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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 ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from _________ to _________
COMMISSION FILE NUMBER: 0-22146
APPLIED BIOMETRICS, INC.
(Exact name of registrant as specified in charter)
MINNESOTA 41-1508112
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
501 EAST HIGHWAY 13, SUITE 108
BURNSVILLE, MN 55337
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (612) 890-1123
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding past 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 [ ]
[X] Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
As of March 23, 1999, assuming as market value the price of $8.00 per share (the
last sales price of the Company's Common Stock on the Nasdaq SmallCap Market),
the aggregate market value of shares held by non-affiliates was approximately
$34,100,600.
As of March 23, 1999, the Company had outstanding 4,462,337 shares of Common
Stock, $.01 par value.
Documents Incorporated by Reference: Portions of the Company's Proxy Statement
for its Annual Meeting of Shareholders to be held on June 14, 1999 (the "1999
Proxy Statement") are incorporated by reference into Part III of this Form 10-K,
to the extent described in Part III. The 1999 Proxy Statement will be filed
within 120 days after the end of the fiscal year ended December 31, 1998.
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TABLE OF CONTENTS
PART I
PAGE NO.
--------
Item 1. Business 2
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security 14
Holders
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosure about Market Risk 18
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers of Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain
Beneficial Owners and Management 19
Item 13. Certain Relationships and Related Transactions 19
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K 19
SIGNATURES 20
FINANCIAL STATEMENTS F1
1
STATEMENTS INCLUDED IN THIS FORM 10-K THAT ARE NOT HISTORICAL OR CURRENT FACTS
ARE "FORWARD-LOOKING STATEMENTS" MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY.
AMONG THESE RISKS AND UNCERTAINTIES ARE (i) THE COMPANY'S LIMITED REVENUES,
HISTORY OF LOSSES, FINANCIAL RESOURCES AND UNCERTAINTY OF FUTURE RESULTS; (ii)
THE UNCERTAINTY OF MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS; (iii) THE
REGULATED NATURE OF THE MEDICAL DEVICE MARKETS AND THE POTENTIAL FOR
GOVERNMENTAL REGULATIONS TO CHANGE, IMPACTING THE COMPANY'S ABILITY TO MARKET
ITS PRODUCTS, (iv) THE POTENTIAL FOR OTHER MEDICAL DEVICE COMPANIES TO DEVELOP
COMPETITIVE PRODUCTS, (v) THE FACT THAT THE COMPANY'S PRODUCTS ARE IN
DEVELOPMENT AND THAT THERE ARE INHERENT RISKS TO RELIABILITY, PERFORMANCE AND
COMPLETION SCHEDULES IN DEVELOPING MEDICAL DEVICES EMPLOYING NEW TECHNOLOGIES,
AND (vi) THE FACT THAT THE COMPANY IS INEXPERIENCED IN MANUFACTURING ITS
PRODUCTS IN COMMERCIAL QUANTITIES.
PART I
ITEM 1: DESCRIPTION OF BUSINESS
INTRODUCTION
Applied Biometrics (the "Company") is a late-development-stage medical device
company, in the business of development and commercialization of advanced
medical diagnostic and monitoring systems. The Company's core competencies in
ultrasound transducer technology, signal processing, cardiac anatomy and
pathology and the fluid dynamics of blood flow position it to develop and
commercialize a range of diagnostic and patient monitoring products. The company
is currently involved with the development of a new product, which monitors the
blood pumping capability of a patient's heart, and is used during and after
open-heart surgery.
ORIGINS
In the mid 1980's the Company's founders investigated the use of then new
technology - doppler ultrasound - to measure the velocity of blood in the
ascending aorta of the human body. In the ensuing years, they developed two
products which used ultrasound sensors to measure blood flow in the aorta by
imaging 1) through the trachea ("trans-tracheal system") and, 2) directly on the
aorta ("trans-aortic system"). Applied Biometrics was founded on the basis of
these products, and introduced them into the market in the late 1980's. During
this period the majority of the technical challenges associated with ultrasound
transducers and signal processing were overcome, and the Company developed
products which worked in many clinical settings, however, it could not achieve a
desired level of consistency and reliability of performance, and decided to
withdraw its products from market.
In the mid 1990's the Company decided to incorporate new technologies to improve
the performance, repeatability and reliability of its devices, and engaged in a
redesign of its trans-aortic system. It also decided to postpone development of
the trans-tracheal system pending successful completion of the aorta-based
system.
2
The Company is currently in the prototype and alpha-testing phase of the
development of an advanced version of its trans-aortic system.
TRANS-CATHETER CLOSURE TECHNOLOGY ACQUISITION AND SPIN-OFF
In late 1997, the company acquired a new technology designed to correct a
certain class of cardiac conditions involving openings in the septum of the
heart. In November of 1998, the Company determined that the technology required
resources independent of its core business, and decided to spin off the
technology as an independent company to shareholders and key management. The new
company, called Cardia, is described in the section covering discontinued
operations.
ONGOING BUSINESS
Applied Biometrics, Inc. is in the business of development, manufacture and
marketing of medical monitoring and diagnostic devices for use in a variety of
clinical, critical care settings. The Company currently has two products cleared
for market by the FDA, which provide continuous monitoring of the output of a
patient's heart, called cardiac output. The first device measures cardiac output
with an ultrasound sensor, which is attached directly to the patient's aorta
during open-heart surgery, (The "Trans-Aortic System" or TA System"). The second
device also measures cardiac output, but with an ultrasound sensor attached to
an endo-tracheal tube, thus sensing the blood flow in the aorta through the wall
of the trachea, ("The Trans-Tracheal System"or "TT System"). Neither product is
being actively marketed at this time, and the Company is in the process of
updating its technology. The first new device, a new trans-aortic (TA) System is
designed to be used during and after cardiac surgery and will provide immediate,
continuous cardiac output measurements. The purpose of the TA System is to aid
medical personnel to better monitor the condition of their patient's heart
during and after cardiac and other types of surgery.
COMPANY PRODUCTS
In the mid 1980's, the company developed two innovative cardiac output
monitoring products: 1) the "EVD", an ultrasound-based system for placement
directly on a patient's aorta (a TA system), and 2) the "TTD", a second
ultrasound-based cardiac output device mounted on an endo-tracheal tube, (a TT
system). Both products received FDA clearance and were marketed by the Company
and later withdrawn from the market. During the past two years, the Company has
been updating the product technology in its TA System.
NEW DEVELOPMENT: TRANS-AORTIC SYSTEM ("TA SYSTEM" OR THE "SYSTEM")
The company's primary product development effort is a new trans-aortic cardiac
output monitoring system: The TA System. The TA System is a new version of the
Company's EVD, with updated technology. The TA System is currently under
development: several prototypes have been made and are being tested in the lab
and in clinical application.
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The purpose for the TA System is to provide real-time, continuous monitoring of
the volume of blood the heart is pumping to the body (cardiac output). The
System determines the volume of blood flowing in the main artery leading from
the heart, the aorta, by using an ultrasound sensor (transducer) to continuously
measure the size of the aorta and the velocity of its internal blood flow.
The TA System consists of two components, the Heart Catheter, an
ultrasound-based probe which senses the cardiac output, and the Monitor, which
energizes the probe, interprets results and displays cardiac output and related
measurements. The Monitor has the capability to display cardiac output as a
real-time, measurement and cardiac output trend information. In addition, it can
derive a measurement called cardiac index, the ratio of cardiac output to body
surface area.
The System is designed to be placed during open-heart surgery to monitor a
patient's cardiac output before, during and after a variety of heart procedures.
The Heart Catheter is a single-use disposable product that is attached by the
surgeon directly to the ascending aorta. It is placed into the body during
open-chest operations to monitor cardiac output during surgery and the
post-operative recovery period.
Following surgery, the Heart Catheter is left attached to the patient's aorta,
and it exits the patient's chest to remain attached to the monitor. During the
post-operative period, the Monitor provides physicians and other medical
personnel continuous, real-time monitoring of cardiac output. The Monitor also
provides trending information and feedback for the purpose of setting heart
pacemakers and assessing the effect of drug therapies on cardiac output. The
Heart Catheter incorporates a patented release mechanism, which allows it to be
removed non-surgically once it is no longer required.
ADDITIONAL POTENTIAL FUTURE APPLICATIONS OF TA TECHNOLOGY
The Company believes that future applications of the TA System could involve
placement of an ultrasound probe on a variety of vessels during surgical
procedures such as vascular grafts and organ transplants to monitor the blood
flow as required. Although these and other similar applications have been
considered, the methods and usefulness have not been determined, and no current
development effort is underway.
In addition, the Company envisions a minimally invasive placement technique for
its TA System, whereby it could be placed on the aorta by a small incision with
specially-design surgical tools. This would permit its use for a potentially
broader range of surgeries, most notably minimally invasive heart procedures,
such as stent placement, and transmyachardial revascularization.
FUTURE POTENTIAL PRODUCT DEVELOPMENT PROGRAMS: NEW VERSIONS OF THE "TTD" OR "TT
SYSTEM"
The Company believes that its original TTD system represented a breakthrough in
cardiac output monitoring technology. The first TTD device, however, presented
difficult user ergonomics so the Company discontinued active marketing it in
1991. The Company possesses significant expertise and intellectual property in
this device and plans to begin a research and development project intended to
bring a TT System back to market at some time in the future. No current
resources are being devoted to the TTD and no assurance can be given that such a
project would result in the reintroduction of the TTD device or that the TTD
device will be successful if it is re-introduced. If the Company is able to
successfully develop a TT System, it could become a significant contributor to
sales and earnings because of the widespread
4
interest, need and desire for such a non-invasive means of monitoring cardiac
output in the critical care environment.
The TT System is envisioned to be a single-use disposable endotracheal tube used
during normal surgery with integrated transducers, which, when inserted into the
trachea transmits an ultrasound signal through the ascending aorta to determine
cardiac output. It would provide a minimally invasive means of measuring cardiac
output and if successful, would be a clear and significant improvement over
other methods. It is expected that the TT System device could be produced in a
variety of sizes for use on a wide range of patients from small children to
large adults. Among the expected benefits that such a system could provide over
other commonly used methods of measurement of cardiac output are the following:
(i) no invasion of the vascular system or the heart (eliminates potential
complications); (ii) no surgical procedure is required; (iii) no indwelling
foreign body in the vascular system, major body cavity or major organ is
necessary; and (iv) no saline, dye or radioactive substance is necessary for
measurement.
COMPANY TECHNOLOGY
The Company's products involve a number of related technologies, including
ultrasound transducers, signal processing, cardiac anatomy, fluid dynamics of
blood and others. Of particular importance are ultrasound transducer and signal
processing technologies, described below.
ULTRASOUND TRANSDUCER
A unique feature of the Company's products is their use of ultrasound
transducers to continuously monitor cardiac output. Ultrasound transducers emit
high frequency sound waves into the body and then sense the acoustic echoes of
the sound waves. In the Company's device, advanced signal processing permits the
monitor to determine the diameter of the aorta as well as the velocity of the
blood flowing through it. By integrating the velocity profile of the blood
across the area of the aorta, cardiac output is derived. The Company's
ultrasound technology is highly developed and the Company believes that it is
well adapted to cardiac output: the Company engineers and manufactures its own
transducers with the size and performance required to meet the unique
requirements of size, shape, sensitivity and cost.
SIGNAL PROCESSING
The TA System requires highly advanced ultrasound signal processing in order to
interpret the ultrasound signals received from the transducer. Signal-processing
scheme requires advanced technology, such as fast fourier technology, and a
significant accumulated experience with ultrasound, cardiac anatomy, blood
acoustics and aortic fluid flow dynamics.
MARKET AND INDUSTRY BACKGROUND
NEED FOR CARDIAC OUTPUT
The Company believes that medical practitioners recognize the importance of
measuring cardiac output (the amount of blood pumped by the heart) in many
clinical settings, illustrated by the fact that approximately 1.9 million
cardiac output catheterizations are performed each year worldwide. Abnormally
low or high cardiac output is an early sign that trouble has or could occur to a
patient under anesthesia during or after
5
surgery, or to a patient in intensive care. Of particular interest is the
immediate cardiac output of patients undergoing cardiac surgery, including heart
transplants and coronary artery bypass surgery. For a broad range of heart
surgeries, the patient's heart is virtually stopped, their blood is routed to a
heart bypass-pumping device, and then restarted after the procedure is finished.
Cardiac output during the critical minutes and hours following the restart of
the heart is a critical vital sign and determinant of the success of the
procedure. The critical requirement here is real time, beat-to-beat, continuous
cardiac output, allowing surgeons, cardiologists and anesthesiologists to react
quickly to changes in their patient's condition.
MARKET SIZE AND POTENTIAL
The market for the Company's products, and in particular the TA Systems, is
determined by the incidence and location of open-heart surgeries. The Company
believes that hospitals and cardiac centers which perform open-chest coronary
bypass surgery, transplant and other heart surgeries are the primary customer
target sites.
As of the late 1990's, there are approximately 700,000 open-chest procedures
performed worldwide annually. This figure represents coronary artery bypass
grafting (CABG), heart valve replacement, repairs of congenital heart defects as
well as other procedures including heart transplants. The United States
represents approximately 70% of the global market. The Company believes the
primary long-term market for its TA System will be in placement of the probe on
the ascending aorta for measurement of blood flow during these open-chest
surgeries and the resulting post-operative recovery period.
The Company believes that other applications could open up new potential markets
for an ultrasound-based blood volume system, such as the Company's TA System,
where blood flow measurements are deemed necessary but are otherwise unavailable
or cost prohibitive. Among the other potential applications are carotid
endarterectomies, liver transplants, kidney transplants, femoral bypass, as well
as many other vascular procedures. It is impossible to predict whether and to
what extent such markets will develop.
The Company believes that the potential market for the Company's TT concept,
wherein a blood volume sensor is integrated with an endotracheal tube, could
represent an attractive growth opportunity. In this case, anesthesiologists and
surgeons could have a non-invasive device which could provide real time,
beat-to-beat cardiac output monitoring for all procedures requiring endotracheal
tubes, including, potentially, all surgeries which require general anesthesia.
CUSTOMERS
The Company believes that the primary customers for the Company's TA System will
be healthcare professionals and institutions associated with cardiac surgery.
Accordingly, this includes cardiac surgeons, anesthesiologists, coronary
intensivists, and the associated clinical and hospital administrators. The
primary hospital customers may be large hospitals, which perform open-heart
surgery. Once the Company's products are established, it is anticipated that the
company will need to market to hospital groups and buying groups to facilitate
large volume purchases.
6
CHANNELS TO MARKET
There are numerous channels to market for the Company's products to reach the
Company's customers. Primary options include direct sales, independent sales
representatives, medical device distributors and dealers, and strategic channel
partners.
PRICING AND REIMBURSEMENT
Pricing for healthcare devices is characterized by intense competition,
extensive government regulations and strong cost-containment pressures. With
regard to the Company's proposed products, two primary forces are most likely to
impact pricing: reimbursement for open-heart surgery, and price comparisons with
alternative devices.
Government and private insurance imposed payment rates for related treatment
groups and prospective reimbursement programs provide economic incentives for
health care institutions to reduce operating costs. As a result of these
reimbursement programs, hospitals and other health care institutions have
adopted cost conscious approaches to the utilization of new techniques and
equipment. This approach tends to increase the level of acceptance of new
products that increase efficiency and productivity. The Company believes, but
cannot assure, that its clinical work will demonstrate advantages in cost
effectiveness resulting from both the decreased cost of performing the
monitoring procedure, as well as the possible benefit of decreased patient
complications and shorter time required to recover as a result of continuous
cardiac output monitoring using a less invasive device.
While the Company is not aware of any current efforts on the part of the
government or other health care insurers to restrict reimbursement for the
procedures performed with its products, future regulation and uncertainty among
health care institutions about the direction of reimbursement rates could
adversely effect the marketing efforts of the Company.
GOVERNMENT REGULATION
US DOMESTIC PRODUCT REGULATION: US FDA 510(K) AND QSR
All new medical devices, including the Company's products, are subject to a
premarket notification process pursuant to Section 510(k) of the Federal Food,
Drug and Cosmetic Act. The 510(k) notification filing must contain information
that establishes that the new product is substantially equivalent to an existing
device that has been continuously marketed since May 28, 1976. The United States
Food and Drug Administration ("FDA") must either deny the 510(k) submission,
request further information or approve the submission. Products that are not
eligible to receive approval through the FDA's premarket notification process
are subject to the FDA's much lengthier and more complex premarket approval
procedures.
FDA regulations classify medical devices into three classes that determine the
degree of regulatory control to which the manufacturer of the device is subject.
In general, Class I devices involve compliance with labeling and record-keeping
requirements and are subject to other general controls. Class II devices are
subject to performance standards in addition to general controls. Class III
devices are those devices for which premarket approval (as distinct from
premarket notification) is required to assure the devices' safety and
effectiveness prior to commercial distribution. All companies subject to FDA
regulation must comply
7
with a variety of rules, including the FDA's Quality Systems Regulations (QSR),
and are subject to periodic inspections by the FDA and other applicable
agencies. If the FDA believe that its regulations have not been fulfilled, it
may implement extensive enforcement powers, which were strengthened by the
enactment of the Safe Medical Devices Act of 1990. The FDA's powers include, but
are not limited to, the ability to ban products from the market, prohibit the
operation of manufacturing facilities and effect recalls of products from
customer locations.
The Company has received 510(k) clearance to market its EVD and TTD as Class II
devices. The Company does not presently believe it will be necessary to submit
new 510(k) notifications covering its updated EVD device, the TA System, but
cannot finalize its determination until product development is complete.
In addition to requiring clearance for new products, the FDA's rules may require
a filing and waiting period prior to marketing modifications of existing
products. After clearance is given, the Company is required to advise the FDA
and offer regulatory agencies of significant modifications to its products, and
those agencies have the power to withdraw the clearance and require the Company
to change the device or its manufacturing process or labeling, to supply
additional proof of its safety and effectiveness or recall, repair, replace or
refund the cost of the medical device if it is shown to be hazardous or
defective or otherwise misbranded or adulterated.
EUROPEAN PRODUCT REGULATION: CE MARK AND ISO
Over the past five years, the European Community of nations has agreed on a
common set of medical device standards and processes for the development,
manufacturing, marketing and customer support of medical devices. These
standards require, among other things, that medical devices sold in the EC have
CE marks and follow ISO Quality Systems processes. CE mark and ISO certification
require reviews by EC-approved auditors. The Company is aware of these
requirements, and is developing its TA System, and its development,
manufacturing and management processes with the goal of satisfying EC
requirements.
COMPETITION
OVERVIEW
The medical device marketplace is one of rapid innovation and intense
competition. Large multinational companies with extensive resources compete on a
global basis, while small, innovative venture-backed startups compete in new and
emerging markets.
At this time, the Company knows of no products in the cardiac output measurement
area that have been commercially offered to the medical community that are
similar to the Company's TA System in their underlying technology and
application. The company is aware that other companies have had development
efforts in this area in the past, but it is unaware of the status of the
efforts, and it has not encountered any clinical or marketing activities of any
like devices by any competitors. Given the rapid pace of innovation in this
market, new competition may arise at any time.
Currently, there are two primary types of alternative devices - employing
different technologies and having different performance from the Company's TA
System - which may provide some degree of competition. These are: thermodilution
catheters and Fick principle devices.
8
Thermodilution Catheters: These devices require a specialized catheter to be
inserted into the patient's blood stream and maneuvered through the heart into
the pulmonary artery. Once in place, the device uses a technical principle
called thermodilution to derive the flow of the blood by measuring its ability
to absorb heat. Thermodilution catheters have the dominant share of the cardiac
output market despite having relatively slow response times and complicated
placement methods. In addition, since they are not placed on the aorta, they may
not measure the entire heart output: they measure a portion of its output and
then estimate the real blood flow.
Fick Principle - Fick principle-based systems derive the cardiac output by
measuring the body's ability to process respiration gases. This approach is
complicated and requires detailed measurement of the blood gas chemistry and the
inhaled and exhaled gases. Fick principle systems have been marketed in
connection with dedicated patient monitoring systems, but have not reached large
market share due to the slow response time, lack of continuous, real-time
readings, and complexity of use.
COMPANIES
There are several companies and institutions that are larger and have more
resources than those of the Company which have developed and are developing
technologies to measure cardiac output which may compete with the Company's
products. These include Edwards Critical-Care, a division of Baxter Healthcare
Corporation, Spectramed, Inc., a division of British Oxygen Company, and Abbott
Critical Care. These companies make and sell catheters, thermodilution cardiac
monitors and peripheral products used to measure cardiac output by the
thermodilution method. Whereas each of them has more financial resources and is
better able than the Company to distribute their products, the Company is
unaware of any clinical or commercial activities to market a device with the TA
System technology or performance. In addition, there is a French company called
Sometec, S.A., which has developed a device to measure cardiac output which uses
an ultrasound transducer imaging through the esophagus to the descending aorta.
Whereas this system uses ultrasound, it is similar to the Company's devices, but
it is applied in the esophagus and images the descending aorta - key differences
in application. The Company has no first hand knowledge of the Sometec system,
and cannot evaluate its performance nor competitive potential in comparison to
the Company's products.
SALES AND MARKETING
The Company is not marketing any products at this time, and as a result has no
active sales and marketing activities. In connection with the TA System
development, and its commercialization, the Company is preparing the appropriate
sales and marketing information for its products, and developing market segment
and target customer data. The Company intends to be ready with the appropriate
sales and marketing collateral material and programs when its TA System device
is ready for commercialization.
The Company is currently evaluating a number of sales strategies, including
direct sales, dealer/distributor relationships, manufacturer representatives and
strategic sales alliances. The Company intends to hire the appropriate Sales
leadership, support team and field sales resources as needed.
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RESEARCH AND DEVELOPMENT
STATUS
The Company's R&D strategy has been to perform product development with its own
staff, and to develop strong, proprietary competencies in ultrasound
transducers, signal processing, cardiac anatomy and pathology and the fluid
dynamics of blood flow.
The Company's research and development expenditures for continuing operations
were $805,459 and $1,409,280 in 1998 and 1997, respectively. These funds were
used primarily to develop the new TA System.
PLANS
The Company plans to increase its R&D spending in the future with the goals of
continual refinement of the TA System, of updating the TTD device and of
developing additional new devices based on the Company's core technologies.
The Company's immediate goal for the TA Systems is to continue to refine this
device until it believes that it will be viewed by the industry as a
consistently accurate and reliable device for monitoring cardiac output. After
this goal is achieved, the Company will begin to identify other applications and
potential modifications for the System that address additional needs of the
critical care environment. To bring these other applications to market, if it
can be done, additional research and development will be necessary.
The Company anticipates that the redevelopment of the TTD device will require
approximately 12 - 24 months of additional development. The Company intends to
develop plans for this project during the calendar year of 1999. There can be no
assurance that the Company can successfully redevelop the TTD device. The TTD
device has already been cleared by the FDA for commercial sale. See -
"Governmental Regulation."
MANUFACTURING AND OPERATIONS
The Company's TA System consists of two primary components: the Heart Catheter
and the Monitor. The Company currently manufactures both components at its
Burnsville, MN location. Certain of the components of the Company's products are
manufactured by third party vendors or are off-the-shelf components. The
Company's TTD device has also been manufactured at the Burnsville location, but
it is not currently in production.
The Company is updating its TA System, and as a result, refining certain
elements of its manufacturing and test processes. The Company believes that at
the time of commercial product release in the US that its operations will
conform to the US FDA Quality Systems Regulations. In addition, the Company
intends to seek ISO 9001 certification at some time in the future, which
certification shows compliance of the Company's manufacturing facilities with
European standards for quality assurance and manufacturing process control. The
Company also intends to establish compliance with the applicable requirements
that will allow it to affix the CE Mark to its product.
10
INTELLECTUAL PROPERTY
PATENTS
The Company has received five U.S. patents, two Canadian patents and one
European patent which relate primarily to devices and methods used to measure
blood flow through a major artery using ultrasound technology. A patent
application has been allowed in Japan and a patent has been granted in six
European countries through the European Patent Convention (the "EPC") relating
to certain of the U.S. patents issued on the TTD device. Another TTD device
patent application is currently pending in Japan and Europe.
The Company has also received a U.S. patent relating primarily to the release
mechanism employed by the EVD probe. An international patent application related
to the issued EVD probe patent is currently pending in various countries. These
patents apply to the TA System. There can be no assurance that patents will
issue on products developed by the Company in the future, that the patents
issued to the Company in the past or in the future will be of material benefit,
or that the Company will have sufficient resources or otherwise be able to
enforce its patent rights. Nor can there be any assurance that the Company's
products do not infringe on patents, copyrights or other proprietary information
known or claimed by others, or that others will not successfully utilize part of
or all of the Company's technologies without compensation to the Company. If the
Company is found to have infringed on the rights of a third party, the Company
may be unable to market its products without a license from such third party.
There is no assurance that the Company would be able to obtain such a license on
satisfactory terms, or at all.
The Company also relies for protection of trade secrets and proprietary know-how
on its internal security and secrecy measures and on the employment agreements
requiring employees and agents of the Company to observe the confidentiality of
Company information and to assign to the Company inventions developed in the
course of work for the Company.
EMPLOYEES
The Company currently has eleven full-time employees, of whom six are engaged in
research and development, one in sales and marketing, three in general
administration and one in manufacturing. The employees are not represented by
any unions and the Company believes that relations with its employees are
satisfactory.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names and ages of the Company's executive
officers together with all positions and offices held with the Company by such
executive officers. Officers are appointed to serve until the meeting of the
Board of Directors following the next Annual Meeting of Shareholders and until
their successors have been elected and have qualified.
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NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
Andrew M. Weiss 42 Chief Executive Officer, and President
Gerald J. Prescott 57 Vice President and Chief Financial Officer,
Through April 16, 1999(1)
Camille M. Meyer 38 Vice President of Finance and Chief Financial Officer,
Effective April 17, 1999
Steven R. Wedan 31 Vice President of Engineering
Andrew M. Weiss was elected Chief Executive Officer and President of the Company
effective March 1, 1999. In 1998, Mr. Weiss served as acting President of
INTELLX of Boulder, Colorado, a venture stage company involved in medical image
processing. From 1995 to 1998 Mr. Weiss was Chief Executive Officer and
President of Vital Images, Inc., a Minneapolis-based provider of diagnostic and
surgical visualization systems. In 1994 and 1995, he was Vice-President of
Global Sales and Marketing for Marquette Medical Systems, a Milwaukee, Wisconsin
- -based manufacturer of patient monitoring systems. Prior to 1994, Mr. Weiss held
various ascending positions with General Electric Company, including several
positions with GE Medical Systems.
Camille M. Meyer was hired effective March 29, 1999, by the Company to become
Vice President, Finance and Chief Financial Officer effective April 17, 1999.
From July 1995 to March 1999, Ms. Meyer served as Controller of Bio-Vascular,
Inc. From 1989 to 1995, Ms. Meyer held a series of increasing positions with
Deloitte and Touche LLP, a public accounting firm, in their Minneapolis office.
Ms. Meyer is a certified public accountant and received a Master's Degree in
Business Taxation from Carlson School or Management at the University of
Minnesota.
Gerald J. Prescott served as Vice President and Chief Financial Officer of the
Company since March 1996 and will do so through April 16, 1999, whereupon he
will be succeeded by Ms. Meyer. Mr. Prescott served as a consultant to the
Company from December 1994 to March 1996. Prior to joining the Company, Mr.
Prescott served as Vice President, Chief Financial Officer of Biomedical
Dynamics Corporation, a manufacturer of disposable medical products, from May
1986 to December 1994. Mr. Prescott is a CPA and has a Master's Degree in
Accounting from the Wharton School at the University of Pennsylvania.
Steven R. Wedan has served as Vice President of Engineering since March 1999,
Director of Engineering since December 1995, and Engineering Manager since
December 1994. Prior to joining the Company, Mr. Wedan was a design and
development engineer for General Electric Medical Systems, where he developed
ultrasound, magnetic resonance, and computed tomography systems. Mr. Wedan has a
Bachelor's Degree in Electrical Engineering from Michigan Technological
University and a Master's Degree in Electrical and Computer Engineering from
Marquette University.
- --------
(1) Effective March 29, 1999, the Company hired Camille Meyer to become Vice
President of Finance and Chief Financial Officer to succeed Mr. Prescott
effective April 17, 1999.
12
DISCONTINUED BUSINESS: CARDIA, INC.
ORIGINS
On November 2, 1997, the Company acquired certain assets and intellectual
property rights relating to Transcatheter Closure Device products ("TCDs"). The
TCD's are designed to correct a certain defect in the heart, which compromises
the heart's ability to pump blood. In December 1998 the Company determined that
the technology required resources independent of its core business, and
determined to spin off the technology as an independent company to Company
shareholders and key management. The spin-off occurred in February of 1999, and
the new company is called Cardia, Inc.
PRODUCT/MARKET
Transcatheter Closure Devices are a new generation of small, implantable
devices, which are delivered through a catheter and designed to permanently
repair certain cardiac defects in children and adults. The implantation of TCDs
often eliminates the need for open-heart surgery, which has traditionally been
required.
SPIN OFF - RATIONALE AND VALUE TO SHAREHOLDERS
The Directors approved a plan wherein the Company would provide the assets of
the TCD technology to Cardia for 75% or 375,000 shares of Cardia stock valued at
1.00 per share, which would be then distributed directly to Company
shareholders, and the remaining 25% or 125,000 shares of Cardia equity would be
sold at $1.00 per share to Joseph A. Marino, the Company's past Chief Executive
Officer and President. The rationale for the plan was to allow the continuing
operations of the Company to focus on the cardiac output monitoring products, to
provide an independent company based on the TCD technology and markets and to
ensure that the Company shareholders benefited from substantially equivalent
equity in both companies with the additional ability to trade the sock of each
company on an independent basis.
On February 11, 1999 the Company implemented its plan and transferred its TCD
assets to Cardia in exchange for 75% of Cardia's common capital stock, and
distributed to Company shareholders one share of Cardia stock for every 11.563
shares of Company Stock held on the record date of January 25, 1999. Twenty-five
percent of Cardia's common stock was issued to Joseph A. Marino. Mr. Marino has
subsequently been succeeded as Chief Executive Officer and President by Andrew
M. Weiss on March 1, 1999, and resigned as an employee of the Company effective
March 22, 1999.
ITEM 2: DESCRIPTION OF PROPERTIES
The Company's executive offices and manufacturing facilities are located at 501
East Highway 13, Suite 108, Burnsville, Minnesota 55337, a suburb of
Minneapolis. The Company leases approximately 11,900 square feet of office,
manufacturing and warehouse space at such address for $6,690 per month plus
common area maintenance and real estate taxes. The lease extends through March
31, 2002. The Company believes that its present facilities will be adequate to
serve its needs for the next several years.
13
ITEM 3: LEGAL PROCEEDINGS
The Company is not a party to any material pending or to its knowledge any
threatened legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded in the over-the-counter market and
quoted on the Nasdaq SmallCap Market under the Symbol "ABIO." The following
table sets forth the high and low bid prices of the Company's Common Stock for
the periods indicated. The bid quotations represent interdealer prices, without
retail mark-ups, markdowns or commissions, and may not represent actual
transactions.
1998 1997
---- ----
Quarter High Low High Low
------- ---- --- ---- ---
First Quarter 8 1/4 6 3/4 15 8 1/2
Second Quarter 11 1/4 6 3/8 9 1/2 5
Third Quarter 9 1/4 4 1/2 8 1/2 5 3/4
Fourth Quarter 8 3/8 6 7/8 9 5 3/4
On March 23, 1999, the last sales price of the Common Stock was $ 8.00 per
share. At March 23, 1999, there were approximately 82 record holders and an
additional 1,050 beneficial holders of the Company's Common Stock.
The Company has never paid or declared any cash dividends on its Common Stock
and does not intend to pay dividends on its Common Stock in the foreseeable
future. The Company presently expects to retain its earnings to finance the
development and expansion of its business. The payment by the Company of
dividends, if any, on its Common Stock in the future is subject to the
discretion of the Board of Directors and will depend on the Company's earnings,
financial condition, capital requirements and other relevant factors.
14
ITEM 6: SELECTED FINANCIAL DATA
The information set forth below should be read in conjunction with the
information contained in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Financial Statements and
Notes to Financial Statements contained in Item 8 of this report.
Year Ended December 31,
-----------------------
Statement of Operations Data: 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Net sales $ -- $ 64,940 $ 125,120 $ -- $ --
Cost of goods sold -- 32,175 61,975 -- --
----------- ----------- ----------- ----------- -----------
Gross profit -- 32,765 63,145 -- --
Operating expenses
Research and development 805,459 1,409,280 894,517 689,354 973,535
Sales and marketing 364,493 387,900 249,180 294,571 290,273
General and administrative 582,228 673,679 613,041 441,960 487,658
----------- ----------- ----------- ----------- -----------
Total operating expenses 1,752,180 2,470,859 1,756,738 1,425,885 1,751,466
----------- ----------- ----------- ----------- -----------
Loss from continuing
operations (1,752,180) (2,438,094) (1,693,593) (1,425,885) (1,751,466)
Interest income 188,189 303,490 324,632 137,827 142,800
----------- ----------- ----------- ----------- -----------
Net loss from continuing operations (1,563,991) (2,134,604) (1,368,961) (1,288,058) (1,608,666)
Discontinued operations
Loss from operations of
Transcatheter closure
business (1,838,147) (457,866) -- -- --
----------- ----------- ----------- ----------- -----------
Net loss $(3,402,138) $(2,592,470) $(1,368,961) $(1,288,058) $(1,608,666)
=========== =========== =========== =========== ===========
Basic and diluted loss per common share
Continuing operations $ (0.36) $ (0.51) $ (0.35) $ (0.44) $ (0.56)
Discontinued operations (0.43) (0.11) -- -- --
----------- ----------- ----------- ----------- -----------
$ (0.79) $ (0.62) $ (0.35) $ (0.44) $ (0.56)
=========== =========== =========== =========== ===========
Weighted average common shares outstanding 4,312,077 4,186,896 3,917,268 2,914,049 2,881,864
=========== =========== =========== =========== ===========
15
Balance Sheet Data: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Cash, cash equivalents and short-term 2,369,413 4,420,180 6,374,452 2,210,587 3,262,731
investments
Working capital 2,438,938 4,490,118 6,639,820 2,072,181 3,170,093
Total assets 3,296,711 5,437,923 7,490,300 2,632,491 3,730,610
Total shareholders' equity 2,151,564 5,271,202 7,287,110 2,447,502 3,560,558
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RESULTS OF OPERATIONS.
1998 compared to 1997
NET SALES. The Company had no revenue in 1998 as it was focusing its efforts on
the completion of the development of its cardiac output monitoring system. The
new system is presently undergoing lab and clinical testing. The Company
believes that because of the early stage of the product, that its net sales will
continue to fluctuate in future periods.
RESEARCH AND DEVELOPMENT. Research and Development expense was $805,459 in 1998
as compared to $1,409,280 in 1997, a decrease of $603,821 or 43%. This decrease
is the result of fewer personnel in 1998 as compared to 1997 and completion
during 1997 of the basic development of the cardiac output monitoring system.
The major efforts in 1998 were on product development and refinement as well as
lab and clinical testing of the TA System.
SALES AND MARKETING. Sales and Marketing was $364,493 in 1998 compared to
$387,900 in 1997, a decrease of $23,907 or 6%. The decrease is a result of the
reduction in marketing activities for the cardiac output monitoring system in
1998. In addition, sales and marketing expenses were allocated to the
transcatheter closure business, which was distributed to shareholders in
February 1999 and is being treated as a discontinued operation in 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expense was $582,228 in
1998 compared to $673,679 in 1997, a decrease of $91,451 or 14%. This decrease
is due to general and administrative expenses allocated to the transcatheter
closure business in 1998 which is being treated as discontinued operations in
1998.
INTEREST INCOME. Interest income was $188,189 in 1998 compared to $303,490 in
1997, a decrease of $115,301. This decrease is the result of fewer funds
available for investment and slightly lower interest rates in 1998.
DISCONTINUED OPERATIONS. In December 1998, the Company's Board of Directors
approved a plan to distribute to its shareholders, its transcatheter closure
business through a wholly owned subsidiary, Cardia, Inc. The distribution was
made on February 11, 1999 to shareholders of record on January 25, 1999. The
loss from operations of Cardia, Inc. for 1997 includes results from the date of
acquisition of the underlying technology through December 31, 1997. The loss
from discontinued operations for the year ended December 31, 1998
16
includes the estimated future results of operations through the February 11,
1999 spin-off date and includes a non-cash expense related to the pending
exercise of stock options held by employees who will join Cardia and does not
impact the ongoing operations of the Company.
1997 Compared to 1996
NET SALES. For the year ended December 31, 1997, the Company had net sales of
$64,940 compared to $125,120 in the year ended December 31, 1996. The decrease
in net sales in 1997 was the result of the Company making a strategic decision
in the third quarter of 1997 not to continue to market its present cardiac
output monitoring system until the completion of the development of the next
generation system.
GROSS PROFIT. The Company's gross profit margin was 50.5% for the year ended
December 31, 1997 and 1996. The Company believes that because of the early stage
of its product sales, its gross margins are not necessarily representative of
the margins it will realize in the future.
RESEARCH AND DEVELOPMENT. Research and Development expenses increased $514,763
or 57.5% in 1997 as compared to 1996. This increase was the result of the
continued and expanded development of the cardiac output monitoring system.
SALES AND MARKETING. Sales and Marketing expenses increased $138,720 or 55.7% in
1997 as compared to 1996. This increase was the result of increased sales
personnel and other costs associated with the then anticipated rollout of the
Company's cardiac output monitoring system.
GENERAL AND ADMINISTRATIVE. General and Administrative expenses increased
$60,638 or 9.9% in 1997 as compared to 1996. The increase in expenses in 1997
was a result of increased personnel and salary expenses and other administrative
expenses associated with a higher level of activity.
NET LOSS FROM DISCONTINUED OPERATIONS. In November 1997, the Company purchased a
transcatheter closure product line used by Schneidt Implantate GmbH of
Frankfurt, Germany. Included in the purchase were in-process research and
development costs of $441,457 plus other expenses of $16,409. This amount was
charged against income in the fourth quarter of 1997 as the underlying research
and development projects had not reached technological feasibility. The
transcatheter closure business was spun-off to shareholders in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998 the Company had cash and short-term investments of
$2,369,413 and working capital of $2,438,938. The Company used $1,399,365 from
continuing operations during 1998, including a net loss from continuing
operations of $1,563,991. The Company generated funds to support this loss
primarily through sales and maturities of short-term investments in the amount
of $3,598,507 and $282,500 generated from the exercise of stock options.
The Company believes that, based on its present rate of spending, that its
existing cash, cash equivalents and short-term investments together with funds
generated from operations will enable the Company to meet its liquidity needs
and capital resource needs for approximately the next twelve months.
17
It is the Company's present plan to raise additional capital sometime during
1999 or 2000 through the issuance of equity, debt or a combination of the two.
However, there can be no assurance that additional capital will be available on
terms acceptable to the Company.
YEAR 2000 COMPLIANCE
The Company has completed an assessment of its major technology systems and
believes that all-necessary modification or replacements of existing systems
have been completed to make its systems Year 2000 compliant. Senior management
is monitoring the Company's progress in this area. Based upon current
expenditures and estimates, the Company does not believe the costs of addressing
the Year 2000 issues to be material to the financial results or operations of
the Company. At this time, the impact on the Company if significant vendors or
suppliers are not in compliance is not considered to be material.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are included herein following the
signatures, beginning at page F-1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this Item with respect to directors is contained in
the Section "Election of Directors" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on June 14, 1999 ("1999 Proxy
Statement"), a definitive copy of which will be filed with the Commission within
120 days of the close of the past fiscal year, and is incorporated herein by
reference.
Information concerning executive officers is set forth in the Section entitled
"Executive Officers of the Company" in Part I of this Form 10-K.
ITEM 11: EXECUTIVE COMPENSATION
Information required under this item is contained in the section entitled
"Executive Compensation" in the 1999 Proxy Statement and is incorporated herein
by reference.
18
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the section entitled
"Security Ownership of Principal Shareholders and Management" in the Company's
1999 Proxy Statement and is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Consolidated Financial Statements See Index to Consolidated Financial
Statements
(2) Financial Statements Schedules have been omitted because they are not
required or are not applicable, Or because the information required to
be set forth therein either is not material or is included in the
Consolidated Financial Statements or related notes.
(3) See Exhibit Index
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the fourth quarter of the year ended December 31, 1998.
(c) Exhibits
See Exhibits Index
19
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Applied Biometrics, Inc.
("Registrant")
Dated: March 26, 1999 By: /s/ Andrew M. Weiss
-------------------
Andrew M. Weiss
Chief Executive Officer, and
President (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed on March 25, 1997 by the following persons on behalf of the
Registrant, in the capacities indicated.
Each person whose signature appears below constitutes and appoints ANDREW M.
WEISS and PATRICK DELANEY as his true and lawful attorneys-in-fact and agents,
each acting alone, with the full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities, to sign any or
all amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes and he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
Signature Title
- --------- -----
/s/ Joseph A. Marino Director
- ----------------------------------------
Joseph A. Marino
/s/ Andrew M. Weiss Chief Executive Officer and President and Director
- ----------------------------------------
Andrew M. Weiss
/s/ Patrick Delaney Director
- ----------------------------------------
Patrick Delaney
/s/ Jeffrey Green Director
- ----------------------------------------
Jeffrey Green
/s/ Demetre Nicoloff Director
- ----------------------------------------
Demetre Nicoloff, M.D., Ph.D.
/s/ Gerald J. Prescott Vice President and Chief Financial Officer
- ---------------------------------------- (Principal Financial and Accounting Officer)
Gerald J. Prescott
20
APPLIED BIOMETRICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEET F-3
CONSOLIDATED STATEMENT OF OPERATIONS F-4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY F-5
CONSOLIDATED STATEMENT OF CASH FLOW F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
F1
Report of Independent Accountants
To the Board of Directors
and Shareholders of
Applied Biometrics, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the consolidated financial position of
Applied Biometrics, Inc. and its subsidiary at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Minneapolis, MN
March 18, 1999
F2
APPLIED BIOMETRICS, INC.
CONSOLIDATED BALANCE SHEET
December 31,
-----------------------------
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 1,869,413 $ 821,673
Short-term investments 500,000 3,598,507
Inventory 175,078 150,493
Prepaid expenses and other current assets 37,833 86,166
------------ ------------
Total current assets 2,582,324 4,656,839
Property and equipment, net 427,086 571,374
Patents, net 75,074 100,125
Other assets 9,585 9,585
Net assets of discontinued operations 202,642 100,000
------------ ------------
Total assets $ 3,296,711 $ 5,437,923
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 56,186 $ 76,042
Accrued expenses and other liabilities 87,200 90,679
------------ ------------
Total current liabilities 143,386 166,721
Liability for pending issuance of common stock 1,001,761
Commitments (Note 9)
Shareholders' equity:
Common stock, $.01 par value, 10,000,000
shares authorized, 4,337,117 and 4,276,117
shares issued and outstanding, respectively 43,371 42,761
Additional paid-in capital 20,560,849 20,278,959
Accumulated deficit (18,452,656) (15,050,518)
------------ ------------
Total shareholders' equity 2,151,564 5,271,202
------------ ------------
Total liabilities and shareholders' equity $ 3,296,711 $ 5,437,923
============ ============
See accompanying notes to consolidated financial statements.
F3
APPLIED BIOMETRICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
-----------------------
1998 1997 1996
----------- ----------- -----------
Net sales $ -- $ 64,940 $ 125,120
Cost of goods sold -- 32,175 61,975
----------- ----------- -----------
Gross profit -- 32,765 63,145
Operating expenses
Research and development 805,459 1,409,280 894,517
Sales and marketing 364,493 387,900 249,180
General and administrative 582,228 673,679 613,041
----------- ----------- -----------
Total operating expenses 1,752,180 2,470,859 1,756,738
----------- ----------- -----------
Loss from continuing operations (1,752,180) (2,438,094) (1,693,593)
Interest income 188,189 303,490 324,632
----------- ----------- -----------
Net loss from continuing operations (1,563,991) (2,134,604) (1,368,961)
Discontinued operations
Loss from operations of transcatheter
closure business (1,838,147) (457,866) --
----------- ----------- -----------
Net loss $(3,402,138) $(2,592,470) $(1,368,961)
=========== =========== ===========
Basic and Diluted loss per common share
Continuing operations $ (0.36) $ (0.51) $ (0.35)
Discontinued operations (0.43) (0.11) --
----------- ----------- -----------
$ (0.79) $ (0.62) $ (0.35)
=========== =========== ===========
Weighted average common shares outstanding 4,312,077 4,186,896 3,917,268
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F4
APPLIED BIOMETRICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock
---------------------- Additional Paid-In Accumulated
Shares Amount Capital Deficit
---------- ------- ------------------ ------------
December 31, 1995 2,943,410 $29,434 $13,507,155 $(11,089,087)
Private placement of common
Stock, net of offering expenses
of $587,133 860,000 8,600 4,564,267 --
Exercise of stock options
and warrants 365,577 3,656 1,632,046 --
1996 Net loss -- -- -- (1,368,961)
---------- ------- ----------- ------------
December 31, 1996 4,168,987 41,690 19,703,468 (12,458,048)
Shares issued for purchase of
transcatheter closure product line 85,000 850 509,150 --
Exercise of stock options 22,130 221 66,341 --
1997 Net loss (2,592,470)
---------- ------- ----------- ------------
December 31, 1997 4,276,117 $42,761 $20,278,959 $(15,050,518)
Exercise of stock options 61,000 610 281,890 --
1998 Net loss -- -- -- (3,402,138)
---------- ------- ----------- ------------
Balance December 31, 1998 4,337,117 $43,371 $20,560,849 $(18,452,656)
========== ======= =========== ============
See accompanying notes to consolidated financial statements.
F5
APPLIED BIOMETRICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
Year ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,402,138) $(2,592,470) $(1,368,961)
Less loss from discontinued operations (1,838,147) (457,866) --
----------- ----------- -----------
Net loss from continuing operations (1,563,991) (2,134,604) (1,368,961)
Adjustments to reconcile net loss from
continuing operations to net cash used by
operating activities
Depreciation and amortization 224,213 188,652 120,567
Cash flows provided by (used for) changes in:
Accounts receivable -- 19,417 (19,417)
Inventory (24,585) 71,983 (222,476)
Prepaid expenses and other current assets 48,333 140,499 (180,082)
Trade accounts payable (19,856) (50,215) 460
Accrued expenses and other liabilities (3,479) 13,746 17,741
----------- ----------- -----------
Net cash used by continuing operations (1,339,365) (1,750,522) (1,652,168)
Net cash used by discontinued operations (908,616) (16,409) --
----------- ----------- -----------
Net cash used by operating activities (2,247,981) (1,766,931) (1,652,168)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of short-term
investments 3,598,507 4,734,808 3,874,633
Purchases of short-term investments (500,000) (2,700,524) (7,754,159)
Purchase of property and equipment (54,874) (222,446) (392,536)
Discontinued operations (30,412) (31,457) --
----------- ----------- -----------
Net cash provided (used) by
investing activities 3,013,221 1,780,381 (4,272,062)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceed from private placement of common stock 4,572,867
Proceeds from exercise of stock options
and warrants 282,500 66,562 1,635,702
----------- ----------- -----------
Net cash provided by financing activities 282,500 66,562 6,208,569
----------- ----------- -----------
Net increase in cash and cash equivalents 1,047,740 80,012 284,339
Cash and cash equivalents at beginning of year 821,673 741,661 457,322
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,869,413 $ 821,673 $ 741,661
=========== =========== ===========
See accompanying notes to consolidated financial statements
F6
APPLIED BIOMETRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIGICANT ACCOUNTING POLICIES
ORGANIZATION - Applied Biometrics, Inc., (ABI or the "Company") operates in one
industry segment and is engaged in the development, manufacturing and marketing
of medical diagnostic equipment for hospital operating rooms and intensive care
units. The Company has developed and obtained patents on continuous cardiac
output monitoring devices, which use Doppler ultrasound to measure cardiac
output.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - Cash equivalents are highly liquid marketable
securities with original maturities of three months or less.
SHORT-TERM INVESTMENTS - Management determines the appropriate classification of
its investments in debt and equity securities at the time of purchase. At
December 31, 1998 and 1997, all short-term investments are considered available
for sale as the Company does not have the intent or ability to hold these
securities to maturity.
The amortized cost of debt securities classified as available for sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and interest are included in interest income. The cost of
securities sold is based on the specific identification method.
INVENTORY - Inventory is stated at the lower of cost (first-in-first-out basis)
or market.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost with
depreciation computed using the straight-line method over the estimated useful
lives of the assets. Expenditures for additions and improvements are capitalized
while repairs and maintenance are expensed as incurred.
PATENTS - The costs of patents are capitalized and amortized on a straight-line
basis over their estimated useful lives. The recoverability of unamortized
patent costs is assessed on an ongoing basis by comparing anticipated
undiscounted future cash flows from the related products to net book value.
RESEARCH AND DEVELOPMENT - The costs of research and development are expensed as
incurred.
INCOME TAXES - Income taxes are accounted for using the liability method. The
liability method requires the recognition of deferred tax assets and liabilities
for differences between the financial reporting and income tax bases of the
Company's assets and liabilities.
LOSS PER COMMON SHARE - Basic earnings (loss) per share is computed by dividing
net loss by the weighted average number of shares of common stock outstanding
during the year. Common stock equivalents, consisting of shares which might be
issued upon exercise of stock options and warrants, are not included in weighted
average common shares for purposes of determining diluted earnings per share in
years where losses are reported since their inclusion would be anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". This standard establishes accounting and reporting
standards for derivative instruments and hedging activities. The Company must
adopt this standard no later than fiscal year 2000. Management believes that
adoption of SFAS No. 133 will not have a material effect on the Company's
financial statements.
F7
NOTE 2 - SHORT TERM INVESTMENTS
The following is a summary of short-term investments:
December 31,
------------
1998 1997
---- ----
Debt Securities:
U.S. Treasury obligations $ 500,000 $1,258,750
Certificates of Deposit -- 370,000
U.S. Government Agency -- 1,969,757
---------- ----------
$ 500,000 $3,598,507
========== ==========
The estimated fair value of investments approximates cost (amortized cost for
debt securities) and, accordingly, there are no unrealized gains or losses as of
December 31, 1998 or 1997.
The estimated fair value of debt securities available for sale by contractual
maturity as of December 31, 1997 is as follows:
Due within one year $500,000
========
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment is comprised as follows at December 31,
Estimated useful life 1998 1997
--------------------- ---- ----
Machinery and Equipment 5 years $ 894,834 $ 839,960
Furniture and fixtures 5 years 83,984 83,984
Leasehold improvements Life of Lease 70,773 70,773
---------- ----------
1,049,591 994,717
Less: Accumulated depreciation (622,505) (423,343)
---------- ----------
$ 427,086 $ 571,374
========== ==========
NOTE 4 - PATENTS
Patents are comprised as follows at December 31,
Estimated useful life 1998 1997
--------------------- ---- ----
Patents 6-10 years $156,564 $ 156,564
Less: Accumulated amortization (81,490) (56,439)
-------- ---------
75,074 $ 100,125
======== =========
NOTE: 5 - PURCHASE OF PRODUCT LINE
In November 1997, the Company acquired the technology and assets (including the
in-process research and development) of the transcatheter closure product line
of Schneidt Implantate, GmbH of Frankfurt, Germany. The total purchase price was
$541,457, which included 85,000 shares of common stock, and $31,457 of
acquisition related costs. The assets acquired consisted exclusively of patents
and other intangibles. The acquisition cost was allocated to the assets acquired
based on their respective fair values. The in-process research and development
costs of $441,457 were charged against income in 1997, as the underlying
research and development projects had not yet reached technological feasibility.
The transcatheter closure product line is being spun off to shareholders in
fiscal 1999. (See Note 6)
F8
NOTE 6 - DISCONTINUED OPERATIONS
In December 1998, the Company's Board of Directors approved a plan to distribute
to its shareholders its transcatheter closure business through a wholly owned
subsidiary, Cardia, Inc. The distribution was ultimately made on February 11,
1999 to shareholders of record on January 25, 1999. ABI shareholders received
one share of Cardia, Inc. common stock for every 11.563 common shares of Applied
Biometrics. The Company's consolidated financial statements report Cardia as a
discontinued operation.
Loss from the operations of Cardia for 1997 included results from the date of
acquisition of the underlying technology (Note 5) through December 31, 1997.
Cardia's operating results from December 31, 1998 through the February 11, 1999
spin-off date were breakeven. Since net assets attributable to Cardia will be
spun-off at net book value and be reflected as a dividend to ABI shareholders',
no gain or loss will be recorded as a result of the spin-off.
Cost directly related to the spin-off represent a non-cash charge related to
amendments to previously issued employee stock options, for employees departing
ABI for Cardia. The amendments converted vested and in the money stock options
to an equivalent benefit in Company shares.
The shares to be issued following amendments to the stock options are presented
in the ABI balance sheet as "Liability for pending issuance of common stock."
Upon issuance of the shares in the first quarter of fiscal 1999, common shares
outstanding will increase by 125,220 and shareholders' equity will increase by
$1,001,761 Net cash used by discontinued operations differs from the loss from
discontinued operations due to the non-cash nature of this charge.
Condensed financial statement information for Cardia, Inc. is as follows:
Year ended, December 31
1998 1997
---- ----
DISCONTINUED OPERATIONS
Net sales $ 167,240 --
----------- ---------
Loss from operations through December 31 $ (836,386) $(457,866)
Costs directly related to the spin-off (1,001,761) --
----------- ---------
Loss from discontinued operations $(1,838,147) $(457,866)
----------- ---------
Net assets of discontinued operations
Current assets
Accounts receivable $ 92,917 --
Inventories 50,888 --
Prepaid and other assets 11,785 --
----------- ---------
155,590 --
Property and equipment 27,371 --
Intangible assets 83,332 100,000
Current liabilities (63,651) --
----------- ---------
Net assets of discontinued operations $ 202,642 $ 100,000
----------- ---------
F9
NOTE 7 - COMMON STOCK OPTIONS AND STOCK WARRANTS
The Company has stock option plans (Plans) which permit granting of both
qualified and non-qualified stock options to employees, directors, officers and
others. At December 31, 1998, a total of 389,167 stock options were outstanding
under the Plans. The Board of Directors is authorized to grant additional
539,580 shares of common stock under the Plans. Options have been granted at an
option price per share equal to or greater than the fair value at the date of
the grant. The options generally vest over a three to five year period and
expire after seven to ten years.
The Company adopted Statement of Financial Accounting Standards ("FAS") No. 123,
"Accounting for Stock-Based Compensation" in 1996. As allowed by FAS No. 123,
the Company applied APB Option No. 25 and related interpretations in accounting
for its stock option plans and accordingly, does not recognize compensation
expense related thereto. If the Company had elected to recognize compensation
expense based on the fair value of the options granted at grant date as
prescribed by FAS 123, net loss and not loss per share would have been increased
to the pro forma amounts indicated in the following table:
1998 1997 1996
---- ---- ----
Net loss - as reported $ (3,402,138) $ (2,592,470) $ (1,368,961)
Net loss - pro forma $ (4,228,043) $ (3,236,790) (1,999,059)
Net loss per share - as reported $ (0.79) $ (0.62) $ (0.35)
Net loss per share - pro forma $ (0.98) $ (0.77) $ (0.51)
The fair value of each option grant is estimated on the date of grant using the
Black-Schools option-pricing model with the following assumptions:
1998 1997 1996
---- ---- ----
Expected dividend level 0.0% 0.0% 0.0%
Expected stock price volatility 58.7% 48.9% 55.0%
Risk-free interest rate 5.7% 5.7% 6.2%
Expected life of options 6 years 4-6 years 4-6 Years
The table below summarizes all stock option activity:
Exercise Price Weighted Average
Number of shares Per Share Exercise Price
---------------- --------------- ----------------
Outstanding at December 31, 1995 548,134 $3.00 - $60.00 $5.27
Granted 220,000 $11.75 - $12.625 $12.11
Canceled (5,400) $6.56 - $60.00 $10.52
Exercised (70,767) $3.00 - $9.00 $4.63
-------
Outstanding at December 31, 1996 691,967 $3.00 - $12.625 $7.41
Granted 69,000 $8.50 - $9.875 $9.82
Canceled (110,170) $4.625 - $60.00 $10.97
Exercised (22,130) $4.625 - $5.00 $4.63
-------
Outstanding December 31, 1997 628,667 $3.00 - $12.625 $7.15
Granted 336,370 $7.50 - $9.75 $7.90
Cancelled (514,870) $3.50 - $11.75 $6.64
Exercised (61,000) $4.625 - $5.00 $4.63
-------
Outstanding December 31, 1998 389,167 $3.00 - $12.625 $9.68
=======
Exercisable at December 31, 1998 239,867
=======
The table above gives effect to the stock options amendments for employees
leaving to join Cardia, Inc. (See Note 6)
F10
The following table summarizes additional information related to stock options
outstanding at December 31, 1998:
OPTIONS
Outstanding Options EXERCISABLE
-------------------
Number Weighted Average Number
Range of Exercise Outstanding at Remaining Weighted Average Exercisable at Weighted Average
Prices 12/31/98 Contractual Life Exercise Price 12/31/98 Exercise Price
------ -------- ---------------- -------------- -------- --------------
$3.00 - $8.50 72,667 4.22 years $ 5.99 59,667 $ 5.65
$9.00 - $12.625 316,500 6.65 years $10.53 180,200 $10.82
NOTE 8 - INCOME TAXES
The Company has available net operating loss carry forwards which begin to
expire in 2005. As a result of limitations imposed under Section 382 of the
Internal Revenue Code (IRC), both the annual amount and timing of utilization of
these carry forwards are limited. Therefore, the Company effectively has a total
net operating loss carry forward of approximately $11,800,000. Of this amount,
approximately $835,000 is subject to limitation and may be utilized at a rate of
approximately $57,000 per annum. In the event of additional common stock
issuance's, the Company's net operating loss carry forwards may be subject to
further limitations pursuant to Section 382 of the IRC. A valuation allowance
has been established for the entire net tax benefit associated with all carry
forwards and temporary differences on December 31, 1998 as their realiztion is
not "more likely than not."
NOTE 9 - LEASE COMMITMENTS
The Company has a three year lease arrangement for a facility in Burnsville,
Minnesota that expires on March 31, 2002. The future minimum payments under this
lease are as follows:
Operating Leases
Year Ending December 31, ----------------
1999 $ 74,593
2000 80,285
2001 80,285
2002 20,071
--------
Minimum lease payment $255,234
========
Rental expense under operating leases including common area maintenance and real
estate tax, was $102,235, $97,780 and $95,375 during the years ended December
31, 1998, 1997 and 1996, respectively.
F11
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Restated Articles of Incorporation, as amended, of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
annual report on Form 10 K for the fiscal year ended December
31, 1994).
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form SB-2,
Commission File No. 33-63754C (the "Form SB-2")).
10.1 Lease dated February 8, 1994 by and between the Company and
American Industrial Properties REIT (incorporated by reference
to Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993.
10.2 Applied Biometrics, Inc. 1987 Stock Option Plan (incorporated
by reference to Exhibit 10.3 to the Company's Form SB-2).
10.3 1996 Stock Option Plan incorporated by reference in the
Company's Registration Statement on Form S-8, File No.
333-04555.
10.4 1998 Stock Option Plan incorporated by reference in the
Company's Registrant Statement on Form S-8, File No.
333-62117.
10.5 Amendment No. 2 to Agreement Regarding Confidential
Information and Intellectual Property between the Registrant
and Claire T. Hovland dated June 15, 1993 (incorporated by
reference to Exhibit 10.10 to the Company's Form SB-2).
10.6 Applied Biometrics, Inc. 1994 Stock Plan (incorporated by
reference to Exhibit 10.1 to the September 1994 Form 10-Q).
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Powers of Attorney (included on signature page).
27.1 Financial Data Schedule