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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDING APRIL 30, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
________________________ TO ________________________
COMMISSION FILE NUMBER: 0-28010
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MEDWAVE, INC.
(Exact name of Registrant as specified in its charter)
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MINNESOTA 41-1493458
(State or other (IRS Employer
jurisdiction of
incorporation or Identification No.)
organization)
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4382 ROUND LAKE ROAD WEST, ARDEN HILLS MINNESOTA 55112
(Address or principal executive offices, zip code)
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Registrant's telephone number, including area code: (612) 639-1227
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the ACT: COMMON STOCK, NO PAR
VALUE
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ____
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained herein, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. /X/
The Registrant's operating revenues for its most recent fiscal year were:
$72,942
The aggregate market value of Common Stock held by non-affiliates of the
Registrant, based on the closing bid price of the Registrant's Common Stock in
the over-the-counter market as reported by the Nasdaq Stock Market, Inc. on July
17, 1997, was approximately $59,702,524. Stocks held by officers, directors, and
persons who own 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily conclusive.
As of July 17, 1997, 4,818,738 shares of Common Stock, no par value, were
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: YES __ NO _X_
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TABLE OF CONTENTS
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PART I
Item 1 Description of Business...................................................... 3
Item 2 Description of Properties.................................................... 14
Item 3 Legal Proceedings............................................................ 14
Item 4 Submission of Matters to a Vote of Security Holders.......................... 14
PART II
Item 5 Market for Common Equity and Related Stockholders Matters.................... 15
Item 6 Management's Discussion and Analysis or Plan of Operation.................... 15
Item 7 Financial Statements......................................................... 17
Item 8 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................. 32
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a)of the Exchange Act........................................... 32
Item 10 Executive Compensation....................................................... 34
Item 11 Security Ownership of Certain Beneficial Owners and Management............... 35
Item 12 Certain Relationships and Related Transactions............................... 36
PART IV
Item 13 Exhibits and Reports on Form 8-K............................................. 36
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
COMPANY PROFILE
The Company was organized under Minnesota Law in 1984. The Company is
engaged exclusively in the development, manufacture, and sale of a non-invasive,
continual blood pressure measurement and monitoring system.
The Company's principal offices are located at 4382 Round Lake Road West,
Arden Hills, Minnesota 55112 and its telephone number is 612/639-1227.
The Company has an April 30 fiscal year.
BUSINESS
GENERAL
The Company is a development stage company that currently employs sixteen
(16) full-time employees and one part-time employee. Since its inception, the
Company has been engaged exclusively in the development of a non-invasive,
continual blood pressure measurement and monitoring system. Utilizing the
Company's proprietary technology, the Vasotrac-Registered Trademark- system
monitors blood pressure continually, providing new readings about every fifteen
heartbeats. The continual, efficacious and non-invasive qualities of the
Vasotrac-Registered Trademark- system make it a new approach to blood pressure
monitoring.
During the year, the Company started selling product, however, the revenue
from operations is not yet significant and the Company has incurred an
accumulated deficit of $7,317,188 from its inception through April 30, 1997.
Significant additional losses resulting from development, testing, regulatory
compliance, sales, and other expenses are expected to be incurred by the Company
at least until it emerges from the development stage.
Until November 1995, the Company financed its activities through a series of
private placements of equity securities, including shares of Preferred Stock
that were converted into Common Stock just prior to the Company's initial public
offering (IPO) in November, 1995.
The proceeds from the IPO have been invested primarily in short-term
investments such as government securities, commercial paper, and similar
investments. The average maturity of the investments is under one year. The
investments are invested in securities with a minimum investment grade of A-1
for short-term investments and A for long-term investments.
The Company's success is dependent upon the successful development and
marketing of the Vasotrac-Registered Trademark- system. However, there can be no
assurance that the Vasotrac-Registered Trademark- system will be successfully
marketed or sold in sufficient quantities and at margins necessary to achieve or
maintain profitability. The Company is currently in the controlled market
rollout of the Vasotrac-Registered Trademark-. This controlled market rollout is
designed to provide the Company with user feedback on the
Vasotrac-Registered Trademark-. The Company is using the feedback to make minor
product enhancements and hopes to be ready for nationwide sales by April, 1998.
This is highly dependent on the development process for the system, the scale up
process, market acceptance, and distribution methods that become available to
the Company. This strategy also pursues limited unit sales to larger healthcare
organizations for review and trial before any significant unit orders are
considered by the customer.
Proceeds from the IPO are being used primarily to continue clinical testing
of the Vasotrac-Registered Trademark- system, to continue manufacturing and
marketing, to conduct any additional research and product development efforts
that may be necessary, and to provide working capital. Over the next twelve
months, the Company expects to spend in excess of $900,000 for research and
development, including amounts expected to be
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spent on clinical trials. Specifically, the funds are expected to be used to
develop improved sensors and wrist holders and to sustain engineering support
for manufacturing start-up. No significant amount of equipment is expected to be
required. The Company spent $816,099 and $379,320 on research and development
expenses net of $9,700 and $154,000 of research and development consulting
revenues for fiscal years ending 1997 and 1996 respectively. The consulting
revenues were from an unrelated company for an unrelated project which was
substantially completed by December 31, 1995. Even assuming no sales by the
Company, the Company believes that the net proceeds of the IPO offering will
allow the Company to meet its cash requirements for approximately two years from
April 30, 1997. If the development process for the system does not proceed as
expected because significant product design changes are required to achieve
market acceptance or unexpected difficulties are encountered in attaining
cost-effective manufacturability, the Company may require additional capital at
an earlier date. Such capital may be sought through bank borrowing, equipment
financing, equity financing, and/or other methods. The Company's financing needs
are subject to change depending on, among other things, market conditions and
opportunities, equipment or other asset-based financing that may be available,
and cash flow from operations. Any material favorable or unfavorable deviation
from its anticipated expense could significantly affect the timing and amount of
additional financing that may be required. However, additional financing may not
be available when needed or, if available, may not be on terms that are
favorable to the Company or its security holders. In addition, any such
financing could result in substantial dilution to then existing security
holders.
BLOOD PRESSURE MEASUREMENT. Blood pressure or, more precisely, arterial
pressure, is the pressure that the blood exerts against the interior of the
arterial walls. The level of the pressure depends upon the strength of the
heart's contraction, the volume of blood in the circulatory system, the
elasticity of the arteries, and the degree of capillary constriction impeding
circulation. During the heart's relaxation phase, the diastole, blood pressure
falls and rises when the heart muscle contracts. Clinically, blood pressure is
commonly reported as three different values. Systolic and diastolic pressures
are the maximum and minimum pressures during a single cardiac cycle,
respectively. Mean pressure is the average pressure during the cardiac cycle.
Blood pressure and changes in blood pressure are critical indicators of the
health and performance of the body's cardiovascular system. Blood pressure
varies with age and by gender, such that young adults tend to have lower blood
pressures than older adults and men tend to have higher blood pressures than
women of the same age. Even in healthy bodies, blood pressure normally
fluctuates during the day. For example, exercise, emotion, and exposure to the
cold tend to cause blood pressure to rise, while it falls in instances of
warmth, fainting, hemorrhage and certain diseases. All hospital patients require
measurement of their blood pressure and many surgical or critically ill patients
require frequent or continual monitoring of their blood pressure. Continual
monitoring of blood pressure is important for patients in operation rooms,
surgical recovery room, intensive care units, and other critical care sites
because of the acuteness of these patients' conditions and rapidity with which
their conditions can deteriorate. Trend information obtained from successive
blood pressure measurements plays an important role in the diagnosis, prognosis,
and treatment of diseases.
CURRENT TECHNOLOGY. Currently, both invasive and non-invasive techniques
are used to measure blood pressure. Invasive techniques employ the surgical
placement of a catheter directly into an artery, an A-line. The fluid-filled
catheter is connected to a pressure transducer and assorted tubing to produce
beat-by-beat continual, as well as generally accurate, blood pressure
measurements. In addition, the catheter may be used to extract blood samples
from which a number of diagnostic test results, such as blood gas information,
may be obtained. Because the Company's non-invasive
Vasotrac-Registered Trademark- system does not allow for the extraction of blood
samples, invasive techniques offer a competitive advantage in this area. The
surgical insertion of the catheter takes about fifteen to twenty minutes,
assuming no complications. While such insertions frequently are performed
without incident, serious complications may include thrombosis (blood clot), air
emboli (air bubble), and infection. Measurement errors may occur due to air
bubbles,
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catheter clotting or movement, or changes in elevation between the pressure
transducer and the level of the heart. Immediately following catheter
withdrawal, firm pressure must be applied over the arterial site for an extended
period of time to avoid serious blood loss. Primarily because of its invasive
nature, the A-line is generally used by clinicians in critical cases and for
only relatively short time periods.
As a general matter, the Company believes that non-invasive rather than
invasive treatments and methods are preferred by clinicians for numerous medical
conditions and processes, including the measurement and monitoring of blood
pressure. Non-invasive techniques significantly reduce patient risk and increase
patient comfort. In addition, the time and expense required to set-up, maintain,
and remove non-invasive equipment generally is substantially less than with
invasive systems. The Company believes that, in some cases, patients in critical
care sites could benefit from continual blood pressure monitoring after the
point at which clinicians may now cease obtaining such readings due to concerns
associated with prolonged or indefinite uses of invasive techniques.
Most non-invasive blood pressure measurement techniques utilize a manually
operated occlusive cuff around the upper arm. A relatively simple blood pressure
instrument, called sphygmomanometer, contains a cuff connected to an air pump
and pressure gauge. The cuff is inflated to a pressure above that of systolic
pressure and then deflated at a typical rate of two to four millimeters of
mercury per heartbeat. During inflation and deflation, the clinician must listen
to the pulse in the brachial artery. Upon hearing and properly interpreting the
appropriate sounds, the clinician records the pressures shown on the gauge. The
cuff pressure occurring simultaneously with certain observed events within the
circulatory or cuff systems are taken as the systolic and diastolic pressures.
An automated system that performs these functions is commonly used in
critical care and operating room settings. The automated non-invasive blood
pressure monitoring market is currently dominated by the Dinamap-TM- product,
marketed by Critikon, Inc., a Johnson & Johnson company. The Dinamap-TM-
provides blood pressure measurements via automatic inflation and deflation of an
occlusive cuff at predetermined intervals. It is reasonably reliable and simple
to use. However, the Dinamap-TM- product provides only intermittent measurements
at one-to-ninety minute intervals, as selected by the clinician. Some patients
suffer from frequent cuff inflations. In addition, with cuff-based systems, arm
circulation is occluded during each measurement, the arm holding the pressure
cuff is unavailable for intravenous lines, and arm bruising and sleep
interruption may occur.
In contrast, to the sphygmomanometer and other cuff-based systems, the
Company's Vasotrac-Registered Trademark- system requires no inflatable cuff but
instead contains a unique pressure sensor that is placed on the wrist. The
Company believes that the Vasotrac-Registered Trademark- system has a number of
advantages over cuff-based systems, primarily continual monitoring of blood
pressure through measurements taken approximately every fifteen heartbeats.
Cuff-based systems may offer some advantages over the Company's
Vasotrac-Registered Trademark- system. Given differences in individual bone
construction, body weight, and physical condition, the system may not provide
accurate readings or be usable on all patients. Contraindications for the
Vasotrac-Registered Trademark- system include patients on cardiopulmonary
bypass, patients with any condition in which rendering a pulsating pressure
signal from the radial artery is not possible which may occur with severe
arterial restrictions, and pediatric use. To date, the Company has not detected
any significant patient complications that are caused by the system. However, as
with any relatively new medical device, complications may become manifest as the
device is used on a greater number of patients with different characteristics
and under various conditions. Finally, the Company must overcome the resistance
of the medical community to the introduction of new techniques or technology.
The Company believes that this resistance may be exacerbated due to the lack of
market acceptance of previous, unsuccessful efforts of other companies to
introduce accurate, continuous, non-invasive blood pressure monitors.
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For those critically ill patients who require continual blood pressure
monitoring, invasive methods are currently the clinician's technology of choice.
Given the attractiveness of non-invasive monitoring, however, several companies
have introduced or are introducing products for non-invasive continual
monitoring of arterial pressure based upon several technologies. These
technologies include pulse-wave velocity, partially inflated finger cuffs,
partially inflated arm cuffs, tonometry, and other technologies now being
developed. The Company believes that none has gained wide acceptance within the
clinical community for continually monitoring arterial pressure. This belief is
based on previous, unsuccessful efforts of other companies to introduce
accurate, continuous, and non-invasive blood pressure monitors, the absence of
such products at major medical and other product shows, the lack of published
advertisements, papers or studies about such products in respected scientific,
medical and other journals, and anecdotal discussions with physicians and other
medical personnel by the Company's management.
PRODUCT DESCRIPTION
The continual, efficacious and non-invasive qualities of the Company's
Vasotrac-Registered Trademark- system make it a new approach to adult blood
pressure monitoring. The system is designed to assist clinicians in the
therapeutic management of their patients by providing frequently updated blood
pressure readings in an easily obtained and comfortable manner. This
microprocessor-controlled system consists of (i) a liquid crystal display, three
high intensity LED displays, a Central Processing Unit and a key pad housed in
an aluminum case, (ii) a patient cable assembly consisting of a motor, hydraulic
system, wrist holder and pressure sensor, and (iii) a hospital grade power cord.
The Vasotrac-Registered Trademark- system monitors blood pressure using as a
key component a pressure sensor placed on the wrist over the radial artery, a
main artery in the arm. The pressure sensor in the
Vasotrac-Registered Trademark- system will be a replaceable component. Although
the Company is evaluating the system to determine its life cycle, it has not yet
determined how often the sensor or other components should be replaced or
serviced. Over eighty of the Company's Vasotrac-Registered Trademark- system
monitors have been used for clinical studies and laboratory experiments, by the
sales representatives, and by customers. The monitor has no moving parts and is
composed of standard, off-the-shelf components. Although these monitors have
been subject to electrical testing of various duration, no end-of-life failures
have been determined. The sensor and motor assembly are the only moving parts of
the Vasotrac-Registered Trademark- system and, as such, they are receiving the
most attention from the Company for life testing. The Company has configured
testing equipment for use in conjunction with the Vasotrac-Registered Trademark-
system to exercise these components continuously in an unattended mode. Testing
and evaluation of these components are still in process.
The Vasotrac-Registered Trademark- system utilizes proprietary technology of
the Company, which uses a miniature hydraulic system to apply varied pressure to
the artery as the pressure waveforms are measured by the sensor. Then, the
Company's proprietary algorithms analyze the pressure waveforms to calculate the
systolic, diastolic, and mean readings of blood pressure about every fifteen
heartbeats. The Vasotrac-Registered Trademark- system displays systolic,
diastolic, and mean blood pressure in millimeters of mercury (mmHg) as well as
heart rate in beats per minute.
The Vasotrac-Registered Trademark- system is designed to be used by trained
medical personnel on adults in hospitals and other critical care sites where
continual blood pressure monitoring is desirable. Patient pressures can be
monitored audibly and visually by entering limits into the
Vasotrac-Registered Trademark- system alarm menu. Those values above or below
the limits will be automatically brought to the attention of the clinician
through audible and visual alarms. Given differences in individual bone
construction, body weight, and physical condition, the system may not be usable
on all patients. However, with proper placement, the system has been usable on
all patients participating in the Company's clinical studies conducted to date
and the Company believes that the system will continue to be usable on virtually
all adults. Care must be taken to properly place the sensor, as clinical studies
have demonstrated that improper placement may lead to erroneous blood pressure
readings. Although there are contraindications for the system, the Company
believes that, as a
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general matter, virtually no medical device is universally applicable for all
patients at all times. Furthermore, the Company does not believe that market
acceptance of the system is likely to be jeopardized by lack of universal
applicability of the system for the adult population, although there can be no
assurance in this regard.
CLINICAL STUDIES
The Company has conducted clinical studies for three purposes: (i) to aid
the product development process, (ii) to obtain data for submission to the FDA,
and (iii) to help the Company prepare marketing and sales information to promote
greater awareness of the Vasotrac-Registered Trademark- system. Two standards of
comparison have been used, the automated cuff and the arterial line (A-line).
The automated cuff clinicals did not allow synchronization of measurements
between the cuff and the Company's system because of the different number of
heartbeats required to produce readings for each method. Further, the cuff does
not meet the accuracy objectives that the Company has set for the
Vasotrac-Registered Trademark- system. For these reasons, the cuff proved to be
of limited utility in the Company's studies. However, these studies were useful
in the initial development process for the Vasotrac-Registered Trademark-
system.
In contrast to automated cuffs, A-lines are believed to provide more
accurate blood pressure measurements. Further, the A-line studies allow for data
synchronization. By inserting an arterial catheter in the radial artery on one
wrist and by placing the Vasotrac-Registered Trademark- system sensor on the
radial artery of the other wrist, data was simultaneously recorded on a
beat-by-beat basis. The Company's clinical studies were conducted at teaching
hospitals under institutional review board controls and protocols. Hospitals
performing investigational studies of medical devices or drugs are required by
the FDA to have an "institutional review board" that supervises such studies.
Generally, such a board represents the hospital and includes physicians that can
make appropriate judgments regarding the safety of the study. The board
periodically reviews protocols for medical devices and maintains meeting
minutes, which are subject to audit by the FDA.
The Company's clinical studies were performed on approximately 30 consenting
adults, some of whom were healthy and some of whom were undergoing surgery.
Results from a series of these studies comparing the
Vasotrac-Registered Trademark- system's readings with the a-line readings were
used in the Company's 510(k) submission to the FDA. Subsequent to the 510(k)
submission, the Company has conducted clinical trials on approximately 110
additional individuals. During the Company's clinical trials conducted to date,
the variance between synchronized Vasotrac-Registered Trademark- system readings
obtained from one arm of the patient and the comparative A-line readings
obtained from the other arm was calculated by computing the standard deviation
of error from more than 13,000 paired readings from the patients. Based on these
measurements, which excludes a certain number of paired readings because the
Company believes that these readings have been effected by artifact, patient
level differences, arm-to-arm differences, or experimental error, the magnitude
of this variance is calculated as a standard deviation of approximately 7, 5,
and 7 mmHg for systolic, mean and diastolic blood pressure measurements,
respectively. These values compare favorably with those found in previous
generations of non-invasive blood pressure measurement devices, such as the
Dinamap-TM- cuff-based system with which the Company claimed "substantial
equivalence" in its 510(k) submission to the FDA. In addition, these values are
below the 8 mmHg limit of clinical acceptability proposed by the Association for
the Advancement of Medical Information ("AAMI") as the national standard for
electronic or automated sphygmomanometers.
AAMI is a non-profit professional association comprised mainly of physicians
and clinicians, medical institutions, medical device manufacturers and
governmental employees and agencies, although participation by federal agency
representatives in the development of AAMI standards does not constitute
endorsement by the federal government or any of its agencies. The AAMI
electronic or automated sphygmomanometer standard was submitted to AAMI by
AAMI's Sphygmomanometer Committee, a group of approximately 25 individuals
associated with medical institutions, the FDA, and manufacturing companies.
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The object of these continued studies is to refine the design of the system
and to test the system on a greater number of patients with different
characteristics and under various conditions, such as a wide range of blood
pressure readings, until such time, if ever, as the
Vasotrac-Registered Trademark- system receives market acceptance. In addition,
the Company believes the studies will help the Company to prepare marketing and
sales information as well as to promote greater awareness and market acceptance
of the Vasotrac-Registered Trademark- system toward the goal of attaining
commercial viability for the product. The Company is conducting some of these
studies outside the United States. To the Company's knowledge, all studies
conducted to date have been performed with Company participation.
In its 510(k) submission to the FDA, the Company included not only clinical
data, but also outlined its plan to continue testing and integrating the results
therefrom into, the Vasotrac-Registered Trademark- system. Based on the
foregoing and, most importantly, the improvement in the overall results of the
system's performance subsequent to its 510(k) submission, the Company does not
believe that applicable FDA regulations require, and therefore at this point
does not anticipate, any need to submit to the FDA the post-510(k) clinical
studies.
EMPLOYEES
The Company's success currently depends on the services of G. Kent
Archibald, President and Chief Executive Officer of the Company, as well as its
engineering group, which has sophisticated technical knowledge about the
Vasotrac-Registered Trademark- system.
For the Company to emerge from the development stage, it will depend on its
ability to hire additional employees. Competition for such employees is intense
and there can be no assurance that the Company will be successful in hiring such
employees on acceptable terms or when required, or in maintaining the services
of its present employees. The Company estimates that within the next twelve
months, it may require approximately 15 additional persons, including one in the
area of general and administrative, eight in sales and marketing, two in
research and development, and four in manufacturing. The Company preliminarily
estimates that these employees will increase employee-related expenses in excess
of $900,000 during the next twelve months. However, such requirements are
subject to change and are highly dependent on the development process for the
system, including the manufacturing scale-up process, market acceptance, and the
Company's distribution methods.
MARKETING
The Company's marketing strategy is primarily dependent on gaining physician
and hospital acceptance of the Vasotrac-Registered Trademark- system. The
Company must overcome the inherent resistance of the medical community to the
introduction of new techniques or technology. The Vasotrac-Registered Trademark-
system may also have to overcome an association, in the minds of some
clinicians, with several earlier technologies that non-invasively monitored
blood pressure but were not commercially acceptable or viable. However, the
Vasotrac-Registered Trademark- system differs from such earlier technologies in
several ways. First, the Vasotrac-Registered Trademark- system does not utilize
a cuff-based system which, in general, requires more frequent calibration.
Cuff-based systems also increase patient discomfort. Second, previous
technologies generally attempted to produce continuous blood pressure readings,
on a beat-by-beat basis, which are relatively difficult to track accurately. In
contrast the Vasotrac-Registered Trademark- system produces continual blood
pressure readings, approximately every fifteen heartbeats, which the Company
believes allows for more stable tracking without a significant sacrifice in
accuracy.
Clinicians may be reluctant to use a new medical technology until its value
has been demonstrated by clinical studies published in respected scientific or
medical journals. Such journals are sometimes reluctant to publish articles
describing new technologies. The Company hopes that additional clinical tests on
the Vasotrac-Registered Trademark- system may lead to the publication of
favorable papers or studies in such journals. In addition, the Company believes
that the clinical testing will help the Company to prepare marketing and sales
information as well as to promote greater awareness and market acceptance of the
system.
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The Company has attended three major medical product shows during the 1997
fiscal year which allowed the Company to advertise and demonstrate the
Vasotrac-Registered Trademark- system. Because the
Vasotrac-Registered Trademark- system is intended to be used by trained
clinicians, physicians, and other professional caregivers, the Company conducts
extensive training on use of the system and perhaps produce a training system.
The Company is conducting a controlled market rollout of the system by
initially scaling up manufacturing capabilities at a conservative rate in order
to allow flexibility if product design alternations are required to meet
customer needs or for other reasons. With a controlled rollout, it is hoped that
customer satisfaction can be maintained even if some early product problems were
encountered. The Company will use a direct sales force and some limited
manufacturer sales representatives for selling the
Vasotrac-Registered Trademark- system. The Company anticipates that it will be
able to market a large portion of the product through the various hospital
purchasing systems. This will allow the Company to service the major markets in
the United States with a limited number of salespeople.
INSURANCE
The Company has not had any material claims against its liability insurance.
The Company has comprehensive general liability insurance with a limit of
$1,000,000 and umbrella liability insurance of an additional $4,000,000.
However, there can be no assurance that the Company will be able to maintain
such insurance in amounts and with coverages that will adequately cover
associated risks or that such insurance will be available in the future at
premiums that can be economically justified. Lack of such insurance could expose
the Company to substantial damages, which could have a material adverse effect
upon the Company. In addition, excessive servicing requirements for the
Vasotrac-Registered Trademark- system could raise product liability concerns.
RELIANCE ON SINGLE PRODUCT
The Company has, and for the foreseeable future expects to have, only one
product, the Vasotrac-Registered Trademark- system. If the
Vasotrac-Registered Trademark- system is not developed, manufactured or marketed
successfully, fails to meet customer needs, or is not accepted in the
marketplace, the Company would be materially and adversely affected, its primary
business focus would need to be changed and its ability to continue operations
would be jeopardized. Although the Company believes that significant and
expanding markets exist for the Vasotrac-Registered Trademark- system as well as
any additional products that may incorporate the Company's proprietary
technology, there can be no assurance that any such products ever will be
successfully developed or marketed. If the Vasotrac-Registered Trademark- system
were found to infringe the patent rights of others or if third parties asserted,
and were successful in claiming, rights to the Vasotrac-Registered Trademark-
system, the Company could be materially adversely affected. The Company has not
undertaken any comprehensive patent infringement searches or studies.
NEED TO EVALUATE DESIGN
Although the Company's initial product development and clinical testing
program for the Vasotrac-Registered Trademark- system is complete, only after
extensive evaluation of the design will it be known if the system, as currently
configured, will meet customer needs or be accepted in the marketplace. The
Company continues to test the Vasotrac-Registered Trademark- system for
validation and promotional efforts. If the configuration of the system must be
modified, there can be no assurance that such modifications will be technically
feasible. Even if feasible, such modifications could result in significant
delays. If such modifications require regulatory approval, additional
significant delays could result. The Company could be materially and adversely
affected by these developments.
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PRODUCT SERVICING REQUIREMENTS
There can be no assurance that additional servicing requirements will not be
necessary or that any such additional servicing requirements, individually or in
the aggregate, will not be significant, difficult, time-consuming, or expensive.
Further the need for any such additional servicing may not be readily apparent
to clinicians using the Vasotrac-Registered Trademark- system. The Company
believes that actual or perceived excessive servicing requirements for, or
erroneous readings produced by, the Vasotrac-Registered Trademark- system could
materially and adversely affect market acceptance of the system or could raise
product liability concerns. Although the Company plans to continue testing the
Vasotrac-Registered Trademark- system to determine the extent of its servicing
requirements, there can be no assurance that the exact scope of such servicing
requirements can be precisely identified. The Company's goal is to produce
Vasotrac-Registered Trademark- systems that do not require excessive servicing,
that are accurate, stable, and reliable enough for the user's needs and that
otherwise meet or exceed clinical and regulatory standards of acceptability, but
there can be no assurance in this regard.
MANUFACTURING
The Company currently procures from outside vendors, on a purchase order
basis, small quantities of virtually all components and subassemblies for the
Vasotrac-Registered Trademark- system. At present, many components are supplied
by only one vendor or are made by hand without production tooling in the
Company's facility. Furthermore, the Company has no agreement with any such
supplier. Should the Company's production rates increase, the supply of
components and subassemblies will become more critical. In that event, the
Company will attempt to consummate formal supply agreement relationships and/or
obtain multiple sources of supply for most of its components, although it may,
in some cases, be preferable or necessary for the Company to obtain components
or subassemblies on a purchase order basis or to utilize single sources of
supply.
PRICING AND DISTRIBUTION
The list of the Vasotrac-Registered Trademark- is $6,900. Such pricing will
evolve throughout the marketing process for the Vasotrac-Registered Trademark-
system, but can be expected to remain dependent on a number of factors,
including manufacturing costs, prices of competitive products, distribution
methods, volume discounts, and market acceptance. The automated cuff-based
systems generally list for approximately $3,800 per unit. The Company believes
that the higher price will be supportable due to the superior features
associated with its product.
In comparison to the costs associated with A-line procedures, the Company
believes that the Vasotrac-Registered Trademark- system will, on a per-procedure
basis, result in savings for healthcare providers. Insertion of an A-line is an
invasive surgical procedure requiring a physician. No matter how routine any
such procedure may become, all invasive procedures retain the inherent risk of
complications and have attendant direct and indirect costs associated with them.
By estimating the price of the Vasotrac-Registered Trademark- system, the
system's life cycle, and the number of procedures which can be performed, the
Company believes that the per-procedure cost for use of the
Vasotrac-Registered Trademark- system can be approximated. Based on that
estimate, the Company believes that the cost for non-invasively monitoring the
blood pressure of a patient with the Vasotrac-Registered Trademark- system will
be less than with an invasive A-line. The Company believes that this will give
it a competitive edge in an increasingly cost-conscious healthcare industry.
The Company expects initially to sell the Vasotrac-Registered Trademark-
system as a stand-alone unit through a direct sales force and some limited
manufacturer sales representatives, which is expected to train medical personnel
in the use of the system. However, in the future, the Company may also explore
additional distribution arrangements, such as sales through stocking
distributors or a major medical company. The Company will also investigate
marketing the system to manufacturers of multi-parameter monitoring and display
systems for use as a component of such systems. However, the Company does not
currently have, and there can be no assurance that in the future it will
implement or effectuate, distribution arrangements.
10
<PAGE>
COMPETITION
The Company will compete with companies that are developing and marketing
instruments that measure blood pressure continually by invasive techniques,
including Abbott Laboratories, Baxter Healthcare Corporation, and Hewlett
Packard Company. In addition, the Company will compete with other companies that
are developing and marketing instruments that measure blood pressure continually
or at regular intervals by several non-invasive techniques. Presently, most
non-invasive methods of measuring blood pressure use an inflatable cuff.
Companies that market such a product include Critikon, Inc., a Johnson & Johnson
company, which markets the Dinamap-TM-, Hewlett Packard Company, Colin Medical
Instrument Corporation, SpaceLabs Medical, Inc., Marquette Electronics Inc., and
others. In the Company's 510(k) Submission to the FDA, the Company claimed that
the Vasotrac-Registered Trademark- system was "substantially equivalent" to the
Dinamap-TM- product and provided analysis and comparative data in areas such as
intended use, display parameters, and performance specifications.
Several of the Company's competitors have significantly greater resources as
well as established technologies and product reputations in the blood pressure
monitoring field. The Company believes that competition in the industry is based
on product quality, accuracy, reliability, ease of use, and design features, as
well as price.
TECHNOLOGICAL OBSOLESCENCE
The medical device industry is subject to rapid technological innovation
and, consequently, the life cycles of products tend to be relatively short. The
Company is engaged in a field characterized by extensive research efforts. There
can be no assurance that new developments or discoveries in the field will not
render the Vasotrac-Registered Trademark- system obsolete. The greater financial
and other resources of many of the companies currently engaged in research in
the area in which the Company expects to compete may permit such companies to
create or respond more rapidly than the Company to technological innovations and
advances.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company has applied for U.S. patents covering various aspects of the
Vasotrac-Registered Trademark- system. As of July 1997, three U.S. patents,
relating to an improved pressure sensor structure, a sensor support structure,
and a sensor positioning device, have issued. Six other applications are still
pending. The general subject matter of the claims of each of these applications
is as follows: (i) the basic sensing concept and structure, (ii) improved
aspects of the pressure sensor structure, (iii) methods and systems for
calculating pressure, (iv) methods and systems for positioning the pressure
sensor, (v) methods and systems of detecting blood pressure pulses, and (vi)
segmentation estimation method for calculating blood pressure.
The Company is seeking patent protection in the European Patent Office,
Brazil, Canada, China, India, Japan, and Russia on its improved pressure sensor
structure, and the methods and systems for calculating pressure. It is also
seeking patent protection for methods and systems for positioning sensors and
for the pressure sensor support structure in the European Patent Office,
Australia, Canada and Japan. Patent Cooperation Treaty (PCT) applications have
been filed to preserve the right to file foreign patent applications on the
method and systems of detecting blood pressure pulses and the segmented
estimation method for calculating blood pressure. A PCT application allows the
Company to file applications abroad, including in Europe and Japan. There can be
no assurance that any pending U.S. or any foreign patents will be granted or, if
obtained, that they will sufficiently protect the Company's proprietary rights.
Even if the patents the Company applies for are granted, they do not confer on
the Company the right to manufacture and market products if such products
infringe patents held by others. While the Company has reviewed prior art in
connection with its patent applications, it has not undertaken or conducted any
comprehensive patent infringement searches or studies. If any such third parties
hold any such conflicting rights, the Company may be required in the future to
stop making, using or selling its products or to obtain
11
<PAGE>
licenses from or pay royalties to others, which could be significant and have a
material adverse effect on the Company. Further, in such event, there can be no
assurance that the Company would be able to obtain or maintain any such licenses
on acceptable terms or at all. The Company has, throughout the development
process for the Vasotrac-Registered Trademark- system, been associated with
various companies, institutions and individuals. Although the Company has no
knowledge that any such companies, institutions or individuals have claimed, or
have any basis for claiming, interests in the Company's proprietary rights or
the Vasotrac-Registered Trademark- system technology, there can be no assurance
that such claims will not be threatened, asserted or perfected. Such claims,
even if the Company ultimately prevails on the merits, could have a material
adverse effect upon the Company.
In addition to patent protection, the Company intends to rely to the extent
possible on trade secrets, unpatented proprietary know-how, and its continuing
development of new products.
THIRD PARTY PAYOR; HEALTHCARE REFORM
The success of the Company in the United States may be related to the number
of third party payors, such as Medicare, private insurance companies, health
maintenance organizations, and other payors, that approve payment or
reimbursement for the use of the Vasotrac-Registered Trademark- system and the
amount of any such payments or reimbursements. If, for example, hospitals are
not able to recover the cost of the system through reimbursement, they may be
reluctant to purchase the system, with the result that the Company's marketing
efforts may be adversely affected. The healthcare industry and associated
regulatory environment are dynamic and rapidly changing, particularly with
respect to proposals to reform Medicare and to control healthcare costs. This
environment makes it impossible to predict the effects, including costs and/or
impediments to development, that adoption of and changes in healthcare laws,
rules and regulations may have on the Company and its operations. However, such
developments could materially and adversely affect the Company's ability to
market its product.
GOVERNMENT REGULATION
Medical products, such as the Vasotrac-Registered Trademark- system, are
subject to regulation by the U.S. Food and Drug Administration ("FDA"). Under
the 1976 amendments to the federal Food, Drug and Cosmetic Act (the "FDA Act")
and regulations promulgated thereunder, manufacturers of medical devices must
comply with certain regulations governing the testing, manufacturing, packaging
and marketing of medical devices. Under the FDA Act, as amended, every medical
device is classified by the FDA into one of three classes, depending on the
degree of regulation the FDA deems necessary to assure the safety and efficacy
of the system. Class I devices are subject only to general controls. Class II
devices must comply with certain specified performance standards. Class III
devices (consisting of life support/life sustaining, diagnostic or implanted
systems) must receive premarket approval from the FDA prior to their commercial
distribution. If the Company decides to market its products outside the United
States, its products will also be subject to regulations in certain foreign
countries, including regulations similar to those established by the FDA.
Irrespective of their classification, medical devices "substantially
equivalent" to existing systems continuously marketed since May 1967 may be
marketed pursuant to a Premarket Notification Submission (a "510(k)
Submission"). In general a 510(k) Submission includes (i) a description of the
device, including an explanation of how the device functions, the scientific
concepts that form the basis for the device and significant performance
characteristics, (ii) a statement of the intended use of the device, (iii) a
presentation of clinical tests, including safety and effectiveness data, and
(iv) a detailed summary providing the basis for a determination of "substantial
equivalence". Certain devices, including those which are not "substantially
equivalent" to predicate devices, are subject to Premarket Approval Application
("PMA") requirements and more stringent FDA reviews. In contrast to the 510(k)
process, the PMA process generally occurs over a more protracted time period and
requires more extensive clinical data.
12
<PAGE>
The regulations for 510(k) Submissions state that an FDA finding of
"substantial equivalence" does not in any way denote official "approval" of the
device. Further, any representation that creates an impression of official
approval of a device because of complying with the premarket notification
regulations is misleading and constitutes misbranding. According to a U.S.
Department of Health and Human Services publication intended to assist
manufacturers in complying with these regulatory requirements, a determination
of "substantial equivalence" to a legally marketed device means that the device
has the same intended use and the same technological characteristics but can be
demonstrated to be as safe and effective as the legally marketed device and does
not raise different questions regarding safety and effectiveness for the
predicate device. Performance data, such as clinical data, in support of a
510(k) Submission is for the purpose of demonstrating that the device is
equivalent in performance, especially safety and effectiveness, to the legally
marketed device. Premarket notification allows the FDA to "screen out" devices
that present new questions of safety and/or effectiveness relative to the
predicate device, appear to be less safe or effective than legally marketed
devices or have indications as a new intended use.
In cases of intended marketing of a device (i) for new or different uses, or
(ii) that has undergone significant change or modification that could
significantly affect the safety or effectiveness of the device, the manufacturer
must submit appropriate supporting data regarding the consequences and effects
the new use or modification might have on the safety and effectiveness of the
device. According to the FDA, manufacturers are best qualified to make the
initial determination of whether the new use or modification can significantly
alter the degree of safety or effectiveness of the device. Further, 510(k)
Submissions are not required for insignificant changes in design, material,
chemical composition, energy source or manufacturing process, but only where
such changes could significantly affect safety or effectiveness of the device.
In the event that a manufacturer makes a decision not to submit a new 510(k),
the FDA can overrule the decision and take appropriate regulatory action.
In late 1994, the Company began a series of studies with the objective of
collecting data to submit to the FDA. In January 1995, the Company submitted a
510(k) Submission, including clinical data addressing the safety and efficacy of
the system, to the FDA for the Vasotrac-Registered Trademark- system. In the
Company's 510(k) Submission to the FDA, the Company claimed that the
Vasotrac-Registered Trademark- system was "substantially equivalent" to the
Dinamap-TM- product, which is marketed by Johnson & Johnson company, and
provided analysis and comparative data in areas such as intended use, display
parameters and performance specifications. The Company also noted distinctions
between the two products, in areas such as weight, type of display system, alarm
parameters, determination times, and storage temperatures. The Company did not
claim in its 510(k) Submission, and is not currently aware of, "substantial
equivalence" between the Vasotrac-Registered Trademark- system and any other
product except the Dinamap-TM-. In February 1995, the Company received formal
notice from the FDA that the Vasotrac-Registered Trademark- system is classified
as a Class II device, that no further data would be required and that the
Company could immediately commence marketing the Vasotrac-Registered Trademark-
system in the United States. The FDA's indication does not in any way denote
official "approval" of the system.
In its 510(k) Submission to the FDA, the Company included not only clinical
data but also outlined its plans to continue testing and integrating the results
therefrom into the Vasotrac-Registered Trademark- system. Subsequent to its
510(k) Submission, the Company has conducted clinical trials on approximately
110 additional individuals. The Company does not believe that applicable FDA
regulations require, and therefore at this point does not anticipate, submission
to the FDA of the post-510(k) clinical studies, including with respect to the
drug-administered patient. However, the FDA could overrule that decision and
could take appropriate regulatory action, which could materially and adversely
affect the Company.
As a manufacturer of medical devices, the Company will be subject to certain
other FDA regulations, and the Company's manufacturing processes and facilities
will be subject to continuing review and inspection by the FDA to ensure
compliance with Good Manufacturing Practices ("GMP") regulations. In general,
GMP regulations cover the methods, facilities, and controls used in
manufacturing, packaging, storing and installing medical devices as well as
identify the essential elements required of quality assurance programs. More
specifically, GMP regulations cover areas including (i) quality assurance and
13
<PAGE>
audit procedures, (ii) personnel training, health and cleanliness, (iii)
facilities and sanitation, (iv) equipment maintenance and inspection, (v)
storage and handling of components, (vi) manufacturing specifications and
processing procedures, (vii) packaging and labelling control (viii) warehouse
and distribution practices, (ix) device evaluation and inspection, and (x)
records. The Company intends to conform its manufacturing and quality control
procedures to the requirements of the FDA regulations. The Company believes that
most medical manufacturers already comply with GMP. Furthermore, the Company
currently has in place internal compliance with GMP requirements.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company leases property in Arden Hills, Minnesota. The building lease is
for three years, expiring in May 2000. The monthly lease payment is
approximately $2,800. The Company is generally responsible for taxes, insurance,
maintenance, and other expenses related to the operation of the facility.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders in the
fourth quarter of fiscal 1997.
14
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Trading activity with respect to the Company's Common Stock has been
limited. A public trading market having the characteristics of depth, liquidity
and orderliness depends upon the existence of market makers as well as the
presence of willing buyers and sellers, which are circumstances over which the
Company does not have control.
The Common Stock began trading in November 1995 on the Nasdaq SmallCap
Market under the symbol "MDWV" The following table sets forth the high and low
bid prices for the Common Stock based on closing transactions during each
specified period as reported by the Nasdaq Stock Market, Inc., which prices
reflect inter-dealer prices without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions:
<TABLE>
<CAPTION>
FISCAL 1996 HIGH LOW
- -------------------------------------------------------------------------- ------- -------
<S> <C> <C>
First Quarter........................................................... N/A N/A
Second Quarter.......................................................... N/A N/A
Third Quarter........................................................... $ 5 3/8 $ 5.00
Fourth Quarter.......................................................... 8.00 5.00
<CAPTION>
FISCAL 1997 HIGH LOW
- -------------------------------------------------------------------------- ------- -------
<S> <C> <C>
First Quarter........................................................... $11 1/4 $ 7 3/4
Second Quarter.......................................................... 12 1/4 7 7/8
Third Quarter........................................................... 12 7/8 10 1/2
Fourth Quarter.......................................................... 11 3/4 9 1/4
</TABLE>
There were approximately 200 record holders and 800 beneficial holders of
the Company's Common Stock as of July 17, 1997. On July 17, 1997, the high and
low prices for the Common Stock were $14 and $13 1/2 respectively.
RECENT SALES OF UNREGISTERED SECURITIES
In April 1997, the Company issued 6,405 shares of Common Stock at a price of
$1.87 per share, upon exercise of a warrant by an investor in the Company's
February 1991 private placement. The sale of such shares was deemed to be exempt
from registration under the Securities Act of 1933 by virtue of Section 4(2)
thereof. The investor represented his intention to acquire the shares for
investment purposes only and not with a view to the distribution thereof. In
addition, a restrictive securities legend has been placed on the certificate
representing the shares.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS.
PLAN OF OPERATION
See "Financial Condition" below and Item 1 above.
15
<PAGE>
RESULTS OF OPERATIONS
Fiscal year ended April 30, 1997 compared to fiscal year ended April 30,
1996
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
------------------------
1997 1996
------------ ----------
DOLLARS DOLLARS
<S> <C> <C>
Revenue
Net sales.......................................... $ 72,942 $ --
Operating expenses:
Cost of sales and product development.............. 113,261 --
Research and development, and clinical............. 816,099 379,320
General and administrative......................... 529,831 389,433
Sales and marketing................................ 555,888 85,537
------------ ----------
Total operating expenses............................. 2,015,079 854,290
------------ ----------
Operating loss....................................... (1,942,137) (854,290)
Interest income...................................... 331,670 182,431
------------ ----------
Net loss............................................. $ (1,610,467) $ (671,859)
------------ ----------
------------ ----------
</TABLE>
Operating revenue for fiscal 1997 was $72,942, versus $0 in fiscal year
1996. The Company commenced sales during fiscal 1997.
Operating expenses for fiscal 1997 were $2,015,079, an increase of
$1,160,789 or 135.9% over fiscal year 1996 operating expenses of $854,290. The
increase was partially due to the Company hiring six additional individuals to
prepare for the marketing and manufacture of the Vasotrac-Registered Trademark-
system. In addition, the Company continued incurring costs to continue the
research and development of the Vasotrac-Registered Trademark- system.
Cost of sales and product development for fiscal 1997 were $113,261, versus
$0 in fiscal year 1996. The Company commenced sales during fiscal 1997.
Research, development, and clinical expenses for fiscal year 1997 were
$816,099, an increase of $436,779 or 115.1% over fiscal year 1996 research and
development costs of $379,320. The increase is due to the continued research and
development costs as the Company prepares for larger scale production of the
Vasotrac-Registered Trademark- system. In addition, the Company continued
clinical research for the purpose of preparing a multi-site paper on the
accuracy of the Vasotrac-Registered Trademark- system.
General and administrative expenses for fiscal year 1997 were $529,831, an
increase of $140,398 or 36.1% over fiscal year 1996 general and administrative
expenses of $389,433. The increase in general and administrative expenses was
attributable to the hiring of a Chief Financial Officer, increased insurance
costs, increased use of outside consultants including legal services, and to
other expenses associated with increased activities of the Company's operations.
Sales and marketing expenses for fiscal year 1997 were $555,888, an increase
of $470,351 or 549.9% over fiscal year 1996 sales and marketing costs of
$85,537. The increase was due to the Company hiring a Vice President of Sales,
three salespersons, and two registered nurses.
Interest income for fiscal year 1997 was $331,670, an increase of $149,239
or 81.8% over fiscal year 1996 interest income of $182,431. The increase in
interest income is a result of the investment of the proceeds for a full year
from the public offering.
Income taxes are accounted for under the liability method. Deferred tax
assets and liabilities are provided to reflect the differences between the
financial statement and tax bases of assets and liabilities at the tax rates in
effect when these differences are expected to reverse. Deferred tax assets are
reduced by a
16
<PAGE>
valuation allowance if, based on the weight of available evidence, it is more
likely than not that the deferred tax assets will not be realized.
At April 30, 1997 and 1996 it was determined that there should be a 100%
valuation allowance on the amount of the net deferred tax assets because of the
continued losses of the Company. If the Company achieves sufficient
profitability to use all or part of the deferred tax assets, the valuation
allowance will be reduced and reflected as an income tax benefit in future
periods.
FINANCIAL CONDITION
The Company's cash, cash equivalents, short and long-term investments were
$5,078,663 and $6,528,321 at April 30, 1997 and April 30, 1996 respectively. The
Company incurred cash expenditures of $1,661,731 for operations for the fiscal
year ended April 30, 1997.
In November 1995, the Company completed its initial public offering (IPO) of
1,610,000 shares of Common Stock raising approximately $6,900,000 in net
proceeds to the Company. Prior to the initial public offering, the Company
financed its activities through a series of private placements of equity
securities. The Company's Common Stock is quoted on the Nasdaq SmallCap Market
under the symbol "MDWV".
With the proceeds of the initial public offering, the Company believes that
sufficient liquidity is available to satisfy its working capital needs for
approximately two years from the end of fiscal year April 1997. The Company has
no significant capital expenditure commitments and does not plan any significant
sale of capital equipment.
IMPACT OF INFLATION
Inflation has had no material effect on the Company's operations or
financial condition.
ITEM 7. FINANCIAL STATEMENTS.
See following pages.
17
<PAGE>
MEDWAVE, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors............................................ 19
Audited Financial Statements
Balance Sheets.......................................................... 20
Statements of Operations................................................ 21
Statement of Changes in Stockholders' Equity............................ 22
Statements of Cash Flows................................................ 24
Notes to Financial Statements........................................... 25
</TABLE>
18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Medwave, Inc.
We have audited the balance sheets of Medwave, Inc. (a development stage
company) as of April 30, 1997 and 1996, and the related statements of
operations, changes in stockholders' equity and cash flows for the years then
ended and the period from June 27, 1984 (inception) to April 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medwave, Inc. at April 30,
1997 and 1996, and the results of its operations and its cash flows for the
years then ended and the period from June 27, 1984 (inception) to April 30,
1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
June 13, 1997
19
<PAGE>
MEDWAVE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 1,240,100 $ 769,121
Short-term investments........................................................... 2,539,905 4,234,080
Accounts receivable.............................................................. 41,986 --
Inventories...................................................................... 114,467 8,974
Prepaid expenses................................................................. 81,182 101,171
------------- -------------
Total current assets............................................................... 4,017,640 5,113,346
Investments........................................................................ 1,298,658 1,525,120
Property and equipment:
Research and development equipment............................................... 237,561 261,076
Office equipment................................................................. 121,193 114,088
Manufacturing and engineering equipment.......................................... 68,262 46,312
Sales and marketing equipment.................................................... 34,371 --
Leasehold improvements........................................................... 31,613 31,613
------------- -------------
493,000 453,089
Accumulated depreciation......................................................... (336,320) (339,127)
------------- -------------
156,680 113,962
Patents, net of accumulated amortization of $57,199 in 1997 and $30,084 in 1996.... 78,818 78,776
------------- -------------
Total assets....................................................................... $ 5,551,796 $ 6,831,204
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 78,390 $ 83,607
Accrued payroll.................................................................. 50,810 28,697
------------- -------------
Total current liabilities.......................................................... 129,200 112,304
Stockholders' equity:
Common Stock, no par value:
Authorized shares--50,000,000
Issued and outstanding shares--April 30, 1997--4,818,738 and April 30,
1996--4,690,560.............................................................. 12,764,703 12,458,866
Unrealized loss on investments................................................... (24,919) (33,245)
Deficit accumulated during the development stage................................. (7,317,188) (5,706,721)
------------- -------------
Total stockholders' equity......................................................... 5,422,596 6,718,900
------------- -------------
Total liabilities and stockholders' equity......................................... $ 5,551,796 $ 6,831,204
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
20
<PAGE>
MEDWAVE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 27, 1984
YEAR ENDED APRIL 30 (INCEPTION)
--------------------------- TO APRIL 30,
1997 1996 1997
------------- ------------ -------------
<S> <C> <C> <C>
Revenue:
Net sales........................................................... $ 72,942 $ -- $ 72,942
Operating expenses:
Cost of sales and product development............................... 113,261 -- 113,261
Research and development............................................ 816,099 379,320 4,587,732
General and administrative.......................................... 529,831 389,433 2,214,490
Sales and marketing................................................. 555,888 85,537 648,277
------------- ------------ -------------
Operating loss........................................................ (1,942,137) (854,290) (7,490,818)
Interest income....................................................... 331,670 182,431 800,390
------------- ------------ -------------
Net loss.............................................................. $ (1,610,467) $ (671,859) $(6,690,428)
------------- ------------ -------------
------------- ------------ -------------
Net loss per share.................................................... $ (.34) $ (.17) $ (3.04)
------------- ------------ -------------
------------- ------------ -------------
Weighted average number of shares outstanding......................... 4,789,242 3,915,295 2,200,920
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
See accompanying notes.
21
<PAGE>
MEDWAVE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK UNREALIZED DURING THE
----------------------- LOSS ON DEVELOPMENT
SHARES AMOUNT INVESTMENTS STAGE TOTAL
--------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock at $.15 per share in
July 1984 for capital equipment donated...... 10,000 $ 1,500 $ -- $ -- $ 1,500
Assets donated to Company by officer in August
1984......................................... -- 1,145 -- -- 1,145
Net income for the period of June 27, 1984
(inception) to April 30, 1985................ -- -- -- 235 235
--------- ------------ ----------- ------------ -----------
Balance at April 30, 1985...................... 10,000 2,645 -- 235 2,880
Net income..................................... -- -- -- 1,393 1,393
--------- ------------ ----------- ------------ -----------
Balance at April 30, 1986...................... 10,000 2,645 -- 1,628 4,273
Issuance of Common Stock in connection with
stock split in July 1986..................... 190,000 -- -- -- --
Net loss....................................... -- -- -- (98,211) (98,211)
--------- ------------ ----------- ------------ -----------
Balance at April 30, 1987...................... 200,000 2,645 -- (96,583) (93,938)
Net loss....................................... -- -- -- (131,931) (131,931)
--------- ------------ ----------- ------------ -----------
Balance at April 30, 1988...................... 200,000 2,645 -- (228,514) (225,869)
Net loss....................................... -- -- -- (258,135) (258,135)
--------- ------------ ----------- ------------ -----------
Balance at April 30, 1989...................... 200,000 2,645 -- (486,649) (484,004)
Issuance of Common Stock at $.975 per share in
April 1990 for consulting services........... 3,500 3,413 -- -- 3,413
Accrual of dividends payable on the Redeemable
Convertible Preferred Stock, Series A........ -- (1,145) -- (21,343) (22,488)
Net loss....................................... -- -- -- (278,845) (278,845)
--------- ------------ ----------- ------------ -----------
Balance at April 30, 1990...................... 203,500 4,913 -- (786,837) (781,924)
Accrual of dividends payable on the Redeemable
Convertible Preferred Stock Series A......... -- -- -- (1,775) (1,775)
Accretion on the Redeemable Convertible
Preferred Stock--Series I.................... -- -- -- (9,711) (9,711)
Net loss....................................... -- -- -- (553,710) (553,710)
--------- ------------ ----------- ------------ -----------
Balance at April 30, 1991...................... 203,500 4,913 -- (1,352,033) (1,347,120)
Accretion on the Redeemable Convertible
Preferred Stock--Series I.................... -- -- -- (10,649) (10,649)
Accretion on the Redeemable Convertible
Preferred Stock--Series II................... -- -- -- (105,318) (105,318)
Net loss....................................... -- -- -- (1,371,031) (1,371,031)
--------- ------------ ----------- ------------ -----------
Balance at April 30, 1992...................... 203,500 4,913 -- (2,839,031) (2,834,118)
Accretion on the Redeemable Convertible
Preferred Stock--Series I.................... -- -- -- (10,914) (10,914)
Accretion on the Redeemable Convertible
Preferred Stock--Series II................... -- -- -- (118,197) (118,197)
Net loss....................................... -- -- -- (615,888) (615,888)
--------- ------------ ----------- ------------ -----------
Balance at April 30, 1993 (carried forward).... 203,500 4,913 -- (3,584,030) (3,579,117)
</TABLE>
22
<PAGE>
MEDWAVE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK UNREALIZED DURING THE
----------------------- LOSS ON DEVELOPMENT
SHARES AMOUNT INVESTMENTS STAGE TOTAL
--------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1993 (brought forward).... 203,500 $ 4,913 $ -- $(3,584,030) $(3,579,117)
Accretion on the Redeemable Convertible
Preferred Stock--Series I.................... -- -- -- (11,185) (11,185)
Accretion on the Redeemable Convertible
Preferred Stock--Series II................... -- -- -- (121,904) (121,904)
Net loss....................................... -- -- -- (646,480) (646,480)
--------- ------------ ----------- ------------ -----------
Balance at April 30, 1994...................... 203,500 4,913 -- (4,363,599) (4,358,686)
Accretion on the Redeemable Convertible
Preferred Stock--Series I.................... -- -- -- (11,463) (11,463)
Accretion on the Redeemable Convertible
Preferred Stock--Series II................... -- -- -- (125,732) (125,732)
Net loss....................................... -- -- -- (455,498) (455,498)
--------- ------------ ----------- ------------ -----------
Balance at April 30, 1995...................... 203,500 4,913 -- (4,956,292) (4,951,379)
Exercise of stock options and warrants......... 126,896 144,299 -- -- 144,299
Initial public offering of Common Stock, net of
expenses..................................... 1,610,000 6,833,491 -- -- 6,833,491
Preferred Stock conversion..................... 2,750,164 5,476,163 -- -- 5,476,163
Change in unrealized loss on investments....... -- -- (33,245) -- (33,245)
Accretion on the Redeemable Convertible
Preferred Stock--Series I.................... -- -- -- (5,874) (5,874)
Accretion on the Redeemable Convertible
Preferred Stock--Series II................... -- -- -- (64,838) (64,838)
Accrual of dividends payable on the Redeemable
Convertible Preferred Stock-- Series X and
Series I..................................... -- -- -- (7,858) (7,858)
Net loss....................................... -- -- -- (671,859) (671,859)
--------- ------------ ----------- ------------ -----------
Balance at April 30, 1996...................... 4,690,560 12,458,866 (33,245) (5,706,721) 6,718,900
Exercise of stock options and warrants......... 128,178 305,837 -- -- 305,837
Change in unrealized loss on investments....... -- -- 8,326 -- 8,326
Net loss....................................... -- -- -- (1,610,467) (1,610,467)
--------- ------------ ----------- ------------ -----------
Balance at April 30, 1997...................... 4,818,738 $ 12,764,703 $ (24,919) $(7,317,188) $ 5,422,596
--------- ------------ ----------- ------------ -----------
--------- ------------ ----------- ------------ -----------
</TABLE>
See accompanying notes.
23
<PAGE>
MEDWAVE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED APRIL 30 JUNE 27, 1984
----------------------------- (INCEPTION) TO
1997 1996 APRIL 30, 1997
------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................................... $ (1,610,467) $ (671,859) $ (6,690,428)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation.................................................... 62,147 44,389 476,883
Amortization.................................................... 27,115 16,094 57,199
Loss on sale of equipment....................................... -- -- 7,375
Issuance of Common Stock for consulting services................ -- -- 3,413
Changes in operating assets and liabilities:
Accounts receivable........................................... (41,986) -- (41,986)
Inventories................................................... (105,493) (8,974) (114,467)
Prepaid expenses.............................................. 19,989 (75,157) (81,182)
Accounts payable.............................................. (5,217) 74,317 78,390
Accrued payroll............................................... 22,113 6,493 50,810
------------- -------------- --------------
Net cash used in operating activities............................. (1,631,799) (614,697) (6,253,993)
INVESTING ACTIVITIES
Purchase of property and equipment................................ (104,865) (89,693) (656,494)
Patent expenditures............................................... (27,157) (38,907) (137,858)
Purchase of investments........................................... (8,914,853) (19,952,765) (28,867,618)
Sales and maturities of investments............................... 10,843,816 14,160,320 25,005,978
Proceeds from sale of equipment................................... -- -- 18,200
------------- -------------- --------------
Net cash provided by (used in) investing activities............... 1,796,941 (5,921,045) (4,637,792)
FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock........................ 305,837 6,977,790 7,283,627
Net proceeds from issuance of Convertible Preferred
Stock........................................................... -- -- 4,848,258
------------- -------------- --------------
Net cash provided by financing activities......................... 305,837 6,977,790 12,131,885
------------- -------------- --------------
Increase in cash and cash equivalents............................. 470,979 442,048 1,240,100
Cash and cash equivalents at beginning of period.................. 769,121 327,073 --
------------- -------------- --------------
Cash and cash equivalents at end of period........................ $ 1,240,100 $ 769,121 $ 1,240,100
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
See accompanying notes.
24
<PAGE>
MEDWAVE, INC.,
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997
1. BUSINESS ACTIVITY
Medwave, Inc. (the "Company"), a development stage company, is engaged
exclusively in the development, manufacturing and marketing of a proprietary,
noninvasive system that continually monitors arterial blood pressure of adults.
The Company's medical device, the VASOTRAC-TM- system, includes as one of its
key components a unique pressure sensor that is placed on the wrist over a main
artery. Utilizing the Company's proprietary technology, the VASOTRAC-TM- system
monitors blood pressure continually, providing new readings about every fifteen
heartbeats. The continual, efficacious and noninvasive qualities of the
VASOTRAC-TM- system make it a new approach to blood pressure monitoring.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining
maturity of three months or less to be cash equivalents. Cash equivalents are
carried at cost which approximates market value.
INVESTMENTS
Short-term investments consist primarily of U.S. corporate securities and
treasury notes with maturities of less than one year. Investments with a
remaining maturity of more than one year are classified as long-term
investments.
Investments are classified as available-for-sale and are carried at fair
value with unrealized gains and losses reported as a separate component of
stockholders' equity. Realized gains and losses and declines in value judged to
be other than temporary are included in investment income along with interest
and dividends.
INVENTORIES
Inventories are valued at the lower of cost or market on the first-in,
first-out (FIFO) method. The majority of inventory consists of purchased
components.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over estimated useful lives of the assets ranging from
three to seven years.
PATENTS
Patent costs are being amortized on a straight-line basis over five years.
The Company periodically reviews its patents for impairment in value. Any
adjustment from the analysis is charged to operations.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between the financial reporting and
the tax bases of assets and liabilities.
25
<PAGE>
MEDWAVE, INC.,
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment of the product.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to operations as incurred.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of Common Stock and common stock equivalents, if dilutive, outstanding during
the periods presented after giving effect to the application of Securities and
Exchange Commission Staff Accounting Bulletin No. 83 ("SAB No. 83"). Pursuant to
SAB No. 83, all common shares issued and stock options and warrants granted by
the Company at a price less than the initial public offering price during the 12
months preceding the offering date (using the treasury stock method until shares
are issued) have been included in the calculation of common and common
equivalent shares outstanding for all periods up to the initial public offering
date.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 128, "EARNINGS PER SHARE" ("Statement"). This Statement
replaces the presentation of primary earnings per share ("EPS") with basic EPS
and also requires dual presentation of basic and diluted EPS for entities with
complex capital structures. This Statement is effective for financial statements
for periods ending after December 15, 1997. For the year ended April 30, 1997,
there is no difference between basic loss per share under Statement No. 128 and
loss per share as reported.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations in
accounting for its stock options. Under APB 25, when the exercise price of stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
26
<PAGE>
MEDWAVE, INC.,
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1997
3. INVESTMENTS
The following is a summary of the investments available-for-sale as of April
30:
<TABLE>
<CAPTION>
UNREALIZED FAIR
COST LOSSES VALUE
------------ ----------- ------------
<S> <C> <C> <C>
1997
U.S. corporate debt securities........................ $ 2,552,681 $ (12,776) $ 2,539,905
U.S. treasury and European bank notes................. 1,310,801 (12,143) 1,298,658
------------ ----------- ------------
$ 3,863,482 $ (24,919) $ 3,838,563
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED FAIR
COST LOSSES VALUE
------------ ----------- ------------
<S> <C> <C> <C>
1996
U.S. corporate debt securities........................ $ 4,769,045 $ (18,560) $ 4,750,485
U.S. treasury notes................................... 1,023,400 (14,685) 1,008,715
------------ ----------- ------------
$ 5,792,445 $ (33,245) $ 5,759,200
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
4. CAPITAL STOCK
STOCK AUTHORIZATION
In September 1995, the Company increased the authorized shares of Common
Stock from 4,285,245 to 50,000,000.
INITIAL PUBLIC OFFERING
In November 1995, the Company sold 1,610,000 shares of Common Stock in an
initial public offering from which the Company received net proceeds of
$6,900,000.
PREFERRED STOCK
Upon the conclusion of the Company's initial public offering, all
outstanding shares of Preferred Stock and accrued cumulative dividends were
converted on a one-for-one basis to Common Stock. Prior to that date, the
Company had issued 585,715 shares of no stated par value Redeemable Convertible
Preferred Stock, Series X, 406,818 shares of $1.10 Redeemable Convertible
Preferred Stock, Series I, and 1,757,631 shares of $2.25 Redeemable Convertible
Preferred Stock, Series II.
5. LEASES
The Company leases its office, research and development, sales, and
production facility under an operating lease that expires May 31, 2000.
Operating expenses including maintenance, utilities, real estate taxes and
insurance are paid by the Company. Total rent expense under operating leases was
$56,434 and $30,949 for the years ended April 30, 1997 and 1996, respectively.
27
<PAGE>
MEDWAVE, INC.,
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1997
5. LEASES (CONTINUED)
Future minimum rental payments required under leases that have remaining
terms in excess of one year as of April 30, 1997 are as follows:
<TABLE>
<S> <C>
Year ending April 30:
1998............................................................ $ 33,456
1999............................................................ 33,456
2000............................................................ 33,456
2001............................................................ 2,788
---------
$ 103,156
---------
---------
</TABLE>
6. INCOME TAXES
At April 30, 1997, the Company had net operating loss carryforwards of
approximately $6,626,000 and research and development tax credit carryforwards
of approximately $261,000. These carryforwards are available to offset future
taxable income through 2011 however, a portion of the net operating loss will
begin to expire in 2003. In addition, these carryforwards are subject to the
limitations of Internal Revenue Code Section 382 relating to certain changes in
the equity ownership of the Company.
No income taxes were paid for the years ended April 30, 1997 and 1996,
respectively.
Components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
APRIL 30
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net operating loss carryforwards................................ $ 2,650,000 $ 2,043,000
Research and development credit carryforwards................... 261,000 218,000
Less valuation allowance........................................ (2,911,000) (2,261,000)
------------- -------------
Net deferred tax assets......................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
APRIL 30
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Tax at statutory rate...................................................... 34.0% 34.0%
State income taxes......................................................... 6.0 6.0
Impact of net operating loss carryforwards................................. (40.0) (40.0)
--------- ---------
--% --%
--------- ---------
--------- ---------
</TABLE>
28
<PAGE>
MEDWAVE, INC.,
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1997
7. RESEARCH AND DEVELOPMENT COSTS
Research and development consulting revenues of $9,700 and $154,000 have
been netted against research and development costs for the years ended April 30,
1997 and 1996, respectively. These amounts were received in connection with
consulting services performed on a single doppler flowmeter project for an
unrelated entity.
8. STOCK OPTIONS AND WARRANTS
The Company has a stock option plan that includes both incentive stock
options and non-statutory stock options to be granted to certain eligible
employees or consultants of the Company. The maximum number of shares of Common
Stock currently reserved for issuance is 1,400,000 shares. A majority of the
options granted have 10 year terms and vest and become fully exercisable at the
end of 4 years of continued employment.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES OPTIONS OUTSTANDING AVERAGE
AVAILABLE ----------------------- EXERCISE PRICE
FOR GRANT PLAN NON-PLAN PER SHARE
---------- ---------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance at April 30, 1995.................. 302,500 597,500 95,000 $ 1.09
Granted.................................... (525,000) 525,000 -- 3.64
Exercised.................................. -- -- (75,000) .98
Canceled................................... 7,000 (7,000) -- 1.05
---------- ---------- -----------
Balance at April 30, 1996.................. (215,500) 1,115,500 20,000 2.30
Additional shares reserved for issuance.... 500,000 -- -- --
Granted.................................... (71,000) 71,000 -- 9.50
Exercised.................................. -- (3,800) -- .75
---------- ---------- -----------
Balance at April 30, 1997.................. 213,500 1,182,700 20,000 2.58
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
29
<PAGE>
MEDWAVE, INC.,
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1997
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about the stock options
outstanding at April 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE WEIGHTED ----------------------------
REMAINING AVERAGE WEIGHTED
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ----------- --------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$ .75 191,200 7 years $ .75 152,200 $ .75
1.25 376,460 6 years 1.25 376,460 1.25
2.00 - 2.25 264,040 8 years 2.23 132,790 2.21
3.00 60,000 8 years 3.00 15,000 3.00
5.00 - 5.25 240,000 9 years 5.11 60,000 5.11
8.00 - 9.00 21,000 10 years 8.05 -- --
10.00 - 10.50 50,000 10 years 10.11 -- --
----------- -----------
.75 - 10.50 1,202,700 7.5 years 2.58 736,450 1.65
----------- -----------
----------- -----------
</TABLE>
Options outstanding expire at various dates during the period from 2002
through 2007. The number of options exercisable as of April 30, 1997 and 1996
were 736,450 and 584,950, respectively, at weighted average exercise prices of
$1.65 and $1.25 per share, respectively.
In connection with the Convertible Preferred Stock, Series II sale in 1992,
the Company issued warrants to purchase 80,000 shares of Common Stock at an
exercise price of $2.25 per share. The warrants were fully exercised in June
1996.
In connection with bridge financing in 1991, the Company issued warrants to
purchase 109,489 shares of Common Stock at an original exercise price of $1.37
per share. The warrants originally expired on February 1, 1996. In September
1995, the Company's Board of Directors amended such warrants to extend the
exercise date to February 1, 1998 and increased the exercise price from $1.37
per share to $1.87 per share. Warrants for the purchase of 44,378 and 51,896
shares were exercised during fiscal 1997 and 1996, respectively. There are a
total of 13,215 warrants remaining to be exercised.
In connection with the IPO, the Company issued warrants to purchase 140,000
shares of Common Stock at an exercise price of $6.00 per share. The warrants
expire in the year 2000.
PRO FORMA DISCLOSURES
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions for 1997 and
1996: risk-free interest
30
<PAGE>
MEDWAVE, INC.,
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1997
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
rates ranging from 5.29% to 6.03%, respectively; dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock of
.57 and a weighted-average expected life of the option of 4 years.
The weighted-average fair value of options granted during the years ended
April 30, 1997 and 1996 was $4.65 and $1.78 per share, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
APRIL 30
--------------------------
1997 1996
------------- -----------
<S> <C> <C>
Pro forma net loss................................................ $ (1,910,295) $ (812,778)
Pro forma net loss per common share............................... (.40) (.21)
</TABLE>
The pro forma effect on net loss for fiscal 1997 and 1996 is not
representative of the pro forma effect on net loss in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to fiscal 1996.
31
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the
directors and executive officers of the Company as of July 17, 1997. A summary
of the background and experience of each of these individuals is set forth after
the table.
The directors and executive officer of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- --------------------------------------
<S> <C> <C>
G. Kent Archibald.............................. 56 President, Chief Executive Officer,
Secretary, and Director
Mark T. Bakko.................................. 37 Chief Financial Officer
Norman Dann(1)................................. 69 Director
Todd A. Erdmann................................ 40 Vice President Sales & Marketing
Jerry E. Robertson, Ph.D.(1)................... 63 Director
</TABLE>
- ------------------------
(1) Member of the Audit and Compensation Committees
All directors hold office until the next annual meeting of shareholders or
until their successors have been duly elected and qualified. Executive officers
of the Company are appointed by and serve at the discretion of the Board of
Directors. There are no family relationships among the directors and executive
officers. The Board of Directors has an Audit Committee, which (i) reviews the
Company's annual financial statements, (ii) makes recommendations regarding the
Company's independent auditors and scope of auditor services, (iii) reviews the
adequacy of accounting and audit policies, compliance assurance procedures and
internal controls, (iv) reviews non-audit service performed by auditors to
maintain auditor's service performed by auditors to maintain auditors'
independence, and (v) reports to the Board on the adequacy of disclosures and
adherence to accounting principles. The Board of Directors also has formed a
Compensation Committee, which (i) reviews compensation philosophy and major
compensation benefits for executives, (ii) administers the Company's Stock
Option Plan, and (iii) approves executive officers' compensation.
G. KENT ARCHIBALD is the President, Chief Executive Officer, Secretary, and
a director of the Company. He has served in these positions since October 1991.
From 1988 to 1991, Mr. Archibald was a private consultant and investor. From
1978 to 1984, Mr. Archibald was founder, president and director of AVI, Inc., a
medical device company acquired by 3M Company's Medical Products Division in
1984. After this acquisition, Mr. Archibald served until 1988 as a general
manager and engineering director for 3M. Prior to his involvement with AVI,
Inc., Mr. Archibald held engineering positions at 3M, Control Data Corporation,
and The Boeing Company, Inc. Mr. Archibald holds a B.S. degree in electrical
engineering and is a professional engineer in the State of Minnesota. He serves
as a director of RayMedica, Inc.
MARK T. BAKKO is the Chief Financial Officer of the Company. He has served
in this position since February 1997. From 1984 to 1997, Mr. Bakko was with
Deloitte & Touche LLP with his most recent position being a senior manager. Mr.
Bakko has been a Certified Public Accountant since 1985 in the State
32
<PAGE>
of Minnesota. Mr. Bakko holds a Masters of Business Taxation and B.S.B.A. degree
in Accounting from the University of Minnesota.
NORMAN DANN, a director of the Company since August 1995, has extensive
experience in the medical device industry. Since 1992, Mr. Dann has been a
business consultant concentrating in the areas of venture capital, strategic
planning, marketing and product development. Mr. Dann also currently serves as a
director of Minntech Corporation, and several private companies. From 1980 to
1992, Mr. Dann served as an executive officer of and consultant to Pathfinder
Ventures, Inc., a venture capital firm ("Pathfinder"), and served as a general
partner of three of Pathfinder's funds and partnerships. From 1971 to 1977, Mr.
Dann served as Vice President of Sales and Marketing and Senior Vice President
of Development with Medtronic, Inc., a leading manufacturer of cardiac
pacemakers and other medical products. In 1960, Mr. Dann founded The Dann
Company, an independent representative and service organization for medical
products which was acquired by Medtronic, Inc. in 1971. Mr. Dann holds a B.S.
degree in industrial engineering from Pennsylvania State University.
TODD A. ERDMANN is the Vice President of Sales and Marketing of the Company.
He has served in this position since December 1995. Prior to joining Medwave,
Mr. Erdmann served as Vice President of Sales and Marketing for Nihon Kohden
America, Inc., a leading manufacturer of EEG and patient monitoring systems.
From 1981 to 1994, Mr. Erdmann served in various senior management position with
Siemens Medical Systems Inc., a leading manufacturer of patient monitoring
systems and other medical products. Mr. Erdmann attended the UW Parkside in
Racine, Wisconsin.
JERRY E. ROBERTSON, Ph.D., has been a director of the Company since August
1995. Dr. Robertson also currently serves as a director of the following
publicly traded companies: Manor Care, Inc., Cardinal Health, Inc., CHOICE
Hotels International, Inc., Haemonetics Corporation, Coherent, Inc., Steris
Corporation, and Allianz Life Insurance Company of North America. Dr. Robertson
also serves as a director of Project HOPE, a nonprofit organization which
provides medical services throughout the world. From 1963 to 1994, Dr. Robertson
served in various supervisory, management, and executive positions with 3M
Company. He served as executive vice president of 3M's Life Sciences Sector and
Corporate Services from 1984 to 1994 and a member of 3M's Board of Directors
from 1990 to 1994. Prior to that time, Dr. Robertson served in various
capacities in the areas of surgical and medical products, chemical and synthetic
medicinal research, and technical planning and coordination. Dr. Robertson holds
a Ph.D. in organic chemistry.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who beneficially own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors, and greater than 10% shareholders
are required by Exchange Act regulations to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Form 5 was
required for such persons, the Company believes that during the fiscal year
ending April 30, 1997, all filing requirements applicable to its officers,
directors, and greater than 10% beneficial owners were complied with.
33
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth certain information regarding compensation
earned or awarded to G. Kent Archibald, the President and Chief Executive
Officer and Todd A. Erdmann, the Vice President of Sales & Marketing of the
Company during the Company's last three fiscal years ended April 30, 1995, 1996,
and 1997. No other executive officer of the Company received total salary and
bonus compensation in excess of $100,000 for fiscal year ending 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------
ANNUAL COMPENSATION SECURITIES
-------------------------------- UNDERLYING OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (# OF SHARES)(1) COMPENSATION
- -------------------------------------------------- --------- ---------- --------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
G. Kent Archibald,................................ 1997 $ 150,000 -- -- $ 4,500(2)
President and Chief Executive Officer 1996 110,425 -- 175,000 1,312(2)
1995 54,840 -- 85,000 --
Todd A. Erdmann,.................................. 1997 $ 162,669 -- -- $ 3,206(2)
Vice President Sales & Marketing 1996 60,288 -- 175,000 --
1995 -- -- -- --
</TABLE>
- ------------------------
(1) Number of shares of Common Stock subject to options that were granted during
the year.
(2) Reflects the Company's contribution to executive's individual retirement
account under the Company's Simplified Employee Pension Plan.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No options were granted during fiscal year 1997 to the named Executive
Officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth certain information concerning each exercise
of stock options during the year ended April 30, 1997 by each of the Named
Executive Officers and the aggregated fiscal year-end value of the unexercised
options of each such Named Executive Officer.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- --------------- ------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
G. Kent Archibald........... -0- $ -0- 303,750 131,250 $ 2,580,625 $ 984,375
Todd A. Erdmann............. -0- -0- 43,750 131,250 205,188 615,563
</TABLE>
COMPENSATION OF DIRECTORS
Directors are not currently paid fees for attending meetings. In connection
with the election of Messrs. Dann and Robertson to the Board of Directors, the
Board of Directors in August 1995 granted to each of Messrs. Dann and Robertson
ten-year non-qualified options to purchase 30,000 shares of Common Stock, at an
exercise price of $3.00 per share, vesting over a four-year period.
Although the Company has non-compete and confidentiality agreements with its
employees, the Company does not have an employment agreement with, or key-man
life insurance on, Mr. Archibald or any other individual.
34
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of shares of Common
Stock of the Company on July 17, 1997 by each director and Named Executive
Officer, by all directors and executive officers as a group and by all persons
known by the Company to be beneficial owners of more than 5% of the Company's
Common Stock. Except as otherwise indicated, each of the shareholders listed in
the table or included within a group listed in the table possesses sole voting
and investment power with respect to the shares indicated.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OWNED(1) OWNERSHIP
- -------------------------------------------------------------- ----------------- -----------
<S> <C> <C>
G. Kent Archibald ............................................ 501,743(2) 9.7%
4382 Round Lake Road West
Arden Hills, MN 55112
Norman Dann .................................................. 15,000(3) *
4382 Round Lake Road West
Arden Hills, MN 55112
Todd A. Erdmann .............................................. 49,400(5) *
4382 Round Lake Road West
Arden Hills, MN 55112
Jerry E. Robertson ........................................... 15,000(3) *
3050 Minnesota Word Trade Center
30 Seventh Street East
St. Paul, MN 55108
David B. Johnson ............................................. 472,037(4) 9.6%
5500 Wayzata Boulevard
8th Floor--Suite 800
Minneapolis, MN 55416
All Executive Officers and Directors as a Group (5 persons)... 591,143(6) 11.3%
</TABLE>
- ------------------------
* Less than 1%
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or member of a group to acquire them within 60 days are treated
as outstanding only when determining the amount and percentage owned by such
person or group.
(2) Includes Options to purchase 347,500 shares of Common Stock which are
currently exercisable or will become exercisable within 60 days of the date
hereof.
(3) Such shares are not outstanding but may be purchased upon exercise of
options which are currently exercisable or will become exercisable within 60
days of the date hereof.
(4) Includes 28,500 shares held by Mr. Johnson's spouse and minor children, over
which he may be deemed to share voting and disposition power, and warrants
to purchase 82,658 shares of Common Stock which are currently exercisable or
will become exercisable within 60 days of the date hereof.
(5) Includes 872 shares owned by Mr. Erdmann's wife, over which he may be deemed
to share voting and investment power and an option to purchase 43,750 shares
of Common Stock which are currently exercisable or will become exercisable
within 60 days of the date hereof.
(6) Includes options to purchase 448,750 shares of Common Stock which are
currently exercisable or will become exercisable within 60 days of the date
hereof.
35
<PAGE>
ITEM 12. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.
There are no related party transactions.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See Exhibit Index on page following signatures.
(b) Reports on Form 8-K
None
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MEDWAVE, INC.
a Minnesota Corporation
Date: July 23, 1997
By /s/ G. KENT ARCHIBALD
-----------------------------------------
G. Kent Archibald
PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
President, CEO, and
/s/ G. KENT ARCHIBALD Director
- ------------------------------ (principal executive July 23, 1997
G. Kent Archibald officer)
/s/ MARK T. BAKKO Chief Financial Officer
- ------------------------------ (principal financial and July 23, 1997
Mark T. Bakko accounting officer)
/s/ NORMAN DANN
- ------------------------------ Director July 23, 1997
Norman Dann
- ------------------------------ Director July 23, 1997
Jerry E. Robertson, Ph.D.
37
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
MEDWAVE, INC.
EXHIBIT INDEX
TO
FORM 10-KSB FOR FISCAL YEAR ENDED APRIL 30, 1997
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation--incorporated by reference
to Exhibit 3.2 to the Registrant's Registration Statement on Form SB-2,
Reg. No. 33-96878C*
3.2 Amended and Restated Bylaws--incorporated by reference to Exhibit 3.4 to
the Registrant's Registration Statement on Form SB-2, Reg. No.
33-96878C*
10.1 Agreement of Lease dated February 22, 1996 between the Company and
Distribution Systems and Service Corporation and Scholl's
Inc.--incorporated by reference to Exhibit 10.1 to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended April 30, 1996*
10.2** Amended and Restated Medwave Stock Option Plan (as amended through
November 19, 1995) and forms of Incentive and Nonstatutory Stock Option
Agreements thereunder-- incorporated by reference to Exhibit 10.2 to the
Registrant's Annual Report on From 10-KSB for the fiscal year ended
April 30, 1996*
10.3 Agreement of Lease dated April 10, 1997 between the Company and The Remada
Companies
11.1 Statement of Computation of Net Loss Per Share
23.2 Consent of Ernst & Young LLP
27 Financial data Schedule (filed in electronic format only)
</TABLE>
- ------------------------
* Incorporated by reference to a previously filed report or document, SEC File
No. 0-28010 unless otherwise indicated
** Indicates a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-KSB
38
<PAGE>
EXHIBIT 10.3
OFFICE/WAREHOUSE LEASE
THIS INDENTURE of lease, dated this 10th day of April 1997, by and between
Round Lake LLC hereinafter referred to as "Lessor", and Medwave, Inc., a
Minnesota corporation hereinafter referred to as "Lessee".
DEFINITIONS:
"Premises"--That certain real property located in the City of Arden Hills,
County of Ramsey and State of Minnesota and legally described on Exhibit "A"
attached hereto and made a part hereof, including all buildings and site
improvements located thereon.
"Building"--That certain office/warehouse building containing
approximately 74,265 square feet located upon the Premises and commonly
described as 4354-4396 Round Lake Road West, Arden Hills, MN (Round Lake
Business Center)
"Demised Premises"--That certain portion of the Building located at
4382-84 Round Lake Road West and designated as Bays 5 through 6, consisting
of approximately 5,964 square feet (2,400 square feet of office space and
3,564 square feet of warehouse space), as measured from the outside walls of
the Demised Premises to the center of the partition wall. The Demised
Premises include a non-exclusive easement for access to common areas, as
hereinafter defined, and all licenses and easements appurtenant to the
Demised Premises.
"Common Areas"--The term "common area" means the entire areas to be used
for the non-exclusive use by Lessee and other lessees in the Building,
including, but not limited to, corridors, lavatories, driveways, truck docks,
parking lots and landscaped areas. Subject to reasonable rules and
regulations promulgated by Lessor, the common areas are hereby made available
to Lessee and its employees, agents, customers, and invitees for reasonable
use in common with other lessees, their employees, agents, customers and
invitees.
WITNESSETH:
TERM:
1. For and in consideration of the rents, additional rents, terms,
provisions and covenants herein contained, Lessor hereby lets, leases and
demises to Lessee the Demised Premises for the term of 36 months commencing
on the first day of June, 1997 (sometimes called "the Commencement Date") and
expiring the last day of May, 2000 (sometimes called "Expiration Date"),
unless sooner terminated as hereinafter provided.
BASE RENT:
2. Lessor reserves and Lessee shall pay Lessor, a total rental of One
Hundred Thousand Three Hundred Sixty Eight Dollars ($100,368.00), payable in
advance, in equal monthly installments of Two Thousand Seven Hundred Eighty
Eight Dollars ($2,788.00), commencing on the Commencement Date and continuing
on the first day of each and every month thereafter for the next succeeding
months during the balance of the term (sometimes called "Base Rent"). In the
event the Commencement Date falls on a date other than the first of a month
the rental for that month shall be prorated and adjusted accordingly.
ADDITIONAL RENT:
3. Lessee shall pay to Lessor throughout the term of this Lease the
following:
a. Lessee shall pay a sum equal to eight & 03/100 percent (8.03%) of the
Real Estate taxes. The term "Real Estate Taxes" shall mean all real estate
taxes, all assessments and any taxes in lieu thereof which may be levied upon
or assessed against the Premises of which the Demised Premises are a part.
Lessee, in addition to all other payments to Lessor by Lessee required
hereunder shall pay to Lessor, in each year during the term of this Lease
and any extension or renewal thereof, Lessee's proportionate share of such
real estate taxes and assessments paid in the first instance by Lessor.
Any tax year commencing during any lease year shall be deemed to
correspond to such lease year. In the event the taxing authorities include in
such real estate taxes and assessments the value of any improvements made by
Lessee, or of machinery, equipment, fixtures, inventory or other personal
property or assets of Lessee, then Lessee shall pay all the taxes
attributable to such items in addition to its proportionate share of said
aforementioned real estate taxes and assessments. A photostatic copy of the
tax statement submitted by Lessor to Lessee shall be sufficient evidence of
the amount of taxes and assessments assessed or levied against the Premises
of which the Demised Premises are a part.
b. A sum equal to eight & 03/100 percent (8.03%) of the annual aggregate
operating expenses incurred by Lessor in the operation, maintenance and
repair of the Premises. The term "Operating Expenses" shall include but not
be limited to maintenance, repair, replacement and care of all common area
lighting, common area plumbing and roofs, parking and landscaped areas,
signs, snow removal, non-structural repair and maintenance of the exterior of
the Building, insurance premiums, management fee, wages and fringe benefits
of personnel employed for such work, costs of equipment purchased and used
for such purposes, and the cost or portion thereof properly allocable to the
Premises (amortized over such reasonable period as lessor shall determine
together with the interest at the rate of 12% per annum on the unamortized
balance) of any capital improvements made to the Building by Lessor after the
Base Year which result in a reduction of Operating Expenses or made to the
Building by Lessor after the date of this Lease that are required under any
governmental law or regulation that was not applicable to the Building at the
time it was constructed.
c. In no event shall the total adjusted monthly rent be less than Two
Thousand Seven Hundred Eighty Eight----Dollars ($2788.00) per month during the
term of this Lease.
The payment of the sums set forth in this Article 3 shall be in addition
to the Base Rent payable pursuant to Article 2 of this Lease. All sums due
hereunder shall be due and payable within thirty (30) days of delivery of
written certification by Lessor setting forth the computation of the amount
due from Lessee. In the event the lease term shall begin or expire at any
time during the calendar year, the Lessee shall be responsible for his pro-
rata share of Additional Rent under subdivisions a. and b. during the Lease
and/or occupancy time.
Prior to commencement of this Lease, and prior to the commencement of each
calendar year thereafter commencing during the term of this Lease or any
renewal or extension thereof, Lessor may estimate for each calendar year (i)
the total amount of Real Estate Taxes; (ii) the total amount of Operating
Expenses; (iii) Lessee's share of Real Estate Taxes for such calendar year;
(iv) Lessee's share of Operating Expenses for such calendar year; and (v) the
computation of the annual and monthly rental payable during such calendar
year as a result of increases or decreases in Lessee's share of Real Estate
Taxes, and Operating Expenses. Said estimates will be in writing and will be
delivered or mailed to Lessee.
The amount of Lessee's share of Real Estate Taxes, and Operating Expenses
for each calendar year, so estimated, shall be payable as Additional Rent, in
equal monthly installments, in advance, on the first day of each month during
such calendar year at the option of Lessor. In the event that such estimate
is delivered to Lessee before the first day of January of such calendar year,
said amount, so estimated, shall be payable as additional rent in equal
monthly installments, in advance, on the first day of each month during such
calendar year. In the event that such estimate is delivered to Lessee after
the first day of January of such calendar year, said amount, so estimated,
shall be payable as additional rent in equal monthly installments, in
advance, on the first day of each month over the balance of such calendar
year, with the number of installments being equal to the number of full
calendar months remaining in such calendar year.
1
<PAGE>
Upon completion of each calendar year during the term of this Lease or any
renewal or extension thereof, Lessor shall cause its accountants to determine
the actual amount of the Real Estate Taxes, and Operating Expenses payable in
such calendar year and Lessee's share thereof and deliver a written
certification of the amounts thereof to Lessee. If Lessee has underpaid its
share of Real Estate Taxes, or Operating Expenses for such calendar year, Lessee
shall pay the balance of its share of same within ten (10) days after the
receipt of such statement. If Lessee has overpaid its share of Real Estate
Taxes, or Operating Expenses for such calendar year, Lessor shall either (i)
refund such excess, or (ii) credit such excess against the most current monthly
installment or installments due Lessor for its estimate of Lessee's share of
Real Estate Taxes, and Operating Expenses for the next following calendar year.
A prorata adjustment shall be made for a fractional calendar year occurring
during the term of this Lease or any renewal or extension thereof based upon the
number of days of the term of the Lease during said calendar year as compared to
three hundred sixty-five (365) days and all additional sums payable by Lessee or
credits due Lessee as a result of the provisions of this Article 3 shall be
adjusted accordingly.
COVENANT TO PAY RENT:
4. The covenants of Lessee to pay the Base Rent and the Additional Rent
are each independent of any other covenant, condition, provision or agreement
contained in this Lease. All rents are payable to Lessor at The Remada Company,
7630 West 78th Street, Bloomington, MN 55439.
UTILITIES:
5. Lessor shall provide mains and conduits to supply water, gas,
electricity and sanitary sewage to the Premises. Lessee shall pay, when due,
all charges for sewer usage or rental, garbage disposal, refuse removal, water,
electricity, gas, fuel oil, L.P. gas, telephone and/or other utility services or
energy source furnished to the Demised Premises during the term of this Lease,
or any renewal or extension thereof. If Lessor elects to furnish any of the
foregoing utility services or other services furnished or caused to be furnished
to Lessee, then the rate charged by Lessor shall not exceed the rate Lessee
would be required to pay to a utility company or service company furnishing any
of the foregoing utilities or services. The charges thereof shall be deemed
additional rent in accordance with Article 3.
CARE AND REPAIR OF DEMISED PREMISES:
6. Lessee shall, at all times throughout the term of this Lease, including
renewals and extension, and at its sole expense, keep and maintain the Demised
Premises in a clean, safe, sanitary and first class condition and in compliance
with all applicable laws, codes, ordinances, rules and regulations. Lessee's
obligations hereunder shall include but not be limited to the maintenance,
repair and replacement, if necessary, of heating, air conditioning fixtures,
equipment, and systems, all lighting and plumbing fixtures and equipment,
fixtures, motors and machinery, all interior walls, partitions, doors and
windows, including the regular painting thereof, all exterior entrances,
windows, doors and docks and the replacement of all broken glass. When used in
this provision, the term "repairs" shall include replacements or renewals when
necessary, and all such repairs made by the Lessee shall be equal in quality and
class to the original work. The Lessee shall keep and maintain all portions of
the Demised Premises and the sidewalk and areas adjoining the same in a clean
and orderly condition, free of accumulation of dirt, rubbish, snow and ice.
If Lessee fails, refuses or neglects to maintain or repair the Demised
Premises as required in this Lease after notice shall have been given Lessee, in
accordance with Article 33 of this Lease, Lessor may make such repairs without
liability to Lessee for any loss or damage that may accrue to Lessee's
merchandise, fixtures or other property or to Lessee's business by reason
thereof, and upon completion thereof, Lessee shall pay to Lessor all costs plus
15% for overhead incurred by Lessor in making such repairs upon presentation to
Lessee of bill therefor.
Lessor shall repair, at its expense, the structural portions of the
Building, provided however where structural repairs are required to be made by
reason of the acts of Lessee, the costs thereof shall be borne by Lessee and
payable by Lessee to Lessor upon demand.
The Lessor shall be responsible for all outside maintenance of the Demised
Premises, including grounds and parking areas. All such maintenance which is
the responsibility of the Lessor shall be provided as reasonably necessary to
the comfortable use and occupancy of Demised Premises during business hours,
except Saturdays, Sundays and holidays, upon the condition that the Lessor shall
not be liable for damages for failure to do so due to causes beyond its control.
SIGNS:
7. Any sign, lettering, picture, notice or advertisement installed on or
in any part of the Premises and visible from the exterior of the Building, or
visible from the exterior of the Demised Premises, shall be approved by Lessor
and installed at Lessee's expense. In the event of a violation of the foregoing
by Lessee, Lessor may remove the same without any liability and may charge the
expense incurred by such removal to Lessee.
ALTERATIONS, INSTALLATION, FIXTURES:
8. Except as hereinafter provided, Lessee shall not make any alteration,
additions, or improvements in or to the Demised Premises or add, disturb or in
any way change any plumbing or wiring therein without the prior written consent
of the Lessor. In the event alterations are required by any governmental agency
by reason of the use and occupancy of the Demised Premises by Lessee, Lessee
shall make such alterations at its own cost and expense after first obtaining
Lessor's approval of plans and specifications therefor and furnishing such
indemnification as Lessor may reasonably require against liens, costs, damages
and expenses arising out of such alterations. Alterations or additions by
Lessee must be built in compliance with all laws, ordinances and governmental
regulations affecting the Premises and Lessee shall warrant to Lessor that all
such alterations, additions, or improvements shall be in strict compliance with
all relevant laws, ordinances, governmental regulations, and insurance
requirements. Construction of such alterations or additions shall commence only
upon Lessee obtaining and exhibiting to Lessor the requisite approvals, licenses
and permits and indemnification against liens. All alterations, installations,
physical additions or improvements to the Demised Premises made by Lessee shall
at once become the property of Lessor and shall be surrendered to Lessor upon
the termination of this Lease; provided, however, this clause shall not apply to
movable equipment or furniture owned by Lessee which may be removed by Lessee at
the end of the term of this Lease if Lessee is not then in default.
POSSESSION:
9. Except as hereinafter provided Lessor shall deliver possession of the
Demised Premises to Lessee in the condition required by this Lease on or before
the Commencement Date, but delivery of possession prior to or later than such
Commencement Date shall not affect the expiration date of this Lease. The
rentals herein reserved shall commence on the date when possession of the
Demised Premises is delivered by Lessor to Lessee. Any occupancy by Lessee
prior to the beginning of the term shall in all respects be the same as that of
a Lessee under this Lease. Lessor shall have no responsibility or liability for
loss or damage to fixtures, facilities or equipment installed or left on the
Demised Premises. If Demised Premises are not ready for occupancy by
Commencement Date and possession is later than Commencement Date, rent shall
begin on date of possession.
SECURITY AND DAMAGE DEPOSIT:
10. Lessee contemporaneously with the execution of this Lease, has
deposited with Lessor the sum of Four Thousand One Hundred Seventy Four and
63/100----- Dollars ($4174.63), receipt of which is acknowledged hereby by
Lessor, which deposit is to be held by Lessor, without liability for interest,
as a security and damage deposit for the faithful performance by Lessee during
the term hereof or any extension hereof. Prior to the time when Lessee shall be
entitled to the return of this security deposit, Lessor may commingle such
deposit with Lessor's own funds and to use such security deposit for such
purpose as Lessor may determine. In the event of the failure of Lessee to keep
and perform any of the terms, covenants and conditions of this Lease to be kept
and performed by Lessee during the term hereof or any extension hereof, then
Lessor, either with or without terminating this Lease, may (but shall not be
required to) apply such portion of said deposit as may be necessary to
compensate or repay Lessor for all losses or damages sustained or to be
sustained by Lessor due to such breach on the part of Lessee, including, but not
limited to overdue and unpaid rent, any other sum payable by Lessee to Lessor
pursuant to the provisions of this Lease, damages or deficiencies in the
reletting of Demised Premises, and reasonable attorney's fees incurred by
Lessor. Should the entire deposit or any portion thereof, be appropriated and
applied by Lessor, in accordance with the provisions of this paragraph, Lessee
upon written demand by Lessor, shall remit forthwith to Lessor a sufficient
amount of cash to restore said security deposit to the original sum deposited,
and Lessee's failure to do so within five (5) days after receipt of such demand
shall constitute a breach of this Lease. Said security deposit shall be
returned to Lessee, less any depletion thereof as the result of the provisions
of this paragraph, at the end of the term of this Lease or any renewal thereof,
or upon the earlier termination of this Lease. Lessee shall have no right to
anticipate return of said deposit by withholding any amount required to be paid
pursuant to the provision of this Lease or otherwise.
In the event Lessor shall sell the Premises, or shall otherwise convey or
dispose of its interest in this Lease, Lessor may assign said security deposit
or any balance thereof to Lessor's assignee, whereupon Lessor shall be released
from all liability for the return or repayment of such security deposit and
Lessee shall look solely to the said assignee for the return and repayment of
said security deposit. Said security deposit shall not be assigned or
encumbered by Lessee without such consent of Lessor, and any assignment or
encumbrance without such consent shall not bind Lessor. In the event of any
rightful and permitted assignment or this Lease by Lessee, said security deposit
shall be deemed to be held by Lessor as a deposit made by the assignee, and
Lessor shall have no further liability with respect to the return of said
security deposit to the Lessee.
USE:
11. The Demised Premises shall be used and occupied by Lessee solely for
the purposes of engineering, light assembly, storage and office functions so
long as such use is in compliance with all applicable laws, ordinances
2
<PAGE>
and governmental regulations affecting the Building and Premises. The
Demised Premises shall not be used in such manner that, in accordance with
any requirement of law or of any public authority, Lessor shall be obliged on
account of the purpose or manner of said use to make any addition or
alteration to or in the Building. The Demised Premises shall not be used in
any manner which will increase the rates required to be paid for public
liability or for fire and extended coverage insurance covering the Premises.
Lessee shall occupy the Demised Premises conduct its business and control its
agents, employees, invitees and visitors in such a way as is lawful, and
reputable and will not permit or create any nuisance, noise, odor, or
otherwise interfere with, annoy or disturb any other Lessee in the Building
in its normal business operations or Lessor in its management of the
Building. Lessee's use of the Demised Premises shall conform to all the
Lessor's rules and regulations relating to the use of the Premises. Outside
storage on the Premises of any type of equipment, property or materials owned
or used on the Premises by Lessee or its customers and suppliers shall not be
permitted.
ACCESS TO DEMISED PREMISES:
12. The Lessee agrees to permit the Lessor and the authorized
representatives of the Lessor to enter the Demised Premises at all times
during usual business hours for the purpose of inspecting the same and making
any necessary repairs to the Demised Premises and performing any work therein
that may be necessary to comply with any laws, ordinances, rules, regulations
or requirements of any public authority or of the Board of Fire Underwriters
or any similar body or that the Lessor may deem necessary to prevent waste or
deterioration in connection with the Demised Premises. Nothing herein shall
imply any duty upon the part of the Lessor to do any such work which, under
any provision of this Lease, the Lessee may be required to perform and the
performance thereof by the Lessor shall not constitute a waiver of the
Lessee's default in failing to perform the same. The Lessor may, during the
progress of any work in the Demised Premises, keep and store upon the Demised
Premises all necessary materials, tools and equipment. The Lessor shall not
in any event be liable for inconvenience, annoyance, disturbance, loss of
business, or other damage of the Lessee by reason of making repairs or the
performance or any work in the Demised Premises, or on account of bringing
materials, supplies and equipment into or through the Demised Premises during
the course thereof and the obligations of the Lessee under this Lease shall
not thereby be affected in any manner whatsoever.
Lessor reserves the right to enter upon the Demised Premises at any time in
the event of an emergency and at reasonable hours to exhibit the Demised
Premises to prospective purchasers or others; and to exhibit the Demised
Premises to prospective Lessees and to the display "For Lease" or similar signs
on windows or doors in the Demised Premises during the last one hundred twenty
(120) days of the term of this Lease, all without hindrance or molestation by
Lessee.
EMINENT DOMAIN:
13. In the event of any eminent domain or condemnation proceeding or
private sale in lieu thereof in respect to the Premises during the term thereof,
the following provisions shall apply:
a. If the whole of the Premises shall be acquired or condemned by
eminent domain for any public or quasipublic use or purpose, then the term of
this Lease shall cease and terminate as of the date possession shall be taken in
such proceeding and all rentals shall be paid up to that date.
b. If any part constituting less than the whole of the Premises
shall be acquired or condemned as aforesaid, and in the event that such partial
taking or condemnation shall materially affect the Demised Premises so as to
render the Demised Premises unsuitable for the business of the Lessee, in the
reasonable opinion of Lessor, then the term of this Lease shall cease and
terminate as of the date possession shall be taken by the condemning authority
and rent shall be paid to the date of such termination.
In the event of a partial taking or condemnation of the Premises which
shall not materially affect the Demised Premises so as to render the Demised
Premises unsuitable for the business of the Lessee, in the reasonable opinion of
the Lessor, this Lease shall continue in full force and effect but with a
proportionate abatement of the Base Rent and Additional Rent based on the
portion, if any, of the Demised Premises taken. Lessor reserves the right, at
its option, to restore the Building and the Demised Premises to substantially
the same condition as they were prior to such condemnation. In such event,
Lessor shall give written notice to Lessee, within thirty (30) days following
the date possession shall be taken by the condemning authority, of Lessor's
intention to restore. Upon Lessor's notice of election to restore, Lessor shall
commence restoration and shall restore the Building and the Demised Premises
with reasonable promptness, subject to delays beyond Lessor's control and delays
in the making of condemnation or sale proceeds adjustments by Lessor; and Lessee
shall have no right to terminate this Lease except as herein provided. Upon
completion of such restoration, the rent shall be adjusted based upon the
portion, if any, of the Demised Premises restored.
c. In the event of any condemnation or taking as aforesaid, whether
whole or partial, the Lessee shall not be entitled to any part of the award paid
for such condemnation and Lessor is to receive the full amount of such award,
the Lessee hereby expressly waiving any right to claim to any part thereof.
d. Although all damages in the event of any condemnation shall
belong to the Lessor whether such damages are awarded as compensation for
diminution in value of the leasehold or to the fee of the Demised Premises.
Lessee shall have the right to claim and recover from the condemning
authority, but not from Lessor, such compensation as may be separately
awarded or recoverable by Lessee in Lessees own right on account of any and
all damage to Lessees business by reason of the condemnation and for or on
account of any cost or loss to which Lessee might be put in removing Lessees
merchandise, furniture, fixtures, leasehold improvements and equipment.
However, Lessee shall have no claim against Lessor or make any claim with the
condemning authority for the loss of its leasehold estate, any unexpired term
or loss of any possible renewal or extension of said lease or loss of any
possible value of said lease, any unexpired term, renewal or extension of
said Lease.
DAMAGE OR DESTRUCTION:
14. In the event of any damage or destruction to the Premises by fire or
other cause during the term hereof, the following provisions shall apply:
a. If the Building is damaged by fire or any other cause to such
extent that the cost of restoration, as reasonably estimated by Lessor, will
equal or exceed thirty percent (30%) of the replacement value of the Building
(exclusive of foundations) just prior to the occurrence of the damage, then
Lessor may, no later than the sixtieth (60th) day following the damage, give
Lessee written notice of Lessor's election to terminate this Lease.
b. If the cost of restoration as estimated by Lessor will equal or
exceed fifty percent (50%) of said replacement value of the Building and if the
Demised Premises are not suitable as a result of said damage for the purposes
for which they are demised hereunder, in the reasonable opinion of Lessee, then
Lessee may, no later than the sixtieth (60th) day following the damage, give
Lessor a written notice of election to terminate this Lease.
c. If the cost of restoration as estimated by Lessor shall amount to
less than thirty percent (30%) of said replacement value of the Building, or if,
despite the cost, Lessor does not elect to terminate this Lease, Lessor shall
restore the Building and the Demised Premises with reasonable promptness,
subject to delays beyond Lessor's control and delays in the making of insurance
adjustments by Lessor; and Lessee shall have no right to terminate this Lease
except as herein provided. Lessor shall not be responsible for restoring or
repairing leasehold improvements of the Lessee.
d. In the event of either of the elections to terminate, this Lease
shall be deemed to terminate on the date of the receipt of the notice of
election and all rentals shall be paid up to that date. Lessee shall have no
claim against Lessor for the value of any unexpired term of this Lease.
e. In any case where damage to the Building shall materially
affect the Demised Premises so as to render them unsuitable in whole or in
part for the purposes for which they are demised hereunder, then, unless such
destruction was wholly or partially caused by the negligence or breach of the
terms of this Lease by Lessee, its employees, contractors or licensees, a
portion of the rent based upon the amount of the extent to which the Demised
Premises are rendered unsuitable shall be abated until repaired or restored.
If the destruction or damage was wholly or partially caused by negligence or
breach of the terms of this Lease by Lessee as aforesaid and if Lessor shall
elect to rebuild, the rent shall not abate and the Lessee shall remain liable
for the same.
CASUALTY INSURANCE:
15. a. Lessor shall at all times during the term of this Lease, at its
expense, maintain a policy or policies of insurance with premiums paid in
advance issued by an insurance company licensed to do business in the State of
Minnesota insuring the Building against loss or damage by fire, explosion or
other insurable hazards and contingencies for the full replacement value,
provided that Lessor shall not be obligated to insure any furniture, equipment,
machinery, goods or supplies not covered by this Lease which Lessee may bring
upon the Demised Premises or any additional improvements which Lessee may
construct or install on the Demised Premises.
b. Lessee shall not carry any stock of goods or do anything in or
about the Demised Premises which will in any way impair or invalidate the
obligation of the insurer under any policy of insurance required by this Lease.
c. Lessor hereby waives and releases all claims, liabilities and
causes of action against Lessee and its agents, servants and employees for loss
or damage to, or destruction of, the Premises or any portion thereof, including
the buildings and other improvements situated thereon, resulting from fire,
explosion and other perils included in standard extended coverage insurance,
whether caused by the negligence of any of said persons or otherwise. Likewise,
Lessee hereby waives and releases all claims, liabilities and causes of action
against Lessor and its agents, servants and employees for loss or damage to, or
destruction of, any of the improvements, fixtures, equipment, supplies,
merchandise and other property, whether that of Lessee or of others in, upon or
about the Premises resulting from fire, explosion or the other perils included
in standard extended coverage insurance, whether caused by the negligence of any
of said persons or otherwise. The waiver shall remain in force whether or not
the Lessee's insurer shall consent thereto.
d. In the event that the use of the Demised Premises by Lessee
increases the premium rate for insurance carried by Lessor on the improvements
of which the Demised Premises are a part, Lessee shall pay Lessor, upon demand
the amount of such premium increase. If Lessee installs any electrical
equipment that overloads the power lines to the build-
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ing or its wiring, Lessee shall, at its own expense, make whatever changes are
necessary to comply with the requirements of the insurance underwriter,
insurance rating bureau and governmental authorities having jurisdiction.
PUBLIC LIABILITY INSURANCE:
16. Lessee shall during the term hereof keep in full force and effect at
its expense a policy or policies of public liability insurance with respect to
the Demised Premises and the business of Lessee, on terms with companies
approved in writing by Lessor, in which both Lessee and Lessor shall be covered
by being named as insured parties under reasonable limits of liability not less
than: $500,000 for injury/death to any one person; $1,000,000 for injury/death
to more than one person, and $500,000 with respect to damage to property. Such
policy or policies shall provide that ten (10) days written notice must be given
to Lessor prior to cancellation thereof. Lessee shall furnish evidence
satisfactory to Lessor at the time this Lease is executed that such coverage is
in full force and effect.
DEFAULT OF LESSEE:
17. a. In the event of any failure of Lessee to pay any rental due
hereunder within ten (10) days after the same shall be due, or any failure to
perform any other of the terms, conditions or covenants of this Lease to be
observed or performed by Lessee for more than thirty (30) days after written
notice of such failure shall have been given to Lessee, or if Lessee or an agent
of Lessee shall falsify any report required to be furnished to Lessor pursuant
to the terms of this Lease, or if Lessee or any guarantor of this Lease shall
become bankrupt or insolvent, or file any debtor proceedings or any person shall
take or have against Lessee or any guarantor of this Lease in any court pursuant
to any statute either of the United States or of any state a petition in
bankruptcy or insolvency or for reorganization or for the appointment of a
receiver or trustee of all or a portion of Lessee's or any such guarantor's
property, or if Lessee or any such guarantor makes an assignment for the benefit
of creditors, or petitions for or enters into an arrangement, or if Lessee shall
abandon the Demised Premises or suffer this Lease to be taken under any writ of
execution, then in any such event Lessee shall be in default hereunder, and
Lessor, in addition to other rights of remedies it may have, shall have the
immediate right of re-entry and may remove all persons and property from the
Demised Premises and such property may be removed and stored in a public
warehouse or elsewhere at the cost of, and for the account of Lessee, all
without service of notice or resort to legal process and without being guilty of
trespass, or becoming liable for any loss or damage which may be occasioned
thereby.
b. Should Lessor elect to re-enter the Demised Premises, as herein
provided, or should it take possession of the Demised Premises pursuant to
legal proceedings or pursuant to any notice provided for by law, it may
either terminate this Lease or it may from time to time, without terminating
this Lease, make such alterations and repairs as may be necessary in order to
relet the Demised Premises, and relet the Demised Premises or any part
thereof upon such term or terms (which may be for a term extending beyond the
term of this Lease) and at such rental or rentals and upon such other terms
and conditions as Lessor in its sole discretion may deem advisable. Upon
each such subletting all rentals received by the Lessor from such reletting
shall be applied first to the payment of any indebtedness other than rent due
hereunder from Lessee to Lessor; second, to the payment of any costs and
expenses of such reletting, including brokerage fees and attorney's fees and
costs of such alterations and repairs; third, to the payment of the rent due
and unpaid payment of future rent as the same may become due and payable
hereunder. If such rentals received from such reletting during any month be
less than that to be paid during that month by Lessee hereunder, Lessee, upon
demand, shall pay any such deficiency to Lessor. No such re-entry or taking
possession of the Demised Premises by Lessor shall be construed as an
election on its part to terminate this Lease unless a written notice of such
intention be given to Lessee or unless the termination thereof be decreed by
a court of competent jurisdiction. Notwithstanding any such reletting
without termination, Lessor may at any time after such re-entry and reletting
elect to terminate this Lease for any such breach, in addition to any other
remedies it may have, it may recover from Lessee all damages it may incur by
reason of such breach, including the cost of recovering the Demised Premises,
reasonable attorney's fees, and including the worth at the time of such
termination of the excess, if any, of the amount of rent and charges
equivalent to rent reserved in this Lease for the remainder of the stated
term over the then reasonable rental value of the Demised Premises for the
remainder of the stated term, all of which amounts shall be immediately due
and payable from Lessee to Lessor.
c. Lessor may, at its option, instead of exercising any other rights or
remedies available to it in this Lease or otherwise by law, statute or equity,
spend such money as is reasonably necessary to cure any default of Lessee herein
and the amount so spent, and costs incurred, including attorney's fees in curing
such default, shall be paid by Lessee, as additional rent, upon demand.
d. In the event suit shall be brought for recovery of possession of the
Demised Premises, for the recovery of rent or any other amount due under the
provisions of this Lease, or because of the breach of any other covenant
herein contained on the part of Lessee to be kept or performed, and a breach
shall be established, Lessee shall pay to Lessor all expenses incurred
therefor, including a reasonable attorney's fee, together with interest on
all such expenses at the rate of twelve percent (12%) per annum from the date
of such breach of the covenants of this Lease.
e. Lessee hereby expressly waives any and all rights of redemption granted
by or under any present or future laws in the event of Lessee being evicted or
dispossessed for any cause, or in the event of Lessor obtaining possession of
the Demised Premises, by reason of the violation by Lessee of any of the
covenants or conditions of the Lease, or otherwise. Lessee also waives any
demand for possession of the Demised Premises, and any demand for payment of
rent and any notice of intent to re-enter the Demised Premises, or of intent to
terminate this Lease, other than the notices above provided in this Article, and
waives any and every other notice or demand prescribed by any applicable
statutes or laws.
f. No remedy herein or elsewhere in this Lease or otherwise by law, statute
or equity, conferred upon or reserved to Lessor or Lessee shall be exclusive of
any other remedy, but shall be cumulative, and may be exercised from time to
time and as often as the occasion may arise.
COVENANTS TO HOLD HARMLESS:
18. Unless the liability for damage or loss is caused by the negligence of
Lessor, its agents or employees, Lessee shall hold harmless Lessor from any
liability for damages to any person or property in or upon the Demised Premises
and the Premises, including the person and the property of Lessee and its
employees and all persons in the Building at its or their invitation or
sufferance, and from all damages resulting from Lessee's failure to perform the
covenants of this Lease. All property kept, maintained or stored on the Demised
Premises shall be so kept, maintained or stored at the sole risk of Lessee.
Lessee agrees to pay all sums of money in respect of any labor, service,
materials, supplies or equipment furnished or alleged to have been furnished to
Lessee in or about the Premises, and not furnished on order of Lessor, which may
be secured by any Mechanic's Materialmen's or other lien to be discharged at the
time performance of any obligation secured thereby matures, provided that Lessee
may contest such lien, but if such lien is reduced to final judgment and if such
judgment or process thereon is not stayed, or if stayed and said stay expires,
then and in each such event, Lessee shall forthwith pay and discharge said
judgment. Lessor shall have the right to post and maintain on the Demised
Premises, notices of non-responsibility under laws of the State of Minnesota.
NON-LIABILITY:
19. Subject to the terms and conditions as Article 14 hereof, Lessor
shall not be liable for damage to any property of Lessee or of others located
on the Premises, nor for the loss of or damage to any property of Lessee or
of others by theft or otherwise. Lessor shall not be liable for any injury
or damage to persons or property resulting from fire, explosion, falling
plaster, steam, gas, electricity, water, rain or snow or leaks from any part
of the Premises or from the pipes, appliances, or plumbing works or from the
roof, street or subsurface or from any other place or by dampness or by any
other cause of whatsoever nature. Lessor shall not be liable for any such
damage caused by other Lessees or persons in the Premises, occupants of
adjacent property, of the buildings, or the public or caused by operations in
construction of any private, public or quasi-public work. Lessor shall not be
liable for any latent defect in the Demised Premises. All property of Lessee
kept or stored on the Demised Premises shall be so kept or stored at the risk
of Lessee only and Lessee shall hold Lessor harmless from any claims arising
out of damage to the same, including subrogation claims by Lessee's insurance
carrier.
SUBORDINATION:
20. This Lease shall be subordinated to any mortgages that may now exist
or that may hereafter be placed upon the Demised Premises and to any and all
advances made thereunder, and to the interest upon the indebtedness evidenced by
such mortgages, and to all renewals, replacements and extensions thereof. In
the event of execution by Lessor after the date of this Lease of any such
mortgage, renewal, replacement or extension, Lessee agrees to execute a
subordination agreement with the holder thereof which agreement shall provide
that:
a. Such holder shall not disturb the possession and other rights of Lessee
under this Lease so long as Lessee is not in default hereunder.
b. In the event of acquisition of title to the Demised Premises by such
holder, such holder shall accept the Lessee as Lessee of the Demised Premises
under the terms and conditions of the Lease and shall perform all the
obligations of Lessor hereunder, and
c. The Lessee shall recognize such holder as Lessor hereunder.
Lessee shall, upon receipt of a request from Lessor therefor, execute and
deliver to Lessor or to any proposed holder of a mortgage or trust deed or to
any proposed purchaser of the Premises, a certificate in recordable form,
certifying that this Lease is in full force and effect, and that there are no
offsets against rent nor defenses to Lessee's performance under this Lease,
or setting forth any such offsets or defenses claimed by Lessee, as the case
may be.
ASSIGNMENT OR SUBLETTING:
21. Lessee agrees to use and occupy the Demised Premises throughout the
entire term hereof for the purpose of purposes herein specified and for no
other purposes, in the manner and to substantially the extent now intended,
and not to transfer or assign this Lease or sublet said Demised Premises, or
any part thereof, whether by voluntary act, operation of law, or otherwise,
without obtaining the prior written consent of Lessor in each instance.
Lessee shall seek such consent of Lessor by a written
4
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request therefor, setting forth such information as Lessor may deem necessary.
Lessor agrees not to withhold consent unreasonably. Consent by Lessor to any
assignment of this Lease or to any subletting of the Demised Premises shall
not be a waiver of Lessor's rights under this Article as to any subsequent
assignment or subletting. Lessor's rights to assign this Lease are and shall
remain unqualified. No such assignment or subleasing shall relieve the Lessee
from any of Lessee's obligations in this Lease contained, nor shall any
assignment or sublease or other transfer of this Lease be effective unless
the assignee, sublessee or transferee shall at the time of such assignment,
sublease or transfer, assume in writing for the benefit of Lessor, its
successors or assigns, all of the terms, covenants and conditions of this
Lease thereafter to be performed by Lessee and shall agree in writing to be
bound thereby. Should Lessee sublease in accordance with the terms of this
Lease, fifty percent (50%) of any increase in rental received by Lessee over
the per square foot rental rate which is being paid by Lessee shall be
forwarded to and retained by Lessor, which increase shall be in addition to
the Base Rent and Additional Rent due Lessor under this Lease.
ATTORNMENT:
22. In the event of a sale or assignment of Lessor's interest, in the
Premises, or the Building in which the Demised Premises are located, or this
Lease, or if the Premises come into customer or possession of a mortgagee or
any other party whether because of a mortgage foreclosure, or otherwise,
Lessee shall attorn to such assignee or other party and recognize such party
as Lessor hereunder; provided, however, Lessee's peaceable possession will
not be disturbed so long as Lessee faithfully performs its obligations under
this Lease. Lessee shall execute, on demand, any attornment agreement
required by any such party to be executed, containing such provisions and
such other provisions as such party may require.
NOVATION IN THE EVENT OF SALE:
23. In the event of the sale of the Demised Premises, Lessor shall be
and hereby is relieved of all of the covenants and obligations created hereby
accruing from and after the date of sale, and such sale shall result
automatically in the purchaser assuming and agreeing to carry out all the
covenants and obligations of Lessor herein. Notwithstanding the foregoing
provisions of this Article, Lessor, in the event of a sale of the Demised
Premises, shall cause to be included in this agreement of sale and purchase a
covenant whereby the purchaser of the Demised Premises assumes and agrees to
carry out all of the covenants and obligations of Lessor herein.
The Lessee agrees at any time and from time to time upon not less than
ten (10) days prior written request by the Lessor to execute, acknowledge and
deliver to the Lessor a statement in writing certifying that this Lease is
unmodified and in full force and effect as modified and stating the
modifications, and the dates to which the basic rent and other charges have
been paid in advance, if any, it being intended that any such statement
delivered pursuant to this paragraph may be relied upon by any prospective
purchaser of the fee or mortgagee or assignee of any mortgage upon the fee of
the Demised Premises.
SUCCESSORS AND ASSIGNS:
24. The terms, covenants and conditions hereof shall be binding upon and
inure to the successors and assigns of the parties hereto.
REMOVAL OF FIXTURES:
25. Notwithstanding anything contained in Article 8, 29 or elsewhere in
this Lease, if Lessor requests then Lessee will promptly remove at the sole
cost and expense of Lessee all fixtures, equipment and alterations made by
Lessee simultaneously with vacating the Demised Premises and Lessee will
promptly restore said Demised Premises to the condition that existed
immediately prior to said fixtures, equipment and alterations having been
made all at the sole cost and expense of Lessee.
QUIET ENJOYMENT:
26. Lessor warrants that is has full right to execute and to perform
this Lease and to grant the estate demised, and that Lessee, upon payment
of the rents and other amounts due and the performance of all the terms,
conditions, covenants and agreements on Lessee's part to be observed and
performed under this Lease, may peaceably and quietly enjoy the Demised
Premises for the business uses permitted hereunder, subject, nevertheless, to
the terms and conditions of this Lease.
RECORDING:
27. Lessee shall not record this Lease without the written consent of
Lessor. However, upon the request of either party hereto, the other party
shall join in the execution of the Memorandum lease for the purposes of
recordation. Said Memorandum lease shall describe the parties, the Demised
Premises and the term of the Lease and shall incorporate this Lease by
reference. This Article 27 shall not be construed to limit Lessor's right to
file this Lease under Article 22 of this Lease.
OVERDUE PAYMENTS:
28. All monies due under this Lease from Lessee to Lessor shall be due
on demand, unless otherwise specified and if not paid when due, shall result
in the imposition of a service charge for such late payment in the amount of
twelve percent (12%) of the amount due.
SURRENDER:
29. On the Expiration Date or upon the termination hereof upon a day
other than the Expiration Date, Lessee shall peaceably surrender the Demised
Premises broom-clean in good order, condition and repair, reasonable wear and
tear only excepted. On or before the Expiration Date or upon termination of
this Lease on a day other than the Expiration Date, Lessee shall, at its
expense, remove all trade fixtures, personal property and equipment and signs
from the Demised Premises and any property not removed shall be deemed to
have been abandoned. Any damage caused in the removal of such items shall be
repaired by Lessee and at its expense. All alterations, additions,
improvements and fixtures (other than trade fixtures) which shall have been
made or installed by Lessor or Lessee upon the Demised Premises and all floor
covering so installed shall remain upon and be surrendered with the Demised
Premises as a part thereof, without disturbance, molestation or injury, and
without charge, at the expiration or termination of this Lease. If the
Demised Premises are not surrendered on the Expiration Date or the date of
termination, Lessee shall indemnify Lessor against loss or liability, claims,
without limitation, made by any succeeding Lessee founded on such delay.
Lessee shall promptly surrender all keys for the Demised Premises to Lessor
at the place then fixed for payment of rent and shall inform Lessor of
combinations of any locks and safes on the Demised Premises.
HOLDING OVER:
30. In the event of a holding over by a Lessee after expiration or
termination of this Lease without the consent in writing of Lessor, Lessee
shall be deemed a lessee at sufferance and shall pay rent for such occupancy
at the rate of twice the last-current aggregate Base and Additional Rent,
prorated for the entire holdover period, plus all attorney's fees and
expenses incurred by Lessor in enforcing its rights hereunder, plus any other
damages occasioned by such holding over. Except as otherwise agreed, any
holding over with the written consent of Lessor shall constitute Lessee a
month-to-month lessee.
ABANDONMENT:
31. In the event Lessee shall remove its fixtures, equipment or
machinery or shall vacate the Demised Premises or any part thereof prior to
the Expiration Date of this Lease, or shall discontinue or suspend the
operation of its business conducted on the Demised Premises for a period of
more than thirty (30) consecutive days (except during any time when the
Demised Premises may be rendered untenantable by reasons of fire or other
casualty), then in any such event Lessee shall be deemed to have abandoned
the Demised Premises and Lessee shall be in default under the terms of this
Lease.
CONSENTS BY LESSOR:
32. Whenever provision is made under this Lease for Lessee securing the
consent or approval by Lessor, such consent or approval shall only be in
writing.
NOTICES:
33. Any notice required or permitted under this Lease shall be deemed
sufficiently given or secured if sent by registered or certified return
receipt mail to Lessee at 4382-84 Round Lake Road West, Arden Hills, MN 55112
and to Lessor at the address then fixed for the payment of rent as provided
in Article 4 of this Lease, and either party may by like written notice at
any time designate a different address to which notices shall subsequently be
sent or rent to be paid.
RULES AND REGULATIONS:
34. Lessee shall observe and comply with the rules and regulations as
Lessor may prescribe, on written notice to Lessee for the safety, care and
cleanliness of the Building.
INTENT OF PARTIES:
35. Except as otherwise provided herein, the Lessee covenants and agrees
that if it shall any time fail to pay any such cost or expense, or fail to
take out, pay for, maintain or deliver any of the insurance policies above
required, or fail to make any other payment or perform any other act on its
part to be made or performed as in this Lease provided, then the Lessor may,
but shall not be obligated so to do, and without notice to or demand upon the
Lessee and without waiving or releasing the Lessee from any obligations of
the Lessee in this Lease contained, pay any such cost or expense, effect any
such insurance coverage and pay premiums therefor, and may make any other
payment or perform any other act on the part of the Lessee to be made and
performed as in this Lease provided, in such manner and to such extent as the
Lessor may deem desirable, and in exercising any such right, to also pay all
necessary and incidental costs and expenses, employ counsel and incur and pay
reasonable attorneys' fees. All sums so paid by Lessor and all necessary and
incidental costs and expenses in connection with the performance of any such
act by the Lessor, together with interest thereon at the rate
<PAGE>
of twelve percent (12%) per annum from the date of making of such expenditure,
by Lessor, shall be deemed additional rent hereunder, and shall be payable to
Lessor on demand. Lessee covenants to pay any such sum or sums with interest as
aforesaid and the Lessor shall have the same rights and remedies in the event of
the non-payment thereof by Lessee as in the case of default by Lessee in the
payment of the Base Rent payable under this Lease.
GENERAL:
36. The Lease does not create the relationship of principal and agent or
of partnership or of joint venture or of any association between Lessor and
Lessee, the sole relationship between the parties hereto being that of Lessor
and Lessee.
No waiver of any default of Lessee hereunder shall be implied from any
omission by Lessor to take any action on account of such default if such default
persists or is repeated, and no express waiver shall affect any default other
than the default specified in the express waiver and that only for the time and
to the extent therein stated. One or more waivers by Lessor shall not then be
construed as a waiver of a subsequent breach of the same covenant, term or
condition. The consent to or approval by Lessor of any act by Lessee requiring
Lessor's consent or approval shall not waive or render unnecessary Lessor's
consent to or approval of any subsequent similar act by Lessee shall be
construed to be both a covenant and a condition. No action required or permitted
to be taken by or on behalf of Lessor under the terms or provisions of this
Lease shall be deemed to constitute an eviction or disturbance of Lessee's
possession of the Demised Premises. All preliminary negotiations are merged into
and incorporated in this Lease. The laws of the State of Minnesota shall govern
the validity, performance and enforcement of this Lease.
a. This Lease and the exhibits, if any, attached hereto and forming a part
hereof, constitute the entire agreement between Lessor and Lessee affecting the
Demised Premises and there are no other agreements, either oral or written,
between them other than are herein set forth. No subsequent alteration,
amendment, change or addition to this Lease shall be binding upon Lessor or
Lessee unless reduced to writing and executed in the same form and manner in
which this Lease is executed.
b. If any agreement, covenant or condition of this Lease or the
application thereof to any person or circumstances shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such agreement, covenant or condition to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby and each agreement, covenant or condition of this Lease shall be valid
and be enforced to the fullest extent permitted by law.
HAZARDOUS MATERIAL:
37.a. The Demised Premises hereby leased shall be used by and/or at the
sufferance of Lessee only for the purpose set forth in Article 11 above and for
no other purposes. Lessee shall not use or permit the use of the Demised
Premises in any manner that will tend to create waste or a nuisance, or will
tend to unreasonably disturb other Lessees in the Building or the Premises.
Lessee, its employees and all persons visiting or doing business with Lessee in
the Demised Premises shall be bound by and shall observe the reasonable rules
and regulations made by Lessor relating to the Demised Premises, the Building or
the Premises of which notice in writing shall be given to the Lessee, and all
such rules and regulations shall be deemed to be incorporated into and form a
part of this Lease.
b. Lessee covenants throughout the Lease Term, at Lessee's sole cost and
expense, promptly to comply with all laws and ordinances and the orders,
rules and regulations and requirements of all federal, state and municipal
governments and appropriate departments, commissions, boards, and officers
thereof, and the orders, rules and regulations of the Board of Fire
Underwriters where the Demised Premises are situated, or any other body now
or hereafter as well as extraordinary, and whether or not the same require
structural repairs or alterations, which may be applicable to the Demised
Premises, or the use or manner of use of the Demised Premises. Lessee will
likewise observe and comply with the requirements of all policies of public
liability, fire and all other policies of insurance at any time in force with
respect to the buildings and improvements on the Demised Premises and the
equipment thereof.
c. In the event any Hazardous Material (hereinafter defined) is brought
or caused to be brought into or onto the Demised Premises, the Building or
the Premises by Lessee. Lessee shall handle any such material in compliance
with all applicable federal, state and/or local regulations. For purposes of
this Article, "Hazardous Material" means and includes any hazardous, toxic or
dangerous waste, substance or material defined as such in (or for purposes
of) the Comprehensive Environmental Response, Compensation, and Liability
Act, any so-called "Superfund" or "Superlien" law, or any federal, state, or
local statute, law, ordinance, code, rule, regulation, order decree
regulating, relating to, or imposing liability or standards of conduct
concerning, any hazardous, toxic or dangerous waste, substance or material,
as now or at any time hereafter in effect. Lessee shall submit to Lessor on
an annual basis copies of its approved hazardous materials communication
plan, OSHA monitoring plan, and permits required by the Resource Recovery and
Conservation Act of 1976, if Lessee is required to prepare, file or obtain
any such plans or permits. Lessee will indemnify and hold harmless Lessor
from any losses, liabilities, damages, costs or expenses (including
reasonable attorneys' fees) which Lessor may suffer or incur as a result of
Lessee's introduction into or onto the Demised Premises, Building or Premises
of any Hazardous Material. This Article shall survive the expiration or
sooner termination of this Lease.
CAPTIONS:
38. The captions are inserted only as a matter of convenience and for
reference, and in no way define, limit or describe the scope of this Lease nor
the intent or any provision thereof.
ATTACHMENTS:
39. See also Exhibits A through C, inclusive, which Exhibits are attached
hereto and made a part of hereof.
EXHIBIT DESCRIPTION
------- ------------
Exhibit A Legal Description
Exhibit B Demised Premises
Exhibit C Sign Criteria
SUBMISSION:
40. Submission of this instrument to Lessee or proposed Lessee or his
agents or attorneys for examination, review, consideration or signature does not
constitute or imply an offer to lease, reservation of space, or option to lease,
and this instrument shall have no binding legal effect until execution hereof by
both Lessor/Owner and Lessee or its agents.
41. Tenant is taking space in "as is" condition.
6
<PAGE>
IN WITNESS WHEREOF, the Lessor and the Lessee have caused these presents to be
executed in form and manner sufficient to bind them at law, as of the day and
year first above written.
Lessee: MEDWAVE, Inc., Lessor: ROUND LAKE LLC,
a Minnesota corporation. a Minnesota limited liability
company.
/s/ G. Kent Archibald /s/ Steven B. Liefschultz
- ------------------------------- -------------------------------
By: G. Kent Archibald By: Steven B. Liefschultz
---------------------------- --------------------------
Its President Its President
-------------------------- --------------------------
STATE OF
COUNTY OF ss.:
On this ________ day of ______, 19___, personally came before me, a Notary
Public within and for said County, _____________________ and _____________, to
me well known to be the same persons described in and who executed the foregoing
instrument, and acknowledged that they executed the same as their free act and
deed.
---------------------------------
Notary Public
My commission expires:
-----------
STATE OF
COUNTY OF ss.:
On this ________ day of ______, 19___, personally came before me, a Notary
Public within and for said County, _____________________ and _____________, to
me well known to be the same persons described in and who executed the foregoing
instrument, and acknowledged that they executed the same as their free act and
deed.
---------------------------------
Notary Public
My commission expires:
-----------
REV 1/92
Printed in U.S.A.
7
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
Round Lake Business Center
Arden Hills, Minnesota
All that part of the following described tract: The Westerly
quadrangular part, measuring 1,711 feet on the North side and 1,768 feet on
the South side, of the North 20 acres of the South 50 acres of the Northwest
1/4 of Section 21, Township 30 North, Range 23 West, except the Westerly 33
feet for Cleveland Avenue; which lies Easterly of a line run parallel with
and distant 166 feet Easterly of the following described line: Beginning at a
point on the Northwest corner thereof; thence run Southerly at an angle of 86
DEG. 46' 36" with said North section line (measured from East to South) for
1115.41 feet; thence deflect to the right on a 0 DEG. 45' curve (delta angle
7 DEG. 49' 03") for 1042.33 feet and there terminating.
Except all that part of the above described property lying Northerly of the
following described line:
Commencing at the Southwest corner of said Northwest quarter; thence North
along the West line of said Northwest quarter a distance of 825 feet;
thence East parallel to the North line of said Northwest quarter a distance
of 945.10 feet to the actual point of beginning of the line to be
described; thence continuing East along said last described parallel line a
distance of 765.90 feet and there terminating.
Subject to easements for power lines, sewer and gas lines.
<PAGE>
EXHIBIT B
[FLOOR PLAN]
<PAGE>
EXHIBIT C
SIGN CRITERIA
Round Lake Business Center
Arden Hills, Minnesota
1. Tenant identification signs shall be individual letters and/or logos on an
aluminum panel and shall be mounted next to the front entry per Lessor
criteria.
2. Rear shipping area shall be identified by six inch letters above the
shipping door. Two and three inch letters may also be used on the rear
entry door if desired.
3. To assist tenants with meeting signage requirements, the Lessor has
appointed a sign consultant for the project. You should contact Richard
Walsh, 561 Third Street, Excelsior, Minnesota 55331, telephone 474-6943.
He will advise tenants and prepare scaled drawings. On request, he will
assist in obtaining acceptable signage at reduced prices.
<PAGE>
EXHIBIT 11.1
EXHIBIT 11.1 - STATEMENT REGARDING COMPUTATION FOR COMMON SHARE
<TABLE>
<CAPTION>
Period from
June 27, 1984
Year Ended April 30 (Inception)
-------------------------- to
1997 1996 April 30, 1997
-------------------------- ---------------
<S> <C> <C> <C>
Primary loss per share:
Shares outstanding 4,818,738 4,690,560 4,818,738
Effect of using weighted average common and
common equivalent shares (29,496) (917,842) (2,869,632)
Effect of shares issuable under common stock
warrants using the treasury stock method * * *
Effect of shares issuable under stock options
using the treasury stock method * * *
SAB No. 83 - for stock options granted at
exercise price less than the initial public
offering price during the 12 months preceding
the initial public offering using the treasury
method N/A 142,577 251,814
----------- ---------- -----------
Total 4,789,242 3,915,295 2,200,920
----------- ---------- -----------
----------- ---------- -----------
Net loss $(1,610,467) $ (671,859) $(6,690,428)
----------- ---------- -----------
----------- ---------- -----------
Net loss per share $ (0.34) $ (0.17) $ (3.04)
----------- ---------- -----------
----------- ---------- -----------
Fully diluted loss per share:
Shares used in computing primary earnings per share 4,789,242 3,915,295 2,200,920
Assumed conversion of all series of redeemable
convertible preferred stock None None None
----------- ---------- -----------
Total 4,789,242 3,915,295 2,200,920
----------- ---------- -----------
----------- ---------- -----------
Net Loss $(1,610,467) $ (671,859) $(6,690,428)
----------- ---------- -----------
----------- ---------- -----------
Pro forma net loss per share $ (0.34) $ (0.17) $ (3.04)
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
* Antidilutive
<PAGE>
EXHIBIT 23.2
EXHIBIT 23.2 -- CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-23583) of Medwave, Inc. and in the related Prospectus of our
report dated June 13, 1997, with respect to the financial statements of Medwave,
Inc. included in this Annual Report (Form 10-KSB) for the year ended April 30,
1997.
/s/ ERNST & YOUNG
Minneapolis, Minnesota
July 21, 1997
