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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] 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: 0-24663
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ASPECT MEDICAL SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-2985553
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
141 NEEDHAM STREET, NEWTON, MASSACHUSETTS 02464-1505
(Address of Principal Executive Offices) (Zip Code)
(617) 559-7000
Registrant's Telephone Number, Including Area Code
--------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
(Title Of Class)
--------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 2001 (based on the closing price as quoted by the
Nasdaq National Market as of such date) was $191,336,000. The registrant had
17,492,790 shares of Common Stock, $0.01 par value per share, outstanding as of
March 15, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2000. Portions of such proxy statement are incorporated by reference into Part
III of this Form 10-K.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Aspect was incorporated as a Delaware corporation in 1987. We develop,
manufacture and market an anesthesia-monitoring system that we call the BIS(R)
system. The BIS system enables anesthesia providers to assess and manage a
patient's level of consciousness during surgery. Our proprietary BIS system
includes our BIS monitor or BIS Module Kit and our single-use, disposable BIS
Sensors. The BIS system is based on our patented core technology, the Bispectral
Index, which we refer to as the BIS index. We developed the BIS system over 10
years, and it is the subject of 12 issued and six pending United States patents.
As of December 31, 2000, more than 10,300 BIS monitors and modules have been
installed worldwide, including approximately 8,200 BIS units in more than 1,000
sites in North America. These sites include 48 of the 100 largest hospitals and
46% of all teaching hospitals with anesthesia residency programs. We believe
that over 2.5 million patients have been monitored using the BIS index during
surgery. Our latest generation monitor, the A-2000(R) BIS Monitor, was cleared
for marketing by the United States Food and Drug Administration, or the FDA, in
February 1998. We market the BIS system in the United States through a
combination of a direct sales organization and specialty distributors.
Internationally we market the BIS system through distributors and marketing
partners. We have also established original equipment manufacturer relationships
with several patient monitoring and anesthesia equipment companies to
incorporate our BIS technology into their equipment using the BIS Module Kit.
Clinical trials and routine clinical use of the BIS system have shown that
patient monitoring with the BIS system results in:
- a reduction in the amount of anesthetics used,
- faster wake-up from anesthesia,
- less patient time in the operating room and the post-anesthesia care
unit following surgery,
- higher rates of outpatients bypassing the post-anesthesia care unit
and proceeding to a less costly step-down recovery area directly from
the operating room,
- improvements in the quality of recovery, and
- improvements in the means to assess the risk of surgical awareness,
which is the unintentional regaining of consciousness during surgery.
THE ASPECT SOLUTION: PATIENT MONITORING WITH THE BIS SYSTEM
We have developed the BIS monitoring system that is based on our
proprietary BIS index. Our BIS system is comprised of our BIS monitor or BIS
Module Kit and our single-use, disposable BIS Sensors. The BIS Sensor is applied
to a patient's forehead to acquire the EEG, a measure of the electrical activity
of the brain. The EEG is then analyzed by the BIS monitor or BIS Module Kit to
produce the BIS index. The BIS index is a numerical index that correlates with
levels of consciousness and is displayed as a number ranging between 100,
indicating that the patient is awake, and zero, indicating an absence of brain
activity. In October 1996, the FDA cleared the BIS index for marketing for use
as a direct measure of anesthetic effect on the brain.
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PRODUCTS
The following chart summarizes our proprietary product offerings, all of
which have received clearance from the FDA:
- ----------------------------------------------------------------------------------------------------------
INITIAL
COMMERCIAL
PRODUCT SHIPMENT DESCRIPTION
- ----------------------------------------------------------------------------------------------------------
A-2000 BIS Monitor 1998 Small, lightweight third-generation BIS monitor
BIS Sensor 1997 Disposable product for use with A-2000, A-1050
and BIS Module Kit
BIS Module Kit 1998 Components of BIS monitoring technology to be
integrated into monitors sold by original
equipment manufacturers
A-1050 EEG Monitor with BIS 1996 Second-generation monitor with BIS index and
simplified user interface
Zipprep EEG Electrode 1995 EEG electrode with our Zipprep technology
BIS Sensor Plus pending initial Second-generation disposable product for use with
commercial the A-2000 and BIS Module Kit
shipment
BIS Pediatric Sensor pending initial Disposable product for use with A-2000 and BIS
commercial Module Kit that is smaller and easier to apply to
shipment children
BIS Sensor XP pending initial Disposable product for use with A-2000 and BIS
commercial Module Kit that offers enhanced performance in
shipment deep anesthetic states and improved robustness
to interference from noise sources
- ----------------------------------------------------------------------------------------------------------
A-2000 BIS MONITOR
We began commercial distribution of the A-2000 BIS Monitor, our
third-generation monitor, in February 1998. The A-2000 is a compact,
lightweight, portable monitor designed to accommodate the space limitations and
positioning requirements of surgical settings. The A-2000 displays the BIS index
and supporting information and includes our proprietary digital signal
converter. This converter is a palm-sized module that serves as the interface
between the BIS monitor and the BIS Sensor. The digital signal converter
acquires the EEG signal from the BIS Sensor and converts the EEG signal to
digital format. The EEG signal is then processed and the BIS index is displayed
on the A-2000.
BIS SENSOR
We commenced commercial distribution of the BIS Sensor in January 1997. The
BIS Sensor is a single-use, disposable product for use with the A-2000, the
A-1050 and the BIS Module Kit. Our BIS monitors and BIS Module Kits require the
use of the BIS Sensor to generate the BIS index. The BIS Sensor provides a
reliable and simple means of acquiring the EEG signal needed to generate the BIS
index. The one-piece design allows quick and accurate placement on the patient's
forehead. The BIS Sensor connects to the monitor by a single-point proprietary
connector.
Our Zipprep self-prepping technology is a key feature of the BIS Sensor,
BIS Sensor Plus, BIS Sensor XP and BIS Pediatric Sensor. The technology
minimizes patient set-up time and establishes effective electrical contact with
the patient which enables consistent, accurate readings of the EEG signal. Prior
to our development of the Zipprep technology, to obtain an EEG signal the user
prepared a patient's skin by rubbing an abrasive cream over the forehead 10 to
20 times in order to remove the top layer of skin prior to applying the
electrode.
BIS MODULE KIT
In 1996, we introduced our BIS Module Kit, which is designed to facilitate
the integration of the BIS index into monitoring products marketed by our
original equipment manufacturers. The BIS Module Kit consists of two pieces, our
proprietary digital signal converter and a small circuit board that resides in
the original equipment manufacturer's system. The digital signal converter
acquires the EEG signal from the BIS Sensor and converts the EEG signal to
digital format. The circuit board then processes the EEG signal and outputs the
BIS index to the original equipment manufacturer's system.
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The common architecture of the BIS Module Kit facilitates integration of
the BIS index into the original equipment manufacturer's system. Each original
equipment manufacturer is required to obtain FDA and other appropriate
regulatory clearance of its BIS module product.
BIS SENSOR PLUS
The BIS Sensor Plus is a second-generation disposable product for use with
the A-2000 BIS Monitor and BIS Module Kit. The BIS Sensor Plus features an
improved design for easy connection and enables the BIS system to automatically
configure its settings for specific patient populations and applications.
BIS PEDIATRIC SENSOR
The BIS Pediatric Sensor is smaller, easier to apply and visually appealing
to children. The BIS Pediatric Sensor features an improved design for easy
connection and enables the BIS system to automatically configure its settings
for specific patient populations and applications.
BIS SENSOR XP
The BIS Sensor XP (for eXpanded Performance) offers enhanced performance in
deep anesthetic states and improved robustness to interference from noise
sources, such as high frequency/EMG conditions in the operating room and
intensive care unit. The BIS Sensor XP features an improved design for easy
connection and enables the BIS system to automatically configure its settings
for specific patient populations and applications.
TECHNOLOGY
We developed the BIS system, including our proprietary BIS index, over 10
years. The BIS index is a numerical index that correlates with levels of
consciousness and is derived from an analysis of the EEG signal. In general, an
EEG signal changes from a small-amplitude, high-frequency signal while a person
is awake to a large-amplitude, low-frequency signal while a person is deeply
anesthetized. Historically, researchers have used observations about these
changes in the EEG signal to create mathematical algorithms to track the effects
of anesthetics on the brain. However, these algorithms have not been widely
adopted because studies have indicated that they generally do not provide
sufficient clinically useful information to assess levels of consciousness with
commonly used anesthetics and doses.
In developing the BIS index, we sought to improve these early EEG analyses
in two ways. First, by using bispectral analysis, a mathematical tool that
examines signals such as the EEG, we can extract new information from the EEG
signal. Second, we developed proprietary processing algorithms that extract
information from bispectral analysis, power spectral analysis and time domain
analysis. Geophysicists originally used bispectral analysis in the early 1960s
to study ocean wave motion, atmospheric pressure changes and seismic activity.
The advent of high-speed, low-cost digital signal processors has enabled the use
of bispectral analysis for other applications. By using bispectral analysis, we
are able to extract a distinctive fingerprint of the underlying signal structure
of the EEG and represent it as a three-dimensional mathematical model.
We created the BIS index to describe changes in the EEG that relate to the
effects of anesthetics on the brain in order to assess levels of consciousness.
Over a number of years, Aspect and others collected a large database of high
fidelity EEG recordings and clinical assessments from patients and volunteers
receiving a wide variety of anesthetics. Researchers used clinical assessments
such as a sedation rating scale, picture or word recall memory tests and
response to stimuli to define levels of consciousness. Using statistical
methods, we identified features within the EEG that correlated with sedation and
loss of consciousness. We then used proprietary statistical methods to combine
these features to generate an interpretive numerical index, which we refer to as
the BIS index. The BIS index ranges from 100, indicating that the patient is
awake, to zero, indicating an absence of electrical brain activity.
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CLINICAL DEVELOPMENT
Our clinical research and regulatory affairs group is responsible for:
- establishing collaborative relationships with leading clinical
researchers,
- encouraging publications related to the BIS index in the scientific
literature,
- coordinating with the FDA and other regulatory agencies,
- conducting clinical research with the goal of extending the
application of patient monitoring with the BIS system to other
settings and clinical uses, and
- collecting data for new product development.
We have a clinical database of over 5,000 cases for use in algorithm
development and product validation based on trials that we conducted or
sponsored or that third parties undertook.
In 1996, the FDA cleared the BIS index for marketing as a measure of
anesthetic effect on the brain. The regulatory process involved studies we
conducted on over 900 subjects. These studies characterized the relationships
between the BIS index value and various clinical endpoints, including movement,
response to incision, response to verbal command as a measure of consciousness
in volunteers and patients, memory function, drug utilization and speed of
patient recovery following surgery.
Although we have not systematically solicited reports of surgical
awareness, only 63 cases of possible surgical awareness during BIS monitoring
had been reported to us as of December 31, 2000. These reports may not include
all cases of surgical awareness that might have occurred during patient
monitoring with the BIS system. In most of the 63 cases that were reported to
us, when BIS index values were recorded at the time of awareness, high BIS index
values were noted, indicating that the BIS index correctly identified the
increased risk of awareness in these patients. However, in a small number of
these reported cases, surgical awareness may not have been detected by
monitoring with the BIS system.
We have not conducted a prospective, randomized, controlled study to
evaluate whether or not monitoring with the BIS system reduces the incidence of
surgical awareness. A controlled study to evaluate the ability of monitoring
with the BIS system to reduce the frequency of surgical awareness in the general
population would require a sample size of up to 50,000 patients, which may not
be practicable. However, we are currently sponsoring three multi-center,
multinational studies to determine the incidence of awareness during BIS
monitoring. Because these studies have not been completed, we cannot and do not
claim that patient monitoring with the BIS system will reduce the incidence of
surgical awareness. Although our experience suggests that surgical awareness is
more likely to occur when BIS values are high, we do not believe that our
experience proves conclusively that patient monitoring with the BIS system will
reduce the frequency of awareness.
SALES, MARKETING AND CUSTOMERS
DOMESTIC
Our customers include anesthesia providers, hospitals, outpatient surgical
centers and individual practitioners in office-based practice. As of December
31, 2000, BIS systems have been installed in more than 1,000 sites in North
America.
We market our BIS system in the United States primarily through a
combination of a direct sales force and specialty distributors. As of December
31, 2000, our domestic sales force was comprised of 29 sales professionals and
40 clinical specialists. We have developed a financial model which is used by
sales representatives to assist administrators in evaluating the economic impact
of patient monitoring with the BIS system at their hospital. We believe that our
clinical specialists play a key role in the ongoing process of developing
support for the BIS technology both before and after the sale of BIS systems.
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We augment our direct sales force with medical products distributors in
selected markets, including Canada and locations in the United States. We have
also begun to market our products through the sales organizations of our
original equipment manufacturers and contracts with hospital group purchasing
organizations.
We entered into a distribution agreement, effective September 1, 2000, with
Datex-Ohmeda Division of Instrumentarium Corporation, under which Datex-Ohmeda
has agreed to act as a nonexclusive distributor of our A-2000 BIS Monitor and
related products in some territories outside the United States.
We entered into a distribution agreement, effective October 1, 1999, with
Agilent Technologies, Inc., formerly part of Hewlett-Packard Company, under
which Agilent agreed to act as a nonexclusive distributor of our A-2000 BIS
Monitor and related products in some territories outside the United States.
Unless earlier terminated in accordance with the terms of the agreement, this
agreement extends for a two-year term.
We entered into a distribution agreement, dated January 21, 1998, with
Nihon Kohden Corporation, under which Nihon Kohden has agreed to act as an
exclusive distributor of our BIS monitors and related products in Japan.
We have entered into a single source agreement, effective November 1, 2000,
with Premier Purchasing Partners, L.P., the group purchasing program of one of
the nation's leading hospital and healthcare system alliances. Under this
agreement, the more than 1,800 hospitals and healthcare facilities affiliated
with Premier will have the right to purchase BIS monitors and BIS Sensors under
the pricing terms contained in the agreement. Under this agreement, Premier's
field force has agreed to work with our sales force to facilitate the adoption
of BIS technology by their affiliated healthcare organizations.
We have entered into an agreement, effective November 1, 2000, with
Consorta, Inc. Consorta's shareholder health care systems operate more than half
of all Catholic hospitals in the United States. The Consorta membership
encompasses more than 300 acute care facilities, representing nearly 50,000
beds, and 700 alternate care sites. Under this agreement, the Consorta
membership will have the right to purchase BIS monitors and BIS Sensors under
the pricing terms contained in the agreement. Under this agreement, Consorta's
field force has agreed to work with our sales force to facilitate the adoption
of BIS technology by their member healthcare organizations.
We have entered into an agreement, effective September 1, 2000, with
AmeriNet, Inc., the nation's largest membership-based health care group
purchasing organization. AmeriNet represents 13,989 member facilities in all 50
states, including hospitals, medical group practices, nursing homes, surgery
centers, managed care organizations, pharmacies and integrated delivery
networks. Under this agreement, AmeriNet's membership will have the right to
purchase BIS monitors and BIS Sensors under the pricing terms contained in the
agreement. Under this agreement, AmeriNet's field force has agreed to work with
our sales force to facilitate the adoption of BIS technology by their member
healthcare organizations.
We have entered into a single source agreement, effective September 1,
2000, with Healthtrust Purchasing Group, L.P. Healthtrust Purchasing Group
serves over 330 hospitals and more than 125 surgery centers, representing five
percent of the nation's operating rooms. Under this agreement, Healthtrust
Purchasing Group's participants will have the right to purchase BIS monitors and
BIS Sensors under the pricing terms contained in the agreement.
We have entered into a single source agreement, effective September 1,
2000, with Health Services Corporation of America, a leading group purchasing
organization dedicated to improving purchasing to improve healthcare. Health
Services Corporation of America's 2,000 plus members include hospitals, health
systems, integrated delivery networks, and other healthcare facilities across
the United States. Under this agreement, Health Services Corporation of
America's membership will have the right to purchase BIS monitors and BIS
Sensors under the pricing terms contained in the agreement. Under this
agreement, Health Services Corporation of America's field force has agreed to
work with our sales force to facilitate the adoption of BIS technology by their
member healthcare organizations.
We have entered into an agreement, dated August 13, 1998, with Novation,
the supply cost management company for VHA Inc. and the University Hospital
Consortium, two national health care alliances. Under this agreement, the
approximately 1,900 member healthcare organizations of VHA and the University
Hospital Consortium will have the right to purchase BIS monitors and BIS Sensors
under the pricing terms contained in the agreement. Under this agreement,
Novation's field force has agreed to work with our sales force to facilitate the
adoption of BIS technology by their member healthcare organizations.
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We offer customers the option either to purchase the BIS monitors outright
or to acquire the BIS monitors pursuant to a sales-type lease agreement whereby
the customer contractually commits to purchase a minimum number of BIS Sensors
per BIS monitor per year. Under this agreement, customers purchase the BIS
Sensors and the BIS monitor for the purchase price of the BIS Sensors plus an
additional charge per BIS Sensor to pay for the purchase price of the BIS
monitor and related financing costs over the term of the agreement. The customer
is granted an option to purchase the BIS monitor at the end of the term of the
agreement, which is typically three to five years. We believe that the
sales-type lease arrangement in some cases reduces the time required for
customers to adopt the BIS system because it provides them with an option to
utilize their operating budget to fund the purchase.
Under certain circumstances, we also offer customers the opportunity to use
the BIS monitors under our Equipment Placement program, which we refer to as the
EP program. Under the EP program the customer receives the right to use the BIS
monitors for a mutually agreed upon period of time. During this period, the
customer purchases BIS Sensors at a price that includes a premium above the list
price of the BIS Sensors to cover the rental of the equipment, but without any
minimum purchase commitments. At the end of the evaluation period the customer
has the option of purchasing the BIS monitors or returning them to us. We
believe that the EP program will, in certain circumstances, provide an effective
method of allowing customers to evaluate and ultimately acquire the BIS
technology from us or our original equipment manufacturers.
We conduct several activities for the different constituencies that may be
involved in the decision-making process. For clinical audiences, we exhibit at
tradeshows, sponsor speakers at professional meetings and develop articles for
publication in conjunction with industry experts. In addition, we work with
hospitals to publicize their adoption of patient monitoring with the BIS system
in an effort to assist them in communicating their commitment to improving the
quality and efficiency of patient care.
INTERNATIONAL
In late 1998, we established our international operations and opened our
international headquarters in Leiden, The Netherlands. We are developing our
international sales and distribution program through a combination of
distributors and marketing partners, including companies with which we have
entered into original equipment manufacturer relationships. We expect to
complement our international third-party distribution program through direct
sales to select customers and to support these customers with clinical
specialists. As of December 31, 2000, we employed 24 persons in our
international organization. Substantially all international sales are
denominated in United States dollars. See Note 17 of notes to our consolidated
financial statements for domestic and international financial information.
ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS
We have entered into agreements with six patient monitoring or anesthesia
equipment companies, Datex-Ohmeda Division of Instrumentarium Corporation,
Drager Medizintechnik GmbH, Agilent Technologies, Inc., formerly part of
Hewlett-Packard Company, GE Medical Systems - Information Technologies, Nihon
Kohden Corporation and Spacelabs Medical, Inc., that provide for the integration
of our BIS technology into their equipment. Spacelabs introduced a BIS module
for its patient monitoring systems in October 1998 and Agilent introduced a BIS
module for its patient monitoring systems in October 2000. We currently expect
that BIS modules for our other four original equipment manufacturers will be
available within the next several years.
Under an OEM Purchase Agreement, dated September 1, 2000, between Aspect
and Datex-Ohmeda Division of Instrumentarium Corporation, we have agreed with
Datex-Ohmeda to integrate our BIS technology with Datex-Ohmeda's patient
monitors. Unless terminated sooner, this agreement expires on December 31, 2005.
The term of the agreement automatically renews for one-year periods unless
either party provides written notice of termination to the other party, at least
12 months prior to expiration of the agreement. Under a separate agreement with
Datex-Ohmeda, Aspect agreed to supply certain sensor products to Datex-Ohmeda if
and when certain monitoring products are developed and introduced by
Datex-Ohmeda.
Under an OEM Development and Purchase Agreement, dated December 22, 1999,
between Aspect and GE Medical Systems - Information Technologies, we have agreed
with GE Medical Systems to integrate our BIS technology with GE Medical Systems'
patient monitors. The agreement expires three years following the introduction
of a GE Medical Systems patient monitor which integrates Aspect's BIS
technology, unless terminated sooner due to certain milestones not being
achieved.
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Under an OEM Development and Purchase Agreement, dated August 6, 1999,
between Aspect and Agilent, we have agreed with Agilent to integrate our BIS
technology with Agilent's patient monitors. Unless terminated sooner if
milestones are not achieved by October 31, 2001, this agreement expires on
August 6, 2005. The term of the agreement automatically renews for one-year
periods unless either party provides written notice of termination to the other
party, at least 60 days prior to expiration of the agreement.
Under a Product Agreement with Drager Medizintechnik GmbH, dated May 5,
1999, we have agreed to integrate our technology with Drager's anesthesia
equipment. Unless terminated sooner, this agreement will expire on December 31,
2005. This agreement automatically renews for successive one-year periods
thereafter unless either party provides written notice of termination to the
other party, at least twelve months prior to expiration of the renewal period.
Under an International License Agreement, dated January 21, 1998, between
Aspect and Nihon Kohden, we have licensed our technology to Nihon Kohden on a
worldwide non-exclusive basis. Nihon Kohden has the right to incorporate our
technology into its patient monitoring systems. Unless terminated sooner, the
agreement expires four years following approval by the Japanese Ministry of
Health and Welfare of a Nihon Kohden patient monitor which integrates Aspect's
BIS technology.
Pursuant to the terms of a Distribution and License Agreement, dated April
1, 1996, between Aspect and Spacelabs Medical, Inc., we have granted to
Spacelabs a worldwide, non-exclusive license to the BIS index to develop,
manufacture, market and sell Spacelabs monitoring equipment that incorporates
the BIS index. Spacelabs also has the right to distribute BIS Sensors on a
non-exclusive basis throughout the world with the exception of the United
States. Unless earlier terminated, the license expires in April 2006.
For the fiscal years ended December 31, 2000, 1999 and 1998, sales to
Spacelabs accounted for approximately less than 1%, 2% and 13%, respectively, of
our total revenue. Spacelabs no longer distributes our monitors. For the fiscal
year ended December 31, 2000, no one customer accounted for 10% or more of our
total revenue.
RESEARCH AND DEVELOPMENT
Our research and development efforts focus primarily on continuing to
improve the function and features of the BIS system and enhancing our technical
leadership in signal-processing technology for use in patient care. We intend to
leverage the BIS technology for the development of new monitoring products and
proprietary disposable sensors for new applications and to take advantage of new
opportunities such as the intensive care unit and procedural sedation markets.
During the fiscal years ended December 31, 2000, 1999 and 1998, we spent
approximately $5.7 million, $4.8 million and $4.0 million, respectively, in our
research and development efforts, including clinical and regulatory expenses.
Our research and development department has four primary areas of
responsibility:
- algorithm research,
- product development,
- pre-production quality assurance, and
- clinical engineering.
Algorithm research involves developing signal-processing techniques to
analyze the EEG and other electrical signals generated by the body. Our product
development activities include developing and maintaining the hardware and
software, including signal-processing software employed in the BIS systems, and
coordinating with external resources, particularly with respect to mechanical
engineering and industrial design. Disposable-product research and development
combines expertise in materials science, disposable-products design, electrode
technology and design for manufacturing to develop our disposable products,
including the BIS Sensor products. Pre-production quality-assurance activities
include testing our products to ensure that they meet FDA guidelines, other
applicable regulatory and international quality standards and internal
verification and validation protocols. Our clinical engineering activities
include optimizing products for use in the clinical environment.
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We have developed a BIS Sensor with improved signal processing for
detection and filtration of electrical interference. We also continue to explore
new signal-processing techniques to improve the quality of the BIS index. We
developed a new version of the BIS Sensor that will contain an electronic memory
device. This memory device will allow information about the sensor, such as lot
code, expiration date and type of sensor, to be stored on the sensor and to be
retrieved by the BIS monitor when used. In addition, we have developed a smaller
BIS Sensor that can be used with children between the ages of two and eight
years. We are exploring the development of other BIS Sensors which offer
advantages in cases where patients may require extended monitoring with the BIS
system, such as in the intensive care unit.
We are also investigating other product areas that utilize our expertise in
anesthesia delivery and monitoring. Specifically, we are exploring the
application of the BIS index to provide additional information about other
effects of anesthetics on the patient. We are evaluating the application of the
BIS index to measure additional states of the brain, including dementia, which
may apply to detection of Alzheimer's disease, sleep cycles, seizure detection,
and/or other neurological states.
Additional studies, some of which we sponsored, are being conducted, or
have been completed, to assess the performance of the BIS index in the presence
of certain anesthetics, such as ketamine, and patient populations such as
infants and young children, not included in the clinical development of the BIS
algorithms.
MANUFACTURING
We have a 19,000 square foot manufacturing and warehousing facility located
in our Newton, Massachusetts headquarters. In this facility we assemble all of
our BIS monitors, and we produce substantially all of our BIS Sensors on a
semi-automated production line. Prior to 1998, we outsourced all BIS Sensor
manufacturing. We currently outsource to third parties the production of our
Zipprep EEG Electrodes.
Our production process for our BIS monitors consists of final assembly,
integration and testing of standard and custom components. Our production
process for our BIS Sensor consists of several manufacturing and assembly
processes using custom components. Qualified sub-contractors, who have met our
supplier certification process and are placed on an approved vendors list,
produce certain custom components.
We maintain a quality-assurance program covering our manufacturing
operations. Suppliers of purchased components are required to meet stated
specifications. We certify suppliers prior to use by conducting audits and
product inspections. We engage in ongoing evaluations of the performance of our
suppliers by evaluating the results of inspections and tests as well as the
timeliness of product deliveries. We employ numerous quality-assurance
procedures during our in-house manufacturing processes to ensure finished
products meet specification. Quality assurance procedures include operator
training, process validation, equipment calibration, inspection and testing. All
manufacturing procedures and processes are formally approved and updated using
established revision control procedures. Documentation of in-process and final
testing results is maintained in device history records for every unit. We
maintain an ongoing post-sale performance-monitoring program.
COMPETITION
The medical device industry is subject to intense competition. We currently
have a single competitor in the US market. This competitive device is based on
signal-processing of the EEG and is marketed by a well-established medical
products company. We believe that new competition will come from companies,
including patient monitoring companies, currently marketing conventional EEG
monitors utilizing standard signal-processing techniques such as spectral edge
frequency analyses and median frequency analyses. We also believe that new
competition will come from companies that market EEG monitors utilizing novel
signal-processing technologies. Several potential competitive products are
currently being marketed outside the United States although we do not believe
that these products provide any significant advantages relative to the BIS
technology. We believe that one or more companies will seek to market
competitive products based on auditory evoked potentials in the United States.
Additionally, a number of academic researchers worldwide are studying the
potential use of other techniques to measure the effects of anesthetics. These
other products and techniques include the use of auditory evoked potentials,
heart rate variability, pupillary reflexes and skin blood flow measurement
techniques.
8
10
We believe that the principal competitive factors in the market for
anesthesia-monitoring products include:
- improved patient outcomes,
- cost effectiveness,
- acceptance by leading anesthesia providers,
- ease of use for anesthesia providers,
- the publication of peer reviewed clinical studies,
- sales and marketing capability,
- timing and acceptance of product innovation,
- patent protection, and
- product quality.
PATENTS AND PROPRIETARY RIGHTS
Our policy is to prosecute and enforce our patents and proprietary
technology. We intend to continue to file United States and foreign patent
applications to protect technology, inventions and improvements that are
considered important to the development of our business. We also rely upon trade
secrets, know how, continuing technological innovation and licensing
opportunities to develop and maintain our competitive position. We have
established a substantial proprietary position with respect to our products and
our core signal processing technology, bispectral analysis, and its application
to biological signals. As of December 31, 2000, we held 12 United States patents
and had filed 6 additional United States patent applications. We also have
numerous corresponding patents and pending patent applications in certain major
industrial countries, including Canada, the major European market countries,
Australia and Japan. The following chart summarizes our United States patents
and patent applications:
- -----------------------------------------------------------------------------------------------------------------
NUMBER NUMBER PATENT
OF ISSUED OF PATENT EXPIRATION
PATENTS APPLICATIONS TECHNOLOGY COVERED DATE
- -----------------------------------------------------------------------------------------------------------------
-- 1 Closed loop delivery of anesthesia
4 -- Application of Bispectral and higher order analysis and March 13, 2007
various statistical modeling technologies to EEG signals April 30, 2008
June 14, 2011
October 17, 2012
2 -- Methods of ensuring the reliability of the computed values December 24, 2016
January 30, 2018
-- 1 Method of evaluating BIS information to facilitate clinical
decision making
2 -- Application of bispectral and higher order analysis May 15, 2007
to electrocardiogram signals June 4, 2008
1 -- Zipprep self-prepping disposable electrode technology April 26, 2011
1 1 Technology relating to the interface between the BIS October 20, 2015
Sensor and the BIS monitor
1 3 BIS Sensor technology October 11, 2016
1 -- Signal acquisition technology for digital signal converter January 17, 2012
---- ----
12 6
==== ====
- -----------------------------------------------------------------------------------------------------------------
We have also been granted a perpetual, royalty-free, non-exclusive license by
Siemens Medical Systems, Inc. to a United States patent covering signal
acquisition technology for digital signal converters.
9
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GOVERNMENT REGULATION
The manufacture and sale of medical diagnostic devices intended for
commercial distribution and use are subject to extensive government regulation
in the United States and in other countries. Our existing products are regulated
in the United States as medical devices by the FDA under the Federal Food, Drug,
and Cosmetic Act, or FDC Act. Pursuant to the FDC Act, the FDA regulates the
research, testing, manufacturing, safety, labeling, storage, record keeping,
advertising, distribution and production of medical devices. Noncompliance with
applicable regulations can result in refusal of the government to grant
clearance for devices, withdrawal of prior clearances or approvals, total or
partial suspension of production, fines, injunctions, civil penalties, recall or
seizure of products and criminal prosecution.
Generally, before we can introduce a new product in the United States, we
must obtain FDA clearance of a premarket notification under Section 510(k) of
the FDC Act, referred to as a 510(k) notification, or approval of a premarket
approval application under Section 515 of the FDC Act. To date, we have received
clearance of 510(k) notification from the FDA with respect to the following
products:
- Zipprep EEG Electrodes (June 1994),
- A-1050 EEG Monitor with BIS (January 1996),
- BIS Sensor (October 1996),
- BIS Clinical Utility Indication (October 1996),
- A-2000 BIS Monitor (February 1998),
- BIS Sensor Plus (January 2000),
- BIS Pediatric Sensor (October 2000),
- BIS Sensor XP (October 2000), and
- BIS Module Kit (October 2000).
Once we have received clearance of a 510(k) notification, any products we
manufacture or distribute are subject to extensive and continuing regulation by
the FDA, including compliance with current Good Manufacturing Practices
regulations, record keeping requirements, reporting of adverse experience with
the use of the device, post-market surveillance, and other actions deemed
necessary by the FDA. A new 510(k) notification is also required when a medical
device manufacturer makes a change or modification to a legally marketed device
that could significantly affect the safety or effectiveness of the device, or
where there is a major change or modification in the intended use of the device.
When any change or modification is made to a device or its intended use, the
manufacturer must make the initial determination whether the change or
modification is of a kind that would necessitate the filing of a new 510(k)
notification. The FDA's regulations provide only limited guidance for making
this determination.
The FDC Act regulates our quality control and manufacturing procedures by
requiring us to demonstrate and maintain compliance with current Good
Manufacturing Practices regulations, including quality systems regulations, as
specified by the FDA. This regulation requires, among other things, that:
- we use written procedures to control our product development and
manufacturing process,
- we validate, by extensive and detailed testing of every aspect of the
process, our ability to produce devices which meet our manufacturing
specifications,
- we investigate any deficiencies in the manufacturing process or in the
products produced, and
- we maintain detailed record keeping.
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12
The current Good Manufacturing Practices regulations are applicable to
manufacturers that produce components specifically for use in a medical device,
and require design controls and maintenance of service records.
The FDA monitors compliance with current Good Manufacturing Practices
regulations by conducting periodic inspections of manufacturing facilities. If
violations of applicable regulations are noted during FDA inspections of our
manufacturing facilities, the continued marketing of our products may be
adversely affected. In August 1996, the FDA conducted a routine inspection of
our manufacturing facility to ensure compliance with current Good Manufacturing
Practices regulations. The FDA noted no adverse observations during this
inspection. We believe that we have continued to maintain manufacturing
facilities and procedures that are fully compliant with all applicable
government quality systems regulations and guidelines.
In June 1998, we obtained ISO 9001/EN 46001 international quality systems
registration, a certification showing that our procedures and manufacturing
facilities comply with standards for quality assurance and manufacturing process
control. Our compliance with this registration has been confirmed since June
1998 in semi-annual surveillance audits. The ISO 9001 certification, along with
the EN 46001, the European Medical Device Directive certification, signifies
compliance with the requirements enabling us to affix the CE Mark to our current
products. The CE Mark denotes conformity with European standards for safety and
allows certified devices to be placed on the market in all European Union
countries. After June 1998, medical devices may not be sold in European Union
countries unless they display the CE Mark.
We have established a dedicated regulatory and quality assurance group to
maintain regulatory compliance and manage all of our quality-assurance
activities. This group is responsible for the following activities:
- all regulatory submissions and communications,
- scheduling and performing company-wide audits,
- coordinating product update procedures and corrective actions,
- maintaining adherence to appropriate procedures and applicable
requirements related to the FDA's quality systems regulations, and
- coordinating appropriate documentation for FDA and ISO 9001/EN 46001
review and audits.
THIRD-PARTY REIMBURSEMENT
Third-party payors, including Medicare, Medicaid, private health insurance
carriers, managed care organizations, health care administration authorities in
foreign countries and other organizations, may affect the pricing or demand for
our products by regulating the maximum amount of reimbursement provided by these
payors to the anesthesia providers, hospitals, outpatient surgical centers or
physicians' offices where surgical procedures are performed.
We expect that anesthesia providers will not be separately reimbursed for
patient-monitoring activities utilizing the BIS system. When providers, such as
hospitals or outpatient surgical centers, are reimbursed a fixed fee calculated
on a per case, per stay, or per capita basis, the cost of monitoring with the
BIS system will not be recovered by these providers unless the incremental costs
of this monitoring are offset by savings in other costs, such as the costs of
anesthetics or costs of the operating room or post-anesthesia care unit. This
type of reimbursement policy has been adopted by Medicare, for example, for both
inpatient and outpatient surgery. In such cases, patient monitoring with the BIS
system may not result in sufficient savings to offset these costs. When
reimbursement is based on charges or costs, patient monitoring with the BIS
system may have the effect of reducing reimbursement because the charges or
costs for surgical procedures, including operating room and post-anesthesia care
unit charges and costs, may decline as a result of monitoring with the BIS
system.
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EMPLOYEES
As of December 31, 2000, we had 215 full-time employees, of which:
- 26 persons were engaged in research and development activities,
- 31 persons were engaged in manufacturing and engineering,
- 13 persons were engaged in clinical and regulatory affairs,
- 117 persons were engaged in sales and marketing and clinical support,
and
- 28 persons were engaged in general and administrative functions.
None of our employees is covered by a collective bargaining agreement. We
consider relations with our employees to be good.
SCIENTIFIC ADVISORS
We seek advice from a number of leading scientists and physicians on
scientific and medical matters, including experts in EEG monitoring,
pharmacology and anesthesia management. These individuals advise us concerning a
number of matters, including:
- our research and development programs,
- the design and implementation of our clinical research program,
- our publication strategies,
- the identification of market opportunities from the clinical
perspective, and
- specific scientific and technical issues.
ITEM 2 PROPERTIES
We currently lease approximately 61,000 square feet of development,
manufacturing, warehouse, and administrative space in Newton, Massachusetts
pursuant to a lease which expires on December 31, 2006. Our international
organization is based in approximately 2,800 square feet of office space, which
we lease in Leiden, The Netherlands. We believe our current facilities are
sufficient to meet our needs through the fiscal year ending December 31, 2001
and that additional space will be available at a reasonable cost to meet our
space needs thereafter.
ITEM 3 LEGAL PROCEEDINGS
We are not a party to any material threatened or pending legal proceedings.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2000 through the solicitation of
proxies or otherwise.
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PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market for Registrant's Common Equity
Our common stock is traded on the Nasdaq National Market under the
symbol "ASPM". The following table sets forth, for the fiscal periods
indicated, the range of high and low sales prices for our common stock
on the Nasdaq National Market. These prices do not include retail
mark-up, mark-down or commissions and may not represent actual
transactions.
High Low
---- ---
2000:
Quarter Ended April 1, 2000 $66.500 $21.563
Quarter Ended July 1, 2000 $49.109 $21.250
Quarter Ended September 30, 2000 $28.563 $ 9.750
Quarter Ended December 31, 2000 $12.313 $ 7.563
On March 15, 2001, the last reported sales price of our common stock
on the Nasdaq National Market was $10.938 per share. As of March 15,
2001, there were approximately 289 holders of record of our common
stock.
(b) Initial Public Offering
On February 2, 2000, we sold 3,500,000 shares of our common stock, at
an initial public offering price of $15.00 per share, pursuant to a
Registration Statement on Form S-1 (Registration No. 333-86295), which
was declared effective by the Securities and Exchange Commission on
January 27, 2000. On February 4, 2000, the underwriters exercised in
full their over-allotment option to purchase an additional 525,000
shares of our common stock at $15.00 per share. The managing
underwriters of our initial public offering were Morgan Stanley & Co.
Incorporated, Deutsche Bank Securities Inc. and U.S. Bancorp Piper
Jaffray Inc.
The aggregate gross proceeds raised in the offering were approximately
$60.4 million. Our total expenses in connection with the offering were
approximately $5.7 million, of which $4.2 million was for underwriting
discounts and commissions and, based on our reasonable estimate,
approximately $1.5 million was for other expenses. Our net proceeds
from the offering were approximately $54.6 million. From January 27,
2000 through December 31, 2000, we used approximately $5.1 million of
the net proceeds for the acquisition of machinery and equipment and
for leasehold improvements to our new facility in Newton,
Massachusetts. In addition, from January 27, 2000 through December 31,
2000, we used approximately $7.5 million of the net proceeds for
general corporate purposes, including working capital, product
development, increasing our sales and marketing capabilities and
expanding our international operations. As of December 31, 2000, we
had approximately $42.0 million of proceeds remaining from the
offering, and pending use of the proceeds, we have invested these
funds in short-term, interest-bearing, investment-grade securities.
(c) Dividend Policy
We have never paid or declared any cash dividends on our common stock
or other securities and do not anticipate paying cash dividends in the
foreseeable future. We currently intend to retain all future earnings,
if any, for use in the operation and expansion of our business.
Payment of future cash dividends, if any, will be at the discretion of
our board of directors after taking into account various factors,
including our financial condition, operating results, current and
anticipated cash needs and plans for expansion. We have a loan
agreement with a bank which prohibits the declaration or payment of
cash dividends without the consent of the lender.
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ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and related
notes and other financial information included elsewhere in this Form 10-K. The
consolidated statements of operations data for the years ended December 31,
2000, 1999 and 1998 and the consolidated balance sheet data as of December 31,
2000 and 1999 are derived from our audited consolidated financial statements
included in this Form 10-K. The consolidated statements of operations data for
the years ended December 31, 1997 and 1996 and the consolidated balance sheet
data as of December 31, 1998, 1997 and 1996 are derived from our audited
consolidated financial statements not included in this Form 10-K. The historical
results presented here are not necessarily indicative of future results.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenue .................................... $ 36,024 $ 27,187 $ 11,238 $ 3,068 $ 1,389
Costs and expenses:
Costs of revenue ......................... 11,279 9,324 5,880 3,602 1,096
Research and development ................. 5,713 4,847 4,042 2,603 2,338
Sales and marketing ...................... 21,979 16,543 10,354 4,813 1,561
General and administrative ............... 6,390 4,829 4,254 2,358 1,871
-------- -------- -------- -------- --------
Total costs and expenses .............. 45,361 35,543 24,530 13,376 6,866
-------- -------- -------- -------- --------
Loss from operations ....................... (9,337) (8,356) (13,292) (10,308) (5,477)
Interest income, net ....................... 3,993 1,317 459 422 81
Other expense .............................. -- -- (774) -- --
-------- -------- -------- -------- --------
Net loss ................................... $ (5,344) $ (7,039) $(13,607) $ (9,886) $ (5,396)
======== ======== ======== ======== ========
Net loss per share:
Basic and diluted ........................ $ (0.34) $ (4.57) $ (11.70) $ (15.63) $ (57.76)
======== ======== ======== ======== ========
Shares used in computing net loss per share:
Basic and diluted ........................ 15,755 1,539 1,163 632 93
DECEMBER 31,
----------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities ............................... $ 58,489 $ 14,535 $ 21,273 $ 4,981 $ 2,231
Working capital ............................ 58,455 12,279 19,104 3,572 1,334
Total assets ............................... 79,411 29,402 28,589 7,603 3,973
Long-term debt ............................. 2,617 3,872 1,441 118 270
Total stockholders' equity ................. 63,974 13,079 19,688 4,067 1,066
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ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
involve risks and uncertainties and are not guarantees of future performance.
Our actual results could differ significantly from the results discussed in such
forward-looking statements. In addition, subsequent events and developments may
cause our expectations to change. While we may elect to update these
forward-looking statements we specifically disclaim any obligation to do so,
even if our expectations change. See "Factors Affecting Future Operating
Results" below.
OVERVIEW
We develop, manufacture and market an anesthesia monitoring system that we
call the BIS system. The BIS system enables anesthesia providers to assess and
manage a patient's level of consciousness during surgery. Our proprietary BIS
system includes our BIS monitor or BIS Module Kit and our disposable BIS
Sensors. The BIS system is based on our patented core technology, the BIS index.
Our latest generation monitor, the A-2000 BIS Monitor, was cleared for marketing
by the FDA in February 1998. Our other monitor products are the A-1000 Monitor,
the A-1050 EEG Monitor with BIS and the BIS Module Kit. After the introduction
of the A-2000 BIS Monitor, we ceased active marketing of the A-1050 EEG Monitor
domestically. In addition to the disposable BIS Sensor, we offer the Zipprep EEG
Electrode.
We follow a system of fiscal months as opposed to calendar months. Under
this system, the first eleven months of each fiscal year end on the Saturday
closest to the end of the calendar month and the last month of the fiscal year
always ends on December 31.
We offer customers the option either to purchase the BIS monitors outright
or to acquire the BIS monitors pursuant to a sales-type lease agreement whereby
the customer contractually commits to purchase a minimum number of BIS Sensors
per BIS monitor per year. Under this agreement, customers purchase BIS Sensors
and the BIS monitor for the purchase price of the BIS Sensors plus an additional
charge per BIS Sensor to pay for the purchase price of the BIS monitor and
related financing costs over the term of the agreement. The customer is granted
an option to purchase the BIS monitor at the end of the term of the agreement,
which is typically three to five years. Revenue related to BIS monitors sold
pursuant to sales-type leases is recognized at the time of shipment of the BIS
monitors. Sales-type leases accounted for approximately 6%, 15% and 27% of
revenue in 2000, 1999 and 1998, respectively.
Under certain circumstances, we also offer customers the opportunity to use
the BIS monitors under our Equipment Placement program, which we refer to as the
EP program. Under the EP program, the customer receives the right to use the BIS
monitors for a mutually agreed upon period of time. During this period, the
customer purchases BIS Sensors at a price that includes a premium above the list
price of the BIS Sensors to cover the rental of the equipment, but without any
minimum purchase commitments. At the end of the evaluation period, the customer
has the option of purchasing the BIS monitors or returning them to us.
In the three months ended December 31, 2000, revenue from the sale of
monitors increased by 22% and revenue from the sale of disposable sensors
increased by 7% as compared to the three months ended September 30, 2000. In
comparison, revenue from the sale of monitors decreased by 58% and revenue from
the sale of disposable sensors decreased by 14% in the three months ended
September 30, 2000 as compared to the three months ended July 1, 2000. In the
fourth quarter, we introduced a variety of sales and marketing programs to
increase sales of our products. Factors that we believe contributed to the
increasingly competitive environment include increased competition in the
domestic level of consciousness monitoring market as a result of recent FDA
approval of a new monitoring system, turnover in our direct sales force and our
underestimating the amount of clinical education necessary to bring our
installed base up to expected sensor utilization levels. The sales and marketing
programs we introduced in the fourth quarter of 2000 include new sales programs
to facilitate monitor placements, such as the EP program. We also increased
investments in clinical education in an effort to return to higher and more
consistent sensor utilization rates. Even with the introduction of new sales and
marketing programs and continued increased investment in clinical education, we
believe that the factors that adversely affected our revenue for the third and
fourth quarters of 2000 will continue to influence our revenue in 2001.
We derive our revenue primarily from sales of monitors, including related
accessories and BIS Module Kits, and sales of disposable sensors. In 2000, 1999
and 1998, revenue from the sale of monitors represented approximately 40%, 53%
and 67%, respectively, of our revenue, and revenue from the sale of disposable
sensors represented approximately 60%, 47% and 33%, respectively, of our
revenue. We expect that revenue from the sale of disposable sensors will
continue to increase as a percentage of revenue as the installed base of
monitors continues to grow.
15
17
Revenue from domestic sales in 2000, 1999 and 1998 was approximately $30.1
million, $24.6 million and $10.3 million, respectively, which represented
approximately 84%, 91% and 92%, respectively, of our revenue. Revenue from
international sales in 2000, 1999 and 1998 was approximately $5.9 million, $2.6
million and $942,000, respectively, which represented approximately 16%, 9% and
8%, respectively, of our revenue.
Effective July 1, 1998, our agreement with Spacelabs Medical, Inc. to
distribute our monitors internationally, except in Japan, was terminated
pursuant to the terms of the agreement. Sales to Spacelabs represented
approximately 1% and 3% of our international revenue in 2000 and 1999,
respectively, and substantially all of our revenue from international sales in
1998. In December 1998 and March 1999, we established subsidiaries in The
Netherlands and the United Kingdom, respectively, to facilitate our entry into
the international market. We are developing our international sales and
distribution program through a combination of distributors and marketing
partners, including companies with which we have entered into original equipment
manufacturer relationships. We expect to enhance our international third-party
distribution program through direct sales efforts and to support our customers
with clinical specialists. In January 1998, we entered into a distribution
agreement with Nihon Kohden Corporation to distribute BIS monitors in Japan. In
March 2000, the Japanese Ministry of Health and Welfare approved our A-1050 EEG
Monitor with BIS for marketing in Japan. Sales to Nihon Kohden represented
approximately 39% of international revenue in 2000 and 3% of international
revenue in each of 1999 and 1998. We believe that Japan's Ministry of Health and
Welfare approval for the A-2000 BIS Monitor will occur no earlier than the first
quarter of 2001. As a result, we believe that monitor shipments to Nihon Kohden
will be delayed until Japan's Ministry of Health and Welfare's approval is
received as Japanese customers will postpone new purchases until the A-2000 BIS
Monitor is approved. As a result, revenue from Japan may decrease in 2001 until
approval is received. Effective September 1, 2000, we entered into an agreement
with Datex-Ohmeda Division of Instrumentarium Corporation, under which
Datex-Ohmeda has agreed to act as a nonexclusive distributor of our A-2000 BIS
Monitor and related products in some territories.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, information
expressed as a percentage of revenue. This information has been derived from our
consolidated statements of operations included elsewhere in this Form 10-K. You
should not draw any conclusions about our future results from the results of
operations for any period.
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---- ---- ----
Revenue .......................... 100% 100% 100%
Costs and expenses:
Costs of revenue ............... 31 34 52
Research and development ....... 16 18 36
Sales and marketing ............ 61 61 92
General and administrative ..... 18 18 38
---- ---- ----
Total costs and expenses..... 126 131 218
---- ---- ----
Loss from operations ............. (26) (31) (118)
Interest income, net ............. 11 5 4
Other expense .................... -- -- (7)
---- ---- ----
Net loss ......................... (15)% (26)% (121)%
==== ==== ====
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenue. Our revenue increased to approximately $36.0 million in 2000 from
approximately $27.2 million in 1999, an increase of approximately 32%. Revenue
from the sale of monitors increased to approximately $14.6 million in 2000 from
approximately $14.3 million in 1999, an increase of approximately 2%. The growth
in revenue from the sale of monitors in 2000 as compared to 1999 was primarily
attributable to an increase of approximately 10% in the number of monitors sold,
partially offset by a decrease in the average selling price of the monitors.
There were two primary factors that contributed to the minimal increase in
revenue from monitor sales in 2000 as compared to 1999. First, as a result of
the recent FDA approval of a competitive monitoring product, in the second-half
of 2000 more customers than we expected have elected to delay purchase decisions
until they have had an opportunity to evaluate the competitive product. Second,
during the second and third quarters of 2000 we experienced higher than
anticipated turnover in our direct sales force. We underestimated the impact
that this turnover in our direct sales force would have on our sales effort. The
development of our domestic distributor channel and the contribution of our
international organization offset these factors that negatively affected our
monitor revenue.
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Revenue from the sale of disposable sensors increased to approximately
$21.4 million in 2000 from approximately $12.9 million in 1999, an increase of
approximately 67%. The increase in revenue from the sale of disposable sensors
was primarily attributable to an increase in the number of disposable sensors
sold as a result of growth in the installed base of monitors. The number of
disposable sensors sold increased approximately 67% in 2000 as compared to 1999.
Our gross profit was approximately 69% of revenue in 2000 as compared to a
gross profit of approximately 66% of revenue in 1999. The increase in the gross
profit percentage in 2000 as compared to 1999 was primarily attributable to an
increase in sales of disposable sensors as a percentage of revenue. Disposable
sensors have a higher profit margin than monitors and contributed almost all of
the increase in gross profit in 2000 as compared to 1999. We expect that sales
of higher-margin disposable sensors, as a percentage of revenue, will continue
to represent the majority of our sales as the installed base of monitors
continues to grow and we continue to increase our investments in clinical
education in an effort to enhance use of the monitors, and accordingly, to grow
sensor volume and revenue.
Research and Development. Research and development expenses increased to
approximately $5.7 million in 2000 from approximately $4.8 million in 1999, an
increase of approximately 18%. Research and development expenses decreased as a
percentage of revenue in 2000 as compared to 1999. The increase in research and
development expenses for 2000 as compared to 1999, was primarily attributable to
an increase in research and development personnel and related payroll and other
expenses. These expenses were incurred in connection with the continued product
development efforts related to the A-2000 BIS Monitor, BIS Sensor Plus, BIS
Sensor XP, BIS Pediatric Sensor and BIS Module Kit and the development of
products for use outside the operating room in the intensive care unit and for
procedural sedation. We expect research and development expenses to increase as
we continue to invest in the development of product improvements, product
extensions and new applications for our technology.
Sales and Marketing. Sales and marketing expenses increased to
approximately $22.0 million in 2000 from approximately $16.5 million in 1999, an
increase of approximately 33%. Sales and marketing expenses remained the same as
a percentage of revenue for 2000 as compared to 1999. The increase in sales and
marketing expenses in 2000 as compared to 1999 was primarily attributable to an
increase in sales and marketing personnel and related payroll and other
expenses, which represented approximately 59% of the increase, increased
operating expenses associated with our international subsidiaries, which
represented approximately 16% of the increase, and fees and commissions related
to the agreements with group purchasing organizations, OEMs and distributors,
which represented approximately 5% of the increase. We expect sales and
marketing expenses to increase as we continue to expand our international
operations, leverage the relationships with group purchasing organizations we
entered into in the second-half of 2000 and enter into additional relationships
with group purchasing organizations and, increase our sales and marketing
programs and engage in activities to further educate and promote the use of the
BIS system by our customers.
General and Administrative. General and administrative expenses increased
to approximately $6.4 million in 2000 from approximately $4.8 million in 1999,
an increase of approximately 32%. General and administrative expenses remained
the same as a percentage of revenue for 2000 as compared to 1999. The increase
in general and administrative expenses in 2000 as compared to 1999 was primarily
attributable to an increase in general and administrative personnel to support
our growth and related payroll and other expenses, which represented
approximately 58% of the increase. The increase in payroll and other expenses
included compensation expense related to stock option grants, which increased
approximately 15% in 2000 as compared to 1999. The increase also included
incremental expenses related to being a public company, such as expenses related
to enhancements of our investor relations capabilities and insurance expenses,
which represented approximately 31% of the increase. We expect general and
administrative expenses to increase as we increase the number of personnel and
related resources required to support our growth.
Interest Income, Net. Interest income, net, increased to approximately $4.0
million in 2000 from approximately $1.3 million in 1999, an increase of
approximately 203%. Interest income increased to approximately $4.7 million in
2000 from approximately $1.5 million in 1999, an increase of approximately 209%.
The increase in interest income was primarily attributable to a higher average
balance of cash and investments resulting from our initial public offering of
common stock and the proceeds from the sale of a portion of our investment in
sales-type leases. Interest expense increased to approximately $713,000 in 2000
from approximately $204,000 in 1999, an increase of approximately 250%. The
increase in interest expense in 2000 was a result of higher average outstanding
debt obligations resulting from borrowings under a term loan we entered into in
December 1999 and debt obligations related to the sale of a portion of our
investments in sales-type leases in the second half of 1999 and throughout 2000.
We expect interest income to decrease in 2001 as compared to the interest income
in 2000 as a result of lower cash and investments balances resulting from
continued operating losses and other uses of cash.
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Net Loss. As a result of the factors discussed above, in 2000 we had a net
loss of approximately $5.3 million as compared to a net loss of approximately
$7.0 million in 1999, a decrease of approximately 24%.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenue. Our revenue increased to approximately $27.2 million in 1999 from
approximately $11.2 million in 1998, an increase of approximately 143%. Revenue
from the sale of monitors increased to approximately $14.3 million in 1999 from
approximately $7.5 million in 1998, an increase of approximately 91%. The growth
in revenue from the sale of monitors was primarily attributable to an increase
of approximately 108% in the number of monitors sold, which resulted from the
growth of our direct sales force and the contribution of our international
organization. In addition, sales of the BIS Module Kit, which was introduced in
the second half of 1998, contributed to the increase in monitor revenue. Revenue
from the sale of disposable sensors increased to approximately $12.9 million in
1999 from approximately $3.7 million in 1998, an increase of approximately 249%.
The increase in revenue from the sale of disposable sensors was primarily
attributable to growth in the installed base of monitors, which resulted in an
increase of approximately 223% in the number of disposable sensors sold. An
increase of approximately 8% in the average selling price of the disposable
sensors also contributed to the increase in revenue.
Our gross profit was approximately 66% of revenue in 1999 as compared to a
gross profit of approximately 48% of revenue in 1998. The increase in the gross
profit percentage in 1999 as compared to 1998 was primarily attributable to an
increase in sales of disposable sensors as a percentage of revenue. Disposable
sensors have a higher profit margin than monitors and contributed approximately
62% of the increase in gross profit. The increase in the gross profit percentage
in 1999 also resulted from improved manufacturing efficiencies.
Research and Development. Research and development expenses increased to
approximately $4.8 million in 1999 from approximately $4.0 million in 1998, an
increase of approximately 20%. Research and development expenses decreased as a
percentage of revenue. The increase in absolute dollars was primarily
attributable to an increase in research and development personnel and related
payroll and other expenses, which represented approximately 65% of the increase.
These expenses were incurred in connection with the continued product
development efforts related to the A-2000 BIS Monitor, BIS Sensor and BIS Module
Kit and the development of products for use outside the operating room in the
intensive care unit and for procedural sedation.
Sales and Marketing. Sales and marketing expenses increased to
approximately $16.5 million in 1999 from approximately $10.4 million in 1998, an
increase of approximately 59%. Sales and marketing expenses decreased as a
percentage of revenue. The increase in absolute dollars in 1999 was primarily
attributable to an increase in sales and marketing personnel and related payroll
and other expenses, which represented approximately 84% of the increase, the
establishment of our international subsidiaries, and an increase in professional
education programs, customer support and clinical education initiatives,
development of sales materials and participation at trade shows.
General and Administrative. General and administrative expenses increased
to approximately $4.8 million in 1999 from approximately $4.3 million in 1998,
an increase of approximately 12%. General and administrative expenses decreased
as a percentage of revenue. The increase in absolute dollars was primarily
attributable to an increase in general and administrative personnel to support
our growth and related payroll and other expenses.
Interest Income, Net. Interest income, net, increased to approximately $1.3
million in 1999 from approximately $459,000 in 1998, an increase of
approximately 183%. Interest income increased to approximately $1.5 million in
1999 from approximately $553,000 in 1998, an increase of approximately 171%. The
increase in interest income was primarily attributable to a higher average
outstanding balance of cash and investments resulting from the sale of our
convertible preferred stock in February 1998 and December 1998, which resulted
in approximately 31% of the increase, and an increase in our investment in
sales-type leases, which resulted in approximately 69% of the increase. Interest
expense increased to approximately $204,000 in 1999 from approximately $94,000
in 1998, an increase of approximately 117%, as a result of higher average
outstanding debt obligations under an equipment loan in the second half of 1998
and debt obligations related to the sale of a portion of our investments in
sales-type leases in the second half of 1999.
Other Expense. Other expense in 1998 primarily related to the costs
incurred in a proposed initial public offering, which was terminated in August
1998.
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Net Loss. Our net loss decreased to approximately $7.0 million in 1999 from
approximately $13.6 million in 1998, a decrease of approximately 49%, as a
result of the factors discussed above.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited selected operating results for
each of the eight fiscal quarters in the two fiscal years ended December 31,
2000. We believe that the following selected quarterly information includes all
adjustments (consisting only of normal, recurring adjustments) that we consider
necessary to present this information fairly. This financial information should
be read in conjunction with the financial statements and related notes appearing
elsewhere in this Form 10-K. Our results of operations have fluctuated in the
past and are likely to continue to fluctuate significantly from quarter to
quarter in the future. Therefore, results of operations for any previous periods
are not necessarily indicative of results of operations to be recorded in the
future.
QUARTER ENDED
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APRIL 3, JULY 3, OCTOBER 2, DECEMBER 31, APRIL 1, JULY 1, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- ------- ---------- ------------ -------- ------- ------------- ------------
Revenue .............. $ 5,327 $ 6,385 $ 7,126 $ 8,349 $ 9,660 $11,066 $ 7,231 $ 8,067
Gross margin ......... 3,274 4,202 4,800 5,587 6,576 7,684 5,134 5,351
Operating expenses ... 5,674 6,531 6,773 7,241 7,336 8,387 8,527 9,831
Net income (loss) .... (2,120) (1,964) (1,630) (1,325) 26 393 (2,419) (3,344)
LIQUIDITY AND CAPITAL RESOURCES
From our inception through January 2000, we financed our operations
primarily from the sale of our convertible preferred stock. Through December 31,
2000, we raised approximately $67.6 million from private equity financings and
have received approximately $3.4 million in equipment financing and
approximately $3.5 million of financing related to our investments in sales-type
leases. We also received approximately $2.8 million of financing under a term
loan in December 1999. In February 2000, we closed our initial public offering
of an aggregate of 4,025,000 shares of common stock and received net proceeds of
approximately $54.6 million. At December 31, 2000, we had approximately $85,000
primarily committed to the purchase of equipment related to improvements in our
monitor and disposable sensor production lines.
Working capital at December 31, 2000 was approximately $58.5 million
compared to approximately $12.3 million at December 31, 1999. The increase in
working capital from December 31, 1999 to December 31, 2000 was primarily
attributable to the net proceeds from our initial public offering of $54.6
million and increases in inventory of approximately $3.2 million and other
current assets of approximately $537,000, offset by continued net operating
losses of approximately $5.3 million, a decrease in net accounts receivable of
approximately $620,000, and an increase in accounts payable and accrued
liabilities of approximately $845,000.
We used approximately $5.8 million of cash for operations in 2000. Cash
used for operations during this period was primarily driven by operating losses,
increases in inventory and other current assets and a decrease in deferred
revenue, offset by decreases in net accounts receivable, investment in
sales-type leases and increases in accounts payable and accrued liabilities. We
used approximately $26.7 million for operations during the three years ended
December 31, 2000. Cash used for operations during this period was also
primarily driven by operating losses, increases in net accounts receivable,
inventory, investment in sales-type leases and other current assets, offset by
increases in accounts payable, accrued liabilities and deferred revenue.
We used approximately $38.8 million of cash for investing activities in
2000. The cash used for investing activities in 2000 was primarily the result of
the investment of the proceeds we received from our initial public offering of
common stock. We invested approximately $33.6 million, net, in marketable
securities and invested approximately $5.1 million primarily in manufacturing
equipment and leasehold improvements for our new facility. We used approximately
$39.6 million for investing activities during the three years ended December 31,
2000. We invested approximately $30.0 million, net, in marketable securities and
approximately $9.6 million in manufacturing equipment, leasehold improvements
and new information systems during the three years ended December 31, 2000.
We received approximately $54.8 million of cash from financing activities
in 2000 primarily as a result of the closing of our initial public offering of
common stock and the sale of approximately $1.6 million of our investments in
sales-type leases offset by approximately $2.5 million of debt repayments. We
received approximately $89.7 million of cash from financing activities during
the three years ended December 31, 2000. Cash provided by financing activities
during this period was
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primarily the result of the closing of our initial public offering, the sale of
our convertible preferred stock, proceeds from our equipment loan and term loan
and the sale of a portion of our investments in sales-type leases in the three
year period ended December 31, 2000.
In December 1999, we renegotiated our loan agreement with Imperial Bank.
Borrowings outstanding at December 31, 2000 of approximately $721,000 under the
equipment portion of the new loan agreement are payable in monthly installments
of approximately $60,000 plus interest through December 31, 2001. The working
capital portion of the original June 1998 loan agreement was replaced with a
term loan portion. Borrowings under the term loan portion outstanding at
December 31, 2000 of approximately $1.9 million are payable in 36 monthly
installments of approximately $79,000 plus interest which commenced in January
2000. Interest on both the equipment portion and the term loan portion of the
loan agreement accrued at the prime rate plus 1.0% through the closing date of
our initial public offering of common stock. Since the closing of our initial
public offering, the interest rate has been the prime rate plus 0.5%. The loan
agreement contains restrictive covenants that require us to maintain liquidity
and borrowing base ratios. The loan agreement also restricts us from declaring
and paying cash dividends. The loan agreement is secured by substantially all of
our assets. No additional amounts may be borrowed under the equipment portion or
term loan portion of the loan agreement. Approximately $1.5 million is available
under the standby letter of credit portion of the loan agreement.
In July 1999, we entered into an agreement under which we can sell a
portion of our existing and future investments in sales-type leases to Americorp
Financial, Inc. Through December 31, 2000, we sold approximately $3.5 million of
our investments in sales-type leases. In accordance with SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, the proceeds from these sales are classified as debt. Payments
on the outstanding principal under this debt match the timing of the payments
due on the underlying investments in sales-type leases.
We anticipate that the level of capital expenditures will decrease in 2001
as a result of the completion of the leasehold improvements to our Newton,
Massachusetts facility in 2000.
We believe that the financial resources available to us, including our
current working capital, together with the proceeds from selling our investments
in sales-type leases, will be sufficient to finance our planned operations and
capital expenditures at least through 2001. However, our future liquidity and
capital requirements will depend upon numerous factors, including the resources
required to further develop our marketing and sales organization domestically
and internationally, to expand manufacturing capacity, to finance our sales-type
lease program and EP program and to meet market demand for our products.
INCOME TAXES
We have net operating loss and research and development tax credit
carryforwards for federal income tax purposes of approximately $53,000,000 and
$1,500,000, respectively, at December 31, 2000 that will expire commencing in
the year 2002 through the year 2019 if not utilized.
The net operating loss and research and development tax credit
carryforwards are subject to review by the Internal Revenue Service. Ownership
changes, as defined under section 382 in the Internal Revenue Code, may limit
the amount of these tax attributes that can be utilized annually to offset
future taxable income or tax liabilities. The amount of the annual limitation is
determined based on our value immediately prior to the ownership change.
Subsequent ownership changes may further affect the limitation in future years.
EFFECTS OF INFLATION
We believe that inflation and changing prices over the past three years
have not had a significant impact on our revenue or on our results of
operations.
CONVERSION TO EURO
Eleven of the 15 members of the European Union have agreed to adopt the
Euro as their legal currency. Our current information systems allow us to
currently process Euro-denominated transactions. We are also assessing the
business implications of the conversion to the Euro, including long-term
competitive implications and the effect of market risk with respect to financial
instruments. Substantially all of our international sales are denominated in
United States dollars. We do not believe the Euro will have a significant effect
on our business, financial condition or results of operations. We will continue
to assess the impact of Euro conversion issues as the applicable accounting,
tax, legal and regulatory guidance evolves.
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QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in foreign
currency exchange rates and interest rates. Most of our revenue, expenses and
capital spending are transacted in U.S. dollars. However, the expenses and
capital spending of our international subsidiaries are transacted in local
currency. As a result, changes in foreign currency exchange rates or weak
economic conditions in foreign markets could affect our financial results. We do
not use derivative instruments to hedge our foreign exchange risk. Our exposure
to market risk for changes in interest rates relates primarily to our cash and
cash equivalent balances, marketable securities, investment in sales-type leases
and loan agreement. The majority of our investments are in short-term
instruments and subject to fluctuations in U.S. interest rates. Due to the
nature of our short-term investments, we believe that there is no material risk
exposure.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivatives and Hedging Activities, which establishes accounting and reporting
standards of derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. In June 1999, the FASB
issued SFAS No. 137, Accounting for Derivatives and Hedging Activities --
Deferral of the Effective Date of FASB Statement No. 133, which defers the
effective date of SFAS No. 133 to be effective for all fiscal quarters beginning
after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an Amendment of
FASB Statement No. 133, which amends the accounting and reporting standards of
SFAS No. 133 for certain derivative instruments and certain hedging activities.
SFAS No. 138 will be effective concurrently with SFAS No. 133. The adoption of
SFAS No. 133, as amended, is not expected to have a material effect on our
financial condition and results of operations as we do not currently hold any
derivative instruments or engage in hedging activities.
In December 1999, the Securities and Exchange Commission, or SEC, issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, which provides guidance related to revenue recognition in financial
statements filed with the SEC. SAB No. 101 requires companies to report any
changes in revenue recognition as a cumulative change in accounting principle at
the time of implementation in accordance with Accounting Principles Board
Opinion No. 20, Accounting Changes. Effective January 1, 2000, we adopted SAB
No. 101. The adoption of SAB No. 101 did not have a material impact on our
results of operations, cash flows or financial position.
In October 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of FASB Statement No. 125. SFAS No. 140 reviews criteria for accounting
securitizations, other financial asset transfers and collateral, and introduces
new disclosures. The new disclosure requirements must be implemented for fiscal
years ending after December 15, 2000. The other provisions of SFAS No. 140 apply
prospectively to the transfer of financial assets and extinguishments of
liabilities occurring after March 31, 2001. SFAS No. 140 carries forward most of
the provisions of SFAS No. 125 without amendment. We do not believe that this
pronouncement will have a material impact on our results of operations, cash
flows or financial position as we have not currently transferred any financial
assets.
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FACTORS AFFECTING FUTURE OPERATING RESULTS
This Annual Report on Form 10-K includes forward looking statements,
including information relating to our ability to achieve profitability,
information with respect to market acceptance of our BIS system, continued
growth in sales of our BIS monitors and BIS Sensors, our dependence on the BIS
system, our ability to remain competitive and achieve future growth, information
with respect to other plans and strategies for our business and factors that may
influence our revenue for the year ended December 31, 2001. The following
factors represent current challenges to us that create risk and uncertainty.
Failure to adequately overcome any of the following challenges could have a
material adverse effect on our results of operations, business or financial
condition.
WE WILL NOT BE PROFITABLE IF HOSPITALS AND ANESTHESIA PROVIDERS DO NOT BUY AND
USE OUR BIS SYSTEM IN SUFFICIENT QUANTITIES.
Customers may determine that the cost of the BIS system exceeds cost
savings in drugs, personnel and post-anesthesia care recovery resulting from use
of the BIS system. In addition, hospitals and anesthesia providers may not
accept the BIS system as an accurate means of assessing a patient's level of
consciousness during surgery. If extensive or frequent malfunctions occur, these
providers may also conclude that the BIS system is unreliable. If hospitals and
anesthesia providers do not accept the BIS system as cost-effective, accurate or
reliable, they will not buy and use the BIS system in sufficient quantities to
enable us to be profitable.
WE DEPEND ON OUR BIS SYSTEM FOR SUBSTANTIALLY ALL OF OUR REVENUE, AND IF THE BIS
SYSTEM DOES NOT GAIN WIDESPREAD MARKET ACCEPTANCE, THEN OUR REVENUE WILL NOT
GROW.
We began selling our current BIS system in early 1998. To date, we have not
achieved widespread market acceptance of the BIS system. Because we depend on
our BIS system for substantially all of our revenue and we have no other
significant products, if we fail to achieve widespread market acceptance we will
not be able to sustain or grow our product revenue.
CASES OF SURGICAL AWARENESS DURING MONITORING WITH THE BIS SYSTEM COULD LIMIT
MARKET ACCEPTANCE OF BIS SYSTEMS AND COULD EXPOSE US TO PRODUCT LIABILITY
CLAIMS.
Clinicians have reported to us a total of 63 cases of possible surgical
awareness during surgical procedures monitored with the BIS system as of
December 31, 2000. In most of the 63 cases that were reported to us, when BIS
index values were recorded at the time of awareness, high BIS index values were
noted, indicating that the BIS index correctly identified the increased risk of
awareness in these patients. However, in a small number of these reported cases,
surgical awareness may not have been detected by monitoring with the BIS system.
Not all cases of surgical awareness during surgical procedures monitored with
the BIS system may be reported to us, and we have not systematically solicited
reports of surgical awareness. Anesthesia providers and hospitals may elect not
to purchase and use BIS systems if there is adverse publicity resulting from the
report of cases of surgical awareness that were not detected during procedures
monitored with the BIS system. If anesthesia providers and hospitals do not
purchase and use the BIS system, then we may not sustain or grow our product
revenue. Although we do not claim that patient monitoring with the BIS system
will reduce the incidence of surgical awareness, we may be subject to product
liability claims for cases of surgical awareness during surgical procedures
monitored with the BIS system. These claims could require us to spend
significant time and money in litigation or to pay significant damages.
WE MAY NOT BE ABLE TO COMPETE WITH NEW PRODUCTS OR ALTERNATIVE TECHNIQUES
DEVELOPED BY OTHERS, WHICH COULD IMPAIR OUR ABILITY TO REMAIN COMPETITIVE AND
ACHIEVE FUTURE GROWTH.
The medical industry in which we market our products is characterized by
rapid product development and technological advances. Our revenue in the second
half of 2000 was adversely affected by commercial introduction of a recently
FDA-approved competitive anesthesia monitoring product. If we do not compete
effectively with this new monitoring product, our revenue will be adversely
affected. Our current or planned products are at risk of obsolescence from:
- other new monitoring products, based on new or improved technologies,
- new products or technologies used on patients or in the operating room
during surgery in lieu of monitoring devices,
- electrical or mechanical interference from new or existing products or
technologies,
- alternative techniques for evaluating the effects of anesthesia,
- significant changes in the methods of delivering anesthesia, and
- the development of new anesthetic agents.
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We may not be able to improve our products or develop new products or
technologies quickly enough to maintain a competitive position in our markets
and continue to grow our business.
IF WE DO NOT SUCCESSFULLY DEVELOP AND INTRODUCE ENHANCED OR NEW PRODUCTS WE
COULD LOSE REVENUE OPPORTUNITIES AND CUSTOMERS.
As the market for our BIS system matures, we need to develop and introduce
new products for anesthesia monitoring or other applications. We face at least
the following risks:
- we may not successfully adapt the BIS system to function properly in
the intensive care unit, for procedural sedation, when used with
anesthetics we have not tested or with patient populations we have not
studied, such as infants, and
- our technology is complex, and we may not be able to develop it
further for applications outside anesthesia monitoring.
If we do not successfully adapt the BIS system for new products and
applications both within and outside the field of anesthesia monitoring, then we
could lose revenue opportunities and customers.
IF WE DO NOT DEVELOP AND IMPLEMENT A SUCCESSFUL SALES AND MARKETING STRATEGY, WE
WILL NOT EXPAND OUR BUSINESS.
We recently experienced higher than anticipated turnover in our direct
sales force and we underestimated the impact that this turnover in our direct
sales force would have on our sales efforts. Until the newly hired sales
representatives become knowledgeable about our products, customer base and sales
programs, our sales efforts will be adversely affected. In addition, our current
sales and marketing operation is not sufficient to achieve the level of market
awareness and sales we need to expand our business. We have only limited sales
and marketing experience both in the United States and internationally and may
not be successful in developing and implementing our strategy. We need to:
- provide or assure that distributors and original equipment
manufacturers provide the technical and educational support customers
need to use the BIS system successfully,
- promote frequent use of the BIS system so that sales of our disposable
BIS sensors increase,
- encourage our customers to purchase our products or the products that
are made by original equipment manufacturers incorporating our
technology,
- manage geographically dispersed operations, and
- modify our products for foreign markets.
IN ORDER TO REACH THE LEVEL OF SALES WE NEED TO ACHIEVE PROFITABILITY, WE NEED
TO FURTHER DEVELOP OUR DIRECT AND INDIRECT SALES CHANNELS.
In order to increase our sales, we need to add domestic and international
distributors, original equipment manufacturers and other sales channels and
increase sales through these channels. In addition, we need to hire and train
more sales persons and clinical specialists. We are also implementing new sales
and marketing programs and clinical education programs to promote the use of our
BIS system by our customers. If we do not further develop our direct and
indirect sales channels and successfully implement new sales and marketing
programs and clinical education programs, we will not reach the level of sales
necessary to achieve profitability.
OUR THIRD-PARTY DISTRIBUTION AND ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS
COULD NEGATIVELY AFFECT OUR PROFITABILITY, CAUSE SALES OF OUR PRODUCTS TO
DECLINE AND BE DIFFICULT TO TERMINATE IF WE ARE DISSATISFIED.
Sales through distributors could be less profitable than direct sales.
Sales of our products through multiple channels could also confuse customers and
cause the sale of our products to decline. We do not control our original
equipment manufacturers and distribution partners. Our partners could sell
competing products, may not incorporate our technology into their products in a
timely manner and may devote insufficient sales efforts to our products. Our
partners are generally not required to purchase minimum quantities. As a result,
even if we are dissatisfied with the performance of our partners, we may be
unable to terminate our agreements with these partners or enter into alternative
arrangements.
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WE MAY NOT BE ABLE TO GENERATE ENOUGH ADDITIONAL REVENUE FROM OUR INTERNATIONAL
EXPANSION TO OFFSET THE COSTS ASSOCIATED WITH ESTABLISHING AND MAINTAINING
FOREIGN OPERATIONS.
A component of our growth strategy is to expand our presence in foreign
markets. We conduct international business primarily in Europe and Japan and we
are attempting to increase the number of countries in which we do business. It
will be costly to establish international facilities and operations and to
promote the BIS system in international markets. In addition, we have little
experience in marketing and distributing products for these markets. Revenue
from international activities may not offset the expense of establishing and
maintaining these foreign operations.
WE MAY NOT BE ABLE TO MEET THE UNIQUE OPERATIONAL, LEGAL AND FINANCIAL
CHALLENGES THAT WE WILL ENCOUNTER IN OUR INTERNATIONAL OPERATIONS, WHICH MAY
LIMIT THE GROWTH OF OUR BUSINESS.
We are increasingly subject to a number of challenges which specifically
relate to our international business activities. These challenges include:
- failure of local laws to provide the same degree of protection against
infringement of our intellectual property,
- protectionist laws and business practices that favor local
competitors, which could slow our growth in international markets,
- less acceptance by foreign anesthesia providers of the use of
disposable products similar to the BIS Sensor,
- longer sales cycles to sell products like the BIS system to hospitals
and outpatient surgical centers, which could slow our revenue growth
from international sales, and
- longer accounts receivable payment cycles and difficulties in
collecting accounts receivable.
If we are unable to meet and overcome these challenges, our international
operations may not be successful which would limit the growth of our business.
WE MAY EXPERIENCE CUSTOMER DISSATISFACTION AND OUR REPUTATION COULD SUFFER IF WE
FAIL TO MANUFACTURE ENOUGH PRODUCTS TO MEET OUR CUSTOMERS' DEMANDS.
We rely on third-party manufacturers to assemble and manufacture the
components of our BIS monitors and a portion of our BIS Sensors. We manufacture
substantially all BIS Sensors in our own manufacturing facility. We have only
one manufacturing facility. If we fail to produce enough products at our own
manufacturing facility or at a third-party manufacturing facility or experience
a termination or modification of any manufacturing arrangement with a third
party, we may be unable to deliver products to our customers on a timely basis.
Our failure to deliver products on a timely basis could lead to customer
dissatisfaction and damage our reputation.
OUR RELIANCE ON SOLE SUPPLIERS COULD ADVERSELY AFFECT OUR ABILITY TO MEET OUR
CUSTOMERS' DEMANDS FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN BUDGET.
Some of the components that are necessary for the assembly of our BIS
system, including some of the components used in the BIS Sensor, are currently
provided to us by separate sole suppliers or a limited group of suppliers. We
purchase components through purchase orders rather than long-term supply
agreements and generally do not maintain large volumes of inventory. We have
experienced shortages and delays in obtaining some of the components of our BIS
systems in the past, and we may experience similar delays or shortages in the
future. The disruption or termination of the supply of components could cause a
significant increase in the costs of these components, which could affect our
profitability. A disruption or termination in the supply of components could
also result in our inability to meet demand for our products, which could lead
to customer dissatisfaction and damage our reputation. Furthermore, if we are
required to change the manufacturer of a key component of the BIS system, we may
be required to verify that the new manufacturer maintains facilities and
procedures that comply with quality standards and with all applicable
regulations and guidelines. The delays associated with the verification of a new
manufacturer could delay our ability to manufacture BIS systems in a timely
manner or within budget.
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WE MAY BE REQUIRED TO BRING LITIGATION TO ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH MAY RESULT IN SUBSTANTIAL EXPENSE AND MAY DIVERT OUR ATTENTION
FROM THE IMPLEMENTATION OF OUR BUSINESS STRATEGY.
We believe that the success of our business depends, in part, on obtaining
patent protection for our products, defending our patents once obtained and
preserving our trade secrets. We rely on a combination of contractual
provisions, confidentiality procedures and patent, trademark and trade secret
laws to protect the proprietary aspects of our technology. These legal measures
afford only limited protection and competitors may gain access to our
intellectual property and proprietary information. Litigation may be necessary
to enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of our proprietary rights. Any litigation could
result in substantial expense and diversion of our attention from the growth of
the business and may not be adequate to protect our intellectual property
rights.
WE MAY BE SUED BY THIRD PARTIES WHICH CLAIM THAT OUR PRODUCTS INFRINGE ON THEIR
INTELLECTUAL PROPERTY RIGHTS, PARTICULARLY BECAUSE THERE IS SUBSTANTIAL
UNCERTAINTY ABOUT THE VALIDITY AND BREADTH OF MEDICAL DEVICE PATENTS.
We may be exposed to litigation by third parties based on claims that our
products infringe the intellectual property rights of others. This risk is
exacerbated by the fact that the validity and breadth of claims covered in
medical technology patents involve complex legal and factual questions for which
important legal principles are unresolved. Any litigation or claims against us,
whether or not valid, could result in substantial costs, could place a
significant strain on our financial resources and could harm our reputation. In
addition, intellectual property litigation or claims could force us to do one or
more of the following:
- cease selling, incorporating or using any of our products that
incorporate the challenged intellectual property, which would
adversely affect our revenue,
- obtain a license from the holder of the infringed intellectual
property right, which license may not be available on reasonable
terms, if at all, and
- redesign our products, which would be costly and time-consuming.
WE COULD BE EXPOSED TO SIGNIFICANT PRODUCT LIABILITY CLAIMS WHICH COULD DIVERT
MANAGEMENT ATTENTION AND ADVERSELY AFFECT OUR CASH BALANCES, OUR ABILITY TO
OBTAIN AND MAINTAIN INSURANCE COVERAGE AT SATISFACTORY RATES OR IN ADEQUATE
AMOUNTS AND OUR REPUTATION.
The manufacture and sale of our products expose us to product liability
claims and product recalls, including those which may arise from misuse or
malfunction of, or design flaws in, our products or use of our products with
components or systems not manufactured or sold by us. Product liability claims
or product recalls, regardless of their ultimate outcome, could require us to
spend significant time and money in litigation or to pay significant damages. We
currently maintain insurance; however, it might not cover the costs of any
product liability claims made against us. Furthermore, we may not be able to
obtain insurance in the future at satisfactory rates or in adequate amounts. In
addition, publicity pertaining to the misuse or malfunction of, or design flaws
in, our products could impair our ability to successfully market and sell our
products.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS COULD CAUSE OUR STOCK PRICE TO
DECREASE.
Our operating results have fluctuated significantly from quarter to quarter
in the past and are likely to vary in the future. These fluctuations are due to
several factors relating to the sale of our products, including the timing and
volume of customer orders for our BIS system, use of and demand for our BIS
Sensors, customer cancellations, introduction of competitive products, changes
in management, reductions in orders by our distribution partners and the timing
and amount of our expenses. Because of these fluctuations, our operating results
for the year ended December 31, 2000 fell below the original expectations of
securities analysts or investors, and it is likely that in some future quarter
or quarters our operating results could again fall below the expectations of
securities analysts or investors. If our quarterly operating results are below
expectations in the future the market price of our stock would also be likely to
decrease. In addition, because we do not have a significant backlog of customer
orders for our BIS system, revenue in any quarter depends on orders received in
that quarter. Our quarterly results may also be adversely affected because some
customers may have inadequate financial resources to purchase our products or
may fail to pay for our products after receiving them. In particular, hospitals
are increasingly experiencing financial constraints, consolidations and
reorganizations as a result of cost containment measures and declining
third-party reimbursement for services, which may result in decreased product
orders or an increase in bad debts in any quarter.
25
27
VARIOUS MARKET FACTORS MAY ADVERSELY AFFECT OUR QUARTERLY OPERATING RESULTS
DURING THE FIRST QUARTER OF 2001 AND FOR THE YEAR ENDING DECEMBER 31, 2001.
Various factors may adversely affect our quarterly operating results during
the first fiscal quarter of 2001 and the year ending December 31, 2001. We are
facing increased competition in the domestic level of consciousness monitoring
market as a result of recent FDA approval of a new monitoring system. Second, we
experienced higher than anticipated turnover in our direct sales force. This may
adversely impact our revenue for the first fiscal quarter of 2001, depending in
part on the timing of when the newly hired sales representatives become
knowledgeable about our products, customer base and sales programs. Third, we
underestimated the amount of clinical education necessary to bring our installed
base up to expected sensor utilization levels.
WE MAY NOT RESERVE AMOUNTS ADEQUATE TO COVER PRODUCT OBSOLESCENCE, CLAIMS AND
RETURNS, WHICH COULD RESULT IN UNANTICIPATED EXPENSES AND FLUCTUATIONS IN
OPERATING RESULTS.
Depending on factors such as the timing of our introduction of new products
which utilize our BIS technology, as well as warranty claims and product
returns, we may need to reserve amounts in excess of those currently reserved
for product obsolescence, excess inventory, warranty claims and product returns.
These reserves may not be adequate to cover all costs associated with these
items. If these reserves are inadequate, we would be required to incur
unanticipated expenses which could result in unexpected fluctuations in
quarterly operating results.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY, WHICH COULD RESULT IN PRICE
REDUCTIONS AND DECREASED DEMAND FOR OUR PRODUCTS.
We are facing increased competition in the domestic level of consciousness
monitoring market as a result of recent FDA approval of a new monitoring
product. This recently approved product is marketed by a well-established
medical products company with significant resources. We may not be able to
compete effectively with this and other potential competitors. We may also face
substantial competition from companies developing sensor products that compete
with our proprietary BIS Sensors for use with our BIS monitors or with
third-party monitoring systems or anesthesia delivery systems that incorporate
the BIS index. We also expect to face competition from companies currently
marketing conventional electroencephalogram, or EEG, monitors using standard and
novel signal-processing techniques. Other companies may develop
anesthesia-monitoring systems that perform better than the BIS system and/or
sell for less. In addition, one or more of our competitors may develop products
that are substantially equivalent to our FDA-approved products, in which case
they may be able to use our products as predicate devices to more quickly obtain
FDA approval of their competing products. Medical device companies developing
these and other competitive products may have greater financial, technical,
marketing and other resources than we do. Competition in the sale of
anesthesia-monitoring systems could result in price reductions, fewer orders,
reduced gross margins and loss of market share.
OUR ABILITY TO MARKET AND SELL OUR PRODUCTS AND GENERATE REVENUE DEPENDS UPON
RECEIPT OF DOMESTIC AND FOREIGN REGULATORY APPROVAL OF OUR PRODUCTS AND
MANUFACTURING OPERATIONS.
Before we can market new products in the United States we must obtain
clearance from the United States Food and Drug Administration, or FDA. If the
FDA concludes that any of our products do not meet the requirements to obtain
clearance of a premarket notification under Section 510(k) of the Food, Drug and
Cosmetic Act, then we would be required to file a premarket approval
application. The approval process for a premarket approval application is
lengthy, expensive and typically requires extensive preclinical and clinical
trial data. We may not obtain clearance of a 510(k) notification or approval of
a premarket approval application with respect to any of our products on a timely
basis, if at all. If we fail to obtain timely clearance or approval for our
products, we will not be able to market and sell our products, which will limit
our ability to generate revenue. We may also be required to obtain clearance of
a 510(k) notification from the FDA before we can market certain previously
marketed products which we modify after they have been cleared. We have made
certain enhancements to our currently marketed products which we have determined
do not necessitate the filing of a new 510(k) notification. However, if the FDA
does not agree with our determination, it will require us to file a new 510(k)
notification for the modification and we may be prohibited from marketing the
modified device until we obtain FDA clearance.
26
28
The FDA also requires us to adhere to current Good Manufacturing Practices
regulations, which include production design controls, testing, quality control,
storage and documentation procedures. The FDA may at any time inspect our
facilities to determine whether adequate compliance has been achieved.
Compliance with current Good Manufacturing Practices regulations for medical
devices is difficult and costly. In addition, we may not continue to be
compliant as a result of future changes in, or interpretations of, regulations
by the FDA or other regulatory agencies. If we do not achieve continued
compliance, the FDA may withdraw marketing clearance or require product recall.
When any change or modification is made to a device or its intended use, the
manufacturer may be required to reassess compliance with current Good
Manufacturing Practices regulations, which may cause interruptions or delays in
the marketing and sale of our products.
Sales of our products outside the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain approvals from foreign countries may be longer than that required for FDA
approval, and requirements for foreign licensing may differ from FDA
requirements.
The federal, state and foreign laws and regulations regarding the
manufacture and sale of our products are subject to future changes, as are
administrative interpretations of regulatory agencies. If we fail to comply with
applicable federal, state or foreign laws or regulations, we could be subject to
enforcement actions, including product seizures, recalls, withdrawal of
clearances or approvals and civil and criminal penalties.
IF WE DO NOT RETAIN OUR SENIOR MANAGEMENT AND OTHER KEY EMPLOYEES, WE MAY NOT BE
ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY.
Our president and chief executive officer, Nassib Chamoun, joined us at our
inception in 1987. Our chairman, J. Breckenridge Eagle, began serving as a
director in 1988. Many other members of our management and key employees have
extensive experience with us and other companies in the medical device industry.
Our success is substantially dependent on the ability, experience and
performance of these members of our senior management and other key employees.
Because of their ability and experience, if we lose one or more of the members
of our senior management or other key employees, our ability to successfully
implement our business strategy could be seriously harmed.
IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, WE WILL NOT BE ABLE TO EXPAND
OUR BUSINESS.
Our products are based on complex signal-processing technology.
Accordingly, we require skilled personnel to develop, manufacture, sell and
support our products. Our future success will depend largely on our ability to
continue to hire, train, retain and motivate additional skilled personnel,
particularly sales representatives and clinical specialists who are responsible
for customer education and training and post-installation customer support. We
continue to experience difficulty in recruiting and retaining skilled personnel
because the pool of experienced persons is small and we compete for personnel
with other companies, many of which have greater resources than we do.
Consequently, if we are not able to attract and retain skilled personnel, we
will not be able to expand our business.
FAILURE OF USERS OF THE BIS SYSTEM TO OBTAIN ADEQUATE REIMBURSEMENT FROM
THIRD-PARTY PAYORS COULD LIMIT MARKET ACCEPTANCE OF THE BIS SYSTEM, WHICH COULD
PREVENT US FROM ACHIEVING PROFITABILITY.
Anesthesia providers are generally not reimbursed separately for patient
monitoring activities utilizing the BIS system. For hospitals and outpatient
surgical centers, when reimbursement is based on charges or costs, patient
monitoring with the BIS system may reduce reimbursements for surgical
procedures, because charges or costs may decline as a result of monitoring with
the BIS system. Failure by hospitals and other users of the BIS system to obtain
adequate reimbursement from third-party payors, or any reduction in the
reimbursement by third-party payors to hospitals and other users as a result of
using the BIS system could limit market acceptance of the BIS system, which
could prevent us from achieving profitability.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item may be found on pages F-1 through
F-20 of this Form 10-K.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters.
27
29
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to directors required under this item is
incorporated by reference to the information set forth under the section
entitled "Election of Directors" in our proxy statement for our 2001 Annual
Meeting of Stockholders to be held on May 22, 2001. Information relating to
certain filings of Forms 3, 4 and 5 is contained in our 2001 proxy statement
under the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance."
ITEM 11 EXECUTIVE COMPENSATION
The information required under this item is incorporated by reference to
the section entitled "Compensation of Executive Officers" in our 2001 proxy
statement.
The sections entitled "Report of the Compensation Committee" and
"Comparative Stock Performance Graph" in our 2001 proxy statement are not
incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated by reference to
the section entitled "Stock Ownership Information" in our 2001 proxy statement.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated by reference to
the section entitled "Certain Relationships and Related Transactions" in our
2001 proxy statement.
28
30
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements.
For a list of the consolidated financial information included
herein, see Index on page F-1.
(a)(2) Financial Statement Schedules.
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable
or is shown in the accompanying Consolidated Financial
Statements or notes thereto.
(a)(3) List of Exhibits.
The following exhibits are filed as part of and incorporated by
reference into, this Annual Report on Form 10-K:
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Restated Certificate of Incorporation is incorporated herein by
reference to Exhibits to the Registrant's Registration Statement
on Form S-1 (File No. 333-86295).
3.2 Amended and Restated By-Laws are incorporated herein by reference
to Exhibits to the Registrant's Registration Statement on Form
S-1 (File No. 333-86295).
4.1 Specimen common stock certificate is incorporated herein by
reference to Exhibits to the Registrant's Registration Statement
on Form S-1 (File No. 333-86295).
4.2 See Exhibits 3.1 and 3.2 for provisions of the Registrant's
certificate of incorporation and by-laws defining the rights of
holders of common stock.
10.1 1998 Director Stock Option Plan, as amended, is incorporated
herein by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-86295).
10.2+ International Distribution Agreement, dated as of January 21,
1998, by and between the Registrant and Nihon Kohden Corporation
is incorporated herein by reference to Exhibits to the
Registrant's Registration Statement on Form S-1 (File No.
333-86295).
10.3+ International License Agreement, dated as of January 21, 1998, by
and between the Registrant and Nihon Kohden Corporation is
incorporated herein by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-86295).
10.4 License Agreement, dated as of October 31, 1995, by and between
the Registrant and Siemens Medical Systems, Inc. is incorporated
herein by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-86295).
10.5+ Product Agreement, dated May 5, 1999, by and between the
Registrant and Drager Medizintechnik GmbH is incorporated herein
by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-86295).
10.6+ OEM Development and Purchase Agreement, dated August 6, 1999, by
and between the Registrant and Agilent Technologies, Inc.
(formerly part of Hewlett-Packard Company) is incorporated herein
by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-86295).
10.7+ Letter Agreement, dated August 27, 1999, by and between the
Registrant and Agilent Technologies, Inc. (formerly part of
Hewlett-Packard Company) is incorporated herein by reference to
Exhibits to the Registrant's Registration Statement on Form S-1
(File No. 333-86295).
10.8+ Distribution and License Agreement, dated as of April 1, 1996,
between SpaceLabs Medical, Inc. and the Registrant is
incorporated herein by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-86295).
10.9 Loan and Security Agreement, dated as of December 10, 1999, by
and between the Registrant and Imperial Bank; together with
Intellectual Property Security Agreement, dated as of December
10, 1999, by and between the Registrant and Imperial Bank and
Securities Account Control Agreement, dated as of December 10,
1999, by and between the Registrant and Imperial Bank are
incorporated herein by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-86295).
10.10 Promissory Note, dated February 18, 1997, as amended on April 14,
1997, made in favor of the Registrant by Nassib G. Chamoun,
together with Pledge Agreement, dated as of February 18, 1997, as
amended on April 14, 1997, by and between the Registrant and
Nassib G. Chamoun are incorporated herein by reference to
Exhibits to the Registrant's Registration Statement on Form S-1
(File No. 333-86295).
29
31
10.11 Promissory Note, dated May 1, 1997, made in favor of the
Registrant by Nassib G. Chamoun, together with Pledge Agreement,
dated as of May 1, 1997, by and between the Registrant and Nassib
G. Chamoun are incorporated herein by reference to Exhibits to
the Registrant's Registration Statement on Form S-1 (File No.
333-86295).
10.12 Promissory Note, dated May 1, 1997, made in favor of the
Registrant by Nassib G. Chamoun, together with Pledge Agreement,
dated as of May 1, 1997, by and between the Registrant and Nassib
G. Chamoun are incorporated herein by reference to Exhibits to
the Registrant's Registration Statement on Form S-1 (File No.
333-86295).
10.13 Form of Promissory Note made in favor of the Registrant by
certain directors and executive officers, together with Form of
Pledge Agreement, by and between the Registrant and certain
directors and executive officers, together with a schedule of
material terms are incorporated herein by reference to Exhibits
to the Registrant's Registration Statement on Form S-1 (File No.
333-86295).
10.14 Promissory Note, dated September 24, 1997, made in favor of the
Registrant by Jeffrey Barrett is incorporated herein by reference
to Exhibits to the Registrant's Registration Statement on Form
S-1 (File No. 333-86295).
10.15 Promissory Note, dated April 10, 1998, made in favor of the
Registrant by Jeffrey Barrett, together with Pledge Agreement,
dated as of April 10, 1998, by and between the Registrant and
Jeffrey Barrett are incorporated herein by reference to Exhibits
to the Registrant's Registration Statement on Form S-1 (File No.
333-86295).
10.16 Fourth Amended and Restated Registration Rights Agreement, dated
December 17, 1998, by and among the Registrant and the several
purchasers named on the signature pages thereto is incorporated
herein by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-86295).
10.17 Form of Warrant to purchase the Registrant's common stock,
together with schedule of warrantholders are incorporated herein
by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-86295).
10.18+ Supplier Agreement, dated August 13, 1999, between Novation, LLC
and the Registrant is incorporated herein by reference to
Exhibits to the Registrant's Registration Statement on Form S-1
(File No. 333-86295).
10.19+ Medical Products Distribution Agreement, dated October 1, 1999,
between Hewlett-Packard Company and the Registrant is
incorporated herein by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-86295).
10.20+ OEM Development and Purchase Agreement, dated December 22, 1999,
by and between the Registrant and GE Marquette Medical Systems,
Inc. is incorporated herein by reference to Exhibits to the
Registrant's Registration Statement on Form S-1 (File No.
333-86295).
10.21+ Master Distribution Agreement, dated September 1, 2000, by and
between the Registrant and Datex-Ohmeda Division of
Instrumentarium Corporation.
10.22 Promissory Note, dated July 13, 2000, made in favor of the
Registrant by Nassib Chamoun, together with Pledge Agreement,
dated as of July 13, 2000, by and between the Registrant and
Nassib Chamoun is incorporated herein by reference to Exhibits to
the Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 2000.
10.23 Promissory Note, dated December 7, 2000, made in favor of the
Registrant by Helgert van Raamt.
10.24 Sublease Agreement, dated as of October 15, 1999, by and between
Newton Technology Park LLC and the Registrant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
- ----------
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such portions have been omitted and filed separately with the
Securities and Exchange Commission.
30
32
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company for the quarter
ended December 31, 2000.
(c) Exhibits.
The Company hereby files as part of this Annual Report on Form 10-K
the exhibits listed in Item 14(a)(3) set forth above. Exhibits which
are incorporated herein by reference may be inspected and copied at
the public reference facilities maintained by the SEC at Room 1024,
Washington, D.C. 20549, and at the SEC's regional offices located at
Seven World Trade Center, Suite 1300, New York, New York 10048, and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60611-2511. Copies of such material may be obtained by mail
from the Public Reference Section of the SEC at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
SEC also maintains a Website that contains reports, proxy and
information statements and other information regarding registrants
that file electronically with the SEC at the address
"HTTP://WWW.SEC.GOV".
31
33
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.
ASPECT MEDICAL SYSTEMS, INC.
Date: March 28, 2001
--------------
By: /s/ J. NEAL ARMSTRONG
------------------------------------
J. Neal Armstrong
Vice President and Chief Financial
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/ NASSIB G. CHAMOUN President, Chief Executive March 28, 2001
- ------------------------------------ Officer and Director
Nassib G. Chamoun (Principal Executive Officer)
/s/ J. BRECKENRIDGE EAGLE Chairman of the Board of March 28, 2001
- ------------------------------------ Directors
J. Breckenridge Eagle
/s/ J. NEAL ARMSTRONG Vice President and Chief March 28, 2001
- ------------------------------------ Financial Officer (Principal
J. Neal Armstrong Financial and Accounting
Officer)
/s/ BOUDEWIJN L.P.M. BOLLEN Director March 28, 2001
- ------------------------------------
Boudewijn L.P.M. Bollen
/s/ STEPHEN E. COIT Director March 28, 2001
- ------------------------------------
Stephen E. Coit
/s/ EDWIN M. KANIA Director March 28, 2001
- ------------------------------------
Edwin M. Kania
/s/ LESTER J. LLOYD Director March 28, 2001
- ------------------------------------
Lester J. Lloyd
/s/ DONALD STANSKI Director March 28, 2001
- ------------------------------------
Donald Stanski
32
34
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.......................................................... F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999...................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998................................................................ F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998.................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998................................................................ F-7
Notes to Consolidated Financial Statements........................................................ F-8
F-1
35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Aspect Medical Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Aspect
Medical Systems, Inc. (a Delaware corporation) and subsidiaries as of December
31, 2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. 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 Aspect Medical Systems, Inc.
and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 29, 2001
F-2
36
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 23,776,617 $ 13,535,364
Marketable securities ............................................. 34,712,325 1,000,000
Accounts receivable, net of allowance of $422,000
and $407,000 at December 31, 2000 and 1999,
respectively .................................................... 3,665,572 4,300,235
Current portion of investment in sales-type leases ................ 1,677,312 1,689,585
Inventory ......................................................... 4,764,479 1,514,702
Other current assets .............................................. 1,542,597 1,006,023
------------- -------------
Total current assets .......................................... 70,138,902 23,045,909
Property and equipment, net ......................................... 6,807,192 3,449,252
Long-term investment in sales-type leases ........................... 2,465,139 2,906,447
------------- -------------
Total assets .................................................. $ 79,411,233 $ 29,401,608
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ................................. $ 2,530,707 $ 2,125,526
Accounts payable .................................................. 1,877,295 1,569,093
Accrued liabilities ............................................... 6,473,887 5,937,554
Deferred revenue .................................................. 802,489 1,135,225
------------- -------------
Total current liabilities ..................................... 11,684,378 10,767,398
------------- -------------
Deferred revenue .................................................... 1,136,676 1,682,509
Long-term debt ...................................................... 2,616,657 3,872,484
------------- -------------
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized, no shares issued or outstanding at
December 31, 2000 ............................................... -- --
Convertible Preferred Stock, $.01 par value;
22,363,224 shares authorized, 11,067,238 shares issued and
outstanding at December 31, 1999; no shares authorized, issued or
outstanding at December 31, 2000 ................................ -- 67,560,365
Common Stock, $.01 par value; 60,000,000 and
17,030,000 shares authorized, 17,377,257 and
1,815,840 shares issued and outstanding at
December 31, 2000 and 1999, respectively ........................ 173,773 18,158
Additional paid-in capital ........................................ 124,934,402 1,273,725
Warrants .......................................................... 121,684 146,606
Notes receivable from employees and directors ..................... (510,787) (305,324)
Deferred compensation ............................................. (75,043) (225,111)
Accumulated other comprehensive income ............................ 63,029 --
Accumulated deficit ............................................... (60,733,536) (55,389,202)
------------- -------------
Total stockholders' equity .................................... 63,973,522 13,079,217
------------- -------------
Total liabilities and stockholders' equity .................... $ 79,411,233 $ 29,401,608
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
37
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenue ............................. $ 36,023,564 $ 27,187,650 $ 11,238,205
Costs and expenses:
Costs of revenue ................. 11,279,031 9,324,111 5,880,288
Research and development ......... 5,712,687 4,847,237 4,041,753
Sales and marketing .............. 21,978,802 16,543,112 10,354,411
General and administrative ....... 6,389,948 4,829,266 4,253,712
------------ ------------ ------------
Total costs and expenses ..... 45,360,468 35,543,726 24,530,164
------------ ------------ ------------
Loss from operations ................ (9,336,904) (8,356,076) (13,291,959)
Interest income ..................... 4,705,236 1,520,480 553,365
Interest expense .................... (712,666) (203,709) (94,137)
Other expense (Note 20) ............. -- -- (774,502)
------------ ------------ ------------
Net loss ............................ $ (5,344,334) $ (7,039,305) $(13,607,233)
============ ============ ============
Net loss per share:
Basic and diluted ................ $ (0.34) $ (4.57) $ (11.70)
============ ============ ============
Shares used in computing net loss per
share:
Basic and diluted ................ 15,754,831 1,538,653 1,162,695
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
38
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONVERTIBLE COMMON STOCK
PREFERRED STOCK ----------------------- ADDITIONAL
COMPREHENSIVE -------------------------- PAR PAID-IN
INCOME (LOSS) SHARES AMOUNT SHARES VALUE CAPITAL
------------- --------- ------------ --------- --------- -----------
Balance, December 31, 1997 .......... $ -- 7,647,275 $ 38,726,070 1,548,027 $ 15,480 $ 338,970
Issuance of Series D convertible
preferred stock, net of issuance
costs of approximately $93,000 . -- 1,666,234 11,573,816 -- -- --
Issuance of Series E convertible
preferred stock and warrants,
net of issuance costs of
approximately $130,000 ......... -- 1,753,729 17,260,479 -- -- --
Issuance of common stock upon
exercise of common stock
options......................... -- -- -- 230,665 2,307 180,595
Deferred compensation related to
stock options .................. -- -- -- -- -- 758,152
Reversal of unamortized deferred
compensation related to canceled
stock options .................. -- -- -- -- -- (344,250)
Payments on notes receivable ..... -- -- -- -- -- --
Amortization of deferred
compensation related to
stock options .................. -- -- -- -- -- --
Comprehensive loss:
Net loss ......................... (13,607,233) -- -- -- -- --
Other comprehensive income--
Unrealized gain on marketable
securities ..................... 543 -- -- -- -- --
------------
Comprehensive loss ............... (13,606,690) -- -- -- -- --
---------- ------------ --------- --------- -----------
Balance, December 31, 1998 .......... 11,067,238 67,560,365 1,778,692 17,787 933,467
Issuance of common stock
upon exercise of common
stock options .................. -- -- -- 37,148 371 46,924
Payments on notes receivable
from employees and directors ... -- -- -- -- -- --
Deferred compensation related
to stock options ............... -- -- -- -- -- 293,334
Amortization of deferred
compensation related to
stock options .................. -- -- -- -- -- --
Comprehensive loss:
Net loss ......................... (7,039,305) -- -- -- -- --
Other comprehensive loss--
Unrealized loss on marketable
securities ..................... (3,641) -- -- -- -- --
------------
Comprehensive loss ............... $ (7,042,946) -- -- -- -- --
---------- ------------ --------- --------- -----------
Balance, December 31, 1999 .......... 11,067,238 $ 67,560,365 1,815,840 $ 18,158 $ 1,273,725
NOTES
RECEIVABLE ACCUMULATED
FROM OTHER TOTAL
EMPLOYEES DEFERRED COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
WARRANTS AND DIRECTORS COMPENSATION INCOME(LOSS) DEFICIT EQUITY
---------- ------------- ------------ ------------- ------------ -------------
Balance, December 31, 1997 .......... $ -- $ (273,579) $ -- $ 3,098 $(34,742,664) $ 4,067,375
Issuance of Series D convertible
preferred stock, net of issuance
costs of approximately $93,000 . -- -- -- -- -- 11,573,816
Issuance of Series E convertible
preferred stock and warrants,
net of issuance costs of
approximately $130,000 ......... 146,606 -- -- -- -- 17,407,085
Issuance of common stock upon
exercise of common stock
options......................... -- (63,001) -- -- -- 119,901
Deferred compensation related to
stock options .................. -- -- (758,152) -- -- --
Reversal of unamortized deferred
compensation related to canceled
stock options .................. -- -- 344,250 -- -- --
Payments on notes receivable ..... -- 30,398 -- -- -- 30,398
Amortization of deferred
compensation related to
stock options .................. -- -- 96,338 -- -- 96,338
Comprehensive loss:
Net loss ......................... -- -- -- -- (13,607,233) (13,607,233)
Other comprehensive income--
Unrealized gain on marketable
securities ..................... -- -- -- 543 -- 543
Comprehensive loss ............... -- -- -- -- -- --
---------- ---------- ---------- -------- ------------ ------------
Balance, December 31, 1998 .......... 146,606 (306,182) (317,564) 3,641 (48,349,897) 19,688,223
Issuance of common stock
upon exercise of common
stock options .................. -- -- -- -- -- 47,295
Payments on notes receivable
from employees and directors ... -- 858 -- -- -- 858
Deferred compensation related
to stock options ............... -- -- (293,334) -- -- --
Amortization of deferred
compensation related to
stock options .................. -- -- 385,787 -- -- 385,787
Comprehensive loss:
Net loss ......................... -- -- -- -- (7,039,305) (7,039,305)
Other comprehensive loss--
Unrealized loss on marketable
securities ..................... -- -- -- (3,641) -- (3,641)
Comprehensive loss ............... -- -- -- -- -- --
---------- ---------- ---------- -------- ------------ ------------
Balance, December 31, 1999 .......... $ 146,606 $ (305,324) $ (225,111) $ -- $(55,389,202) $ 13,079,217
F-5
39
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
CONVERTIBLE COMMON STOCK
PREFERRED STOCK ----------------------- ADDITIONAL
COMPREHENSIVE -------------------------- PAR PAID-IN
INCOME (LOSS) SHARES AMOUNT SHARES VALUE CAPITAL
------------- --------- ------------ --------- --------- -----------
Conversion of preferred stock
into common stock upon closing
of initial public offering .... $ -- (11,067,238) $(67,560,365) 11,067,238 $ 110,673 $ 67,449,692
Issuance of common stock
upon closing of initial
public offering ............... -- -- -- 4,025,000 40,250 54,602,033
Issuance of common stock
upon exercise of common
stock options ................. -- -- -- 446,273 4,463 1,040,148
Issuance of common stock
upon exercise of warrants ..... -- -- -- 22,906 229 175,862
Payments on notes receivable
from employees and directors .. -- -- -- -- -- --
Deferred compensation related
to stock options .............. -- -- -- -- -- 392,942
Amortization of deferred
compensation related to
stock options ................. -- -- -- -- -- --
Comprehensive loss:
Net loss .................... (5,344,334) -- -- -- -- --
Other comprehensive income --
Unrealized gain on marketable
securities .................. 63,029 -- -- -- -- --
-----------
Comprehensive loss: ................ $(5,281,305) -- -- -- -- --
------------ ------------ ---------- --------- ------------
Balance, December 31, 2000 ......... -- $ -- 17,377,257 $ 173,773 $124,934,402
============ ============ ========== ========= ============
NOTES
RECEIVABLE ACCUMULATED
FROM OTHER TOTAL
EMPLOYEES DEFERRED COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
WARRANTS AND DIRECTORS COMPENSATION INCOME(LOSS) DEFICIT EQUITY
---------- ------------- ------------ ------------- ------------ -------------
Conversion of preferred stock
into common stock upon closing
of initial public offering .... $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
upon closing of initial
public offering ............... -- -- -- -- -- 54,642,283
Issuance of common stock
upon exercise of common
stock options ................. -- (234,420) -- -- -- 810,191
Issuance of common stock
upon exercise of warrants ..... (24,922) -- -- -- -- 151,169
Payments on notes receivable
from employees and directors .. -- 28,957 -- -- -- 28,957
Deferred compensation related
to stock options .............. -- -- (392,942) -- -- --
Amortization of deferred
compensation related to
stock options ................. -- -- 543,010 -- -- 543,010
Comprehensive loss:
Net loss .................... -- -- -- -- (5,344,334) (5,344,334)
Other comprehensive income --
Unrealized gain on marketable
securities .................. -- -- -- 63,029 -- 63,029
Comprehensive loss: ................ -- -- -- -- -- --
--------- ---------- ---------- -------- ------------ -----------
Balance, December 31, 2000 ......... $ 121,684 $ (510,787) $ (75,043) $ 63,029 $(60,733,536) $63,973,522
========= ========== ========== ======== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
40
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net loss .................................... $ (5,344,334) $ (7,039,305) $(13,607,233)
Adjustments to reconcile net loss to net cash
used for operating activities--
Depreciation and amortization ............ 1,767,050 1,296,296 623,133
Provision for doubtful accounts .......... 15,000 212,100 146,500
Compensation expense related to
stock options ......................... 543,010 385,787 96,338
Changes in assets and liabilities--
Decrease (increase) in accounts receivable 619,663 (2,403,392) (1,536,272)
(Increase) decrease in inventory ......... (3,249,777) (1,244,513) 117,290
Increase in other current assets ......... (536,574) (689,250) (70,811)
Decrease (increase) in investment in
sales-type leases ..................... 453,581 (2,097,932) (2,152,634)
Increase (decrease) in accounts payable .. 308,202 677,150 (227,112)
Increase in accrued liabilities .......... 536,333 2,274,147 2,162,816
(Decrease) increase in deferred revenue .. (878,569) 760,841 1,413,893
------------ ------------ ------------
Net cash used for operating activities (5,766,415) (7,868,071) (13,034,092)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment ....... (5,124,990) (2,623,633) (1,821,489)
Purchases of marketable securities .......... (59,899,296) (1,810,895) (42,947,415)
Proceeds from sales and maturities of
marketable securities ................. 26,250,000 4,957,593 43,410,084
------------ ------------ ------------
Net cash (used for) provided by
investing activities ............... (38,774,286) 523,065 (1,358,820)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on capital lease
obligations.............................. -- (126,775) (145,811)
Proceeds from term loan ..................... -- 2,827,399 --
Proceeds from equipment loan ................ -- -- 2,162,009
Principal payments on equipment loan ........ (720,672) (720,672) --
Principal payments on term loan ............. (942,462) -- --
Proceeds from sale of investment in
sales-type leases ....................... 1,614,065 1,852,092 --
Principal payments on debt related to
investment in sales-type leases ......... (801,577) (122,820) --
Proceeds from issuance of convertible
preferred stock and warrants, net of
issuance costs .......................... -- -- 28,980,901
Proceeds from issuance of common stock ...... 55,603,643 47,295 119,901
Payments received on notes receivable from
employees and directors ................. 28,957 858 30,398
------------ ------------ ------------
Net cash provided by financing
activities ......................... 54,781,954 3,757,377 31,147,398
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ............................... 10,241,253 (3,587,629) 16,754,486
Cash and cash equivalents, beginning of period 13,535,364 17,122,993 368,507
------------ ------------ ------------
Cash and cash equivalents, end of period ...... $ 23,776,617 $ 13,535,364 $ 17,122,993
============ ============ ============
Supplemental disclosure of cash flow
information:
Interest paid ............................... $ 728,203 $ 203,709 $ 94,137
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
41
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF OPERATIONS
Aspect Medical Systems, Inc. and its subsidiaries (the "Company") develop,
manufacture and market an anesthesia monitoring system that enables anesthesia
providers to assess and manage a patient's level of consciousness. The Company's
BIS system incorporates the Company's proprietary disposable BIS Sensors and the
Company's BIS monitor or BIS Module Kit. The Company's latest generation BIS
monitor, the A-2000 BIS Monitor, was cleared for marketing by the United States
Food and Drug Administration in February 1998. The BIS system is based on the
Company's patented core technology, the BIS index.
The Company incurred net losses of $5,344,334, $7,039,305 and $13,607,233
for the years ended December 31, 2000, 1999 and 1998, respectively. At December
31, 2000, the Company had an accumulated deficit of $60,733,536. Principal risks
that may affect the business, results of operations and financial condition of
the Company include the Company's ability to raise sufficient capital to fund
operations, the ability to effectively market and sell the Company's products,
market acceptance of the Company's technology and products, limited sales and
marketing experience, the reliance on a single product family, manufacturing
risks, the dependence on single source or limited suppliers, technological risks
and other risks.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies used by the Company in the
preparation of its financial statements follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION
Financial statements of international subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and a weighted average exchange rate for revenue and expenses. The
functional currency of the Company's international subsidiaries is the U.S.
dollar; therefore, translation adjustments are recorded in the consolidated
statements of operations and have not been material.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company invests its excess cash in money market accounts, certificates
of deposit, U.S. Treasury bills, high-grade commercial paper and debt
obligations of various government agencies. The Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. In accordance with SFAS No. 115, the
Company has classified all of its investments as available-for-sale at December
31, 2000 and 1999. The securities are reported at fair value, with any
unrealized gains and losses excluded from earnings and reported as other
comprehensive income (loss).
REVENUE RECOGNITION
Revenue from equipment sales, disposable product sales and sales-type
leases is recognized at the time of shipment. Payments received prior to
shipment are recorded as deferred revenue. The Company has entered into certain
licensing and distribution agreements for which payments received in advance are
recorded as deferred revenue (see Note 11). Revenue is recognized as earned per
the terms of the respective agreements. The Company provides for the cost of
warranty at the time of product shipment.
F-8
42
In December 1999, the Securities and Exchange Commission, or SEC, issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, which provides guidance related to revenue recognition in financial
statements filed with the SEC. SAB No. 101 requires companies to report any
changes in revenue recognition as a cumulative change in accounting principle at
the time of implementation in accordance with Accounting Principles Board
Opinion No. 20, Accounting Changes. Effective January 1, 2000, the Company
adopted SAB No. 101. The adoption of SAB No. 101 did not have a material impact
on our results of operations, cash flows or financial position.
RESEARCH AND DEVELOPMENT COSTS
The Company charges research and development costs to operations as
incurred.
INVENTORY
Inventory is valued at the lower of cost or estimated market, cost being
determined on a first-in, first-out basis.
ADVERTISING COSTS
Advertising costs are expensed as incurred. These costs are included in
sales and marketing expense in the consolidated statements of operations.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the related equipment.
Equipment held under capital leases is stated at the lower of the fair market
value of the equipment or the present value of the minimum lease payments at the
inception of the lease and is amortized on a straight-line basis over the
shorter of the lives of the related assets or the term of the leases.
Maintenance and repair expenditures are charged to expense as incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are recognized for the expected future tax consequences, utilizing
currently enacted tax rates, of temporary differences between the carrying
amounts and the tax basis of assets and liabilities. Deferred tax assets are
recognized, net of any valuation allowance, for the estimated future tax effects
of deductible temporary differences and tax operating loss and credit
carryforwards.
CONCENTRATION OF CREDIT RISK, SIGNIFICANT CUSTOMER AND SINGLE OR LIMITED
SOURCE SUPPLIERS
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable, investment in
sales-type lease receivables and investments. To minimize the risk with respect
to accounts receivable and investment in sales-type lease receivables, the
Company maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations. The Company maintains
cash, cash equivalents and investments with various financial institutions. The
Company performs periodic evaluations of the relative credit quality of
investments and Company policy is designed to limit exposure to any one
institution or type of investment. The primary objective of the Company's
investment strategy is the safety of the principal invested.
For the years ended December 31, 2000, 1999 and 1998, sales of the
Company's products to one of the Company's international distributors accounted
for approximately less than 1%, 2% and 13%, respectively, of the Company's total
revenue. Effective July 1, 1998, this customer no longer distributes the
Company's monitors.
The Company currently obtains certain key components of its products from
single or limited sources. The Company purchases components pursuant to purchase
orders rather than long-term supply agreements. The Company has experienced
shortages and delays in obtaining certain components of its products in the
past. There can be no assurance that the Company will not experience similar
delays or shortages in the future. The disruption or termination of the supply
of components or a significant increase in the costs of these components from
these sources could have a material adverse effect on the Company's business,
financial condition and results of operations.
F-9
43
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board, or FASB, issued,
SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure
of all components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. The only element of comprehensive income impacting the
Company is the unrealized gains (losses) on marketable securities.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair market values of the Company's financial instruments,
which include marketable securities, accounts receivable, investment in
sales-type leases, accounts payable and bank loans, approximate their carrying
values.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been
reclassified to conform with current year presentation.
(3) CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents consist of the following:
DECEMBER 31,
------------------------
2000 1999
----------- -----------
Cash...................................................... $ 8,862,667 $13,535,364
Commercial paper.......................................... 14,913,950 --
----------- -----------
$23,776,617 $13,535,364
=========== ===========
Available-for-sale marketable securities at December 31, 2000 and 1999
consist of the following:
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
December 31, 2000--
U.S. Government debt securities......... $ 1,000,590 $ -- $ -- $ 1,000,590
Corporate obligations .................. 33,648,706 232,516 169,487 33,711,735
----------- ----------- ----------- -----------
$34,649,296 $ 232,516 $ 169,487 $34,712,325
=========== =========== =========== ===========
December 31, 1999--
U.S. Government debt securities......... $ 1,000,000 $ -- $ -- $ 1,000,000
----------- ----------- ----------- -----------
$ 1,000,000 $ -- $ -- $ 1,000,000
=========== =========== =========== ===========
The amortized cost and estimated fair value of investments at December 31,
2000, by contractual maturity, were as follows:
ESTIMATED
FAIR
COST VALUE
----------- -----------
Maturing in one to two years................................... $34,649,296 $34,712,325
----------- -----------
$34,649,296 $34,712,325
=========== ===========
The cost of securities sold is determined based on the specific
identification method for purposes of recording realized gains and losses. Gross
realized gains and losses on the sales of investments have not been material to
the Company's financial statements.
F-10
44
(4) INVESTMENT IN SALES-TYPE LEASES
The Company leases equipment to customers under sales-type leases. The
components of the Company's net investment in sales-type leases are as follows:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Total minimum lease payments receivable...................... $5,143,738 $5,737,674
Less-- unearned interest................................... 1,001,287 1,141,642
---------- ----------
Net investment in sales-type leases.......................... 4,142,451 4,596,032
Less-- current portion..................................... 1,677,312 1,689,585
---------- ----------
$2,465,139 $2,906,447
========== ==========
Future minimum lease payments due under non-cancelable leases as of
December 31, 2000 are as follows:
YEAR ENDING
- -----------
2001...................................................................... $2,156,016
2002...................................................................... 1,502,879
2003...................................................................... 913,798
2004...................................................................... 457,926
2005...................................................................... 113,119
----------
$5,143,738
==========
(5) INVENTORY
Inventory consists of the following:
DECEMBER 31,
----------------------
2000 1999
---------- ----------
Raw materials................................................ $2,200,119 $ 421,117
Work-in-progress............................................. 1,742 100,586
Finished goods............................................... 2,562,618 992,999
---------- ----------
$4,764,479 $1,514,702
========== ==========
(6) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
USEFUL LIFE ------------------------
IN YEARS 2000 1999
-------------------------- ---------- ----------
Construction in progress............ -- $1,262,868 $1,456,784
Computer equipment.................. 3 3,422,898 2,173,878
Demonstration, evaluation and rental
equipment......................... 2 958,542 475,046
Machinery and equipment............. 3 to 5 2,717,802 1,467,425
Furniture and fixtures.............. 3 1,400,788 387,431
Shorter of the life of the
lease or the estimated
Leasehold improvements.............. remaining useful life 1,629,620 298,198
---------- ----------
11,392,518 6,258,762
Accumulated depreciation and
amortization...................... (4,585,326) (2,809,510)
---------- ----------
$6,807,192 $3,449,252
========== ==========
F-11
45
(7) INCOME TAXES
Deferred income tax assets consist of the following:
DECEMBER 31,
--------------------------
2000 1999
------------ ------------
Net operating loss carryforwards............................ $ 21,427,000 $ 16,895,000
Tax credit carryforwards.................................... 2,005,000 1,953,000
Other....................................................... 2,553,000 2,125,000
------------ ------------
Gross deferred tax assets................................. 25,985,000 20,973,000
Valuation allowance....................................... (25,985,000) (20,973,000)
------------ ------------
Net deferred tax asset.................................... $ -- $ --
============ ============
The Company has provided a full valuation allowance against its gross
deferred tax assets at December 31, 2000 and 1999 because the future
realizability of such assets is uncertain. Should the Company achieve
profitability in the future, various components of the gross deferred tax assets
would be available to offset future income tax liabilities and expenses.
The Company has net operating loss and research and development tax credit
carryforwards for federal income tax purposes of approximately $53,000,000 and
$1,500,000, respectively, at December 31, 2000 that will expire commencing in
the year 2002 through the year 2019 if not utilized.
The net operating loss and research and development tax credit
carryforwards are subject to review by the Internal Revenue Service. Ownership
changes, as defined under section 382 in the Internal Revenue Code, may limit
the amount of these tax attributes that can be utilized annually to offset
future taxable income or tax liabilities. The amount of the annual limitation is
determined based on the Company's value immediately prior to the ownership
change. Subsequent ownership changes may further affect the limitation in future
years.
(8) STOCKHOLDERS' EQUITY
AUTHORIZED CAPITAL STOCK
As of December 31, 2000, the Company's authorized capital stock consists of
60,000,000 shares of common stock, $.01 par value, and 5,000,000 shares of
preferred stock, the terms of which have not been designated. At December 31,
1999, the Company's capital stock consisted of 17,030,000 shares of common
stock, $.01 par value, and 22,363,224 shares of preferred stock, $.01 par value.
Of the 22,363,224 shares of preferred stock, 406,898 shares were designated
Series A-1 convertible preferred stock, 3,800,428 shares were designated Series
B-1 convertible preferred stock, 3,500,000 shares were designated Series C
convertible preferred stock, 1,714,286 shares were designated Series D
convertible preferred stock, 1,760,000 shares were designated Series E
convertible preferred stock, 406,898 shares were designated Series A-2
convertible preferred stock, 3,800,428 shares were designated Series B-2
convertible preferred stock, 3,500,000 shares were designated Series C-2
convertible preferred stock, 1,714,286 shares were designated Series D-2
convertible preferred stock and 1,760,000 shares were designated Series E-2
convertible preferred stock.
F-12
46
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock outstanding consist of the following:
DECEMBER 31,
--------------------------------
2000 1999
----------- -----------
Series A-1 convertible preferred stock; 406,898 shares issued and outstanding,
at issuance price, net of issuance costs .................................... $ -- $18,384,462
Series B-1 convertible preferred stock; 3,800,428 shares issued and outstanding,
at issuance price, net of issuance costs .................................... -- 7,506,808
Series C convertible preferred stock; 3,439,949 shares issued and outstanding,
at issuance price, net of issuance costs .................................... -- 12,834,800
Series D convertible preferred stock; 1,666,234 shares issued and outstanding,
at issuance price, net of issuance costs .................................... -- 11,573,816
Series E convertible preferred stock; 1,753,729 shares issued and outstanding,
at issuance price, net of issuance costs .................................... -- 17,260,479
----------- -----------
$ -- $67,560,365
=========== ===========
In February 1998, the Company issued 1,666,234 shares of Series D
convertible preferred stock for net proceeds of $11,573,816.
In December 1998, the Company issued 1,753,729 shares of Series E
convertible preferred stock and warrants to purchase 192,902 shares of common
stock for net proceeds of $17,407,085. The warrants are fully exercisable with
an exercise price of $12.50 per share and expire on February 2, 2003, the third
anniversary of the closing of the Company's initial public offering. However, if
the average closing market price per share of common stock over 25 consecutive
trading days equals or exceeds $25.00, the Company has the right to require the
exercise of the warrants. The Company has allocated the proceeds received
between the Series E convertible preferred stock and the warrants based on the
estimated fair market value of the convertible preferred stock and the warrants.
On February 2, 2000, upon the closing of the Company's initial public
offering all of the Company's convertible preferred stock automatically
converted into 11,067,238 shares of common stock. At December 31, 2000, the
number of authorized but unissued shares of convertible preferred stock is zero.
PREFERRED STOCK
As of December 31, 2000, no shares of preferred stock are outstanding.
WARRANTS
During 2000, the Company issued a total of 22,906 shares of common stock
pursuant to the exercise of warrants issued by the Company in December 1998 in
connection with the Company's Series E preferred stock financing. The exercise
price of the warrants was $12.50 per share of common stock; however, 10,806
shares of common stock were issued pursuant to a cashless exercise provision
contained in the warrants. As a result, the Company received no consideration
upon the exercise of those warrants and approximately $151,250 of consideration
for the other 12,100 shares of common stock. At December 31, 2000, warrants to
purchase 160,110 shares of common stock remain outstanding.
COMMON STOCK
On February 2, 2000, the Company completed the initial public offering of
its common stock. Upon the closing of the initial public offering, the Company
issued 3,500,000 shares of its common stock at an offering price of $15.00 per
share. On February 4, 2000, the underwriters exercised in full their
over-allotment option to purchase an additional 525,000 shares at $15.00 per
share. Cash proceeds from the sale of the 4,025,000 shares of common stock, net
of the underwriters' discount and offering expenses, totaled approximately
$54,642,000.
At December 31, 2000, the Company has reserved 4,399,949 shares of common
stock for issuance under the Company's stock option plans, 284,942 shares of
common stock for issuance under the Company's 1999 Employee Stock Purchase Plan
and 160,110 shares of common stock for issuance upon the exercise of outstanding
warrants.
F-13
47
(9) STOCK OPTION PLANS
At December 31, 2000, the Company's stock option plans provided for the
grant, at the discretion of the Board of Directors, of options for the purchase
of up to 6,560,000 shares of common stock to employees, directors and advisors.
Option prices are determined by the Board of Directors. At December 31, 2000,
993,218 shares of common stock were available for future grant under the
Company's stock option plans.
A summary of stock option activity is as follows:
WEIGHTED
AVERAGE OPTION
NUMBER OF OPTION PRICE PRICE PER
SHARES PER SHARE SHARE
--------- ------------ --------------
Outstanding, December 31, 1997......................... 1,070,626 $ .20 - $45.83 $ .74
Granted.............................................. 1,613,632 .80 - 11.05 6.18
Exercised............................................ (230,665) .20 - 4.20 1.32
Canceled............................................. (616,577) .20 - 45.83 10.07
--------- -------------- -------
Outstanding, December 31, 1998......................... 1,837,016 .20 - 45.83 2.31
Granted.............................................. 961,415 6.00 - 11.05 8.84
Exercised............................................ (37,148) .20 - 6.00 1.27
Canceled............................................. (65,603) .375 - 11.05 4.66
--------- -------------- -------
Outstanding, December 31, 1999......................... 2,695,680 .20 - 45.83 4.60
Granted.............................................. 1,326,187 4.20 - 47.86 20.34
Exercised............................................ (431,215) .20 - 45.83 2.16
Canceled............................................. (183,921) .20 - 28.63 9.36
--------- -------------- -------
Outstanding, December 31, 2000......................... 3,406,731 $ .20 - $47.88 $ 10.77
========= ============== =======
Exercisable, December 31, 1998......................... 406,706 $ .20 - $45.83 $ .83
Exercisable, December 31, 1999......................... 989,572 $ .20 - $45.83 $ 2.27
Exercisable, December 31, 2000......................... 1,284,377 $ .20 - $47.88 $ 4.70
On September 17, 1998, the Company's Board of Directors authorized the
repricing of 480,698 stock options previously granted under the Company's stock
option plans. The repricing provided for the exercise price of the options to be
reduced from $11.05 per share to $4.20 per share, the estimated fair market
value of the Company's common stock at that time.
During 1997 and 1998, the Company accelerated the vesting of certain
employees' and directors' stock options. These employees and directors exercised
options to acquire 1,495,470 shares of common stock. The shares of common stock
are subject to a repurchase right by the Company such that if the holder ceases
to be employed by the Company before the shares which remain subject to the
repurchase provision vest, the Company has the right to repurchase such shares
for 90 days at a price equal to the original exercise price. The number of
shares subject to the repurchase provision decreases over time in accordance
with the vesting schedule of the original option grant. The shares generally
vest over two to four years from the initial grant date, provided that the
holder continues to be employed by the Company. The option exercise price was
paid in the form of cash of $45,735 and by delivery to the Company of full
recourse promissory notes of $336,580. As of December 31, 2000, an aggregate of
29,948 shares remain subject to repurchase.
During 2000, one employee exercised stock options to purchase 143,511
shares of common stock with a full recourse promissory note of $234,420. The
loan is payable over five years and bears interest at a rate of 8% per annum.
The entire amount of this loan was outstanding at December 31, 2000.
Stock options and restricted common stock generally vest over two to four
years and provide for the acceleration of vesting upon a change of control of
the Company.
F-14
48
A summary of outstanding and exercisable options as of December 31, 2000 is
as follows:
WEIGHTED
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL NUMBER
PRICE OUTSTANDING LIFE EXERCISABLE
---------------- ----------- ----------- -----------
$ 0.20 - $0.375 184,837 5.71 175,424
0.80 366,259 6.76 279,568
2.80 160,638 7.29 119,406
4.20 621,783 6.80 363,984
6.00 - 8.375 353,370 8.15 103,490
8.56 228,759 9.91 5,000
10.20 538,119 8.61 184,051
11.05 - 19.50 194,233 9.22 24,314
23.63 518,752 9.23 --
24.50 - 47.88 239,981 8.48 29,140
------------ -------- -----------
$ 0.20 - $47.88 3,406,731 8.02 1,284,377
In 1998, the Company recorded deferred compensation in connection with
certain stock option grants, of approximately $506,250, which represents the
aggregate difference between the estimated fair market value of the common stock
and the exercise price of the stock options. In connection with an employee
termination, an option to purchase 85,000 shares of common stock was canceled,
and the related unamortized deferred compensation of $344,250 was reversed. In
2000, 1999 and 1998, the Company recorded additional deferred compensation of
approximately $393,000, $293,300 and $252,000, respectively, which represents
the estimated fair value of stock options granted to non-employees. The
remaining unamortized deferred compensation of $75,043 at December 31, 2000 will
be recognized as compensation expense over the vesting term of the related
options.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of stock
options or warrants to be included in the statement of income or disclosed in
the notes to financial statements. The Company has determined that it will
continue to account for stock-based compensation for employees under Accounting
Principles Board Opinion No. 25 and elect the disclosure-only alternative under
SFAS No. 123. The Company has computed the value of options granted in 2000,
1999 and 1998 using the Black-Scholes option-pricing model prescribed by SFAS
No. 123. The following table shows the weighted average assumptions used in the
applicable periods and the weighted average fair market value of the options
granted in each period.
YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
------- ------------ -------
Risk-free interest rate .................................. 6.51% 4.34% - 5.91% 5.47%
Expected dividend yield .................................. -- -- --
Expected life ............................................ 5 years 7 years 7 years
Expected volatility ...................................... 75% 60% 60%
Weighted average fair market value of options granted..... $15.14 $6.29 $1.92
Had compensation cost for these options been determined consistent with
SFAS No. 123, the Company's net loss and pro forma net loss per common share
would have been increased to the following pro forma amounts:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------ ----------- ------------
Net loss
As reported................................... $ (5,344,334) $(7,039,305) $(13,607,233)
============ =========== ============
Pro forma..................................... $ (9,629,145) $(7,901,550) $(13,842,377)
============ =========== ============
Basic and diluted net loss per common share
As reported................................... $ (0.34) $ (4.57) $ (11.70)
============ =========== ===========
Pro forma..................................... $ (0.61) $ (5.14) $ (11.91)
============ =========== ===========
F-15
49
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. Also, because options
vest over several years and the Company expects to grant options in future
years, the above pro forma results of applying the provisions of SFAS No. 123
are not necessarily representative of the pro forma results in future years.
1991 AMENDED AND RESTATED STOCK OPTION PLAN
The Company's 1991 Amended and Restated Stock Option Plan (the "1991 Plan")
provides for the granting, at the discretion of the Board of Directors, of
options for the purchase of up to 3,360,000 shares of common stock to employees,
directors and advisors. Option prices are determined by the Board of Directors.
1998 STOCK INCENTIVE PLAN
The Company's 1998 Stock Incentive Plan (the "Incentive Plan") was adopted
by the Board of Directors on July 8, 1998 and is intended to replace the 1991
Plan. The Board of Directors has authorized the Compensation Committee to
administer the Incentive Plan, including the granting of options to executive
officers. At December 31, 2000, the Incentive Plan provided for the granting, at
the discretion of the Compensation Committee, of options for the purchase of up
to 3,000,000 shares of common stock (subject to adjustment in the event of stock
splits and other similar events) to employees, directors and advisors. Option
prices are determined by the Compensation Committee, but cannot be less than
100% of fair market value for incentive stock options (or less than 110% of the
fair market value in the case of incentive stock options granted to optionees
holding more than 10% of the voting power of the Company).
1998 DIRECTOR STOCK OPTION PLAN
In February 1998, the Company adopted the 1998 Director Stock Option Plan
("Director Plan"). Under the terms of this plan, directors of the Company who
are not employees of the Company are eligible to receive nonstatutory options to
purchase shares of common stock. At December 31, 2000, a total of 200,000 shares
of common stock could be issued upon exercise of options under this plan. The
initial options granted under the Director Plan are exercisable as to 50% of the
shares pursuant to the option as of the date of grant and as to one-sixth of the
shares on the first, second and third anniversaries of the date of grant,
provided that the optionee continues to serve as a director and provide for the
acceleration of vesting upon a change of control of the Company. Additional
options granted will be exercisable in three equal annual installments on each
of the first, second and third anniversaries of the date of grant, provided that
the optionee continues to serve as a director. Options granted under the
Director Plan terminate on the earlier of (i) ten years from the date of grant,
or (ii) sixty days after the optionee ceases to serve as a director.
1999 EMPLOYEE STOCK PURCHASE PLAN
In December 1999, the Company adopted its 1999 Employee Stock Purchase Plan
(the "Purchase Plan") . The Purchase Plan allows eligible employees the right to
purchase shares of common stock at the lower of 85% of the closing price per
share of common stock on the first or last day of an offering period. Each
offering period is six months. An aggregate of 300,000 shares of common stock
have been reserved for issuance pursuant to the Purchase Plan. As of December
31, 2000, 15,058 shares of the Company's common stock had been issued under the
Purchase Plan.
F-16
50
(10) NET LOSS PER SHARE
The Company follows SFAS No. 128, Earnings per Share. Basic net loss per
share represents net loss available to common stockholders divided by the
weighted average number of common shares outstanding. The Company has excluded
all shares of restricted common stock that are subject to repurchase by the
Company from the weighted average number of common shares outstanding. Diluted
net loss per share is the same as basic net loss per share as the inclusion of
common stock issuable pursuant to the exercise of stock options, warrants and
the conversion of convertible preferred stock would be antidilutive. For the
years ended December 31, 2000, 1999, and 1998 the Company has excluded
3,162,000, 12,671,000 and 10,638,000 shares, respectively, related to restricted
common stock subject to repurchase and common stock issuable pursuant to the
exercise of stock options, warrants and the conversion of convertible preferred
stock, from the calculation of the Company's diluted earnings per share because
the inclusion of these shares would have been antidilutive as a result of the
Company's net loss position for each of the three years then ended. The Company
evaluated the requirements of the SEC's SAB No. 98 and concluded that there are
no nominal issuances of common stock or common stock equivalents which would be
required to be shown as outstanding for all periods as outlined in SAB No. 98.
(11) DISTRIBUTION AND LICENSING AGREEMENTS
The Company has entered into various distribution, licensing and royalty
agreements relating to its products with distributors and original equipment
manufacturer partners covering both the domestic and the international markets.
These agreements have terms ranging from two to ten years. In connection with
these agreements, approximately $1,939,000 and $2,674,000 in revenue was
deferred as of December 31, 2000 and 1999, respectively. The deferred revenue
relates to prepayments for monitoring systems under minimum purchase obligations
and also includes prepaid license and royalty fees. The deferred revenue will be
recognized upon product shipment and as license and royalty fees are earned.
License and royalty fees are related to future technological developments and
will be recognized upon shipment of units incorporating the technology.
(12) 401(k) SAVINGS PLAN
The Company has a 401(k) savings plan in which substantially all employees
can participate. Employer contributions are at the discretion of the Board of
Directors and vest ratably over five years. The Company made no contributions to
the plan during the years ended December 31, 2000, 1999 and 1998.
(13) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases approximately 61,000 square feet of development,
production and administrative space under an operating lease that expires in
December 2006. Prior to April 2000, the company also leased office space under
an operating lease that was terminated in May 2000. Rent expense was
approximately $1,130,000, $440,000 and $414,000 in 2000, 1999 and 1998,
respectively. Future gross minimum lease commitments for all operating leases as
of December 31, 2000 are as follows:
YEAR ENDING
-----------
2001.............................. $1,064,908
2002.............................. 1,059,752
2003.............................. 1,041,271
2004.............................. 1,074,482
2005.............................. 990,942
Thereafter........................ 995,196
----------
Total minimum lease payments...... $6,226,551
==========
F-17
51
(14) OTHER RELATED PARTY TRANSACTIONS
In addition to the transactions discussed in Note 9, the Company has made
loans to certain employees of the Company. The loans are evidenced by promissory
notes bearing interest with rates ranging from 6.42% to 8% per annum. The
outstanding balance on these notes at December 31, 2000 and 1999 was
approximately $249,000 and $131,000, respectively.
(15) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
------------------------------
2000 1999
---------- ----------
Payroll and payroll-related................... $2,759,230 $2,390,343
Clinical studies ............................. 389,000 255,500
Warranty ..................................... 1,475,000 1,348,000
Other ........................................ 1,850,657 1,943,711
---------- ----------
$6,473,887 $5,937,554
========== ==========
(16) SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables that follow summarize unaudited quarterly financial data for the
years ended December 31, 2000 and December 31, 1999:
FOR THE QUARTER ENDED
-------------------------------------------------------------------
APRIL 1, 2000 JULY 1, 2000 SEPTEMBER 30, 2000 DECEMBER 31, 2000
------------- ------------ ------------------ -----------------
Revenue ............................................... $ 9,659,377 $11,066,167 $ 7,231,033 $ 8,066,987
Gross margin .......................................... 6,576,240 7,683,869 5,133,317 5,351,107
Operating expenses .................................... 7,336,485 8,387,406 8,526,876 9,830,670
Net income (loss) ..................................... $ 25,800 $ 393,006 $(2,418,558) $(3,344,582)
Basic and diluted net income (loss) per share.......... $ 0.00 $ 0.02 $ (0.14) $ (0.19)
FOR THE QUARTER ENDED
-------------------------------------------------------------------
APRIL 3, 1999 JULY 3, 1999 OCTOBER 2, 1999 DECEMBER 31, 1999
------------- ------------ ------------------ -----------------
Revenue................................................ $ 5,326,761 $ 6,385,436 $ 7,125,464 $ 8,349,989
Gross margin........................................... 3,274,391 4,201,869 4,799,909 5,587,370
Operating expenses..................................... 5,673,991 6,530,822 6,773,249 7,241,553
Net (loss)............................................. $(2,120,457) $(1,964,009) $(1,629,990) $(1,324,849)
Basic and diluted net loss per share................... $ (1.49) $ (1.31) $ (1.03) $ (0.80)
(17) SEGMENT INFORMATION AND ENTERPRISE REPORTING
The Company has adopted the FASB's SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, effective for fiscal years beginning
after December 31, 1997. The Company operates in one reportable segment as it
has one family of anesthesia monitoring systems. The Company does not
disaggregate financial information by product or geographically, other than
export sales by region and sales by product, for management purposes.
Substantially all of the Company's assets are located within the United States.
All of the Company's products are manufactured in the United States.
F-18
52
Revenue by geographic destination and as a percentage of total revenue is
as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
----------- ----------- -----------
GEOGRAPHIC AREA BY DESTINATION
Domestic..................... $30,085,477 $24,629,484 $10,296,424
International................ 5,938,087 2,558,166 941,781
----------- ----------- -----------
$36,023,564 $27,187,650 $11,238,205
=========== =========== ===========
YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
---- ---- ----
GEOGRAPHIC AREA BY DESTINATION
Domestic..................... 84% 91% 92%
International................ 16 9 8
--- --- ---
100% 100% 100%
=== === ===
(18) VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's allowance for
doubtful accounts:
BALANCE AT BALANCE AT
BEGINNING OF CHARGES TO END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
Year Ended--
December 31, 1998......... $ 62,400 $146,500 $ 8,900 $200,000
December 31, 1999......... 200,000 212,100 5,100 407,000
December 31, 2000......... 407,000 15,000 -- 422,000
(19) LOAN AGREEMENTS
In December 1999, the Company renegotiated its loan agreement with a
commercial bank. Borrowings outstanding at December 31, 2000 of approximately
$721,000 under the equipment portion of the new loan agreement are payable in
monthly installments of approximately $60,000 plus interest through December
2001. The working capital portion of the original loan agreement was replaced
with a term loan portion. Borrowings under the term loan portion outstanding at
December 31, 2000 of approximately $1,885,000 are payable in 36 monthly
installments of approximately $79,000 plus interest through December 2002.
Interest on both the equipment portion and the term loan portion of the loan
agreement accrue at the prime rate plus 0.5% (10.0% at December 31, 2000). At
December 31, 2000, no additional amounts may be borrowed under the equipment
portion or term loan portion of the loan agreement. Approximately $1.5 million
is available under the standby letter of credit portion of the loan agreement.
The loan agreement contains restrictive covenants that require the Company
to maintain liquidity and borrowing base ratios. The loan agreement also
restricts the Company from declaring and paying cash dividends. The loan
agreement is secured by substantially all of the Company's assets. At December
31, 2000, the Company was in compliance with all covenants under the loan
agreement.
In July 1999, the Company entered into an agreement under which it can sell
a portion of its existing and future investments in sales-type leases to a
third-party finance company. Through December 31, 2000, the Company sold
approximately $3.5 million of investments in sales-type leases. In accordance
with SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, the proceeds from these sales are classified
as debt. Payments on the outstanding principal under this debt match the timing
of the payments due on the underlying investments in sales-type leases.
F-19
53
Future principal payments under the Company's debt agreements are as
follows:
YEAR ENDING
- -----------
2001.............................. $ 2,530,707
2002.............................. 1,716,033
2003.............................. 576,772
2004.............................. 275,508
2005.............................. 48,344
-----------
Total principal payments.......... $ 5,147,364
===========
(20) OTHER EXPENSE
In 1998, the Company incurred approximately $775,000 in one-time charges
related to a proposed initial public offering that was terminated in August
1998.
F-20
54
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Restated Certificate of Incorporation is incorporated herein by
reference to Exhibits to the Registrant's Registration Statement
on Form S-1 (File No. 333-86295).
3.2 Amended and Restated By-Laws are incorporated herein by reference
to Exhibits to the Registrant's Registration Statement on Form
S-1 (File No. 333-86295).
4.1 Specimen common stock certificate is incorporated herein by
reference to Exhibits to the Registrant's Registration Statement
on Form S-1 (File No. 333-86295).
4.2 See Exhibits 3.1 and 3.2 for provisions of the Registrant's
certificate of incorporation and by-laws defining the rights of
holders of common stock.
10.1 1998 Director Stock Option Plan, as amended, is incorporated
herein by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-86295).
10.2+ International Distribution Agreement, dated as of January 21,
1998, by and between the Registrant and Nihon Kohden Corporation
is incorporated herein by reference to Exhibits to the
Registrant's Registration Statement on Form S-1 (File No.
333-86295).
10.3+ International License Agreement, dated as of January 21, 1998, by
and between the Registrant and Nihon Kohden Corporation is
incorporated herein by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-86295).
10.4 License Agreement, dated as of October 31, 1995, by and between
the Registrant and Siemens Medical Systems, Inc. is incorporated
herein by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-86295).
10.5+ Product Agreement, dated May 5, 1999, by and between the
Registrant and Drager Medizintechnik GmbH is incorporated herein
by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-86295).
10.6+ OEM Development and Purchase Agreement, dated August 6, 1999, by
and between the Registrant and Agilent Technologies, Inc.
(formerly part of Hewlett-Packard Company) is incorporated herein
by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-86295).
10.7+ Letter Agreement, dated August 27, 1999, by and between the
Registrant and Agilent Technologies, Inc. (formerly part of
Hewlett-Packard Company) is incorporated herein by reference to
Exhibits to the Registrant's Registration Statement on Form S-1
(File No. 333-86295).
10.8+ Distribution and License Agreement, dated as of April 1, 1996,
between SpaceLabs Medical, Inc. and the Registrant is
incorporated herein by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-86295).
10.9 Loan and Security Agreement, dated as of December 10, 1999, by
and between the Registrant and Imperial Bank; together with
Intellectual Property Security Agreement, dated as of December
10, 1999, by and between the Registrant and Imperial Bank and
Securities Account Control Agreement, dated as of December 10,
1999, by and between the Registrant and Imperial Bank are
incorporated herein by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-86295).
10.10 Promissory Note, dated February 18, 1997, as amended on April 14,
1997, made in favor of the Registrant by Nassib G. Chamoun,
together with Pledge Agreement, dated as of February 18, 1997, as
amended on April 14, 1997, by and between the Registrant and
Nassib G. Chamoun are incorporated herein by reference to
Exhibits to the Registrant's Registration Statement on Form S-1
(File No. 333-86295).
10.11 Promissory Note, dated May 1, 1997, made in favor of the
Registrant by Nassib G. Chamoun, together with Pledge Agreement,
dated as of May 1, 1997, by and between the Registrant and Nassib
G. Chamoun are incorporated herein by reference to Exhibits to
the Registrant's Registration Statement on Form S-1 (File No.
333-86295).
55
10.12 Promissory Note, dated May 1, 1997, made in favor of the
Registrant by Nassib G. Chamoun, together with Pledge Agreement,
dated as of May 1, 1997, by and between the Registrant and Nassib
G. Chamoun are incorporated herein by reference to Exhibits to
the Registrant's Registration Statement on Form S-1 (File No.
333-86295).
10.13 Form of Promissory Note made in favor of the Registrant by
certain directors and executive officers, together with Form of
Pledge Agreement, by and between the Registrant and certain
directors and executive officers, together with a schedule of
material terms are incorporated herein by reference to Exhibits
to the Registrant's Registration Statement on Form S-1 (File No.
333-86295).
10.14 Promissory Note, dated September 24, 1997, made in favor of the
Registrant by Jeffrey Barrett is incorporated herein by reference
to Exhibits to the Registrant's Registration Statement on Form
S-1 (File No. 333-86295).
10.15 Promissory Note, dated April 10, 1998, made in favor of the
Registrant by Jeffrey Barrett, together with Pledge Agreement,
dated as of April 10, 1998, by and between the Registrant and
Jeffrey Barrett are incorporated herein by reference to Exhibits
to the Registrant's Registration Statement on Form S-1 (File No.
333-86295).
10.16 Fourth Amended and Restated Registration Rights Agreement, dated
December 17, 1998, by and among the Registrant and the several
purchasers named on the signature pages thereto is incorporated
herein by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-86295).
10.17 Form of Warrant to purchase the Registrant's common stock,
together with schedule of warrantholders are incorporated herein
by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-86295).
10.18+ Supplier Agreement, dated August 13, 1999, between Novation, LLC
and the Registrant is incorporated herein by reference to
Exhibits to the Registrant's Registration Statement on Form S-1
(File No. 333-86295).
10.19+ Medical Products Distribution Agreement, dated October 1, 1999,
between Hewlett-Packard Company and the Registrant is
incorporated herein by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-86295).
10.20+ OEM Development and Purchase Agreement, dated December 22, 1999,
by and between the Registrant and GE Marquette Medical Systems,
Inc. is incorporated herein by reference to Exhibits to the
Registrant's Registration Statement on Form S-1 (File No.
333-86295).
10.21+ Master Distribution Agreement, dated September 1, 2000, by and
between the Registrant and Datex-Ohmeda Division of
Instrumentarium Corporation.
10.22 Promissory Note, dated July 13, 2000, made in favor of the
Registrant by Nassib Chamoun, together with Pledge Agreement,
dated as of July 13, 2000, by and between the Registrant and
Nassib Chamoun is incorporated herein by reference to Exhibits to
the Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 2000.
10.23 Promissory Note, dated December 7, 2000, made in favor of the
Registrant by Helgert van Raamt.
10.24 Sublease Agreement, dated as of October 15, 1999, by and between
Newton Technology Park LLC and the Registrant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
- ----------
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such portions have been omitted and filed separately with the
Securities and Exchange Commission.