoring and measuring blood pressure.
Blood pressure or, more precisely, arterial pressure, is the pressure that the
blood exerts against the interior of the arterial walls. The level of the
pressure depends upon the strength of the heart's contraction, the volume of
blood in the circulatory system, the elasticity of the arteries, and the degree
of capillary constriction impeding circulation. During the heart's relaxation
phase, (the diastole), blood pressure falls. When the heart muscle contracts,
(the systole), blood pressure rises. Clinically, blood pressure is commonly
reported as three different values. Systolic and diastolic pressures are the
maximum and minimum pressures during a single cardiac cycle, respectively.
Systolic pressure is also often referred to as contracting pressure, when the
heart muscle is contracting and pumping blood through the blood vessels of the
body. Diastolic pressure is also often referred to as the resting or relaxation
pressure of the heart muscle. Mean pressure is the average pressure during the
cardiac cycle.
Blood pressure and changes in blood pressure are critical indicators of the
health and performance of the body's cardiovascular system. Blood pressure
varies with age and by gender, such that young adults tend to have lower blood
pressures than older adults, and men tend to have higher blood pressures than
women of the same age. Even in healthy bodies, blood pressure normally
fluctuates during the day. For example, exercise, emotion, and exposure to the
cold tend to cause blood pressure to rise, while it falls in instances of
warmth, fainting, hemorrhage, and certain diseases. All hospital patients
require measurement of their blood pressure and many surgical or critically ill
patients require frequent or continual monitoring of their blood pressure.
Continual monitoring of blood pressure is important for patients in operating
rooms, surgical recovery rooms, intensive care units, emergency departments and
other critical care sites because of the acuteness of these patients' conditions
and rapidity with which their conditions can deteriorate. Trend information
obtained from successive blood pressure measurements plays an important role in
the diagnosis, prognosis, and treatment of diseases. Blood pressure is one vital
sign that is measured in every clinical location of the healthcare spectrum,
including a patient's own home environment. It is estimated that approximately
25 million people in the United States are measuring their personal blood
pressure each day.
Utilizing our proprietary technology, we developed the Vasotrac(R) APM205A
system which monitors blood pressure, providing new readings approximately every
fifteen heartbeats. We believe that the continual blood pressure readings and
non-invasive qualities of the Vasotrac system make it the most advanced approach
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to blood pressure monitoring. In February 1995, we received clearance from the
US Food and Drug Administration (FDA) to market the Vasotrac system. We have
also developed a hand-held blood pressure monitor, the Vasotrax(R). This
hand-held monitor is based on the technology used in the Vasotrac system. In
June 2000, we submitted a 510(k) notification to the FDA for review of the
Vasotrax hand-held monitor. In August 2000, we received FDA clearance, which
allows us to market the Vasotrax in the United States for use on adult patients
by trained medical personnel. In addition, and as a result of our supplier
agreement with Nihon Kohden of Japan, we have developed a module of our Vasotrac
continual non-invasive blood pressure monitor. The module is designed to be
integrated into the other company's larger, more comprehensive systems.
Current Technology:
Invasive Arterial Catheter:
Currently, both invasive and non-invasive techniques are used to measure blood
pressure. Invasive techniques employ the surgical placement of a catheter
directly into an artery, an A-line. The fluid-filled catheter is connected to a
pressure transducer and assorted tubing to produce beat-by-beat, continual blood
pressure measurements. In addition, the catheter may be used to extract blood
samples from which a number of diagnostic test results, such as blood gas
information, may be obtained. Because our non-invasive Vasotrac system does not
allow for the extraction of blood samples, invasive techniques offer a
competitive advantage in this area. The surgical insertion of the catheter,
however, takes about fifteen to twenty minutes, assuming no complications.
Moreover, while such insertions frequently are performed without incident,
serious complications can occur, including thrombosis (blood clot), air emboli
(air bubble), and infection. Measurement errors may occur due to air bubbles,
catheter clotting or movement, or changes in elevation between the pressure
transducer and the level of the heart. Immediately following catheter
withdrawal, firm pressure must also be applied over the arterial site for an
extended period of time to avoid serious blood loss. Primarily because of its
invasive nature, the A-line is generally used by clinicians in critical cases
and for only relatively short time periods. The cost associated with inserting
an arterial catheter can be significantly higher than non-invasive blood
pressure monitoring.
As a general matter, we believe that non-invasive rather than invasive
treatments and methods are preferred by clinicians for numerous medical
conditions and processes, including the measurement and monitoring of blood
pressure. Non-invasive techniques significantly reduce patient risk and increase
patient comfort. In addition, the time and expense required to set up, maintain,
and remove non-invasive equipment generally is substantially less than with
invasive systems. We believe that, in many cases, patients in emergency
departments and associated environments, critical care, operating rooms,
cardiology departments, and pediatric environments could benefit from continual
blood pressure monitoring after the point at which clinicians may now cease
obtaining such readings due to concerns associated with prolonged or indefinite
uses of invasive techniques.
Non-Invasive Blood Pressure Cuffs:
Many non-invasive blood pressure measurement techniques utilize a manually
operated occlusive cuff around the upper arm. A relatively simple blood pressure
instrument, called a sphygmomanometer, contains a cuff connected to a hand air
pump and pressure gauge or mercury column. The cuff is inflated to a pressure
above that of systolic pressure until the brachial artery is completely
occluded, and then the cuff is slowly deflated. During deflation, the clinician
must listen to the pulse in the brachial artery. Upon hearing and properly
interpreting the appropriate sounds, the clinician records the pressures shown
on the gauge or mercury column. The cuff pressure occurring simultaneously with
certain observed events within the circulatory or cuff systems are taken as the
systolic and diastolic pressures. This process may take several minutes to
complete, and in some patients will cause significant discomfort due to the
squeezing of the cuff around the upper arm. Several clinical studies have been
performed comparing the accuracy of this method with the invasive arterial
catheter, and have shown a wide degree of variation with this method being
caused by such things as environmental noise, improper cuff size, and readings
taken too close in time to one another.
4
Our Vasotrax hand-held monitor appears to have several advantages over a
traditional sphygmomanometer. The Vasotrax can produce a reading in
approximately 15 seconds, whereas the sphygmomanometer may take several minutes
to produce a reading. This can be a significant advantage in emergency
situations. Also, this time saving of several minutes each time a blood pressure
is obtained can be a great staff efficiency improvement, which is particularly
important in light of the current shortage of nursing professionals. Another
advantage is patient comfort because the Vasotrax does not require a complete
obstruction of the artery as does the sphygmomanometer. In addition, in the
future the Vasotrax will be capable of storing approximately 200 patient
readings for up to 16 different patients and be capable of downloading these
readings into a larger information system. This will improve the caregiver's
workflow and process of interaction with patients. Recently, many states have
mandated that the reduction of mercury be accomplished by specified dates.
Healthcare systems are searching for an alternative method to replace the
thousands of mercury filled blood pressure sphygmomanometers currently in use.
An automated, non-invasive blood pressure monitoring system is already commonly
used in critical care and operating room settings. The automated non-invasive
blood pressure monitoring system currently dominating the market is the
Dinamap(R) product, marketed by GE Medical Systems, a division of General
Electric Company. The Dinamap(R) provides blood pressure measurements via
automatic inflation and deflation of an occlusive cuff at predetermined
intervals. It is reasonably reliable and simple to use. However, the Dinamap(R)
product provides only intermittent measurements at one-to-ninety minute
intervals, as selected by the clinician. Some patients suffer signification
discomfort from the frequent cuff inflation. In addition, with cuff-based
systems, arm circulation is cut off during each measurement, the arm holding the
pressure cuff is unavailable for intravenous lines and other forms of
monitoring, and arm bruising and sleep interruption frequently occur. Also, the
manual and automatic cuff systems have not performed well in areas with a high
degree of motion, such as in ambulances or cardiac stress labs.
In contrast to the sphygmomanometer and other cuff-based systems, our Vasotrac
system and Vasotrax hand-held monitor require no inflatable cuff but instead
contain a unique pressure sensor that is placed on the wrist. Beyond the comfort
factor and greater versatility of our Vasotrac system and Vasotrax hand-held
monitor, we believe that our Vasotrac has a very important advantage over
cuff-based systems--more rapid readings that allow for more precise monitoring.
Indeed the accuracy of the Vasotrac has been compared to an invasive arterial
catheter with excellent correlation across a broad spectrum of patients. The
Vasotrac produces an arterial waveform, not available on either manual or
automatic cuffs, and provides significant improvement in patient comfort due to
our measurement technique. The Vasotrac interfaces directly into existing
patient monitoring systems by plugging an interface package (the NIA V-Line)
into the invasive pressure channel normally used for the arterial catheter. It
is estimated that the combined sum of hospitals in the U.S. market have over
500,000 patient monitoring systems installed with invasive pressure channels.
During the Spring of 2001, we introduced a new High Motion Tolerant (HMT)
software package that has the capability of monitoring a patient's blood
pressure during excessive movement, such as is found in ambulances or cardiac
stress labs.
The contraindications for our Vasotrac system and Vasotrax hand-held monitor
include patients on cardiopulmonary bypass, and patients with any condition in
which rendering a pulsating pressure signal from the radial artery is not
possible which may occur with severe arterial restrictions. Although there are
contraindications for the system, we believe that, as a general matter,
virtually no medical device is universally applicable for all patients at all
times. As such, this should not be a critical factor for market acceptance.
Moreover, given differences in individual body construction, our products may
not provide consistent readings or be usable on all patients. We do not believe
our products have caused any significant patient complications.
For those hospital based patients who require continual blood pressure
monitoring, invasive methods are currently the clinician's technology of choice.
Given the attractiveness of non-invasive monitoring, however, several companies
have introduced or are introducing products for non-invasive continual
monitoring of arterial pressure based upon several technologies. These
technologies include pulse-wave velocity, partially inflated finger cuffs,
partially inflated arm cuffs, and tonometry. We believe that none of these
alternatives has gained wide acceptance within the clinical community for
continually monitoring arterial pressure. This belief is based on previous,
5
unsuccessful efforts of other companies to introduce accurate, continuous, and
non-invasive blood pressure monitors, the absence of such products at major
medical and other product shows, the lack of published advertisements, papers or
studies about such products in respected scientific, medical and other journals,
and anecdotal discussions with physicians and other medical personnel by our
management.
We originally attempted to build a dealer network to sell our technology, in an
a effort to seek sales coverage without the commensurate increase in sales staff
and cost that would occur if the same coverage were sought by building our own
employee sales force. However, we found this to not be an effective manner to
enter, and initially penetrate the market, as most medical device dealer
organizations do not have the level of sales time required to sell innovative,
breakthrough technology such as ours. Therefore, to augment our dealer network,
we have hired a core team of sales professionals to work within defined
geographies. The success of our product sales will depend upon the ability of
our sales professionals, dealers and other partners to sell the products to the
pre-hospital (EMT/EMS) environment, hospitals, the post-hospital environment
such as physician offices, and other markets. At this time, certain of our
dealers have not achieved the sales success we desired. Accordingly, we have
terminated these dealers, and in most cases we will not replace them, due to the
reasons stated above. We have provided product training for our remaining dealer
organizations as well as our direct sales team. Part of this training is to
exploit the high cost to hospitals of monitoring invasively, versus monitoring
with comparable accuracy and speed with our non-invasive Vasotrac Monitor. This
is accomplished by using a detailed cost analysis customized for a particular
hospital or institution.
Our success is dependent upon the successful development and marketing of the
Vasotrac system, the MJ23 OEM module, and the Vasotrax hand-held monitor as well
as related technology. However, there can be no assurance that our products or
related technology will be successfully marketed or sold in sufficient
quantities and at margins necessary to achieve or maintain profitability.
Between February 2000 and April 2002 we entered into distribution agreements in
numerous European and Asian countries. However, for the reasons stated above,
most of these organizations have not possessed the skills required to sell our
technology. We are looking for alternative ways to distribute our products into
these markets, possibly by use of an agreement similar to the one we have with
Nihon Kohden in Japan. In January 2001, we received the necessary clearances to
be able to sell into the Canadian market. We were notified in the spring of
2001, that we received South Korean government clearance to market the Vasotrac
system in South Korea. In January 2002, we obtained the Ministry of Health and
Welfare approval to sell our Vasotrac Monitor in the Japanese Market. This
approval was obtained in working with Nihon Kohden in Japan, who is our
exclusive distribution partner in Japan. Local government approvals are not
necessary in all countries, and in fact many will accept either ISO 9001
Certification, and/or US FDA 510K pre market notification.
In September 2000, we signed an OEM module agreement with Nihon Kohden that
required us to develop and produce a Vasotrac module integrated into the Nihon
Kohden patient monitoring product family. As a part of this agreement, Nihon
Kohden placed an initial order for Vasotrac OEM modules, to be delivered over
the initial 18 months, and paid us a down payment of $125,000, that was received
in October 2000. This payment was accounted for as deferred revenue. We have
been shipping our MJ23 OEM Modules to Nihon Kohden, since November 2001. We are
now placing focus on selling our MJ23 OEM Module to other companies in need of a
sensor based non-invasive blood pressure technology.
At the end of November 2000, we began shipments of our Vasotrax hand-held
monitor. We have re-drafted sales plans to promote the sale of the Vasotrax. To
date, this product has been sold into hospitals, in conjunction with Vasotrac
sales projects, and in some cases this product has been sold into the EMS/EMT
market segment. This product may require a more focussed sales channel to sell
to, for example, the EMS and post-hospital markets.
We have been building our own sales organization to work in smaller geographies,
and those individuals will continue to work with our remaining dealers. We
currently have a direct sales force of 10 employees. All of our sales
professionals are focused on the hospital environment and typically sell into
numerous departments within the same institution. The success of our product
sales will depend upon the ability of dealers, partners and/or sales
representatives to sell the products to hospitals, their affiliates, and other
markets.
6
The initial response regarding the Vasotrax hand-held monitor from trade shows
and sales situations has been favorable. We have had some EMS/EMT organizations
purchase the Vasotrax, and like its portability, speed to readings, and comfort
to the patient. However, since it is different than what they are used to using
(the cuff), and therefore, acceptance time and user training are important
aspects of the sales process. We may need to establish additional distribution
arrangements, and complement those arrangements with a number of "in-house"
experts. The Vasotrax hand-held product will be targeted at the pre-hospital
(EMT and EMS) market, the hospital market, and the post-hospital markets
(sub-acute, skilled nursing homes, homecare, and physician offices). There has
been a considerable interest expressed by healthcare professionals and
individuals about the desire to have the Vasotrax become self-applicable,
whereas today it must be applied to a patient by a professional. The feasibility
of this and a market-based focus group are expected to be established this year
to determine target specifications for a self applied device.
Our short-term and long-term investments are being used primarily to increase
our sales and marketing efforts and increase awareness of Medwave and our
technology in the markets, to continue clinical testing of the Vasotrac system,
the Vasotrax hand-held monitor and related technologies, to continually validate
our technology against traditionally used blood pressure monitoring devices and
to create peer-to-peer consensus regarding Medwave's technology. We anticipate
incurring additional losses from further development, testing, regulatory
compliance and sales and marketing expenses for the foreseeable future. Over the
next twelve months, we expect to spend in excess of $500,000 for research and
development, including amounts expected to be spent on clinical trials and
further clinical studies. Specifically, the funds are expected to be used to
develop alternative sensors (including disposable sensors and sensors for use in
infants), to sustain engineering support for manufacturing, to continue
development of the Vasotrax hand-held monitor, and to investigate other clinical
uses for our technology. We do not expect to spend any material amount on
equipment in connection with these initiatives. Even assuming only limited
sales, we believe that cash and cash equivalents will allow us to meet our cash
requirements for approximately fourteen months from April 30, 2003. If the
development process for our products does not proceed as expected due to
significant product design changes, market acceptance difficulties, unexpected
difficulties in attaining cost-effective manufacturability or higher than
expected sales and marketing costs, we may require additional capital at an
earlier date. We may seek such capital through bank borrowing, equipment
financing, equity financing, and/or other methods. Our financing needs are
subject to change depending on, among other things, market conditions and
opportunities, equipment or other asset-based financing that may be available,
and cash flow from operations. Any material favorable or unfavorable deviation
from our anticipated expense levels could significantly affect the timing and
amount of additional financing that may be required. However, additional
financing may not be available when needed or, if available, may not be on terms
that are favorable to our shareholders or us. In addition, any such financing
could result in substantial dilution to our existing shareholders.
We have incurred an accumulated deficit of $20,570,140 from our inception
through April 30, 2003. We expect to incur additional losses from development,
clinical studies, regulatory compliance, sales, marketing, and other expenses at
least until we complete the development of the technology.
We have financed our activities through an initial public offering (IPO) in
November 1995, and a series of earlier private placements of equity securities,
including shares of preferred stock that were converted into common stock just
prior to our IPO in November 1995. On March 6, 1998, we completed a private
placement that raised approximately $2,990,000 in net proceeds. On March 20,
2001 and June 13, 2001, we completed the first round and the second round,
respectively, of a private placement that raised approximately $5,300,000 in net
proceeds. On January 23, 2003, we sold an additional 1,400,000 shares of our
company common stock, and raised approximately $1,697,000 in net proceeds.
PRODUCTS DESCRIPTION
We believe that the continual blood pressure readings and the efficacious and
non-invasive qualities of our Vasotrac system and Vasotrax hand-held monitor
make them a new, superior approach to blood pressure monitoring. The system is
designed to assist clinicians in the therapeutic management of their patients by
providing frequently updated blood pressure readings in an easily obtained and
comfortable manner. The Vasotrac is a microprocessor-controlled system
consisting of (i) a liquid crystal display, LED displays, a Central Processing
7
Unit and a key pad, all housed in an aluminum case, (ii) a patient cable, and
(iii) a replaceable pressure sensor. In order to ensure the accuracy of the
system, the sensor is expected to be replaced approximately every six months.
The Vasotrac system monitors blood pressure using, as a key component, the
pressure sensor placed on the wrist over the radial artery, a main artery in the
arm. Over one thousand (1,000) of our Vasotrac system monitors have been shipped
to customers and distribution partners for use in clinical environments. The
monitor has no moving parts and is composed of standard, off-the-shelf
components. These monitors have been subjected to electrical testing of various
duration, including extended life cycle testing, which has shown that the
monitor has an expected useful life of at least 10 years. We believe that
medical devices are expected to have a life expectancy of 7-10 years. The motor
assembly is the only moving part of the Vasotrac system and, as such, it has
received the most attention from us for life testing. The Vasotrac system has
produced very favorable performance results in testing.
The Vasotrac system and Vasotrax hand-held monitor utilize the Company's
proprietary algorithms and sensors, which applies pressure to the artery as the
pressure waveforms are measured by the sensor. Then, our proprietary algorithms
analyze the pressure waveforms to calculate the systolic, diastolic, mean
pressure readings, and pulse rate approximately every fifteen heartbeats. The
Vasotrac system displays systolic, diastolic, and mean blood pressure in
millimeters of mercury (mmHg) as well as heart rate in beats per minute. The
Vasotrax hand-held monitor displays systolic and diastolic blood pressure as
well as pulse rate. These values are displayed after the clinical user manually
presses the Vasotrax on the subject's radial artery for approximately 15
seconds.
The Vasotrac system is designed to be used by trained medical personnel in
hospitals and other health care settings where automatic blood pressure
monitoring is desirable. Patient pressures can be monitored audibly and visually
by entering limits into the Vasotrac system alarm menu. Those values above or
below the limits will be automatically brought to the attention of the clinician
through audible and visual alarms. Given differences in individual body
characteristics and physical condition, the system may not be usable on all
patients. However, with proper placement, the system has been usable on all
patients participating in our clinical studies conducted to date, and we believe
that the system will continue to be usable on virtually all patients with wrist
sizes larger than 11 cm. We do not believe, however, that market acceptance of
the system is likely to be jeopardized by lack of universal applicability of the
system for the population, although there can be no assurance in this regard.
In the Summer of 2001, we introduced the NIA V-Line interface product, which
allows the clinician to plug the Vasotrac directly into the pressure channel of
the clinician's existing, more comprehensive monitoring system, allowing for a
true "Plug and Play" and capture of data into the clinician's central system. In
addition, we introduced the HMT (High Motion Tolerant) software package, which
is designed to allow the clinician to take continual non-invasive blood pressure
readings on patients in circumstances where motion is prevalent. In these
clinical environments, obtaining a valid blood pressure value with manual cuffs
is a significant challenge for the caregiver, as it requires using a stethoscope
that may be difficult to hear through due to high motion and accompanying noise.
Also, it has been reported to us that automatic cuff systems have not functioned
well in situations involving high motion, even if they are designed for this
application. As a result, our technology has been a topic in numerous clinical
studies in cardiology and emergency departments who are considering the Vasotrac
as a solution.
Our continued development of the Vasotrax hand-held blood pressure monitor may
result in a product that has sales potential in both the professional market
(doctors, nurses, and medical technicians) and the consumer market.
CLINICAL STUDIES
We have conducted clinical studies for four purposes: (i) to aid the product
development process, (ii) to obtain data for submission to the regulatory
agencies, (iii) to help us prepare marketing and sales information to promote
greater awareness of the Vasotrac system and Vasotrax hand-held monitor, and
(iv) to gain a peer to peer recommendation for our technology. We have used two
standards of comparison, the automated cuff and the arterial line (A-line). The
8
automated cuff clinical did not allow synchronization of measurements between
the cuff and our system because of the different number of heartbeats required
to produce readings for each method. Further, the cuff does not meet the
accuracy objectives that we set for the Vasotrac system and Vasotrax hand-held
monitor. For these reasons, the cuff proved to be of limited utility in our
studies. However, since the cuff has been a clinical tool for numerous years,
and is still relied on by thousands of caregivers, we have started to do more
comparisons.
A-lines are believed to provide more accurate blood pressure measurements than
automated cuffs. In contrast to automated cuffs, the A-line studies allow for
data synchronization. By inserting an arterial catheter in the radial artery on
one wrist and by placing the Vasotrac system (or the Vasotrax hand-held monitor)
sensor on the radial artery of the other wrist, data was simultaneously recorded
on a beat-by-beat basis. Our clinical studies were conducted at teaching
hospitals under institutional review board controls and protocols. Generally,
such review boards represent their respective hospital and include physicians
that can make appropriate judgments regarding the safety of the study. The
boards periodically review protocols for medical devices and maintain meeting
minutes, which are subject to audit by the FDA.
Our initial clinical studies were performed on approximately 30 subjects, some
of whom were healthy and some of whom were undergoing surgery. Results from a
series of these studies comparing the Vasotrac system's readings with the
A-line's readings were used in our 510(k) submissions to the FDA. Subsequent to
the 510(k) submissions, we have conducted clinical trials on over 500 additional
individuals. During our clinical trials conducted to date, the variance between
synchronized Vasotrac system readings obtained from one arm of the patient and
the comparative A-line readings obtained from the other arm was calculated by
computing the standard deviation of error from more than 30,000 paired readings
from the patients. Based on these measurements (which excludes a certain number
of paired readings because we believe that these readings have been affected by
artifact, patient level differences, arm-to-arm differences, or experimental
error) the magnitude of this variance was calculated as a standard deviation of
approximately 7, 5, and 7 mmHg for systolic, mean and diastolic blood pressure
measurements, respectively. As such, the Vasotrac system compares favorably with
those found in previous generations of non-invasive blood pressure measurement
devices, such as the Dinamap(TM) cuff-based system with which we claimed
"substantial equivalence" in our 510(k) submission to the FDA. In addition,
these standard deviation values are below the crucial 8 mmHg standard deviation
limit of clinical acceptability as defined by the Association for the
Advancement of Medical Instrumentation ("AAMI") as the national standard for
electronic or automated sphygmomanometers.
In our 510(k) Vasotrac submission to the FDA, we included not only clinical
data, but also outlined a plan to continue testing and integrating the results
therefrom into the Vasotrac system. Based on the foregoing and, most
importantly, the improvement in the overall results of the system's performance
subsequent to its 510(k) submission, we believe that applicable FDA regulations
do not require, and therefore at this point do not anticipate any need to submit
to the FDA, the post-510(k) clinical studies.
Although we believe that our current product design for the Vasotrac system and
our clinical studies conducted to date provide an adequate basis to continue
marketing the system, it will take widespread use and testing to verify that the
Vasotrac system is usable under most conditions and environments. We expect to
continue conducting or supervising on-going clinical studies of the system on
individuals with different characteristics and under various conditions until
such time as the Vasotrac system receives general market acceptance. We cannot
currently estimate the number of individuals to be tested or the amount of time
and expense that will be required to perform and analyze these additional
clinical studies in order to achieve general market acceptance for the system.
In March 2001, we completed clinical testing of the Vasotrac system in pediatric
applications. We used this clinical information to file a 510(k) to the FDA
requesting clearance to allow for the use of the Vasotrac system on pediatric
patients. In June 2001, we received 510(k) clearance from the FDA for use of the
Vasotrac system in pediatric applications. To date, additional studies involving
pediatric patients are ongoing, and in some cases, completed with favorable
results.
9
We are currently expanding our studies of our systems to determine if the
possibility exists to use the current sensor technology on different sites of
the patient's body.
The object of our continued studies is to refine the design of the system and to
test the system on a greater number of patients with different characteristics
and under various conditions, such as a wide range of blood pressure readings,
until such time, if ever, the Vasotrac system and Vasotrax hand-held monitor may
receive general market acceptance. In addition, we believe that the studies will
help us to prepare better marketing, sales, and training information as well as
to promote greater awareness and market acceptance of our products toward the
goal of attaining commercial viability for them.
BELOW IS A SUMMARY OF THE CLINICAL STUDIES COMPLETED AND CURRENTLY UNDERWAY ON
THE VASOTRAC CONTINUAL NON-INVASIVE BLOOD PRESSURE SYSTEM:
STUDY AND INSTITUTION DATE COMPLETED
a. Volunteer Study - University of Minnesota June 1994
b. International Multi Center Study December 1997
Tokyo's Women's Medical College, University of California,
University of Vienna, University of Lille, St. Antoine Hospital
and University of Minnesota
c. Induced Hypotension - University of Vienna August 1998
d. Morbidly Obese Patients - University of Minnesota September 1998
e. Patient Comfort - University of Vienna December 1999
f. Volunteer Study II - University of Minnesota June 2000
g. Pediatric vs. Cuff - University of Minnesota August 2000
h. Patient Comfort - Virginia Tech September 2000
i. Vasotrac vs. Arterial Catheter - University of Arkansas, Children's' Hospital February 2001
j. Vasotrac vs. Arterial Catheter - Children Cardiology - Boston Children's Hospital In Process
k. University of Chicago - Atrial disturbances Investigator departed
l. Arkansas Children's - Sensor Options-Vasotrax Handheld Validation In Process
m. LDS Hospital-Vasotrac in Sleep Lab Patients-Nocturnal Hypertension episodes In Process
n. Mayo Clinic-Liver Transplant Correlation April 2003
o. Univ. of UT-Primary Children's using the Vasotrac in Cath Lab instead of Catheters In Process
p. Massachusetts General Hospital-Vasotrac in Trauma Patients/EMS-EMT Environ. In Process
q. Boston University Med Center-Can Vasotrac be used instead of A-Line in OR In Process
r. Washington University in St. Louis-Comparing Vasotrac to Cuff in Obese Patients In Process
s. Children's Hospital of Chicago-Vasotrac versus Femoral Artery Pressure in Children In Process
t. Children's Hospital of Boston-Vasotrac instead of A-Line in Scoliosis Patients March 2003
We have also conducted clinical studies to develop and validate the Company's
Vasotrax hand-held blood pressure measurement technology. These clinical studies
included 60 healthy subjects. For each subject an arterial catheter was inserted
in one arm and several operators performed repeated blood pressure measurements
from the opposite arm using the hand-held monitor. For each one of the
operator's blood pressure measurements, the corresponding arterial blood
pressure measurements were determined and compared for accuracy. The raw
waveform data from the arterial line as well as the raw data from the hand-held
device were also recorded and stored into our clinical database for further
processing. The data from the first 45 subjects was used for product development
purposes. The data from the last set of 15 subjects was recorded with the final
design of the hand-held monitor. The results of the comparison between the
arterial line blood pressure readings and the hand-held device on these 15
subjects was then referenced as part of our filing with the FDA for the
hand-held device's 510(k) submission, which was filed in June 2000. As was the
case for the Vasotrac system, the standard deviation values for the Vasotrax
hand-held monitor were below the 8mmHg standard deviation limit for clinical
acceptability as established by AAMI. In August 2000, we received FDA clearance
to begin marketing the Vasotrax hand-held monitor in the United States for use
on adult patients by trained medical personnel. We are now undertaking studies
to determine the usefulness and accuracy of the Vasotrax hand-held monitor for
use in pediatric patients.
10
Introduction of the Vasotrac system and Vasotrax hand-held monitor to additional
foreign markets and/or market segments may require us to conduct further
clinical studies in order to achieve both regulatory and general market
acceptance. These clinical studies and the results obtained thereby may require
us to undertake additional product development efforts in order to sell the
Vasotrac system and Vasotrax hand-held monitor in these countries and/or market
segments.
MARKETING
Our success depends primarily on gaining physician and hospital acceptance of
our products. One focus of our marketing strategy must necessarily involve
overcoming resistance of the medical community to the introduction of new
techniques or technology. We have built educational material (video tapes, CD
ROMS, web tools and clinical workbooks) specifically about blood pressure
monitoring and the benefits derived from Medwave's technology. We believe that
testing of our products has yielded favorable results compared to other
non-invasive blood pressure monitors. Now we are attempting to create more of a
presence and awareness about our technology and the benefits it brings to the
healthcare provider. We intend to accomplish this by increasing our presence at
key industry trade shows, increasing the number of people representing our
products, placing advertisements in industry trade journals, continually
enhancing our web site, increasing our public relations activity, and conducting
and participating in industry "Symposiums" regarding blood pressure monitoring
and the benefits derived from Medwave's technology. We conducted our first
"Clinical Symposium" in February 2003 in Boston, and invited three guest
speakers to discuss various aspects of blood pressure monitoring. There were
more than 50 clinical professionals from New England who attended this
Symposium. Over the next 12 months, we plan on holding more of these Symposiums
in various geographic locations. Also, in the Fall of 2002, Nihon Kohden, our
distribution partner in Japan, participated in a clinical speech at the Japanese
Anesthesia Society's annual meeting. Dr. Mark Heulitt of Arkansas Children's
Hospital in Little Rock, Arkansas went to Japan to present the results of his
findings when comparing the Vasotrac monitor to an invasive arterial catheter
when used on children in a critical care setting. The results of this study
confirmed that the Vasotrac technology provided good correlation to an invasive
arterial catheter within this patient group and environment.
EMPLOYEES
As of June 23, 2003, we had 22 employees, three of whom are part time. Of this
number, ten are in sales and marketing positions, three are in manufacturing,
three are in research and development, and the balance are in management or
administration. We also use contract employees to satisfy some development and
accounting functions.
We anticipate we will hire additional employees within the next 12-month period,
primarily in sales, marketing, development, and support positions. However, such
requirements are subject to change and are highly dependent on the market
acceptance of our products, our distribution methods, and existing employment
market conditions.
PRICING AND DISTRIBUTION
We are constantly evaluating the marketable price of the Vasotrac system and the
Vasotrax hand-held monitor. Our pricing strategy takes into consideration the
marketing process for the Vasotrac system and the Vasotrax hand-held monitor and
can be expected to remain dependent on a number of factors, including
manufacturing costs, prices of competitive products, distribution methods,
volume discounts, and market acceptance. We believe that the Vasotrac system is
currently priced slightly higher than the high-end automatic cuffs sold by our
competitors. Conversely, the Vasotrax hand-held monitor is priced considerably
lower than most automatic cuff products. The Vasotrax is priced slightly higher
than most manual cuffs on the market. We believe, however, that our higher price
is supportable due to the superior clinical performance associated with our
product over such automatic and manual cuff devices. In addition, because many
departments at hospitals use disposable blood pressure cuffs, there can be an
added cost to using these products. We have developed cost benefit models that
highlight the savings related with the use of the Vasotrac.
11
In comparison to the costs associated with A-line procedures, we believe that
the Vasotrac system, on a per-procedure basis, results in significant savings
for healthcare providers. Insertion of an A-line is an invasive surgical
procedure requiring a physician. No matter how routine any such procedure may
become, all invasive procedures retain the inherent risk of complications and
have attendant direct and indirect costs associated with them. We believe that
the cost for non-invasively monitoring the blood pressure of a patient with the
Vasotrac system will be less than with an invasive A-line. We believe that this
gives the Vasotrac a competitive edge in an increasingly cost-conscious
healthcare industry. We are currently preparing and presenting cost benefit
models to potential customers. Recently, a hospital that has been using the
Vasotrac technology for a number of months reported that it has been able to
substitute the Vasotrac for invasive catheters in certain patients.
Our Vasotrax hand-held monitor is priced slightly higher than a manual cuff,
however, this price is significantly lower than an automatic cuff system. We
believe that the process of taking a manual blood pressure reading has the
potential of introducing significant error for a number of reasons. Errors in
obtaining manual blood pressures with a cuff based system may occur due to
improper cuff size, motion, or cardiac disturbance. The Vasotrax improves the
workflow process of taking a manual blood pressure by taking an accurate reading
in just 15 seconds.
We believe that a market also exists for us to sell our Vasotrac OEM module to
other equipment companies, such as companies who manufacture patient monitoring,
defibrillators, sleep systems, and cardiology systems. [Over the past several
quarters], we began to ship production MJ23 Modules to Nihon Kohden of Japan, a
market leader in the Japanese market with approximately 50% market share in
patient monitoring. These types of agreements offer the potential for widespread
market penetration without the tremendous investment in resources that would be
expected if we were to attempt entry on such a wide scale ourselves. In
addition, we expect that the volume commitments from such agreements could be
multi-year and offer yields that would take a direct sales organization years to
accomplish. Now that development and production of the OEM Module is completed,
we are pursuing other such agreements with other organizations.
For additional information concerning our product distribution efforts and
arrangements, see "General" above.
PATENTS AND PROPRIETARY TECHNOLOGY
We have applied for U.S. patents covering various aspects of Medwave's blood
pressure technology. As of June 2003, twenty-three U.S. patents relating to
Medwave's blood pressure technology have been granted, and three U.S. patent
applications are pending. We also have pending patent applications relating to
our blood pressure technology in the European Patent Office, Canada, China, Hong
Kong, India, and Japan. Most of our patents and patent applications relate to
both the Vasotrac system and to the Vasotrax hand-held blood pressure monitor.
There can be no assurance that any pending U.S. or any foreign patents will be
granted or, if obtained, that they, or those already granted to us, will
sufficiently protect our proprietary rights. Although patents have been granted
to us, and even if the patents for which we apply are granted, they do not
confer on us the right to manufacture and market products if such products
infringe on patents held by others. While we have reviewed prior art in
connection with our patent applications, we have not undertaken or conducted any
comprehensive patent infringement searches or studies. If any third parties hold
any such conflicting rights, we may be required in the future to stop making,
using or selling our products or to obtain licenses from or pay royalties to
others, which could entail significant expense and have a material, adverse
effect upon us. Further, in such event, there can be no assurance that we would
be able to obtain or maintain any licenses on acceptable terms, if at all. We
have, throughout the development process for the Vasotrac and Vasotrax products,
been associated with various companies, institutions and individuals. Although
we have no knowledge that any such companies, institutions or individuals have
12
claimed, or have any basis for claiming, interests in our proprietary rights,
there can be no assurance that such claims will not be threatened, asserted or
perfected. Such claims, even if we ultimately prevail on the merits, could have
a material, adverse effect upon us.
In addition to patent protection, we rely, to the extent possible, on trade
secrets, confidentiality agreements, un-patented proprietary know-how, and our
continuing development of new products.
GOVERNMENT REGULATION
We are subject to FDA and other government regulations, including regulations
with respect to marketing approval, manufacturing practices, packaging, labeling
and complaint reporting. Medical devices "substantially equivalent" to existing
systems continuously marketed since May 1976 may be marketed pursuant to a
Pre-Market Notification Submission (a "510(k) Submission") with the FDA. The FDA
finding of "substantial equivalence" for the Vasotrac system and the Vasotrax
hand-held monitor does not in any way denote official approval of the device.
Further, any representation that creates an impression of official approval of a
device because it complies with the pre-market notification regulations is
misleading and constitutes misbranding. Certain devices, including those which
are not "substantially equivalent" to predicate devices, are subject to
Pre-Market Approval Application ("PMA") requirements and more stringent FDA
reviews. In contrast to the 510(k) process, the PMA process generally occurs
over a more protracted time period and requires more extensive clinical data.
Like all medical device manufacturers, we must implement, maintain and follow
the FDA's Quality System Regulation ("QSR") and Good Manufacturing Practices
("GMP"). We believe our primary manufacturing costs are driven by initial
scale-up and ultimate production levels and will not be significantly impacted
by such requirements. Should we intend to market the Vasotrac system or the
Vasotrax hand-held monitor for new or different uses, or should we significantly
modify the system in a way that could significantly affect its safety or
effectiveness, we would be required to again file a new 510(k) Submission with
the FDA. Moreover, it is anticipated that any new product concepts developed by
us will require various government clearances prior to being sold.
In our initial 510(k) Submission to the FDA, we included not only clinical data,
but also outlined our plans to continue testing and integrating the results
therefrom into the Vasotrac system. We do not believe that FDA regulations
require, and therefore at this point do not anticipate, submission to the FDA of
our post-510(k) clinical studies. Although the FDA has stated that a
manufacturer is best qualified to make an initial determination of whether a new
510(k) Submission is necessary, the FDA can overrule a manufacturer's decision
not to submit a new 510(k) Submission and take appropriate regulatory action. If
we determine we do not need to submit any such new 510(k) Submission, including
with respect to our post-510(k) clinical studies, and the FDA consequently takes
regulatory action, we could be materially and adversely affected.
WARRANTY AND SERVICE
Our products are available with limited 12-month parts and labor warranty
commencing at the date of shipment. When warranty repairs are necessary, we
generally perform them at our Arden Hills, Minnesota facility. We also provide
on-call technical support. We also service equipment on a time and materials
basis.
RISK FACTORS
Our business and an investment in our company are subject to a number of risks,
including those described in the preceding sections as well as those highlighted
below.
WE MUST DEVELOP A MARKET FOR OUR PRODUCTS
We presently depend on our Vasotrac, Vasotrax, and/or our MJ23 OEM module
product line, the market acceptance of which is in its early stages. Our future
is dependent upon the success of these products and similar products that are
based on the same core technology. The market for these products is in an early
13
stage of development and may never fully develop as we expect. We have
sponsored, and will continue to sponsor or conduct clinical trials. We cannot be
certain that such clinical trials will be completed, that they will have a
positive outcome or that a positive outcome in these trials will be sufficient
to promote widespread acceptance of our products within the medical community.
OUR SUCCESS IS DEPENDENT ON MARKET ACCEPTANCE
Medwave's success depends on market acceptance of the Vasotrac system, the MJ23
OEM modules thereof, and/or the Vasotrax hand-held monitor. Such acceptance
depends primarily on gaining customer (end-user) and institutional (hospitals,
outpatient centers, ambulance companies, nursing homes and physician offices)
acceptance of these products. We believe that testing of the Vasotrac system and
Vasotrax hand-held monitor has yielded favorable results compared to other
non-invasive blood pressure monitors. However, improper placement of the
pressure sensor or improper use of the system may cause the readings produced by
the Vasotrac system and Vasotrax hand-held monitor to be questionable. As a
result, another key component of our marketing strategy has been to focus on
training and education of clinicians in the correct use of the Vasotrac system
and Vasotrax hand-held monitor. Also, given differences in individual bone
physiology, body weight and physical condition, the Vasotrac system, the MJ23
OEM modules thereof, and the Vasotrax hand-held monitor may not provide adequate
readings or be usable on all patients. For example, if a patient's peripheral
blood flow to his or her arms has been compromised, these products may not
function as specified. Other contraindications for these products may result
from patients on cardiopulmonary bypass and patients with any condition in which
rendering a pulsating pressure signal from the radial artery is not possible. To
date, we believe we have not detected significant patient complications caused
by any of our products. However, as with any relatively new product,
complications may occur as the Vasotrac system, the MJ23 OEM modules thereof,
and the Vasotrax hand-held monitor are used on a greater number of patients with
different characteristics and under various conditions. The presence of any
significant complications would necessitate additional research and evaluation
to determine the impact of such complications. Finally, we must overcome the
resistance of the medical community to the introduction of new techniques or
technology. We believe that this resistance may be exacerbated due to the fact
that the blood pressure cuff has been in use for more than 100 years, and
virtually all medical professionals are trained using cuff technology.
Therefore, there can be no assurance that the Vasotrac system, MJ23 OEM modules
thereof, or the Vasotrax hand-held monitor will gain market acceptance. If these
products do not gain market acceptance, our future would be jeopardized.
WE MUST MAINTAIN AND DEVELOP STRATEGIC RELATIONSHIPS WITH THIRD PARTIES TO
INCREASE MARKET PENETRATION OF OUR PRODUCT LINES.
We distribute our products to domestic hospitals with our direct sales
organization and in some cases with regional dealers, and to targeted
international markets primarily through distributors. We also have a Vasotrac
system OEM modules sales agreement in place with Nihon Kohden, a well known
medical device company in the Japanese market, with close to 50% market share in
patient monitoring. We intend to enter into similar agreements with other major
medical device companies and to establish technology partnerships with other
medical product and technology companies. Widespread acceptance of technology is
dependent on our establishing and maintaining these strategic relationships with
third parties and on the successful distribution efforts of our direct sales
organization.
Many aspects of our relationships with third parties, and the success with which
third parties promote distribution of our products, are beyond our control. We
may be unsuccessful in maintaining our existing strategic relationships and in
identifying and entering into future development and distribution agreements
with third parties.
OUR INTERNATIONAL SALES EXPOSE US TO UNIQUE RISKS.
In fiscal 2003, international sales of our stand-alone products accounted for
approximately 23% of our revenue. The sale of MJ23 Modules accounted for
approximately 21% of revenue.
14
We believe that international sales will represent a meaningful portion of our
revenue in the future. We rely on distributors to assist us with our
international operations. In addition, we are exposed to risks from
international sales, which include unexpected changes in regulatory
requirements, tariffs and other barriers and restrictions and reduced protection
for intellectual property rights. Moreover, fluctuations in the rates of
exchange may increase the price in local currencies of our products in foreign
markets and may price us out of special foreign markets.
WE MAY NOT HAVE ADEQUATE INTELLECTUAL PROPERTY PROTECTION.
Although we believe that we have effective patent protection, our patents and
proprietary technology may not be able to prevent competition by others. In
addition, in the future our products may be found to infringe upon the rights of
others. Any claims resulting in intellectual property litigation, whether
defensive or offensive, could drain our resources and, if decided against us,
materially adversely affect our business.
WE RELY ON A SINGLE TECHNOLOGY PLATFORM.
We believe that significant and expanding markets exist for the Vasotrac system,
the Vasotrax hand-held monitor, the MJ23 OEM module, and for additional products
incorporating our proprietary technology. Currently we utilize one technology
platform in the Vasotrac system, the MJ23 OEM module, and the Vasotrax hand-held
monitor. The technology platform is our sensor technology and the software
algorithms. In addition, in September 2000 we entered into an agreement to
incorporate the Vasotrac system technology into an OEM module. Reliance on a
single technology platform creates substantial risks for us. If, for example,
the Vasotrac system and the Vasotrax hand-held monitor are not successfully
marketed, if they fail to meet customer needs, or if they are not accepted in
the marketplace, we would be materially and adversely affected, our primary
business focus would require re-evaluation, and our ability to continue
operations would be jeopardized. We have not undertaken any comprehensive patent
infringement searches or studies. If the Vasotrac system or the Vasotrax
hand-held monitor were found to infringe on the patent rights of others or if
third parties successfully asserted rights to these products, we would be
materially adversely affected.
We also intend to develop additional products based on our core technology. The
technology employed in the Vasotrac system may be useful in developing products
for other markets. We are early in considering the development possibilities of
these new products so there can be no assurance that additional products will be
successful either from a technical standpoint or from a manufacturing or
customer acceptance standpoint.
WE MUST CONTINUE TO EVALUATE THE DESIGN OF OUR PRODUCTS
While our initial product development and clinical testing program for the
Vasotrac system, Vasotrax hand-held monitor, and MJ23 OEM module are complete,
extensive use and evaluation of the design is necessary in order to assess
whether the products, as currently configured, will broadly meet customer needs
or be accepted as a viable alternative in the marketplace. We will continue to
test the Vasotrac system and Vasotrax hand-held monitor to enhance their market
acceptance. If the configuration of the system must be modified, there can be no
assurance such modifications will be acceptable to customers or be technically
feasible. Even if feasible, such modifications could result in significant
delays and significant expenses. If such modifications require regulatory
approval, additional significant delays could result. We could be materially and
adversely affected by any of these developments.
We have entered in to an agreement to incorporate the Vasotrac system technology
into an OEM module. Although sale of the Vasotrac system as an OEM module is
intended to complement sales of the system as a stand-alone product, it is
possible that configuration as an OEM module will be the principal or customer
preferred way of purchasing and using this product. It is also likely that OEM
modules will require regulatory approval, which may result in additional delays.
Any regulatory application must be submitted by any of the third party companies
that use the OEM module. We could be materially and adversely affected by any of
these developments.
15
OUR PRODUCTS MAY REQUIRE SERVICING; WE MAY BE SUBJECT TO PRODUCT LIABILITY
CLAIMS
Our goal is to produce highly reliable Vasotrac systems, OEM modules thereof,
and Vasotrax hand-held monitors that do not require excessive subsequent
servicing. There can be no assurance, however, that we will be successful in
achieving such goal. There also can be no assurance that additional problems
will not occur, that additional servicing requirements will not be necessary or
that any additional problems or servicing requirements, individually or in the
aggregate, will not be significant, difficult to correct, time-consuming or
prohibitively expensive. Further, the need for any such additional servicing may
not be readily apparent to clinicians using the Vasotrac system, OEM modules
thereof, or the Vasotrax hand-held monitor. We believe that actual or perceived
excessive servicing requirements for the Vasotrac system, OEM modules thereof,
or the Vasotrax hand-held monitor could materially and adversely affect market
acceptance of the system and could raise product liability concerns. See "Risk
Factors -- We may be subject to product liability claims that exceed insurance
coverage." Although we plan to continue testing our products to determine the
extent of their servicing requirements, there can be no assurance that we can
precisely identify the exact scope of such servicing requirements.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND CAPABILITY
We currently have little manufacturing experience or capability, other than a
limited ability to produce relatively small quantities of the Vasotrac system
and Vasotrax hand-held monitor. We have not developed, arranged for, or invested
in any significant production tooling, nor have we contractually arranged for
any significant third-party manufacturing capacity or agreements. There can be
no assurance that we will be able to scale-up manufacturing of the Vasotrac
system, OEM modules thereof, or the Vasotrax hand-held monitor for commercial
production at quantities required to meet cost targets and profitability goals.
If our manufacturing costs are higher than anticipated or if a lower-priced
competitive product becomes available, we may not be able to produce and sell
the Vasotrac system, OEM modules thereof, or the Vasotrax hand-held monitor
competitively. In addition, there can be no assurance that subcontractors, on
whom we will rely for functions we will not perform internally, will produce
sufficient products at required quality and cost levels. We will be materially
adversely affected if we are unable to scale-up manufacturing successfully or
effectuate manufacturing arrangements on acceptable terms.
WE CURRENTLY HAVE LIMITED OR SINGLE SOURCES OF SUPPLY
We currently purchase from outside vendors, on a purchase order basis,
quantities of virtually all components and subassemblies for the Vasotrac system
and Vasotrax hand-held monitor. Should production rates increase, the supply of
components and subassemblies will become more critical. Furthermore, we have no
formal agreements with any of our vendors. Should a key vendor be unwilling or
unable to supply any components or subassemblies required by us in a timely
manner, we may be materially adversely affected.
WE FACE SUBSTANTIAL COMPETITION
We currently know of two other continual non-invasive blood pressure monitoring
devices on the market. However, one of those devices uses a cuff to calibrate
the blood pressure readings and we therefore do not consider the device to be
directly competitive. The other device uses a wrist sensor mechanism. We face
substantial competition from numerous companies that manufacture and market
noninvasive and invasive instruments for blood pressure measurement and
monitoring. Several companies competing in the traditional cuff and catheter
blood pressure monitoring market have significantly greater resources as well as
established technologies and product reputations in the blood pressure
monitoring field. Our ability to compete successfully in this market will depend
on our ability to develop and market a technologically superior blood pressure
monitoring or measurement system that provides cost-benefit, patient benefit,
and improved staff effectiveness.
To compete successfully, we likely will need to develop and introduce new
products and/or enhancements that keep pace with technological advancements,
respond to evolving consumer requirements and achieve market acceptance. We may
be unable to develop new products that address our competition.
16
Our business plan contemplates an income stream from sales of replacement
sensors that are compatible with only our monitors and OEM modules. We may be
subject to price competition from other sensor manufacturers whose products are
also compatible with our monitors. To mitigate this we developed proprietary
sensor technology that provides and promotes the exclusive use of our
proprietary sensors with our equipment. There can be no assurance, however, that
such measures will preclude replacement sensor competition in the future.
The current widespread acceptance of non-invasive cuff technology and of the
arterial line, and the lack of widespread acceptance of non-invasive
technologies like ours, is an important competitive disadvantage that we must
overcome in order to gain general market acceptance. In addition, the current
technology involving cuffs and arterial lines has established cooperative
relationships with large medical equipment companies and buying groups that we
must also overcome in order to successfully compete. If we are not successful at
overcoming such competition, our primary business focus would likely require
re-evaluation with our ability to continue operations being jeopardized. We have
however entered into a national group purchasing agreement with AmeriNet, one of
the largest GPO's in the US, with approximately 15,000 members. In addition,
Medwave was recognized by the Alliance of Children's Hospitals as the most
efficacious non-invasive blood pressure monitoring system, and was awarded their
Seal of Acceptance. Most recently, Frost and Sullivan honored Medwave with their
Technology Innovation Award. This award is given each year to the company that
shows the ability to successfully develop and introduce new technology,
formulate a well-designed product family, and make significant product
performance contributions to the industry.
OUR TECHNOLOGY MAY BECOME OBSOLETE
The medical device industry is subject to rapid technological innovation and,
consequently, the life cycles of products tend to be relatively short. We are
engaged in a field characterized by extensive research efforts. There can be no
assurance that new developments or discoveries in the field will not render the
Vasotrac system or Vasotrax hand-held monitor obsolete. The greater resources of
many of the companies currently engaged in research of blood pressure management
may permit such companies to create, or respond more rapidly than Medwave to,
technological innovations or advances.
THIRD-PARTY PAYERS MAY NOT APPROVE PAYMENT FOR USE OF OUR PRODUCTS, AND WE MAY
BE AFFECTED BY CHANGES IN HEALTH CARE LAWS
Our success in the United States may be related to the number of third party
payers, such as Medicare, private insurance companies, health maintenance
organizations, and other payers, that approve payment or reimbursement for the
use of the Vasotrac system, OEM modules thereof, and the Vasotrax hand-held
monitor and the amount of any such payments or reimbursements. If, for example,
hospitals are not able to recover the cost of these products through
reimbursement, they may be reluctant to purchase these products, with the result
that our sales may be adversely affected. The health care industry and
associated regulatory environment are dynamic and rapidly changing, particularly
with respect to proposals to reform Medicare and to control health care costs.
This environment makes it impossible to predict the effects, including costs or
impediments to development, that adoption of and changes in health care laws,
rules and regulations may have on us and on our operations. Such developments
could, however, materially and adversely affect our ability to market our
products.
WE DEPEND ON MANAGEMENT
Our success currently depends on the services of Tim O'Malley, our President and
Chief Executive Officer. The loss of Mr. O'Malley may hurt our business if we
are unable to identify other individuals to provide us with similar services. We
do not maintain "key person" insurance on any of our employees.
WE MAY NOT BE ABLE TO MANAGE GROWTH.
If successful, we will experience a period of growth that could place a
significant strain upon our managerial, financial and operational resources. Our
infrastructure, procedures and controls may not be adequate to support our
17
operations and to achieve the rapid execution necessary to successfully market
our products. Our future operating results will also depend on our ability to
expand our direct sales force and our internal sales, marketing and support
staff. If we are unable to manage future expansion effectively, our business,
results of operations and financial condition will suffer, our management will
be less effective, and our revenues and product development efforts may
decrease.
WE MAY NOT CONTINUE TO RECEIVE NECESSARY FDA CLEARANCES OR APPROVALS.
Our products and activities are subject to extensive, ongoing regulation by the
Food and Drug Administration and other governmental authorities. Delays in
receipt of, or failure to obtain or maintain, regulatory clearances and
approvals, or any failure to comply with regulatory requirements, could delay or
prevent our ability to market our product line.
WE MAY NOT RECEIVE APPROVALS BY FOREIGN REGULATORS THAT ARE NECESSARY FOR
INTERNATIONAL SALES.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary from country to country. If we, or our
international distributors, fail to obtain or maintain required pre-market
approvals or fail to comply with foreign regulations, foreign regulatory
authorities may require us to file revised governmental notifications, cease
commercial sales of our products in the applicable countries or otherwise cure
the problem. Such enforcement action by regulatory authorities may be costly.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT EXCEED INSURANCE COVERAGE.
We have obtained product liability insurance, including excess umbrella
coverage, in the aggregate amount of $12,000,000 covering the Vasotrac system,
OEM Module and Vasotrax hand-held monitor. However, there can be no assurance
that we will be able to maintain such insurance in amounts and with coverage
that will adequately cover associated risks or that such insurance will be
available in the future at premiums that can be economically justified. Lack of
such insurance could expose us to substantial damages, which could have a
material adverse effect upon us.
WE HAVE A HISTORY OF LOSSES AND MAY EXPERIENCE CONTINUED LOSSES.
We have experienced losses every year since our incorporation. These losses have
resulted because we have expended more money in the course of researching,
developing and enhancing our technology and products and establishing our sales
and marketing organization than we have generated in revenues. We expect that
our operating expenses will remain relatively stable in the foreseeable future
even as we increase our sales and marketing activities, and expand our
operations. It is possible that we will never achieve or sustain the revenue
levels required for profitability.
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY BE UNAVAILABLE.
The commercialization of our product line and the development and
commercialization of any additional products may require greater expenditures
than expected in our current business plan. Our capital requirements will depend
on numerous factors, including:
o our rate of sales growth--fast growth may actually increase our need for
additional capital to hire additional staff, purchase additional component
inventories, finance the increase in accounts receivable and supply
additional support services;
o our progress in marketing-related clinical evaluations and product
development programs, all of which will require additional capital;
o our receipt of, and the time required to obtain, regulatory clearances and
approvals--the longer regulatory approval takes, the more working capital
we will need to support our regulatory and development efforts in advance
of sales;
18
o the level of resources that we devote to the development, manufacture and
marketing of our products--any decision we make to improve, expand or
simply change our process, products or technology will require increased
funds;
o our facilities requirements--as we grow we may need additional
manufacturing, warehousing and administration facilities and the costs of
the facilities would be borne long before any increased revenue from growth
would occur;
o market acceptance and demand for our products--although growth may increase
our capital needs, the lack of growth and continued losses would also
increase our need for capital; and
o financing strategies--our attempt to accelerate the otherwise lengthy
purchasing processes of hospitals by offering programs as an alternative to
outright purchasing and by providing purchasers with extended payment terms
and financing options will require additional capital.
We may be unable to predict accurately the timing and amount of our capital
requirements. We may be required to raise additional funds through public or
private financing, bank loans, collaborative relationships or other arrangements
earlier than expected. It is possible that banks, venture capitalists and other
investors may perceive our capital structure, our history of losses or the need
to achieve widespread acceptance of our technology as too great a risk to bear.
As a result, additional funding may not be available on attractive terms, or at
all. If we cannot obtain additional capital when needed, we may be forced to
agree to unattractive financing terms, to change our method of operation or to
curtail our operations.
COMMON STOCK WHICH IS AVAILABLE FOR IMMEDIATE RESALE MAY DEPRESS OUR MARKET
PRICE.
We have filed registration statements with the Securities and Exchange
Commission covering the potential resale by some of our shareholders of up to
4,165,793 shares of common stock. The existence of a substantial number of
shares of common stock subject to immediate resale could depress the market
price for our common stock and impair our ability to raise needed capital.
A LOW STOCK PRICE OR FAILURE TO MAINTAIN A MINIMUM OF $2.5 MILLION OF
STOCKHOLDERS' EQUITY COULD RESULT IN OUR BEING DE-LISTED FROM THE NASDAQ MARKET
AND SUBJECT US TO REGULATIONS THAT COULD REDUCE OUR ABILITY TO RAISE FUNDS.
If our stock price were to drop below $1.00 per share and remain below $1.00 per
share for an extended period of time, or if we fail to maintain stockholders'
equity of at least $2.5 million (and do not meet alternative tests of either
having $35 million in market capitalization or $500,000 in annual net income),
or if we fail to maintain other Nasdaq continued listing criteria, Nasdaq may
de-list our common stock from the Nasdaq Market. In such an event, our shares
could only be traded on over-the-counter bulletin board systems. This method of
trading could significantly impair our ability to raise new capital.
In the event that our common stock was de-listed from the Nasdaq Market due to
low stock price, we may become subject to special rules, called penny stock
rules, that impose additional sales practice requirements on broker- dealers who
sell our common stock. The rules require, among other things, the delivery,
prior to the transaction, of a disclosure schedule required by the Securities
and Exchange Commission relating to the market for penny stocks. The
broker-dealer also must disclose the commissions payable both to the
broker-dealer and the registered representative and current quotations for the
securities, and monthly statements must be sent disclosing recent price
information.
In the event that our common stock becomes characterized as a penny stock, our
market liquidity could be severely affected. The regulations relating to penny
stocks could limit the ability of broker-dealers to sell our common stock and
thus the ability of purchasers in this offering to sell their common stock
favorably in the secondary market.
19
OUR COMMON STOCK IS SUBJECT TO PRICE VOLATILITY.
The market price of our common stock has been and is likely to continue to be
highly volatile. Our stock price could be subject to wide fluctuations in
response to various factors beyond our control, including:
o quarterly variations in operating results;
o announcements of technological innovations, new products or pricing by
our competitors;
o changes in, or failure to meet, financial estimates of securities
analysts;
o the rate of adoption by physicians of Medwave's technology in targeted
markets;
o the timing of patent and regulatory approvals;
o the timing and extent of technological advancements;
o results of clinical studies;
o the sales of our common stock by affiliates or other shareholders with
large holdings; and
o general market conditions.
Our future operating results may fall below the expectations of securities
industry analysts or investors. Any such shortfall could result in a significant
decline in the market price of our common stock. In addition, the stock market
has experienced significant price and volume fluctuations that have affected the
market prices of the stock of many medical device companies and that often have
been unrelated to the operating performance of such companies. These broad
market fluctuations may directly and adversely influence the market price of our
common stock.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We have never declared or paid a cash dividend on our common stock. We currently
intend to retain any earning for use in the operation and expansion of our
business and therefore do not anticipate paying any cash dividends in the
foreseeable future.
ITEM 2. PROPERTIES.
We lease property in Arden Hills, Minnesota and Danvers, Massachusetts. Our
Minnesota building lease expires in May 2004. The monthly lease payment is
approximately $4,585. The Danvers building lease expires January 2005. The
monthly lease payment is approximately $2,265. We are generally responsible for
taxes, insurance, maintenance, and other expenses related to the operation of
these facilities. Our production capacity is adequate for our present needs. We
believe that the property has been adequately maintained and is suitable for our
business as presently conducted.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
RESULTS FROM APRIL 30, 2003 ANNUAL MEETING OF STOCKHOLDERS
The Company's Annual Meeting of Stockholders, held April 30, 2003, imparted
results of a vote FOR Norman Dann (election of directors / class III three year
term), as well as a vote FOR reorganization of the Company to change its state
of incorporation from Minnesota to Delaware.
There were 8,650,916 shares of Common Stock entitled to vote at the meeting and
a total of 6,733,234 shares (77.83%) were represented at the meeting.
20
1. Election of Directors:
---------------------------- ------------------------- --------------------------
FOR WITHHOLD
---------------------------- ------------------------- --------------------------
Norman Dann 6,714,444 18,790
---------------------------- ------------------------- --------------------------
2. To approve a reorganization of the Company to change its state of
incorporation from Minnesota to Deleware.
-------------------- --------------- ------------------ -------------------------
FOR AGAINST ABSTAIN BROKER NON-VOTE
-------------------- --------------- ------------------ -------------------------
5,831,561 42,000 176,818 682,855
-------------------- --------------- ------------------ -------------------------
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock began trading in November 1995 on the Nasdaq SmallCap Market
under the symbol "MDWV" The following table sets forth the high and low closing
sales price for the Common Stock during each specified period as reported by the
Nasdaq Stock Market, Inc.:
FISCAL 2003 HIGH LOW
----------- ---- ---
First Quarter $ 2.01 $ 0.74
Second Quarter 1.50 1.00
Third Quarter 2.75 0.80
Fourth Quarter 3.09 1.40
FISCAL 2002 HIGH LOW
----------- ---- ---
First Quarter $ 4.80 $ 3.35
Second Quarter 5.00 3.20
Third Quarter 3.45 1.81
Fourth Quarter 2.35 1.15
There were approximately 176 record holders of our common stock as of July 11,
2003. On July 11, 2003, the closing price for our common stock was $4.49. We
have never paid a dividend on our common stock and do not intend to pay
dividends in the foreseeable future.
In a private placement conducted from March to June, 2001, we issued units
consisting of common stock and warrants to 67 accredited investors. In the first
round of the private placement, on March 20, 2001 we issued 181,125 units, each
unit consisting of one share of common stock and a five-year warrant to purchase
one and one-half shares of common stock, for aggregate cash consideration of
$1,154,672. The warrants become exercisable six months after the date of
issuance at an exercise price of $6.425 per share. In the second round of the
private placement, on June 13, 2001 we issued 1,235,777 units, each unit
consisting of one share of common stock and a five-year warrant to purchase one
share of common stock, in consideration of $4,867,164 cash. The warrants become
exercisable six months after the date of issuance at an exercise price of $4.25
per share. Miller Johnson Steichen Kinnard, Inc., which acted as our agent in
the private placement, received a commission of $602,184, a five-year warrant to
purchase 13,603 shares at $6.425 per share and a five-year warrant to purchase
121,287 shares at $4.25 per share. We relied on Rule 506 under the Securities
Act of 1933 for the offer and sale of these securities. Each investor
represented in writing that the securities were being acquired for investment
and, in addition, the certificates representing the securities bear a
restrictive securities legend.
On January 23, 2003, we sold an additional 1,400,000 shares of our common stock
for $1.25 per share, raising $1,697,009 in net proceeds.
21
ITEM 6. SELECTED FINANCIAL DATA
Year Ended April 30
(Audited)
------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------------------------------
Revenue:
Net Sales $ 1,148,745 $ 790,599 $ 555,233 $ 486,132 $ 509,530
------------------------------------------------------------------------------------
Operating expenses:
Cost of sales and product development 683,812 583,255 622,011 617,172 505,110
Research and development 520,716 673,852 1,142,685 1,122,247 1,230,072
Sales and marketing 1,400,356 1,597,744 1,157,149 823,373 855,153
General and administrative 704,308 709,506 602,564 691,771 506,621
------------------------------------------------------------------------------------
Total operating expenses 3,309,192 3,564,357 3,524,409 3,254,563 3,096,956
------------------------------------------------------------------------------------
Operating loss (2,160,447) (2,773,758) (2,969,176) (2,768,431) (2,587,426)
Other income:
Interest income (other expense) 26,245 117,229 116,532 215,488 367,529
Other Income ---- ---- ---- ---- 1,500,000
------------------------------------------------------------------------------------
Net loss $(2,134,202) $(2,656,529) $(2,852,644) $(2,552,943) $ (719,897)
====================================================================================
Net loss per share - basic and diluted $ (0.28) $ (0.39) $ (0.52) $ (0.47) $ (0.13)
====================================================================================
Weighted average number of common and
common equivalent shares outstanding
- basic and diluted 7,622,971 6,841,991 5,522,363 5,475,886 5,398,331
====================================================================================
BALANCE SHEET DATA: 2003 2002 2001 2000 1999
Cash and cash equivalents $2,597,649 $3,048.051 $1,116,589 $1,155,924 $1,175,756
Working capital 2,816,124 3,243,511 1,461,596 3,007,302 3,965,613
Total assets 3,329,307 3,799,616 2,130,790 3,766,789 6,143,492
Total shareholders' equity 2,878,974 3,316,167 1,606,547 3,499,665 5,902,956
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
With the Vasotrac monitor, Medwave is emerging as a technological alternative to
invasive arterial blood pressure monitoring in many surgical procedures. In
addition, the Vasotrac monitor is being used in situations where a conventional
blood pressure cuff is simply not effective. This can occur for a number of
reasons, which make the Vasotrac product an excellent alternative to a
conventional blood pressure cuff. Pediatric patients, morbidly obese and frail
patients are all becoming very good candidates for the Vasotrac within hospital
settings. We believe that in time, sensor based blood pressure monitoring, due
to its clinical flexibility, as well as improved accuracy, comfort and speed,
will promote the change of the market away from the use of invasive catheters
within specific patient groups, and completely eliminate the automatic blood
pressure cuff found throughout many hospital settings. With the ability to
interface our Vasotrac monitor into larger more comprehensive patient monitoring
systems via the use of our NIA V-Line, the addition of the High Motion Tolerant
(HMT) software in areas where a high degree of motion exist, and the capability
of monitoring patient groups from pediatric to the morbidly obese, the Company
believes that the Vasotrac monitor is the most advanced non-invasive blood
pressure measurement instrument available in the market today.
The Vasotrax Handheld monitor is an alternative product for mercury based
sphygmomanometers, which are pervasive in the market today in all aspects of the
healthcare spectrum. There is a desire to replace the mercury sphygmomanometers,
as there are concerns about the environmental impact of a potential mercury
spill, and the effects that such a spill may have on the well being of the
healthcare providers. Healthcare professionals have expressed a general
resistance to changing from mercury, due to good reliability, and the general
in-expensive nature of these devices. We believe that products like the
Vasotrax, which are small and lightweight, operate on batteries, offer more
comfort, faster time to readings, digital storage capabilities, and are sensor
based will change the market away from manual blood pressure cuffs, such as the
mercury sphygmomanometers. In addition, the technology in the Vasotrax Handheld
monitor may be attractive in a home based setting in the future. This is a
market, which currently has more than 25 million people who are monitoring their
own blood pressure values, as they have been diagnosed with blood pressure
irregularities. There is a great deal of user error, which may occur with the
self-application of a blood pressure cuff in a home setting. We believe that the
technology in the Vasotrax allows us to adapt the current Vasotrax Handheld
monitor into a home based, self-applicable device in the future.
The Company has also invested in developing the MJ23 OEM Module over the past
few years. The purpose of this product is to incorporate blood pressure
measurement into other company's devices, which may offer other physiologic
monitoring parameters, therapeutic treatments, or other general monitoring
functions in a variety of clinical environments. We believe that over time, as
we continue to achieve success in having major institutions purchase the
Vasotrac technology, that other companies will feel compelled to convert at
least a portion of their blood pressure measurement products to the same
functionality as is offered in the Vasotrac. There is an estimated 500,000
physiologic monitoring systems installed in hospital settings in the United
States, which currently offer an automatic blood pressure cuff for measuring
patients blood pressure.
The Company has intentionally designed its business plans and activities over
the past few years, around a tiered approach to the market. Tier one is to enter
and become a well-known alternative to both invasive catheters and automatic
blood pressure cuffs in the hospital settings. In an effort to gauge the success
of this strategy, the company has attempted to penetrate larger more prestigious
medical centers. These are typically involved in educating the clinicians of the
future, and perform clinical research to validate the usefulness of new
technologies. The success of this strategy will allow the company to branch out
into the smaller markets, and smaller hospitals, as they will have the
endorsement and support of the larger academic medical centers. Another benefit
from this initial strategy is that the company has the ability to provide
exposure to a medical staff, which may move around from center to center.
Therefore, positive exposure in one center may lead to activity in other centers
in the future.
23
Tier two of the business approach is to focus on the markets, which are defined
as outside the hospital. This is the pre and post hospital market. The company
believes that the emergency medical market segments may prove to be a popular
segment for the Company's technology. Several problems exist for caregivers in
the emergency environment, such as the inability to monitor with a blood
pressure cuff at times of motion, or when a patient's heart rhythm is disturbed.
Field reports from users of the Company's technology have been very favorable in
these situations. During the past few years, the company invested in developing
an advanced motion tolerance algorithm, specifically for this environment. In
addition, the Company has had good success with the Vasotrax Handheld monitor in
this market segment, even though the sales channel has been focused on the
hospital environment. The other area which may prove beneficial is the physician
office market. Patients are living longer, and are becoming better educated
about their own health care and treatment. As the use of the Company's
technology becomes more pervasive, the more consumers will be exposed to the
technology and its associated benefits.
The third tier of our business approach will be to use the success from tiers
one and two to enter the consumer market. The Company believes that there are
numerous benefits that a home-based patient will experience with our technology,
such as speed to readings, accuracy and consistency, comfort and data
transmission.
In 2002, The Company received the prestigious Seal of Acceptance from the
Alliance of Children's Hospitals. This award is presented only to those products
that are considered more efficacious than others for the treatment of children.
The Alliance of Children's Hospitals is an alliance of 40 of the largest, most
prestigious children's hospitals in the U.S. and Canada.
In addition, the Company was honored with Frost and Sullivan's Technology
Innovation Award. This award is presented each year to the company that has
demonstrated excellence in technology innovation in the market. The award
recognizes the ability of the company to successfully develop and introduce a
new technology, formulate a well-designed product family, and make significant
product performance contributions to the industry.
The Company believes that these prestigious accomplishments, along with the
increasing number of clinical studies that are being completed within a
multitude of clinical settings, endorse the fact that the Company's technology
is cutting a new path to standardization using non-invasive sensors while
monitoring blood pressure.
24
RESULTS OF OPERATIONS
Year Ended April 30
-------------------------------------------
2003 2002 2001
-------------------------------------------
Revenue:
Net Sales $ 1,148,745 $ 790,599 $ 555,233
Operating expenses:
Cost of sales and product development 683,812 583,255 622,011
Research and development 520,716 673,852 1,142,685
Sales and marketing 1,400,356 1,597,744 1,157,149
General and administrative 704,308 709,506 602,564
-------------------------------------------
Total operating expenses 3,309,192 3,564,357 3,524,409
-------------------------------------------
Operating loss (2,160,447) (2,773,758) (2,969,176)
Other income:
Interest income (other expense) 26,245 117,229 116,532
-------------------------------------------
Net loss $ (2,134,202) $(2,656,529) $ (2,852,644)
===========================================
Net loss per share - basic and diluted $ (0.28) $ (0.39) $ (0.52)
===========================================
Weighted average number of common and
common equivalent shares outstanding
- basic and diluted 7,622,971 6,841,991 5,522,363
===========================================
Fiscal year ended April 30, 2003 compared to fiscal years ended April 30, 2002
and April 30, 2001
Operating revenue for fiscal 2003 was $1,148,745, an increase of $358,146 or
45.3% from fiscal 2002 operating revenue of $790,599. Operating revenue for
fiscal 2002 of $790,599, was an increase of $235,366 or 42.4% from fiscal year
2001 operating revenue of $555,233. The increase in operating revenue in fiscal
2003 was due to the addition of direct sales specialists and the commencement of
shipping our MJ23 Modules. The increase in operating revenue from fiscal year
2001 to fiscal year 2002 was primarily due to sales from a direct sales
organization and from the sale of products to international markets and the
establishment of selected regional specialty dealers in the U.S.
Operating expense for fiscal 2003 was $3,309,192, a decrease of $255,165 or 7.2%
from fiscal year 2002. Operating expense for fiscal 2002 was $3,564,357, an
increase of $39,948 or 1.1% from fiscal year 2001 operating expense of
$3,524,409. The decrease in operating expense from fiscal 2002 to fiscal 2003
was primarily due to a reduction in Research and Development expenses, as well
as a change in the profile for our sales team such that it is more
incentive-based. The increase in operating expense from fiscal 2001 to fiscal
2002 relates primarily to an increase in direct sales and marketing expenses,
offset in part by a decrease in research and development expenses.
25
The cost of sales and product development for fiscal 2003 were $683,812, an
increase of $100,557 or 17.2% from fiscal year 2002 cost of sales and product
development expense of $583,255. This increase is attributable to the increase
in product shipments and increased sales. The cost of sales and product
development for fiscal 2002 were $583,255, a decrease of $38,756 or 6.2% from
fiscal year 2001 cost of sales and product development expense of $622,011.
Research, development, and clinical expense for fiscal year 2003 were $520,716,
a decrease of $153,136 or 22.7% from fiscal year 2002 research and development,
and clinical expense of $673,852. Research, development, and clinical expense
for fiscal year 2002 were $673,852, a decrease of $468,833 or 41.0% from fiscal
year 2001 research and development, and clinical expense of $1,142,685. The
decrease in research, development, and clinical expense for both periods is
attributed to a decrease in research and development activity as we progressed
from product development to focussing on sales and marketing. Specifically, the
development work on the NIA V-Line interface package was completed, as well as
the (HMT) High Motion Tolerant algorithms, and the validation project for
monitoring pediatric patients.
Sales and marketing expense for fiscal year 2003 were $1,400,356 a decrease of
$197,388 or 12.4% from fiscal year 2002 sales and marketing expense of
$1,597,744. Sales and marketing expense for fiscal year 2002 were $1,597,744, an
increase of $440,595 or 38.0% from fiscal year 2001 sales and marketing expense
of $1,157,149. The decrease in sales and marketing expense from fiscal 2002 to
fiscal 2003 relates to a decrease in marketing activity, specifically, reduced
expenses associated with management of our trade show booth, as we moved this
responsibility inside the company. In addition, we also had a decrease in the
number of trade shows which we attended. The increase in sales and marketing
expense from fiscal 2001 to fiscal 2002 relates primarily to an increase of
marketing activity, such as construction of a new trade show booth, and
associated cost with maintenance, and attendance at more trade shows, a new
expanded web site and the addition of direct sales specialists.
General and administrative expense for fiscal year 2003 were $704,308, a
decrease of $5,198 or .7% from fiscal year 2002 general and administrative
expense of $709,506. General and administrative expense for fiscal year 2002
were $709,506, an increase of $106,942 or 17.7% from fiscal year 2001 general
and administrative expense of $602,564. The decrease in general and
administrative expenses from 2002 to 2003 was due to a decrease in salaries as a
result of not hiring a new CFO offset by an increase in legal and outside
contracted accounting expenses. The increase in legal expenses had to do with
preparation for the annual shareholders meeting, and expenses associated with
re-incorporation into the state of Delaware. The increase in general and
administrative expenses from 2001 to 2002 was primarily due to an increase in
monthly rent with the addition of the Danvers, MA, sales and marketing office,
increased insurance costs and reliance on outside contractors for accounting
services.
Interest income for fiscal year 2003 was $26,245 a decrease of $90,984 or 77.6%
from fiscal year 2002 interest income of $117,229. Interest income for fiscal
year 2002 was $117,229 an increase of $697 or .06% from fiscal year 2001
interest income of $116,532. The decrease in interest income in fiscal 2003 from
fiscal 2002 was due to a decreased level of invested cash. The increase in
interest income in fiscal 2002 from fiscal 2001 was due to a higher level of
invested cash offset by decreasing interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, and cash equivalents were $2,597,649 and $3,048,051 at April
30, 2003 and April 30, 2002, respectively. We incurred cash expenditures of
$2,115,897 for operations for the fiscal year ended April 30, 2003.
26
With the cash and cash equivalents we believe that sufficient liquidity is
available to satisfy our working capital needs for approximately fourteen months
from the end of fiscal year April 2003. We have no significant capital
expenditure commitments and do not plan any significant sale of capital
equipment.
Cash flows used in operations decreased to $2,115,897 in fiscal year 2003 from
$2,372,700 in fiscal year 2002, a decrease of $256,803 or 10.8%. In both periods
cash flows were used primarily to fund operating losses, which were partially
offset by non-cash expenses for depreciation and amortization. The primary use
of cash in operations for fiscal year 2001 was for increases in inventory,
primarily due to our preparing for future anticipated sales as the result of our
signing agreements with foreign distributors and our starting production on the
Vasotrax hand-held blood pressure monitor, and for prepaid expenses primarily
the result of deposit on a future inventory purchase and for prepaid insurance
costs. These uses in cash were partially offset by increases in deferred income,
primarily due to our contract with Nihon Kohden for OEM modules and a
distribution agreement for the Japanese market, for fiscal year 2001, and
increases in accounts payable, primarily from increased trade payables.
Net investing activities used $31,514 and $61,987 of cash in fiscal years 2003
and 2002, respectively, for property and equipment additions, primarily sales
equipment. In 2001, net investing activities provided cash of $1,928,237,
primarily due to the conversion of marketable securities into cash to be used
for operations.
Financing activities provided $1,697,009 and $4,366,149 of cash in fiscal years
2003 and 2002, respectively. In fiscal year 2003, the proceeds were primarily
from the January 2003 private placement of common stock. In fiscal year 2002,
the proceeds were primarily from the June 2001 second round of the private
placement of common stock and warrants as well as the exercise of stock options.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We have
followed the prescribed format and provided the additional disclosures required
by SFAS No. 148 in the accompanying notes to financial statements for the year
ended April 30, 2003. We must also provide the disclosures in our quarterly
reports containing condensed financial statements for subsequent interim
periods.
CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at April 30, 2003 and the
effect these contractual obligations are expected to have on our liquidity and
cash flows in future periods.
PAYMENTS DUE BY PERIOD
----------------------------------------
TOTAL 1 YEAR OR LESS 1-3 YEARS
Operating lease commitments........... $108,013 $82,413 $25,600
========== ========== ==========
27
INCOME TAXES
Under our income tax policy, we record the estimated future tax effects of
temporary differences between the tax bases of assets and liabilities and
amounts reported in the accompanying balance sheets, as well as operating loss
and tax credit carryforwards. The evaluation of the recoverability of any tax
assets recorded on the balance sheet is subject to significant judgement. We
have provided valuation allowances for all our deferred tax assets to date.
IMPACT OF INFLATION
Inflation has had no material effect on the Company's operations or financial
condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
None
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Medwave, Inc.
Financial Statements
Years Ended April 30, 2003 and 2002
CONTENTS
Reports of Independent Auditors........................................................................29
Reports of Independent Auditors........................................................................30
Audited Financial Statements
Balance Sheets.........................................................................................31
Statements of Operations...............................................................................33
Statement of Changes in Stockholders' Equity...........................................................34
Statements of Cash Flows...............................................................................35
Notes to Financial Statements..........................................................................36
28
Report of Independent Auditors
Board of Directors and Stockholders
Medwave, Inc.
Danvers, Massachusetts
We have audited the accompanying balance sheet of Medwave, Inc. as of April 30,
2003 and the related statements of operations, changes in stockholders' equity
and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides 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 Medwave, Inc. at April 30,
2003, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
BDO Seidman, LLP
Boston, Massachusetts
June 19, 2003
29
Report of Independent Auditors
The Board of Directors and Stockholders
Medwave, Inc.
We have audited the balance sheet of Medwave, Inc. as of April 30, 2002 and the
related statements of operations, changes in stockholders' equity, and cash
flows for each of the two years in the period ended April 30, 2002. 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 auditing standards generally accepted
in the United States. 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 Medwave, Inc. at April 30,
2002, and the results of its operations and its cash flows for each of the two
years in the period ended April 30, 2002, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 21, 2002
30
Medwave, Inc.
Balance Sheets
APRIL 30
2003 2002
--------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $2,597,649 $3,048,051
Accounts receivable, net of allowance for doubtful accounts of
$15,000 and $18,012 for 2003 and 2002, respectively 294,791 283,114
Inventories, net 270,118 252,498
Prepaid expenses 103,899 143,297
--------------------------------------
Total current assets 3,266,457 3,726,960
--------------------------------------
Property and equipment:
Research and development equipment 31,535 210,633
Office equipment 76,836 100,048
Manufacturing and engineering equipment 247,824 282,158
Sales and marketing equipment 62,365 109,895
Leasehold improvements 31,613 31,613
--------------------------------------
450,173 734,347
Accumulated depreciation and amortization (387,323) (661,691)
--------------------------------------
Property and equipment, net 62,850 72,656
--------------------------------------
Total assets $3,329,307 $3,799,616
======================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
31
Medwave, Inc.
Balance Sheets (continued)
APRIL 30
2003 2002
--------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 310,180 $ 252,727
Accrued payroll and related expenses 101,303 81,097
Deferred revenue 38,850 149,625
----------------------------------
Total current liabilities 450,333 483,449
----------------------------------
Commitments (Notes 9, 11 and 12)
Stockholders' equity:
Common Stock, no par value
Authorized shares - 50,000,000
Issued and outstanding shares - April 30, 2003--
8,650,916 and April 30, 2002--7,250,916 23,449,114 21,752,105
Accumulated deficit (20,570,140) (18,435,938)
----------------------------------
Total stockholders' equity 2,878,974 3,316,167
----------------------------------
Total liabilities and stockholders' equity $ 3,329,307 $ 3,799,616
==================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
32
Medwave, Inc.
Statement of Operations
YEAR ENDED APRIL 30
2003 2002 2001
-----------------------------------------------------
Revenue:
Net sales $ 1,148,745 $ 790,599 $ 555,233
Operating expenses:
Cost of sales and product development 683,812 583,255 622,011
Research and development 520,716 673,852 1,142,685
Sales and marketing 1,400,356 1,597,744 1,157,149
General and administrative 704,308 709,506 602,564
-----------------------------------------------------
Operating loss (2,160,447) (2,773,758) (2,969,176)
Interest income 26,245 117,229 116,532
Other income - - -
-----------------------------------------------------
Net loss $(2,134,202) $(2,656,529) $(2,852,644)
=====================================================
Net loss per share - basic and diluted $(.28) $(.39) $(.52)
=====================================================
Weighted average number of shares
outstanding - basic and diluted 7,622,971 6,841,991 5,522,363
=====================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
33
Medwave, Inc.
Statement of Changes in Stockholders' Equity
ACCUMULATED
COMMON STOCK OTHER
--------------------------- COMPREHENSIVE ACCUMULATED
SHARES AMOUNT LOSS DEFICIT TOTAL
-----------------------------------------------------------------------------
Balance at April 30, 2000 5,499,596 $ 16,436,870 $ (10,440) $ (12,926,765) $ 3,499,665
Exercise of stock options 53,328 - - - -
Private Placement of Common Stock, in March
2001 at $6.38, net of expenses 181,125 949,086 - - 949,086
Change in unrealized loss on investments - - 10,440 - 10,440
Net loss - - - (2,852,644) (2,852,644)
----------------
Comprehensive loss - - - - (2,842,204)
-----------------------------------------------------------------------------
Balance at April 30, 2001 5,734,049 17,385,956 - (15,779,409) 1,606,547
Exercise of options 19,773 12,500 12,500
Private Placement of Common Stock, in June 2001
at $4.25, net of expenses 1,235,777 4,353,649 - - 4,353,649
Private Placement look-back provision 261,317 - - - -
Net loss - - - (2,656,529) (2,656,529)
-----------------------------------------------------------------------------
Balance at April 30, 2002 7,250,916 21,752,105 - (18,435,938) 3,316,167
Private Placement of Common Stock, in January 1,400,000 1,697,009 - - 1,697,009
2003 at $1.25, net of expenses
Net loss - - - (2,134,202) (2,134,202)
=============================================================================
Balance at April 30, 2003 8,650,916 $23,449,114 $ - $(20,570,140) $2,878,974
=============================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
34
MEDWAVE, INC.
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (2,134,202) $ (2,656,529) $ (2,852,644)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 41,320 134,282 114,456
Loss on sale of equipment - - -
Issuance of Common Stock for consulting
services - - -
Changes in operating assets and liabilities:
Accounts receivable (11,677) (75,105) (108,821)
Inventories (17,620) 215,134 (209,755)
Prepaid expenses 39,398 50,312 (117,013)
Accounts payable 57,453 (26,160) 62,820
Accrued payroll and related expenses 20,206 35,431 (5,391)
Deferred income (110,775) (50,065) 199,690
--------------------------------------------------------------
Net cash used in operating activities (2,115,897) (2,372,700) (2,916,658)
INVESTING ACTIVITIES
Patent expenditures - - -
Purchase of investments - - -
Sales and maturity of investments - - 2,093,439
Purchase of property and equipment (31,514) (61,987) (165,202)
Proceeds from sale of equipment - - -
--------------------------------------------------------------
Net cash provided (used) in investing activities (31,514) (61,987) 1,928,237
FINANCING ACTIVITIES
Net proceeds from issuance of
Convertible Preferred Stock - - -
Net proceeds from issuance of Common Stock 1,697,009 4,366,149 949,086
--------------------------------------------------------------
Net cash provided by financing activities 1,697,009 4,366,149 949,086
--------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (450,402) 1,931,462 (39,335)
Cash and cash equivalents at beginning of period 3,048,051 1,116,589 1,155,924
--------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,597,649 $ 3,048,051 $ 1,116,589
==============================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
35
Medwave, Inc.
Notes to Financial Statements
April 30, 2003
1. BUSINESS ACTIVITY
Medwave, Inc. (the Company) is engaged exclusively in the development,
manufacturing, and marketing of a proprietary, noninvasive system that monitors
arterial blood pressure, and in the development of related technology and
products. Utilizing the Company's proprietary technology, the VASOTRAC(R) system
monitors blood pressure continually, providing new readings approximately every
15 heartbeats. In 1997, the Company began development of a hand-held blood
pressure measurement device. This hand-held device is based upon the technology
used in the Vasotrac System, and was introduced to the market in 2001 as the
Vasotrax Handheld Monitor. The Company has also developed an OEM module version
of the Vasotrac Monitor, which has been released for production in the spring of
2002. During fiscal year 2003, the MJ23 OEM Module accounted for approximately
21% of the Company's revenue.
The Company has a fiscal year that begins on May 1 and ends on April 30. The
Company emerged from the development stage during the year ended April 30,2003.
Subsequent to April 30, 2003, the board of directors approved a plan to change
the fiscal year to October 1 - September 30. The reason for making this change
is to align the Company's business cycles with the business cycles of its
customers.
In May 2003, the shareholders voted to re-incorporate the Company into the state
of Delaware.
2. MANAGEMENT'S PLANS CONCERNING CASH FLOWS AND ONGOING OPERATIONS
The Company continues to experience net losses and has an accumulated deficit in
stockholders' equity of $20,570,140 through April 30, 2003. The Company believes
that net proceeds from its private placements completed in June 2001 and January
2003 (see Note 4) together with achieving its operating budget for 2004 will be
sufficient to fund its operations through June 30, 2004.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining maturity of
three months or less to be cash equivalents. Cash equivalents are carried at
cost which approximates market value.
36
Medwave, Inc.
Notes to Financial Statements
April 30, 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories which consist of material, labor and overhead are valued at the
lower of cost or market on the first-in, first-out (FIFO) method and consist of
the following:
2003 2002
----------------- -----------------
Raw materials $ 193,548 $ 149,615
Work-in-process - 40,859
Finished goods 76,570 62,024
----------------- -----------------
Total $ 270,118 $ 252,498
================= =================
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over estimated useful lives of the assets as follows:
Research and development equipment 3 - 5 years
Office equipment 3 - 7 years
Manufacturing and engineering equipment 18 months to 5 years
Sales and marketing equipment 18 months to 5 years
Leasehold improvements are amortized over the related lease term or estimated
useful life of the assets, whichever is shorter.
Depreciation and amortization expense related to property and equipment was
$41,320, $134,282, and $114,456 for the years ended April 30, 2003, 2002 and
2001, respectively.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred income taxes
are provided for temporary differences between the financial reporting and the
tax bases of assets and liabilities.
37
Medwave, Inc.
Notes to Financial Statements
April 30, 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue upon product shipment, provided there exists
persuasive evidence of an arrangement, the fee is fixed or determinable, and
collectability of the related receivable is reasonably assured.
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.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to operations as incurred.
PRODUCT WARRANTY COST
The Company's policy is to make provisions in the year of sale for the estimated
future repair costs on products covered by warranty.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common shares
outstanding in each year. Diluted EPS is similar to basic EPS, except that the
weighted average of common shares outstanding is increased to include the
additional common shares that would have been outstanding if the potential
dilutive common shares, consisting of shares of those stock options and warrants
for which market price exceeds exercise price, had been issued. Such common
equivalent shares are excluded from the calculation of diluted EPS in loss
years, as the impact is antidilutive. Therefore, there was no difference between
basic and diluted EPS for each period presented.
38
Medwave, Inc.
Notes to Financial Statements
April 30, 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
As discussed above, The Company has elected to follow APB No. 25, and related
Interpretations in accounting for employee stock options and has adopted the
disclosure provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation (Statement 123), relating to the fair value method of accounting
for stock options.
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 the
Black-Scholes option pricing model with the following assumptions for 2003,
2002, and 2001: risk-free interest rates of 3.96% for 2003 and rates ranging
from 5.11% - 6.00% for 2002 and 2001, respectively; dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock of
1.45, .57, and .56, respectively, and a weighted average expected life of the
option of five years.
The weighted average fair value of options granted during the years ended April
30, 2003, 2002, and 2001 was $0.66, $1.32, and $3.49 per share, respectively.
39
Medwave, Inc.
Notes to Financial Statements
April 30, 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:
APRIL 30
2003 2002 2001
---------------------------------------------------------
Net loss as reported $(2,134,202) $(2,656,529) $(2,852,644)
Add: Stock-based employee compensation expense
included in reported net loss - - -
Deduct: Total stock-based employee compensation
determined under fair value method for all
awards (125,062) (510,827) (329,022)
---------------------------------------------------------
Pro forma net loss $(2,259,264) $(3,167,356) $(3,182,56)
=========================================================
Basis and diluted loss per share
As reported $(0.28) $(0.39) $(0.52)
Pro forma $(0.30) $(0.46) $(0.58)
The pro forma effect on net loss for fiscal 2003, 2002, and 2001 is not
representative of the pro forma effect on net loss in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to fiscal 1996.
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.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was $105,295,
$180,678, and $85,564 for the years ended April 30, 2003, 2002, and 2001
respectively.
40
Medwave, Inc.
Notes to Financial Statements
April 30, 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHIPPING AND HANDLING
The Company classifies shipping and handling costs as costs of goods sold.
Shipping costs are defined as the costs to get the finished product from the
seller to the buyer. Handling costs are defined as the costs to store, move, and
prepare finished goods for shipment. All amounts billed to a customer in a sale
transaction are classified as revenues.
ACCOUNTS RECEIVABLE
Accounts receivable are customer obligations due under normal trade terms. The
Company reviews accounts receivable on a monthly basis to determine if any
receivables will potentially be uncollectable. The Company includes any reserves
for specific accounts receivable balances that are determined to be
uncollectable, along with a general reserve, in the overall allowance for
doubtful accounts. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance. Based on the information
available, the Company believes allowance for doubtful accounts as of April 30,
2003 is adequate. However, actual write-offs may exceed the recorded allowance.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We have
followed the prescribed format and provided the additional disclosures required
by SFAS No. 148 in the accompanying notes to financial statements for the year
ended April 30, 2003. We must also provide the disclosures in our quarterly
reports containing condensed financial statements for subsequent interim
periods.
41
Medwave, Inc.
Notes to Financial Statements
April 30, 2003
4. CAPITAL STOCK
In March 2001, the Company sold 181,125 shares of Common Stock in the first
round of a private placement for $6.38 per share, resulting in net proceeds of
$949,086.
The March 2001 round of the private placement contained a "look-back" provision
in which the participants could receive an additional 297,555 shares for no
additional consideration in the event that certain conditions exist at specified
dates through July 30, 2002. In fiscal 2002, the Company issued 261,317 shares
as a result of this "look-back" provision.
In June 2001, the Company sold 1,235,777 shares of its Common stock in a private
placement for $4.25 per share, resulting in net proceeds of $4,353,649.
In January 2003, the Company sold 1,400,000 shares of its common stock in a
private placement for $1.25 per share, resulting in net proceeds of $1,697,009.
5. COMMITMENTS
The Company leases its office, research and development, sales, and production
facilities under operating leases that expire through January 2005. Operating
expenses, including maintenance, utilities, real estate taxes, and insurance,
are paid by the Company. Total rent expense under operating leases was $80,160,
$69,778, and $73,849 for the years ended April 30, 2003, 2002, and 2001,
respectively.
Future minimum rental payments required under leases that have remaining terms
in excess of one year as of April 30, 2003 are as follows:
2004 $82,413
2005 25,600
--------------
$108,013
==============
6. INCOME TAXES
At April 30, 2003, the Company had net operating loss carryforwards of
approximately $20 million and research and development tax credit carryforwards
of approximately $600,000. These carryforwards are available to offset future
taxable income expiring at various dates through 2023.
Included in the NOL is approximately $527,000 of deductions resulting from
disqualifying dispositions of stock options. These deductions currently have a
full valuation allowance and when realized for financial statement purposes they
will not result in a reduction in income tax expense. Rather, the benefit will
be recorded as additional paid-in capital.
42
Medwave, Inc.
Notes to Financial Statements
April 30, 2003
6. INCOME TAXES (CONTINUED)
The Company's ability to utilize its net operating loss carryforwards to offset
future taxable income is subject to certain limitations under Section 382 of the
Internal Revenue Code due to changes in the equity ownership of the Company.
No income taxes were paid for the years ended April 30, 2003, 2002, and 2001,
respectively.
Components of deferred tax assets are as follows:
APRIL 30
2003 2002
------------------------------------
Net operating loss carryforwards $ 7,709,000 $ 6,754,000
Research and development credit carryforwards 600,000 540,000
Other 44,000 136,000
Less valuation allowance (8,353,000) (7,430,000)
------------------------------------
Net deferred tax assets $ - $ -
====================================
The Federal and state income tax benefit computed at the statutory rates is
offset by the increase in the valuation allowance of the deferred tax assets.
7. STOCK OPTIONS AND WARRANTS
The Company has a stock option plan that includes both incentive stock options
and non-statutory stock options to be granted to certain eligible employees,
non-employee directors, or consultants of the Company. The maximum number of
shares of Common Stock currently reserved for issuance is 2,200,000 shares. A
majority of the options granted have ten-year terms and vest annually over a
four year term and become fully exercisable at the end of four years of
continued employment.
In April 2002 the plan was amended to (a) increase the number of shares reserved
for issuance under the Plan by 500,000 shares, (b) provide for discretionary
grants of options to non-employee directors, and (c) extend to February 26,
2012, the term during which incentive stock options can be granted under the
Plan.
43
Medwave, Inc.
Notes to Financial Statements
April 30, 2003
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
Option activity is summarized as follows:
WEIGHTED
AVERAGE
SHARES OPTIONS OUTSTANDING EXERCISE
AVAILABLE ------------------------------- PRICE
FOR GRANT PLAN NON-PLAN PER SHARE
--------------------------------------------------------------
Balance at April 30, 2000 108,000 1,360,000 20,000 $ 4.34
Granted (75,500) 75,500 - 7.13
Exercised - (79,000) - 1.44
Canceled 157,500 (157,500) - 7.56
----------------------------------------------
Balance at April 30, 2001 190,000 1,199,000 20,000 4.28
Reserved for issuance 500,000 - - -
Granted (395,000) 395,000 - 2.72
Exercised - (30,000) - 1.92
Canceled 475,000 (475,000) - 3.66
----------------------------------------------
Balance at April 30, 2002 770,000 1,089,000 20,000 4.06
Granted (284,000) 284,000 - 0.81
Exercised - - - -
Canceled 90,000 (90,000) - 6.96
==============================================
Balance at April 30, 2003 576,000 1,283,000 20,000 $ 3.22
==============================================
The following table summarizes information about the stock options outstanding
at April 30, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------------------------------------------------------------------- --------------------------------
$ 0.74 - 0.98 372,000 7 years $ .75 130,000 $ .75
1.14 - 1.60 202,000 9 years 1.45 40,000 1.52
2.15 - 2.25 255,000 5 years 2.24 232,500 2.25
3.00 - 4.35 140,000 7 years 3.87 67,500 3.51
6.75 - 7.13 257,000 7 years 6.78 192,250 6.78
8.94 -10.00 67,000 5 years 9.50 59,500 9.57
13.50 10,000 6 years 13.50 10,000 13.50
-------------------------------------- ----------------
1,303,000 6.8 years 731,750
====================================== ================
44
Medwave, Inc.
Notes to Financial Statements
April 30, 2003
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
Options outstanding expire at various dates during the period from 2004 through
2013. The number of options exercisable as of April 30, 2003, 2002, and 2001 was
731,750, 542,000, and 897,250, respectively, at weighted average exercise prices
of $4.01, $5.26, and $3.15 per share, respectively.
In connection with the IPO in 1995, the Company issued warrants to purchase
140,000 shares of Common Stock at an exercise price of $6.00 per share. These
warrants expired in July 2001.
In connection with the March 2001 round of the private placement, the Company
issued warrants to purchase 289,799 shares of Common Stock at an exercise price
of $6.43 per share. The warrants expire in March 2006.
In connection with the June 2001 round of the private placement, the Company
issued warrants to purchase 1,334,151 shares of Common Stock at an exercise
price of $4.25 per share. The warrants expire in June 2006.
8. CONTRACTS
In September 1998, the Company entered into a technical evaluation agreement
with an interested party related to its blood pressure technology specifically
its hand-held blood pressure device. The Company received and recognized other
income of $1,500,000 when the agreement terminated with no additional agreement
with the interested party.
9. SEGMENT REPORTING
The Company's business activities are aggregated into one reportable segment,
given the similarities of economic characteristics between the activities and
the common nature of the Company's products and customers. The total sales
outside the United States account for approximately 42%, 33% and 20% of the
Company's sales in fiscal years ended April 30, 2003, 2002, and 2001
respectively. Japan accounted for approximately 36% of the Company's net sales
for the year ended April 30, 2003, and approximately 25% of the Company's net
sales for the year ended April 30, 2002. There was no single geographic area
outside the United States that accounted for more than 10% of the Company's
sales during the year ended April 30, 2001.
45
Medwave, Inc.
Notes to Financial Statements
April 30, 2003
10. CONCENTRATIONS
CONCENTRATION OF CREDIT RISK ARISING FROM CASH DEPOSITS IN EXCESS OF INSURED
LIMITS
The Company has cash on deposit with a bank, which exceeds federally insured
limits by approximately $2,536,000 as of April 30, 2003. The Company has not
experienced any losses in such accounts, and management believes they are not
exposed to any significant credit risk on cash.
SIGNIFICANT CUSTOMERS
During the year ended April 30, 2003, one customer accounted for approximately
36% of net sales. The accounts receivable related to this customer amounted to
20% of the total accounts receivable balance as of April 30, 2003. During the
year ended April 30, 2002, one customer accounted for approximately 24% of net
sales. The accounts receivable related to this customer amounted to 33% of the
total accounts receivable balance as of April 30, 2002. There were no
significant customers for the year ended April 30, 2001.
11. VALUATION AND QUALIFYING ACCOUNTS
The following is a summary of the Company's valuation and qualifying account
activity:
BALANCE AT CHARGED TO COSTS CREDIT BALANCE
BEGINNING OF AND EXPENSES ACCOUNTS END OF
PERIOD RECEIVABLE PERIOD
----------------- --------------------- ---------------- ---------------
Allowance for doubtful accounts
receivable - Trade for the year ended:
April 30, 2003 $18,013 $5,519 $8,532 $15,000
April 30, 2002 13,203 12,000 7,190 18,013
April 30, 2001 13,203 - - 13,203
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND CREDITS TO END OF
PERIOD EXPENSES INVENTORY PERIOD
Reserve for inventories for the year ended:
April 30, 2003 $25,000 $ - $ - $25,000
April 30, 2002 33,974 - 8,974 25,000
April 30, 2001 33,974 - - 33,974
46
Medwave, Inc.
Notes to Financial Statements
April 30, 2003
12. PENSION PLAN
The Company adopted a simplified employee pension plan that covers all eligible
employees. The plan states, among other things, that the Company will match up
to the first three percent of the employee's salary contribution. For the year
ended April 30, 2003 and 2002 pension expense was $7,282 and $12,446,
respectively.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
2003 QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------------------------
Net sales 209,615 301,577 277,088 360,465
Operating loss (617,758) (601,406) (494,643) (446,640)
Net loss (608,885) (594,108) (490,501) (440,708)
Basic and diluted net loss per share (.08) (.08) (.07) (.05)
2002
- --------------------------------------------
Net sales $ 172,891 $ 124,949 $191,866 $300,893
Operating loss (702,875) (745,487) (657,934) (667,462)
Net loss (665,064) (697,647) (638,886) (654,932)
Basic and diluted net loss per share (.10) (.10) (.09) (.10)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As discussed more fully in the current report on Form 8K/A filed with the
Securities and Exchange Commission on May 27, 2003, the Company has informed and
dismissed Ernst & Young LLP and engaged BDO Seidman, LLP as independent public
accountants.
47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the directors
and executive officers of the Company as of June 30, 2003. A summary of the
background and experience of each of these individuals is set forth after the
table.
The directors and executive officer of the Company are:
Name Age Position
- -------------------------------- ------- -------------------------------------
William D. Corneliuson(1,2) 59 Chairman and Director
Norm Dann(1,2) 75 Director
Frank A. Katrow(2) 44 Director
John L. Miclot(1) 44 Director
Timothy J. O'Malley 41 President, Chief Executive Officer,
and Director, Secretary
- -----------------
(1)-Member of the Compensation Committee
(2)-Member of the Audi Committee
Members of the Board of Directors are divided into classes. Upon their initial
election, the Class I directors held office for a term that expired at the 2003
Annual Meeting of Shareholders, which was held on April 30, 2003. The Class II
directors will hold office for a term expiring at the 2004 Annual Meeting of
shareholders. Tim O'Malley and Bill Corneliuson are presently Class II
directors. The Class III directors will hold office for a term expiring at the
2005 Annual Meeting of shareholders. Frank Katarow and John Miclot are presently
Class III directors. Commencing with the 2003 Annual Meeting of shareholders,
the shareholders will elect only one class of directors each year, with
directors of such class so elected to hold office for a term expiring at the
third Annual Meeting of Shareholders following their election. During the Annual
Meeting of Shareholders, held April 30, 2003, the shareholders re-elected Norman
Dann as a director, serving a new three year term. Executive officers of the
Company are appointed by and serve at the discretion of the Board of Directors.
There are no family relationships among the directors and executive officers.
The Board of Directors has an Audit Committee, which (i) reviews the Company's
annual financial statements, (ii) makes recommendations regarding the Company's
independent auditors and scope of auditor services, (iii) reviews the adequacy
of accounting and audit policies, compliance assurance procedures and internal
controls, (iv) reviews non-audit service performed by auditors to maintain
auditors' independence, and (v) reports to the Board on the adequacy of
disclosures and adherence to accounting principles. The Board of Directors also
has formed a Compensation Committee, which (i) reviews compensation philosophy
and major compensation benefits for executives, (ii) administers the Company's
Stock Option Plan, and (iii) approves executive officers' compensation.
TIMOTHY J. O'MALLEY is the President, Chief Executive Officer, and a director of
the Company. He has served in these positions since October 1999. From 1984
until 1999, Mr. O'Malley was an employee of Siemens Medical Systems, Inc.
Throughout his employment he served in a variety of technical, sales, marketing
and general management roles. At the time of his departure from Siemens, Mr.
O'Malley was Vice President/Division Manager of Siemens Medical Systems,
Electromedical Division for North America. Prior to joining Siemens, Mr.
O'Malley worked as a biomedical engineer at a small privately held company in
the Chicago area, selling and supporting medical equipment service and
maintenance agreements. Mr. O'Malley received his Associates of Applied Science
degree in 1983 from Oakton College in Des Plaines, Illinois and attended DePaul
University of Chicago from 1986 until 1991, with an emphasis in Business
Management and Marketing.
48
WILLIAM D. CORNELIUSON, has been a director of the Company since May 1999 and
Chair of the Board since February 2002. Mr. Corneliuson is President of B.C.
Holdings, Inc., a private investment company. Mr. Corneliuson has been with B.C.
Holdings, Inc. since 1993. From 1976 to 1993, Mr. Corneliuson was President,
Co-Founder, and Vice Chairman of the Board of Strong/Corneliuson Capital
Management, Inc. He was also co-founder of the Strong family of mutual funds.
NORMAN DANN, a director of the Company since August 1995, has extensive
experience in the medical device industry. Since 1992, Mr. Dann has been a
business consultant concentrating in the areas of venture capital, strategic
planning, marketing and product development. Mr. Dann also currently serves as a
director of Medical CV Inc. and several private companies. From 1980 to 1992,
Mr. Dann served as an executive officer of and consultant to Pathfinder
Ventures, Inc., a venture capital firm ("Pathfinder"), and served as a general
partner of three of Pathfinder's funds and partnerships. From 1971 to 1977, Mr.
Dann served as Vice President of Sales and Marketing and Senior Vice President
of Development with Medtronic, Inc., a leading manufacturer of cardiac
pacemakers and other medical products. In 1960, Mr. Dann founded The Dann
Company, an independent representative and service organization for medical
products, which was acquired by Medtronic, Inc. in 1971. Mr. Dann holds a B.S.
degree in industrial engineering from Pennsylvania State University.
FRANK A. KATAROW, a Director of the Company since 2002, has been President and
Chief Operating Officer of BCI, Inc., a designer, manufacturer and distributor
of patient monitoring equipment, since November 1993. Mr. Katarow has been
employed by BCI since October 1980 serving in various capacities, including
Executive Vice President from January 1993 to November 1993, Senior Vice
President and General Manager from March 1992 to January 1993, and Vice
President of Operations from June 1990 to March 1992. In addition, Mr. Katarow
is the President of SurgiVet, Inc. the wholly owned veterinary division of BCI,
Inc. BCI, then a public company, was successfully sold to Smiths Group, plc., in
1999, a public company traded on London exchange.
JOHN L. MICLOT, a director of the Company since 2002, joined Respironics in 1998
as Group - Vice President Sleep Disorders. He was quickly promoted to Senior
Vice President, Sales, Marketing and Manufacturing, and in 1999 was promoted to
President, Homecare Division, prior to his most current position as Chief
Strategic Officer. Miclot began his career at DeRoyal Industries, a medical
device company based in Tennessee, as a Sales Territory Manager in Minnesota. In
1984 he joined the Edward's Critical Care Division of Baxter Healthcare as a
Territory Manager in Minnesota. Miclot became a Product Manager in 1985 for
Baxter's pulmonary artery catheter product line and moved to Southern
California. He advanced to positions with increasing responsibility including
Senior Product Manager, Electronics followed by Marketing Manager, Catheters
before leaving the company in 1988 to join the Ohmeda Division of BOC Healthcare
as Director of Marketing, Medical Device Division. In this position he directed
research and development investments and developed annual operating plans and
global strategic plans. Miclot was appointed Director of International Marketing
and Service in 1992 and assumed the position of Vice President of International
in 1993. He was responsible for supporting international sales for all
divisions, the development of distribution channels, and establishing a global
sales, marketing, and service network in all major international markets. In
1994 Miclot joined Medex Inc., a medical device company specializing in
cardiovascular pressure monitoring, as Vice President of Marketing. He was
responsible for leading the integration of two acquisitions, strategic planning
and the reorganization of the sales and marketing structure. In 1995 Miclot took
a position with Healthdyne, Inc. as Senior Vice President, Sales and Marketing.
He directed the company's worldwide sales and marketing initiatives including
strategic planning, sales management, operating plan implementation, and
prioritization of product development activities. Miclot earned a bachelor of
business administration degree in Marketing from the University of Iowa. He is
currently a member of the Young Presidents Organization.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and directors,
and persons who beneficially own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors, and greater than 10% shareholders
are required by Exchange Act regulations to furnish the Company with copies of
all Section 16(a) forms they file.
49
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Form 5 was
required for such persons, the Company believes that during the fiscal year
ending April 30, 2003, all filing requirements applicable to its officers,
directors, and greater than 10% beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information regarding compensation earned
by or awarded to Timothy J. O'Malley, the President and Chief Executive Officer,
during the Company's last three fiscal years ended April 30, 2003, 2002 and
2001. No other executive officer of the Company received total salary and bonus
compensation in excess of $100,000 for the fiscal year ended 2003.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation ------------------
-------------------------------- Securities All Other
Name and Principal Position Year Salary Bonus Underlying Options Compensation
(# of shares)(1)
- ------------------------------------- ------- ----------- -------------- ---------------------- -------------------
Timothy J. O'Malley 2003 $225,000 ---- ---- ----
President and Chief Executive 2002 219,375 ---- 185,000 ----
Officer 2001 180,000 ---- ---- ----
- ----------
(1) Number of shares of Common Stock subject to options that were granted
during the year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No options were granted during fiscal year 2003 to the executive officer named
in the above Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth certain information concerning each exercise of
stock options during the year ended April 30, 2003 by the executive officer
named in the above Summary Compensation Table and the aggregated fiscal year-end
value of the unexercised options of such executive officer.
Number of Unexercised Value of Unexercised
Securities Underlying In-the-Money Options at Fiscal
Options at Fiscal Year-End (#) Year- End ($)(1)
-------------------------------- ------------------------------
Shares Value
Acquired on Realized ($) Exercisable Unexercisable Exercisable Unexercisable
Name Exercise (#)
- -------------------------- -------------- ------------- --------------- ---------------- -------------- ---------------
Timothy J. O'Malley - 0 - $ - 0 - 215,000 195,000 --- ----
- ----------
(1) Based on the differences between the closing price of the Company's Common
Stock at fiscal year-end and the option exercise price, no options granted
to Mr. O'Malley were in the money at fiscal year end.
COMPENSATION OF DIRECTORS
Directors are not currently paid fees for attending meetings. Under the
Company's Stock Option Plan, each non-employee director receives an option to
purchase 30,000 shares of Common Stock upon his initial election to the Board.
Pursuant to such provision, in August 1995 Mr. Dann received a non-qualified
option to purchase 30,000 shares of Common Stock at an exercise price of $3.00
per share; in May 1999 Mr. Corneliuson received a non-qualified option to
50
purchase 30,000 shares of Common Stock at an exercise price of $8.94 and in May
2002, a non-qualified option to purchase 10,000 shares at $1.28 per share. In
February 2002, Mr. Katarow and Mr. Miclot each received a non-qualified option
to purchase 30,000 shares of Common Stock at an exercise price of $1.60. Each
such option is for a term of ten years and vests over a four-year period. In
addition, after three years of service each non-employee director receives a
ten-year non-qualified option for 10,000 shares, vesting after one year, each
year he or she continues to serve as a director. Mr. Dann received an option for
10,000 shares in November 1998 at an exercise price of $13.50, an option for
10,000 shares in November 1999 at an exercise price of $6.75, an option for
10,000 shares in November 2000 at an exercise price of $7.125, an option for
10,000 shares in November 2001 at an exercise price $3.07, and an option for
10,000 shares in November 2002 at an exercise price of $.80.
The Company has non-compete and confidentiality agreements with its employees.
In addition, the Company has a letter agreement of employment with Mr. O'Malley.
The letter agreement outlines the terms of Mr. O'Malley's stock options and
compensation plan but does not include a non-compete agreement. The letter
agreement does not provide for any severance benefits. The Company does not have
key man life insurance on Mr. O'Malley. The Company does not have an employment
agreement with, or key man life insurance on, any other individual.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of shares of Common
Stock of the Company on June 26, 2003, by each of the executive officers named
in the Summary Compensation Table set forth in Item 11, by each director, by all
directors and current executive officers as a group and by all persons known by
us to be beneficial owners of more than 5% of the Company's common stock. Except
as otherwise indicated, each of the shareholders listed in the table or included
within a group listed in the table possesses sole voting and investment power
with respect to the shares indicated.
Name and Address Shares Beneficially Percent of
Owned(1) Ownership
- ------------------------------------------- ---------------------- ---------------
Deephaven Private Placement 529,776 6.1%
c/o Jim Korn
130 Cheshire Lane
Suite 102
Minnetonka, MN 55305
Heartland Value Fund 800,000 9.2%
c/o Heartland Advisors
789 North Water Street
Milwaukee, WI 53202
William D. Corneliuson 793,400(2) 9.2%
777 East Wisconsin Avenue
Suite 3020
Milwaukee, WI 53202
David B. Johnson 646,037(8) 7.5%
Miller Johnson Steichen Kinnard
1400 Kinnard
Financial Center
920 2nd Avenue South
Minneapolis, MN 55402
51
Name and Address Shares Beneficially Percent of
Owned(1) Ownership
- ------------------------------------------- ---------------------- ---------------
Aaron Boxer Revocable Trust 524,539(9) 6.1%
Aaron Boxer, Trustee
7287 Sidonig Court
Boca Raton, FL 33433
G. Kent Archibald 502,377(10) 5.8%
15 Evergreen Lane
North Oaks, MN 55127
Norman Dann 80,000(3) *
Frank Katarow 7,500(4) *
John Miclot 7,500(5) *
Tim O'Malley 246,950(6) 2.9%
All Current Executive Officers and 1,135,350(7) 13.1%
Directors as a Group (5 persons)
- ----------
* Less than 1%
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person to acquire them as of June 26, 2003, or within 60 days of such
date are treated as outstanding only when determining the percent owned by
such individual and when determining the percent owned by a group.
(2) Includes options to purchase 82,500 shares of common stock which are
exercisable as of June 26, 2003, or will become exercisable within 60 days
of such date. Also includes 225,100 shares held by Duchess Limited
Partnership, an entity in which Mr. Corneliuson holds a pecuniary interest.
(3) Includes options and warrants to purchase 70,000 shares of common stock
which are exercisable as of June 26, 2003, or will become exercisable
within 60 days of such date.
(4) Includes an option to purchase 7,500 shares of common stock which is
exercisable as of June 26, 2003, or will become exercisable within 60 days
of such date.
(5) Includes an option to purchase 7,500 shares of common stock which is
exercisable as of June 26, 2003, or will become exercisable within 60 days
of such date.
(6) Includes options to purchase 237,500 shares of common stock which are
exercisable as of June 26, 2003, or will become exercisable within 60 days
of such date.
(7) Includes 405,000 shares, which may be purchased upon exercise of options
and warrants which are exercisable as of June 26, 2003, or will become
exercisable within 60 days of such date.
(8) Includes 91,797 shares and 30,000 units (consisting of 30,000 shares and
warrants to purchase 30,000 shares) owned by David B. Johnson; 269,840
shares owned by Betty L. Johnson, wife of David B. Johnson; 7,800, 8,000,
and 4,600 shares owned respectively by each Todd, Molly, and Joel Johnson,
children of David B. Johnson; and 214,000 shares and 20,000 units
(consisting of 20,000 shares and warrants to purchase 20,000 shares) owned
by a foundation controlled by David B. Johnson.
(9) Based on information set forth in a Schedule 13G/A filed under the Exchange
Act on February 14, 2003.
(10) Based on information set forth in a Schedule 13G/A filed under the Exchange
Act on February 7, 2003.
52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
President and Chief Executive Officer (who is the Company's principal
executive officer and principal financial officer), Tim O'Malley, has
reviewed the Company's disclosure controls and procedures within 90
days prior to filing this report. Based upon this review, this officer
believes that the Company's disclosure controls and procedures are
effective in ensuring that material information related to the Company
is made known to him by others within the Company.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could
significantly affect these controls during the fiscal year covered by
this report or from the end of the reporting period to the date of
this Form 10-K.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
See Part II, Item 8.
(a)(2) Exhibits
See Exhibit Index on page following Certifications for Sarbanes - Oxley
Act of 2002 (which follow the signature page).
(a)(3) Financial Statement Schedules
None
(b) Reports on Form 8-K
Form 8-K filed May 21, 2003 regarding change in public accountants.
Form 8-K filed May 27, 2003 regarding change in public accountants.
Form 8-K filed May 30, 2003 regarding change in fiscal year.
53
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.
MEDWAVE, INC.
Date: July 25, 2002 By /s/ Tim O'Malley
------------------------------
Timothy J. O'Malley, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Tim O'Malley President, CEO, and Director July 25, 2003
- ---------------------------------------- (principal executive officer)
Timothy J. O'Malley
/s/ William D. Corneliuson Director July 25, 2003
- ----------------------------------------
William D. Corneliuson
/s/ Norman Dann Director July 25, 2003
- ----------------------------------------
Norman Dann
/s/ Frank A. Katarow Director July 25, 2003
- ----------------------------------------
Frank A. Katarow
/s/ John L. Miclot Director July 25, 2003
- ----------------------------------------
John L. Miclot
54
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Timothy J. O'Malley, President and Chief Executive Officer, certify
that:
1. I, (the "Registrant"), have reviewed this annual report on Form 10-K
of Medwave, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in the annual report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filling date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: July 25, 2003 By: /s/ Timothy J. O'Malley
----------------------------
President and Chief Executive
Officer (Principal Executive
Officer and Principal
Financial Officer)
55
MEDWAVE, INC.
EXHIBIT INDEX
TO
FORM 10-K FOR FISCAL YEAR ENDED APRIL 30, 2003
Exhibit
Number Description
- ------- -----------
3.1 Amended and Restated Articles of Incorporation - incorporated by
reference to Exhibit 3.2 to the Registrant's Registration Statement
on Form SB-2, Reg. No. 33-96878C*
3.2 Amendment of Articles of Incorporation - incorporated by reference
to Exhibit 4.2 to the Registrant's Registration Statement on Form
S-3, Reg. No. 333-103477*
3.3 Amended and Restated Bylaws - incorporated by reference to Exhibit
3.4 to the Registrant's Registration Statement on Form SB-2, Reg.
No. 33-96878C*
3.4 Amendments to Bylaws - incorporated by reference to Exhibit 4.4 to
the Registrant's Registration Statement on Form S-3, Reg. No.
333-103477*
10.1 Amended and Restated Medwave Stock Option Plan (as amended through
August 4, 1998 - incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
October 31, 1998)*
10.2 Forms of Incentive and Nonstatutory Stock Option Agreements under
Amended and Restated Stock Option Plan - incorporated by reference
to Exhibit 10.2 to the Registrant's Annual Report on From 10-KSB
for the fiscal year ended April 30, 1996*
10.4 Letter agreement of employment with Timothy O'Malley dated
September 9, 1999 and amendment dated September 16, 1999 -
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended October 31,
1999*
10.5 Critical Care Concepts Distributor Agreement - incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended January 31, 2000*
10.6 Agreement of Lease extension dated November 30, 1999 between the
Company and AMB Property, L.P. - incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 2000.* Agreement of Lease extension
dated March 21, 2002, between the Company and AMB Property, L.P.
10.7 Agreement of Lease dated December 20, 2001 between the Company and
Hawthorne North Realty Trust.
10.8 2002 Amended and Restated Stock Option Plan (amendment No. 2, as
amended through February 26, 2002).
10.9 The Agreement and Plan of Merger by and between Medwave, Inc., a
Minnesota Corporation and Medwave, Inc., a Delaware Corporation
dated as of April 30, 2003.
10.10 Supply Agreement entered into September 14, 2000 by and between the
Registrant and Nihon Kohden Corporation.
23.1 Consent of Ernst & Young, LLP
23.2 Consent of BDO Seidman, LLP
99.1 Certification pursuant to 18 U.S.C. Section 1350
- ------------
* Incorporated by reference to a previously filed report or document,
SEC File No. 0-28010 unless otherwise indicated
56