As filed with the Securities and Exchange Commission on January 4, 2002
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
ALTUS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 3845 77-0492262
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
821 Cowan Road
Burlingame, California 94010
(650) 552-9700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-----------------
Kevin P. Connors
Chief Executive Officer
Altus Medical, Inc.
821 Cowan Road
Burlingame, California 94010
(650) 552-9700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------
Copies to:
David J. Saul Robert M. Smith
Philip H. Oettinger Dewey Ballantine LLP
Wilson Sonsini Goodrich & Rosati 525 Middlefield Road
Professional Corporation Suite 250
650 Page Mill Road Menlo Park, CA 94025
Palo Alto, California 94304 (650) 462-7400
(650) 493-9300
-----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
-----------------
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Proposed
Maximum Aggregate Amount of
Title of Securities to be Registered Offering Price (1)(2) Registration Fee
- ----------------------------------------------------------------------------
Common Stock, par value $0.001... $60,000,000 $14,340
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
(1) In accordance with Rule 457(o) under the Securities Act of 1933, the number
of shares being registered and the proposed maximum offering price per
share are not included in this table.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
-----------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS January 4, 2002
Subject to completion
- --------------------------------------------------------------------------------
Shares
[Altus Medical, Inc. Logo]
Common Stock
- --------------------------------------------------------------------------------
This is our initial public offering of shares of our common stock. No public
market currently exists for our common stock. We expect the public offering
price to be between $ and $ per share.
We have applied to have our common stock approved on the Nasdaq National Market
for quotation under the symbol "ALTU."
Before buying any shares you should read the discussion of material risks of
investing in our common stock in "Risk factors" beginning on page 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
Per share Total
- --------------------------------------------------------------------------------
Public offering price $ $
- --------------------------------------------------------------------------------
Underwriting discounts and commissions $ $
- --------------------------------------------------------------------------------
Proceeds, before expenses, to us $ $
- --------------------------------------------------------------------------------
The underwriters may also purchase up to shares of common stock from
us at the public offering price, less the underwriting discounts and
commissions, within 30 days from the date of this prospectus. The underwriters
may exercise this option only to cover over-allotments, if any. If the
underwriters exercise the option in full, the total underwriting discounts and
commissions will be $ , and our total proceeds, before expenses, will be $ .
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about , 2002.
UBS Warburg Lehman Brothers
- --------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of shares of our common stock.
Through and including , 2002 (the 25th day after the commencement of this
offering), all dealers that buy, sell or trade shares of our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Prospectus summary..................... 3 Business........................... 34
The offering........................... 6 Technical advisory board........... 46
Summary financial data................. 7 Management......................... 47
Risk factors........................... 9 Related party transactions......... 57
Forward-looking information............ 20 Principal stockholders............. 58
Use of proceeds........................ 21 Description of capital stock....... 60
Dividend policy........................ 21 Shares eligible for future sale.... 64
Capitalization......................... 22 Underwriting....................... 66
Dilution............................... 23 Legal matters...................... 69
Selected financial data................ 25 Experts............................ 69
Management's discussion and analysis of Where you can find more information 69
financial condition and results of Index to financial statements...... F-1
operations........................... 27
- --------------------------------------------------------------------------------
CoolGlide(R) is a registered trademark and CoolGlide Excel and Enterprise are
trademarks of Altus Medical, Inc. This prospectus also refers to trademarks and
trade names of other organizations.
As used in this prospectus, references to "we," "our," "us" and "Altus" refer
to Altus Medical, Inc., unless the context requires otherwise.
- --------------------------------------------------------------------------------
Prospectus summary
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all the information you
should consider before buying shares in the offering. You should read the
entire prospectus carefully, especially the risks of investing in our common
stock, which we discuss under "Risk factors." Except as otherwise indicated,
information in this prospectus assumes the conversion of each outstanding share
of convertible preferred stock into one share of common stock and assumes no
exercise of the underwriters' over-allotment option.
OUR BUSINESS
We design, manufacture and market innovative medical devices for use in the
aesthetic market. We enable dermatologists, plastic surgeons, general
physicians and other licensed healthcare practitioners to offer non-invasive
laser-based treatments to their patients. Our initial product, CoolGlide, is
used for the removal and permanent reduction of hair. CoolGlide is effective
for patients across the full spectrum of skin pigmentation, including patients
with dark or tanned skin, who could not be treated safely by other aesthetic
laser products. CoolGlide Excel, our second product, combines in one compact
solution CoolGlide performance for permanent hair reduction with the broadest
range of leg and facial vein treatments available. Our products are easy to use
and the procedures performed using our products are efficient, effective and
safe. These and other advantages have allowed us to rapidly grow our business
and successfully compete in the aesthetic market.
We are introducing additional, advanced, laser-based aesthetic solutions to
increase the range of products and services we offer our customers. In the fall
of 2001, we acquired North American distribution rights to the new Medlite C
series of products, manufactured by Continuum Electro Optics for removal of
tattoos and pigmented lesions. In addition, we have developed the Enterprise
Program, through which we will offer customers the opportunity to use CoolGlide
on a pay-per-use basis. This program is designed to make CoolGlide attractive
to customers who may not otherwise be able to justify the capital outlay.
Our customers pay for our products directly and typically are not reimbursed by
the government or other third-party payors. We received United States Food and
Drug Administration, or FDA, clearance to market CoolGlide for the treatment of
vascular lesions, including leg and facial veins, in June 1999, for hair
removal in March 2000 and for the permanent reduction of hair in January 2001.
In addition, we have filed for clearance with the FDA for additional
indications involving non-invasive procedures to improve skin appearance. We
commercially launched CoolGlide in March 2000, CoolGlide Excel in March 2001
and the first Medlite series C product in the fourth quarter of 2001. As of
December 1, 2001, we had sold approximately 400 units. We have been profitable
since the second quarter of 2000.
INDUSTRY BACKGROUND
We believe that the aesthetic market for elective, non-invasive procedures is
experiencing broad growth. According to the American Society of Plastic
Surgeons, an estimated $7.4 billion was spent on cosmetic surgery in over 13
million surgical and non-surgical procedures in 2000. The December 2001 US
Worldwide Epilation Market report estimates that more than 5 million
light-based hair removal treatments will be performed in 2001, generating $1.3
billion in fees. The report also indicates that the installed base of lasers
for hair removal will grow approximately 300% from 2000 to 2004.
Aesthetic laser-based procedures include the following:
. removal and permanent reduction of unwanted hair;
. treatment of unwanted leg and facial veins;
3
. removal of tattoos and pigmented lesions;
. wrinkle reduction; and
. other emerging applications, such as acne and psoriasis treatments.
While our existing laser-based technology platform has the potential to offer
multiple applications in the aesthetic market, our initial focus has been on
the removal and permanent reduction of unwanted hair and the treatment of
unwanted veins.
Hair removal
The only treatment, other than laser-based treatments, that provides a
long-lasting solution for hair removal is electrolysis. Lasers are well suited
for the removal of hair because, with the proper selection of four parameters
- -- wavelength, pulse length, spot size and energy -- lasers can be used to
non-invasively target the hair structure without damaging the surrounding skin.
In addition, numerous hair follicles can be treated simultaneously, allowing
for rapid coverage of large areas. Historically, lasers have provided effective
treatment primarily for people with lightly-pigmented skin, as dark and tanned
skin was found to absorb too much energy and treatments often resulted in
blistering, skin discoloration and other complications.
Leg and facial veins
The current methods for the treatment of leg and facial veins include
sclerotherapy and laser-based treatments. Sclerotherapy, the treatment of
choice for leg veins, is almost impossible to use for small leg or facial
veins. Historically, laser-based treatments have been used to treat small
facial veins, but have tended to result in either significant bruising and pain
or limited efficacy. In addition, these lasers are unsuitable for the treatment
of larger leg veins. As a result, there has been an unmet market need for a
laser technology that can be used to treat the whole range of veins from small
facial veins to large leg veins.
THE ALTUS SOLUTION
Our products address unmet needs in the aesthetic market. We believe that our
products are technologically superior to competitors' products. Key features of
our products include:
. Broadest range of treatments. The limitations on many competing hair
removal and vein treatment products cause practitioners to turn away
patients on a regular basis from aesthetic laser procedures. CoolGlide
removes hair safely and effectively, not only on those with fair
pigmentation, but also on the otherwise unserved population of patients
with dark or tanned skin. CoolGlide Excel also adds the capability of
treating large leg veins, in addition to small face and leg veins.
. Technology leadership. We believe that we offer the most advanced
laser-based solutions for the aesthetic market. Our technology combines
longer wavelength, higher power, larger spot size and wider range of pulse
lengths to provide a laser that is safe and effective for people with
conditions that were previously untreatable using competitors' products.
. Proprietary ClearView handpiece. Our proprietary ClearView handpiece
provides an unobstructed view of the treatment area that enables a
practitioner to quickly and accurately position the laser beam. In
addition, the active cooling system integrated into our ClearView handpiece
permits the practitioner to move continuously and safely through a targeted
area.
. Multiple applications. CoolGlide Excel provides the practitioner one unit
for multiple applications that would normally require the purchase of two.
Because practitioners can use our CoolGlide Excel product for both
permanent hair reduction and vein treatment, the cost of the unit may be
spread across a greater number of procedures, and therefore more rapidly
recovered.
4
. Easy-to-use controls. The practitioner has three simple independently
adjustable controls from which to select a wide range of treatment
parameters and settings to suit the patient's profile and treatment needs.
. Compact and transportable design. The compact design gives the practitioner
the flexibility to easily move the product from room to room. Our products
weigh significantly less than many competing products.
OUR STRATEGY
Our strategy is to become a leading provider of medical devices and services
for the aesthetic market by:
. increasing sales of existing products in the United States;
. expanding our international presence;
. continuing to develop additional clinical capabilities of our existing
technology platform;
. broadening our customer base;
. continuing our commitment to new research and development; and
. acquiring complementary businesses and technologies.
-----------------
We were incorporated in Delaware in August 1998 as Acme Medical, Inc. and
changed our name to Altus Medical, Inc. in July 1999. Our principal executive
offices are located at 821 Cowan Road, Burlingame, CA 94010. Our telephone
number is (650) 552-9700. Our web site is located at www.altusmedical.com. We
do not intend information contained on our web site to be part of this
prospectus.
5
The offering
The following information assumes that the underwriters do not exercise their
over-allotment option to purchase additional shares in this offering.
Common stock being offered.......................... shares
Common stock to be outstanding after the offering... shares
Proposed Nasdaq National Market symbol.............. ALTU
Use of proceeds..................................... For working capital and general corporate
purposes. See "Use of proceeds."
Unless we indicate otherwise, all information in this prospectus has been
adjusted to reflect the conversion of all outstanding shares of our preferred
stock into 4,675,000 shares of our common stock and the assumed exercise and
conversion of warrants to purchase 50,000 shares of preferred stock into 50,000
shares of our common stock upon the closing of this offering.
The number of shares of common stock that will be outstanding after this
offering is based on shares outstanding as of December 1, 2001, and excludes
the following:
. 3,222,969 shares of common stock issuable upon the exercise of options
outstanding as of December 1, 2001 under our 1998 Stock Plan at a
weighted-average exercise price of $1.29 per share;
. 20,000 shares of common stock issuable upon the exercise of warrants
outstanding as of December 1, 2001 at a weighted-average exercise price of
$1.55 per share;
. shares of common stock reserved for future issuance under our 2002 Stock
Plan; and
. shares reserved for future issuance under our 2002 Employee Stock Purchase
Plan.
6
Summary financial data
The following table presents summary historical and unaudited pro forma
financial data. The summary financial data for the period from August 10, 1998
(date of inception) to December 31, 1998, and the years ended December 31, 1999
and 2000 and the nine months ended September 30, 2001 are derived from our
audited financial statements. We have also included data from our unaudited
financial statements for the nine months ended September 30, 2000. You should
read this data together with our financial statements and related notes
included elsewhere in this prospectus and the information under "Selected
financial data" and "Management's discussion and analysis of financial
condition and results of operations."
Period from
August 10, Years ended Nine months ended
1998 (date of December 31, September 30,
inception) to --------------- -------------------
December 31, 1999 2000 2000 2001(1)
Statements of operations data 1998 (unaudited)
- -----------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Net revenue............................................ $ -- $ 100 $9,531 $6,447 $13,918
Cost of revenue........................................ -- 413 3,365 2,246 5,036
------ ------- ------ ------ -------
Gross profit (loss).................................... -- (313) 6,166 4,201 8,882
------ ------- ------ ------ -------
Operating expenses:
Sales and marketing.................................. 26 706 2,794 1,790 4,047
Research and development............................. 188 1,333 1,539 1,099 1,593
General and administrative........................... 43 419 989 709 1,111
------ ------- ------ ------ -------
Total operating expenses............................ 257 2,458 5,322 3,598 6,751
------ ------- ------ ------ -------
Income (loss) from operations.......................... (257) (2,771) 844 603 2,131
Interest and other income, net......................... 11 57 193 146 146
------ ------- ------ ------ -------
Income (loss) before income taxes...................... (246) (2,714) 1,037 749 2,277
Provision for income taxes............................. -- -- -- -- 370
------ ------- ------ ------ -------
Net income (loss)...................................... $ (246) $(2,714) $1,037 $ 749 $ 1,907
====== ======= ====== ====== =======
Net income (loss) per share:
Basic................................................ $(1.06) $ (3.04) $ 0.97 $ 0.72 $ 1.35
====== ======= ====== ====== =======
Diluted.............................................. $(1.06) $ (3.04) $ 0.13 $ 0.09 $ 0.22
====== ======= ====== ====== =======
Weighted average number of shares used in per share
calculations:
Basic................................................ 231 892 1,064 1,034 1,412
====== ======= ====== ====== =======
Diluted.............................................. 231 892 8,008 8,001 8,668
====== ======= ====== ====== =======
Pro forma net income per share (unaudited):
Basic................................................ $ 0.18 $ 0.31
====== =======
Diluted.............................................. $ 0.13 $ 0.22
====== =======
Weighted average number of shares used in pro forma per
share calculations (unaudited):
Basic................................................ 5,789 6,137
====== =======
Diluted.............................................. 8,058 8,687
====== =======
7
As of September 30, 2001
---------------------------------------
Pro forma
Balance sheet data Actual Pro forma (2) as adjusted (3)
- -------------------------------------------------------------------------------------
(In thousands)
Cash and cash equivalents................... $ 6,491 $ 6,591 $
Working capital............................. 6,636 6,736
Total assets................................ 10,667 10,767
Non-current liabilities..................... -- --
Redeemable convertible preferred stock...... 7,272 --
Accumulated deficit......................... (16) (16)
Total stockholders' equity.................. 399 7,771
- --------
(1) Stock-based compensation expense of $93,000, $38,000, $181,000, $25,000 and
$40,000 is included in net revenue, cost of revenue, sales and marketing,
research and development, and general and administrative, respectively, for
the nine months ended September 30, 2001.
(2) On a pro forma basis to give effect to the automatic conversion of all
outstanding shares of preferred stock into 4,675,000 shares of common stock
and the assumed exercise and conversion of warrants to purchase 50,000
shares of preferred stock into 50,000 shares of common stock upon closing
of this offering.
(3) On a pro forma as adjusted basis to reflect the net proceeds from the sale
of shares of our common stock in this offering at an assumed public
offering price of $ per share, after deducting the underwriting
discounts and commissions and estimated offering expenses.
8
- --------------------------------------------------------------------------------
Risk factors
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks described below with all of the other information
included in this prospectus before making an investment decision. If any of the
possible adverse events described below actually occurs, our business, results
of operations or financial condition would likely suffer. In such an event, the
market price of our common stock could decline and you could lose all or part
of your investment.
RISKS RELATED TO OUR BUSINESS
We have a limited history of operations, which could impair our ability to grow
significantly, as well as our future revenues, profits and our ability to
remain profitable.
We were incorporated in August 1998 and first became profitable in March 2000.
Consequently, we have limited experience operating as a profitable company. Our
ability to maintain profitability, and the overall success of our business,
will depend on our ability to increase product sales and expand our
international distribution network, which we cannot guarantee. Even if we are
able to expand our sales and marketing capabilities, we cannot guarantee that
our direct sales force or third-party distributors will be able to promote and
sell our products successfully. As a result, we cannot assure you that we will
be able to increase sales of our products and achieve continued revenue growth
and profitability.
Our future revenue and operating results will depend on our ability to manage
the anticipated growth of our business. It may be difficult for us to contain
costs if we have to significantly expand our manufacturing abilities. Our
success in growing our business also will depend upon the ability of our
management team to implement improvements in our operational systems, realize
economies of scale, manage multiple development projects and continue to
expand, train and manage our personnel worldwide. If we cannot scale and manage
our business appropriately or manage the introduction of new products, we will
not experience projected growth and our financial results will suffer.
We may experience fluctuations in our revenue and income from operations, which
may cause our financial results to fluctuate and our stock price to fall.
Our limited operating history makes it difficult for us to predict future
performance. Historically, the demand for our products has varied from quarter
to quarter. A number of factors may contribute to fluctuations in our financial
results, such as:
. the timing of customer orders and shipments;
. the seasonality of the industry;
. the condition of the economy and the willingness of consumers to spend
money on elective aesthetic procedures;
. decisions by our customers not to purchase existing products due to
impending introduction of new and improved products; and
. foreign currency fluctuations.
Our net sales and operating results may vary significantly from quarter to
quarter and from year to year. In the event our revenue and operating results
do not meet the expectations of stock market analysts and investors for a
certain quarter, the price of our stock may decline significantly. Our
inability to
- --------------------------------------------------------------------------------
9
Risk factors
- --------------------------------------------------------------------------------
provide meaningful projections of our operating results on a quarter to quarter
and year to year basis may result in volatility of our stock price.
Our success depends on our ability to compete effectively with our existing
products, as well as our ability to develop product enhancements and new
products. If our products fail to meet the needs of prospective customers, our
business will suffer.
The aesthetic laser market is highly competitive and dynamic, and marked by
rapid obsolescence of products. Demand for our products could be diminished by
equivalent or superior products and technologies offered by competitors. To be
successful, we must be able to respond to new developments in the aesthetic
market by creating innovative products and new applications of existing
products. Our ability to compete could suffer if we are unable to respond
quickly to new technological innovations and competitors' new products, or if
we are unable to anticipate and meet the needs of our customers through new
product offerings and improvements to existing products.
We must devote significant resources to develop new products and technology.
Resources committed to research and development will not be used to expand
other activities, such as sales and marketing. Once we create new products and
technologies, we will need to successfully transition them into the
manufacturing process and to find suitable suppliers for product components. If
we fail to devote sufficient resources to research and development, we may not
be able to introduce new products or enhancements to existing products. Our
inability to compete effectively with new products or technology could
negatively impact our business, financial condition and results of operations.
We compete against companies that have greater resources and more established
products, which may prevent us from achieving significant market penetration or
increased operating results.
Our products compete against similar products offered by Lumenis, Candela and
Laserscope, as well as other smaller, highly-specialized firms. Competition
with these companies could result in price cutting, reduced profit margins and
loss of market share, any of which would harm our business and results of
operations. Our ability to compete effectively depends upon our ability to
distinguish our company and our products from our competitors and include such
factors as:
. market acceptance of our products both domestically and internationally;
. the product performance;
. the price of our products and procedures;
. quality of our customer support;
. success and timing of new product development and introduction;
. our ability to obtain regulatory clearances or approvals for new products
or modifications; and
. continued development of successful distribution channels.
Some of our current and prospective competitors have significantly greater
financial, research and development, manufacturing, and sales and marketing
resources than we have. Our competitors could utilize their greater financial
resources to acquire other companies to gain new technologies or products that
could effectively compete with our existing product lines. For example, ESC
Medical purchased Coherent's medical business and the surviving company,
Lumenis, incorporates competitive product lines and technologies of the
predecessor companies into its current products. Any business combination, such
as this one, could exacerbate any existing competitive forces, which could harm
our business.
- --------------------------------------------------------------------------------
10
Risk factors
- --------------------------------------------------------------------------------
In addition, some of our competitors have more established products and
customer relationships than we do, which could inhibit our market penetration
efforts. For example, we have in the past encountered, and expect in the future
to encounter, situations where due to pre-existing relationships, potential
customers are committed to purchasing products offered by our competitors. Such
commitments reduce the possibility that potential customers also will purchase
our products. Potential customers also may need to recoup the cost of expensive
products that they have already purchased from our competitors and may decide
not to purchase our products, or to delay such purchase, as a result. If we are
unable to achieve market penetration, we will be unable to compete effectively
and our business will be harmed.
We depend on skilled personnel to operate our business effectively. If we are
unable to recruit, hire and retain skilled employees, our ability to manage and
expand our business will be harmed, which would impair our future revenue and
profit.
Our ability to retain our skilled labor force and our success in attracting and
hiring new highly-skilled employees will be a critical factor in determining
whether we will be successful in the future. We intend to hire a significant
number of employees over the next 12 months. We may not be able to meet our
future hiring needs or retain existing personnel. We will face particularly
significant challenges and risks in hiring, training, managing and retaining
engineering, sales and marketing employees, as well as independent
distributors, all of whom are geographically dispersed and must be trained in
the use and benefits of our products. Failure to attract and retain personnel,
particularly technical and sales and marketing personnel, would materially harm
our ability to compete effectively and grow our business.
We depend on our management team to run our operations. If we are unable to
retain our management team, our business will be harmed.
Our success largely depends on the skills, experience and efforts of our
executive officers. None of our officers or key employees is party to an
employment agreement and any of our employees may terminate their employment at
any time. In addition, we do not maintain "key person" life insurance policies
covering any of our employees. The loss of any of our management team members
could weaken our management expertise and harm our business.
Intellectual property rights may not provide meaningful commercial protection
for some or all of our products, which may permit third parties to compete
against us more effectively.
We rely on patent, copyright, trade secret and trademark laws to protect our
products from being duplicated by competitors. As of December 1, 2001, we did
not have any issued patents, and we had four pending US patent applications and
three pending foreign patent applications. Intellectual property laws afford us
only limited protection. We and our competitors rely upon proprietary rights
that cannot be patented. Certain of our patentable products and processes may
not be protected by patents. Additionally, our patent applications may not
issue as patents or, if issued, may not issue in a form that will be
advantageous to us. Any patents we obtain may be challenged, invalidated or
legally circumvented by third parties. We may not be able to prevent the
unauthorized disclosure or use of our technical knowledge or other trade
secrets by consultants, vendors, former employees or current employees, despite
the existence of nondisclosure and confidentiality agreements and other
contractual restrictions.
An absence of intellectual property protection could result in competition that
would make our market opportunity accessible to a greater number of companies.
Any of our competitors could purchase one of our products and attempt to
replicate some or all of the competitive advantages we derive from our
development efforts. Moreover, the laws of many foreign countries will not
protect our intellectual
- --------------------------------------------------------------------------------
11
Risk factors
- --------------------------------------------------------------------------------
property rights to the same extent as the laws of the United States. If our
intellectual property is not adequately protected, our competitors could
develop new products or enhance existing products to compete more directly and
effectively with us and harm our business.
We are involved in intellectual property litigation with Lumenis that may hurt
our competitive position, may be costly to us and may prevent us from selling
our products.
In October 2001, Lumenis filed a lawsuit against us, which alleges that we sell
our products in willful disregard of two issued patents that they own and that
they claim our products infringe. Lumenis's patents concern methods and devices
for conducting various aspects of laser skin treatments. We believe that we
have meritorious defenses in this action. However, litigation is unpredictable
and we may not prevail in successfully defending our position.
If we lose this lawsuit, we could be required to pay Lumenis substantial
damages. Further, a finding of willful infringement would result in a treble
damages award. We may have to obtain a license from Lumenis or another entity
that has the right to license the technology. We may need to pay a royalty to
Lumenis, or a licensee of Lumenis, if we are to continue to market products
that have been found to infringe Lumenis's patents. Lumenis may not be required
to, and Lumenis or a licensee of Lumenis may be unwilling to, grant us a
license, which could require us to stop selling any then commercially-available
product that is found to infringe their patents. In that case, we would have to
redesign such product so it does not infringe Lumenis's patents, which we may
be unable to do without delay if at all.
This litigation will be expensive, may be protracted and our confidential
information may be compromised. Whether or not we are successful in this
lawsuit, this litigation could consume substantial amounts of our financial
resources and could divert management's attention away from our core business.
At any time Lumenis may file additional claims against us, or we may file
claims against Lumenis, which could increase the risk, expense and duration of
the litigation. For more information on our litigation with Lumenis, see
"Business -- Litigation."
Others may assert that our products infringe their intellectual property
rights, which may cause us to engage in costly disputes and, if we are not
successful in defending ourselves, could also cause us to pay substantial
damages and prohibit us from selling our products.
The laser industry is characterized by a large number of patents, claims of
which appear to overlap in many cases. As a result, there is a significant
amount of uncertainty in the industry regarding patent protection and
infringement, and many of the claims in issued patents may not be valid or
enforceable. We are aware of patents owned by our competitors, including a
patent which others in our industry have licensed. We believe that our products
do not require us to obtain such a license but the patent owner may disagree,
and may assert the patent against us. While we attempt to ensure that our
products do not infringe the valid intellectual property rights of other
parties, our competitors may assert that our products and the methods we employ
may be covered by patents held by them or invented by them before they were
invented by us.
We may become involved in litigation not only as a result of alleged
infringement of a third party's intellectual property rights but also to
protect our own intellectual property. Although we may seek to obtain an
agreement to resolve certain claims or actions, we may not be able to obtain
such an agreement on reasonable terms or at all. If, following a successful
third-party action for infringement, we are not successful in obtaining a
license or redesigning our products, we may have to stop manufacturing our
products and our business would suffer as a result.
- --------------------------------------------------------------------------------
12
Risk factors
- --------------------------------------------------------------------------------
Infringement and other intellectual property claims, with or without merit, can
be expensive and time-consuming to litigate and divert management's attention
from our core business. If we lose in this kind of litigation, a court could
require us to pay substantial damages or grant royalties, and prohibit us from
using technologies essential to our products.
Our manufacturing operations are highly dependent upon third-party suppliers,
making us vulnerable to supply shortages and price fluctuations, which could
harm our business.
Many of the components and materials that comprise our products are currently
manufactured by a limited number of third-party suppliers, including some of
our key components, such as laser crystals, optical fibers, electronic parts
and printed circuit boards. Although we believe that alternative sources for
these components are available, a supply interruption could harm our ability to
manufacture our products until a new source of supply is identified and
qualified. Our reliance on these outside suppliers subjects us to a number of
risks that could harm our business, including:
. some of these suppliers are small privately-held companies that may modify
or discontinue their operations at any time;
. an uncorrected defect or supplier's variation in a component, either
unknown to us or incompatible with our manufacturing process, could delay
our ability to ship our products;
. we purchase our key components through the use of long-term purchase orders
and do not have guaranteed supply arrangements with any of our suppliers;
. we may not be able to obtain adequate supply in a timely manner or on
commercially-reasonable terms;
. we may have difficulty locating and qualifying alternative suppliers for
our components;
. once we identify alternative suppliers, we could experience significant
delays in production due to the need to evaluate and test the products
delivered by alternative suppliers and to obtain regulatory qualification
for them;
. many of our suppliers have multiple customers, some of whom may have
greater priority with our suppliers;
. any fluctuation in demand for products produced by our suppliers for
third-party customers may affect delivery of our components; and
. our suppliers may encounter financial hardships unrelated to our demand for
components, which could inhibit their ability to fulfill our orders.
Any interruption or delay in the supply of components or materials, or our
inability to obtain components or materials from alternate sources at
acceptable prices in a timely manner could impair our ability to meet the
demand of our customers and cause customers to cancel orders.
We forecast sales to determine requirements for components and other materials
used in our products and if our forecasts are incorrect, we may experience
delays in shipments and an inability to meet demand.
We keep limited materials and components on hand. To manage our manufacturing
operations with our third-party suppliers, we forecast anticipated product
orders and material requirements to predict our inventory needs up to 12 months
in advance and enter into purchase orders on the basis of these requirements.
Our limited historical experience may not provide us with enough data to
predict future
- --------------------------------------------------------------------------------
13
Risk factors
- --------------------------------------------------------------------------------
demand. If our business expands, our demand for components will increase and
supplier lead times may increase. If we overestimate our component and material
requirements, we will have excess inventory, which would increase our expenses.
If we underestimate our component and material requirements, we may have
inadequate inventory, which could interrupt and delay delivery of our products
to our customers or result in cancellation of orders. Any of these occurrences
would negatively affect our financial performance and the level of satisfaction
our customers have with our business.
Our business is based upon an elective procedure. A number of factors could
inhibit a patient's decision to choose the procedure and our revenues could
suffer.
Most procedures performed using CoolGlide and CoolGlide Excel are not
reimbursable through insurance and are therefore elective surgeries, the cost
of which must be borne by the patient. The decision to utilize our products may
therefore be influenced by a number of factors, including:
. the cost of procedures performed using our products;
. the cost and effectiveness of alternative treatments;
. the success of our sales and marketing efforts; and
. consumer confidence, which has been impacted by the current US recession,
terrorism and war in Afghanistan, as well as other general economic
conditions.
If, as a result of these factors, there is not sufficient demand for the
procedures performed with our products, practitioner demand for the products
could be inhibited, resulting in unfavorable operating results.
We are subject to risks associated with international operations that could
harm our financial condition and results of operations.
To successfully market our products internationally, we must address many
issues with which we have little or no experience. We have obtained regulatory
clearance to market our products in the European Union but we have not obtained
any other international regulatory approvals for other markets. We may not
obtain such approvals or maintain approvals that we do obtain. Currently,
approximately 31% of our total revenue is derived from international sales and
we believe that an increasing percentage of our future revenues will come from
international sales. However, these sales are subject to a number of risks,
including:
. dependence on foreign distributors to sell our products;
. export restrictions, tariff and trade regulations and foreign tax laws;
. customs duties and shipping delays;
. lengthy payment cycles and difficulty in collecting accounts receivable;
. foreign certification and regulatory requirements;
. fluctuating foreign currency exchange rates;
. reduced protection for intellectual property rights in some countries;
. general market conditions;
. political and economic instability; and
. preference for locally-produced products.
- --------------------------------------------------------------------------------
14
Risk factors
- --------------------------------------------------------------------------------
The occurrence of any one or more of the foregoing could harm our financial
condition and results of operations.
We currently depend on third-party distributors to sell our products
internationally and if these distributors underperform, or if we are unable to
attract additional distributors, we may be unable to increase international
revenues.
Internationally, we rely on a network of distributors to sell our products. We
depend on these distributors in such markets and we will need to attract
additional distributors to grow our business and expand the territories into
which we sell our products. Distributors may not commit the necessary resources
to market and sell our products to the level of our expectations. If current or
future distributors do not perform adequately, we may not realize expected
international revenue growth.
Components used in our products are complex in design and defects may not be
discovered prior to shipment to customers, which could result in returns and
warranty service, reducing our revenue and increasing our cost.
In manufacturing our products, we depend upon third parties for the supply of
various components. Many of these components require a significant degree of
technical expertise to produce. If our third-party suppliers fail to produce
components to specification or inadvertently use defective materials in the
manufacturing process, the reliability and performance of our products will be
compromised.
The existence of defects may not be discovered until after shipment. The cost
associated with product recall or repair may be significant, which would in
turn reduce our operating results. If our products contain defects that cannot
be repaired easily, we may experience:
. loss of customer orders;
. damage to our brand reputation;
. increased cost of our warranty program due to product returns;
. inability to attract new customers and market acceptance;
. diversion of resources from our engineering and research and development
departments into our service department; and
. legal actions.
The occurrence of any one or more of the foregoing could harm our business.
Because we are permitted to sell our products to non-physicians and we are not
required to provide training for the use of our products, there exists an
increased potential for misuse of our products, which could harm our reputation
and our business.
Federal regulation allows for the sale of our products to licensed
practitioners as determined on a state-by-state basis. We do not supervise the
procedures performed with our products, nor do we require that direct medical
director supervision occur. The absence of required training and the purchase
and use of our products by non-physicians may result in their misuse, which
could harm our reputation and expose us to costly product liability litigation.
Many foreign jurisdictions also do not require our products to be purchased,
administered or supervised by a physician. In addition, our distributors may
sell our products to untrained practitioners, since we do
- --------------------------------------------------------------------------------
15
Risk factors
- --------------------------------------------------------------------------------
not control the sales activities of our distributors. We may be liable for the
misuse of our products if our distributors sell to customers that are not
qualified or fail to use our products in accordance with standard practice and
operating instructions.
Product liability suits against us due to a defective design, defective
manufacture or misuse of our products, could result in expensive and
time-consuming litigation, payment of substantial damages and an increase in
our insurance rates.
If our products are defectively designed or manufactured, malfunction or are
misused, we may become subject to substantial and costly litigation. The risk
of malfunction or misuse leading to injury is significant, since our products
are classified as Class IV lasers, the most powerful class of lasers available.
Misusing our laser could cause significant skin and tissue damage. Product
liability claims could divert management's attention from our core business, be
expensive to defend and result in sizable damage awards against us. While we
believe that we are reasonably insured against these risks, we may not be able
to obtain insurance in amounts or scope sufficient to provide us with adequate
coverage against all potential liabilities. Any product liability claims
brought against us, with or without merit, could increase our product liability
insurance rates or prevent us from securing coverage in the future and would
harm our reputation in the industry. A product liability claim in excess of our
insurance coverage would be paid out of cash reserves reducing our operating
results.
If we fail to obtain and maintain necessary FDA clearances or approvals for our
products, or if clearances or approvals for future products are delayed, our US
commercial operations would be harmed.
Our products are medical devices that are subject to extensive regulation in
the United States by the FDA. Unless an exemption applies, each medical device
that we wish to market in the United States must first receive either 510(k)
clearance or premarketing approval from the FDA. Either process can be
expensive and lengthy. Although we have obtained 510(k) clearance for our
CoolGlide and CoolGlide Excel products our clearances can be revoked if safety
or effectiveness problems develop. We may not be able to obtain clearances or
approvals for additional products in a timely fashion, or at all. Delays in
obtaining future clearances or approvals could adversely affect our revenues
and profitability. We also are subject to Medical Device Reporting regulations
which require us to report to the FDA if our products cause or contribute to a
death or serious injury or malfunction in a way that would likely cause or
contribute to a death or serious injury. Our failure to comply with applicable
regulatory requirements could result in enforcement action by the FDA which may
include any of our following sanctions:
. fines, injunctions, and civil penalties;
. recall or seizure of our products;
. operating restrictions, partial suspension or total shutdown of production;
. refusing our requests for 510(k) clearance or premarket approval of new
products or new intended uses;
. withdrawing 510(k) clearance or premarket approvals that are already
granted; and
. criminal prosecution.
If we fail to comply with the FDA's Quality System Regulation and laser
performance standards, our manufacturing operations could be delayed, and our
business would suffer.
We are currently required to demonstrate and maintain compliance with the FDA's
Quality System Regulation, or QSR. The QSR covers the methods and documentation
of the design, testing, control,
- --------------------------------------------------------------------------------
16
Risk factors
- --------------------------------------------------------------------------------
labeling, packaging, storage and shipping of our products. The FDA enforces the
QSR through periodic unannounced inspections. We have in the past been, and
anticipate in the future to be, subject to such inspections. Because our
products involve the use of lasers, our products also are covered by a
performance standard for lasers set forth in FDA regulations. The laser
performance standard imposes certain specific record-keeping, reporting,
product testing and product labeling requirements. These requirements also
include affixing warning labels to laser products, as well as incorporating
certain safety features in the design of laser products. Our failure to take
satisfactory corrective action in response to an adverse QSR inspection or our
failure to comply with applicable laser performance standards could result in
enforcement actions that could have a material adverse effect on our operations.
Modifications to our marketed devices may require new 510(k) clearances or
premarket approvals or require us to cease marketing and recall the modified
devices until clearances or approvals are obtained.
Any modification to an FDA-cleared device that significantly affects its safety
or effectiveness, or that would constitute a major change in its intended use,
requires a new FDA 510(k) clearance or possibly premarket approval. The FDA
requires every manufacturer to make this determination in the first instance,
but the FDA can review any such decision. We have modified aspects of our
products since receiving regulatory clearance without additional FDA
submissions and may make additional modifications to those products and future
products after they have received clearance or approval and, in appropriate
circumstances, determine that new submission is unnecessary. The FDA may not
agree with any of our decisions not to seek new clearance or approval. If the
FDA requires us to seek 510(k) clearance or premarket approval for any
modifications to a previously cleared product, we may be required to cease
marketing or recall the modified device until we obtain clearance or approval.
Also, in such a circumstance, we could be subject to significant regulatory
fines or penalties.
We may be unable to obtain or maintain international regulatory approvals for
our current or future products.
We are subject to international rules and regulations governing the sale of our
products in foreign markets. For example, we are required to maintain our ISO
9001/EN 46001 status for our manufacturing facility and CE Mark certification
through international Notified Body audit requirements similar to those of the
FDA. If we do not pass such audits, our ability to sell our products in foreign
countries will be harmed and we will encounter delays in selling our products
as a result of implementing corrective action. In addition, the international
regulatory environment is constantly changing. New rules and regulations may
prevent or delay product sales, or increase our costs, either of which would
adversely impact our operating results.
Any acquisitions that we make could disrupt our business and harm our financial
condition.
In the future we may evaluate potential strategic acquisitions of complementary
businesses, products or technologies. We may not be able to identify
appropriate acquisition candidates or successfully negotiate, finance or
integrate any businesses, products or technologies that we acquire.
Furthermore, the integration of any acquisition may divert management's time
and resources from our core business. While we from time to time evaluate
potential acquisitions of businesses, products and technologies, and anticipate
continuing to make these evaluations, we have no present understandings,
commitments or agreements with any respect to acquisitions.
- --------------------------------------------------------------------------------
17
Risk factors
- --------------------------------------------------------------------------------
Power outages in California may adversely affect us.
We conduct all of our assembly, testing and management activities in California
and rely on a continuous supply of electrical power to conduct operations, as
do many of our suppliers, who are also located in California. California's
current energy crisis could substantially disrupt our operations and increase
our expenses. California recently implemented, and may in the future implement,
rolling blackouts throughout the state. If blackouts interrupt our power
supply, we may be temporarily unable to continue operations at our facilities,
which include the production of CoolGlide and CoolGlide Excel. Interruptions in
our ability to continue operations at our facilities could delay our shipments
of products, delay the development of new products and disrupt communications
with our customers, suppliers and third-party manufacturers. Future
interruptions could result in lost revenue and damage our reputation, either of
which could harm our business and results of operations. Furthermore, shortages
in wholesale electricity supplies have caused power prices to increase. Any
wholesale price increase would have a negative effect on our operating results.
RISKS RELATED TO THIS OFFERING
Our directors, executive officers and principal stockholders have significant
voting power and may take actions that may not be in the best interests of our
other stockholders.
After this offering, our officers, directors, and principal stockholders
holding more than 5% of our common stock, together will control approximately
% of our outstanding common stock. As a result, these stockholders, if they act
together, will be able to control the management and affairs of our company and
all matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. This concentration of
ownership may have the effect of delaying or preventing a change in control and
might adversely affect the market price of our common stock. This concentration
of ownership may not be in the best interest of our other stockholders.
Anti-takeover provisions in our certificate of incorporation and bylaws and
Delaware law contain provisions that could discourage a takeover.
Our basic corporate documents and Delaware law contain provisions that might
enable our management to resist a takeover. These provisions might discourage,
delay or prevent a change in control of our company or a change in our
management. The existence of these provisions could adversely affect the voting
power of holders of common stock and limit the price that investors might be
willing to pay in the future for shares of our common stock. See "Description
of capital stock."
We have not paid dividends in the past and do not expect to pay dividends in
the future, and any return on investment may be limited to the value of our
stock.
We have never paid cash dividends on our common stock and do not anticipate
paying cash dividends on our common stock in the foreseeable future. The
payment of dividends on our common stock will depend on our earnings, financial
condition and other business and economic factors affecting us at such time as
the board of directors may consider relevant. If we do not pay dividends, our
stock may be less valuable because a return on your investment will only occur
if our stock price appreciates.
Our common stock has not been publicly traded, and we expect that the price of
our common stock will fluctuate substantially.
Before this offering, there has been no public market for our common stock. An
active public trading market may not develop after completion of this offering
or, if developed, may not be sustained. The
- --------------------------------------------------------------------------------
18
Risk factors
- --------------------------------------------------------------------------------
price of the common stock sold in this offering will not necessarily reflect
the market price of the common stock after this offering. The market price for
the common stock after this offering will be affected by a number of factors,
including:
. the announcement of new customers or service enhancements by us or our
competitors;
. quarterly variations in our or our competitors' results of operations;
. changes in earnings estimates, recommendations by securities analysts or
our failure to achieve analysts' earning estimates;
. developments in our industry; and
. general market conditions and other factors, including factors unrelated to
our operating performance or the operating performance of our competitors.
In addition, the stock prices of many companies in both the medical device and
medical services industries have experienced wide fluctuations that have often
been unrelated to the operating performance of those companies. These factors
and price fluctuations may materially and adversely affect the market price of
our common stock.
A sale of a substantial number of shares of our common stock may cause the
price of our common stock to decline.
If our stockholders sell substantial amounts of our common stock in the public
market after this offering, including shares issued upon the exercise of
outstanding options, the market price of our common stock could fall. These
sales also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem reasonable or
appropriate. See "Shares eligible for future sale."
New investors in our common stock will experience immediate and substantial
dilution after this offering.
If you purchase shares of our common stock in this offering, you will incur
immediate and substantial dilution in pro forma net tangible book value. If the
holders of outstanding options exercise those options, you will incur further
dilution. See "Dilution."
If our management team does not effectively allocate the proceeds of this
offering, we may fail to achieve our objectives and our stock price may decline.
Our management has significant flexibility in applying the proceeds that we
receive in this offering. We intend to use the proceeds for working capital and
general corporate purposes. We may use a portion of the net proceeds to acquire
complementary products, technologies or businesses; however, we currently have
no agreements or commitments to complete any such transactions and are not
involved in negotiations to do so. Because the proceeds are not required to be
allocated to any specific investment or transaction, you cannot determine the
value or propriety of our management's application of the proceeds prior to
your investment. If we do not allocate the proceeds of the offering
effectively, we may fail to achieve our objectives and the market price of our
common stock may decline.
- --------------------------------------------------------------------------------
19
- --------------------------------------------------------------------------------
Forward-looking information
Some of the statements under "Prospectus summary," "Risk factors,"
"Management's discussion and analysis of financial condition and results of
operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance and involve known and unknown risks, uncertainties
and other factors that may cause our or our industry's actual results, levels
of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those listed under "Risk factors" and elsewhere in this prospectus. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "could," "expects," "plans," "intends," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms and other comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. These statements are only predictions. Actual events or results
may differ materially. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of those statements. We
undertake no duty to update any of the forward-looking statements after the
date of this prospectus to conform them to actual results.
- --------------------------------------------------------------------------------
20
- --------------------------------------------------------------------------------
Use of proceeds
We estimate that the net proceeds from the sale of the shares of common stock
we are offering will be approximately $ million. If the underwriters fully
exercise the over-allotment option, the net proceeds will be approximately $
million. Net proceeds are what we expect to receive after we pay the
underwriting discounts and commissions and the estimated offering expenses. For
the purpose of estimating net proceeds, we are assuming that the public
offering price will be $ per share. We expect to use all of the net proceeds
from this offering for working capital and general corporate purposes. We may
use a portion of the net proceeds to acquire complimentary products,
technologies or businesses; however, we currently have no agreements or
commitments to complete any such transactions and are not involved in
negotiations to do so. Pending our uses of the proceeds, we intend to invest
the net proceeds of this offering primarily in short-term, interest-bearing
instruments.
The timing and amount of our actual expenditures will be based on many factors,
including cash flows from operations and the anticipated growth of our business.
Dividend policy
We have never declared or paid any dividends on our capital stock. We
anticipate that we will retain any earnings to support operations and to
finance the growth and development of our business. Therefore, we do not expect
to pay cash dividends in the foreseeable future. Any future determination
relating to our dividend policy will be made at the discretion of our board of
directors and will depend on a number of factors, including future earnings,
capital requirements, financial conditions, future prospects and other factors
that the board of directors may deem relevant.
- --------------------------------------------------------------------------------
21
- --------------------------------------------------------------------------------
Capitalization
The following table sets forth our capitalization as of September 30, 2001:
. on an actual basis;
. on a pro forma basis to give effect to the automatic conversion upon
completion of this offering of all outstanding shares of our preferred
stock into 4,675,000 shares of common stock and the assumed exercise and
conversion of warrants to purchase 50,000 shares of preferred stock into
50,000 shares of common stock; and
. on a pro forma as adjusted basis to give effect to the sale of shares
of common stock at an assumed public offering price of $ per share, less
underwriting discounts and commissions and estimated offering expenses.
As of September 30, 2001
---------------------------------------
Pro forma
Actual Pro forma as adjusted
- ----------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts
Convertible preferred stock, $0.001 par value; 4,784,000 shares
authorized, 4,675,000 shares issued and outstanding, actual; no
shares issued and outstanding, pro forma and pro forma as
adjusted....................................................... $ 7,272 $ -- $ --
------- ------- -----
Stockholders' equity:
Common stock, $0.001 par value; 20,000,000 shares authorized,
1,825,092 shares issued and outstanding, actual;
6,550,092 shares issued and outstanding, pro forma; and
shares issued and outstanding, pro forma as adjusted...... 2 7
------- ------- -----
Additional paid-in capital...................................... 2,254 9,621
------- ------- -----
Deferred stock-based compensation............................... (1,841) (1,841)
------- ------- -----
Accumulated deficit............................................. (16) (16)
------- ------- -----
Total stockholders' equity.................................... 399 7,771
------- ------- -----
Total capitalization........................................ $ 7,671 $ 7,771 $
======= ======= =====
The table above does not include:
. 3,200,357 shares of common stock issuable upon the exercise of options
under our 1998 Stock Plan outstanding as of September 30, 2001 at a
weighted-average exercise price of $1.12 per share;
. 20,000 shares of common stock issuable upon the exercise of warrants
outstanding as of September 30, 2001 at a weighted-average exercise price
of $1.55 per share;
. shares of common stock reserved for future issuance under our 2002 Stock
Plan; and
. shares of common stock reserved for future issuance under our 2002 Employee
Stock Purchase Plan.
- --------------------------------------------------------------------------------
22
- --------------------------------------------------------------------------------
Dilution
If you invest in our common stock, your interest will be diluted immediately to
the extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering.
Our pro forma net tangible book value as of September 30, 2001 was $7,771,000,
or $1.19 per share. Pro forma net tangible book value per share represents the
amount of our total tangible assets reduced by the amount of our total
liabilities and divided by the total number of shares of common stock
outstanding after giving effect to the conversion of all outstanding shares of
preferred stock into common stock and the assumed exercise and conversion of
warrants to purchase 50,000 shares of preferred stock into common stock.
Dilution in net tangible book value per share represents the difference between
the amount per share paid by purchasers of shares of our common stock in this
offering and the net tangible book value per share of our common stock
immediately afterwards. After giving effect to our sale of shares of our common
stock offered by this prospectus at an assumed public offering price of $ per
share and after deducting the underwriting discounts and commissions, estimated
offering expenses, our pro forma net tangible book value as of September 30,
2001 would be $ , or $ per share. This represents an immediate increase in
pro forma net tangible book value of $ per share to existing stockholders and
an immediate dilution in pro forma net tangible book value of $ per share to
new investors. The following table illustrates this per share dilution:
Assumed initial public offering price per share................................ $
Pro forma net tangible book value per share as of September 30, 2001......... $
Increase per share attributable to new investors.............................
-----
Pro forma as adjusted net tangible book value per share after the offering.....
--------
Dilution per share to new investors............................................ $
========
The following table sets forth, on a pro forma basis, as of September 30, 2001,
the differences between the number of shares of common stock purchased from us,
the total consideration paid and average price per share paid by existing
stockholders, and by new investors purchasing shares of our common stock in
this offering, before deducting underwriting discounts and commissions and
estimated expenses at an assumed public offering price of $ per share.
Total
Shares purchased consideration Average
--------------- -------------- price
Number Percent Amount Percent per share
- -----------------------------------------------------------------------------------
Existing stockholders.................. % $ % $
New investors..........................
--- ----- ------ -----
Total................................ 100.0% $ 100.0%
=== ===== ====== =====
The tables above assume no exercise of the underwriters' over-allotment option
and exclude 3,200,357 options outstanding as of September 30, 2001, with a
weighted-average exercise price of $1.12 per share, and 20,000 shares of common
stock subject to warrants outstanding as of September 30, 2001, with a
weighted-average price of $1.55 per share. Assuming exercise in full of these
options and warrants having an exercise price less than the offering price
would increase the dilutive effect to new investors an additional $ per
share, to $ per share.
- --------------------------------------------------------------------------------
23
Dilution
- --------------------------------------------------------------------------------
If the underwriters exercise their over-allotment option in full, the following
will occur:
. the number of shares of common stock held by existing stockholders will
decrease to approximately % of the total number of shares of common stock
outstanding; and
. the number of shares held by new investors will increase to or
approximately % of the total number of shares of our common stock
outstanding after this offering.
- --------------------------------------------------------------------------------
24
- --------------------------------------------------------------------------------
Selected financial data
The selected financial data set forth below should be read in conjunction with
our financial statements and the related notes thereto and "Management's
discussion and analysis of financial condition and results of operations,"
included in this prospectus. The statement of operations data for the period
from August 10, 1998 (date of inception) to December 31, 1998, for the years
ended December 31, 1999 and 2000 and for the nine months ended September 30,
2001, and the balance sheet data as of December 31, 1999 and 2000 and September
30, 2001, are derived from our audited financial statements included elsewhere
in this prospectus. The balance sheet data as of December 31, 1998 is derived
from our audited financial statements that are not included in this prospectus.
The statement of operations data for the nine months ended September 30, 2000
is derived from our unaudited financial statements included elsewhere in this
prospectus. In the opinion of management, the unaudited financial statements
include all adjustments, consisting principally of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for these periods. The historical results are not
necessarily indicative of the operating results to be expected in the future
and the results of interim periods are not necessarily indicative of the
results for a full year.
Period from
August 10, 1998 Years ended Nine months ended
(date of December 31, September 30,
inception) --------------- -------------------
to December 31, 1999 2000 2000 2001(1)
Statements of operations data 1998 (unaudited)
- -----------------------------------------------------------------------------------------------
(In thousands, except per share data)
Net revenue.............................. $ -- $ 100 $9,531 $6,447 $13,918
Cost of revenue.......................... -- 413 3,365 2,246 5,036
------ ------- ------ ------ -------
Gross profit (loss)...................... -- (313) 6,166 4,201 8,882
------ ------- ------ ------ -------
Operating expenses:
Sales and marketing................... 26 706 2,794 1,790 4,047
Research and development.............. 188 1,333 1,539 1,099 1,593
General and administrative............ 43 419 989 709 1,111
------ ------- ------ ------ -------
Total operating expenses.......... 257 2,458 5,322 3,598 6,751
------ ------- ------ ------ -------
Income (loss) from operations............ (257) (2,771) 844 603 2,131
Interest and other income, net........... 11 57 193 146 146
------ ------- ------ ------ -------
Income (loss) before income taxes........ (246) (2,714) 1,037 749 2,277
Provision for income taxes............... -- -- -- -- 370
------ ------- ------ ------ -------
Net income (loss)........................ $ (246) $(2,714) $1,037 $ 749 $ 1,907
====== ======= ====== ====== =======
Net income (loss) per share(2):
Basic................................. $(1.06) $ (3.04) $ 0.97 $ 0.72 $ 1.35
====== ======= ====== ====== =======
Diluted............................... $(1.06) $ (3.04) $ 0.13 $ 0.09 $ 0.22
====== ======= ====== ====== =======
Weighted average number of shares used in
per share calculations:
Basic................................. 231 892 1,064 1,034 1,412
====== ======= ====== ====== =======
Diluted............................... 231 892 8,008 8,001 8,668
====== ======= ====== ====== =======
- --------------------------------------------------------------------------------
25
Selected financial data
- --------------------------------------------------------------------------------
As of December 31, As of
------------------------ September 30,
Balance sheet data 1998 1999 2000 2001
- ----------------------------------------------------------------------------------------------------
(In thousands)
Cash and cash equivalents.................................. $1,781 $ 4,184 $ 3,562 $ 6,491
Working capital............................................ 1,690 4,180 4,768 6,636
Total assets............................................... 1,798 4,913 7,038 10,667
Non-current liabilities.................................... -- 118 68 --
Redeemable convertible preferred stock..................... 1,945 7,272 7,272 7,272
Total stockholders' equity (deficit)....................... (244) (2,958) (1,918) 399
- --------
(1) Stock-based compensation expense of $93,000, $38,000, $181,000, $25,000 and
$40,000 is included in net revenue, cost of revenue, sales and marketing,
research and development and general and administrative, respectively at
September 30, 2001.
(2) Please see the notes to the financial statements for an explanation of the
method used to determine the numbers of shares used in computing basic and
diluted net income (loss) per share.
- --------------------------------------------------------------------------------
26
- --------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations
The following discussion of our financial condition and results of operations
should be read in conjunction with our financial statements and the notes to
those statements included elsewhere in this prospectus. This discussion may
contain forward-looking statements that involve risks and uncertainties. As a
result of many factors, such as those set forth under "Risk factors" and
elsewhere in this prospectus, our actual results may differ materially from
those anticipated in these forward-looking statements.
OVERVIEW
We design, manufacture and market innovative medical devices for use in the
aesthetic market. We enable our customers to offer non-invasive laser-based
treatments to their patients. We were incorporated in August 1998. Our
activities from our inception to the fourth quarter of 1999 principally
consisted of development of our first product, CoolGlide, for the permanent
reduction of hair and the treatment of leg and facial veins. We received FDA
clearance to market CoolGlide for the treatment of vascular lesions in June
1999. We commercially launched CoolGlide in March 2000 after obtaining FDA
clearance for hair removal. We obtained FDA clearance for permanent reduction
of hair in January 2001 and began sales of our second product, CoolGlide Excel,
in March 2001. We have been profitable since the second quarter of 2000 and, as
of September 30, 2001, had an accumulated deficit of $16,000. In September
2001, we acquired North American distribution rights to the new Medlite C
series of products, manufactured by Continuum Electro Optics, for removal of
tattoos and pigmented lesions. We launched the first of these products in the
fourth quarter of 2001. We have also developed the Enterprise Program, through
which we will offer CoolGlide for a "pay-per-use" fee. To date, we have no
material revenue from Medlite or the Enterprise Program.
We derive revenue primarily from the sale of our aesthetic laser products.
Revenue is recognized upon shipment of product to the customer, provided that a
purchase order exists, remaining obligations are insignificant and
collectibility of the resulting receivable is reasonably assured. We generally
offer a one-year warranty with our products. We provide for the estimated
warranty costs at the time of sale. We also earn revenues from the sale of
extended warranty contracts. Such revenues are deferred and recognized ratably
over the extended warranty period. We sell our products in the United States
through direct sales representatives, and use distributors to sell our products
outside of the United States. For the nine months ended September 30, 2001,
international sales comprised 31% of our revenue.
Our cost of revenue consists primarily of materials, labor, manufacturing
overhead expenses, amortization of deferred stock-based compensation and
warranty and shipping and handling costs. As we grow our business and realize
manufacturing efficiencies and economies of scale, we expect our cost of
revenue to decrease as a percentage of net sales, thereby increasing our gross
margin. For the year ended December 31, 2000 and the nine months ended
September 30, 2001, our gross margins were 65% and 64%, respectively. We
attempt to maintain gross margins even as average selling prices decline by
introducing new products with higher margins and by realizing manufacturing
efficiencies and cost reductions. The markets in which we operate are highly
competitive, and there can be no assurance that we will be able to successfully
maintain our current gross margins. Any significant decline in our gross
margins could materially harm our business.
Our operating expenses include sales and marketing, research and development,
and general and administrative expenses. Sales and marketing expenses consist
primarily of personnel costs, advertising, amortization of deferred stock-based
compensation, public relations and participation in selected medical
conferences and trade shows. Research and development expenses consist
primarily of personnel costs,
- --------------------------------------------------------------------------------
27
Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------
clinical and regulatory costs, patent application costs, amortization of
deferred stock-based compensation and supplies. General and administrative
expenses consist primarily of personnel costs, professional fees, amortization
of deferred stock-based compensation and other general operating expenses of
our company. We expect our operating expenses to increase in the future as a
result of increased sales and marketing expenses to promote revenue growth and
geographic expansion, continued research and development of new products and
technologies, and increased general and administrative expenses, to keep pace
with our overall growth and the requirements of a public company. We expect
operating expenses to decrease as a percentage of net revenue.
We incurred net operating losses from inception through the year ended December
31, 1999 and, accordingly, did not pay any federal or state income taxes during
this period. We did not incur an income tax charge during the year ended
December 31, 2000 due to the utilization of net operating loss carryforwards
from prior periods. We had no net operating loss carryforwards and no research
and development credits remaining at September 30, 2001 and, accordingly, we
recorded a provision for income taxes during the nine months ended September
30, 2001.
We grant incentive stock options to attract, motivate and retain employees. In
connection with the grant of stock options to employees, we record deferred
stock-based compensation as a component of stockholders' equity. Deferred
stock-based compensation for options granted to employees is the difference
between the option exercise price and the fair value of our common stock on the
date such options were granted. For stock options granted to non-employees, the
fair value of the options is estimated using the Black-Scholes valuation model
and is periodically remeasured as the options vest. As a result of stock
options granted through September 30, 2001, we recorded aggregate deferred
stock-based compensation of $2,218,000, of which $1,841,000 was unamortized as
of September 30, 2001. The remaining deferred stock-based compensation as of
September 30, 2001 will be amortized to expense on a straight-line basis over
the respective vesting terms of the underlying options, which is typically four
years. Deferred stock-based compensation expense is allocated according to
employees and their respective departments and by function for non-employees.
During the period from October 1, 2001 through December 14, 2001, we recorded
additional deferred stock-based compensation of $2,996,000 in connection with
options granted to employees.
We have a limited history of operations. We anticipate that our quarterly
results of operations will fluctuate for the foreseeable future due to several
factors, including market acceptance of our current and new products, the
timing of significant orders and the length of the sales cycle, the
introduction of new products by our competitors, litigation and dispute
resolution, the timing and extent of our research and development efforts, and
general market conditions. Our limited history makes accurate predictions of
future operating results difficult.
RESULTS OF OPERATIONS
Nine months ended September 30, 2001 and 2000
Net revenue
Net revenue for the nine months ended September 30, 2001 was $13.9 million,
compared to $6.4 million for the nine months ended September 30, 2000, an
increase of 116%. The increase was primarily due to higher sales volume
resulting from increased customer awareness of our technology, expansion of our
sales force, increased geographical coverage and the introduction of the
CoolGlide Excel product in March 2001, both domestically and internationally.
Revenue increased by $4.7 million in the United States and $2.7 million
internationally. International growth was seen in almost all markets, with the
largest increase of $1.0 million coming from Japan.
- --------------------------------------------------------------------------------
28
Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------
Cost of revenue
Cost of revenue for the nine months ended September 30, 2001 was $5.0 million,
compared to $2.2 million for the nine months ended September 30, 2000, an
increase of 124%. This increase was primarily attributable to the expansion of
our manufacturing operations and higher material, labor and overhead costs
associated with increased sales volume of our products. Included in cost of
revenue was amortization of deferred stock-based compensation of $38,000 for
the nine months ended September 30, 2001, compared to none in the nine months
ended September 30, 2000. As a percentage of net revenue, cost of revenue was
36% and 35% for the nine months ended September 30, 2001 and 2000, respectively.
Gross profit
Gross profit for the nine months ended September 30, 2001 was $8.9 million,
compared to $4.2 million for the nine months ended September 30, 2000, an
increase of 111%. This increase was primarily due to higher sales volume. As a
percentage of net revenue, gross profit was 64% and 65% for the nine months
ended September 30, 2001 and 2000, respectively.
Sales and marketing expenses
Sales and marketing expenses for the nine months ended September 30, 2001 were
$4.0 million, compared to $1.8 million for the nine months ended September 30,
2000, an increase of 126%. This increase was primarily due to an increase of
$1.6 million related to additional labor costs, travel and other expenses
related to the expansion of our sales force. In addition, marketing expenses
increased by $425,000 as a result of trade show expenses, labor costs and other
promotional expenses. Included in sales and marketing expenses was amortization
of deferred stock-based compensation of $181,000 for the nine months ended
September 30, 2001, compared to none in the nine months ended September 30,
2000. As a percentage of revenue, sales and marketing expenses were 29% and 28%
for the nine months ended September 30, 2001 and 2000, respectively.
Research and development expenses
Research and development expenses for the nine months ended September 30, 2001
were $1.6 million, compared to $1.1 million for the nine months ended September
30, 2000, an increase of 45%. This increase was primarily due to higher
employee labor costs of $353,000 and higher outside consulting service costs of
$213,000. The labor costs increased due to hiring additional staff for
engineering and regulatory positions. In addition to higher labor costs, we
contracted with additional engineering and industrial design consultants to
expedite the product launch of CoolGlide Excel. Included in research and
development expenses was amortization of deferred stock-based compensation of
$25,000 in the nine months ended September 30, 2001, compared to none in the
nine months ended September 30, 2000. As a percentage of net revenue, research
and development expenses decreased to 11% for the nine months ended September
30, 2001, from 17% for the nine months ended September 30, 2000.
General and administrative expenses
General and administrative expenses for the nine months ended September 30,
2001 were $1.1 million, compared to $709,000 for the nine months ended
September 30, 2000, an increase of 57%. This increase was primarily due to the
addition of administrative staff and outside services for legal, accounting and
information technology consulting. Included in general and administrative
expenses was amortization of deferred stock-based compensation of $40,000 in
the nine months ended September 30, 2001, compared to none in the nine months
ended September 30, 2000. As a percentage of net revenue, general and
administrative expenses decreased to 8% for the nine months ended September 30,
2001, from 11% for the nine months ended September 30, 2000.
- --------------------------------------------------------------------------------
29
Management's discussion and analysis of financial condition and results of
operations.
- --------------------------------------------------------------------------------
Interest and other income, net
Interest and other income, net for the nine months ended September 30, 2001 was
$146,000, compared to $146,000 for the nine months ended September 30, 2000.
Interest income was $163,000 for the nine months ended September 30, 2001,
compared to $161,000 for the nine months ended September 30, 2000. Interest
expense was $17,000 for the nine months ended September 30, 2001, compared to
$15,000 for the nine months ended September 30, 2000.
Provision for income taxes
We recorded a provision for income taxes of $370,000 during the nine months
ended September 30, 2001. This comprised a current income tax charge of
$964,000, offset by a deferred tax benefit of $594,000. We recorded a deferred
tax asset at September 30, 2001 related to short-term timing differences that
are likely to be realized.
Years ended December 31, 2000, 1999 and the period from August 10, 1998 to
December 31, 1998
Net revenue
Net revenue in 2000 was $9.5 million, compared to $100,000 in 1999 and none in
1998. Although two units were sold in December 1999, CoolGlide was commercially
launched in March 2000.
Cost of revenue
Cost of revenue in 2000 was $3.4 million, compared to $413,000 in 1999 and none
in 1998. The cost of revenue in 1999 was primarily comprised of start-up costs
associated with our manufacturing operations. As a percentage of net revenue,
cost of revenue was approximately 35% in 2000.
Sales and marketing expenses
Sales and marketing expenses in 2000 were $2.8 million, compared to $706,000 in
1999 and $26,000 in 1998. The increase in sales and marketing expenses during
2000 was attributable to increased costs of $1.5 million associated with the
creation of our direct sales force in the United States and increased costs of
$600,000 associated with marketing support. As a percentage of net revenue,
sales and marketing expenses were 29% of net revenue in 2000.
Research and development expenses
Research and development expenses in 2000 were $1.5 million, compared to $1.3
million in 1999 and $188,000 in 1998. The increase in research and development
expenses during 1999 and 2000 was due to the hiring of additional employees and
expenses associated with the development of our CoolGlide and CoolGlide Excel
products. As a percentage of net revenue, research and development expenses
were 16% in 2000.
General and administrative expenses
General and administrative expenses in 2000 were $1.0 million, compared to
$419,000 in 1999 and $43,000 in 1998. The increase in general and
administrative expenses was primarily attributable to the hiring of additional
financial and administrative staff. As a percentage of net revenue, general and
administrative expenses were 10% in 2000.
- --------------------------------------------------------------------------------
30
Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------
Interest and other income, net
Interest and other income, net in 2000 was $193,000, compared to $57,000 in
1999 and $11,000 in 1998. Interest income in 2000 increased significantly due
to higher average cash and cash equivalents balances, offset by a small
increase in interest expense. Interest income was $217,000 and interest expense
was $24,000 in 2000.
Provision for Income Taxes
We did not record provisions for income taxes during 2000, 1999 and 1998 due to
the availability of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations principally through two
private placements of preferred stock during 1998 and 1999, resulting in net
proceeds of $7.3 million.
At September 30, 2001 we did not have any outstanding debt financing
arrangements. At September 30, 2001 we had working capital of $6.6 million and
our primary source of liquidity was $6.5 million in cash and cash equivalents.
Net cash provided by (used in) operating activities was $3.8 million for the
nine months ended September 30, 2001, $(1,000) in 2000 and $(2.8 million) in
1999. During the nine months ended September 30, 2001, net cash provided by
operating activities resulted from net income, adjusted for decreases in
accounts receivable, increases in accrued liabilities, deferred stock-based
compensation expense and depreciation expense, offset by an increase in
inventory, an increase in deferred tax asset and a decrease in deferred
revenue. During 2000, net income and increases in accruals and deferred revenue
were offset by an increase in accounts receivable.
Net cash provided by (used in) investing activities was $(781,000) in the nine
months ended September 30, 2001, $(579,000) in 2000 and $(264,000) in 1999. Our
investing activities consisted principally of capital expenditures for
equipment and machinery relating to manufacturing, research and development,
and other operating activities.
Net cash provided by (used in) financing activities was $(85,000) in the nine
months ended September 30, 2001, $(42,000) in 2000 and $5.5 million in 1999.
The cash provided by financing activities in 1999 was primarily attributable to
the proceeds from the private placement of equity securities.
We expect to continue to generate positive cash flow from operations in the
future. Our future capital requirements depend on a number of factors,
including market acceptance of our products, the resources we devote to
developing and supporting our products, continued progress of our research and
development of new products and the potential need to acquire licenses to
proprietary technology.
While we believe that the net proceeds from this offering together with our
existing capital resources and expected positive cash flow will be sufficient
to fund our operations and capital investments for at least the next 24 months,
we cannot assure you that we will not require additional financing before that
time. We cannot assure you that such additional financing will be available on
a timely basis on terms acceptable to us or at all, or that such financing will
not be dilutive to our stockholders. If adequate funds are not available to us,
we could be required to suspend research and development efforts, delay
commercialization of our products, reduce resources dedicated to sales and
marketing activities or decide
- --------------------------------------------------------------------------------
31
Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------
not to acquire companies or products that would complement our business, any of
which could have a material adverse effect on our business, financial condition
and results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our excess cash primarily in US government securities and marketable
debt securities of financial institutions and corporations with strong credit
ratings. These instruments have maturities of three months or less when
acquired. We do not utilize derivative financial instruments, derivative
commodity instruments or other market risk sensitive instruments, positions or
transactions in any material fashion. Accordingly, we believe that, while the
instruments we hold are subject to changes in the financial standing of the
issuer of such securities, we are not subject to any material risks arising
from changes in interest rates, foreign currency exchange rates, commodity
prices, equity prices or other market changes that affect market risk sensitive
instruments.
Although substantially all of our sales and purchases are denominated in US
dollars, future fluctuations in the value of the US dollar may affect the price
competitiveness of our products. We do not believe, however, that we currently
have significant direct foreign currency exchange rate risk and have not hedged
exposures denominated in foreign currencies.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations," which establishes financial accounting and reporting for
business combinations and supersedes Accounting Principles Board ("APB")
Opinion No. 16, "Business Combinations," and FASB Statement No. 38, "Accounting
for Preacquisition Contingencies of Purchased Enterprises." SFAS No. 141
requires that all business combinations be accounted for using one method, the
purchase method. The provisions of this Statement apply to all business
combinations initiated after June 30, 2001. We will adopt SFAS No. 141 during
the first quarter of fiscal year 2002, and this adoption is not expected to
have any impact on our financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." SFAS No. 142 addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired
in a business combination) should be accounted for in financial statements upon
their acquisition, and after they have been initially recognized in the
financial statements. The provisions of this Statement are effective for fiscal
years beginning after December 15, 2001. We will adopt SFAS No. 142 during the
first quarter of fiscal year 2002, and this adoption is not expected to have
any material impact on our financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which is effective for fiscal years beginning after June 15,
2002. This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 requires, among other
things, that the retirement obligations be recognized when they are incurred
and displayed as liabilities on the balance sheet. In addition, the asset's
retirement costs are to be capitalized as part of the asset's carry amount and
subsequently allocated to expense over the asset's useful life. We believe that
the adoption of SFAS No. 143 will not have a material impact on our financial
statements.
- --------------------------------------------------------------------------------
32
Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal
years. This Statement develops one accounting model for long-lived assets that
are to be disposed of by sale, as well as addressing the principal
implementation issues. We believe that the adoption of SFAS No. 144 will not
have a material impact on our financial statements.
- --------------------------------------------------------------------------------
33
- --------------------------------------------------------------------------------
Business
OVERVIEW
We design, manufacture and market innovative medical devices for use in the
aesthetic market. We enable dermatologists, plastic surgeons, general
physicians and other licensed healthcare practitioners to offer non-invasive
laser-based treatments to their patients. Our initial product, CoolGlide, is
used for the removal and permanent reduction of hair. CoolGlide, unlike many
other aesthetic laser products currently available, is effective for patients
across the full spectrum of skin pigmentation, including patients with dark or
tanned skin, who may not otherwise be treated safely. CoolGlide Excel, our
second product, integrates in one compact solution CoolGlide performance for
permanent hair reduction with the broadest available range of leg and facial
vein treatments. Our products are easy to use, and the procedures performed
using our products are efficient, effective and safe. These and other
advantages have allowed us to rapidly grow our business and successfully
compete in the aesthetic market.
We are introducing additional, advanced, laser-based aesthetic solutions to
increase the range of products and services we offer our customers. In the fall
of 2001, we acquired North American distribution rights to the new Medlite C
series of products, manufactured by Continuum Electro Optics, for removal of
tattoos and pigmented lesions. In addition, we have developed the Enterprise
Program which enables us to offer CoolGlide for a "pay-per-use" fee, making the
product attractive to licensed practitioners who perform a limited number of
aesthetic procedures and who may not otherwise be able to justify the capital
outlay for one of our products.
We received FDA clearance to market CoolGlide for the treatment of vascular
lesions, including leg and facial veins, in June 1999, for hair removal in
March 2000 and for the permanent reduction of hair in January 2001. In
addition, we have filed for clearance with the FDA for additional indications
involving non-invasive procedures to improve skin appearance. We commercially
launched CoolGlide in March 2000, CoolGlide Excel in March 2001 and the first
Medlite series C product in the fourth quarter of 2001. As of December 1, 2001,
we had sold approximately 400 units. We have been profitable since the second
quarter of 2000.
INDUSTRY BACKGROUND
We believe that the aesthetic market for elective, non-invasive procedures is
experiencing broad growth. According to the American Society of Plastic
Surgeons, an estimated $7.4 billion was spent on aesthetic surgery in over 13
million surgical and non-surgical procedures in 2000. The December 2001 US
Worldwide Epilation Market report estimates that more than 5 million
light-based hair removal treatments will be performed in 2001, generating $1.3
billion in fees. The report also indicates that the installed base of lasers
for hair removal will grow approximately 300% from 2000 to 2004.
The market for aesthetic laser-based procedures includes the following:
. removal and permanent reduction of unwanted hair from the face and body;
. treatment of unwanted leg and facial veins;
. removal of tattoos and pigmented lesions;
. wrinkle reduction; and
. emerging applications, such as acne and psoriasis treatments.
- --------------------------------------------------------------------------------
34
Business
- --------------------------------------------------------------------------------
Except in rare instances, aesthetic procedures are not reimbursed by
third-party payors. Therefore, the success of a product in the aesthetic
industry is not dependent upon third-party reimbursement. As a result,
aesthetic procedures have become increasingly attractive to physicians and
other licensed professionals.
While our existing laser-based technology platform has the potential to offer
multiple applications in the aesthetic market, our initial focus has been on
the removal and permanent reduction of unwanted hair and the treatment of
unwanted veins.
Hair removal
The current methods for hair removal include waxing, chemical treatments,
depilatories, tweezing, shaving, electrolysis and laser-based hair removal. Of
these, the only technique other than laser-based hair removal that provides a
long-lasting solution is electrolysis. However, electrolysis is performed on
one hair follicle at a time and makes the treatment of even small areas very
time-consuming and often painful.
Laser-based solutions for long-lasting hair removal were first introduced in
the United States in 1995. Lasers are well suited for the removal of hair
because, with the proper selection of four parameters -- wavelength, pulse
length, spot size and energy -- lasers can be used to non-invasively target the
hair structure without damaging the surrounding skin. In addition, numerous
hair follicles can be treated simultaneously, allowing for rapid coverage of
large areas. Historically, lasers have provided effective treatment primarily
for people with lightly-pigmented skin, as dark and tanned skin was found to
absorb too much energy and treatments often resulted in blistering, skin
discoloration and other complications.
Leg and facial veins
The current methods for the treatment of leg and facial veins include
sclerotherapy and laser-based treatments. Sclerotherapy, which has been the
treatment of choice for leg veins, involves the use of a syringe and small
needle and requires the tip of the needle to be placed into the inner portion
of the vein. A saline-based solution is then injected to collapse the vein.
However, smaller veins are especially difficult or impossible to treat due to
the requirement of correctly positioning the needle. Additionally, there are
some potential patients with a fear of needle injections who would prefer a
less invasive form of treatment.
Historically, laser-based treatments have been used to treat small facial
veins, but have tended to result in either significant bruising and pain or
limited efficacy. In addition, these lasers are unsuitable for the treatment of
larger leg veins. As a result, there has been an unmet market need for a laser
technology which can be used to treat the whole range of veins, from small
facial veins to large leg veins.
THE ALTUS SOLUTION
Our products address unmet needs in the aesthetic market. We believe that our
products are technologically superior to our competitors' products. Key
features of our products include:
. Broadest range of treatments. The limitations on many competing hair
removal and vein treatment products cause practitioners to turn away
patients on a regular basis. CoolGlide removes hair safely and effectively,
not only on those with fair skin, but also on the otherwise unserved
population of patients with dark or tanned skin. CoolGlide Excel adds the
capability of treating large leg veins, including spider and varicose
veins, in addition to small face and leg veins.
- --------------------------------------------------------------------------------
35
Business
- --------------------------------------------------------------------------------
. Technology leadership. We believe that we offer the most advanced
laser-based solutions for the aesthetic market. Our technology combines
longer wavelength, higher power, larger spot size and wider range of pulse
lengths, to provide a laser that is safe and effective for people with
conditions that have been previously untreatable.
. Proprietary ClearView handpiece. Our proprietary ClearView handpiece
provides an unobstructed view of the treatment area that enables a
practitioner to position the laser beam quickly and accurately. In
addition, the active cooling system integrated into our ClearView handpiece
permits the practitioner to move continuously through a targeted area. It
also pre-cools the skin prior to delivery of energy at the treatment site.
By cooling the skin in advance, the skin can absorb more energy without
overheating and blistering, ensuring patient comfort and effective skin
protection.
. Multiple applications. CoolGlide Excel gives the practitioner the ability
to purchase one unit for multiple applications that would otherwise require
the purchase of two. Because practitioners can use CoolGlide Excel for both
permanent hair reduction and vein treatment, the cost of the unit may be
spread across a greater number of procedures, and therefore be more rapidly
recovered.
. Easy-to-use controls. The practitioner has three simple, independently
adjustable controls from which to select a wide range of treatment
parameters and settings to suit the patient's profile and treatment choice.
. Compact and transportable design. The compact design gives the practitioner
the flexibility to easily move the product from room to room. Our products
weigh only 135 pounds. Many competing products weigh in excess of 200
pounds and are more difficult to move.
STRATEGY
Our strategy is to become a leading provider of medical devices and services
for the aesthetic market by:
. Increasing sales of existing products in the United States. While we have
sold approximately 250 units in the United States as of December 1, 2001,
we are still relatively new to the marketplace and have significant growth
potential with our current products. For example, we first began selling
CoolGlide Excel in March 2001. We intend to increase penetration of our
primary customer base, dermatologists and plastic surgeons, by increasing
our sales force and serving more regions within the United States. We
currently offer frequent educational seminars and intend to increase the
number of programs and offering sites.
. Expanding our international presence. We are focused on increasing our
market penetration overseas and building global brand-recognition for our
product lines. We currently sell our products through a network of
distributors in 26 countries. We have recently added regional managers in
Europe and Asia to increase our international market penetration and
cultivate distributor relationships. We require our distributors to invest
in service training and equipment, display our products at exhibitions and
commit to a minimum sales amount to obtain exclusivity. We intend to add
additional distributors, regional managers and support staff to increase
sales and strengthen customer relationships.
. Continuing to develop additional clinical capabilities. Although our
products are currently marketed for hair removal and vein treatment, we are
exploring the use of our existing technology platform for other aesthetic
laser-based applications, such as improving skin appearance. We work with
our technology advisory board and other thought leaders to explore and
develop new applications with our existing technology platform. The
development of additional capabilities will allow us to offer a more
complete line of the latest, most advanced products and services to our
customers.
- --------------------------------------------------------------------------------
36
Business
- --------------------------------------------------------------------------------
. Broadening our customer base. We intend to expand our marketing efforts to
a broader base of users with our new Enterprise Program. This program will
offer customers the opportunity to provide laser-based solutions on a
"pay-per-use" basis, without the need to purchase our product. Our
Enterprise Program will offer customers all the advantages of our CoolGlide
product and requires only a non-refundable deposit up front and a
commitment to a set rate for each laser pulse. By charging on a per-use
basis, we make the product attractive to physicians who perform a limited
number of aesthetic procedures and who may not otherwise be able to justify
the capital outlay.
. Continuing our commitment to new research and development. We intend to
develop other products for the aesthetic market. We continue to invest in
research and development for the next generation of products and
technologies for the aesthetic market. We also intend to leverage our
ability to design and manufacture innovative products for the aesthetic
market with an emphasis on cost effective solutions to target broad markets.
. Acquiring complementary businesses and technologies. We intend to pursue
opportunities to expand our core business, offering a full range of
products and service into the aesthetic market, by acquiring businesses or
products that have technologies or capabilities complementary to ours.
Consistent with this strategy, we entered into a strategic relationship in
September 2001 with Continuum Electro Optics, a leading manufacturer of
laser-based devices for removal of tattoos and pigmented lesions.
THE COOLGLIDE PROCEDURE
To perform a CoolGlide procedure, the treatment site on the skin is first
cleaned and shaved. The practitioner applies a thin layer of clear gel, such as
ultrasound gel, for easy gliding of the handpiece. The practitioner then uses
the ClearView handpiece to cool the area to be treated and deliver a laser
pulse. This procedure is then repeated at the next treatment site. The energy
delivered by the 1064 nanometer laser light emitted by the CoolGlide product
primarily penetrates through the surface layer of skin, and into the underlying
skin, where the hair follicle or hemoglobin targets are located. The
surrounding tissue remains unaffected. For hair removal, patients receive on
average three to six treatments, while vein removal patients typically require
fewer treatments.
PRODUCTS AND PROGRAMS
CoolGlide
CoolGlide consists of a control console, which includes a high-powered, 1064
nanometer wavelength laser and the ClearView handpiece. The control console
produces up to 4,700 watts of laser power, which is as much as 600% greater
than the power produced by competing products and enables the practitioner to
rapidly deliver therapeutic energy to the target without damaging surrounding
tissue. The easy-to-use control console includes a user-interface, which
provides controls to adjust the fluence, or brightness of the light
transmitted, pulse width and repetition rate. The ClearView handpiece provides
a 10 millimeter spot size, enabling fast and accurate treatment of a large area
with minimal scatter and allowing the practitioner to effectively target the
base of the hair follicle. The ClearView handpiece incorporates our proprietary
cooling system, providing integrated pre-cooling of the treatment area through
a temperature-controlled metal plate. Its ergonomic design allows the
practitioner an unobstructed view of the treatment area and minimizes user
fatigue, a common problem associated with other heavier devices.
CoolGlide Excel
In addition to the features of CoolGlide, CoolGlide Excel allows the
practitioner to effectively reduce hair and treat a full range of leg and
facial veins. CoolGlide Excel features a much broader range of
- --------------------------------------------------------------------------------
37
Business
- --------------------------------------------------------------------------------
treatment parameters that significantly expand the clinical capabilities beyond
CoolGlide. The product provides an adjustable spot size of 3, 5, 7 or 10
millimeters, which allows the practitioner to control treatment depth. Larger
spots enable hair removal and the treatment of deep leg veins. Smaller spots
provide for shallow penetration, typically useful for superficial vein
treatments.
Medlite C
We are the exclusive US distributor for the Medlite C series of products
manufactured by Continuum Electro Optics, a subsidiary of Hoya Photonics. The
Medlite C products are used for the removal of tattoos and the treatment of
pigmented skin irregularities, such as age spots and brown spots. The products
feature two treatment modalities, with green and infrared wavelengths, and
treatments using variable spot sizes ranging from 2 millimeters to 7
millimeters. The Medlite C products are self-contained, with closed-loop water
cooling systems. The products are compact for easy transport and storage.
There are currently two products in the the Medlite C series, C3 and C6. The C6
product can deliver twice the energy of the C3 product, allowing for greater
treatment speed. The C6 is the only Medlite product designed for use with a
MultiLite handpiece, an optional accessory, that is intended to enable
practitioners to treat a wider range of tattoo colors. We launched the first of
these products, the C3, in the fourth quarter of 2001, and expect to launch the
C6 in 2002.
Enterprise Program
We have developed a pay-for-use program, called the Enterprise Program,
designed to allow practitioners to place the CoolGlide product in their
facilities and offer hair removal treatments with a minimal cash outlay. The
focus of this arrangement will be on licensed practitioners who perform a
limited number of aesthetic laser-based procedures and who may not otherwise be
able to justify the capital outlay for CoolGlide.
The Enterprise Program will allow customers to use the CoolGlide product by
paying a non-refundable licensing fee, which commits them to a minimum monthly
fee and a set rate for each laser pulse administered in excess of a designated
number per billing cycle. The number of pulses is counted and stored by a key,
the S-Key, which is required for the product to function.
SERVICES AND SUPPORT
Our products are engineered to enable quick and efficient service and support.
There are several separate components of our CoolGlide product, each of which
can easily be removed and replaced. We believe that quick and effective
delivery of service is important to our customers. We strive to respond to
service calls within 48 hours to minimize practitioner disruptions. We have
five service engineers, one in each of California, Connecticut, Michigan, Rhode
Island and Florida. We have also trained third parties to repair our products
in various other states. Replacement parts are shipped from our headquarters
into the field and each of our service engineers carries spare parts.
Independent distributors maintain parts depots and service representatives
adequate to cover their installed products and have primary responsibility to
service such products. In addition, we have service representatives in each of
our markets worldwide.
Initial warranties on our products cover parts and service for 12 months. Our
extended warranties vary by the type of product and the level of service
desired by the customer and are typically for a 12 to 24 month period after the
initial warranty period expires. Customers are notified 60 to 90 days before
their initial warranty expires and are able to choose from three different
extended warranty plans
- --------------------------------------------------------------------------------
38
Business
- --------------------------------------------------------------------------------
covering preventative maintenance and replacement parts and labor. In the event
one of our customers declines an additional warranty, we will still service our
products and charge for time and materials.
SALES AND MARKETING
We sell, market and distribute CoolGlide, CoolGlide Excel and our Medlite
products in the United States through a direct sales force supported by a team
of technical service specialists. We also intend to market our Enterprise
Program through our sales force. Currently, we have 17 sales personnel, three
of whom are regional managers and one of whom is our Vice President of North
American Sales. Our strategy to increase market penetration in the United
States relies on selling directly to high volume practicing dermatologists and
plastic surgeons. In addition, we target lower volume OB/Gyn practitioners,
family practitioners, general practitioners and physician-directed licensed
practitioners.
Internationally, we sell our products through a network of distributors. We
have distributors in the following countries: Argentina, Australia, Brazil,
Canada, China, Cyprus, France, Germany, Greece, India, Indonesia, Italy, Japan,
Korea, Malaysia, New Zealand, Pakistan, Philippines, Portugal, Saudi Arabia,
Singapore, South Africa, Spain, Switzerland, Thailand and Uruguay. We require
our distributors to invest in service training and equipment, to attend certain
exhibitions and congresses, and to commit to minimum sales amounts to gain
exclusivity.
Our regional sales managers are available to train and serve as mentors for our
distributors, and to assist them in selling our products most effectively. For
the nine months ended September 30, 2001, international sales accounted for 31%
of our revenue.
We primarily target our marketing efforts to practitioners through office
visits, trade shows and trade journals and to consumers through glossy
brochures and our web site. Our sales philosophy includes establishing strong
collaborations with the leading people of influence in our field regarding our
technology platform. In addition, we allow physicians and nurse practitioners
to use our products on a free trial basis, on patients that they consider
difficult to treat, to demonstrate the effectiveness of our products.
MANUFACTURING
Our products are manufactured with components and subassemblies supplied by
subcontractors. We assemble and test each of our CoolGlide products at our
Burlingame, California facility. Ensuring adequate inventory, continuous cost
reduction and superior product quality are top priorities of our manufacturing
operations. To achieve our goals, we:
. work closely with our research and development team;
. continually improve just-in-time inventory management; and
. effectively manage a limited number of the most qualified suppliers.
We purchase certain components and subassemblies from a limited number of
suppliers. We enter into purchase orders for the component and material
requirements that we need 12 months in advance. We have met the requirements of
the purchase orders by increasing the amount of components and materials we
order every four months. The forecasts we use are based on historical demand
and fluctuations from quarter to quarter in our orders and components and
materials needs. It is very important that we accurately predict the demand for
our products and the lead times for the components of our laser products. Lead
times for components and materials may vary significantly depending on the size
of the order, specific supplier requirements and current market demand for the
components.
- --------------------------------------------------------------------------------
39
Business
- --------------------------------------------------------------------------------
The S-Key component used in our Enterprise Program is supplied by a single
source supplier. Although we believe that we could readily find an alternative
to our S-Key component if we are forced to do so, we could experience delays in
our manufacturing. If our suppliers are unable to meet our requirements on a
timely basis, our production could be interrupted until we obtain an
alternative source of supply. To date, we have not experienced significant
delays in obtaining any of our products.
We are required to manufacture our products in compliance with the FDA's
Quality System Regulations, or QSR. The QSR covers the methods and
documentation of the design, testing, control, labeling, packaging, storage and
shipping of our products. The FDA enforces the QSR through periodic unannounced
inspections. Our failure to maintain compliance with the QSR requirements could
result in the shut down of our manufacturing operations and the recall of our
products, which would have a material adverse effect on our business. In the
event that one of our suppliers failed to maintain compliance with our quality
requirements, we may have to qualify a new supplier and could experience
manufacturing delays as a result. In February 2000, our facility was awarded
the ISO 9001 and EN 46001 certification.
RESEARCH & DEVELOPMENT
We are committed to investing in our research and development activities to
develop new products and enhance existing products. Our research and
development activities are conducted internally by a staff consisting of five
employees. Expenditures for the nine months ended September 30, 2001 were $1.6
million, or 11% of net revenue. We work closely with customers, both
individually and through our sponsored seminars, to develop products that meet
customer application and performance needs. We are developing a new product
with indications for use primarily relating to non-invasive procedures for
improving skin appearance, including redness and pigmentary variations. We
recently submitted a premarket notification with the FDA for this product.
Assuming clearance is received, we plan to launch the product in the first half
of 2002. We are working with leading practitioners in the field to develop
additional new products and make improvements to existing products.
PATENTS AND PROPRIETARY TECHNOLOGY
We rely on a combination of patent, copyright, trademark and trade secret laws
and restrictions on disclosure to protect our intellectual property rights. We
currently have four pending US patent applications and three pending foreign
patent applications. We intend to file for additional patents to strengthen our
intellectual property rights. CoolGlide is a registered trademark in the United
States and Japan.
Our employees, consultants and advisors are required to execute confidentiality
agreements in connection with their employment, consulting or advisory
relationships with us. We also require our employees and consultants to agree
to disclose and assign to us all inventions conceived during the work day,
using our property or which relate to our business. We cannot provide any
assurance that employees, consultants or advisors will abide by the
confidentiality terms of their agreements. Despite any measures taken to
protect our intellectual property, unauthorized parties may attempt to copy
aspects of our products or to obtain and use information that we regard as
proprietary.
Our patent applications may not be approved, and if they are approved we cannot
assure you that the patents that issue will protect our intellectual property
rights. Any patents issued to us may be challenged by third parties as invalid
or parties may independently develop similar or competing technology or design
around any of our patents. We cannot be certain that the steps we have taken
will prevent the misappropriation of our intellectual property, particularly in
foreign countries where the laws may not protect our proprietary rights as
fully as in the United States.
- --------------------------------------------------------------------------------
40
Business
- --------------------------------------------------------------------------------
We believe that we own or have the right to use the patentable inventions
embodied in our products. However, the laser industry is characterized by a
very large number of patents, many of which are of questionable validity and
some of which appear to overlap with other issued patents. As a result, there
is a significant amount of uncertainty in the industry regarding patent
protection and infringement. Because patent applications are maintained in
secrecy until such patents are issued and are maintained in secrecy for a
period of time outside the United States, we cannot be certain whether our
technology infringes any patents or patent applications of others.
While we attempt to ensure that our products do not infringe other parties'
valid patents and proprietary rights, our competitors may assert that our
products and the methods they employ may be covered by patents held by them. In
addition, our competitors may assert that future or current products we market
infringe their patents. For example, while we are aware that others in our
industry have licensed a patent from one of our competitors, we believe that
our products do not require us to obtain a license. Nonetheless, the patent
owner may disagree with our assessment. We have, and may in the future, become
involved in litigation to protect our intellectual property rights or as a
result of an alleged infringement of intellectual property rights belonging to
other parties. Any unfavorable judgments could subject us to significant
liability for damages and invalidation of our proprietary rights. These
lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management's time and attention. Any
potential intellectual property litigation also could force us to do one or
more of the following:
. redesign our products;
. stop selling our products or incorporating components into our products if
they include intellectual property belonging to another party; or
. acquire a license to sell or use the proprietary technology, which license
may not be available on reasonable terms, or available at all.
If we are required to take any of these actions, our results of operations and
financial condition may be seriously harmed. Although we carry general
liability insurance, our insurance may not cover potential claims of this type
or may not be adequate to indemnify us for all liability that may be imposed.
COMPETITION
The medical device industry is subject to intense competition. Our products
compete against similar products offered by Lumenis, Candela and Laserscope, as
well as several smaller highly-specialized companies. We compete primarily on
the basis of performance, brand name, reputation and price. In addition,
competition among providers of devices for the aesthetic market is
characterized by extensive research efforts and rapid technological progress.
To compete effectively, we have to demonstrate that our products are attractive
alternatives to other laser-based devices. Additionally, there are many
companies, both public and private, that are developing devices that use both
laser-based and alternative technologies for the conditions treated by our
products that may prove to be more effective, safer or less costly than our
products. Many of these competitors have significantly greater financial and
human resources than we do and have established reputations as well as
worldwide distribution channels that are more effective than ours. Additional
competitors may enter the market, and we are likely to compete with new
companies in the future. We expect to encounter potential customers that, due
to existing relationships with our competitors, are committed to or prefer the
products offered by these competitors. We expect that competitive pressures may
result in price reductions, reduced margins and loss of market share. There can
be no assurance that competitors, many of which have made substantial
investments in competing technologies, will not prevent, limit or interfere
with our ability to make, use or sell our products either in the United States
or in international markets.
- --------------------------------------------------------------------------------
41
Business
- --------------------------------------------------------------------------------
GOVERNMENT REGULATION
Our products are medical devices subject to extensive regulation by the FDA and
other regulatory bodies. The FDA regulations govern, among other things, the
following activities that we or our partners perform and will continue to
perform:
. product design and development;
. product testing;
. product manufacturing;
. product labeling;
. product storage;
. premarket clearance or approval;
. advertising and promotion; and
. product sales and distribution.
FDA's premarket clearance and approval requirements
Unless an exemption applies, each medical device we wish to commercially
distribute in the United States will require either prior 510(k) clearance or
premarket approval from the FDA. The FDA classifies medical devices into one of
three classes. Devices deemed to pose lower risks are placed in either class I
or II, which requires the manufacturer to submit to the FDA a premarket
notification requesting permission to commercially distribute the device. This
process is generally known as 510(k) clearance. Some low risks devices are
exempted from this requirement. Devices deemed by the FDA to pose the greatest
risk, such as life-sustaining, life-supporting or implantable devices, or
devices deemed not substantially equivalent to a previously cleared 510(k)
device, are placed in class III, requiring premarket approval.
510(k) clearance pathway
To obtain 510(k) clearance, we must submit a premarket notification
demonstrating that our proposed device is substantially equivalent to a
previously cleared 510(k) device or a device that was in commercial
distribution before May 28, 1976 for which the FDA has not yet called for the
submission of premarket approval applications, or PMA. The FDA's 510(k)
clearance review has recently taken from three to twelve months from the date
the application is submitted, but it can take significantly longer.
Laser devices used for aesthetic procedures, such as hair removal, have
generally qualified for clearance under 510(k) procedures. We received FDA
clearance to market CoolGlide for the treatment of vascular lesions in June
1999, for hair removal in March 2000, and for permanent hair reduction in
January 2001. We recently submitted a premarket notification with the FDA with
indications for use primarily relating to non-invasive procedures for improving
skin appearance including redness and pigmentary variations. We are
anticipating clearance for these indications in the first half of 2002.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, will require a new 510(k) clearance or could
require premarket approval. The FDA requires each manufacturer to make this
determination initially, but the FDA can review any such decision and can
disagree with a manufacturer's determination. If the FDA disagrees with a
manufacturer's determination, the FDA can require the manufacturer to cease
marketing and/or recall the modified device until 510(k) clearance or premarket
approval is obtained. We have modified aspects of the CoolGlide product since
receiving regulatory
- --------------------------------------------------------------------------------
42
Business
- --------------------------------------------------------------------------------
clearance, but we believe that new 510(k) clearances are not required. If the
FDA requires us to seek 510(k) clearance or premarket approval for any
modifications to a previously cleared product, we may be required to cease
marketing or recall the modified device until we obtain this clearance or
approval. Also, in these circumstances, we may be subject to significant
regulatory fines or penalties.
Premarket approval pathway
A PMA must be submitted to the FDA if the device cannot be cleared through the
510(k) process. A PMA must be supported by extensive data including, but not
limited to, technical, preclinical, clinical trials, manufacturing and labeling
to demonstrate to FDA's satisfaction the safety and effectiveness of the device.
After a PMA is filed, the FDA begins an in-depth review of the submitted
information, which generally takes between one and three years, but may take
significantly longer. During this review period, the FDA may request additional
information or clarification of information already provided. Also during the
review period, an advisory panel of experts from outside the FDA may in many
cases be convened to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the device. In addition,
the FDA will conduct a pre-approval inspection of the manufacturing facility to
insure compliance with quality system regulations. New PMAs or application
supplements are required for significant modifications to the manufacturing
process, labeling and design of a device that is approved through the premarket
approval process. Premarket approval supplements often require submission of
the same type of information as a PMA, except that the supplement is limited to
information needed to support any changes from the device covered by the
original PMA, and may not require as extensive clinical data or the convening
of an advisory panel.
We currently do not expect that any additional indications that we may seek for
our products will require premarket approval.
Clinical trials
A clinical trial is almost always required to support a PMA and is sometimes
required for a 510(k) premarket notification. These trials generally require
submission of an investigational device exemption, or IDE, application to the
FDA. The application must be supported by appropriate data, such as animal and
laboratory testing results, showing that it is safe to test the device in
humans and that the testing protocol is scientifically sound. The application
must be approved in advance by the FDA for a specified number of patients,
unless the product is deemed a non-significant risk device and eligible for
more abbreviated IDE requirements. Clinical trials for a significant risk
device may begin once the application is reviewed and cleared by the FDA and
the appropriate institutional review boards at the clinical trial sites. Future
clinical trials of our products may require that we submit and obtain clearance
of an IDE from the FDA prior to commencing clinical trials. The results of
clinical testing may not be sufficient to obtain clearance or approval of a new
intended use of our device. For example, we are currently investigating wrinkle
reduction. To obtain FDA approval or clearance for this new indication, we
would be required to conduct clinical trials.
Pervasive and continuing regulation
After a device is placed on the market, numerous regulatory requirements apply.
These include:
. quality system regulations, which require manufacturers to follow design,
testing, control, documentation and other quality assurance procedures
during the manufacturing process;
. labeling regulations, which prohibit the promotion of products for
uncleared or unapproved, or "off-label" uses; and
- --------------------------------------------------------------------------------
43
Business
- --------------------------------------------------------------------------------
. medical device reporting regulations, which require that manufacturers
report to the FDA if their device may have caused or contributed to a death
or serious injury or malfunctioned in a way that would likely cause or
contribute to a death or serious injury if it were to recur.
Failure to comply with applicable regulatory requirements can result in
enforcement action by the FDA, which may include any of the following sanctions:
. fines, injunctions and civil penalties;
. recall or seizure of our products;
. operating restrictions, partial suspension or total shutdown of production;
. refusing our requests for 510(k) clearance or premarket approval of new
products or new intended uses;
. withdrawing 510(k) clearance or premarket approvals that are already
granted; and
. criminal prosecution.
We are subject to unannounced inspections by the FDA and the Food and Drug
Branch of the California Department of Health Services, or CDHS, to determine
our compliance with the Quality Systems Regulations and other regulations, and
these inspections may include the manufacturing facilities of our
subcontractors. In the past, our facilities have been inspected, and
observations were noted. Our responses to these observations have been accepted
by the FDA and CDHS.
We are also regulated under the Radiation Control for Health and Safety Act,
which requires laser products to comply with performance standards, including
design and operation requirements, and manufacturers to certify in product
labeling and in reports to the FDA that their products comply with all such
standards. The law also requires laser manufacturers to file new product and
annual reports, maintain manufacturing, testing and sales records, and report
product defects. Various warning labels must be affixed and certain protective
devices installed, depending on the class of the product.
We are also subject to a wide range of federal, state and local laws and
regulations, including those related to the environment, health and safety,
land use and quality assurance. We believe that compliance with these laws and
regulations as currently in effect will not have a material adverse effect on
our capital expenditures, earnings and competitive and financial position.
International
International sales of medical devices are subject to foreign governmental
regulations, which vary substantially from country to country. The time
required to obtain clearance or approval by a foreign country may be longer or
shorter than that required for FDA clearance or approval, and the requirements
may be different.
The primary regulatory environment in Europe is that of the European Union,
which consists of fifteen countries encompassing most of the major countries in
Europe. Other countries, such as Switzerland, have voluntarily adopted laws and
regulations that mirror those of the European Union with respect to medical
devices. The European Union has adopted numerous directives and standards
regulating the design, manufacture, clinical trials, labeling and adverse event
reporting for medical devices. Devices that comply with the requirements of a
relevant directive will be entitled to bear CE conformity marking, indicating
that the device conforms with the essential requirements of the applicable
directives and, accordingly, can be commercially distributed throughout Europe.
The method of assessing conformity
- --------------------------------------------------------------------------------
44
Business
- --------------------------------------------------------------------------------
varies depending on the class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third-party assessment
by a Notified Body. This third-party assessment may consist of an audit of the
manufacturer's quality system and specific testing of the manufacturer's
device. An assessment by a Notified Body in one country within the European
Union is required in order for a manufacturer to commercially distribute the
product throughout the European Union. ISO 9001 certification is one of the CE
Mark certification requirements. In February 2000, our facility was awarded ISO
9001 and EN 46001 certification, allowing us to apply the CE mark to our
products and market them throughout the European Union.
EMPLOYEES
As of December 1, 2001, we had 53 employees, with 17 employees in sales, 9
employees in technical service, 8 employees in manufacturing operations, 8
employees in general and administrative, 5 employees in research and
development, 2 employees in marketing, 2 employees in regulatory and quality
control, 1 employee in business development and 1 employee in clinical affairs.
We believe that our future success will depend in part on our continued ability
to attract, hire and retain qualified personnel. None of our employees is
represented by a labor union and we believe our employee relations are good.
FACILITIES
We are headquartered in Burlingame, California, where we lease one building
with approximately 11,600 square feet of office, research and development and
manufacturing space under a lease expiring October 1, 2005. We believe our
current facility is adequate to meet our current and foreseeable requirements
through the end of 2003 or that suitable additional or substitute space will be
available as needed.
LITIGATION
On October 12, 2001, Lumenis filed a lawsuit in United States District Court
for the Southern District of New York (Case No. 01CV-9085) alleging that by
making, using, selling or offering for sale our CoolGlide and CoolGlide Excel
products, we are infringing Lumenis's US patent numbers 5,527,350 and 5,707,403
in willful disregard of Lumenis's patent rights. These patents concern methods
for conducting various aspects of laser skin treatment.
Although issued patents enjoy a presumption of validity as a matter of law, we
believe that we have meritorious defenses in this action and intend to
challenge the validity of the Lumenis patents. On November 26, 2001, we filed
our answer to the complaint wherein we have responded that the Lumenis patents
are not infringed and/or are invalid. We have also asserted a counterclaim for
declaratory judgment that the Lumenis patents are not infringed and/or are
invalid. This matter has been transferred to the United States District Court
for the Northern District of California.
The Lumenis action seeks to enjoin our continued activities relating to these
products. This action subjects us to potential liability for damages, including
treble damages. If Lumenis prevails in the lawsuit, we could be required to
cease making, using or selling the products at issue, or to obtain a license
from Lumenis or another entity to continue to manufacture, use or sell those
affected products. We cannot assure you that we will prevail in this action,
nor can we assure you that any license required would be made available on
commercially-acceptable terms, if at all. Failure to successfully defend
ourselves against the Lumenis action could harm our business, financial
condition and operating results. For further information on the risks
associated with this litigation see "Risk factors -- We are involved in
intellectual property litigation with Lumenis that may hurt our competitive
position, may be costly to us and may prevent us from selling our products."
- --------------------------------------------------------------------------------
45
- --------------------------------------------------------------------------------
Technical Advisory Board
The members of our technical advisory board, none of whom are our managers or
employees, consult with us to provide advice, assistance and consultation in
the fields of dermatology and plastic surgery. We consider our advisory board
to be opinion leaders in their fields and they offer us advice and feedback
regarding the following:
. unmet needs and opportunities in their fields;
. clinical feedback on existing products;
. assessment of new technologies and their applications; and
. assessment of new clinical applications.
Technical Advisory Board members
Name Position and Affiliation
- --------------------------------------------------------------------------------------------
R. Rox Anderson, MD Associate Professor of Dermatology, Harvard Medical
School; Research Director, Wellman Laboratories of
Photomedicine
A. Jay Burns, MD Assistant Professor of Plastic Surgery, University of Texas
Southwestern Medical School
Donald Groot, MD, FRCP(C), FACP Medical Director, Groot DermaSurgery Centre;
Clinical Professor of Medicine, University of Alberta
Melanie Grossman, MD Dermatologist, private practice, New York, New York
Suzanne L. Kilmer, MD Director, Laser & Skin Surgery Center of Northern
California; Assistant Clinical Professor, University of
California, Davis
David Trost Director of Technology Development, Etec Systems
Jay Walsh, PhD Professor of Biomedical Engineering, Northwestern
University
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
46
- --------------------------------------------------------------------------------
Management
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning our executive
officers and directors as of December 1, 2001.
Name Age Position(s)
- --------------------------------------------------------------------------------
Kevin P. Connors........... 39 President, Chief Executive Officer and Director
Ronald J. Santilli......... 42 Chief Financial Officer and Vice President of
Finance and Administration
David A. Gollnick.......... 37 Vice President of Research and Development
and Director
Michael R. Davin........... 43 Vice President of North American Sales
Gregory R. Fava............ 41 Vice President of New Business Development
Michael J. Levernier....... 40 Vice President of Clinical Development
Marc P. Maisel............. 55 Vice President of International Sales
Kathleen A. Maynor......... 48 Vice President of Regulatory Affairs and
Quality Assurance
David B. Apfelberg, MD..... 60 Director
Annette J. Campbell-White.. 54 Director
Guy P. Nohra............... 41 Director
Kevin P. Connors has served as our President and Chief Executive Officer and a
member of our board of directors since our inception in August 1998. From May
1996 to June 1998, Mr. Connors served as President and General Manager of
Coherent Medical Group, a unit of Coherent, a manufacturer of lasers, optics
and related accessories.
Ronald J. Santilli has served as our Chief Financial Officer and Vice President
of Finance and Administration since September 2001. From April 2001 to August
2001, Mr. Santilli served as Senior Director of Financial Planning and
Accounting at Lumenis, a manufacturer of medical lasers. From May 1993 to March
2001, Mr. Santilli held several positions at Coherent, including Sales
Operations Manager, Controller of the Medical Group and, most recently,
Director of Finance and Administration. Mr. Santilli holds an MBA in Finance
from Golden Gate University and a BS in Business Administration from San Jose
State University.
David A. Gollnick has served as our Vice President of Research and Development
and as a member of our board of directors since our inception in August 1998.
From June 1996 to July 1998, Mr. Gollnick was Vice President of Research and
Development at Coherent Medical Group. Mr. Gollnick holds a BS in Mechanical
Engineering from Fresno State University.
Michael R. Davin has served as our Vice President of North American Sales since
April 1999. From November 1997 to April 1999, Mr. Davin served as Sales Manager
of Coherent Medical Group. From September 1995 to November 1997, Mr. Davin
first served as Sales Representative and later as a
- --------------------------------------------------------------------------------
47
Management
- --------------------------------------------------------------------------------
Regional Sales Trainer for Baxter V. Muler, a manufacturer of surgical
instrumentation and operating room equipment. Mr. Davin holds a BS in Business
Administration from New Hampshire College.
Gregory R. Fava has served as our Vice President of New Business Development
since September 2001. From March 1995 to September 2001, Mr. Fava held several
positions at Iridex, a medical laser manufacturer, including Product Manager,
Director of Product Marketing and Business Development and, most recently,
General Manager of OEM Laser Products. Mr. Fava holds an AS in Electronics from
the College of San Mateo.
Michael J. Levernier has served as our Vice President of Clinical Development
since December 2001. From September 1998 to December 2001 he served as our
Director of Clinical Development. From June 1996 to September 1998, Mr.
Levernier served as manager of the photorefractive development program at
Coherent Medical Group. Mr. Levernier holds a BS in Electronic Engineering from
California Polytechnic State University, San Luis Obispo and an MS in
Electrical Engineering from Stanford University.
Marc P. Maisel has served as our Vice President of International Sales since
December 1999. From July 1998 to December 1999, Mr. Maisel worked as an
independent sales and marketing consultant. From October 1983 to July 1998, Mr.
Maisel held several senior management positions at Coherent Medical Group. In
his last four years there, he served as Director of US Sales and Vice President
Sales, Americas. Mr. Maisel holds a BA in Psychology from the State University
of New York, Buffalo.
Kathleen A. Maynor has served as our Vice President of Regulatory Affairs and
Quality Assurance since August 2001. From November 1997 to August 2001, Ms.
Maynor served as Vice President of Regulatory, Quality & Clinical of Coherent
Medical Group. From January 1997 to November 1997, Ms. Maynor served as the
Regulatory and Quality Assurance Manager of Cavro, Inc., a manufacturer of
Medical pumps and robots. Ms. Maynor holds a BA in Natural Sciences --
Chemistry from the University of South Florida and a JD from Lincoln University
School of Law.
David B. Apfelberg, MD has served on our board of directors since November
1998. He has been an Assistant Clinical Professor of Plastic Surgery at the
Stanford University Medical Center since 1980. Since 1987, Dr. Apfelberg has
also been a consultant for individual entrepreneurs, venture capital companies
and attorneys, with special expertise in the area of lasers in medicine. From
June 1991 to May 2001, Dr. Apfelberg was Director of the Plastic Surgery
Center, in Atherton, California. Dr. Apfelberg holds both a BMS, bachelor of
medical science, and an MD from Northwestern University Medical School.
Annette J. Campbell-White has served on our board of directors since November
1998. She has been the Managing Partner of MedVenture Associates I, II and III,
which are venture partnerships investing primarily in early stage businesses in
the health care field, since May 1986. Ms. Campbell-White currently serves on
the board of directors of ArthroCare, a publicly-traded company that designs,
manufactures and markets surgical instruments, on the board of directors of
Therasense, a company that develops, manufactures and sells glucose
self-monitoring systems, as well as on the boards of a number of privately-held
companies. Ms. Campbell-White holds a BS degree in Chemical Engineering and an
MS degree in Chemistry, both from the University of Cape Town, South Africa.
Guy P. Nohra has served on our board of directors since November 1999. He has
been a partner at Alta Partners, a venture partnership that invests in
biotechnology and medical device companies, since February 1996. Mr. Nohra
currently serves as a director on the boards of several privately-held
companies. Mr. Nohra holds a BA in History from Stanford University and an MBA
from the University of Chicago.
- --------------------------------------------------------------------------------
48
Management
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors and
officers.
BOARD OF DIRECTORS
Currently, our authorized number of directors is seven. Upon completion of this
offering, our amended and restated certificate of incorporation will provide
that, as of the first annual meeting of stockholders, our board of directors
will be divided into three classes, each with staggered three-year terms. As a
result, only one class of directors will be elected at each annual meeting of
our stockholders, with the other classes continuing for the remainder of their
respective three-year terms. Messrs. Connors and Gollnick have been designated
as Class I directors, whose terms expire at the 2003 annual meeting of
stockholders; Dr. Apfelberg and Mr. Nohra have been designated as Class II
directors, whose terms expire at the 2004 annual meeting of stockholders. Ms.
Campbell-White has been designated as a Class III director whose term expires
at the 2005 annual meeting of stockholders. This classification of the board of
directors may delay or prevent a change in control of our company or our
management. See "Description of capital stock -- Anti-takeover effects of
provisions of the certificate of incorporation, bylaws and Delaware law."
BOARD COMMITTEES
Our board of directors has an audit committee and a compensation committee.
The audit committee was formed in and currently consists of ,
and . The audit committee reviews the results and scope of our annual
audits and other services provided by our independent accountants, reviews and
evaluates our internal audit and control functions and monitors transactions
between us and our employees, officers and directors.
The compensation committee was formed in and currently consists of
and . The compensation committee administers our 1998 Stock Plan, the 2002
Stock Plan and 2002 Employee Stock Purchase Plan, and reviews the compensation
and benefits for our executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Before establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. None of
our compensation committee members and none of our executive officers have a
relationship that would constitute an interlocking relationship with executive
officers or directors of another entity.
DIRECTOR COMPENSATION
Our non-employee directors are reimbursed for certain of their out-of-pocket
expenses incurred in connection with attending board and committee meetings,
but they are not compensated for their services as board members. We have in
the past granted directors options to purchase our common stock pursuant to the
terms of our 1998 Stock Plan. See "Employee benefit plans."
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation of
our chief executive officer and each of the other four most highly compensated
current executive officers whose aggregate cash compensation exceeded $100,000
during the year ended December 31, 2000. We refer to these persons as our named
executive officers elsewhere in this prospectus.
- --------------------------------------------------------------------------------
49
Management
- --------------------------------------------------------------------------------
Summary compensation table
Long-term
compensation
2000 compensation securities
----------------- underlying All other
Name and principal position Salary Bonus options compensation
- ------------------------------------------------------------------------------------------------
Kevin P. Connors................................ $177,500 $ 4,000 850,000 --
President, Chief Executive Officer and Director
Michael R. Davin................................ 92,625 13,650 190,000 91,336(1)
Vice President of North American Sales
David A. Gollnick............................... 128,646 9,583 425,000 --
Vice President of Research and Development
and Director
Michael J. Levernier............................ 113,208 8,433 220,000 --
Vice President of Clinical Development
Marc P. Maisel.................................. 111,604 8,342 105,000 --
Vice President of International Sales
- --------
(1) Consists of $90,180 in commissions and $1,156 in car allowance.
OPTION GRANTS
The following table sets forth certain information with respect to stock
options granted to each of our named executive officers during the fiscal year
ended December 31, 2000.
Option grants in fiscal year 2000
Potential realizable value
at assumed annual rates
of stock price appreciation
Individual grants for option term(1)
------------------------------------------ ---------------------------
Number of Percent of
securities total net
underlying options Exercise
options granted to price Expiration
Name granted employees per share date 5% 10%
- ------------------------------------------------------------------------------------------------
Kevin P. Connors........ 50,000 7.02% $ 0.50 08/04/10 $15,722 $39,844
Michael R. Davin........ 25,000 3.51 0.50 06/09/10 7,861 19,922
David A. Gollnick....... 25,000 3.51 0.50 08/04/10 7,861 19,922
Michael J. Levernier.... 20,000 2.81 0.50 08/04/10 6,289 15,937
Marc P. Maisel.......... 15,000 2.11 0.50 06/09/10 4,717 11,953
90,000 12.63 0.20 02/11/10 11,320 28,687
- --------
(1) Potential realizable value is based upon fair market value of our common
stock on the grant date of the options as determined by our board of
directors, which is substantially less than the initial public offering
price. If the potential realizable value were calculated over the ten-year
term of the options, based on the initial public offering price, the
resulting stock price at the end of the term would be significantly higher.
In 2000, we granted options to purchase an aggregate of 743,000 shares. Shares
generally vest at the rate of 25.0% after one year of service from the date of
grant, and monthly thereafter, generally over 36 additional months. Options
have a term of ten years but may terminate before their expiration dates if the
optionee's status as an employee is terminated or upon the optionee's death or
disability.
With respect to the amounts disclosed in the column captioned "Potential
realizable value at assumed annual rates of stock price appreciation for option
term," the 5% and 10% assumed annual rates of
- --------------------------------------------------------------------------------
50
Management
- --------------------------------------------------------------------------------
compounded stock price appreciation are mandated by rules of the Securities and
Exchange Commission and do not represent our estimate or projection of our
future common stock prices. The potential realizable values are calculated by
assuming that the exercise price per share of each option was equal to the fair
market value of our common stock at the time of grant, that the common stock
appreciates at the indicated rate for the entire term of the option, and that
the option is exercised at the exercise price and sold on the last day of the
option term at the appreciated price. Actual gains, if any, on stock option
exercises are dependent on the future performance of our common stock and
overall stock market conditions. The amounts reflected in the table may not
necessarily be achieved.
OPTIONS EXERCISED AND YEAR-END VALUES
The following table sets forth certain information concerning exercises of
stock options during the fiscal year ended December 31, 2000 by the named
executive officers and the number and value of unexercised options held by each
of the named executive officers on December 31, 2000. No options were exercised
by the named executive officers in 2000. The value of in-the-money stock
options represents the positive spread between the exercise price of stock
options and the fair market value of the options, based upon the public
offering price minus the exercise price per share.
Number of securities Value of
underlying unexercised options unexercised in-the-money options
at December 31, 2000 at December 31, 2000
------------------------------ --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------
Kevin P. Connors........ 250,000 600,000 $ $
Michael R. Davin........ 64,062 125,938
David A. Gollnick....... 125,000 300,000
Michael J. Levernier.... 62,500 157,500
Marc P. Maisel.......... 22,500 82,500
LIMITATIONS ON LIABILITY AND INDEMNIFICATION
Our bylaws provide that we will indemnify our directors and executive officers,
and may indemnify our other officers, employees and other agents, to the
fullest extent permitted by the General Corporation Law of the State of
Delaware. Under our bylaws, we also are empowered to enter into indemnification
agreements with our directors and officers and to purchase insurance on behalf
of any person whom we are required or permitted to indemnify. We intend to
purchase a directors' and officers' liability insurance policy that insures
such persons against the costs of defense, settlement or payment of a judgment
under certain circumstances.
We intend to enter into indemnification agreements with our directors and
executive officers. Under these agreements, we would be required to indemnify
them against all expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any actual, or any
threatened, proceeding if any of them may be made a party because he or she is
or was one of our directors or officers. We are obligated to pay these amounts
only if the officer or director acted in good faith and in a manner that he or
she reasonably believed to be in or not opposed to our best interests. With
respect to any criminal proceeding, we are obligated to pay these amounts only
if the officer or director had no reasonable cause to believe that his or her
conduct was unlawful. The indemnification agreements also set forth procedures
that will apply in the event of a claim for indemnification thereunder.
In addition, our amended and restated certificate of incorporation filed in
connection with this offering provides that the liability of our directors for
monetary damages shall be eliminated to the fullest extent
- --------------------------------------------------------------------------------
51
Management
- --------------------------------------------------------------------------------
permissible under the General Corporation Law of the State of Delaware. This
provision in our amended and restated certificate of incorporation does not
eliminate a director's duty of care and, in appropriate circumstances,
equitable remedies such as an injunction or other forms of non-monetary relief
would remain available. Each director will continue to be subject to liability
for any breach of the director's duty of loyalty to us, for acts or omissions
not in good faith or involving intentional misconduct or knowing violations of
law, for acts or omissions that the director believes to be contrary to our
best interests or our stockholders, for any transaction from which the director
derived an improper personal benefit, for improper transactions between the
director and us, and for improper distributions to stockholders and loans to
directors and officers. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable.
There is no pending litigation or proceeding involving any of our directors or
officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
EMPLOYEE BENEFIT PLANS
1998 Stock Plan
Our sole director at the time adopted our 1998 Stock Plan in August 1998, and
the stockholders approved our 1998 Plan in November 1998. Our board of
directors has decided not to grant any additional awards under the 1998 Plan as
of the effective date of this offering. However, the 1998 Plan will continue to
govern the terms and conditions of the outstanding awards granted under the
1998 Plan.
A total of 3,850,000 shares of our common stock are authorized for issuance
under the 1998 Plan. As of December 1, 2001, options and stock purchase rights
to acquire a total of 3,222,969 shares of our common stock were issued and
outstanding, and a total of 236,115 shares of our common stock had been issued
upon the exercise of options and stock purchase rights granted under the 1998
Plan.
Our board of directors or a committee of our board administers the 1998 Plan.
The administrator of the 1998 Plan has the authority to determine the terms and
conditions of the options and stock purchase rights granted under the 1998 Plan.
Our 1998 Plan provides for the grant of options and stock purchase rights to
our service providers. Stock purchase rights and nonstatutory stock options may
be granted to our employees, directors and consultants, and incentive stock
options within the meaning of Section 422 of the Internal Revenue Code may be
granted to our employees.
The exercise price of options granted under our 1998 Plan may not be less than
85% of fair market value of our common stock on the date of grant, or 100% of
fair market value of our common stock in the case of an incentive stock option,
and the term of an option may not exceed 10 years. An outstanding option may
terminate before the end of its 10 year term if an optionee ceases to be a
service provider.
- --------------------------------------------------------------------------------
52
Management
- --------------------------------------------------------------------------------
Stock purchase rights provide an eligible service provider the right to
purchase shares of our common stock. The shares under a stock purchase right
may or may not be fully vested on the date of grant. If the shares are
initially unvested, the shares will vest over the individual's period of
continued service with us. We will have the right to repurchase any unvested
shares upon the individual's termination of service with us at the original
price paid for the shares.
Our 1998 Plan provides that in the event of our merger with or into another
corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each stock purchase right and option. If
the outstanding stock purchase rights or options are not assumed or
substituted, they become fully exercisable before termination.
2002 Stock Plan
Our board of directors adopted the 2002 Stock Plan in 2002 and the
stockholders initially approved it in 2002. Our 2002 Stock Plan provides
for the grant of incentive stock options, within the meaning of Section 422 of
the Internal Revenue Code, to our employees, and for the grant of nonstatutory
stock options and stock purchase rights to our employees, directors and
consultants.
As of , 2002, a total of shares of our common stock were reserved for
issuance pursuant to the 2002 Stock Plan, of which no options were issued and
outstanding as of that date. The 2002 Stock Plan will become effective on the
completion of this offering. At that time, no further grants will be made under
the 1998 Stock Plan. In addition, our 2002 Stock Plan provides that any shares
reserved but unissued under the 1998 Stock Plan and any shares returned to the
1998 Stock Plan as the result of termination of options or the repurchase of
shares issued under the 1998 Stock Plan will be reserved for issuance under the
2002 Stock Plan together with annual increases in the number of shares
available for issuance under the 2002 Stock Plan on the first day of each
fiscal year, beginning with our fiscal year 2003, equal to the lesser of:
. 5% of the outstanding shares of common stock on the first day of our fiscal
year;
. shares; and
. an amount our board may determine.
Our board of directors or a committee of our board administers the 2002 Stock
Plan. In the case of options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue
Code, the committee will consist of two or more "outside directors" within the
meaning of Section 162(m) of the Code. The administrator has the power to
determine the terms of the options or stock purchase rights granted, including
the exercise price, the number of shares subject to each option or stock
purchase right, the exercisability of the options and the form of consideration
payable upon exercise.
The administrator determines the exercise price of options granted under the
2002 Stock Plan, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code and all incentive stock options, the exercise price must at
least be equal to the fair market value of our common stock on the date of
grant. The term of an incentive stock option generally may not exceed ten years
and the administrator determines the term of all other options.
No optionee may be granted an option to purchase more than shares in any
fiscal year. In connection with his or her initial service, an optionee may be
granted an additional option to purchase up to shares.
- --------------------------------------------------------------------------------
53
Management
- --------------------------------------------------------------------------------
After termination of one of our employees, directors or consultants, he or she
may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for 3 months. However, an option may never be
exercised later than the expiration of its term.
The administrator determines the exercise price of stock purchase rights
granted under our 2002 Stock Plan. Unless the administrator determines
otherwise, the restricted stock purchase agreement will grant us a repurchase
option that we may exercise upon the voluntary or involuntary termination of
the purchaser's service with us for any reason (including death or disability).
The purchase price for shares we repurchase will generally be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to us. The administrator determines the rate at which our
repurchase option will lapse.
Our 2002 Stock Plan generally doesn't allow for the transfer of options or
stock purchase rights and only the optionee may exercise an option and stock
purchase right during his or her lifetime.
Our 2002 Stock Plan provides that in the event of our "change of control," the
successor corporation will assume or substitute an equivalent option or right
for each outstanding option or stock purchase right. If there is no assumption
or substitution of outstanding options or stock purchase rights, the
administrator will provide notice to the optionee that he or she has the right
to exercise the option or stock purchase right as to all of the shares subject
to the option or stock purchase right, including shares which would not
otherwise be exercisable, for a period of 15 days from the date of the notice.
The option or stock purchase right will terminate upon the expiration of the
15-day period.
Our 2002 Stock Plan will automatically terminate in 2012, unless we terminate
it sooner. In addition, our board of directors has the authority to amend,
suspend or terminate the 2002 Stock Plan provided it does not adversely affect
any option previously granted under it.
Employee Stock Purchase Plan
Concurrently with this offering, we intend to establish an Employee Stock
Purchase Plan.
A total of shares of our common stock will be made available for sale. In
addition, our Employee Stock Purchase Plan provides for annual increases in the
number of shares available for issuance under the Employee Stock Purchase Plan
on the first day of each fiscal year, beginning with our fiscal year 2003,
equal to the lesser of:
. 2% of the outstanding shares of our common stock on the first day of the
fiscal year;
. shares; and
. such other amount as may be determined by our board of directors.
Our board of directors or a committee of our board administers the Employee
Stock Purchase Plan. Our board of directors or its committee has full and
exclusive authority to interpret the terms of the Employee Stock Purchase Plan
and determine eligibility.
All of our employees are eligible to participate if they are customarily
employed by us or any participating subsidiary for at least 20 hours per week
and more than five months in any calendar year. However, an employee may not be
granted an option to purchase stock if such employee:
. immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
- --------------------------------------------------------------------------------
54
Management
- --------------------------------------------------------------------------------
. whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
Our Employee Stock Purchase Plan is intended to qualify under Section 423 of
the Internal Revenue Code and provides for consecutive, overlapping 12-month
offering periods. Each offering period includes two 6-month purchase periods.
The offering periods generally start on the first trading day on or after May 1
and November 1 of each year, except for the first such offering period which
will commence on the first trading day on or after the effective date of this
offering and will end on the first trading day on or after May 1, 2003.
Our Employee Stock Purchase Plan permits participants to purchase common stock
through payroll deductions of up to 15% of their eligible compensation which
includes a participant's base salary, wages, overtime pay, commissions, bonuses
and other compensation remuneration paid directly to the employee. A
participant may purchase a maximum of shares during a 6-month purchase
period.
Amounts deducted and accumulated by the participant are used to purchase shares
of our common stock at the end of each six-month purchase period. The price is
85% of the lower of the fair market value of our common stock at the beginning
of an offering period or after a purchase period end. If the fair market value
at the end of a purchase period is less than the fair market value at the
beginning of the offering period, participants will be withdrawn from the
current offering period following their purchase of shares on the purchase date
and will be automatically re-enrolled in a new offering period. Participants
may end their participation at any time during an offering period, and will be
paid their payroll deductions to date. Participation ends automatically upon
termination of employment with us.
A participant may not transfer rights granted under the Employee Stock Purchase
Plan other than by will, the laws of descent and distribution or as otherwise
provided under the Employee Stock Purchase Plan.
In the event of our "change of control," a successor corporation may assume or
substitute each outstanding option. If the successor corporation refuses to
assume or substitute for the outstanding options, the offering period then in
progress will be shortened, and a new exercise date will be set.
Our board of directors has the authority to amend or terminate our Employee
Stock Purchase Plan, except that, subject to certain exceptions described in
the Employee Stock Purchase Plan, no such action may adversely affect any
outstanding rights to purchase stock under our Employee Stock Purchase Plan.
2002 Director Option Plan
Our board of directors adopted the 2002 Director Option Plan in 2002 and
our stockholders initially approved it in , 2002. The 2002 Director
Option Plan provides for the periodic grant of nonstatutory stock options to
our non-employee directors.
As of , 2002, a total of shares were reserved for issuance under the
2002 Director Option Plan, of which no options to acquire shares were issued
and outstanding as of this date.
In addition, our 2002 Director Option Plan provides for annual increases in the
number of shares available for issuance under it on the first day of each
fiscal year, beginning with our fiscal year 2003, equal to the lesser of: the
number of shares issued pursuant to options under the 2002 Director Option Plan
in the prior fiscal year, or an amount determined by our board of directors.
- --------------------------------------------------------------------------------
55
Management
- --------------------------------------------------------------------------------
All grants of options to our non-employee directors under the Director Plan are
automatic. We will grant each non-employee director an option to purchase
shares when such person first becomes a non-employee director (except for those
directors who become non-employee directors by ceasing to be employee
directors). All non-employee directors receive an option to purchase shares
on the date of our annual stockholder's meeting each year.
All options granted under our Director Plan have a term of ten years and an
exercise price equal to fair market value on the date of grant. Each option to
purchase shares becomes exercisable as to one-third of the shares subject
to the option on each anniversary of its date of grant, provided the
non-employee director remains a director on such dates. Each option to purchase
shares becomes exercisable as to 100% of the shares subject to the option
on the third anniversary of its date of grant, provided the non-employee
director remains a director on such date.
After termination as a non-employee director with us, an optionee must exercise
an option at the time set forth in his or her option agreement. If termination
is due to death or disability, the option will remain exercisable for 12
months. In all other cases, the option will remain exercisable for a period of
3 months. However, an option may never be exercised later than the expiration
of its term.
A non-employee director may not transfer options granted under our 2002
Director Option Plan other than by will or the laws of descent and
distribution. Only the non-employee director may exercise the option during his
or her lifetime.
In the event of our merger with or into another corporation or a sale of
substantially all of our assets, the successor corporation will assume or
substitute each option. If such assumption or substitution occurs, the options
will continue to be exercisable according to the same terms as before the
merger or sale of assets. Following such assumption or substitution, if a
non-employee director is terminated other than by voluntary resignation, the
option will become fully exercisable and generally will remain exercisable for
a period of 3 months. If the outstanding options are not assumed or substituted
for, our board of directors will notify each non-employee director that he or
she has the right to exercise the option as to all shares subject to the option
for a period of 30 days following the date of the notice. The option will
terminate upon the expiration of the 30-day period.
Unless terminated sooner, our 2002 Director Option Plan will automatically
terminate in 2012. Our board of directors has the authority to amend, alter,
suspend, or discontinue the 2002 Director Option Plan, but no such action may
adversely affect any grant made under it.
- --------------------------------------------------------------------------------
56
- --------------------------------------------------------------------------------
Related party transactions
On October 15, 1998, we issued and sold an aggregate of 2,000,000 shares of
common stock to a total of 8 individuals at a purchase price of $0.001 per
share. The officers, directors and five percent stockholders who purchased
shares of common stock were: Kevin Connors, Michael Levernier and David
Gollnick. The shares are subject to a right of repurchase in the event of
termination of employment. The right of repurchase lapsed as to 25% of the
shares on October 15, 1998 and continues to lapse 1/48 of the remainder each
full month thereafter such that our repurchase right lapses in full as of
October 15, 2002.
In November 1998, we sold shares of our Series A preferred stock, which is
convertible into an aggregate of 2,000,000 shares of common stock, at a price
per share equal to $1.00. We sold the shares to a total of 18 investors,
pursuant to a preferred stock purchase agreement and a registration rights
agreement under which we made standard representations, warranties and
covenants, and provided the purchasers with registration rights and information
rights. The registration rights are the only rights that survive beyond this
offering. See "Description of capital stock."
In November 1999, we sold shares of our Series B preferred stock, which is
convertible into an aggregate of 2,675,000 shares of common stock, at a price
per share equal to $2.00. We sold the shares to a total of 6 investors,
pursuant to a preferred stock purchase agreement and a registration rights
agreement under which we made standard representations, warranties and
covenants, and provided the purchasers with registration rights and information
rights. The registration rights are the only rights that survive beyond this
offering. See "Description of capital stock."
The purchasers of the Series A and Series B preferred stock included, among
others, the following principal stockholders, directors and affiliated entities:
Series A Series B
Stockholders, directors and affiliated entities preferred preferred
- --------------------------------------------------------------------------------
MedVenture Associates III, LP.............................. 1,439,759 1,199,000
MedVen Affiliates III, LP.................................. 61,241 51,000
Alta California Partners II, LP............................ -- 1,357,846
Alta Embarcadero Partners II, LLC.......................... -- 17,154
Kevin P. Connors........................................... 38,000 --
- --------------------------------------------------------------------------------
57
- --------------------------------------------------------------------------------
Principal stockholders
The following table sets forth certain information known to us with respect to
beneficial ownership of our common stock as of December 1, 2001, as adjusted to
reflect the sale of shares offered by:
. each person known by us to own beneficially more than 5% of our outstanding
stock;
. each of our directors;
. each of our executive officers; and
. all current executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the SEC. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
held by that person that are currently exercisable or exercisable within 60
days of December 1, 2001 are deemed outstanding. Percentage of beneficial
ownership is based upon shares of common stock outstanding before this offering
and shares of common stock outstanding after this offering, based on the
number of shares outstanding as of December 1, 2001. To our knowledge, except
as set forth in the footnotes to this table and subject to applicable community
property laws, each person named in the table has sole voting and investment
power with respect to the shares set forth opposite such person's name. Except
as otherwise indicated, the address of each of the persons in this table is 821
Cowan Road, Burlingame, California 94010.
Number of Percent Percent
shares beneficially beneficially
Number of underlying owned owned
shares options or before this after this
Name of beneficial owner owned warrants offering offering
- ---------------------------------------------------------------------------------------------------
Entities affiliated with MedVenture Associates.... 2,801,000 50,000 43.1%
4 Orinda Way, Bldg. D, Suite 150
Orinda, CA 94563
Funds Affiliated with Alta Partners............... 1,375,000 -- 21.1
One Embarcadero Center
Suite 4050
San Francisco, CA 94111
Annette J. Campbell-White(1)...................... 2,806,166 54,166 43.1
4 Orinda Way, Bldg. D, Suite 150
Orinda, CA 94563
Guy P. Nohra(2)................................... 1,379,166 4,166 21.2
One Embarcadero Center
Suite 4050
San Francisco, CA 94111
David B. Apfelberg, MD............................ 35,000 -- *
Kevin P. Connors.................................. 848,189 486,457 12.1
Michael R. Davin.................................. 118,645 48,645 1.8
David A. Gollnick................................. 509,735 243,228 7.6
Michael J. Levernier.............................. 402,534 277,952 6.1
Marc P. Maisel.................................... 52,812 27,812 *
- --------------------------------------------------------------------------------
58
Principal stockholders
- --------------------------------------------------------------------------------
Number of Percent Percent
shares beneficially beneficially
Number of underlying owned owned
shares options or before this after this
Name of beneficial owner owned warrants offering offering
- -----------------------------------------------------------------------------------------------
All executive officers and directors as a group
(10 persons)................................. 6,151,247 939,056 82.6
- --------
* Less than 1% of the outstanding common stock.
(1) Includes 2,638,759 shares and a warrant for 47,960 shares held by
MedVenture Associates III, LP and 112,241 shares and a warrant for 2,040
shares held by MedVen Affiliates III, LP (collectively "MedVenture
Associates") and 4,166 shares exercisable within 60 days of December 1,
2001 under an option granted to Ms. Campbell-White. Ms. Campbell-White is a
member of MedVentures Associates Management III Co., LLC, which is the
general partner of MedVentures Associates III, LP and MedVen Affiliates
III, LP. Ms. Campbell-White disclaims beneficial ownership of these shares
except to the extent of her pecuniary interest therein. Annette
Campbell-White and George Choi, another general partner, share voting and
investment control in MedVentures Associates Management III Co., LLC, and
MedVentures Associates Management III Co., LLC.
(2) Includes 1,357,846 shares held by Alta California Partners II, LP. and
17,154 shares held by Alta Embarcadero Partners II, LLC. Mr. Nohra is a
general partner of Alta California Partners II, LP and Alta Embarcadero
Partners II, LLC and disclaims beneficial ownership of the shares held by
such entities except to the extent of his proportionate partnership
interest therein.
- --------------------------------------------------------------------------------
59
- --------------------------------------------------------------------------------
Description of capital stock
The following information describes our common stock and preferred stock, as
well as options to purchase our common stock, and provisions of our amended and
restated certificate of incorporation and bylaws. This description is only a
summary. You should also refer to our amended and restated certificate of
incorporation and bylaws which have been filed with the SEC as exhibits to our
registration statement, of which this prospectus forms a part.
Upon the completion of this offering, we will be authorized to issue up to
shares of capital stock, $0.001 par value, to be divided into two classes to be
designated, respectively, common stock and preferred stock. Of such shares
authorized, shares shall be designated as common stock, and 5,000,000
shares shall be designated as preferred stock.
COMMON STOCK
As of December 1, 2001, there were 6,556,092 shares of common stock outstanding
that were held of record by 41 stockholders, assuming conversion of all shares
of preferred stock outstanding as of December 1, 2001 into 4,675,000 shares of
common stock and the assumed exercise and conversion of warrants for 50,000
shares of preferred stock into 50,000 shares of common stock. There will be
shares of common stock outstanding assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options after giving
effect to the sale of common stock offered in this offering. As of December 1,
2001, there were outstanding options to purchase a total of 3,222,969 shares of
our common stock under our stock plans.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Our stockholders
do not have cumulative voting rights in the election of directors. Accordingly,
holders of a majority of the shares voting are able to elect all of the
directors. Subject to preferences that may be granted to any then outstanding
preferred stock, holders of common stock are entitled to receive ratably only
those dividends as may be declared by the board of directors out of funds
legally available therefor, as well as any distributions to the stockholders.
See "Dividend policy." In the event of our liquidation, dissolution or winding
up, holders of common stock are entitled to share ratably in all of our assets
remaining after we pay our liabilities and distribute the liquidation
preference of any then outstanding preferred stock. Holders of common stock
have no preemptive or other subscription or conversion rights. There are no
redemption or sinking fund provisions applicable to the common stock.
PREFERRED STOCK
Upon the completion of this offering, our board of directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof. These rights, preferences and
privileges include dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series, any or all of
which may be greater than the rights of common stock. The issuance of preferred
stock could adversely affect the voting power of holders of common stock and
the likelihood that such holders will receive dividend payments and payments
upon liquidation. In addition, the issuance of preferred stock could have the
effect of delaying, deferring or preventing a change in our control or other
corporate action. We have no present plan to issue any shares of preferred
stock.
- --------------------------------------------------------------------------------
60
Description of capital stock
- --------------------------------------------------------------------------------
WARRANTS
As of December 1, 2001, there were warrants to purchase 9,000 shares of Series
A convertible preferred stock and 61,000 shares of Series B convertible
preferred stock at an exercise price of $1.00 per share and $2.00 per share,
respectively. Warrants for 50,000 shares of Series B preferred stock will be
automatically net exercised upon this offering. Assuming a public offering
price of per share, the net exercise of the warrants for 50,000 shares of
Series B preferred stock with result in shares of common stock. In addition,
assuming conversion of Series A and Series B convertible preferred stock into
common stock upon completion of this offering, the warrant to purchase Series A
preferred stock will be exercisable into 9,000 shares of common stock at an
exercise price of $1.00 per share, and the remaining warrant to purchase Series
B preferred stock will be exercisable into 11,000 shares of common stock at an
exercise price of $2.00 per share. The warrant to purchase 9,000 shares of
Series A preferred stock is exercisable at any time prior to February 2004, and
the warrant to purchase 11,000 shares of Series B preferred stock is
exercisable at any time prior to May 2007. We issued the warrant for 9,000
shares of Series A preferred stock and for the 11,000 shares of Series B
preferred stock to Silicon Valley Bank in connection with a line of credit. We
issued the warrants for 50,000 shares of Series B preferred stock to entities
affiliated with MedVenture Associates in connection with our Series B preferred
stock financing.
REGISTRATION RIGHTS
After the closing of this offering, the holders of approximately 4,675,000
shares of our common stock will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. In the event that we
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders, these holders are
entitled to notice of such registration and are entitled to include their
common stock in such registration, subject to certain marketing and other
limitations. Beginning six months after the closing of this offering, the
holders of at least 50% of these securities have the right to require us, on
not more than two occasions, to file a registration statement under the
Securities Act in order to register shares of their common stock. We may, in
certain circumstances, defer such registrations and the underwriters have the
right, subject to certain limitations, to limit the number of shares included
in such registrations. Further, these holders may require us to register all or
a portion of their shares on Form S-3, subject to certain conditions and
limitations.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Our amended and restated bylaws, to be effective upon completion of this
offering, will provide for our board of directors to be divided into three
classes, with staggered three-year terms. Only one class of directors will be
elected at each annual meeting of our stockholders, with the other classes
continuing for the remainder of their respective three-year terms. However,
until this classification of our board of directors is effective, and because
our stockholders have no cumulative voting rights, our stockholders
representing a majority of the shares of common stock outstanding will be able
to elect all of the directors. Our amended and restated bylaws will also
provide that all stockholder action must be effected at a duly called meeting
of stockholders and not by a consent in writing, and that only our board of
directors, chairman of the board and president may call a special meeting of
stockholders.
The combination of the classification of our board of directors, when
effective, and the lack of cumulative voting will make it more difficult for
our existing stockholders to replace our board of directors as well as for
another party to obtain control of us by replacing our board of directors.
Since the board of directors has the power to retain and discharge our
officers, these provisions could also make it more difficult for existing
stockholders or another party to effect a change in management. In
- --------------------------------------------------------------------------------
61
Description of capital stock
- --------------------------------------------------------------------------------
addition, the authorization of undesignated preferred stock makes it possible
for the board of directors to issue preferred stock with voting or other rights
or preferences that could impede the success of any attempt to change our
control.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in our control or management. These provisions are intended to enhance
the likelihood of continued stability in the composition of our board of
directors and in the policies they implement, and to discourage certain types
of transactions that may involve an actual or threatened change of our control.
These provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal. The provisions also are intended to discourage certain
tactics that may be used in proxy fights. However, such provisions could have
the effect of discouraging others from making tender offers for our shares and,
as a consequence, they also may inhibit fluctuations in the market price of our
shares that could result from actual or rumored takeover attempts. Such
provisions may also have the effect of preventing changes in our management.
SECTION 203 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
We are subject to Section 203 of the General Corporation Law of the State of
Delaware, which prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years after
the date that such stockholder became an interested stockholder, with the
following exceptions:
. before such date, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the
stockholder becoming an interested holder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction began, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and also
officers and by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or
. on or after such date, the business combination is approved by the board of
directors and authorized at an annual or special meeting of the
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include the following:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the issuance
or transfer by the corporation of any stock of the corporation to the
interested stockholder;
. any transaction involving the corporation that has the effect of increasing
the proportionate share of the stock or any class or series of the
corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loss,
advances, guarantees, pledges or other financial benefits by or through the
corporation.
- --------------------------------------------------------------------------------
62
Description of capital stock
- --------------------------------------------------------------------------------
In general, Section 203 defines interested stockholder as an entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation or any entity or person affiliated with or controlling or
controlled by such entity or person.
NASDAQ NATIONAL MARKET LISTING
Application has been made for quotation of our common stock on The Nasdaq
National Market under the symbol "ALTU."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computershare Investor
Services, LLC. Its address is 12039 West Alameda Parkway, Suite Z-2, Lakewood,
Colorado 80228, and its telephone number is (303) 986-5400.
- --------------------------------------------------------------------------------
63
- --------------------------------------------------------------------------------
Shares eligible for future sale
We will have shares of common stock outstanding after the completion of
this offering ( shares if the underwriters' over-allotment is exercised in
full). Of those shares, the shares of common stock sold in the offering (
shares if the underwriters' over-allotment option is exercised in full) will be
freely transferable without restriction, unless purchased by persons deemed to
be our "affiliates" as that term is defined in Rule 144 under the Securities
Act). Any shares purchased by an affiliate may not be resold except pursuant to
an effective registration statement or an applicable exemption from
registration, including an exemption under Rule 144. The remaining 6,556,092
shares of common stock to be outstanding immediately following the completion
of this offering are "restricted," which means they were originally sold in
offerings that were not registered under the Securities Act. These restricted
shares may only be sold through registration under the Securities Act or under
an available exemption from registration, such as provided through Rule 144
promulgated under the Securities Act.
All of our officers, directors and security holders, have entered into lock-up
agreements pursuant to which they have agreed, subject to limited exceptions,
not to offer or sell any shares of common stock or securities convertible into
or exchangeable or exercisable for shares of common stock for a period of 180
days from the date of this prospectus without the prior written consent of UBS
Warburg LLC. See "Underwriting." After the 180-day lock-up period, these shares
may be sold in accordance with Rule 144.
After the offering, the holders of approximately shares of our common
stock (including 20,000 shares issuable upon exercise of outstanding warrants)
will be entitled to registration rights. For more information on these
registration rights, see "Description of capital stock -- Registration rights."
In general, under Rule 144, as currently in effect, a person (or persons whose
shares are aggregated), including an affiliate, who has beneficially owned
shares of our common stock for one year or more, may sell in the open market
within any three-month period a number of shares that does not exceed the
greater of:
. one percent of the then outstanding shares of our common stock
(approximately shares immediately after the offering); or
. the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to certain limitations on the manner of
sale, notice requirements and the availability of our current public
information. A person (or persons whose shares are aggregated) who is deemed
not to have been our affiliate at any time during the 90 days preceding a sale
by him and who has beneficially owned his shares for at least two years, may
sell the shares in the public market under Rule 144(k) without regard to the
volume limitations, manner of sale provisions, notice requirements or the
availability of current public information we refer to above.
Any of our employees, officers, directors, or consultants who purchased his or
her shares before the date of completion of this offering or who holds options
as of that date pursuant to a written compensatory plan or contract is entitled
to rely on the resale provisions of Rule 701, which permits non-affiliates to
sell their Rule 701 shares without having to comply with the
public-information, holding-period, volume-limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding-period restrictions, in each case commencing 90
days after completion of this offering. Neither Rule 144 nor Rule 701
supersedes the contractual obligations of our security holders set forth in the
lock-up agreements described above.
- --------------------------------------------------------------------------------
64
- --------------------------------------------------------------------------------
Subject to the lock-up agreements, the shares of our common stock that were
outstanding on December 1, 2001 that will become eligible for sale without
registration pursuant to Rule 144 or Rule 701 under the Securities Act are as
follows:
. shares will be immediately eligible for sale in the public market without
restriction pursuant to Rule 144(k);
. shares will be eligible for sale in the public market under Rule 144 or
Rule 701 beginning 90 days after the date of this prospectus, subject to
volume, manner of sale, and other limitations under those rules; and
. the remaining shares of common stock will become eligible for sale
from time to time after the date of this prospectus under Rule 144 upon
expiration of their respective holding periods.
Upon closing of this offering, we intend to file a registration statement on
Form S-8 under the Securities Act to register shares of common stock reserved
for issuance under the 1998 Stock Plan, the 2002 Stock Plan and the 2002
Employee Stock Purchase Plan, thus permitting the resale of such shares by non-
affiliates in the public market without restriction under the Securities Act.
Such registration statements will become effective immediately upon filing.
Before this offering, there has been no public market for our common stock, and
any sale of substantial amounts in the open market may adversely affect the
market price of our common stock offered hereby.
- --------------------------------------------------------------------------------
65
- --------------------------------------------------------------------------------
Underwriting
We and the underwriters named below have entered into an underwriting agreement
concerning the shares we are offering. Subject to conditions, each underwriter
has severally agreed to purchase the number of shares indicated in the
following table. UBS Warburg LLC and Lehman Brothers Inc. are the
representatives of the underwriters.
Underwriters Number of shares
- -----------------------------------------------------------------------------
UBS Warburg LLC............................................
Lehman Brothers Inc........................................
------
Total...................................................
======
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy from us up to
additional shares at the initial public offering price less the underwriting
discounts and commissions to cover these sales. If any shares are purchased
under this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up
to additional shares.
No exercise Full exercise
- -----------------------------------------------------------------------
Per share................................... $ $
Total....................................... $ $
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $ .
Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the initial
public offering price. If all the shares are not sold at the initial public
offering price, the representatives may change the offering price and the other
selling terms.
The underwriters have informed us that they do not expect discretionary sales
to exceed 5% of the shares of common stock to be offered.
We, our directors, officers and substantially all of our stockholders, have
agreed with the underwriters not to offer, sell, contract to sell, hedge or
otherwise dispose of, directly or indirectly, or file with the SEC a
registration statement under the Securities Act of 1933 relating to, any of our
common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, without the prior
written consent of UBS Warburg LLC.
The underwriters have reserved for sale, at the initial public offering price,
up to shares of our common stock being offered for sale to our customers
and business partners. At the discretion of our
- --------------------------------------------------------------------------------
66
Underwriting
- --------------------------------------------------------------------------------
management, other parties, including our employees, may participate in the
reserved share program. The number of shares available for sale to the general
public in the offering will be reduced to the extent these persons purchase
reserved shares. Any reserved shares not so purchased will be offered by the
underwriters to the general public on the same terms as the other shares in
this offering. Shares purchased in this program by persons who have otherwise
entered into lock-up agreements with the underwriters, as described above,
generally may not be sold for 180 days after the date of this prospectus. In
some cases, the rules of National Association of Securities Dealers, Inc. may
require purchasers in this offering, including participants in this program, to
enter into agreements not to sell their shares for a specified period.
Before this offering, there has been no public market for our common stock. The
initial public offering price was negotiated by us and the representatives. The
principal factors considered in determining the initial public offering price
include:
. the information set forth in this prospectus and otherwise available to the
representatives;
. the history and the prospects for the industry in which we compete;
. the ability of our management;
. our prospects for future earnings, the present state of our development,
and our current financial position;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
In connection with the offering, the underwriters may purchase and sell shares
of common stock in the open market. These transactions may include stabilizing
transactions. Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market price of the
common stock while the offering is in progress. These transactions may also
include short sales and purchases to cover positions created by short sales.
Short sales involve the sale by the underwriters of a greater number of shares
than they are required to purchase in the offering. Short sales may be either
"covered short sales" or "naked short sales." Covered short sales are sales
made in an amount not greater than the underwriters' over-allotment option to
purchase additional shares in the offering. The underwriters may close out any
covered short position by either exercising their over-allotment option or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. Naked short sales are sales in excess of the
over-allotment option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there may be downward
pressure on the price of the shares in the open market after pricing that could
adversely affect investors who purchase in the offering.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise
- --------------------------------------------------------------------------------
67
Underwriting
- --------------------------------------------------------------------------------
might exist in the open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. These transactions may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
We have agreed to indemnify the several underwriters against some liabilities,
including liabilities under the Securities Act of 1933 and to contribute to
payments that the underwriters may be required to make in respect thereof.
- --------------------------------------------------------------------------------
68
- --------------------------------------------------------------------------------
Legal matters
The validity of the shares of common stock offered hereby will be passed upon
for Altus Medical, Inc. by Wilson Sonsini Goodrich & Rosati, Palo Alto,
California. Certain members of Wilson Sonsini Goodrich & Rosati, Palo Alto,
California maintain beneficial ownership of 100,000 shares of our common stock.
Dewey Ballantine LLP, Menlo Park, California, is acting as counsel for the
underwriters in connection with this offering.
Experts
The financial statements as of December 31, 1999 and 2000 and September 30,
2001 and for the period from August 10, 1998 (date of inception) to December
31, 1998, for each of the two years in the period ended December 31, 2000 and
for the nine month period ended September 30, 2001, included in this
prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
Where you can find more information
We have filed with the SEC a registration statement on Form S-1 (including
exhibits, schedules and amendments) under the Securities Act with respect to
the shares of common stock to be sold in this offering. This prospectus does
not contain all the information set forth in the registration statement. For
further information with respect to us and the shares of common stock to be
sold in this offering, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. Whenever
a reference is made in this prospectus to any contract or other document of
ours, the reference may not be complete, and you should refer to the exhibits
that are apart of the registration statement for a copy of the contract or
document.
You may read and copy all or any portion of the registration statement or any
other information that we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. Our SEC filings, including the registration statement,
are also available to you on the SEC's web site (http://www.sec.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act and, in accordance with
those requirements, will file periodic reports, proxy statements and other
information with the SEC.
This prospectus includes statistical data that were obtained from industry
publications. These industry publications generally indicate that the authors
of these publications have obtained information from sources believed to be
reliable, but do not guarantee the accuracy and completeness of their
information. While we believe these industry publications to be reliable, we
have not independently verified their data.
- --------------------------------------------------------------------------------
69
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants.................................... F-2
Balance Sheets....................................................... F-3
Statements of Operations............................................. F-4
Statements of Stockholders' Equity (Deficit)......................... F-5
Statements of Cash Flows............................................. F-6
Notes to Financial Statements........................................ F-7
- --------------------------------------------------------------------------------
F-1
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Altus Medical, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Altus Medical, Inc. at
December 31, 1999, 2000 and September 30, 2001, and the results of its
operations and its cash flows for the period from August 10, 1998 (date of
inception) to December 31, 1998 and for the years ended December 31, 1999 and
2000 and for the nine months ended September 30, 2001, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audits 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 our opinion.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
December 14, 2001
- --------------------------------------------------------------------------------
F-2
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
(in thousands, except share and per share data)
Pro forma
stockholders'
equity at
December 31, September 30,
---------------- September 30, 2001
1999 2000 2001 (unaudited)
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 4,184 $ 3,562 $ 6,491
Restricted cash............................................... -- -- 100
Accounts receivable, net...................................... 67 2,141 1,411
Inventory..................................................... 328 479 826
Deferred cost of revenue...................................... -- 86 --
Deferred tax asset............................................ -- -- 594
Other current assets.......................................... 82 116 210
------- ------- -------
Total current assets....................................... 4,661 6,384 9,632
Property and equipment, net..................................... 243 645 1,035
Other assets.................................................... 9 9 --
------- ------- -------
Total assets............................................... $ 4,913 $ 7,038 $10,667
======= ======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................................. $ 254 $ 374 $ 696
Accrued liabilities........................................... 115 686 2,211
Deferred revenue.............................................. 67 506 89
Line of credit, current....................................... 45 50 --
------- ------- -------
Total current liabilities................................... 481 1,616 2,996
Non-current liabilities:
Line of credit, net of current portion........................ 118 68 --
------- ------- -------
Total liabilities........................................... 599 1,684 2,996
------- ------- -------
Commitments and contingencies (Note 5)
Redeemable convertible preferred stock, $0.001 par value:
Authorized: 4,734,000 shares at December 31, 1999 and
4,784,000 shares at December 31, 2000 and
September 30, 2001
Issued and outstanding: 4,675,000 shares at December 31,
1999 and 2000 and September 30, 2001, none pro forma
(Liquidation and redemption value: $7,350 at December 31,
1999 and 2000 and September 30, 2001)........................ 7,272 7,272 7,272 $ --
------- ------- ------- -------
Stockholders' equity (deficit):
Common stock, $0.001 par value:
Authorized: 20,000,000 shares;
Issued and outstanding: 2,000,000, 1,688,076 and
1,825,092 shares at December 31, 1999 and 2000 and
September 30, 2001, respectively, and 6,550,092 shares
pro forma (unaudited)...................................... 2 2 2 7
Additional paid-in capital.................................... -- 3 2,254 9,621
Deferred stock-based compensation............................. -- -- (1,841) (1,841)
Accumulated deficit........................................... (2,960) (1,923) (16) (16)
------- ------- ------- -------
Total stockholders' equity (deficit)....................... (2,958) (1,918) 399 $ 7,771
------- ------- ------- =======
Total liabilities, redeemable convertible preferred
stock and stockholders' equity (deficit)................ $ 4,913 $ 7,038 $10,667
======= ======= =======
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
F-3
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Period from
August 10, Years ended Nine months ended
1998 (date of December 31, September 30,
inception) to --------------- -------------------
December 31, 1999 2000 2000 2001
1998 (unaudited)
- ----------------------------------------------------------------------------------------------
Net revenue............................... $ -- $ 100 $9,531 $6,447 $13,918
Cost of revenue........................... -- 413 3,365 2,246 5,036
------ ------- ------ ------ -------
Gross profit (loss).................. -- (313) 6,166 4,201 8,882
------ ------- ------ ------ -------
Operating expenses:
Sales and marketing...................... 26 706 2,794 1,790 4,047
Research and development................. 188 1,333 1,539 1,099 1,593
General and administrative............... 43 419 989 709 1,111
------ ------- ------ ------ -------
Total operating expenses............. 257 2,458 5,322 3,598 6,751
------ ------- ------ ------ -------
Income (loss) from operations............. (257) (2,771) 844 603 2,131
Interest and other income, net............ 11 57 193 146 146
------ ------- ------ ------ -------
Income (loss) before income taxes......... (246) (2,714) 1,037 749 2,277
Provision for income taxes................ -- -- -- -- 370
------ ------- ------ ------ -------
Net income (loss)......................... $ (246) $(2,714) $1,037 $ 749 $ 1,907
====== ======= ====== ====== =======
Net income (loss) per share:
Basic.................................. $(1.06) $ (3.04) $ 0.97 $ 0.72 $ 1.35
====== ======= ====== ====== =======
Diluted................................ $(1.06) $ (3.04) $ 0.13 $ 0.09 $ 0.22
====== ======= ====== ====== =======
Weighted-average number of shares used in
per share calculations:
Basic.................................. 231 892 1,064 1,034 1,412
====== ======= ====== ====== =======
Diluted................................ 231 892 8,008 8,001 8,668
====== ======= ====== ====== =======
Pro forma net income per share (unaudited)
(Note 2):
Basic.................................. $ 0.18 $ 0.31
====== =======
Diluted................................ $ 0.13 $ 0.22
====== =======
Weighted-average number of shares used in
pro forma per share calculations
(unaudited) (Note 2):
Basic.................................. 5,789 6,137
====== =======
Diluted................................ 8,058 8,687
====== =======
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
F-4
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share amounts)
Total
Additional Deferred stockholders'
Common stock paid-in stock-based Accumulated equity
----------------- capital compensation deficit (deficit)
Shares Amount ---------- ------------ ----------- -------------
- -------------------------------------------------------------------------------------------------------
Issuance of common stock to
founders...................... 2,000,000 $ 2 $ -- $ -- $ -- $ 2
Net loss....................... -- -- -- -- (246) (246)
--------- --- ------ ------- ------- -------
Balance at December 31,
1998......................... 2,000,000 2 -- -- (246) (244)
Net loss....................... -- -- -- -- (2,714) (2,714)
--------- --- ------ ------- ------- -------
Balance at December 31,
1999......................... 2,000,000 2 -- -- (2,960) (2,958)
Repurchase of common stock
from founders................ (332,674) -- -- -- -- --
Exercise of stock options...... 20,750 -- 3 -- -- 3
Net income..................... -- -- -- -- 1,037 1,037
--------- --- ------ ------- ------- -------
Balance at December 31,
2000......................... 1,688,076 2 3 -- (1,923) (1,918)
Repurchase of common stock
from founders................ (72,349) -- -- -- -- --
Exercise of stock options...... 209,365 -- 33 -- -- 33
Deferred stock-based
compensation................. -- -- 2,218 (2,218) -- --
Amortization of deferred stock-
based compensation........... -- -- -- 377 -- 377
Net income..................... -- -- -- -- 1,907 1,907
--------- --- ------ ------- ------- -------
Balance at September 30,
2001......................... 1,825,092 $ 2 $2,254 $(1,841) $ (16) $ 399
========= === ====== ======= ======= =======
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
F-5
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(in thousands)
Period from
August 10, Years ended Nine months ended
1998 (date of December 31, September 30,
inception) to ---------------- -------------------
December 31, 1999 2000 2000 2001
1998 (unaudited)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from operations:
Net income (loss)............................................... $ (246) $(2,714) $ 1,037 $ 749 $1,907
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................................. 1 31 177 111 291
Amortization of deferred stock-based compensation.............. -- -- -- -- 377
Change in assets and liabilities:
Accounts receivable, net...................................... -- (67) (2,074) (1,449) 730
Inventory..................................................... -- (328) (151) (122) (347)
Deferred cost of revenue...................................... -- -- (86) (12) 86
Other current assets.......................................... (7) (75) (34) (4) (94)
Deferred tax asset............................................ -- -- -- -- (594)
Other assets.................................................. -- (9) -- 9 9
Accounts payable.............................................. 98 157 120 168 322
Accrued liabilities........................................... -- 115 571 349 1,525
Deferred revenue.............................................. -- 67 439 18 (417)
------ ------- ------- ------- ------
Net cash provided by (used in) operating activities......... (154) (2,823) (1) (183) 3,795
------ ------- ------- ------- ------
Cash flows from investing activities:
Acquisition of property and equipment........................... (12) (264) (579) (467) (681)
Change in restricted cash....................................... -- -- -- -- (100)
------ ------- ------- ------- ------
Net cash provided by (used in) investing activities......... (12) (264) (579) (467) (781)
------ ------- ------- ------- ------
Cash flows from financing activities:
Proceeds from line of credit.................................... -- 190 -- -- --
Repayments on line of credit.................................... -- (27) (45) (32) (118)
Proceeds from issuance of redeemable convertible preferred
stock, net..................................................... 1,945 4,327 -- -- --
Proceeds from bridge loan....................................... -- 1,000 -- -- --
Proceeds from issuance of common stock to founders.............. 2 -- -- -- --
Proceeds from exercise of stock options......................... -- -- 3 1 33
------ ------- ------- ------- ------
Net cash provided by (used in) financing activities......... 1,947 5,490 (42) (31) (85)
------ ------- ------- ------- ------
Net increase (decrease) in cash and cash equivalents.............. 1,781 2,403 (622) (681) 2,929
Cash and cash equivalents at beginning of period.................. -- 1,781 4,184 4,184 3,562
------ ------- ------- ------- ------
Cash and cash equivalents at end of period........................ $1,781 $ 4,184 $ 3,562 $ 3,503 $6,491
====== ======= ======= ======= ======
Supplemental disclosure of cash flow information:
Cash paid for interest.......................................... $ -- $ 17 $ 18 $ 14 $ 13
====== ======= ======= ======= ======
Cash paid for taxes............................................. $ -- $ -- $ -- $ -- $ 63
====== ======= ======= ======= ======
Supplemental disclosure of significant non-cash investing and
financing activities:
Issuance of Series B preferred stock in exchange for conversion
of bridge loan................................................. $ -- $ 1,000 $ -- $ -- $ --
====== ======= ======= ======= ======
Deferred stock-based compensation............................... $ -- $ -- $ -- $ -- $2,218
====== ======= ======= ======= ======
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
F-6
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION:
Formation and business of the Company
Altus Medical, Inc. (the "Company") designs, manufactures and markets medical
devices for use in the aesthetic market. The Company was incorporated in
Delaware on August 10, 1998 under the name of Acme Medical, Inc. and changed
its name to Altus Medical, Inc. in July 1999. The Company's activities from
inception to the fourth quarter of 1999 consisted of development of the
CoolGlide laser system for the removal and permanent reduction of hair and for
vein treatment. The Company commenced sales of CoolGlide in December 1999 and
of its second product, CoolGlide Excel, in March 2001. In September 2001, the
Company acquired North American distribution rights to laser products,
manufactured by a third party, for removal of tattoos and pigmented lesions.
The Company exited the development stage during the year ended December 31,
2000.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Unaudited interim financial data
The accompanying statements of operations and of cash flows for the nine months
ended September 30, 2000 are unaudited. The unaudited interim financial
statements have been prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly the
Company's financial position and its results of operations and its cash flows
for the nine months ended September 30, 2000. The financial data and other
information disclosed in the notes to the financial statements related to this
interim period are unaudited. The results of interim periods are not
necessarily indicative of the results for a full year.
Pro forma common shares outstanding and pro forma net income per share
(unaudited)
The pro forma common shares outstanding at September 30, 2001, the pro forma
weighted-average common shares outstanding during the year ended December 31,
2000 and the pro forma weighted-average common shares outstanding during the
nine months ended September 30, 2001 reflect the automatic conversion of all
shares of redeemable convertible preferred stock outstanding into 4,675,000
shares of common stock and the assumed exercise and conversion of warrants for
50,000 shares of preferred stock into 50,000 shares of common stock as if such
exercises and conversions had occurred on January 1, 2000.
Unaudited pro forma net income per share amounts for the year ended December
31, 2000 and for the nine months ended September 30, 2001, included in the
statement of operations, are computed using the pro forma weighted-average
number of common shares outstanding, which includes the pro forma effects of
the automatic conversion of preferred stock into common stock and the assumed
exercise and conversion of warrants for 50,000 shares of preferred stock into
common stock as if such exercises and conversions had occurred on January 1,
2000.
- --------------------------------------------------------------------------------
F-7
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the numerator and denominator used in the calculation of
pro forma net income per share follows (in thousands):
Nine months
Year ended ended
December 31, September 30,
2000 2001
- --------------------------------------------------------------------------------------------
(unaudited)
Numerator:
Net income................................................... $1,037 $1,907
====== ======
Denominator:
Weighted average number of shares outstanding used in
computing basic net income per share....................... 1,064 1,412
Adjustment to reflect the effect of the assumed conversion
of the preferred stock from the date of issuance........... 4,675 4,675
Adjustment to reflect the effect of the assumed exercise and
conversion of warrants from the date of issuance........... 50 50
------ ------
Weighted-average number of shares used in computing
basic pro forma net income per share....................... 5,789 6,137
====== ======
Weighted-average number of shares used in computing
diluted pro forma net income per share..................... 8,058 8,687
====== ======
Use of estimates
The preparation of the accompanying financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make certain 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 stated at cost, which approximates market value. The
Company considers all highly liquid investments with an original maturity of
three months or less at the time of purchase to be cash equivalents.
Restricted cash
At September 30, 2001, cash balances of $100,000 were restricted from
withdrawal and held by a bank in the form of certificates of deposit. These
certificates of deposit serve as collateral against payroll direct deposits and
merchant accounts.
Fair value of financial instruments
Carrying amounts of the Company's financial instruments including, cash and
cash equivalents, accounts receivable, accounts payable, and accrued
liabilities, approximate their fair values due to their short maturities.
- --------------------------------------------------------------------------------
F-8
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Concentration of credit risk and other risks and uncertainties
Financial instruments, which potentially subject the Company to concentrations
of risk, consist principally of cash and cash equivalents and accounts
receivable. The Company's cash and cash equivalents are invested in deposits
and money market accounts with one major bank in the United States of America.
Deposits in this bank may exceed the amount of insurance provided on such
deposits, if any. Management believes that this financial institution is
financially sound and, accordingly, minimal credit risk exists. The Company has
not experienced any losses on its deposits of cash and cash equivalents.
The following table summarizes significant customer information:
% of revenue
-------------------------------------------------------
Period from
August 10,
1998 (date of Nine months
inception) to Years ended December 31, ended
December 31, -------------------------- September 30,
1998 1999 2000 2001
- -----------------------------------------------------------------------------------
Customer A............... -- 40% -- --
Customer B............... -- 60% -- --
Customer C............... -- -- 16% 10%
% of accounts receivable
-----------------------------------------
December 31,
-------------------------- September 30,
1999 2000 2001
- -----------------------------------------------------------------------------------
Customer A............................. 100% -- --
Customer B............................. -- 11% 17%
Customer C............................. -- -- 18%
Customer D............................. -- -- 10%
The following table summarizes revenue by geographic region:
% of revenue
----------------------------------------------------------
Period from
August 10,
1998 (date of Nine months
inception) to Years ended December 31, ended
December 31, -------------------------- September 30,
1998 1999 2000 2001
- -----------------------------------------------------------------------------------
United States......... -- 60% 74% 69%
Canada................ -- 40% 13% 9%
Other................. -- -- 13% 22%
- --------------------------------------------------------------------------------
F-9
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company is subject to risks common to companies in the medical device
industry including, but not limited to, new technological innovations,
dependence on key personnel, dependence on key suppliers, protection of
proprietary technology, product liability and compliance with government
regulations. To continue profitable operations, the Company must continue to
successfully develop, manufacture and market its products. There can be no
assurance that current products will continue to be widely accepted in the
marketplace. Nor can there be any assurance that any future products can be
developed or manufactured at an acceptable cost and with appropriate
performance characteristics, or that such products will be successfully
marketed, if at all. These factors could have a material adverse effect on the
Company's future financial results.
The future products developed by the Company may require clearance or approvals
from the Food and Drug Administration or other international regulatory
agencies prior to commercial sales. There can be no assurance that the
Company's products will continue to meet the necessary regulatory requirements.
If the Company were denied such approvals or such approvals were delayed, it
may have a materially adverse impact on the Company.
Inventory
Inventory is stated at the lower of cost or market, cost being determined on a
standard cost basis (which approximates actual cost on a first-in, first-out
basis) and market being determined as the lower of replacement cost or net
realizable value.
Deferred cost of revenue
Deferred cost of revenue consists of the direct costs associated with the
manufacture of units for which the revenue has been deferred in accordance with
the Company's revenue recognition policies. If the Company expects the deferred
revenue to be realized within one year, then the deferred revenue and
associated deferred costs are classified as current liabilities and current
assets, respectively.
Property and equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over the estimated useful lives of the related assets, which is generally
two to five years. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the remaining lease term or the
estimated useful life of the related assets, typically five years. Upon sale or
retirement of assets, the costs and related accumulated depreciation and
amortization are removed from the balance sheet and the resulting gain or loss
is reflected in operations. Maintenance and repairs are charged to operations
as incurred.
Impairment of long-lived assets
The Company accounts for long-lived assets under Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS No. 121
requires the Company to review for impairment of long-lived assets, whenever
events or changes in circumstances indicate that the carrying amount of an
asset might not be recoverable. When such an event occurs, management
determines whether there has been an impairment by comparing the anticipated
undiscounted future cash flows to the related asset's carrying value. If an
asset is considered impaired, the asset is written down to fair value, which is
determined based either on discounted cash flows or appraised values, depending
on the nature of the asset.
- --------------------------------------------------------------------------------
F-10
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Revenue recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements." The Company's revenue is
primarily derived from the sale of its laser-based products for use in the
aesthetic market. Revenue is recognized upon shipment of the product to the
customer, provided that a purchase order exists, remaining obligations are
insignificant and collectibility of the resulting receivable is reasonably
assured.
The Company generally offers a one-year warranty with its products. The Company
provides for the estimated warranty costs at the time of sale. The Company also
earns revenues from the sale of extended warranty contracts. Such revenues are
deferred and recognized ratably over the extended warranty period. Such
revenues were $0, $0 and $8,000 during the years ended December 31, 1999 and
2000 and the nine months ended September 30, 2001, respectively.
Research and development expenditures
Costs related to research, design and development of products are charged to
research and development expense as incurred.
Advertising costs
Advertising costs are included in sales and marketing expenses and are expensed
as incurred. Advertising expense was $0, $0 and $91,000 during the period from
August 10, 1998 (date of inception) to December 31, 1998 and the years ended
December 31, 1999 and 2000, respectively and $80,000 for the nine months ended
September 30, 2001.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and its interpretations, and
complies with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB Opinion No. 25, compensation expense is
based on the difference, if any, on the date of the grant, between the fair
value of the Company's stock and the exercise price. SFAS No. 123 defines a
"fair value" based method of accounting for an employee stock option or similar
equity investment. The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of SFAS No. 123 and Emerging
Issues Task Force No. 96-18, "Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
Income taxes
Deferred tax assets and liabilities are determined based on the differences
between financial reporting and tax basis of assets and liabilities, measured
at tax rates that will be in effect when the differences are expected to
reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
Comprehensive income (loss)
Comprehensive income (loss) is defined as the change in equity from
transactions and other events and circumstances other than those resulting from
investments by owners and distributions to owners. For the periods ended
December 31, 1998, 1999 and 2000, and for the nine months ended September 30,
- --------------------------------------------------------------------------------
F-11
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2001, the Company did not have any significant components of comprehensive
income (loss) other than net income (loss). Therefore, no separate statement of
comprehensive income (loss) has been presented.
Segment information
The Company operates in one business segment, which encompasses the designing,
manufacturing and marketing of aesthetic laser systems for dermatologists,
plastic surgeons, general physicians and other licensed healthcare
practitioners worldwide. Management uses one measurement of profitability and
does not desegregate its business for internal reporting. All long-lived assets
are maintained in the United States of America. The Company has sales outside
the United States, which are disclosed elsewhere in Note 2.
Recent accounting pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations" which establishes financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16,
"Business Combinations", and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." SFAS No. 141 requires that all
business combinations be accounted for using one method, the purchase method.
The provisions of this Statement apply to all business combinations initiated
after June 30, 2001. The Company will adopt SFAS No. 141 during the first
quarter of fiscal year 2002, and this adoption is not expected to have any
impact on the Company's financial statements.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets," which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." SFAS No. 142 addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired
in a business combination) should be accounted for in financial statements upon
their acquisition, and after they have been initially recognized in the
financial statements. The provisions of this Statement are effective for fiscal
years beginning after December 15, 2001. The Company will adopt SFAS No. 142
during the first quarter of fiscal year 2002, and this adoption is not expected
to have any material impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which is effective for fiscal years beginning after June 15,
2002. This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 requires, among other
things, that the retirement obligations be recognized when they are incurred
and displayed as liabilities on the balance sheet. In addition, the asset's
retirement costs are to be capitalized as part of the asset's carrying amount
and subsequently allocated to expense over the asset's useful life. The Company
believes that the adoption of SFAS No. 143 will not have a significant impact
on the Company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal
years. This Statement develops one accounting model for long-lived assets that
are to be disposed of by sale, as well as addressing the principal
implementation issues. The Company believes that the adoption of SFAS No. 144
will not have a significant impact on the Company's financial statements.
- --------------------------------------------------------------------------------
F-12
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BALANCE SHEET DETAIL:
Inventory
Inventory consists of the following (in thousands):
December 31,
------------------------ September 30,
1999 2000 2001
- -----------------------------------------------------------------------------------------
Raw materials.................................... $246 $457 $681
Work-in-process.................................. 82 1 6
Finished goods................................... -- 21 139
---- ---- ----
$328 $479 $826
==== ==== ====
Property and equipment, net
Property and equipment, net consists of the following (in thousands):
December 31,
------------------------- September 30,
1999 2000 2001
- ----------------------------------------------------------------------------------------------
Leasehold improvements............................. $ 21 $ 76 $ 104
Office equipment and furniture..................... 128 426 599
Machinery and equipment............................ 104 157 343
Demonstration units................................ 23 196 465
---- ----- ------
276 855 1,511
Less: Accumulated depreciation and amortization.... (33) (210) (476)
---- ----- ------
$243 $ 645 $1,035
==== ===== ======
Depreciation and amortization expense related to property and equipment was
$1,000, $31,000 and $177,000 for the period from August 10, 1998 (date of
inception) to December 31, 1998 and the years ended December 31, 1999 and 2000,
respectively, and $291,000 for the nine months ended September 30, 2001.
Accrued liabilities
Accrued liabilities consist of the following (in thousands):
December 31,
------------------------- September 30,
1999 2000 2001
- ------------------------------------------------------------------------------------------
Warranty......................................... $ 8 $260 $ 952
Income tax....................................... -- -- 899
Payroll and related expenses..................... 37 294 294
Other............................................ 70 132 66
---- ---- ------
$115 $686 $2,211
==== ==== ======
- --------------------------------------------------------------------------------
F-13
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LINE OF CREDIT:
At December 31, 1999 and 2000, the Company had $163,000 and $118,000,
respectively, outstanding under a line of credit. This line of credit provided
for equipment based lease borrowings up to $300,000, collateralized by certain
assets of the Company. The interest rates on these borrowings ranged between
11.99% to 12.50% per annum. This line of credit was amended in May 2000 to
include a revolving line facility which expired in May 2001. At September 30,
2001, the Company had no amounts outstanding under these borrowing facilities.
NOTE 5--COMMITMENTS AND CONTINGENCIES:
Facility lease
The Company leases its office and manufacturing facilities under a
non-cancelable operating lease which expires in September 2005. The future
minimum rental payments required under the noncancelable operating lease as of
September 30, 2001 are as follows (in thousands):
Years ending
December 31,
-------------------------------------------------------
2001............................................. $ 46
2002............................................. 187
2003............................................. 193
2004............................................. 199
2005............................................. 152
----
Future minimum rental payments................... $777
====
Rent expense was $12,000, $63,000 and $130,000 for the period from August 10,
1998 (date of inception) to December 31, 1998 and for the years ended December
31, 1999 and 2000, respectively, and $136,000 for the nine months ended
September 30, 2001.
Contingencies
In October 2001, a third party filed a lawsuit against the Company, alleging
patent infringement. Management believes that the claim is without merit and
will not have a material adverse effect on the financial position, results of
operations or cash flows of the Company. However, litigation is unpredictable
and the Company may not prevail in successfully defending its position.
From time to time, the Company may become involved in litigation relating to
claims arising from the ordinary course of business. Management does not
believe the final disposition of these matters will have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
- --------------------------------------------------------------------------------
F-14
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Redeemable convertible preferred stock
As of December 31, 1999, 2000 and September 30, 2001, the Company had
redeemable convertible preferred stock outstanding as follows (in thousands):
December 31,
------------------------- September 30,
1999 2000 2001
- --------------------------------------------------------------------------------------------
Total authorized shares............................ 4,734 4,784 4,784
====== ====== ======
Outstanding shares:
Series A........................................ 2,000 2,000 2,000
Series B........................................ 2,675 2,675 2,675
------ ------ ------
Total outstanding shares.................... 4,675 4,675 4,675
====== ====== ======
Liquidation and redemption amount:
Series A........................................ $2,000 $2,000 $2,000
Series B........................................ 5,350 5,350 5,350
------ ------ ------
Total liquidation and redemption amount..... $7,350 $7,350 $7,350
====== ====== ======
Proceeds, net of issuance costs:
Series A........................................ $1,945 $1,945 $1,945
Series B........................................ 5,327 5,327 5,327
------ ------ ------
Total proceeds, net of issuance costs....... $7,272 $7,272 $7,272
====== ====== ======
Dividend rights
The holders of shares of Series A and Series B preferred stock are entitled to
receive dividends at the rate of $0.08 and $0.16 per share respectively, per
annum. Dividends on preferred stock are in preference to and prior to any
payment of any dividend on common stock. Such dividends are payable when and if
declared by the board of directors, and are not cumulative. As of September 30,
2001, no dividends had been declared.
Liquidation rights
In the event of any liquidation, dissolution or winding up of the Company, the
holders of shares of preferred stock are entitled to receive, prior and in
preference to any distribution of any of the assets of the Company to the
holders of common stock, an amount per share equal to $1.00 and $2.00 for each
outstanding share of Series A and Series B preferred stock, respectively (as
adjusted for any stock dividends, combinations, or splits) plus any declared
but unpaid dividends on such shares. In the event that upon liquidation or
dissolution, the assets and funds of the Company are insufficient to permit the
payment to preferred stockholders of the full preferential amounts, then the
entire assets and funds of the Company legally available for distribution are
to be distributed ratably among the holders of the shares of preferred stock in
proportion to the full preferential amount each such holder is otherwise
entitled to receive.
Conversion rights
Each share of preferred stock, at the option of the holder, is convertible into
a number of fully paid shares of common stock as determined by dividing the
respective preferred stock issue price by the
- --------------------------------------------------------------------------------
F-15
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
conversion price in effect at the time. The initial conversion price per share
of Series A and Series B preferred stock is $1.00 and $2.00, respectively, and
is subject to adjustment in accordance with conversion provisions contained in
the Company's Certificate of Incorporation. Conversion is automatic immediately
upon closing of a firm commitment underwritten public offering in which the
public offering price equals or exceeds $8.00 per share (adjusted to reflect
subsequent stock dividends, stock splits or recapitalization) and the aggregate
proceeds raised exceed $15,000,000.
Voting rights
Each holder of Series A and Series B preferred stock is entitled to one vote
for each share of common stock into which it could be converted.
Redemption rights
The holders of the Series A and Series B preferred stock are entitled at any
time after November 10, 2004 with the approval of 50% of the then outstanding
Series A and Series B preferred stockholders to require the Company to redeem
all shares of Series A and Series B preferred stock in three annual
installments.
The redemption price for Series A and Series B preferred stock is $1.00 and
$2.00 per share, respectively, plus an amount equal to declared and unpaid
dividends on such shares.
As of September 30, 2001, the Company is required, upon approval, to redeem the
preferred stock as follows:
Series A Series B Total
Years ending -------------------- -------------------- --------------------
December 31, Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------
2004............... 666,667 $ 666,667 891,667 $1,783,334 1,558,334 $2,450,001
2005............... 666,667 666,667 891,667 1,783,334 1,558,334 2,450,001
2006............... 666,666 666,666 891,666 1,783,332 1,558,332 2,449,998
--------- ---------- --------- ---------- --------- ----------
2,000,000 $2,000,000 2,675,000 $5,350,000 4,675,000 $7,350,000
========= ========== ========= ========== ========= ==========
Stock warrants
In February 1999, in connection with the line of credit agreement, the Company
issued a warrant to purchase 9,000 shares of Series A preferred stock at $1.00
per share. The warrant may be exercised within five years of the date of grant.
The value of the warrant was calculated using the Black-Scholes option pricing
model and deemed insignificant. The warrant was outstanding at September 30,
2001.
In September 1999, the Company issued warrants to purchase 50,000 shares of
Series B preferred stock at $2.00 per share. The warrants may be exercised
within four years of the date of grant. The warrants terminate upon the
effective date of an initial public offering of the Company's shares or a
consolidation, merger or sale of all or substantially all the Company's assets.
The value of the warrants was calculated using the Black-Scholes option pricing
model and deemed insignificant. The warrants were outstanding at September 30,
2001.
In May 2000, in connection with the amended line of credit agreement, the
Company issued a warrant to purchase 11,000 shares of Series B preferred stock
at $2.00 per share. The warrant may be exercised
- --------------------------------------------------------------------------------
F-16
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
within seven years of the date of grant. The value of the warrant was
calculated using the Black-Scholes option pricing model and deemed
insignificant. The warrant was outstanding at September 30, 2001.
NOTE 7--STOCKHOLDERS' EQUITY (DEFICIT):
Common stock
Each share of common stock is entitled to one vote. The holders of common stock
are also entitled to receive dividends whenever funds are legally available and
when declared by the board of directors, subject to the prior rights of the
preferred stockholders.
Shares of common stock were issued to founders and other key persons under
purchase agreements. Some of these agreements contain provisions for the
repurchase of unvested shares by the Company upon the termination of employment
or services to the Company. The number of shares subject to repurchase is
generally reduced by 25% of the initial number issued at the vesting
commencement date and 1/36/th/ of the remaining shares each month thereafter
that the holder continues to serve as an employee, director or consultant. At
September 30, 2001, 236,873 shares of common stock remained subject to
repurchase at the original purchase price of $0.001 per share.
Stock option plan
In 1998, the Company adopted the 1998 Stock Plan (the "Plan") under which
3,430,472 shares of the Company's common stock have been reserved for issuance
to employees, directors and consultants. Options granted under the Plan may be
incentive stock options or non-statutory stock options. Stock purchase rights
may also be granted under the Plan. Incentive stock options may only be granted
to employees. The board of directors determines the period over which options
become exercisable, however, except in the case of options granted to officers,
directors and consultants, options shall become exercisable at a rate of no
less than 20% per year over five years from the date the options are granted.
Options are to be granted at an exercise price not less than the fair market
value per share on the grant date for incentive options or 85% of fair market
value for nonqualified stock options. For employees holding more than 10% of
the voting rights of all classes of stock, the exercise price shall not be less
than 110% of the fair market value per share on the grant date. Options granted
under the Plan generally become exercisable 25% on the first anniversary of the
vesting commencement date and an additional 1/48/th/ of the total number of
shares subject to the option shares shall become exercisable on the last day of
each calendar month thereafter until all of the shares have become exercisable.
Unvested options that have been exercised are subject to repurchase upon
termination of the holder's status as an employee, director or consultant. At
September 30, 2001, none of the shares of common stock issued under the plan
are subject to the Company's repurchase rights. The term of the options is ten
years.
- --------------------------------------------------------------------------------
F-17
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Activity under the Plan is summarized as follows:
Options outstanding
--------------------------
Weighted
average
Shares exercise
available for Number of price
grant options per share
- --------------------------------------------------------------------------------------------
Shares reserved at plan inception................ 2,000,000 --
---------- ---------
Balances, December 31, 1998...................... 2,000,000 --
Additional shares reserved....................... 750,000 --
Options granted.................................. (2,022,000) 2,022,000 $0.10
---------- ---------
Balances, December 31, 1999...................... 728,000 2,022,000 $0.10
Options granted.................................. (743,000) 743,000 $0.38
Options exercised................................ -- (20,750) $0.14
Options cancelled................................ 98,500 (98,500) $0.15
---------- ---------
Balances, December 31, 2000...................... 83,500 2,645,750 $0.18
Additional shares reserved....................... 680,472 --
Options granted.................................. (965,150) 965,150 $3.36
Options exercised................................ -- (209,365) $0.16
Options cancelled................................ 201,178 (201,178) $0.45
---------- ---------
Balances, September 30, 2001..................... -- 3,200,357 $1.12
========== =========
The following table summarizes information concerning outstanding and
exercisable options as at September 30, 2001:
Options outstanding Options exercisable
---------------------------------- --------------------------------------
Weighted-
average Weighted-
remaining average
Exercise Number contractual Number exercise
price outstanding life (in years) outstanding price
- --------------------------------------------------------------------------------------
$0.10 1,763,000 7.93 545,907 $0.10
$0.20 165,907 8.36 53,468 $0.20
$0.50 314,500 8.81 110,360 $0.50
$0.75 155,750 9.52 -- $0.75
$2.50 310,200 9.69 21,400 $2.50
$3.00 72,000 9.84 10,000 $3.00
$4.50 189,000 9.89 -- $4.50
$5.50 230,000 9.98 -- $5.50
--------- -------
3,200,357 8.40 741,135 $0.28
========= =======
Stock-based compensation
During the nine months ended September 30, 2001, the Company issued options to
certain employees and directors under the Plan with exercise prices below the
estimated fair value, determined with
- --------------------------------------------------------------------------------
F-18
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
hindsight, of the Company's common stock on the date of grant. In accordance
with the requirements of APB No. 25, the Company has recorded deferred
stock-based compensation for the difference between the exercise price of the
stock options and the estimated fair value of the Company's stock on the date
of grant. This deferred stock-based compensation is being amortized to expense
on a straight-line basis over the period during which the Company's right to
repurchase the stock lapses or the options become vested, generally four years.
At September 30, 2001, the Company had recorded deferred stock-based
compensation in the amount of $2,024,000, of which $183,000 was amortized to
expense during the nine months ended September 30, 2001.
Stock-based compensation expense related to stock options granted to
non-employees is recognized on a straight-line basis as the stock options are
earned in accordance with SFAS No. 123. The Company believes that the fair
values of the stock options are more reliably measurable than the fair values
of the services received. The estimated fair values of the stock options
granted are calculated at each reporting date using the Black-Scholes option
pricing model, as prescribed by SFAS No. 123, using the following weighted
average assumptions: contractual life of 10 years; weighted average risk-free
rate of 5.18%; expected dividend yield of 0%; volatility of 80% and estimated
fair values of common stock between $0.09 and $7.28 per share.
The stock-based compensation expense related to non-employees will fluctuate as
the deemed fair market value of the common stock fluctuates. In connection with
the grants of stock options to non-employees during the nine months ended
September 30, 2001, the Company recorded deferred stock-based compensation of
$194,000, which was fully amortized during the period.
Pro forma stock-based compensation
With respect to stock options granted to employees, the Company has adopted the
disclosure only provisions of SFAS No. 123. The following table discloses the
Company's net income (loss) on a pro forma basis, had compensation expense been
determined based on the estimated fair value of the options on the date of
grant (in thousands, except per share amounts):
Period from
August 10, Years ended Nine months ended
1998 (date of December 31, September 30,
inception) to -------------------------- -------------------------
December 31, 1999 2000 2000 2001
1998 (unaudited)
- --------------------------------------------------------------------------------------------------------------
Net income (loss):
As reported........................... $ (246) $(2,714) $1,037 $ 749 $1,907
Pro forma............................. $ (246) $(2,721) $1,008 $ 774 $1,390
Net income (loss) per common share:
Basic:
As reported....................... $(1.06) $ (3.04) $ 0.97 $0.72 $ 1.35
Pro forma......................... $(1.06) $ (3.05) $ 0.95 $0.75 $ 0.98
Diluted:
As reported....................... $(1.06) $ (3.04) $ 0.13 $0.09 $ 0.22
Pro forma......................... $(1.06) $ (3.05) $ 0.13 $0.10 $ 0.16
- --------------------------------------------------------------------------------
F-19
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Such pro forma disclosures may not be representative of future stock-based
compensation expense because options vest over several years, and additional
grants may be made each year. The value of each option granted is estimated on
the date of grant using the minimum value method with the following weighted
average assumptions:
Period from
August 10, Years ended Nine months ended
1998 (date of December 31, September 30,
inception) to ------------------------- --------------------------
December 31, 1999 2000 2000 2001
1998 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------
Risk-free interest rate.......................... 4.22% 5.72% 6.01% 6.13% 5.05%
Expected life (in years)......................... 4 4 4 4 4
Dividend yield................................... -- -- -- -- --
Based on the above assumptions, the weighted average estimated minimum values
of options granted were $0.00, $0.02, $0.13 and $3.94 per share for the years
ended December 31, 1998, 1999, 2000 and the nine months ended September 30,
2001, respectively.
NOTE 8--INCOME TAXES:
The components of the provision for income taxes are as follows (in thousands):
Period from
August 10,
1998 (date of Nine months
inception) to December 31, ended
December 31, --------------------------- September 30,
1998 1999 2000 2001
- -----------------------------------------------------------------------------------------------------------
Current:
Federal....................................... $ -- $ -- $ -- $ 964
State......................................... -- -- -- --
---- ---- ---- -----
-- -- -- 964
---- ---- ---- -----
Deferred:
Federal....................................... -- -- -- (521)
State......................................... -- -- -- (73)
---- ---- ---- -----
-- -- -- (594)
---- ---- ---- -----
Total provision for income taxes................. $ -- $ -- $ -- $ 370
==== ==== ==== =====
- --------------------------------------------------------------------------------
F-20
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company's deferred tax asset consists of the following (in thousands):
Nine months
December 31, ended
-------------------- September 30,
1999 2000 2001
- --------------------------------------------------------------------------------------
Net operating loss carryforwards................. $ 1,086 $ 380 $ --
Capitalized start-up costs....................... 53 36 23
Credits.......................................... 106 196 --
Accruals and reserves............................ 44 148 550
Depreciation and amortization.................... -- -- 21
------- ----- ----
Gross deferred tax asset......................... 1,289 760 594
Less: Valuation allowance........................ (1,289) (760) --
------- ----- ----
Net deferred tax asset........................... $ -- $ -- $594
======= ===== ====
The provision for income taxes reconciles to the amount computed by applying
the statutory federal rate of 34% to income (loss) before taxes as follows:
Period from
August 10,
1998 (date of Nine months
inception) to Years ended December 31, ended
December 31, ----------------------------- September 30,
1998 1999 2000 2001
- ------------------------------------------------------------------------------------------------------------------
Tax at federal statutory rate.................... (34.00)% (34.00)% 34.00 % 34.00 %
State, net of federal benefit.................... (5.83)% (5.83)% 5.83 % 5.83 %
Meals and entertainment.......................... 0.00 % 0.50 % 1.50 % 2.19 %
Benefit for research and development credit...... (2.62)% (2.30)% (5.00)% (1.77)%
Deferred stock-based compensation expense........ 0.00 % 0.00 % 0.00 % 5.63 %
Other............................................ (2.25)% (1.77)% (0.33)% 3.75 %
Change in valuation allowance.................... 44.70 % 43.40 % (36.00)% (33.38)%
------ ------ ------ ------
Provision for taxes.............................. -- % -- % -- % 16.25 %
====== ====== ====== ======
The Company did not record an income tax charge during 2000 due to the
utilization of net operating loss carryforwards from prior periods. The Company
had no net operating loss carryforwards and no research and development credits
remaining at September 30, 2001. During the nine months ended September 30,
2001, the Company released its valuation allowance against its deferred tax
asset and recorded a benefit of $594,000 that, in the opinion of management, is
more likely than not to be realized.
- --------------------------------------------------------------------------------
F-21
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed by giving effect to all
dilutive potential common shares, including options, common stock subject to
repurchase, warrants and redeemable convertible preferred stock. A
reconciliation of the numerator and denominator used in the calculation of
historical basic and diluted net income (loss) per share follows (in thousands):
Period from
August 10, Years ended Nine months ended
1998 (date of December 31, September 30,
inception) to ---------------- ---------------------
December 31, 1999 2000 2000 2001
1998 (unaudited)
- ------------------------------------------------------------------------------------------------------
Numerator:
Net income (loss)......................... $ (246) $(2,714) $1,037 $ 749 $1,907
====== ======= ====== ====== ======
Denominator:
Weighted-average number of common
shares outstanding...................... 1,000 2,000 1,701 1,705 1,778
Less: Weighted-average shares subject to
repurchase.............................. (769) (1,108) (637) (671) (366)
------ ------- ------ ------ ------
Weighted-average number of common
shares outstanding used in computing
basic net income (loss) per share....... 231 892 1,064 1,034 1,412
Dilutive potential common shares used in
computing diluted net income (loss) per
share................................... -- -- 6,944 6,967 7,256
------ ------- ------ ------ ------
Total weighted-average number of shares
used in computing diluted net income
(loss) per share........................ 231 892 8,008 8,001 8,668
====== ======= ====== ====== ======
- --------------------------------------------------------------------------------
F-22
ALTUS MEDICAL, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Anti-dilutive securities
The following weighted-average number of outstanding options, common stock
subject to repurchase and warrants (prior to the application to the treasury
stock method) and redeemable convertible preferred stock (on an as-converted
basis) were excluded from the computation of diluted net income (loss) per
common share for the period ended December 31, 1998, the years ended December
31, 1999 and 2000 and for the nine months ended September 30, 2000 (unaudited)
and 2001 because including them would have had an antidilutive effect (in
thousands):
Period from
August 10, Years ended Nine months ended
1998 (date of December 31, September 30,
inception) to ------------------- ---------------------
December 31, 1999 2000 2000 2001
1998 (unaudited)
- ----------------------------------------------------------------------------------------------------------
Options to purchase common stock................. -- -- 442 335 230
Common stock subject to repurchase............... 1,437 915 -- -- --
Redeemable convertible preferred stock........... 231 2,360 -- -- --
Warrants to purchase preferred stock............. -- 59 70 70 --
----- ----- --- --- ---
1,668 3,334 512 405 230
===== ===== === === ===
NOTE 10--EMPLOYEE BENEFIT PLANS:
In April 1999, the Company adopted a defined contribution retirement plan,
which qualifies under Section 401(k) of the Internal Revenue Code. The plan
covers essentially all employees. Eligible employees make voluntary
contributions to the plan up to 15% of their annual compensation, subject to
statutory annual limitations, and the employer is allowed to make discretionary
contributions. During the years ended December 31, 1999 and 2000 and the nine
month period ended September 30, 2001, the Company made contributions of $0, $0
and $94,000, respectively, under the plan.
NOTE 11--SUBSEQUENT EVENTS:
Initial public offering
In December 2001, the Company's board of directors authorized the filing of a
registration statement with the Securities and Exchange Commission to permit
the Company to sell its common stock to the public. Upon the effective
completion of the Company's initial public offering, assuming the conditions
described in Note 6 are met, all of the outstanding shares of the Company's
redeemable convertible preferred stock will be automatically converted into
4,675,000 shares of common stock (see Notes 2 and 6).
Deferred stock-based compensation
During the period from October 1, 2001 through December 14, 2001, the Company
recorded deferred stock-based compensation of $2,996,000 in connection with
options granted to employees. The deferred stock-based compensation will be
amortized to expense on a straight-line basis over the vesting period of the
options.
- --------------------------------------------------------------------------------
F-23
Part II
- --------------------------------------------------------------------------------
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by Altus Medical in connection with the sale
of the common stock being registered hereby, other than underwriting
commissions and discounts. All amounts are estimates except the SEC
Registration Fee and the NASD filing fee.
SEC registration fee....................................... $ 14,340
NASD filing fee............................................ 6,500
Nasdaq National Market listing fee......................... 95,000
Blue Sky fees and expenses................................. 10,000
Printing and engraving expenses............................ 250,000
Legal fees and expenses.................................... 450,000
Accounting fees and expenses............................... 400,000
Transfer agent and registrar fees.......................... 5,000
Miscellaneous.............................................. 69,160
----------
Total................................................... $1,300,000
==========
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article VII of our Amended and Restated Certificate of Incorporation provides
for the indemnification of directors to the fullest extent permissible under
Delaware law.
Article VI of our Bylaws provides for the indemnification of officers,
directors and third parties acting on our behalf if such person acted in good
faith and in a manner reasonably believed to be in and not opposed to our best
interest and, with respect to any criminal action or proceeding, the
indemnified party had no reason to believe his or her conduct was unlawful.
We intend to enter into indemnification agreements with our directors and
executive officers, in addition to indemnification provided for in the our
Bylaws, and intend to enter into indemnification agreements with any new
directors and executive officers in the future.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification by
the Underwriters of us and our executive officers and directors, and by us of
the underwriters for certain liabilities, including liabilities arising under
the Securities Act, in connection with matters specifically provided in writing
by the Underwriters for inclusion in the Registration Statement.
We intend to purchase and maintain insurance on behalf of any person who is or
was a director or officer against any loss arising from any claim asserted
against him or her and incurred by him or her in any such capacity, subject to
certain exclusions.
See also the undertakings set out in response to Item 17 herein.
- --------------------------------------------------------------------------------
II-1
Part II
- --------------------------------------------------------------------------------
Item 15. Recent Sales of Unregistered Securities.
We have issued and sold the following securities:
1. From August 1998 through September 2001, we granted and issued 230,115
shares of our common stock at prices ranging from $0.10 to $0.50 per share
to employees and consultants upon exercise of stock options pursuant to our
1998 Stock Plan, as amended.
2. On November 12, 1999, we issued and sold to 6 private investors an aggregate
of 2,675,000 shares of Series B preferred Stock convertible into an
aggregate of 2,675,000 shares of common stock at a purchase price per share
of common stock of $2.00
3. On November 19, 1998, we issued and sold to 18 private investors an
aggregate of 2.0 million shares of Series A preferred Stock convertible into
an aggregate of 2.0 million shares of common stock at a purchase price per
share of common stock of $1.00.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act with respect to items 2 and 3 above in reliance on
Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, and
with respect to Item 1 above Rule 701 promulgated under Section 3(b) of the
Securities Act as transactions by an issuer not involving a public offering or
transactions pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipients of securities in
each such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
- --------------------------------------------------------------------------------
II-2
Part II
- --------------------------------------------------------------------------------
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
Exhibit
number Description
- ----------------------------------------------------------------------------------------------------
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Registrant (Delaware) as currently
in effect and Certificate of Amendment thereto.
3.2* Amended and Restated Certificate of Incorporation of the Registrant (Delaware) to be
effective upon closing of the offering.
3.3 Bylaws of the Registrant as currently in effect.
3.4* Bylaws of the Registrant to be effective upon the closing of the offering.
4.1* Specimen Common Stock certificate of the Registrant.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement for directors and executive officers.
10.2 1998 Stock Plan.
10.3* 2002 Stock Plan.
10.4* 2002 Director Option Plan.
10.5* 2002 Employee Stock Purchase Plan.
10.6 Amended and Restated Investor Rights Agreement dated November 12, 1999 by and among
the Registrant and certain stockholders.
10.7 Lease dated October 1, 2000 for office space located at 819-831 Cowan Road, Burlingame,
California 94010.
10.8+ Distribution Agreement by and between the Registrant and Hoya Photonics, Inc., a California
corporation doing business as Continuum, Continuum Electro-Optics, Inc. and as Continuum
Biomedical, effective September 1, 2001.
23.1 Consent of Independent Accountants.
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (See Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
- --------
* Documents to be filed by amendment.
+ Portions of the Exhibit have been omitted pursuant to a request for
confidential treatment.
(b) Financial statement schedules:
None.
- --------------------------------------------------------------------------------
II-3
Part II
- --------------------------------------------------------------------------------
Item 17. Undertakings.
We hereby undertake to provide to the Underwriters at the closing specified in
the Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification by us for liabilities arising under the Securities
Act may be permitted of our directors, officers and controlling persons
pursuant to the provisions described in Item 14 or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or
paid by a director, officer or controlling person in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
- --------------------------------------------------------------------------------
II-4
Part II
- --------------------------------------------------------------------------------
SIGNATURES
Under the requirements of the Securities Act of 1933, Altus Medical, Inc. has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Burlingame, State of
California, on the 4th day of January, 2002.
ALTUS MEDICAL, INC.
By: /s/ Kevin P. Connors
------------------------------------
Name: Kevin P. Connors
Title: President and Chief
Executive Officer
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Kevin P. Connors and Ronald J. Santilli,
and each of them acting individually, as his true and lawful attorneys-in-fact
and agents, with full power of each to act alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement filed herewith and
any and all amendments to said Registration Statement (including post-effective
amendments and any related registration statements thereto filed pursuant to
Rule 462 and otherwise), and 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, with full power of
each to act alone, full power and authority to do and perform each and every
act and thing requisite and necessary to be done in connection therewith, as
fully for all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or his or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this amendment to
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Name and Signature Title Date
- ---------------------------------------------------------------------------------------
/s/ Kevin P. Connors President, Chief Executive Officer January 4, 2002
- ----------------------------------- and Director (Principal
Kevin P. Connors Executive Officer)
/s/ Ronald J. Santilli Vice President, Finance and Chief January 4, 2002
- ----------------------------------- Financial Officer (Principal
Ronald J. Santilli Accounting Officer)
/s/ David A. Gollnick Vice President, Research and January 4, 2002
- ----------------------------------- Development and Director
David A. Gollnick
- ----------------------------------- Director
David B. Apfelberg
/s/ Annette J. Campbell-White Director January 4, 2002
- -----------------------------------
Annette J. Campbell-White
/s/ Guy P. Nohra Director January 4, 2002
- -----------------------------------
Guy P. Nohra
- --------------------------------------------------------------------------------
II-5
EXHIBIT INDEX
Exhibit
number Description
- ----------------------------------------------------------------------------------------------------
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Registrant (Delaware) as currently
in effect and Certificate of Amendment thereto.
3.2* Amended and Restated Certificate of Incorporation of the Registrant (Delaware) to be
effective upon closing of the offering.
3.3 Bylaws of the Registrant as currently in effect.
3.4* Bylaws of the Registrant to be effective upon the closing of the offering.
4.1* Specimen Common Stock certificate of the Registrant.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement for directors and executive officers.
10.2 1998 Stock Plan.
10.3* 2002 Stock Plan.
10.4* 2002 Director Option Plan.
10.5* 2002 Employee Stock Purchase Plan.
10.6 Amended and Restated Investor Rights Agreement dated November 12, 1999 by and among
the Registrant and certain stockholders.
10.7 Lease dated October 1, 2000 for office space located at 819-831 Cowan Road, Burlingame,
California 94010.
10.8+ Distribution Agreement by and between the Registrant and Hoya Photonics, Inc., a California
corporation doing business as Continuum, Continuum Electro-Optics, Inc. and as Continuum
Biomedical, effective September 1, 2001.
23.1 Consent of Independent Accountants.
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (See Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
- --------
* Documents to be filed by amendment.
+ Portions of the Exhibit have been omitted pursuant to a request for
confidential treatment.
- --------------------------------------------------------------------------------