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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDING APRIL 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
______________________________ TO ________________________________
COMMISSION FILE NUMBER: 0-28010
MEDWAVE, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1493458
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4382 ROUND LAKE ROAD WEST, ARDEN HILLS MINNESOTA 55112
(Address or principal executive offices, zip code)
Registrant's telephone number, including area code: (651) 639-1227
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: COMMON STOCK,
NO PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant, based on the last sale price of the Registrant's Common Stock in the
over-the-counter market as reported by the Nasdaq Stock Market, Inc. on June 28,
2002, was approximately $7,250,916. Shares held by officers, directors, and
persons who own 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily conclusive.
As of June 28, 2002, 7,250,916 shares of Common Stock, no par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
PART I
ITEM 1 DESCRIPTION OF BUSINESS................................................................3
ITEM 2 PROPERTIES............................................................................21
ITEM 3 LEGAL PROCEEDINGS.....................................................................21
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................21
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.............................22
ITEM 6 SELECTED FINANCIAL DATA...............................................................23
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS.......................................24
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................26
ITEM 8 FINANCIAL STATEMENTS..................................................................26
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..................................................................46
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT................................................46
ITEM 11 EXECUTIVE COMPENSATION................................................................48
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................49
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................51
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................53
MEDWAVE(R), VASOTRAC(R), VASOTRAX(TM), VASOPORT(TM) ARE TRADEMARKS OF THE
COMPANY.
Forward Looking Statements
CERTAIN STATEMENTS CONTAINED HEREIN CONSTITUTE "FORWARD-LOOKING STATEMENTS" AS
THAT TERM IS DEFINED UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
(THE "ACT") AND RELEASES ISSUED BY THE SECURITIES AND EXCHANGE COMMISSIONS AND
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE EXCHANGE ACT OF 1934. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE,"
"INTEND," "ESTIMATE," AND OTHER EXPRESSIONS WHICH ARE PREDICTIONS OF OR INDICATE
FUTURE EVENTS AND TRENDS AND WHICH DO NOT RELATE TO HISTORICAL MATTERS IDENTIFY
FORWARD-LOOKING STATEMENTS. RELIANCE SHOULD NOT BE PLACED ON FORWARD-LOOKING
STATEMENTS BECAUSE THEY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER
FACTORS, WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE
COMPANY TO DIFFER MATERIALLY FROM ANTICIPATED FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENT WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS
OR OTHERWISE. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY
OF FACTORS, INCLUDING THOSE SET FORTH IN ITEM 1.
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
COMPANY PROFILE
Medwave was organized under Minnesota law in 1984. We are engaged exclusively in
the development, manufacture, and sale of a non-invasive, continual blood
pressure measurement and monitoring system and of related technologies.
Our principal offices are located at 4382 Round Lake Road West, Arden Hills,
Minnesota 55112 and our telephone number is 651/639-1227.
We have an April 30 fiscal year end.
BUSINESS
GENERAL
Medwave is a development stage company that currently employs fifteen (15)
full-time employees. Since our inception, we have been engaged exclusively in
the development of devices for monitoring and measuring blood pressure.
Blood pressure or, more precisely, arterial pressure, is the pressure that the
blood exerts against the interior of the arterial walls. The level of the
pressure depends upon the strength of the heart's contraction, the volume of
blood in the circulatory system, the elasticity of the arteries, and the degree
of capillary constriction impeding circulation. During the heart's relaxation
phase, the diastole, blood pressure falls and rises when the heart muscle
contracts. Clinically, blood pressure is commonly reported as three different
values. Systolic and diastolic pressures are the maximum and minimum pressures
during a single cardiac cycle, respectively. Mean pressure is the average
pressure during the cardiac cycle.
Blood pressure and changes in blood pressure are critical indicators of the
health and performance of the body's cardiovascular system. Blood pressure
varies with age and by gender, such that young adults tend to have lower blood
pressures than older adults and men tend to have higher blood pressures than
women of the same age. Even in healthy bodies, blood pressure normally
fluctuates during the day. For example, exercise, emotion, and exposure to the
cold tend to cause blood pressure to rise, while it falls in instances of
warmth, fainting, hemorrhage, and certain diseases. All hospital patients
require measurement of their blood pressure and many surgical or critically ill
patients require frequent or continual monitoring of their blood pressure.
Continual monitoring of blood pressure is important for patients in operating
rooms, surgical recovery rooms, intensive care units, and other critical care
sites because of the acuteness of these patients' conditions and rapidity with
which their conditions can deteriorate. Trend information obtained from
successive blood pressure measurements plays an important role in the diagnosis,
prognosis, and treatment of diseases.
Utilizing our proprietary technology, we developed the Vasotrac(R) APM205A
system which monitors blood pressure, providing new readings approximately every
fifteen heartbeats. We believe that the continual blood pressure readings and
non-invasive qualities of the Vasotrac system make it the most advanced approach
to blood pressure monitoring. In February 1995, we received clearance from the
US Food and Drug Administration (FDA) to market the Vasotrac system. We have
also developed a hand-held blood pressure monitor, the Vasotrax(TM). This
hand-held monitor is based on the technology used in the Vasotrac system. In
June 2000, we submitted a 510(k) notification to the FDA for review of the
Vasotrax hand-held monitor. In August 2000, we received FDA clearance, which has
allowed us to begin marketing the Vasotrax in the United States for use on adult
patients by trained medical personnel. In addition, and as a result of our
supplier agreement with Nihon Kohden of Japan, we have developed a module of our
Vasotrac continual non-invasive blood pressure monitor. The module is designed
to be integrated into the other company's larger, more comprehensive systems.
3
Current Technology:
Invasive Arterial Catheter:
Currently, both invasive and non-invasive techniques are used to measure blood
pressure. Invasive techniques employ the surgical placement of a catheter
directly into an artery, an A-line. The fluid-filled catheter is connected to a
pressure transducer and assorted tubing to produce beat-by-beat, continual blood
pressure measurements. In addition, the catheter may be used to extract blood
samples from which a number of diagnostic test results, such as blood gas
information, may be obtained. Because our non-invasive Vasotrac system does not
allow for the extraction of blood samples, invasive techniques offer a
competitive advantage in this area. The surgical insertion of the catheter,
however, takes about fifteen to twenty minutes, assuming no complications.
Moreover, while such insertions frequently are performed without incident,
serious complications can occur, including thrombosis (blood clot), air emboli
(air bubble), and infection. Measurement errors may occur due to air bubbles,
catheter clotting or movement, or changes in elevation between the pressure
transducer and the level of the heart. Immediately following catheter
withdrawal, firm pressure must also be applied over the arterial site for an
extended period of time to avoid serious blood loss. Primarily because of its
invasive nature, the A-line is generally used by clinicians in critical cases
and for only relatively short time periods. The cost associated with inserting
an arterial catheter can be significantly higher than non-invasive blood
pressure monitoring.
As a general matter, we believe that non-invasive rather than invasive
treatments and methods are preferred by clinicians for numerous medical
conditions and processes, including the measurement and monitoring of blood
pressure. Non-invasive techniques significantly reduce patient risk and increase
patient comfort. In addition, the time and expense required to set up, maintain,
and remove non-invasive equipment generally is substantially less than with
invasive systems. We believe that, in many cases, patients in emergency
departments and environments, critical care, operating rooms, cardiology
departments, and pediatric environments could benefit from continual blood
pressure monitoring after the point at which clinicians may now cease obtaining
such readings due to concerns associated with prolonged or indefinite uses of
invasive techniques.
Non-Invasive Blood Pressure Cuffs:
Many non-invasive blood pressure measurement techniques utilize a manually
operated occlusive cuff around the upper arm. A relatively simple blood pressure
instrument, called a sphygmomanometer, contains a cuff connected to a hand air
pump and pressure gauge or mercury column. The cuff is inflated to a pressure
above that of systolic pressure until the brachial artery is blocked, and then
slowly deflated. During deflation, the clinician must listen to the pulse in the
brachial artery. Upon hearing and properly interpreting the appropriate sounds,
the clinician records the pressures shown on the gauge or mercury column. The
cuff pressure occurring simultaneously with certain observed events within the
circulatory or cuff systems are taken as the systolic and diastolic pressures.
This process may take several minutes to complete, and in some patients will
cause significant discomfort due to the squeezing of the cuff around the upper
arm. Several clinical studies have been performed comparing the accuracy of this
method with the invasive arterial catheter, and have shown a wide degree of
variation with this method being caused by such things as environmental noise,
improper cuff size, and readings taken too close in time.
Our Vasotrax hand-held monitor appears to have several advantages over a
traditional sphygmomanometer. The Vasotrax can produce a reading in
approximately 15 seconds, whereas the sphygmomanometer may take several minutes
to produce a reading. Another advantage is patient comfort because the Vasotrax
does not require a complete obstruction of the artery as does the
sphygmomanometer. In addition, in the future the Vasotrax will be capable of
storing approximately 200 patient readings for up to 16 different patients and
be capable of downloading these readings into a larger information system.
Recently many states have mandated that the reduction of mercury be accomplished
by specified dates. Healthcare systems are searching for an alternative method
to replace the thousands of mercury filled blood pressure sphygmomanometers
currently in use.
4
An automated, non-invasive blood pressure monitoring system is already commonly
used in critical care and operating room settings. The automated non-invasive
blood pressure monitoring system currently dominating the market is the
Dinamap(R) product, marketed by GE Medical Systems, a division of General
Electric Company. The Dinamap(R) provides blood pressure measurements via
automatic inflation and deflation of an occlusive cuff at predetermined
intervals. It is reasonably reliable and simple to use. However, the Dinamap(R)
product provides only intermittent measurements at one-to-ninety minute
intervals, as selected by the clinician. Some patients suffer signification
discomfort from the frequent cuff inflations. In addition, with cuff-based
systems, arm circulation is cut off during each measurement, the arm holding the
pressure cuff is unavailable for intravenous lines, and arm bruising and sleep
interruption frequently occur. Also the manual and automatic cuff systems have
not performed well in areas with a high degree of motion, such as in ambulances
or cardiac stress labs.
In contrast to the sphygmomanometer and other cuff-based systems, our Vasotrac
system and Vasotrax hand-held monitor require no inflatable cuff but instead
contain a unique pressure sensor that is placed on the wrist. Beyond the comfort
factor and greater versatility of our Vasotrac system and Vasotrax hand-held
monitor, we believe that our Vasotrac has a very important advantage over
cuff-based systems--more rapid readings that allow for more precise monitoring.
Indeed the accuracy of the Vasotrac has been compared to an invasive arterial
catheter with excellent correlation across a broad spectrum of patients. The
Vasotrac produces an arterial waveform, not available on either manual or
automatic cuffs, and provides significant improvement in patient comfort due to
our measurement technique. The Vasotrac interfaces directly into existing
patient monitoring systems by plugging an interface cable (the NIA V-Line) into
the invasive pressure channel normally used for the arterial catheter. During
the Spring of 2001, we introduced a new software package that has the capability
of monitoring a patient's blood pressure during excessive movement, such as is
found in ambulances or a cardiac stress labs.
The contraindications for our Vasotrac system and Vasotrax hand-held monitor
include patients on cardiopulmonary bypass, and patients with any condition in
which rendering a pulsating pressure signal from the radial artery is not
possible which may occur with severe arterial restrictions. Although there are
contraindications for the system, we believe that, as a general matter,
virtually no medical device is universally applicable for all patients at all
times. As such, this should not be a critical factor for market acceptance.
Moreover, given differences in individual bone construction, body weight, and
physical condition, our products may not provide consistent readings or be
usable on all patients. To date, however, we believe we have not detected any
significant patient complications that are caused by the system.
For those hospital based patients who require continual blood pressure
monitoring, invasive methods are currently the clinician's technology of choice.
Given the attractiveness of non-invasive monitoring, however, several companies
have introduced or are introducing products for non-invasive continual
monitoring of arterial pressure based upon several technologies. These
technologies include pulse-wave velocity, partially inflated finger cuffs,
partially inflated arm cuffs, and tonometry. We believe that none has gained
wide acceptance within the clinical community for continually monitoring
arterial pressure. This belief is based on previous, unsuccessful efforts of
other companies to introduce accurate, continuous, and non-invasive blood
pressure monitors, the absence of such products at major medical and other
product shows, the lack of published advertisements, papers or studies about
such products in respected scientific, medical and other journals, and anecdotal
discussions with physicians and other medical personnel by our management.
We have focused on building a dealer network so that we can seek sales coverage
without the commensurate increase in sales staff and cost that would occur if
the same coverage were sought by building our own employee sales force. We also
have hired a core team of sales professionals to work within defined
geographies. The success of our product sales will depend upon the ability of
dealers and/or sales professionals to sell the products to the pre-hospital
(EMT/EMS) environment, hospitals, the post-hospital environment such as
physician offices, and other markets. At this time, our dealers have not
demonstrated that they have achieved the sales success we desired. We are
currently focusing on product training for our Dealer organizations as well as
our direct sales team. We are also attempting to exploit the high cost to
hospitals of monitoring invasively, versus monitoring with comparable accuracy
and speed with our non-invasive Vasotrac Monitor.
Our success is dependent upon the successful development and marketing of the
Vasotrac system, the Vasotrac module, and the Vasotrax hand-held monitor as well
as related technology. However, there can be no assurance that our products or
related technology will be successfully marketed or sold in sufficient
quantities and at margins necessary to achieve or maintain profitability.
5
In the fall of 2000, we entered into a non-exclusive agreement with 3Ci for the
sale of the Vasotrax hand-held monitor to the hospital market in the United
States. In March 2001, 3Ci was acquired by Allegiance Healthcare - Respiratory
Care. We have effectively terminated our relationship with 3CI/Allegiance
Healthcare.
Between February 2000 and April 2002 we entered into distribution agreements in
Austria, Canada, China, Germany, Hong Kong, Italy, Israel, Japan, Norway, South
Korea, Spain, Sweden, Switzerland, Taiwan, Turkey, Finland, Singapore, Israel,
Malaysia, Estonia, Australia, United Kingdom, South Africa, and New Zealand. In
China, we are currently working with our distributor to obtain the necessary
government clearances to be able to sell our Vasotrac system and Vasotrax
hand-held monitor. In August 2000, we received the CE mark allowing us to sell
the Vasotrac system in European Union Countries. In November 2001, we placed the
CE mark on all of our products and obtained our ISO9001 certification. In
January 2001, we received the necessary clearances to be able to sell into the
Canadian market. We were notified in the spring of 2001, that we received South
Korean government clearance to market the Vasotrac system in South Korea. Local
government approvals are not necessary in all countries, and in fact many will
accept either ISO 9001 Certification, and/or US FDA 510K pre market
notification.
In June 2000, we signed an agreement for distribution of the Vasotrac system
with Nihon Kohden of Tokyo, Japan. Nihon Kohden is a very well known medical
device company in the Japanese market, with close to 50% market share in patient
monitoring. In January 2002 we obtained Ministry of Health clearance and
subsequently started to ship our product to Nihon Kohden.
In September 2000, we also signed an OEM module agreement with Nihon Kohden that
calls for us to develop and produce a Vasotrac module that will be integrated
into the Nihon Kohden patient monitoring product family. As a part of this
agreement, Nihon Kohden placed an initial order for Vasotrac OEM modules, to be
delivered over the initial 18 months, and paid the Company a down payment of
$125,000, that was received in October 2000. This payment has been treated as
deferred revenue on our financial statements for the quarter ended October 31,
2000. We are anticipating to be able to ship the first production units to Nihon
Kohden by the end of the second quarter of fiscal 2003.
At the end of November 2000, we began shipments of our Vasotrax hand-held
monitor. We have re-drafted sales plans to promote the sale of the Vasotrax.
Prior to the introduction of the enhanced Vasotrac system in October of 1999, we
used both a limited number of employees for sales and marketing and a limited
dealer network to sell the initial Vasotrac system. We used the feedback from
initial customers of the Vasotrac system to enhance the Vasotrac system to make
the system more user friendly. During the enhancement project, we reduced our
sales and marketing employees and focused on the engineering required for the
enhancement effort. After we introduced the enhanced Vasotrac system in October
of 1999, we focused on building a dealer network so that we could seek
nationwide sales coverage without the commensurate increase in sales staff and
cost that would occur if the same coverage were sought by building our own
employee sales force. We have been building our own sales organization to work
with the dealers in order to provide better product support. We currently have a
direct sales force of 9 employees that will work with and support a distribution
network focused on the pre-hospital, hospital, and post-hospital environments,
as well as sell directly on their own in certain geography. We are also
currently looking for a distribution, or a private label partner for the
Vasotrax hand-held monitor outside the hospital market. The success of our
product sales will depend upon the ability of dealers and/or sales
representatives to sell the products to hospitals, their affiliates, and other
markets. At this time, dealers have not consistently demonstrated that they will
be successful. However, several direct sales specialists have been effective in
penetrating hospitals.
The initial response regarding the Vasotrax hand-held monitor from trade shows
and sales situations has been favorable. However, we will need to establish
additional distribution arrangements, and complement those arrangements with a
number of "in-house" experts. The Vasotrax hand-held product will be targeted at
the pre-hospital (EMT and EMS) market, the hospital market, and the
post-hospital markets (sub-acute, skilled nursing homes, homecare, and physician
offices). There has been a considerable interest expressed by healthcare
professionals and individuals about the desire to have the Vasotrax become
self-applicable, whereas today it must be applied by a professional to a
patient.
6
Our short-term and long-term investments are being used primarily to increase
our sales and marketing efforts and increase awareness of Medwave and our
technology in the markets, to continue clinical testing of the Vasotrac system,
the Vasotrax hand-held monitor and related technologies, to continually validate
our technology against traditionally used blood pressure monitoring devices and
to create peer-to-peer consensus regarding Medwave's technology. We spent
$673,852, $1,142,685, and $1,122,247 on research and development expense for
fiscal years ending 2002, 2001, and 2000, respectively. We anticipate incurring
additional losses from further development, testing, regulatory compliance and
sales and marketing expenses for the foreseeable future. Over the next twelve
months, we expect to spend in excess of $500,000 for research and development,
including amounts expected to be spent on clinical trials. Specifically, the
funds are expected to be used to develop alternative sensors (including
disposable sensors and sensors for use in infants,), to sustain engineering
support for manufacturing start-up, to continue development of the hand-held
monitor. We do not expect to spend any material amount on equipment in
connection with these initiatives. Even assuming only limited sales, we believe
that cash and cash equivalents will allow us to meet our cash requirements for
approximately fourteen months from April 30, 2002. If the development process
for our products does not proceed as expected due to significant product design
changes, market acceptance difficulties, unexpected difficulties in attaining
cost-effective manufacturability or higher than expected sales and marketing
costs, we may require additional capital at an earlier date. We may seek such
capital through bank borrowing, equipment financing, equity financing, and/or
other methods. Our financing needs are subject to change depending on, among
other things, market conditions and opportunities, equipment or other
asset-based financing that may be available, and cash flow from operations. Any
material favorable or unfavorable deviation from our anticipated expense could
significantly affect the timing and amount of additional financing that may be
required. However, additional financing may not be available when needed or, if
available, may not be on terms that are favorable to us or our shareholders. In
addition, any such financing could result in substantial dilution to our
existing shareholders.
We have incurred an accumulated deficit of $18,435,938 from our inception
through April 30, 2002. We expect to incur additional losses from development,
clinical studies, regulatory compliance, sales, marketing, and other expenses at
least until we emerge from the development stage.
We have financed our activities through an initial public offering (IPO) in
November 1995, and a series of earlier private placements of equity securities,
including shares of Preferred Stock that were converted into Common Stock just
prior to our IPO in November 1995. On March 6, 1998, we completed a private
placement that raised approximately $2,990,000 in net proceeds. On March 20,
2001 and June 13, 2001, we completed the first round and the second round,
respectively, of a private placement that raised approximately $5,300,000 in net
proceeds.
PRODUCTS DESCRIPTION
We believe that the continual blood pressure readings and the efficacious and
non-invasive qualities of our Vasotrac system and Vasotrax hand-held monitor
make them a new, superior approach to blood pressure monitoring. The system is
designed to assist clinicians in the therapeutic management of their patients by
providing frequently updated blood pressure readings in an easily obtained and
comfortable manner. This microprocessor-controlled system consists of (i) a
liquid crystal display, LED displays, a Central Processing Unit and a key pad,
all housed in an aluminum case, (ii) a patient cable, and (iii) a pressure
sensor. We require that the sensors be changed at a minimum of every six months.
This is intended to assure adequate sensor performance, and, as a side benefit,
it provides us with an ongoing revenue stream.
The Vasotrac system monitors blood pressure using, as a key component, the
pressure sensor placed on the wrist over the radial artery, a main artery in the
arm. Over seven hundred (700) of our Vasotrac system monitors have been used for
clinical studies, laboratory experiments, by sales professionals and
distribution partners, and by our customers. The monitor has no moving parts and
is composed of standard, off-the-shelf components. These monitors have been
subjected to electrical testing of various duration, including extended life
cycle testing, which has shown that the monitor has an expected useful life of
at least 10 years. We believe that medical devices are expected to have a life
expectancy of 7-10 years. The sensor and motor assemblies are the only moving
parts of the Vasotrac system and, as such, they have received the most attention
from us for life testing. We have configured testing equipment for use in
conjunction with the Vasotrac system to exercise these components continuously
in an unattended mode.
7
The Vasotrac system and Vasotrax hand-held monitor utilize the Company's
proprietary sensor, which applies pressure to the artery as the pressure
waveforms are measured by the sensor. Then, our proprietary algorithms analyze
the pressure waveforms to calculate the systolic, diastolic, and mean readings
of blood pressure approximately every fifteen heartbeats. The Vasotrac system
displays systolic, diastolic, and mean blood pressure in millimeters of mercury
(mmHg) as well as heart rate in beats per minute. The Vasotrax hand-held monitor
displays systolic and diastolic blood pressure as well as pulse rate. These
values are displayed after the clinical user manually presses the Vasotrax on
the subject's radial artery for approximately 15 seconds.
The Vasotrac system is designed to be used by trained medical personnel in
hospitals and other health care settings where automatic blood pressure
monitoring is desirable. Patient pressures can be monitored audibly and visually
by entering limits into the Vasotrac system alarm menu. Those values above or
below the limits will be automatically brought to the attention of the clinician
through audible and visual alarms. Given differences in individual bone
construction, body weight, and physical condition, the system may not be usable
on all patients. However, with proper placement, the system has been usable on
all patients participating in our clinical studies conducted to date, and we
believe that the system will continue to be usable on virtually all patients
with wrist sizes larger than 11 cm. We do not believe, however, that market
acceptance of the system is likely to be jeopardized by lack of universal
applicability of the system for the population, although there can be no
assurance in this regard.
In the Summer of 2001, we introduced the NIA V-Line interface product, which
allows the clinician to plug the Vasotrac directly into the pressure channel of
the clinician's existing monitoring system, allowing for a true "Plug and Play"
and capture of data into the clinician's central system. To our knowledge, no
other non-invasive blood pressure device has this capability today. In addition,
we introduced the HMT (High Motion Tolerant) software package, which is designed
to allow the clinician to take continual non-invasive blood pressure readings on
patients in circumstances where motion is prevalent. In these clinical
environments, obtaining a valid blood pressure value with manual cuffs is a
significant challenge for the caregiver, as it requires using a stethoscope that
may be difficult to hear through due to high motion and accompanying noise.
Also, it has been reported to us that automatic cuff systems have not functioned
well in situations involving high motion, even if they are designed for this
application. As a result we have been involved in numerous clinical trails in
cardiology departments who are considering the Vasotrac as a solution.
Our development of the Vasotrax hand-held blood pressure monitor may result in a
product that has sales potential in both the professional market (doctors,
nurses, and medical technicians) and the consumer market. We have finished
development of the first generation of the Vasotrax hand-held monitor, and have
received a 510(k) clearance from the United States Food and Drug Administration
for use on adult patients by trained medical personnel. The Vasotrax is designed
to make accurate blood pressure and pulse rate measurements without using a cuff
or a stethoscope. To use the device, the clinician presses the device against
the wrist and slowly increases the force. In about fifteen seconds, the device
will display the blood pressure and pulse rate. Currently we do not have
suitable distribution channels for the potential markets for the Vasotrax
hand-held monitor and there can be no assurance that we will be able to
implement or effectuate suitable arrangements for such markets. We ultimately
may be required to have focused sales professionals with responsibility only for
the market segments that the Vasotrax hand-held monitor addresses, specifically
the pre- and post- hospital markets. The technology employed in the hand-held
device may also be useful in developing products for other markets.
CLINICAL STUDIES
We have conducted clinical studies for four purposes: (i) to aid the product
development process, (ii) to obtain data for submission to the regulatory
agencies, (iii) to help us prepare marketing and sales information to promote
greater awareness of the Vasotrac system and Vasotrax hand-held monitor, and
(iv) to gain a peer to peer recommendation for our technology. We have used two
standards of comparison, the automated cuff and the arterial line (A-line). The
automated cuff clinical did not allow synchronization of measurements between
the cuff and our system because of the different number of heartbeats required
to produce readings for each method. Further, the cuff does not meet the
accuracy objectives that we set for the Vasotrac system and Vasotrax hand-held
monitor. For these reasons, the cuff proved to be of limited utility in our
studies.
8
A-lines are believed to provide more accurate blood pressure measurements than
automated cuffs. In contrast to automated cuffs, the A-line studies allow for
data synchronization. By inserting an arterial catheter in the radial artery on
one wrist and by placing the Vasotrac system (or the Vasotrax hand-held monitor)
sensor on the radial artery of the other wrist, data was simultaneously recorded
on a beat-by-beat basis. Our clinical studies were conducted at teaching
hospitals under institutional review board controls and protocols. Generally,
such review boards represent their respective hospital and include physicians
that can make appropriate judgments regarding the safety of the study. The
boards periodically review protocols for medical devices and maintain meeting
minutes, which are subject to audit by the FDA.
Our initial clinical studies were performed on approximately 30 subjects, some
of whom were healthy and some of whom were undergoing surgery. Results from a
series of these studies comparing the Vasotrac system's readings with the
A-line's readings were used in our 510(k) submissions to the FDA. Subsequent to
the 510(k) submissions, we have conducted clinical trials on approximately 500
additional individuals. During our clinical trials conducted to date, the
variance between synchronized Vasotrac system readings obtained from one arm of
the patient and the comparative A-line readings obtained from the other arm was
calculated by computing the standard deviation of error from more than 30,000
paired readings from the patients. Based on these measurements (which excludes a
certain number of paired readings because we believe that these readings have
been affected by artifact, patient level differences, arm-to-arm differences, or
experimental error) the magnitude of this variance was calculated as a standard
deviation of approximately 7, 5, and 7 mmHg for systolic, mean and diastolic
blood pressure measurements, respectively. As such, the Vasotrac system compares
favorably with those found in previous generations of non-invasive blood
pressure measurement devices, such as the Dinamap(TM) cuff-based system with
which we claimed "substantial equivalence" in our 510(k) submission to the FDA.
In addition, these standard deviation values are below the crucial 8 mmHg
standard deviation limit of clinical acceptability as defined by the Association
for the Advancement of Medical Instrumentation ("AAMI") as the national standard
for electronic or automated sphygmomanometers.
In our 510(k) Vasotrac submission to the FDA, we included not only clinical
data, but also outlined a plan to continue testing and integrating the results
therefrom into the Vasotrac system. Based on the foregoing and, most
importantly, the improvement in the overall results of the system's performance
subsequent to its 510(k) submission, we do not believe that applicable FDA
regulations require, and therefore at this point do not anticipate, any need to
submit to the FDA the post-510(k) clinical studies.
Although we believe that our current product design for the Vasotrac system and
our clinical studies conducted to date provide an adequate basis to continue
marketing the system, it will take widespread use and testing to verify that the
Vasotrac system is usable under most conditions. We expect to continue
conducting or supervising on-going clinical studies of the system on individuals
with different characteristics and under various conditions until such time as
the Vasotrac system receives general market acceptance. We cannot currently
estimate the number of individuals to be tested or the amount of time and
expense that will be required to perform and analyze these additional clinical
studies in order to achieve general market acceptance for the system.
In March 2001, we completed clinical testing of the Vasotrac system in pediatric
applications. We used this clinical information to file a 510(k) to the FDA
requesting clearance to allow for the use of the Vasotrac system on pediatric
patients. In June 2001, we received 510(k) clearance from the FDA for use of the
Vasotrac system in pediatric applications.
We are currently expanding our studies of our systems to determine if the
possibility exits to use the current sensor technology on different sites of the
patient's body.
The object of our continued studies is to refine the design of the system and to
test the system on a greater number of patients with different characteristics
and under various conditions, such as a wide range of blood pressure readings,
until such time, if ever, the Vasotrac system and Vasotrax hand-held monitor may
receive general market acceptance. In addition, we believe that the studies will
help us to prepare better marketing and sales information as well as to promote
greater awareness and market acceptance of our products toward the goal of
attaining commercial viability for them.
9
Below is a summary of the clinical studies completed and currently underway on
the Vasotrac continual non-invasive blood pressure system:
a. Volunteer Study - University of Minnesota June 1994
b. International Multi Center Study December 1997
Tokyo's Women's Medical College, University of California,
University of Vienna, University of Lille, St. Antoine Hospital
and University of Minnesota
c. Induced Hypotension - University of Vienna August 1998
d. Morbidly Obese Patients - University of Minnesota September 1998
e. Patient Comfort - University of Vienna December 1999
f. Volunteer Study II - University of Minnesota June 2000
g. Pediatric vs. Cuff - University of Minnesota August 2000
h. Patient Comfort - Virginia Tech September 2000
i. Vasotrac vs. Arterial Catheter - University of Arkansas, Children's' Hospital February 2001
j. Vasotrac vs. Arterial Catheter - Children Cardiology - Boston Children's Hospital In Process
k. University of Chicago - Atrial disturbances In Process
l. Arkansas Children's - Sensor Options-Vasotrax Handheld Validation In Process
m. LDS Hospital-Vasotrac in Sleep Lab Patients-Nocturnal Hypertension episodes In Process
n. Mayo Clinic-Liver Transplant Correlation In Process
o. Univ. of UT-Primary Children's using the Vasotrac in Cath Lab instead of
Catheters In Process
We have also conducted clinical studies to develop and validate the Company's
Vasotrax hand-held blood pressure measurement technology. These clinical studies
included 60 healthy subjects. For each subject an arterial catheter was inserted
in one arm and several operators performed repeated blood pressure measurements
from the opposite arm using the hand-held monitor. For each one of the
operator's blood pressure measurements, the corresponding arterial blood
pressure measurements were determined and compared for accuracy. The raw
waveform data from the arterial line as well as the raw data from the hand-held
device were also recorded and stored into our clinical database for further
processing. The data from the first 45 subjects was used for product development
purposes. The data from the last set of 15 subjects was recorded with the final
design of the hand-held monitor. The results of the comparison between the
arterial line blood pressure readings and the hand-held device on these 15
subjects was then referenced as part of our filing with the FDA for the
hand-held device's 510(k) submission, which was filed in June 2000. As was the
case for the Vasotrac system, the standard deviation values for the Vasotrax
hand-held monitor were below the 8mmHg standard deviation limit for clinical
acceptability as established by AAMI. In August 2000, we received FDA clearance
to begin marketing the Vasotrax hand-held monitor in the United States for use
on adult patients by trained medical personnel. Future studies will be explored
to determine the usefulness and accuracy of the Vasotrax hand-held monitor for
use in pediatric patients.
Introduction of the Vasotrac system and Vasotrax hand-held monitor to additional
foreign markets and/or market segments may require us to conduct further
clinical studies in order to achieve both regulatory and general market
acceptance. These clinical studies and the results obtained therefrom may
require us to undertake additional product development efforts in order to sell
the Vasotrac system and Vasotrax hand-held monitor in these countries and/or
market segments.
MARKETING
Our success depends primarily on gaining physician and hospital acceptance of
our products. One focus of our marketing strategy must necessarily involve
overcoming resistance of the medical community to the introduction of new
techniques or technology. We will build educational material (video tapes, CD
ROMS, web tools and clinical workbooks) specifically about blood pressure
monitoring and the benefits derived from Medwave's technology. We believe that
testing of our products has yielded favorable results compared to other
non-invasive blood pressure monitors. Now we will strive to create more of a
presence and awareness about our technology and the benefits it brings to the
healthcare provider. We intend to accomplish this by increasing our presence at
industry trade shows, increasing the number of people representing our products,
placing advertisements in industry trade journals, enhancing our web site,
increasing our public relations activity, and conducting and participating in
industry "Symposiums" regarding blood pressure monitoring and the benefits
derived from Medwave's technology.
10
EMPLOYEES
As of June 28, 2002, we had 15 full-time employees. Of this number, nine are in
sales, three are in manufacturing, one is in research and development, and the
balance are in management or administration. In addition we have several part
time employees, and use contract employees to satisfy some development work.
We anticipate we will hire additional employees within the next 12-month period,
primarily in sales and marketing positions. However, such requirements are
subject to change and are highly dependent on the market acceptance of our
products, our distribution methods, and existing employment market conditions.
PRICING AND DISTRIBUTION
We are constantly evaluating the marketable price of the Vasotrac system and the
Vasotrax hand-held monitor. Such pricing takes into consideration the marketing
process for the Vasotrac system and the Vasotrax hand-held monitor and can be
expected to remain dependent on a number of factors, including manufacturing
costs, prices of competitive products, distribution methods, volume discounts,
and market acceptance. We believe that the Vasotrac system is currently priced
slightly higher than the high-end automatic cuffs sold by our competitors. We
believe, however, that our higher price will be supportable due to the superior
clinical performance associated with our product over such automatic cuff
devices. In addition, because many departments at hospitals use disposable blood
pressure cuffs, which can be an added cost to using these products. We have
developed cost benefit models that highlight the savings related with the use of
the Vasotrac.
In comparison to the costs associated with A-line procedures, we believe that
the Vasotrac system will, on a per-procedure basis, result in significant
savings for healthcare providers. Insertion of an A-line is an invasive surgical
procedure requiring a physician. No matter how routine any such procedure may
become, all invasive procedures retain the inherent risk of complications and
have attendant direct and indirect costs associated with them. We believe that
the cost for non-invasively monitoring the blood pressure of a patient with the
Vasotrac system will be less than with an invasive A-line. We believe that this
gives it a competitive edge in an increasingly cost-conscious healthcare
industry. We are currently preparing and presenting cost benefit models to
potential customers.
We believe that a market also exists for us to sell our Vasotrac OEM module to
other equipment companies, such as companies who manufacture patient monitoring,
defibrillators, sleep systems, and cardiology systems. We recently began to ship
pre-production modules to Nihon Kohden of Japan, a market leader in the Japanese
market with approximately 50% market share in-patient monitoring. These types of
agreements offer the potential for widespread market penetration without the
tremendous investment in resources, that would be expected if we were to attempt
entry on such a wide scale ourselves. In addition, we expect that the volume
commitments from such agreements could be multi-year and offer yields that would
take a direct sales organization years to accomplish. Now that development of
the OEM Module is completed, we will pursue other such agreements with other
organizations.
For additional information concerning our product distribution efforts and
arrangements, see "General" above.
PATENTS AND PROPRIETARY TECHNOLOGY
We have applied for U.S. patents covering various aspects of Medwave's blood
pressure technology. As of June 2002, nineteen U.S. patents relating to
Medwave's blood pressure technology have been granted, and five U.S. patent
applications are pending. We also have pending patent applications relating to
our blood pressure technology in the European Patent Office, Australia, Brazil,
Canada, China, India, Japan, and Russia. Most of our patents and patent
applications relate to both the Vasotrac system and to the Vasotrax hand-held
blood pressure monitor.
There can be no assurance that any pending U.S. or any foreign patents will be
granted or, if obtained, that they, or those already granted to us, will
sufficiently protect our proprietary rights. Although patents have been granted
to us, and even if the patents for which we apply are granted, they do not
confer on us the right to manufacture and market products if such products
infringe on patents held by others. While we have reviewed prior art in
11
connection with our patent applications, we have not undertaken or conducted any
comprehensive patent infringement searches or studies. If any such third parties
hold any such conflicting rights, we may be required in the future to stop
making, using or selling our products or to obtain licenses from or pay
royalties to others, which could entail significant expense and have a material,
adverse effect upon us. Further, in such event, there can be no assurance that
we would be able to obtain or maintain any such licenses on acceptable terms, if
at all. We have, throughout the development process for the Vasotrac and
Vasotrax products, been associated with various companies, institutions and
individuals. Although we have no knowledge that any such companies, institutions
or individuals have claimed, or have any basis for claiming, interests in our
proprietary rights, there can be no assurance that such claims will not be
threatened, asserted or perfected. Such claims, even if we ultimately prevail on
the merits, could have a material, adverse effect upon us.
In addition to patent protection, we rely, to the extent possible, on trade
secrets, confidentiality agreements, unpatented proprietary know-how, and our
continuing development of new products.
GOVERNMENT REGULATION
We are subject to FDA and other government regulations, including regulations
with respect to marketing approval, manufacturing practices, packaging, labeling
and complaint reporting. Medical devices "substantially equivalent" to existing
systems continuously marketed since May 1976 may be marketed pursuant to a
Pre-Market Notification Submission (a "510(k) Submission") with the FDA. The FDA
finding of "substantial equivalence" for the Vasotrac system and the Vasotrax
hand-held monitor does not in any way denote official approval of the device.
Further, any representation that creates an impression of official approval of a
device because it complies with the pre-market notification regulations is
misleading and constitutes misbranding. Certain devices, including those which
are not "substantially equivalent" to predicate devices, are subject to
Pre-market Approval Application ("PMA") requirements and more stringent FDA
reviews. In contrast to the 510(k) process, the PMA process generally occurs
over a more protracted time period and requires more extensive clinical data.
Like all medical device manufacturers, we must implement, maintain and follow
the FDA's Quality System Regulation ("QSR") and Good Manufacturing Practices
("GMP"). We believe our primary manufacturing costs will be driven by initial
scale-up and ultimate production levels and will not be significantly impacted
by such requirements. Should we intend to market the Vasotrac system or the
Vasotrax hand-held monitor for new or different uses, or should we significantly
modify the system in a way that could significantly affect its safety or
effectiveness, we would be required to again file a new 510(k) Submission with
the FDA. Moreover, it is anticipated that any new product concepts developed by
us, will require various government clearances prior to being sold. In our
initial 510(k) Submission to the FDA, we included not only clinical data, but
also outlined our plans to continue testing, and integrating the results
therefrom into the Vasotrac system. We do not believe that FDA regulations
require, and therefore at this point do not anticipate, submission to the FDA of
our post-510(k) clinical studies. Although the FDA has stated that the
manufacturer is best qualified to make an initial determination of whether a new
510(k) Submission is necessary, the FDA can overrule a manufacturer's decision
not to submit a new 510(k) Submission and take appropriate regulatory action. If
we determine we need not submit any such new 510(k) Submission, including with
respect to our post-510(k) clinical studies, and the FDA consequently takes
regulatory action, we could be materially and adversely affected.
During the Spring of 2000, we began working on gaining the CE Mark, which is
required by European Union countries prior to commencement of sales into those
countries. We satisfied the requirements and were able to display the "CE Mark"
on designated units of our Vasotrac system. In addition, we completed the
process necessary for ISO 9001-EN46001-EC Directive 93/42/EEC Annex II.3
approval in November 2001. This allows us to display the "CE Mark" on all of our
products. In addition to this approval, we are also working on non-English
versions for the Vasotrac system, which may be required in certain international
markets. To date we have completed a German and Italian version.
In June 2000 we entered into an agreement with Nihon Kohden of Tokyo, Japan. As
part of this agreement, we worked with Nikon Kohden to submit extensive
documentation to the Japanese Ministry of Health for clearance of the Vasotrac
System in the Japanese market. We have received the necessary clearance in
January 2002 and have started to ship Vasotrac Monitors to the Japanese Market.
12
WARRANTY AND SERVICE
Our products are available with limited 12-month parts and labor warranty
commencing at the date of shipment. When warranty repairs are necessary, we
generally perform them at our headquarters. We also provide on-call technical
support. We also service equipment on a time and materials basis.
RISK FACTORS
Our business and an investment in our company are subject to a number of risks,
including those described in the preceding sections as well as those highlighted
below.
WE MUST DEVELOP A MARKET FOR OUR PRODUCTS
We presently depend on our Vasotrac, Vasotrax, and/or our OEM module product
line, the market acceptance of which is in its early stages. Our future is
dependent upon the success of these products and similar products that are based
on the same core technology. The market for these products is in an early stage
of development and may never fully develop as we expect. We have sponsored, and
will continue to sponsor or conduct clinical trials. We cannot be certain that
such clinical trials will be completed, that they will have a positive outcome
or that a positive outcome in these trials will be sufficient to promote
widespread acceptance of our products within the medical community.
OUR SUCCESS IS DEPENDENT ON MARKET ACCEPTANCE
Medwave's success depends on market acceptance of the Vasotrac system, the OEM
modules thereof, and/or the Vasotrax hand-held monitor. Such acceptance depends
primarily on gaining customer (end-user) and institutional (hospitals,
outpatient centers, ambulance companies, nursing homes and physician offices)
acceptance of these products. We believe that testing of the Vasotrac system and
Vasotrax hand-held monitor has yielded favorable results compared to other
non-invasive blood pressure monitors. However, improper placement of the
pressure sensor or improper use of the system may cause the readings produced by
the Vasotrac system and Vasotrax hand-held monitor to be questionable. As a
result, another key component of our marketing strategy will be to focus on
training and education of clinicians in the correct use of the Vasotrac system
and Vasotrax hand-held monitor. Also, given differences in individual bone
physiology, body weight and physical condition, the Vasotrac system, the OEM
modules thereof, and the Vasotrax hand-held monitor may not provide adequate
readings or be usable on all patients. For example, if a patient's peripheral
blood flow to his or her arms has been affected, these products may not function
as specified. Other contraindications for these products may result from
patients on cardiopulmonary bypass and patients with any condition in which
rendering a pulsating pressure signal from the radial artery is not possible. To
date, we believe we have not detected significant patient complications caused
by the system. However, as with any relatively new product, complications may
occur as the Vasotrac system, the OEM modules thereof, and the Vasotrax
hand-held monitor are used on a greater number of patients with different
characteristics and under various conditions. The presence of any significant
complications would necessitate additional research and evaluation to determine
the impact of such complications. Finally, we must overcome the resistance of
the medical community to the introduction of new techniques or technology. We
believe that this resistance may be exacerbated due to the fact that the blood
pressure cuff has been in use for more than 100 years, and virtually all medical
professionals are trained using cuff technology. Therefore, there can be no
assurance that the Vasotrac system, OEM modules thereof, or the Vasotrax
hand-held monitor will gain market acceptance. If these products do not gain
market acceptance, our future would be jeopardized.
WE MUST MAINTAIN AND DEVELOP STRATEGIC RELATIONSHIPS WITH THIRD PARTIES TO
INCREASE MARKET PENETRATION OF OUR PRODUCT LINES.
We distribute our products to domestic hospitals with our direct sales
organization and regional dealers, and targeted international markets primarily
through distributors. We also have a Vasotrac system OEM modules sales agreement
in place with Nihon Kohden, a well known medical device company in the Japanese
market, with close to 50% market share in patient monitoring. We intend to enter
into similar agreements with other major medical device companies and to
establish technology partnerships with other medical product and technology
companies. Widespread acceptance of technology is dependent on our establishing
and maintaining these strategic relationships with third parties and on the
successful distribution efforts of our direct sales organization.
13
Many aspects of our relationships with third parties, and the success with which
third parties promote distribution of our products, are beyond our control. We
may be unsuccessful in maintaining our existing strategic relationships and in
identifying and entering into future development and distribution agreements
with third parties.
OUR INTERNATIONAL SALES EXPOSE US TO UNIQUE RISKS.
In fiscal 2002, international sales accounted for approximately 33% of our
revenue.
We believe that international sales will represent a meaningful portion of our
revenue in the future. We rely on distributors to assist us with our
international operations. In addition, we are exposed to risks from
international sales, which include unexpected changes in regulatory
requirements, tariffs and other barriers and restrictions and reduced protection
for intellectual property rights. Moreover, fluctuations in the rates of
exchange may increase the price in local currencies of our products in foreign
markets and may price us out of the foreign market.
WE MAY NOT HAVE ADEQUATE INTELLECTUAL PROPERTY PROTECTION.
Although we believe that we have effective patent protection, our patents and
proprietary technology may not be able to prevent competition by others. In
addition, in the future our products may be found to infringe upon the rights of
others. Any claims resulting in intellectual property litigation, whether
defensive or offensive, could drain our resources and, if decided against us,
materially adversely affect our business.
WE RELY ON A SINGLE TECHNOLOGY PLATFORM.
We believe that significant and expanding markets exist for the Vasotrac system,
the Vasotrax hand-held monitor, and for additional products incorporating our
proprietary technology. Currently we utilize one technology platform in both the
Vasotrac system and the Vasotrax hand-held monitor. The technology platform is
our sensor technology and the software algorithm. In addition, in September 2000
we entered into an agreement to incorporate the Vasotrac system technology into
an OEM module. Recently we began shipping pre-production units to Nihon Kohden.
Reliance on a single technology platform creates substantial risks for us. If,
for example, the Vasotrac system and the Vasotrax hand-held monitor are not
successfully marketed, if they fail to meet customer needs, or if they are not
accepted in the marketplace, we would be materially and adversely affected, our
primary business focus would require re-evaluation and our ability to continue
operations would be jeopardized. Additionally, there can be no assurance that
other products utilizing our proprietary technology will ever be successfully
developed or marketed. We have not undertaken any comprehensive patent
infringement searches or studies. If the Vasotrac system or the Vasotrax
hand-held monitor were found to infringe on the patent rights of others or if
third parties successfully asserted rights to the these products, we would be
materially adversely affected.
We also intend to develop additional products based on our core technology. The
technology employed in the Vasotrac system may be useful in developing products
for other markets. We are early in considering the development possibilities of
these new products so there can be no assurance that additional products will be
successful either from a technical standpoint or from a manufacturing or
customer acceptance standpoint.
WE MUST CONTINUE TO EVALUATE THE DESIGN OF OUR PRODUCTS
While our initial product development and clinical testing program for the
Vasotrac system, Vasotrax hand-held monitor, and OEM Module are complete,
extensive use and evaluation of the design is necessary in order to assess
whether the products, as currently configured, will broadly meet customer needs
or be accepted as a viable alternative in the marketplace. We will continue to
test the Vasotrac system and Vasotrax hand-held monitor to enhance their market
acceptance. If the configuration of the system must be modified, there can be no
assurance such modifications will be acceptable to customers or be technically
feasible. Even if feasible, such modifications could result in significant
delays and significant expenses. If such modifications require regulatory
approval, additional significant delays could result. We could be materially and
adversely affected by any of these developments.
In addition, we have recently entered in to an agreement to incorporate the
Vasotrac system technology into an OEM module. Although sale of the Vasotrac
system as an OEM module is intended to complement sales of the system as a stand
alone product, it is possible that configuration as an OEM module will be the
principal or customer preferred way of purchasing and using this product. It is
also likely that OEM modules will require regulatory approval, which may result
in additional delays. Any regulatory application must be submitted by any of the
third party companies that use the OEM module. We could be materially and
adversely affected by any of these developments.
14
OUR PRODUCTS MAY REQUIRE SERVICING; WE MAY BE SUBJECT TO PRODUCT LIABILITY
CLAIMS
Our goal is to produce highly reliable Vasotrac systems, OEM modules thereof,
and Vasotrax hand-held monitors that do not require excessive subsequent
servicing. There can be no assurance, however, that we will be successful in
achieving such goal. There also can be no assurance that additional problems
will not occur, that additional servicing requirements will not be necessary or
that any additional problems or servicing requirements, individually or in the
aggregate, will not be significant, difficult to correct, time-consuming or
prohibitively expensive. Further, the need for any such additional servicing may
not be readily apparent to clinicians using the Vasotrac system, OEM modules
thereof, or the Vasotrax hand-held monitor. We believe that actual or perceived
excessive servicing requirements for the Vasotrac system, OEM modules thereof,
or the Vasotrax hand-held monitor could materially and adversely affect market
acceptance of the system and could raise product liability concerns. See "Risk
Factors -- We may be subject to product liability claims that exceed insurance
coverage." Although we plan to continue testing our products to determine the
extent of their servicing requirements, there can be no assurance that we can
precisely identify the exact scope of such servicing requirements.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND CAPABILITY
We currently have little manufacturing experience or capability, other than a
limited ability to produce small quantities of the Vasotrac system and Vasotrax
hand-held monitor. We have not developed, arranged for, or invested in any
significant production tooling, nor have we contractually arranged for any
significant third-party manufacturing capacity or agreements. There can be no
assurance that we will be able to scale-up manufacturing of the Vasotrac system,
OEM modules thereof, or the hand-held monitor for commercial production at
quantities required to meet cost targets and profitability goals. If our
manufacturing costs are higher than anticipated or if a lower-priced competitive
product becomes available, we may not be able to produce and sell the Vasotrac
system, OEM modules thereof, or the Vasotrax hand-held monitor competitively. In
addition, there can be no assurance that subcontractors, on whom we will rely
for functions we will not perform internally, will produce sufficient products
at required quality and cost levels. We will be materially adversely affected if
we are unable to scale-up manufacturing successfully or effectuate manufacturing
arrangements on acceptable terms.
WE CURRENTLY HAVE LIMITED OR SINGLE SOURCES OF SUPPLY
We currently purchase from outside vendors, on a purchase order basis, small
quantities of virtually all components and subassemblies for the Vasotrac system
and Vasotrax hand-held monitor. Should production rates increase, the supply of
components and subassemblies will become more critical. At present, many
components are supplied by one vendor or are made by hand without production
tooling in our facility. Furthermore, we have no formal agreements with any of
our vendors. Should a key vendor be unwilling or unable to supply any components
or subassemblies required by us in a timely manner, we may be materially
adversely affected.
WE FACE SUBSTANTIAL COMPETITION
We currently know of one other continual non-invasive blood pressure monitoring
device on the market. However, that device uses a cuff to calibrate the blood
pressure readings and we therefore do not consider the device to be directly
competitive. We face substantial competition from numerous companies that
manufacture and market noninvasive and invasive instruments for blood pressure
measurement and monitoring. Several companies competing in the blood pressure
monitoring market have significantly greater resources as well as established
technologies and product reputations in the blood pressure monitoring field. Our
ability to compete successfully in this market will depend on our ability to
develop and market a technologically superior blood pressure monitoring or
measurement system that provides cost-benefit, patient benefit, and improved
staff effectiveness.
To compete successfully, we likely will need to develop and introduce new
products that keep pace with technological advancements, respond to evolving
consumer requirements and achieve market acceptance. We may be unable to develop
new products that address our competition.
15
Our business plan contemplates an income stream from sales of replacement
sensors that are compatible with only our monitors and OEM modules. We may be
subject to price competition from other sensor manufacturers whose products are
also compatible with our monitors. To mitigate this we developed proprietary
sensor technology that provides and promotes the exclusive use of our
proprietary sensors with our equipment. There can be no assurance, however, that
such measures will preclude replacement sensor competition in the future.
The current widespread acceptance of non-invasive cuff technology and of the
arterial line, and the lack of widespread acceptance of non-invasive
technologies like ours, is an important competitive disadvantage that we must
overcome in order to gain general market acceptance. In addition, the current
technology involving cuffs and arterial lines has established cooperative
relationships with large medical equipment companies and buying groups that we
must also overcome in order to successfully compete. If we are not successful at
overcoming such competition, our primary business focus would likely require
re-evaluation with our ability to continue operations being jeopardized. We have
however entered into a national group purchasing agreement with AmeriNet, one of
the largest GPO's in the US, with approximately 15,000 members.
OUR TECHNOLOGY MAY BECOME OBSOLETE
The medical device industry is subject to rapid technological innovation and,
consequently, the life cycles of products tend to be relatively short. We are
engaged in a field characterized by extensive research efforts. There can be no
assurance that new developments or discoveries in the field will not render the
Vasotrac system or Vasotrax hand-held monitor obsolete. The greater resources of
many of the companies currently engaged in research of blood pressure management
may permit such companies to create, or respond more rapidly than Medwave to,
technological innovations or advances.
THIRD-PARTY PAYERS MAY NOT APPROVE PAYMENT FOR USE OF OUR PRODUCTS, AND WE MAY
BE AFFECTED BY CHANGES IN HEALTH CARE LAWS
Our success in the United States may be related to the number of third party
payers, such as Medicare, private insurance companies, health maintenance
organizations, and other payers, that approve payment or reimbursement for the
use of the Vasotrac system, OEM modules thereof, and the Vasotrac hand-held
monitor and the amount of any such payments or reimbursements. If, for example,
hospitals are not able to recover the cost of these products through
reimbursement, they may be reluctant to purchase these products, with the result
that our sales may be adversely affected. The health care industry and
associated regulatory environment are dynamic and rapidly changing, particularly
with respect to proposals to reform Medicare and to control health care costs.
This environment makes it impossible to predict the effects, including costs or
impediments to development, that adoption of and changes in health care laws,
rules and regulations may have on us and on our operations. Such developments
could, however, materially and adversely affect our ability to market our
products.
WE DEPEND ON MANAGEMENT
Our success currently depends on the services of Tim O'Malley, our President and
Chief Executive Officer. The loss of Mr. O'Malley may hurt our business if we
are unable to identify other individuals to provide us with similar services. We
do not maintain "key person" insurance on any of our employees, however the
Board of Directors in currently investigating the cost and benefits of
purchasing a "key man" life insurance policy on Tim O'Malley.
WE MAY NOT BE ABLE TO MANAGE GROWTH.
If successful, we will experience a period of growth that could place a
significant strain upon our managerial, financial and operational resources. Our
infrastructure, procedures and controls may not be adequate to support our
operations and to achieve the rapid execution necessary to successfully market
our products. Our future operating results will also depend on our ability to
expand our direct sales force and our internal sales, marketing and support
staff. If we are unable to manage future expansion effectively, our business,
results of operations and financial condition will suffer, our management will
be less effective, and our revenues and product development efforts may
decrease.
16
WE MAY NOT CONTINUE TO RECEIVE NECESSARY FDA CLEARANCES OR APPROVALS.
Our products and activities are subject to extensive, ongoing regulation by the
Food and Drug Administration and other governmental authorities. Delays in
receipt of, or failure to obtain or maintain, regulatory clearances and
approvals, or any failure to comply with regulatory requirements, could delay or
prevent our ability to market our product line.
WE MAY NOT RECEIVE APPROVALS BY FOREIGN REGULATORS THAT ARE NECESSARY FOR
INTERNATIONAL SALES.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary from country to country. If we, or our
international distributors, fail to obtain or maintain required pre-market
approvals or fail to comply with foreign regulations, foreign regulatory
authorities may require us to file revised governmental notifications, cease
commercial sales of our products in the applicable countries or otherwise cure
the problem. Such enforcement action by regulatory authorities may be costly.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT EXCEED INSURANCE COVERAGE.
We have obtained product liability insurance, including excess umbrella
coverage, in the aggregate amount of $10,000,000 covering the Vasotrac system;
OEM Module and Vasotrax hand-held monitor. However, there can be no assurance
that we will be able to maintain such insurance in amounts and with coverage
that will adequately cover associated risks or that such insurance will be
available in the future at premiums that can be economically justified. Lack of
such insurance could expose us to substantial damages, which could have a
material, adverse effect upon us.
17
WE HAVE A HISTORY OF LOSSES AND MAY EXPERIENCE CONTINUED LOSSES.
We have experienced losses every year since our incorporation. These losses have
resulted because we have expended more money in the course of researching,
developing and enhancing our technology and products and establishing our sales
and marketing organization than we have generated in revenues. We expect that
our operating expenses will remain relatively stable in the foreseeable future
even as we increase our sales and marketing activities, and expand our
operations. It is possible that we will never achieve or sustain the revenue
levels required for profitability.
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY BE UNAVAILABLE.
The commercialization of our product line and the development and
commercialization of any additional products may require greater expenditures
than expected in our current business plan. Our capital requirements will depend
on numerous factors, including:
o our rate of sales growth--fast growth may actually increase our need for
additional capital to hire additional staff, purchase additional component
inventories, finance the increase in accounts receivable and supply
additional support services;
o our progress in marketing-related clinical evaluations and product
development programs, all of which will require additional capital;
o our receipt of, and the time required to obtain, regulatory clearances and
approvals--the longer regulatory approval takes, the more working capital
we will need to support our regulatory and development efforts in advance
of sales;
o the level of resources that we devote to the development, manufacture and
marketing of our products--any decision we make to improve, expand or
simply change our process, products or technology will require increased
funds;
o our facilities requirements--as we grow we may need additional
manufacturing, warehousing and administration facilities and the costs of
the facilities would be borne long before any increased revenue from growth
would occur;
o market acceptance and demand for our products--although growth may increase
our capital needs, the lack of growth and continued losses would also
increase our need for capital; and
o financing strategies--our attempt to accelerate the otherwise lengthy
purchasing processes of hospitals by offering programs as an alternative to
outright purchasing and by providing purchasers with extended payment terms
and financing options will require additional capital.
We may be unable to predict accurately the timing and amount of our capital
requirements. We may be required to raise additional funds through public or
private financing, bank loans, collaborative relationships or other arrangements
earlier than expected. It is possible that banks, venture capitalists and other
investors may perceive our capital structure, our history of losses or the need
to achieve widespread acceptance of our technology as too great a risk to bear.
As a result, additional funding may not be available on attractive terms, or at
all. If we cannot obtain additional capital when needed, we may be forced to
agree to unattractive financing terms, to change our method of operation or to
curtail our operations.
COMMON STOCK WHICH IS AVAILABLE FOR IMMEDIATE RESALE MAY DEPRESS OUR MARKET
PRICE.
We have filed a registration statement with the Securities and Exchange
Commission covering the potential resale by some of our shareholders of up to
2,765,793 shares of common stock. The existence of a substantial number of
shares of common stock subject to immediate resale could depress the market
price for our common stock and impair our ability to raise needed capital.
18
A LOW STOCK PRICE OR FAILURE TO MAINTAIN A MINIMUM OF $2.5 MILLION OF
STOCKHOLDERS' EQUITY COULD RESULT IN OUR BEING DE-LISTED FROM THE NASDAQ MARKET
AND SUBJECT US TO REGULATIONS THAT COULD REDUCE OUR ABILITY TO RAISE FUNDS.
If our stock price were to drop below $1.00 per share and remain below $1.00 per
share for an extended period of time, or if we fail to maintain stockholders'
equity of at least $2.5 million (and do not meet alternative tests of either
having $35 million in market capitalization or $500,000 in annual net income),
or if we fail to maintain other Nasdaq continued listing criteria, Nasdaq may
de-list our common stock from the Nasdaq Market. In such an event, our shares
could only be traded on over-the-counter bulletin board systems. This method of
trading could significantly impair our ability to raise new capital.
In the event that our common stock was de-listed from the Nasdaq Market due to
low stock price, we may become subject to special rules, called penny stock
rules, that impose additional sales practice requirements on broker- dealers who
sell our common stock. The rules require, among other things, the delivery,
prior to the transaction, of a disclosure schedule required by the Securities
and Exchange Commission relating to the market for penny stocks. The
broker-dealer also must disclose the commissions payable both to the
broker-dealer and the registered representative and current quotations for the
securities, and monthly statements must be sent disclosing recent price
information.
In the event that our common stock becomes characterized as a penny stock, our
market liquidity could be severely affected. The regulations relating to penny
stocks could limit the ability of broker-dealers to sell our common stock and
thus the ability of purchasers in this offering to sell their common stock
favorably in the secondary market.
19
OUR COMMON STOCK IS SUBJECT TO PRICE VOLATILITY.
The market price of our common stock has been and is likely to continue to be
highly volatile. Our stock price could be subject to wide fluctuations in
response to various factors beyond our control, including:
o quarterly variations in operating results;
o announcements of technological innovations, new products or pricing by our
competitors;
o changes in, or failure to meet, financial estimates of securities analysts;
o the rate of adoption by physicians of Medwave's technology in targeted
markets;
o the timing of patent and regulatory approvals;
o the timing and extent of technological advancements;
o results of clinical studies;
o the sales of our common stock by affiliates or other shareholders with
large holdings; and
o general market conditions.
Our future operating results may fall below the expectations of securities
industry analysts or investors. Any such shortfall could result in a significant
decline in the market price of our common stock. In addition, the stock market
has experienced significant price and volume fluctuations that have affected the
market prices of the stock of many medical device companies and that often have
been unrelated to the operating performance of such companies. These broad
market fluctuations may directly and adversely influence the market price of our
common stock.
MEDWAVE'S BOARD CAN CREATE AND ISSUE DIFFERENT CLASSES OF STOCK WITHOUT APPROVAL
OF SHAREHOLDERS
Under Minnesota law and our Articles of Incorporation, no action by Medwave
shareholders is necessary, and only action of our Board of Directors is
required, to authorize the issuance by Medwave of any of our undesignated stock,
including designation of some such shares as preferred. Our Board of Directors
is empowered to establish, and to designate the name of, each class or series of
the undesignated shares and to set the terms of such shares (including terms
with respect to redemption, sinking fund, dividend, liquidation, preemptive,
conversion and voting rights and any preferences). Accordingly, our Board of
Directors, without shareholder approval, may issue undesignated stock with terms
that could adversely affect the voting power and other rights of holders of the
common stock. The existence of undesignated stock may have the effect of
discouraging an attempt, through acquisition of a substantial number of shares
of common stock, to acquire control of Medwave with a view to effecting a
merger, sale or exchange of assets or a similar transaction. The anti-takeover
effects of the undesignated shares may deny shareholders the receipt of a
premium on their common stock and may also have a depressive effect on the
market price of the common stock.
CERTAIN PROVISIONS OF THE MINNESOTA BUSINESS CORPORATION ACT MAY HAVE AN
ANTI-TAKEOVER EFFECT
Medwave is subject to Section 302A.673 of the Minnesota Business Corporation
Act. In general, Section 302A.673 prohibits certain publicly held Minnesota
corporations from engaging in a "business combination" with an "interested
shareholder" for a period of four years following the date of the transaction in
which the person or entity became an interested shareholder, unless either the
business combination or the share acquisition by which the shareholder became an
interested shareholder was approved by a disinterested committee of the
company's board of directors before the shareholder became an interested
shareholder. For purposes of Section 302A.673, "business combination" is defined
broadly to include mergers, assets sales, and other transactions resulting in a
financial benefit to the interested shareholder. An "interested shareholder" is
any person or entity who, together with affiliates and associates, owns (or
within the three immediately preceding years did own) 10% or more of the
corporation's voting shares.
Medwave is also subject to Section 302A.671 of the Minnesota Business
Corporation Act. Section 302A.671 provides that an "acquiring person" proposing
to make a "control share acquisition" must disclose certain information to the
target corporation and the target corporation's shareholders must thereafter
approve the control share acquisition or certain of the shares acquired in the
control share acquisition shall not have voting rights and shall be subject to
redemption by the target corporation for a specified period of time at the
market value of such shares. A "control share acquisition" is an acquisition of
20
shares of an issuing public corporation which results in the acquiring person's
voting power increasing from its pre-acquisition level to one of the following
levels of voting power: (i) at least 20 percent but less than 33-1/3 percent;
(ii) at least 33-1/3 percent but less than or equal to 50 percent; and (iii)
over 50 percent. The definition of a "control share acquisition" specifically
excludes acquisitions of shares from the corporation issuing such shares, and
acquisitions pursuant to plans of merger or exchange that are approved by the
shareholders of the corporation. Unless the disclosure provisions and the
shareholder approval provisions of Section 302A.671 are met, the shares acquired
in a control share acquisition that exceed the initial threshold of any of the
new ranges of voting power described above do not have voting rights and are
subject to the redemption by the target corporation.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We have never declared or paid a cash dividend on our common stock. We currently
intend to retain any earning for use in the operation and expansion of our
business and therefore do not anticipate paying any cash dividends in the
foreseeable future.
ITEM 2. PROPERTIES.
We lease property in Arden Hills, Minnesota and Danvers, Massachusetts. Our
Minnesota building lease expires in May 2004. The monthly lease payment is
approximately $4,722. The Danvers Building lease expires January 2005. The
monthly lease payment is approximately $2,200. We are generally responsible for
taxes, insurance, maintenance, and other expenses related to the operation of
the facility. Our production capacity is adequate for our present needs. We
believe that the property has been adequately maintained and is suitable for our
business as presently conducted.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The undersigned Inspectors of Election at the Annual Meeting of Shareholders of
Medwave Inc. report as follows:
There were 6,989,599 shares of Common Stock entitled to vote at the meeting and
a total of 5,931,955 shares (84.87%) were represented at the meeting.
1. Election of Directors:
FOR WITHHOLD
---------------------------------------- --------------------- -----------------------
Norman Dann 5,900,605 31,350
---------------------------------------- --------------------- -----------------------
William D. Corneliuson 5,900,605 31,350
---------------------------------------- --------------------- -----------------------
Timothy J. O'Malley 5,796,905 135,050
---------------------------------------- --------------------- -----------------------
Frank A. Katarow 5,900,605 31,350
---------------------------------------- --------------------- -----------------------
John Miclot 5,900,605 31,350
---------------------------------------- --------------------- -----------------------
2. Amend Articles of Incorporation and Bylaws to provide for staggered
election of directors and modify removal requirements for directors.
FOR AGAINST ABSTAIN BROKER NON-VOTE
--------------- ------------------- ----------------------- --------------------------
2,638,286 632,434 15,760 2,645,475
--------------- ------------------- ----------------------- --------------------------
21
3. Adopt Amended and Restated Stock Option Plan, including
reservation of 500,000 additional shares, adding provision for
discretionary grants to nonemployee directors and extension to
February 26, 2012 of term during which incentive stock options may
be granted.
FOR AGAINST ABSTAIN BROKER NON-VOTE
--------------- ------------------- ----------------------- --------------------------
3,100,811 158,909 26,760 2,645,475
--------------- ------------------- ----------------------- --------------------------
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock began trading in November 1995 on the Nasdaq SmallCap Market
under the symbol "MDWV" The following table sets forth the high and low closing
sales price for the Common Stock during each specified period as reported by the
Nasdaq Stock Market, Inc.:
FISCAL 2001 HIGH LOW
----------- ---- ---
First Quarter $8.25 $6.75
Second Quarter 7.625 7.063
Third Quarter 8.125 7.125
Fourth Quarter 7.50 4.00
FISCAL 2002 HIGH LOW
----------- ---- ---
First Quarter $4.80 $3.35
Second Quarter 5.00 3.20
Third Quarter 3.45 1.81
Fourth Quarter 2.35 1.15
There were approximately 175 record holders and 1,000 beneficial holders of our
common stock as of June 28, 2002. On June 28, 2002, the closing price for our
common stock was $1.00. We have never paid a dividend on our common stock and do
not intend to pay dividends in the foreseeable future.
In a private placement conducted from March to June, 2001, we issued units
consisting of common stock and warrants to 67 accredited investors. In the first
round of the private placement, on March 20, 2001 we issued 181,125 units, each
unit consisting of one share of common stock and a five-year warrant to purchase
one and one-half shares of common stock, for aggregate cash consideration of
$1,154,672. The warrants become exercisable six months after the date of
issuance at an exercise price of $6.425 per share. In the second round of the
private placement, on June 13, 2001 we issued 1,235,777 units, each unit
consisting of one share of common stock and a five-year warrant to purchase one
share of common stock, in consideration of $4,867,164 cash. The warrants become
exercisable six months after the date of issuance at an exercise price of $4.25
per share. Miller Johnson Steichen Kinnard, Inc., which acted as our agent in
the private placement, received a commission of $602,184, a five-year warrant to
purchase 13,603 shares at $6.425 per share and a five-year warrant to purchase
121,287 shares at $4.25 per share. We relied on Rule 506 under the Securities
Act of 1933 for the offer and sale of these securities. Each investor
represented in writing that the securities were being acquired for investment
and, in addition, the certificates representing the securities bear a
restrictive securities legend.
22
ITEM 6. SELECTED FINANCIAL DATA
Year Ended April 30
(Audited)
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
-----------------------------------------------------------------------
Revenue:
Net Sales $ 790,599 $ 555,233 $ 486,132 $ 509,530 $ 593,012
Operating expenses:
Cost of sales and product development 583,255 622,011 617,172 505,110 552,560
Research and development 673,852 1,142,685 1,122,247 1,230,072 1,033,145
Sales and marketing 1,597,744 1,157,149 823,373 855,153 1,091,780
General and administrative 709,506 602,564 691,771 506,621 491,229
-----------------------------------------------------------------------
Total operating expenses 3,564,357 3,524,409 3,254,563 3,096,956 3,168,714
-----------------------------------------------------------------------
Operating loss ($2,773,758) ($2,969,176) ($2,768,431) ($2,587,426) ($2,575,702)
Other income:
Interest income (other expense) 117,229 116,532 215,488 367,529 238,965
Other Income -- -- -- 1,500,000 --
-----------------------------------------------------------------------
Net loss $(2,656,529) $(2,852,644) $(2,552,943) $ (719,897) $ (2,336,737)
=======================================================================
Net loss per share - basic and diluted $ (0.39) $ (0.52) $ (0.47) $ (0.13) $ (0.48)
=======================================================================
Weighted average number of common and
common equivalent shares outstanding
- basic and diluted 6,841,991 5,522,363 5,475,886 5,398,331 4,916,654
=======================================================================
BALANCE SHEET DATA: 2002 2001 2000 1999 1998
Cash and cash equivalents $3,048.051 $1,116,589 $1,155,924 $1,175,756 $1,926,697
Working capital 3,243,511 1,461,596 3,007,302 3,965,613 2,903,011
Total assets 3,799,616 2,130,790 3,766,789 6,143,492 6,739,162
Total shareholders' equity 3,316,167 1,606,547 3,499,665 5,902,956 6,572,046
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Year Ended April 30
----------------------------------------------
2002 2001 2000
----------------------------------------------
Revenue:
Net Sales $790,599 $555,233 $486,132
Operating expenses:
Cost of sales and product development 583,255 622,011 617,172
Research and development 673,852 1,142,685 1,122,247
Sales and marketing 1,597,744 1,157,149 823,373
General and administrative 709,506 602,564 691,771
----------------------------------------------
Total operating expenses 3,564,357 3,524,409 3,254,563
----------------------------------------------
Operating loss ($2,773,758) ($2,969,176) ($2,768,431)
Other income:
Interest income (other expense) 117,229 116,532 215,488
Other Income -- -- --
----------------------------------------------
Net loss $ (2,656,529) $(2,852,644) $ (2,552,943)
==============================================
Net loss per share - basic and diluted $ (0.39) $ (0.52) $ (0.47)
==============================================
Weighted average number of common and
common equivalent shares outstanding
- basic and diluted 6,841,991 5,522,363 5,475,886
==============================================
Fiscal year ended April 30, 2002 compared to fiscal years ended April 30, 2001
and April 30, 2000
Operating revenue for fiscal 2002 was $790,599, an increase of $235,366 or 42.4%
from fiscal 2001 operating revenue of $555,233. Operating revenue for fiscal
2001 of $555,233, was an increase of $69,101 or 14.2% from fiscal year 2000
operating revenue of $486,132. The increase in operating revenue in fiscal 2002
was due to sales from a direct sales organization and from the sale of products
to international markets and the establishment of regional specialty dealers in
the U.S. The increase in operating revenue from fiscal year 2000 to fiscal year
2001 was primarily due to our adding direct sales representatives to support the
dealer network.
24
Operating expense for fiscal 2002 was $3,564,357, an increase of $39,948 or 1.1%
from fiscal year 2001. Operating expense for fiscal 2001 was $3,524,409, an
increase of $270,46 or 8.3% from fiscal year 2000 operating expense of
$3,254,563. The increase in operating expense from fiscal 2002 to fiscal 2001
was primarily due to an increase in direct sales and marketing expenses, offset
in part by a decrease in research and development expenses. The increase in
operating expense from fiscal 2000 to fiscal 2001 relates primarily to increased
sales and marketing expenses as we increased our direct sales representatives to
support the dealer network and as we created marketing material to support the
sales representatives and dealer network. However, part of this increase was
offset by a decrease in general and administrative expenses as we did not have
the cost of hiring a new CEO, an expense that were incurred in the fiscal year
2000.
The cost of sales and product development for fiscal 2002 were $583,255, a
decrease of $38,756 or 6.2% from fiscal year 2001 cost of sales and product
development expense of $622,011. The cost of sales and product development for
fiscal 2001 were $622,011, an increase of $4,839 or 0.8% from fiscal year 2000
cost of sales and product development expense of $617,172.
Research, development, and clinical expense for fiscal year 2002 were $673,852,
a decrease of $468,833 or 41.0% from fiscal year 2001 research and development,
and clinical expense of $1,142,685. Research, development, and clinical expense
for fiscal year 2001 were $1,142,685, an increase of $20,438 or 1.8% from fiscal
year 2000 research and development, and clinical expense of $1,122,247. The
decrease in research, development, and clinical expense from fiscal 2001 to
fiscal 2002 was attributed to a decrease in research and development activity as
we progressed from a product development to sales and marketing and less
reliance on outside contractors. The increase in research, development, and
clinical expense from fiscal 2000 to fiscal 2001 was primarily related to the
research and development of the Vasotrax hand-held monitor that was introduced
in November 2000.
General and administrative expense for fiscal year 2002 were $ 709,506, an
increase of $106,942 or 17.7% from fiscal year 2001 general and administrative
expense of $602,564. General and administrative expense for fiscal year 2001
were $602,564, a decrease of $89,207 or 12.9% from fiscal year 2000 general and
administrative expense of $691,771. The increase in general and administrative
expenses from 2001 to 2002 was due to an increase in monthly rent with the
addition of the Danvers, MA, sales and marketing office, increased insurance
costs and reliance on outside contractors for accounting services. The decrease
in general and administrative expenses from 2000 to 2001 was primarily due to
the one-time expense incurred in fiscal 2000 relating to the hiring of a new
President and CEO.
Sales and marketing expense for fiscal year 2002 were $1,597,744 an increase of
$440,595 or 38.0% from fiscal year 2001 sales and marketing expense of
$1,157,149. Sales and marketing expense for fiscal year 2001 were $1,157,149, an
increase of $333,776 or 40.5% from fiscal year 2000 sales and marketing expense
of $823,373. The increase in sales and marketing expense from fiscal 2001 to
fiscal 2002 relates to an increase of marketing activity, such as attendance at
more trade shows. A new expanded web site and the addition of direct sales
specialists. The increase in sales and marketing expense from fiscal 2000 to
fiscal 2001 relates primarily to increased sales and marketing expenses as we
increased our direct sales representatives to support the dealer network and as
we created marketing material to support the sales representatives and dealer
network.
Other income of $1,500,000 in fiscal year 1999 was derived from a technical
evaluation agreement entered into in September 1998.
Interest income for fiscal year 2002 was $117,229 an increase of $697 or .06%
from fiscal year 2001 interest income of $116,532. Interest income for fiscal
year 2001 was $116,532, a decrease of $98,956 or 45.9% from fiscal year 2000
interest income of $215,488. The increase in interest income in fiscal 2002 from
fiscal 2001 was due to a higher level of invested cash offset by decreasing
interest rates. The decrease in interest income in fiscal 2001 from fiscal 2000
was a result of the use of investments to fund operations.
25
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, and cash equivalents were $3,048,051and $1,116,589 at April
30, 2002 and April 30, 2001, respectively. We incurred cash expenditures of
$2,375,727 for operations for the fiscal year ended April 30, 2002.
With the cash and cash equivalents we believe that sufficient liquidity is
available to satisfy our working capital needs for approximately fourteen months
from the end of fiscal year April 2002. We have no significant capital
expenditure commitments and do not plan any significant sale of capital
equipment.
Cash flows used in operations decreased to $2,375,727 in fiscal year 2002 from
$2,916,658 in fiscal year 2001, a decrease of $540,931 or 18.5%. In both periods
cash flows were used primarily to fund operating losses, which were partially
offset by non-cash expenses for depreciation and amortization. The primary use
of cash in operations for fiscal year 2001 was for increases in inventory,
primarily due to our preparing for future anticipated sales as the result of our
signing agreements with foreign distributors and our starting production on the
Vasotrax hand-held blood pressure monitor, and for prepaid expenses primarily
the result of deposit on a future inventory purchase and for prepaid insurance
costs. These uses in cash were partially offset by increases in deferred income,
primarily due to our contract with Nihon Kohden for OEM modules and a
distribution agreement for the Japanese market, for fiscal year 2001, and
increases in accounts payable, primarily from increased trade payables, for
fiscal years 2001 and 2000.
Net investing activities used $60,334 and $165,202 of cash in fiscal years 2002
and 2001, respectively, for property and equipment additions, primarily sales
equipment in 2002 and for production tooling and molding for the Company's
products, in 2001, and provided cash of $2,093,439 for fiscal years 2001,
primarily due to the conversion of marketable securities into cash to be used
for operations.
Financing activities provided $4,366,149 and $949,086 of cash in fiscal years
2002 and 2001, respectively. In fiscal year 2002, the proceeds were primarily
from the June 2001 second round of the private placement of common stock and
warrants as well as the exercise of stock options. In fiscal year 2001, the
proceeds were from the March 2001 first round of our private placement of common
stock and warrants.
IMPACT OF INFLATION
Inflation has had no material effect on the Company's operations or financial
condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
26
Medwave, Inc.
(A Development Stage Company)
Financial Statements
Years Ended April 30, 2002 and 2001
CONTENTS
Report of Independent Auditors.........................................................................28
Audited Financial Statements
Balance Sheets.........................................................................................29
Statements of Operations...............................................................................31
Statement of Changes in Stockholders' Equity...........................................................32
Statements of Cash Flows...............................................................................35
Notes to Financial Statements..........................................................................36
Report of Independent Auditors
The Board of Directors and Stockholders
Medwave, Inc.
We have audited the balance sheets of Medwave, Inc. (a development stage
company) as of April 30, 2002 and 2001 and the related statements of operations,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended April 30, 2002 and the period from June 27, 1984 (inception) to
April 30, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Medwave, Inc. at April 30, 2002
and 2001, and the results of its operations and its cash flows for each of the
three years in the period ended April 30, 2002 and the period from June 27, 1984
(inception) to April 30, 2002, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 21, 2002
28
Medwave, Inc.
(A Development Stage Company)
Balance Sheets
APRIL 30
2002 2001
--------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $3,048,051 $1,116,589
Accounts receivable, net of allowance for doubtful accounts of
$18,012 and $13,203 for 2002 and 2001, respectively
283,114 208,009
Inventories 252,498 467,632
Prepaid expenses 143,297 193,609
--------------------------------------
Total current assets 3,726,960 1,985,839
Property and equipment:
Research and development equipment 210,633 218,292
Office equipment 100,048 113,086
Manufacturing and engineering equipment 285,158 285,504
Sales and marketing equipment 109,895 54,269
Leasehold improvements 31,613 31,613
--------------------------------------
734,347 702,764
Accumulated depreciation (661,691) (557,813)
--------------------------------------
72,656 144,951
--------------------------------------
Total assets $3,799,616 $2,130,790
======================================
29
APRIL 30
2002 2001
--------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 252,727 $ 278,887
Accrued payroll and related expenses 81,097 45,666
Deferred revenue 149,625 199,690
--------------------------------------
Total current liabilities 483,449 524,243
Stockholders' equity:
Common Stock, no par value:
Authorized shares - 50,000,000
Issued and outstanding shares - April 30, 2002--7,250,916 and
April 30, 2001--5,734,049 21,752,105 17,385,956
Deficit accumulated during the development stage (18,435,938) (15,779,409)
--------------------------------------
Total stockholders' equity 3,316,167 1,606,547
--------------------------------------
Total liabilities and stockholders' equity $ 3,799,616 $ 2,130,790
======================================
See accompanying notes.
30
Medwave, Inc.
(A Development Stage Company)
Statements of Operations
PERIOD FROM
JUNE 27, 1984
YEAR ENDED APRIL 30 (INCEPTION) TO
2002 2001 2000 APRIL 30, 2002
----------------------------------------------------- -----------------------
Revenue:
Net sales $ 790,599 $ 555,233 $ 486,132 $ 3,007,448
Operating expenses:
Cost of sales and product development 583,255 622,011 617,172 2,993,369
Research and development 673,852 1,142,685 1,122,247 9,789,733
General and administrative 709,506 602,564 691,771 5,216,181
Sales and marketing 1,597,744 1,157,149 823,373 6,173,476
----------------------------------------------------- -----------------------
Operating loss (2,773,758) (2,969,176) (2,768,431) (21,165,311)
Interest income 117,229 116,532 215,488 1,856,133
Other income - - - 1,500,000
----------------------------------------------------- -----------------------
Net loss $ (2,656,529) $ (2,852,644) $ (2,552,943) $ (17,809,175)
===================================================== =======================
Net loss per share - basic and diluted $(.39) $(.52) $(.47) $(5.63)
===================================================== =======================
Weighted average number of shares
outstanding - basic and diluted 6,841,991 5,522,363 5,475,886 3,160,479
===================================================== =======================
See accompanying notes.
31
Medwave, Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity
DEFICIT
ACCUMULATED ACCUMULATED
COMMON STOCK OTHER DURING THE
----------------------------- COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT LOSS STAGE TOTAL
-----------------------------------------------------------------------------
Issuance of Common Stock at $.15 per share in
July 1984 for capital equipment donated 10,000 $ 1,500 $ - $ - $ 1,500
-
Assets donated to Company by officer in
August 1984 - 1,145 - - 1,145
Net income for the period of June 27, 1984
(inception) to April 30, 1985 - - - 235 235
-----------------------------------------------------------------------------
Balance at April 30, 1985 10,000 2,645 - 235 2,880
Net income - - - 1,393 1,393
-----------------------------------------------------------------------------
Balance at April 30, 1986 10,000 2,645 - 1,628 4,273
Issuance of Common Stock in connection with
stock split in July 1986 190,000 - - - -
Net loss - - - (98,211) (98,211)
-----------------------------------------------------------------------------
Balance at April 30, 1987 200,000 2,645 - (96,583) (93,938)
Net loss - - - (131,931) (131,931)
-----------------------------------------------------------------------------
Balance at April 30, 1988 200,000 2,645 - (228,514) (225,869)
Net loss - - - (258,135) (258,135)
-----------------------------------------------------------------------------
Balance at April 30, 1989 200,000 2,645 - (486,649) (484,004)
Issuance of Common Stock at $.975 per share in
April 1990 for consulting services 3,500 3,413 - - 3,413
Accrual of dividends payable on the Redeemable
Convertible Preferred Stock, Series A
- (1,145) - (21,343) (22,488)
Net loss - - - (278,845) (278,845)
-----------------------------------------------------------------------------
Balance at April 30, 1990 203,500 4,913 - (786,837) (781,924)
Accrual of dividends payable on the Redeemable
Convertible Preferred Stock Series A
- - - (1,775) (1,775)
Accretion on the Redeemable Convertible
Preferred Stock - Series I - - - (9,711) (9,711)
Net loss - - - (553,710) (553,710)
-----------------------------------------------------------------------------
Balance at April 30, 1991 203,500 4,913 - (1,352,033) (1,347,120)
Accretion on the Redeemable Convertible
Preferred Stock - Series I - - - (10,649) (10,649)
Accretion on the Redeemable Convertible
Preferred Stock - Series II - - - (105,318) (105,318)
Net loss - - - (1,371,031) (1,371,031)
-----------------------------------------------------------------------------
Balance at April 30, 1992 (carried forward) 203,500 4,913 - (2,839,031) (2,834,118)
32
Medwave, Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity (continued)
DEFICIT
ACCUMULATED ACCUMULATED
COMMON STOCK OTHER DURING THE
----------------------------- COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT LOSS STAGE TOTAL
-----------------------------------------------------------------------------
Balance at April 30, 1992 (brought forward) 203,500 $ 4,913 $ - $ (2,839,031) $(2,834,118)
Accretion on the Redeemable Convertible
Preferred Stock - Series I - - - (10,914) (10,914)
Accretion on the Redeemable Convertible
Preferred Stock - Series II - - - (118,197) (118,197)
Net loss - - - (615,888) (615,888)
-----------------------------------------------------------------------------
Balance at April 30, 1993 203,500 4,913 - (3,584,030) (3,579,117)
Accretion on the Redeemable Convertible
Preferred Stock - Series I - - - (11,185) (11,185)
Accretion on the Redeemable Convertible
Preferred Stock - Series II - - - (121,904) (121,904)
Net loss - - - (646,480) (646,480)
-----------------------------------------------------------------------------
Balance at April 30, 1994 203,500 4,913 - (4,363,599) (4,358,686)
Accretion on the Redeemable Convertible
Preferred Stock - Series I - - - (11,463) (11,463)
Accretion on the Redeemable Convertible
Preferred Stock - Series II - - - (125,732) (125,732)
Net loss - - - (455,498) (455,498)
-----------------------------------------------------------------------------
Balance at April 30, 1995 203,500 4,913 - (4,956,292) (4,951,379)
Exercise of stock options and warrants 126,896 144,299 - - 144,299
Initial public offering of Common Stock, net of
expenses 1,610,000 6,833,491 - - 6,833,491
Preferred Stock conversion 2,750,164 5,476,163 - - 5,476,163
Accretion on the Redeemable Convertible
Preferred Stock - Series I - - - (5,874) (5,874)
Accretion on the Redeemable Convertible
Preferred Stock - Series II - - - (64,838) (64,838)
Accrual of dividends payable on the Redeemable
Convertible Preferred Stock - Series X and
Series I - - - (7,858) (7,858)
Change in unrealized loss on investments - - (33,245) - (33,245)
Net loss - - - (671,859) (671,859)
-------------
Comprehensive loss (705,104)
-----------------------------------------------------------------------------
Balance at April 30, 1996 4,690,560 12,458,866 (33,245) (5,706,721) 6,718,900
Exercise of stock options and warrants 128,178 305,837 - - 305,837
Change in unrealized loss on investments - - 8,326 - 8,326
Net loss - - - (1,610,467) (1,610,467)
-------------
Comprehensive loss (1,602,141)
-----------------------------------------------------------------------------
Balance at April 30, 1997 (carried forward) 4,818,738 12,764,703 (24,919) (7,317,188) 5,422,596
33
Medwave, Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity (continued)
DEFICIT
ACCUMULATED ACCUMULATED
COMMON STOCK OTHER DURING THE
----------------------------- COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT LOSS STAGE TOTAL
-----------------------------------------------------------------------------
Balance at April 30, 1997 (brought forward) 4,818,738 $12,764,703 $(24,919) $ (7,317,188) $5,422,596
Exercise of stock options and warrants 119,658 484,058 - - 484,058
Private Placement of Common Stock, in March
1998 at $7.50 per share, net of expenses 440,000 2,992,209 - - 2,992,209
Change in unrealized loss on investments - - 9,920 - 9,920
Net loss - - - (2,336,737) (2,336,737)
-------------
Comprehensive loss (2,326,817)
-----------------------------------------------------------------------------
Balance at April 30, 1998 5,378,396 16,240,970 (14,999) (9,653,925) 6,572,046
Exercise of stock options and warrants 58,200 53,650 - - 53,650
Change in unrealized loss on investments - - (2,843) - (2,843)
Net loss - - - (719,897) (719,897)
-------------
Comprehensive loss (722,740)
-----------------------------------------------------------------------------
Balance at April 30, 1999 5,436,596 16,294,620 (17,842) (10,373,822) 5,902,956
Exercise of stock options and warrants 63,000 142,250 - - 142,250
Change in unrealized loss on investments - - 7,402 - 7,402
Net loss - - - (2,552,943) (2,552,943)
-------------
Comprehensive loss (2,545,541)
-----------------------------------------------------------------------------
Balance at April 30, 2000 5,499,596 16,436,870 (10,440) (12,926,765) 3,499,665
Exercise of stock options 53,328 - - - -
Private Placement of Common Stock, in March
2001 at $6.38, net of expenses 181,125 949,086 - - 949,086
Change in unrealized loss on investments - - 10,440 - 10,440
Net loss - - - (2,852,644) (2,852,644)
-------------
Comprehensive loss - - - - (2,842,204)
-----------------------------------------------------------------------------
Balance at April 30, 2001 5,734,049 $17,385,956 $ - $(15,779,409) $1,606,547
Exercise of options 19,773 12,500 12,500
Private Placement of Common Stock, in June 2001
at $4.25, net of expenses 1,235,777 4,353,649 - - 4,353,649
Private Placement look-back provision 261,317 - - - -
Net loss - - - (2,656,529) (2,656,529)
-----------------------------------------------------------------------------
Balance at April 30, 2002 7,250,916 $21,752,105 $ - $(18,435,938) $3,316,167
=============================================================================
See accompanying notes.
34
Medwave, Inc.
(A Development Stage Company)
Statements of Cash Flows
PERIOD FROM
JUNE 27, 1984
YEAR ENDED APRIL 30 (INCEPTION) TO
2002 2001 2000 APRIL 30, 2002
------------------------------------------------ -----------------
OPERATING ACTIVITIES
Net loss $(2,656,529) $(2,852,644) $ (2,552,943) $(17,809,178)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 134,282 104,451 62,988 921,029
Amortization - 10,005 18,014 136,017
Loss on sale of equipment - - 7,375
Issuance of Common Stock for consulting
services - - - 3,413
Changes in operating assets and liabilities:
Accounts receivable (75,105) (108,821) (68,119) (283,114)
Inventories 215,134 (209,755) (119,939) (252,498)
Prepaid expenses 50,312 (117,013) (882) (143,297)
Accounts payable (26,160) 62,820 39,571 252,727
Accrued payroll 35,431 (5,391) (12,983) 81,097
Deferred revenue (50,065) 199,690 - 149,625
------------------------------------------------ -----------------
Net cash used in operating activities (2,372,700) (2,916,658) (2,634,293) (16,936,804)
INVESTING ACTIVITIES
Purchase of property and equipment (61,987) (165,202) (74,940) (1,020,078)
Patent expenditures - - - (136,017)
Purchase of investments - - (1,814,634) (38,908,724)
Sales and maturities of investments - 2,093,439 4,361,785 38,908,724
Proceeds from sale of equipment - - - 21,663
------------------------------------------------ -----------------
Net cash (used in) provided by investing (61,987) 1,928,237 2,472,211 (1,134,432)
activities
FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock 4,366,149 949,086 142,250 16,271,029
Net proceeds from issuance of Convertible
Preferred Stock - - - 4,848,258
------------------------------------------------ -----------------
Net cash provided by financing activities 4,366,149 949,086 142,250 21,119,287
------------------------------------------------ -----------------
(Decrease) increase in cash and cash equivalents 1,931,462 (39,335) (19,832) 3,048,051
Cash and cash equivalents at beginning of period 1,116,589 1,155,924 1,175,756 -
------------------------------------------------ -----------------
Cash and cash equivalents at end of period $ 3,048,051 $ 1,116,589 $1,155,924 $ 3,048,051
================================================ =================
See accompanying notes.
35
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements
April 30, 2002
1. BUSINESS ACTIVITY
Medwave, Inc. (the Company), a development stage company, is engaged exclusively
in the development, manufacturing, and marketing of a proprietary, noninvasive
system that monitors arterial blood pressure of adults, and in the development
of related technology and products. Utilizing the Company's proprietary
technology, the VASOTRAC(R) system monitors blood pressure continually,
providing new readings approximately every 15 heartbeats. In 1997, the Company
began development of a hand-held blood pressure measurement device. This
hand-held device is based upon the technology used in the Vasotrac System, and
was introduced to the market in 2001. The Company has also developed and OEM
module version of the Vasotrac Monitor, which has been released for production
in the spring of 2002.
2. MANAGEMENT'S PLANS CONCERNING CASH FLOWS AND ONGOING OPERATIONS
The Company continues to experience net losses and has an accumulated deficit in
stockholders' equity of $18.4 million through April 30, 2002. The Company
believes that net proceeds from its private placement completed in June 2001
(see Note 4) will be sufficient to fund its operations through April 30, 2003.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining maturity of
three months or less to be cash equivalents. Cash equivalents are carried at
cost which approximates market value.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost or market on the first-in, first-out
(FIFO) method. The majority of inventory consists of purchased components.
36
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements
April 30, 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over estimated useful lives of the assets as follows:
Research and development equipment 3 - 5 years
Office equipment 3 - 7 years
Manufacturing and engineering equipment 18 months to 5 years
Sales and marketing equipment 18 months to 5 years
Leasehold improvements are amortized over the related lease term or estimated
useful life of the assets, whichever is shorter.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred income taxes
are provided for temporary differences between the financial reporting and the
tax bases of assets and liabilities.
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment of the product, with
appropriate provisions for estimated allowances.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
37
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements
April 30, 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to operations as incurred.
PRODUCT WARRANTY COST
The Company's policy is to make provisions in the year of sale for the estimated
future repair costs on products covered by warranty.
NET LOSS PER SHARE
For all years presented, the Company's basic and diluted loss per share is the
same because the effects of all options, warrants, and convertible securities
were antidilutive.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
4. CAPITAL STOCK
In November 1995, the Company sold 1,610,000 shares of Common Stock in an
initial public offering from which the Company received net proceeds of
$6,800,000.
38
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements
April 30, 2002
4. CAPITAL STOCK (CONTINUED)
In March 1998, the Company sold 440,000 shares of Common Stock in a private
placement for $7.50 per share from which the Company received net proceeds of
$2,992,209.
In March 2001, the Company sold 181,125 shares of Common Stock in the first
round of a private placement for $6.38 per share, resulting in net proceeds of
$949,086.
The March 2001 round of the private placement contains a "look-back" provision
in which the participants can receive an additional 297,555 shares for no
additional consideration in the event that certain conditions exist at specified
dates through July 30, 2002. In fiscal 2002, the Company issued 261,317 shares
as a result of this "look-back" provision.
In June 2001, the Company sold 1,235,778 shares of its Common stock in a private
placement for $4.25 per share, resulting in net proceeds of approximately $4.4
million.
5. LEASES
The Company leases its office, research and development, sales, and production
facilities under operating leases that expire through January 2005 . Operating
expenses, including maintenance, utilities, real estate taxes, and insurance,
are paid by the Company. Total rent expense under operating leases was $69,778,
$73,849, and $53,712 for the years ended April 30, 2002, 2001, and 2000,
respectively.
Future minimum rental payments required under leases that have remaining terms
in excess of one year as of April 30, 2002 are as follows:
2003 $65,254
2004 84,048
2005 25,737
-----------
$175,039
===========
39
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements
April 30, 2002
6. INCOME TAXES
At April 30, 2002, the Company had net operating loss carryforwards of
approximately $17.8 million and research and development tax credit
carryforwards of approximately $540,000. These carryforwards are available to
offset future taxable income through 2022; however, $133,000 of the net
operating loss expired in 2002.
Included in the NOL is approximately $527,000 of deductions resulting from
disqualifying dispositions of stock options. These deductions currently have a
full valuation allowance and when realized for financial statement purposes they
will not result in a reduction in income tax expense. Rather, the benefit will
be recorded as additional paid-in capital.
The Company's ability to utilize its net operating loss carryforwards to offset
future taxable income is subject to certain limitations under Section 382 of the
Internal Revenue Code due to changes in the equity ownership of the Company.
No income taxes were paid for the years ended April 30, 2002, 2001, and 2000,
respectively.
Components of deferred tax assets are as follows:
APRIL 30
2002 2001
------------------------------------
Net operating loss carryforwards $ 6,754,000 $ 5,863,000
Research and development credit carryforwards 540,000 540,000
Other 136,000
Less valuation allowance (7,430,000) (6,403,000)
------------------------------------
Net deferred tax assets $ - $ -
====================================
40
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements
April 30, 2002
7. STOCK OPTIONS AND WARRANTS
The Company has a stock option plan that includes both incentive stock options
and non-statutory stock options to be granted to certain eligible employees or
consultants of the Company. The maximum number of shares of Common Stock
currently reserved for issuance is 2,200,000 shares. A majority of the options
granted have ten-year terms and vest and become fully exercisable at the end of
four years of continued employment.
Option activity is summarized as follows:
SHARES OPTIONS OUTSTANDING WEIGHTED AVERAGE
AVAILABLE ------------------------------- EXERCISE PRICE
FOR GRANT PLAN NON-PLAN PER SHARE
------------------------------------------------------------------
Balance at April 30, 1999 272,000 1,259,000 20,000 5.14
Granted (455,000) 455,000 - 6.98
Exercised - (63,000) - 2.26
Canceled 291,000 (291,000) - 12.38
----------------------------------------------
Balance at April 30, 2000 108,000 1,360,000 20,000 4.34
Granted (75,500) 75,500 - 7.13
Exercised - (79,000) - 1.44
Canceled 157,500 (157,500) - 7.56
----------------------------------------------
Balance at April 30, 2001 190,000 1,199,000 20,000 4.28
Reserved for issuance 500,000 - - -
Granted (395,000) 395,000 - 2.72
Exercised - (30,000) - 1.92
Canceled 475,000 (475,000) - 3.66
----------------------------------------------
Balance at April 30, 2002 770,000 1,089,000 20,000 $ 4.06
==============================================
41
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements
April 30, 2002
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about the stock options outstanding
at April 30, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------------------------------------------------------------------- --------------------------------
$ .75 130,000 2 years $ .75 130,000 $ .75
1.25 - 2.25 465,000 2 years 1.94 60,000 2.08
3.00 - 5.25 150,000 4 years 3.90 85,000 4.46
6.75 - 13.50 364,000 6 years 8.02 267,000 8.42
---------------- ----------------
0.75 - 13.50 1,109,000 3.58 years 4.06 542,000 5.26
================ ================
Options outstanding expire at various dates during the period from 2003 through
2009. The number of options exercisable as of April 30, 2002, 2001, and 2000 was
542,000, 897,250, and 876,750, respectively, at weighted average exercise prices
of $5.26, $3.15, and $2.55 per share, respectively.
In connection with the IPO in 1995, the Company issued warrants to purchase
140,000 shares of Common Stock at an exercise price of $6.00 per share. These
warrants expired in July 2001.
In connection with the March 2001 round of the private placement, the Company
issued warrants to purchase 289,799 shares of Common Stock at an exercise price
of $6.43 per share. The warrants expire in March 2006.
In connection with the June round of the private placement, the Company issued
warrants to purchase 1,334,151 shares of Common Stock at an exercise price of
$4.25 per share. The warrants expire in June 2006.
42
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements
April 30, 2002
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
PRO FORMA DISCLOSURES
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation (Statement 123), requires use of option
valuation models that were not developed for use in valuing employee stock
options.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions for 2002,
2001, and 2000: risk-free interest rates ranging from 5.11% to 6.00%,
respectively; dividend yield of 0%; volatility factor of the expected market
price of the Company's common stock of .57, .56, and .57, respectively, and a
weighted average expected life of the option of five years.
The weighted average fair value of options granted during the years ended April
30, 2002, 2001, and 2000 was $1.32, $3.49, and $3.40 per share, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
43
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements
April 30, 2002
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
APRIL 30
2002 2001 2000
--------------------------------------------------------
Actual net loss $(2,656,529) $(2,852,644) $(2,552,943)
Pro forma net loss (3,167,356) (3,182,566) (2,313,865)
Pro forma net loss per common share (.46) (.58) (.42)
The pro forma effect on net loss for fiscal 2002, 2001, and 2000 is not
representative of the pro forma effect on net loss in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to fiscal 1996.
8. CONTRACTS
In September 1998, the Company entered into a technical evaluation agreement
with an interested party related to its blood pressure technology, specifically
its hand-held blood pressure device. The Company received and recognized other
income of $1,500,000 when the agreement terminated with no additional agreement
with the interested party.
9. SEGMENT REPORTING
The Company's business activities are aggregated into one reportable segment,
given the similarities of economic characteristics between the activities and
the common nature of the Company's products and customers. The Company does not
currently have any single geographic area outside the United States that
accounts for more than 10% of the Company's sales. The total sales outside the
United States account for approximately 33% and 20% of the Company's sales in
fiscal years ended April 30, 2002 and 2001, respectively.
44
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements
April 30, 2002
10. QUARTERLY FINANCIAL DATA
FIRST SECOND THIRD FOURTH
2002 QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------------------------
Net sales $ 172,891 $ 129,949 $191,866 $300,892
Operating loss (702,875) (745,487) (657,934) (667,461)
Net loss (665,064) (697,647) (638,886) (654,931)
Basic and diluted net loss per share (.10) (.10) (.09) (.09)
2001
- --------------------------------------------
Net sales $ 84,480 $ 95,250 $164,707 $210,796
Operating loss (719,269) (783,179) (764,143) (702,585)
Net loss (669,064) (750,487) (743,676) (689,417)
Basic and diluted net loss per share (.12) (.14) (.14) (.12)
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the directors
and executive officers of the Company as of June 30, 2002. A summary of the
background and experience of each of these individuals is set forth after the
table.
The directors and executive officer of the Company are:
Name Age Position Class of Director
- --------------------------------------- ------- ------------------------------------- --------------------
William D. Corneliuson(1),(2) 58 Chairman and Director Class 2
Norm Dann(1),(2) 74 Director Class 1
Frank A. Katrow(2) 43 Director Class 3
John L. Miclot(1) 43 Director Class 3
Timothy J. O'Malley 40 President, Chief Executive Officer, Class 2
and Director, Secretary
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Members of the Board of Directors are divided into classes. Upon their initial
election, the Class I directors hold office for a term expiring at the 2003
Annual Meeting of Shareholders, the Class II directors will hold office for a
term expiring at the 2004 Annual Meeting of shareholders, and the Class III
directors will hold office for a term expiring at the 2005 Annual Meeting of
shareholders. Commencing with the 2003 Annual Meeting of shareholders, the
shareholders will elect only one class of directors each year, with directors of
such class so elected to hold office for a term expiring at the third Annual
Meeting of shareholders following their election. Executive officers of the
Company are appointed by and serve at the discretion of the Board of Directors.
There are no family relationships among the directors and executive officers.
The Board of Directors has an Audit Committee, which (i) reviews the Company's
annual financial statements, (ii) makes recommendations regarding the Company's
independent auditors and scope of auditor services, (iii) reviews the adequacy
of accounting and audit policies, compliance assurance procedures and internal
controls, (iv) reviews non-audit service performed by auditors to maintain
auditors' independence, and (v) reports to the Board on the adequacy of
disclosures and adherence to accounting principles. The Board of Directors also
has formed a Compensation Committee, which (i) reviews compensation philosophy
and major compensation benefits for executives, (ii) administers the Company's
Stock Option Plan, and (iii) approves executive officers' compensation.
TIMOTHY J. O'MALLEY is the President, Chief Executive Officer, and a director of
the Company. He has served in these positions since October 1999. From 1984
until 1999, Mr. O'Malley was an employee of Siemens Medical Systems, Inc.
Throughout his employment he served in a variety of technical, sales, marketing
and general management roles. At the time of his departure from Siemens, Mr.
O'Malley was Vice President/Division Manager of Siemens Medical Systems,
Electromedical Division for North America. Prior to joining Siemens, Mr.
O'Malley worked as a biomedical engineer at a small privately held company in
the Chicago area, selling and supporting medical equipment service and
maintenance agreements. Mr. O'Malley received his Associates of Applied Science
degree in 1983 from Oakton College in Des Plaines, Illinois and attended DePaul
University of Chicago from 1986 until 1991, with an emphasis in Business
Management and Marketing.
46
WILLIAM D. CORNELIUSON, has been a director of the Company since May 1999 and
Chair of the Board since February 2002. Mr. Corneliuson is President of B.C.
Holdings, Inc., a private investment company. Mr. Corneliuson has been with B.C.
Holdings, Inc. since 1993. From 1976 to 1993, Mr. Corneliuson was President,
Co-Founder, and Vice Chairman of the Board of Strong/Corneliuson Capital
Management, Inc. He was also co-founder of the Strong family of mutual funds.
NORMAN DANN, a director of the Company since August 1995, has extensive
experience in the medical device industry. Since 1992, Mr. Dann has been a
business consultant concentrating in the areas of venture capital, strategic
planning, marketing and product development. Mr. Dann also currently serves as a
director of Medical CV Inc. and several private companies. From 1980 to 1992,
Mr. Dann served as an executive officer of and consultant to Pathfinder
Ventures, Inc., a venture capital firm ("Pathfinder"), and served as a general
partner of three of Pathfinder's funds and partnerships. From 1971 to 1977, Mr.
Dann served as Vice President of Sales and Marketing and Senior Vice President
of Development with Medtronic, Inc., a leading manufacturer of cardiac
pacemakers and other medical products. In 1960, Mr. Dann founded The Dann
Company, an independent representative and service organization for medical
products, which was acquired by Medtronic, Inc. in 1971. Mr. Dann holds a B.S.
degree in industrial engineering from Pennsylvania State University.
FRANK A. KATAROW, a Director of the Company since 2002, has been President and
Chief Operating Office of BCI, Inc., a designer, manufacturer and distributor of
patient monitoring equipment, since November 1993. Mr. Katarow has been employed
by BCI since October 1980 serving in various capacities, including Executive
Vice President from January 1993 to November 1993, Senior Vice President and
General Manager from March 1992 to January 1993, and Vice President of
Operations from June 1990 to March 1992. In addition, Mr. Katarow is the
President of SurgiVet, Inc. the wholly owned veterinary division of BCI, Inc.
BCI, then a public company, was successfully sold to Smiths Group, plc., in
1999, a public company traded on London exchange.
JOHN L. MICLOT, a Director of the company since 2002, has since July 1999 been
Senior Vice President and President, Home Care Division of Respironics, Inc., a
developer, manufacturer and marketer of medical devices used for the treatment
of patients suffering from respiratory disorders. He joined Respironics in
February 1998 as Group Vice President, Sleep Disorders. In August 1998, in
addition to his Group Vice President role he acquired the added responsibility
of Vice President of Sales and Marketing from 1995 to February of 1998. Mr.
Miclot had been Senior Vice President of Sales and Marketing for Healthdyne.
Prior to that time, he was Vice President of Marketing for Medex, Inc. which he
joined in February 1994. Mr. Miclot previously held several senior positions in
marketing, international activities and sales with Ohmeda, a Division of British
Oxygen Corporation, which he joined in 1988.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and directors,
and persons who beneficially own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors, and greater than 10% shareholders
are required by Exchange Act regulations to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Form 5 was
required for such persons, the Company believes that during the fiscal year
ending April 30, 2002, all filing requirements applicable to its officers,
directors, and greater than 10% beneficial owners were complied with.
47
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information regarding compensation earned
by or awarded to Timothy J. O'Malley, the President and Chief Executive Officer,
during the Company's last three fiscal years ended April 30, 2002, 2001 and
1999. No other executive officer of the Company received total salary and bonus
compensation in excess of $100,000 for the fiscal year ended 2002.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------- ------------
Securities All Other
Name and Principal Position Year Salary Bonus Underlying Options Compensation
(# of shares)(1)
- ------------------------------------- ------- ----------- -------------- ---------------------- -------------------
Timothy J. O'Malley 2002 $219,375 ---- 185,000 ----
President and Chief Executive 2001 180,000 ---- ---- ----
Officer 2000 96,808 ---- 225,000 ----
- ----------
(1) Number of shares of Common Stock subject to options that were granted during
the year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No options were granted during fiscal year 2001 to the executive officer named
in the above Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth certain information concerning each exercise of
stock options during the year ended April 30, 2002 by the executive officer
named in the above Summary Compensation Table and the aggregated fiscal year-end
value of the unexercised options of such executive officer.
Number of Unexercised Value of Unexercised
Securities Underlying In-the-Money Options at Fiscal
Options at Fiscal Year-End (#) Year- End ($)(1)
-------------------------------- --------------------------------
Shares Value
Acquired on Realized Exercisable Unexercisable Exercisable Unexercisable
Name Exercise (#) ($)
- -------------------------- -------------- ------------- --------------- ---------------- -------------- -----------------
Timothy J. O'Malley - 0 - $ - 0 - 168,750 241,250 --- ----
(1) Based on the differences between the closing price of the Company's Common
Stock at fiscal year-end and the option exercise price.
COMPENSATION OF DIRECTORS
Directors are not currently paid fees for attending meetings. Under the
Company's Stock Option Plan, each non-employee director receives an option to
purchase 30,000 shares of Common Stock upon his initial election to the Board.
Pursuant to such provision, in August 1995 Mr. Dann received a non-qualified
option to purchase 30,000 shares of Common Stock at an exercise price of $3.00
per share; in May 1999 Mr. Corneliuson received a non-qualified option to
purchase 30,000 shares of Common Stock at an exercise price of $8.94; and in
July 1999,and in May 2002, a non-qualified option ot purchase 10,000 shares at
$1.28 per share. In February 2002, Mr. Katarow and Mr. Miclot each received a
non-qualified option to purchase 30,000 shares of Common Stock at an exercise
price of $1.60. Each such option is for a term of ten years and vests over a
four-year period. In addition, after three years of service each non-employee
director receives a ten-year non-qualified option for 10,000 shares, vesting
after one year, each year he or she continues to serve as a director. Mr. Dann
received an option for 10,000 shares in November 1998 at an exercise price of
$13.50, and an option for 10,000 shares in November 1999 at an exercise price of
$6.75, an option for 10,000 shares in November 2000 at an exercise price of
$7.125 and an option for 10,000 shares in November 2001 at an exercise price
$3.07.
48
The Company has non-compete and confidentiality agreements with its employees.
In addition, the Company has a letter agreement of employment with Mr. O'Malley.
The letter agreement outlines the terms of Mr. O'Malley's stock options and
compensation plan but does not include a non-compete agreement. The letter
agreement does not provide for any severance benefits. The Company does not have
key man life insurance on Mr. O'Malley however at a recent Board meeting it was
decided that this would be investigated. The Company does not have an employment
agreement with, or key man life insurance on, any other individual.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of shares of Common
Stock of the Company on June 30, 2002, by each of the executive officers named
in the Summary Compensation Table set forth in Item 11, by each director, by all
directors and current executive officers as a group and by all persons known by
us to be beneficial owners of more than 5% of the Company's common stock. Except
as otherwise indicated, each of the shareholders listed in the table or included
within a group listed in the table possesses sole voting and investment power
with respect to the shares indicated.
49
Name and Address Shares Beneficially Percent of
Owned(1) Ownership
- ------------------------------------------- ---------------------- -----------------
David B. Johnson 634,058 (4)(5)(6) 8.7%
C/o Miller Jounson Steichen Kinnard, Inc.
920 Second Avenue South
Minneapolis, MN 55416
G. Kent Archibald 616,377 (7) 8.5%
17 Evergreen Lane
North Oaks, MN 55127
Aaron Boxer Revocable Trust 504,539 (8)(9) 7.0%
7287 Sidonia Court
Boca Raton, FL 33433
William D. Corneliuson 368,300 5.1%
777 East Wisconsin Avenue
Suite 3020
Milwaukee, WI 53202
Tim O'Malley 198,150(3) 2.7%
4382 Round Lake Road West
St. Paul, MN 55112
Norman Dann 70,000(2) *
4382 Round Lake Road West
Arden Hills, MN 55112
Frank Katarow -------- --------
N7 W22025 Johnson Road
Waukesha, WI 53186
John Miclot -------- --------
1001 Murry Ridge Lane
Murrysville, PA 15668-8550
All Current Executive Officers and
Directors as a Group (5 persons)
* Less than 1%
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or member of a group to acquire them within 60 days are treated
as outstanding only when determining the amount and percentage owned by
such person or group.
(2) Includes options to purchase 60,000 shares of common stock which are
currently exercisable or will become exercisable within 60 days of June 30,
2002.
50
(3) Such shares are not outstanding but may be purchased upon exercise of
options which are currently exercisable or will become exercisable within
60 days of June 30, 2002.
(4) Based on information set forth in a schedule 13G/A filed under the Exchange
Act on February 14, 2002.
(5) Includes 30,000 units (consisting of 30,000 shares and warrants to purchase
30,000 shares.)
(6) Includes 278,861 shares owned by Betty Johnson, wife of David B. Johnson:
7800, 8000, and 4600 shares owned respectively by each of Todd, Molly, and
Joel Johnson, children of David B. Johnson; and 143,000 shares and 20,000
units (consisting of 20,000 shares and warrants to purchase 20,000 shares)
owned by a foundation controlled by David B. Johnson.
(7) Based on information set forth in a schedule 13G/A filed under the Exchange
Act on February 14, 2002.
(8) Based on information set forth in a schedule 13G/A filed under the Exchange
Act on February 15, 2002.
(9) These shares were previously reported as being held by Aaron Boxer
individually.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There are no related party transactions.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
See Part II, Item 8.
(a)(2) Exhibits
See Exhibit Index on page following signatures.
(a)(3) Financial Statement Schedules
None
(b) Reports on Form 8-K
None.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MEDWAVE, INC.
Date: July 29, 2002 By /s/ Tim O'Malley
------------------------------
Timothy J. O'Malley, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Tim O'Malley President, CEO, and Director July 29, 2002
- ---------------------------------------- (principal executive officer)
Timothy J. O'Malley
Director July 29, 2002
/s/ William D. Corneliuson
- ----------------------------------------
William D. Corneliuson
/s/ Norman Dann Director July 29, 2002
- ----------------------------------------
Norman Dann
/s/ Frank A. Katarow Director July 29, 2002
- ----------------------------------------
Frank A. Katarow
/s/ John L. Miclot Director July 29, 2002
- ----------------------------------------
John L. Miclot
52
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
MEDWAVE, INC.
EXHIBIT INDEX
TO
FORM 10-K FOR FISCAL YEAR ENDED APRIL 30, 2002
Exhibit
Number Description
- ------- -----------
3.1 Amended and Restated Articles of Incorporation - incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form SB-2, Reg. No. 33-96878C*
3.2 Amended and Restated Bylaws - incorporated by reference to Exhibit 3.4 to the Registrant's
Registration Statement on Form SB-2, Reg. No. 33-96878C*
10.1** Amended and Restated Medwave Stock Option Plan (as amended through August 4, 1998 - incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended
October 31, 1998)*
10.2** Forms of Incentive and Nonstatutory Stock Option Agreements under Amended and Restated Stock
Option Plan - incorporated by reference to Exhibit 10.2 to the Registrant's Annual Report on From
10-KSB for the fiscal year ended April 30, 1996*
10.4** Letter agreement of employment with Timothy O'Malley dated September 9, 1999 and amendment dated
September 16, 1999 - incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended October 31, 1999*
10.5 Critical Care Concepts Distributor Agreement - incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 2000*
10.6 Agreement of Lease extension dated November 30, 1999 between the Company and AMB Property, L.P. -
incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 2000*
23 Consent of Ernst & Young LLP
- ------------
* Incorporated by reference to a previously filed report or document, SEC
File No. 0-28010 unless otherwise indicated
** Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K