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Proc-Type: 2001,MIC-CLEAR
Originator-Name: [email protected]
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<SEC-DOCUMENT>0000897101-00-000248.txt : 20000321
<SEC-HEADER>0000897101-00-000248.hdr.sgml : 20000321
ACCESSION NUMBER: 0000897101-00-000248
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 19991231
FILED AS OF DATE: 20000320
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: APPLIED BIOMETRICS INC
CENTRAL INDEX KEY: 0000816568
STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845]
IRS NUMBER: 411508112
STATE OF INCORPORATION: MN
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 000-22146
FILM NUMBER: 573909
BUSINESS ADDRESS:
STREET 1: 501 E HGWY 13 STE 108
CITY: BURNSVILLE
STATE: MN
ZIP: 55337
BUSINESS PHONE: 6128901123
MAIL ADDRESS:
STREET 1: 501 EAST HWY 13
CITY: BURNSVILLE
STATE: MN
ZIP: 55337
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
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<TEXT>
- --------------------------------------------------------------------------------
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, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission file number: 0-22146
- --------------------------------------------------------------------------------
APPLIED BIOMETRICS, INC.
(Exact name of Registrant as specified in its charter)
- --------------------------------------------------------------------------------
Minnesota 41-1508112
------------------------ -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
501 EAST HIGHWAY 13, SUITE 108, BURNSVILLE, MINNESOTA 55337
(Address of principal executive offices)
TELEPHONE NUMBER: (612) 890-1123
--------------------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 10, 2000, 5,354,004 shares of Common Stock of the Registrant were
outstanding, and the aggregate market value of the Registrant's outstanding
Common Stock (based upon the last reported sale price of the Common Stock on
that date by the Nasdaq SmallCap Market), excluding outstanding shares owned
beneficially by executive officers and directors, was approximately $19,376,767.
Part III of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held
on May 9, 2000 (the "2000 Proxy Statement").
<PAGE>
Basis(TM) and RealFlow(TM) are trademarks of the Company.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-K INCLUDE "FORWARD LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. THESE STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS
"EXPECT," ANTICIPATE," "PLAN," "MAY," "ESTIMATE" OR OTHER SIMILAR EXPRESSIONS.
SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS
WHICH MAY CAUSE THE ACTUAL RESULT TO DIFFER MATERIALLY FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED IN OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FACTORS MAY INCLUDE THE COMPANY'S DEPENDENCE ON AND NEED FOR
FURTHER DEVELOPMENT OF THE BASIS SYSTEM ITS SOLE PRODUCT, THE COMPANY'S LIMITED
EXPERIENCE AND FINANCIAL RESOURCES AND UNCERTAINTY OF FUTURE RESULTS, THE NEED
FOR FURTHER DEVELOPMENT ON AND THE UNCERTAINTY OF MARKET ACCEPTANCE OF THE BASIS
SYSTEM, THE COMPANY'S NEED FOR ADDITIONAL FINANCING, THE REGULATED NATURE OF THE
MEDICAL DEVICE MARKET, COMPETITIVE FACTORS AND OTHER RISK FACTORS DISCUSSED IN
EXHIBIT 99.1 TO THIS REPORT AND FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH
THE SECURITIES AND EXCHANGE COMMISSION.
PART I
ITEM 1: DESCRIPTION OF BUSINESS
OVERVIEW AND HISTORY
Applied Biometrics, Inc. ("Applied Biometrics" or "the Company") is a
late-development stage medical device company engaged in the research,
development, manufacture and marketing of advanced cardio-vascular and
hemodynamic diagnostic and monitoring systems. The Company believes that its
core competencies in ultrasound transducer technology, signal processing,
cardiac anatomy, pathology and hemodynamics position it to develop and
commercialize a range of cardiac diagnostic and patient monitoring products. The
Company's Basis Cardiac Output Monitor and RealFlow Cardiac Output Probe
(collectively, the "Basis System") are medical devices designed to work together
to provide real time, beat-to-beat, cardiac output monitoring in surgical and
post-operative, intensive care unit settings.
Applied Biometrics was founded in 1984 to develop and market a cardiac output
monitoring system using an ultrasound-based probe mounted in an endotrachial
tube. After a number of years of research and development, the Company decided
in 1996 to focus its efforts on a derivative of this device; a new,
intra-operative cardiac output system using a disposable ultrasound probe
applied directly to the ascending aorta. These efforts have resulted in the
Basis System, which is in final stages of development.
During 1999, the Company continued development of the Basis System, focusing on
product development and refinement, upgrading and validating its manufacturing
facility, transitioning from prototype production to commercial production
ability, conducting market evaluations and
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completing an equity financing to provide capital for the Company's development
and commercialization efforts.
The Company is currently conducting product evaluations at adult and pediatric
clinical sites in the U.S. prior to an intended commercial release of the Basis
System. These product evaluations were originally commenced in October 1999 at
one clinical site in the U.S. Although the early results from these evaluations
indicated that the product performed well in a number of respects, the results
also indicated the need for modifications to the Basis System in order to meet
the Company's product performance expectations. The Company anticipates that its
product evaluations and any further modifications necessary will continue in the
first half of 2000 and intends to commercialize the Basis System following their
successful completion. These forward-looking statements will be impacted
however, by the Company's ability to timely and successfully complete product
development and testing, commence manufacture of commercial quantities,
establish adequate sales, marketing and customer support activities, obtaining
additional financial resources and the outcome of end-user product evaluations.
As of the date of this Report, the Company believes that it has made significant
progress toward completing and testing the identified product refinements.
During 1999, the Company also completed the spin-off distribution of Cardia,
Inc. a company engaged in developing technology designed to correct a certain
class of cardiac conditions involving openings in the septum of the heart. The
Company determined to spin-off Cardia because it believed that this technology
required resources independent of its core cardiac output monitor technology.
Applied Biometrics' principal offices are located at 501 East Highway 13, Suite
108, Burnsville, MN 55337. The Company can be contacted by telephone at (612)
890-1123, by facsimile at (612) 890-1104, or by electronic mail at
[email protected].
CLINICAL USE OF CARDIAC OUTPUT
Cardiac output (or "CO"), is a measure of the volume of blood pumped by the
heart into the aorta and, is one of the most basic physiological parameters of
the body's hemodynamic system. There are typically two types of parameters
measured in the heart for diagnostic and monitoring purposes:
electro-physiological, such as the electrocardiogram ("ECG"), and hemodynamic,
such as heart rate, blood pressure and cardiac output. In many cases, ECG, heart
rate and pressures are used as a proxy to understand cardiac output. Surgical,
electrical and drug therapies, as well as life support systems, such as bypass
machines and heart assist devices, are often designed to develop and sustain a
specified level of cardiac output.
Since the advent of open-heart surgery, surgeons, anesthesiologists and
intensivists have desired a reliable, accurate, continuous and real time measure
of cardiac output. The Company believes that medical practitioners recognize the
importance of measuring cardiac output and that there is significant demand for
an accurate, real-time cardiac output capability, especially for intra-operative
and post-operative heart surgery settings. In these settings, surgeons,
anesthesiologists and intensivists require continuous, real-time information
about cardiac output to guide surgery, drug delivery and life support systems.
The Company believes that practitioners are particularly
2
<PAGE>
interested in immediate cardiac output data for certain patients undergoing
cardiac surgery, including heart transplant and coronary artery bypass
surgeries, where the ability to provide real time, beat-to-beat, continuous
cardiac output data can allow surgeons, cardiologists and anesthesiologists to
react quickly to changes in a patient's condition.
THE COMPANY'S BASIS CARDIAC OUTPUT MONITORING SYSTEM
The Company's Basis Cardiac Output Monitoring System is an innovative new system
designed to measure CO on a continuous and real-time basis during and after
cardiac surgery. The Company believes that the Basis System is the only system
designed to directly, continuously, and in real-time, measure the velocity and
volume of blood in the ascending aorta. The Basis System is designed for use on
a broad range of aortic diameters in both adults and children. By using
ultrasound to monitor CO directly from the ascending aorta, the Basis System is
expected to provide real-time accuracy never before available. In contrast to
conventional CO techniques, the Basis System is designed to directly measure the
patient's aortic diameter and blood velocity 44 times each second for a true,
real-time view of cardiac output.
The Basis System consists of the patented, disposable, ultrasonic RealFlow Probe
and the Basis Cardiac Output Monitor. The RealFlow Probe consists of an
ultrasound sensor mounted in the probe head, a power cable and an integrated
release mechanism. The release mechanism involves two nitinol "release" wires
integrated into the sensor head, which the surgeon sutures to the patient's
aorta during open-heart surgery. Later, after the chest cavity has been closed,
the physician may release the sutures by withdrawing the release wires,
permitting the probe to be removed from the chest without additional surgical
intervention.
The Basis System monitor consists of both software and electronic hardware and
display, which energize the Basis System's RealFlow probe, senses the probe's
signal, determines cardiac output and provides a graphical and numeric display
to the physician. The electro-lumiscent flat panel display provides numerical,
waveform and trend information of the patient's cardiac output, stroke volume,
blood velocity, aortic diameter and blood velocity. The monitor is designed to
be automatic, requiring no user calibration, and to automatically adjust its
analysis and readout to each individual patient.
The Basis System is specifically designed to address the need for continuous,
real-time, cardiac output data in surgical and post-operative settings by
reporting cardiac output accurately and without subjective user intervention.
The Basis System readings may be used to guide cardiac surgeons during their
surgical procedures and to assist intensivists and anesthesiologists by
monitoring vital signs and managing life support systems both during and after
the procedures.
CUSTOMERS AND MARKETS
There are over 1 million open chest cardiac procedures performed worldwide each
year. The Company believes that the Basis System can be applied to the majority
of these cases, but provides its most significant value where real time,
continuous CO is indicated. Based on feedback from cardiovascular surgeons, the
Company believes that these procedures include higher risk cases, a new class of
procedures called "beating heart" surgery and pediatric cardiac
3
<PAGE>
surgeries. On a global basis, the Company believes that there are approximately
350,000-400,000 procedures of these types conducted every year. The Company
believes that the Basis System is the only method that is designed to provide
continuous, real-time, accurate CO monitoring in these cases.
The primary market for the Basis System is cardiac surgery centers and the
associated cardiac surgeons. As of 1999, there were approximately 900 open-heart
surgery centers in the United States, and an equal number outside the US. The
primary purchaser and user of the Basis System will be the cardiac surgeon.
The Company also believes that new products based on Basis technology could open
up new potential markets where blood flow measurements are deemed clinically
useful but are otherwise unavailable or too costly. Among the other potential
applications are carotid endarterectomies, liver transplants, kidney transplants
and femoral bypass, as well as many other vascular procedures. The Company is
unable to predict whether and to what extent such markets will develop until
more investigation is performed.
BUSINESS STRATEGY
The Company's mission is to develop its core competences in sensor, signal
processing and probe manufacture, monitor hardware and software technologies to
develop a family of advanced, real-time monitoring products. The Company's focus
is to develop and market unique systems to the cardiac and surgery markets,
which provide high margin, disposable product revenue streams.
The Company's initial focus is to complete the development and commercialization
of the Basis System. The Company believes that its core technology and expertise
provide the basis for numerous additional product development opportunities in
addition to the Basis System. The Company has several products in early
development that fit this profile, including intra-operative probes, minimally
invasive insertion systems and endo-trachial tube based systems.
SALES AND MARKETING
The Company is currently evaluating a number of sales strategies for its Basis
System, including establishing a direct sales force, dealer/distributor
relationships, manufacturers representatives and strategic sales alliances. The
Company intends to hire the appropriate sales support personnel and field sales
resources as needed for domestic and international markets.
The Company plans to develop a small network of opinion leaders in clinical
practice to develop and validate specific applications for its products. The
plans call for creation of a Medical Advisory Board and a group of Clinical
Development partners. One of the Company's Directors, Dr. Demetre Nicoloff,
M.D., PhD., an influential cardiac surgeon, is advising the Company in this
matter.
The Company is preparing the appropriate sales and marketing tools for the Basis
System and is developing market segment and target customer data. The Company
intends to be ready with a
4
<PAGE>
full complement of sales and marketing collateral materials and programs to
support Basis System commercialization.
MANUFACTURING
The Company currently builds its prototype probes at its 11,000 sq. ft.
Burnsville, Minnesota location and intends to manufacture both the probe and
monitor for its Basis System in this location. Certain component parts are
manufactured by third party vendors or are off-the-shelf components. However,
the Basis System Monitor contains a number of component parts that are nearing
the end of their product life cycle and availability. The Company is working to
design and test newer parts into the current monitor design in advance of any
potential future component shortages.
The Company plans to continue to manufacture its proprietary probe, which
requires a controlled environment and proprietary, specialized manufacturing
skills and knowledge. Monitor assembly and testing will also be performed by the
Company internally in the near term, but may be outsourced if the Company
determines that it can improve its overall economics and maintain quality
standards. The Company upgraded its probe and monitor manufacturing capabilities
in 1999 in preparation for production readiness.
RESEARCH AND DEVELOPMENT
The Company's research and development strategy has been to perform its product
development with its own staff, and to develop strong, proprietary competencies
in ultrasound transducers, signal processing, cardiac anatomy and pathology, and
the fluid dynamics of blood flow. At December 31, 1999, seven professionals,
constituting 32% of the Company's staff, were devoted full time to research and
development efforts. The Company's research and development expenditures for
continuing operations were approximately $1,469,000, $805,000 and $1,409,000 in
1999, 1998 and 1997, respectively. These funds were used primarily to develop
the Basis System and its underlying core technologies.
Although the Company believes the development of the Basis System is
substantially complete, the Company may determine through its testing and
evaluation process that further refinements are required prior to market launch.
Initial results from the Company's product evaluations conducted in late 1999
indicated that the Basis System functioned well in many respects, but required
certain modifications to meet the Company's expectations for performance and
reliability on a clinical basis. Additional product evaluations were delayed
until the necessary modifications to the product could be made to address the
clinical performance issues. As of the date of this Report, the Company believes
that it has made significant progress toward completing and testing the
identified product refinements. The Company intends to participate in additional
clinical evaluations during 2000 to continue to broaden the Company's market
knowledge and data regarding the usefulness, cost effectiveness and clinical
application of its products.
The Company believes that its core technology and expertise provide for numerous
additional product development opportunities - each of which may offer
attractive growth potential for the
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<PAGE>
Company. After the commercial launch of the Basis System, the Company plans to
devote resources to these product initiatives, which include an intra-operative
version of the RealFlow probe, an upgraded Basis Monitor and other projects. No
assurance can be provided, that any of these product development projects will
be undertaken or will result in the successful development and commercialization
of additional products. Further, the Company will require additional financial
resources to complete new product development activities and no assurance can be
given that such financial resources will be obtained.
REGULATORY AND QUALITY ASSURANCE
The Company has established and maintains a design and development system, a
management process and a manufacturing and quality control system designed to
conform to the Food and Drug Administration's (the "FDA") Quality System
Regulations ("QSR"). The Company plans to apply for ISO certification in 2000,
consistent with its objective to receive CE marking of the Basis System, which,
if received, would allow it to be freely marketed within the European Union
member nations in 2001.
PATENTS AND PROPRIETARY RIGHTS
The Company has developed extensive proprietary technology and knowledge in a
variety of fields that relate to cardiac output, blood flow and associated
diagnostic and monitoring products. These include ultrasound transducer design
and manufacturing, signal processing, cardiac anatomy, pathology and clinical
procedures, the fluid dynamics of blood flow and acoustic properties of the
human anatomy.
The Company's success depends in part on its ability to obtain and maintain
patent protection for its products, to preserve its trade secrets and to operate
without infringing the proprietary rights of other parties. The Company seeks to
protect its technology by filing patent applications for technologies that it
considers important to the development of its business, based on an analysis of
the cost of obtaining a patent, the likely scope of protection and the relative
benefits of patent protection compared to trade secret protection, among other
considerations.
The Company has U.S. and foreign patents and patents pending, which relate to
devices and methods used to measure blood flow through a major mammalian artery
using ultrasound technology, the release mechanism employed by the RealFlow
probe, and certain methods and techniques which relate to minimally invasive
surgery, beating heart surgery and advanced signal processing.
There can be no assurance that patents will be issued on current products or on
products developed by the Company in the future, that the patents issued to the
Company in the past or in the future will be of material benefit, or that the
Company will have sufficient resources to enforce its patent rights. There can
also be no assurance that the Company's products do not infringe on patents,
copyrights or other proprietary information known or claimed by others, or that
others will not successfully utilize part of or all of the Company's
technologies without compensation to the Company. Infringement claims by third
parties could have a material adverse effect on the Company. Intellectual
property litigation is complex, time-consuming and
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expensive and the outcome of such litigation is difficult to predict. If the
Company is found to have infringed on the rights of a third party, the Company
may be unable to market its products without a license from such third party.
There is no assurance that the Company would be able to obtain such a license on
satisfactory terms, or at all.
In addition to its patented technology, the Company also relies heavily on trade
secrets and unprotected proprietary technology. The Company seeks to maintain
the confidentiality of such information through its internal security and
secrecy measures and the employment agreements requiring employees and agents of
the Company to observe the confidentiality of Company information and to assign
to the Company inventions developed in the course of work for the Company. There
can be no assurance, however, that these measures will prevent the unauthorized
disclosure or use of this information or that others will not be able to
independently develop such information. Additionally, there can be no assurance
that any agreements regarding confidentiality and non-disclosure will not be
breached, or, in the event of any breach, that adequate remedies would be
available to the Company.
COMPETITION AND ALTERNATIVE CARDIAC OUTPUT METHODS
The medical device marketplace is characterized by rapid innovation and intense
competition. The Company anticipates two types of competition for the Basis
System; indirect competition from pulmonary artery thermodilution catheter
methods for measuring CO, and capnography (or Ficke principle) devices, and dye
dilution products, and direct competition from other ultrasound-based systems.
The most common method for measuring cardiac output available today is called
the thermal dilution method, which involves insertion of a catheter into the
right side of the heart and the pulmonary artery (PA). Multiple injections of
cold saline solution are made into the PA, and, the temperature change of the
blood is monitored and correlated to blood volume. This method has a number of
limitations: (1) it provides a single reading, based on the average flow over a
1 - 3 minute period, (2) it requires manual timing of the injections and
subjective user interpretation of the results, and (3) it measures pulmonary
artery flow instead of aortic flow.
Clinically, perhaps the most significant implication of these limitations is
that the surgeon is not provided the actual cardiac output at any given time -
they must wait while a separate, time consuming procedure is being conducted for
a single, time-averaged reading. Although newer, continuous readout PA catheters
are being marketed and have captured approximately 8% market share, these also
average the heart's output over a 3-minute period. This "time-lagged" data means
that the physicians, once again, do not have an accurate, current measure of
cardiac output.
Bioimpedance measures the change in the electrical impedance of the chest, using
ECG-type leads, and attempts to correlate to cardiac output. This technique is
considered more appropriate as a low cost, non-invasive diagnostic method for
use in a physician's office. Capnography (also referred to as the Ficke
Principle) measures the intake of oxygen in the lungs by monitoring the inhaled
and exhaled gases and correlates these measurements to blood volume in the lungs
and
7
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then to cardiac output. Both of these systems have seen limited use and, due
to their indirect nature, may be subject to a number of biasing effects.
Competition with thermodilution, bioimpedance and capnography methods for
measuring CO are deemed indirect in that none of these methods provides
real-time continuous monitoring and readout. The Company's Basis System will
compete against these devices, but will target the surgical and intensive care
markets, which the Company believes, will place high value on these
differentiating features.
With regard to direct competition from other ultrasound-based systems, the
Company currently knows of no products that are similar to the Company's Basis
System in their underlying technology and application. The Company is aware that
other companies have had development efforts in this area in the past (including
patents received by Medtronic) but it is unaware of the status of the efforts,
and it has not encountered any clinical or marketing activities of any like
devices by any competitors. There are ultrasound-based devices, which monitor
blood flow in the descending aorta from the esophagus, but the Company believes
that there is little market penetration or clinical acceptance of these systems
for cardiac surgery procedures. There can be no assurance, however, that others
will not develop and commercialize cardiac output monitoring systems directly
competitive with the Basis System.
Many of the Company's competitors and potential competitors have significantly
greater financial, manufacturing, marketing and technical resources than the
Company. The Company's competitors include Edwards Critical Care, a division of
Baxter Healthcare Corporation, Johnson and Johnson, and Abbott Critical Care,
all of which make and sell catheters, thermodilution cardiac monitors and
peripheral products used to measure cardiac output by the thermodilution method.
Two small companies, Deltex and Arrow market ultrasound-based systems, which
monitor the descending aorta from the esophagus. Novametrix provides capnography
systems, and Cardio-Dynamics provides bio-impedance systems. There can be no
assurance that the Company will be able to compete effectively with these or any
future competitors.
GOVERNMENT REGULATION
Government regulation in the U.S. and in foreign countries is a significant
factor in the Company's business. In the U.S., manufacturers of medical devices
must comply with certain regulations governing the testing, manufacture,
packaging and marketing of medical devices under the Federal Food, Drug and
Cosmetic Act and related regulations, which is administered by the FDA. All
companies subject to FDA regulation must comply with a variety of rules,
including the QSR, and are subject to periodic inspections by the FDA and other
applicable agencies. If the FDA believes that its regulations have not been
fulfilled, it may implement extensive enforcement powers, which were
strengthened by the enactment of the Safe Medical Devices Act of 1990. The FDA's
powers include, but are not limited to, the ability to ban products from the
market, prohibit the operation of manufacturing facilities and effect recalls of
products from customer locations.
The Basis System is considered by the FDA to be a Class II medical device, and
is subject to the 510(k) pre-market notification process. The Company received
510(k) clearance to market a
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prior cardiac output device in 1991, and confirmed its clearance for the Basis
System in 1996 and then again in May of 1999, using both internal and external
consulting evaluations. Accordingly, the Company believes that the Basis System
may be marketed in the U.S. without any further regulatory filings. The
Company's regulatory personnel work closely with R&D and manufacturing to
continually evaluate the regulatory status of all products and as with all,
medical device manufacturers, the Company's 510(k) status is subject to review
by the FDA.
In addition to 510(k) market clearance, the Company must comply with FDA QSR
requirements, including the appropriate design control procedures and
manufacturing quality processes and documentation. The Company will be subject
to routine inspection by the FDA, and to a variety of state laws and regulations
in those states or localities where its products are marketed. The Company is
also subject to numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection
and disposal of hazardous or potentially hazardous substances.
There can be no assurance that the Company will not incur significant costs to
comply with such laws and regulations now or in the future or that such laws or
regulations will not have a material adverse effect upon the Company's ability
to do business. Changes in existing requirements or adoption of new requirements
or policies may also adversely affect the Company's ability to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations.
To introduce the Basis System in Europe, the Company must comply with the
"essential requirements" set forth in the Medical Device Directive (the "MDD")
of the European Union (the "EU"), which define the safety, design, and
manufacturing requirements for medical products. Typically, a full quality
assurance system complying with international standards is required to conform
to the MDD. Compliance with these requirements will allow the Company to apply
the CE mark to the Basis System, allowing free sale in the EU, subject only to
certain member country national laws.
PRICING AND THIRD PARTY REIMBURSEMENT
Pricing for medical devices is characterized by intense competition, extensive
government regulation and strong cost-containment pressures from third-party
payers such as government health programs, private health insurance plans,
managed care organizations and other similar programs. With regard to the
Company's proposed products, two primary forces are most likely to impact
pricing: third party reimbursement for open heart surgery, and price comparisons
with alternative devices.
It is well known that hospitals and third-party payers have adopted cost
conscious approaches to the utilization of new techniques and equipment. This
approach tends to increase the level of acceptance of new products that increase
efficiency and productivity. The Company believes that the Basis System, and
intra-operative real time cardiac output monitoring in cardiac surgery, has the
potential to decrease costs and improve clinical outcomes for a broad range of
cardiac surgery procedures in a large patient population. Advantages could
result from both the
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decreased cost of performing the monitoring procedure, as well as the possible
benefit of decreased patient complications and shorter time required to recover
as a result of continuous cardiac output monitoring using a less invasive
device. There can be no assurance, however that the Company's clinical work will
demonstrate advantages in cost effectiveness of its Basis System. Furthermore,
as with most new technologies there are no established reimbursement practices
in place with third party payors, aside from the normal "999" codes which
provide for physician reimbursement with explanation. The Company intends to
begin to develop data to substantiate its hypotheses of cost savings during
2000.
Currently, the most common measurement technique for cardiac output uses the
thermodilution PA catheter. These catheters are priced in the range of $75 -
$300. Published reports indicate that the total cost to the hospital of a
traditional thermodilution procedure is in excess of $1,000, given the
requirement of a special test, related materials and personnel costs. The
Company anticipates pricing its probe in the range of $400 - $500, thus at a
price premium over the thermodilution catheter, but at a significant cost saving
with respect to the thermodilution procedure.
While the Company is not aware of any significant reluctance on the part of the
government or other health care insurers to provide reimbursement for the
procedures performed with its products, future regulation and uncertainty among
health care institutions about the direction of reimbursement rates could
adversely affect the marketing efforts of the Company.
EMPLOYEES
As of December 31, 1999, the Company had 22 full-time and no part-time
employees. Of these employees, 7 are engaged in research and development, 1 is
in sales and marketing, 4 are in general and administration, 3 are in
regulatory, quality or clinical affairs and 7 are in manufacturing. The
Company's operating plan for 2000 calls for staffing to approximately 44
employees by year end, which includes 7 people in sales and marketing. The
Company is not a party to any collective bargaining agreements and believes that
its relations with its employees are good.
ITEM 1A: IMPORTANT FACTORS
Included as Exhibit 99.1 to this Report on Form 10-K are factors that are
important and should be considered carefully in connection with any evaluation
of the Company's business, financial condition, results of operations and
prospects. These factors could cause the Company's actual results to materially
differ from those reflected in any forward-looking statements of the Company.
10
<PAGE>
ITEM 2: DESCRIPTION OF PROPERTY
The Company presently occupies approximately 11,900 square feet of office,
manufacturing and warehouse space in Burnsville, Minnesota. The Company leases
this space for $83,000 annually plus common area maintenance and real estate
taxes. The lease extends through March 31, 2002. The Company believes that these
facilities are sufficient for its current needs through 2000, at which time
additional office space may be required. The Company plans to evaluate its space
requirements in mid-2000 with the intent to secure additional short-term space
as needed and begin planning for a long-term facility solution.
ITEM 3: LEGAL PROCEEDINGS
None.
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 covered by this Report.
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers, their ages, and their offices held as of
February 29, 2000 are as follows:
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
Andrew M. Weiss 42 PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
Camille M. Meyer 39 VICE PRESIDENT, FINANCE, CHIEF
FINANCIAL OFFICER AND SECRETARY
Steven R. Wedan 32 VICE PRESIDENT, ENGINEERING
Joshua J. Baltzell. 30 VICE-PRESIDENT, SALES AND MARKETING
Vic Fabano 38 VICE-PRESIDENT, MANUFACTURING
Elizabeth R. Kempen 36 VICE-PRESIDENT, QUALITY ASSURANCE,
REGULATORY AND CLINICAL AFFAIRS
ANDREW M. WEISS was elected Chief Executive Officer, President, and Director of
the Company in March 1999. In 1998, Mr. Weiss served as President of Intellx of
Boulder, Colorado, a venture stage company involved in medical image processing.
From 1995 to 1998, Mr. Weiss was Chief Executive Officer and President of Vital
Images, Inc., a Minneapolis-based provider of diagnostic and surgical
visualization systems. In 1994 and 1995, he was Vice-President of Global Sales
and Marketing for Marquette Medical Systems, a Milwaukee, Wisconsin based
manufacturer of patient monitoring systems. Prior to 1994, Mr. Weiss held
various positions
11
<PAGE>
with General Electric Company, including several positions with General Electric
Medical Systems.
CAMILLE M. MEYER has served as Vice President, Finance and Chief Financial
Officer since April 1999 and Secretary of the Company since June 1999. From July
1995 to March 1999, Ms. Meyer served as Controller of Bio-Vascular, Inc., a
medical products company based in St. Paul, Minnesota. From 1989 to 1995, Ms.
Meyer held a series of positions of increasing responsibility with Deloitte and
Touche LLP, a public accounting firm, in their Minneapolis office. Ms. Meyer is
a certified public accountant and received a Masters Degree in Business Taxation
from the Carlson School of Management at the University of Minnesota.
STEVEN R. WEDAN has served as Vice President, Engineering since March 1999,
Director of Engineering since December 1995, and Engineering Manager since
December 1994. Prior to joining the Company, Mr. Wedan was a design and
development engineer for General Electric Medical Systems, where he developed
ultrasound, magnetic resonance, and computed tomography systems. Mr. Wedan
received a Bachelor's Degree in Electrical Engineering from Michigan
Technological University and a Master's Degree in Electrical and Computer
Engineering from Marquette University.
JOSHUA BALTZELL has served as Vice-President, Sales and Marketing since February
2000 and Vice-President, Marketing and Business Development since September
1999. From 1993 to 1999, Mr. Baltzell held a series of marketing position of
increasing scope and responsibility with Boston Scientific Corp., including most
recently, Group Product Manager of Emerging Technologies and Business
Development. Mr. Baltzell received degrees in Economics and Philosophy from St.
Olaf College and a Masters of Business Administration from the Carlson School of
Management at the University of Minnesota.
VIC FABANO has served as Vice-President, Manufacturing since February 2000 and
Director of Manufacturing since May 1999. Mr. Fabano has extensive experience in
start-up manufacturing of medical devices, including heart catheters and
vascular wound closure devices. Prior to joining the Company, Mr. Fabano was
Director of Manufacturing for Vascular Solutions, a medical device manufacturer
based in Plymouth, Minnesota. From 1992 to 1998, Mr. Fabano worked at Boston
Scientific Corp. in roles of increasing responsibility in manufacturing and
quality engineering. Mr. Fabano received a Mechanical Engineering degree from
the University of North Dakota.
ELIZABETH R. KEMPEN has served as Vice-President, Quality Assurance, Regulatory
and Clinical Affairs since February 2000 and Director of Quality Assurance,
Regulatory and Clinical Affairs since May 1999. Ms. Kempen has over ten years of
experience in regulatory affairs and quality assurance within the Biomedical
industry. Prior to joining the Company, Ms. Kempen held management positions in
Project Development and Quality Assurance for Bio-Vascular, Inc, a medical
products company based in St. Paul, Minnesota. From 1993 to 1996, Ms. Kempen
worked in Regulatory Affairs for Guidant - Cardiac Pacemaker, Inc. Ms. Kempen
received degrees in Microbiology and Public Health from the University of
Wisconsin and a Masters of Business Administration from the Carlson School of
Management at the University of Minnesota.
12
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap Market under the
symbol "ABIO". The following table sets forth, for each of the fiscal periods
indicated, the range of high and low closing sale prices per share as reported
by the Nasdaq SmallCap Market. These prices do not include adjustments for
retail mark-ups, markdowns or commissions.
HIGH LOW
---- ---
1999
First Quarter ............. $ 8.500 $ 7.625
Second Quarter ............ 8.000 4.375
Third Quarter ............. 5.250 3.875
Fourth Quarter ............ 5.000 2.375
1998
First Quarter ............. $ 8.250 $ 6.750
Second Quarter ............ 11.250 6.375
Third Quarter ............. 9.250 4.500
Fourth Quarter ............ 7.500 6.875
The Company has not declared or paid any cash dividends on its Common Stock
since its inception and the Company intends to retain all earnings for use in
the business for the near future. The payment of dividends is subject to the
discretion of the Board of Directors and will depend on the Company's earnings,
financial condition, capital requirements and other relevant factors. As of
March 10, 2000, there were approximately 900 beneficial owners of the Company's
Common Stock.
13
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
SUMMARY STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997(1) 1996 1995
---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenue ........................ $ -- $ -- $ 64,940 $ 125,120 $ --
Gross margin ....................... -- -- 32,765 63,145 --
Operating Expenses:
Selling, general &
administrative ................ 1,028,065 946,721 1,061,579 862,221 736,531
Research & development .......... 1,469,001 805,459 1,409,280 894,517 689,354
Net loss from continuing
operations ...................... (2,445,942) (1,563,991) (2,134,604) (1,368,961) (1,288,058)
Loss per share from continuing
operations, basic and diluted ... $ (0.52) $ (0.36) $ (0.51) $ (0.35) $ (0.44)
Weighted average shares(2)
outstanding, basic and diluted .. 4,659,300 4,312,077 4,186,896 3,917,268 2,914,049
</TABLE>
SUMMARY BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents & short-
term investments ................ $ 1,910,356 $ 2,369,413 $ 4,420,180 $ 6,374,452 $ 2,210,587
Total assets ....................... 2,827,739 3,296,711 5,437,923 7,490,300 2,632,491
Shareholders' equity(3) ............ 2,516,625 2,151,564 5,271,202 7,287,110 2,447,502
</TABLE>
- -----------------------------
(1) In 1997, the Company ceased marketing efforts of two cardiac output devices:
one that was integrated into an endotrachial tube, and the other being a
predecessor to the current Basis System.
(2) The Company's weighted shares outstanding were increased by the issuance, in
September 1999, of 815,000 shares of Common Stock in a private placement,
(3) Shareholders' equity increased by approximately $2,100,000 from net proceeds
from the private placement of the Company's Common Stock in September 1999.
Shareholders' equity was reduced by approximately $334,000 as result of the
distribution of Cardia, Inc. to shareholders in February 1999. This amount
represented the net assets of Cardia on the distribution date (See Note 3 to the
Company's financial statements included in this Report).
14
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Applied Biometrics, Inc. ("Applied Biometrics" or "the Company") is a
late-development stage medical device company engaged in the research,
development, manufacture and marketing of advanced cardio-vascular and
hemodynamic diagnostic and monitoring systems. The Company believes that its
core competencies in ultrasound transducer technology, signal processing,
cardiac anatomy, pathology and hemodynamics position it to develop and
commercialize a range of cardiac diagnostic and patient monitoring products. The
Company's Basis Cardiac Output Monitor and RealFlow Cardiac Output Probe are
medical devices designed to work together to provide real time, beat-to-beat,
cardiac output monitoring in surgical and post-operative, intensive care unit
settings.
During 1999, the Company continued development of its Basis System, focusing on
product refinement, upgrading its manufacturing facility, transitioning from
prototype production to commercial production ability, and completing an equity
financing to provide capital for the Company's development and commercialization
efforts.
The Company is currently conducting product evaluations at adult and pediatric
clinical sites in the U.S. prior to an intended commercial release of the Basis
System. These product evaluations were originally commenced in October 1999 at
one clinical site in the U.S. Although the early results from these evaluations
indicated that the product performed well in a number of respects, the results
also indicated the need for modifications to the Basis System in order to meet
the Company's product performance expectations. The Company anticipates that its
product evaluations and any further modifications necessary will continue in the
first half of 2000 and intends to commercialize the Basis System following their
successful completion. These forward-looking statements will be impacted
however, by the Company's ability to timely and successfully complete product
development and testing, commence manufacture of commercial quantities,
establish adequate sales, marketing and customer support activities, obtaining
additional financial resources and the outcome of end-user product evaluations.
As of the date of this Report, the Company believes that it has made significant
progress toward completing and testing the identified product refinements.
During 1999, the Company also completed the distribution of Cardia, Inc. to the
Company's shareholders. The distribution was effective on February 11, 1999 to
shareholders of record on January 25, 1999. The completion of the Cardia
distribution allows the Company to focus all of its resources on completing the
development of its cardiac output monitoring system. Results of operations of
the transcatether closure have been presented as discontinued operations for
each year presented. Certain selling and administrative expenses were allocated
between continuing and discontinued operations during 1998 and 1997.
15
<PAGE>
RESULTS OF CONTINUING OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
General and administrative expenses increased $353,000 to $935,000 in 1999 from
$582,000 in 1998. The increase in 1999 reflects increased compensation related
costs of approximately $133,000 due to higher compensation levels and additional
personnel hired in anticipation of product launch. The balance of the
year-to-year increase relates to an allocation of personnel and other costs to
discontinued operations in 1998.
Selling costs decreased $271,000 from $364,000 in 1998 to $93,000 in 1999. The
Company had minimal sales and marketing activity in 1999. Of the $93,000 total
sales and marketing costs for 1999, 32% was incurred in the first quarter and
was related to marketing costs absorbed prior to the spin-off of the
transcatheter business. The remaining 68% was incurred primarily in the fourth
quarter of 1999 as the Company started adding marketing personnel and conducting
marketing research and product evaluation activities related to the Basis
System.
Research and development expenses increased $664,000 from $805,000 in 1998 to
$1,469,000 in 1999 due to increased engineering, operations and quality
personnel costs, mammal testing and manufacturing pilot costs in 1999 over 1998.
Additionally, some 1998 costs, primarily related to manufacturing and quality
personnel were allocated to discontinued operations in 1998.
The Company focused all research and development efforts during 1999 to the
Company's Basis Cardiac Output Monitoring System and RealFlow Probe. Although
the Company believes the development of the Basis Cardiac Output Monitoring
System is nearly complete, the Company believes that further refinements will be
made as the Company receives feedback from its mammal studies and users of the
Basis System. Initial results from the Company's product evaluations conducted
in late 1999 indicated that the Basis System functioned well in many respects,
but failed to meet the Company's expectations for performance and reliability on
a clinical basis. Additional product evaluations were delayed until the
necessary modifications to the product could be made to address the clinical
performance issues. The Company intends to participate in additional clinical
validations during 2000 to continue to broaden the Company's market knowledge
and data regarding the usefulness, cost effectiveness and clinical application
of its products.
Operating costs are expected to continue to increase in 2000 as the Company adds
personnel, equipment and other costs to complete the development and bring to
market its Basis Cardiac Output Monitoring System. This forward looking
statement will be influenced primarily by the Company's estimate of time and
resources needed to complete development (including the necessary modifications
discussed above), the Company's ability to establish manufacturing and quality
systems necessary to produce the product, success of the Company's field product
evaluations and market acceptance of the cardiac output monitoring system.
Other income, primarily interest, decreased $137,000 from $188,000 1998 to
$51,000 in 1999. The decrease is due to lower average investment balances in
1999 than in 1998.
16
<PAGE>
The 1999 net loss was $2,446,000, or $0.52 per share, compared to a net loss of
$1,564,000, or $0.36 per share in 1998, excluding a loss of $1,838,000, or $.43
per share, from discontinued operations.
YEARS ENDED DECEMBER 31, 1998 AND 1997
The Company had no revenue in 1998 as compared to $65,000 in 1997. In 1996,
after a number of years of research and development, the Company decided to
focus its efforts on a new intra-operative cardiac output system using a
disposable ultrasound probe applied directly to the ascending aorta. Sales of an
earlier version of this device were ceased in 1997 until the completion of this
next generation product.
Selling, general and administrative costs decreased $115,000 in 1998 from
$1,062,000 to $947,000. Lower selling costs accounted for $24,000 of the
decrease due to the reduction in marketing activities in 1998 as the Company
focused on research and development. Reduced general and administrative costs of
$91,000 accounted for the balance of the year-to-year decrease, primarily due to
costs allocated to discontinued operations.
Research and development decreased $604,000 from $1,409,000 in 1997 to $805,000
in 1998. During 1998, fewer personnel and other resources were dedicated to the
cardiac output development effort as compared to the 1997 activity. The
Company's research and development activities were split between its continuing
operations, cardiac output monitoring, and the transcatether closure business,
which comprises discontinued operations.
Other income, primarily interest, was $188,000 in 1998 as compared to $303,000
in 1997 a decrease of 115,000. The decrease is the result of fewer funds
available for investment.
The 1998 loss from continuing operations was $1,564,000, or $0.36 per share, as
compared to a $2,135,000 loss, or $0.51 per share, in 1997. The loss from
discontinued operations was $1,838,000, or $0.43 per share, in 1998 as compared
to the 1997 loss from discontinued operations of $458,000, or $0.11 per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash was $1,900,000 at December 31, 1999 as compared to $2,400,000 of cash, cash
equivalents and marketable securities at December 31, 1998, a decrease of
$500,000. In 1999, the Company completed a private equity financing resulting in
net proceeds of $2.1 million. The cash inflow from the equity financing was more
than offset by the year-to-date loss from operations and cash used for leasehold
improvements and equipment purchases.
Continuing operating activities in 1999 used cash of $2,095,000 as compared to
$1,339,000 used during 1998. Discontinued operations used cash of $121,000
during 1999 as compared to $909,000 in the prior year.
17
<PAGE>
Investing activities provided cash of $116,000 in 1999 as compared to $3,013,000
in 1998. In 1999, maturing short-term investments of $500,000 added cash and
were offset by $400,000 of cash outflow for leasehold improvements, equipment
purchases, and patent and trademark costs. The 1998 period had $3,100,000 of
short-term investments maturing, offset by $55,000 of equipment purchases.
Discontinued operations used $11,000 and $30,000 in the 1999 and 1998 periods,
respectively.
The Company needs approximately $500,000 for capital expenditures in the
upcoming year. These expenditures will expand the manufacturing and information
technology capabilities of the Company and directly support the
commercialization of the Company's Basis Cardiac Output Monitoring System. The
Company has lease financing for some of the capital expenditures. The lease will
be secured by the equipment and requires the Company to issue the lenders a
warrant to purchase the Company's common stock. Additional financing will need
to be secured to support the balance of the capital spending required.
Financing activities provided $2,140,000 of cash, resulting primarily from the
issuance of Common Stock.
Based on its expected rate of spending the Company believes that its existing
cash and cash equivalents will enable the Company to meet its cash requirements
until June 30, 2000. See Item 1A: "Important Factors" contained in Exhibit 99.1
of this Report and Note 2 to the Company's financial statements included on Page
30 of this Report regarding the Company's ability to continue as a going
concern. As a result, the Company will need additional financing in order to
successfully meet its current product development, market commercialization
plans for its Basis Cardiac Output Monitoring System and capital expenditure
needs. This forward-looking statement will be influenced by the Company's
ability to meet its operational and development plans, as well as unanticipated
changes to commit cash primarily for additional personnel and capital
expenditures. The Company continues to pursue alternatives for obtaining
additional working capital.
INFLATION
Management believes inflation has not had a material effect on the Company's
operations or on its financial condition.
18
<PAGE>
NEW ACCOUNTING STANDARDS
Effective January 1, 1999, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income, which
establishes standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) in the financial statements.
The Company currently has no items that would be included as a component of
other comprehensive income.
Other than the above statement, no other new accounting pronouncements have been
issued that will have an impact on the Company's financial statements.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements can be found on pages 23 to 35 of this
Report. The index to such items is included on page 21 in Item 14(a)(1).
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On October 18, 1999, the Company appointed Ernst & Young LLP as the Company's
independent auditors and replaced PricewaterhouseCoopers LLP. The report of
PricewaterhouseCoopers on the financial statements of the Company for the year
ended December 31, 1998 was unqualified and did not contain an adverse opinion,
any disclaimers, qualification or modification as to uncertainty, audit scope,
or accounting principles. In connection with the audits of the financial
statements of the Company for the two most recent fiscal years ending December
31, 1998, and each subsequent interim period preceding October 18, 1999, there
were no disagreements or reportable events. The decision to change firms was
approved by the Company's Board of Directors.
19
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Registrant
The information under the caption "Election of Directors" in the Registrant's
2000 Proxy Statement is incorporated by reference herein.
(b) Executive Officers of the Registrant
Information concerning Executive Officers of the Company is included in this
Report under Item 4A, "Executive Officers of the Registrant."
(c) Compliance with Section 16(a) of the Exchange Act
The Information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's 2000 Proxy Statement is incorporated by
reference herein.
ITEM 11: EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" and "Other
Information Regarding the Board - Directors' Compensation" in the Registrant's
2000 Proxy Statement is incorporated by reference herein.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Principal Shareholders
and Management" in the Registrant's 2000 Proxy Statement is incorporated by
reference herein.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
20
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report:
(1) Financial Statements
The following financial statements are included hereinafter contained
on pages 23 to 35 in this Annual Report on Form 10-K:
Report of Independent Auditors
Report of Independent Accountants
Balance Sheets as of December 31, 1999 and 1998
Statements of Operations for the Years Ended December 31, 1999, 1998
and 1997
Statements of Shareholders' Equity for the Years Ended December 31,
1999, 1998 and 1997
Statements of Cash Flows for the Years Ended December 31, 1999, 1998
and 1997
Notes to Financial Statements
(2) Financial Statement Schedules
All information required by this section that is applicable to the
Company is included in the Financial Statements or Notes thereto.
(3) Exhibits:
The exhibits to this Annual Report on Form 10-K are listed in the
Exhibit Index hereinafter contained on page E-1 of this Annual Report
on Form 10-K. The Company will furnish a copy of any exhibit to a
shareholder who requests a copy in writing upon payment to the Company
of a fee of $5.00 per exhibit. Requests should be sent to: Camille M.
Meyer, Vice-President, Finance and Chief Financial Officer; Applied
Biometrics, Inc.; 501 East Highway 13, Suite 108; Burnsville,
Minnesota 55337.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Report
pursuant to Item 14(c):
A. Applied Biometrics 1996 Stock Option Plan, amended July 2, 1999
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1999).
B. Applied Biometrics Amended 1994 Stock Option Plan, amended July
2, 1999 (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the period ended June
30, 1999).
C. Applied Biometrics 1998 Stock Plan, amended June 12, 1998
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1999).
21
<PAGE>
D. Employment letter dated February 19, 1999, between the Company
and Andrew M. Mr. Weiss (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1999).
(b) Reports on Form 8-K
During the quarter ended December 31, 1999, the Company filed a Current Report
on Form 8-K, dated October 18, 1999, reporting a change in the Company's
certifying accountants under Item 4.
(c) Exhibits
The response to this portion of Item 14 is included as a separate section of
this Report. See the Exhibit Index on page E-1 of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is included as a separate section of
this Report.
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS
APPLIED BIOMETRICS, INC.
We have audited the accompanying balance sheet of Applied Biometrics, Inc. as of
December 31, 1999, and the related statements of operations, shareholders'
equity, and cash flows for the year ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the financial position of Applied Biometrics, Inc. at
December 31, 1999, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company has incurred recurring operating losses and does not have sufficient
liquidity to continue operations for at least the next twelve months. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
Ernst & Young LLP
Minneapolis, Minnesota
January 14, 2000
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF APPLIED BIOMETRICS, INC.:
In our opinion, the consolidated balance sheet as of December 31, 1998 and the
related consolidated statements of operations, of shareholders' equity and of
cash flows for each of the two years in the period ended December 31, 1998
present fairly, in all material respects, the financial position, results of
operations and cash flows of Applied Biometrics, Inc. and its subsidiary at
December 31, 1998 and for each of the two years in the period ended December 31,
1998, in conformity with accounting principles generally accepted in the United
States. 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 of these statements in
accordance with auditing standards generally accepted in the United States,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Applied Biometrics, Inc. for any period
subsequent to December 31, 1998.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 18, 1999
24
<PAGE>
APPLIED BIOMETRICS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 1,910,356 $ 1,869,413
Marketable securities, short-term ................................ -- 500,000
Inventories, net ................................................. 167,109 175,078
Prepaid expenses and other current assets ........................ 90,577 37,833
------------ ------------
Total current assets ......................................... 2,168,042 2,582,324
Equipment and leasehold improvements, net ........................ 550,675 427,086
Patents and other intangible assets, net ......................... 99,437 75,074
Other assets ..................................................... 9,585 9,585
Net assets of discontinued operations ............................ -- 202,642
------------ ------------
TOTAL ASSETS ................................................. $ 2,827,739 $ 3,296,711
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 95,255 $ 56,186
Accrued expenses and short-term debt obligations ................. 195,849 87,200
Current maturities of capital lease obligations .................. 8,333 --
------------ ------------
Total current liabilities .................................... 299,437 143,386
Capital lease obligations ........................................ 11,677 --
Liability for pending issuance of common stock ................... -- 1,001,761
------------ ------------
Total liabilities ............................................ 311,114 1,145,147
------------ ------------
Shareholders' equity:
Undesignated stock: authorized 5,000,000 shares of $.01 par value; -- --
none issued or outstanding at December 31, 1999 and 1998 ..... -- --
Common stock: authorized 20,000,000 shares of $.01 par value;
issued and outstanding, 5,299,004 and 4,337,117
at December 31, 1999 and 1998, respectively .................. 52,990 43,371
Additional paid-in capital ....................................... 23,362,233 20,560,849
Accumulated deficit .............................................. (20,898,598) (18,452,656)
------------ ------------
Total shareholders' equity ................................... 2,516,625 2,151,564
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................... $ 2,827,739 $ 3,296,711
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
APPLIED BIOMETRICS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net revenue ............................................... $ -- $ -- $ 64,940
Cost of revenue ........................................... -- -- 32,175
------------ ------------ ------------
Gross margin .............................................. -- -- 32,765
Operating expenses:
Selling, general and administrative ....................... 1,028,065 946,721 1,061,579
Research and development .................................. 1,469,001 805,459 1,409,280
------------ ------------ ------------
Operating loss ............................................ (2,497,066) (1,752,180) (2,438,094)
Other income, net ......................................... 51,124 188,189 303,490
------------ ------------ ------------
Loss from continuing operations ........................... (2,445,942) (1,563,991) (2,134,604)
Discontinued operations:
Loss from operations of discontinued business ............. -- (1,838,147) (457,866)
------------ ------------ ------------
Net loss .................................................. $ (2,445,942) $ (3,402,138) $ (2,592,470)
============ ============ ============
Basic and diluted loss per share:
Continuing operations ..................................... $ (0.52) $ (0.36) $ (0.51)
Discontinued operations ................................... -- (0.43) (0.11)
------------ ------------ ------------
Net loss .................................................. $ (0.52) $ (0.79) $ (0.62)
============ ============ ============
Weighted average common shares outstanding ................ 4,659,300 4,312,077 4,186,896
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
APPLIED BIOMETRICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $ (2,445,942) $ (3,402,138) $ (2,592,470)
Net loss from discontinued operations ............................. -- (1,838,147) (457,866)
------------ ------------ ------------
Loss from continuing operations ................................... (2,445,942) (1,563,991) (2,134,604)
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization of capital leases ................... 191,391 199,162 179,470
Amortization of patents and other intangible assets ............... 25,012 25,051 9,182
Loss on disposal of assets ........................................ 31,776 -- --
Changes in operating assets and liabilities:
Accounts receivable ............................................... -- -- 19,417
Inventories ....................................................... 7,969 (24,585) 71,983
Prepaid expenses and other current assets ......................... (52,744) 48,333 140,499
Accounts payable .................................................. 39,069 (19,856) (50,215)
Accrued expenses .................................................. 108,649 (3,479) 13,746
------------ ------------ ------------
Net cash used in continuing operations ........................ (2,094,820) (1,339,365) (1,750,522)
Net cash used in discontinued operations ...................... (120,548) (908,616) (16,409)
------------ ------------ ------------
Net cash used in operating activities ......................... (2,215,368) (2,247,981) (1,766,931)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements ............................ (323,148) (54,874) (222,446)
Investment in patents and trademarks .............................. (49,375) -- --
Investments in marketable securities .............................. -- (500,000) (2,700,524)
Proceeds upon sale and maturity of marketable securities .......... 500,000 3,598,507 4,734,808
Discontinued operations, net ...................................... (10,981) (30,412) (31,457)
------------ ------------ ------------
Net cash provided by investing activities ...................... 116,496 3,013,221 1,780,381
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement of Common Stock ................... 2,067,562 -- --
Proceeds related to exercise of stock options
and warrants .................................................. 75,851 282,500 66,562
Repayment of capital lease obligations ............................ (3,598) -- --
------------ ------------ ------------
Net cash provided by financing activities ..................... 2,139,814 282,500 66,562
------------ ------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS ................................................... 40,943 1,047,740 80,012
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR ....................................................... 1,869,413 821,673 741,661
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR .......................... $ 1,910,356 $ 1,869,413 $ 821,673
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
APPLIED BIOMETRICS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT
------ --------- ------- -------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 ................ 4,168,987 $ 41,690 $ 19,703,468 $ (12,458,048)
Shares issued for purchase of
transcatheter closure product line ....... 85,000 850 509,150 --
Stock option activity ....................... 22,130 221 66,341 --
1997 Net loss ............................... -- -- -- (2,592,470)
------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1997 ................ 4,276,117 42,761 20,278,959 (15,050,518)
Stock option activity ....................... 61,000 610 281,890 --
1998 Net loss ............................... -- -- -- (3,402,138)
------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 ................ 4,337,117 43,371 20,560,849 (18,452,656)
Stock option activity ....................... 146,887 1,469 1,076,143 --
Issuance of stock, net of offering
costs .................................... 815,000 8,150 2,059,412 --
Distribution of the net assets of
Cardia, Inc. ............................. -- -- (334,171) --
1999 Net loss ............................... -- -- -- (2,445,942)
------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1999 ................ 5,299,004 $ 52,990 $ 23,362,233 $ (20,898,598)
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
APPLIED BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS DESCRIPTION:
Applied Biometrics, Inc. ("Applied Biometrics" or the "Company") is a medical
device company engaged in the research, development, manufacture and marketing
of advanced cardio-vascular and hemodynamic diagnostic and monitoring systems.
The Company believes that its core competencies in ultrasound transducer
technology, signal processing, cardiac anatomy, pathology and hemodynamics
position it to develop and commercialize a range of cardiac diagnostic and
patient monitoring products. The Company is currently completing the development
and testing of an innovative, ultrasound-based cardiac output monitoring system
for cardiac surgery applications. The Company's Basis(TM) Cardiac Output Monitor
and RealFlow(TM) Cardiac Output Probe (the "Basis System") are designed to
provide real time, beat-to-beat, cardiac output monitoring in surgical and
post-operative intensive care settings.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepting
accounting principles 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 periods.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of cash and highly liquid investments
purchased with an original maturity of three months or less. Cash at December
31, 1999 was primarily invested in a money market fund.
MARKETABLE SECURITIES:
Investments having original maturities in excess of three months are classified
as marketable securities. Investments are classified as short-term or long-term
in the balance sheet based on their maturity date. At December 31, 1998, all of
the Company's marketable securities consisted of U.S. Government or U.S.
Government-backed obligations and were classified as available-for-sale.
Available-for-sale investments are recorded at market value with net unrealized
holding gains and losses included as a separate component of shareholders'
equity. At December 31, 1998, the market value of the investments approximated
cost.
INVENTORIES:
Inventories are comprised of component parts and are valued at the lower of
first-in, first-out (FIFO) cost or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are calculated using the straight-line method over the estimated
useful lives of the related assets. Furniture, fixtures, computer and
manufacturing equipment are depreciated over a 5-year life. Leasehold
improvements are amortized over the life of the related facility lease or the
asset whichever is shorter. Major replacements and improvements are capitalized
and maintenance and repairs that do not improve or extend the useful lives of
the respective assets are charged to operations. The asset and related
accumulated depreciation or amortization accounts are adjusted for asset
retirements and disposals with the resulting gain or loss, if any, recorded in
"Other income, net" on the Statements of Operations at the time of disposal.
29
<PAGE>
APPLIED BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
LONG-LIVED ASSETS:
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. Impairment losses are recorded whenever
indicators of impairment are present.
PATENTS AND OTHER INTANGIBLE ASSETS:
Patents and other intangible assets are recorded at cost and are amortized using
the straight-line method over their estimated useful lives ranging from ten to
fifteen years. The Company evaluates the net realizability of intangibles on an
ongoing basis, based on current and anticipated undiscounted cash flows.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
STOCK-BASED COMPENSATION:
The Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standard ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
which disclosures are presented in Note 7 "Shareholders' Equity". The Company
continues to account for employee stock-based compensation using the intrinsic
value method as prescribed under Accounting Principles Board Opinion ("APB") No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations.
INCOME TAXES:
The Company accounts for income taxes using the asset and liability method. The
asset and liability method provides that deferred tax assets and liabilities are
recorded based on the differences between the tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes
("temporary differences"). Temporary differences relate primarily to operating
and capital loss carryforwards and research and experimentation tax credit
carryforwards. The Company has established a valuation allowance against its
deferred tax assets as the relizability of such deferred tax assets is
uncertain.
LOSS PER COMMON SHARE:
Basic earnings per share ("EPS") is computed based on the weighted average
number of common shares outstanding, while diluted EPS is computed based on the
weighted average number of common shares outstanding adjusted by the weighted
average number of additional shares that would have been outstanding had the
potential dilutive common shares been issued. Potential dilutive shares of
common stock include stock options and other stock-based awards granted under
the Company's stock-based compensation plans. Diluted earnings per share is not
separately presented as the effect of outstanding options and warrants is
antidilutive.
(2) GOING CONCERN:
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has incurred operating losses and has not generated positive cash flow
from operations. As a result, the Company needs additional financing to continue
as a going concern. The Company continues to explore possible financing
alternatives.
Because of uncertainties regarding the achievability of additional financing, no
assurance can be given as to the Company's ability to continue in existence. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amount
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.
30
<PAGE>
APPLIED BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
(3) DISCONTINUED OPERATIONS:
The Company's Board of Directors approved a plan in December 1998 to distribute
to the shareholders of the Company its transcatheter closure business. On
February 11, 1999, the Company completed the spin-off distribution of Cardia,
Inc. ("Cardia") with Cardia thereafter operating as an independent company with
its own publicly traded securities. All Applied Biometrics shareholders of
record received one share of Cardia common stock for every 11.563 shares of
Applied Biometrics common stock held, comprising 75% of Cardia's common stock.
The spin-off distribution was recorded by reducing shareholders' equity by
$334,000, which represents the carrying value of Cardia's net assets. Cardia's
1999 operating results through the distribution date were breakeven. No gain or
loss was recorded on the distribution. The Company's financial statements report
the operating results of the transcatheter closure business as discontinued
operations. Costs of $1,001,761 were incurred as a result of amendments to
previously issued stock options to employees departing the Company for Cardia.
Loss from operations of the transcatheter closure business for 1997 included
results from the date of acquisition of the underlying technology through
December 31, 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
DISCONTINUED OPERATIONS
Net revenue .............................................. $ 167,240 $ --
Loss from operations of discontinued business ............ (836,386) (457,866)
Costs related to spin-off of discontinued business ....... (1,001,761) --
Loss from discontinued operations ........................ $ (1,838,147) $ (457,866)
NET ASSETS OF DISCONTINUED OPERATIONS
Accounts receivable ...................................... $ 92,917 $ --
Inventories .............................................. 50,888 --
Prepaid expenses and other current assets ................ 11,785 --
Equipment, net ........................................... 27,371 --
Intangible assets, net ................................... 83,332 100,000
Accounts payable ......................................... (63,651) --
------------ ------------
Net assets of discontinued operations ................. $ 202,642 $ 100,000
============ ============
</TABLE>
31
<PAGE>
APPLIED BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
(4) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET:
Furniture and fixtures .................................................... $ 106,484 $ 83,984
Machinery and equipment ................................................... 919,239 894,834
Leasehold improvements .................................................... 266,784 70,773
Computer equipment under capital leases ................................... 23,608 --
Less accumulated depreciation and leasehold improvement amortization ...... (763,079) (622,505)
Less accumulated amortization of capital leases ........................... (2,361) --
------------ ------------
$ 550,675 $ 427,086
============ ============
PATENTS AND OTHER INTANGIBLE ASSETS, NET:
Patents ................................................................... $ 203,803 $ 156,564
Other intangibles ......................................................... 2,136 --
Less accumulated amortization ............................................. (106,502) (81,490)
------------ ------------
$ 99,437 $ 75,074
============ ============
ACCRUED EXPENSES AND SHORT-TERM OBLIGATIONS:
Payroll, other employee benefits and related taxes ........................ $ 90,486 $ 53,824
Other accrued expenses .................................................... 105,363 33,376
------------ ------------
$ 195,849 $ 87,200
============ ============
</TABLE>
(5) INCOME TAXES:
The Company has approximately $20,000,000 of net operating loss carryforwards
that begin to expire in 2003 and $450,000 of research and experimentation
credits. As a result of limitations imposed under ss.382 and ss.383 of the
Internal Revenue Code of 1986, both the annual amount and timing of the
utilization of these carryforwards will be limited. As the Company issues
additional common stock, the Company's carryforwards may be subject to further
limitation. A valuation allowance has been established that offsets the
Company's entire net deferred tax asset, as the realization of the deferred tax
asset is uncertain.
(6) COMMITMENTS:
OPERATING LEASES:
The Company is committed under a non-cancelable operating lease that expires
March 31, 2002 for the rental of its office and production facilities in
Burnsville, MN. In addition to base rent charges, the Company also pays
apportioned real estate taxes and common costs on its leased facility. Total
facility rent expense, including real estate taxes and common costs, was
$118,000, $102,000 and $98,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
As of December 31, 1999, future minimum lease payments, excluding real estate
taxes and common costs, due under this non-cancelable operating lease are as
follows:
YEAR ENDING DECEMBER 31 AMOUNT
----------------------- ------
2000........................... $ 80,000
2001........................... 82,000
2002........................... 21,000
32
<PAGE>
APPLIED BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
(7) SHAREHOLDERS' EQUITY:
AUTHORIZED SHARES AND DESIGNATION OF AN UNDESIGNATED CLASS OF STOCK:
The Company's authorized capital stock consists of 20,000,000 shares of common
stock and 5,000,000 shares of undesignated stock.
WARRANTS:
During 1999, in connection with a private offering of its common shares, the
Company issued the underwriters warrants to purchase 81,500 shares of common
stock at an exercise price of $3.000 per share. These warrants became
exercisable in September 1999 and expire in September 2009.
STOCK-BASED COMPENSATION:
The Company has various stock plans. Under these plans, the Company is
authorized to grant up to 1,400,000 shares of its Common Stock for issuance and
at December 31, 1999, 38,932 shares remained available for grant.
STOCK OPTIONS:
The exercise price of each stock option generally equals 100% of the market
price of the Company's stock on the date of grant and has a maximum term of up
to ten years. A summary of the status of the Company's stock options for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ..... 389,167 $ 9.68 628,667 $ 7.15 691,967 $ 7.41
Granted .............................. 788,750 5.23 336,370 7.90 69,000 9.82
Exercised ............................ (21,667) 3.46 (61,000) 4.63 (22,130) 4.63
Canceled ............................. (296,100) 9.79 (514,870) 6.64 (110,170) 10.97
-------- -------- --------
Outstanding at end of year ........... 860,150 5.72 389,167 9.68 628,667 7.15
======== ======== ========
Options exercisable at end of year ... 469,733 5.00 239,867 9.54 505,166 6.20
======== ======== ========
</TABLE>
33
<PAGE>
APPLIED BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER OF AVERAGE REMAINING NUMBER OF AVERAGE
OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE
RANGE OF PRICES OUTSTANDING PRICE LIFE (YEARS) EXERCISABLE PRICE
--------------- ----------- ----- ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
$2.656 - $ 3.125 279,500 $ 2.660 5.0 279,500 $ 2.660
4.250 - 5.500 184,750 4.817 9.5 10,000 4.500
6.560 - 8.500 341,500 7.896 8.5 125,833 7.743
9.000 - 12.625 54,400 10.800 5.5 54,400 10.800
--------- ---------
$2.656 - $12.625 860,150 5.717 7.4 469,733 5.004
========= =========
</TABLE>
SFAS NO. 123 DISCLOSURE:
For the years ended December 31, 1999, 1998 and 1997 the Company did not record
any compensation expense for stock-based compensation awards.
Had compensation expense for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with SFAS No.
123, the Company's net loss and loss per share would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss ....................................As Reported $ (2,445,942) $ (3,402,138) $ (2,592,470)
...............................................Pro Forma (3,388,707) (4,228,043) (3,236,790)
Basic and diluted loss per share ............As Reported (0.52) (0.79) (0.62)
...............................................Pro Forma (0.73) (0.98) (0.77)
</TABLE>
The weighted average fair value per option granted during 1999, 1998 and 1997
was $ 2.41, $ 5.08, and $ 5.33, respectively. The weighted average fair value
was calculated by using the fair value of each option on the date of grant. The
fair value of the options was estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected option term ....................... 3 years 6 years 6 years
Expected volatility factor.................. 63% 59% 49%
Expected dividend yield .................... 0.0% 0.0% 0.0%
Risk-free interest rate .................... 5.2% 5.7% 5.7%
</TABLE>
34
<PAGE>
APPLIED BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
(8) EMPLOYEE BENEFIT PLAN:
SALARY REDUCTION PLAN:
During 1999, the Company established a salary reduction plans for all full-time
employees, which qualify under Section 401(k) of the Internal Revenue Code.
Employee contributions are limited to 20% of their annual compensation, subject
to annual limitations. At its discretion, the Company may make matching
contributions equal to a percentage of the salary reduction or other
discretionary amount. The Company has made no contributions to the plan during
1999.
35
<PAGE>
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.
APPLIED BIOMETRICS, INC.
By /s/ Andrew M. Weiss
-----------------------
Andrew M. Weiss
President and Chief Executive Officer
Dated: March 20, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 20, 2000 by the following persons on behalf of
the Registrant and in the capacities indicated.
Signature Title
- --------- -----
/s/ Andrew M. Weiss President, Chief Executive Officer and
- -------------------------------- Director (Principal Executive Officer)
Andrew M. Weiss
/s/ Camille M. Meyer Vice-President, Finance and Chief Financial
- -------------------------------- Officer (Principal Financial and Accounting
Camille M. Meyer Officer)
/s/ Jeffrey Green Director
- --------------------------------
Jeffrey Green
/s/ Demetre Nicoloff, M.D., PhD. Director
- --------------------------------
Demetre Nicoloff, M.D., PhD.
/s/ Norman Dann Director
- --------------------------------
Norman Dann
36
<PAGE>
APPLIED BIOMETRICS, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation of the Company, as amended,
(filed herewith electronically).
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form SB-2,
Commission File No. 33-63754C).
4.1 Restated Articles of Incorporation of the Company, as amended
(see Exhibit 3.1).
4.2 Bylaws of the Company (see Exhibit 3.2).
4.3 Form of common stock Certificate of the Company (incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form SB-2, Commission File No. 33-63754C).
10.1 Lease dated February 8, 1994 by and between the Company and
American Industrial Properties REIT (incorporated by reference
to Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993.
10.2 Amendment No. 1 to Lease Agreement dated December 31, 1998
between the Company and The Trustees under the Will and of the
Estate of James Campbell, Deceased (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1999).
10.3 Applied Biometrics 1996 Stock Plan, amended July 2, 1999
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1999).
10.4 Applied Biometrics Amended 1994 Stock Plan, amended July 2,
1999 (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1999).
10.5 Applied Biometrics 1998 Stock Plan, amended June 12, 1998
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1999).
10.6 Employment letter dated February 19, 1999, between the Company
and Andrew M. Weiss (incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1999).
23.1 Consent of Ernst & Young LLP (filed herewith electronically).
23.2 Consent of PricewaterhouseCoopers LLP (filed herewith
electronically).
99.1 Important Factors (filed herewith electronically).
27.1 Financial Data Schedule for the year ended December 31, 1999
(filed herewith electronically).
E 1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.1
<SEQUENCE>2
<DESCRIPTION>RESTATED ARTICLES OF INCORPORATION
<TEXT>
Exhibit 3.1
RESTATED ARTICLES OF INCORPORATION
OF
APPLIED BIOMETRICS, INC.
Pursuant to the provisions of Chapter 302A of the Minnesota Statutes, known as
the Minnesota Business Corporation Act, and amendments thereto, the following
Restated Articles of Incorporation are adopted and shall supersede and take the
place of the existing Articles of Incorporation and all amendments thereto.
ARTICLE 1 - NAME
1.1) The name of the corporation shall be APPLIED BIOMETRICS, INC.
ARTICLE 2 - REGISTRATION OFFICE
2.1) The location and post office address of the registered office of
the corporation shall be 501 East Highway 13, Suite 108, Burnsville, MN 55337.
ARTICLE 3 - PURPOSE
3.1) The corporation is organized for general business purposes.
ARTICLE 4 - DURATION
4.1) The duration of the corporation shall be perpetual.
ARTICLE 5 - CAPITAL STOCK
5.1) The aggregate number of shares that the Corporation has authority
to issue shall be Twenty-Five Million (25,000,000) shares, which shall consist
of Twenty Million (20,000,000) shares that shall be designated as common shares,
$.01 par value and Five Million (5,000,000) of undesignated shares. The Board of
Directors of the Corporation is authorized to establish from the undesignated
shares by resolution adopted and filed in the manner provided by law, one or
more classes or series of shares, to designate each class or series, and to fix
the relative powers, qualifications, restrictions, rights and preferences of
each such class or series, including, without limitation, the right to create
voting, dividend and liquidation rights and preferences greater than those of
common stock. The Board of Directors may designate such shares as shares of
Preferred Stock or may designated such shares as additional common shares.
5.2) Shareholders shall not have any preemptive rights to subscribe for
or purchase any shares of the Capital Stock of the corporation. The Board of
Directors may, at any time and from time to time, issue and sell for such
consideration as may be permitted by law, any or all of the authorized shares of
the Capital Stock of the corporation not then issued.
5.3) The Board of Directors may issue any or all shares of Capital
Stock of the corporation authorized by these Articles and not already issued,
including any shares previously issued and reacquired by the corporation,
provided such shares have not been retired. Upon approval by the Board of
Directors, shares may be issued for any consideration or for no consideration to
effectuate share conversions, dividends or splits, including reverse splits.
1
<PAGE>
Exhibit 3.1
The Board of Directors may determine the value of nonmonetary consideration
received for shares.
5.4) The Board of Directors may issue rights to purchase shares of
Capital Stock of the corporation, and shall fix the terms, provisions and
conditions of such rights to purchase, including the conversion basis and the
price at which shares may be purchased or subscribed for. Shares to be issuable
upon the exercise of all outstanding rights to purchase, including such rights
to be issued, must be authorized by these Articles and not already issued.
ARTICLE 6 - DIRECTORS
6.1) The Board of Directors shall have the power and authority to take
any action required to permitted of it by law or by these Articles. The Board
shall take action by the affirmative vote of a majority of directors present at
a duly held meeting, except where law requires the affirmative vote of a larger
proportion or number.
6.2) Any action required or permitted to be taken at a Board meeting
may be taken by written action signed by a majority of directors. If the action
must also be approved by the shareholders, then the action must be taken by
written action of all the directors.
6.3) A director of the corporation shall not be personally liable to
the corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for (i) liability based on a breach of the duty of
loyalty to the corporation or the shareholders; (ii) liability for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law; (iii) liability under Minnesota Statutes Section 302A.559 or
80A.23; (iv) liability for any transaction from which the director derived an
improper personal benefit; or (v) liability for any act or omission occurring
prior to the date when these Articles of Incorporation become effective. If
Chapter 302A, the Minnesota Business Corporation Act, is hereafter amended to
authorize the further elimination or limitation of the liability of directors,
then the liability of a director of the corporation in addition to the
limitation on personal liability provided herein, shall be limited to the
fullest extent permitted by the amended Chapter 302A, the Minnesota Business
Corporation Act. Any repeal or modification of this article by the shareholders
of the corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the corporation at the
time of such repeal or modification.
ARTICLE 7 - POWERS
7.1) The corporation shall have the unlimited power to engage in and to
do any act necessary or incidental to the carrying out of its purposes, together
with the power to do or perform any acts consistent with or which may be implied
from the powers expressly conferred upon corporations by Minnesota Statutes,
Chapter 302A.
ARTICLE 8 - BYLAWS
8.1) The Board of Directors may adopt Bylaws which may contain any
provision relating to the management of the business or the regulation of the
affairs of the corporation not inconsistent with law or the Articles of
Incorporation. The power to adopt, amend or repeal the Bylaws shall be vested in
the Board.
ARTICLE 9 - SHAREHOLDERS
9.1) Actions which require shareholder approval shall be taken by the
affirmative vote of the holders of a majority of the voting power of the shares
present, except when Minnesota Statutes, Chapter 302A, requires a larger
proportion or number.
2
<PAGE>
Exhibit 3.1
9.2) The affirmative vote of the holders of a majority of the voting
power of the shares present shall be sufficient to amend these Articles of
Incorporation. All other shareholder actions shall require an affirmative vote
of the holders of a majority of the voting power of the shares present.
9.3) There shall be no cumulative voting by the holders of the Common
Shares.
3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>3
<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS
<TEXT>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-62117, 33-81486 and 333-04555) and in the Registration
Statement No. 333-42789 on Form S-3, of our report dated January 14, 2000, with
respect to the financial statements of Applied Biometrics, Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1999.
ERNST & YOUNG LLP
Minneapolis, Minnesota
March 17, 2000
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.2
<SEQUENCE>4
<DESCRIPTION>CONSENT OF INDEPENDENT ACCOUNTANTS
<TEXT>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-62117, 33-81486 and 333-04555) and in the
Registration Statement on Form S-3 (No. 333-42789), of our report dated March
18, 1999, with respect to the financial statements of Applied Biometrics, Inc.
included in the Annual Report on Form 10-K for the year ended December 31, 1999.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
March 15, 2000
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>5
<DESCRIPTION>IMPORTANT FACTORS
<TEXT>
Exhibit 99.1
IMPORTANT FACTORS
HISTORY OF LOSSES; ANTICIPATED FUTURE LOSSES; ABILITY TO CONTINUE AS A GOING
CONCERN
The Company has experienced continued and significant operating losses since its
inception in 1984 and has an accumulated deficit. The Company anticipates
continuing operating losses for the near future. The Company's ability to,
continue as a going concern or to ultimately generate revenues from operations
and achieve profitability depend upon a number of factors, including its ability
to successfully complete development work on and commercialize the Basis(TM)
Cardiac Output Monitoring System (the "Basis System") and the costs and related
timing of implementation of its marketing, sales and manufacturing activities.
There can be no assurance that the Company will be able to successfully
introduce the Basis System or that the Company will generate revenues or achieve
profitability at any time in the future.
DEPENDENCE ON AND NEED FOR FURTHER DEVELOPMENT OF THE BASIS CARDIAC OUTPUT
MONITORING SYSTEM
The Company's success depends upon the Basis System, which currently is its sole
product. Although product prototypes were found to perform consistently with the
Company's expectations in Company lab and mammal tests, early results from the
Company's product evaluations of the Basis System and RealFlow Probe indicated
the need for modifications in order to meet the Company's product performance
expectations. While the Company believes that it has made significant progress
completing these modifications, there can be no assurance that all necessary
modifications have been or can be timely and successfully developed. Any
inability to timely and successfully make necessary product modifications could
delay or prevent successful commercialization of the Basis System, which would
have a material, adverse effect on the Company's business, financial condition
and results of operations.
FAILURE OF PRIOR CARDIAC OUTPUT MONITORING SYSTEM
In the Company's early stages - from the years 1984 to 1994 - it developed and
marketed two ultrasound-based cardiac output devices: one that was integrated
into an endotrachial tube, and the other being a predecessor to the current
Basis System. Both products were sold or distributed in the 1990's in small
quantities. After a small commercialization effort, the Company ceased marketing
due to unreliable product performance caused by a variety of factors, including
inadequate probe sensitivity and signal processing, and hardware performance
constraints. Although management believes that the Basis System incorporates
design changes that address the shortcomings of the prior systems, there can be
no assurance that performance problems will not occur in clinical use of the
Basis System.
NEED FOR ADDITIONAL FINANCING
The Company expects that additional financing will be needed in the first half
of 2000 to fund its development and product commercialization plans. If the
Company's operational plans do not progress as anticipated, the Company's
ability to attract additional financing could be impaired. No assurance can be
given that the Company will be able to obtain any additional financing on
acceptable terms or at all, and failure to do so would have a material, adverse
effect on the Company's business, financial condition and results of operations.
UNCERTAINTY OF MARKET ACCEPTANCE
The commercial success of the Company's Basis System will require acceptance by
cardiac surgeons and other medical specialists. Such acceptance will depend, in
part, upon clinical validation results and the conclusion by these medical
professionals that the Basis System is accurate, reliable and effective and that
that Basis System offers enhanced functionality relative to current cardiac
output monitoring technologies. There can be no assurance that the Basis System
will provide clinical benefits considered superior by these professionals or
that a sufficient number of such professionals will use the Basis System for
commercial success to be achieved. Because the Basis System represents a
different method of clinical assessment and an improved product compared to the
Company's earlier development efforts that failed to achieve commercial success,
there may be greater reluctance to accept this product than would occur with
products using well-established technologies. Substantial efforts may need to be
devoted to
1
<PAGE>
Exhibit 99.1
educating the market to the Company's technologically different approach and the
improvements in the Basis System over the Company's prior cardiac output
monitoring systems. Failure of the Company's product to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.
LACK OF MANUFACTURING EXPERIENCE
The Company's current plans call for it to manufacture the Basis System
internally. The Company has only limited manufacturing experience and could
encounter difficulties in scaling up production. These problems may include
estimating optimal product volume and mix requirements, production yields,
controlling and anticipating product costs, quality control and assurance,
component supply and contending with shortages of qualified personnel. There can
be no assurance that manufacturing difficulties will not occur. Such
difficulties could have a material adverse effect on the Company.
LACK OF MARKETING EXPERIENCE
The Company has no experience in marketing the Basis System and no current sales
capabilities. There can be no assurance that the Company's marketing efforts
will result in commercial sales or that the Company will be able to develop an
effective sales force and distribution network without incurring substantial
delays or costs or at all. Failure to develop an effective direct sales
organization or an effective distribution network would have a material adverse
effect on the Company.
COMPETITION
Competition in the medical device industry in general and in the market for
cardiac output monitoring in particular is intense. Edwards Critical Care (a
division of Baxter Healthcare Corporation), Johnson and Johnson and Abbott
Critical Care currently dominate the cardiac output monitoring market. These
companies make and sell catheters, thermodilution cardiac monitors and
peripheral products used to measure cardiac output by the widely used
thermodilution method. While the Company believes its Basis System represents
significant improvements over existing products in the marketplace, the Company
must be able to effectively demonstrate the beneficial features of the Basis
System and must maintain competitive pricing in order to successfully sell its
products. Competition in the Company's market may result in pricing pressures
that may adversely affect product gross margins. The Company competes with the
companies listed above and other large companies, many of which have greater
resources and established operations. These competitors also have greater depth
in research and development, manufacturing and marketing and sales capabilities.
The ability of the Company to compete effectively will depend upon the
advantages and proprietary nature of the Basis System, on the Company's ability
to attain and maintain technological leadership and to generate sales. There can
be no assurance that the Company will be able to successfully compete against
its current or future competitors.
LIMITED HUMAN USE OF THE BASIS CARDIAC OUTPUT MONITORING SYSTEM
To date, the Company has completed extensive research, conducted lab and animal
testing and conducted limited human clinical use of the Basis System. Although
the Company believes that its research and testing provide support for the Basis
System's performance in humans, there can be no assurance that research and
animal testing alone will identify all the technical issues or potential
problems with use of the Basis System in humans in generally, or in any subset
of humans having differing anatomical structures or disease characteristics. The
Company began product evaluations of the Basis System and RealFlow Probe at one
clinical site in the U.S. Early results from these evaluations indicated the
need for modifications to the Basis System in order to meet the Company's
product performance expectations. While the Company believes that it has made
significant progress completing these modifications, there can be no assurance
that all necessary modifications can be timely and successfully developed. Any
failure of the Basis System to achieve acceptable results in future evaluations
could lead to delays in the introduction and market acceptance of the Basis
System. A delay in market introduction of the Basis System would have a material
adverse effect on the Company's business, financial condition and results of
operations.
2
<PAGE>
Exhibit 99.1
TECHNOLOGICAL OBSOLESCENCE; DEVELOPMENT OF NEW PRODUCTS
Rapid technological advances characterize the medical device market. Even if the
Basis System is successfully developed and accepted, it may be rendered obsolete
by technological developments, new innovations or changes in the medical
marketplace. The Company's success will depend in part on its ability to respond
quickly to medical and technological changes and to develop and introduce new,
cost-effective versions of its Basis System in response to competitive
innovations. Development and commercialization of new products will require
additional research and development expenditures and may require new regulatory
approvals. There can be no assurance that the Company will successfully identify
new market opportunities and develop new products or that these new products
will receive necessary regulatory approvals or be successfully received by the
marketplace or, if so, that the Company's products will not be rendered obsolete
by changes in technology.
LIMITATIONS ON THIRD PARTY REIMBURSEMENT
The Basis System will generally be purchased by hospitals which then seek
reimbursement from various public and private third party payers covering
cardiac surgery patients, such as Medicare, Medicaid and private insurers, for
the health care services provided to patients. There can be no assurance that
these third party payers will consider use of the Basis System cost-effective.
If the Basis System is not considered cost-effective and not approved for
reimbursement, this will materially adversely affect the prospects of the Basis
System and the Company itself. Even if the third party payers approve the Basis
System for reimbursement, there can be no assurance that the level of
reimbursement approved will be high enough to make the Company a profit from
selling the Basis System. Furthermore, the amount of reimbursement for treatment
for various cardiac diseases could decrease in the future and reduce the amount
paid for the Basis System. Failure by hospitals and other users of the Company's
products to obtain sufficient reimbursement for use of the Basis System in
cardiac output monitoring could have a material adverse effect on the Company.
PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability to obtain and maintain
patent protection for its products, to preserve its trade secrets and to operate
without infringing the proprietary rights of third parties. The Company has U.S.
and foreign patents and patents pending, which relate to devices and methods
used to measure blood flow through a major mammalian artery using ultrasound
technology, the release mechanism employed by the RealFlow probe, and certain
methods and techniques which relate to minimally invasive surgery, beating heart
surgery and advanced signal processing.. The validity and breadth of claims
covered in medical technology patents involve complex legal and factual
questions and, therefore, may be highly uncertain. No assurances can be given
that any current patents will be maintained, that patents under pending
applications or any future patent applications will be issued, that the scope of
any patent protection will exclude competitors or provide competitive advantages
to the Company, that any of the Company's patents will be held valid if
subsequently challenged, that others will not claim rights in or ownership of
the patents and other proprietary rights held by the Company or that the Basis
System or other products and processes will not infringe, or be alleged to
infringe, the proprietary rights of others.
If the Company is found to have infringed on the rights of a third party, the
Company may be unable to market its products without a license from such third
party. There can be no assurance that the Company would be able to obtain such a
license on satisfactory terms, or at all. Furthermore, there can be no assurance
that others have not developed or will not develop similar products or
manufacturing processes, duplicate any of the Company's products or
manufacturing processes, or design around the Company's patents. In addition,
whether or not additional patents are issued to the Company, others may hold or
receive patents that contain claims having a scope that covers products
subsequently developed by the Company.
The Company also relies on unpatented trade secrets to protect its proprietary
technology, and no assurance can be given that others will not independently
develop or otherwise acquire substantially equivalent technologies or otherwise
gain access to the Company's proprietary technology or disclose such technology
or that the Company can ultimately protect meaningful rights to such unpatented
proprietary technology.
There has been substantial litigation regarding patent and other intellectual
property rights in the medical device industry. Litigation, which could result
in substantial cost to and diversion of effort by the Company, may be necessary
to enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company, to defend the Company against claimed infringement of the
rights of others or to determine the ownership, scope or
3
<PAGE>
Exhibit 99.1
validity of the proprietary rights of the Company and others. An adverse
determination in such litigation could subject the Company to significant
liabilities to third parties, require the Company to seek licenses from third
parties and prevent the Company from manufacturing, selling or using its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
GOVERNMENTAL REGULATION
As a medical device company, the Company is subject to extensive and rigorous
regulation by the FDA in the United States and by comparable agencies in foreign
countries. The FDA regulates the introduction of medical devices as well as
manufacturing, labeling, distribution, sale, marketing, advertising, promotion
and record keeping procedures for such products.
Although the 510(k) marketing clearance received from the FDA in 1991 for the
Company's trans-aortic system was confirmed in 1996 and then again in May of
1999, using both internal and external consulting evaluations and is believed to
be valid for the Basis System, such clearance can be withdrawn temporarily or
permanently by the FDA due to failure to comply with regulatory standards or the
occurrence of unforeseen problems with the Basis System. The FDA also has the
power to limit or prevent the manufacture or distribution of the Basis System
and could require its recall. FDA regulations depend heavily on administrative
interpretation, and there can be no assurance that future interpretation made by
the FDA or other regulatory bodies, with possible retroactive effect, will not
adversely affect the Company. The FDA and various agencies inspect the Company
and its facilities from time to time to determine whether the Company is in
compliance with regulations relating to medical device manufacturing, including
regulations concerning manufacturing, testing, quality control and product
labeling practices. A determination that the Company is in material violation of
such regulations could lead to the imposition of civil penalties, including
fines, product recalls, product seizures, or, in extreme cases, criminal
sanctions. In addition, there can be no assurance that the government
regulations will not change, and thereby prevent the Company from temporarily or
permanently marketing the Basis System. The withdrawal by the FDA of its
marketing approval for the Basis System, the recall of the Basis System or
similar regulatory action would have a material adverse effect on the Company's
business, financial condition and results of operations.
As part of its strategy, the Company expects to pursue commercialization of its
products in international markets, and therefore, the Company's products will be
subject to regulations that vary from country to country. The process of
obtaining foreign regulatory approvals in certain countries can be lengthy and
require the expenditure of substantial resources. There can be no assurance that
the Company will be able to obtain necessary regulatory approvals or clearances
on a timely basis or at all, and delays in receipt of or failure to receive such
approvals or clearances, or failure to comply with existing or future regulatory
requirements, could have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY OF HEALTH CARE REFORM
The levels of revenue and profitability of medical device companies may be
affected by the continuing efforts of government and third party payers to
contain or reduce the costs of health care through various means. In the United
States there have been, and the Company expects that there will continue to be,
a number of federal and state proposals to control health care costs. These
proposals contain measures intended to control public and private spending on
health care as well as to provide universal public access to the health care
system. If enacted, such proposals may result in a substantial restructuring of
the health care delivery system. Significant changes in the nation's health care
system are likely to have a substantial impact on the manner in which the
Company conducts its business and could have a material adverse effect on the
Company's business, financial condition and results of operations. Similarly,
the marketing and sale of the Company's products in foreign countries could be
materially adversely affected by health care reform in such countries.
NEED TO EXPAND; DEPENDENCE ON KEY PERSONNEL
The Company needs to expand its management, research and development,
manufacturing and sales and marketing personnel in order to support development
and commercialization of the Basis System. The inability to hire personnel as
needed may have a material adverse effect on the Company. The success of the
Company will depend in part upon its ability to attract and retain capable
technical staff as well as sales and marketing personnel in the
4
<PAGE>
Exhibit 99.1
future. The Company is currently dependent on the services of Andrew M. Weiss,
the Company's President and Chief Executive Officer, and Steven R. Wedan, the
Company's Vice-President, Engineering. The loss of either of Messrs. Weiss or
Wedan could have a material adverse effect on the Company.
RISKS RELATED TO INTERNATIONAL SALES
The Company's plan to distribute the Basis System in international markets
involves certain risks, including the impact of any tariffs, quotas and taxes
which may be imposed by foreign governments on international sales of the Basis
System, the impact of potential political and economic instability on demand for
the Basis System, restrictions on import or export of technology which could
prohibit or restrict international sales, and potentially limited intellectual
property protection which could cause the Company to refrain from selling in
certain international markets. Currency fluctuations could also cause the Basis
System to become less affordable or less price competitive in international
markets. Any of these factors would adversely impact the Company's ability to
sell the Basis System internationally, and could in turn have a material,
adverse impact on the Company's business, financial condition and results of
operations.
DEPENDENCE ON KEY SUPPLIERS
There are multiple sources for most of the components used in the Basis System.
Several components, however, are currently available from only a limited number
of vendors or are nearing the end of their product life cycle and availability.
The inability to obtain such components on a timely basis or to identify,
validate and procure alternative components would have an adverse impact on the
Company's ability to fill orders from customers.
PRODUCT LIABILITY; AVAILABILITY OF INSURANCE
The medical device industry is subject to substantial litigation, and the
Company faces an inherent business risk of exposure to product liability claims
in the event that the use of the Basis System is alleged to have resulted in
adverse effects to a patient. Although the Company maintains product liability
insurance, there can be no assurance that the coverage limits of its insurance
policies will be adequate, or that such insurance will be available in the
future on acceptable terms, if at all. A product liability claim or other claim
with respect to uninsured liabilities or in excess of insured liabilities could
have a material adverse effect on the business, financial conditions and results
of operations of the Company.
5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>6
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM FINANCIAL STATEMENTS
AND RELATED NOTES FOR THE YEAR ENDED DECEMBER 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,910,356
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 167,109
<CURRENT-ASSETS> 2,168,042
<PP&E> 1,316,115
<DEPRECIATION> 765,440
<TOTAL-ASSETS> 2,827,739
<CURRENT-LIABILITIES> 299,437
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 52,990
<OTHER-SE> 2,463,635
<TOTAL-LIABILITY-AND-EQUITY> 2,827,739
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (2,497,066)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,445,942)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,445,952)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,445,942)
<EPS-BASIC> (.52)
<EPS-DILUTED> (.52)
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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