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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDING
APRIL 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_____________________________ TO ____________________________
COMMISSION FILE NUMBER: 0-28010
MEDWAVE, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1493458
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4382 ROUND LAKE ROAD WEST, ARDEN HILLS MINNESOTA 55112
(Address or principal executive offices, zip code)
Registrant's telephone number, including area code: (651) 639-1227
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: COMMON STOCK, NO PAR
VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of Common Stock held by non-affiliates of the
Registrant, based on the last sale price of the Registrant's Common Stock in
the over-the-counter market as reported by the Nasdaq Stock Market, Inc. on
June 30, 1999, was approximately $26,662,926. Shares held by officers,
directors, and persons who own 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive.
As of June 30, 1999, 5,436,596 shares of Common Stock, no par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
<TABLE>
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PART I
<S> <C> <C>
ITEM 1 BUSINESS...............................................................................3
ITEM 2 PROPERTIES............................................................................13
ITEM 3 LEGAL PROCEEDINGS.....................................................................13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................13
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.............................14
ITEM 6 SELECTED FINANCIAL DATA...............................................................15
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS.......................................16
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................18
ITEM 8 FINANCIAL STATEMENTS..................................................................18
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..................................................................35
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT................................................35
ITEM 11 EXECUTIVE COMPENSATION................................................................37
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................38
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................39
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................40
</TABLE>
MEDWAVE-Registered Trademark- AND VASOTRAC-Registered Trademark- ARE
TRADEMARKS OF THE COMPANY.
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS.
FOR THIS PURPOSE, ANY STATEMENTS CONTAINED IN THIS FORM 10-K THAT ARE NOT
STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS.
WITHOUT LIMITED THE FOREGOING, WORDS SUCH AS "MAY", "WILL", "EXPECT",
"BELIEVE", "ANTICIPATE", "ESTIMATE", "CONTINUED" OR THE NEGATIVE OR OTHER
VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE
SUBSTANTIAL RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY
DEPENDING ON A VARIETY OF FACTORS, INCLUDING THOSE SET FORTH IN ITEM 1.
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PART I
ITEM 1. 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 and of related
technology.
The Company's principal offices are located at 4382 Round Lake Road West,
Arden Hills, Minnesota 55112 and its telephone number is 651/639-1227.
The Company has an April 30 fiscal year.
BUSINESS
GENERAL
The Company is a development stage company that currently employs fourteen
(14) full-time employees and two part-time employees. Since its inception,
the Company has been engaged exclusively in the development of devices for
monitoring and devices for measuring blood pressure. Utilizing the Company's
proprietary technology, the Vasotrac-Registered Trademark- APM205 system
monitors blood pressure, providing new readings approximately every fifteen
heartbeats. The Company believes that the continual blood pressure readings
and non-invasive qualities of the Vasotrac system make it the most advanced
approach to blood pressure monitoring. In 1997, the Company began development
of a hand-held blood pressure measurement device. This hand-held unit is
based on the technology used in the Vasotrac system. For additional
information, see "Reliance on Single Product."
During the year, the Company engaged in developing improvements to the
Vasotrac system and developed working prototypes of the hand-held unit. These
improvements were done principally to meet customer needs for greater ease of
use for the Company's Vasotrac system. Management believes that this strategy
resulted in limited revenues. The Company has incurred an accumulated deficit
of $10,373,822 from its inception through April 30, 1999. Additional losses
resulting from development, testing, regulatory compliance, sales, and other
expenses are expected to continue to be incurred by the Company at least
until it emerges from the development stage.
The Company has financed its activities through the Company's initial public
offering (IPO) in November, 1995, and a series of earlier private placements
of equity securities, including shares of Preferred Stock that were converted
into Common Stock just prior to the Company's IPO in November, 1995. In
addition, on March 6, 1998, the Company completed a private placement that
raised approximately $2,990,000.
The Company's success is dependent upon the successful development and
marketing of the Vasotrac system and/or related technology. However, there
can be no assurance that the Vasotrac system or related technology will be
successfully marketed or sold in sufficient quantities and at margins
necessary to achieve or maintain profitability.
In December 1997, the Company began developing a dealer sales network for
selling the Vasotrac system. The Company focused on building a dealer
network, so that the Company could seek nationwide sales coverage without the
commensurate increase in sales staff and cost that would occur if the same
coverage were sought by building the Company's own employee sales force. To
date, the Company has entered into agreements with nine dealers whose
territories cover most of the United States. The success of the Company's
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Vasotrac system sales will depend upon the ability of dealers or sales
representatives to sell the Vasotrac system to the hospitals in their area.
At this time, dealers have not demonstrated that they will be successful. It
appears that product changes designed to make the product easier for
clinicians to use will be required before the Vasotrac system will be
accepted in the market. In addition, the Company is evaluating using a mix of
dealers and of direct sales representatives for sales of the Vasotrac System.
Feedback from the dealers and from clinicians indicates that many clinicians
find the Vasotrac system difficult to use and, therefore, requires
significant training. Sales time is increased because of the training
required; therefore, many of the dealer's sales employees and representatives
do not dedicate the time required to provide and sell the system. To
alleviate this problem, the Company is working on an enhanced Vasotrac system
with "ease of use" as the primary objective. The Company began beta testing
the enhanced product in April 1999. Early beta test results indicated that
additional product changes were required. These changes have been made and
the Company is continuing beta testing. If the beta test is successful, the
Company hopes to begin selling the enhanced product by the end of September
1999. There can be no assurance that the Company will be able to enhance the
product on the timetable discussed above, or that the product enhancements
will resolve the ease of use issues the clinicians and dealers have
encountered. Furthermore, the Company has limited distribution arrangements
and there can be no assurance that the Company will be able to implement or
effectuate other such arrangements.
The Company's short-term and long-term investments are being used primarily
to continue clinical testing of the Vasotrac system, to continue
manufacturing and marketing, and to conduct any additional research and
product development efforts that may be necessary. The Company anticipates
incurring significant additional losses from further development, testing,
regulatory compliance and sales and marketing expenses for the foreseeable
future. Over the next twelve months, the Company expects to spend in excess
of $1,200,000 for research and development, including amounts expected to be
spent on clinical trials. Specifically, the funds are expected to be used to
develop improved sensors and to sustain engineering support for manufacturing
start-up and for the continued development of the hand-held unit. In
addition, the Company expects to spend approximately $200,000 for equipment,
which would include tooling for production manufacturing scale-up. The
Company spent $1,230,072, $1,033,145, and $816,099 on research and
development expense for fiscal years ending 1999, 1998, and 1997,
respectively. Even assuming limited sales, the Company believes that its
current investments will allow the Company to meet its cash requirements for
approximately two years from April 30, 1999. If the development process for
the system does not proceed as expected due to significant product design
changes or unexpected difficulties are encountered in attaining
cost-effective manufacturability or the sales and marketing costs are higher
than expected, 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.
In September 1998, the Company entered into a technical evaluation agreement
with an interested party, related to its blood pressure technology,
specifically its hand-held blood pressure measurement device. The agreement
called for the Company to receive $1,500,000 in exchange for a "stand still"
period of six (6) months, during which the Company would not have any
discussions or negotiations with other parties including, among other things,
the licensing or selling of the technology of its hand-held unit. The amount
received was recognized as revenue when the agreement terminated with no
additional agreement with the interested party.
In May 1999, the Company retained Vector Securities International, Inc. as
its exclusive financial advisor to evaluate strategic alternatives that may
be available to the Company. The alternatives may include sale of all or part
of the Company, licensing of products and technology, mergers, acquisitions,
joint ventures, investment by strategic partners, product development,
manufacture and/or distribution arrangements, other business combinations or
strategic alliances, or continuation as an independent company.
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In July 1999, the Company retained Gillespie & Associates to help the Board
of Directors search for a new CEO. The Board, which includes the Company's
current CEO, unanimously believes that since it has begun beta testing of its
enhanced Vasotrac system and expects to begin production scale-up and formal
introduction this fall and since the hand-held blood pressure measurement
device has been submitted for FDA clearance, the timing is right for a new
CEO.
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
operating rooms, surgical recovery rooms, intensive care units, and other
critical care sites because of the acuteness of these patients' conditions
and rapidity with which their conditions can deteriorate. Trend information
obtained from successive blood pressure measurements plays an important role
in the diagnosis, prognosis, and treatment of diseases.
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
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, 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 a 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.
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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-Trademark-
product, marketed by Critikon, Inc.. The Dinamap-Trademark- 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-Trademark- 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 system requires no inflatable cuff but instead contains a
unique pressure sensor that is placed on the wrist. The Company believes that
the Vasotrac 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
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 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.
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 Company believes that the continual blood pressure readings, and the
efficacious and non-invasive qualities of the Company's Vasotrac 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, LED displays, a Central Processing Unit and a key
pad housed in an aluminum case, (ii) a patient cable, and (iii) a pressure
sensor.
The Vasotrac 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 system is 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 three hundred (300) of the
Company's Vasotrac 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 system and, as
such, they are
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receiving the most attention from the Company for life testing. The Company
has configured testing equipment for use in conjunction with the Vasotrac
system to exercise these components continuously in an unattended mode.
Testing and evaluation of these components are still in process.
The Vasotrac system utilizes proprietary technology of the Company, which
applies 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 approximately every fifteen heartbeats. The Vasotrac system displays
systolic, diastolic, and mean blood pressure in millimeters of mercury (mmHg)
as well as heart rate in beats per minute.
The Vasotrac 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 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 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.
The Company's research and development of its hand-held blood pressure
measurement device may result in a product that has sales potential both in
the professional market (doctors, nurses, and medical technicians) and in the
consumer market. The Company has developed a prototype of its hand-held blood
pressure measurement device based upon the Company's core technology. This
device is designed to make accurate blood pressure and pulse rate
measurements without using a cuff or stethoscope. To use the device, the
clinician or consumer presses the device against the wrist with increasing
force. In about ten seconds, the device will display the blood pressure and
pulse rate. Although still in development, this device may have advantages to
existing technology in the professional and consumer/home markets. The
technology employed in the hand-held device may be useful in developing
products for other markets. The Company does not have suitable distribution
channels for the potential markets for the hand-held unit and there can be no
assurance that the Company will be able to implement or effectuate suitable
arrangements for such markets.
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 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 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 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 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
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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 initial 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
system's readings with the a-line readings were used in the Company's 510(k)
submissions to the FDA. Subsequent to the 510(k) submissions, the Company has
conducted clinical trials on approximately 200 additional individuals. During
the Company's clinical trials conducted to date, the variance between
synchronized Vasotrac system readings obtained from one arm of the patient
and the comparative A-line readings obtained from the other arm was
calculated by computing the standard deviation of error from more than 24,000
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 affected 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. The Vasotrac system compares favorably with those found in
previous generations of non-invasive blood pressure measurement devices, such
as the Dinamap(TM) cuff-based system with which 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 defined 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.
In its 510(k) submissions 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 system. Based on the foregoing and, most
importantly, the improvement in the overall results of the system's
performance subsequent to its 510(k) submissions, 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.
While the Company believes that the Vasotrac system's accuracy compares
favorably with that found in previous generations of noninvasive blood
pressure measurement devices, the accuracy of the Vasotrac system's readings
may be negatively impacted by the presence of certain drugs in the patient's
system. Although the Company believes that its current product design for the
Vasotrac system and its clinical studies conducted to date provide an
adequate basis for the Company to continue marketing the system, it will take
wide spread use and testing to verify that the Vasotrac system is usable
under all conditions. The Company expects to continue conducting or
supervising on-going clinical studies of the system on individuals with
different characteristics and under various conditions until such time as the
Vasotrac system receives market acceptance. The Company cannot currently
estimate the number of individuals to be tested or the amount of time and
expense that will be required to perform and analyze these additional
clinical studies in order to achieve general market acceptance for the system.
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 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 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.
The Company has conducted clinical studies to develop and validate the
Company's hand-held blood pressure measurement technology. These clinical
studies included 45 consenting healthy volunteers. For each volunteer an
arterial catheter was inserted in one arm and several operators performed
repeated blood pressure measurements
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from the opposite arm using the hand-held device. For each one of the
operator's blood pressure measurements, the corresponding arterial blood
pressure measurements were determined and compared for accuracy. The raw
waveform data from the arterial line as well as the raw data from the
hand-held device were also recorded and stored into the Company's clinical
database for further processing. The data from the first 30 volunteers was
used for product development purposes. The data from the last set of 15
patients was recorded with the prototype of the hand-held device. The results
of the comparison between the arterial line blood pressure readings and the
hand-held device on these 15 patients was then referenced as part of the
Company's filing with the FDA for the hand-held device's 510(k) submission.
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 system.
For the Company to emerge from the development stage, it will depend on its
ability to hire additional employees within a 12-month period for key
operating positions, including general and administrative, sales and
marketing, R&D, and manufacturing positions. 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 preliminarily
estimates that these employees will increase employee-related expenses in
excess of $700,000 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. For additional information, see
discussion regarding hiring of Gillespie & Associates under "General".
MARKETING
The success of the Company depends primarily on gaining physician and
hospital acceptance of the Company's products. One focus of the Company's
marketing strategy must necessarily involve overcoming resistance of the
medical community to the introduction of new techniques or technology. The
Company believes that this resistance may be exacerbated by unsuccessful
attempts by other companies to manufacture and market accurate, continuous
and non-invasive blood pressure monitors. The company believes that testing
of the Vasotrac system has yielded favorable results compared to other
non-invasive blood pressure monitors. However, the pressure sensor of the
Vasotrac system must be placed over the center of the radial artery and
clinicians find it difficult to place properly and use the system. Improper
placement of the pressure sensor or improper use of the system may cause the
readings produced by the Vasotrac system to be clinically unacceptable. As a
result, another key component of the Company's marketing strategy will be to
focus on training of clinicians in the correct use of the Vasotrac system.
Also, given differences in individual bone physiology, body weight and
physical condition, the Vasotrac system may not provide accurate readings or
be usable on all patients. For example, if a patient's peripheral blood flow
to his or her arms has been affected, the system may not function properly.
Other contraindications for the system may result from patients on
cardiopulmonary bypass, patients with any condition in which rendering a
pulsating pressure signal from the radial artery is not possible, and
pediatric use. To date, the Company has not detected significant patient
complications caused by the system. However, as with any relatively new
product, complications may occur as the Vasotrac system is used on a greater
number of patients with different characteristics and under various
conditions. The presence of any significant complications would necessitate
additional research and evaluation to determine the impact of such
complications. Therefore, there can be no assurance that the Vasotrac system
will gain market acceptance. If the system does not gain market acceptance,
the Company's future would be jeopardized. For additional information, see
discussion regarding dealers and ease of use under "General" above.
INSURANCE
The Company has not had any material claims against its liability insurance.
The Company has comprehensive general liability insurance, including excess
umbrella coverage, in the aggregate amount of $9,000,000. 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
9
<PAGE>
be economically justified. Lack of such insurance could expose the Company to
substantial damages, which could have a material adverse effect upon the
Company.
RELIANCE ON SINGLE PRODUCT
The Company believes that significant and expanding markets exist for the
Vasotrac system, and for additional products incorporating the Company's
proprietary technology. Currently the Company has, however, only one product
in production, the Vasotrac system. Reliance on a single product creates
substantial risks for the Company. If for example, the Vasotrac system is not
successfully marketed or if it 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 require re-evaluation and its
ability to continue operations would be jeopardized. Additionally, there can
be no assurance that other products utilizing the Company's proprietary
technology will ever be successfully developed or marketed. The Company has
not undertaken any comprehensive patent infringement searches or studies. If
the Vasotrac system were found to infringe on the patent rights of others or
if third parties asserted, and were successful in claiming, rights to the
Vasotrac system, the Company would be materially adversely affected.
The Company is developing additional products based on the Company's core
technology. For example, the Company has developed a prototype of a hand-held
blood pressure measurement device based upon the Company's core technology.
This device is designed to make accurate blood pressure and pulse rate
measurements without using a cuff or stethoscope. To use the device, the
clinician or consumer presses the device against the wrist with increasing
force. In about ten seconds, the device will display the blood pressure and
pulse rate. Although still in development, this device may have advantages to
existing technology in the professional and consumer/home markets. The
technology employed in the hand-held device may be useful in developing
products for other markets. The Company is early in the development process
of these new products so there can be no assurance that additional products
will be successful either from a technical standpoint or from a manufacturing
or customer acceptance standpoint.
NEED TO EVALUATE DESIGN
While the Company's initial product development and clinical testing program
for the Vasotrac system is complete, extensive use and evaluation of the
design is necessary in order to determine whether the system, as currently
configured, will meet customer needs or be accepted in the marketplace. The
Company continues to test the Vasotrac system to enhance its market
acceptance. If the configuration of the system must be modified, there can be
no assurance that such modifications will be acceptable to customers or be
technically feasible. Even if feasible, such modifications could result in
significant delays and significant expense. If such modifications require
regulatory approval, additional significant delays could result. The Company
could be materially and adversely affected by these developments. For
additional information, see ease of use discussion under "General" above.
PRODUCT SERVICING REQUIREMENTS
The Company's goal is to produce Vasotrac systems that do not require
excessive servicing, that are sufficiently accurate, stable and reliable for
the user's needs and that otherwise meet or exceed clinical and regulatory
standards of acceptability. There can be no assurance, however, that the
Company will be successful in achieving such goals. There also can be no
assurance that additional problems will not occur, that additional servicing
requirements will not be necessary or that any such additional problems or
servicing requirements, individually or in the aggregate, will not be
significant, difficult to correct, time-consuming or prohibitively expensive.
Further, the need for any such additional servicing may not be readily
apparent to clinicians using the Vasotrac system. The Company believes that
actual or perceived excessive servicing requirements for, or erroneous
readings produced by, the Vasotrac 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 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.
MANUFACTURING
The Company currently procures from outside vendors, on a purchase order basis,
small quantities of virtually all components and subassemblies for the Vasotrac
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
10
<PAGE>
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 Company is currently evaluating the price of the enhanced Vasotrac
system. Such pricing will evolve throughout the marketing process for the
Vasotrac 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 Company
anticipates that the enhanced Vasotrac System will be price slightly higher
than the high end automatic cuffs. 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 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. The Company believes that the cost for non-invasively monitoring the
blood pressure of a patient with the Vasotrac system will be less than with
an invasive A-line. The Company believes that this will give it a competitive
edge in an increasingly cost-conscious healthcare industry.
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, such
arrangements.
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.
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 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's ability to compete successfully in
this market will depend on its ability to develop and market a
technologically superior blood pressure monitoring system that provides ease
of use, reliability and cost effectiveness.
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 system obsolete. The greater 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.
11
<PAGE>
PATENTS AND PROPRIETARY TECHNOLOGY
The Company has applied for U.S. patents covering various aspects of
Medwave's blood pressure technology. As of July 1999, nine U.S. patents
relating to Medwave's blood pressure technology have been granted, and nine
U.S. patent applications are pending (two of which have been allowed and are
awaiting issuance). The Company also has pending patent applications relating
to its blood pressure technology in the European Patent Office, Australia,
Brazil, Canada, China, India, Japan, and Russia. Most of the patents and
patent applications relate to both the Vasotrac system and to the hand-held
blood pressure device.
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 for which the Company applies are
granted, they do not confer on the Company the right to manufacture and
market products if such products infringe on 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 licenses from or pay royalties to
others, which could entail significant expense 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, if at all. The Company has, throughout the development
process for the Vasotrac 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 in the
Vasotrac system, 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 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
The Company is subject to FDA and other government regulations, including
regulations with respect to marketing approval, manufacturing practices,
packaging, labeling and complaint reporting. Medical devices "substantially
equivalent" to existing systems continuously marketed since May 1976 may be
marketed pursuant to a Pre-market Notification Submission (a "510(k)
Submission") with the FDA. The FDA finding of "substantial equivalence" for
the Vasotrac system does not in any way denote official approval of the
device. Further, any representation that creates an impression of official
approval of a device because it complies with the pre-market notification
regulations is misleading and constitutes misbranding. Certain devices,
including those which are not "substantially equivalent" to predicate
devices, are subject to Pre-market Approval Application ("PMA") requirements
and more stringent FDA reviews. In contrast to the 510(k) process, the PMA
process generally occurs over a more protracted time period and requires more
extensive clinical data. In January 1995, the Company filed a 510(k)
Submission, including clinical data, with the FDA for the Vasotrac system. In
February 1995, the Company received notice from the FDA that no further data
would be required and that the Company could immediately commence marketing
the Vasotrac system in the United States. Again, this does not constitute FDA
"approval" of the Vasotrac system, but merely allows the Company
12
<PAGE>
to market the system in the United States. In addition, the Company, like all
medical device manufacturers, must implement, maintain and follow the FDA's
Quality System regulation ("QSR") good manufacturing practices ("GMP"). The
Company believes its manufacturing costs will be driven by initial scale-up
and ultimate production levels and will not be significantly impacted by such
requirements. Should the Company intend to market the Vasotrac system for new
or different uses, or should it significantly modify the system in a way that
could significantly affect its safety or effectiveness, the Company would be
required to again file a 510(k) Submission for the Vasotrac system with the
FDA.
In its initial 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 system. The Company does
not believe that FDA regulations require, and therefore at this point does
not anticipate, submission to the FDA of its post-510(k) clinical studies.
Although the FDA has stated that the manufacturer is best qualified to make
an initial determination of whether a new 510(k) Submission is necessary, the
FDA can overrule a manufacturer's decision not to submit a new 510(k)
Submission and take appropriate regulatory action. If the Company determines
it need not submit any such new 510(k) Submission, including with respect to
its post-510(k) clinical studies, and the FDA consequently takes regulatory
action, the Company could be materially and adversely affected. If the
Company seeks to sell the Vasotrac system outside the United States, it will
be subject to additional regulation. Failure to comply with all such
regulations may result in material and adverse effects to the Company,
including loss of any regulatory approvals relating to the Vasotrac system.
In May 1999, the Company filed a 510(k) submission with the FDA for the
Company's hand-held device for the professional market. The Company is
uncertain as to the timing for final FDA clearance. It is also possible that
the FDA will not clear the Company's submission, or may require revision or
additional clinical trials before the hand-held device can be marketed by the
Company.
It is anticipated that with new product concepts developed by the Company, if
any, various government approvals will be required prior to being able to
sell the products.
ITEM 2. PROPERTIES.
The Company leases property in Arden Hills, Minnesota. The building lease is
for one year, 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. The Company's production capacity is adequate for its present
needs. The Company believes that its property has been adequately maintained
and is suitable for the Company's business as presently conducted.
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 1999.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S 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
closing sales price for the Common Stock during each specified period as
reported by the Nasdaq Stock Market, Inc.:
<TABLE>
<CAPTION>
FISCAL 1998 HIGH LOW
----------- ---- ---
<S> <C> <C>
First Quarter $15.00 $9.25
Second Quarter 14.25 9.50
Third Quarter 10.50 8.25
Fourth Quarter 13.50 8.00
FISCAL 1999 HIGH LOW
----------- ---- ---
First Quarter $12.00 $8.50
Second Quarter 14.50 9.00
Third Quarter 13.875 13.50
Fourth Quarter 14.125 9.00
</TABLE>
There were approximately 149 record holders and 1,100 beneficial holders of
the Company's Common Stock as of June 30, 1999. On June 30, 1999, the closing
price for the Common Stock was $7.25. The Company has never paid a dividend
on its Common Stock and does not intend to pay dividends in the foreseeable
future.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended April 30
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Net Sales $ 509,530 $593,012 $ 72,942 $ -- $ --
Operating expenses:
Cost of sales and product development 505,110 552,560 113,261 -- --
Research and development 1,230,072 1,033,145 816,099 379,320 307,142
Sales and marketing 855,153 1,091,780 555,888 85,537 --
General and administrative 506,621 491,229 529,831 389,433 135,368
---------------------------------------------------------------
Total operating expenses 3,096,956 3,168,714 2,015,079 854,290 442,510
---------------------------------------------------------------
Operating loss ($2,587,426) ($2,575,702) ($1,942,137) ($854,290) ($442,510)
Other income:
Interest income (other expense) 367,529 238,965 331,670 182,431 (12,988)
Other Income 1,500,000 -- -- -- --
---------------------------------------------------------------
Net loss $ (719,897) $(2,336,737) $(1,610,467) $(671,859) $(455,498)
---------------------------------------------------------------
---------------------------------------------------------------
Net Loss per share - basic and diluted $ (0.13) $ (0.48) $ (0.34) $ (0.17) $ (2.24)
---------------------------------------------------------------
---------------------------------------------------------------
Weighted average number of common and
common equivalent shares outstanding
- basic and diluted 5,398,331 4,916,654 4,789,242 3,915,295 203,500
---------------------------------------------------------------
---------------------------------------------------------------
<CAPTION>
BALANCE SHEET DATA: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $1,175,756 $1,926,697 $1,240,700 $ 769,161 $ 327,073
Working capital 3,965,613 2,903,011 3,888,440 5,001,042 319,751
Total assets 6,143,492 6,739,162 5,551,796 6,831,204 477,709
Total shareholders' equity 5,902,956 6,572,046 5,422,596 6,718,900 (4,951,379)
(deficiency)
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended April 30
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Revenue:
Net Sales $509,530 $593,012 $ 72,942
Operating expenses:
Cost of slaes and product development 505,110 552,560 113,261
Research and development 1,230,072 1,033,145 816,099
Sales and marketing 855,153 1,091,780 555,888
General and administrative 506,621 491,229 529,831
---------------------------------------------------
Total operating expenses 3,096,956 3,168,714 2,015,079
---------------------------------------------------
Operating loss ($2,587,426) ($2,575,702) ($1,942,137)
Other income:
Interest income (other expense) 367,529 238,965 331,670
Other Income 1,500,000 -- --
---------------------------------------------------
Net loss $ (719,897) $(2,336,737) $(1,610,467)
---------------------------------------------------
---------------------------------------------------
Net loss per share - basic and diluted $ (0.13) $ (0.48) $ (0.34)
---------------------------------------------------
---------------------------------------------------
Weighted average number of common and
common equivalent shares outstanding
- basic and diluted 5,398,331 4,916,654 4,789,242
---------------------------------------------------
---------------------------------------------------
</TABLE>
Fiscal year ended April 30, 1999 compared to fiscal years ended April 30,
1998 and April 30, 1997.
Operating revenue for fiscal 1999 was $509,530, a decrease of $83,482 or
14.1% over fiscal year 1998 operating revenue of $593,012. Operating revenue
for fiscal 1998 was $593,012, an increase of $520,070 or 712.9% over fiscal
year 1997 operating revenue of $72,942. The decrease in operating revenue
from fiscal year 1998 to fiscal year 1999 was due to dealers not devoting the
sales effort that the Company had anticipated as the Company converted to a
dealer network from a direct sales force and the Company's focus on the
engineering of the enhanced Vasotrac product and the hand-held product during
the last two quarters of the 1999 fiscal year, as previously stated. The
increase in operating revenue from fiscal year 1997 to fiscal year 1998 was
due to initial product rollout during fiscal 1997.
16
<PAGE>
Operating expense for fiscal 1999 were $3,096,956, a decrease of $71,758 or
2.3% over fiscal year 1998 operating expense of $3,168,714. Operating expense
for fiscal 1998 were $3,168,714, an increase of $1,153,635 or 57.2% over
fiscal 1997 operating expense of $2,015,079. The decrease in operating
expense from fiscal year 1998 to fiscal year 1999 relates primarily to a
decrease in the number of sales employees as the Company focused on building
a dealer network and on the engineering of the enhanced Vasotrac system and
on the hand-held unit. However, part of this decrease was offset by an
increase in research and development expense related to the ongoing research
and development of the Vasotrac system and the hand-held unit. The increase
from fiscal year 1998 over fiscal year 1997 was partially due to the Company
hiring additional individuals to prepare for the marketing and manufacture of
the Vasotrac system.
Cost of sales and product development for fiscal 1999 were $505,110, a
decrease of $47,450 or 8.6% over fiscal year 1998 cost of sales and product
development expense of $552,560. Cost of sales and product development for
fiscal 1998 were $552,560, an increase of $439,299 over fiscal year 1997 cost
of sales and product development expense of $113,261 or 387.9%. The decrease
in cost of sales and product development from fiscal 1998 to fiscal 1999 was
the result of lower unit sales. The cost associated with the Company's
hand-held unit and enhanced Vasotrac system are reflected in the Company's
research and development expense. The increase in cost of sales and product
development from fiscal 1997 to fiscal year 1998 was due to the increase in
unit sales.
Research, development, and clinical expense for fiscal year 1999 were
$1,230,072, an increase of $196,927 or 19.0% over fiscal year 1998 research
and development expense of $1,033,145. Research, development, and clinical
expense for fiscal year 1998 were $1,033,145, an increase of $217,046 or
26.6% over fiscal year 1997 research and development expense of $816,099. The
increase in research, development, and clinical expense from fiscal year 1997
to fiscal year 1998, as well as the increase from fiscal year 1998 to fiscal
year 1999 was related to the continued research and development of an
enhanced Vasotrac system with the focus on "ease of use" issues and the
ongoing development of the hand-held unit. In addition, in fiscal year 1998,
the Company completed clinical research for the purpose of preparing a
multi-site paper on the accuracy of the Vasotrac system.
General and administrative expense for fiscal year 1999 were $506,621, an
increase of $15,392 or 3.1% versus fiscal year 1998 general and
administrative expense of $491,229. General and administrative expense for
fiscal year 1998 were $491,229, a decrease of $38,602 or 7.2% over fiscal
year 1997 general and administrative expense of $529,831. The increase in
general and administrative expense from fiscal 1998 to fiscal 1999 is
attributable to an overall increase in general expenses. The decrease in
general and administrative expense in fiscal 1998 over fiscal 1997 was
primarily attributable to decreased insurance costs.
Sales and marketing expense for fiscal year 1999 were $855,153, a decrease of
$236,627 or 21.7% over fiscal year 1998 sales and marketing expense of
$1,091,780. Sales and marketing expense for fiscal year 1998 were $1,091,780,
an increase of $535,892 or 96.4% over fiscal year 1997 sales and marketing
expense of $555,888. The decrease in sales and marketing expense from fiscal
year 1998 to fiscal year 1999 was due to the decrease in sales personnel as
the Company converted over to a dealer network from direct sales and as the
Company decreased the number of sales personnel and focused on the
engineering of the enhanced Vasotrac system. The increase from fiscal year
1997 to fiscal year 1998 was due to the Company hiring a Vice President of
Marketing and additional sales persons.
Other income in fiscal year 1999 was due to the technical evaluation
agreement entered into in September 1998, with a six month standstill. For
additional information, see discussion regarding technical evaluation
agreement under "General" in Item 1.
Interest income for fiscal year 1999 was $367,529, an increase of $128,564 or
53.8% over fiscal year 1998 interest income of $238,965. Interest income for
fiscal year 1998 was $238,965, a decrease of $92,705 or 28.0% over fiscal
year 1997 interest income of $331,670. The increase in interest income in
fiscal 1999 over fiscal 1998 was the result of the increase in the investment
accounts as a result of the private placement in March of 1998 and the
$1,500,000 from the stand-still agreement. The decrease in interest income in
fiscal 1998 over fiscal 1997 was a result of the use of investment accounts
to fund operations.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, short and long-term investments were
$5,800,346 and $6,170,970 at April 30, 1999 and April 30, 1998 respectively.
The Company incurred cash expenditures of $418,012 for operations for the
fiscal year ended April 30, 1999.
With the cash and cash equivalents, short-term investments, and investments,
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 1999. The Company has no significant capital expenditure commitments
and does not plan any significant sale of capital equipment.
THE YEAR 2000 UPDATE
The Company has instituted a Year 2000 compliance project to address the
issue of computer programs and embedded computer chips being unable to
distinguish between the year 1900 and the year 2000. In the spring of 1998,
the Company conducted a review of its Information Technology ("IT") systems
and non-IT systems to identify the impact of the Year 2000 issue. The review
concluded that the Company's software and internal operations will not
require Year 2000 modifications. The total cost associated with testing for
Year 2000 compliance is not expected to be material to the Company's
financial position.
In connection with this review, the Company also asked critically important
vendors, suppliers, and financial institutions whose incomplete or untimely
resolution of the Year 2000 problem could potentially have a significant
impact on the Company's operations to assess their Year 2000 readiness. The
Company has been informed that these vendors, suppliers, and financial
institutions will be substantially Year 2000 compliant by late 1999.
In the reasonable worst case scenario, the Company's suppliers and customers
would experience delays in filling orders, making payments or other Year 2000
problems that may adversely affect the Company. Contingency plans have been
prepared, where necessary, to minimize any significant exposures from the
failure of third parties to be Year 2000 compliant. These plans include
development of backup procedures, identification of alternate suppliers, and
an assessment of the need for increases in inventory levels.
The Company does not expect the Year 2000 problem or the cost of the
compliance program to have a material impact on the results of operations,
financial condition, or cash flows. However, there can be no absolute
assurance that third parties will convert their systems in a timely manner
and in a way that is compatible with the Company's systems.
IMPACT OF INFLATION
Inflation has had no material effect on the Company's operations or financial
condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. None
ITEM 8. FINANCIAL STATEMENTS AND SUPLLEMENTAL DATA
18
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Financial Statements
Years ended April 30, 1999 and 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors................................................20
Audited Financial Statements
Balance Sheets................................................................21
Statements of Operations......................................................23
Statement of Changes in Stockholders' Equity..................................24
Statements of Cash Flows......................................................26
Notes to Financial Statements.................................................27
</TABLE>
19
<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, 1999 and 1998, and the related statements of
operations, changes in stockholders' equity and cash flows for each of the
three years in the period ended April 30, 1999 and the period from June 27,
1984 (inception) to April 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our 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,
1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended April 30, 1999 and the period from
June 27, 1984 (inception) to April 30, 1999, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 28, 1999
20
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
APRIL 30
1999 1998
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,175,756 $1,926,697
Short-term investments 2,785,672 759,758
Accounts receivable 31,069 59,618
Inventories 137,938 249,079
Prepaid expenses 75,714 74,975
------------------------------------
Total current assets 4,206,149 3,070,127
Investments 1,838,918 3,484,515
Property and equipment:
Research and development equipment 237,136 242,606
Office equipment 111,745 115,243
Manufacturing and engineering equipment 65,259 65,259
Sales and marketing equipment 59,927 60,183
Leasehold improvements 31,613 31,613
------------------------------------
505,680 514,904
Accumulated depreciation (435,274) (383,802)
------------------------------------
70,406 131,102
Patents, net of accumulated amortization of $107,998 in 1999 and
$82,599 in 1998 28,019 53,418
------------------------------------
Total assets $6,143,492 $6,739,162
------------------------------------
------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
APRIL 30
1999 1998
------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 176,496 $ 109,585
Accrued payroll 64,040 57,531
------------------------------------
Total current liabilities 240,536 167,116
Stockholders' equity:
Common Stock, no par value:
Authorized shares - 50,000,000
Issued and outstanding shares - April 30, 1999--5,436,596 and
April 30, 1998--5,378,396 16,294,620 16,240,970
Unrealized loss on investments (17,842) (14,999)
Deficit accumulated during the development stage (10,373,822) (9,653,925)
------------------------------------
Total stockholders' equity 5,902,956 6,572,046
------------------------------------
Total liabilities and stockholders' equity $ 6,143,492 $ 6,739,162
------------------------------------
------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
22
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 27, 1984
YEAR ENDED APRIL 30 (INCEPTION) TO
1999 1998 1997 APRIL 30, 1999
--------------------------------------------- ----------------
<S> <C> <C> <C> <C>
Revenue:
Net sales $ 509,530 $ 593,012 $ 72,942 $ 1,175,484
Operating expenses:
Cost of sales and product development 505,110 552,560 113,261 1,170,931
Research and development 1,230,072 1,033,145 816,099 6,850,949
General and administrative 506,621 491,229 529,831 3,212,340
Sales and marketing 855,153 1,091,780 555,888 2,595,212
--------------------------------------------- ----------------
Operating loss (2,587,426) (2,575,702) (1,942,137) (12,653,948)
Interest income 367,529 238,965 331,670 1,406,884
Other income 1,500,000 - - 1,500,000
--------------------------------------------- ----------------
Net loss $ (719,897) $(2,336,737) $(1,610,467) $ (9,747,064)
============================================= ================
Net loss per share - basic and diluted $(.13) $(.48) $(.34) $(3.75)
============================================= ================
Weighted average number of shares
outstanding - basic and diluted 5,398,331 4,916,654 4,789,242 2,599,109
============================================= ================
</TABLE>
SEE ACCOMPANYING NOTES.
23
<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>
24
<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
Accretion on the Redeemable Convertible
Preferred Stock - Series I - - - (5,874) (5,874)
Accretion on the Redeemable Convertible
Preferred Stock - Series II - - - (64,838) (64,838)
Accrual of dividends payable on the Redeemable
Convertible Preferred Stock - Series X and
Series I - - - (7,858) (7,858)
Change in unrealized loss on investments - - (33,245) - (33,245)
Net loss - - - (671,859) (671,859)
-----------
Comprehensive loss (705,104)
-----------------------------------------------------------------
Balance at April 30, 1996 4,690,560 12,458,866 (33,245) (5,706,721) 6,718,900
Exercise of stock options and warrants 128,178 305,837 - - 305,837
Change in unrealized loss on investments - - 8,326 - 8,326
Net loss - - - (1,610,467) (1,610,467)
-----------
Comprehensive loss (1,602,141)
-----------------------------------------------------------------
Balance at April 30, 1997 4,818,738 12,764,703 (24,919) (7,317,188) 5,422,596
Exercise of stock options and warrants 119,658 484,058 - - 484,058
Private Placement of Common Stock, in March
1998 at $7.50 per share net of expenses 440,000 2,992,209 - - 2,992,209
Change in unrealized loss on investments - - 9,920 - 9,920
Net loss - - - (2,336,737) (2,336,737)
-----------
Comprehensive loss (2,326,817)
-----------------------------------------------------------------
Balance at April 30, 1998 5,378,396 16,240,970 (14,999) (9,653,925) 6,572,046
Exercise of stock options and warrants 58,200 53,650 - - 53,650
Change in unrealized loss on investments - - (2,843) - (2,843)
Net loss - - - (719,897) (719,897)
-----------
Comprehensive loss (722,740)
-----------------------------------------------------------------
Balance at April 30, 1999 5,436,596 $16,294,620 $(17,842) $(10,373,822) $ 5,902,956
=================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
25
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 27, 1984
YEAR ENDED APRIL 30 (INCEPTION) TO
1999 1998 1997 APRIL 30, 1999
-------------------------------------------- ---------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (719,897) $(2,336,737) $ (1,610,467) $ (9,747,064)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 64,115 79,736 62,147 620,735
Amortization 25,399 25,400 27,115 107,998
Loss on sale of equipment - - - 7,375
Issuance of Common Stock for consulting
services - - - 3,413
Changes in operating assets and liabilities:
Accounts receivable 28,549 (17,632) (41,986) (31,069)
Inventories 111,141 (134,612) (105,493) (137,938)
Prepaid expenses (739) 6,207 19,989 (75,714)
Accounts payable 66,911 31,195 (5,217) 176,496
Accrued payroll 6,509 6,721 22,113 64,040
-------------------------------------------- ----------------
Net cash used in operating activities (418,012) (2,339,722) (1,631,799) (9,011,728)
INVESTING ACTIVITIES
Purchase of property and equipment (6,882) (54,158) (104,865) (719,375)
Patent expenditures - - (27,157) (136,017)
Purchase of investments (3,481,041) (4,745,431) (8,914,853) (37,094,089)
Sales and maturities of investments 3,097,881 4,349,641 10,843,816 32,453,500
Proceeds from sale of equipment 3,463 - - 21,663
-------------------------------------------- ---------------
Net cash (used in) provided by investing activities (386,579) (449,948) 1,796,941 (5,474,318)
FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock 53,650 3,476,267 305,837 10,813,544
Net proceeds from issuance of Convertible
Preferred Stock - - - 4,848,258
-------------------------------------------- ---------------
Net cash provided by financing activities 53,650 3,476,267 305,837 15,661,802
-------------------------------------------- ---------------
Increase in cash and cash equivalents (750,941) 686,597 470,979 1,175,756
Cash and cash equivalents at beginning of period 1,926,697 1,240,100 769,121 -
-------------------------------------------- ---------------
Cash and cash equivalents at end of period $1,175,756 $ 1,926,697 $ 1,240,100 $ 1,175,756
============================================ ===============
</TABLE>
SEE ACCOMPANYING NOTES.
26
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements
April 30, 1999
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, and in the development of related technology and products. Utilizing
the Company's proprietary technology, the VASOTRAC-Registered Trademark-
system monitors blood pressure continually, providing new readings
approximately every 15 heartbeats. In 1997, the Company began development of
a hand-held blood pressure measurement device. This hand-held device is based
upon the technology used in the Vasotrac System.
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.
27
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
For all years presented, the Company's basic and diluted loss per share is
the same because the effects of all options, warrants and convertible
securities were antidilutive.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations in
accounting for its stock options. Under APB 25, when the exercise price of
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
28
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
COMPREHENSIVE INCOME
As of May 1, 1998, the Company adopted Statement 130, REPORTING COMPREHENSIVE
INCOME. Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net income or stockholders' equity.
Statement 130 requires unrealized gains or losses on available-for-sale
securities, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income.
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>
1999
U.S. corporate debt securities $4,356,379 $ (4,445) $4,351,934
European bank notes 286,053 (13,397) 272,656
------------------------------------------------------
$4,642,432 $ (17,842) $4,624,590
------------------------------------------------------
------------------------------------------------------
<CAPTION>
UNREALIZED FAIR
COST LOSSES VALUE
------------------------------------------------------
<S> <C> <C> <C>
1998
U.S. corporate debt securities $3,973,219 $ (9,777) $3,963,442
European bank notes 286,053 (5,222) 280,831
------------------------------------------------------
$4,259,272 $ (14,999) $4,244,273
------------------------------------------------------
------------------------------------------------------
</TABLE>
29
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
4. CAPITAL STOCK
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
$6,800,000.
In March 1998, the Company sold 440,000 shares of Common Stock in a private
placement for $7.50 per share from which the Company received net proceeds of
$2,992,209.
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 $52,566, $53,109 and $56,434 for the years ended April 30, 1999, 1998 and
1997, respectively.
Future minimum rental payments required under leases that have remaining
terms in excess of one year as of April 30, 1999 are as follows:
<TABLE>
<S> <C>
Year ending April 30:
2000 $33,456
2001 2,788
-------------------
$36,244
-------------------
-------------------
</TABLE>
6. INCOME TAXES
At April 30, 1999, the Company had net operating loss carryforwards of
approximately $9,824,996 and research and development tax credit
carryforwards of approximately $343,000. These carryforwards are available to
offset future taxable income through 2014; however, a portion of the net
operating loss will begin to expire in 2002.
No income taxes were paid for the years ended April 30, 1999, 1998 and 1997,
respectively.
Components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
APRIL 30
1999 1998
------------------------------------
<S> <C> <C>
Net operating loss carryforwards $3,733,000 $3,556,000
Research and development credit carryforwards 343,000 300,000
Less valuation allowance (4,076,000) (3,856,000)
------------------------------------
Net deferred tax assets $ - $ -
------------------------------------
------------------------------------
</TABLE>
30
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS
The Company has a stock option plan that includes both incentive stock
options and non-statutory stock options to be granted to certain eligible
employees or consultants of the Company. The maximum number of shares of
Common Stock currently reserved for issuance is 1,700,000 shares. A majority
of the options granted have ten year terms and vest and become fully
exercisable at the end of four years of continued employment.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING WEIGHTED AVERAGE
SHARES AVAILABLE -------------------------------- EXERCISE PRICE
FOR GRANT PLAN NON-PLAN PER SHARE
------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 2.85
Additional shares reserved for
issuance 300,000 - - -
Granted (255,000) 255,000 - 12.98
Exercised - (107,000) - 4.30
Canceled 122,500 (122,500) - 7.16
------------------------------------------------
Balance at April 30, 1998 381,000 1,208,200 20,000 4.28
Granted (126,000) 126,000 - 12.18
Exercised - (58,200) - .92
Canceled 17,000 (17,000) - 9.59
------------------------------------------------
Balance at April 30, 1999 272,000 1,259,000 20,000 $ 5.14
------------------------------------------------
------------------------------------------------
</TABLE>
31
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about the stock options outstanding
at April 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------------------------------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C>
$ .75 139,000 5 years $ .75 139,000 $ .75
1.25 350,960 4 years 1.25 350,960 1.25
2.00 - 2.25 264,040 6 years 2.23 220,290 2.23
3.00 60,000 6 years 3.00 45,000 3.00
5.00 - 5.25 65,000 7 years 5.22 48,750 5.22
8.00 - 9.00 23,000 8 years 8.14 10,500 8.05
10.00 - 11.00 108,000 9 years 10.51 22,500 10.08
13.00 - 14.00 269,000 9 years 13.38 51,250 13.34
----------------- -----------------
$ .75 -$14.00 1,279,000 6.3 years $ 5.14 888,250 $ 2.72
----------------- -----------------
----------------- -----------------
</TABLE>
Options outstanding expire at various dates during the period from 2002
through 2008. The number of options exercisable as of April 30, 1999, 1998
and 1997 were 888,250, 792,200 and 736,450, respectively, at weighted average
exercise prices of $2.72, $1.76 and $1.65 per share, respectively.
In connection with the IPO in 1995, the Company issued warrants to purchase
140,000 shares of Common Stock at an exercise price of $6.00 per share. 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.
32
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
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 1999, 1998
and 1997: risk-free interest rates ranging from 6.00% to 5.29%, respectively;
dividend yield of 0%; volatility factor of the expected market price of the
Company's common stock of .68, .65 and .57, respectively, 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, 1999, 1998 and 1997 was $6.35, $7.07 and $4.65 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
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Actual net loss $ (719,897) $(2,336,737) $(1,610,467)
Pro forma net loss (1,410,264) (2,736,066) (1,910,295)
Pro forma net loss per common share (.26) (.56) (.40)
</TABLE>
The pro forma effect on net loss for fiscal 1999, 1998 and 1997 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.
33
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
8. CONTRACTS
In September 1998, the Company entered into a technical evaluation agreement
with an interested party related to its blood pressure technology, specifically
its hand-held blood pressure device. The agreement called for the Company to
receive $1,500,000 in exchange for a "stand still" period of six (6) months,
during which the Company will not have any discussions or negotiations with
other parties including, among other things, the licensing or selling of the
technology of its hand-held blood pressure device. The amount received was
recognized as revenue when the agreement terminated with no additional agreement
with the interested party.
In May 1999, the Company retained Vector Securities International, Inc. as its
exclusive financial advisor to evaluate strategic alternatives that may be
available to the Company. The alternatives may include sale of all or part of
the Company, licensing of products and technology, mergers, acquisitions, joint
ventures, investment by strategic partners, product development, manufacture
and/or distribution arrangements, other business combinations or strategic
alliances, or continuation as an independent company.
34
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the directors
and executive officers of the Company as of June 30, 1999. 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 58 President, Chief Executive Officer,
Secretary, and Director
Mark T. Bakko 39 Chief Financial Officer
William D. Corneliuson 56 Director
Norman Dann(1) 72 Director
Jeffrey W. Green 59 Director
Keith A. Libbey(1) 62 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
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 1996. From 1984 to 1996, 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 of
Minnesota. Mr. Bakko holds a Masters of Business Taxation and B.S.B.A. degree in
Accounting from the University of Minnesota.
35
<PAGE>
WILLIAM D. CORNELIUSON, has been a director of the Company since May 1999. Mr.
Corneliuson is President of B.C. Holdings, Inc., a registered investment
advisor. Mr. Corneliuson has been with B. C. Holdings, Inc. since 1993.
Previously Mr. Corneliuson was President, Co-Founder, and Vice Chairman of the
Board of Strong/Corneliuson Capital Management, Inc from 1976 to 1993.
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.
JEFFREY W. GREEN, has been a director of the Company since August 1997. Mr.
Green serves as Chairman of the Board of Hutchinson Technology, Inc. Mr. Green
co-founded Hutchinson Technology, Inc. in 1965 and served as its Chief Executive
Officer from January 1983 to May 1996. Hutchinson Technology, Inc. is the
world's leading supplier of suspension assemblies for rigid magnetic disk
drives. Mr. Green is a board member of Applied Biometrics, Inc., a maker of
medical devices. Mr. Green is also a board member of the following privately
held businesses: ContiMed, Inc., which is developing urinary catheters and
Internet Financial Services, Inc. Mr. Green is also a board member of the
Chamber of Commerce of South Dakota.
KEITH A. LIBBEY, has been a director of the Company since July 1999. Mr. Libbey
is Chairman Emeritus of the Board of Directors of Fredrikson & Byron, P.A., a
law firm in Minneapolis, Minnesota. Mr. Libbey has been with Fredrikson & Byron,
P.A. since 1969.
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, 1999, all filing requirements applicable to its officers,
directors, and greater than 10% beneficial owners were complied with.
36
<PAGE>
ITEM 11. 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
Richard Harbaugh, formerly the Vice President of Marketing of the Company during
the Company's last three fiscal years ended April 30, 1997, 1998, and 1999. No
other executive officer of the Company received total salary and bonus
compensation in excess of $100,000 for the fiscal year ending 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation ------------
Securities All Other
Name and Principal Position Year Salary Bonus Underlying Options Compensation
(# of shares)(1)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
G. Kent Archibald, 1999 $150,000 ---- --- $4,500(2)
President and Chief Executive 1998 150,000 ---- --- 4,500(2)
Officer 1997 150,000 ---- --- 4,500(2)
- --------------------------------------------------------------------------------------------------
Richard Harbaugh, 1999 $145,833 ---- --- $4,375(2)
Former Vice President of 1998 92,000 ---- 175,000 300(2)
Marketing 1997 ---- ---- --- ----
</TABLE>
- ---------------
(1) Number of shares of Common Stock subject to options that were granted during
the year.
(2) Reflects the Company's contribution to executive's individual
retirement account under the Company's Simplified Employee Pension Plan.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No options were granted during fiscal year 1999 to the named Executive Officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth certain information concerning each exercise of
stock options during the year ended April 30, 1999 by each of the executive
officers named in the above Summary Compensation Table and the aggregated fiscal
year-end value of the unexercised options of each such executive officer.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Securities Underlying In-the-Money Options at Fiscal
Options at Fiscal Year-End (#) Year-End ($)(1)
--------------------------------------------------------------
Shares Value
Acquired on Realized ($) Exercisable Unexercisable Exercisable Unexercisable
Name Exercise (#)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
G. Kent Archibald - 0 - $ - 0 - 391,250 43,750 $2,943,438 $295,313
Richard Harbaugh - 0 - $ - 0 - 43,750 131,250 --- ---
</TABLE>
(1) Based on the differences between the closing price of the Company's Common
Stock fiscal year-end and the option exercise price.
37
<PAGE>
COMPENSATION OF DIRECTORS
Directors are not currently paid fees for attending meetings. In connection with
the election of Messrs. Dann, Green, Corneliuson and Libbey to the Board of
Directors, in August 1995 Mr. Dann received a non-qualified option to purchase
30,000 shares of Common Stock at an exercise price of $3.00 per share, in August
1997 Mr. Green received a non-qualified option to purchase 30,000 shares of
Common Stock at an exercise price of $13.875, in May 1999 Mr. Corneliuson
received a non-qualified option to purchase 30,000 shares of Common Stock at an
exercise price of $8.94, and in July 1999 Mr. Libbey received a non-qualified
option to purchase 30,000 shares of Common Stock at an exercise price of $7.50.
Each such option is for a term of ten years and vests over a four-year period.
In addition, after three years of service each non-employee director receives a
ten-year non-qualified option for 10,000 shares, vesting after one year, each
year he or she continues to serve as a director. Mr. Dann received an option for
10,000 shares in November 1998 at an exercise price of $13.50.
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of shares of Common
Stock of the Company on June 30, 1999 by each of the executive officers named in
the Summary Compensation Table set forth in Item 11 by each director, by all
directors and current executive officers as a group and by all persons known by
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>
Name and Address Shares Beneficially Percent of
Owned(1) Ownership
--------------------------------------------------------------------
<S> <C> <C>
John R. Albers 451,869 8.3%
3825 Gillon Avenue
Dallas, TX 75205
G. Kent Archibald 609,243(2) 10.4%
4382 Round Lake Road West
Arden Hills, MN 55112
Aaron Boxer Revocable Trust 396,639 7.3%
Aaron Boxer, Trustee
5500 Wayzata Boulevard
8th Floor - Suite 800
Minneapolis, MN 55416
William D. Corneliuson 300,100 5.5%
777 East Wisconsin Avenue
Suite 3020
Milwaukee, WI 53202
Norman Dann 30,000(3) *
4382 Round Lake Road West
Arden Hills, MN 55112
Jeffrey W. Green 15,000(3) *
3401 4th Avenue North
Sioux Falls, SD 57104
38
<PAGE>
<CAPTION>
Name and Address Shares Beneficially Percent of
Owned(1) Ownership
--------------------------------------------------------------------
<S> <C> <C>
Richard Harbaugh 43,750(3) *
6267 Harbor Sunset Drive
Gig Harbor, WA 98335
Keith A. Libbey 6,700 *
900 Second Avenue South
1100 International Center
Minneapolis, MN 55402
David B. Johnson 494,400(4) 9.0%
5500 Wayzata Boulevard
8th Floor - Suite 800
Minneapolis, MN 55416
All Current Executive Officers and 1,021,043(5) 17.1%
Directors as a Group (6 persons)
</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 435,000 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 237,603 shares held by Mr. Johnson's spouse and minor children and
55,000 shares owned by a foundation, over all which he may be deemed to
share voting and dispositive power, and warrants to purchase 70,000 shares
of Common Stock which are currently exercisable or will become exercisable
within 60 days of the date hereof.
(5) Includes options to purchase 535,000 shares of Common Stock which are
currently exercisable or will become exercisable within 60 days of the date
hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There are no related party transactions.
39
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
See Part II, Items 8.
(a)(2) Exhibits
See Exhibit Index on page following signatures.
(a)(3) Financial Statement Schedules
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of fiscal 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MEDWAVE, INC.
Date: July 19, 1999 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ G. Kent Archibald President, CEO, and Director July 19, 1999
- ------------------------------- (principal executive officer)
G. Kent Archibald
/s/ Mark T. Bakko Chief Financial Officer July 19, 1999
- ------------------------------- (principal financial and accounting officer)
Mark T. Bakko
/s/ William D. Corneliuson Director July 19, 1999
- -------------------------------
William D. Corneliuson
/s/ Norman Dann Director July 19, 1999
- -------------------------------
Norman Dann
/s/ Jeffrey W. Green Director July 19, 1999
- -------------------------------
Jeffrey W. Green
/s/ Keith A. Libbey Director July 19, 1999
- -------------------------------
Keith A. Libbey
</TABLE>
40
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
MEDWAVE, INC.
EXHIBIT INDEX
TO
FORM 10-K FOR FISCAL YEAR ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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 August 4, 1998 - incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended October 31, 1998)*
10.3** Forms of Incentive and Nonstatutory Stock Option Agreements
under Amended and Restated Stock Option Plan - incorporated by
reference to Exhibit 10.2 to the Registrant's Annual Report on
From 10-KSB for the fiscal year ended April 30, 1996*
10.4 Agreement of Lease dated April 10, 1997 between the Company
and The Remada Companies - incorporated by reference to
Exhibit 10.3 to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended April 30, 1997*
10.5 Agreement dated September 25, 1998 between the Company and an
unnamed Company - incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 1998*
23 Consent of Ernst & Young LLP
27 Financial data Schedule (filed in electronic format only)
* Incorporated by reference to a previously filed report or
document, SEC File No. 0-28010 unless otherwise indicated
** Indicates a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form 10-K
</TABLE>
41
<PAGE>
EXHIBIT 23
EXHIBIT 23 - CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-23583 and Form S-8 No. 333-59675) pertaining to the Amended
and Restated Stock Option Plan of Medwave, Inc. and in the related Prospectus of
our report dated May 28, 1999, with respect to the financial statements and
schedule of Medwave, Inc. included in this Annual Report (Form 10-K) for the
year ended April 30, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
July 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE YEARS ENDED APRIL 30, 1999 AND 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> APR-30-1999
<CASH> 1,175,756
<SECURITIES> 2,785,672
<RECEIVABLES> 31,069
<ALLOWANCES> 0
<INVENTORY> 137,938
<CURRENT-ASSETS> 4,206,149
<PP&E> 505,680
<DEPRECIATION> 435,274
<TOTAL-ASSETS> 6,143,492
<CURRENT-LIABILITIES> 240,536
<BONDS> 0
0
0
<COMMON> 16,294,620
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,143,492
<SALES> 509,530
<TOTAL-REVENUES> 509,530
<CGS> 0
<TOTAL-COSTS> 505,110
<OTHER-EXPENSES> 2,591,846
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (719,897)
<INCOME-TAX> 0
<INCOME-CONTINUING> (719,897)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (719,897)
<EPS-BASIC> (.13)
<EPS-DILUTED> (.13)
</TABLE>
