<PAGE>
As filed with the Securities and Exchange Commission on August 18, 2000
Registration No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under The Securities Act of 1933
---------------
NATUS MEDICAL INCORPORATED
(Exact name of Registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 3845 77-0154833
(State or other
jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or
organization) Classification Code Number) Identification Number)
</TABLE>
1501 Industrial Road
San Carlos, CA 94070
(650) 802-0400
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
William H. Lawrenson
Chief Financial Officer
1501 Industrial Road
San Carlos, CA 94070
(650) 802-0400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Please send copies of all communications to:
<TABLE>
<S> <C>
Robert P. Latta, Esq. John W. White, Esq.
Julia Reigel, Esq. Cravath, Swaine & Moore
G. Scott Giesler, Esq. WorldWide Plaza
Wilson Sonsini Goodrich & Rosati 825 Eighth Avenue,
Professional Corporation New York New York 10019-7475
650 Page Mill Road (212) 474-1000
Palo Alto, CA 94304-1050
(650) 493-9300
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Each Class Proposed Maximum
of Securities to be Aggregate Offering Amount of
Registered Price(1) Registration Fee
-----------------------------------------------------------------------------
<S> <C> <C>
Common stock, $0.001 par
value..................... $50,600,000 $13,358.40
-----------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell these securities and is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 18, 2000
PROSPECTUS
Shares
Natus Medical Incorporated
Common Stock
--------
We are selling shares of our common stock. We have granted the
underwriters a 30-day option to purchase up to an additional shares of
common stock to cover over-allotments.
This is the initial public offering of our common stock. We currently expect
that the initial public offering price will be between $ and $ per share. We
have applied to have our common stock included for quotation on the Nasdaq
National Market under the symbol "BABY."
--------
Investing in our common stock involves certain risks. See "Risk Factors"
beginning on page 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
--------
<TABLE>
<CAPTION>
Per
Share Total
------ ------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Natus Medical Incorporated (before expenses) $ $
</TABLE>
The underwriters expect to deliver the shares to purchasers on or about ,
2000.
--------
Salomon Smith Barney
Dain Rauscher Wessels
Prudential Vector Healthcare
a unit of Prudential
Securities
, 2000
<PAGE>
[Artwork:
Text reads as follows:
ALGO(R) Newborn Hearing Screeners use AABR(TM) Automated Auditory Brainstem
Response technology, which screens the entire hearing pathway from the ear to
the brainstem.
Picture of ALGO Newborn Hearing Screener in use.
Text surrounding the picture reads as follows (counter-clockwise):
1. The ALGO screener sends a series of soft clicking sounds into the baby's
ear.
2. The baby's brain responds with a specific brainwave pattern called the
auditory brainstem response (ABR).
3. The screener automatically compares the baby's ABR to a stored template from
normal hearing infants.
4. The ALGO screener prints pass/refer results after every screen.
Caption at bottom of page reads:
NATUS because every baby is precious]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
Information Regarding Forward-Looking Statements......................... 21
Use of Proceeds.......................................................... 22
Our Policy Regarding Dividends........................................... 22
Capitalization........................................................... 23
Dilution................................................................. 24
Selected Financial Data.................................................. 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 37
Management............................................................... 58
Relationships and Related Party Transactions............................. 68
Principal Stockholders................................................... 71
Description of Capital Stock............................................. 74
Shares Eligible for Future Sale.......................................... 78
United States Tax Consequences to Non-United States Holders.............. 80
Underwriting............................................................. 82
Legal Matters............................................................ 84
Experts.................................................................. 84
Where You Can Find Additional Information................................ 84
Index to Financial Statements............................................ F-1
</TABLE>
Until , 2000, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
buying shares in this offering. Therefore, you should read this entire
prospectus carefully, including the risks of purchasing our common stock
discussed under the "Risk Factors" section and our financial statements and the
related notes.
Our Business
We are a medical device company focused on developing, manufacturing and
marketing screening products for the identification and monitoring of common
medical disorders that may occur in the critical developmental period from
conception to a baby's first birthday. Currently, we are selling our ALGO
products for newborn hearing screening, and, in early 2001, we expect to begin
actively marketing our CO-Stat products for the evaluation of jaundice, a
potentially toxic condition that can cause the skin to turn yellow. Both of our
current product lines are comprised of hardware units and single-use disposable
components and both product lines have been cleared for marketing by the United
States Food and Drug Administration, or the FDA. We believe our products
deliver accurate crib-side results in a rapid and reliable manner, and are
simple to use and cost-effective. In addition, our products address the
American Academy of Pediatrics' standard of care guidelines.
Our ALGO products use automated auditory response brainstem technology, or
automated ABR, to enable simple, non-invasive and accurate screening for
hearing impairment in newborns. The ALGO screener delivers sound stimuli to a
newborn's ears and analyzes brain wave responses to produce a "Pass" or "Refer"
result. The screening can be performed within hours after birth. In addition,
the ALGO meets the American Academy of Pediatrics' guidelines without requiring
a trained audiologist to operate the equipment. We currently sell our ALGO
products in the United States, Europe, Japan, Australia and New Zealand. Our
ALGO products have been installed in approximately 40% of the approximately
4,000 hospitals with birthing facilities in the United States. In 1999, we sold
disposable supplies to conduct approximately 1.2 million tests, and in the six
months ended June 30, 2000, we sold disposable supplies to conduct
approximately 770,000 tests.
In addition to ALGO products, we have developed the CO-Stat analyzer that,
within hours after birth, enables physicians to assess the likelihood that
serious newborn jaundice will not occur. Jaundice may be a sign of an
abnormally high rate of hemolysis, which is the process by which red blood
cells in the human body are destroyed. Our CO-Stat analyzers accurately and
non-invasively measure the rate of hemolysis by detecting the level of carbon
monoxide in exhaled breath. In addition, we are currently investigating the use
of the CO-Stat for other conditions, including pregnancy induced hypertension.
To date, we have sold our CO-Stat system primarily for clinical research.
Our Market Opportunity
Early detection of disorders for which treatments are readily available
maximizes the possibility of achieving the best outcome for the child and
reduces the social impact and the financial cost of treatment and habilitation.
Our products address hearing impairment and jaundice, which are among the more
common disorders a baby may face after birth.
Each year, there are approximately 3.8 million births in the United States,
and approximately 10.5 million births in all industrialized countries. Impaired
hearing affects approximately six per 1,000 newborns in the United States.
Undetected hearing impairment may result in the failure to learn, process
spoken language or speak. The annual cost to society of profound newborn
hearing impairment is estimated to be approximately $79 billion in the United
States due to increased educational costs, lower lifetime income and higher
unemployment. Early identification and habilitation can mitigate the effects of
this disorder, regardless of its
4
<PAGE>
severity. Recent clinical evidence in support of early detection for hearing
impairment combined with the introduction of new technologies has led health
organizations, such as the American Academy of Pediatrics, and state
governments to endorse universal newborn hearing screening programs. As a
result, we estimate that 88% of births in the United States during 2000 will
occur in states with mandates or pending mandates for universal newborn hearing
screening. In addition, we estimate that hospitals in four other states without
mandates or pending mandates will screen more than half of newborns in those
states. Although universal newborn hearing screening is less prevalent outside
the United States, some foreign governments, such as those in Japan and regions
of Belgium, have begun to implement newborn hearing screening initiatives. We
believe a significant opportunity exists in international markets to increase
the population of newborns screened for hearing impairment.
Jaundice affects over half of all newborns and may be indicative of serious
conditions that can result in irreversible brain damage or death. Due to the
potentially serious implications of jaundice, the American Academy of
Pediatrics recommends that every newborn be closely monitored for jaundice and
that physicians should definitively determine the presence or absence of an
abnormal rate of hemolysis to establish the appropriate treatment for babies
with jaundice. However, since jaundice is most often detected visually more
than three days after birth, the need for definitive evaluation is often not
established before a newborn's discharge from the hospital. We believe that
hospitals in the United States spend approximately $1.3 billion per year to
treat neonatal jaundice in the hospital, mainly due to late detection and
subsequent readmission for evaluation.
----------------
We were incorporated in California on May 26, 1987 under the name Medical
Instruments, Inc. On July 10, 1987, we changed our name to ALGOTEK Instruments,
Inc., and on September 29, 1998 we changed our name to Natus Medical
Incorporated. We reincorporated in Delaware in August 2000. Our principal
executive offices are located at 1501 Industrial Road, San Carlos, California
94070, and our telephone number is (650) 802-0400.
Natus(R); 70-40(R); ALGO(R); ALGO 1e(R); ALGO 2(R); ALGO2e; ALGO 2e Color;
ALGO Portable; ALGO Databook(R); ALGO DataBook NHS Data Tracking System; CO-
Stat(R); CO-Stat End Tidal Breath Analyzer; Dri-Prep(R); Ear Couplers(R); Jelly
Button(R); MiniMuffs(R); Duracoupler; AABR; and ALGO 3 are our trademarks.
Other service marks, trademarks and trade names referred to in this prospectus
are the property of their respective owners.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered.......................... shares
Common stock outstanding after this offering.. shares
Use of proceeds............................... To fund international
expansion, working capital,
capital expenditures, general
corporate purposes and
potential acquisitions of
complementary businesses,
products and technologies.
Proposed Nasdaq National Market symbol........ "BABY"
</TABLE>
Unless otherwise noted, all information in this prospectus:
. assumes no exercise of the underwriters' option to purchase up to
additional shares of our common stock to cover over-allotments;
. reflects a two-for-five reverse split of our common and preferred stock
in August 2000;
. reflects the conversion of each outstanding share of our convertible
preferred stock into one share of common stock, or an aggregate of
8,931,534 shares, concurrently with the completion of this offering;
. assumes our reincorporation into Delaware prior to completion of this
offering; and
. assumes the filing of our amended and restated certificate of
incorporation authorizing a class of 10,000,000 shares of undesignated
preferred stock concurrently with the completion of this offering.
The number of shares of common stock to be outstanding immediately after
this offering:
. is based upon 9,684,520 shares of common stock outstanding as of June 30,
2000 assuming conversion of all convertible preferred stock;
. does not take into account 1,326,123 shares of common stock issuable upon
the exercise of options outstanding as of June 30, 2000 at a weighted
average exercise price of $1.09 per share;
. does not take into account 1,500,000 shares of common stock available for
future issuance under our 2000 stock option plan;
. does not take into account 1,000,000 shares of common stock available for
future issuance under our 2000 employee stock purchase plan; and
. does not take into account 400,000 shares of common stock available for
future issuance under our 2000 director option plan.
6
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended June 30,
------------------------------------------- ---------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------ -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 4,274 $ 6,501 $10,031 $15,884 $19,783 $8,918 $11,009
Cost of revenues........ 2,027 2,567 3,612 5,577 6,624 3,082 3,908
------- ------- ------- ------- ------- ------ -------
Gross profit........... 2,247 3,934 6,419 10,307 13,159 5,836 7,101
------- ------- ------- ------- ------- ------ -------
Operating expenses:
Marketing and selling.. 2,105 2,828 4,259 6,275 7,684 3,654 4,395
Research and
development........... 645 962 1,602 2,711 2,457 1,288 1,605
General and
administrative........ 648 829 1,231 1,638 2,384 1,021 1,152
Amortization of
deferred stock
compensation.......... -- -- -- -- -- -- 278
------- ------- ------- ------- ------- ------ -------
Total operating
expenses............. 3,398 4,619 7,092 10,624 12,525 5,963 7,430
------- ------- ------- ------- ------- ------ -------
Income (loss) from
operations............. (1,151) (685) (673) (317) 634 (127) (329)
Other income (expense),
net.................... (12) 21 97 118 20 5 12
------- ------- ------- ------- ------- ------ -------
Income (loss) before
taxes.................. (1,163) (664) (576) (199) 654 (122) (317)
Income tax expense...... -- -- -- -- 10 -- --
------- ------- ------- ------- ------- ------ -------
Net income (loss)....... (1,163) (664) (576) (199) 644 (122) (317)
Accretion of redeemable
convertible preferred
stock.................. 625 1,079 1,292 1,389 2,085 695 692
------- ------- ------- ------- ------- ------ -------
Net loss available to
common stockholders.... $(1,788) $(1,743) $(1,868) $(1,588) $(1,441) $ (817) $(1,009)
======= ======= ======= ======= ======= ====== =======
Basic and diluted net
loss per share......... $(20.55) $(16.29) $ (7.62) $ (3.63) $ (2.56) $(1.47) $ (1.59)
======= ======= ======= ======= ======= ====== =======
Shares used in computing
basic and diluted net
loss per share......... 87 107 245 438 562 557 633
Pro forma basic and
diluted net loss per
share.................. $ (0.17) $ (0.11)
======= =======
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 8,478 9,565
</TABLE>
During the six months ended June 30, 2000, we amortized deferred stock
compensation of $353,000, of which $75,000 was included in cost of revenues and
$278,000 was included in operating expenses. The amortization of deferred stock
compensation allocated to operating expenses was comprised of expenses related
to marketing and selling of $91,000, research and development of $48,000 and
general and administrative of $139,000.
Pro forma basic and diluted net loss per share for the year ended December
31, 1999 and the six months ended June 30, 2000 have been calculated assuming
the conversion of all outstanding shares of our convertible preferred stock as
of June 30, 2000 into 8,931,534 shares of common stock as if the stock had been
converted at the beginning of the respective period.
<TABLE>
<CAPTION>
June 30, 2000
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments.................................. $ 1,805 $1,805 $
Working capital............................... 3,859 3,859
Total assets.................................. 9,059 9,059
Convertible preferred stock................... 24,534 --
Total stockholders' equity (deficit).......... (18,811) 5,723
</TABLE>
The pro forma balance sheet data reflects the conversion of all outstanding
shares of convertible preferred stock as of June 30, 2000 into 8,931,534 shares
of common stock upon the closing of this offering. The pro forma as adjusted
balance sheet data further reflects the sale of shares of common stock in
this offering at an assumed initial public offering price of $ after
deducting estimated underwriting discounts, commissions and offering expenses.
7
<PAGE>
RISK FACTORS
An investment in our common stock involves significant risks. You should
carefully consider the following risks described below and the other
information in this prospectus including our financial statements and related
notes before you decide to buy our common stock. The trading price of our
common stock could decline due to any of these risks, and you could lose all or
part of your investment.
We have a history of losses and may experience losses in the future, which may
result in the market price of our common stock declining
Since our inception, we have incurred significant net losses, including net
losses available to common stockholders of $1.9 million in 1997, $1.6 million
in 1998, $1.4 million in 1999 and $1.0 million in the six months ended June 30,
2000. In addition, we had an accumulated deficit of $19.5 million as of June
30, 2000. We expect to continue to incur net losses for at least the next 12
months.
We anticipate that our expenses will increase substantially in the
foreseeable future as we:
. continue to invest in research and development to enhance our ALGO and
CO-Stat products and develop new technologies;
. develop additional applications for our current technology, such as the
use of our CO-Stat breath analyzer for the detection of pregnancy induced
hypertension;
. increase our marketing and selling activities, particularly outside the
United States;
. continue to increase the size and number of locations of our customer
support organization; and
. develop additional infrastructure and hire additional management and
other employees to keep pace with our growth.
As a result of these increased expenses, we will need to generate
significantly higher revenues to achieve profitability. We cannot be certain
that we will achieve profitability in the future or, if we achieve
profitability, sustain it. If we do not achieve and maintain profitability, the
market price of our common stock is likely to decline, perhaps substantially.
We have relied, and expect to continue to rely, on sales of our ALGO product
family for substantially all of our revenues, and a decline in sales of these
products could cause our revenues to fall
Historically, we have derived substantially all of our revenues from sales
of our ALGO products. Revenues from our ALGO products accounted for
approximately 98% of our revenues in 1998, 1999 and the six months ended June
30, 2000. We expect that the revenues from the ALGO product family will
continue to account for a substantial majority of our revenues for at least the
next two years. To date, our MiniMuff product, which is disposable ear covers
for newborns, has accounted for only a small percentage of our net revenues. We
have not derived any significant revenues from sales of our CO-Stat products.
Any factors adversely affecting the pricing of our ALGO screening equipment and
related disposables or demand for our ALGO products, including physician
acceptance or the selection of competing products, could cause our revenues to
decline and our business to suffer.
As the ALGO and MiniMuff products are our only lines of commercially marketed
products to date, if more physicians do not adopt our ALGO and MiniMuff
products, we will not achieve future sales growth
The ALGO product family was commercially introduced in 1985, and our
MiniMuff product was introduced in 1995. More neonatologists and pediatricians
must adopt our products for us to increase our sales. We believe that
physicians will not continue to use our ALGO products unless they determine,
based on published peer-reviewed journal articles, long-term clinical data and
experience, that the ALGO products
8
<PAGE>
provide an accurate and cost-effective alternative to other means of testing
for hearing impairment. There are currently alternative hearing screening
products, which are less expensive and may be quicker on a per test basis.
Physicians are traditionally slow to adopt new products and testing practices,
partly because of perceived liability risks and the uncertainty of third party
reimbursement. If more neonatologists and pediatricians do not adopt our ALGO
products, we may never have significant revenues or achieve and maintain
profitability. Factors that may affect the medical community's acceptance of
our ALGO products, some of which are beyond our control, include:
. the changing governmental and physician group guidelines for screening of
newborns, particularly with respect to full term babies;
. the performance, quality, price and total cost of ownership of our
screening products relative to other screening products for newborns;
. our ability to maintain and enhance our existing relationships and to
form new relationships with leading physician organizations, hospitals
and third party payors;
. changes in state and third party payor reimbursement policies for newborn
hearing screening equipment; and
. the adoption of state and foreign laws requiring universal newborn
hearing screening.
Our quarterly operating results may fluctuate, which could cause our stock
price to decline
Our revenues and operating results have varied significantly from quarter to
quarter in the past and may continue to fluctuate in the future. The following
are among the factors that could cause our operating results to fluctuate
significantly from quarter to quarter:
. the budgeting cycle of our customers;
. the size and timing of specific sales, such as large purchases of
screening equipment or disposables by government agencies or hospital
systems, as described below;
. product and price competition;
. the timing and market acceptance of new product introductions and product
enhancements by us and our competitors, such as the expected reduction in
demand for our ALGO 2e Color screener prior to the announced launch date
of our ALGO 3 screener;
. the length of our sales cycle;
. the loss of key sales personnel or international distributors; and
. changes caused by the rapidly evolving market for newborn screening
products.
In addition, we experience seasonality in the sale of our screening
equipment. For example, our sales typically decline from our fourth fiscal
quarter to our first fiscal quarter. We anticipate that we will continue to
experience relatively lower sales in our first fiscal quarter due to patterns
in the capital budgeting and purchasing cycles of our current and prospective
customers, many of which are government agencies. We may also experience
declining sales in the third fiscal quarter due to summer holiday and vacation
schedules. These seasonal factors may lead to fluctuations in our quarterly
operating results. It is difficult for us to evaluate the degree to which the
summer slow down and capital budgeting and customer purchasing cycle variations
may make our revenues unpredictable in the future.
In addition, if a majority of our customers were to implement enterprise-
wide evaluation programs or purchase products for the entire organization at
once, our sales cycle could lengthen and our revenues could be erratic from
quarter to quarter. This could make our business difficult to manage. For
example, in the fourth quarter of 1997, a local government agency in Belgium
made a one time purchase of equipment for each of the
9
<PAGE>
hospitals in its jurisdiction and approximately one year's supply of
disposables. This purchase resulted in an abnormally high level of sales during
that period.
We do not have any historical experience selling our CO-Stat products and
cannot determine how the sales cycle for the CO-Stat products will affect our
revenues; however, the sales cycle could be protracted and could result in
further unpredictability in our revenues from quarter to quarter.
Many of these factors are beyond our control, and we believe that you should
not rely on our results of operations for interim periods as any indication of
our expected results in any future period. If our revenues vary significantly
from quarter to quarter, our business could be difficult to manage and our
quarterly results could be below expectations of investors and stock market
analysts, which could cause our stock price to decline.
Our operating results will decline if we do not succeed in developing and
marketing additional newborn testing products, such as our CO-Stat product, or
improving our existing products
We intend to develop additional testing products for the diagnosis and
monitoring of common medical conditions in infants and pregnant women.
Developing new products that meet the needs of neonatologists and pediatricians
requires significant investments in research and development. If we fail to
successfully develop and market new products, our operating results will
decline.
We introduced our CO-Stat product family for clinical research uses in July
1999. To date, CO-Stat products have accounted for only a limited portion of
our revenues, which have been derived primarily from sales to participants in
our clinical trials. We have no experience marketing our CO-Stat product for
commercial use. However, our future growth and profitability will depend on our
ability to begin commercial sales of our CO-Stat products and to sell our CO-
Stat products in volume. We cannot be certain that our entry into the hemolysis
monitoring segment of the newborn testing market with CO-Stat will be
successful, that the hemolysis monitoring market will develop at all or that
physicians, governments or other third party payors will accept and adopt these
products.
We cannot be certain that the clinical study of the cost-effectiveness of
our CO-Stat product compared to other tests used for jaundice monitoring will
produce results that are favorable to our products. The commercial acceptance
of our CO-Stat products depends in part upon a favorable result from this
study. If our CO-Stat products are not shown to be cost-effective, we may not
be able to persuade clinicians to adopt our products and our results of
operations may suffer.
If the studies do not produce satisfactory clinical data supported by the
independent efforts of clinicians, our new products may not be accepted by
physicians or government agencies as meeting the standards of care for
universal newborn screening. Our safety, effectiveness, reliability,
sensitivity and specificity data for the CO-Stat products is based on a study
of 1,200 children. We may find that data from longer-term follow-up studies or
studies involving a larger number of children is inconsistent with our
relatively short-term data. If longer-term studies or clinical experience
indicate that the CO-Stat products do not provide sensitive, specific and
reliable results, our products may not gain commercial acceptance and our
revenues could decline. In addition, we could be subject to significant
liability for screening that failed to detect hemolysis leading to jaundice or
costs and emotional distress incurred by families whose children received
results indicating jaundice when none existed. We could have similar problems
with any other products we offer in the future.
If the guidelines for recommended universal newborn screening do not continue
to develop in the United States and foreign countries, and governments do not
require testing of all newborns as we anticipate, our revenues may not grow
because our products will not be needed for universal newborn screening
The demand for our screening products depends, in part, on the state and
foreign governments' adoption of universal screening requirements for the
disorders for which our products screen. The guidelines for universal newborn
screening for hearing impairment and jaundice monitoring have been adopted by
some
10
<PAGE>
physician groups and governments only recently. We cannot predict the outcome
or the impact that statutes and government regulations requiring universal
newborn screening will have on our sales. The widespread adoption of these
guidelines will depend on, among other things, our ability to:
. educate government agencies, neonatologists, pediatricians, third party
payors and hospital administrators about the benefits of universal
newborn hearing testing and the benefits of universal newborn hemolysis
monitoring, as well as the use of our products to perform the screenings;
. establish and maintain relationships with leading physician groups,
government agencies and other third party payors and maintain and enhance
our relationships with our customers; and
. design our products to meet or exceed recommended guidelines for
universal newborn screening.
If the governments in the most densely populated states and foreign
countries do not require universal screening for the disorders for which our
products test, our business would be harmed and our sales may not grow. As of
June 30, 2000, 31 states have mandated universal newborn hearing screening, but
the phase-in of these guidelines varies widely from six months to four years.
To date, there has been only limited adoption of newborn hearing screening
prior to hospital discharge by foreign governments. Our revenues may not grow
if hospitals are slow to comply with these guidelines or the government
provides for a lengthy phase-in period for compliance.
To date, physician groups and federal, state and local governments have not
mandated the screening methodology to be used for newborn jaundice management
or established monitoring of hemolysis as the best practice. If these mandates
or practice recommendations are not issued, a market may not develop for our
CO-Stat products.
Any failure in our efforts to educate clinician, government and other third
party payors could significantly reduce our product sales
It is critical to the success of our sales effort that we educate a
sufficient number of clinicians, hospital administrators and government
agencies about our products and the costs and benefits of universal newborn
hearing testing and universal newborn jaundice management using hemolysis
monitoring. We rely on physician, government agency and other third party payor
confidence in the benefits of testing with our products as well as their
comfort with the reliability, sensitivity and specificity of our products. The
impact of our products will not be demonstrable unless highly sensitive and
specific evaluations are performed on a substantial number of newborns,
including those who do not have risk factors for hearing impairment or who do
not display signs of jaundice. If we fail to demonstrate the effectiveness of
our products and the potential long-term benefits to patients and third party
payors of universal newborn screening, our products will not be adopted.
We depend on our relationships with leading neonatology and pediatric physician
groups and government agencies, and if these relationships suffer, we may have
difficulty introducing and selling our products and our revenues would decline
We believe that our success depends in part on our ability to maintain or
further develop our relationships with leading neonatology and pediatric
physician groups, such as the American Academy of Pediatrics, as well as state
health care agencies. We believe our relationships with these constituencies
are important for market acceptance of our products. If we are unable to
maintain and enhance our existing relationships with these physician groups and
government agencies or develop similar relationships with other major physician
groups or third party payors, we may have difficulty selling our products.
If health care providers are not adequately reimbursed for the screening
procedures or for screening equipment itself, we may never achieve significant
revenues
Physicians, hospitals and state agencies are unlikely to purchase our
products if clinicians are not adequately reimbursed for the screening
procedures conducted with our equipment or the disposable products
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needed to conduct the screenings. Unless a sufficient amount of positive, peer-
reviewed clinical data about our products has been published, third party
payors, including insurance companies and government agencies, may refuse to
provide reimbursement for the cost of newborn hearing screening and hemolysis
monitoring with our products. Furthermore even if reimbursement is provided, it
may not be adequate to fully compensate the clinicians or hospitals. Some third
party payors may refuse adequate reimbursement for screening unless the infant
has demonstrable risk factors. See "Business--Third Party Reimbursement" for a
further discussion of reimbursement. If health care providers cannot obtain
sufficient reimbursement from third party payors for our products or the
screenings conducted with our products, it is unlikely that our products will
ever achieve significant market acceptance.
Even if third party payors provide adequate reimbursement for some newborn
hearing screening or hemolysis monitoring for jaundice management, adverse
changes in reimbursement policies in general could harm our business
We are unable to predict changes in the reimbursement methods used by third
party health care payors. For example, some payors are moving toward a managed
care system in which providers contract to provide comprehensive health care
for a fixed cost per person. We cannot assure you that in a managed care system
the cost of our products will be incorporated into the overall payment for
childbirth and newborn care or that there will be adequate reimbursement for
our screening equipment and disposable products separate from reimbursement for
the procedure. Unless the cost of screening is reimbursed as a standard
component of the newborn's care, universal screening is unlikely to occur and
the number of infants likely to be screened with our products will be
substantially reduced.
We have very limited experience selling and marketing products other than our
ALGO products, and our failure to build and manage our sales force or to market
and distribute our CO-Stat products or other products effectively will hurt our
revenues and quarterly results
Since we have not yet actively marketed our CO-Stat products, our sales
force has little experience selling these products, and we cannot predict how
successful they will be in selling these products. In order to successfully
introduce and build market share for our CO-Stat products, we must sell our
products to hospital administrators accustomed to the use of laboratory bench
equipment rather than portable point of care screening devices for jaundice
management.
We market almost all of our newborn hearing screening products in the United
States through a small direct sales force of 14 persons. We must expand our
sales team over the next two years in order to market our CO-Stat products
along with our other products. There are significant risks involved in building
and managing our sales force and marketing our products. We may be unable to
hire a sufficient number of qualified sales people with the skills and training
to sell our newborn hearing screening and jaundice management products
effectively. Furthermore, we do not have any agreements with distributors or
group purchasing organizations for sales of our CO-Stat products.
We may not be successful in generating revenues from our CO-Stat products
because we may encounter difficulties in manufacturing our CO-Stat products in
commercial quantities
We do not have experience manufacturing our CO-Stat products in commercial
quantities, and we may encounter difficulties in the manufacturing of these
products due to the following factors:
. our lack of extensive experience manufacturing our CO-Stat products in
compliance with the FDA's regulations that govern manufacturing of
medical devices;
. the need to enhance our manufacturing operations to increase our capacity
or enter into agreements with contract manufacturers to produce the CO-
Stat products for us; and
. the difficulty in attracting and retaining qualified employees, who are
in short supply, for our assembly and testing operations.
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If we encounter any of these difficulties, we may not be successful in
marketing our CO-Stat products, and our revenues and financial condition may be
harmed.
If we lose our relationship with any supplier of key product components, our
relationship with a supplier deteriorates or key components are not available
in sufficient quantities, our manufacturing could be delayed and our business
could suffer
We contract with third parties for the supply of some of the components used
in our products and the production of our disposable products. Some of our
suppliers are not obligated to continue to supply us. For certain of these
materials and components, relatively few alternative sources of supply exist.
In addition, the lead time involved in the manufacturing of some of these
components can be lengthy. If these suppliers become unwilling or unable to
supply us with our requirements, it might be difficult to establish additional
or replacement suppliers in a timely manner or at all. This would cause our
product sales to be disrupted and our revenues and operating results to suffer.
Replacement or alternative sources might not be readily obtainable due to
regulatory requirements and other factors applicable to our manufacturing
operations. Incorporation of components from a new supplier into our products
may require a new or supplemental filing with applicable regulatory authorities
and clearance or approval of the filing before we could resume product sales.
This process may take a substantial period of time, and we cannot assure you
that we would be able to obtain the necessary regulatory clearance or approval.
This could create supply disruptions that would harm our product sales and
operating results.
There is only one supplier that provides hydrogel, the adhesive used in our
disposable products. In addition, we have relied on a single supplier for the
electrochemical sensors used in our CO-Stat analyzer and we have not qualified
another vendor for this component. A disruption in the supply of the adhesive
or electrochemical sensors could negatively affect our revenues. If we or our
contract manufacturers were unable to locate another supplier, it could
significantly impair our ability to sell our products. In addition, we may be
required to make new or supplemental filings with applicable regulatory
authorities prior to our marketing a product containing new materials or
produced in a new facility. If we fail to obtain regulatory approval to use a
new material, we may not be able to continue to sell the affected products.
Our sales efforts through group purchasing organizations may conflict with our
direct sales efforts to our existing customers, which would reduce our revenues
and gross profits from these sales
Recently, we entered into two agreements to sell our products through group
purchasing organizations, which negotiate volume purchase prices for medical
devices and supplies for member hospitals, group practices and other clinics.
Sales to members of one group purchasing organization, Novation, Inc.,
accounted for approximately 20.6% of our total revenues in the six months ended
June 30, 2000. These group purchasing organizations receive volume discounts
off our direct selling price and other special pricing considerations from us.
Many of our existing customers are members of group purchasing organizations,
including those with which we have agreements. Our sales efforts through group
purchasing organizations may conflict with our direct sales efforts to our
existing customers. If our existing customers begin purchasing our products
through group purchasing organizations, our revenues and profit margin could
decline.
We rely on sales to existing customers for a substantial portion of our
revenues, and if our existing customers do not continue to purchase products
from us, our revenues may decline
We rely on sales of additional screening equipment to our existing customers
for a substantial portion of our revenues. If we fail to sell additional
screening equipment to our existing customers directly or indirectly, we would
experience a material decline in revenues.
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Because we rely on distributors to sell our products outside of the United
States, our revenues could decline if our existing distributors do not continue
to purchase products from us or if our relationships with any of these
distributors is terminated
We rely on distributors, such as Nippon Eurotec, our Japanese distributor,
for a majority of our sales outside the United States. These distributors also
assist us with regulatory approvals and education of physicians and government
agencies. Our revenues outside the United States represented approximately 10%
of our net revenues in 1999 and approximately 14% of our net revenues in the
six months ended June 30, 2000. We intend to continue our efforts to increase
our sales in Europe, Japan and other countries with a relatively high level of
health care spending on infants. If we fail to sell our products through our
existing international distributors, we would experience a decline in revenues.
We cannot be certain that we will be able to attract new international
distributors that market our products effectively or provide timely and cost-
effective customer support and service. Even if we are successful in selling
our products through new distributors, the rate of growth of our revenues could
be harmed if our existing distributors do not continue to sell a large dollar
volume of our products. None of our existing distributors are obligated to
continue selling our products.
In the past, we have terminated our relationships with distributors for poor
performance. We are also subject to foreign laws governing our relationships
with our distributors. These laws may require us to make payments to our
distributors even if we terminate our relationship for cause. Some countries
require termination payments under common law or legislation that may supercede
our contractual relationship with the distributor. Any required payments would
adversely affect our operating results.
Our plan to expand in international markets will result in increased costs and
may not be successful, which could harm our business
We must expand the number of distributors who sell our products or increase
our direct international sales presence to significantly penetrate
international markets. We have only recently begun to develop a direct sales
force outside the United States. As we continue to increase our direct
international sales presence, we will incur higher personnel costs that may not
result in additional revenues. A higher percentage of our sales to
international distributors could also impair our revenues due to discounts
available to these distributors. We may not realize corresponding growth in
operating results from growth in international sales, due to the higher costs
of sales outside of the United States. Even if we are able to successfully
expand our direct and indirect international selling efforts, we cannot be
certain that we will be able to create or increase demand for our products
outside of the United States.
Acceptance of our products in international markets will be dependent upon
the availability of adequate reimbursement within prevailing health care
payment systems. Reimbursement and health care payment systems vary
significantly by country and include both government-sponsored health care and
private insurance. Although we intend to seek international reimbursement
approvals, we may not obtain these approvals in a timely manner or at all.
Although our sales contracts provide for payment in United States dollars,
we expect that we will incur expenses related to international sales
denominated in the respective local currency. We also expect to begin selling
our products in local currencies as we expand our direct international sales.
To date, we have not undertaken any foreign currency hedging transactions, and
as a result, our future revenues and expense levels from international
operations may be unpredictable due to exchange rate fluctuations. Furthermore,
a strengthening of the dollar could make our products less competitive in
foreign markets. Our international operations are subject to other risks, which
include:
. contractual provisions governed by foreign law, such as common law rights
to sales commissions by terminated distributors;
. the dependence of demand for our products on health care spending by
local governments;
. greater difficulty in accounts receivable collection and longer
collection periods;
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. difficulties of staffing and managing foreign operations;
. difficulties in obtaining reimbursement for procedures using medical
devices in some foreign markets;
. reduced protection for intellectual property rights in some countries and
potentially conflicting intellectual property rights of third parties
under the laws of various foreign jurisdictions;
. potentially adverse tax consequences, including the impact of expiration
of favorable short-term tax rates; and
. difficulty in obtaining foreign regulatory approvals.
Our failure to obtain necessary FDA clearances or approvals or to comply with
FDA regulations could hurt our ability to commercially distribute and market
our products in the United States, and this would harm our business and
financial condition
Unless an exemption applies, each medical device that we wish to market in
the United States must first receive one of the following types of FDA
premarket review authorizations:
. 510(k) clearance via Section 510(k) of the federal Food, Drug, and
Cosmetics Act of 1938, as amended; or
. premarket approval via Section 515 of the Food, Drug, and Cosmetics Act
if the FDA has determined that the medical device in question poses a
greater risk of injury.
The FDA's 510(k) clearance process usually takes from four to 12 months, but
can take longer. The process of obtaining premarket approval is much more
costly, lengthy and uncertain. Premarket approval generally takes from one to
three years, but can take even longer.
We have obtained 510(k) clearances for the uses of the ALGO products in
newborn hearing testing, the MiniMuff product for newborn noise diminution and
the CO-Stat products for newborn hemolysis monitoring. We may need to obtain
additional 510(k) clearance to expand the market for our CO-Stat products for
use in new applications. Furthermore, if the FDA concludes that these future
products using our technology do not meet the requirements to obtain 510(k)
clearance, then we would have to seek premarket approval. We cannot assure you
that the FDA will not impose the more burdensome premarket approval requirement
on modifications to our existing products or future products, which in either
case could be costly and cause us to divert our attention and resources from
the development of new products or the enhancement of existing products. In
addition, we cannot assure you that the FDA will ever grant either 510(k)
clearance or premarket approval for any product we propose to market.
We may not promote or advertise the ALGO, MiniMuff or CO-Stat products, or
any future cleared or approved devices, for uses not within the scope of our
clearances or approvals or make unsupported promotional claims about the
benefits of our products. If the FDA requires us to revise our promotional
claims or takes enforcement action against us based upon our labeling and
promotional materials, our sales could be delayed, our revenues could decline
and our reputation among clinicians could be harmed.
The FDA may require us to obtain a new 510(k) clearance or premarket
approval if we make any modification to a 510(k) cleared device that
significantly affects its safety or effectiveness. We have modified aspects of
our ALGO products, but we believe that these modifications do not require new
510(k) clearances. We cannot assure you that the FDA would agree with any of
our decisions not to seek new clearances. In the future, we may modify our
products after they have received clearance or approval, and, in appropriate
circumstances, we may determine that new clearances or approvals are
unnecessary. If the FDA requires us to seek 510(k) clearance or a premarket
approval for any modification to a previously cleared product, we may be
required to cease marketing or recall the modified device until we obtain the
new clearance or approval, which would disrupt our revenues and harm our
business.
We are also subject to inspection and market surveillance by the FDA
concerning compliance with pertinent regulatory requirements. If the FDA finds
that we have failed to comply with these requirements, the
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agency can institute a wide variety of enforcement actions, ranging from a
public warning letter to more severe sanctions such as:
. fines, injunctions and civil penalties;
. the recall or seizure of our products;
. the issuance of public notices or warnings;
. the imposition of operating restrictions, partial suspension or total
shutdown of production;
. the refusal of our requests for 510(k) clearance or premarket approval of
new products;
. the withdrawal of 510(k) clearance or premarket approvals already
granted; and
. criminal prosecution.
The FDA also has the authority to require repair, replacement or refund of
the cost of any medical device manufactured or distributed by us. Our failure
to comply with applicable requirements could lead to an enforcement action that
may have an adverse effect on our financial condition and results of
operations.
If we fail to obtain necessary foreign regulatory approvals in order to market
and sell our products outside of the United States, we may not be able to sell
our products in other countries
Our products are regulated outside the United States as medical devices by
foreign governmental agencies similar to the FDA and are subject to regulatory
requirements similar to the FDA's in foreign countries. We are currently
subject to regulations governing the sales of our ALGO products in Australia,
Europe, Japan and New Zealand. We plan to seek approval to sell our products in
additional countries. The time and cost required to obtain market authorization
from other countries and the requirements for licensing a product in another
country may differ significantly from FDA requirements. We may not be able to
obtain these approvals without incurring significant expenses or at all.
If we or our suppliers fail to comply with applicable regulations, sales of our
products could be delayed and our revenues could be harmed
Every manufacturer of a finished medical device, including us and some of
our contract manufacturers and suppliers, are required to demonstrate and
maintain compliance with the FDA's quality system regulation. This regulation
incorporates the requirements of the FDA's current good manufacturing practices
and covers product design, testing and manufacturing quality assurance, and
requires the maintenance of accurate records and documentation. The FDA
enforces the quality system regulation through periodic unannounced
inspections. Although we have passed inspections in the past, we cannot assure
you that we or our contract manufacturers will pass any future quality system
regulation inspections. If we or our contract manufacturers fail one of these
inspections in the future, our operations could be disrupted and our
manufacturing and sales delayed significantly until we can demonstrate adequate
compliance. If we or our contract manufacturers fail to take adequate
corrective action in a timely fashion in response to a quality system
regulations inspection, the FDA could shut down our or our contract
manufacturers' manufacturing operations and require us, among other things, to
recall our products, either of which would harm our business. We cannot assure
you that we or our key component suppliers and contract manufacturers are or
will continue to be in compliance with applicable regulatory requirements or
will not encounter any manufacturing difficulties. If these suppliers fall out
of compliance or experience manufacturing difficulties, our ability to
manufacture and sell our products would be harmed.
We may experience intense competition from other medical device companies, and
this competition could adversely affect our revenues and our business
Our most significant current and potential competitors for the ALGO products
include companies that market hearing screening equipment. For the CO-Stat
products, we anticipate that our competitors will be large medical
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device companies that market laboratory bench equipment used for blood-based
antibody and bilirubin tests and companies that sell devices that analyze the
amount of yellow in the skin to estimate the level of bilirubin.
In addition, large medical testing equipment vendors, such as Johnson &
Johnson or F. Hoffmann-La Roche Ltd, may also acquire or establish cooperative
relationships with our current competitors. We expect that the medical testing
equipment industry will continue to consolidate. New competitors or alliances
among competitors may emerge and rapidly acquire significant market share,
which would harm our business and financial prospects.
Our competitors may have greater financial resources and name recognition or
larger, more established distribution channels than we do. We believe that Bio-
Logic Systems Corp., Intelligent Hearing Systems and Sonamed Corp., each of
which is also currently marketing enhanced auditory brainstem response and
otoacoustic hearing screening equipment products, could also introduce new,
lower priced hearing screening equipment similar to our products. Similarly, we
believe that Chromatics Color Sciences International, Inc., Minolta Co., Ltd.
or SpectRx, Inc., each of which is currently marketing skin color analysis
products for bilirubin monitoring, or Johnson & Johnson or Roche, each of which
is currently marketing equipment for blood-based bilirubin or antibody tests,
could also introduce new, lower-priced screening equipment similar to our CO-
Stat products.
In addition, other medical device companies may decide to bundle their
products with other newborn hearing screening or hemolysis monitoring products
and sell the bundle at lower prices. If this happens, our business and future
operating results could suffer if we were no longer able to offer commercially
viable or competitive products.
We believe our future success depends on our ability to enhance existing
products, develop and introduce new products, satisfy customer requirements and
achieve market acceptance. We cannot be certain that we will successfully
identify new product opportunities. We may not be able to develop and bring new
products to market before our competitors or in a more cost-effective manner.
Increased competition may negatively affect our business and future operating
results by leading to price reductions, higher selling expenses or a reduction
in our market share.
We may not be able to preserve the value of our products' intellectual property
because we may not be able to protect access to our intellectual property
If we fail to protect our intellectual property rights or if our
intellectual property rights do not adequately cover the technology we employ,
other medical device companies could sell hearing screening or hemolysis
monitoring products with features similar to ours, and this could reduce demand
for our products. We protect our intellectual property through a combination of
patent, copyright, trade secret and trademark laws. We have eight issued United
States patents, five patent applications pending before the United States
Patent and Trademark Office and seven patent applications pending before
foreign governmental bodies of which one European Patent Office application has
been allowed and will be registered in nine European countries. We enter into
confidentiality or license agreements with our employees, consultants and
corporate partners and seek to control access to our intellectual property and
the distribution of our hearing screening or hemolysis monitoring products,
documentation and other proprietary information. However, we believe that these
measures afford only limited protection. Others may develop technologies that
are similar or superior to our technology or design around the patents,
copyrights and trade secrets we own. The patent we licensed from a third party
for the technology upon which we have developed our automated ABR technology
has expired, and our rights to commercialize this technology are not exclusive.
Despite our efforts to protect our proprietary rights, others may attempt to
copy or otherwise improperly obtain and use our products or technology.
Policing unauthorized use of our products is difficult and expensive, and we
cannot be certain that the steps we have taken will prevent misappropriation of
our technology, particularly in foreign countries where the laws may not
protect our proprietary rights as fully. Our means of protecting our
proprietary rights may be inadequate. Enforcing our intellectual property
rights could be costly and time consuming and may divert our management's
attention and resources. Enforcing our intellectual property rights could also
result in the loss of our intellectual property rights.
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Our operating results would suffer if we were subject to a protracted
infringement claim or a significant damage award
Substantial intellectual property litigation and threats of litigation
exist in our industry. We expect that medical screening equipment may become
increasingly subject to third party infringement claims as the number of
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. Third parties such as individuals,
educational institutions or other medical device companies may claim that we
infringe their intellectual property rights. Any claims, with or without
merit, could have any of the following negative consequences:
. result in costly litigation and damage awards;
. divert our management's attention and resources;
. cause product shipment delays or suspensions; or
. require us to seek to enter into royalty or licensing agreements, which
may not be available on terms acceptable to us, if at all.
A successful claim of infringement against us could result in a substantial
damage award and materially harm our financial condition. Our failure or
inability to license the infringed or similar technology could prevent us from
selling our products and adversely affect our business and financial results.
Product liability suits against us could result in expensive and time
consuming litigation, payment of substantial damages and an increase in our
insurance rates
The sale and use of our medical testing products could lead to the filing
of a product liability claim if someone were to be injured using one of our
devices or if one of our devices fails to detect a disorder for which it was
being used to screen. A product liability claim could result in substantial
damages and be costly and time consuming to defend, either of which could
materially harm our business or financial condition. We cannot assure you that
our product liability insurance would protect our assets from the financial
impact of defending a product liability claim. Any product liability claim
brought against us, with or without merit, could increase our product
liability insurance rates or prevent us from securing any coverage in the
future.
We may incur significant costs related to a class action lawsuit due to the
likely volatility of the public market price of our stock
When our common stock is publicly traded, our stock price may fluctuate for
a number of reasons including:
. quarterly fluctuations in our results of operations;
. our ability to successfully commercialize our products;
. announcements of technological or competitive developments by us or our
competitors;
. announcements regarding patent litigation or the issuance of patents to
us or our competitors;
. announcements regarding state screening mandates or third party payor
reimbursement policies;
. regulatory developments regarding us or our competitors;
. acquisitions or strategic alliances by us or our competitors;
. changes in estimates of our financial performance or changes in
recommendations by securities analysts; and
. general market conditions, particularly for companies with a relatively
small number of shares available for sale in the public market.
Securities class action litigation is often brought against a company after
a period of volatility in the market price of its stock. If our future
quarterly operating results are below the expectations of securities analysts
or investors, the price of our common stock would likely decline. Stock price
fluctuations may be exaggerated if the trading volume of our common stock is
low. Any securities litigation claims brought against us could result in
substantial expense and damage awards and divert our management's attention
from running our business.
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We depend upon key employees in a competitive market for skilled personnel,
and, without additional employees, we cannot grow or achieve and maintain
profitability
Our products and technologies are complex, and we depend substantially on
the continued service of our senior management team including Tim C. Johnson,
our chief executive officer, William New, Jr., M.D., Ph.D., our chief
technology officer, chairman and a founder, Bryan Flaherty, Ph.D., our vice
president of research and development and Lucille Ferus, our vice president of
engineering. The loss of any of our key employees could adversely affect our
business and slow our product development process. Although we maintain key
person life insurance on Dr. New, we do not maintain key person life insurance
on any of our other employees, and the amount of the policy on Dr. New may be
inadequate to compensate us for his loss.
Our future success also will depend in part on the continued service of our
key management personnel, software engineers and other research and development
employees and our ability to identify, hire, and retain additional personnel,
including customer service, marketing and sales staff. Hiring sales, marketing
and customer service personnel in our industry is very competitive due to the
limited number of people available with the necessary technical skills and
understanding of pediatric audiology and neonatal jaundice management. We may
be unable to attract and retain personnel necessary for the development of our
business. Moreover, our business is located in the San Francisco Bay area of
California, where demand for personnel with the skills we seek is extremely
high and is likely to remain high. Because of this competition, our
compensation costs may increase significantly.
We could lose the ability to use net operating losses, which may adversely
affect our financial results
As of December 31, 1999, we had total net operating loss carryforwards of
approximately $8.4 million for income tax purposes. These net operating loss
carryforwards, if not utilized to offset taxable income in future periods, will
expire in various amounts beginning in 2002 through 2012. If we continue to
have net losses, we may not be able to utilize some or all of our net operating
loss carryforwards before they expire.
In addition, applicable United States income tax law imposes limitations on
the ability of corporations to use net operating loss carryforwards if the
corporation experiences a more than 50% change in ownership during any three-
year period. We cannot assure you that we will not take actions, such as the
issuance of additional stock, that would cause an ownership change to occur.
Accordingly, we may be limited to the amount we can use in any given year, so
even if we have substantial net income, we may not be able to use our net
operating loss carryforwards before they expire. In addition, the net operating
loss carryforwards are subject to examination by the Internal Revenue Service,
or IRS, and are thus subject to adjustment or disallowance resulting from any
such IRS examination.
If we are unable to use our net operating loss carryforwards to offset our
taxable income, our future tax payments will be higher and our financial
results may suffer.
We have broad discretion in how we use the net proceeds of this offering, and
we may not use these proceeds effectively
Our management could spend most of the net proceeds from this offering in
ways that our stockholders may not desire or that do not yield a favorable
return. You will not have the opportunity, as part of your investment in our
common stock, to assess whether the net proceeds of this offering will be used
appropriately. The failure of our management to apply the net proceeds of this
offering effectively could have a material adverse effect on our business,
financial condition and results of operations.
Our executive officers, directors and their affiliates hold a substantial
portion of our stock and could exercise significant influence over matters
requiring stockholder approval, regardless of the wishes of other stockholders
Our executive officers, directors and individuals or entities affiliated
with them will beneficially own approximately % of our outstanding common
stock as a group immediately after this offering. Acting
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together, these stockholders would be able to significantly influence all
matters that our stockholders vote upon, including the election of directors
and determination of significant corporate actions. This concentration of
ownership could delay or prevent a change of control transaction that could
otherwise be beneficial to our stockholders.
We may need to raise additional capital in the future, which could result in
dilution to our stockholders and adversely affect our operations
While we believe the proceeds from this offering will provide us with
adequate capital to fund operations for at least the next 18 months, we may
need to raise additional funds prior to that time. We may seek to sell
additional equity or debt securities or to obtain an additional credit
facility, which we may not be able to do on favorable terms, or at all. The
sale of additional equity or convertible debt securities could result in
additional dilution to our stockholders. If additional funds are raised through
the issuance of debt securities or preferred stock, these securities could have
rights that are senior to holders of common stock and any debt securities could
contain covenants that would restrict our operations.
Our charter documents and Delaware law contain provisions that may inhibit
potential acquisition bids, which may adversely affect the market price of our
common stock, discourage merger offers and prevent changes in our management
Section 203 of the Delaware General Corporation Law may inhibit potential
acquisition bids for our company. Upon completion of this offering, we will be
subject to Section 203, which regulates corporate acquisitions and limits the
ability of a holder of 15% or more of our stock from acquiring the rest of our
stock for three years. Under Delaware law, a corporation may opt our of the
antitakeover provisions. We do not intend to opt out of the antitakeover
provisions of Delaware Law.
Upon the closing of this offering, our board of directors will have the
authority to issue up to 10 million shares of preferred stock. Our board of
directors can fix the price, rights, preferences and privileges of the
preferred stock without any further vote or action by our stockholders. These
rights, preferences and privileges may be senior to those of the holders of our
common stock. We have no current plans to issue any shares of preferred stock.
We have also adopted other provisions in our charter documents effective upon
the closing of this offering that could delay or prevent a change in control.
The consent of two-thirds of our stockholders is required to amend our
certificate of incorporation, and our stockholders cannot act by written
consent. Only stockholders entitled to vote at least 30% of the shares eligible
to vote may call a special meeting. Each member of our board of directors will
serve for a three year term and will only stand for election once every three
years. These provisions could discourage potential acquisition proposals and
could delay or prevent a change in control transaction.
A large number of shares, 9,684,520, or % of our total outstanding common
stock, may be sold into the market in the near future, which could cause the
market price of our common stock to drop significantly
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock could cause our stock price to
fall. In addition, the sale of these shares could impair our ability to raise
capital through the sale of additional stock.
Immediately after the closing of this offering, we will have outstanding
shares of common stock. This includes shares that we are
selling in this offering, which may be resold immediately in the public market.
The remaining 9,684,520 shares will become eligible for resale in the public
market 180 days after the date of the final prospectus pursuant to agreements
our stockholders have with us and the underwriters. However, Salomon Smith
Barney Inc. can waive this restriction and allow these stockholders to sell
their shares at any time. Of these shares, 6,103,902 shares will be subject to
volume limitations under the federal securities laws.
20
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are contained principally in the sections entitled "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." These statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by the forward-
looking statements. Forward-looking statements include, but are not limited to,
statements about:
. the capabilities, development and marketing of our products;
. the benefits of universal newborn screening and, in particular, our
technology and methods;
. the development of voluntary and governmentally mandated universal
newborn hearing and jaundice management screening programs;
. third party payor reimbursement for our products and the tests conducted
with them;
. our plans for future products and for enhancements of our existing
products;
. our patent applications and proposed patents;
. our ability to attract customers; and
. our sources of revenues and anticipated revenues, including the
development and commercialization of our products.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these uncertainties,
you should not place undue reliance on these forward-looking statements. We
discuss many of these risks in this prospectus in greater detail under the
heading "Risk Factors." Also, these forward-looking statements represent our
estimates and assumptions only as of the date of this prospectus.
This prospectus contains statistical data regarding medical conditions and
medical products that we obtained from private and public industry
publications. These publications generally indicate that they have obtained
their information from sources believed to be reliable, but do not guarantee
the accuracy and completeness of their information. Although we believe that
the publications are reliable, we have not independently verified their data.
You should read this prospectus and the documents that we reference in this
prospectus completely and with the understanding that our actual future results
may be materially different from what we expect. We qualify all of our forward-
looking statements by these cautionary statements.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
21
<PAGE>
USE OF PROCEEDS
We expect that we will receive net proceeds of approximately $ million
from the sale of the shares of common stock we are offering, based on an
assumed initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses payable by us. If the underwriters exercise their over-allotment
option in full, we will receive net proceeds of approximately $ million. We
currently intend to use the net proceeds of this offering as follows:
. to fund international expansion;
. to increase our working capital;
. to fund our capital expenditures; and
. for general corporate purposes.
In addition, we also may use a portion of the net proceeds of this offering
for the acquisition of complementary businesses, products or technologies.
While we evaluate these types of opportunities from time to time, there are
currently no agreements or negotiations with respect to any specific
transaction.
We have not yet determined all of our expected expenditures, and we cannot
estimate the amounts to be used for each purpose set forth above. Accordingly,
our management will have significant flexibility in applying the net proceeds
of this offering. Pending use of the net proceeds as described above, we intend
to invest the net proceeds of this offering in short-term, interest-bearing,
investment-grade securities.
OUR POLICY REGARDING DIVIDENDS
We have never declared or paid any cash dividends on our capital stock and
we do not currently intend to pay any cash dividends on our common stock in the
foreseeable future. We expect to retain future earnings, if any, to fund the
development and growth of our business. In addition, our bank line of credit
generally prohibits us from paying cash dividends.
22
<PAGE>
CAPITALIZATION
You should read this table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and the related notes included elsewhere in this prospectus. The
following table describes our capitalization as of June 30, 2000:
. on an actual basis;
. on a pro forma basis after giving effect to the conversion of all
outstanding shares of convertible preferred stock into 8,931,534 shares
of common stock concurrently with the completion of this offering; and
. on a pro forma as adjusted basis to reflect the conversion of all
outstanding shares of convertible preferred stock into 8,931,534 shares
of common stock and the sale of shares of common stock offered
by us at an assumed initial public offering price of $ per share,
after deducting the estimated underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
June 30, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
and per share amounts)
<S> <C> <C> <C>
Long-term debt, net of current portion......... $ -- $ -- $ --
-------- -------- --------
Convertible preferred stock:
Series A convertible preferred stock, $0.001
par value; 1,241,842 shares authorized,
1,241,841 shares issued and outstanding,
actual; no shares authorized, issued or
outstanding, pro forma and pro forma as
adjusted; aggregate liquidation value of
$3,716...................................... 2,227 -- --
Redeemable convertible preferred stock, $0.001
par value; 8,781,412 shares authorized;
outstanding shares: aggregate liquidation
value of $24,486 and aggregate redemption
value of $22,307:
Series B: 3,967,126 shares authorized;
3,967,120 shares issued and outstanding,
actual; no shares authorized, issued or
outstanding, pro forma and pro forma as
adjusted.................................... 12,121 -- --
Series C: 3,214,286 shares authorized;
2,490,181 shares issued and outstanding,
actual; no shares authorized, issued or
outstanding, pro forma and pro forma as
adjusted.................................... 5,640 -- --
Series D: 1,600,000 shares authorized;
1,232,392 shares issued and outstanding,
actual; no shares authorized, issued or
outstanding, pro forma and pro forma as
adjusted.................................... 4,546 -- --
-------- -------- --------
Total convertible preferred stock............ 24,534 -- --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; no shares
authorized, issued or outstanding, actual and
pro forma; 10,000,000 shares authorized, no
shares issued or outstanding, pro forma as
adjusted..................................... -- -- --
Common stock, $0.001 par value; 120,000,000
shares authorized, actual, pro forma and pro
forma as adjusted; 752,986 shares issued and
outstanding, actual; 9,684,520 shares issued
and outstanding, pro forma; shares
issued and outstanding, pro forma as
adjusted..................................... 1,824 26,358
Deferred stock compensation................... (1,122) (1,122) (1,122)
Accumulated deficit........................... (19,513) (19,513) (19,513)
-------- -------- --------
Total stockholders' equity (deficit)......... (18,811) 5,723
-------- -------- --------
Total capitalization........................ $ 5,723 $ 5,723 $
======== ======== ========
</TABLE>
The actual, pro forma and pro forma as adjusted information set forth in the
table excludes:
. shares of common stock issuable upon the exercise of the
underwriters' over-allotment option;
. 1,326,123 shares of common stock issuable upon the exercise of stock
options outstanding as of June 30, 2000 at a weighted average exercise
price of $1.09 per share; and
. 2,900,000 shares of common stock reserved for future issuance under our
2000 stock option plan, 2000 employee stock purchase plan and 2000
director option plan as of June 30, 2000.
23
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was approximately
$5.7 million, or $0.58 per share of common stock. Pro forma net tangible book
value per share represents the amount of our total assets less total
liabilities and intangible assets, divided by the number of shares of common
stock outstanding, assuming the conversion of all shares of convertible
preferred stock outstanding as of June 30, 2000 into 8,931,534 shares of common
stock concurrently with the completion of this offering. Pro forma net tangible
book value dilution per share represents the difference between the amount per
share paid by purchasers of shares of common stock in this offering and the pro
forma net tangible book value per share of common stock immediately after the
completion of this offering on a pro forma as adjusted basis. After giving
effect to the sale of the shares of common stock by us at an assumed
initial public offering price of $ per share, and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses payable by us, our pro forma net tangible book value as of June 30,
2000 would have been approximately $ million or $ per share of common
stock. This represents an immediate increase in pro forma net tangible book
value of $ per share of common stock to existing common stockholders and an
immediate dilution in net tangible book value of $ per share to new
investors of common stock in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $
Pro forma net tangible book value per share before this
offering..................................................... $0.58
Increase in pro forma net tangible book value per share
attributable to this offering................................
-----
Pro forma net tangible book value per share after this
offering.......................................................
----
Dilution per share to new investors............................. $
====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 2000,
the number of shares of common stock purchased from us, the total consideration
paid and the average price per share paid by existing and new investors
purchasing shares of common stock in this offering, before deducting estimated
underwriting discounts and commissions and estimated offering expenses. The pro
forma basis gives effect to the conversion of all shares of convertible
preferred stock outstanding as of June 30, 2000 into 8,931,534 shares of common
stock concurrently with the completion of this offering.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
----------------- -------------------- Average Price
Number Percent Amount Percent Per Share
--------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 9,684,520 % $ 17,676,815 % $ 1.83
New investors.................
--------- ----- ------------ ----- ------
Total..................... 100.0% $ 100.0%
========= ===== ============ ===== ======
</TABLE>
The tables and calculations above assume no exercise of the underwriters'
over-allotment option to purchase up to an additional shares of
common stock. If the underwriters' over-allotment option is exercised in full,
the number of shares of common stock held by existing stockholders will be
reduced to % of the total number of shares of common stock outstanding after
this offering and the number of shares of common stock held by new investors
will be increased to , or % of the total number of shares of
common stock outstanding after this offering.
The information also assumes no exercise of any outstanding stock options.
As of June 30, 2000, there were 1,326,123 shares of common stock issuable upon
the exercise of outstanding stock options at a weighted average exercise price
of $1.09 per share. To the extent that any of these options are exercised,
there will be further dilution to new investors.
24
<PAGE>
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
our financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus. We have derived our selected statement of operations data
for the years ended December 31, 1997, 1998 and 1999 and the selected balance
sheet data as of December 31, 1998 and 1999 from the audited financial
statements included elsewhere in this prospectus. The selected balance sheet
data as of December 31, 1995, 1996 and 1997 and the statement of operations
data for the years ended December 31, 1995 and 1996 are derived from our
audited financial statements, which are not included in this prospectus. The
selected statement of operations data for the six months ended June 30, 1999
and 2000 and the selected balance sheet data as of June 30, 2000 are derived
from unaudited financial statements included elsewhere in this prospectus. We
prepared the unaudited financial statements on the same basis as the audited
financial statements and, in our opinion, they include all adjustments,
consisting only of normal recurring adjustments, we consider necessary for a
fair presentation of our financial position and results of operations for the
periods presented. Historical results are not necessarily indicative of results
of operations to be expected for future periods, and the results of the interim
periods are not necessarily indicative of the results to be expected for a full
year.
Our redeemable convertible preferred stock has a feature that requires us to
repurchase the redeemable convertible preferred stock from its holders at the
election of the holders of at least two-thirds of the outstanding redeemable
convertible preferred stock commencing January 1, 2000. Accretion of redeemable
convertible preferred stock represents the charge to retained earnings and net
loss available to common stockholders we took in 1995, 1996, 1997, 1998 and
1999 and the six months ended June 30, 1999 and 2000 to reflect this potential
liability. The outstanding shares of redeemable convertible preferred stock
will convert into shares of our common stock on a one for one basis in
connection with the closing of this offering, and no dividends will be paid or
converted into common stock. The pro forma net loss per share for the years
ended December 31, 1999 and the six months ended June 30, 2000 reflect the
conversion of our convertible preferred stock. See the notes to our financial
statements included elsewhere in this prospectus for a detailed explanation of
how we have computed basic and diluted net loss per share and pro forma basic
and diluted net loss per share.
Our operating results for the six months ended June 30, 2000 reflected
amortization of deferred stock compensation of $353,000, of which $75,000 was
included in cost of revenues. The amortization of deferred stock compensation
allocated to operating expense was $278,000 and was comprised of marketing and
selling expenses of $91,000, research and development expenses of $48,000 and
general and administrative expenses of $139,000.
25
<PAGE>
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended June 30,
------------------------------------------- ---------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------ -------
(in thousands, except per share amounts )
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 4,274 $ 6,501 $10,031 $15,884 $19,783 $8,918 $11,009
Cost of revenues........ 2,027 2,567 3,612 5,577 6,624 3,082 3,908
------- ------- ------- ------- ------- ------ -------
Gross profit.......... 2,247 3,934 6,419 10,307 13,159 5,836 7,101
------- ------- ------- ------- ------- ------ -------
Operating expenses:
Marketing and
selling.............. 2,105 2,828 4,259 6,275 7,684 3,654 4,395
Research and
development.......... 645 962 1,602 2,711 2,457 1,288 1,605
General and
administrative....... 648 829 1,231 1,638 2,384 1,021 1,152
Amortization of
deferred stock
compensation......... -- -- -- -- -- -- 278
------- ------- ------- ------- ------- ------ -------
Total operating
expenses........... 3,398 4,619 7,092 10,624 12,525 5,963 7,430
------- ------- ------- ------- ------- ------ -------
Income (loss) from
operations............. (1,151) (685) (673) (317) 634 (127) (329)
Other income (expense),
net.................... (12) 21 97 118 20 5 12
------- ------- ------- ------- ------- ------ -------
Income (loss) before
taxes.................. (1,163) (664) (576) (199) 654 (122) (317)
Income tax expense...... -- -- -- -- 10 -- --
------- ------- ------- ------- ------- ------ -------
Net income (loss)....... (1,163) (664) (576) (199) 644 (122) (317)
Accretion of redeemable
convertible preferred
stock.................. 625 1,079 1,292 1,389 2,085 695 692
------- ------- ------- ------- ------- ------ -------
Net loss available to
common stockholders.... $(1,788) $(1,743) $(1,868) $(1,588) $(1,441) $ (817) $(1,009)
======= ======= ======= ======= ======= ====== =======
Basic and diluted net
loss per share ........ $(20.55) $(16.29) $ (7.62) $ (3.63) $ (2.56) $(1.47) $ (1.59)
======= ======= ======= ======= ======= ====== =======
Shares used in computing
basic and diluted net
loss per share......... 87 107 245 438 562 557 633
Pro forma basic and
diluted net loss per
share.................. $ (0.17) $ (0.11)
======= =======
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 8,478 9,565
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------ June 30,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
short-term
investments............ $ 459 $ 754 $ 2,823 $ 1,943 $ 2,376 $ 1,805
Working capital......... 836 830 3,730 3,206 3,814 3,859
Total assets............ 2,256 2,681 6,330 7,418 8,699 9,059
Long-term debt, net of
current portion........ -- 10 -- 150 -- --
Convertible preferred
stock.................. 13,022 14,234 19,207 21,154 23,842 24,534
Total stockholders'
deficit................ (11,777) (13,544) (15,363) (16,851) (18,226) (18,811)
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Financial Data" and our financial statements and the related notes
included elsewhere in this prospectus.
Overview
We develop, manufacture and market screening products for the detection and
monitoring of common medical disorders in infants. Currently, we sell our ALGO
products for hearing screening, and we expect to begin actively marketing our
CO-Stat products for the analysis of hemolysis and management of jaundice in
early 2001.
Our net revenues consist of revenues from sales of equipment and
disposables. We currently derive substantially all of our net revenues from
sales of a limited number of products. Nearly all of our net revenues were from
sales of our ALGO products in 1997, 1998, 1999 and the six months ended June
30, 2000. Although we began selling our CO-Stat product in July 1999 on a very
limited basis for clinical testing, we have not actively marketed it for
commercial sale and expect that a substantial majority of our net revenues will
continue to be generated from sales of our ALGO products for at least the next
two years.
We sell our products directly through our sales force in the United States
and indirectly through distributors internationally. Domestic sales were 86% of
our net revenues in 1997, 81% of our net revenues in 1998, 90% of our net
revenues in 1999 and 86% of our net revenues in the six months ended June 30,
2000. We plan to expand our international operations significantly because we
believe international markets represent a significant growth opportunity.
Consequently, we anticipate that international revenues will increase as a
percent of net revenues in the future. If international sales increase, we may
not experience corresponding growth in operating income due to the higher cost
of selling outside of the United States.
We record revenues upon shipment of products to our customers and
distributors. Revenues from extended warranty contracts are deferred and
recognized on a straight line basis over the contractual period. We provide
allowances for estimated warranty costs at the time of revenue recognition
based on our historical results. To date, warranty and extended warranty costs
have been in line with projected amounts. However, our past product warranty
experience may not be indicative of those we may experience in the future. We
provide ALGO screening equipment to our customers on loan without charge while
we repair or service their screening equipment.
We enter into general sales contracts with our distributors, and those
distributors are required to purchase a specified minimum amount of our
products. Our only remedy if these distributors fail to purchase the required
amounts is to cancel the contract. We rely on our distributors to submit
purchase orders for specific quantities of our products. Our sales are final
and not subject to a right of return. We do not consider backlog to be a
meaningful measure of future revenues because our customers can generally
cancel orders without penalty.
Large one-time sales of equipment or disposables may cause our gross profits
to be unpredictable from quarter to quarter. Our gross profit may also be
adversely affected by the level of sales to international distributors, large
individual customers, members of group purchasing organizations or groups of
customers, each of which receive volume discounts. Our gross profit may also be
affected by changes in manufacturing efficiencies.
Significant investment in research and development has been, and we believe
it will continue to be, required to develop new products and enhance existing
products to allow us to further penetrate our markets. In
27
<PAGE>
addition, research and development costs are impacted by the timing of
development activities, including clinical trials, which can have a significant
impact on costs in a given period.
During the six months ended June 30, 2000, we granted options to purchase
451,100 shares of our common stock at a weighted average exercise price of
$1.53 per share. The weighted average exercise price was below the weighted
average deemed fair value of $3.57 per share. We recorded cumulative deferred
stock compensation on our balance sheet of $1.5 million in connection with
these stock option grants. We will amortize this deferred stock compensation to
expense on an accelerated method over the four year vesting periods of the
related options. During the remainder of 2000, we expect to amortize stock
compensation expense of $425,000. We expect to amortize aggregate stock
compensation of approximately $432,000 during 2001, $201,000 during 2002,
$63,000 during 2003 and $1,000 during 2004. The amount of stock compensation
expense to be recorded in future periods could decrease if options for which
accrued but unrecognized compensation has been recorded are forfeited.
As of December 31, 1999, we had approximately $8.4 million of federal net
operating loss carryforwards for tax reporting purposes available to offset
future taxable income. These net operating loss carryforwards expire beginning
in 2002. We have not recognized any benefit from the future use of loss
carryforwards for these periods or for any other period since inception because
of uncertainty surrounding their realization. We may not be able to utilize our
net operating loss carryforwards before they expire if we continue to generate
net losses. The amount of net operating losses that we can utilize may be
limited under tax regulations in circumstances including a cumulative stock
ownership change of more than 50% over a three year period. Accordingly, even
if we have net income, the amount of net operating loss carryforwards we can
use in any given year may be limited, and we may not be able to use some
portion or all of our net operating loss carryforwards. This offering may
result in a cumulative change in ownership sufficient to limit our ability to
use our net operating loss carryforwards.
Since our inception, we have incurred significant net losses, including net
losses available to common stockholders of $1.9 million in 1997, $1.6 million
in 1998, $1.4 million in 1999 and $1.0 million in the six months ended June 30,
2000. In addition, we had an accumulated deficit of $19.5 million as of June
30, 2000. We expect to continue to incur net losses for at least the next
12 months.
Our net loss available to common stockholders includes accretion charges to
increase over time the carrying amount of our redeemable convertible preferred
stock to the amount we would be required to pay if the preferred stock were to
be redeemed. Our redeemable convertible preferred stock will convert to common
stock on a one to one basis upon the closing of this offering. We will not pay
accrued dividends on the redeemable convertible preferred stock when it
converts, and accrued but unpaid dividends will become additional paid-in
capital.
28
<PAGE>
Results of Operations
The following table sets forth the results of our operations expressed as a
percent of net revenues. Our historical operating results are not necessarily
indicative of the results for any future period.
<TABLE>
<CAPTION>
Percent of Revenue
-------------------------------------
Six Months
Years Ended Ended
December 31, June 30,
--------------------- -------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues.......................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues...................... 36.0 35.1 33.5 34.6 35.5
----- ----- ----- ----- -----
Gross profit........................ 64.0 64.9 66.5 65.4 64.5
----- ----- ----- ----- -----
Operating expenses:
Marketing and selling............... 42.5 39.5 38.8 41.0 39.9
Research and development............ 16.0 17.1 12.4 14.4 14.6
General and administrative.......... 12.3 10.3 12.1 11.4 10.5
Amortization of deferred stock
compensation....................... -- -- -- -- 2.5
----- ----- ----- ----- -----
Total operating expenses.......... 70.8 66.9 63.3 66.8 67.5
----- ----- ----- ----- -----
Income (loss) from operations......... (6.8) (2.0) 3.2 (1.4) (3.0)
Other income (expense), net........... 1.0 0.7 0.1 0.1 0.1
----- ----- ----- ----- -----
Income (loss) before taxes............ (5.8) (1.3) 3.3 (1.3) (2.9)
Income tax expense.................... -- -- 0.1 -- --
----- ----- ----- ----- -----
Net loss.............................. (5.8) (1.3) 3.2 (1.3) (2.9)
Accretion of redeemable convertible
preferred stock...................... 12.9 8.7 10.5 7.8 6.3
----- ----- ----- ----- -----
Net loss available to common
stockholders..................... (18.7)% (10.0)% (7.3)% (9.1)% (9.2)%
===== ===== ===== ===== =====
</TABLE>
For the six months ended June 30, 2000, cost of revenues includes
amortization of deferred stock compensation of 0.7%. Amortization of deferred
stock compensation for the six months ended June 30, 2000 includes marketing
and selling of 0.8%, research and development of 0.4% and general and
administrative of 1.3%.
Six Months Ended June 30, 2000 and 1999
Net revenues consist almost exclusively of revenues from the sale of ALGO
screening equipment and its related disposables. Our net revenues increased
$2.1 million, or 23.4%, from $8.9 million in the six months ended June 30, 1999
to $11.0 million in the six months ended June 30, 2000. These increases were
primarily attributable to increased sales of disposables. Net revenues from
disposables increased $2.3 million, or 52.4%, from $4.5 million in the six
months ended June 30, 1999 to $6.8 million in the six months ended June 30,
2000. As a percent of net revenues, net revenues from sales of disposables
increased from 50.3% in the six months ended June 30, 1999 to 62.1% in the six
months ended June 30, 2000. No end customer accounted for more than 10% of our
net revenues in either of the six month periods ended June 30, 1999 or 2000.
Sales to our Japanese distributor accounted for 12% of our net revenues in the
six months ended June 30, 2000.
Net revenues from indirect sales outside the United States increased $1.1
million, or 275%, from $400,000 in the six months ended June 30, 1999 to $1.5
million in the six months ended June 30, 2000. This increase was due primarily
to the expansion of our operations in Japan and other countries. One factor
relating to the increase in net revenues in the Japanese market was the
commencement of the Japanese Ministry of Health and Welfare's pilot newborn
hearing screening program.
Cost of revenues includes materials costs, personnel expenses, amortization
of deferred stock compensation, packaging and shipping costs, other
manufacturing costs, warranty expenses and technology
29
<PAGE>
license fees. To date, technology license fees have not been material. Our cost
of revenues increased $826,000, or 26.8%, from $3.1 million in the six months
ended June 30, 1999 to $3.9 million in the six months ended June 30, 2000. The
increase in the cost of revenues in absolute dollars was primarily due to the
increased volume of screening equipment and disposable supplies sold during the
most recent six month period. Cost of revenues did not include any amortization
of deferred stock compensation in the six months ended June 30, 1999 but did
include amortization of $75,000 of deferred stock compensation in the six
months ended June 30, 2000. As a percent of net revenues, the cost of revenues
increased from 34.6% in the six months ended June 30, 1999 to 35.5% in the six
months ended June 30, 2000. The increase in cost of revenues as a percent of
net revenues was attributable to the higher percentage of international sales
and the lower per unit selling prices associated with those sales. In addition,
our cost of revenues in the six months ended June 30, 2000 was impacted by
amortization of deferred stock compensation. Excluding amortization of deferred
stock compensation, cost of revenues increased from 34.6% of net revenues in
the six months ended June 30, 1999 to 34.8% of net revenues in the six months
ended June 30, 2000.
Gross profit increased $1.3 million, or 21.7%, from $5.8 million in the six
months ended June 30, 1999 to $7.1 million in the six months ended June 30,
2000. Gross profit as a percentage of net revenues decreased from 65.4% in the
six months ended June 30, 1999 to 64.5% in the six months ended June 30, 2000.
The decrease in gross profit as a percentage of net revenues was primarily due
to a higher percentage of international sales. Excluding the deferred
compensation charge, gross profit as a percent of net revenues was 65.4% in the
first six months of 1999 and 65.2% in the six months ended June 30, 2000.
Marketing and selling expenses consist primarily of salaries, commissions,
travel, promotional and advertising costs. Our marketing and selling expenses
increased $741,000, or 20.3%, from $3.7 million in the six months ended June
30, 1999 to $4.4 million in the six months ended June 30, 2000. The absolute
dollar increase in marketing and selling expenses was primarily attributable to
the hiring of additional marketing and selling personnel, increases in
commissions due to increased sales and the expansion of our sales efforts. As a
percent of net revenues, marketing and selling expenses decreased from 41.0% in
the six months ended June 30, 1999 to 39.9% in the six months ended June 30,
2000. The decrease in marketing and selling expenses as a percent of net
revenues was primarily attributable to the increase in net revenues for the six
months ended June 30, 2000.
Research and development expenses consist of engineering costs to develop
new products, enhance existing products and perform design quality assurance
activities. Our research and development expenses increased $317,000, or 24.6%,
from $1.3 million in the six months ended June 30, 1999 to $1.6 million in the
six months ended June 30, 2000. As a percent of net revenues, research and
development expenses were 14.4% in the six months ended June 30, 1999 and 14.6%
in the six months ended June 30, 2000. This increase in research and
development expenses was primarily attributable to the hiring of additional
engineers and consultants.
General and administrative expenses consist of corporate, finance, human
resource, administrative and legal expenses. Our general and administrative
expenses increased $131,000, or 12.8%, from $1.0 million in the six months
ended June 30, 1999 to $1.2 million in the six months ended June 30, 2000. The
absolute dollar level increase in general and administrative expenses was
primarily attributable to the hiring of additional personnel, as well as
increased legal, accounting and other consulting fees. As a percent of net
revenues, general and administrative expenses decreased from 11.4% in the six
months ended June 30, 1999 to 10.5% in the six months ended June 30, 2000. The
decrease in general and administrative expenses as a percent of net revenues
was primarily attributable to the increase in net revenues in the six months
ended June 30, 2000.
We recorded no amortization of deferred stock compensation in the six months
ended June 30, 1999. We recorded aggregate amortization of $353,000 of deferred
stock compensation in the six months ended June 30, 2000, of which $75,000 was
included in cost of revenues.
30
<PAGE>
Other income (expense), net consists of interest income, interest expense
and other miscellaneous expenses. Our other income (expense), net increased
$7,000, or 140%, from $5,000 in the six months ended June 30, 1999 to $12,000
in the six months ended June 30, 2000. The increase was primarily due to higher
interest earned on increased average cash balances in the six months ended June
30, 2000.
Years Ended December 31, 1999 and 1998
Net revenues increased $3.9 million, or 24.5%, from $15.9 million in 1998 to
$19.8 million in 1999. These increases were primarily attributable to
substantial growth in our installed base of screening equipment, as well as
additional sales of disposables to our existing customers. Net revenues from
disposables increased $3.6 million, or 51.1%, from $7.1 million in 1998 to
$10.7 million in 1999. As a percent of net revenues, net revenues from sales of
disposables increased from 44.6% in 1998 to 54.1% in 1999. No end customer
accounted for more than 10% of our net revenues in either 1998 or 1999.
However, our Japanese distributor accounted for 14% of our net revenues in
1998.
Net revenues from indirect sales outside the United States fell $1.1
million, or 35.4%, from $3.1 million in 1998 to $2.0 million in 1999. The
decrease was due to a large one time equipment purchase in 1998 by a local
government agency in Belgium that instituted a universal newborn hearing
screening program.
Cost of revenues increased $1.0 million, or 18.8%, from $5.6 million in 1998
to $6.6 million in 1999. The increase in the cost of revenues in absolute
dollars was primarily due to the increased volume of screening equipment and
disposable supplies sold during 1999. As a percent of revenues, the cost of
revenues decreased from 35.1% in 1998 to 33.5% in 1999.
Gross profit increased $2.9 million, or 27.7%, from $10.3 million in 1998 to
$13.2 million in 1999. Gross profit as a percentage of net revenues increased
from 64.9% in 1998 to 66.5% in 1999. The increase in gross profit and the
corresponding decrease in cost of revenues as a percent of net revenues was
primarily due to increased domestic direct sales and greater efficiencies in
our manufacturing and procurement operations.
Marketing and selling expenses increased $1.4 million, or 22.5%, from $6.3
million in 1998 to $7.7 million in 1999. The absolute dollar increase in
marketing and selling expenses was primarily attributable to the hiring of
additional marketing and selling personnel and increases in commissions due to
increased sales. As a percent of net revenues, marketing and selling expenses
decreased marginally from 39.5% in 1998 to 38.8% in 1999. The decrease in
marketing and selling expenses as a percent of net revenues was primarily
attributable to the increase in net revenues in 1999.
Research and development expenses decreased $254,000, or 9.4%, from $2.7
million in 1998 to $2.5 million in 1999. As a percent of net revenues, research
and development expenses decreased from 17.1% in 1998 to 12.4% in 1999. This
decrease in research and development expenses was primarily attributable to
reduced spending on CO-Stat development and clinical trials.
General and administrative expenses increased $746,000, or 45.5%, from $1.6
million in 1998 to $2.4 million in 1999. As a percent of net revenues, general
and administrative expenses increased from 10.3% in 1998 to 12.1% in 1999. The
increase in general and administrative expenses was primarily attributable to
the hiring of additional personnel, as well as increased legal, accounting and
other consulting fees. In addition, we elected not to pursue an acquisition of
a private company to which we had loaned $200,000, in connection with which we
received an exclusive, three month option to purchase substantially all of the
assets of the company. We subsequently wrote off the related promissory note,
which was in default and deemed uncollectible.
Other income (expense), net decreased $98,000, or 83.1%, from $118,000 in
1998 to $20,000 in 1999, as a result of reduced interest income on a lower
level of invested cash balances.
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<PAGE>
Years Ended December 31, 1997 and 1998
Net revenues increased $5.9 million, or 58.3%, from $10.0 million in 1997 to
$15.9 million in 1998. This increase was primarily attributable to growth in
existing product sales and the introduction of the ALGO Portable product. Net
revenues from disposables increased $2.1 million, or 42.0%, from $5.0 million
in 1997 to $7.1 million in 1998. As a percent of net revenues, net revenues
from sales of disposables decreased from 49.8% in 1997 to 44.6% in 1998, due
primarily to a large one-time supply purchase by a single customer in 1997. No
end customer accounted for more than 10% of our net revenues in either 1997 or
1998. However, our Belgian distributor accounted for 12% of our net revenues in
1997, and our Japanese distributor accounted for 14% of our net revenues in
1998.
Net revenues from sales outside the United States increased $1.7 million, or
121%, from $1.4 million in 1997 to $3.1 million in 1998. This increase was due
to expansion of our operations in Japan, Belgium and other countries.
Cost of revenues increased $2.0 million, or 54.4%, from $3.6 million in 1997
to $5.6 million in 1998. The absolute dollar increase in the cost of revenues
was due primarily to the increased volume of screening equipment and
disposables sold during the year. As a percent of revenues, the cost of
revenues decreased from 36.0% in 1997 to 35.1% in 1998. The decrease in cost of
net revenues as a percent of net revenues was primarily due to efficiencies
achieved on the greater volume of product shipments.
Gross profit increased $3.9 million, or 60.6%, from $6.4 million in 1997 to
$10.3 million in 1998. As a percent of net revenues, gross profit increased
from 64.0% in 1997 to 64.9% in 1998. The increase in both absolute dollars and
as a percent of net revenues was primarily attributable to increased net
revenues and efficiencies achieved in the manufacturing process.
Marketing and selling expenses increased $2.0 million, or 47.3%, from $4.3
million in 1997 to $6.3 million in 1998. As a percent of net revenues,
marketing and selling expenses decreased from 42.5% in 1997 to 39.5% in 1998.
This increase in absolute dollars was primarily attributable to increased
personnel costs, increased trade show and travel costs, and to a lesser extent,
the expansion of our marketing and selling activities in Europe.
Research and development expenses increased $1.1 million, or 69.2%, from
$1.6 million in 1997 to $2.7 million in 1998. As a percent of net revenues,
research and development expenses increased from 16.0% in 1997 to 17.1% in
1998. The increase in research and development expenses was primarily
attributable to an increase in the number of engineers we employed for the
enhancement of existing products and the development of new products, including
the CO-Stat products.
General and administrative expenses increased $407,000, or 33.1%, from $1.2
million in 1997 to $1.6 million in 1998. As a percent of net revenues, general
and administrative expenses decreased from 12.3% in 1997 to 10.3% in 1998. The
absolute dollar level increase of general and administrative expenses was
primarily attributable to hiring of additional personnel.
Other income (expense), net increased $21,000, or 21.6%, from $97,000 in
1997 to $118,000 in 1998. The increase in other income (expense), net was
primarily due to lower interest expense in 1998 as a result of lower borrowings
under our credit facilities and higher interest earnings on available cash
balances.
32
<PAGE>
Quarterly Results of Operations
The following table presents our operating results for each of the six
quarters in the period from January 1, 1999 through June 30, 2000. The
information for each of these quarters is unaudited and has been prepared on
the same basis as our audited financial statements appearing elsewhere in this
prospectus. In the opinion of our management, all necessary adjustments,
consisting only of normal recurring adjustments, have been included to present
fairly the unaudited quarterly results when read in conjunction with our
audited consolidated financial statements and the related notes appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Quarters Ended
-----------------------------------------------------
Dec.
Mar. 31, June 30, Sept. 30, 31, Mar. 31, June 30,
1999 1999 1999 1999 2000 2000
-------- -------- --------- ------ -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenues ........... $4,341 $4,577 $4,715 $6,150 $4,912 $6,097
Cost of revenues........ 1,508 1,574 1,654 1,888 1,766 2,142
------ ------ ------ ------ ------ ------
Gross profit.......... 2,833 3,003 3,061 4,262 3,146 3,955
Gross margin.......... 65.3% 65.6% 64.9% 69.3% 64.0% 64.9%
Operating expenses:
Marketing and
selling.............. 1,691 1,963 1,914 2,116 2,043 2,352
Research and
development ......... 703 585 587 582 743 862
General and
administrative....... 460 561 562 801 563 589
Amortization of
deferred stock
compensation......... -- -- -- -- 27 251
------ ------ ------ ------ ------ ------
Total operating
expenses........... 2,854 3,109 3,063 3,499 3,376 4,054
------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (21) (106) (2) 763 (230) (99)
Other income (expense),
net.................... 1 4 7 8 19 (7)
------ ------ ------ ------ ------ ------
Income (loss) before
taxes.................. (20) (102) 5 771 (211) (106)
Income tax expense...... -- -- -- 10 -- --
------ ------ ------ ------ ------ ------
Net income (loss)....... (20) (102) 5 761 (211) (106)
Accretion of redeemable
convertible preferred
stock.................. 347 348 347 1,043 346 346
------ ------ ------ ------ ------ ------
Net loss available to
common stockholders.... $ (367) $ (450) $ (342) $ (282) $ (557) $ (452)
====== ====== ====== ====== ====== ======
</TABLE>
Cost of revenues includes amortization of deferred stock compensation of
$10,000 in the three months ended March 31, 2000 and $65,000 in the three
months ended June 30, 2000. The amortization of deferred stock compensation
allocated to operating expenses in the three months ended March 31, 2000 was
comprised of marketing and selling expenses of $9,000, research and development
expenses of $6,000 and general and administrative expenses of $12,000. The
amortization of deferred stock compensation allocated to operating expenses in
the three months ended June 30, 2000 was comprised of marketing and selling
expenses of $82,000, research and development expenses of $42,000 and general
and administrative expenses of $127,000.
When compared to the comparable quarter from the prior year, net revenues
generally have increased each quarter due to sales of a larger number of
screening equipment units and disposables to our customers, as well as from
increases in the size and productivity of our sales force and broader
international distribution. We believe seasonal factors in our business have
caused and in the future will continue to cause revenues in the quarter ended
March 31 to decrease from the revenues in the immediately preceding quarter.
These seasonal factors include patterns in the capital budgeting and purchasing
cycles of our current and prospective customers and the economic incentives to
our sales force that generally occur in the last quarter of the calendar year.
In addition, bulk purchases by a state or agency of a foreign government can
cause a significant fluctuation in revenue for any quarter. For example, we
received a large order from a state during the quarter ended March 31, 1999
that increased revenues in the quarter significantly.
33
<PAGE>
Our operating results have varied significantly from quarter to quarter in
the past and may continue to fluctuate in the future. The quarterly
fluctuations are caused by a number of factors, including:
. the budgeting cycle of our customers;
. the size and timing of specific sales, such as large purchases of
screening equipment or disposables by government agencies or hospital
systems;
. product and price competition;
. the timing and market acceptance of new product introductions and product
enhancements by us and our competitors, such as the expected reduction in
demand for our ALGO 2e Color screener prior to the announced launch date
of our ALGO 3 screener;
. the length of our sales cycle;
. the loss of key sales personnel or international distributors; and
. changes caused by the rapidly evolving market for newborn screening
products.
Many of these factors are beyond our control, and therefore, we believe that
results of operations for interim periods should not be relied upon as any
indication of the results to be expected in any future period.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of convertible preferred stock and common stock, equipment financing and
cash generated from product sales. As of June 30, 2000, we had cash and cash
equivalents of $1.5 million, an accumulated deficit of $19.5 million and
working capital of $3.9 million.
Net cash used by operating activities was $939,000 for the year ended
December 31, 1997 and resulted primarily from net losses in that period offset
by increases in accrued liabilities and accounts payable. Net cash used by
operating activities was $298,000 for the year ended December 31, 1998 and
resulted primarily from net losses in that period and increases in accounts
receivable and inventory. These uses of cash were partially offset by increases
in accrued liabilities and accounts payable. Net cash provided by operating
activities was $1.3 million for the year ended December 31, 1999 and resulted
primarily from net income. Net cash used by operating activities was $159,000
for the six months ended June 30, 2000 and resulted from increases in inventory
and other working capital items.
Net cash used in investing activities was $579,000 for the year ended
December 31, 1997, $950,000 for the year ended December 31, 1998, $1.4 million
for the year ended December 31, 1999 and $414,000 for the six months ended June
30, 2000. Net cash used in investing activities during these periods was
primarily for purchases of new computers, equipment and furniture as we
expanded operations, loans to a foreign distributor in the form of convertible
notes and the purchase of a long-term investment.
Net cash provided by financing activities was $3.5 million for the year
ended December 31, 1997 and resulted primarily from our Series D convertible
preferred stock financing. Net cash provided by financing activities was
$350,000 for the year ended December 31, 1998 and resulted primarily from
borrowings under a bank line of credit and issuance of common stock upon the
exercise of employee options. Net cash provided by financing activities was
$519,000 for the year ended December 31, 1999 and resulted primarily from the
proceeds from the exercise of warrants to purchase series C convertible
preferred stock and issuance of common stock upon the exercise of employee
stock options. Net cash used by financing activities was $4,000 for the
six months ended June 30, 2000 and resulted primarily from the repayment of
short-term debt but was offset largely by the proceeds from issuance of common
stock upon the exercise of employee stock options.
As of June 30, 2000, we had $75,000 outstanding under a term equipment loan
that will be repaid through December 31, 2000.
34
<PAGE>
Our future liquidity and capital requirements will depend on numerous
factors, including:
. the amount and timing of revenues;
. the extent to which our existing and new products gain market acceptance;
. the extent to which we make acquisitions;
. the cost and timing of expansion of product development efforts and the
success of these development efforts;
. the cost and timing of expansion of marketing and selling activities; and
. available borrowings under line of credit arrangements and the
availability of other means of financing.
We believe that the net proceeds from this offering, together with our
current cash and investment balances and any cash generated from operations and
from current or future debt financing, will be sufficient to meet our operating
and capital requirements for at least the next 18 months. However, it is
possible that we may require additional financing within this period. We have
no current plans, and we are not currently negotiating, to obtain additional
financing following the completion of this offering. We intend to continue to
invest heavily in the development of new products and enhancements to our
existing products. The factors described above will affect our future capital
requirements and the adequacy of our available funds. In addition, even if we
raise sufficient funds to meet our anticipated cash needs during the next 18
months, we may need to raise additional funds beyond this time. We may be
required to raise those funds through public or private financings, strategic
relationships or other arrangements. Any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants.
Qualitative and Quantitative Disclosures about Market Risk
We develop products in the United States and sell those products primarily
in the United States, Japan and Europe. Our revenues for sales outside the
United States were approximately 10% of our net revenues in 1999 and
approximately 14% in the six months ended June 30, 2000. As a result, our
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. Our
sales are generally denominated in United States dollars; however, we expect
that a portion of our operating expenses and revenues in international
locations will be denominated in local currencies in the future. Historically,
our exposure to foreign exchange fluctuations has been minimal; however, as our
international sales and operations expand, we anticipate that our exposure to
foreign currency fluctuations will increase. As all of our sales are currently
made in United States dollars, a strengthening of the dollar could make our
products less competitive in foreign markets.
Our interest income is sensitive to changes in the general level of interest
rates in the United States, particularly since the majority of our investments
are in short-term instruments. Due to the nature of our short-term investments,
we have concluded that we do not have material market risk exposure.
Our investment policy requires us to invest funds in excess of current
operating requirements in:
. obligations of the United States government and its agencies;
. investment grade state and local government obligations;
. securities of United States corporations rated A1 or P1 by Standard &
Poors' or the Moody's equivalents; or
. money market funds, deposits or notes issued or guaranteed by United
States and non-United States commercial banks meeting certain credit
rating and net worth requirements with maturities of less than two years.
As of June 30, 2000, our cash and equivalents consisted primarily of demand
deposits and money market funds held by large institutions in the United
States. The recorded carrying amounts of cash and cash equivalents approximate
fair value due to their short-term maturities.
35
<PAGE>
Recent Accounting Pronouncements
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements, or
SAB 101, which summarizes certain of the SEC staff's views in applying
accounting principles generally accepted in the United States of America to
revenue recognition in financial statements. We have not yet determined what
the impact of the adoption of SAB 101, if any, will have on our financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, or SFAS 133. SFAS 133 defines derivatives, requires all
derivatives to be carried at fair value and provides for hedge accounting when
certain conditions are met. We will be subject to SFAS 133 commencing in 2001.
We have not yet determined what the impact of the adoption of SFAS 133, if any,
will have on our financial position or results of operations.
36
<PAGE>
BUSINESS
Overview
We are focused on developing, manufacturing and marketing screening products
for the identification and monitoring of common medical disorders that may
occur during the time from conception to a baby's first birthday. This period
is critical to a child's development. By allowing for early detection and
treatment, we believe our products can help reduce costs and minimize the
probability of unnecessary retesting or hospital readmission. We design our
products to deliver accurate results in a rapid and reliable manner. In
addition, our products address the standard of care guidelines set forth by the
American Academy of Pediatrics.
We have two product lines that have been cleared for marketing by the FDA:
the ALGO and the CO-Stat. We are selling our ALGO products for newborn hearing
screening, and, in early 2001, we expect to begin actively marketing our CO-
Stat products for the evaluation of newborn jaundice. Both of our current
product lines are comprised of hardware units and single-use disposable
components.
Our ALGO products use automated ABR to enable simple, non-invasive and
accurate screening for hearing impairment in newborns. The ALGO screener
delivers sound stimuli to a newborn's ears and analyzes the resulting brain
wave responses to produce a "Pass" or "Refer" result. The procedure can be
performed within hours after birth. In addition, the ALGO meets the American
Academy of Pediatrics' guidelines without requiring a trained audiologist to
operate the equipment. We currently sell our ALGO products in the United
States, Europe, Japan, Australia and New Zealand.
Our CO-Stat analyzer enables physicians, within hours after birth, to assess
the likelihood that serious newborn jaundice will not occur, thereby allowing
physicians to keep newborns with higher risk of developing serious newborn
jaundice in the hospital or under observation. Jaundice may be a sign of an
abnormally high rate of hemolysis. Our CO-Stat analyzers accurately and non-
invasively measure the rate of hemolysis by detecting the level of carbon
monoxide in exhaled breath. In addition, we are currently investigating the use
of the CO-Stat for monitoring and analysis of other conditions, including
pregnancy induced hypertension. To date, our CO-Stat products have been sold
primarily for clinical research.
Our Opportunity
Approximately 10.5 million children are born every year in industrialized
countries, including approximately 3.8 million in the United States. The most
critical time in a child's development is from conception to a baby's first
birthday. If a baby experiences a medical problem or disease during this period
of rapid growth and development, there can be profound and lasting effects on
his or her development and long-term societal and financial impacts on the
child's family and community.
Early detection of treatable disorders helps to achieve the best possible
outcome for the child and can reduce the impact and cost of the disorder. As a
result, governments and physician groups in industrialized countries have
adopted policies and guidelines for standard medical practices, known as
standards of care. The guidelines suggest that physicians should conduct
childhood screening and take preventative measures for common and potentially
serious disorders. Examples of standards of care include prenatal care offered
to pregnant women, universal newborn screening for common disorders and infant
immunization for common infections.
Hearing impairment and jaundice are among the more common disorders that a
baby may face after birth. Impaired hearing is one of the most common permanent
disabilities in infants and affects approximately six per every 1,000 newborns
in the United States. Jaundice affects approximately 60% of newborns in the
United States and may be a symptom of serious disorders that can cause
permanent brain damage or death. Other medical conditions that may occur during
pregnancy and the first year after birth include miscarriage and spontaneous
abortion, genetic abnormalities, premature labor and delivery, infection before
birth, metabolic problems and respiratory disorders. Despite the importance of
early identification and treatment of medical conditions in pregnant women and
infants, there are limited products for cost-effective and reliable detection
of common disorders.
37
<PAGE>
Our Solution
We believe our products deliver specific, sensitive results in a rapid and
reliable manner and are simple to use and cost-effective. We believe our
products offer the following benefits:
. Accuracy. Our products are designed to provide highly sensitive, specific
and reliable results and meet applicable guidelines developed by the
American Academy of Pediatrics.
. Immediate crib-side results. Clinicians can use our products to screen
newborns hours after birth. By obtaining the results of the newborn's
screening before the baby is discharged from the hospital, the child's
physician is able to assess whether discharge or further assessment is
appropriate. If the results indicate a potential hearing impairment or
that jaundice is likely to develop or worsen, the physician can begin to
develop a treatment plan or begin treatment before the baby is
discharged.
. Ease of use. Our products are designed to operate with a simple set-up
procedure and to be used by hospital staff with only a minimal level of
training. Our products are non-invasive and are designed to perform
screenings quickly.
. Cost-effectiveness. By identifying the disease or condition early, we
believe our products can reduce the long-term costs of care by enabling
the physician to begin treatment early. In addition, we believe the
accuracy of our devices minimizes erroneous and misleading results and,
therefore, lowers the costs of unnecessary retesting or hospital
readmission.
. Designed to meet standard of care guidelines. We design our products to
meet the standard of care requirements for universal screening programs
so that health care providers can obtain reimbursement for newborn
screening. Health care providers may not receive reimbursement if their
equipment cannot meet the applicable standard of care. We will continue
to work with states, other governmental organizations and other third
party payor groups to develop standard of care guidelines that include
universal hearing screenings.
Our Strategy
Our goal is to become the leading provider of equipment and single-use
disposable supplies for detection of common, treatable medical disorders that
occur during the period from conception to the baby's first birthday. The key
elements of our strategy include:
. Increase awareness. We plan to continue to use the following methods to
increase awareness of our products and the need for universal screening:
-- marketing our products to key clinical audiences including
neonatologists, pediatricians, obstetricians, ear, nose and throat
physicians, pediatric nurses and audiologists;
-- educating physicians and other clinicians about the benefits of
newborn screening;
-- supporting the publication of additional clinical research to provide
data supporting the expanded use of our products; and
-- expanding our domestic direct sales force and international
distribution channels.
. Focus on government and physician groups to promote universal screening
of newborns. We believe that clinical education of hospital
administrators and government officials will improve awareness of the
benefits of universal screening and the advantages of our products. For
example, we focus substantial marketing and selling efforts on state and
foreign government agencies that fund special education and other
services for hearing impaired children. We encourage these state agencies
to require universal hearing screening of all newborns and to provide
reimbursement or grants to purchase screening equipment. We intend to
pursue a similar strategy for future products.
. Continue to advance technology. We intend to aggressively pursue ongoing
research and development to introduce new products and improve our
existing products and technologies. We believe a number of additional
opportunities exist for the screening of newborns and pregnant women.
38
<PAGE>
. Enhance Natus brand by introducing new products. Through our
relationships with key clinicians and administrators and the market
acceptance of our hearing screening technology, we believe we are well
positioned to distribute existing products and introduce new products
into the nursery and neonatal intensive care unit. In addition, we intend
to expand our product offerings to address diseases and conditions that
affect both babies and pregnant women during the period of time from
conception to a baby's first birthday. As recognition of the Natus brand
grows, we believe we can introduce a number of new products, which can be
marketed to the same clinical audience as our existing ALGO and CO-Stat
product lines.
. License our technology to strategic partners for use in screening
adults. We intend to enter into strategic partnerships to conduct
clinical studies of our products for adult indications including blood
disorders, heart and lung diseases and respiratory disorders.
Clinical Background
Hearing Impairment
Overview
Approximately 3.8 million babies are born each year in the United States,
and hearing impairment affects approximately six per every 1,000 of those
newborns. Until the introduction of universal newborn hearing screening
programs, screening was generally performed only on those newborns who had risk
factors for hearing impairment, including a family history of hearing
impairment, infection prior to birth, low birth weight, skull or facial
anomalies or bacterial meningitis. However, screening only those newborns with
risk factors for hearing impairment overlooks approximately half of newborns
with some level of hearing impairment.
Early identification of hearing impairment and early intervention has been
shown to improve language development significantly. Babies identified at birth
as deaf or hearing impaired, who begin immediate therapy, can learn and
progress at a rate comparable to children with normal hearing, regardless of
the severity of hearing loss. However, undetected hearing impairment often
results in the failure to learn, process spoken language and speak. A 1997
study conducted at the University of Colorado, Boulder evaluated the impact of
a hearing impairment on language and speech. All of the children evaluated in
the study were born with a hearing impairment but differed by the age at which
it was detected. The study concluded that those children whose hearing loss was
detected and received treatment early had significantly better language skills
and vocabularies than those children whose hearing loss was detected later.
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Prior to universal newborn hearing screening, the average age of hearing
impairment detection was two and one-half years after birth. The following
chart from the Marion Downs National Center for Infant Hearing at the
University of Colorado, Boulder compares the vocabulary at 36 months of age of
hearing impaired children to the vocabulary of children with normal hearing.
The following chart illustrates the impact of early identification and
intervention.
[Graphic: Diagram showing range of high and low and average number of
vocabulary words of children at 36 months of age with normal hearing and with
hearing impairment identified at (1) birth, (2) six months and (3) two years.]
The Marion Downs Center estimates that the cost of profound neonatal hearing
impairment to society is approximately $79 billion per year in the United
States due to increased educational costs, lower lifetime income and higher
unemployment. The Marion Downs Center also estimates that profound hearing
impairment can cost a child's family and society up to one million dollars
during his or her lifetime. Effective and early newborn hearing screening can
help to reduce these costs by enabling a newborn with hearing impairment to
obtain treatment. Early identification and therapy for hearing impaired
children has the potential to reduce the cost of special services and education
substantially for state governments. The State of Colorado estimates that a
state can save as much as $400,000 per child over his or her lifetime in
special services and educational costs alone.
The University of Colorado, Boulder's study also demonstrates that early
identification of hearing impairment has a significant impact on the child's
development regardless of the degree of hearing impairment. Treatment options
for hearing impaired children, include:
. amplification, such as hearing aids;
. therapies for language acquisition, such as sign language;
. oral approaches, such as lip reading; and
. surgical intervention, such as cochlear implants.
These treatments, when begun early, allow the child to learn, listen, speak
and process spoken language at more advanced levels throughout his or her life.
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Newborn Hearing Screening
Newborn hearing screening has been performed in the United States since 1964
but has been generally limited to babies with risk factors for hearing
impairment. We believe the lack of accurate, low cost screening devices and the
subjective nature of other currently used tests has limited the willingness of
governments and physicians to adopt hearing screening as a standard of care for
all newborns. In recent years, the clinical evidence in support of early
detection for hearing impairment combined with the introduction of new
screening technology has increased support for universal newborn hearing
screening programs. In 1993, the National Institutes of Health and, in 1994,
the Joint Committee on Infant Hearing endorsed universal newborn hearing
screening. The combined clinical benefit and cost savings provided incentives
for states to begin mandating universal newborn hearing screening as early as
1995.
Thirty-one states have universal newborn hearing screening mandates in place
with legislation pending in another six states. The majority of the mandates
currently allow for implementation over a two to three year period. An
additional four states have voluntary programs in place. We defined states that
voluntarily comply to be states without mandated universal newborn screening
but in which at least 50% of newborns are screened using ALGO equipment. In
these states, the state health departments may purchase and distribute hearing
screening equipment even though screening is not mandated. We estimate that
approximately 94% of births in 2000 will occur in states with mandates, pending
mandates or voluntary programs in place.
Status of Universal Newborn Hearing Screening by State
(as of May 2000)
<TABLE>
<CAPTION>
Voluntary
Mandatory(1) Compliance Legislation Pending No Active Programs
<S> <C> <C> <C> <C> <C>
1995 1999 Texas Arizona New Mexico Alabama
---- ----
Hawaii Arkansas Wisconsin Michigan Ohio Alaska
Rhode Island Georgia Wyoming Montana Pennsylvania Delaware
1997 Illinois 2000 Nevada Tennessee Idaho
---- ----
Connecticut Indiana Florida Vermont Iowa
Mississippi Kansas Kentucky Washington Minnesota
1998 Louisiana Maine New Hampshire
----
California Maryland New Jersey North Dakota
Colorado Missouri Oklahoma South Dakota
Massachusetts Nebraska South Carolina
Utah New York
Virginia North Carolina
West Virginia Oregon
------------------------------------------------------------------------------------------------
</TABLE>
(1) The year listed reflects the year the particular state passed legislation
or implemented regulations to require universal newborn hearing screening.
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The following graphic illustrates the impact of state newborn hearing
screening programs and the estimated number of babies screened annually, each
in terms of the estimated number of births in 2000. The differences in the
estimated number of births in states with mandated universal screening and the
estimated number of babies screened is primarily due to the time it takes
hospitals to implement mandated programs, as well as voluntary compliance in
states with no mandates.
[Graphic description consisting of 2 pie charts.
Mandatory Universal Newborn Hearing Screening Coverage
Mandated 75% 2.9 million births
Mandate pending 13% 0.5 million births
Voluntary 6% 0.2 million births
No mandate 6% 0.2 million births
Estimated Newborns Screened
Not Screened 57% 2.3 million births
Screened 43% 1.7 million births]
Recognizing that only 50% of children with hearing impairment have a risk
factor, the American Academy of Pediatrics stated that selectively screening
babies at high risk was inadequate, and it has recommended that all babies be
screened for hearing impairment. In 1999, the American Academy of Pediatrics'
Task Force on Newborn and Infant Hearing published guidelines for universal
newborn hearing screening programs. These guidelines are intended to establish
the standard of care and provide that:
. at least 95% of all newborns should be screened;
. the screening method used must have the ability to detect all infants
with a hearing impairment of at least 35 decibels in the better ear;
. the screening method should not refer more than 4% of all children tested
for further evaluation;
. no more than 3% of children with normal hearing who are screened should
receive results that indicate they have a hearing impairment, a screening
error known as a false positive result; and
. no child whose hearing is impaired should receive a normal result, a
screening error known as a false negative result.
Because positive results are referred to an audiologist or physician for
additional testing and evaluation, the cost of a newborn screening program is
reduced by limiting the number of further evaluations stemming from false
positive results. In addition, false positive results can cause unnecessary
emotional trauma for parents.
In order to meet the guidelines set forth by the American Academy of
Pediatrics, a hearing screening program needs to employ a screening method that
focuses on two parameters: sensitivity and specificity. Sensitivity is the
capacity to detect the disease or disorder in those infants with the disease or
disorder. A sensitivity of 100% indicates that no newborns with a hearing
impairment receive results indicating the absence of a hearing impairment.
Specificity is the capacity to detect those infants without the disease or
disorder. A specificity of 100% indicates that no newborns who actually have
normal hearing receive results suggesting the presence of a hearing impairment.
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Screening Techniques
Traditional methods of screening for hearing impairment include subjective
behavioral tests and more expensive objective diagnostic processes. We believe
widespread acceptance of screening newborns for hearing impairment requires a
relatively inexpensive screening method that produces sensitive, specific and
reliable results. The two traditional technologies used to screen newborns for
hearing impairment are auditory brainstem response and otoacoustic emissions.
Auditory brainstem response (ABR). ABR is the most accurate and
comprehensive method for characterizing hearing impairment in adults and
infants. ABR uses sensors placed on the head to measure the response of the
brain and auditory nerves to sounds delivered through earphones. Hearing
impairment is evaluated by monitoring the brain's response to varying the
frequency and volume of the sounds. Trained clinicians must operate the ABR
screening equipment, and the screening results must be interpreted by an
audiologist or trained physician. ABR is primarily used to assess the degree of
hearing impairment in adults and children and is not widely used for newborn
screening due to the high cost, lengthy procedure time and unavailability of
trained specialists in many neonatal nurseries.
Otoacoustic emissions (OAE). OAE screening is a method of detecting hearing
impairment in adults and children. Otoacoustic emissions are sounds created by
the active biomechanical processes within the sensory cells of normal ears.
Since otoacoustic emissions are present in normal ears, an absence of
otoacoustic emissions is a sign of irregular function of these sensory cells,
which could result in hearing impairment. OAE screening uses a probe placed in
the ear to deliver auditory stimulus and measures the response of the sensory
cells with a sensitive microphone. OAE screening does not evaluate the function
of the entire hearing pathway because it does not assess the neural pathways.
Therefore, OAE can fail to detect disorders affecting the neural pathways. An
individual OAE screening is relatively inexpensive. However, OAE screening can
result in an excessive number of false positive results, which require
retesting. These false positive results occur because in the first days after
birth newborns commonly have fluid in their ears from the birth process, which
can impair the ability to accurately assess hearing impairment with one
screening.
Automated ABR. In order to address the limitations of other screening
techniques, our ALGO product family utilizes automated ABR to provide accurate
and non-invasive hearing screening for newborns. The ALGO screener, like ABR
devices, utilizes a number of sensors placed on the head to measure the
response of the brain and auditory nerves to sounds delivered through
earphones. Unlike ABR devices, however, our ALGO screener does not require a
trained clinician to conduct the screening or an audiologist or physician to
interpret the results. The ALGO screener uses algorithms to perform the
screening and draw a conclusion as to whether a baby needs to be referred to an
audiologist for further evaluation. We estimate that the annual market for our
ALGO products is approximately $140 million.
Hemolysis and Jaundice
Overview
Babies are generally born with a quantity of red blood cells necessary for
fetal life but in excess of their needs as newborns. These excess red blood
cells are normally broken down by the body in a process known as hemolysis. The
two products of hemolysis are a yellow pigment called bilirubin and a
proportional amount of carbon monoxide, or CO. Abnormal rates of hemolysis
cause abnormal levels of carbon monoxide and bilirubin. An abnormal rate of
hemolysis may also be an indicator of a number of other disorders including
anemia, infection and some genetic disorders.
High amounts of bilirubin in the body can cause a yellowing of the skin and
eyes called jaundice. The high level of bilirubin can result either from too
much bilirubin being produced by hemolysis or from the body's failure to
excrete the bilirubin. Extremely high levels of bilirubin, or
hyperbilirubinemia, are toxic and may cause irreversible brain damage and
potentially result in death.
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The American Academy of Pediatrics Committee on Fetus and Newborns estimates
that each year 60% of the four million newborns in the United States become
jaundiced. According to the Journal of the American Medical Association,
neonatal jaundice is the single largest cause for hospital readmission of
newborns in the United States and account for 50% of readmissions.
Hyperbilirubinemia occurs in approximately 6% to 10% of newborns. Because of
the serious consequences of hyperbilirubinemia, the American Academy of
Pediatricians recommends that all newborns be closely monitored for jaundice
and has called for the physician to determine the presence or absence of an
abnormal rate of hemolysis to establish the appropriate treatment for the
newborn. We believe that the hospitals in the United States spend approximately
$1.3 billion per year to treat neonatal jaundice in the hospital. Of this
amount, approximately half is due to treatment of readmitted newborns. By
identifying those infants with high rates of hemolysis before they are
discharged, fewer newborns would need to be readmitted and treatment could
begin earlier.
Depending on its cause, jaundice can be treated by helping the newborn to
excrete the bilirubin or to reduce bilirubin production. In the early stages,
jaundice can be treated with blue light, known as phototherapy, hydration and
frequent feedings. Dangerous or toxic levels of bilirubin are treated by blood
exchange transfusion, which is a high-risk procedure for newborns. If a
physician can assess the levels of bilirubin being created and excreted by a
newborn, the physician can tailor the treatment appropriately, reduce the
number of invasive tests required to monitor the levels of bilirubin, evaluate
the long-term effects of the jaundice and determine the appropriate term of
hospitalization. In full term infants, the level of bilirubin in their blood is
highest at approximately 72 hours after birth. However, infants are being
discharged from the hospital before 48 hours after birth due to cost
considerations. Thus, some infants may develop a potentially dangerous
elevation in bilirubin levels after discharge. With early discharge, clinical
reports show that the number of cases of brain damage caused by
hyperbilirubinemia is on the rise.
Our CO-Stat product measures a baby's exhaled carbon monoxide to indicate
the rate at which bilirubin is being produced and may assist the clinician in
determining the cause of neonatal jaundice. If the rate of production, or
hemolysis, is normal or low, the baby is not producing excessive levels of
bilirubin and may be a candidate for early discharge. If the rate of hemolysis
is high, this may be an indication of potentially serious disorders and
increases the likelihood of neonatal jaundice. If the baby is producing high
levels of bilirubin and does not develop jaundice in the first few days, the
baby is assumed to be eliminating bilirubin efficiently but the underlying
cause of the hemolysis may require treatment. If the baby develops jaundice,
monitoring the rate of hemolysis with our CO-Stat product can help determine if
jaundice is caused by excessive bilirubin production or inadequate bilirubin
excretion.
Screening Techniques
Current means of identifying newborns with high or increasing bilirubin
levels include visual observation, blood tests to assess bilirubin levels,
antibody tests and the use of devices that measure the amount of yellow in the
skin.
Total Serum Bilirubin Test. The total serum bilirubin test is a blood test
that measures the total amount of bilirubin in the blood but does not
differentiate between increased bilirubin production or decreased bilirubin
elimination. As a result, the test does not give the clinician the information
necessary to determine the cause of the increased bilirubin level and the most
appropriate treatment for the newborn.
The Coombs Test. The Coombs test is another frequently administered blood
test that determines whether a specific antibody is affixed to the baby's red
blood cells. This antibody is often associated with a high rate of hemolysis in
newborns. However, other conditions may result in the presence of the antibody,
and the antibody's absence does not rule out a high rate of hemolysis or
excessive levels of bilirubin. In addition, the Coombs test does not measure
the rate of hemolysis. Even given these limitations, the Coombs test remains
the most frequently used indicator of high levels of hemolysis and, in
developed countries, it is currently administered to 50% to 60% of newborns
prior to hospital discharge.
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Skin Tone Assessment. In recent years, a number of devices have been
introduced to monitor changes in bilirubin levels by measuring the amount of
yellow in the skin. They are convenient because they do not require a blood
sample. However, the reliability of tests performed with these devices is
complicated by the variations in skin pigmentation, the baby's age and birth
weight. As with the blood sampling methods, measuring the amount of yellow in
the skin does not identify the factors contributing to the elevated bilirubin
level.
Natus CO-Stat Analyzer. In order to address the limitations of other means
of analyzing hemolysis, our CO-Stat product family measures a baby's exhaled
carbon monoxide to assess the rate of hemolysis accurately. Hemolysis produces
bilirubin and carbon monoxide in equal amounts, so that the rate of bilirubin
production can be estimated by an analysis of the carbon monoxide in a
newborn's exhaled breath, while correcting for the carbon monoxide existing in
the screening environment. The physician can measure the level of exhaled
carbon monoxide to assess the rate of hemolysis. An assessment of how rapidly a
newborn is producing bilirubin can help to identify those newborns who are more
likely to develop jaundice after discharge from the hospital. If a newborn
develops jaundice, knowing how rapidly a newborn is producing bilirubin can
also help physicians determine whether jaundice stems from excessive bilirubin
production or failure to excrete bilirubin adequately. We estimate that the
annual market for our CO-Stat products is approximately $200 million.
Our Products
Our products include the ALGO, MiniMuff and CO-Stat products. The ALGO
screeners and single use disposable supplies are designed to objectively test
newborn hearing shortly after birth and prior to discharge. We also make the
MiniMuff, a single use protective ear cover, which reduces the noise newborns
in neonatal intensive care units hear. The CO-Stat analyzer and disposable
supplies are designed to provide a measure of the rate of hemolysis in order to
monitor the cause of elevation in the level of bilirubin. The following table
provides a list of our current products.
<TABLE>
<S> <C> <C>
Hearing Products Description Approved Markets
ALGO 2e Color Screener Newborn hearing screening station United States, Europe,
Japan, Australia and New
Zealand
ALGO Portable Screener Portable newborn hearing screening station United States, Europe
and Japan
ALGO Disposable Kit: Single use disposables including earphones
and United States, Europe,
Ear Couplers Jelly electrodes Japan, Australia and
Button Sensors New Zealand
MiniMuff Single use disposable ear cover to reduce United States, Europe
noise (no approval required),
Australia and
New Zealand
Jaundice/Hemolysis Products
CO-Stat Breath Analyzer Newborn screening station to analyze the United States and Europe
rate of hemolysis
CO-Stat Disposable Kit: Single use disposables including tubing and United States and Europe
Sample Tubing Filters filter unit for patient sampling
</TABLE>
--------------------------------------------------------------------------------
45
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Hearing Products
ALGO Product Family
Our ALGO product family utilizes automated ABR technology to provide
accurate and non-invasive hearing screening for newborns. The ALGO screener
delivers thousands of soft clicking sounds at 35 decibels to the newborn's ears
through sound cables and disposable ear phones connected to the instrument.
Each click elicits a series of identifiable brain waves, which are detected by
disposable sensors placed on the baby's forehead and shoulder and at the nape
of the neck. The ALGO screener automatically extracts the infant's brainwave
responses from the background noise and noise caused by muscle activity. These
brainwave responses are then compared to a template based on the brainwave
responses of infants with normal hearing. The ALGO screener displays a "Pass"
message when it collects sufficient data to establish that the baby's responses
are normal with a 99.96% level of statistical confidence. If a determination
cannot be reached after 15,000 clicks, the ALGO screener displays a "Refer"
message, indicating that the infant should be referred for more detailed
evaluation. We believe that by using AABR technology our ALGO products have a
number of advantages:
. Accuracy. Tests using automated ABR have the highest documented
specificity and sensitivity for newborn hearing screening of devices not
requiring a specially trained audiologist.
. Compliant with standard of care guidelines. Our ALGO screener meets the
requirements of the American Academy of Pediatricians for universal
newborn hearing impairment.
. Immediate crib-side results. Our screening tests can be conducted within
hours after birth. Middle ear fluid and ear canal debris, which are often
still present in the first 12 to 24 hours of after birth, do not
significantly affect the results of our test.
. Non-invasive. No probes are used to conduct our tests.
. Ease of use. Our test can be administered by nurses or other hospital
staff with minimal training because it does not require a trained
audiologist to conduct the screening or interpret the results.
. Objective results. Our test produces objective "Pass" or "Refer" results,
which do not require interpretation by an audiologist or other trained
clinician.
. Rapid results. ALGO hearing screenings can be performed and results can
be obtained prior to discharge from the hospital.
The ALGO Newborn Hearing screener line was first introduced in 1985. We have
since introduced five new versions of the ALGO and currently market the ALGO 2e
Color and the ALGO Portable.
ALGO 2e Color Screener. In December 1998, we introduced the ALGO 2e Color,
which incorporates a laptop computer containing our circuit boards and uses
commercially available operating system software. This system uses our software
to conduct simultaneous screening of both ears and also conducts tests at 40
decibels and 70 decibels. The ALGO 2e Color uses our software to store results
from every test automatically, which facilitates prompt follow-up and tracking
of patient results. Users can print daily, weekly or monthly reports, create
backup files and integrate screening results into statewide databases. The ALGO
2e Color also is designed to allow for future software and hardware upgrades.
The current list price of the ALGO 2e Color is $17,500.
ALGO Portable Screener. In June 1998, we introduced the ALGO Portable, which
is compact and weighs less than five pounds. The ALGO Portable screener
provides the flexibility to screen newborns in the newborn nursery, doctor's
office, clinic or home. The ALGO Portable comes with an attachable printer and
is sold primarily in Europe and to low-volume birthing centers and hospitals.
The current list price of the ALGO Portable is $10,900.
ALGO Disposable Kit. For infection control and accuracy, each hearing
impairment test conducted with the ALGO is carried out with the ALGO disposable
kit that includes single use earphones, which we call Ear
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Couplers, and electrodes, which we call Jelly Button Sensors. All of our
screening supplies are alcohol and latex-free, and our adhesives are specially
formulated for newborns. The current list price of our ALGO disposable kit is
$9.75 per kit.
Currently some hospitals use our ALGO products to screen only those newborns
with risk factors for hearing losses while other hospitals use our ALGO
products in their universal newborn screening programs.
MiniMuff Neonatal Noise Attenuators
In 1995, we introduced our MiniMuff neonatal noise attenuators, which are
disposable earmuffs designed to decrease noise exposure for babies in neonatal
intensive care units. The MiniMuff fits securely over a baby's ear and reduces
sound levels by at least seven decibels, representing a reduction of sound
pressure by more than 50%. Our MiniMuff products are sold in the United States
and meet health care infection control standards through a single use design.
They adhere to the baby's head with a non-toxic adhesive and are designed for a
single use on a single patient for one day. The current list price of our
MiniMuff product is $5.00.
Hemolysis Products
CO-Stat Product Family
Our CO-Stat product measures a baby's exhaled carbon monoxide to indicate
the rate at which bilirubin is being produced and may assist the clinician in
determining the cause of neonatal jaundice. We believe that our CO-Stat
products have a number of advantages, which include:
. Accuracy. We believe our CO-Stat analyzer produces reliable results
because it separates environmental carbon monoxide from carbon monoxide
in exhaled breath.
. Address standard of care guidelines. Our CO-Stat products can be used by
physicians to address the guidelines of the American Academy of
Pediatrics, which recommends the monitoring of the rate of hemolysis in
newborns.
. Immediate crib-side results. Screening procedures using the CO-Stat
analyzer can be conducted in less than 10 minutes and within hours after
birth.
. Non-invasive. No invasive probes or needles are used to conduct hemolysis
screening with the CO-Stat analyzer.
. Objective results. The CO-Stat test results are not affected by
variations in skin tone or the after effects of the birth process on skin
color.
. Ease of use. Our CO-Stat test can be administered by nurses or other
hospital staff with minimal training.
. Important clinical data provided. The CO-Stat analyzer indexes the rate
at which the baby is producing new bilirubin to aid physicians in
determining the cause of newborn jaundice and selecting appropriate
therapies.
By measuring and subtracting the environmental carbon monoxide during the
screening procedure, CO-Stat isolates trace levels of carbon monoxide produced
primarily through the breakdown of red blood cells. This information helps
physicians distinguish between the jaundice stemming from bilirubin production
rather than the body's failure to excrete bilirubin. The CO-Stat assists
clinicians to assess bilirubin production, but does not determine the level of
bilirubin.
CO-Stat End Tidal Breath Analyzer. Our CO-Stat End Tidal Breath Analyzer is
a patient-side device used for the non-invasive, quantitative measurement of
respiratory rate, carbon dioxide concentration and carbon monoxide
concentration in the breath. We believe that the CO-Stat analyzer is the only
commercially available product that can detect the rate of hemolysis in
newborns. We received FDA clearance for use of our CO-Stat products to monitor
hemolysis in March 1998. However, we have not yet begun to actively market our
CO-Stat products. We intend to market the CO-Stat analyzer upon release of a
study of the cost-effectiveness and reliability of jaundice monitoring with CO-
Stat as compared to the Coombs test. This study is scheduled to be completed by
the University of Chicago in early 2001.
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<PAGE>
CO-Stat Disposables. A small plastic tube containing filters attaches to the
CO-Stat analyzer and is placed at the opening of the baby's nostril. To ensure
proper infection control and accuracy of the test, the tube and filters used to
sample the baby's breath and environmental carbon monoxide are disposed of
after a single use. The sampling of environmental carbon monoxide alters the
tube and filters so that they cannot be reused for another test.
Development Status
We conducted a two year study of the CO-Stat analyzer at ten sites with
1,200 newborns to evaluate the ability of the carbon monoxide analysis alone
and in combination with blood-based bilirubin testing to identify newborns who
are at risk for developing hyperbilirubinemia. Principal clinical investigators
in the United States included researchers from Stanford University, University
Hospital of Cleveland, Women & Infants' Hospital in Providence, Rhode Island,
the University of Pennsylvania and William Beaumont Hospital in Royal Oak,
Michigan. Investigators from hospitals in Israel, Hong Kong and Japan also
participated. Based on the data gathered during the study, the investigators
concluded that a high rate of hemolysis is an important contributing factor in
the majority of cases of hyperbilirubinemia. In addition, the investigators
concluded that the CO-Stat enables clinicians to rule out excessive rates of
hemolysis and thereby identify those babies who potentially may be discharged
early because they are not likely to develop hyperbilirubinemia. In addition,
the study also concluded that the preferred means of conducting pre-symptomatic
jaundice monitoring is assessing bilirubin production and elimination
concurrently. The CO-Stat assists clinicians to assess bilirubin production,
but does not determine the level of bilirubin in the blood or bilirubin
elimination.
In addition, the University of Chicago is conducting a clinical study of
approximately 600 babies to assess the cost-effectiveness and reliability of
the CO-Stat as compared to the Coombs test.
Customers
Our customers include neonatologists, physicians, audiologists, hospitals
and government agencies. We have sold 2,570 ALGO screeners. Our ALGO products
have been installed in approximately 40% of the approximately 4,000 hospitals
with birthing facilities in the United States.
Of our customers, which made purchases from us in 1999, 87% also made
purchases from us in the first seven months of 2000. We sold disposable
supplies to conduct approximately 1.2 million tests in 1999 and approximately
770,000 tests in the six months ended June 30, 2000. While the majority of our
sales have been to customers in the United States, we have also sold ALGO
screeners in 22 countries, including Austria, Australia, Belgium, Germany,
Japan, New Zealand and the United Kingdom.
In general, our customers initially buy ALGO screening equipment and a small
supply of disposables and then increase the purchase of disposables over time
for screening of high risk newborns. We intend to sell our existing ALGO
products more extensively within our existing customer sites and sell new
products, such as CO-Stat, as we expand our product offerings. We will also
continue to pursue state and hospital system sales as appropriate. We have not
yet begun to actively market our CO-Stat analyzer. In 1999 and the six months
ended June 30, 2000, no single end customer comprised more than 10% of our net
revenues.
Marketing and Sales
Our ALGO products have been commercially available since 1985, and we began
selling our MiniMuff products in 1995. We intend to begin marketing our CO-Stat
products for commercial use in 2001. We intend to use similar methods to sell
our CO-Stat products as we currently use to sell our ALGO products.
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<PAGE>
Marketing
Our marketing strategy is to attempt to distinguish our products by their
level of sensitivity, specificity and reliability, ease of use and pre-
discharge testing advantages. Our marketing staff consists of 13 persons. We
attempt to educate customers and potential customers about our products
through:
. participation in physician group and health care agency conferences;
. efforts by our clinical educators;
. publications in professional journals;
. our web site;
. print and direct mail advertising;
. participation in seminars; and
. electronic mail notification to customers about new products.
We believe that educational efforts directed at government agencies and
other third party payors about the benefits of universal screening in terms of
patient outcomes and long-term treatment costs are a key element of our
marketing strategy.
Direct Sales
We have a direct sales force in the United States. As of June 30, 2000, our
sales force consisted of 14 sales representatives, two of whom focus
exclusively on state programs and national accounts, 12 clinical educators and
two telesales representatives. Following each sale, our clinical educators
visit the customer to provide training, ongoing customer and technical support
and program development.
In the United States, we sell our ALGO screeners and MiniMuffs to three
groups of potential purchasers:
. States. To reduce the cost of special education and state funded
rehabilitation programs, many states have mandated universal newborn
hearing screening through legislation or provided funding for screening
at hospitals. Some of these states purchase hearing screening units
directly from us and loan them to hospitals. New Mexico, Mississippi,
Georgia, North Carolina and Oklahoma have each purchased ALGO products
for hospital placement.
. Hospitals. Hospitals often purchase hearing screeners from us directly,
either in response to a state mandate requiring universal newborn hearing
screening or in conjunction with a voluntary screening program.
. Neonatologists, pediatricians and audiologists. Our sales force often
identifies these professionals as the advocate of universal hearing
screening programs within the hospital. We focus our sales efforts on
these individuals who tend to be knowledgeable about the cost and
treatment benefits of universal newborn hearing screening.
Direct sales accounted for approximately 90% of our net revenues in 1999
and approximately 86% of our net revenues in the six months ended June 30,
2000.
Indirect Sales
In addition to our direct sales force, outside the United Sates we have
historically relied heavily on indirect sales channels. Revenues from sales
through distributors were approximately 10% of net revenues in 1999 and
approximately 14% of net revenues in the six months ended June 30, 2000. Our
distributors either assist our direct sales staff or are our sole sales and
support representatives in their territories. We have established a network of
distributors in Europe, Asia and Australia. Our distributors typically perform
marketing, sales and technical support functions in their country or region.
Each one may distribute directly to the customer, via other distributors or
resellers or both. We actively train our distributors in both product and
sales methods. Although we have previously relied exclusively on distributors
in Japan, we have recently established a Japanese subsidiary and intend to
commence direct sales in Japan in late 2001.
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In addition, approximately 90% of the hospitals in the United States are
members of group purchasing organizations, which negotiate large volume
purchase prices for member hospitals, group practices and other clinics. We
have recently signed agreements with Novation and AmeriNet, Inc. and we intend
to enter into similar agreements with other group purchasing organizations in
the future. These group purchasing organizations are not required to continue
to negotiate prices with us, and the members of these organizations are not
required to purchase our products. Sales to members of Novation accounted for
approximately 20.6% of our net revenues in the six months ended June 30, 2000.
The members of these group purchasing organizations receive volume discounts
and other special pricing considerations from us. Many of our existing
customers are members of group purchasing organizations including Novation and
AmeriNet.
Customer Service and Support
Our ALGO products are sold with a one-year warranty. We intend to make
available a similar warranty for the CO-Stat analyzer for an additional fee. We
also sell extended warranty agreements for our ALGO products. We provide
service to our domestic customer base through our Cottonwood, California
service center. This facility is equipped to perform full service, repair, and
calibration services to customers on a warranty and fee basis. Service for our
international customers is provided either by TriVirix International, Inc., our
European contract manufacturer, Nippon Eurotec, our Japanese distributor, or
our Cottonwood facility. We have certified TriVirix to perform all levels of
service and repair on ALGO products.
Third Party Reimbursement
In the United States, health care providers that purchase products like ours
generally rely on third party payors, including private health insurance plans,
federal Medicare, state Medicaid and managed care organizations, to reimburse
all or part of the cost of the procedure in which the product is used. Our
ability to commercialize our products successfully in the United States will
depend, in part, on the extent to which reimbursement is available for
screenings performed with the ALGO screening or CO-Stat analyzer. Third party
payors can affect the pricing or the relative attractiveness of our products by
regulating the maximum amount of reimbursement these payors, such as insurance
companies or health maintenance organizations, provide for testing services.
The current cost reduction orientation of third party payors makes it
difficult for new medical screening and testing devices and tests performed
with them to be eligible for reimbursement. Often, it is necessary to convince
these payors that the new devices or procedures will establish an overall cost
savings compared to the cost of those that are currently reimbursed or long-
term treatment for the condition if the screening does not occur early. While
we believe that our products possess economic advantages that will be
attractive, third party payors may not make reimbursement decisions based upon
these advantages. Third party payors are increasingly scrutinizing and
challenging the prices charged for medical products and services. In addition,
certain hospitals and physicians are moving toward a managed care system in
which the hospital or physician contracts to provide comprehensive health care
for a fixed cost per patient.
Effective October 1, 1991, the United States' Health Care Finance
Administration, or HCFA, adopted regulations that provide for the inclusion of
capital related costs in the prospective payment system for hospital inpatient
services. Under this system most hospitals are reimbursed by Medicare on a per
diagnosis basis at fixed rates unrelated to actual costs incurred in making the
diagnosis. Under this system of reimbursement, equipment costs generally are
not reimbursed separately, but rather are included in a single, fixed rate
per patient reimbursement for screening based on approved current procedural
terminology codes. These regulations are being phased in over a ten year
period. Recently enacted Medicare reform legislation required the HCFA to
implement a prospective payment system for outpatient hospital services by 1999
as well. This system also provides for a per-patient fixed rate reimbursement
for outpatient department capital costs. Although the full implications of
these changes cannot be known, we believe that the regulations will place more
pressure on hospitals' operating margins, causing them to limit capital
expenditures. These regulations
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could cause hospitals to decide to defer purchasing equipment like our products
as a result of limitations on their capital expenditures. The recent Medicare
legislation also requires HCFA to adopt uniform coverage and administration
policies for laboratory tests.
In addition to traditional third party reimbursement, universal newborn
hearing screening may be either paid for directly by the state or through
private insurance coverage required by state legislation. Thirty-one states
have passed legislation requiring newborns to be screened for hearing
impairment prior to hospital discharge.
In the United States, we have found the state to be the most appropriate
level of government to implement universal newborn hearing screening. At the
state level, the cost of newborn hearing screening can most directly be weighed
against the much higher cost to the state of education and treatment programs
required for the hearing impaired. A key element of our reimbursement strategy
for the ALGO products has been to promote the adoption of universal newborn
hearing screening legislation and equipment purchases at the state level.
States typically implement universal newborn hearing screening in the
following manners:
. Voluntary. Hospitals are not required to provide universal newborn
hearing screening, but the state supports programs with grants. The state
may also purchase the equipment and disposables directly and provide them
to hospitals.
. Mandate with equipment purchase. The state has mandated universal newborn
hearing screening, and the state purchases equipment and disposables for
birthing facilities.
. Mandate with state reimbursement. The state has mandated universal
newborn hearing screening and reimburses hospitals on a per-test basis.
. Mandate without state reimbursement. The state has mandated universal
newborn hearing screening and requires third party reimbursement, usually
as a part of the newborn birth process amount.
We help our customers understand the applicable regulations in their state
and provide them with copies of published public policies. We also provide
hospitals with local references so that customers may learn more about
reimbursement in their states.
Reimbursement systems in international markets vary significantly by country
and, within some countries, by region. Reimbursement approvals must be obtained
on a country-by-country basis or a region-by-region basis. In addition,
reimbursement systems in international markets may include both private and
government sponsored insurance.
There are currently no states that have passed legislation related to
universal newborn hemolysis monitoring.
Manufacturing
A significant portion of the components of our products are manufactured for
us by other manufacturers. However, we perform final assembly, testing and
packaging ourselves to control quality and manufacturing efficiency. In order
to reduce costs and to add additional capacity, in the future we may move some
labor intensive operations to less costly manufacturing locations or
outsourcing processes. For example, we entered into an agreement with TriVirix
in December 1998 for the manufacture of our ALGO Portable product.
We use contract vendors to manufacture our disposable products, and we
perform monthly quality audits of these vendors. We expect to hire additional
personnel to assemble our CO-Stat products. We will also need to enhance our
manufacturing operations to increase our capacity once we begin commercial sale
of these products.
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<PAGE>
We purchase materials and components from qualified suppliers that are
subject to our stringent quality specifications and inspections by us. We
conduct quality audits of our key suppliers, several of which are experienced
in the supply of components to manufacturers of finished medical devices or
disposables for use with these medical devices. Most of our purchased
components are available from more than one supplier. For those components for
which relatively few alternate supply sources exist, we are currently trying to
locate additional suppliers that meet our quality standards as well as specific
regulatory compliance standards.
Currently, only one supply source exists for the adhesive used in our ALGO
disposables and our MiniMuff product. The adhesive, called hydrogel, is
manufactured by a supplier that also sells the product to a variety of other
medical device manufacturers. We are in the process of identifying other
sources of hydrogel for ongoing supply, but, in the meantime, our disposables
manufacturer has scheduled long term delivery of hydrogel for our products in
an amount that we believe will be sufficient to allow us time to locate and
qualify a new supplier should our current supplier fail to fulfill our needs.
Other formulations of hydrogel exist. However, if a new adhesive is
incorporated into our products, then those products may require new regulatory
clearance by the FDA, as well as by similar regulatory agencies outside the
United States. In addition, we have used a single source to obtain
electrochemical sensors for our CO-Stat analyzer. Other sources of supply exist
for this component, but we could experience a delay in production of our CO-
Stat analyzers if we were unable to obtain a sufficient quantity from our
current vendor.
Our manufacturing facility and service and repair facility are subject to
periodic inspection by United States, state and foreign regulatory authorities.
Our quality assurance system is subject to regulation of both the FDA and the
State of California. We are required to conduct our product design, testing,
manufacturing and control activities in conformance with the FDA's quality
system regulations and to maintain our documentation of these activities in a
prescribed manner. Our manufacturing and service and repair facilities are
registered and/or licensed by the FDA and the California Department of Health
Services, Food and Drug Branch. We have passed all quality system regulations
inspections of our facilities conducted by the FDA and the State of California.
In addition, our facility has received ISO 9001/EN46001 certification. ISO
9001/EN46001 certification standards for quality operations have been developed
to ensure that companies know the standards of quality on a worldwide basis. We
have also received the EC Certificate pursuant to the European Union Medical
Device Directive 93/42/EEC, which allowed us to place a CE mark on our products
after assembling appropriate documentation.
We entered into a manufacturing agreement with TriVirix to serve as our
European manufacturing, service and distribution center. We qualified
TriVirix's Belfast, Northern Ireland facility to produce the ALGO Portable in
April 1999. TriVirix is also an FDA registered manufacturing facility with a
full quality system in place in accordance with the FDA's Quality System
Regulation and ISO 9002. TriVirix currently supplies all of our ALGO Portable
units.
Research and Development
We believe that strong product development capabilities are essential to our
strategy of enhancing our core technology and developing additional test
applications for our current products.
ALGO 3
We are developing the ALGO 3, a new ALGO screener, which will incorporate
software designed to increase ease of use. In addition, we believe the added
features will enable the ALGO 3 to generate greater accuracy to further reduce
the percentage of false negatives. We expect to begin clinical trials of the
ALGO 3 in the fourth quarter of 2000. We cannot market the ALGO 3 without FDA
clearance, and we intend to request FDA clearance upon completion of the
clinical trials.
Expanded Indications for CO-Stat
We believe our CO-Stat analyzer may have additional applications for testing
of other diseases and common conditions. For example, we believe the CO-Stat
may be used to detect pregnancy induced
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<PAGE>
hypertension in its early stages. Exhaled carbon monoxide may be a clinical
indicator for disorders such as sudden infant death syndrome, pneumonia, asthma
and blood disorders. However, there are no current commercial uses for our CO-
Stat analyzer in diagnosing or monitoring these conditions and we cannot be
sure we will ever market a device to monitor or screen for these or any other
disorders.
Our research and development expenses were $1.6 million in 1997, $2.7
million in 1998, $2.5 million in 1999 and $1.6 million in the six months ended
June 30, 2000. As of June 30, 2000, we had 16 people engaged in research and
development activities.
Proprietary Rights
Our products rely on our internally developed intellectual property and
other proprietary rights. We rely on a combination of patent, copyright,
trademark and trade secret laws, confidentiality procedures and contractual
provisions to protect our intellectual property and other proprietary rights.
However, we believe that these measures afford only limited protection. We have
eight United States patents, five patent applications pending before the United
States Patent and Trademark Office and seven patent applications pending before
foreign governmental bodies of which one European patent office application has
been allowed and will be registered in nine European countries. Our ALGO
screeners and CO-Stat analyzers use our proprietary software to produce their
results, which we license under shrink wrap licenses that are included as part
of the product packaging. Shrink wrap licenses are not negotiated with or
signed by individual customers and purport to take effect upon the opening of
the product package or use of the screening equipment. We also generally enter
into confidentiality agreements with our employees and technical consultants.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or improperly obtain and use
information that we regard as proprietary. Monitoring unauthorized use of our
products is difficult and we are unable to determine the extent to which
unauthorized use of our products exists. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the
United States. Our means of protecting our proprietary rights may be inadequate
and enforcing our intellectual property rights could be costly and time
consuming and may divert our management's attention and resources. Enforcing
our intellectual property rights could also result in the loss of intellectual
property rights.
We are not aware that our products employ technologies that infringe any
valid proprietary rights of third parties and no assertions of infringement
have been made by any third parties. However, the medical device industry is
characterized by the existence of a large number of patents and frequent
litigation based on allegations of patent infringement. As the number of
entrants into our market increases, the possibility of an infringement claim
against us grows. While we attempt to ensure that our products do not infringe
other parties' patents and proprietary rights, our competitors may assert that
our products and the methods we employ now or in the future may be covered by
U.S. patents held by these competitors. In addition, our competitors may assert
that the products and the methods we employ now or in the future infringe their
other proprietary rights. Any infringement claims, with or without merit, could
be time consuming to defend or result in costly litigation or damage awards.
Any claim could divert management's attention and resources or cause a
significant disruption in our revenues while we redesign products if we are
found to infringe. A claim also could cause product shipment delays or
cessation or require us to enter into royalty or licensing agreements. These
royalty or licensing agreements may not be available on terms acceptable to us,
if at all.
Competition
We compete in intensely competitive and rapidly evolving markets. We face
competition primarily from medical device companies that manufacture hearing
screening products, testing products for determining bilirubin levels based on
skin color and chemicals used to conduct the Coombs test or blood-based
bilirubin monitoring tests. We have experienced and expect to continue to
experience increased competition from current and potential competitors, many
of which have significantly greater financial, technical, marketing and other
resources.
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Companies offering competitive products vary in scope and breadth. With
respect to our hearing impairment screening products, our competitors include:
. ETYMOTIC Research, Kedly, Inc., Nicolet Biomedical/Grason-Stadler, Inc.,
Madsen Electronics, Otodynamics, Ltd., Starkey Laboratories, Inc. and
Welch Allyn, Inc., which sell OAE products;
. Bio-Logic Systems, Intelligent Hearing Systems and Sonamed Corp., which
sell enhanced ABR and OAE products; and
. SLE Ltd., which sells ABR products.
With respect to our CO-Stat products, our competitors include:
. Johnson & Johnson and Roche, which sell laboratory equipment and
chemicals used to conduct the Coombs test or to measure bilirubin levels
in the blood; and
. Chromatics Color Sciences, Minolta and SpectRx, which sell equipment to
measure the yellowness of the skin.
We believe the principal factors that will draw clinicians and other buyers
to a newborn testing product, including hearing testing and hemolysis
monitoring products, include:
. the level of specificity, sensitivity and reliability of the product;
. the time required to run tests with the product;
. the relative ease of use of the product;
. the depth and breadth of the product's features;
. the quality of customer support for the product;
. the frequency of product updates;
. the extent to which third party reimbursement for the purchase of the
product or the screening is available;
. the extent to which the products conform to standards of care guidelines;
and
. the price of the product.
We believe that we compete favorably on these factors. However, we expect
competition in the newborn screening to increase significantly as new companies
enter the market and current competitors expand their product lines and
services. Many of these potential competitors are likely to enjoy substantial
competitive advantages, including greater resources that can be devoted to the
development, promotion and sale of their products. In addition, these potential
competitors may have more established sales channels, greater product
development experience or greater name recognition.
Government Regulation
FDA's Premarket Clearance and Approval Requirements
Unless an exemption applies, the FDA must either clear or approve in advance
each medical device that we wish to market in the United States, pursuant to
the Federal Food, Drug, and Cosmetic Act of 1938, as amended. Unless an
exemption applies, each medical device that we wish to market in the United
States must receive in advance from the FDA either:
. clearance pursuant to Section 510(k) of the Food, Drug, and Cosmetics
Act; or
. premarket approval pursuant to Section 515 of the Food, Drug, and
Cosmetics Act, if the FDA has determined that the medical device in
question poses a greater risk of injury.
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The FDA's 510(k) clearance process usually takes from four to 12 months, but
can take longer. The process of obtaining premarket approval is much more
costly, uncertain and may take from one to three years or even longer. We
cannot be sure that 510(k) clearance or premarket approval will be obtained for
products we propose to market.
The FDA decides whether a device must undergo either the 510(k) clearance or
premarket approval process based upon statutory criteria. These criteria
include the level of risk that the agency perceives to be associated with the
device and a determination of whether the product is a type of device that is
substantially equivalent to devices that are already legally marketed. The FDA
places devices deemed to pose relatively less risk in either class I or class
II, which requires the manufacturer to submit a premarket notification
requesting 510(k) clearance, unless an exemption applies. The premarket
notification must demonstrate that the proposed device is substantially
equivalent in intended use and in safety and effectiveness to an existing
legally marketed device that is either in class I, class II, preamendment class
III device or any of those for which the FDA has not yet called for submission
of a premarket approval. The FDA has classified our ALGO and CO-Stat products
as class II devices.
After a device receives 510(k) clearance, any modification made to the
device requires the manufacturer to determine whether the modification could
significantly affect its safety or effectiveness. If it does not, the
manufacturer's decision must be documented. If the modification could
significantly affect the device's safety and effectiveness, then the
modification requires at least a new 510(k) clearance or, in rare instances,
could require a premarket approval. The FDA requires each manufacturer to make
this determination, but the FDA can review any manufacturer's decision. If the
FDA disagrees with a manufacturer's decision, the agency may retroactively
require the manufacturer to seek 510(k) clearance or premarket approval. The
FDA also can require the manufacturer to cease marketing the modified device or
recall the modified device or both until 510(k) clearance or premarket approval
is obtained.
The FDA places devices deemed to pose the greatest risk, such as life-
sustaining, life-supporting or implantable devices, or devices deemed to be not
substantially equivalent to a predicate device, in class III. The FDA requires
these devices to undergo the premarket approval process in which the
manufacturer must prove the safety and effectiveness of the device to the FDA's
satisfaction. A premarket approval application must provide extensive pre-
clinical and clinical trial data and also information about the device and its
components regarding, among other things, device design, manufacturing and
labeling. After any premarket approval, a new premarket approval or premarket
approval Supplement may be required in the event of significant modifications
to the device, its labeling or its manufacturing process.
The FDA may require results of clinical trials in support of a 510(k)
submission and generally requires clinical trial results for a premarket
approval application. In order to conduct a clinical trial, the FDA requires
manufacturers to apply for and obtain in advance an investigational device
exemption, or IDE. An IDE approval provides for a specified clinical protocol,
including the number of patients and study sites. If the FDA deems the product
a nonsignificant risk device, the product will be eligible for more abbreviated
IDE requirements. The IDE application must be supported by appropriate data,
such as animal and laboratory testing results. If the FDA and the Institutional
Review Boards at the clinical trial sites approve the IDE application, the
manufacturer may begin the clinical trial.
The following chart shows the regulatory status of the products we currently
sell:
<TABLE>
<CAPTION>
FDA Japanese Clearance Australia and
Natus Product 510(k) Clearance CE Marking (Shonin) New Zealand
<S> <C> <C> <C> <C>
ALGO Portable June 1998 July 1999 Pending Pending
ALGO 2e Color December 1998 July 1999 September 1997 June 2000
CO-Stat March 1998 July 1999 Pending Pending
MiniMuff February 1995 N/A Pending June 2000
</TABLE>
--------------------------------------------------------------------------------
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Pervasive and Continuing FDA Regulation
Numerous FDA regulatory requirements apply to our marketed devices. These
requirements include:
. the FDA's quality system regulation which requires manufacturers to
create, implement and follow numerous elaborate design, testing, control,
documentation and other quality assurance procedures;
. medical device reporting regulations, which require that manufacturers
report to the FDA certain types of adverse and other events involving
their products; and
. the FDA's general prohibition against promoting products for unapproved
uses.
Class II devices may also be subject to special controls applied to them,
such as performance standards, post-market surveillance, patient registries and
FDA guidelines that may not apply to class I devices. We could be required to
change our compliance activities if the FDA changes its existing regulations or
adopts new requirements.
We are subject to inspection and market surveillance by the FDA to determine
compliance with regulatory requirements. If the FDA finds that we have failed
to adequately comply, the agency can institute a wide variety of enforcement
actions, ranging from a public warning letter to more severe sanctions such as:
. fines, injunctions and civil penalties;
. recall or seizure of our products;
. the issuance of public notices or warnings;
. the imposition of operating restrictions, partial suspension or total
shutdown of production;
. the refusal of our requests for 510(k) clearance or premarket approval of
new products;
. the withdrawal of 510(k) clearance or premarket approval already granted;
and
. criminal prosecution.
The FDA also has the authority to require repair, replacement or refund of
the cost of any medical device manufactured or distributed by us. Our failure
to comply with applicable requirements could lead to an enforcement action that
may have an adverse effect on our financial condition and results of
operations.
Other United States Regulations
We also must comply with numerous additional federal, state and local laws
relating to matters such as safe working conditions, manufacturing practices,
environmental protection, biohazards, fire hazard control and hazardous
substance disposal. We cannot be sure that we will not be required to incur
significant costs to comply with these laws and regulations in the future or
that these laws or regulations will not hurt our business and results of
operations. Unanticipated changes in existing regulatory requirements or
adoption of new requirements could hurt our business, results of operations and
financial condition.
Foreign Regulation
Our products are also regulated outside the United States as medical devices
by foreign governmental agencies, similar to the FDA, and are subject to
regulatory requirements, similar to the FDA's, in the foreign countries in
which we plan to sell our products. Our ALGO products carry a CE Mark for sale
in Europe and our ALGO 2E Color carries a TGA approval for sale in Australia.
Our facility has been audited and certified to be ISO9001/EN46001 compliant,
which allows us to sell our products in Europe. Our facility is subject to CE
Mark and ISO 9001 inspection by TUV Rheinland. We plan to seek approval to sell
our products in additional countries. The time and cost required to obtain
market authorization from other countries and the requirements for licensing a
product in another country may differ significantly from FDA requirements.
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Employees
As of June 30, 2000, we had 101 full time employees, including 16 in
research and development and related customer support services, 38 in sales, 13
in marketing and 34 in manufacturing, finance and administration. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.
Facilities
Our principal offices are located in a leased 26,000 square foot facility in
San Carlos, California and house substantially all of our manufacturing,
research and development and related customer support services employees, as
well as all marketing, administration and finance employees. Our lease on the
San Carlos facility expires in December 2003. In addition, we lease a 1,500
square foot service and support center in Cottonwood, California, and our lease
for this center expires in December 2001. We expect that our current leased
facilities will be sufficient for our needs over the next 12 months, except
that we intend to lease a small facility in Tokyo, Japan to support our Asian
sales efforts.
Legal Proceedings
We are not currently a party to any material legal proceeding, nor are we
aware of any material threatened actions.
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MANAGEMENT
Executive Officers and Directors
The following table shows specific information about our executive officers
and directors as of June 30, 2000:
<TABLE>
<CAPTION>
Name Age Position(s)
------------------------------- --- ------------------------------------------
<C> <C> <S>
Tim C. Johnson................. 43 Chief Executive Officer, President, Chief
Operating Officer, Secretary and Director
William New, Jr., M.D, Ph.D. .. 58 Chairman, Chief Technology Officer and
Director
William H. Lawrenson........... 52 Vice President, Finance, Chief Financial
Officer and Assistant Secretary
Terese M. Baker................ 41 Vice President, Marketing
Lucille A. Ferus............... 43 Vice President, Engineering
Bryan P. Flaherty, Ph.D. ...... 36 Vice President, Research and Development
Thomas Waugh................... 55 Vice President, Operations
James J. Bochnowski............ 57 Director
William M. Moore............... 51 Director
David Nierenberg............... 47 Director
</TABLE>
Tim C. Johnson has served as our chief executive officer since July 1999, as
our president since March 1996, as our chief operating officer since October
1995 and as our secretary since April 1992. Mr. Johnson also was our controller
from July 1990 to June 1991 and served as director of finance and
administration from July 1991 to March 1992. In April 1992 Mr. Johnson was
named vice president of finance and chief financial officer and served in that
capacity until December 1997. Prior to joining our company, Mr. Johnson served
in various capacities at Cray Research, Inc. and was previously an auditor with
Coopers & Lybrand. Mr. Johnson holds a Bachelor of Science degree in Accounting
from the University of Minnesota and a Masters of Business Administration
degree from Stanford University.
William New, Jr., M.D., Ph.D., one of our co-founders, has served as our
chairman, chief technology officer and director since 1987. Dr. New also served
as our chief executive officer from 1992 to July 1999. Dr. New served as a
member of the clinical anesthesia faculty at Stanford University Medical Center
from 1975 to August 2000. Dr. New served as the chairman of the Board of
Visitors of the Duke University Medical Center from 1994 to 1998. Dr. New was a
co-founder and the chairman of Nellcor Incorporated. Dr. New holds a Bachelor
of Science degree and a Masters of Science degree in Engineering from Stanford
University, a Doctor of Medicine degree from Duke University and a Doctorate
degree in Physiology from the University of California at Los Angeles.
William H. Lawrenson has served as our vice president of finance and chief
financial officer since December 1997. Mr. Lawrenson also has served as our
assistant secretary since July 2000. Since July 1998, Mr. Lawrenson has also
served as president of Saratoga Knowledge Systems, Inc., which he and his wife
own. Mr. Lawrenson served as a consultant to IDG Interactive Services, Inc., a
wholly owned subsidiary of International Data Group, Inc., a publishing
company, from September 1996 to December 1997. From September 1995 to September
1996, Mr. Lawrenson was a vice president and chief operating officer of
IDG Interactive Services. From December 1984 to March 1995, Mr. Lawrenson
served in various capacities at Dialog Information Services, Inc., an
information services company, the most recent of which was as vice president of
business development, and he also served as vice president of finance and
administration. Mr. Lawrenson is a certified public accountant and a South
African chartered accountant. Mr. Lawrenson was educated at the University of
Port Elizabeth, South Africa.
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Terese M. Baker has served as our vice president of marketing since January
1998. From April 1996 to January 1998, Ms. Baker served as a director of
marketing. Prior to joining our company, Ms. Baker served as director of
marketing at River Medical Inc., subsequently acquired by ALARIS Medical
Systems, Inc. from May 1993 to October 1995. Ms. Baker served as a director of
marketing at Sulzer Calcitek, Inc. from March 1989 to April 1993. From March
1982 to March 1989, Ms. Baker held several management positions in the McGaw
division of American Hospital Supply. Ms. Baker holds a Bachelor of Arts degree
in Economics from the University of California at Irvine and a Masters of
Business Administration degree from Pepperdine University.
Lucille A. Ferus has served as our vice president of engineering since
December 1997. Ms. Ferus served as our director of software operations from
October 1996 to December 1997. From May 1991 to October 1996, Ms. Ferus served
as an engineering manager at Ventritex Corporation, a medical device company.
Ms. Ferus was a software engineer at Nellcor from June 1986 to April 1991. From
April 1983 to May 1986, Ms. Ferus served as a computer science engineer at
Thoratec Laboratories Corporations, a medical device company. Ms. Ferus served
as design engineer at Picker/Cambridge Medical from February 1981 to April 1983
and as a project engineer at the Howmedica division or Pfizer, Inc. from
January 1979 to February 1981. Ms. Ferus holds a Bachelor of Science degree in
Electrical Engineering and a Master of Science degree in Bioengineering from
Fairleigh Dickenson University.
Bryan P. Flaherty, Ph.D. has served as our vice president of research and
development since February 2000. Dr. Flaherty was our director of research and
development from July 1998 to February 2000. Dr. Flaherty served as our manager
of advanced product engineering from November 1996 to July 1998. From June 1994
to November 1996, Dr. Flaherty served as a senior development engineer of Vital
Insite, Inc., a medical monitoring technology company. From September 1993 to
June 1994, Dr. Flaherty served as a consultant at Failure Analysis Associates,
an engineering consulting company. From September 1992 to September 1993,
Dr. Flaherty served as a staff engineer at Rush Medical College, and from
September 1989 to September 1992, he served as a staff engineer at Hines VA
Rehabilitation Research and Development Center. Dr. Flaherty holds a Bachelor
of Science degree in Mechanical Engineering from the University of California
at Davis and Master of Science and Doctorate degrees in Bioengineering from the
University of Illinois, Chicago.
Thomas Waugh has served as our vice president of operations since January
2000. Prior to joining our company, Mr. Waugh was vice president of operations
of Surface/Interface, Inc., a semiconductor equipment manufacturer from
September 1999 to January 2000. From April, 1999 to September 1999, Mr. Waugh
worked as an independent consultant. From January 1998 to April 1999, Mr. Waugh
served as vice president of manufacturing of VidaMed, Inc., a medical device
company. From May 1997 to January 1998, Mr. Waugh served as vice president of
operations of ChemTrak, Inc., a medical diagnostics company, and from November
1996 to May 1997, he served as consultant to Tissue Technologies, Inc., a
medical laser company. From February 1992 to November 1996, Mr. Waugh served as
vice president of operations at American Dental Technologies, Inc. Mr. Waugh
holds a Bachelor of Science degree in Electrical Engineering from the
University of Colorado, Boulder and a Masters of Science degree in Electrical
Engineering from Stanford University.
James J. Bochnowski has served as a director of our company since August
1991. From 1988 to present, Mr. Bochnowski has been a general partner of Delphi
Ventures, a venture capital firm, which he co-founded. Mr. Bochnowski has
served as a director of Applied Molecular Evolution, Inc. from 1997 to the
present. Mr. Bochnowski holds a Bachelor of Science degree in Aerospace
Engineering from the Massachusetts Institute of Technology and a Masters of
Business Administration degree from Harvard University.
David Nierenberg has served as a director of our company since August 1991.
From January 1996 to present, Mr. Nierenberg has been the president of
Nierenberg Investment Management Company, Inc., which manages the D3 Family
Fund, a private investment partnership. From November 1986 to date, Mr.
Nierenberg has been a general partner of six venture funds associated with
Trinity Ventures, a venture capital firm. Mr. Nierenberg also sits on the board
of Mexican Restaurants, Inc., formerly Casa Ole Restaurants, Inc., an operator
and franchiser of restaurants. Mr. Nierenberg holds a Bachelor of Arts degree
in History from Yale College and a Doctor of Jurisprudence degree from Yale Law
School.
59
<PAGE>
William M. Moore has served as a director of our company since inception and
is one of our co-founders. From April 1989 to May 1992, Mr. Moore served as our
chief executive officer. Mr. Moore has served as chief executive officer of
MetaSensors, Inc. a medical device company, from February 1997 to present. From
June 1992 to January 1997, Mr. Moore was a general partner of Alpine Partners,
a venture capital firm. Mr. Moore holds a Bachelor of Science degree in
Business from the University of Utah.
Our board of directors currently consists of five members, each of whom is
currently subject to election at our annual meeting of stockholders. Upon the
closing of this offering, our board of directors will be able to change the
number of our directors without the approval of our stockholders. At the time
of the closing of this offering, our board of directors will be divided into
three classes, with each director serving a three-year term and one class being
elected at each year's annual meeting of stockholders. Mr. Bochnowski will be
in the class of directors whose initial term expires at the 2001 annual meeting
of stockholders. Messrs. Moore and New will be in the class of directors whose
initial term expires at the 2002 annual meeting of the stockholders. Messrs.
Johnson and Nierenberg will be in the class of directors whose initial term
expires at the 2003 annual meeting of stockholders.
Executive officers are elected by the board of directors on an annual basis
and serve until their successors have been duly elected and qualified. There
are no family relationships among any of our directors, officers or key
employees.
Director Compensation
We do not currently pay our directors any cash compensation for their
service as members of our board of directors, except for reimbursement for
reasonable travel expenses in connection with attendance at board and committee
meetings. Under our 1991 stock option plan and our 2000 stock option plan,
nonemployee directors are eligible to receive stock option grants at the
discretion of the board of directors. After this offering is completed,
nonemployee directors will receive stock options pursuant to the automatic
option grant program in effect under the 2000 director option plan. See "--
Incentive Stock Plans" for more information about the automatic grant program.
Board of Directors Committees
We have established an audit committee and a compensation committee. Messrs.
Bochnowski, Moore and Nierenberg are members of both the audit and the
compensation committees.
The audit committee:
. reviews our internal accounting procedures; and
. consults with and reviews the services provided by our independent
auditors.
The compensation committee:
. reviews and recommends to the board of directors the compensation and
benefits for all of our officers; and
. establishes and reviews general policies relating to compensation and
benefits of our other employees.
Compensation Committee Interlocks and Insider Participation
Our board of directors established its compensation committee in September
1991. Prior to establishing the compensation committee, our board of directors
as a whole performed the functions delegated to the compensation committee. No
interlocking relationship exists between any member of our compensation
committee and any member of any other company's board of directors or
compensation committee.
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<PAGE>
Executive Compensation
The following table sets forth the compensation earned including salary,
bonuses, commissions, stock options and other compensation during the fiscal
year ended December 31, 1999 by Tim C. Johnson, our chief executive officer,
and our four next most highly compensated executive officers, each of whose
total annual compensation exceeded $100,000 in 1999. We refer to these officers
as our named executive officers elsewhere in this prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-term
Compensation Compensation
---------------- ------------
Securities
Underlying All Other
Name and Position(s) Salary Bonus Options Compensation
------------------------------------ -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Tim C. Johnson...................... $227,558 $ -- 14,000 $1,038
Chief Executive Officer, President,
Chief Operating Officer, Secretary
and Director
William New, Jr., M.D., Ph.D. ...... 167,192 -- -- 5,015
Chairman, Chief Technology Officer
and Director
William H. Lawrenson................ 144,068 -- 26,200 736
Vice President, Finance and Chief
Financial Officer
Lucille A. Ferus.................... 145,382 -- 5,200 766
Vice President, Engineering
June Fallon(1)...................... 135,000 39,504 2,000 796
Vice President, Sales
</TABLE>
---------------------
(1) Ms. Fallon resigned as our Vice President of Sales in January 2000. The
amount in the column titled "Bonus" for Ms. Fallon represents sales
commissions.
The amounts in the column titled "All Other Compensation" represent premiums
for life insurance paid by us for Messrs. Johnson, New and Lawrenson and Ms.
Ferus and Ms. Fallon. The amount for Dr. New includes health insurance premiums
for Dr. New's family.
The following summarizes stock options granted to each named executive
officer during the year ended December 31, 1999. For grants to the named
executive officers in 2000, see "Related Party Transactions--Option Grants to
Directors and Executive Officers." All of the options were granted under our
1991 stock option plan. Options under the 1991 stock option plan generally vest
ratably monthly over four years.
61
<PAGE>
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------
Potential
Realizable
Value
at Assumed
Annual Rates
of Stock
Percent of Price
Number of Total Appreciation
Securities Options for Option
Underlying Granted to Exercise Term
Options Employees Price per Expiration -------------
Name Granted in 1999(1) Share(2) Date 5% 10%
------------------------ ---------- ---------- --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Tim C. Johnson.......... 14,000 10.3% $2.25 07/06/09 $ $
William New, Jr., M.D.,
Ph.D. ................. -- -- -- --
William H. Lawrenson.... 20,000 14.7 2.25 05/05/09
6,200 4.6 2.25 07/06/09
Lucille A. Ferus........ 5,200 3.8 2.25 07/06/09
June Fallon............. 2,000 1.5 2.25 07/06/09
</TABLE>
-------------------------
(1) The percents above are based on an aggregate of 135,600 shares subject to
options we granted to employees and consultants in the year ended December
31, 1999.
(2) The exercise price per share of each option was equal to the fair market
value of the common stock as determined by the board of directors on the
date of grant. The potential realizable values assume that the initial
public offering price of $ per share was the fair market value of the
common stock on the date of grant and that the price of the applicable
stock increases from the date of grant until the end of the ten-year
option term of the annual rates specified. There is no assurance provided
to any holder of our securities that the actual stock price appreciation
over the 10 year option term will be at the assumed 5% and 10% levels or
at any other defined level.
The following table provides information concerning exercises of options by
our named executive officers and the number and value of exercisable and
unexercisable options held by the named executive officers as of December 31,
1999.
Aggregate Option Exercises in Last Fiscal Year and Option Values at December
31, 1999
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares December 31, 1999 December 31, 1999(2)
Acquired on Value ------------------------- -------------------------
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
------------------------ ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Tim C. Johnson.......... 23,111 $ 170,181 88,710 $ $
William New, Jr., M.D.,
Ph.D. ................. -- -- 130,000 -- --
William H. Lawrenson.... -- -- 27,669 48,531
Lucille A. Ferus........ -- -- 26,523 36,426
June Fallon............. -- -- 12,124 29,876
</TABLE>
-----------------------
(1) Assumes that the fair market value at the time of exercise was equal to
the assumed initial public offering price of $ per share.
(2) The value of unexercised in-the-money options held at December 31, 1999
represents the total gain which an option holder would realize if he or
she exercised all of the in-the-money options held at December 31, 1999,
and is determined by multiplying the number of shares of common stock
underlying the options by the difference between an assumed initial public
offering price of $ per share and the per share option exercise
price. An option is in-the-money if the fair market value of the
underlying shares exceeds the exercise price of the option.
62
<PAGE>
Employment Agreements and Change in Control Arrangements
We do not have any employment, noncompete or change in control arrangements
or agreements with our current officers that are in effect as of the date of
this prospectus. For a description of arrangements with our former officers,
directors and five percent stockholders, see "Relationships and Related Party
Transactions."
Stock Plans
1991 Stock Option Plan
Our 1991 stock option plan was adopted by our board of directors in July
1991 and approved by our stockholders in August 1991. It was amended most
recently in May 2000. A total of 2,393,482 shares of common stock have been
reserved for issuance under our 1991 stock option plan and, after the effective
date of this offering, we do not intend to grant additional options under the
1991 stock option plan. In July 2000, our board of directors approved the
termination of the 1991 stock option plan as to future grants, effective upon
the closing of this offering. However, options outstanding under the 1991 stock
option plan will continue and will be governed by the terms of the 1991 stock
option plan.
The 1991 stock option plan provided for grants of incentive stock options to
our employees, including officers and employee directors, and nonstatutory
stock options to our consultants including nonemployee directors. The purposes
of our 1991 stock option plan were to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to our employees and consultants to our company and to promote the
success of our business. At the request of the board of directors, the
compensation committee administers our 1991 stock option plan and determines
the optionees and the terms of options granted, including the exercise price,
number of shares subject to the option and the exercisability of the options.
The term of the options granted under the 1991 stock option plan is set
forth in the option agreement. However, the term of an incentive stock option
may not exceed ten years and, in the case of an option granted to an optionee
who owns more than 10% of our outstanding stock at the time of grant, the term
of an option may not exceed five years. Options granted under the 1991 stock
option plan vest and become exercisable as set forth in each option agreement.
With respect to any optionee who owns more than 10% of our outstanding
stock, the exercise price of any stock option granted must be at least 110% of
the fair market value of our common stock on the grant date.
No incentive stock options may be granted to an optionee, which, when
combined with all other incentive stock options becoming exercisable in any
calendar year that are held by that person, would have an aggregate fair market
value in excess of $100,000.
If, within four years after the effective date of this offering, we merge
with or into another corporation or sell all or substantially all of our assets
and our stockholders before the transaction hold less than 50% of the stock of
the corporation surviving such a transaction immediately after the transaction,
the surviving corporation may assume the options outstanding under our 1991
stock option plan or substitute equivalent options for those options
outstanding. If an optionee's status as an employee is terminated within 12
months after such a transaction other than voluntarily or for cause, that
employee's options will accelerate and become fully exercisable. If the
optionee's options are not substituted for or assumed by the successor
corporation, the options will accelerate and become fully exercisable prior to
the closing of the transaction. In the event a transaction like those described
above occurs more than four years after the effective date of this offering,
the administrator of our 1991 stock option plan has discretion to provide for
any of the following:
. the assumption of options or substitution of equivalent options;
. the acceleration of exercisability of options after an assumption or
substitution if an optionee's status as an employee is terminated other
than voluntarily or for cause within 12 months of the change in control;
63
<PAGE>
. the termination of the 1991 stock option plan and exercise of options to
the extent already vested; and
. the acceleration of any portion or all of the outstanding options.
Notwithstanding these provisions, until we have 800 record holders of our
common stock as of the record date for our annual meeting of stockholders,
each option under the 1991 stock option plan will be substituted for or
assumed by the successor corporation in the event of a change in control.
Should the surviving corporation refuse to assume or substitute for
outstanding options, the options will terminate on the closing of the change
in control transaction.
As of June 30, 2000, we had issued 750,729 shares of common stock upon the
exercise of options granted under our 1991 stock option plan, we had
outstanding options to purchase 1,326,123 shares of common stock at a weighted
average exercise price of $1.09 per share and 316,514 shares remained
available for future option grants under our 1991 stock option plan until the
closing of this offering.
2000 Stock Option Plan
Our 2000 stock option plan was adopted by our board of directors and
approved by our stockholders in July 2000. A total of 1,500,000 shares of
common stock have been reserved for issuance under our 2000 stock option plan,
together with an annual increase in the number of shares of common stock
reserved under the plan beginning on the first day of our fiscal year,
commencing January 1, 2002, in an amount equal to the lesser of:
. 1,500,000 shares of common stock;
. 7% of our outstanding shares of common stock on the last day of the
prior fiscal year; or
. an amount determined by our board of directors.
As a result of these annual increases, a maximum of 13,500,000 additional
shares of common stock could be issued over the ten year life of the 2000
stock option plan.
The 2000 stock option plan provides for grants of incentive stock options
to our employees including officers and employee directors and nonstatutory
stock options to our consultants including nonemployee directors. The purposes
of our 2000 stock option plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to our employees and consultants to our company and to promote the
success of our business. At the request of the board of directors, the
compensation committee administers our 2000 stock option plan and determines
the optionees and the terms of options granted, including the exercise price,
number of shares subject to the option and the exercisability thereof.
The term of the options granted under the 2000 stock option plan is set
forth in the option agreement. However, the term of an incentive stock option
may not exceed ten years and, in the case of an option granted to an optionee
who owns more than 10% of our outstanding stock at the time of grant, the term
of an option may not exceed five years. Options granted under the 2000 stock
option plan vest and become exercisable as set forth in each option agreement.
With respect to any optionee who owns more than 10% of our outstanding
stock, the exercise price of any stock option granted must be at least 110% of
the fair market value of our common stock on the grant date.
No incentive stock options may be granted to an optionee, which, when
combined with all other incentive stock options becoming exercisable in any
calendar year that are held by that person, would have an aggregate fair
market value in excess of $100,000. In any fiscal year, we may not grant any
employee options to purchase more than 1,000,000 shares or 1,500,000 shares in
the case of an employee's initial employment.
The 2000 stock option plan will terminate in July 2010, unless our board of
directors terminates it sooner.
64
<PAGE>
If, within four years after the effective date of this offering, we merge
with or into another corporation or sell all or substantially all of our assets
and our stockholders before the transaction hold less than 50% of the stock of
the corporation surviving such a transaction immediately after the transaction,
the surviving corporation may assume the options outstanding under our 2000
stock option plan or substitute equivalent options for those options
outstanding. If an optionee's status as an employee is terminated other than
voluntarily or for cause within 12 months after the transaction, that
employee's options will accelerate and become fully exercisable. If the
optionee's options are not substituted for or assumed by the successor
corporation, the options will accelerate and become fully exercisable prior to
the closing of the transaction. In the event a transaction like those described
above occurs more than four years after the effective date of this offering,
the administrator of our 2000 stock option plan has discretion to provide for
any of the following:
. the assumption of options or substitution of equivalent options;
. the acceleration of exercisability of options after an assumption or
substitution if an optionee's status as an employee is terminated other
than voluntarily or for cause within 12 months of the change in control;
. the termination the 2000 stock option plan and exercise of options to the
extent already vested; and
. the acceleration of any portion or all of the outstanding options.
Notwithstanding these provisions, until we have 800 record holders of our
common stock as of the record date for our annual meeting of stockholders, each
option under the 2000 stock option plan will be substituted for or assumed by
the successor corporation in the event of a change in control. Should the
surviving corporation refuse to assume or substitute for outstanding options,
the options will terminate on the closing of the change in control transaction.
As of June 30, 2000, we had neither granted any options nor issued any
shares of common stock upon the exercise of options granted under our 2000
stock option plan, and 1,500,000 shares remain available for future option
grants under our 2000 stock option plan.
2000 Employee Stock Purchase Plan
Our 2000 employee stock purchase plan was adopted by our board of directors
and our stockholders in July 2000 and will become effective upon the closing of
this offering. We have reserved a total of 1,000,000 shares of common stock for
issuance under the 2000 employee stock purchase plan, together with an annual
increase in the number of shares of common stock reserved under the plan
beginning on the first day of our fiscal year commencing January 1, 2002 in an
amount equal to the lesser of:
. 650,000 shares of common stock;
. 4% of our outstanding common stock on the last day of the prior fiscal
year; or
. an amount determined by our board of directors.
As a result of these annual increases, a maximum of 5,850,000 additional
shares of common stock could be sold over the ten year life of the employee
stock purchase plan.
Our employee stock purchase plan is administered by the board of directors
and is intended to qualify under Section 423 of the Internal Revenue Code. Our
employees, including our officers and employee directors but excluding our 5%
or greater stockholders, are eligible to participate if they are customarily
employed for at least 30 hours per week and for more than five months in any
calendar year. With respect to the initial offering period, each of our
employees as of the effective date of the offering will be automatically
enrolled in the plan with the maximum deduction. Our employees will be
permitted to reduce or terminate participation in the employee stock purchase
plan after this offering has closed and we have filed a registration statement
related to the employee stock purchase plan. Our 2000 employee stock purchase
plan permits eligible employees to purchase common stock through payroll
deductions, which may not exceed the lesser of 15% of
65
<PAGE>
an employee's cash compensation, defined as Form W-2 compensation plus
contributions to our 401(k) plan or $25,000 per annum.
Our 2000 employee stock purchase plan will be implemented in a series of
overlapping 24 month offering periods, and each offering period consists of
four six month purchase periods. The initial offering period under our employee
stock purchase plan will begin on the effective date of this offering, and the
subsequent offering periods will begin on the first trading day on or after May
1 and November 1 of each year. Each participant will be granted an option on
the first day of the offering period and the option will be automatically
exercised on the date six months later, the end of a purchase period,
throughout the offering period. If the fair market value of our common stock on
any purchase date is lower than the fair market value of our common stock on
the start date of that offering period, then all participants in that offering
period will be automatically withdrawn from that offering period and re-
enrolled in the immediately following offering period. The purchase price of
our common stock under our 2000 employee stock purchase plan will be 85% of the
lesser of the fair market value per share on the start date of the offering
period or at the end of the purchase period. Employees may end their
participation in an offering period at any time, and their participation ends
automatically on termination of employment with our company.
Our 2000 employee stock purchase plan will terminate in July 2010, unless
our board of directors terminates it sooner.
2000 Director Option Plan
Our 2000 director option plan was adopted by our board of directors and our
stockholders in July 2000 and will become effective upon the effective date of
this offering. We have reserved a total of 400,000 shares of common stock for
issuance under the 2000 director option plan, together with an annual increase
in the number of shares of common stock reserved under the plan beginning on
the first day of our fiscal year commencing January 1, 2002 equal to the lesser
of:
. 100,000 shares of common stock;
. one-half of one percent of the outstanding shares of our common stock on
the last day of the prior fiscal year; or
. an amount determined by the board of directors.
As a result of these annual increases, a maximum of 900,000 additional
shares of common stock could be issued over the ten year life of the 2000
director option plan.
The option grants under the 2000 director option plan are automatic and
nondiscretionary, and the exercise price of the options is 100% of the fair
market value of our common stock on the grant date.
Nonemployee directors are eligible for grants under our 2000 director option
plan. The 2000 director option plan provides for an initial grant to a new
nonemployee director of an option to purchase 30,000 shares of common stock.
Subsequent to the initial grants, each nonemployee director will be granted an
option to purchase 10,000 shares of common stock at the next meeting of the
board of directors following the annual meeting of stockholders, if on the date
of the annual meeting, the director has served on the board of directors for
six months.
The term of the options granted under the 2000 director option plan is ten
years, but the options expire three months following the termination of the
optionee's status as a director or twelve months if the termination is due to
death or disability. The initial 30,000 share grants will become exercisable at
a rate of 1/36th of the shares per month. The subsequent 10,000 share grants
will become exercisable at the rate of 1/12th of the shares per month.
The 2000 director option plan will terminate in July 2010, unless our board
of directors terminates it sooner.
66
<PAGE>
401(k) Plan
In March 1992, we adopted a retirement savings and investment plan, the
401(k) plan, covering our full-time employees located in the United States. The
401(k) plan is intended to qualify under Section 401(k) of the Internal Revenue
Code, so that contributions to the 401(k) plan by employees or by us, and the
investment earnings on those contributions are not taxable to the employees
until withdrawn. If our 401(k) plan qualifies under Section 401(k) of the
Internal Revenue Code, our contributions will be deductible by us when made.
Our employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit of $10,500 in 2000 and to have those funds
contributed to the 401(k) plan. The 401(k) plan permits us, but does not
require us, to make additional matching contributions on behalf of all
participants. Beginning January 1, 2000, we commenced matching contributions to
the 401(k) plan for each participant of up to a maximum of $500 per year.
Limitations on Directors' Liability and Indemnification
Our certificate of incorporation limits the liability of our directors and
executive officers for monetary damages for breach of their fiduciary duties to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to our company or our stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derived an improper personal
benefit.
The limits on a director or officer's liability in our certificate of
incorporation do not apply to liabilities arising under the federal securities
laws and do not affect the availability of equitable remedies such as
injunctive relief or rescission.
Our certificate of incorporation together with our bylaws provide that we
must indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in that capacity,
regardless of whether our bylaws would otherwise permit indemnification. We
believe that the indemnification provisions of our certificate of incorporation
and bylaws are necessary to attract and retain qualified persons as directors
and officers. We also maintain directors' and officers' liability insurance.
Prior to the effective time of this offering, we expect to enter into
agreements to indemnify our directors, executive officers and other employees
as determined by the board of directors. These agreements will provide for
indemnification for related expenses including attorneys' fees, judgments,
fines and settlement amounts incurred by any of these individuals in any action
or proceeding. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as our directors and executive officers.
At present we are not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of our company where
indemnification will be required or permitted. Nor are we aware of any
threatened litigation or proceeding that might result in a claim for
indemnification.
67
<PAGE>
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We believe that we have executed all of the transactions set forth below on
terms no less favorable to us than we could have obtained from unaffiliated
third parties. It is our intention to ensure that all future transactions,
including loans, between us and our officers, directors and principal
stockholders and their affiliates, are approved by a majority of the board of
directors, including a majority of the independent and disinterested members of
the board of directors, and are on terms no less favorable to us than those
that we could obtain from unaffiliated third parties.
Stock Issuances to our Directors, Officers and Principal Stockholders
In connection with our founding, we issued 320,000 shares of common stock in
June 1987 at the then fair market value price of $0.25 per share to two of our
founders, Maurizio Liverani and John Porter, for aggregate proceeds of $80,000.
In May 1989, we issued 460,000 shares of common stock at the then fair
market value price of $0.50 per share to John Porter, William New, Jr., M.D.
and the family trusts of Brian Prinn and William W. Moore, each of whom are our
founders, for aggregate proceeds of $230,000.
In December 1989, we issued 160,000 shares of common stock at the then fair
market value price of $2.50 to Maurizio Liverani, William New, Jr., M.D., John
Porter and the family trusts of Brian Prinn and William M. Moore, each of whom
are our founders, for aggregate proceeds of $400,000.
In May and June 1990, we issued 80,000 shares of common stock at the then
fair market value price of $5.00 to John Porter, William New, Jr., M.D. and the
family trusts of Brian Prinn and William W. Moore, each of whom are our
founders, for aggregate proceeds of $400,000.
In December 1990, we issued 94,339 shares of common stock to William New,
Jr., M.D. and the family trust of William M. Moore, each of whom are our
founders, at the then fair market value price of $5.30 per share for aggregate
proceeds of $500,000.
In February 1991, we issued 114,739 shares of common stock at the then fair
market value price of $5.30 to William New, Jr., M.D., John Porter and the
family trusts of Brian Prinn and William W. Moore, each of whom are our
founders, for aggregate proceeds of $608,117.
We reclassified our outstanding common stock as Series A convertible
preferred stock in May 1991.
From August 1991 to June 30, 2000, we have issued shares of additional
preferred stock in private placement transactions as follows:
. an aggregate of 1,428,683 shares of Series B convertible preferred stock
at $1.75 per share in August 1991;
. an aggregate of 2,532,209 shares of Series B convertible preferred stock
at $1.75 per share in December 1992;
. an aggregate of 6,228 shares of Series B convertible preferred stock at
$1.75 per share in January 1993;
. an aggregate of 375,027 shares of Series C convertible preferred stock
at $1.75 per share in June 1995;
. an aggregate of 76,319 shares of Series C convertible preferred stock at
$1.75 per share in August 1995;
. an aggregate of 600,000 shares of Series C convertible preferred stock
at $1.75 per share and warrants to purchase 1,314,188 shares of Series C
convertible preferred stock at a per share exercise price of $1.75 in
November 1995;
. an aggregate of 377,222 shares of Series C convertible preferred stock
at $1.75 per share and warrants to purchase 471,526 shares of Series C
convertible preferred stock at a per share exercise price of $1.75 in
March and April 1996; and
. an aggregate of 1,232,392 shares of Series D convertible preferred stock
at $3.125 per share in April and May 1997.
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<PAGE>
Upon closing of this offering, all shares of outstanding convertible
preferred stock will be automatically converted into shares of common stock on
a one for one basis. The purchasers of our convertible preferred stock include
the following holders of five percent or more of our securities and their
affiliated entities, if any, and those stockholders purchased the following
securities from us:
<TABLE>
<CAPTION>
Shares of Convertible Preferred Stock
-----------------------------------------------
Warrants to
Purchase
Investor Series A Series B Series C Series C(1) Series D
------------------------------ -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Entitles or Persons Affiliated
with Delphi Ventures:
Delphi Ventures, L.P. ........ -- 654,821 94,311 117,890 --
Delphi Ventures II, L.P. ..... -- 198,877 219,714 274,644 --
Delphi BioInvestments, L.P. .. -- 2,323 335 419 --
Delphi BioInvestments II,
L.P. ........................ -- 1,123 1,125 1,405 --
James Bochnowski(2)........... -- -- -- -- --
Entities or Persons Affiliated
with Trinity Ventures:
Trinity Ventures II, L.P. .... -- 644,261 237,130 296,412 --
Trinity Ventures III, L.P. ... -- 178,367 65,650 82,063 --
Trinity Side-by-Side I,
L.P. ........................ -- 34,518 12,705 15,881 --
David Nierenberg(3)........... -- -- 13,714 17,143 --
Entities or Persons Affiliated
with Nikko Capital:
Nikko Capital Co. Ltd......... -- -- -- -- 96,000
Nikko Capital No. 2 Investment
Enterprise Partnership
(Asia)....................... -- -- -- -- 256,000
Nikko Capital No. 7 Investment
Enterprise Partnership
(Asia)....................... -- -- -- -- 128,000
John Porter or Entities
Affiliated with John Porter:
John Porter................... 94,703 201,060 -- -- --
Rabobank Nominees Guernsey
Limited...................... 210,000 -- -- -- --
Gracechurch Co. .............. -- -- 114,286 178,572 --
Toxford Corporation SA........ -- -- 28,572 -- --
Other Entities or Persons:
Landmark Equity Partners V,
L.P.......................... -- 761,905 38,096 47,619 --
Pantheon International
Participations............... -- 952,381 -- -- --
William M. Moore and Patricia
A. Moore, Family Trust....... 217,908 16,684 -- -- --
William New, Jr., M.D.,
Ph.D. ....................... 447,797 74,278 229,710 287,213 --
</TABLE>
--------
(1) The Series C convertible preferred stock warrants expired on December 31,
1999 and are no longer outstanding.
(2) Mr. Bochnowski, one of our directors, is a managing member of Delphi
Management Partners, L.L.C. and Delphi Management Partners II, L.L.C.
Delphi Management Partners, L.L.C. is the general partner of Delphi
Ventures, L.P. and Delphi BioInvestments, L.P. Delphi Management Partners
II, L.L.C. is the general partner of Delphi Ventures II, L.P. and Delphi
BioInvestments II, L.P. Mr. Bochnowski disclaims beneficial ownership of
the shares held by each of the entities listed above as affiliated with
Delphi Ventures, except to the extent of his pecuniary interest therein.
(3) Mr. Nierenberg, one of our directors, is a general partner of Trinity
Ventures II, L.P., Trinity Ventures III, L.P. and Trinity Side-by-Side I,
L.P. Mr. Nierenberg disclaims beneficial ownership of the shares held by
each of the entities listed above as affiliated with Trinity Ventures,
except to the extent of his pecuniary interest therein.
69
<PAGE>
Option Grants to our Directors and Executive Officers
Stock option grants to our directors and executive officers are described
under the captions "Management--Board Compensation" and "--Executive
Compensation." From January 1997 to the present, we have granted options to our
directors and current executive officers, including the named executive
officers as follows:
<TABLE>
<CAPTION>
Number
of Grant Exercise
Name Shares Date Price
------------------------------------------------------ ------- -------- --------
<S> <C> <C> <C>
Tim C. Johnson........................................ 200,000 04/23/97 0.25
20,000 04/22/98 1.88
14,000 07/06/99 2.25
100,000 02/15/00 1.50
William H. Lawrenson.................................. 40,000 12/17/97 1.00
10,000 10/23/98 1.88
20,000 05/05/99 2.25
6,200 07/06/99 2.25
40,000 02/15/00 1.50
Terese M. Baker....................................... 10,000 04/23/97 0.25
20,000 01/21/98 1.00
10,000 10/23/98 1.88
7,200 07/06/99 2.25
4,000 09/01/99 2.25
40,000 02/15/00 1.50
Lucille A. Ferus...................................... 20,000 12/17/97 1.00
20,000 03/04/98 1.00
4,000 10/23/98 1.88
5,200 07/06/99 2.25
40,000 02/15/00 1.50
Bryan Flaherty, Ph.D.................................. 4,000 04/22/98 1.88
2,000 10/23/98 1.88
12,000 07/06/99 2.25
40,000 02/15/00 1.50
Thomas Waugh.......................................... 40,000 01/10/00 1.50
20,000 02/15/00 1.50
</TABLE>
Loans to Executive Officers
In February 1999, in connection with the purchase of his home, we loaned Mr.
Johnson $250,000 under a secured, promissory note at the rate of 4.62%,
compounded monthly. Mr. Johnson repaid the promissory note in full with
interest in March 1999. Upon repayment we provided collateral of $310,000 to a
commercial bank against a loan to Mr. Johnson for $250,000, which he had
received from that bank. Mr. Johnson pledged 111,111 shares of our common stock
that he owns to us to provide us a security interest in the event our $310,000
is not released by the bank. We have no recourse against Mr. Johnson other than
the pledged shares in the event he defaults.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following tables set forth information about the beneficial ownership of
our common stock as of June 30, 2000, and as adjusted to reflect the sale of
shares of common stock in this offering, by:
. each person known to us to be the beneficial owner of more than five
percent of our common stock;
. each of our named executive officers;
. each of our directors; and
. all of our directors and executive officers as a group.
Except as otherwise noted below, the address of each beneficial owner noted
in the tables is c/o Natus Medical Incorporated, 1501 Industrial Road, San
Carlos, California 94070.
We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. Except as indicated by the footnotes below,
we believe, based on the information furnished to us, that the persons and
entities named in the tables below have sole voting and investment power with
respect to all shares of common stock that they beneficially own, subject to
applicable community property laws. We have based our calculation of the
percentage of beneficial ownership on 9,684,520 shares of common stock
outstanding on June 30, 2000 and shares of common stock outstanding
upon completion of this offering.
In computing the number of shares of common stock beneficially owned by a
person and the percentage ownership of that person, we deemed outstanding
shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of June 30, 2000. We did
not deem these shares outstanding, however, for the purpose of computing the
percentage ownership of any other person. Asterisks represent beneficial
ownership of less than one percent.
Executive Officers and Directors
<TABLE>
<CAPTION>
Percent of Shares
and Options
Exercisable
Within 60 days of
Options June 30, 2000
Number of Exercisable Beneficially
Shares of Within Owned
Common Stock 60 Days of -----------------
Beneficially June 30, Before After
Name of Beneficial Owner Owned 2000 Offering Offering
----------------------------------- ------------ ----------- -------- --------
<S> <C> <C> <C> <C>
Tim C. Johnson..................... 183,111 187,512 3.8
William New, Jr., M.D., Ph.D. ..... 895,451 130,000 10.4
William H. Lawrenson............... -- 46,202 *
Lucille A. Ferus................... 47,050 26,422 *
June Fallon........................ -- -- -- --
James Bochnowski(1)................ 1,369,809 -- 14.1
William M. Moore(2)................ 234,592 -- 2.4
David Nierenberg(3)................ 1,400,667 -- 14.5
All executive officers and
directors as a group (10
persons).......................... 4,197,180 432,104 45.8
</TABLE>
--------------
(1) The beneficial ownership reported for James Bochnowski includes 808,077
shares held by Delphi Ventures, L.P., 555,913 shares held by Delphi
Ventures II, L.P., 2,868 shares held by Delphi BioInvestments, L.P. and
2,951 shares held by Delphi BioInvestments II, L.P. Mr. Bochnowski
disclaims beneficial ownership of the shares held by these entities except
to the extent of his proportional interest in the entities.
71
<PAGE>
(2) The beneficial ownership reported for Mr. Moore includes 234,592 shares
held by Mr. Moore's family trust.
(3) The beneficial ownership reported for David Nierenberg includes 1,029,597
shares held by Trinity Ventures II, L.P., 285,049 shares held by Trinity
Ventures III, L.P., 55,164 shares held by Trinity Side-By-Side I, L.P. and
30,857 shares held in Mr. Nierenberg's irrevocable trust. Mr. Nierenberg
is a general partner of each of these partnerships. Mr. Nierenberg
disclaims beneficial ownership of the shares held by these entities except
to the extent of his proportional interest in the entities.
Five Percent or Greater Stockholders
<TABLE>
<CAPTION>
Percent of Shares
and Options
Exercisable Within
Options 60 days of June 30,
Number of Exercisable 2000 Beneficially
Shares of Within Owned
Common Stock 60 Days of -----------------------
Name and Address of Beneficially June 30, Before After
Beneficial Owner Owned 2000 Offering Offering
--------------------------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C>
Delphi Ventures
Entities(1)............... 1,369,809 -- 14.1%
3000 Sand Hill Road
Bldg. 1, Suite 135
Menlo Park, CA 94025
Trinity Ventures
Entities(2)............... 1,400,667 -- 14.5
3000 Sand Hill Road
Bldg. 4, Suite 160
Menlo Park, CA 94025
Pantheon International
Participations PLC(3)..... 952,381 -- 9.8
23 Cathedral Yard
Exeter
Devon EX1 1HB
England
Landmark Equity Partners V,
L.P.(4)................... 847,620 -- 8.8
760 Hopemeadow Street
Simsburg, CT 06070
John Porter Entities(5).... 755,764 7.8
Nikko Capital Entities(6).. 480,000 -- 5.0
c/o International Division
2-3, Higashi Gotanda 2-
chome
Shinagawa-Ku, Tokyo
Japan 141
</TABLE>
--------
(1) The beneficial ownership reported for the Delphi Venture Entities includes
808,077 shares held by Delphi Ventures, L.P., 555,913 shares held by
Delphi Ventures II, L.P., 2,868 shares held by Delphi BioInvestments, L.P.
and 2,951 shares held by Delphi BioInvestments II, L.P. Mr. Bochnowski is
a general partner of each of these partnerships. Mr. Bochnowski disclaims
beneficial ownership of the shares held by these entities except to the
extent of his proportional interest in the entities.
(2) The beneficial ownership reported for the Trinity Ventures Entities
includes 1,029,597 shares held by Trinity Ventures II, L.P., 285,049
shares held by Trinity Ventures III, L.P., 55,164 shares held by Trinity
Side-By-Side I, L.P. and 30,857 shares held in Mr. Nierenberg's
irrevocable trust. Mr. Nierenberg is a general partner of each of these
partnerships. Mr. Nierenberg disclaims beneficial ownership of the shares
held by these entities except to the extent of his proportional interest
in the entities.
(3) Pantheon International Participations, PLC is an investment company
publicly traded on the London Stock Exchange.
72
<PAGE>
(4) The general partner of Landmark Equity Partners V, L.P. is Landmark
Advisors, Inc.
(5) Includes 295,763 shares held by Mr. Porter, 210,000 shares held by
Rabobank Nominees Guernsey Limited, 114,286 shares held by Gracechurch Co.
and 135,715 shares held by Toxford SA.
(6) Includes 256,000 shares held by Nikko Capital No. 2 Investment Enterprise
Partnership (Asia), 128,000 shares held by Nikko Capital No. 7 Investment
Enterprise Partnership (Asia) and 96,000 shares held by Nikko Capital Co.
Ltd. Nikko Capital No. 2 and Nikko Capital No. 7 are managed by Nikko
Capital Co., Ltd.
73
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
120,000,000 shares of common stock, $0.001 par value, and 10,000,000 shares of
undesignated preferred stock, $0.001 par value. The following description of
our capital stock does not purport to be complete and is qualified in its
entirety by our certificate of incorporation and bylaws, which are included as
exhibits to the registration statement of which this prospectus forms a part.
Common Stock
As of June 30, 2000, we had 9,684,520 shares of common stock outstanding
held by approximately 168 stockholders of record.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably any dividends that may be declared from time to
time by the board of directors out of funds legally available for that purpose.
In the event of our liquidation, dissolution or winding up, the holders of
common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to be issued upon
the closing of this offering will be fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, all outstanding shares of our convertible
preferred stock will be converted into an aggregate of 8,931,534 shares of
common stock. Thereafter, our board of directors will have the authority,
without further action by the stockholders, to designate and issue preferred
stock in one or more series in order to provide us with flexibility in
connection with possible acquisitions and other corporate purposes. The board
of directors may also designate the rights, preferences and privileges of each
series of preferred stock, any or all of which may be superior to the rights of
the common stock. It is not possible to state the actual effect of the issuance
of any shares of preferred stock upon the rights of holders of the common stock
until the board of directors determines the specific rights of the holders of
the preferred stock. However, these effects might include:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; and
. delaying or preventing a change in control of our company without further
action by the stockholders.
We have no present plans to issue any shares of preferred stock.
Holders of Registration Rights Can Require Us to Register Shares of Our Stock
for Resale
As of June 30, 2000, the holders of 8,832,558 shares of common stock
issuable upon the conversion of preferred stock or their permitted transferees
are entitled to require us to register their shares under the Securities Act of
1933, as amended. These rights are provided under the terms of our agreement
with the holders of registrable securities. Under these registration rights,
holders of at least a majority of the then outstanding registrable securities
may require on two occasions that we register their shares for public resale.
We are obligated to register these shares if the holders of 20% of the eligible
shares request registration
74
<PAGE>
or if the shares to be registered have an anticipated public offering price of
at least $7,500,000. In addition, holders of 20% of the registrable securities
or holders of a lesser amount, if the anticipated aggregate offering price is
at least $1,000,000, may require that we register their shares for public
resale on Form S-3 or similar short-form registration, if we are eligible to
use Form S-3 or similar short-form registration. If we elect to register any of
our shares of common stock for any public offering, the holders of registrable
securities are entitled to include shares of common stock in the registration.
However, we may reduce the number of shares proposed to be registered in view
of market conditions. We will pay all expenses in connection with any
registration, other than underwriting discounts and commissions.
Anti-Takeover Effects of Some Provisions of Delaware Law and Our Charter
Documents
A number of the provisions of Delaware law and our certificate of
incorporation and bylaws could make the acquisition of our company through a
tender offer, a proxy contest or other means more difficult and could also make
the removal of incumbent officers and directors more difficult. These
provisions include the protections of Section 203 of the Delaware Code, as
described below, as well as our reservation of 10,000,000 shares of blank check
preferred stock and our staggered board of directors. We expect these
provisions to discourage coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of our company to
first negotiate with our board of directors. We believe that the benefits
provided by our ability to negotiate with the proponent of an unfriendly or
unsolicited proposal outweigh the disadvantages of discouraging such proposals.
We believe the negotiation of an unfriendly or unsolicited proposal could
result in an improvement of its terms.
Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless:
. prior to the date of the transaction, the board of directors of the
corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder;
. the stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes
of determining the number of shares outstanding
. shares owned by persons who are directors and also officers; and
. shares owned by employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer; or
. on or subsequent to the date of the transaction, the business combination
is approved by the board and authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder.
Generally, a "business combination" includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns or, within three years prior to the
determination of interested stockholder status, owned 15% or more of a
corporation's outstanding voting securities. We expect the existence of this
provision to have an anti-takeover effect with respect to transactions our
board of directors does not approve in advance. Section 203 may also discourage
transactions that might result in a premium over the market price for the
shares of common stock held by stockholders.
75
<PAGE>
Charter Documents
Upon completion of this offering, our certificate of incorporation will
provide for our board of directors to be divided into three classes serving
staggered terms. Approximately one-third of the board of directors will be
elected each year. The provision for a classified board could prevent a party
who acquires control of a majority of the outstanding voting stock from
obtaining control of the board of directors until the second annual
stockholders meeting following the date the acquirer obtains the controlling
stock interest. The classified board provision could discourage a potential
acquirer from making a tender offer or otherwise attempting to obtain control
of our company and could increase the likelihood that incumbent directors will
retain their positions. Our certificate of incorporation provides that
directors may be removed:
. with cause by the affirmative vote of the holders of at least a majority
of the outstanding shares of voting stock; or
. without cause by the affirmative vote of the holders of at least 66 2/3%
of the then-outstanding shares of the voting stock.
Our bylaws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to the board of directors. At an annual
meeting, stockholders may only consider proposals or nominations specified in
the notice of meeting or brought before the meeting by or at the direction of
the board of directors. Stockholders may also consider a proposal or nomination
by a person who:
. was a stockholder of record on the record date for the meeting;
. is entitled to vote at the meeting; and
. has given to our corporate secretary timely written notice, in proper
form, of his or her intention to bring that business before the meeting.
The bylaws do not give the board of directors the power to approve or
disapprove stockholder nominations of candidates or proposals regarding other
business to be conducted at a special or annual meeting of the stockholders.
However, our bylaws may have the effect of precluding the conduct of that item
of business at a meeting if the proper procedures are not followed. These
provisions may also discourage or deter a potential acquirer from conducting a
solicitation of proxies to elect the acquirer's own slate of directors or
otherwise attempting to obtain control of our company.
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in our
certificate of incorporation or bylaws. The following persons are authorized to
call a special meeting of stockholders:
. a majority of our board of directors;
. the chairman of the board;
. the chief executive officer; or
. 30% of our stockholders entitled to vote at the special meeting.
The limitation on the right of our stockholders to call a special meeting
will make it more difficult for a stockholder to force stockholder
consideration of a proposal over the opposition of the board of directors by
calling a special meeting of stockholders. The restriction on the ability of
stockholders to call a special meeting also will make it more difficult to
replace the board until the next annual meeting.
Although Delaware law provides that stockholders may execute an action by
written consent in lieu of a stockholder meeting, it also allows us to
eliminate stockholder actions by written consent. Elimination of written
consents of stockholders may lengthen the amount of time required to take
stockholder actions since actions by written consent are not subject to the
minimum notice requirement of a stockholders meeting.
76
<PAGE>
However, we believe that the elimination of stockholders written consents may
deter hostile takeover attempts. Without the availability of stockholder's
actions by written consent, a holder controlling a majority of our capital
stock would not be able to amend our bylaws or remove directors without holding
a stockholders meeting. The holder would have to obtain the consent of a
majority of the board of directors, the chairman of the board or the chief
executive officer to call a stockholders meeting and satisfy the notice periods
determined by the board of directors. Our certificate of incorporation provides
for the elimination of actions by written consent of stockholders upon the
closing of this offering.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is BankBoston, N.A.,
which is located at 150 Royall Street, Canton, Massachusetts 02021. BankBoston,
N.A.'s telephone number is (781) 575-3120.
Nasdaq Stock Market Listing
We have applied to have our common stock listed for quotation on the Nasdaq
National Market under the symbol "BABY."
77
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and no predictions can be made regarding the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. As described below, only a limited number
of shares will be available for sale shortly after this offering due to
contractual and legal restrictions that apply to resale. Nevertheless, sales of
our common stock in the public market after the restrictions lapse, or the
perception that such sales may occur, could adversely affect the prevailing
market price.
Sales of Restricted Shares and Lock-up Agreements
Upon completion of this offering, we will have an aggregate of shares
of common stock outstanding, based upon shares outstanding as of June 30, 2000,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options after June 30, 2000. If the underwriter's over-allotment
option is exercised in full, we will have an aggregate of shares of
common stock outstanding based on 9,684,520 shares outstanding as of June 30,
2000. All of the shares sold in this offering, plus any share sold if
the over-allotment option is exercised, will be freely tradable without
restriction under the Securities Act, except for any shares purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act.
Affiliates include but are not limited to those persons who hold 10% or more of
our outstanding stock, our officers and our directors.
The remaining 9,684,520 shares of common stock outstanding are held by
existing stockholders and "restricted" shares as that term is defined in Rule
144. We issued and sold the restricted shares in private transactions in
reliance upon exemptions from registration under the Securities Act. Restricted
shares may be sold in the public market only if they are registered under the
Securities Act or if they qualify for an exemption from registration, such as
Rule 144 or 701 under the Securities Act, which are summarized below. Sales of
the restricted securities in the public market or the availability of those
shares for sale could adversely affect the market price of our common stock.
Our officers, directors, employees and other stockholders, who collectively
hold an aggregate of 9,684,520 restricted shares, have entered into lock-up
agreements in connection with this offering. These lock-up agreements provide
that, with limited exceptions, our officers, directors, employees and
stockholders have agreed not to offer, sell, contract to sell, grant any option
to purchase or otherwise dispose of any of our common stock or any securities
exercisable for or convertible into our common stock, except that they may
exercise stock options for a period of 180 days after the effective date of the
final prospectus for this offering. Salomon Smith Barney Inc. may, in its sole
discretion and at any time without prior notice, release all or any portion of
the shares subject to these lock-up agreements. We also have entered into an
agreement with Salomon Smith Barney Inc. that we will not offer, sell or
otherwise dispose of our common stock until 180 days after the effective date
of this offering.
Notwithstanding possible earlier eligibility for sale under the provisions
of Rules 144, 144(k) and 701, shares subject to lock-up agreements will not be
salable until such agreements expire or are waived by Salomon Smith Barney Inc.
Taking into account the lock-up agreements, and assuming Salomon Smith Barney
Inc. does not release stockholders from these agreements, beginning 180 days
after the effective date, approximately 9,684,520 shares will be eligible for
sale.
Following the expiration of the lock-up period, shares issued upon exercise
of options granted by us prior to the completion of this offering will also be
available for sale in the public market pursuant to Rule 701 under the
Securities Act unless those shares are held by one of our affiliates, directors
or officers.
78
<PAGE>
Rule 144
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for
at least one year, including the holding period of any prior owner except an
affiliate, would be entitled to sell within any three month period a number of
shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding,
which will equal approximately shares immediately after this
offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 also are subject to manner of sale provisions that
require arm's length sales through a stockbroker, notice requirements with
respect to sales by our officers, directors and greater than 5% stockholders
and the availability of current public information about us. Under Rule 144(k),
a person who is not deemed to have been an affiliate of our company at any time
during the six months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years including the holding period
of any prior owner except an affiliate, is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
Rule 701
Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares under a written compensatory plan or
contract to resell these shares in reliance upon Rule 144. Rule 701 provides
that affiliates may sell their Rule 701 shares under Rule 144 without complying
with the holding period requirement and that non-affiliates may sell these
shares in reliance on Rule 144 without complying with the holding period,
public information, volume limitation or notice provisions of Rule 144.
We intend to file, shortly after the effectiveness of this offering, a
registration statement on Form S-8 under the Securities Act covering all shares
of common stock reserved for issuance under the stock plans and subject to
outstanding options under our 1991 stock option plan and 2000 stock option
plan, if any. See "Management--Stock Plans." Shares of common stock issued upon
exercise of options under the Form S-8 will be available for sale in the public
market, subject to Rule 144 volume limitations applicable to affiliates and
subject to the contractual restrictions described above. As of June 30, 2000,
options to purchase 1,326,123 shares of common stock were outstanding of which
approximately 663,047 options were then vested and exercisable. Beginning on
the date that is 180 days after the effective date of this offering,
approximately 897,161 shares issuable upon the exercise of vested stock options
will become eligible for sale in the public market, if such options are
exercised.
Following this offering, the holders of an aggregate of 8,832,558 shares of
outstanding common stock as of June 30, 2000, have the right to require us to
register their shares for sale upon meeting requirements to which the parties
have previously agreed. See "Description of Capital Stock--Holders of
Registration Rights Can Require Us to Register Shares of Our Stock for Resale"
for additional information regarding registration rights.
79
<PAGE>
UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of the material United States federal
income tax consequences of the ownership and disposition of our common stock to
a non-United States holder. As used in this prospectus, the term non-United
States holder is a person other than:
. a citizen or individual resident of the United States for United States
federal income tax purposes;
. a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or any political
subdivision of the United States;
. an estate whose income is included in gross income for United States
federal income tax purposes regardless of its source; or
. a trust, in general, if it is subject to the primary supervision of a
court within the United States and which has one or more United States
persons who have the authority to control all substantial decisions of
the trust.
This discussion does not address all aspects of United States federal income
taxation that may be relevant in light of a non-United States holder's
particular facts and circumstances, such as being a United States expatriate,
and does not address any tax consequences arising under the laws of any state,
local or non-United States taxing jurisdiction. Furthermore, the following
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended, and administrative and judicial interpretations thereof, all as in
effect on the date hereof, and all of which are subject to change, possibly
with retroactive effect. Accordingly, each non-United States holder should
consult a tax advisor regarding the United States federal, state, local and
non-United States income and other tax consequences of acquiring, holding and
disposing of shares of our common stock.
Dividends
We have never paid dividends on our capital stock and do not anticipate
paying any cash dividends in the foreseeable future. In addition our bank line
of credit generally prohibits us from paying cash dividends. In the event,
however, that we do pay dividends on our common stock, any dividend paid to a
non-United States holder of common stock generally will be subject to United
States withholding tax either at a rate of 30% of the gross amount of the
dividend or such lower rate as may be specified by an applicable tax treaty.
Dividends received by a non-United States holder that are effectively connected
with a United States trade or business conducted by the non-United States
holder are exempt from such withholding tax. However, those effectively
connected dividends, net of certain deductions and credits, are taxed at the
same graduated rates applicable to Unites States persons.
In addition to the graduated tax described above, dividends received by a
corporate non-United States holder that are effectively connected with a United
States trade or business of the corporate non-United States holder may also be
subject to a branch profits tax at a rate of 30% or such lower rate as may be
specified by an applicable tax treaty.
A non-United States holder of common stock that is eligible for a reduced
rate of withholding tax pursuant to a tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund
with the Internal Revenue Service.
Gain on Disposition of Common Stock
A non-United States holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
our common stock unless:
. the gain is effectively connected with a United States trade or business
of the non-United States holder (which gain, in the case of a corporate
non-United States holder, must also be taken into account for branch
profits tax purposes);
80
<PAGE>
. the non-United States holder is an individual who holds his or her common
stock as a capital asset (generally, an asset held for investment
purposes) and who is present in the United States for a period or periods
aggregating 183 days or more during the calendar year in which the sale
or disposition occurs and certain other conditions are met; or
. we are or have been a "United States real property holding corporation"
for United States federal income tax purposes at any time within the
shorter of the five-year period preceding the disposition or the holder's
holding period for our common stock. We have determined that we are not
and do not believe that we will become a "United States real property
holding corporation" for United States federal income tax purposes.
Backup Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax authorities in the
recipient's country of residence.
Dividends paid to a non-United States holder at an address within the United
States may be subject to backup withholding at a rate of 31% if the non-United
States holder fails to establish that it is entitled to an exemption or to
provide a correct taxpayer identification number and other information to the
payer. Backup withholding generally will not apply to dividends paid to non-
United States holders at an address outside the United States on or prior to
December 31, 2000 unless the payer has knowledge that the payee is a United
States person. Under recently finalized Treasury Regulations regarding
withholding and information reporting, payment of dividends to non-United
States holders at an address outside the United States after December 31, 2000
may be subject to backup withholding at a rate of 31% unless such non-United
States holder satisfies various certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the United States office of a broker
is subject to information reporting and backup withholding at a rate of 31%
unless the holder certifies its non-United States status under penalties of
perjury or otherwise establishes an exemption. Generally, the payment of the
proceeds of the disposition by a non-United States holder of common stock
outside the United States to or through a foreign office of a broker will not
be subject to backup withholding but will be subject to information reporting
requirements if the broker is:
. a United States person;
. a "controlled foreign corporation" for United States federal income tax
purposes; or
. a foreign person 50% or more of whose gross income for certain periods is
from the conduct of a United States trade or business
unless the broker has documentary evidence in its files of the holder's non-
United States status and certain other conditions are met, or the holder
otherwise establishes an exemption. Neither backup withholding nor information
reporting generally will apply to a payment of the proceeds of a disposition of
common stock by or through a foreign office of a foreign broker not subject to
the preceding sentence.
In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certifications procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-United States holders should consult their tax
advisors regarding the effect, if any, of those final Treasury Regulations on
an investment in our common stock. Those final Treasury Regulations generally
are effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the United States
income tax liability of persons subject to backup withholding will be reduced
by the amount of tax withheld. If withholding results in an overpayment of
taxes, a refund may be obtained, provided that the required information is
furnished to the IRS.
81
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, each
underwriter named below has severally agreed to purchase, and we have agreed to
sell to each underwriter, the number of shares set forth opposite the name of
that underwriter.
<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Salomon Smith Barney Inc. .........................................
Dain Rauscher Incorporated.........................................
Prudential Securities Incorporated.................................
----
Total............................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the shares of common stock, other than those
covered by the over-allotment option described below, if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc., Dain Rauscher
Incorporated and Prudential Securities Incorporated are acting as
representatives, propose to offer some of the shares directly to the public at
the public offering price set forth on the cover page of this prospectus and
some of the shares to dealers at the public offering price less a concession
not in excess of $ per share. The underwriters may allow, and the dealers may
reallow, a concession not in excess of $ per share on sales to other dealers.
If all of the shares are not sold at the initial offering price, the
representatives may change the public offering price and the other selling
terms. The representatives have advised us that the underwriters do not intend
to confirm any sales to any accounts over which they exercise discretionary
authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to additional shares of common
stock at the public offering price less the underwriting discount. The
underwriters may exercise this option solely for the purpose of covering over-
allotments, if any, in connection with this offering. To the extent the option
is exercised, each underwriter must, subject to specified conditions, purchase
a number of additional shares approximately proportionate to that underwriter's
initial purchase commitment.
At our request, the underwriters have reserved up to % of the shares to be
offered, or shares, as directed shares for sale at the initial public
offering price to our directors, officers and employees, as well as to
individuals associated with us or our employees, who have advised us of their
desire to purchase these shares. This directed share program will be
administered by Salomon Smith Barney Inc. The number of shares available for
sale to the general public will be reduced to the extent these individuals
purchase directed shares. Any directed shares not purchased will be offered by
the underwriters to the general public on the same terms as the other shares
offered by this prospectus. We have agreed to indemnify the underwriters
against some liabilities and expenses, including liabilities under the
Securities Act of 1933, in connection with sales of the directed shares.
We, our officers and directors and holders of substantially all of our
existing outstanding shares have agreed that, for a period of 180 days from the
date of this prospectus, we and they will not, without the prior written
consent of Salomon Smith Barney Inc., dispose of or hedge any shares of our
common stock or any securities convertible into or exchangeable for common
stock. Salomon Smith Barney Inc. in its sole discretion may release any of the
securities subject to these lock-up agreements at any time without notice.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our shares will be
determined by negotiation among us and the representatives. Among the factors
considered in determining the initial public offering price will be our record
of operations, our current financial condition, our future prospects, our
markets, the economic conditions and future prospects for the industry in which
we compete, our management, and currently prevailing general conditions in the
equity
82
<PAGE>
securities markets, including current market valuations of publicly traded
companies considered comparable to us. There can be no assurance, however, that
the prices at which our shares will sell in the public market after this
offering will not be lower than the price at which they are sold by the
underwriters or that an active trading market in our common stock will develop
and continue after this offering.
We have applied to have our common stock included for quotation on the
Nasdaq National Market under the symbol "BABY."
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
Paid by Natus
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share.......................................... $ $
Total.............................................. $ $
</TABLE>
Salomon Smith Barney Inc., on behalf of the underwriters, may purchase and
sell shares of common stock in the open market. These transactions may include
short-sales, syndicate covering transactions and stabilizing transactions.
Short-sales involve syndicate sales of common stock in excess of the number of
shares to be purchased by the underwriters in this offering, which creates a
syndicate short position. Covered short sales are sales of shares made in an
amount up to the number of shares represented by the underwriters' over-
allotment option. Transactions to close out the covered syndicate short involve
either purchases of the common stock in the open market after the distribution
has been completed or the exercise of the over-allotment option. The
underwriters may also make "naked" short sales of shares in excess of the over-
allotment option. The underwriters must close out any naked short position by
purchasing shares of common stock in the open market. A naked short position is
more likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase in the offering. Stabilizing
transactions consist of the bids for or purchases of shares in the open market
while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from an underwriter when Salomon
Smith Barney Inc., in covering syndicate short positions or making stabilizing
purchases, repurchases shares originally sold by that underwriter.
Any of these activities may cause the price of the common stock to be higher
than the price that otherwise would exist in the open market in the absence of
these transactions. These transactions may be effected on the Nasdaq National
Market or in the over-the-counter market, or otherwise and, if commenced, may
be discontinued at any time.
We estimate that the total expenses, excluding underwriting discounts and
commissions, payable by us in connection with this offering will be
approximately $1,550,000.
Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
Advisor, a full service brokerage firm program, may view offering terms and a
prospectus online and place orders through their financial advisors.
The representatives may, from time to time, engage in transactions with and
perform services for us in the ordinary course of business.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
83
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters specified by the underwriters in connection with this
offering will be passed upon for the underwriters by Cravath, Swaine & Moore,
New York, New York. Members of Wilson Sonsini Goodrich & Rosati and investment
funds associated with that firm hold 46,350 shares of Natus common stock.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for each of
the three years in the period ended December 31, 1999 included in this
prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement, and have been so included in reliance upon the
reports of such firm given upon the authority of such firm as experts in
auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act with respect to the shares of
common stock offered in this offering. This prospectus, which is a part of the
registration statement, does not contain all of the information set forth in
the registration statement, or the exhibits which are part of the registration
statement, parts of which are omitted as permitted by the rules and regulations
of the Securities and Exchange Commission. For further information about us and
the shares of our common stock to be sold in this offering, please refer to the
registration statement and the exhibits which are part of the registration
statement. Statements contained in this prospectus as to the contents of any
contract or any other document are not necessarily complete. Each statement in
this prospectus regarding the contents of the referenced contract or other
document is qualified in all respects by our reference to the copy filed with
the registration statement.
For further information about us and our common stock, we refer you to our
registration statement and its attached exhibits, copies of which may be
inspected without charge at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You can request copies of these documents
by writing to the Securities and Exchange Commission and paying a duplicating
fee. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information about the public reference rooms. The Commission maintains
a World Wide Web site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy and information statements and
other information with the Commission. Our periodic reports, proxy and
information statements and other information will be available for inspection
and copying at the regional offices, public references facilities and Web site
of the Commission referred to above.
We intend to furnish our stockholders with annual reports containing audited
financial statements and an opinion thereon expressed by independent certified
public accountants. We also intend to furnish other reports as we may determine
or as required by law.
84
<PAGE>
NATUS MEDICAL INCORPORATED
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets as of December 31, 1998 and 1999 and June 30, 2000
(Unaudited).............................................................. F-3
Statements of Operations for Each of the Three Years in the Period Ended
December 31, 1999 and for the Six Months Ended June 30, 1999 and 2000
(Unaudited).............................................................. F-4
Statements of Stockholders' Deficit for Each of the Three Years in the
Period Ended December 31, 1999 and for the Six Months Ended June 30, 2000
(Unaudited).............................................................. F-5
Statements of Cash Flows for Each of the Three Years in the Period Ended
December 31, 1999 and for the Six Months Ended June 30, 1999 and 2000
(Unaudited).............................................................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Natus Medical Incorporated:
We have audited the accompanying balance sheets of Natus Medical
Incorporated (the "Company") as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' deficit, and cash flows for each of the
three years in the period ended December 31, 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 auditing standards generally
accepted in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and
1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
San Jose, California
March 10, 2000 (August 16, 2000 as to Note 14)
F-2
<PAGE>
NATUS MEDICAL INCORPORATED
BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Pro Forma
December 31, (Note 1)
------------------ June 30, June 30,
1998 1999 2000 2000
-------- -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents.................. $ 1,664 $ 2,087 $ 1,510
Short-term investments................ 279 289 295
Accounts receivable, net of allowance
for doubtful accounts of $138 in
1998, $201 in 1999 and $225 in
2000................................. 2,807 3,128 3,334
Inventories........................... 1,180 1,253 1,799
Prepaid expenses and other current
assets............................... 241 140 257
-------- -------- --------
Total current assets................ 6,171 6,897 7,195
Property and equipment, net............ 1,154 1,277 1,339
Convertible notes receivable........... -- 95 106
Long-term investment................... -- 315 317
Deposits and other assets.............. 93 115 102
-------- -------- --------
Total assets........................ $ 7,418 $ 8,699 $ 9,059
======== ======== ========
LIABILITIES, CONVERTIBLE PREFERRED
STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Long-term debt, current portion....... $ 150 $ 150 $ 75
Accounts payable...................... 959 974 755
Accrued liabilities................... 1,546 1,526 2,008
Deferred revenues..................... 310 433 498
-------- -------- --------
Total current liabilities........... 2,965 3,083 3,336
-------- -------- --------
Long-term debt, net of current
portion............................... 150 -- --
-------- -------- --------
Total liabilities................... 3,115 3,083 3,336
-------- -------- --------
Commitments and contingencies (Notes 1,
6, 9 and 12)..........................
Convertible preferred stock:
Series A convertible preferred stock,
$0.001 par value; 1,241,842 shares
authorized; 1,241,841 shares issued
and outstanding in 1998, 1999 and
2000, none pro forma; aggregate
liquidation value of $3,629 in 1999
and $3,716 in 2000................... 2,227 2,227 2,227 $ --
Redeemable convertible preferred
stock, $0.001 par value; 8,781,412
shares authorized; outstanding
shares: aggregate liquidation value
of $23,794 in 1999 and $24,486 in
2000 and aggregate redemption value
of $21,615 in 1999 and $22,307 in
2000:
Series B: 3,967,126 shares
authorized; 3,967,120 shares issued
and outstanding in 1998, 1999 and
2000, none pro forma............... 11,050 11,764 12,121 --
Series C: 3,214,286 shares
authorized; shares issued and
outstanding: 1,428,568 in 1998,
2,490,181 in 1999 and 2000, none
pro forma.......................... 3,168 5,416 5,640 --
Series D: 1,600,000 shares
authorized; 1,232,392 shares issued
and outstanding in 1998, 1999 and
2000, none pro forma............... 4,151 4,435 4,546 --
Warrants--Series C redeemable
convertible preferred stock........ 558 -- -- --
-------- -------- -------- --------
Total convertible preferred stock... 21,154 23,842 24,534 --
-------- -------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value;
120,000,000 shares authorized;
shares issued and outstanding:
515,632 in 1998, 597,689 in 1999,
752,986 in 2000 and 9,684,520 pro
forma................................ 212 278 1,824 26,358
Deferred stock compensation........... -- -- (1,122) (1,122)
Accumulated deficit................... (17,063) (18,504) (19,513) (19,513)
-------- -------- -------- --------
Total stockholders' equity
(deficit).......................... (16,851) (18,226) (18,811) $ 5,723
-------- -------- -------- ========
Total liabilities, convertible
preferred stock and stockholders'
deficit............................ $ 7,418 $ 8,699 $ 9,059
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NATUS MEDICAL INCORPORATED
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December Six Months
31, Ended June 30,
------------------------- ---------------
1997 1998 1999 1999 2000
------- ------- ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues....................... $10,031 $15,884 $19,783 $8,918 $11,009
Cost of revenues*.................. 3,612 5,577 6,624 3,082 3,908
------- ------- ------- ------ -------
Gross profit....................... 6,419 10,307 13,159 5,836 7,101
------- ------- ------- ------ -------
Operating expenses:
Marketing and selling............ 4,259 6,275 7,684 3,654 4,395
Research and development......... 1,602 2,711 2,457 1,288 1,605
General and administrative....... 1,231 1,638 2,384 1,021 1,152
Amortization of deferred stock
compensation*................... -- -- -- -- 278
------- ------- ------- ------ -------
Total operating expenses....... 7,092 10,624 12,525 5,963 7,430
------- ------- ------- ------ -------
Income (loss) from operations...... (673) (317) 634 (127) (329)
Interest income.................... 105 116 35 14 17
Interest expense and other......... (8) 2 (15) (9) (5)
------- ------- ------- ------ -------
Income (loss) before taxes......... (576) (199) 654 (122) (317)
Income tax expense................. -- -- 10 -- --
------- ------- ------- ------ -------
Net income (loss).................. (576) (199) 644 (122) (317)
Accretion of redeemable convertible
preferred stock................... 1,292 1,389 2,085 695 692
------- ------- ------- ------ -------
Net loss available to common
stockholders...................... $(1,868) $(1,588) $(1,441) $ (817) $(1,009)
======= ======= ======= ====== =======
Basic and diluted net loss per
share............................. $ (7.62) $ (3.63) $ (2.56) $(1.47) $ (1.59)
======= ======= ======= ====== =======
Shares used in computing basic and
diluted net loss per share........ 245 438 562 557 633
Pro forma basic and diluted net
loss per share (Note 1)........... $ (0.17) $ (0.11)
======= =======
Shares used in computing pro forma
basic and diluted net loss per
share (Note 1).................... 8,478 9,565
*Amortization of deferred stock
compensation:
Included in cost of revenues..... $ -- $ -- $ -- $ -- $ 75
======= ======= ======= ====== =======
Marketing and selling............ $ -- $ -- $ -- $ -- $ 91
Research and development......... -- -- -- -- 48
General and administrative....... -- -- -- -- 139
------- ------- ------- ------ -------
$ -- $ -- $ -- $ -- $ 278
======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NATUS MEDICAL INCORPORATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Deferred
-------------- Stock Accumulated
Shares Amount Compensation Deficit Total
------- ------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1997.... 114,469 $ 63 $ -- $(13,607) $(13,544)
Accretion to redemption value
on Series B, C and D
redeemable convertible
preferred stock............. (1,292) (1,292)
Exercise of stock options.... 197,352 49 49
Net loss..................... (576) (576)
------- ------ ------- -------- --------
Balances, December 31, 1997.. 311,821 112 -- (15,475) (15,363)
Accretion to redemption value
on Series B, C and D
redeemable convertible
preferred stock............. (1,389) (1,389)
Stock compensation expense... 40 40
Exercise of options.......... 203,811 60 60
Net loss..................... (199) (199)
------- ------ ------- -------- --------
Balances, December 31, 1998.. 515,632 212 -- (17,063) (16,851)
Accretion to redemption value
on Series B, C and D
redeemable convertible
preferred stock............. (1,389) (1,389)
Accretion to redemption value
of shares issued on exercise
of warrants on Series C
redeemable convertible
preferred stock............. (696) (696)
Exercise of options.......... 82,057 66 66
Net income................... 644 644
------- ------ ------- -------- --------
Balances, December 31, 1999.. 597,689 278 -- (18,504) (18,226)
Accretion to redemption value
on Series B, C and D
redeemable convertible
preferred stock*............ (692) (692)
Deferred stock
compensation*............... 1,475 (1,475) --
Amortization of deferred
stock compensation*......... 353 353
Exercise of stock options*... 155,297 71 71
Net loss*.................... (317) (317)
------- ------ ------- -------- --------
Balances, June 30, 2000*..... 752,986 $1,824 $(1,122) $(19,513) $(18,811)
======= ====== ======= ======== ========
</TABLE>
--------
* Unaudited
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NATUS MEDICAL INCORPORATED
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June
Year Ended December 31, 30,
--------------------------- --------------
1997 1998 1999 1999 2000
-------- ------- -------- ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)............... $ (576) $ (199) $ 644 $ (122) $ (317)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and
amortization................. 266 357 585 264 346
Amortization of deferred stock
compensation................. -- 40 -- -- 353
Writeoff of note receivable... -- -- 200 -- --
Changes in operating assets
and liabilities:
Accounts receivable......... (1,120) (689) (321) 446 (206)
Inventories................. (225) (589) (73) (490) (546)
Prepaid expenses and other
assets..................... 9 (115) 101 (76) (117)
Accounts payable............ 221 329 15 -- (219)
Accrued liabilities......... 486 568 103 449 547
-------- ------- -------- ------ ------
Net cash provided by (used
in) operating activities.. (939) (298) 1,254 471 (159)
-------- ------- -------- ------ ------
Investing activities:
Acquisition of property and
equipment...................... (496) (900) (694) (421) (395)
Deposits and other assets....... (14) (32) (36) -- --
Purchase of convertible notes
receivable..................... -- -- (95) -- (10)
Purchase of note receivable..... -- -- (200) -- --
Purchases of short-term
investments.................... (459) (547) (569) (282) (295)
Sales of short-term
investments.................... 390 529 559 282 286
Purchase of long-term
investment..................... -- -- (315) (312) --
-------- ------- -------- ------ ------
Net cash used in investing
activities................ (579) (950) (1,350) (733) (414)
-------- ------- -------- ------ ------
Financing activities:
Issuance of preferred stock..... 3,681 -- -- -- --
Exercise of warrants on Series C
preferred stock................ -- -- 603 -- --
Issuance of common stock........ 49 60 66 43 71
Borrowings on bank loans........ -- 300 -- -- --
Payments of borrowings and
capital lease obligations...... (212) (10) (150) (75) (75)
-------- ------- -------- ------ ------
Net cash provided by (used
in) financing activities.. 3,518 350 519 (32) (4)
-------- ------- -------- ------ ------
Net increase (decrease) in cash
and equivalents................. 2,000 (898) 423 (294) (577)
Cash and equivalents, beginning
of period....................... 562 2,562 1,664 1,664 2,087
-------- ------- -------- ------ ------
Cash and equivalents, end of
period.......................... $ 2,562 $ 1,664 $ 2,087 $1,370 $1,510
======== ======= ======== ====== ======
Noncash investing and financing
activities:
Accretion of redeemable
convertible preferred stock.... $ 1,292 $ 1,389 $ 2,085 $ 695 $ 692
Exercise of warrants, cashless.. $ -- $ -- $ 448 $ -- $ --
Supplemental disclosure of cash
flow information:
Cash paid for interest.......... $ 17 $ 1 $ 17 $ 8 $ 6
Cash paid for income taxes...... $ -- $ -- $ 7 $ 33 $ 28
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NATUS MEDICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1998 and 1999 and for the
Six Months Ended June 30, 1999 (Unaudited) and June 30, 2000 (Unaudited)
1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Natus Medical Inc. (the "Company") was incorporated in California in May
1987 (see Note 14), and was formed to design, manufacture and market newborn
screening products for the identification and monitoring of common medical
disorders that may occur during the critical development period of infants. The
Company's main products include (1) the ALGO series, which use automated
auditory brainstem technology, or AABR, to enable simple, non-invasive and
accurate screening for hearing impairment in newborns and (2) the CO-Stat
analyzers which accurately and non-invasively measuring the rate of hemolysis
through the detection of carbon monoxide, in exhaled breath. Both the ALGO and
CO-Stat products use single-use disposable supplies during the process of
screening an infant.
Unaudited Interim Financial Information
The interim financial information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited and has been prepared on the same
basis as the audited financial statements. In the opinion of management, such
unaudited information includes all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the interim
information. Operating results for the six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
Financial Statement Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Such estimates include allowances for
potentially uncollectible accounts receivable, warranty costs, sales returns,
and a valuation allowance for deferred tax assets. Actual results could differ
from those estimates.
Certain Significant Risks and Uncertainties
Financial instruments that potentially subject the Company to credit risk
consist principally of cash and equivalents, investments and accounts and notes
receivable. Cash and equivalents and investments consist of cash in bank
accounts, money market accounts and certificates of deposit.
The Company sells its products primarily to hospitals and medical
institutions and generally does not require its customers to provide collateral
or other security to support accounts receivable. The Company maintains
allowances for estimated potential bad debt losses. No single customer
accounted for more that 10% of accounts receivable at December 31, 1998 or
1999. One customer accounted for 13% of accounts receivable at June 30, 2000.
See Note 4 for discussion of the terms of convertible notes receivable.
The Company operates in a dynamic industry and, accordingly, can be affected
by a variety of factors. For example, management believes that changes in any
of the following areas could have a negative effect on the Company in terms of
its future financial position, cash flows and results of operations: ability to
obtain additional financing; changes in domestic and international economic
and/or political conditions or regulations; fundamental changes in the
technology; market acceptance of the Company's products under development;
changes in the overall demand for products offered by the Company; successful
and timely completion of
F-7
<PAGE>
NATUS MEDICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
product development efforts; competitive pressures in the form of new product
introductions by competitors or price reductions on current products;
availability of necessary product components; development of sales channels;
litigation or other claims against the Company based on intellectual property,
patent, product, regulatory or other factors; and the hiring, training and
retention of key employees.
Effective January 1, 2000, the Series B, C and D redeemable convertible
preferred stockholders or the Board of Directors may require the Company to
redeem such outstanding stock (see Note 6). The aggregate accreted values for
the Series B, C and D redeemable convertible preferred stock and the
corresponding aggregate redemption value totaled $21,615,000 at December 31,
1999 and $22,307,000 at June 30, 2000. The Company may, at its discretion,
elect to pay any redemption obligations in quarterly installments over a three-
year period commencing with the date of the redemption notice. In the event
redemption is required, the Company may need to seek alternative financing or
reduce its operating costs, which could have a negative effect on the Company's
future financial position, cash flows and results of operations. In addition,
there is no assurance that alternative financing will be available on terms
acceptable to the Company or on a timely basis, if at all.
Cash and Equivalents
The Company considers all highly liquid debt instruments purchased with a
remaining maturity of three months or less to be cash equivalents.
Short-Term Investments
The Company has classified all of its short-term investments as available-
for-sale securities. While the Company's practice is to hold securities to
maturity, the Company has classified all securities as available-for-sale
securities, as the sale of such securities may be required prior to maturity to
implement management strategies. The Company's short-term investments consist
of certificates of deposit of $279,000, $289,000 and $295,000 at December 31,
1998 and 1999 and June 30, 2000, respectively, with original maturities ranging
between three and six months. Cost, which approximated market value at December
31, 1998 and 1999 and June 30, 2000, is based on the specific identification
method for purposes of computing realized gains or losses.
Long-Term Investment
The Company has a $310,000 interest-bearing certificate of deposit with a
bank that matures in April 2004. This investment has been assigned to a bank to
guarantee a loan on the primary residence of an officer totaling $250,000 plus
accrued interest. The sole collateral for such guarantee is 111,111 shares of
the Company's common stock that is owned by the officer. Due to this
arrangement, the Company has classified the investment as held-to-maturity. The
estimated fair value of the long-term investment, using discounted cash flows
is approximately $272,000 at December 31, 1999.
Fair Value of Financial Instruments
The Company's financial instruments include cash and equivalents,
investments, accounts receivable, convertible notes receivable and debt
obligations. The recorded carrying amounts of cash equivalents, short-term
investments and accounts receivable approximate their fair value due to their
short-term maturities. The recorded amount of the Company's debt obligations
approximate their estimated fair value due to their variable interest rates. At
December 31, 1999, the difference between estimated fair value and amortized
cost for the convertible notes receivable was not significant.
F-8
<PAGE>
NATUS MEDICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over estimated useful lives of three to five years.
Equipment under capital leases and leasehold improvements are amortized over
the shorter of the lease term or the estimated useful life.
Patent Costs
The Company capitalizes direct costs associated with obtaining and filing
patents. Such costs are amortized to expense over five years on a straight-line
basis. At December 31, 1998 and 1999, capitalized patent costs, which are
included in deposits and other assets in the accompanying balance sheets,
totaled $108,000 and $145,000, respectively, and accumulated amortization
totaled $46,000 and $60,000, respectively. During 1997, 1998 and 1999, the
Company recorded amortization expense in association with capitalized patent
costs of $10,000, $10,000 and $14,000, respectively.
Long-Lived Assets
The Company reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of that asset may
not be recoverable. When the sum of the undiscounted future net cash flows
expected to result from the use of the asset and its eventual disposition is
less than its carrying amount, an impairment loss would be measured based on
the discounted cash flows compared to the carrying amount. No impairment charge
has been recorded in any of the periods presented.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment. A provision
for estimated warranty costs and sales returns is recorded at the time of sale.
Revenues from extended warranty contracts are recognized ratably over the
warranty period. Advance payments from customers are recorded as deferred
revenue until shipment of the related product.
Research and Development
Costs incurred in research and development are charged to operations as
incurred.
Income Taxes
Deferred tax assets and liabilities are recorded for the expected future tax
consequences of temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. A valuation allowance is
recorded to reduce net deferred tax assets to amounts that are more likely than
not to be realized.
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board ("APB") No. 25,
Accounting for Stock Issued to Employees. The
F-9
<PAGE>
NATUS MEDICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Company accounts for stock-based awards to nonemployees in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation and Emerging Issues Task Force ("EITF") Issue No. 96-
18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services.
Comprehensive Income (Loss)
In accordance with SFAS No. 130, Reporting Comprehensive Income, the Company
is required to report by major components and as a single total, the change in
its net assets during the period from nonowner sources. Comprehensive income
(loss) was the same as net income (loss) for all periods presented.
Net Loss per Share
Basic net loss per common share excludes dilution and is computed by
dividing net loss available to common stockholders by the weighted average
number of common shares outstanding during the respective period. Diluted net
loss per share was the same as basic net loss per share for all periods
presented since the effect of any potentially dilutive securities is excluded
as they are anti-dilutive (see Note 8).
Unaudited Pro Forma Net Loss per Share
Pro forma basic and diluted net loss per share is computed by dividing net
loss available to common stockholders by the weighted average number of common
shares outstanding for the period and the weighted average number of common
shares resulting from the assumed conversion of all outstanding shares of
convertible preferred stock, which will occur upon the closing of the initial
public offering contemplated by the Company.
Unaudited Pro Forma Information
The unaudited pro forma balance sheet presents the Company's balance sheet
as if the automatic conversion upon the closing of an initial public offering
of each share of convertible preferred stock into one share of common stock had
occurred at June 30, 2000.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which defines
derivatives and requires all derivatives be carried at fair value, and provides
for hedge accounting when certain conditions are met. SFAS No. 133 is effective
for the Company in fiscal year 2001. The Company has not yet completed its
assessment of the effect, if any, this statement will have on its financial
position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements, which summarizes certain of the SEC Staff's views in applying
accounting principles generally accepted in the United States of America to
revenue recognition in the financial statements. The Company has not yet
completed its assessment of the effect, if any, this SAB will have on its
financial position or results of operations.
F-10
<PAGE>
NATUS MEDICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
2--INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1998 1999 2000
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Raw materials and subassemblies.................... $ 592 $ 469 $1,098
Finished goods..................................... 588 784 701
------ ------ ------
Total............................................ $1,180 $1,253 $1,799
====== ====== ======
</TABLE>
3--PROPERTY AND EQUIPMENT
Property and equipment consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------- June 30,
1998 1999 2000
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Furniture and equipment....................... $ 876 $ 1,179 $ 1,038
Computer software and equipment............... 870 1,061 983
Demonstration and loaned equipment............ 777 970 688
Leasehold improvements........................ 82 88 222
------- ------- -------
2,605 3,298 2,931
Accumulated depreciation and amortization..... (1,451) (2,021) (1,592)
------- ------- -------
Total....................................... $ 1,154 $ 1,277 $ 1,339
======= ======= =======
</TABLE>
4--NOTES RECEIVABLE
During 1999, the Company agreed to loan up to $115,000 in the form of
convertible notes to a foreign distributor. During 1999 and January 2000, the
Company advanced $95,000 and $10,000, respectively, under such commitment. The
remaining $10,000 installment available during April 2000 was not drawn by the
foreign distributor. The notes bear interest at a fixed rate of 7%, and all
outstanding principal and interest related thereto is due in June 2002. The
notes are secured by substantially all of the assets of the foreign distributor
and at the Company's sole discretion, at any time prior to repayment of all
principal and interest, can be converted into a 19.9% equity interest in the
foreign distributor.
During 1999, the Company agreed to loan $200,000 to a private company which
included an exclusive, three month option to purchase substantially all of the
assets of that company. The Company elected not to pursue the acquisition, and
subsequently the private company defaulted on the promissory note, which was
written off as it was deemed uncollectible.
F-11
<PAGE>
NATUS MEDICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
5--ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1998 1999 2000
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Compensation and related benefits.................. $ 685 $ 758 $ 885
Warranty reserve................................... 500 487 566
Other.............................................. 361 281 557
------ ------ ------
Total............................................ $1,546 $1,526 $2,008
====== ====== ======
</TABLE>
6--CONVERTIBLE PREFERRED STOCK
At December 31, 1999, the Company had outstanding 1,241,841; 3,967,120;
2,490,181 and 1,232,392 shares of Series A convertible preferred stock and
Series B, C and D redeemable convertible preferred stock, respectively. Changes
in each class of convertible preferred stock from January 1, 1997 to June 30,
2000 are as follows (in thousands):
<TABLE>
<CAPTION>
Warrants on
--------------------------------------------
Series Series Series Series Series
A B C D C Total
------ ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997.......... $2,227 $ 9,622 $2,385 $ -- $ 558 $14,792
Issuance of 1,232,392 shares of
Series D redeemable convertible
preferred stock (less issuance
costs of $171,000)................ 3,681 3,681
Accretion to redemption value on
Series B, C and D redeemable
convertible preferred stock....... 714 391 187 1,292
------ ------- ------ ------ ----- -------
Balances, December, 31, 1997....... 2,227 10,336 2,776 3,868 558 19,765
Accretion to redemption value on
Series B, C and D redeemable
convertible preferred stock....... 714 392 283 1,389
------ ------- ------ ------ ----- -------
Balances, December, 31, 1998....... 2,227 11,050 3,168 4,151 558 21,154
Issuance of 344,652 shares of
Series C redeemable convertible
preferred stock upon exercise of
warrants for cash................. 713 (110) 603
Issuance of 716,961 shares of
Series C redeemable convertible
preferred stock upon exercise of
warrants, cashless--net of shares
tendered at $3.50 per share....... 448 (448) --
Accretion to redemption value of
shares issued on exercise of
warrants on Series C redeemable
convertible preferred stock....... 696 696
Accretion to redemption value on
Series B, C and D redeemable
convertible preferred stock....... 714 391 284 1,389
------ ------- ------ ------ ----- -------
Balances, December, 31, 1999....... 2,227 11,764 5,416 4,435 -- 23,842
Accretion to redemption value on
Series B, C and D redeemable
convertible preferred stock*...... 357 224 111 -- 692
------ ------- ------ ------ ----- -------
Balances, June 30, 2000*........... $2,227 $12,121 $5,640 $4,546 $ -- $24,534
====== ======= ====== ====== ===== =======
</TABLE>
--------
* Unaudited
Significant terms of the Series A, B, C and D convertible preferred stock
("preferred stock") are as follows:
. Each share of Series A, B, C and D preferred stock is convertible into
one share of common stock (subject to certain events of dilution). Shares
will automatically be converted upon a public offering of common stock in
which the offering price is at least $6.75 per share and the aggregate
offering proceeds exceed $7,500,000.
F-12
<PAGE>
NATUS MEDICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
. The Series B, C and D preferred stock are redeemable at the request of
the holders of not less than two-thirds of the then outstanding shares of
Series B, C and D preferred stock, or at the option of the Board of
Directors, by paying cash equal to $1.75, $1.75 and $3.13 per share of
Series B, C and D preferred stock, together with all cumulative dividends
and all declared and unpaid dividends as of the date of redemption. The
cumulative dividends for the Series B, C and D redeemable preferred stock
are accreted annually so that the carrying value will equal the mandatory
redemption amount on January 1, 2000 and thereafter. In addition,
differences between the redemption amount and the net proceeds received
(i.e., the costs of financing) are being accreted. The redemption amount
of Series B, C and D preferred stock at December 31, 1999, including
cumulative dividends, was $11,764,000, $5,416,000 and $4,435,000,
respectively.
. Each share of preferred stock has the same voting rights as the common
stock into which it is convertible.
. Dividends may be declared at the discretion of the Board of Directors and
are cumulative. Per annum dividends of $0.14, $0.18, $0.18 and $0.18 for
each share of Series A, B, C and D preferred stock, respectively, must be
declared and paid before any dividends on common stock may be declared or
paid. Series B, C and D are payable in preference and priority to Series
A, and Series A is payable in preference and priority to common stock.
Dividends in arrears for Series A preferred stock at December 31, 1999
were $1,456,000. Cumulative dividends for Series B, C and D preferred
stock at December 31, 1999 of $4,821,000, $1,058,000, and $584,000,
respectively, have been accreted as noted above.
. In the event of liquidation, dissolution or winding up of the Company,
including a sale of substantially all of the Company's assets on a change
in control, the Series D preferred stockholders are entitled to receive
$3.13 per share, the Series C preferred stockholders are entitled to
receive $2.63 per share, the Series B preferred stockholders are entitled
to receive $1.75 per share, the Series A preferred stockholders are
entitled to receive $1.75 per share, and common stockholders are entitled
to $0.25 per share, plus all cumulative dividends, respectively. The
distribution to Series C and Series D preferred stockholders is payable
in preference and priority to Series B preferred stockholders, the
distribution to Series B preferred stockholders is payable in preference
and priority to Series A preferred stockholders, and the distribution to
Series A preferred stockholders is payable in preference and priority to
the distribution to common stockholders. After such payments have been
made, any remaining assets of the Company will be distributed pro rata
among all stockholders, based on the number of common shares held by
each, assuming conversion of all Series A, B, C and D preferred stock at
the then applicable conversion rate.
In connection with the issuance of Series C preferred stock, warrants were
issued to purchase 1,785,714 shares of Series C preferred stock. The warrants
were exercisable at $1.75 per share through December 31, 1999 and were valued
at an aggregate of $558,000. During December 1999, 344,652 warrants were
exercised for cash proceeds of $603,000; 1,433,810 warrants were exercised by
net settlement in a noncash transaction resulting in the issuance of 716,961
shares, and 7,252 warrants lapsed. Additional accretion of $696,000 was
recorded upon issuance of the 1,061,557 shares of such Series C preferred stock
to record the carrying value at the related redemption amount.
7--STOCKHOLDERS' DEFICIT
Common Stock
At December 31, 1999, the Company had reserved an aggregate of 10,129,468
shares of common stock of which 8,931,534 shares are reserved for conversion of
convertible preferred stock and 1,197,934 shares are reserved for issuance and
exercise of stock options.
F-13
<PAGE>
NATUS MEDICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Option Plan
At December 31, 1999, under the Company's 1991 stock option plan (the
"Plan"), incentive and nonstatutory stock options to purchase up to 1,793,482
shares of common stock (see Note 14), may be issued at not less than the fair
market value of the stock at the date of grant, as determined by the Board of
Directors. Options issued under the Plan become exercisable as determined by
the Board of Directors and expire no more than ten years after the date of
grant. Most options vest ratably over four years. However, for those optionees
who, at the time the option is granted, own stock representing more than 10% of
the voting power of all classes of stock of the Company, stock options may be
issued at not less than 110% of the fair market value of the stock at the date
of grant, and the options expire five years after the date of grant.
A summary of option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Outstanding, January 1, 1997 (389,939 exercisable at a
weighted average exercise price of $0.25 per share).... 778,080 $0.25
Granted (weighted average fair value of $0.13 per
share)............................................... 442,480 $0.43
Exercised............................................. (197,352) $0.25
Cancelled............................................. (11,712) $0.25
---------
Outstanding, December 31, 1997 (397,476 exercisable at a
weighted average exercise price of $0.28 per share).... 1,011,496 $0.33
Granted (weighted average fair value of $0.55 per
share)............................................... 306,060 $1.65
Exercised............................................. (203,811) $0.30
Cancelled............................................. (32,754) $0.53
---------
Outstanding, December 31, 1998 (471,583 exercisable at a
weighted average exercise price of $0.45 per share).... 1,080,991 $0.68
Granted (weighted average fair value of $0.73 per
share)............................................... 135,600 $2.25
Exercised............................................. (82,057) $0.80
Cancelled............................................. (40,904) $1.63
---------
Outstanding, December 31, 1999 (668,006 exercisable at a
weighted average exercise price of $0.58 per share).... 1,093,630 $0.85
Granted (weighted average fair value of $3.57 per
share)*.............................................. 451,100 $1.53
Exercised* ........................................... (155,297) $0.46
Cancelled*............................................ (63,310) $1.85
---------
Outstanding, June 30, 2000 (1,111,850 exercisable at a
weighted average exercise price of $0.68 per share)*... 1,326,123 $1.09
=========
</TABLE>
--------
* Unaudited
F-14
<PAGE>
NATUS MEDICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information concerning outstanding and
exercisable options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Contractual
Exercise Number Life Number
Price Outstanding (Years) Exercisable
-------- ----------- ----------- -----------
<S> <C> <C> <C>
$ 0.25 638,917 5.5 506,221
$ 1.00 141,801 8.0 70,101
$ 1.88 180,512 8.7 68,412
$ 2.25 132,400 9.5 23,272
--------- -------
1,093,630 6.8 668,006
========= =======
</TABLE>
At December 31, 1999 and June 30, 2000, options to purchase 104,304 and
316,514 shares, respectively, were available for future grants under the Plan.
Deferred Stock Compensation
During the six-month period ended June 30, 2000, the Company issued 443,100
common stock options to employees at a weighted average exercise price of $1.53
per share, which was less than the deemed weighted average fair value of $4.77
per share. The cumulative deferred stock compensation with respect to these
grants totaled $1,438,000 and is being amortized to expense on a graded vesting
method over the four-year vesting period of the options through June 2004.
During 1998 and for the six months ended June 30, 2000, the Company issued
fully vested options to nonemployees for the purchase of 43,400 and 8,000
shares of common stock at a weighted average exercise price of $1.55 and $1.50
per share, respectively. Such options were issued for services rendered and the
Company expensed the fair value of such awards on the date of grant as deferred
stock compensation of $40,000 and $37,000 for the year ended December 31, 1998
and the six months ended June 30, 2000, respectively. The Black-Scholes option
pricing model was used to determine the fair value with the following weighted
average assumptions: contractual life of 5.5 years for 1998 and 10 years for
the six months ended June 30, 2000; risk-free interest rate of 5.3% for 1998
and 6.6% for the six months ended June 30, 2000; expected volatility factor of
75% for 1998 and for the six months ended June 30, 2000.
Amortization of employee and nonemployee stock-based compensation totaled
$353,000 for the six months ended June 30, 2000.
Additional Stock Plan Information
Although the Company continues to account for its stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25, SFAS
No. 123 requires the disclosure of pro forma net income (loss) as if the
Company had adopted the fair value method. Under SFAS No. 123, the fair value
of stock-based awards to employees is calculated through the use of the option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which differ significantly from the Company's stock option
awards. The models also require subjective assumptions, including expected time
to exercise, which greatly affect the calculated values. The weighted average
fair value of the Company's stock-based awards to employees was estimated using
the minimum value method with the following weighted average assumptions:
expected life of 5.5 years from the date of grant in 1997, 1998 and 1999; risk
free interest rate of approximately 6.0% in 1997, 1998 and 1999; and no
dividends during the expected term. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as they
occur.
F-15
<PAGE>
NATUS MEDICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
If the computed fair values of the Company's awards had been amortized to
expense over the related vesting periods, pro forma net loss and net loss per
share, basic and diluted, would have been as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net loss available to common stockholders:
As reported.................................... $(1,868) $(1,588) $(1,441)
Pro forma...................................... $(1,901) $(1,667) $(1,544)
Basic and diluted net loss per share:
As reported.................................... $ (7.62) $ (3.63) $ (2.56)
Pro forma...................................... $ (7.76) $ (3.81) $ (2.75)
</TABLE>
8--NET LOSS PER SHARE
During 1997, 1998 and 1999 and for the six months ended June 30, 1999 and
2000, the Company had securities outstanding which could potentially dilute
basic earnings per share in the future, but were excluded in the computation of
diluted net loss per share in the periods presented, as their effect would have
been antidilutive. Such outstanding securities consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------------- ---------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Convertible preferred
stock.................. 7,869,921 7,869,921 8,931,534 7,869,925 8,931,534
Warrants for convertible
preferred stock........ 1,785,714 1,785,714 -- 1,785,714 --
Stock options........... 1,011,496 1,080,991 1,093,630 1,063,268 1,326,123
---------- ---------- ---------- ---------- ----------
Total................. 10,667,131 10,736,626 10,025,164 10,718,907 10,257,657
========== ========== ========== ========== ==========
</TABLE>
9--LEASES
The Company has entered into noncancelable operating leases for its
facilities through December 2003. Minimum lease payments under noncancelable
operating leases as of December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
Year Ending December 31,
2000............................................................. $ 456
2001............................................................. 557
2002............................................................. 574
2003............................................................. 593
------
Total minimum lease payments..................................... $2,180
======
</TABLE>
Rent expense is recorded on a straight-line basis and totaled approximately
$189,000 in 1997, $238,000 in 1998 and $413,000 in 1999.
10--BORROWING ARRANGEMENTS
The Company had a $1,000,000 revolving bank line of credit through March
2000. In addition, the Company financed the expansion of its information system
during 1998 with a two-year note under an extension of its existing bank
facility in the amount of $300,000. The remaining principal balance outstanding
at December 31, 1999 of $150,000 will be repaid in monthly installments through
December 2000. Borrowings
F-16
<PAGE>
NATUS MEDICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
under the line of credit are limited to eligible accounts receivable,
collateralized by substantially all of the Company's assets and bear interest
at the bank's prime rate (9.5% at December 31, 1999) plus 1.0%. The Company
must meet certain financial ratios to maintain the line of credit, including
minimum tangible net worth, a minimum quick ratio, and total debt to tangible
net worth ratio. It also must meet certain operating profitability
requirements. At December 31, 1999, the Company was in compliance with all such
requirements of the borrowing arrangement.
11--INCOME TAXES
Income tax expense during 1999 represents current state taxes. Deferred
income taxes consist of net operating loss and tax credit carryforwards as well
as the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Net deferred income tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards......................... $ 3,278 $ 2,956
Accruals deductible in different periods................. 626 605
Capitalized research and development costs............... 281 268
Credit carryforwards..................................... 375 370
------- -------
Total net deferred tax assets.......................... 4,560 4,199
Valuation allowance........................................ (4,560) (4,199)
------- -------
Total.................................................. $ -- $ --
======= =======
</TABLE>
Due to the uncertainty surrounding the realization of its deferred tax
assets, the Company has established valuation allowances sufficient to fully
reserve its net deferred tax assets. Annually, management evaluates the
recoverability of the deferred tax assets and the level of the valuation
allowance. At such time as it is determined that it is more likely than not
that deferred tax assets are realizable, the valuation allowance will be
reduced.
The Company's amount of income tax recorded differs from the amount using
the federal statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal statutory tax expense (benefit)........ $ (202) $ (70) $ 229
State tax expense (benefit).................... (33) (11) 38
Valuation allowance............................ 258 193 (361)
Other.......................................... (23) (112) 104
-------- -------- --------
$ -- $ -- $ 10
======== ======== ========
</TABLE>
At December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $8,447,000 available to reduce future taxable
income. Such carryforwards expire beginning in 2002 through 2012. At December
31, 1999, the Company had research and experimentation credit carryforwards
available of approximately $260,000 for federal and $98,000 for California tax
purposes.
The extent to which the federal and California operating loss and tax credit
carryforwards can be used to offset future taxable income may be limited,
depending on the extent of ownership changes within any three-year period, as
provided in the Tax Reform Act of 1986. Such a limitation could result in the
expiration of carryforwards before they are utilized.
F-17
<PAGE>
NATUS MEDICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
12--EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax-deferred savings plan under which eligible
employees may elect to have a portion of their salary deferred and contributed
to the plan. Employer matching contributions are determined by the Board of
Directors and are discretionary. There were no employer matching contributions
in 1997, 1998 or 1999; however, the Board of Directors approved a dollar-for-
dollar employer match of up to $500 per employee on employee contributions for
the year ending December 31, 2000.
On September 1, 1999, the Board of Directors approved the creation of
retention plans (the "Plans"), which were designed to provide eligible
employees with (i) retention benefits payable upon the employee's continued
employment with the Company before and through the effective date of a change
in control, as defined by the Plans, and (ii) severance benefits upon certain
terminations of employment before or after a change in control. Severance
benefits include, among others, accelerated vesting on options outstanding to
purchase the Company's common stock and cash payments, up to a defined maximum
for each participant, based on the terms of the change in control event.
Certain employees who are designated by the Board of Directors are eligible to
participate in the Plans. The Plans terminate in September 2000, unless
extended by the Board of Directors or a change in control occurs prior to
termination.
13--CUSTOMER AND GEOGRAPHIC INFORMATION
The Company operates in one reportable segment and is engaged in the design,
manufacture and, marketing of newborn screening products for the identification
and monitoring of common medical disorders that may occur during the critical
development period of infants. The nature of the Company's products and
production processes as well as type of customers and distribution methods are
consistent among all of the Company's devices.
Revenues from customers by geographic area are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December Six Months
31, Ended June 30,
----------------------- --------------
1997 1998 1999 1999 2000
------- ------- ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues:
United States....................... $ 8,650 $12,820 $17,804 $8,535 $ 9,511
Japan............................... 169 2,228 1,717 295 1,323
All other........................... 1,212 836 262 88 175
------- ------- ------- ------ -------
$10,031 $15,884 $19,783 $8,918 $11,009
======= ======= ======= ====== =======
</TABLE>
For all periods presented, all of the Company's long-lived assets were
located within the United States.
In 1997 and 1999, no sales to a single customer accounted for greater than
10% of net revenues. One customer, a distributor, represented 14% of net
revenues in fiscal year 1998 and 12% of net revenues for the six months ended
June 30, 2000.
14--SUBSEQUENT EVENTS
Inventory Purchase
Subsequent to December 31, 1999, the Company purchased $780,000 of a major
component in order to secure consistent components for its planned production
needs for 2000.
1991 Stock Plan Amendment
In May 2000, the stockholders approved an amendment to increase the numbers
of shares of common stock reserved for issuance under the Plan to an aggregate
of 2,393,482 shares.
F-18
<PAGE>
NATUS MEDICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Creation of Subsidiary
On July 28, 2000, the Company created and incorporated a wholly owned
subsidiary in Japan.
Other Matters
On August 15, 2000, the stockholders approved the following actions:
. A two-for-five reverse stock split of the outstanding shares of common
and preferred stock; accordingly, all share and per share amounts in
these financial statements have been restated to give effect to the
reverse stock split.
. Reincorporation of the Company in the State of Delaware, including an
increase of the authorized shares of common stock to 120,000,000, and the
associated exchange of one share of common stock or preferred stock of
the Company for every share of common stock or preferred stock, as the
case may be, of the Company's California predecessor. The reincorporation
was effected on August 16, 2000. Accordingly, these financial statements
have been restated to reflect the effect of the reincorporation.
. Adoption of the 2000 Employee Stock Purchase Plan to be effective upon
the effectiveness of the initial public offering contemplated by the
Company. Under the purchase plan, eligible employees are allowed to have
salary withholdings of up to 15% of their base compensation to purchase
shares of common stock at a price equal to 85% of the lower of the market
value of the stock at the beginning or end of defined purchase periods.
The initial purchase period commences upon the effective date of the
initial public offering of the Company's common stock. The Company has
initially reserved 1,000,000 shares of common stock under this plan, plus
an annual increase to be added on the first day of the Company's fiscal
year beginning January 1, 2002 equal to the lesser of (i) 650,000 shares,
(ii) 4% of the shares of common stock outstanding on the last day of the
preceding fiscal year, or (iii) an amount determined by the Board of
Directors.
. Adoption of the 2000 Stock Option Plan (the "2000 Stock Plan") and the
termination of the 1991 Stock Option Plan (the "1991 Stock Plan") as to
future option grants to be effective upon the effectiveness of the
initial public offering contemplated by the Company. The Company has
initially reserved a total of 1,500,000 shares of common stock under the
2000 Stock Plan, plus an annual increase to be added on the first day of
the Company's fiscal year beginning January 1, 2002 equal to the lesser
of (i) 1,500,000 shares, (ii) 7% of the shares of common stock
outstanding on the last day of the preceding fiscal year, or (iii) an
amount determined by the Board of Directors.
. Adoption of the 2000 Director Option Plan (the "2000 Director Plan") to
be effective upon the effectiveness of the initial public offering
contemplated by the Company. The 2000 Director Plan provides for an
initial grant to new nonemployee directors, options to purchase 30,000
shares of common stock. Subsequent to the initial grant, each nonemployee
director will be granted an option to purchase 10,000 shares of common
stock at the next meeting of the Board of Directors following the annual
meeting of stockholders, if on the date of the annual meeting the
director has served on the board of directors for six months. The Company
has initially reserved a total of 400,000 shares of common stock under
the 2000 Director Plan, plus an annual increase to be added on the first
day of the Company's fiscal year beginning January 1, 2002 equal to the
lesser of (i) 100,000 shares, (ii) 0.5% of the shares of common stock
outstanding on the last day of the preceding fiscal year, or (iii) an
amount determined by the Board of Directors.
. Authorization of a new class of undesignated preferred stock totaling
10,000,000 shares, contingent upon the reincorporation of the Company in
Delaware and the closing of the initial public offering contemplated by
the Company.
F-19
<PAGE>
[Artwork:
Text reads as follows: CO-Stat/R/ End Tidal Breath Analyzer passively and non-
invasively measures carbon monoxide in a baby's breath to accurately identify
the rate at which red blood cells are being broken down. Identifying hemolysis,
the breakdown of red blood cells, is a critical component in the management of
neonatal jaundice. The CO-Stat analyzer identifies the rate of hemolysis non-
invasely without any patient effort at the baby's crib-side.
Picture showing the CO-Stat/R/ End Tidal Breath Analyzer in use.
Caption at bottom of page: NATUS because every baby is precious.]
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Shares
Natus Medical Incorporated
Common Stock
[LOGO OF NATUS MEDICAL INCORPORATED APPEARS HERE]
--------
PROSPECTUS
, 2000
--------
Salomon Smith Barney
Dain Rauscher Wessels
Prudential Vector Healthcare
a unit of Prudential Securities
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discounts, payable by the Registrant in connection with the sale
of the securities being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market System
listing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 13,358
NASD Filing Fee.................................................. 5,560
Nasdaq National Market Listing Fee............................... 95,000
Printing Costs................................................... 250,000
Legal Fees and Expenses.......................................... 650,000
Accounting Fees and Expenses..................................... 500,000
Blue Sky Fees and Expenses....................................... 10,000
Transfer Agent and Registrar Fees................................ 10,000
Miscellaneous.................................................... 16,082
----------
Total.......................................................... $1,550,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant is subject to Section 145 of the Delaware General Corporation
Law ("Section 145"). Section 145 permits indemnification of officers and
directors of the Registrant under certain conditions and subject to certain
limitations, but in terms sufficiently broad to permit indemnification
(including reimbursement for expenses) under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Section 145 also provides that a corporation has the power
to maintain insurance on behalf of its officers and directors against any
liability asserted against such person and incurred by him or her in such
capacity, or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify him or her against such liability
under the provisions of Section 145. Article VI, Section 6.1, of the
Registrant's Bylaws provides for mandatory indemnification of its directors and
officers and permissible indemnification of employees and other agents to the
maximum extent not prohibited by the Delaware General Corporation Law,
including proceedings under the Securities Act or the Securities Exchange Act
of 1934, as amended. The rights to indemnity thereunder continue as to a person
who has ceased to be a director, officer, employee or agent and inure to the
benefit of the heirs, executors and administrators of the person. In addition,
expenses incurred by a director or executive officer in defending any civil,
criminal, administrative or investigative action, suit or proceeding by reason
of the fact that he or she is or was a director or officer of the Registrant
(or was serving at the Registrant's request as a director or officer of another
corporation) shall be paid by the Registrant in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that he or she is not entitled to be indemnified by
the Registrant as authorized by the relevant section of the Delaware General
Corporation Law.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
the Registrant's Certificate of Incorporation provides that, pursuant to
Delaware law, its directors shall not be personally liable for monetary damages
for breach of the directors' fiduciary duty as directors to the Registrant and
its stockholders. This provision in the Certificate of Incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief
will remain available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Registrant for acts or omission not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of Stock repurchases or redemptions that are unlawful under
II-1
<PAGE>
Section 174 of the Delaware General Corporation Law. The provision also does
not affect a director's responsibilities under any other law, such as the
federal securities laws or state or federal environmental laws. Prior to the
effective date of this offering, the Registrant will enter into indemnification
agreements with each of its directors and executive officers. Generally, the
indemnification agreements attempt to provide the maximum protection permitted
by Delaware law as it may be amended from time to time. Moreover, the
indemnification agreements provide for certain additional indemnification.
Under such additional indemnification provisions, however, an individual will
not receive indemnification for judgments, settlements or expenses if he or she
is found liable to the Registrant (except to the extent the court determines he
or she is fairly and reasonably entitled to indemnity for expenses), for
settlements not approved by the Registrant or for settlements and expenses if
the settlement is not approved by the court. The indemnification agreements
provide for the Registrant to advance to the individual any and all reasonable
expenses (including legal fees and expenses) incurred in investigating or
defending any such action, suit or proceeding. In order to receive an advance
of expenses, the individual must submit to the Registrant copies of invoices
presented to him or her for such expenses. Also, the individual must repay such
advances upon a final judicial decision that he or she is not entitled to
indemnification.
The Registrant intends to enter into additional indemnification agreements
with each of its directors and executive officers to effectuate these indemnity
provisions and to purchase directors' and officers' liability insurance.
In addition to the foregoing, the Underwriting Agreement contains certain
provisions by which the Underwriters have agreed to indemnify the Registrant,
each person, if any, who controls the Registrant within the meaning of Section
15 of the Securities Act, each director of the Registrant, each officer of the
Registrant who signs the Registration Statement, with respect to information
furnished in writing by or on behalf of the Underwriters for use in the
Registration Statement.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since our incorporation in February 1987, we have sold and issued the
following securities:
1. In June 1987, May 1989, December 1989, May 1990, June 1990, December
1990 and February 1991, the Registrant issued and sold 1,229,078 shares of
Common Stock to 5 of our founders for $2.22 million pursuant to Section
4(2) of the Securities Act.
3. In August 1991, December 1992 and January 1993, the Registrant issued
and sold an aggregate of 3,967,120 shares of Series B Preferred Stock to 36
accredited investors for approximately $6.94 million pursuant to Section
4(2) of the Securities Act.
4. In June 1995, August 1995, November 1995, March 1996, April 1996 and
May 1996, the Registrant issued and sold an aggregate of 1,428,568 shares
of Series C Preferred Stock and warrants to purchase 1,785,714 shares of
Series C Preferred Stock to 43 accredited investors for approximately $2.50
million pursuant to Section 4(2) of the Securities Act.
5. In April and May 1997, the Registrant issued and sold 1,232,392
shares of Series D Preferred Stock to 42 accredited investors for
approximately $3.85 million pursuant to Section 4(2) of the Securities Act.
6. In December 1999, the Registrant issued and sold 1,061,613 shares of
Series C Preferred Stock to 41 accredited investors for approximately
$603,000 and the cancellation of Series C shares upon the exercise of
warrants pursuant to Section 4(2) of the Securities Act.
II-2
<PAGE>
7. Pursuant to Rule 701 promulgated under the Securities Act, from July
1991 to June 30, 2000, the Registrant issued and sold 750,729 shares of
Common Stock to employees and consultants for aggregate consideration of
approximately $307,196 upon the exercise of stock options pursuant to the
Registrant's 1991 Stock Option Plan.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Registrant, as currently in effect
3.1.1 Form of Certificate of Incorporation of the Registrant to be filed
after the closing of the offering made under this Registration
Statement
3.2 Bylaws of the Registrant
4.1* Specimen Common Stock Certificate
4.2 Information and Registration Rights Agreement dated August 15, 1991 and
amendments thereto by and among the Registrant and certain
stockholders of the Registrant
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
Form of Indemnification Agreement between the Registrant and each of
10.1 its directors and officers
10.2 Amended and Restated 1991 Stock Option Plan
10.2.1 Form of Option Agreement under the 1991 Stock Option Plan
10.3 2000 Stock Option Plan
10.3.1 Form of Option Agreement under the 2000 Stock Option Plan
10.4 2000 Director Option Plan
10.4.1 Form of Option Agreement under 2000 Director Option Plan
2000 Employee Stock Purchase Plan and form of subscription agreement
10.5 thereunder
10.6+ Distribution Agreement dated June 11, 1997 between Registrant and
Nippon Eurotec Co., Ltd.
10.6.1 Addendum to Distribution Agreement dated January 1, 2000 between
Registrant and Nippon Eurotec Co., Ltd.
10.7+ Patent License Agreement dated June 30, 1998 between Registrant and The
Leland Stanford Junior University
Lease Agreement dated August 24, 1998 between Registrant and San Carlos
10.8 Co-Tenancy
10.9 Promissory Note dated March 24, 1999 between Scott Valley Bank and Tim
C. Johnson
10.9.1 Assignment of Deposit Account dated March 24, 1999 between Registrant,
Scott Valley Bank and Tim C. Johnson
10.9.2 Security Agreement dated March 26, 1999 between Registrant and Tim C.
Johnson
10.10+ Capital Equipment Supplier Agreement dated June 25, 1999 between the
Registrant and Novation, LLC
10.11+ Manufacturing Agreement dated December 3, 1998 between Registrant and
TriVirix International, Inc. (formerly CMA International, Inc.)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
Commercial Lease dated August 4, 2000 between Registrant and Concept
10.12 Development Corp.
21.1 Subsidiaries
23.1 Independent Auditors' Consent and Report on Schedule
23.2* Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (see Page II-5)
27.1 Financial Data Schedule
</TABLE>
--------
* To be filed by amendment.
+ Confidential treatment requested.
(b) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Carlos, State of
California on August 18, 2000.
/s/ Tim C. Johnson
By: _________________________________
Tim C. Johnson
President, Chief Executive
Officer, Chief Operating
Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Tim C. Johnson
and William H. Lawrenson, and each of them, as his attorney-in-fact, with full
power of substitution, for him or her in any and all capacities, to sign any
and all amendments to this registration statement (including post-effective
amendments), and any and all registration statements filed pursuant to Rule 462
under the Securities Act of 1933, as amended, in connection with or related to
the offering contemplated by this registration statement and its amendments, if
any, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said registration statement.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Tim C. Johnson President, Chief Executive August 18, 2000
____________________________________ Officer, Chief Operating
Tim C. Johnson Officer and Director
(Principal Executive
Officer)
/s/ William H. Lawrenson Vice President Finance and August 18, 2000
____________________________________ Chief Financial Officer
William H. Lawrenson (Principal Financial and
Accounting Officer)
/s/ William New, Jr. Director August 18, 2000
____________________________________
William New, Jr.
/s/ James J. Bochnowski Director August 18, 2000
____________________________________
James J. Bochnowski
/s/ William M. Moore Director August 18, 2000
____________________________________
William M. Moore
/s/ David Nierenberg Director August 18, 2000
____________________________________
David Nierenberg
</TABLE>
II-5
<PAGE>
Schedule II
NATUS MEDICAL INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
Balance at Charges to Deductions- Balance at
beginning costs and write-offs end
Year Ended of period expenses of accounts of period
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
June 30, 2000(*)................... 201 24 -- 225
December 31, 1999.................. 138 131 (68) 201
December 31, 1998.................. 125 13 -- 138
December 31, 1997.................. 55 83 (13) 125
Warranty Reserve
June 30, 2000(*)................... 487 144 (65) 566
December 31, 1999.................. 500 185 (198) 487
December 31, 1998.................. 297 306 (103) 500
December 31, 1997.................. 244 112 (59) 297
</TABLE>
--------
(*) Unaudited
S-1
<PAGE>
EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Registrant, as currently in effect
3.1.1 Form of Certificate of Incorporation of the Registrant to be filed
after the closing of the offering made under this Registration
Statement
3.2 Bylaws of the Registrant
4.1* Specimen Common Stock Certificate
4.2 Information and Registration Rights Agreement dated August 15, 1991 and
amendments thereto by and among the Registrant and certain
stockholders of the Registrant
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
Form of Indemnification Agreement between the Registrant and each of
10.1 its directors and officers
10.2 Amended and Restated 1991 Stock Option Plan
10.2.1 Form of Option Agreement under the 1991 Stock Option Plan
10.3 2000 Stock Option Plan
10.3.1 Form of Option Agreement under the 2000 Stock Option Plan
10.4 2000 Director Option Plan
10.4.1 Form of Option Agreement under 2000 Director Option Plan
2000 Employee Stock Purchase Plan and form of subscription agreement
10.5 thereunder
10.6+ Distribution Agreement dated June 11, 1997 between Registrant and
Nippon Eurotec Co., Ltd.
10.6.1 Addendum to Distribution Agreement dated January 1, 2000 between
Registrant and Nippon Eurotec Co., Ltd.
10.7+ Patent License Agreement dated June 30, 1998 between Registrant and The
Leland Stanford Junior University
Lease Agreement dated August 24, 1998 between Registrant and San Carlos
10.8 Co-Tenancy
10.9 Promissory Note dated March 24, 1999 between Scott Valley Bank and Tim
C. Johnson
10.9.1 Assignment of Deposit Account dated March 24, 1999 between Registrant,
Scott Valley Bank and Tim C. Johnson
10.9.2 Security Agreement dated March 26, 1999 between Registrant and Tim C.
Johnson
10.10+ Capital Equipment Supplier Agreement dated June 25, 1999 between the
Registrant and Novation, LLC
10.11+ Manufacturing Agreement dated December 3, 1998 between Registrant and
TriVirix International, Inc. (formerly CMA International, Inc.)
Commercial Lease dated August 4, 2000 between Registrant and Concept
10.12 Development Corp.
21.1 Subsidiaries
23.1 Independent Auditors' Consent and Report on Schedule
23.2* Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (see Page II-5)
27.1 Financial Data Schedule
</TABLE>
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* To be filed by amendment.
+ Confidential treatment requested.
